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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 October 5, 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
November 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)
October 5, January 5,
2002 2002
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash $ 95,858 $ 39,558
Accounts receivable, less reserves of $89,568 and $107,947, respectively 206,887 282,387
Inventories, less reserves of $37,257 and $50,097 373,170 418,902
Prepaid expenses and other current assets 26,793 36,988
Assets held for sale 112 31,066
----------- -----------
Total current assets 702,820 808,901
----------- -----------
Property, plant and equipment -- net 180,333 212,129
Licenses, trademarks, intangible and other assets, at cost, less
accumulated amortization 96,961 271,500
Goodwill, less accumulated amortization - 692,925
Deferred income tax 2,236 -
----------- -----------
Total other assets 99,197 964,425
----------- -----------
$ 982,350 $ 1,985,455
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt $ 7,762 $ 1,583
Amended Debtor-in-Possession revolving credit facility - 155,915
Accounts payable 110,128 84,764
Accrued liabilities 88,562 105,278
Accrued income tax payable 19,326 14,505
----------- -----------
Total current liabilities 225,778 362,045
----------- -----------
Other long-term liabilities 35,883 31,754
Long-term debt 1,420 1,755
Liabilities subject to compromise 2,482,339 2,436,055
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 (59,701) (53,016)
Deficit (2,299,046) (1,393,674)
Treasury stock, at cost 12,242,629 shares (313,889) (313,889)
Unearned stock compensation (142) (413)
----------- -----------
Total stockholders' deficiency (1,763,070) (851,284)
----------- -----------
$ 982,350 $ 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 Nine Months Ended
---------------------------- ---------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited)
Net revenues $ 345,458 $ 397,664 $1,137,277 $1,259,153
Cost of goods sold 246,162 310,152 803,721 1,050,677
--------- --------- ---------- ----------
Gross profit 99,296 87,512 333,556 208,476
Selling, general and administrative expenses 86,977 114,202 289,674 441,743
--------- --------- ---------- ----------
Operating income (loss) before reorganization items 12,319 (26,690) 43,882 (233,267)
Reorganization items 21,122 25,735 79,207 103,937
--------- --------- ---------- ----------
Operating loss (8,803) (52,425) (35,325) (337,204)
Investment loss - - - 6,672
Interest expense, net 4,284 8,446 14,343 112,909
--------- --------- ---------- ----------
Loss before provision for income taxes and cumulative
effect of change in accounting principle (13,087) (60,871) (49,668) (456,785)
Provision for income taxes 2,544 3,300 54,082 9,422
--------- --------- ---------- ----------
Loss before cumulative effect of change in
accounting principle (15,631) (64,171) (103,750) (466,207)
Cumulative effect of change in accounting principle
(net of income tax benefit of $53,513) - - (801,622) -
--------- --------- ---------- ----------
Net loss $ (15,631) $ (64,171) $ (905,372) $ (466,207)
========= ========= ========== ==========
Contractual interest expense $ 43,431 $ 53,743 $ 134,484 $ 167,456
========= ========= ========== ==========
Basic and diluted loss per common share:
Loss before accounting change $ (0.30) $ (1.21) $ (1.96) $ (8.81)
Cumulative effect of accounting change, net of taxes - - (15.14) -
--------- --------- ---------- ----------
Net loss $ (0.30) $ (1.21) $ (17.10) $ (8.81)
========= ========= ========== ==========
Weighted average number of shares outstanding used in
computing loss per share:
Basic and diluted 52,936 52,936 52,936 52,903
========= ========= ========== ==========
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)
Nine Months Ended
--------------------------------
October 5, October 6,
2002 2001
---------- ----------
(Unaudited)
Cash flows from operating activities:
Net loss $(905,372) $(466,207)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Net loss on sale of GJM, Penhaligon's and Ubertech 3,462 -
loss on sale of fixed assets 407 4,510
Non-cash reorganization and other items 39,555 115,541
Cumulative effect of change in accounting, net of taxes 801,622 -
Increase in deferred income tax valuation allowance 46,058 -
Depreciation and amortization 42,461 81,906
Market value adjustments to Equity Agreements - 6,672
Amortization of interest rate swap gain - (2,468)
Amortization of unearned stock compensation 270 2,809
Amortization of deferred financing costs 6,888 11,565
Preferred stock accretion - 16,613
Deferred taxes 1,846 -
Change in operating assets and liabilities:
Repurchase of accounts receivable - (185,000)
Accounts receivable 71,942 12,081
Inventories 47,183 24,939
Prepaid expenses and other assets 11,376 (44,056)
Accounts payable, accrued expenses and other liabilities 30,706 (16,648)
Accrued income taxes 4,821 1,731
--------- ---------
Net cash provided by (used in) operating activities 203,225 436,012
--------- ---------
Cash flows from investing activities
Disposals of fixed assets 9,821 5,355
Purchase of property, plant & equipment (8,101) (22,742)
Proceeds from sale of business units, net of cash balances 20,609 -
Increase in intangible and other assets - (151)
--------- ---------
Net cash provided by (used in) investing activities 22,329 (17,538)
--------- ---------
Cash flows from financing activities:
Net borrowing under pre-petition credit facilities - 341,953
Repayments of GECC debt (1,939) -
Repayments of pre-petition debt (11,071) -
Borrowings (repayments) under Amended DIP (155,915) 165,000
Increase in deferred financing costs - (19,852)
Payment of withholding tax on preferred stock accretion - (49)
--------- ---------
Net cash provided by (used in) financing activities (168,925) 487,052
--------- ---------
Translation adjustments (329) (532)
--------- ---------
Increase in cash 56,300 32,970
Cash at beginning of period 39,558 11,076
--------- ---------
Cash at end of period $ 95,858 $ 44,046
========= =========
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 October 5, 2002 as well as its results
of operations and cash flows for the periods ended October 5, 2002 and October
6, 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 October 5, 2002, the Company had repaid all outstanding
borrowings under the Amended DIP and at November 7, 2002 had approximately
$60,727 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 October 5, 2002, the Debtors had rejected a number of executory
contracts and unexpired leases and had accrued approximately $28,354 related to
rejected leases and contracts. The Debtors have attempted to estimate the
ultimate amount of liability, 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 and as amended on November 8, 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 October 5, 2002, the Company was not in compliance
with certain financial and bankruptcy covenants contained in certain of its
license agreements. Under applicable provisions of the Bankruptcy Code,
compliance with such terms and conditions in executory contracts generally are
either excused or suspended during the Chapter 11 Cases.
In the Chapter 11 Cases, substantially all of the Debtors' unsecured
liabilities as of the Petition Date are subject to compromise or other treatment
under a plan or plans of reorganization which must be confirmed by the
Bankruptcy Court after obtaining the requisite amount of votes from 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 joint plan of reorganization and
related disclosure statement with the Bankruptcy Court on October 1, 2002. The
Debtors subsequently filed a first amended joint plan of reorganization and
related disclosure statement on November 9, 2002. A hearing was held before the
Bankruptcy Court on November 13, 2002 with respect to the adequacy of the
information contained in the disclosure statement. The Bankruptcy Court entered
an order on November 14, 2002 approving the Debtors' disclosure statement as
containing information of a kind and in sufficient detail, as far as is
reasonably practicable to enable holders of claims to make informed judgments
about the plan, as required under section 1125 of the Bankruptcy Code. As a
result, the Debtors will solicit acceptances of the plan from their creditors
whose claims are impaired and who may receive distributions under the plan. In
order to confirm the plan, the Bankruptcy Court is required to find, among other
things, 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 6, 2002, respectively. The Debtors filed a proposed
joint plan of reorganization on October 1, 2002, which was amended on
November 9, 2002. The Debtors expect to conclude the solicitation of votes with
respect to the plan by December 27, 2002 and, accordingly, expect to secure an
extension of their exclusive period to obtain acceptances of the plan through
and including January 6, 2003. If the Debtors' plan is not confirmed by the
Bankruptcy Court, impaired classes of creditors and equity holders or any
party-in-interest (including a creditor, equity holder, a committee of
creditors or equity holders or an indenture trustee) may file their own plan
of reorganization for the Debtors.
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 $101,000 in cash, newly issued
second lien 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 as a class 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, second lien 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, allowed administrative and
priority claims will be paid in full in cash. Under the
proposed plan additional shares of common stock of the
reorganized Company equal 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 October 5, 2002, the Company sold certain personal
property, certain owned buildings and land and other assets generating net
proceeds of approximately $12,500 of which approximately $9,800 was generated in
the first nine months of fiscal 2002 (collectively the "Asset Sales"). The Asset
Sales did not result in a material gain or loss since the Company had previously
written-down assets identified for potential disposition to estimated net
realizable value. Substantially all of the net proceeds from the Asset Sales
were used to reduce outstanding borrowings under the Amended DIP. In addition,
in the first quarter of fiscal 2002, the Company sold the business
7
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 domestic 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. In October 2002, the Company began the process of
closing its 26 remaining domestic outlet retail stores. The closing of the
stores and the related sale of inventory, at approximately net book value,
generated approximately $10,300 of net proceeds through November 13, 2002. The
Company will receive additional proceeds of approximately $2 million in the
fourth quarter of fiscal 2002. The Company expects that all domestic outlet
retail stores will be closed by the end of January 2003. In September 2002, the
Company sold certain assets related to the design and production of certain
swim-related products ("Ubertech"). The Company retained its swimwear and swim
related business. The sale of Ubertech generated $150 of net proceeds and
resulted in a loss on the sale of $1,362. Assets held for sale of $112 are
various fixed assets the Company expects to sell in the fourth quarter of fiscal
2002. Such assets were previously written-down to estimated net realizable
value.
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 current 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
8
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated condensed financial statements do not include any
of the adjustments relating to the recoverability and classification of recorded
assets or the amounts and classifications of liabilities that might result from
the outcome of these uncertainties.
Periods Covered. The quarters ended October 5, 2002 (the "third quarter
of fiscal 2002") and October 6, 2001 (the "third quarter of fiscal 2001")
included 13 weeks of operations. The nine months ended October 5, 2002 (the
"first nine months of fiscal 2002") include 39 weeks of operations. The nine
months ended October 6, 2001 (the "first nine months of fiscal 2001") included
40 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.
9
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 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.
In October 2002, the Company agreed to settle certain lease obligations
with Bancomext S.N.C. ("Bancomext") related to certain leased facilities in
Mexico. Under the terms of the settlement agreement, the Company will pay, in
cash, $112 to Bancomext for outstanding rent payments and other fees and will
grant an unsecured claim to Bancomext in the amount of $9,500 in consideration
for Bancomext's release of the Company's lease obligation on a closed facility
and amendments to leases for two other facilities. The Company had accrued
approximately $6,884 in the fourth quarter of fiscal 2001 as a reorganization
item for its estimated obligations under the lease for the closed facility.
The additional accrual of approximately $2,616 for the total unsecured
claim pursuant to the settlement agreement is included in reorganization items
in the third quarter of fiscal 2002.
10
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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:
For the Three Months Ended For the Nine Months Ended
-------------------------- --------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Legal & professional fees $ 5,138 $ 8,427 $20,056 $ 14,533
Lease terminations 4,470 5,500 5,319 5,500
Employee contracts and retention 4,422 - 14,846 -
Facility shutdown costs 4,081 (389) 4,081 (389)
Sales of Penhaligon's, GJM and Ubertech 1,362 - 3,462 -
Write-off of fixed assets related to retail stores closed 1,005 12,131 5,995 12,131
Losses on sales of fixed assets 512 - 407 4,510
Other 132 (115) 1,155 (20)
GECC lease settlement - - 22,907 -
Employee benefit costs related to plant closings - 404 979 404
Company-obligated mandatorily redeemable preferred securities (a) - - - 21,411
Systems development abandoned - - - 30,145
Deferred financing fees - (223) - 34,599
Interest rate swap gain - - - (18,887)
------- ------- ------- --------
$21,122 $25,735 $79,207 $103,937
======= ======= ======= ========
Cash portion of reorganization items $ 9,692 $ 8,312 $36,057 $ 14,513
Non-cash portion of reorganization items $11,430 $17,423 $43,424 $ 89,364
(a) includes original issue discount and deferred bond issue costs of $4,798,
net of accumulated amortization.
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
11
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 is deemed impaired if
the net book value of a business reporting unit exceeds the fair value of that
business reporting unit. Intangible assets are deemed impaired if the carrying
amount exceeds the 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 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
finite 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 goodwill and intangible assets was $226
and $678 in the three and nine month periods ending October 5, 2002,
respectively and $9,255 and $36,279 in the three and nine month periods ending
October 6, 2001, respectively. Pro-forma net loss for the third quarter and
first nine months of fiscal 2001, assuming SFAS No. 142 had been adopted
effective January 1, 2001 is as follows:
Three Months Nine Months
Ended Ended
October 6, 2001 October 6, 2001
--------------------------------------------------
Net loss - as reported $ (64,171) $ (466,207)
Decrease in amortization expense 9,029 35,601
---------- -----------
Net loss - as adjusted $ (55,142) $ (430,606)
========== ===========
Basic and diluted loss per weighted
average share outstanding:
As reported $ (1.21) $ (8.81)
========== ===========
As adjusted $ (1.04) $ (8.14)
========== ===========
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 October 5, 2002 for
costs incurred in connection with the fiscal 2000 special charges are summarized
below:
Facility Employee
Inventory write- shutdown and termination and Legal and
downs and other contract termination severance Retail outlet other related
asset write-offs costs (a) costs store closings costs Total
--------- --------- -------- -------- -------- ---------
Balance as of January 5, 2002 $ - $ 6,057 $ 279 $ - $ - $ 6,336
Cash Reductions - 2002 - (2,380) (235) - - (2,615)
--------- --------- -------- -------- -------- ---------
Balance as of October 5, 2002 $ - $ 3,677 $ 44 $ - $ - $ 3,721
========= ========= ======== ======== ======== =========
Balance as of December 30, 2000 $ 29,501 $ 11,805 $ 6,655 $ 4,711 $ 3,820 56,492
Cash Reductions - 2001 - (7,828) (4,855) (1,039) (3,172) (16,894)
Non-cash reductions - 2001 (28,454) (204) - (3,044) - (31,702)
--------- --------- -------- -------- -------- ---------
Balance as of October 6, 2001 $ 1,047 $ 3,773 $ 1,800 $ 628 $ 648 $ 7,896
========= ========= ======== ======== ======== =========
(a) Includes $2,211 of liabilities subject to compromise at October 5, 2002 and
January 5, 2002.
Note 5 - Inventories
October 5, January 5,
2002 2002
---------- ----------
Finished goods $314,512 $375,956
Work in process 50,872 47,325
Raw materials 45,043 45,718
-------- --------
410,427 468,999
Less: reserves (a) 37,257 50,097
-------- --------
$373,170 $418,902
======== ========
(a) Inventory reserves are based upon the estimated recoveries the Company
expects to receive from the disposition of excess and obsolete inventory.
As of October 5, 2002 and January 5, 2002, the Company had identified
inventory with a carrying value of $58,200 and $88,300, respectively as
potentially excess and/or obsolete.
13
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Note 6 - Debt
October 5, January 5,
2002 2002
----------- -----------
Amended DIP $ - $ 155,915
GECC lease settlement (a) 7,131 -
$600 million term loan (b) 584,824 587,548
Revolving credit facilities (b) 1,013,995 1,018,719
Term loan agreements (b) 27,034 27,161
Capital lease obligations (e) 3,316 5,582
Foreign credit facilities (b)(c) 143,456 143,439
Equity Agreement Notes (b)(d) 56,506 56,677
----------- -----------
1,836,262 1,995,041
Current portion (7,762) (157,498)
Reclassified to liabilities subject to compromise (1,827,080) (1,835,788)
----------- -----------
Total long-term debt $ 1,420 $ 1,755
=========== ===========
(a) Represents amounts due pursuant to the GECC lease settlement, net of
payments made through October 5, 2002 of $1,939.
(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 the 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) Includes capital lease obligations not subject to compromise of $2,051 and
$3,338, respectively.
Total debt does not include pre-petition trade drafts outstanding as of
October 5, 2002 and January 5, 2002 of $349,737 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 a 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
14
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 voluntarily reduced the amount of borrowing
available to the Company under the Amended DIP to $275,000. Borrowing under the
Amended DIP bears interest at either the London Inter Bank Offering Rate (LIBOR)
plus 2.75% (4.4% at October 5, 2002) or at the Citibank N.A. Base Rate plus
1.75% (6.5% at October 5, 2002).
All outstanding borrowings under the Amended DIP had been repaid as of
October 5, 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 October 5, 2002 and January 5, 2002
of approximately $44,309 and $60,031 respectively. The total amount of
additional credit available to the Company at October 5, 2002 and January 5,
2002 was $165,638 and $159,054 respectively. As of November 7, 2002, the Company
had approximately $60,727 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 monthly 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 $7,131 is
classified as short-term debt not subject to compromise at October 5, 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 October 5, 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. GECC
retains a perfected security interest in the leased assets equal to the
outstanding cash settlement payments due under the settlement agreement until
all such amounts are paid.
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 October 5, 2002. All pre-petition debt of
the Debtors has been classified as liabilities subject to compromise in the
consolidated condensed balance sheet at October 5, 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
$1,706 in the third quarter of fiscal 2002. Total interest accrued on foreign
debt agreements since the
15
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Petition Date totaled $9,034, which is included in liabilities subject to
compromise at October 5, 2002. The Company's proposed plan of reorganization
requires the payment of such interest.
Interest expense, net
Interest expense included in the consolidated condensed statement of
operations is as follows:
For the Three Months Ended For the Nine Months Ended
------------------------------- ------------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
------------- --------------- ------------ -------------
Interest expense $ 4,395 $ 8,446 $ 17,377 $ 112,909
Interest income (111) - (3,034) -
------------- --------------- ------------ -------------
Interest expense, net $ 4,284 $ 8,446 $ 14,343 $ 112,909
============= =============== ============ =============
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 October 5, 2002 and January 5, 2002:
October 5, 2002 January 5, 2002
------------------------------------
Current liabilities:
Accounts payable $ 385,874 $ 386,711
Accrued liabilities, including GECC claim 122,325 66,071
Debt:
$600 million term loan (a) 584,824 587,548
Revolving credit facilities (a) 1,013,995 1,018,719
Term loan agreements (a) 27,034 27,161
Capital lease obligations 1,265 2,244
Foreign credit facilities (a) (b) 143,456 143,439
Equity Agreement Notes (a) 56,506 56,677
Company-obligated mandatorily redeemable convertible 120,000 120,000
preferred securities
Other liabilities 27,060 27,485
--------------- ---------------
$2,482,339 $2,436,055
=============== ===============
(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.
16
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Note 8 - Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities.
In 1996, the Company's wholly owned subsidiary, Designer Holdings Ltd.
("Designer Holdings") issued 2.4 million Company-obligated mandatorily
redeemable convertible preferred securities with an aggregate nominal value of
$120,000 (the "Preferred Securities"). Each Preferred Security is convertible
into 0.6888 of a share of the Company's common stock, or an aggregate of
1,653,177 shares. The nominal value of the Preferred Securities is included in
liabilities subject to compromise at October 5, 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 October 5, 2002 and January 5, 2002 and for the three month and
nine month periods ended October 5, 2002 and October 6, 2001.
The information below may not be indicative of future operating results.
Balance sheet summary:
October 5, January 5,
2002 2002
-------------- -------------
Current assets $ 89,560 $ 96,536
Noncurrent assets 148,708 421,955
Current liabilities 34,203 24,684
Noncurrent liabilities 45,373 39,562
Liabilities subject to compromise:
Current liabilities 8,586 8,564
Preferred Securities 120,000 120,000
Stockholders' equity 21,948 325,681
Statement of operations summary: Three months ended Nine months ended
----------------------------- -----------------------------
October 5, October 6, October 5, October 6,
2002 (a) (b) 2001 (a) (b) 2002 (a) (b) 2001 (a) (b)
-------------- ------------- ------------- ------------
Net revenues $ 79,436 $ 83,341 $ 209,898 $ 209,565
Cost of goods sold 55,994 61,261 154,694 173,697
Net loss 3,401 451 (303,733)(c) (88,390)
(a) Excludes Retail Store Division's net revenues of $7,188 and $25,990 and
$13,435 and $37,900 for the three and nine month periods ended October 5,
2002 and October 6, 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 $5,916 and $13,840 and $4,536 and $33,476 of
general corporate expenses for the three and nine month periods,
respectively.
(c) Includes the cumulative effect of a change in accounting principle of
$302,655 in the first nine 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 Nine Months Ended
-------------------------- -----------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
------------ ------------ --------- -----------
Cash paid (received) for:
Interest $ 540 $ 7,104 $ 6,342 $ 127,300
Income taxes, net of refunds received $ 3,130 $ 938 (8,907) $ 5,877
Supplemental non-cash investing and financing
activities:
Debt issued for purchase of fixed assets (a) - - 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 domestic and international outlet retail stores. Through
October 5, 2002, the Company closed 47 Speedo Authentic Fitness stores and 38
outlet retail stores leaving 48 Speedo Authentic Fitness and 48 outlet retail
stores operating as of October 5, 2002. In October 2002, the Company began the
process of closing its 26 remaining Calvin Klein domestic outlet retail stores.
The closing of the stores and the related sale of inventory generated
approximately $10,300 of net proceeds through November 7, 2002. The Company will
receive additional proceeds of approximately $2,000 in the fourth quarter of
fiscal 2002. The Company expects that all domestic outlet retail stores will be
closed by the end of January 2003. During the third quarter of fiscal 2002, the
Company accrued approximately $4,413 related to rejected leases and wrote-off
approximately $1,005 of fixed assets related to the above-mentioned store
closures. The Company does not intend to operate any domestic outlet retail
stores in 2003.
Net revenues for the 38 domestic outlet retail stores closed in the first
nine months of fiscal 2002 for the nine months ended October 5, 2002 and October
6, 2001 were $9,662 and $30,302, respectively. Net revenues for the 26 domestic
outlet retail stores to be closed in the fourth quarter of fiscal 2002 for the
nine months ended October 5, 2002 and October 6, 2001 were $29,227 and $33,588,
respectively.
18
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
Net revenues for the 24 Authentic Fitness stores closed in the first six
months of fiscal 2002 for the nine months ended October 5, 2002 and October 6,
2001 were $1,936 and $6,472, respectively. Net revenues for the 23 Authentic
Fitness stores closed in the third quarter of fiscal 2002 for the nine months
ended October 5, 2002 and October 6, 2001 were $5,546 and $6,825, 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.
Sportswear
and Intimate Retail
Swimwear Apparel Stores Total
------------- ------------ ------------ ---------------
Three months ended October 5, 2002:
- ---------------------------------------------
Net revenues $176,914 $145,401 $ 23,143 $ 345,458
Segment operating income (loss) 7,250 21,212 415 28,877
Three months ended October 6, 2001:
- ---------------------------------------------
Net revenues $180,235 $168,551 $ 48,878 $ 397,664
Segment operating loss (8,111) 5,589 (3) (2,525)
Nine months ended October 5, 2002:
- ---------------------------------------------
Net revenues $622,627 $434,845 $ 79,805 $1,137,277
Segment operating income (loss) 47,400 53,453 (4,233) 96,620
Nine months ended October 6, 2001:
- ---------------------------------------------
Net revenues $672,845 $444,898 $141,410 $1,259,153
Segment operating loss (38,033) (77,982) (13,313) (129,328)
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 October 5, 2002 and October 6, 2001,
respectively, is as follows:
Three Months Ended Nine Months Ended
October 5, October 6 October 5, October 6
2002 2001 2002 2001
------------- ------------ ------------ ---------------
Segment operating income (loss) $ 28,877 $ (2,525) $ 96,620 $(129,328)
General corporate expenses not allocated (a) 16,558 24,165 52,738 103,939
------------- ------------ ----------- ------------
Operating income (loss) before reorganization
items 12,319 (26,690) 43,882 (233,267)
Reorganization items 21,122 25,735 79,207 103,937
------------- ------------ ----------- ------------
Operating loss (8,803) (52,425) (35,325) (337,204)
Investment expense - - - 6,672
Interest expense, net 4,284 8,446 14,343 112,909
------------- ------------ ----------- ------------
Loss before provision for income taxes
and cumulative effect of change in
accounting principle $(13,087) $(60,871) $(49,668) $(456,785)
============= ============ =========== ============
(a) includes amortization of goodwill and intangible assets of $226 and $9,255
and $678 and $36,279 for the three and nine month periods ended October 5,
2002 and October 6, 2001, respectively.
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 Nine Months Ended
------------------------- --------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net loss $(15,631) $(64,171) $(905,372) $(466,207)
---------- ----------- ----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustments (2,185) (1,014) (329) (532)
Change in unfunded minimum pension liability (2,000) (8,000) (6,000) (11,530)
Unrealized deferred loss on marketable securities (378) (196) (356) (166)
---------- ----------- ----------- -----------
Total other comprehensive loss (4,563) (9,210) (6,685) (12,228)
---------- ----------- ----------- -----------
Comprehensive loss $(20,194) $(73,381) $(912,057) $(478,435)
========== =========== =========== ===========
The components of accumulated other comprehensive loss are as follows:
October 5, January 5,
2002 2002
------------- ------------
Unfunded minimum pension liability $(38,494) $(32,494)
Foreign currency translation adjustments (20,890) (20,561)
Unrealized holding losses (gains), net (317) 39
------------ -----------
Total accumulated other comprehensive loss $(59,701) $(53,016)
============ ===========
Note 12 - Income Taxes
The provision for income taxes of $2,544 for the third quarter of fiscal
2002 reflects accrued income taxes on foreign earnings. The provision for income
taxes for the first nine months of fiscal 2002 of $54,082 reflects accrued
income taxes of $8,024 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 third quarter of fiscal 2001 and
first nine months of fiscal 2001 reflects accrued taxes of $3,300 and $9,422,
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, except share amounts)
(Unaudited)
Note 13 - Equity
Three Months Ended Nine Months Ended
---------------------------- -------------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
------------- ------------- -------------- ---------------
Numerator for basic and diluted earnings per share:
Loss before cumulative effect of change
in accounting $ (15,631) $ (64,171) $ (103,750) $ (466,207)
Cumulative effect of change in accounting - - (801,622) -
------------- ------------- -------------- ---------------
Net loss $ (15,631) $ (64,171) $ (905,372) $ (466,207)
============= ============= ============== ===============
Denominator for basic and diluted loss per share
-- weighted average number of shares 52,936 52,936 52,936 52,903
============= ============= ============== ===============
Basic and diluted loss per share before cumulative
effect of change in accounting (a) (b) $ (0.30) $ (1.21) $ (1.96) $ (8.81)
============= ============= ============== ===============
(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 October 5, 2002 and
October 6, 2001 included options to purchase 3,963,213 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 October 5, 2002.
Options to purchase shares of common stock outstanding at October 5, 2002
and October 6, 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:
October 5, October 6,
2002 2001
--------------- --------------
Number of shares under option 3,963,213 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 October 5, 2002. In
addition, as of October 5, 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, except 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.
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.
The Company has recently been engaged in settlement discussions with
SIL. Subject to the execution of definitive agreements, the Company expects to
seek Bankruptcy Court approval of a proposed settlement which, inter alia,
provides for the Company's assumption of the Speedo Licenses. The proposed
settlement would not have a material effect on the Company's financial
condition, results of operations or its business. In the event that a definitive
agreement with respect to the proposed settlement were not executed, the Company
believes that all issues raised by SIL with respect to the assumption of the
Speedo Licenses could be resolved by the Bankruptcy Court or otherwise resolved
in a manner which would 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. A settlement has been reached, however, subject
to Bankruptcy Court Approval, pursuant to which Mrs. Wachner would receive, in
full settlement of the Wachner Claim, the following: a) an Allowed Unsecured
Claim in connection with the termination of her Employment Agreement in the
amount of $3,500,000 (which would be satisfied under the First Amended Plan of
Reorganization (the "Plan") by a distribution of its pro rata share of newly
issued common stock of Reorganized Warnaco); and b) an Allowed Administrative
Claim of $200,000 (which would be satisfied by a cash payment of such amount
upon confirmation of the Plan). While the Company expects to seek Bankruptcy
Court approval of the settlement, confirmation and effectiveness of the Debtors'
Plan is 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 fraud with the requisite
particularity. On April 25, 2002, the District Court granted the individual
22
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
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 judgment 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.
The Company has filed a Wells Submission and is continuing its discussions with
the SEC staff. 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 October 5, 2002 and January 5,
2002, results of operations and cash flows for the Debtors for the periods ended
October 5, 2002 and October 6, 2001:
23
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
October 5, January 5,
2002 2002
------------- --------------
ASSETS
Current assets $ 563,062 $ 624,623
Net property, plant and equipment 160,028 191,117
Intercompany accounts, net 13,588 44,532
Intangible and other assets, net 69,145 869,659
Deferred income taxes 2,236 -
Investment in affiliates 112,899 181,212
------------- --------------
$ 920,958 $ 1,911,143
============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities not subject to compromise:
Current Liabilities:
Amended DIP $ - $ 155,915
Current portion of long-term debt 7,762 -
Other current liabilities 156,753 135,383
------------- --------------
Total current liabilities 164,515 291,298
Other long-term liabilities 35,866 31,736
Long-term debt 1,308 -
Liabilities subject to compromise 2,482,339 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 (59,701) (53,016)
Deficit (2,299,046) (1,393,674)
Treasury stock, at cost 12,242 629 shares (313,889) (313,889)
Unearned stock compensation (142) (413)
------------- --------------
Total stockholders' deficiency (1,763,070) (851,284)
------------- --------------
$ 920,958 $ 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 Nine Months Ended
------------------------- --------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
------------ ----------- ------------ ------------
Net revenues $ 282,452 $ 335,820 $ 949,560 $ 1,064,812
Cost of goods sold 207,173 278,132 699,521 938,836
------------ ----------- ------------ ------------
Gross profit 75,279 57,688 250,039 125,976
Selling, general and administrative expenses 65,649 87,216 221,689 351,224
------------ ----------- ------------ ------------
Operating income (loss) before reorganization items 9,630 (29,528) 28,350 (225,248)
Reorganization items 20,535 25,735 76,154 103,937
Equity in income (loss) of unconsolidated subsidiaries 3,748 (2,381) 40 11,602
------------ ----------- ------------ ------------
Operating loss (14,653) (52,882) (47,844) (340,787)
Interest expense, net 4,718 8,112 14,662 120,366
Other income (expense) (3,740) (427) (4,814) (1,157)
------------ ----------- ------------ ------------
Loss before provision for income taxes and cumulative
effect of change in accounting principle (15,631) (60,567) (57,692) (459,996)
Provision for income taxes - 3,604 46,058 6,211
------------ ----------- ------------ ------------
Loss before cumulative effect of
change in accounting principle (15,631) (64,171) (103,750) (466,207)
Cumulative effect of change in accounting
principle net of income tax benefit - - 801,622
------------ ----------- ------------ ------------
Net loss $ (15,631) $ (64,171) $ (905,372) $ (466,207)
============ =========== ============ ============
25
THE WARNACO GROUP, INC.
(Debtor-in-Possession)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(Unaudited)
For the Nine Months Ended
---------------------------
October 5, October 6,
2002 2001
----------- ------------
Cash flows from operating activities:
Net loss $(905,372) $(466,207)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 37,826 67,416
Loss on sales of fixed assets 407 4,510
Amortization of deferred financing costs 6,888 11,565
Amortization of interest rate swap gain - (2,468)
Cumulative effect of the change in accounting 801,622 -
Market value adjustments to Equity Agreements - 6,672
Increase in deferred income tax valuation allowance 46,058 -
Net loss on sale of GJM, Penhaligon's and Ubertech 3,462 -
Amortization of unearned stock compensation 270 2,809
Non-cash reorganization and other items 43,257 106,149
Changes in operating assets and liabilities:
Accounts receivable 64,595 (101,759)
Inventories 39,469 16,599
Accounts payable, accrued expenses and other liabilities 31,166 (18,039)
Prepaid expenses and other assets 22,567 8,735
Change in other long-term assets and liabilities 1,825 (13,589)
Net change in intercompany and investment accounts 12,221 (66,908)
----------- -----------
Net cash provided by (used in) operating activities 206,261 (444,515)
Cash flows from investing activities:
Proceeds from the sale of GJM and Penhaligon's 20,609 -
Proceeds from sales of fixed assets 9,821 5,355
Capital expenditures (13,051) (21,376)
----------- -----------
Net cash provided by (used in) investing activities 17,379 (16,021)
Cash flows from financing activities:
Net borrowings (repayments) under pre-petition credit facilities (10,031) 331,483
Net borrowings (repayments) under Amended DIP (155,915) 165,000
Repayments of GECC and other debt (1,939) -
Increase in deferred financing costs - (19,852)
----------- -----------
Net cash provided by (used in) financing activities (167,885) 476,631
Translation adjustments 403 (532)
----------- -----------
Net increase in cash and cash equivalents 56,158 15,563
Cash at beginning of period 18,758 5,355
----------- -----------
Cash at end of period $ 74,916 20,918
=========== ===========
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 October 31, 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 $55.4 million in the aggregate. In October
2002, the Company began the process of closing its remaining 26 domestic Calvin
Klein outlet retail stores. The closing of the stores and the related sale of
inventory generated net proceeds of approximately $10.3 million through November
7, 2002. The Company will receive additional proceeds of approximately $2
million in the fourth quarter of fiscal 2002. The Company expects that all of
its domestic outlet retail stores will be closed by the end of January 2003. At
October 5, 2002, the Company has classified certain assets as assets held for
sale. The assets held for sale of $112 are primarily fixed assets that the
Company expects to sell by the end of fiscal 2002. Such assets were previously
written-down to estimated net realizable value.
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
27
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 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 be
ultimately be claimed by certain of the Company's creditors in the Chapter 11
Cases. The actual amounts that will ultimately be realized or claimed may differ
significantly from the amounts originally estimated by the Company. The Company
reviews its estimates of reorganization items on a monthly basis and adjustments
to the previously estimated amounts are recorded when it becomes evident that a
particular item will 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 cumulative effect involved significant judgment in the
estimates of the future earnings of the Company and its various business units
and the fair value assigned to the
28
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.
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, the
inventory position of the Company customers, sell-through of the Company's
products by these 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 October 5, 2002, the Company had
identified inventory with a carrying value of approximately $58.2 million as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of October 5, 2002, the Company had approximately $37.7
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.
29
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 and has closed 197 of the 266 stores it operated at the
beginning of fiscal 2001. The Company wrote-off $1.0 million of fixed assets and
accrued $4.4 million of lease termination costs related to rejected leases of
the closed stores in third quarter of fiscal 2002. In October 2002, the Company
agreed to settle certain lease obligations with Bancomext related to certain
leased facilities in Mexico. Under the terms of the settlement agreement, the
Company will pay, in cash, to Bancomext $0.1 million for outstanding rent
payments and other fees and will grant an unsecured claim to Bancomext in the
amount of $9.5 million in consideration for Bancomext's release of the Company's
lease obligation on a closed facility and amendments to leases for two other
facilities. The Company had accrued approximately $6.9 million in the fourth
quarter of fiscal 2001 as a reorganization item for its estimated obligations
under the lease for the closed facility. The additional accrual of approximately
$2.6 million for the total unsecured claim pursuant to the settlement agreement
is included in reorganization items in the third quarter of fiscal 2002. Lease
termination costs are classified as 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 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 June 12, 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 $7.1 million as of October 5,
2002 are included in long-term debt not subject to compromise. The remaining
amount of the GECC claim of approximately $36.0 million is included in
liabilities subject to compromise at October 5, 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' creditor
constituencies will find acceptable.
In the first quarter of fiscal 2002, the Company sold the assets of
Penhaligon's and GJM for net proceeds of approximately $20.5 million in the
aggregate. In fiscal 2001 the Company recorded an impairment loss related to the
goodwill of GJM of approximately $26.8 million.
The amount of proceeds that will be realized, if any, and the effect of any
additional asset sales on the Company's proposed plan or plans of reorganization
cannot presently be determined. The Company has recorded asset impairment losses
for those assets that the Company believes will not be fully realized when they
are sold or abandoned.
As a direct result of the Chapter 11 Cases, the Company has recorded
certain liabilities, incurred certain legal and professional fees, written-down
certain assets and accelerated the recognition of certain deferred charges. The
transactions were recorded consistent with the provisions of SOP 90-7.
Reorganization items included in the consolidated condensed statement of
operations in the first nine months of fiscal 2002 and fiscal 2001 are $79.2
million and $103.9 million, respectively. Included in
30
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 with
certainty. The Company's proposed plan of reorganization, as filed with the
Bankruptcy Court on October 1, 2002, and as amended on November 9, 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.
Results of Operations.
STATEMENT OF OPERATIONS (SELECTED DATA)
Three Months Ended Nine Months Ended
--------------------------- --------------------------
October 5, October 6, October 5, October 6,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Amounts in thousands of dollars)
(Unaudited)
Net revenues $345,458 $397,664 $1,137,277 $1,259,153
Cost of goods sold 246,162 310,152 803,721 1,050,677
----------- ----------- ------------ ------------
Gross profit 99,296 87,512 333,556 208,476
% of net revenue 28.7% 22.0% 29.3% 16.6%
Selling, general and administrative expenses 86,977 114,202 289,674 441,743
% of net revenue 25.2% 28.7% 25.5% 35.1%
----------- ----------- ------------ ------------
Operating income (loss) before reorganization items 12,319 (26,690) 43,882 (233,267)
% of net revenue 3.6% -6.7% 3.9% -18.5%
Reorganization items 21,122 25,735 79,207 103,937
----------- ----------- ------------ ------------
Operating loss (8,803) (52,425) (35,325) (337,204)
% of net revenue -2.5% -13.2% -3.1% -26.8%
Investment loss - - - 6,672
Interest expense, net 4,284 8,446 14,343 112,909
Provision for income taxes 2,544 3,300 54,082 9,422
----------- ----------- ------------ ------------
Loss before cumulative effect of a
change in accounting $(15,631) $(64,171) $ (103,750) $ (466,207)
=========== =========== ============ ============
The Company's results of operations for the first nine months of fiscal
2001 included 40 weeks of operations based on a 52/53 week fiscal year compared
to 39 weeks in the first nine months of fiscal 2002.
Net Revenues
Net revenues are as follows:
31
Three months ended Nine months ended
---------------------------------- ----------------------------------------
Oct, 5 Oct, 6 Inc. % Oct, 5 Oct, 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- -------- --------- ------ ---------- ---------- ---------- ------
Sportswear and Swimwear $176,914 $180,235 $ (3,321) -1.8% $ 622,627 $ 672,845 $ (50,218) -7.5%
Intimate Apparel 145,401 168,551 (23,150) -13.7% 434,845 444,898 (10,053) -2.3%
Retail Stores 23,143 48,878 (25,735) -52.7% 79,805 141,410 (61,605) -43.6%
-------- -------- --------- ------ ---------- ---------- ---------- ------
$345,458 $397,664 $(52,206) -13.1% $1,137,277 $1,259,153 $(121,876) -9.7%
======== ======== ========= ====== ========== ========== ========== ======
Third quarter
Net revenues decreased $52.2 million, or 13.1%, to $345.5 million in the
third quarter of fiscal 2002 compared to $397.7 million in the third quarter of
fiscal 2001. In the same period, Sportswear and Swimwear Division net revenues
decreased $3.3 million, or 1.8%, to $176.9 million, Intimate Apparel Division
net revenues decreased $23.2 million, or 13.7%, to $145.4 million (excluding
discontinued and sold business units, Intimate Apparel Division net revenues
decreased $3.9 million or 2.6%) and Retail Stores Division net revenues
decreased $25.7 million, or 52.7%, to $23.1 million.
First nine months
Net revenues decreased $121.9 million, or 9.7%, to $1,137.3 million in the
first nine months of fiscal 2002 compared to $1,259.2 million in the first nine
months of fiscal 2001. In the same period, Sportswear and Swimwear Division net
revenues decreased $50.2 million, or 7.5%, to $622.6 million, Intimate Apparel
Division net revenues decreased $10.1 million, or 2.3%, to $434.8 million
(excluding discontinued and sold business units, Intimate Apparel Division net
revenues increased $48.5 million or 12.7%) and Retail Stores net revenues
decreased $61.6 million, or 43.6%, to $79.8 million.
Sportswear and Swimwear Division.
The work stoppage by certain long-shore workers in the West Coast ports of
the United States has not had a material impact on the Sportswear and Swimwear
Division's net revenues to date. However, should the work stoppage continue
after the current cooling-off period expires in December 2002, shipments of the
Company's swimwear products could be affected in the first quarter of fiscal
2003. The Sportswear and Swimwear Division is developing contingency plans to
minimize the effect of any potential work stoppage.
Sportswear and Swimwear Division net revenues are as follows:
Three months ended Nine months ended
------------------------------------ ------------------------------------
Oct, 5 Oct, 6 Inc. % Oct, 5 Oct, 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
--------- --------- --------- ------ -------- -------- --------- -------
Authentic Fitness $ 28,133 $ 15,350 $ 12,783 83.3% $245,396 $258,855 $(13,459) -5.2%
Chaps Ralph Lauren 41,704 57,293 (15,589) -27.2% 98,604 143,181 (44,577) -31.1%
Calvin Klein Jeans/Kids 88,892 96,137 (7,245) -7.5% 235,325 238,113 (2,788) -1.2%
Calvin Klein Accessories 3,970 3,737 233 6.2% 10,071 11,180 (1,109) -9.9%
ABS 14,215 7,718 6,497 84.2% 33,231 21,516 11,715 54.4%
--------- --------- --------- ------ -------- -------- --------- -------
Sportswear and Swimwear Division $176,914 $180,235 $ (3,321) -1.8% $622,627 $672,845 $(50,218) -7.5%
========= ========= ========= ====== ======== ======== ========= =======
Third quarter
The increase in Authentic Fitness net revenues in the third quarter of
fiscal 2002 compared to fiscal 2001 reflects increases in Speedo U.S. shipments
during the quarter and an increase in Designer Swimwear net revenues reflecting
the timing of the recognition of customers' returns and allowances and more
favorable experience in customers' returns and allowances. The decrease in Chaps
net revenues primarily reflects the elimination of sales to warehouse clubs
($10.4 million), the strategic decision to reduce accounts receivable exposure
in Mexico and the overall softness in the men's sportswear business.
32
The decrease in Calvin Klein Jeans/Kids net revenues primarily reflects softness
in the sportswear business in the United States, the strategic decision to
reduce accounts receivable exposure in Mexico and elimination of unprofitable CK
Kids accounts. The increase in Calvin Klein accessories net revenues reflects
lower sales in the United States including decreases in business with airport
duty free shops offset by increases in the European accessories business. ABS
net revenues have benefited from a favorable reception of its new styles at
retail.
First nine months
The decrease in Authentic Fitness net revenues in the first nine months of
fiscal 2002 compared to the first nine months of fiscal 2001 primarily reflects
a decrease in Designer Swimwear due to the loss of the Victoria's Secret catalog
business ($8.0 million) 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 ($26.2 million), the loss of the
Dillard's business ($4.2 million), lower sales in Mexico and the overall
softness in the men's sportswear business. The decrease in Calvin Klein
Jeans/Kids net revenues primarily reflects softness in the sportswear business
and the decision to reduce business with unprofitable Calvin Klein Kids
accounts. ABS net revenues have benefited from a favorable reception of its new
styles at retail.
Intimate Apparel Division.
Net revenues for the Intimate Apparel Division are as follows:
Three months ended Nine months ended
---------------------------------- ------------------------------------
Oct, 5 Oct, 6 Inc. % Oct, 5 Oct, 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- -------- --------- ------ -------- --------- --------- ------
Continuing:
Warner's/Olga $ 56,765 $ 68,040 $(11,275) -16.6% $180,562 $157,503 $ 23,059 14.6%
Calvin Klein Underwear 65,330 60,136 5,194 8.6% 169,016 151,506 17,510 11.6%
Lejaby 19,769 17,094 2,675 15.6% 70,181 61,753 8,428 13.6%
Mass sportswear licensing 3,405 3,903 (498) -12.8% 11,358 11,890 (532) -4.5%
-------- -------- --------- ------ -------- --------- --------- ------
Total continuing 145,269 149,173 (3,904) -2.6% 431,117 382,652 48,465 12.7%
Total discontinued business units 132 19,378 (19,246) -99.3% 3,728 62,246 (58,518) -94.0%
-------- -------- --------- ------ -------- --------- --------- ------
Intimate Apparel Division $145,401 $168,551 $(23,150) -13.7% $434,845 $444,898 $(10,053) -2.3%
======== ======== ========= ====== ======== ========= ========= ======
Third quarter
Net revenues decreased $23.2 million, or 13.7%, to $145.4 million in the
third quarter of fiscal 2002 compared with $168.6 million in the third 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
decreased $3.9 million, or 2.6%, to $145.3 million in the third quarter of
fiscal 2002 compared to $149.2 million in the third quarter of fiscal 2001.
Warner's/Olga net revenues decreased $11.3 million, reflecting a less favorable
reception of certain new products at retail. 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 Calvin Klein Underwear business is growing despite the
difficult retail environment and the decision to exit the JC Penney's business.
Shipments of Calvin Klein Underwear to JC Penney's decreased approximately $5.9
million in the third quarter of fiscal 2002 compared to the comparable period of
fiscal 2001. Lejaby net revenues increased $2.7 million, or 15.6%, primarily
through favorable reception of products at retail.
First nine months
For the first nine months of fiscal 2002, Intimate Apparel net revenues
decreased $10.1 million or, 2.3%, to $434.8 million compared with $444.9 million
in the first nine months of fiscal 2001. Excluding
33
net revenues from sold and discontinued business units (GJM, Fruit of the Loom
and Weight Watchers) Intimate Apparel net revenues increased $48.5 million, or
12.7%, to $431.1 million in the first nine months of fiscal 2002 compared to
$382.7 million in the first nine months of fiscal 2001. Increases in
Warner's/Olga and Lejaby net revenues primarily reflect improved distribution
fulfillment, favorable reception of Lejaby products at retail and more favorable
customer allowance and markdown experience. Calvin Klein Underwear net revenues
increased $17.5 million due to improved sell-through at retail, particularly in
the women's business and despite the decision to exit the JC Penney's business.
JC Penney's business decreased approximately $11 million in the first nine
months of fiscal 2002 compared to the first nine months of fiscal 2001.
Retail Stores Division.
Net revenues are as follows:
Three months ended Nine months ended
------------------------------------ -------------------------------------
Oct, 5 Oct, 6 Inc. % Oct, 5 Oct, 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- -------- --------- ------- -------- --------- --------- -------
Outlet retail stores $ 14,568 $ 32,105 $(17,537) -54.6% $ 49,966 $ 90,989 $(41,023) -45.1%
Authentic Fitness stores 8,556 14,173 (5,617) -39.6% 28,837 42,702 (13,865) -32.5%
Penhaligon's - 2,278 (2,278) -100.0% 676 6,719 (6,043) -89.9%
IZKA 19 322 (303) -94.1% 326 1,000 (674) -67.4%
-------- -------- --------- ------- -------- --------- --------- -------
$ 23,143 $ 48,878 $(25,735) -52.7% $ 79,805 $ 141,410 $(61,605) -43.6%
======== ======== ========= ======= ======== ========= ========= =======
In October 2002, the Company began the process of closing its remaining 26
domestic "Calvin Klein" outlet retail stores. The closing of the stores and the
related sale of inventory generated net proceeds of approximately $10.3 million
through November 7, 2002. The Company expects to receive approximately $2.0
million of additional proceeds in the fourth quarter of fiscal 2002. Retail
Stores Division net revenues for the fourth quarter of fiscal 2002 will include
the remaining 48 Authentic Fitness stores and the 22 international retail outlet
stores.
Third quarter
Net revenues decreased $25.7 million, or 52.7%, to $23.1 million in the
third quarter of fiscal 2002 compared to $48.9 million in the first nine months
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 8.9% for the Authentic
Fitness retail stores in the third quarter of fiscal 2002 compared to the same
period in the prior year. The sale of the Penhaligon's in February 2002 and the
liquidation of IZKA, a French retail subsidiary, in the third quarter of fiscal
2002 also adversely affected net revenues in the third quarter of fiscal 2002.
First nine months
Net revenues decreased $61.6 million, or 43.6%, to $79.8 million in the
first nine months of fiscal 2002 compared to $141.4 million in the first nine
months of fiscal 2001. The decrease in net revenues reflects the reduction in
the number of retail outlet stores and Authentic Fitness stores the Company
operates. Same store sales for the 48 Authentic Fitness stores the Company
continues to operate decreased approximately 4.4% in the first nine months of
fiscal 2002 compared to the comparable period of fiscal 2001. The Penhaligon's
business was sold in February 2002 and IZKA, a French retail subsidiary, was
liquidated in the third quarter of fiscal 2002.
Gross Profit
Third quarter
34
Gross profit increased $11.8 million to $99.3 million in the third quarter
of fiscal 2002 compared with a gross profit of $87.5 million in the third
quarter of fiscal 2001, despite the decrease in net revenues as noted above. The
increase in gross profit reflects an improved regular to off-price sales mix,
improved sales allowance and markdown experience and improved manufacturing
efficiencies. Gross margin was 28.7% in the third quarter of fiscal 2002
compared with gross margin of 22.0% in the third quarter of fiscal 2001. The
improvement in gross margin primarily reflects the favorable mix of full price
sales, improved markdown and allowance experience, favorable manufacturing
variances and more efficient product sourcing.
First nine months
Gross profit for the first nine months of fiscal 2002 increased $125.1
million, or 60.0%, to $333.6 million compared to $208.5 million in the first
nine months of fiscal 2001. Gross profit in the first nine months of fiscal 2001
included the impact of recording unfavorable markdown and allowance experience
and inventory write-downs totaling approximately $71.0 million. Gross margin for
the first nine months of fiscal 2002 was 29.3% compared to 16.6% in the first
nine months of fiscal 2001. The improvement in gross margin reflects the more
favorable mix of full price sales, improved markdown and allowance experience,
improved manufacturing efficiencies and more efficient product sourcing.
Selling, General and Administrative Expenses
Third quarter
Selling, general and administrative expenses for the third quarter of
fiscal 2002 decreased $27.2 million, or 23.8%, to $87.0 million compared to
$114.2 million in the third quarter of fiscal 2001. Selling, general and
administrative expenses as a percentage of net revenues were 25.2% in the third
quarter of fiscal 2002 compared with 28.7% in the third quarter of fiscal 2001.
Amortization expense associated with goodwill and intangible assets decreased
approximately $9.0 million in the third quarter of fiscal 2002 compared to the
third quarter of fiscal 2001 reflecting the adoption of SFAS No. 142. The Retail
Stores Division reduced selling, general and administrative expenses by
approximately $10.3 million due primarily to the reduction in the number of
stores the division was operating during the third quarter of fiscal 2002
compared to the third quarter of fiscal 2001. Intimate Apparel Division selling,
general and administrative expenses were reduced by approximately $1.9 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, Pennsylvania ("Duncansville"). Marketing expenses decreased
approximately $3.6 million in the third quarter of fiscal 2002 compared to the
third quarter of fiscal 2001 due primarily to reductions in co-operative
advertising expenses.
First nine months
Selling general and administrative expenses for the first nine months of
fiscal 2002 decreased $152.0 million, or 34.4%, to $289.7 million compared to
$441.7 million in the first nine months of fiscal 2001. Selling, general and
administrative expenses as a percentage of net revenues were 25.5% in the first
nine months of fiscal 2002 compared with 35.1% in the first nine months of
fiscal 2001.The decrease in selling, general and administrative expenses
reflects lower marketing expenses, lower amortization expense of $35.6 million,
lower retail expenses of $25.2 million due to the reduction in the number of
retail stores the Company operates, lower expenses in Intimate Apparel of $46.1
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 and lower administrative expenses of $21.9 million due to cost
saving measures implemented as part of the Company's restructuring efforts.
Marketing expenses decreased
35
approximately $22.5 million in the first nine months of fiscal 2002 compared to
the first nine months of fiscal 2001 due primarily to a decrease in co-operative
advertising expenses.
Operating Income before Reorganization Items
Operating income before reorganization items is as follows:
Three months ended Nine months ended
-------------------- --------------------
Oct 5 Oct 6 Inc. % Oct 5 Oct 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
-------- --------- -------- -------- --------- ---------- -------- ------
Sportswear and Swimwear $ 7,250 $ (8,111) $ 15,361 189.4% $ 47,400 $ (38,033) $ 85,433 224.6%
Intimate Apparel 21,212 5,589 15,623 279.5% 53,453 (77,982) 131,435 168.5%
Retail Stores 415 (3) 418 13933.3% (4,233) (13,313) 9,080 68.2%
-------- --------- -------- -------- --------- ---------- -------- ------
28,877 (2,525) 31,402 1243.6% 96,620 (129,328) 225,948 174.7%
General corporate
expenses, not allocated (16,558) (24,165) 7,607 31.5% (52,738) (103,939) 51,201 49.3%
-------- --------- -------- -------- --------- ---------- -------- ------
$ 12,319 $(26,690) $ 39,009 146.2% $ 43,882 $(233,267) $277,149 118.8%
======== ========= ======== ======== ========= ========== ======== ======
Third quarter
Operating income before reorganization items increased $39.0 million to
$12.3 million (3.5% of net revenues) in the third quarter of fiscal 2002
compared to an operating loss of $26.7 million (-6.7% of net revenues) in the
third quarter of fiscal 2001. The increase in operating income reflects the
increase in gross margin to 28.7% from 22.0% and the decrease in selling,
general and administrative expenses to 25.2% of net revenues in the third
quarter of fiscal 2002 from 28.7% of net revenues in the third quarter of fiscal
2001. 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 retail selling expenses and other cost savings, as noted
above.
First nine months
Operating income before reorganization items increased $277.2 million to
$43.9 million (3.8% of net revenues) in the first nine months of fiscal 2002
compared to an operating loss of $233.3 million (-18.5% of net revenues) in the
first nine months of fiscal 2001. The increase in operating income reflects the
increase in gross margin to 29.3% from 16.6% and the decrease in selling,
general and administrative expenses to 25.5% of net revenues from 35.1% 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 expenses, lower
retail selling costs and other cost savings, as noted above.
Sportswear and Swimwear Division.
Sportswear and Swimwear Division operating income (loss) is as follows:
36
Three months ended Nine months ended
------------------ --------------------
Oct 5 Oct 6 Inc. % Oct 5 Oct 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
------- -------- -------- -------- -------- --------- -------- --------
Authentic Fitness $(4,533) $(24,277) $19,744 81.3% $28,838 $ (7,939) $36,777 463.2%
Chaps Ralph Lauren 2,015 8,170 (6,155) -75.3% 7,841 6,759 1,082 16.0%
Calvin Klein Jeans/Kids 6,586 7,614 (1,028) -13.5% 6,520 (30,929) 37,449 121.1%
Calvin Klein Accessories 594 127 467 367.7% 132 (1,568) 1,700 108.4%
ABS 2,588 255 2,333 914.9% 4,069 (4,356) 8,425 193.4%
------- -------- ------- ------ ------- -------- ------- ------
$ 7,250 $ (8,111) $15,361 189.4% $47,400 $(38,033) $85,433 224.6%
======= ======== ======= ====== ======= ======== ======= ======
Third quarter
The decrease in Authentic Fitness operating loss for the third quarter of
fiscal 2002 compared to the third quarter of fiscal 2001 reflects higher net
revenues and gross margins and the impact of lower selling, general and
administrative expenses primarily due to cost saving measures. Authentic Fitness
operating loss in the third quarter reflects the seasonal nature of the swimwear
business. The decrease in Chaps operating income reflects lower sales volume
(club business and soft men's sportswear business) and lower gross profit. The
decrease in Calvin Klein Jeans/Kids operating income reflects lower gross profit
partially offset by lower selling, general and administrative expenses. ABS
operating income improvement reflects higher sales volume and gross profit.
First nine months
Authentic Fitness operating income for the first nine months of fiscal 2002
increased $36.8 million to $28.8 million compared to an operating loss of $7.9
million in the first nine months of fiscal 2001. The improvement in operating
income reflects higher gross profit and lower selling, general and
administrative expenses in both Speedo and Designer Swimwear. The improvement in
gross profit primarily reflects better markdown and allowance experience. Lower
selling, general and administrative expenses primarily reflect cost saving
measures. The improvement in Chaps operating income in the first nine months of
fiscal 2002 compared to the first nine months of fiscal 2001 reflects lower
selling, general and administrative expenses due primarily to lower sales
volumes and cost saving measures that were implemented in the second half of
fiscal 2001. Chaps gross margin improved to 24.7% of net revenues in the first
nine months of fiscal 2002 from 23.3% in the first nine months 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.
Intimate Apparel Division.
Intimate Apparel Division operating income (loss) is as follows:
37
Three months ended Nine months ended
------------------ --------------------
Oct 5 Oct 6 Inc. % Oct 5 Oct 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
------- -------- -------- -------- -------- --------- -------- --------
Continuing:
Warner's/Olga $ 5,241 $ 1,305 $ 3,936 301.6% $13,825 $(76,137) $ 89,962 118.2%
Calvin Klein Underwear 11,956 7,558 4,398 58.2% 22,694 (2,757) 25,451 923.1%
Lejaby 1,470 587 883 150.4% 8,117 5,402 2,715 50.3%
Mass sportswear licensing 2,380 3,121 (741) -23.7% 8,780 9,589 (809) -8.4%
------- ------- ------- ------ ------- -------- -------- ------
Total continuing 21,047 12,571 8,476 67.4% 53,416 (63,903) 117,319 183.6%
Total discontinued business units 165 (6,982) 7,147 102.4% 37 (14,079) 14,116 100.3%
------- ------- ------- ------ ------- -------- -------- ------
$21,212 $ 5,589 $15,623 279.5% $53,453 $(77,982) $131,435 168.5%
======= ======= ======= ====== ======= ======== ======== ======
Third quarter
Warner's/Olga operating income increased $3.9 million, or 301.6%, to $5.2
million in the third quarter of fiscal 2002 compared to $1.3 million in the
third quarter of fiscal 2001 reflecting higher gross profit and lower selling,
general and administrative expenses. The increased gross profit primarily
reflects improved manufacturing efficiencies including favorable manufacturing
variances. 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 gross profit reflecting higher sales
volume and improved gross margin. The improved gross margin reflects favorable
markdown and allowance experience. Selling, general and administrative expenses
decreased primarily due to better bad debt experience and other cost saving
measures. Losses from the discontinued GJM, Fruit of the Loom and Weight
Watchers business units totaled $7.0 million in the third quarter of fiscal 2001
compared to operating income of $0.2 million in the third quarter of fiscal
2002. Operating income in the discontinued business units in the third quarter
of fiscal 2002 relates primarily to sales of inventory and collection of
accounts receivable for more than was originally anticipated.
First nine months
Warner's/Olga operating income for the first nine months of fiscal 2002
increased $90.0 million, or 118.2%, to $13.8 million compared to an operating
loss of $76.1 million in the first nine months 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
gross profit reflecting higher sales volume and improved gross margins and and
lower selling, general and administrative expenses. The improved gross margin
reflects favorable markdown and allowance experience. Selling, general and
administrative expenses decreased due to lower legal expenses due to the
settlement of the Calvin Klein litigation in the second quarter of fiscal 2002,
better bad debt experience and other cost saving measures. The first nine months
of fiscal 2001 includes a $14.1 million loss from the discontinued/sold GJM,
Weight Watchers and Fruit of the Loom businesses compared to operating income of
$0.1 million in the first nine months of fiscal 2002. The operating income in
the first nine months of fiscal 2002 for discontinued units represents operating
losses incurred by GJM prior to its sale offset by income from the sale of
inventory and collection of accounts receivable for more than was originally
estimated.
Retail Stores Division.
Retail Stores Division operating income (loss) is as follows:
38
Three months ended Nine months ended
------------------ --------------------
Oct 5 Oct 6 Inc. % Oct 5 Oct 6 Inc. %
2002 2001 (Dec.) change 2002 2001 (Dec.) change
------- -------- -------- -------- -------- --------- -------- --------
Outlet retail stores $(261) $ 699 $(960) -137.3% $(4,168) $(10,614) $6,446 60.7%
Authentic Fitness stores 683 237 446 188.2% 947 (163) 1,110 681.0%
Penhaligon's - (367) 367 100.0% (125) (1,079) 954 88.4%
IZKA (7) (572) 565 98.8% (887) (1,457) 570 39.1%
----- ----- ----- -------- ------- -------- ------ ------
$ 415 $ (3) $ 418 13933.3% $(4,233) $(13,313) $9,080 68.2%
===== ===== ===== ======== ======= ======== ====== ======
Third quarter
The increase in the Retail Stores Division's operating income of $0.4
million in the third quarter of fiscal 2002 compared to the third quarter of
fiscal 2001 primarily reflects the closing of unprofitable and marginally
profitable stores, the sale of Penhaligon's in February 2002 and the liquidation
of IZKA.
First nine months
The decrease in the Retail Stores Division's operating loss for the first
nine months of fiscal 2002 compared to the first nine months 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 income improved $1.1 million in the first nine months of fiscal 2002
compared to the first nine months of fiscal 2001. Retail Stores Division losses
for the first nine months 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
First nine months
Investment loss for the first nine months 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 nine months of fiscal 2002 because the
Equity Agreements are liabilities subject to compromise.
Interest Expense
Third quarter
Interest expense decreased $4.1 million to $4.3 million in the third
quarter of fiscal 2002 compared with $8.4 million in the third quarter of fiscal
2001. The decrease reflects lower outstanding debt balances in fiscal 2002 as
the Company had repaid all outstanding borrowing under the Amended DIP before
the beginning of the third quarter of fiscal 2002. Interest expenses for the
third quarter of fiscal 2002 primarily reflects unused commitment and other fees
related to the Amended DIP, interest expense related to the GECC settlement,
interest on certain foreign debt and amortization of deferred financing costs
related to the Amended DIP. Interest expense for the third quarter of fiscal
2001 primarily reflects interest and related fees on the Amended DIP and
interest on certain foreign debt. 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 third quarter
fiscal 2002 and fiscal 2001 includes approximately $1.7 million and $2.4
million, respectively, of interest on these foreign debt agreements.
39
First nine months
Interest expense decreased $98.6 million to $14.3 million in the first
nine months of fiscal 2002 compared with $112.9 million in the first nine months
of fiscal 2001. As of June 11, 2002, the Company stopped accruing interest on
approximately $2.3 billion of pre-petition debt (not including certain foreign
debt agreements, as noted above). Interest expense for the first nine months of
fiscal 2002 primarily reflects interest and related fees on the Amended DIP and
interest on certain foreign debt. The Company had repaid all amounts borrowed
under the Amended DIP prior to the start of the third quarter of fiscal 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 first nine months of fiscal 2002 includes approximately $4.9
million of interest on these foreign debt agreements. Interest expense for the
first nine months of fiscal 2002 includes interest income of approximately $2.9
million related to tax refunds received by the Company in June 2002 and interest
earned on cash balances held in the Company's cash collateral accounts.
Income Taxes
Third quarter
The provision for income taxes for the third 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 third quarter of fiscal 2002 and third quarter of fiscal 2001.
First nine months
The provision for income taxes for the first nine months 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 is 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.
Capital Resources and Liquidity.
Debtor-in-Possession Financing Arrangement
40
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% (4.4% at October 5, 2002) or at the
Citibank N.A. Base Rate plus 1.75% (6.5% at October 5, 2002). In addition, the
fees for the undrawn amounts are .50% for Tranche A. During fiscal 2001 and
through its termination on April 19, 2002, the Company did not borrow any funds
under Tranche B. The Amended DIP contains restrictive covenants that require the
Company to maintain minimum levels of EBITDAR (earnings before interest, taxes,
depreciation, amortization, restructuring charges and other items as set forth
in the agreement), restrict investments, limit the annual amount of capital
expenditures, prohibit paying dividends and prohibit the Company from incurring
material additional indebtedness. Certain restrictive covenants are subject to
adjustment in the event the Company sells certain business units and/or assets.
In addition, the Amended DIP requires that proceeds from the sale of certain
business units and/or assets are to be used to reduce the outstanding balance of
Tranche A. The maximum borrowings under Tranche A are limited to 75% of eligible
accounts receivable, 25% to 67% of eligible inventory and 50% of other inventory
covered by outstanding trade letters of credit.
The Company did not have any amounts outstanding under the Amended DIP at
October 5, 2002. The Company had stand-by and documentary letters of credit
outstanding under the Amended DIP at October 5, 2002 of $44.3 million. The total
amount of additional credit available to the Company at October 5, 2002 was
$165.6 million. As of November 7, 2002, the Company had approximately $60.7
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 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 $349.7 million
of trade drafts) and approximately $140.0 million of accounts payable and
accrued liabilities. Since the Petition Date through October 5, 2002, the
Company sold certain personal property, certain owned buildings and land and
other assets for approximately $12.5 million, approximately $2.3 million of
41
which was recorded in the third 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 connection with the
Company's decision to close unprofitable outlet retail stores, in May 2002, the
Company began closing 25 of its outlet retail stores. 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. In October 2002, the Company began the
process of closing its 26 remaining Calvin Klein domestic outlet retail stores.
The closing of the stores and the related sale of inventory generated net
proceeds of $10.3 million through November 7, 2002. The Company will receive
approximately $2.0 million of additional net proceeds in the fourth quarter of
fiscal 2002. The Company expects that all of its domestic outlet retail stores
will be closed by the end of January 2003.
At October 5, 2002, the Company had working capital of $477.0 million,
excluding $2,482.3 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 nine months of fiscal 2002 cash provided by operating
activities was $203.2 million compared to cash used in operating activities of
$436.0 million in the first nine months 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 (not including the repurchase
of the accounts receivable of $185.0 million) of $454.2 million in the first
nine months of fiscal 2002 compared to the first nine months of fiscal 2001
reflects improved operating income of $277.1 million, (includes reductions in
amortization expenses of approximately $35.6 million due to the adoption of SFAS
No. 142), lower interest expense of $98.6 million, proceeds from the sale of
$12.0 million of outlet retail store inventory and improved working capital
management. Better management of inventory and accounts receivable contributed
$82.1 million of improvement. The reduction in inventory balances reflects
improved inventory management including a reduction in excess and obsolete
inventory at October 5, 2002 to approximately $58 million from approximately $88
million at January 5, 2002. Improved accounts receivable collection efforts have
resulted in a reduction in 16 days of sales outstanding to 52 days at October 5,
2002 compared to 68 days at October 6, 2001. Cash interest expense for the first
nine months of fiscal 2002 was $6.3 million, $121.0 million lower than the
$127.3 million in the first nine months of fiscal 2001. The decrease in cash
interest is primarily a result of the Chapter 11 Cases. Amortization expense
decreased approximately $35.6 million in the first nine months of fiscal 2002
compared to the first nine months 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 $22.3 million in the
first nine months of fiscal 2002 compared to cash used in investing activities
of $17.5 million in the first nine months of fiscal 2002. Cash provided from
investing activities in the first nine months of fiscal 2002 primarily reflects
proceeds from the sales of GJM, Penhaligon's and Ubertech of $20.6 million and
proceeds from other asset dispositions of $9.8 million partially offset by
capital expenditures of $8.1 million. Cash used in investing
42
activities in the first nine months of fiscal 2001 primarily reflects capital
expenditures of $22.7 million offset by the disposition of certain fixed assets
of $5.4 million.
Cash used in financing activities of $168.9 million in the first nine
months of fiscal 2002 reflects the repayment of borrowing under the Amended DIP
of $155.9 million, repayments of other debt of $11.1 million consisting
primarily of repayments of certain pre-petition debt amounts with proceeds from
the sale of GJM and Penhaligon's and payments of amounts due to GECC under the
settlement agreement of $1.9 million. In the first nine months of fiscal 2001,
the Company financed its increase in working capital, as noted above, by
borrowing approximately $342.0 million. Financing activity for the first nine
months of fiscal 2001 includes the payment of $19.9 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 October 5, 2002.
The Company had stand-by and documentary letters of credit outstanding under the
Amended DIP at October 5, 2002 of $44.3 million. The Company had excess cash
available as collateral against outstanding trade and stand-by letters of credit
of $64.4 million at October 5, 2002. The Company also had cash in operating
accounts of approximately $26.2 million at October 5, 2002, not including
restricted cash held in escrow classified with other assets 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 November 7, 2002, the
Company had no outstanding amounts borrowed under the Amended DIP and had
approximately $160.7 million of additional credit available under the Amended
DIP, not including $59.7 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.
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
43
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
period 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, 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.
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 are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from
44
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 October 6, 2001, the Company had terminated all previously
outstanding interest rate swap agreements. As of October 5, 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 third
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 October 5, 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 October 5, 2002 banks purchased the maximum of 5.2 million
shares under the Equity Agreements. Amounts recorded as liabilities subject to
compromise as of October 5, 2002 were approximately $56.5 million. The amount of
equity notes outstanding reflects repayments of Equity Agreements of
approximately $0.2 million in the first 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 and
amended on November 8, 2002. See Note 1 of Notes to Consolidated Condensed
Financial Statements.
45
Item 4. Controls and Procedures.
In response to recent legislation and regulations, the Company has
established a Disclosure Committee comprised of certain members of the Company's
management and has reviewed its internal control structure and disclosure
controls and procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act). Within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"), the Company carried out an evaluation
of the effectiveness of the Company's disclosure controls and procedures. Based
upon that evaluation, after giving consideration and subject to the ongoing
evaluation of the Company's internal control environment and corrective actions
taken by the Company to date, as discussed below, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to the Company,
including its consolidated subsidiaries, required to be included in the
Company's reports filed or submitted under the Exchange Act.
There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect such controls
subsequent to the Evaluation Date.
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 may be 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 October 5, 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 October 5, 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.
99.2 First Amended Joint Plan of Reorganization of The Warnaco Group, Inc.
and its Affiliated Debtors and Debtors in Possession Under Chapter 11
of the Bankruptcy Code.
99.3 Disclosure Statement with respect to the First Amended Joint Plan of
Reorganization of The Warnaco Group, Inc. and its Affiliated Debtors
and Debtors in Possession Under Chapter 11 of the Bankruptcy Code.
(c) Reports on Form 8-K
None
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: November 15, 2002 By: /s/ ANTONIO C. ALVAREZ II
-------------------------------------
Antonio C. Alvarez II
Director, President and
Chief Executive Officer
Date: November 15, 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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002 /s/ ANTONIO C. ALVAREZ
--------------------------
Antonio C. Alvarez II
Director, President and
Chief Executive Officer
49
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002 /s/ JAMES P. FOGARTY
---------------------------------
James P. Fogarty
Senior Vice President and
Chief Financial Officer
50
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.................. 'r'
The section symbol shall be expressed as............................... 'SS'
The British pound sterling sign shall be expressed as.................. 'L'