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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 July 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
October 15, 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)
July 6, January 5,
2002 2002
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash $ 116,164 $ 39,558
Accounts receivable, less reserves of $110,991 and $107,947, respectively 212,212 282,387
Inventories, less reserves of $38,931 and $50,097 336,176 418,902
Prepaid expenses and other current assets 19,576 36,988
Assets held for sale 1,310 31,066
----------- -----------
Total current assets 685,438 808,901
----------- -----------
Property, plant and equipment -- net 193,823 212,129
Licenses, trademarks, intangible and other assets, at cost, less
accumulated amortization 101,106 271,500
Goodwill, less accumulated amortization -- 692,925
Deferred income tax 2,325 --
----------- -----------
$ 982,692 $ 1,985,455
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt $ 6,825 $ --
Amended Debtor-in-Possession revolving credit facility -- 155,915
Accounts payable 106,715 84,764
Accrued liabilities 87,438 105,278
Accrued income tax payable 18,340 14,505
----------- -----------
Total current liabilities 219,318 360,462
----------- -----------
Other long-term liabilities 34,349 31,754
----------- -----------
Long-term debt 1,756 --
Liabilities subject to compromise 2,470,199 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 (55,138) (53,016)
Deficit (2,283,415) (1,393,674)
Treasury stock, at cost 12,242,629 shares (313,889) (313,889)
Unearned stock compensation (196) (413)
----------- -----------
Total stockholders' deficiency (1,742,930) (851,284)
----------- -----------
$ 982,692 $ 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 Six Months Ended
-------------------- ---------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- --------- --------- ---------
(Unaudited)
Net revenues $381,767 $ 362,270 $ 791,819 $ 861,489
Cost of goods sold 265,919 386,583 557,559 740,525
-------- --------- --------- ---------
Gross profit (loss) 115,848 (24,313) 234,260 120,964
Selling, general and administrative expenses 100,579 188,472 202,697 327,541
-------- --------- --------- ---------
Operating income (loss) before reorganization items 15,269 (212,785) 31,563 (206,577)
Reorganization items 42,554 78,202 58,085 78,202
-------- --------- --------- ---------
Operating loss (27,285) (290,987) (26,522) (284,779)
Investment loss -- 3,708 -- 6,672
Interest expense, net 3,095 40,523 10,059 104,463
-------- --------- --------- ---------
Loss before provision for income taxes and cumulative
effect of change in accounting principle (30,380) (335,218) (36,581) (395,914)
Provision for income taxes 1,609 3,200 51,538 6,122
-------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle (31,989) (338,418) (88,119) (402,036)
Cumulative effect of change in accounting principle
(net of income tax benefits of $53,513) -- -- (801,622) --
-------- --------- --------- ---------
Net loss $(31,989) $(338,418) $(889,741) $(402,036)
======== ========= ========= =========
Contractual interest expense $ 42,101 $ 49,773 $ 88,071 $ 113,713
======== ========= ========= =========
Basic and diluted loss per common share:
Loss before accounting change $ (0.60) $ (6.40) $ (1.66) $ (7.60)
Cumulative effect of accounting change, net of taxes -- -- (15.14) --
-------- --------- --------- ---------
Net loss $ (0.60) $ (6.40) $ (16.81) $ (7.60)
======== ========= ========= =========
Weighted average number of shares used in computing loss per share:
Basic and diluted 52,936 52,898 52,936 52,886
======== ========= ========= =========
See notes to unaudited consolidated condensed financial statements.
3
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Debtor-In-Possession)
INCREASE (DECREASE) IN CASH
(Dollars in thousands)
Six Months Ended
---------------------
July 6, July 7,
2002 2001
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net loss $(889,741) $(402,036)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on sale of GJM and Penhaligon's 2,100 --
Loss (gain) on sales of fixed assets (105) 4,510
Non-cash reorganization and other items 31,994 96,945
Cumulative effect of change in accounting, net of taxes 801,622 --
Increase in deferred income tax valuation allowance 46,058 --
Depreciation and amortization 29,011 48,755
Market value adjustments to Equity Agreements -- 6,672
Amortization of interest rate swap gain -- (2,468)
Amortization of unearned stock compensation 217 1,994
Amortization of deferred financing costs 4,731 10,345
Change in operating assets and liabilities:
Repurchase of accounts receivable -- (185,000)
Accounts receivable 66,617 (29,735)
Inventories 84,177 71,731
Prepaid expenses and other assets 18,570 4,252
Accounts payable, accrued expenses and other liabilities 19,359 (81,048)
Accrued income taxes 3,835 (8,721)
--------- ---------
Net cash provided by (used in) operating activities 218,445 (463,804)
--------- ---------
Cash flows from investing activities
Disposals of fixed assets 7,564 3,014
Purchase of property, plant & equipment (5,214) (20,534)
Proceeds from sale of business units, net of cash balances 20,459 --
Increase in intangible and other assets -- (151)
--------- ---------
Net cash provided by (used in) investing activities 22,809 (17,671)
--------- ---------
Cash flows from financing activities:
Net borrowing under pre-petition credit facilities -- 340,246
Repayments of GECC debt (490) --
Repayments of pre-petition debt (10,054) --
Borrowings (repayments) under Amended DIP (155,915) 183,922
Increase in deferred financing costs -- (17,344)
--------- ---------
Net cash provided by (used in) financing activities (166,459) 506,824
--------- ---------
Translation adjustments 1,811 (73)
--------- ---------
Increase in cash 76,606 25,276
Cash at beginning of period 39,558 11,076
--------- ---------
Cash at end of period $ 116,164 $ 36,352
========= =========
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, except share amounts)
(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 (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
adjustments related to the Chapter 11 Cases) necessary to present fairly the
financial position of the Company as of July 6, 2002 as well as its results of
operations and cash flows for the periods ended July 6, 2002 and July 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 voluntary 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, August 22, 2002 and September 30, 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. On October 8, 2002, the Company voluntarily
reduced the amount of borrowing available to the Company under the Amended DIP
to $275,000. As of July 6, 2002, the Company had repaid all outstanding
borrowings under the Amended DIP and at October 1, 2002 had approximately
$60,835 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,
5
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
"assumption" means the Debtors agree to perform their obligations under the
lease or contract and to cure all defaults, and "rejection" means that the
Debtors are relieved from their obligation to perform under the contract or
lease, but are subject to damages for the breach thereof. Any damages resulting
from such a breach will be treated as unsecured claims in the Chapter 11 Cases.
The Debtors are reviewing their executory contracts and unexpired leases.
Through July 6, 2002, the Debtors had rejected a number of executory contracts
and unexpired leases and had accrued approximately $21,400 related to rejected
leases and contracts. Through October 1, 2002, the Company had rejected
additional contracts and had accrued an additional $1,694 related to rejected
leases which is included in liabilities subject to compromise on the
consolidated condensed balance sheets. The Debtors have attempted to estimate
the ultimate amount of liability that may result from rejected contracts and
leases, however, the ultimate distribution that such creditors will receive is
subject to the satisfaction of certain requirements under the Bankruptcy Code
and the approval of the Bankruptcy Court. In connection with the consummation of
its proposed plan of reorganization as filed on October 1, 2002, the Company
will assume certain of its leases and executory contracts. The Debtors' ability
to confirm any plan of reorganization is dependent upon the Bankruptcy Court's
approval of the Company's assumption of certain license agreements.
As a result of the Chapter 11 Cases and the circumstances leading to the
filing thereof, as of July 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 confirmation of the Debtors' proposed
plan of reorganization and, accordingly, are not presently determinable.
The Debtors filed their proposed plan of reorganization and related
disclosure statement with the Bankruptcy Court on October 1, 2002. A hearing is
scheduled before the Bankruptcy Court on November 13, 2002 with respect to the
adequacy of the information contained in the disclosure statement. If the
Bankruptcy Court approves the Debtors' disclosure statement, the Debtors will
solicit acceptances of the plan from certain of their creditors whose claims are
impaired under 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 Debtors may invoke the "cram-down" provisions of the
Bankruptcy Code. Under these provisions, the Bankruptcy Court may approve a plan
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders if certain requirements are met. These requirements include
payment in full 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.
6
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 have obtained approval of five separate extensions of their
exclusive periods, the most recent extension being to and including October 7,
2002 and December 2, 2002, respectively. The Debtors filed a proposed joint plan
of reorganization on October 1, 2002 within the applicable exclusive period. If
the Debtors' plan is not confirmed by the Bankruptcy Court, or if the Debtors
fail to obtain additional extensions of time to file an amended plan of
reorganization or solicit acceptances thereof by the expiration of the
applicable exclusive periods, 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.
As a result of the amount and character of the Company's pre-petition
indebtedness, the shortfall between the Company's projected enterprise value and
the amount necessary to satisfy the claims, in full, of its secured and
unsecured creditors and the impact of the provisions of the Bankruptcy Code
applicable to confirmation of the Debtors' proposed plan of reorganization,
holders of the Company's debt and equity securities will receive distributions
under the Company's proposed plan of reorganization as follows:
(i) the Company's existing common stock will be extinguished and common
stockholders will receive no distribution;
(ii) general unsecured claimants will receive approximately 2.55% of newly
issued common stock of the reorganized Company;
(iii) the Company's pre-petition secured lenders will receive their
pro-rata share of approximately $101 million in cash, newly issued
senior subordinated notes in the principal amount of $200,000 and
approximately 96.26% of newly issued common stock of the reorganized
Company;
(iv) holders of claims arising from or related to certain preferred
securities will receive approximately 0.60% of newly issued common
stock of the reorganized Company if such holders do not vote to reject
the plan; and
(v) pursuant to the terms of his Employment Agreement, as adjusted under
the Plan, Antonio C. Alvarez II, the President and Chief Executive
Officer of the Company, will receive an incentive bonus consisting of
$1,950 in cash, senior subordinated notes in the principal amount of
$940 and 0.59% of newly issued common stock of the reorganized
Company.
(vi) In addition to the foregoing, cash distributions will be made to
certain parties holding administrative and certain priority claims.
Under the proposed plan, additional shares of common stock of the
reorganized Company up to 10% of the newly issued common stock of
the Company will be reserved for issuance pursuant to management
incentive stock grants.
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 evaluate the Company's operations and may identify additional assets
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 July 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 $7,564 was generated in the first half 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
7
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 sales of GJM and
Penhaligon's generated approximately $20,459 of net proceeds in the aggregate
and a net loss of approximately $2,100. 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 retail stores. The closing of the outlet stores and the
related sale of inventory at approximately net book value, generated
approximately $12,000 of net proceeds which were used to reduce amounts
outstanding under the Amended DIP in the second quarter of fiscal 2002. The
Company expects to close its remaining 26 domestic outlet retail stores by the
end of fiscal 2002. At July 6, 2002, the Company has classified certain assets
as assets held for sale. The assets held for sale of $1,310 primarily represent
remaining land and buildings that were sold by the Company in the third
quarter of fiscal 2002. Such assets were previously written down to estimated
net realizable value in fiscal 2001.
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 Company's current Chief Executive Officer, Antonio C. Alvarez II, and
Chief Financial Officer, James P. Fogarty, joined the Company from the
turnaround and crisis management consulting firm, Alvarez & Marsal, Inc. ("A&M")
in April 2001. The Company has formed a search committee and has engaged an
executive search firm to identify internal and external candidates to succeed
Messrs. Alvarez and Fogarty following their return to their practices at A&M.
Messrs. Alvarez and Fogarty have committed to remain in place through the
completion of the restructuring process and to provide for a smooth and orderly
transition to a new Chief Executive Officer and Chief Financial Officer.
Separately, the Company has engaged an executive search firm to identify
candidates for the Board of Directors of the reorganized Company.
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 to, (i) 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) continue to comply with the terms of the Amended DIP, (iii) return
to profitability, and (iv) 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
8
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 quarters ended July 6, 2002 (the "second quarter of
fiscal 2002") and July 7, 2001 (the "second quarter of fiscal 2001") included 13
weeks of operations. The six months ended July 6, 2002 (the "first half of
fiscal 2002") included 26 weeks of operations. The six months ended July 7, 2001
(the "first half of fiscal 2001") included 27 weeks of operations
Reclassification: Certain prior period amounts have been reclassified to
conform to the current period 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 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
9
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 costs associated
with the exit or disposal of an 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, that SFAS No. 146
will have 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. The Company continues to evaluate the operations of the Company and may
identify additional assets for 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.
Certain reorganization-related accruals are classified with liabilities
subject to compromise. The Company's proposed plan of reorganization summarizes
the amount of distribution that each class of impaired creditors is expected to
receive. See Note 1.
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. The components of reorganization items are as follows:
10
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
------- -------- ------- --------
GECC lease settlement $22,907 $ -- $22,907 $ --
Professional fees 7,737 6,106 14,918 6,106
Employee contracts and retention 5,261 -- 10,424 --
Write-off of fixed assets related to
retail stores closed 4,990 -- 4,990 --
(Gains) losses on sales of fixed assets (231) 4,510 (105) 4,510
Sales of Penhaligon's and GJM (39) -- 2,100
Employee benefit costs related to
plant closings 979 -- 979 --
Interest rate swap gain -- (18,887) -- (18,887)
Company-obligated mandatorily redeemable
preferred securities -- 21,411 -- 21,411
Systems development abandoned -- 30,145 -- 30,145
Deferred financing fees -- 34,822 -- 34,822
Other 950 95 1,872 95
------- -------- ------- --------
$42,554 $ 78,202 $58,085 $ 78,202
======= ======== ======= ========
Cash portion of reorganization items $13,948 $ 6,261 $26,091 $ 6,261
Non-cash portion of reorganization items $28,606 $ 71,941 $31,994 $ 71,941
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) 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 (subsequently written-off in connection with the sale of
Penhaligon's). The Company also had other indefinite lived intangible assets
consisting of owned trademarks of $9,950. In addition, the Sportswear and
Swimwear Division had definite lived intangible assets consisting of certain
license rights of $6,316.
Under the provisions of SFAS No. 142, goodwill may be deemed impaired if the net
book value of a business reporting unit exceeds the fair value of that business
reporting unit. Intangible assets may be deemed
11
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
impaired if the carrying amount exceeds the fair value of the assets. The
Company obtained an independent appraisal of its Business Enterprise Value
("BEV") in connection with the preparation of its proposed 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 had other
indefinite lived intangible assets of $9,950. The Retail Stores Division had
goodwill of $3,616 (subsequently written-off in connection with the sale of
Penhaligon's). In addition, the Sportswear and Swimwear Division had definite
lived intangible assets of $6,316, net of accumulated amortization of $2,712
with a remaining useful life of seven years.
Amortization expense related to intangible assets was $226 and $452 in the
three and six month periods ending July 6, 2002, respectively. Amortization
expense related to goodwill and intangible assets was $17,849 and $27,024 in
the three and six month periods ending July 7, 2001, respectively. Pro-forma
net loss for the second quarter and first six months of fiscal 2001, assuming
SFAS No. 142 had been adopted effective January 1, 2001 is as follows:
Three Months Six Months
Ended Ended
July 7, 2001 July 7, 2001
------------ ------------
Net loss - as originally reported $(338,418) $(402,036)
Decrease in amortization expense 17,623 26,572
--------- ---------
Net Loss - as adjusted $(320,795) $(375,464)
========= =========
Basic and diluted loss per weighted
average share outstanding:
As reported $ (6.40) $ (7.60)
========= =========
As adjusted $ (6.06) $ (7.10)
========= =========
12
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Note 4 - Special Charges
The Company incurred certain special charges during fiscal 2000. The
details of reserves remaining as of January 5, 2002 and July 6, 2002 for costs
incurred in connection with the fiscal 2000 special charges are summarized
below:
Facility Employee
Inventory write- shutdown and termination and
downs and other contract termination severance
asset write-offs costs (a) costs
---------------- -------------------- ---------------
Balance as of January 5, 2002 $ -- $ 6,057 $ 279
Cash Reductions - 2002 -- (1,864) (207)
-------- ------- -------
Balance as of July 6, 2002 $ -- $ 4,193 $ 72
======== ======= =======
Balance as of December 30, 2000 $ 29,501 $11,805 $ 6,655
Cash Reductions - 2001 -- (5,302) (3,861)
Non-cash reductions - 2001 (22,016) (129) --
-------- ------- -------
Balance as of July 7, 2001 $ 7,485 $ 6,374 $ 2,794
======== ======= =======
Legal and
Retail outlet other related
store closings costs Total
-------------- ------------- --------
Balance as of January 5, 2002 $ -- $ -- $ 6,336
Cash Reductions - 2002 -- -- (2,071)
------- ------- --------
Balance as of July 6, 2002 $ -- $ -- $ 4,265
======= ======= ========
Balance as of December 30, 2000 $ 4,711 $ 3,820 $ 56,492
Cash Reductions - 2001 (937) (3,172) (13,272)
Non-cash reductions - 2001 (2,859) -- (25,004)
------- ------- --------
Balance as of July 7, 2001 $ 915 $ 648 $ 18,216
======= ======= ========
(a) Includes $2,211 of liabilities subject to compromise at July 6, 2002 and
January 5, 2002.
Note 5 - Inventories
July 6, January 5,
2002 2002
-------- ----------
Finished goods $288,522 $375,956
Work in process 46,020 47,325
Raw materials 40,565 45,718
-------- --------
375,107 468,999
Less: reserves 38,931 50,097
-------- --------
$336,176 $418,902
======== ========
Note 6 - Debt
13
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
July 6, 2002 January 5, 2002
------------ ---------------
Amended DIP $ -- $ 155,915
GECC lease settlement (a) (e) 8,581 --
$600 million term loan (b) 585,050 587,548
Revolving credit facilities (b) 1,014,386 1,018,719
Term loan agreements (b) 27,045 27,161
Capital lease obligations 3,862 5,582
Foreign credit facilities (b)(c) 143,702 143,439
Equity Agreement Notes (b)(d) 56,520 56,677
----------- -----------
1,839,146 1,995,041
Current portion (6,825) (155,915)
Reclassified to liabilities subject to compromise (1,830,565) (1,839,126)
----------- -----------
Total long-term debt $ 1,756 $ --
=========== ===========
(a) Represents payments due pursuant to the GECC lease settlement.
(b) The reduction in the credit facilities primarily reflects the repayment of
certain amounts from the proceeds generated from the sale of GJM and
Penhaligon's.
(c) Includes impact of fluctuations in foreign currency exchange rates.
(d) Interest bearing notes payable to certain banks related to the settlement
of equity forward purchase agreements ("Equity Agreements") entered into in
connection with the Company's stock repurchase program.
(e) Reflects July 2002 payment.
Total debt does not include pre-petition trade drafts outstanding as of
July 6, 2002 and January 5, 2002 of $349,872 and $351,367, respectively 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, August 22, 2002 and September 30, 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 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. The Amended DIP (when originally executed) provided for a
$375,000 non-amortizing revolving credit facility (which includes letter of
credit facility of up to $200,000) ("Tranche A") and a $225,000 revolving credit
facility ("Tranche B"). On December 27, 2001 the Tranche B commitment was
reduced to $100,000. On April 19, 2002, the Company voluntarily elected to
eliminate Tranche B based upon its determination that the Company's liquidity
position had improved significantly since the Petition Date and Tranche B 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 to the Company
under the Amended DIP to $325,000. On October 8, 2002, the Company
14
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
voluntarily reduced the amount of borrowing available to the Company under the
Amended DIP to $275,000.
All outstanding borrowings under the Amended DIP had been repaid as of July
6, 2002. Amounts outstanding under the Amended DIP at January 5, 2002 were
$155,915. In addition, the Company had stand-by and documentary letters of
credit outstanding under the Amended DIP at July 6, 2002 and January 5, 2002 of
approximately $64,008 and $60,031 respectively. The total amount of additional
credit available to the Company at July 6, 2002 and January 5, 2002 was $143,954
and $159,054 respectively. As of October 1, 2002, the Company had repaid all
outstanding borrowings under the Amended DIP and had approximately $60,835 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.
GECC Settlement
On June 12, 2002, the Bankruptcy Court approved the Company's settlement of
certain operating lease agreements with General Electric Capital Corporation
("GECC"). The leases had original terms of from three to seven years and were
secured by certain equipment, machinery, furniture, fixtures and other assets.
GECC's total claims under the leases were approximately $51,152. Under the terms
of the settlement agreement, the Company will pay GECC $15,200 of which $5,600
had been paid by the Company through June 12, 2002. The Company will pay the
balance of $9,600 (net present value of $9,071 at June 12, 2002) in equal
installments of $550 through the date of the consummation of a confirmed plan
of reorganization and $750 per month thereafter until the balance is fully paid.
The net present value of the remaining GECC payments of $8,581 is classified
as long-term debt not subject to compromise at July 6, 2002. All other amounts
claimed by GECC under the leases of $35,952 (including $13,045 previously
accrued and charged to operating expense by the Company) are classified as
liabilities subject to compromise at July 6, 2002. Amounts not previously
accrued by the Company but included in the GECC claim of $22,907 were charged
to reorganization items in the second quarter of fiscal 2002.
The assets acquired pursuant to the terms of the settlement agreement were
recorded at their estimated fair value, which was estimated to be equal to the
present value of payments due to GECC under the terms of the settlement
agreement. Such assets are being depreciated using the straight-line method over
their estimated remaining useful lives of 2 to 4 years.
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 July 6, 2002. All pre-petition debt of the Debtors has
been classified as liabilities subject to compromise in the consolidated
condensed balance sheet at July 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 $1,630 in the
second quarter of fiscal 2002. Total interest accrued on foreign debt agreements
since the Petition Date totaled $7,328, which is included in liabilities subject
to compromise at July 6, 2002. The Company's proposed plan of reorganization
requires the payment of such interest.
15
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Interest expense, net
Interest expense included in the consolidated condensed statement of
operations is as follows:
Interest expense
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
------- ------- -------- --------
Interest expense $ 6,018 $40,523 $ 12,982 $104,463
Interest income (2,923) -- (2,923) --
------- ------- -------- --------
Interest expense, net $ 3,095 $40,523 $ 10,059 $104,463
======= ======= ======== ========
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 July 6, 2002 and January 5, 2002:
July 6, 2002 January 5, 2002
------------ ---------------
Current liabilities :
Accounts payable $ 385,718 $ 386,711
Accrued liabilities, including GECC claim 106,431 66,071
Debt :
$600 million term loan (a) 585,050 587,548
Revolving credit facilities (a) 1,014,386 1,018,719
Term loan agreements (a) 27,045 27,161
Capital lease obligations 3,862 5,582
Foreign credit facilities (a) (b) 143,702 143,439
Equity Agreement Notes (a) 56,520 56,677
Company-obligated mandatorily redeemable convertible 120,000 120,000
preferred securities
Other liabilities 27,485 27,485
---------- ----------
$2,470,199 $2,439,393
========== ==========
(a) Reduction in the amount outstanding reflects repayments of certain amounts
under the Company's pre-petition credit facilities from the proceeds
generated by the sale of GJM and Penhaligon's.
(b) Reflects the impact of foreign currency translation.
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
16
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 July 6, 2002 and January 5, 2002. Holders
of Preferred Securities will receive a distribution under the Company's proposed
plan of reorganization equal to 0.60% of the newly issued common stock in the
Company if such holders do not vote to reject the Company's proposed plan of
reorganization, see Note 1.
The following summarizes the unaudited financial information of Designer
Holdings, as of July 6, 2002 and January 5, 2002 and for the three month and six
month period ended July 6, 2002 and July 7, 2001.
The information below may not be indicative of future operating results.
Balance sheet summary:
July 6, January 5,
2002 2002
-------- ----------
Current assets $ 73,090 $ 96,536
Noncurrent assets 161,156 421,955
Current liabilities 29,905 24,684
Noncurrent liabilities 49,085 39,562
Liabilities subject to compromise:
Current liabilities 8,551 8,564
Redeemable preferred securities 120,000 120,000
Stockholders' equity 18,547 325,681
Statement of operations summary:
Three months ended Six months ended
--------------------------- --------------------------
July 6, July 7, July 6, July 7,
2002 (a) (b) 2001 (a) (b) 2002 (a) (b) 2001 (a) (b)
------------ ------------ ------------ ------------
Net revenues $ 59,986 $ 45,898 $ 130,462 $ 126,224
Cost of goods sold 45,377 51,477 98,700 112,436
Net loss (7,963) (68,989) (307,134)(c) (88,841)
(a) Excludes Retail Store Division's net revenues of $9,977 and $18,802 and
$13,125 and $24,465 for the three and six month periods ended July 6, 2002
and July 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 loss includes a charge of $3,801 and $7,924 and $6,031 and $22,985 of
general corporate expenses for the three and six month periods,
respectively.
(c) Includes the cumulative effect of a change in accounting principle of
$302,655 in the first six months of fiscal 2002 related to the adoption of
SFAS No. 142.
17
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Note 9 - Supplemental Cash Flow Information
Three Months Ended Six Months Ended
------------------ -------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- ------- -------- --------
Cash paid (received) for:
Interest $ 2,600 $62,213 $ 5,802 $120,196
Income taxes, net of refunds received (13,743) (284) (12,037) 4,938
Supplemental non-cash investing and financing
activities:
Debt issued for purchase of fixed assets (a) 9,071 -- 9,071 --
(a) Represents debt incurred and assets purchased under the GECC lease
settlement - Note 6.
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 swimwear and 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.
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 retail 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 Company retail outlet stores for the disposition of excess and irregular
inventory. At January 5, 2002 the Company operated 95 Speedo Authentic Fitness
retail stores and 86 outlet retail stores. Through July 6, 2002 the Company
closed 24 Speedo Authentic Fitness stores and 38 domestic outlet retail stores
leaving 71 Speedo Authentic Fitness and 48 outlet retail stores as of July 6,
2002. Through October 14, 2002 the Company had closed 23 additional Speedo
Authentic Fitness Stores leaving 48 stores operating on October 14, 2002. The
Company expects to close its remaining 26 domestic outlet retail stores by the
end of fiscal 2002.
Net revenues for the 38 outlet retail stores closed in the first half of
fiscal 2002 for the six months ended July 6, 2002 and July 7, 2001 were $9,662
and $19,231, respectively. Net revenues for the 26 outlet retail stores to be
closed in the fourth quarter of fiscal 2002 for the six months ended July 6,
2002 and July 7, 2001 were $18,583 and $21,826, respectively.
Net revenues for the 24 Authentic Fitness stores closed in the first half
of fiscal 2002 for the six months ended July 6, 2002 and July 7, 2001 were
$1,936 and $2,863, respectively. Net revenues for the 23 Authentic Fitness
stores closed in the third quarter of fiscal 2002 for the six months ended
July 6, 2002 and July 7, 2001 were $3,998 and $4,529, respectively.
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
Swimwear segments. The Company evaluates the performance of its segments based
upon operating income (loss) before general corporate expenses not allocated and
reorganization items. Information by business segment is set forth below.
18
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Sportswear
and Intimate Retail
Swimwear Apparel Stores Total
---------- -------- -------- ---------
Three months ended July 6, 2002:
Net revenues $208,769 $145,277 $ 27,721 $ 381,767
Segment operating income (loss) 13,010 19,735 (438) 32,307
Three months ended July 7, 2001:
Net revenues $201,094 $113,468 $ 47,708 $ 362,270
Segment operating loss (68,977) (93,214) (9,698) (171,889)
Six months ended July 6, 2002:
Net revenues $445,713 $289,444 $ 56,662 $ 791,819
Segment operating income (loss) 39,698 32,241 (4,648) 67,291
Six months ended July 7, 2001:
Net revenues $492,610 $276,347 $ 92,532 $ 861,489
Segment operating loss (36,291) (84,684) (13,286) (134,261)
The reconciliation of total segment operating income (loss) to total
consolidated loss before taxes and cumulative effect of a change in accounting
principle for the periods ended July 6, 2002 and July 7, 2001, respectively, is
as follows:
Three Months Ended Six Months Ended
-------------------- --------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- --------- -------- ---------
Segment operating income (loss) $ 32,307 $(171,889) $ 67,291 $(134,261)
General corporate expenses not allocated 17,038 40,896 35,728 72,316
-------- --------- -------- ---------
Operating income (loss) before
reorganization items 15,269 (212,785) 31,563 (206,577)
Reorganization items 42,554 78,202 58,085 78,202
-------- --------- -------- ---------
Operating loss (27,285) (290,987) (26,522) (284,779)
Investment loss -- 3,708 -- 6,672
Interest expense, net 3,095 40,523 10,059 104,463
-------- --------- -------- ---------
Loss before provision for income taxes
and cumulative effect of change in
accounting principle $(30,380) $(335,218) $(36,581) $(395,914)
======== ========= ======== =========
19
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Note 11 - Comprehensive (Loss)
The components of comprehensive loss are as follows:
Three Months Ended Six Months Ended
-------------------- ---------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- --------- --------- ---------
Net loss $(31,989) $(338,418) $(889,741) $(402,036)
-------- --------- --------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustments 126 (314) 1,856 482
Change in unfunded minimum pension liability (2,000) (2,000) (4,000) (3,530)
Transition adjustment for SFAS No. 133 adoption -- (20,328) -- --
Change in fair value of cash flow hedge,
interest rate swaps -- 202 -- --
Unrealized deferred loss on marketable securities 67 44 22 30
-------- --------- --------- ---------
Total other comprehensive loss (1,807) (22,396) (2,122) (3,018)
-------- --------- --------- ---------
--
Comprehensive loss $(33,796) $(360,814) $(891,863) $(405,054)
======== ========= ========= =========
The transition adjustment relates to the reclassification of a gain on the
termination of certain interest rate swaps from other liabilities to other
comprehensive income and the subsequent reclassification of the gain to
reorganization items in the second quarter of fiscal 2001.
The components of accumulated other comprehensive loss are as follows:
July 6, January 5,
2002 2002
-------- ----------
Unfunded minimum pension liability $(36,494) $(32,494)
Foreign currency translation adjustments (18,705) (20,561)
Unrealized holding losses, net 61 39
-------- --------
Total accumulated other comprehensive loss $(55,138) $(53,016)
======== ========
Note 12 - Income Taxes
The provision for income taxes of $1,609 for the second quarter of fiscal
2002 reflects accrued income taxes on foreign earnings. The provision for income
taxes for the first half of fiscal 2002 of $51,538 reflects accrued income taxes
of $5,480 on foreign earnings and an increase in the Company's valuation
allowance of $46,058. The increase in the valuation allowance resulted from an
increase in the Company's deferred tax assets that may not be realized. The tax
benefit associated with impairment losses was recorded by the Company in
connection with the adoption of SFAS No. 142 during the first quarter of fiscal
2002. The Company has not provided any tax benefit for domestic losses and
certain foreign losses incurred during the first half of fiscal 2002.
The provision for income taxes for the second quarter of fiscal 2001 and
first six months of fiscal 2001 reflects accrued taxes of $3,200 and $6,122,
respectively on foreign earnings. The Company has not provided any tax benefit
for domestic losses and certain foreign losses incurred in the first half of
fiscal 2001.
20
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, expect share amounts)
(Unaudited)
Note 13 - Equity
Three Months Ended Six Months Ended
-------------------- ---------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- --------- --------- ---------
Numerator for basic and diluted earnings per share:
Loss before cumulative effect of change
in accounting principle $(31,989) $(338,418) $ (88,119) $(402,036)
Cumulative effect of change in accounting
principle -- -- 801,622 --
-------- --------- --------- ---------
Net loss $(31,989) $(338,418) $(889,741) $(402,036)
======== ========= ========= =========
Denominator for basic and diluted loss per share
-- weighted average number of shares 52,936 52,898 52,936 52,886
======== ========= ========= =========
Basic and diluted loss per share before cumulative
effect of change in accounting principle (a) (b) $ (0.60) $ (6.40) $ (1.66) $ (7.60)
======== ========= ========= =========
(a) The effect of potentially dilutive securities has been excluded from the
computation of loss per share for all periods presented because the effect
would have been anti-dilutive. Dilutive securities at July 6, 2002 and July
7, 2001 included options to purchase 5,293,342 shares and 15,699,796 shares
of common stock, respectively; unvested restricted stock of 19,424 shares
and 260,950 shares, respectively, and; 5,200,000 shares issuable pursuant
to the Equity Agreements, respectively.
(b) There were no outstanding, in-the-money options at July 6, 2002.
Options to purchase shares of common stock outstanding at July 6, 2002 and
July 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 as shown below:
July 6, July 7,
2002 2001
------------ ------------
Number of shares under option 5,293,342 15,699,796
Range of exercise prices $0.67-$42.88 $0.67-$42.88
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 July 6, 2002. In addition,
as of July 6, 2002 and January 5, 2002 there were 12,242,629 shares of Class A
Common Stock in treasury stock available for the issuance under certain of the
plans.
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.
21
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, expect share amounts)
(Unaudited)
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.
The Company believes the Speedo Claims to be without merit and intends to
vigorously dispute them and pursue its counterclaims.
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. Pursuant to, and in conjunction with, confirmation of the
Company's proposed plan of reorganization, the Debtors will assume the Speedo
Licenses. The Debtors believe that all issues raised by SIL with respect to the
assumption of the Speedo licenses can be resolved by the Bankruptcy Court or
otherwise resolved in a manner which will not preclude assumption of the Speedo
Licenses as of the effective date of the proposed plan.
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. Confirmation and effectiveness of the Debtors' proposed plan of
reorganization are not conditioned upon or otherwise dependent upon a resolution
of 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 of its
officers and directors (the "Shareholder I Class Action"). The complaints, on
behalf of a putative class of shareholders of the Company who purchased Company
stock between September 17, 1997 and July 19, 2000 (the "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 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
22
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, expect share amounts)
(Unaudited)
fraud with the requisite particularity. On April 25, 2002, the District Court
granted the individual defendant's 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 with respect to such dismissal. 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. On
October 2, 2002, plaintiffs filed a notice of appeal with respect to the
District Court's entry of final judgement in favor of the individual defendants.
Between April 20, 2001 and May 31, 2001, five putative class action
complaints, against the Company and certain of its officers and directors were
filed in the U.S. District Court for the Southern District of New York (the
"Shareholder II Class Action"). The complaints, on behalf of a putative class of
shareholders of the Company who purchased Company stock between September 29,
2000 and April 18, 2001 (the "Second Class Period"), allege, inter alia, that
defendants violated the Exchange Act by artificially inflating the price of the
Company's stock and failing to disclose negative information during the Second
Class Period.
On August 3, 2001, the District 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 District 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 as of July 6, 2002 and January 5,
2002, results of operations and cash flows for the Debtors for the periods ended
July 6, 2002 and July 7, 2001:
23
THE WARNACO GROUP, INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, expect share amounts)
(Unaudited)
July 6, January 5,
2002 2002
----------- -----------
ASSETS
Current assets $ 530,809 $ 624,623
Net property, plant and equipment 172,005 191,117
Intercompany accounts, net 21,055 44,532
Intangible and other assets, net 76,683 869,659
Investment in affiliates 116,328 181,212
----------- -----------
$ 916,880 $ 1,911,143
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current Liabilities:
Amended DIP $ -- $ 155,915
Current portion of long-term debt 6,825 --
Other current liabilities 146,698 135,383
----------- -----------
Total current liabilities 153,523 291,298
Other long-term liabilities 34,332 31,736
Long-term debt 1,756 --
Liabilities subject to compromise 2,470,199 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 (55,138) (53,016)
Deficit (2,283,415) (1,393,674)
Treasury stock, at cost 12,242 629 shares (313,889) (313,889)
Unearned stock compensation (196) (413)
----------- -----------
Total stockholders' deficiency (1,742,930) (851,284)
----------- -----------
$ 916,880 $ 1,911,143
=========== ===========
24
THE WARNACO GROUP,INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended Six Months Ended
-------------------- ---------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- --------- --------- ---------
Net revenues $320,337 $ 301,816 $ 667,108 $ 728,992
Cost of goods sold 231,541 339,724 492,348 660,704
-------- --------- --------- ---------
Gross profit (loss) 88,796 (37,908) 174,760 68,288
Selling, general and administrative expenses 78,176 150,622 156,040 264,008
-------- --------- --------- ---------
Operating income (loss) before reorganization items 10,620 (188,530) 18,720 (195,720)
Reorganization items 41,228 78,202 55,619 78,202
Equity in (income) loss of unconsolidated
subsidiaries 1,235 25,514 (3,708) 13,983
-------- --------- --------- ---------
Operating loss (31,843) (292,246) (33,191) (287,905)
Interest expense, net 3,021 43,946 9,944 112,254
Other income (583) (358) (1,074) (730)
-------- --------- --------- ---------
Loss before provision for income taxes
and cumulative effect of change in accounting
principle (34,281) (335,834) (42,061) (399,429)
Provision (benefit) for income taxes (2,292) 2,584 46,058 2,607
-------- --------- --------- ---------
Loss before cumulative effect of
change in accounting principle (31,989) (338,418) (88,119) (402,036)
Cumulative effect of change in accounting
principle net of income tax benefit -- -- 801,622 --
-------- --------- --------- ---------
Net loss $(31,989) $(338,418) $(889,741) $(402,036)
======== ========= ========= =========
25
THE WARNACO GROUP,INC.
(Debtor-In-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
For the Six Months Ended
------------------------
July 6, July 7,
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $(889,741) $(402,036)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 25,845 47,558
(Gain) loss on sales of fixed assets (105) 4,510
Amortization of deferred financing costs 4,731 10,345
Cumulative effect of the change in accounting 801,622 --
Increase in deferred income tax valuation allowance 46,058 --
Loss on sale of GJM and Penhaligon's 2,100 --
Market value adjustments to Equity Agreements -- 6,672
Amortization of interest rate swap gain -- (2,468)
Amortization of unearned stock compensation 217 1,994
Non-cash reorganization costs and other items 31,994 82,506
Changes in operating assets and liabilities:
Accounts receivable 68,363 (144,877)
Inventories 85,029 51,878
Accounts payable and accrued liabilities 20,474 (69,604)
Prepaid expenses and other current assets and liabilities 15,975 870
Change in other long-term assets and liabilities (1,383) (784)
Net change in intercompany and investment accounts 10,293 (52,927)
--------- ---------
Net cash provided by (used in) operating activities 221,472 (466,363)
Cash flows from investing activities:
Proceeds from the sale of GJM and Penhaligon's 20,459 --
Capital expenditures, net of disposals (1,818) (16,833)
--------- ---------
Net cash provided by (used in) investing activities 18,641 (16,833)
Cash flows from financing activities:
Net borrowings (repayments) under pre-petition credit facilities (10,032) 329,490
Net borrowings (repayments) under Amended DIP (155,915) 183,922
Repayments of GECC debt (490) --
Increase in deferred financing costs -- (17,344)
--------- ---------
Net cash provided by (used in) financing activities (166,437) 496,068
Translation adjustments 1,811 (223)
--------- ---------
Net increase in cash and cash equivalents 75,487 12,649
Cash at beginning of period 18,758 5,355
--------- ---------
Cash at end of period $ 94,245 18,004
========= =========
26
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.
The Company filed its proposed plan of reorganization on October 1, 2002
and is in the process of seeking the acceptance and confirmation of the plan by
the Bankruptcy Court in accordance with the provisions of the Bankruptcy Code.
During the course of the Chapter 11 Cases, the Debtors may seek Bankruptcy
Court authorization to sell assets and settle liabilities for amounts other than
those reflected in the consolidated condensed financial statements. The Debtors
continue to evaluate the Company's operations and may identify additional assets
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 July 6, 2002, the Company sold certain assets including its GJM and
Penhaligon's business and the inventory of certain of its retail outlet stores
generating proceeds of approximately $43 million in the aggregate. In October
2002, the Company made a strategic decision to close the remaining 26 outlet
retail stores it was then operating. The Company expects that the stores will be
closed before the end of fiscal 2002. At July 6, 2002, the Company has
classified certain assets as assets held for sale. The assets held for sale of
$1,310 primarily represent remaining land and buildings that were sold by the
Company in the third quarter of fiscal 2002. Such assets were previously
written-down to estimated net realizable value in fiscal 2001.
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 to (i) formulate a plan of reorganization that will gain the
approval of the parties required by the Bankruptcy Code and the Bankruptcy
Court, (ii) comply with the terms of the Amended DIP, (iii) return to
profitability, and (iv) generate sufficient cash flows from
27
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 its quarterly and annual reports. 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 judgment of the Company's
management. The Company evaluates its assumptions and estimates on an on-going
basis and may employ outside experts to assist in the Company's evaluations. The
Company believes that the use of estimates affects the application of all of the
Company's accounting policies and procedures.
The Company has estimated the 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
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 these 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 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
judgment 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 its various business
units will ultimately earn and the future fair value of the Company's assets and
business units could differ significantly from these estimates.
28
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 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 impacted 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 July 6, 2002, the Company
had identified inventory with a carrying value of approximately $49.7 million as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of July 6, 2002, the Company had approximately $38.9
million of inventory reserves for excess, obsolete and 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. Based upon the estimated recoveries related to such inventory, as of
January 5, 2002, the Company had approximately $50.1 million of inventory
reserves for excess, obsolete and 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 141 of the 267 stores it operated at the beginning of
fiscal 2001. The Company closed 23 stores in the second and third quarters of
fiscal 2002 and expects to close additional stores by the end of fiscal 2002.
The Company wrote-off $6.4 million of fixed assets and accrued $2.5 million of
lease termination costs related to rejected leases
29
of the closed stores in the second and third quarters of fiscal 2002. Lease
termination costs are included in liabilities subject to compromise.
On June 12, 2002, the Bankruptcy Court approved the Company's settlement of
certain operating lease agreements with General Electric Capital Corporation
("GECC"). The leases had original terms of from three to seven years and were
secured by certain equipment, machinery, furniture, fixtures and other assets.
GECC's total claims under the leases totaled approximately $51.2 million. Under
the terms of the settlement agreement, GECC will receive $15.2 million payable
in installments of $0.55 million per month until the Company's plan of
reorganization is consummated and $0.75 million per month thereafter until the
balance is paid in full. Through July 6, 2002, the Company had previously paid
GECC $5.6 million of the $15.2 million. The present value of the remaining cash
payments to GECC under the settlement agreement of $8.6 million are included in
long-term debt not subject to compromise at July 6, 2002. The remaining amount
of the GECC claim of approximately $36.0 million is included in liabilities
subject to compromise at July 6, 2002. The Company had recorded accrued
liabilities related to the GECC leases of approximately $13.0 million prior to
the settlement and, recorded approximately $22.9 million as reorganization items
in the second quarter of fiscal 2002. See Note 6 of Notes to Consolidated
Condensed Financial Statements.
The Debtors continue to evaluate the assets of the Company 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 SOP 90-7.
Reorganization items included in the consolidated condensed statement of
operations in the first six months of fiscal 2002 are $58.1 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. The
Company's proposed plan of reorganization, as filed with the Bankruptcy Court on
October 1, 2002, identifies the Company's plan for the settlement of
pre-petition liabilities. The Company is currently seeking approval and
confirmation of the plan by its creditor constituencies and the Bankruptcy
Court. Under the terms of the Company's proposed plan of reorganization,
pre-petition liabilities will be settled for substantially less than face value.
30
Results of Operations.
STATEMENT OF OPERATIONS (SELECTED DATA)
Three Months Ended Six Months Ended
--------------------- ---------------------
July 6, July 7, July 6, July 7,
2002 2001 2002 2001
-------- --------- -------- ---------
(Amounts in thousands of dollars)
(Unaudited)
Net revenues $381,767 $ 362,270 $791,819 $ 861,489
Cost of goods sold 265,919 386,583 557,559 740,525
-------- --------- -------- ---------
Gross profit (loss) 115,848 (24,313) 234,260 120,964
% of net revenue 30.3% -6.7% 29.6% 14.0%
Selling, general and administrative expenses 100,579 188,472 202,697 327,541
-------- --------- -------- ---------
Operating income (loss) before reorganization 15,269 (212,785) 31,563 (206,577)
items % of net revenue 4.0% -58.7% 4.0% -24.0%
Reorganization items 42,554 78,202 58,085 78,202
-------- --------- -------- ---------
Operating loss (27,285) (290,987) (26,522) (284,779)
% of net revenue -7.1% -80.3% -3.3% -33.1%
Investment loss -- 3,708 -- 6,672
Interest expense, net 3,095 40,523 10,059 104,463
Provision for income taxes 1,609 3,200 51,538 6,122
-------- --------- -------- ---------
Loss before cumulative effect of a
change in accounting $(31,989) $(338,418) $(88,119) $(402,036)
======== ========= ======== =========
The Company's results of operations for the first half of fiscal 2001
included 27 weeks of operations based on a 52/53 week fiscal year compared to 26
weeks in the first half of fiscal 2002.
Net Revenues
Net revenues are as follows:
Three months ended Six months ended
--------------------------------------- ---------------------------------------
July 6, July 7, Inc. % July 6, July 7, Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- -------- -------- ------ -------- -------- -------- ------
Sportswear and Swimwear $208,769 $201,094 $ 7,675 3.8% $445,713 $492,610 ($46,897) -9.5%
Intimate Apparel 145,277 113,468 31,809 28.0% 289,444 276,347 13,097 4.7%
Retail Stores 27,721 47,708 (19,987) -41.9% 56,662 92,532 (35,870) -38.8%
-------- -------- -------- ------ -------- -------- -------- ------
$381,767 $362,270 $ 19,497 5.4% $791,819 $861,489 ($69,670) - 8.1%
======== ======== ======== ====== ======== ======== ======== ======
Second Quarter
Net revenues increased $19.5 million, or 5.4%, to $381.8 million in the
second quarter of fiscal 2002 compared to $362.3 million in the second quarter
of fiscal 2001. In the same period, Sportswear and Swimwear Division net
revenues increased $7.7 million, or 3.8%, to $208.8 million, Intimate Apparel
Division net revenues increased $31.8 million, or 28.0%, to $145.3 million and
Retail Stores Division net revenues decreased $20.0 million, or 41.9%, to $27.7
million.
First Half
Net revenues decreased $69.7 million, or 8.1%, to $791.8 million in the
first half of fiscal 2002 compared to $861.5 million in the first half of fiscal
2001. In the same period, Sportswear and Swimwear Division net revenues
decreased $46.9 million, or 9.5%, to $445.7 million, Intimate Apparel Division
net
31
revenues increased $13.1 million, or 4.7%, to $289.4 million and Retail Stores
net revenues decreased $35.9 million, or 38.8%, to $56.7 million.
Sportswear and Swimwear Division.
Sportswear and Swimwear Division net revenues are as follows:
Three months ended Six months ended
--------------------------------------- ---------------------------------------
July 6, July 7, Inc. % July 6, July 7, Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- -------- -------- ------ -------- -------- -------- ------
Authentic Fitness $104,691 $ 97,302 $ 7,389 7.6% $217,263 $243,505 ($26,242) -10.8%
Chaps Ralph Lauren 24,345 42,376 (18,031) -42.6% 56,900 85,888 (28,988) -33.8%
Calvin Klein Jeans/Kids 67,218 52,694 14,524 27.6% 146,433 141,976 4,457 3.1%
Calvin Klein Accessories 2,700 3,430 (730) -21.3% 6,101 7,443 (1,342) -18.0%
ABS 9,815 5,292 4,523 85.5% 19,016 13,798 5,218 37.8%
-------- -------- -------- ----- -------- -------- -------- -----
Sportswear and Swimwear Division $208,769 $201,094 $ 7,675 3.8% $445,713 $492,610 ($46,897) -9.5%
======== ======== ======== ===== ======== ======== ======== =====
Second Quarter
The increase in Authentic Fitness net revenues in the second quarter of
fiscal 2002 compared to fiscal 2001 reflects increases in Speedo U.S. shipments
to Gart's and membership clubs partially offset by decreases in smaller Speedo
accounts and by decreases in the Victoria's Secret private label business. The
decrease in Chaps net revenues primarily reflects the elimination of sales to
warehouse clubs $(11.5 million) and the strategic decision to reduce accounts
receivable exposure in Mexico. The increase in Calvin Klein Jeans/Kids net
revenues primarily reflects an increase of $6.5 million in sales to membership
clubs partially offset by the strategic decision to reduce accounts receivable
exposure in Mexico. The decrease in net revenue in Calvin Klein accessories
reflects reductions in the United States associated with the post-September 11
reductions in business and with decreases in business with airport duty free
shops somewhat offset by increases in the European accessories business. ABS net
revenues have benefited from a favorable reception of its new styles at retail.
First Half
The decrease in Authentic Fitness net revenues in the first half of fiscal
2002 compared to the first half of fiscal 2001 reflects decreases in Designer
Swimwear due to the loss of the Victoria's Secret catalog business and a
strategic decision to reduce accounts receivable exposure with certain swim team
dealers. The decrease in Chaps net revenues reflects lower sales to warehouse
clubs, the loss of the Dillard's business and lower sales in Mexico. The
increase in CK Jeans/Kids net revenues reflects higher sales to membership
clubs. CK Jeans/Kids sales to membership clubs for the full 2002 fiscal year are
expected to be lower than in fiscal 2001. ABS net revenues have benefited from a
favorable reception of its new styles at retail.
32
Intimate Apparel Division.
Net revenues for the Intimate Apparel Division are as follows:
Three months ended Six months ended
---------------------------------------- ---------------------------------------
July 6, July 7, Inc. % July 6, July 7, Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- -------- -------- ------- -------- -------- -------- ------
Continuing:
Warner's/Olga $ 65,279 $ 33,989 $ 31,290 92.1% $123,797 $ 89,463 $ 34,334 38.4%
Calvin Klein Underwear 50,911 38,177 12,734 33.4% 103,686 91,370 12,316 13.5%
Lejaby 25,887 20,259 5,628 27.8% 50,412 44,659 5,753 12.9%
Mass sportswear licensing 3,121 3,088 33 1.1% 7,953 7,987 (34) -0.4%
-------- -------- -------- ----- ------- -------- -------- -----
Total continuing 145,198 95,513 49,685 52.0% 285,848 233,479 52,369 22.4%
Total discontinued business units 79 17,955 (17,876) -99.6% 3,596 42,868 (39,272) -91.6%
-------- -------- -------- ----- ------- -------- -------- -----
Intimate Apparel Division $145,277 $113,468 $ 31,809 28.0% $289,444 $276,347 $ 13,097 4.7%
======== ======== ======== ===== ======== ======== ======== =====
Second Quarter
Net revenues increased $31.8 million, or 28.0%, to $145.3 million in the
second quarter of fiscal 2002 compared with $113.5 million in the second 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 $49.7 million, or 52.0%, to $145.2 million in the second quarter of
fiscal 2002 compared to $95.5 million in the second quarter of fiscal 2001.
Warner's/Olga net revenues increased $31.3 million, or 92.1%, primarily through
improved distribution fulfillment and increased business with Kohl's
(approximately $5 million). The increase in Calvin Klein Underwear net revenues
reflects increases in all major accounts, including the international divisions,
due to improved sell-through at retail, particularly in the women's business.
The increase in Calvin Klein Underwear was realized even though the division
made a strategic decision to exit the JC Penney's business in the second quarter
of fiscal 2002. Lejaby net revenues increased $5.6 million or 27.8% primarily
through improved distribution fulfillment.
First Half
For the first half of fiscal 2002 , Intimate Apparel net revenues increased
$13.1 million or, 4.7%, to $289.4 million compared with $276.3 million in the
first half 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 $52.4 million, or 22.4%, to $285.9 million in the first half
of fiscal 2002 compared to $233.5 million in the first half of fiscal 2001. The
increase in net revenues for continuing businesses primarily is a result of
improved distribution fulfillment, as noted above.
33
Retail Stores Division.
Net revenues are as follows:
Three months ended Six months ended
--------------------------------------- ---------------------------------------
July 6, July 7, Inc. % July 6, July 7, Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
------- -------- -------- ------ -------- -------- -------- ------
Outlet retail stores $ 17,293 $ 30,529 ($13,236) -43.4% $ 35,398 $ 58,884 ($23,486) -39.9%
Authentic Fitness stores 10,342 14,736 (4,394) -29.8% 20,281 28,529 (8,248) -28.9%
Penhaligon's -- 2,133 (2,133) -100.0% 676 4,441 (3,765) -84.8%
IZKA 86 310 (224) -72.3% 307 678 (371) -54.7%
-------- -------- -------- ------ -------- -------- -------- -----
$ 27,721 $ 47,708 ($19,987) -41.9% $ 56,662 $ 92,532 ($35,870) -38.8%
======== ======== ======== ====== ======== ======== ======== =====
The Company expects to close its 26 remaining domestic outlet retail
stores by the end of fiscal 2002.
Second Quarter
Net revenues decreased $20.0 million, or 41.9%, to $27.7 million in the
second quarter of fiscal 2002 compared to $47.7 million in the second quarter of
fiscal 2001. The decrease in net revenues reflects the reduction in the number
of outlet retail stores and Authentic Fitness stores the Company operates. Same
store sales decreased approximately 14.2% for the outlet retail stores and
approximately 3.4% for Authentic Fitness stores in the second quarter of fiscal
2002 compared to the same period in the prior year. The sale of the Penhaligon's
business and the planned liquidation of IZKA, a French retail subsidiary, in the
third quarter of fiscal 2002 also adversely affected net revenues in the second
quarter of fiscal 2002.
First Half
Net revenues decreased $35.9 million, or 38.8%, to $56.7 million in the
first half of fiscal 2002 compared to $92.5 million in the first half of fiscal
2001. The decrease in net revenues reflects the reduction in the number of
retail outlets and Authentic Fitness stores the Company operates. The
Penhaligon's business was sold in February 2002 and IZKA, a French retail
subsidiary, was liquidated in the third quarter of fiscal 2002.
Net revenues for the 38 outlet retail stores closed in the first half of
fiscal 2002 for the six months ended July 6, 2002 and July 7, 2001 were $9,662
and $19,231, respectively. Net revenues for the 26 outlet retail stores to be
closed in the fourth quarter of fiscal 2002 for the six months ended July 6,
2002 and July 7, 2001 were $18,583 and $21,826, respectively.
Net revenues for the 24 Authentic Fitness stores closed in the first half
of fiscal 2002 for the six months ended July 6, 2002 and July 7, 2001 were
$1,936 and $2,863, respectively. Net revenues for the 23 Authentic Fitness
stores closed in the third quarter of fiscal 2002 for the six months ended
July 6, 2002 and July 7, 2001 were $3,998 and $4,529, respectively.
Gross Profit
Second Quarter
Gross profit increased $140.1 million to $115.8 million in the second
quarter of fiscal 2002 compared with a negative gross profit of $(24.3) million
in the second quarter of fiscal 2001. The increase in gross profit reflects an
improved regular to off-price sales mix due to the Company's improved sales
allowance and markdown experience and improved manufacturing efficiencies. In
the second quarter of fiscal 2001, the Company revised its strategy to dispose
of its excess and obsolete inventory at the end of each selling season and, as a
result, recorded an increase in sales allowances and inventory markdowns of $36
million. Gross margin was 30.3% in the second quarter of fiscal 2002 compared
with a negative gross margin of -6.7% in the second quarter of fiscal 2001.
First Half
Gross profit for the first half of fiscal 2002 increased $113.3 million, or
93.6%, to $234.3 million compared to $121.0 million in the first half of fiscal
2001. Gross profit in the first half of fiscal 2001
34
includes the impact of the unfavorable markdown and allowance experience, as
noted previously. Gross margin for the first half of fiscal 2002 was 29.6%
compared to 14.0% in the first half of fiscal 2001.
Selling, General and Administrative Expenses
Second Quarter
Selling, general and administrative expenses for the second quarter of
fiscal 2002 decreased $87.9 million, or 46.6%, to $100.6 million compared to
$188.5 million in the second quarter of fiscal 2001. Selling, general and
administrative expenses as a percentage of net revenues were 26.3% in the second
quarter of fiscal 2002 compared with 52.0% in the second quarter of fiscal 2001.
Marketing expense for the second quarter of fiscal 2001 includes approximately
$15.7 million of increased cooperative advertising expense related to the
Company's review of the amounts necessary to satisfy customer claims related in
part to the decrease in retail traffic and sales experienced by the Company's
core department and specialty store customers. Amortization expense associated
with goodwill and intangible assets decreased approximately $8.9 million in the
second quarter of fiscal 2002 compared to the second quarter of fiscal 2001
reflecting the adoption of SFAS No. 142. The Retail Stores Division reduced
selling, general and administrative expenses by approximately $8.3 million due
primarily to the reduction in the number of stores the division was operating
during the second quarter of fiscal 2002 compared to the second quarter of
fiscal 2001. Intimate Apparel Division selling, general and administrative
expenses were reduced by approximately $3.5 million related to the sale of GJM
and the discontinuance of Fruit of the Loom and Weight Watchers business units.
Selling and distribution expenses decreased due to the consolidation of certain
of the Company's distribution facilities in Duncansville, PA. Other selling,
general and administrative expenses were reduced by approximately $12.3 million
in the second quarter of fiscal 2002 compared to the second quarter of fiscal
2001 due to cost saving measures implemented as part of the Company's
restructuring efforts.
First Half
Selling, general and administrative expenses for the first half of fiscal
2002 decreased $124.8 million, or 38.1%, to $202.7 million compared to $327.5
million in the first half of fiscal 2001. The decrease in selling, general and
administrative expenses reflects lower marketing expenses, as noted above, lower
amortization expense of $20.2 million, lower retail expenses of $14.9 million
due to the reduction in the number of retail stores the Company operates, lower
expenses in Intimate Apparel of $6.0 million related to the discontinuance of
the Fruit of the Loom and Weight Watchers business units and the sale of GJM,
lower distribution expenses due to the consolidation of certain of the Company's
distribution facilities in Duncansville, PA and lower administrative expenses of
$23.2 million due to cost saving measures implemented as part of the Company's
restructuring efforts.
35
Operating Income before Reorganization Items
Operating income before reorganization items is as follows:
Three months ended Six months ended
--------------------- ---------------------
July 6, July 7, increase percentage July 6, July 7, increase percentage
2002 2001 (decrease) change 2002 2001 (decrease) change
-------- --------- ---------- ---------- -------- --------- ---------- ---------
Sportswear and Swimwear $ 13,010 $ (68,977) $ 81,987 118.9% $ 39,698 $ (36,291) $ 75,989 209.4%
Intimate Apparel 19,735 (93,214) 112,949 121.2% 32,241 (84,684) 116,925 138.1%
Retail Stores (438) (9,698) 9,260 95.5% (4,648) (13,286) 8,638 65.0%
-------- --------- -------- ----- -------- --------- --------- -----
32,307 (171,889) 204,196 118.8% 67,291 (134,261) 201,552 150.1%
General corporate
expenses, not allocated (17,038) (40,896) 23,858 58.3% (35,728) (72,316) (36,588) 50.6%
-------- --------- -------- ----- -------- --------- --------- -----
$ 15,269 $(212,785) $228,054 107.2% $ 31,563 $(206,577) $ 238,140 115.3%
======== ========= ======== ===== ======== ========= ========= =====
Second Quarter
Operating income before reorganization items increased $228.1 million to
$15.3 million (4.0% of net revenues) in the second quarter of fiscal 2002
compared to an operating loss of $(212.8) million (-58.7% of net revenues) in
the second quarter of fiscal 2001. The increase in operating income reflects the
increase in net revenues of $19.5 million, the increase in gross margin to 30.3%
from -6.7% and the decrease in selling, general and administrative expenses to
26.3% of net revenues from 52.0% of net revenues. The improvement in gross
margin reflects the better regular to off-price sales mix, improved management
of customer allowance and markdown deductions and improved manufacturing
efficiencies, as noted above. The decrease in selling, general and
administrative expenses reflects the lower depreciation and amortization, lower
cooperative advertising, lower retail selling and other cost savings, as noted
above.
First Half
Operating income before reorganization items increased $238.2 million to
$31.6 million (4.0% of net revenues) in the first half of fiscal 2002 compared
to an operating loss of $206.6 million (-24.0% of net revenues) in the first
half of fiscal 2001. The increase in operating income reflects the increase in
gross margin to 29.6% from 14.0% and the decrease in selling, general and
administrative expenses to 25.6% of net revenues from 38.0% of net revenues. The
improvement in gross margin reflects the better regular to off-price sales mix,
improved management of customer sales allowance and markdown deductions and
improved manufacturing efficiencies, as noted above. The decrease in selling,
general and administrative expenses reflects the lower depreciation and
amortization, lower cooperative advertising, lower retail selling and other cost
savings, as noted above.
36
Sportswear and Swimwear Division.
Sportswear and Swimwear Division operating profit is as follows:
Three months ended Six months ended
------------------- --------------------
July 6, July 7, increase percentage July 6, July 7, increase percentage
2002 2001 (decrease) change 2002 2001 (decrease) change
------- -------- ---------- ---------- -------- -------- ---------- ----------
Authentic Fitness $12,450 $(19,949) $32,399 162.4% $ 33,371 $ 13,582 $19,789 145.7%
Chaps Ralph Lauren 1,848 (4,964) 6,812 137.2% 5,374 (1,597) 6,971 436.5%
Calvin Klein Jeans/Kids (1,724) (38,292) 36,568 95.5% (66) (41,292) 41,226 99.8%
Calvin Klein Accessories (573) (2,094) 1,521 72.6% (462) (1,695) 1,233 72.7%
ABS 1,009 (3,678) 4,687 127.4% 1,481 (5,289) 6,770 128.0%
------- -------- ------- ----- -------- -------- ------- -----
$13,010 $(68,977) $81,987 118.9% $ 39,698 $(36,291) $75,989 209.4%
======= ======== ======= ===== ======== ======== ======= =====
Second Quarter
The increase in Authentic Fitness operating income for the second quarter
of fiscal 2002 compared to the second quarter of fiscal 2001 reflects higher net
revenues and gross margins and the impact of lower selling, general and
administrative expenses. The gross margin improvements reflect improved sales
mix, more favorable experience related to customer sales allowances and
markdowns and lower selling, general and administrative expenses. The increase
in Chaps operating income reflects higher gross profit and lower selling,
general and administrative expenses. The increase in Calvin Klein Jeans/Kids
operating income reflects higher gross profit and lower selling, general and
administrative expenses. The improved gross profit in Calvin Klein Jeans/Kids
reflects improved regular/off-price sales mix. In addition, in the second
quarter of fiscal 2002, the Company closed two domestic Calvin Klein Jeans
manufacturing facilities. ABS operating income improvement reflects higher sales
volume and gross profit.
First Half
Authentic Fitness operating income for the first half of fiscal 2002
reflects higher operating income in Speedo partially offset by lower operating
income in Designer Swimwear. The decreased Designer Swimwear operating income
primarily reflects lower sales. The improvement in Chaps operating income in the
first half of fiscal 2002 compared to the first half of fiscal 2001 reflects
lower selling, general and administrative expenses due primarily to cost saving
measures (including the consolidation of distribution with intimate apparel)
implemented in the second half of fiscal 2001. Chaps gross margin improved to
30.7% of net revenues from 20.8% in the first half of fiscal 2001. The improved
gross margin in Chaps reflects better markdown and allowance experience. The
increase in Calvin Klein Jeans/Kids operating income reflects higher gross
profit (despite lower sales) and lower selling, general and administrative
expenses. The improvement in ABS operating income reflects higher net revenues
and higher gross margin.
37
Intimate Apparel Division.
Intimate Apparel Division operating income is as follows:
Three months ended Six months ended
------------------ ------------------
July 6, July 7, increase percentage July 6, July 7, increase percentage
2002 2001 (decrease) change 2002 2001 (decrease) change
------- -------- ---------- ---------- ------- -------- ---------- ----------
Warner's/Olga $ 8,434 $(69,688) $ 78,122 112.1% $ 8,584 $(77,490) $ 86,074 111.1%
Calvin Klein Underwear 6,603 (17,222) 23,825 138.3% 10,738 (10,315) 21,053 204.1%
Lejaby 2,153 79 2,074 2625.3% 6,647 3,963 2,684 67.7%
Mass sportswear licensing 2,313 2,258 55 2.4% 6,400 6,468 (68) -1.1%
------- -------- -------- ------ ------- -------- -------- -----
Total continuing 19,503 (84,573) 104,076 -123.1% 32,369 (77,374) 109,743 141.8%
Total discontinued business units 232 (8,641) 8,873 -102.7% (128) (7,310) 7,182 98.2%
------- -------- -------- ------ ------- -------- -------- -----
$19,735 $(93,214) $112,949 -121.2% $32,241 $(84,684) $116,925 138.1%
======= ======== ======== ====== ======= ======== ======== =====
Second Quarter
Warner's/Olga operating income increased $78.1 million, or 112.1%, to $8.4
million in the second quarter of fiscal 2002 compared to an operating loss of
$69.7 million in the second quarter of fiscal 2001 reflecting higher gross
profit and lower selling, general and administrative expenses. The increased
gross profit reflects more favorable experience related to customer sales
allowances and markdowns and improved manufacturing efficiencies. Lower selling,
general and administrative costs reflect the consolidation of Warner's/Olga
distribution in the Company's Duncansville, PA facility as well as other cost
reduction efforts. The increase in Calvin Klein Underwear operating income
reflects higher net revenues, higher gross profit and lower selling, general and
administrative expenses. Losses from the discontinued GJM, Fruit of the Loom and
Weight Watchers business units totaled $8.6 million in the second quarter of
fiscal 2001 compared to operating income of $0.2 million in the second quarter
of fiscal 2002. Operating income in the discontinued business units in the
second quarter of fiscal 2002 relates primarily to sales of inventory and
collection of accounts receivable for more than was originally anticipated.
First Half
Warner's/Olga operating income for the first half of fiscal 2002 increased
$86.1 million, or 111.1%, to $8.6 million compared to an operating loss of $77.5
million in the first half of fiscal 2001 reflecting more favorable experience
related to customer sales allowances and markdowns and improved manufacturing
efficiencies. Warner's/ Olga also benefited from lower selling, general and
administrative expenses reflecting the consolidation of Warner's/Olga
distribution in Duncansville, PA as well as other cost reduction efforts. The
increase in Calvin Klein Underwear operating income reflects higher net revenues
and higher gross profit and lower selling, general and administrative expenses.
Calvin Klein Underwear selling expenses decreased despite an increase in
marketing expenses of approximately $2 million over the first six months of
fiscal 2001 reflecting the launch of the men's "Body" line. The first half of
fiscal 2001 includes the $7.3 million loss from the discontinued/sold GJM,
Weight Watchers and Fruit of the Loom businesses compared to an operating loss
of $0.1 million in the first half of fiscal 2002. The operating loss in the
first half for discontinued units represents operating losses incurred by GJM
prior to its sale and losses on accounts receivable and inventory dispositions.
38
Retail Stores Division.
Retail Stores Division operating loss is as follows:
Three months ended Six months ended
------------------ ------------------
July 6, July 7, increase percentage July 6, July 7, increase percentage
2002 2001 (decrease) change 2002 2001 (decrease) change
------- ------- ---------- ---------- ------- -------- ---------- ----------
Outlet retail stores $(780) $(8,702) $7,922 91.0% $(3,907) $(11,289) $7,382 65.4%
Authentic Fitness stores 906 12 894 7450.0% 264 (400) 664 166.0%
Penhaligon's -- (524) 524 100.0% (125) (712) 587 82.4%
IZKA (564) (484) (80) -16.5% (880) (885) 5 0.6%
----- ------- ------ ------ ------- -------- ------ -----
$(438) $(9,698) 9,260 95.5% $(4,648) $(13,286) 8,638 65.0%
===== ======= ====== ====== ======= ======== ====== =====
Second Quarter
The decrease in the Retail Stores Division's operating loss primarily
reflects the closing of unprofitable and marginally profitable stores, sale of
Penhaligon's and the pending liquidation of IZKA. Authentic Fitness stores
operating profit improved $0.9 million in the second quarter of fiscal 2002
compared to the second quarter of fiscal 2001. Outlet retail stores losses for
the second quarter of fiscal 2001 include $7.1 million of inventory write-downs
to reflect the Company's strategy to close unprofitable and marginally
profitable stores.
First Half
The decrease in the Retail Stores Division's operating loss for the first
half of fiscal 2002 compared to the first half of fiscal 2001 primarily reflects
the closing of unprofitable and marginally profitable stores, the sale of
Penhaligon's and the liquidation of IZKA. Authentic Fitness stores operating
profit improved $0.7 million in the first half of fiscal 2002 compared to the
first half of fiscal 2001. Retail Stores Division losses for the first half of
fiscal 2001 include $7.1 million of inventory write-downs to reflect the
Company's strategy to close unprofitable and marginally profitable stores.
Investment loss
Second Quarter
Investment loss for the second quarter of fiscal 2001 was $3.7 million. The
investment loss reflects the adjustment of amounts due under the Equity
Agreements based upon changes in the Company's common stock price. No comparable
adjustment was recorded in the second quarter of fiscal 2002 because the Equity
Agreements are liabilities subject to compromise.
First Half
Investment loss for the first half of fiscal 2001 was $6.7 million. The
investment loss reflects the adjustment of amounts due under the Equity
Agreements based upon changes in the Company's common stock price. No comparable
adjustment was recorded in the first half of fiscal 2002 because the Equity
Agreements are liabilities subject to compromise.
Interest Expense
Second Quarter
Interest expense decreased $37.4 million to $3.1 million in the second
quarter of fiscal 2002 compared with $40.6 million in the second quarter of
fiscal 2001. The decrease reflects the impact of the Chapter 11 Cases where the
Company has stopped accruing interest on approximately $2.3 billion of
pre-petition debt (not including certain foreign debt agreements, as noted
below). Interest expense for the second quarter of fiscal 2002 primarily
reflects interest and related fees on the Amended DIP. The
39
Company had repaid all amounts borrowed under the Amended DIP as of July 6,
2002. 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
Company's proposed plan of reorganization requires the payment of such interest.
Interest expense for the second quarter fiscal 2002 includes approximately $1.6
million of interest on these foreign debt agreements. In addition, interest
expense for the second quarter of fiscal 2002 includes approximately $2.9
million of interest income related to the investment of cash balances held as
collateral against letters of credit and interest earned on certain income tax
refunds received in June 2002.
First Half
Interest expense decreased $94.4 million to $10.1 million in the first half
of fiscal 2002 compared with $104.5 million in the first half of fiscal 2001.
The decrease reflects the impact of the Chapter 11 Cases where the Company has
stopped accruing interest on approximately $2.3 billion of pre-petition debt
(not including certain foreign debt agreements, as noted below). Interest
expense for the first half of fiscal 2002 primarily reflects interest and
related fees on the Amended DIP. The Company had repaid all amounts borrowed
under the Amended DIP as of July 6, 2002. 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 Company's proposed plan of reorganization
requires the payment of such interest. Interest expense for the second quarter
fiscal 2002 includes approximately $3.2 million of interest on these foreign
debt agreements. Interest expense for the first half of fiscal 2002 includes
interest income of approximately $2.9 million as noted above.
Income Taxes
Second Quarter
The provision for income taxes for the second quarter of fiscal 2002 and
fiscal 2001 reflects taxes on certain foreign earnings. The Company has not
provided any tax benefit for its domestic losses and certain foreign losses
incurred in the second quarter of fiscal 2002 and second quarter of fiscal 2001.
First Half
The provision for income taxes for the first half of fiscal 2002 reflects
an increase in the Company's valuation allowance of approximately $46.0 million
primarily related to the tax benefit from the write-off of goodwill and
intangible assets associated with the adoption of SFAS No.142. The increase in
the valuation allowance results from an increase in the Company's deferred tax
assets that may not be realized.
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 may be deemed
impaired if the net book value of a business reporting unit exceeds the fair
value of that business reporting unit. Intangible assets may be deemed impaired
if the carrying amount exceeds the fair 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.
40
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, August
22, 2002 and September 30, 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. On October 8, 2002,
the Company voluntarily reduced the amount of borrowing available under the
Amended DIP to $275.0 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.
The Company had repaid all amounts outstanding under the Amended DIP at
July 6, 2002. The Company had stand-by and documentary letters of credit
outstanding under the Amended DIP at July 6, 2002 of $64.0 million. The total
amount of additional credit available to the Company at July 6, 2002 was $144.0
million. As of October 1, 2002, the Company had repaid all amounts outstanding
under the Amended DIP and had approximately $60.8 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. By operating under the
protection of the Bankruptcy Court, making improvements in the Company's
operations and selling certain assets, the Company has improved its cash
position subsequent to the Petition Date. The Company is not permitted to pay
any pre-petition liabilities
41
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 $140.0 million of accounts payable and accrued liabilities. Since
the Petition Date through September 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 or provide
collateral for outstanding trade and stand-by letters of credit. 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 $12.0 million of net proceeds which were used to reduce amounts
outstanding under the Amended DIP. The Company expects to close its remaining
26 domestic outlet retail stores by the end of fiscal 2002.
At July 6, 2002, the Company had working capital of $466.1 million,
excluding $2,470.2 million of pre-petition liabilities that are subject to
compromise.
The Debtors continue to review their operations and identify assets 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 half of fiscal 2002 cash provided by operating activities
was $218.4 million compared to cash used in operating activities of $463.8
million in the first half of fiscal 2001. The Company repurchased $185.0
million of accounts receivable previously subject to a securitization
arrangement in June 2001 as part of the completion of the DIP financing. The
improvement in cash flow from operating activities of $497.2 million (not
including the repurchase of accounts receivable of $185.0 million) in the first
half of fiscal 2002 compared to the first half of fiscal 2001 reflects improved
operating income of $258.3 million, (includes reductions in depreciation and
amortization expenses of approximately $20.2 million due to the adoption of
SFAS No. 142), lower interest expense of $94.4 million, the sale of $12.0
million of retail store inventory and improved working capital management.
Better management of inventory and accounts receivable contributed $108.8
million. The reduction in inventory balances reflects improved inventory
management including a reduction in excess and obsolete inventory at July 6,
2002 to approximately $49 million from approximately $88 million at January 5,
2002. Improved accounts receivable collection efforts have resulted in a
reduction in days sales outstanding of 23 days to 53 days at July 6, 2002
compared to 77 days at July 7, 2001. Cash interest expense for the first six
months of fiscal 2002 was $5.8 million, $114.4 million lower than the $120.2
million in the first half of fiscal 2001. The decrease in cash interest is
primarily a result of the Chapter 11 Cases. Depreciation and amortization
expenses decreased approximately $20.2 million in the first half of fiscal
2002 compared to the first half of fiscal 2001 reflecting the adoption of
SFAS No.142 effective with the first quarter of fiscal 2002.
Net cash provided from investing activities was $22.8 million in the first
half of fiscal 2002 compared to cash used in investing activities of
$17.7 million in the first half of fiscal 2002. Cash provided from investing
activities in the first half of fiscal 2002 primarily reflects proceeds from the
sale of GJM and Penhaligon's of $20.5 million and other asset dispositions of
$7.6 million partially offset by capital expenditures of $5.2 million. Cash
used in investing activities in the first half of
42
fiscal 2001 primarily reflects capital expenditures of $20.5 million offset by
the disposition of certain fixed assets of $3.0 million.
Cash used in financing activities of $166.5 million in the first half of
fiscal 2002 reflects the repayment of borrowing under the Amended DIP of
$155.9 million, repayments of other debt of $10.5 million consisting primarily
of repayments of certain pre-petition debt amounts with proceeds from the sale
of GJM and Penhaligon's. In the first half of fiscal 2001, the Company financed
its increase in working capital, as noted above, by borrowing approximately
$340.2 million. Financing activity for the first half of fiscal 2001 includes
the payment of $17.3 million of amendment fees and deferred financing costs
associated with the Company's pre-petition credit agreements and with the
Amended DIP.
There were no amounts outstanding under the Amended DIP at July 6, 2002.
The Company had stand-by and documentary letters of credit outstanding under the
Amended DIP at July 6, 2002 of $64.0 million. The Company had excess cash
available as collateral against outstanding trade and stand-by letters of credit
of $79.1 million at July 6, 2002. The Company also had cash in operating
accounts of approximately $38.7 million at July 6, 2002, including restricted
cash of $1.7 million related to 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
October 1, 2002, the Company had no outstanding amounts borrowed under the
Amended DIP and had approximately $144.0 million of additional credit available
under the Amended DIP, not including $60.8 million of cash collateral available
for 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.
43
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 the classification of
debt extinguishment are effective for periods 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.
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 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
44
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those anticipated, and the Company's business
in general is subject to certain risks that could 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 July 7, 2001, the Company had terminated all previously
outstanding interest rate swap agreements. The Company terminated its
outstanding interest rate swap at April 6, 2001 in the second quarter of fiscal
2001 at a loss to the Company of approximately $0.4 million. As of July 6, 2002,
the Company did not have any borrowings outstanding under the Amended DIP,
therefore a hypothetical 10% adverse change in interest rates as of January 5,
2002 would not have had a significant impact on the Company's interest expense
in the second 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 July 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 July 6, 2002 banks purchased the maximum of 5.2 million shares
under the Equity Agreements. Amounts recorded as liabilities subject to
compromise as of July 6, 2002 were approximately $56.5 million. The amount of
equity notes outstanding reflects repayments of Equity Agreements of
approximately $0.2 million in the second quarter of fiscal 2002 from the
proceeds of the Penhaligon's and GJM sales. The ultimate amount that the Company
will pay to its pre-petition lenders related to the Equity Agreements is
included in the Company's proposed plan of reorganization as filed on October 1,
2002. See Note 1 of Notes to Consolidated Condensed Financial Statements.
45
Item 4. Controls and Procedures.
The Company's independent auditors, Deloitte & Touche LLP ("Deloitte") had
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 considered
material weaknesses constituting reportable conditions under standards
established by the American Institute of Certified Public Accountants:
(i) certain corporate and U.S. division accounting personnel lacked
appropriate experience and/or technical accounting knowledge
appropriate for their responsibilities and required 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 has
recruited 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.
46
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 July 6, 2002 and January 5, 2002. All pre-petition debt of the
Debtors has been reclassified with liabilities subject to compromise in the
consolidated condensed balance sheets at July 6, 2002 and January 5, 2002. The
additional information required by Item 3 of Part II is incorporated herein by
reference to Part I of 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.
(b) Reports on Form 8-K
On October 3, 2002, the Company filed a Current Report on Form 8-K dated
October 2, 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 August 4,
2002 and ending August 31, 2002.
On October 2, 2002, the Company filed a Current Report on Form 8-K dated
October 2, 2002. The Form 8-K reported at Item 9 the filing of the Company's
proposed plan of reorganization, the Company's disclosure statement related to
its proposed plan of reorganization and the related exhibits.
On October 1, 2002, the Company filed a Current Report on Form 8-K dated
October 1, 2002. The Form 8-K reported at Item 5 the press release announcing
the filing of the Company's proposed plan of reorganization with the Bankruptcy
Court on October 1, 2002.
47
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: October 24, 2002 By: /s/ ANTONIO C. ALVAREZ II
---------------------------------
Antonio C. Alvarez II
Director, President and
Chief Executive Officer
Date: October 24, 2002 By: /s/ JAMES P. FOGARTY
---------------------------------
James P. Fogarty
Senior Vice President Finance and
Chief Financial Officer
48
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: October 24, 2002 /s/ ANTONIO C. ALVAREZ
-----------------------------
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: October 24, 2002 /s/ JAMES P. FOGARTY
-----------------------------
James P. Fogarty
Chief Financial Officer
49
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.................. 'r'
The section symbol shall be expressed as............................... 'SS'