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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended April 6, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4032739
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
90 Park Avenue
New York, New York 10016
(Address of registrant's principal executive offices)
(212) 661-1300
(Registrant's telephone number, including area code)
Copies of all communications to:
The Warnaco Group, Inc.
90 Park Avenue
New York, New York 10016
Attention: Vice President and General Counsel
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] Yes [X] No
The number of shares outstanding of the registrant's Class A Common Stock as of
September 25, 2002 is as follows: 52,936,206.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
April 6, January 5,
2002 2002
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash (restricted cash $10,897 at April 6, 2002) $ 49,561 $ 39,558
Accounts receivable, less reserves of $101,344 and $107,947, respectively 301,344 282,387
Inventories, less reserves of $45,799 and $50,097, respectively 376,104 418,902
Prepaid expenses and other current assets 34,521 36,988
Assets held for sale 3,359 31,066
----------- -----------
Total current assets 764,889 808,901
----------- -----------
Property, plant and equipment -- net 200,764 212,129
Other assets:
Licenses, trademarks, intangible and other assets, at cost, less
accumulated amortization 103,157 271,500
Goodwill, less accumulated amortization - 692,925
Deferred income tax 2,325 -
----------- -----------
Total other assets 105,482 964,425
----------- -----------
$ 1,071,135 $ 1,985,455
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current Liabilities:
Debtor-in-Possession revolving credit facility 108,859 155,915
Accounts payable 82,237 84,764
Accrued liabilities 104,427 105,278
Accrued income tax payable 16,866 14,505
----------- -----------
Total current liabilities 312,389 360,462
----------- -----------
Other long-term liabilities 33,101 31,754
----------- -----------
Liabilities subject to compromise 2,434,876 2,439,393
Deferred income taxes - 5,130
Stockholders' deficiency:
Class A Common stock: $.01 par value, 130,000,000 shares
authorized, 65,232,594 issued in 2002 and 2001 654 654
Additional paid-in capital 909,054 909,054
Accumulated other comprehensive loss (53,331) (53,016)
Deficit (2,251,426) (1,393,674)
Treasury stock, at cost 12,242.629 shares (313,889) (313,889)
Unearned stock compensation (293) (413)
----------- -----------
Total stockholders' deficiency (1,709,231) (851,284)
----------- -----------
$ 1,071,135 $ 1,985,455
=========== ===========
See notes to unaudited consolidated condensed financial statements.
-2-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Three Months Ended
-------------------------------
April 6, April 7,
2002 2001
--------- --------
(Unaudited)
Net revenues $ 410,052 $ 499,219
Cost of goods sold 291,640 353,942
--------- ---------
Gross profit 118,412 145,277
Selling, general and administrative expenses 102,118 139,069
--------- ---------
Operating income before reorganization items 16,294 6,208
Reorganization items 15,531 -
--------- ---------
Operating income 763 6,208
Investment loss - 2,964
Interest expense (contractual interest of $45,970 - 2002) 6,964 63,940
--------- ---------
Loss before provision for income taxes and cumulative
effect of change in accounting principle (6,201) (60,696)
Provision for income taxes 49,929 2,922
--------- ---------
Loss before cumulative effect of change in
accounting principle $ (56,130) $ (63,618)
Cumulative effect of change in accounting principle (net of
income tax benefit of $53,513) (801,622) -
--------- ---------
Net loss $(857,752) $ (63,618)
========= =========
Basic loss per common share:
Loss before accounting change $ (1.06) $ (1.20)
Cumulative effect of accounting change (15.14) -
--------- ---------
Net loss $ (16.20) $ (1.20)
========= =========
Diluted loss per common share:
Loss before accounting change $ (1.06) $ (1.20)
Cumulative effect of accounting change (15.14) -
--------- ---------
Net loss $ (16.20) $ (1.20)
========= =========
Weighted average number of shares used in computing loss per share:
Basic 52,936 52,874
========= =========
Diluted 52,936 52,874
========= =========
See notes to unaudited consolidated condensed financial statements.
-3-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Dollars in thousands)
Three Months Ended
---------------------------------
April 6, April 7,
2002 2001
--------- ----------
(Unaudited)
Cash flows from operating activities:
Net loss $(857,752) $(63,618)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on sale of GJM and Penhaligon's 2,139 -
Cumulative effect of accounting change 801,622 -
Increase in deferred tax valuation allowance 46,058 -
Depreciation and amortization 13,831 24,051
Market value adjustments to Equity Agreements - 2,964
Amortization of unearned stock compensation 120 1,034
Amortization of deferred financing cost 2,350 3,992
Changes in operating assets and liabilities:
Accounts receivable (17,732) (71,521)
Inventories 44,249 (19,313)
Prepaid expenses and other current assets 4,135 1,577
Accounts payable, accrued expenses and other liabilities 1,611 (58,901)
Accrued income taxes 2,361 (5,004)
--------- ---------
Net cash provided by (used in) operating activities 42,992 (184,739)
--------- ---------
Cash flows from investing activities
Disposals of fixed assets 346 1,987
Purchase of property, plant & equipment (1,978) (13,050)
Proceeds from sale of business units, net of cash balances 20,459 -
(Increase) decrease in intangible and other assets 685 (1,085)
--------- ---------
Net cash provided by (used in) investing activities 19,512 (12,148)
--------- ---------
Cash flows from financing activities:
Net repayments under accounts receivable securitzation facility - (80,600)
Net borrowing under pre-petition credit facilities - 326,102
Repayments of pre-petition debt (5,932) (5,662)
Repayments of Amended DIP (47,056) -
Other (1,243) (171)
--------- ---------
Net cash provided by (used in) financing activities (54,231) 239,669
--------- ---------
Translation adjustments 1,730 1,594
--------- ---------
Increase in cash 10,003 44,376
Cash at beginning of period 39,558 11,076
--------- ---------
Cash at end of period $ 49,561 $ 55,452
========= =========
See notes to unaudited consolidated condensed financial statements.
-4-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Note 1 - Basis of Presentation
General. The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and Securities and Exchange Commission
rules and regulations for interim financial information. Accordingly, they do
not contain all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of The Warnaco Group, Inc. and its
subsidiaries (collectively the "Company"), the accompanying consolidated
condensed financial statements contain all of the adjustments (all of which were
of a normal recurring nature, except for the adoption of Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible Assets ("SFAS No.
142")) and any adjustments related to the Chapter 11 Cases necessary to present
fairly the financial position of the Company as of April 6, 2002 as well as its
results of operations and cash flows for the periods ended April 6, 2002 and
April 7, 2001. Operating results for interim periods may not be indicative of
results for the full fiscal year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 5,
2002.
Chapter 11 Cases. 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, 36 of its 37 U.S.
subsidiaries and one of the Company'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 ("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 on August 27, 2001, December 27,
2001, February 5, 2002 and May 15, 2002. In addition, the Administrative Agent
granted certain extensions under the DIP on April 12, 2002, June 19, 2002, July
18, 2002 and August 22, 2002 (the "Amended DIP"). The amendments and extensions,
among other things, amend certain definitions and covenants, permit the sale of
certain of the Company's assets and businesses, extend certain deadlines with
respect to certain asset sales and 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.
Amounts outstanding under the Amended DIP were $108,859 at April 6, 2002. As of
August 30, 2002, the Company had repaid all outstanding borrowings under the
Amended DIP and had approximately $70,507 of cash available as collateral
against outstanding trade and stand-by letters of credit.
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
-5-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
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 April 6, 2002, the Debtors have rejected
a number of executory contracts and unexpired leases. As of April 6, 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 condensed 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 amount of liability that may ultimately 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 April 6, 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 condensed 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 August 28, 2002 were granted, an extension of time
until September 30, 2002 to file their exclusive plan of reorganization and
until November 30, 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"
-6-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
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 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 operation of the
provisions of the Bankruptcy Code applicable to confirmation of a plan or plans
of reorganization, the Company anticipates that under the plan of reorganization
that it contemplates filing with the Bankruptcy Court holders of the Company's
(i) common stock will not receive any distribution, (ii) general unsecured
claims will receive a modest distribution, (iii) secured indebtedness will
receive a distribution substantially less than the face value of such
indebtedness, and (iv) claims arising from or related to certain preferred
securities will receive a modest distribution if the claimants thereunder do not
oppose the plan. Accordingly, investment in the Company's securities and
financial instruments is highly speculative.
Management has stabilized the business of the Debtors and evaluated the
Company's operations as part of the development of a plan of reorganization.
After filing its proposed 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 condensed financial statements. The Debtors
continue to review their operations and identify assets available for potential
disposition. 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 April 6,
2002, the Company sold certain personal property, certain owned buildings and
land and other assets generating net proceeds of approximately $10,200 of which
approximately $4,000 was generated in the second quarter of fiscal 2002
(collectively the "Asset Sales"). The Asset Sales did not result in a material
gain or loss since the Company had previously written down assets identified for
potential disposition to estimated net realizable value. 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 business 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 sale of GJM and Penhaligon's
generated approximately $20,459 of net proceeds and a net loss of approximately
$2,139. 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 ($9,759) 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 in the second
quarter of fiscal 2002 which were used to reduce amounts outstanding under the
Amended DIP. At April 6, 2002, the Company has classified certain assets as
assets held for sale. The assets held for sale of $3,359 primarily represent
land and buildings that were sold by the Company in the second and third
quarters of fiscal 2002, at approximately net book value. Such assets were
previously written-down to estimated net realizable value in fiscal 2001.
-7-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
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 condensed statement of operations
as reorganization items.
The accompanying consolidated condensed 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 its
ability, (i) 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) to continue to comply with the terms of the Amended DIP, (iii) to
return to profitability, and (iv) to generate sufficient cash flows from
operations and obtain financing sources to meet future obligations. These
matters, along with the Company's losses from operations and stockholders'
capital deficiency raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated condensed 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.
Periods Covered. The quarter ended April 6, 2002 (the "first quarter of
fiscal 2002") included 13 weeks of operations. The quarter ended April 7, 2001
(the "first quarter of fiscal 2001") included 14 weeks of operations.
Reclassification: Certain prior year amounts have been reclassified to
conform to the current year presentation.
Impact of New Accounting Standards: In June 2001, the FASB issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated or completed after June 30, 2001. SFAS No.
141 specifies criteria for the recognition of certain intangible assets apart
from goodwill. The adoption of SFAS No. 141 did not have an impact on the
Company's financial statements.
SFAS No. 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives effective for the Company's 2002 fiscal
year. SFAS No. 142 requires that indefinite lived intangible assets be tested
for impairment at least annually. SFAS No. 142 further requires that intangible
assets with finite useful lives be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. The Company adopted SFAS No. 142
beginning with the first quarter of fiscal 2002, See Note 3.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company plans to adopt the
provisions of SFAS No. 143 for its 2003 fiscal year and does not expect the
adoption of SFAS No. 143 to have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Company was required to adopt the provisions of SFAS No. 144 for its
-8-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
2002 fiscal year. The adoption of SFAS No. 144 did not have a material impact on
the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 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 No. 145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have
a material impact on the financial position or results of operations of the
Company.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact, if any, of SFAS No. 146 on its consolidated financial
statements.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
a Vendor's Products, which was later codified along with 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 was effective for
the Company in the first quarter of fiscal 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. The adoption of EITF
01-09 did not have a material impact on the Company's financial position or its
results of operations.
Note 2 - Reorganization Items
In connection with the Chapter 11 Cases, the Company has initiated several
actions and organizational changes designed 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 addition, the Company continues to review its operations and identify
assets available for potential disposition. 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.
The amount of proceeds that will be realized, if any, and the effect of any
additional asset sales on the Company's proposed plan of reorganization cannot
presently be determined. The Company has recorded reductions to the net
realizable value for assets the Company believes will not be fully realized when
they are sold or abandoned.
As a direct result of the Chapter 11 Cases, the Company has recorded
certain liabilities, incurred certain legal and professional fees and
written-down certain assets. The transactions recorded were consistent with the
provisions of SOP 90-7.
-9-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
The components of reorganization items for the first quarter fiscal 2002
are:
Professional fees $7,181
Employee retention and transaction bonuses 5,163
Loss from the sale of Penhaligon's and GJM 2,139
Loss from sales of fixed and other assets, net 126
Other 922
-------
$15,531
=======
For the first quarter of fiscal 2002 cash reorganization items were $12,143
and non-cash reorganization items were $3,388. Certain reorganization related
accruals are classified with 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
presently be determined.
Note 3 - Intangible Assets and Goodwill
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives effective for the Company's 2002 fiscal
year. SFAS No. 142 addresses financial accounting and reporting for intangible
assets and acquired goodwill. SFAS No. 142 requires that indefinite lived
intangible assets be tested for impairment at least annually. Intangible assets
with finite useful lives are to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
As of January 5, 2002 the Company had intangible assets with indefinite
useful lives and goodwill net of accumulated amortization of approximately
$940,065. The Intimate Apparel Division's intangible assets consisted of
goodwill of $136,960 and indefinite lived intangible assets (primarily owned
trademarks and rights to utilize certain trademarks in perpetuity) of $64,992.
The Sportswear and Swimwear Division's intangible assets consisted of goodwill
of $552,349 and indefinite lived intangible assets (primarily owned trademarks
and license rights for periods exceeding forty years) of $172,198. The Retail
Stores Division had intangible assets consisting of goodwill of $3,616. The
Company also had other indefinite lived intangible assets consisting of owned
trademarks of $9,950. The Company's Sportswear and Swimwear Division also had
definite lived intangible assets consisting of certain license rights of $6,316.
Under the provisions of SFAS No. 142, goodwill is deemed impaired if the
net book value of a business reporting unit exceeds the fair value of that
business reporting unit intangible assets are deemed impaired if the carrying
amount exceeds the face value of the assets. The Company obtained an independent
appraisal of its Business Enterprise Value ("BEV") in connection with the
preparation of its plan of reorganization. The Company allocated the appraised
BEV to its various reporting units and determined that the value of certain of
the Company's intangible assets and goodwill were impaired. As a result, the
Company recorded a charge of $801,622 net of income tax benefit of $53,513 as a
cumulative effect of a change in accounting from the adoption of SFAS No. 142.
The remaining value of intangible assets with indefinite useful lives and
goodwill after the adoption of SFAS No. 142 is $84,930. The Intimate Apparel
Division has indefinite lived intangible assets of $52,037. The Sportswear and
Swimwear Division has indefinite lived intangible assets of $19,327. The Company
also has other indefinite lived intangible assets of $9,950. The Retail Stores
Division has goodwill of $3,616. In addition, the Sportswear and Swimwear
Division has definite lived intangible assets of $6,316.
-10-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Amortization expense related to goodwill and intangible assets was $226 in
the first quarter of fiscal 2002 and $9,175 in the first quarter of fiscal 2001,
respectively. Pro-forma net loss for the first quarter of fiscal 2001, assuming
SFAS No. 142 had been adopted effective January 1, 2001 is as follows:
Net loss - as originally reported $(63,618)
Reduction in amortization expense 8,949
--------
Net loss - as adjusted $(54,669)
========
Basic and diluted loss per share:
As reported $ (1.20)
========
As adjusted $ (1.03)
========
Note 4 - Special Charges
The details of reserve utilization during the first quarter of fiscal 2002 and
the first quarter of fiscal 2001 and reserves remaining at April 6, 2002 and
April 7, 2001 for costs incurred in connection with the fiscal 2000 special
charges are summarized below:
Inventory Facility Employee
write-downs shutdown termination
and and contract and Legal and
other asset termination severance Retail outlet other related
write-offs costs (a) costs store closings costs Total
---------- ------------ ------------ -------------- ------------- --------
Balance as of January 5, 2002 $ -- $6,057 $279 $ -- $ -- $ 6,336
Cash reductions -- -- (128) -- -- (128)
------- ------ ------ ------ ------ --------
Balance as of April 6, 2002 $ -- $6,057 $151 $ -- $ -- $ 6,208
======= ====== ====== ====== ====== ========
Balance as of December 30, 2000 $29,501 $11,805 $6,655 $4,711 $3,820 $ 56,492
Cash reductions -- (2,318) (2,033) (458) (2,832) (7,641)
Non-cash reductions (18,138) (48) -- (1,754) -- (19,940)
------- ------ ------ ------ ------ --------
Balance as of April 7, 2001 $11,363 $9,439 $4,622 $2,499 $ 988 $ 28,911
======= ====== ====== ====== ====== ========
(a) Includes $2,211 of liabilities subject to compromise as of April 6, 2002 and
January 5, 2002.
-11-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Note 5 - Inventory
April 6, January 5,
2002 2002
-------- ----------
Finished goods $340,055 $375,956
Work in process 43,700 47,325
Raw materials 38,148 45,718
-------- --------
421,903 468,999
Less: reserves 45,799 50,097
-------- --------
$376,104 $418,902
======== ========
Note 6 - Debt
April 6, 2002 January 5, 2002
------------- ---------------
Amended DIP $ 108,859 $ 155,915
$600 million term loan 587,548 587,548
Revolving credit facilities 1,018,719 1,018,719
Term Loan agreements 27,161 27,161
Capital lease obligations 5,018 5,582
Foreign credit facilities (a) 138,070 143,439
Equity Agreement Notes 56,677 56,677
----------- -----------
1,942,052 1,995,041
Reclassified to liabilities subject to compromise (1,833,193) (1,839,126)
----------- -----------
Total debt (all current) $ 108,859 $ 155,915
=========== ===========
(a) The reduction in the amount of foreign credit facilities primarily reflects
repayments of certain amounts from the proceeds generated from the sale of
GJM and Penhaligon's.
Total debt does not include trade drafts outstanding as of April 6,
2002 and January 5, 2002 of $351,367 that 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 ("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 on August 27, 2001,
December 27, 2001, February 5, 2002 and May 15, 2002. In addition, the
Administrative Agent granted certain extensions under the DIP on April 12, 2002,
June 19, 2002, July 18, 2002 and August 22, 2002 (the "Amended DIP"). The
amendments and extensions, among other things, amend certain definitions and
covenants, permit the sale of certain of the Company's assets and businesses,
extend certain deadlines with respect to certain asset sales and 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.
-12-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Amounts outstanding under the Amended DIP at April 6, 2002 and January
5, 2002 were $108,859 and $155,915 respectively. In addition, the Company had
stand-by and documentary letters of credit outstanding under the Amended DIP at
April 6, 2002 and January 5, 2002 of approximately $53,146 and $60,031
respectively. The total amount of additional credit available to the Company at
April 6, 2002 and January 5, 2002 was $221,212 and $159,054 respectively.
As of August 30, 2002, the Company had repaid all outstanding
borrowings under the Amended DIP and had approximately $70,507 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 April 6, 2002. All pre-petition debt of the
Debtors has been classified as liabilities subject to compromise in the
consolidated condensed balance sheet at April 6, 2002 and 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
inter-creditor agreements. Total interest accrued on foreign debt agreements was
$1,588 in the first quarter of fiscal 2002. Total interest accrued on foreign
debt agreements since the Petition Date totaled $5,698, which is included in
liabilities subject to compromise at April 6, 2002. The Company's plan or plans
of reorganization may require the payment of such interest.
Note 7 - 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
liabilities subject to compromise at April 6, 2002 and January 5, 2002:
-13-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
April 6, 2002 January 5, 2002
------------- ---------------
Current liabilities:
Accounts payable $ 386,796 $ 386,711
Accrued liabilities and interest 67,402 66,071
Debt:
$600 million term loan 587,548 587,548
Revolving credit facilities 1,018,719 1,018,719
Term Loan agreements 27,161 27,161
Capital lease obligations 5,018 5,582
Foreign credit facilities (a) 138,070 143,439
Equity Agreement Notes 56,677 56,677
Company-obligated mandatorily redeemable convertible 120,000 120,000
preferred securities
Other liabilities 27,485 27,485
---------- ----------
$2,434,876 $2,439,393
========== ==========
(a) The reduction in the amount of foreign credit facilities primarily reflects
repayments of certain amounts from the proceeds generated from the sale of
GJM and Penhaligon's.
Note 8 - Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities.
In 1996, the Company's wholly owned subsidiary, Designer Holdings Ltd.
("Designer Holdings") issued 2.4 million Company-obligated mandatorily
redeemable convertible preferred securities with an aggregate nominal value of
$120,000 (the "Preferred Securities"). Each Preferred Security is convertible
into 0.6888 of a share of the Company's common stock, or an aggregate of
1,653,177 shares. The nominal value of the Preferred Securities is included in
liabilities subject to compromise at April 6, 2002 and January 5, 2002. 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 operation of the provisions of the Bankruptcy Code applicable to
confirmation of a plan or plans of reorganization, the Company believes that
under the plan of reorganization it contemplates filing with the Bankruptcy
Court holders of the Preferred Securities will receive a modest distribution
if the claimants thereunder do not oppose the plan.
The following summarizes the unaudited financial information of
Designer Holdings, as of April 6, 2002 and January 5, 2002 and for the three
months ended April 6, 2002 and April 7, 2001.
The information below may not be indicative of future operating
results.
-14-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Balance sheet summary:
April 6, January 5,
2002 2002
-------- ----------
Current assets $ 87,966 $ 96,536
Noncurrent assets 136,102 421,955
Current liabilities 24,279 24,684
Noncurrent liabilities 41,535 39,562
Liabilities subject to compromise:
Current liabilities 8,403 8,564
Redeemable preferred securities 120,000 120,000
Stockholders' equity 26,510 325,681
Statement of operations summary:
Three months ended
-------------------------------
April 6, April 7,
2002 2001
--------- --------
Net revenues $ 70,476 (a) $ 80,326 (a)
Cost of goods sold 53,323 60,959
Net loss (299,171)(c) (19,852)(b)
(a) Excludes Retail Store Division's net revenues of $14,707 and $11,340 for
the three months ended April 6, 2002 and April 7, 2001 respectively. As a
result of the integration of Designer Holdings into the operations of the
Company, cost of goods sold and net income associated with these net
revenues cannot be separately identified.
(b) Net income (loss) includes a charge of $4,123 for general corporate
expenses.
(c) Includes the cumulative effect of a change in accounting principle of
$302,655 related to the adoption of SFAS No. 142
Note 9 - Supplemental Cash Flow Information
Three months ended
----------------------------
April 6, April 7,
2002 2001
-------- --------
Cash paid for:
Interest $3,202 $57,983
Income taxes, net of refunds received 1,706 5,222
Note 10 - Business Segments
The Company operates in three segments: Sportswear and Swimwear,
Intimate Apparel, and Retail Stores.
The Sportswear and Swimwear segment 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'r', Calvin Klein'r',
Catalina'r', A.B.S. by Allen Schwartz'r', Speedo'r', Speedo'r' Authentic
Fitness'r', Anne Cole'r', Cole of California'r', Sandcastle'r', Sunset Beach'r',
Lauren'r'/Ralph Lauren'r', Ralph'r'/Ralph Lauren'r', Ralph Lauren'r', Polo Sport
Ralph Lauren'r' and Polo Sport-RLX'r' brand names.
-15-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
The Intimate Apparel segment designs, manufactures, imports and markets
moderate to premium priced intimate apparel for women under the Warner's'r',
Olga'r', Calvin Klein'r', White Stag'r', Lejaby'r', Rasurel'r' and
Bodyslimmers'r' brand names, and men's underwear under the Calvin Klein'r' brand
name.
The Retail Stores segment 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'r' Authentic Fitness'r' name as
well as through Company outlet stores for the disposition of excess and
irregular inventory. The Company had 75 Speedo Authentic Fitness and 51 retail
outlet stores as of April 6, 2002.
The accounting policies of the segments are the same as those of the
Company. Transfers to the Retail Stores segment occur at standard cost and are
not reflected in the net revenues of the Intimate Apparel or Sportswear and
Accessories segments. The Company evaluates the performance of its segments
based upon operating income (loss) before corporate charges and reorganization
items. Information by business segment is set forth below.
Sportswear
and Intimate Retail
Swimwear Apparel Stores Total
---------- -------- ------- --------
Three months ended April 6, 2002:
- -------------------------------------
Net revenues $236,944 $144,167 $28,941 $410,052
Segment operating income (loss) 26,688 12,506 (4,210) 34,984
Three months ended April 7, 2001:
- -------------------------------------
Net revenues $291,516 $162,879 $44,824 $499,219
Segment operating income (loss) 32,686 8,530 (3,588) 37,628
A reconciliation of total segment operating income (loss) to total
consolidated income (loss) before taxes and cumulative effect of a change in
accounting principle for the three months ended April 6, 2002 and April 7, 2001,
respectively, is as follows:
Three Months Ended
April 6, April 7,
2002 2001
--------- --------
Segment operating income (loss) $34,984 $ 37,628
General corporate expenses not allocated 18,690 31,420
------- --------
Operating income before reorganization
items 16,294 6,208
Reorganization items 15,531 -
------- --------
Operating income 763 6,208
Investment (income) expense - 2,964
Interest expense 6,964 63,940
------- --------
Loss before provision for income taxes and
cumulative effect of change in accounting principle $(6,201) $(60,696)
======= ========
-16-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Note 11 - Comprehensive Loss
The components of comprehensive loss for the three months ended April
6, 2002 and April 7, 2001 are as follows:
Three Months Ended
------------------------------
April 6, April 7,
2002 2001
--------- --------
Net loss $(857,752) $(63,618)
--------- --------
Other comprehensive income loss:
Foreign currency translation adjustments 1,730 796
Change in unfunded minimum pension liability (2,000) (1,530)
Transition adjustment for SFAS No. 133 adoption - 20,328
Change in fair value of cash flow hedge, interest rate swaps - (202)
Unrealized loss on marketable securities (45) (14)
--------- --------
Total other comprehensive income (loss) (315) 19,378
--------- --------
Comprehensive loss $(858,067) $(44,240)
========= ========
The transition adjustment related to the reclassification of a gain on
the termination of certain interest rate swaps from other liabilities to other
comprehensive income.
The components of accumulated other comprehensive loss as of April 6,
2002 and January 5, 2002 is as follows:
April 6, January 5,
2002 2002
-------- ----------
Unfunded minimum pension liability $(34,494) $(32,494)
Foreign currency translation adjustments (18,831) (20,561)
Unrealized holding gain (loss), net (6) 39
-------- --------
Total accumulated other comprehensive loss $(53,331) $(53,016)
======== ========
Note 12 - Income Taxes
The provision for income taxes for the first quarter of fiscal 2002 of
$49,929 reflects an increase in the Company's valuation allowance of
approximately $46,058 and accrued income taxes of approximately $3,871 on
foreign earnings. The increase in the valuation allowance during the first
quarter of fiscal 2002 results from an increase in the Company's deferred tax
assets that may not be realized. The Company has not provided any tax benefit
for domestic losses incurred during the first quarter of fiscal 2002.
The provision for income taxes for the first quarter of fiscal 2001 of
$2,922 reflects accrued taxes on foreign earnings. The Company has not provided
any tax benefit for domestic losses incurred in the first quarter of fiscal
2001.
The tax effect associated with impairment losses was recorded by the
Company in accordance with the adoption of SFAS No. 142 during the first quarter
of fiscal 2002.
-17-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Note 13 - Equity
- ----------------
Three Months Ended
--------------------------------
April 6, April 7,
2002 2001
--------- --------
Numerator for basic and diluted loss per share:
Loss before cumulative effect of change in accounting $ (56,130) $(63,618)
Cumulative effect of change in accounting (801,622) -
--------- --------
Net loss $(857,752) $(63,618)
========= ========
Denominator for basic and diluted loss per share -- weighted
average shares 52,936 52,874
========= ========
Basic loss per share before cumulative effect
of change in accounting (a) (b) $ (1.06) $ (1.20)
========= ========
Diluted loss per share before cumulative effect
of change in accounting (a) (b) $ (1.06) $ (1.20)
========= ========
(a) The effect of potentially dilutive securities has been excluded from the
computation of loss per share for both the first quarter of fiscal 2002 and
the first quarter of fiscal 2001 because the effect would have been
anti-dilutive. Dilutive securities at the end of the first quarter of
fiscal 2002 and the first quarter of fiscal 2001 included options to
purchase 5,293,342 shares and 15,699,796 shares of common stock, unvested
restricted stock of 19,424 shares and 260,950 shares, respectively.
Dilutive securities also includes 5,200,000 shares which are issuable
pursuant to the Equity Agreements at April 6, 2002 and April 7, 2001,
respectively.
(b) There were no outstanding, in-the-money options at April 6, 2002.
April 6, April 7,
2002 2001
------------ -------------
Number of shares under option 5,293,342 15,699,796
Range of exercise prices $0.67-$42.88 $2.88-$42.88
Options to purchase shares of common stock outstanding at April 6, 2002 and
April 7, 2001 were not included in the computation of diluted earnings per share
because the option exercise price was greater than the average market price of
the common shares.
Incremental shares issuable on the assumed conversion of the Preferred
Securities amounting to 1,653,177 shares were not included in the computation of
diluted earnings per share for any of the periods presented, as the impact would
have been anti-dilutive.
The Company has reserved 16,132,022 shares of Class A Common Stock for
issuance under its various stock option plans as of April 6, 2002. In addition,
as of April 6, 2002 there are 12,242,629 shares of Class A Common Stock in
treasury stock available for the issuance under certain of the plans.
-18-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
Note 14 - 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.
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 in issue (the "Speedo
Licenses") may not be terminated.
On or about October 30, 2001, SIL filed a motion in 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 asserting an administrative priority claim in excess of $25 million
(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.
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 current and
former 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 "First
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 First 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
-19-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
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. On July 30, 2002, the plaintiffs'
voluntarily dismissed, without prejudice, their claims against the Company.
Between April 20, 2001 and May 31, 2001, five putative class action
complaints, against the Company and certain of its current and former 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 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. On August 21, 2002, plaintiffs filed a third amended complaint
adding the Company's current independent auditors as a defendant.
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. On July 18, 2002, the SEC staff informed the
Company that it intends to recommend that the SEC authorize a civil 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 invited the Company to make a
Wells Submission describing the reasons why no such action should be brought. On
September 3, 2002, the Company filed its 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 operations or its business.
Note 15 - Supplemental Condensed Financial Information
- ------------------------------------------------------
The following condensed financial statements of The Warnaco Group, Inc., 36
of its 37 U.S. subsidiaries and Warnaco Canada (the "Debtors") represent the
condensed consolidated financial position at April 6, 2002 and January 5, 2002,
results of operations and cash flows for the Debtors for the first quarter of
fiscal 2002.
-20-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
April 6, 2002 January 5, 2002
------------- ---------------
ASSETS
Current assets $ 591,528 $ 624,623
Net property, plant and equipment 178,886 191,117
Intercompany accounts, net 44,002 44,532
Intangible assets, net 80,480 869,659
Investment in affiliates 119,599 181,212
----------- -----------
$ 1,014,495 $ 1,911,143
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current Liabilities:
Debtor-in-Possession revolving credit facility $ 108,859 $ 155,915
Other current liabilities 146,904 135,383
----------- -----------
Total current liabilities 255,763 291,298
Other long-term liabilities 33,087 31,736
Liabilities subject to compromise 2,434,876 2,439,393
Stockholders' deficiency:
Class A Common Stock, $0.01 par value
130,000,000 shares authorized, 65,232,594 issued 654 654
Additional paid-in-capital 909,054 909,054
Accumulated other comprehensive loss (53,331) (53,016)
Deficit (2,251,426) (1,393,674)
Treasury stock, at cost (313,889) (313,889)
Unearned stock compensation (293) (413)
----------- -----------
Total stockholders' deficiency (1,709,231) (851,284)
----------- -----------
$ 1,014,495 $ 1,911,143
=========== ===========
-21-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
For the Three
Months Ended
April 6, 2002
--------------
Net revenues $ 346,771
Cost of goods sold 260,807
---------
Gross profit 85,964
Selling, general and administrative expenses 77,864
---------
Operating income before reorganization items 8,100
Reorganization items 14,391
Equity in (income) loss of unconsolidated subsidiaries (4,943)
---------
Operating income (1,348)
Interest expense 6,923
Other (income) expense (491)
---------
Loss before provision for income taxes
and cumulative effect of change in accounting
principle (7,780)
Provision for income taxes 48,350
---------
Loss before cumulative effect of
change in accounting principle (56,130)
Cumulative effect of change in accounting
principle net of income tax benefit 801,622
---------
Net loss $(857,752)
=========
-22-
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, excluding share data)
(Unaudited)
For the Three
Months Ended
April 6, 2002
-------------
Cash flows from operating activities:
Net loss $(857,752)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 12,332
Amortization of deferred financing costs 2,350
Cumulative effect of the change in accounting 801,622
Increase in income tax valuation allowance 53,513
Loss on sale of GJM and Penhaligon's 2,139
Accounts receivable (12,283)
Inventories 44,761
Accounts payable and accrued liabilities 2,430
Change in pre-petition liabilities 1,415
Prepaid expenses and other current assets 11,587
Net change in intercompany and investment accounts (74,435)
Change in other long-term liabilities 55,535
---------
Net cash provided by operating activities 43,214
Cash flows from investing activities:
Capital expenditures, net of disposals 303
---------
Net cash provided by investing activities 303
Cash flows from financing activities:
Net repayments under Pre-petition Credit Facilities (356)
Net repayments under Amended DIP (47,056)
---------
Net cash used in financing activities (47,412)
Translation adjustments 1,730
---------
Net decrease in cash and cash equivalents (2,165)
Cash at beginning of period 18,758
---------
Cash at end of period $ 16,593
=========
-23-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company is subject to certain risks and uncertainties that could
cause its future results of operations to differ materially from its historical
results of operations and those expected in the future. The Company generally is
subject to certain risks that could affect the value of the Company's common
stock. Please refer to Item 1. Business included in the Company's Annual Report
on Form 10-K for the year ended January 5, 2002 for a discussion of the
Company's business operations.
Proceedings under Chapter 11 of the Bankruptcy Code
On the Petition Date the Company, 36 of its 37 U.S. subsidiaries and
Warnaco Canada (the "Debtors") each filed a petition for relief under Chapter 11
of the Bankruptcy Code. 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 has stabilized the business of the Debtors and evaluated the
Company's operations as part of the development of a plan of reorganization.
After filing its proposed 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 term 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 condensed financial statements. The Debtors
continue to review their operations and identify assets for disposition.
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 August 30, 2002, the
Company sold certain assets including its GJM and Penhaligon's business units
and the inventory of certain retail outlet stores generating net proceeds of
approximately $43 million in the aggregate.
The 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.
Basis of Presentation
The Company's consolidated condensed financial statements included in
this Quarterly Report have been prepared on a "going concern" basis in
accordance with accounting principles generally accepted in the United States of
America. 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 condensed 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 its ability (i) to formulate a plan of reorganization that will gain the
approval of the parties required by the Bankruptcy Code and the Bankruptcy
Court, (ii) to comply with the terms of the Amended DIP, (iii) to return to
profitability, and (iv) to generate sufficient cash flows
-24-
from operations and obtain financing sources to meet future obligations. These
matters create substantial doubt about the Company's ability to continue as a
"going concern".
Discussion of Critical Accounting Policies
SEC Financial Reporting Release No. 60 encourages companies to include a
discussion of critical accounting policies or methods used to prepare financial
statements. In addition, Financial Reporting Release No. 61 encourages companies
to include a discussion addressing, among other matters, liquidity, off-balance
sheet arrangements and contractual obligations and commercial commitments. 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 consolidated condensed
financial statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses. Actual results could materially differ from
these estimates. The estimates the Company makes are based upon historical
factors, current circumstances and the experience and judgement 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 amounts 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 ultimately be settled for cannot be determined at this
time.
The Company has identified reorganization items related to the Company's
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 amount of liabilities that will be
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 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 be settled for more or less than was originally estimated.
In fiscal 2000, the Company 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 involved 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 will ultimately be realized from asset sales or liabilities 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 estimated amounts are recorded when it
becomes evident that a particular item will be settled for more or less than
was originally estimated.
In the first quarter of fiscal 2002, the Company recorded a charge of
$801,622, net of income tax benefit of $53,513 for the cumulative effect of a
change in accounting related to the adoption of SFAS No. 142. The determination
of the amount of the charge for the cumulative effect involved significant
judgement and the use of estimates of the future earnings of the Company and its
various business units and the fair value assigned to the Company's various
assets and liabilities. The amount that the Company and
-25-
its various business units will ultimately earn and the future fair value of the
Company's assets and business units could differ significantly from those
estimates.
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 a
general 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, most of which are
not controlled by the Company or its management. The determination of the amount
of the allowance accounts is subject to significant levels of judgment and
estimation by the Company's management. If circumstances change or economic
conditions deteriorate, the Company may need to increase the allowance for
doubtful accounts significantly. The Company has purchased 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. 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. As of April 6, 2002, the Company
had identified inventory with a carrying value of approximately $64.0 million as
potentially excess and or obsolete and had approximately $45.8 million of
inventory reserves for this excess and obsolete inventory and for other
inventory adjustments. As of January 5, 2002, the Company had identified
inventory with a carrying value of approximately $88.2 million as potentially
excess and or obsolete and had approximately $50.1 million of inventory reserves
for this excess and obsolete inventory and for other inventory adjustments.
Long-Lived Assets. The Company reviews its long-lived assets for possible
impairment when events or circumstances indicate that the carrying value 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.
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.
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 reorganized its Retail
Stores Division by closing 86 of the 267 stores it operated at the beginning of
fiscal 2001. The Company closed 55 additional stores in fiscal 2002 and
-26-
plans to close approximately 50 additional stores by the end of 2002.
The Company recorded approximately $2,500 of lease termination costs in the
second and third quarters of fiscal 2002 related to the additional retail store
closings.
The Debtors continue to review their operations and identify assets
available for potential disposition. 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 $20.5 million in the
aggregate. In fiscal 2001, the Company recorded an impairment loss related to
the goodwill of GJM of approximately $26.8 million.
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 asset
impairment losses for those assets that the Company believes will not be fully
realized when they are sold or abandoned.
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 condensed statement of
operations in the first quarter of fiscal 2002 are $15.5 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 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.
-27-
Results of Operations.
STATEMENT OF OPERATIONS (SELECTED DATA)
Three Months Ended
----------------------------------------------------
% of % of
April 6, net April 7, net
2002 revenue 2001 revenue
---- ------- ---- -------
(Amounts in thousands of dollars)
(Unaudited)
Net revenues $410,052 $499,219
Cost of goods sold 291,640 353,942
--------- ---------
Gross profit 118,412 28.9% 145,277 29.1%
Selling, general and administrative expenses 102,118 24.9% 139,069 27.9%
--------- ---------
Operating income before reorganization items 16,294 4.0% 6,208 1.2%
Reorganization items 15,531 -
--------- ---------
Operating income 763 0.2% 6,208 1.2%
Investment loss - 2,964
Interest expense 6,964 63,940
Provision for income taxes 49,929 2,922
--------- ---------
Loss before cumulative effect of
change in accounting $(56,130) $(63,618)
========= =========
The Company's results of operations for the first quarter of fiscal 2001
included 14 weeks of operations based on a 52/53 week fiscal year compared to 13
weeks in the first quarter of fiscal 2002.
Net Revenues
Net revenues decreased $89.2 million, or 17.9%, to $410.1 million in the
first quarter of fiscal 2002 compared with $499.2 million in the first quarter
of fiscal 2001. Sportswear and Swimwear Division net revenues decreased $54.6
million or 18.7%, Intimate Apparel Division net revenues decreased $18.7 million
or 11.5% and Retail Stores Division net revenues decreased $15.9 million or
35.4%.
Sportswear and Swimwear Division. Net revenues decreased $54.6 million or
18.7% as follows:
Three months ended
---------------------------
April 6, April 7, Increase percentage
2002 2001 (Decrease) change
---- ---- ---------- ------
Authentic Fitness $112,572 $146,203 $(33,631) -23.0%
Chaps 32,555 43,512 (10,957) -25.2%
Calvin Klein Jeans/Kids 79,215 89,282 (10,067) -11.3%
Calvin Klein Accessories 3,401 4,013 (612) -15.3%
ABS 9,201 8,506 695 8.2%
-------- -------- -------- ----
Sportswear and Swimwear Division $236,944 $291,516 $(54,572) -18.7%
======== ======== ======== ====
Authentic Fitness reflects declines in Designer swimwear of $21.2 million
or 33.4% driven principally by the loss of the Victoria's Secret private label
business and decreases in Speedo swimwear of $12.4 million driven principally by
a strategic decision to reduce sales to certain swim team dealers. Chaps
reflects the elimination of sales to membership clubs, the loss of the Dillard's
business and a
-28-
strategic decision to reduce sales to certain customers in Mexico. Calvin Klein
Jeans/Kids reflects reductions in sales to off-price retailers, the loss of
business at Dillard's and a strategic decision to reduce sales to certain
customers in Mexico. The Company has regained components of the lost Dillard's
business and expects to begin shipping Dillard's by the fourth quarter of fiscal
2002. Calvin Klein accessories reflects reductions in U.S. sales associated with
post-September 11th reductions in business with airport duty free shops somewhat
offset by increases in the European accessories business. ABS has benefited from
a favorable reception of its new styles at retail.
Intimate Apparel Division. Net revenues decreased $18.7 million, or
11.5%, to $144.2 million in the first quarter of fiscal 2002 compared with
$162.9 million in the first quarter of fiscal 2001. Excluding net revenues from
sold and discontinued business units (GJM, Fruit of the Loom and Weight
Watchers), Intimate Apparel net revenues increased $2.7 million, or 1.9%, to
$140.7 million in the first quarter of fiscal 2002 compared to $138.0 million in
the first quarter of fiscal 2001 as follows:
Three months ended
---------------------------
April 6, April 7, Increase percentage
2002 2001 (Decrease) change
---- ---- ---------- ------
Continuing:
Warner's/Olga $ 58,518 $ 55,474 $ 3,044 5.5%
Calvin Klein Underwear 52,775 53,193 (418) -0.8%
Lejaby 24,525 24,400 125 0.5%
Mass sportswear licensing 4,832 4,899 (67) -1.4%
-------- -------- -------- ----
Total continuing 140,650 137,966 2,684 1.9%
Total discontinued 3,517 24,913 (21,396) -85.9%
-------- -------- -------- ----
Intimate Apparel Division $144,167 $162,879 $(18,712) -11.5%
======== ======== ======== ====
Warner's/Olga net revenues increased $3.0 million or 5.5% through improved
distribution fulfillment. The decrease in Calvin Klein underwear net revenues
reflects the discontinuation of CK Kids underwear, somewhat offset by increases
in other US accounts as well as increases in Asia.
Retail Stores Division. Net revenues decreased $15.9 million or 35.4% as
follows:
Three months ended
---------------------------
April 6, April 7, Increase percentage
2002 2001 (Decrease) change
---- ---- ---------- ------
Retail outlets $18,105 $28,355 $(10,250) -36.1%
Authentic Fitness retail 9,939 13,793 (3,854) -27.9%
Penhaligon's 676 2,308 (1,632) -70.7%
IZKA 221 368 (147) -39.9%
------- ------- -------- ----
$28,941 $44,824 $(15,883) -35.4%
======= ======= ======== ====
The decrease in retail outlets primarily reflects a reduction in the number
of outlet stores the Company operates coupled with same store sales declines of
approximately 9.0%. The decrease in Authentic Fitness retail net revenues also
reflects a reduction in the number of stores the Company operates partially
offset by an increase in same store sales of approximately 1.7%. The
Penhaligon's business was sold in February 2002 and IZKA, a French intimate
apparel retail subsidiary is in the process of being liquidated.
-29-
Gross Profit
Gross profit decreased $26.9 million, or 18.5%, to $118.4 million in
the first quarter of fiscal 2002 compared with $145.3 million in the first
quarter of fiscal 2001. Gross margin was 28.9% in the first quarter of fiscal
2001 compared with 29.1% in the first quarter of fiscal 2001. The decrease in
gross profit primarily reflects the lower net revenues noted above. Decreased
gross margin in the Sportswear and Swimwear Division and in the Retail Stores
Division was somewhat offset by higher gross margin in the Intimate Apparel
Division. Sportswear and Swimwear primarily reflected lower revenues coupled
with increased markdown expenses. The higher gross margin in Intimate Apparel
reflects improved manufacturing efficiencies for Warner's/Olga and an improved
mix of business for Calvin Klein Underwear. Retail Stores reflects the reduced
store base.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $37.0 million,
or 26.6%, to $102.1 million in the first quarter of fiscal 2002 compared to
$139.1 million in first quarter of fiscal 2001. Selling, general and
administrative expenses as a percentage of net revenue were 24.9% in the first
quarter of fiscal 2002 compared with 27.9% in the first quarter of fiscal 2001.
The reduction in selling, general and administrative expenses reflects lower
variable selling expenses due to lower sales as noted above. Selling, general
and administrative expenses reflect a $8.9 million reduction in amortization
expense in the first quarter of fiscal 2002 compared to the first quarter of
fiscal 2001 related to the adoption of SFAS No. 142. The Retail Stores Division
reduced selling, general and administrative expenses by approximately $8.2
million due to the reduction in the number of stores the division was operating
and the sale of Penhaligon's. Intimate Apparel Division selling, general and
administrative expenses were reduced by approximately $2.0 million related to
the sale of GJM and the discontinuance of Fruit of the Loom and Weight Watchers.
Corporate selling, general and administrative expenses were reduced by
approximately $13.2 million in the first quarter of fiscal 2002 compared to the
first quarter of fiscal 2001 due to cost saving measures implemented as part of
the Company's restructuring efforts.
Operating Profit before Reorganization Items
Operating income before reorganization items increased $10.1 million to
$16.3 million in the first quarter of fiscal 2002 compared to $6.2 million in
the first quarter of fiscal 2001 as follows:
Three months ended
-------------------------
April 6, April 7, increase percentage
2002 2001 (decrease) change
-------- -------- ---------- ----------
Sportswear and Swimwear $ 26,688 $ 32,686 $ (5,998) -18.4%
Intimate Apparel 12,506 8,530 3,976 46.6%
Retail Stores (4,210) (3,588) (622) -17.3%
-------- -------- -------- ----------
34,984 37,628 (2,644) -7.0%
General corporate expenses, not allocated (18,690) (31,420) (12,730) -40.5%
-------- -------- -------- ----------
$ 16,294 $ 6,208 $ 10,086 162.5%
======== ======== ======== ==========
-30-
Sportswear and Swimwear Division: Operating profit decreased 18.4% to
$26.7 million as follows:
Three months ended
------------------------
April 6, April 7, increase percentage
2002 2001 (decrease) change
------- ------- ---------- ----------
Authentic Fitness $20,921 $33,531 $(12,610) -37.6%
Chaps 3,526 3,367 159 4.7%
Calvin Klein Jeans/Kids 1,658 (3,000) 4,658 155.3%
Calvin Klein Accessories 111 399 (288) -72.2%
ABS 472 (1,611) 2,083 129.3%
------- ------- -------- ----------
$26,688 $32,686 $ (5,998) -18.4%
======= ======= ======== ==========
Authentic Fitness reflects lower net revenues in Designer (loss of
Victoria's Secret) and Speedo (reduction in sales to swim team dealers) with
lower gross margin (increased markdowns) somewhat offset by lower selling,
general and administrative expenses. Chaps reflects lower net revenues
(elimination of sales to membership clubs) offset by improved gross margin and
lower selling, administrative and general expenses. Calvin Klein Jeans/Kids
reflects lower net revenues (loss of Dillard's, off-price retailers and Mexico
decreases) offset by improved gross margin and lower selling, general and
administrative expense. ABS reflects higher net revenues coupled with improved
gross margin and lower selling, general and administrative expenses.
Intimate Apparel Division. Operating profit increased $4.0 million, or
46.6%, to $12.5 million as follows:
Three months ended
------------------------
April 6, April 7, increase percentage
2002 2001 (decrease) change
------- ------- -------- ----------
Continuing:
Warner's/Olga $ 150 $(7,802) $ 7,952 101.9%
Calvin Klein Underwear 4,135 6,907 (2,772) -40.1%
Lejaby 4,494 3,884 610 15.7%
Mass sportswear licensing 4,087 4,210 (123) -2.9%
------- ------- ------- ----------
Total continuing 12,866 7,199 5,667 78.7%
Total discontinued (360) 1,331 (1,691) -127.0%
------- ------- ------- ----------
$12,506 $ 8,530 $ 3,976 46.6%
======= ======= ======= ==========
The increase in Warner's/Olga operating profit reflects higher gross
profit and lower selling, general and administrative expenses. The higher gross
profit reflects higher quality of sales to customers and the improved
manufacturing efficiencies. The lower selling, general and administrative
expenses in Warner's/Olga reflect the consolidation of intimate apparel
distribution in the Company's Duncansville facility, as well as other cost
reduction efforts. Calvin Klein underwear reflects higher gross profit offset by
higher marketing expenses associated with the launch of the new men's "Body"
line. Lejaby operating profit increased primarily because of lower amortization
expenses related to the adoption of SFAS No. 142. Mass sportswear licensing
operating income decreased slightly primarily reflecting lower royalty revenues.
Losses from the discontinued Fruit of the Loom and Weight Watchers brands, as
well as operating losses from the GJM business prior to its sale February 2002
comprise the discontinued units operating loss as compared to an operating
profit in the first quarter of fiscal 2001.
Retail Stores Division. Operating loss increased $0.6 million to $4.2
million in the first quarter of fiscal 2002 as follows:
-31-
Three months ended
------------------------
April 6, April 7, increase percentage
2002 2001 (decrease) change
------- ------- ---------- ----------
Retail outlets $(3,127) $(2,587) $(540) -20.9%
Authentic Fitness retail (642) (412) (230) -55.8%
Penhaligon's (125) (188) 63 33.5%
IZKA (316) (401) 85 21.2%
------- ------- ----- ----------
$(4,210) $(3,588) $(622) -17.3%
======= ======= ===== ==========
Retail outlet store operating loss increased primarily due to lower
gross profit associated with fewer stores and a decrease in same store sales of
approximately 9.0%. Authentic Fitness retail stores operating loss increased
primarily due to lower gross profit associated with fewer stores. Penhaligon's
was sold in February 2002 and IZKA is being liquidated.
Reorganization items
Due to the Chapter 11 Cases, the Company has recorded certain items
directly related to the Chapter 11 Cases including legal and professional fees,
employee retention payments, employee transaction bonuses, write-downs and
losses related to the sale of certain assets and other items totaling $15.5
million in the first quarter of fiscal 2002. Reorganization items are separately
identified in the consolidated condensed statement of operations. See Note 2 of
Notes to Consolidated Condensed Financial Statements.
Other Income (loss)
Investment loss was $3.0 million in the first quarter of fiscal 2001.
The investment loss reflects the adjustment of amounts due under the Company's
Equity Forward Purchase Agreements (the "Equity Agreements") based upon changes
in the Company's common stock price. No comparable adjustment was required in
the first quarter of fiscal 2002 because the Equity Agreements are liabilities
subject to compromise.
Interest Expense
Interest expense decreased $57.0 million to $7.0 million in the first
quarter of fiscal 2002 compared with $63.9 million in the first quarter of
fiscal 2001. The decrease reflects the impact of the Chapter 11 Cases wherein
the Company has stopped accruing interest on approximately $2.4 billion of
pre-petition debt. Interest expense for the first quarter of fiscal 2002
primarily includes interest and related fees on the Amended DIP. Certain of the
Company's foreign debt agreements are subject to standstill and inter-creditor
agreements with the Company's pre-petition lenders. The Company has continued to
accrue interest on these foreign debt agreements. The plan of reorganization the
Company contemplates filing will require the payment of such interest. Interest
expense includes approximately $1.6 million of interest on these foreign debt
agreements.
Income Taxes
The provision for income taxes for the first quarter of fiscal 2002 of
$49.9 million reflects an increase in the Company's valuation allowance of
approximately $46.0 million and accrued taxes of $3.9 million on foreign
earnings. The increase in the valuation allowance results from an increase in
the Company's net deferred tax assets that may not be realized. Similar to the
first quarter of 2001, the Company has not provided any tax benefit for domestic
losses incurred during the first quarter of fiscal 2002. The provision for
income taxes for the first quarter of fiscal 2001 of $2.9 million reflects
accrued taxes on foreign earnings.
-32-
Cumulative Effect of Change in Accounting
As of January 5, 2002, the Company had goodwill and other indefinite
lived intangible assets net of accumulated amortization of approximately $940.1
million. The Company adopted SFAS No. 142 effective with the first quarter of
fiscal 2002. Under the provisions of SFAS No. 142, goodwill is deemed impaired
if the net book value of a business reporting unit exceeds the fair value of
that business reporting unit intangible assets are deemed impaired if the
carrying amount exceeds the face value of the assets. The Company obtained an
independent appraisal of its Business Enterprise Value ("BEV") in connection
with the preparation of its plan of reorganization. The Company allocated the
appraised BEV to its various reporting units and determined that the value of
certain of the Company's indefinite lived intangible assets and goodwill was
impaired. As a result, the Company recorded a charge of $801.6 million, net of
income tax benefit of $53.5 million as a cumulative effect of a change in
accounting from the adoption of SFAS No. 142 in the first quarter of fiscal
2002.
Capital Resources and Liquidity.
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 $375.0
million. On July 9, 2001, the Bankruptcy Court approved an increase in the
amount of borrowing available to the Company to $600.0 million. The DIP was
subsequently amended as of August 27, 2001, December 27, 2001, February 5, 2002
and May 15, 2002. In addition, the Administrative Agent granted certain
extensions under the DIP on April 12, 2002, June 19,2002, July 18, 2002 and
August 22, 2002. The amendments and extensions, among other things, amend
certain definitions and covenants, permit the sale of certain of the Company's
assets and businesses, extend certain 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.
The Amended DIP (when originally executed) provided for a $375.0
million non-amortizing revolving credit facility (which includes a letter of
credit facility of up to $200.0 million) (Tranche A) and a $225.0 million
reducing revolving credit facility (Tranche B). 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 $325.0 million. 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% at April 6, 2002) or at the
Citibank N.A. Base Rate plus 1.75% (6.5% at April 6, 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 April 6, 2002 were $108.9
million. In addition, the Company had stand-by and documentary letters of credit
outstanding under the Amended DIP at April 6, 2002 of $53.1 million. The total
amount of additional credit available to the Company at April 6, 2002
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was $221.2 million. As of August 30, 2002, the Company had repaid all amounts
outstanding under the Amended DIP and had approximately $70.5 million of cash
available as collateral against outstanding documentary 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. The Company has
improved its cash position subsequent to the Petition Date by making
improvements in the Company's operations and working capital management and by
selling certain assets. 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 August 30, 2002, the Company sold
certain personal property, certain owned buildings and land and other assets for
approximately $10.2 million, approximately $4.0 million of which was recorded in
the second quarter of fiscal 2002. Substantially all of the net proceeds from
these sales were used to reduce outstanding borrowing under the Amended DIP. 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 $20.5 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 debt agreements of the Company's
foreign subsidiaries which are not part of the Chapter 11 Cases ($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 ($9.8
million) (subsequently disbursed in June 2002) and (iv) create an escrow fund
for the benefit of the purchasers for potential indemnification claims and
working capital valuation adjustments ($1.7 million). In the second quarter of
fiscal 2002, the Company made a strategic decision to close 25 of its outlet
stores. In May 2002, the Company contracted with a third party and sold the
inventory in these stores generating approximately $12 million of net proceeds
in the second quarter of fiscal 2002 which were used to reduce amounts
outstanding under the Amended DIP.
At April 6, 2002, the Company had working capital of $452.5 million,
excluding $2,434.9 million of pre-petition liabilities that are subject to
compromise.
The Debtors continue to review their operations and identify assets
available for potential disposition. 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.
Cash Flows
For the first quarter of fiscal 2002 cash provided by operating
activities was $43.0 million compared to cash used in operating activities of
$184.7 million in the first quarter of fiscal 2001. The improvement in cash flow
from operating activities of $227.7 million in the first quarter of fiscal 2002
compared to the first quarter of fiscal 2001 reflects lower operating income of
$0.8 million in the first quarter of fiscal 2002 compared to $6.2 million in the
first quarter of fiscal 2001 offset by improved working capital management.
Better management of inventory and accounts receivable contributed $112.6
million of cash flow. Cash interest expense was $3.2 million in the first
quarter of fiscal 2002, $54.8 million lower than cash interest expense of $58.0
million in the first quarter of fiscal 2001. The decrease in cash interest is
primarily a result of the Chapter 11 Cases. Depreciation and amortization
expense decreased approximately $10.2 million in the first quarter of fiscal
2002 compared to the first quarter of fiscal 2001 primarily due to the adoption
of SFAS No. 142.
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Net cash provided from investing activities was $19.5 million in the
first quarter of fiscal 2002 compared to cash used in investing activities of
$12.1 million in the first quarter of fiscal 2001. Cash provided from investing
activities in the first quarter of fiscal 2002 primarily reflects proceeds from
the sale of GJM and Penhaligon's of $20.5 million and other asset sales of $0.3
million offset by capital expenditures of $2.0 million. Cash used in investing
activities in the first quarter of fiscal 2001 primarily reflects capital
expenditures of $13.0 million and the increase in intangible assets of $1.1
million offset by $2.0 million of proceeds from the sale or disposition of
capital assets.
Cash used in financing activities of $54.2 million in the first quarter
of fiscal 2002 reflects the repayment of borrowings under the Amended DIP of
$47.1 million and repayments of other debt of $5.9 million, consisting primarily
of foreign debt agreements repaid with proceeds from the sale of GJM and
Penhaligon's. In the first quarter of fiscal 2001, the Company financed its
increase in working capital, as noted above, by borrowing approximately $239.8
million, net of repayments of debt of $5.7 million and reduced amounts borrowed
under its accounts receivable securitzation facility of $80.6 million. Amounts
outstanding under the Amended DIP at April 6, 2002 were $108.9 million. In
addition, the Company had stand-by and documentary letters of credit outstanding
under the Amended DIP at April 6, 2002 of $53.1 million. The total amount of
additional credit available to the Company at April 6, 2002 was approximately
$221.2 million. The Company had cash in operating accounts of approximately
$49.6 million at April 6, 2002, including restricted cash of $10.9 million to be
used to repay certain pre-petition debt obligations from the sale of GJM and
Penhaligon's. 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 August 30, 2002, the Company had repaid all outstanding
amounts borrowed under the Amended DIP and had approximately $157.5 million of
additional credit available under the Amended DIP, not including $70.5 million
of cash available as collateral against outstanding trade and stand-by letters
of credit.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated or completed after June 30, 2001. SFAS No. 141 specifies criteria for
the recognition of certain intangible assets apart from goodwill. The adoption
of SFAS No. 141 did not have an impact on the Company's financial statements.
SFAS No. 142 eliminates the amortization of goodwill and certain other
intangible assets with indefinite lives effective for the Company's 2002 fiscal
year. SFAS No. 142 requires that indefinite lived intangible assets be tested
for impairment at least annually. SFAS No. 142 further requires that intangible
assets with finite useful lives be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. The Company adopted SFAS No. 142
beginning with the first quarter of fiscal 2002, See Note 3 of Notes to
Consolidated Condensed Financial Statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company plans to adopt the
provisions of SFAS No. 143 for its 2003 fiscal year and does not expect the
adoption of SFAS No. 143 to have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Company was required to adopt the provisions of SFAS No. 144 for its 2002
fiscal year. The adoption of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations.
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In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 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 No. 145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002.
The provisions of SFAS No. 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not
have a material impact on the financial position or results of operations of
the Company.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact, if any, of SFAS No. 146 on its consolidated financial
statements.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
a Vendor's Products, which was later codified along with 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 was effective for
the Company in the first quarter of fiscal 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. The adoption of EITF
01-09 did not have a material impact on the Company's financial position or its
results of operations.
Statement Regarding Forward-Looking Disclosure
This Quarterly Report may contain "forward-looking statements" within the
meaning of Section 27A of Securities Act of 1933, as amended and Section 21E of
the Securities Exchange Act of 1934, as amended, 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
international, national, and regional economic conditions, the overall level of
consumer spending, the performance of the Company's products within the
prevailing retail environment, customer acceptance of both new designs and newly
introduced product lines, 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 Quarterly
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 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
-36-
Company's business in general is subject to certain risks that could effect the
value of the Company's stock.
Item 3. 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 to manage these risks since
the Petition Date and has sold or terminated all such arrangements.
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 entered into interest rate swap agreements, which had
the effect of converting the Company's variable rate obligations to fixed rate
obligations, to reduce the impact of interest rate fluctuations on cash flow and
interest expense. As of April 7, 2001, approximately $6.5 million of
interest-rate sensitive obligations were swapped to achieve a fixed rate of
6.6%. As of April 7, 2001, the net fair value of the outstanding interest rate
swap was approximately $0.5 million. The swap that was outstanding at April 7,
2001 was sold in the second quarter of fiscal 2001 at a loss to the Company of
approximately $0.4 million. As of April 6, 2002, the Company had approximately
$108.9 million of borrowings outstanding under the Amended DIP. Such borrowings
are subject to variable interest rates. A hypothetical 10% adverse change in
interest rates as of January 5, 2002 would have increased interest expenses
approximately $0.2 million in the first quarter of fiscal 2002.
Foreign Exchange Risk
The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
British pound and the Euro. 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. As of April 6, 2002, the Company had no such
financial instruments outstanding.
Equity Price Risk
The Company was subject to market risk from changes in its stock price as
a result of its Equity Agreements with several banks prior to the Petition Date.
The Equity Agreements provided for the purchase by the Company of up to 5.2
million shares of the Company's Common Stock and would have matured on August
12, 2002. As of April 6, 2002 banks had purchased the maximum of 5.2 million
shares under the Equity Agreements. Amounts recorded as liabilities subject to
compromise as of April 6, 2002 were approximately $56.7 million. The ultimate
amount that the Company will pay to its pre-petition lenders related to the
Equity Agreements is subject to a confirmed plan or plans of reorganization and
cannot be determined at this time.
Item 4. Controls and Procedures.
The Company's independent auditors, Deloitte & Touche LLP ("Deloitte")
have advised the Company's management and its Audit Committee of the following
matters noted in connection with its audits of the Company's consolidated
financial statements for fiscal 2000 and fiscal 2001 which Deloitte considers
material weaknesses constituting reportable conditions under standards
established by the American Institute of Certified Public Accountants:
-37-
(i) certain corporate and U.S. division accounting personnel lacked
appropriate experience and/or technical accounting knowledge
appropriate for their responsibilities and require additional
supervision and review of their work on an ongoing basis;
(ii) there were an insufficient number of qualified accounting
personnel in certain international accounting departments; and
(iii) there was an absence of appropriate reviews and approvals of
transactions and inadequate procedures for assessing and applying
accounting principles resulting in numerous Company-prepared
closing and adjusting entries at the end of fiscal 2001.
Beginning in the second half of Fiscal 2001 and continuing into Fiscal
2002, new management of the Company has taken corrective actions to address each
of these matters, including:
(i) replacing certain financial staff and hiring additional accounting
and financial staff with appropriate experience and technical
accounting knowledge in certain domestic divisions and in
corporate finance;
(ii) replacing and upgrading certain financial staff in its
international divisions and assigning personnel with extensive
accounting and internal control experience to provide additional
supervision of its international accounting personnel and review
of its international accounting and financial operations; and
(iii) instituting monthly and quarterly reviews to ensure timely and
consistent application of accounting principles and procedures and
approval and appropriate review of transactional activity by each
of the Company's business units; in addition the Company is
recruiting new personnel to create a corporate financial reporting
department with responsibility for financial reporting and the
assessment and application of accounting principles.
The Company continues to evaluate the effectiveness of these actions as
well as the Company's overall disclosure controls and procedures and internal
controls and will take such further actions as dictated by such continuing
reviews.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
The information required by Item 1 of Part II is incorporated herein by
reference to Part I, Item I. Financial Statements - Note 14 - "Legal Matters".
Item 2. Changes in Securities and use of Proceeds
- -------------------------------------------------
None.
Item 3. Defaults upon Senior Securities
- ---------------------------------------
The Company was in default of substantially all of its pre-petition
credit agreements as of April 6, 2002 and January 5, 2002. All pre-petition debt
of the Debtors has been reclassified as liabilities subject to compromise in the
consolidated condensed balance sheets at April 6, 2002 and January 5, 2002. The
additional information required by Item 3 of Part II is incorporated herein by
reference to Part I, Item 1. Financial Statements - Note 6 - "Debt" and
Note 7 - "Liabilities Subject to Compromise".
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
Item 5. Other Information
- -------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
99.1 Certificate of CEO and CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(c) Reports on Form 8-K
On September 27, 2002, the Company filed a Current Report on Form 8-K
dated September 26, 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
May 5, 2002 and ending June 1, 2002 and for the period commencing July 7, 2002
and ending August 3, 2002.
On August 21, 2002, the Company filed a Current Report on Form 8-K dated
August 21, 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 June 2,
2002 and ending to July 6, 2002.
On August 7, 2002, the Company filed a Current Report on Form 8-K dated
August 7, 2002. The Form 8-K reported at Item 9 the execution of a certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-39-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
Date: September 27, 2002 By: /s/ ANTONIO C. ALVAREZ II
---------------------------------
Antonio C. Alvarez II
Director, President and
Chief Executive Officer
Date: September 27, 2002 By: /s/ JAMES P. FOGARTY
----------------------------------
James P. Fogarty
Vice President, Finance and
Chief Financial Officer
-40-
I, Antonio C. Alvarez II, as Chief Executive Officer of the Company, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of The Warnaco
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 27, 2002 /s/ ANTONIO C. ALVAREZ II
--------------------------
Antonio C. Alvarez II
Chief Executive Officer
I, James P. Fogarty, as Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Warnaco
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 27, 2002
/s/ JAMES P. FOGARTY
-----------------------
James P. Fogarty
Chief Financial Officer
-41-
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as...................................'SS'
The registered trademark symbol shall be expressed as.......................'r'