WARNACO GROUP INC /DE/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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 4, 2003

OR

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

COMMISSION FILE NUMBER 1-10857

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

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DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

501 SEVENTH AVENUE
NEW YORK, NEW YORK 10018
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

(212) 287-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
501 SEVENTH AVENUE
NEW YORK, NEW YORK 10018
ATTENTION: GENERAL COUNSEL

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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. [x] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act. [x] Yes [ ] No

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [x] Yes [ ] No

The number of outstanding shares of the registrant's common stock, par value
$.01 per share, as of November 8, 2003 is as follows: 45,188,183.

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)

See Notes to Consolidated Condensed Financial Statements.

1

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)

See Notes to Consolidated Condensed Financial Statements.

2

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCLUDING PER SHARE DATA)
(UNAUDITED)

See Notes to Consolidated Condensed Financial Statements.

3

THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

See Notes to Consolidated Condensed Financial Statements.

4

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organization: The Warnaco Group, Inc. ('Warnaco Group') was incorporated in
Delaware on March 14, 1986 and on May 10, 1986, acquired substantially all of
the outstanding shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal
operating subsidiary of Warnaco Group. Warnaco Group, Warnaco and certain of
Warnaco's subsidiaries were reorganized under Chapter 11 of the U.S. Bankruptcy
Code, 11 U.S.C. 'SS'SS'101-1330, as amended (the 'Bankruptcy Code') effective
February 4, 2003 (the 'Effective Date').

Nature of Operations: Warnaco Group and its subsidiaries (collectively, the
'Company') design, manufacture, source and market a broad line of (i) intimate
apparel (including bras, panties, sleepwear, loungewear, shapewear and daywear
for women and underwear and sleepwear for men); (ii) sportswear for men, women
and juniors (including jeanswear, knit and woven shirts, tops and outerwear);
and (iii) swimwear for men, women, juniors and children (including swim
accessories and fitness and active apparel). The Company's products are sold
under a number of internationally known owned and licensed brand names. The
Company offers a diversified portfolio of brands across multiple distribution
channels to a wide range of customers. The Company distributes its products to
customers, both domestically and internationally, through a variety of channels,
including department and specialty stores, independent retailers, chain stores,
membership clubs, mass merchandisers and Company-owned retail stores.

Chapter 11 Cases: On June 11, 2001 (the 'Petition Date'), Warnaco Group, 36
of its 37 U.S. subsidiaries and one of its Canadian subsidiaries, Warnaco of
Canada Company (each a 'Debtor' and, collectively, the 'Debtors'), each filed a
voluntary petition for relief under 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 remainder of Warnaco Group's foreign
subsidiaries were not debtors in the Chapter 11 Cases, nor were they subject to
foreign bankruptcy or insolvency proceedings.

On November 9, 2002, the Debtors filed 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 (the 'Plan'). On
January 16, 2003, the Bankruptcy Court entered (i) its Findings of Fact to and
Conclusions of Law Re: Order and Judgment Confirming The First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of Title 11 of the United States Code,
dated November 8, 2002, and (ii) an Order and Judgment Confirming The First
Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and Its
Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the
United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order').

In accordance with the provisions of the Plan and the Confirmation Order,
the Plan became effective on the Effective Date and the Company entered into the
$275,000 Senior Secured Revolving Credit Facility (the 'Exit Financing
Facility'). The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. See Note 16. In accordance with the Plan, on the
Effective Date, the Company issued $200,942 of New Warnaco Second Lien Notes due
2008 (the 'Second Lien Notes') to certain pre-petition creditors and others in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the 'Securities Act'), pursuant to Section 1145(a) of the
Bankruptcy Code. The Second Lien Notes were secured by a second priority
security interest in substantially all of the Debtors' domestic assets and
guaranteed by Warnaco Group and Warnaco's domestic subsidiaries. On June 12,
2003, the Company repaid the Second Lien Notes and the accrued interest thereon,
in full, with the proceeds of the offering of the 8 7/8% Senior Notes due 2013
(the 'Senior Notes'). See Note 16.

5

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Set forth below is a summary of certain material provisions of the Plan.
Among other things, as described below, the Plan resulted in the cancellation of
Warnaco Group's Class A Common Stock, par value $0.01 per share (the 'Old Common
Stock'), issued prior to the Petition Date. The holders of Old Common Stock did
not receive any distribution on account of the Old Common Stock under the Plan.
The Company, as reorganized under the Plan, issued 44,999,973 shares of common
stock, par value $0.01 per share (the 'New Common Stock'), in reliance on the
exemption from registration afforded by Section 1145 of the Bankruptcy Code,
which were distributed to pre-petition creditors as described below. In
addition, 5,000,000 shares of New Common Stock were reserved for issuance
pursuant to management incentive stock grants. On March 12, 2003, subject to
approval by the stockholders of the Company's proposed 2003 Stock Incentive Plan
(the 'Stock Incentive Plan'), the Company authorized the grant of 750,000 shares
of restricted stock and options to purchase 3,000,000 shares of New Common Stock
at the fair market value of the New Common Stock on the date of grant. On May
28, 2003, the stockholders of the Company approved the Stock Incentive Plan. The
Company received no proceeds from the issuance of the New Common Stock and the
Second Lien Notes; however, approximately $2,499,385 of indebtedness was
extinguished in connection with such issuances.

The following is a summary of distributions made pursuant to the Plan:

(a) the Old Common Stock, including all stock options and restricted shares,
was extinguished and holders of the Old Common Stock received no
distribution on account of the Old Common Stock;

(b) general unsecured claimants received 2.55% (1,147,023 shares) of the New
Common Stock;

(c) the Company's pre-petition secured lenders received their pro-rata share
of $106,112 in cash, Second Lien Notes in the principal amount of
$200,000 and 96.26% of the New Common Stock (43,318,350 shares);

(d) holders of claims arising from or related to certain preferred
securities received 0.60% of the New Common Stock (268,200 shares);

(e) pursuant to the terms of his employment agreement, as modified by the
Plan, Antonio C. Alvarez II, the former President and Chief Executive
Officer of the Company, received an incentive bonus in an aggregate
amount of $5,873, consisting of $1,950 in cash, Second Lien Notes in the
principal amount of $942 and 0.59% of the New Common Stock (266,400
shares valued at $11.19 per share); and

(f) in addition to the foregoing, allowed administrative and certain
priority claims were paid in full in cash.

Basis of Consolidation and Presentation: References in these consolidated
condensed financial statements to the 'Predecessor' refer to the Company prior
to February 4, 2003. References to the 'Successor' refer to the Company on and
after February 4, 2003 after giving effect to the implementation of fresh start
reporting.

All inter-company accounts have been eliminated in consolidation.

The accompanying consolidated condensed financial statements of the
Predecessor for the periods July 7, 2002 to October 5, 2002 (the 'Third Quarter
of Fiscal 2002'), January 6, 2002 to October 5, 2002 (the 'Nine Months Ended
October 5, 2002') and January 5, 2003 to February 4, 2003 have been presented in
accordance with American Institute of Certified Public Accountants Statement of
Position ('SOP') 90-7, Financial Reporting by Entities in Reorganization under
the Bankruptcy Code ('SOP 90-7'). In the Chapter 11 Cases, substantially all
unsecured liabilities and under-secured liabilities as of the Petition Date were
subject to compromise or other treatment under the Plan. For financial reporting
purposes, those liabilities and obligations whose treatment

6

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

and satisfaction were dependent on the outcome of the Chapter 11 Cases have been
segregated and classified as liabilities subject to compromise in the
accompanying consolidated condensed balance sheet as of January 4, 2003.

Pursuant to SOP 90-7, professional fees and other costs associated with the
Chapter 11 Cases were being expensed as incurred and reported as reorganization
items. Interest expense was reported only to the extent that it was to be paid
during the Chapter 11 Cases.

Upon its emergence from bankruptcy on February 4, 2003, the Company
implemented fresh start reporting under the provisions of SOP 90-7. Pursuant to
the provisions of SOP 90-7, (i) the Company's reorganization value of $750,000
was allocated to the fair value of the Company's assets; (ii) the Company's
accumulated deficit was eliminated; and (iii) the Old Common Stock was
cancelled. In addition, approximately $2,499,385 of the Company's outstanding
pre-petition debt and liabilities were discharged.

The accompanying unaudited consolidated condensed financial statements
include all adjustments (all of which were of a normal, recurring nature except
for (i) the adoption of Statement of Financial Accounting Standards ('SFAS')
No. 142, Goodwill and Other Intangible Assets ('SFAS 142'); (ii) adjustments
related to the Chapter 11 Cases; and (iii) adjustments related to the
forgiveness of indebtedness and adoption of fresh start reporting pursuant to
the provisions of SOP 90-7) which are, in the opinion of management, necessary
for fair presentation of the results of operations and financial position of the
Company.

Periods Covered: The period July 6, 2002 to October 5, 2002 (the 'Third
Quarter of Fiscal 2002') contained 13 weeks of operations of the Predecessor and
the Nine Months Ended October 5, 2002 contained 39 weeks of operations of the
Predecessor. The period January 5, 2003 to February 4, 2003 contained four weeks
of operations of the Predecessor. The period July 6, 2003 to October 4, 2003
(the 'Third Quarter of Fiscal 2003') contained 13 weeks of operations of the
Successor and the period February 5, 2003 to October 4, 2003 contained 35 weeks
of operations of the Successor.

Statement of Cash Flows: The statement of cash flows includes discontinued
operations because these cash flows are not material.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

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 ongoing
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.

Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers and title and risk of loss has passed, net of estimated customer
returns, allowances and other discounts. The Company recognizes revenue from its
consignment accounts and retail stores when goods are sold to consumers, net of
allowances for future returns. The determination of allowances and returns
involves the use of significant judgment and estimates by the Company. The
Company bases its estimates of allowance rates on past experience by product
line and account, the financial

7

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

stability of its customers, the expected rate of retail sales growth and general
economic and retail forecasts. The Company reviews and adjusts its accrual rates
each month based on its current experience. During the Company's monthly review,
the Company also considers its accounts receivable collection rate and the
nature and amount of customer deductions and requests for promotion assistance.
The Company believes it is likely that its accrual rates will vary over time and
could change materially if the Company's mix of customers, channels of
distribution or product mix changes. The Company's current rates of accrual for
sales allowances, returns and discounts vary by business unit and channel of
distribution and range from 5.0% to 20.0%.

Cost of Goods Sold: Cost of goods sold for the Successor consists of the
cost of products produced or purchased and certain period costs related to the
production and manufacturing process. Product costs include (i) material, direct
labor and overhead (including the costs incurred by external contractors),
(ii) duty, quota and related tariffs, (iii) in-bound freight and traffic costs,
including inter-plant freight, (iv) procurement and material handling costs,
(v) indirect production overhead including inspection, quality control, sample
making/room, production control and planning, cost accounting, and engineering,
and (vi) in-stocking costs in the Company's warehouse (cost to receive, unpack
and stock product available for sale in the Company's distribution center).
Period costs included in costs of goods sold include (a) royalty, (b) design and
merchandising, (c) samples, (d) manufacturing variances (net of amounts
capitalized), (e) loss on seconds and (f) provisions for inventory losses
(including provisions for shrinkage and losses on the disposition of excess and
obsolete inventory). Costs incurred to store, pick, pack and ship inventory to
customers are included in shipping and handling costs and are classified in
selling, general and administrative expenses. The Company's gross profit and
gross margin may not be comparable to those of other companies as some companies
include shipping and handling costs in cost of goods sold. The Predecessor
included design, merchandising, and other product related costs in its
determination of inventory value. Beginning on February 4, 2003 the Company
expenses such costs as incurred.

Accounts Receivable: The Company maintains reserves for estimated amounts
that the Company does not expect to collect from its trade customers. Accounts
receivable reserves include amounts the Company expects its customers to deduct
for trade discounts, amounts for accounts that go out of business or seek the
protection of the Bankruptcy Code and amounts related to charges in dispute with
customers. The Company's estimate of the allowance amounts that are necessary
includes amounts for specific deductions the Company has authorized and an
amount for other estimated losses. Adjustments for specific account allowances
and negotiated settlements of customer deductions are recorded as deductions to
revenue in the period the specific adjustment is identified. The provision for
accounts receivable allowances is affected by general economic conditions, the
financial condition of the Company's customers, the inventory position of the
Company's customers and many other factors. As of October 4, 2003 the Company
had approximately $257,044 of open trade invoices and other receivables and
$10,969 of open debit memos. Based upon the Company's analysis of estimated
recoveries and collections associated with the related invoices and debit memos,
the Company had $65,318 of accounts receivable reserves at October 4, 2003. As
of February 4, 2003, the Company had approximately $281,917 of open trade
invoices and other receivables and $10,836 of open debit memos. Based upon the
Company's analysis of estimated recoveries and collections associated with the
related invoices and debit memos, the Company reduced its accounts receivable
balance by $79,705 to reflect its accounts receivable at fair value. As of
January 4, 2003, the Company had approximately $276,889 of open trade invoices
and other receivables and $10,440 of open debit memos. Based upon the Company's
analysis of estimated recoveries and collections associated with the related
invoices and debit memos, the Company had $87,512 of accounts receivable
reserves at January 4, 2003. The net accounts receivable balance of $213,048 at
February 4, 2003 was estimated to be the fair value of

8

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

the Company's accounts receivable at February 4, 2003. The determination of
accounts receivable reserves 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 reserves
significantly. The Company has purchased credit insurance to help mitigate the
potential losses it may incur from the bankruptcy, reorganization or liquidation
of some of its customers.

Inventories: The Company values its inventories at the lower of cost,
determined on a first-in, first-out basis, or market. The Company evaluates its
inventories to determine excess units or slow-moving styles based upon
quantities on hand, orders in house and expected future orders. For those items
for which the Company believes it has an excess supply or for styles or colors
that are obsolete, 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. The Company's calculation of the reduction in
carrying value necessary for the disposition of excess inventory is highly
dependent on its projections of future sales of those products and the prices it
is able to obtain for such products. The Company reviews its inventory position
monthly and adjusts its reserves for excess or obsolete goods based on revised
projections and current market conditions for the disposition of excess and
obsolete inventory. If economic conditions worsen the Company may have to
increase its reserve estimates substantially. At October 4, 2003, the Company
had identified inventory with a carrying value of approximately $51,000 as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of October 4, 2003, the Company had approximately $25,747
of inventory reserves for excess, obsolete and other inventory adjustments. At
February 4, 2003, the Company had identified inventory with a carrying value of
approximately $57,200 as potentially excess and/or obsolete. Based upon the
estimated recoveries related to such inventory, as of February 4, 2003, the
Company reduced its inventory by $32,785 to reflect such inventory at fair
value. At January 4, 2003, the Company had identified inventory with a carrying
value of approximately $61,500 as potentially excess and/or obsolete. Based upon
the estimated recoveries related to such inventory, as of January 4, 2003, the
Company had approximately $33,816 of inventory reserves for excess, obsolete and
other inventory adjustments. The Company believes that the carrying value of its
inventory, net of the adjustments noted, was equal to its fair value at
February 4, 2003.

Long-lived Assets: As of February 4, 2003, the Company adopted fresh start
accounting and its long-lived assets, including property, plant and equipment
were recorded at their fair values based upon the preliminary appraised values
of such assets. The Company used the work of an independent third party
appraisal firm to assist it in determining the fair value of its property, plant
and equipment. The Company and the independent third party appraiser determined
the fair value of the Company's property, plant and equipment using the planned
future use of each asset or group of assets, quoted market prices for assets
where a market exists for such assets, the expected future revenue and
profitability of the business unit utilizing such assets and the expected future
life of such assets. In its determination of fair value, the Company also
considered whether an asset would be sold either individually or with other
assets and the proceeds the Company expects to receive from such a sale.
Assumptions relating to the expected future use of individual assets could
affect the fair value of such assets and the depreciation expense recorded
related to such assets in the future.

Intangible assets consist primarily of licenses and trademarks. The Company
used the work of an independent third party appraisal firm to assist it in
determining the value of its trademarks, licenses and other intangible assets.
The fair values were calculated using the discounted estimated future cash flow
to be generated from the sales of products utilizing such trademarks and/or

9

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

licenses. The determination of fair value considered the royalty rates
attributable to products of similar types, recent sales or licensing agreements
entered into by companies selling similar products and the expected term during
which the Company expects to earn cash flows from each license or trademark. The
majority of the Company's license and trademark agreements cover periods of time
in excess of forty years. The estimates and assumptions used in the
determination of the value of these intangible assets will not have any effect
on the Company's future earnings unless a future evaluation of trademark or
license value indicates that such asset is impaired. Identifiable intangible
assets with finite useful lives are amortized on a straight-line basis over the
estimated useful lives of the assets. Pursuant to the provisions of SFAS 142 the
Company does not amortize assets with indefinite lives.

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. The estimated remaining useful lives of the Company's
fixed assets and finite lived intangible assets for periods at February 4, 2003
are based upon the remaining useful lives as determined by independent third
party appraisers and the Company. The estimated useful lives of fixed assets and
finite lived intangible assets acquired after February 5, 2003 are based on
their classification and expected usage, as determined by the Company.

Income Taxes: 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 established to
reduce the amount of deferred tax assets to an amount that the Company believes,
based upon objectively verifiable evidence, is realizable. The only objectively
verifiable evidence the Company used in determining the need for a valuation
allowance were the future reversals of existing temporary differences. The
future recognition of deferred tax assets, through a reduction in valuation
allowances that existed at February 4, 2003, will first reduce goodwill. Should
the recognition of deferred tax assets result in the elimination of goodwill,
any additional deferred tax asset recognition will reduce other intangible
assets. Deferred tax assets recognized in excess of the carrying value of
intangible assets will be treated as an increase to additional paid-in capital.

Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering certain full-time non-union domestic employees and certain
domestic employees covered by a collective bargaining agreement. The Pension
Plan's third party actuary has determined the total liability attributable to
benefits owed to participants covered by the Pension Plan using assumptions
provided by the Company. The assumptions used can have a significant effect on
the amount of pension expense and pension liability recorded by the Company. The
Pension Plan actuary also determines the annual cash contribution to the Pension
Plan using the assumptions set forth by the Pension Benefit Guaranty
Corporation. The Pension Plan was under-funded as of January 4, 2003,
February 4, 2003 and October 4, 2003. The Pension Plan and the Company's plan of
reorganization contemplate that the Company will continue to fund its minimum
required contributions and any other premiums due under the Employee Retirement
Income Security Act of 1974, as amended ('ERISA') and the United States Internal
Revenue Code of 1986, as amended (the 'Code'). Effective January 1, 2003, the
Pension Plan was amended and, as a result, no future benefits will accrue to
participants in the Pension Plan. As a result of the amendment, the Company will
not record any pension expense for current service costs after January 1, 2003.
As of February 4, 2003 and October 4, 2003, the Company had recorded a Pension
Plan liability

10

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

equal to the amount that the present value of accumulated benefit obligations
(discounted using an interest rate of approximately 5.3%) exceeded the fair
value of Pension Plan assets as determined by the Pension Plan trustee. The
Company's cash contributions to the Pension Plan for fiscal 2003 will be
approximately $9,380 and will be approximately $46,293 in the aggregate from
fiscal 2004 through fiscal 2008. The amount of estimated cash contributions that
the Company will be required to make to the Pension Plan could increase or
decrease depending on the actual return earned by the assets of the Pension Plan
compared to the estimated rate of return on Pension Plan assets. The accrued
long-term Pension Plan liability and accruals for other post retirement benefits
are classified as other long-term liabilities in the consolidated condensed
balance sheet at October 4, 2003. Cash contributions to the Pension Plan were
$7,720 for the period February 5, 2003 to October 4, 2003. The remaining
contributions to the Pension Plan to be paid in fiscal 2003 of $1,660 are
classified with accrued liabilities at October 4, 2003.

Stock-Based Compensation: Effective February 5, 2003, the Successor adopted
the fair value method of accounting for stock options for all options granted by
the Successor after February 4, 2003 pursuant to the prospective method
provisions of SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure ('SFAS 148'). The Company uses the Black-Scholes model to
calculate the fair value of stock option awards. The Black-Scholes model
requires the Company to make significant judgments regarding the assumptions
used within the Black-Scholes model, the most significant of which are the stock
price volatility assumption, the expected life of the option award and the
risk-free rate of return. The Company emerged from bankruptcy on February 4,
2003, and as a result, the Company does not have sufficient stock price history
upon which to base its volatility assumption. In determining the volatility used
in its model, the Company considered the volatility of the stock prices of
selected companies in the apparel industry, the nature of those companies, the
Company's emergence from bankruptcy and other factors in determining its stock
price volatility assumption of 35%. The Company based its estimate of the
average life of a stock option of five years upon the vesting period of 42
months and the option term of ten years. The Company's risk-free rate of return
assumption of 2.55% for options granted in fiscal 2003 is equal to the quoted
yield for five-year U.S. treasury bonds as of March 12, 2003.

Prior to February 5, 2003, the Company followed the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation ('SFAS
123'). SFAS 123 encourages, but does not require, companies to adopt a fair
value based method for determining expense related to stock option compensation.
The Company accounted for stock-based compensation for employees using the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ('APB 25'), and related
interpretations. Under APB 25, no compensation expense was recognized for
employee share option grants because the exercise price of the options granted
equaled the market price of the underlying shares on the date of grant (the
'intrinsic value method'). Compensation expense related to restricted stock
grants is recognized over the vesting period of the grants.

The following table illustrates the effect that stock-based compensation
would have had on net income (loss) and net income (loss) per share of the
Predecessor if such compensation had been included in its net income (loss) and
net income (loss) per share for the period January 5, 2003 to February 4, 2003,
the Third Quarter of Fiscal 2002 and the Nine Months Ended October 5, 2002,
respectively:

11

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Total stock-based compensation expense before income taxes was $4,455 for
the period February 5, 2003 to October 4, 2003. Stock-based compensation expense
included in the consolidated condensed statement of operations for the Third
Quarter of Fiscal 2003 was $712 (net of income tax benefit of $475) related to
stock options and $506 (net of income tax benefit of $338) related to restricted
stock grants. For the period February 5, 2003 to October 4, 2003, stock-based
compensation expense related to stock options was $1,556 (net of income tax
benefit of $1,037) and $1,087 (net of income tax benefit of $725) related to
restricted stock grants. Included in stock-based compensation expense for the
period February 5, 2003 to October 4, 2003 is $50 related to the issuance of
shares of common stock to the directors as partial compensation for serving as
members on the Board of Directors of the Company. The Company expects that total
stock-based compensation expense for fiscal 2003 will be approximately $3,460
(net of income tax benefit of $2,307). See Note 19.

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

- ---------

(a) The Company is restricted from paying dividends under the terms of the Exit
Financing Facility and the terms of the indenture governing the Senior
Notes.

The Predecessor did not grant any stock-based compensation or stock options
during the Nine Months Ended October 5, 2002 or the period January 5, 2003 to
February 4, 2003.

12

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Advertising Costs: Advertising costs are included in selling, general and
administrative expenses and are expensed when the advertising or promotion is
published or presented to consumers. Cooperative advertising allowances provided
to customers are charged to operations as incurred and are included in selling,
general and administrative expenses. The amounts charged to operations for
advertising expense (including cooperative advertising, marketing and promotion
expenses) for the Nine Months Ended October 5, 2002, the period January 5, 2003
to February 4, 2003 and the period February 5, 2003 to October 4, 2003 were
$82,541, $7,550 and $51,827, respectively. Cooperative advertising expense for
the Nine Months Ended October 5, 2002, the period January 5, 2003 to
February 4, 2003 and the period February 5, 2003 to October 4, 2003 was $25,155,
$1,398 and $15,474, respectively.

Shipping and Handling Costs: Costs to store, pick, pack and ship merchandise
to customers are expensed as incurred and are classified in selling, general and
administrative expenses. The amounts charged to shipping and handling costs were
$11,061, $31,477, $3,721, $14,071 and $44,390 for the Third Quarter of Fiscal
2003, the period February 5, 2003 to October 4, 2003, the period January 5, 2003
to February 4, 2003, the Third Quarter of Fiscal 2002 and the Nine Months Ended
October 5, 2002, respectively.

Marketable Securities: Marketable securities are stated at fair value based
on quoted market prices. Marketable securities are classified as
available-for-sale.

Assets Held for Sale: The Company classifies assets to be sold as assets
held for sale. Assets held for sale are reported at the estimated fair value
less selling costs. Assets held for sale include certain property and equipment
of closed facilities which the Company has identified for disposition.

Property, Plant and Equipment: Property, plant and equipment as of
October 4, 2003 is stated at estimated fair value, net of accumulated
depreciation, for the assets in existence at February 4, 2003 and at historical
costs, net of accumulated depreciation, for additions during the period
February 5, 2003 to October 4, 2003. As of January 4, 2003, property, plant and
equipment is stated at historical costs net of accumulated depreciation. The
estimated useful lives of such assets are summarized below:

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

Computer Software Costs: Internal and external costs incurred in developing
or obtaining computer software for internal use are capitalized in property,
plant and equipment in accordance with SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, and related guidance
and are amortized on a straight-line basis over the estimated useful life of the
software (three to seven years). General and administrative costs related to
developing or obtaining such software are expensed as incurred.

Intangible Assets: Intangible assets primarily consist of licenses and
trademarks. The fair value of such licenses and trademarks owned by the Company
at February 4, 2003 was based upon the preliminary appraised values of such
assets as determined by the Company and an independent third party appraiser.
Adjustments to the preliminary appraised amounts were recorded as adjustments to
goodwill. Identifiable intangible assets with finite lives are amortized on a
straight-line basis over the estimated useful lives of the assets. Pursuant to
the provisions of SFAS 142 intangible assets with indefinite lives are not
amortized. See Note 13.

13

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Goodwill: Goodwill represents the amount by which the Company's
reorganization value exceeded the fair value of its tangible assets and
identified intangible assets minus its liabilities allocated in accordance with
the provisions of SFAS 141, Business Combinations, as of February 4, 2003.
Pursuant to the provisions of SFAS 142, goodwill is not amortized and is subject
to an annual impairment test which the Company will perform in the fourth
quarter of each fiscal year.

Deferred Financing Costs: Deferred financing costs represent legal, other
professional and bank underwriting fees incurred in connection with the
Company's Exit Financing Facility and the issuance of the Senior Notes. Such
fees are amortized over the life of the related debt using the interest method.
Amortization of deferred financing costs is included in interest expense.

Other Assets: Other assets include certain barter credits and long-term rent
receivable related to certain subleases. Barter assets, amounting to $683 at
each of October 4, 2003 and February 4, 2003, are recognized when realized and
deferred rent charges are recognized over the life of the related lease.

Financial Instruments: The Company does not use derivative financial
instruments for speculation or for trading purposes and has not done so since
the Petition Date. A number of major international financial institutions are
counterparties to the Company's outstanding letters of credit. The Company
monitors its positions with, and the credit quality of, these counterparty
financial institutions and does not anticipate nonperformance of these
counterparties. Management believes that the Company would not suffer a material
loss in the event of nonperformance by these counterparties. The Company
utilizes interest rate swaps to hedge certain exposures related to its long-term
debt.

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

Other Liabilities: Other long-term liabilities consist primarily of
long-term accrued pension and post retirement benefit obligations.

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

Translation of Foreign Currencies: Cumulative translation adjustments arise
primarily from consolidating the net assets and liabilities of the Company's
foreign operations at current rates of exchange. Assets and liabilities of the
Company's foreign operations are recorded at current rates of exchange at the
balance sheet date and translation adjustments are applied directly to
stockholders' equity (deficiency) and are included as part of other
comprehensive income (loss). Gains and losses related to the translation of
current amounts due from foreign subsidiaries are included in other income and
expense in the period incurred. Translation gains and losses related to
long-term and permanently invested inter-company balances are recorded in
cumulative translation adjustments. The consolidated condensed balance sheet at
February 4, 2003 represents the fair value of the Company's assets at that date
and, as a result, there is no cumulative translation adjustment on that date.
Income and expense items for the Company's foreign operations are translated
using monthly average exchange rates.

Reclassifications: Certain items have been reclassified to conform to the
current period presentation.

Recent Accounting Pronouncements: In November 2002, the Financial Accounting
Standards Board (the 'FASB') issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ('FIN 45'). This interpretation requires
certain disclosures to be made by a guarantor in its interim and annual

14

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual periods beginning after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have an effect on the Company's consolidated
financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities ('SFAS
133') and No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, establish accounting and reporting standards for derivative
instruments including derivatives embedded in other contracts (collectively
referred to as 'derivatives') and for hedging activities. SFAS 149 amends SFAS
133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. This statement contains amendments relating to
FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in
Accounting Measurements, and FASB Statements No. 65, Accounting for Certain
Mortgage Banking Activities, No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from Certain
Required Disclosures about Financial Instruments for Certain Nonpublic Entities.
The provisions of SFAS 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 did not have a material effect on
the Company's consolidated financial statements.

During May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
('SFAS 150'). SFAS 150 clarifies the accounting for certain financial
instruments that could previously be accounted for as equity. SFAS 150 requires
those instruments be classified as liabilities in statements of financial
position and is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 did not
have a material effect on the Company's consolidated financial statements.

NOTE 3 -- BUSINESS ENTERPRISE VALUE

In conjunction with the preparation of the Plan, the Company considered many
factors in determining its reorganization value, including the amount and nature
of its monetary assets, estimated earnings and cash flow to be generated by the
Company in the future, the enterprise value of apparel companies selling similar
products based on quoted market prices and the value of recently completed
transactions for the purchase and sale of companies or parts of companies in the
apparel industry. All of these factors involved the use of judgments and
estimates, the most significant of which involve estimates of future earnings
and cash flow that the Company will generate. The Company also engaged an
independent third party appraisal and consulting firm (the 'BEV Appraiser') to
assist the Company in preparing a valuation analysis of the reorganized Company.
The BEV Appraiser utilized a combination of the market approach and income
approaches. The BEV Appraiser made certain assumptions in its work. The weighted
average long-term debt interest rate was assumed to be 7.81% and the weighted
average cost of capital was assumed to be 13.80%. The appraiser used three years
of financial projections in its evaluation and determined the terminal value
based upon the Company's weighted average cost of capital and expected free cash
flow using a 5.00% growth rate per annum. The determination of the Company's
projected income and free cash flow required the use of significant judgments
and estimates by the Company. Changes in economic conditions, the cost of equity
or debt financing and many other factors will have a significant effect on the
Company's ability to earn the income

15

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

or generate the free cash flow assumed in its projections. As a result,
variations in the amounts of income and cash flow actually earned by the Company
will have a significant effect on its business enterprise value ('BEV').

The Company also allocated the overall business enterprise value to its
various business units. The determination of the value of each of the Company's
business units was based upon the estimated earnings and cash flow to be
generated by those business units. The Company also considered the type and
amount of assets held by each of those units. In addition, the Company offered
several of its business units for sale as part of its reorganization under the
bankruptcy code. The Company considered the prices offered for those business
units in allocating its business enterprise value to its business units. The
Company allocated the value of each business unit to the individual assets and
liabilities held by each business unit based on the fair value of the specific
assets. The Company used the work of third party appraisers to assist it in
allocating such fair value.

Based upon the analysis of the BEV Appraiser and considering the factors
noted above, the Company determined that the BEV of the reorganized Company was
between $730,000 and $770,000. Based upon the timing of the Debtors' emergence
from bankruptcy, market conditions at the time of emergence and the net assets
of the Company at the Effective Date, the Company determined its reorganization
equity value of $503,548 by subtracting the Company's debt of $246,452 on the
Effective Date from the mid-point ($750,000) of the BEV valuation range.

NOTE 4 -- FAIR VALUE OF CERTAIN LONG-TERM TANGIBLE AND INTANGIBLE ASSETS

In order to implement the provisions of SFAS 141, the Company engaged an
independent third party to appraise its various business units and long-term
tangible and intangible assets and to assist the Company in allocating the
reorganization value of the Company to its various assets and liabilities at
February 4, 2003. The Company engaged an independent third party appraisal and
consulting firm (the 'Asset Appraiser') separate from the BEV Appraiser to
assist the Company in determining the fair value of the Company's long-term
tangible assets and identifiable intangible assets. Based upon the
reorganization value of the Company, the Asset Appraiser provided detailed
analysis of certain of the Company's long-term tangible and intangible assets.
See Note 13.

NOTE 5 -- FRESH START REPORTING

The Debtors' emergence from bankruptcy proceedings on February 4, 2003
resulted in a new reporting entity and adoption of fresh start reporting as of
that date in accordance with SOP 90-7. The consolidated condensed balance sheet
as of February 4, 2003 gives effect to adjustments in the carrying value of
assets and liabilities to fair value in accordance with the provisions of SOP
90-7 and SFAS 141.

The following table reflects the implementation of the Plan and the
adjustments recorded to the Company's assets and liabilities to reflect the
implementation of the Plan and the adjustments of such assets and liabilities to
fair value at February 4, 2003, based upon the Company's reorganization value of
$750,000 (as included in the Plan and as approved by the Bankruptcy Court).

Reorganization adjustments resulted primarily from the:

(a) distribution of cash of $106,112 (including accrued interest of $14,844)
to the Company's pre-petition secured lenders;

(b) forgiveness of the Debtors' pre-petition debt;

(c) issuance of New Common Stock and Second Lien Notes pursuant to the Plan;

16

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

(d) payment of various administrative and other claims associated with the
Company's emergence from bankruptcy;

(e) adjustment of property, plant and equipment carrying values to fair
value; and

(f) adjustment of the carrying value of the Company's various trademarks and
license agreements to fair value.

These adjustments were based upon the work of the BEV Appraiser, Asset
Appraiser and the Company, as well as other valuation estimates to determine the
preliminary fair values of the Company's assets and liabilities. The table below
reflects reorganization adjustments for the discharge of indebtedness, issuance
of New Common Stock, issuance of Second Lien Notes and the fresh start
adjustments and the resulting fresh start consolidated balance sheet.

17

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

(footnotes on next page)

18

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

(footnotes from previous page)

(a) Utilized excess cash of $75,533 and borrowed $30,579 under
the Exit Financing Facility to pay $106,112 (including
accrued interest of $14,844) to the Company's pre-petition
secured creditors; such amounts were included in liabilities
subject to compromise.
(b) Reflects the discharge of pre-petition indebtedness of
$2,393,273 (not including $106,112 in cash paid to
pre-petition secured lenders) and cancellation of all
outstanding shares of Old Common Stock ($654), including all
options and restricted stock, additional paid-in capital
($908,939), treasury stock ($313,889), unearned stock
compensation ($32) and elimination of accumulated other
comprehensive loss ($92,671) and deficit ($2,380,615). A
corresponding amount of $515,659 was recorded as a decrease
in goodwill.
(c) Reflects the issuance of 44,999,973 shares of New Common
Stock and recognition of reorganization equity value of
$503,548 pursuant to the provisions of the Plan. A
corresponding amount of $503,548 was recorded as an increase
in goodwill.
(d) Reflects the issuance of $200,000 principal amount of Second
Lien Notes to creditors pursuant to the terms of the Plan,
payment of $1,950 in cash bonus to the Company's former
Chief Executive Officer pursuant to the terms of the Plan
and the payment of $4,427 of deferred financing costs. The
Company also issued $942 in Second Lien Notes and 266,400
shares of common stock (representing value of $2,981) to its
former Chief Executive Officer in payment of a bonus
pursuant to the terms of the Plan. The total accrued bonus
to the former Chief Executive Officer was $5,873. A
corresponding amount of $197,019 was recorded as an increase
in goodwill.
(e) Reflects $24,037 adjustment to fixed assets to their fair
value of $129,357 as determined by the Asset Appraiser,
$277,796 to intangible assets to reflect their fair value of
$364,700 as determined by the Asset Appraiser, the
recognition of deferred income tax liability of $82,011 and
the recognition of deferred tax assets of $4,427 related to
the preliminary fair value adjustments noted above. The
deferred tax balance as of February 4, 2003 reflects a
valuation allowance of $126,654 which was established in
connection with fresh start reporting. A corresponding
amount of $176,175 was recorded as a decrease in goodwill.
(f) Borrowed $2,244 under the Exit Financing Facility to pay
certain administrative and priority claims aggregating $859
and $1,156, unaccrued tax claims of $114, the translation
escrow account (subsequently released to the Company) of
$100 and to provide additional cash funds at closing of $15.
A corresponding amount of $114 was recorded as an increase
in goodwill.
(g) Reflects the recording of an unfavorable contract commitment
of $2,801 related to one of the Company's distribution
facilities. A corresponding amount of $2,801 was recorded as
an increase in goodwill.
(h) Reflects adjustments of $22,494 to adjust inventory to its
fair value of $348,033. A corresponding amount of $22,494
was recorded as an increase in goodwill.

NOTE 6 -- DISCONTINUED OPERATIONS

As part of the Company's ongoing restructuring activities, in October 2003,
the Company entered into an agreement to sell its A.B.S. by Allen Schwartz
('ABS') business unit. The sale is expected to be final in the first quarter of
fiscal 2004. The purchase price is $15,000 in cash plus the assumption of up to
$2,000 in liabilities. In addition, during the Third Quarter of Fiscal 2003, the
Company determined that it will not be seeking lease renewals for five
Speedo/Authentic Fitness retail stores. The operating lease rental agreements on
these stores will expire during the first quarter of fiscal 2004.

19

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

ABS and the five Speedo/Authentic Fitness retail stores have been accounted
for as discontinued operations in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ('SFAS 144'). Accordingly, the
results of operations, assets and liabilities of these business units are
separately presented in the accompanying consolidated condensed financial
statements. Prior to accounting for ABS and the five Speedo/Authentic Fitness
retail stores as discontinued operations, the results of operations, assets and
liabilities of these business units were included in the results of operations,
assets and liabilities of the Sportswear and Swimwear segments, respectively.

Summarized operating results for the discontinued operations are as follows:

Summarized assets and liabilities of the discontinued operations at
October 4, 2003 are presented in the consolidated condensed balance sheet as
follows:

20

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 7 -- REORGANIZATION ITEMS

In connection with the Chapter 11 Cases, the Company initiated strategic and
organizational changes 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 and fiscal
2002, will not be completed until the end of fiscal 2003. 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 were classified as liabilities
subject to compromise. The Plan summarized the amount of distribution that each
class of impaired creditors received. See Note 1.

As a direct result of the Chapter 11 Cases, the Company has recorded certain
liabilities, incurred certain legal and professional fees and written-down
certain assets. The transactions recorded were consistent with the provisions of
SOP 90-7. The components of reorganization items are as follows:

NOTE 8 -- RESTRUCTURING ITEMS

In the Third Quarter of Fiscal 2003, the Company continued the process of
consolidating its manufacturing and distribution operations in accordance with
the Plan. Included in restructuring charges are accruals for closing and/or
consolidating two sewing plants located in Puerto Cortes, Honduras and Los
Angeles, California, one cutting and warehousing facility in Thomasville,
Georgia, distribution facilities in Secaucus, New Jersey, and Montreal, Canada,
and the consolidation of certain manufacturing operations in France, resulting
in total restructuring charges of $5,242 and $11,382 for the Third Quarter of
Fiscal 2003 and the period February 5, 2003 to October 4, 2003, respectively.
Accruals for restructuring items at February 4, 2003 and charges to the
statement of operations for the period February 5, 2003 to October 4, 2003
primarily relate to severance and other benefits payable to approximately 1,463
terminated employees. The Company expects that substantially all payments to
terminated employees will be completed by the end of fiscal 2003. Also included
in restructuring items for the period February 5, 2003 to October 4, 2003

21

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

are asset impairment charges related to the write-down to salvage value of idle
plant and machinery at certain of the distribution and manufacturing facilities
and legal expenses primarily related to the shutdown of the manufacturing
operations in France. A summary of restructuring items is as follows:

Changes in accrued liabilities related to restructuring items are
summmarized below:

NOTE 9 -- BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

The Company operates in three business segments or groups: (i) Intimate
Apparel Group; (ii) Sportswear Group; and (iii) Swimwear Group. During fiscal
2002, the Company operated in four business segments or groups: (i) Intimate
Apparel Group; (ii) Sportswear Group; (iii) Swimwear Group; and (iv) Retail
Stores Group. Because the Company has closed over 200 retail stores since
January 1999, the retail stores no longer represent a material portion of the
Company's net revenues (retail stores accounted for 2.47% of consolidated net
revenue in the period February 5, 2003 to October 4, 2003). In addition, the
operations of the remaining retail stores have been combined both on a
functional and on a reporting basis with the operations of the Company's three
wholesale business groups. Beginning in fiscal 2003, the operations of the
Retail Stores Group are being included with the Company's three wholesale groups
according to the type of product sold. Certain financial information contained
in this Quarterly Report on Form 10-Q has been restated to correspond to the
Company's current segment presentation.

22

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The Intimate Apparel Group designs, manufactures, sources and markets
moderate to premium priced intimate apparel and other products for women and
better to premium priced men's underwear and loungewear under the Warner's'r',
Olga'r', Body Nancy Ganz'TM'/Bodyslimmers'r', Calvin Klein'r', Lejaby'r' and
Rasurel'r' brand names. The Intimate Apparel Group also operates 29 retail
stores, including 11 full price Calvin Klein underwear retail stores in Asia,
five full price Calvin Klein underwear retail stores in Europe, two Warnaco
outlet stores in Canada and 11 Warnaco outlet retail stores in Europe.

The Sportswear Group designs, sources and markets mass market to premium
priced men's and women's sportswear under the Calvin Klein'r', Chaps Ralph
Lauren'r' and White Stag'r' brand names.

The Swimwear Group designs, manufactures, sources and markets mass market to
premium priced swimwear, fitness apparel, swim accessories and related products
under the Speedo'r'/Speedo Authentic Fitness'r', Anne Cole'r', Cole of
California'r', Sunset Beach'r', Sandcastle'r', Catalina'r', White Stag'r',
Lifeguard'r', Nautica'r' and Calvin Klein'r' brand names. The Swimwear Group
also operates 45 full price Speedo Authentic Fitness retail stores (including
one online store).

The accounting policies of the segments are the same as those described in
Note 2 -- Significant Accounting Policies.

During the Company's bankruptcy, the Company sold assets, wrote down
impaired assets, recorded an impairment charge related to the adoption of SFAS
142 and stopped amortizing goodwill and certain intangible assets that were
previously amortized. In addition, on February 4, 2003, the Company emerged from
bankruptcy and adopted fresh start reporting in accordance with the provisions
of SOP 90-7. The adoption of fresh start reporting resulted in adjustments of
the Company's assets and liabilities to fair value. As a result of these changes
and adjustments, depreciation and amortization expense, excluding amortization
of sales order backlog, has decreased by an amount in excess of $20,000 annually
from the amounts reported in previous years. For informational purposes, the
Company has separately identified the depreciation and amortization components
of operating income (loss) in the following table. The presentation of segment
information for prior periods has been restated to reflect the current
classification of the Company's business groups. Information by business group,
excluding discontinued operations, is set forth below:

23

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The Company does not allocate corporate departmental expenses, stock-based
compensation expenses, reorganization items, restructuring items or depreciation
and amortization of corporate assets to its operating segments. Corporate
departmental expenses include general corporate overhead and certain corporate
services. The Company evaluates the operating groups' results

24

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

without allocating corporate/other items. Other companies may allocate these
costs to their operating divisions and, as a result, the operating results of
the Company's operating groups may not be directly comparable to the results of
other companies. The table below summarizes corporate/other expenses for each
period presented:

A reconciliation of Group operating income to total income (loss) from
continuing operations before provision (benefit) for income taxes for the Third
Quarter of Fiscal 2003, the Third Quarter of Fiscal 2002, the period February 5,
2003 to October 4, 2003, the period January 5, 2003 to February 4, 2003 and the
Nine Months Ended October 5, 2002 is as follows:

25

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

GEOGRAPHIC INFORMATION

26

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

INFORMATION ABOUT MAJOR CUSTOMERS

In the period February 5, 2003 to October 4, 2003, there were no customers
with sales that accounted for 10% or more of the Company's net revenues. In the
Nine Months Ended October 5, 2002, two customers, Federated Department Stores,
Inc. and Wal-Mart Stores, Inc., accounted for approximately 11.30% and 10.22%,
respectively, of the Company's net revenues.

NOTE 10 -- COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) are as follows:

The components of accumulated other comprehensive income (loss) are as
follows:

27

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 11 -- INCOME TAXES

PREDECESSOR COMPANY

The provision for income taxes of $78,150 for the period January 5, 2003 to
February 4, 2003 consists of a deferred income tax provision of $77,584 related
to the increase in the carrying value of certain assets to fair value recorded
in connection with the Company's adoption of fresh start reporting and accrued
income taxes on foreign earnings of $566.

As of February 4, 2003, the Company had recorded a valuation allowance of
$126,654 against deferred tax assets to reduce the amount of deferred tax assets
created as a result of the adoption of fresh start reporting to an amount that
the Company believes, based upon objectively verifiable evidence, is realizable.
The future recognition of such amount, through a reduction in valuation
allowances that existed at February 4, 2003, will first reduce goodwill. Should
the recognition of net deferred tax assets result in the elimination of
goodwill, any additional deferred tax asset recognition will reduce other
intangible assets. Deferred tax assets recognized in excess of the carrying
value of intangible assets will be treated as an increase to additional paid-in
capital.

The Company has also established a valuation allowance against certain
foreign net operating loss carry-forwards to reduce them to the amount that will
more likely than not be realized.

SUCCESSOR COMPANY

The income tax benefit of $1,336 for the Third Quarter of Fiscal 2003
consists of an income tax benefit of $1,876 on domestic losses offset by an
income tax expense of $540, which consists of an income tax expense of $2,530 on
foreign earnings offset by an income tax benefit of $1,990 resulting from a
favorable settlement to a foreign tax examination. The provision for income
taxes of $8,456 for the period February 5, 2003 to October 4, 2003 consists of
income taxes of $925 on domestic earnings and an income tax expense of $7,531,
which consists of income taxes of $9,521 on foreign earnings, offset by an
income tax benefit of $1,990 resulting from a favorable settlement to a foreign
tax examination.

During the Third Quarter of Fiscal 2003, the Company increased its valuation
allowance by $1,135 to $157,935 and reduced its deferred tax asset by $2,656 to
an amount that will, more likely than not, be realized. The increase in the
valuation allowance resulted from adjustments to the preliminary estimates of
the fair value of fixed and intangible assets and to reflect the amount of
deferred tax asset that will more likely than not be realized. The decrease in
the deferred tax asset (established during the first quarter of fiscal 2003 for
the utilization of domestic tax losses carried forward for U.S. tax purposes)
resulted from a decrease in the Company's domestic taxable income through the
Third Quarter of Fiscal 2003. The increase in the Company's valuation allowance
related to the adjustments to the preliminary estimates of the fair value of
fixed and intangible assets and the decrease in the deferred tax asset have been
recorded against goodwill. See Note 13. The Company has not provided any tax
benefit for domestic and certain foreign losses incurred during the Third
Quarter of Fiscal 2003 where it is more likely than not that the Company will
not realize the income tax benefit for these losses.

BANKRUPTCY EFFECT

In connection with the Debtors' emergence from bankruptcy, the Company
realized a gain on the extinguishment of debt of $1,692,696. This gain will not
be taxable since the gain resulted from the Company's reorganization under the
Bankruptcy Code. However, for U.S. income tax reporting purposes, as of the
beginning of its 2004 taxable year, the Company will be required to reduce
certain tax attributes, including (a) net operating loss carryforwards,
(b) certain tax credit

28

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

carryforwards and (c) tax bases in assets in an amount equal to the gain on the
extinguishment of debt. The reorganization of the Company on the Effective Date
constituted an ownership change under Section 382 of the Code and the use of any
of the Company's net operating loss carryforwards and tax credit carryforwards
generated prior to the ownership change that are not reduced pursuant to these
provisions will be subject to an overall annual limitation. The actual amount of
reduction in tax attributes for U.S. income tax reporting purposes will not be
determined until 2004 and is therefore not reflected in this note to the
consolidated condensed financial statements.

NOTE 12 -- INVENTORIES

- ---------

(a) Inventory adjustments are based upon the cost of excess and obsolete
inventory less the estimated recoveries the Company expects to receive from
the disposition of excess and obsolete inventory. As of October 4, 2003,
February 4, 2003 and January 4, 2003, the Company had identified inventory
with a carrying value of approximately $51,000, $57,200 and $61,500,
respectively, as potentially excess and/or obsolete. Based upon the
estimated recoveries related to inventory as of February 4, 2003, the
Company reduced its inventory by $32,785 to reflect such inventory at fair
value.

NOTE 13 -- GOODWILL AND INTANGIBLE ASSETS

Accumulated amortization related to finite lived intangible assets at
October 4, 2003, February 4, 2003 and January 4, 2003 was $13,480, $0 and
$19,069, respectively. Amortization expense is expected to be $14,842 for fiscal
2003 and $564 in each of fiscal 2004 through fiscal

29

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

2018, primarily related to the Chaps license. The following table summarizes
intangible assets since February 4, 2003:

The following table summarizes the changes in the carrying amount of
goodwill for the period February 5, 2003 to October 4, 2003:

Goodwill balance at February 4, 2003....................... $34,142
Adjustments:
Fixed assets -- fair value............................. 11,654
Trademarks -- fair value............................... 34,500
Favorable lease -- fair value.......................... 264
Deferred income taxes.................................. 12,862
Other.................................................. 1,601
-------
Goodwill balance at October 4, 2003........................ $95,023
-------
-------

The Company performed a detailed review of the preliminary work of the Asset
Appraisers during the second and Third Quarters of Fiscal 2003. During the
course of the review, the Company has made adjustments and corrections to reduce
preliminary appraisals to fair value for intangible assets, property, plant and
equipment and other assets and to reflect deferred income tax liability, as
appropriate. The Company completed its reviews of the preliminary appraisals and
allocation of fair value during the Third Quarter of Fiscal 2003.

Goodwill at October 4, 2003 reflects adjustments of $60,881 to the
preliminary estimates of the fair value of fixed and intangible assets and
accrued liabilities and the related deferred income taxes and valuation
allowance as a result of changes in the preliminary fair values of fixed assets,
trademarks and accrued liabilities. The reductions in fixed and intangible
assets resulted in a corresponding increase in the valuation allowance related
to deferred taxes, which increased goodwill.

In June 2001, the FASB issued SFAS 142. SFAS 142 eliminated the amortization
of goodwill and certain other intangible assets with indefinite lives effective
for the Company's 2002 fiscal year. SFAS 142 addresses financial accounting and
reporting for intangible assets and acquired goodwill. SFAS 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 144.

Under the provisions of SFAS 142, goodwill is deemed potentially impaired if
the net book value of a business reporting unit exceeds the fair value of that
business reporting unit. As of January 5, 2002, the Company had incurred losses
in each of its two previous fiscal years and had filed for bankruptcy. As a
result, the Company's BEV had decreased. Intangible assets are deemed impaired
if the carrying amount exceeds the fair value of the assets. The Company
determined its BEV in connection with the preparation of the Plan. The Company
allocated the BEV to its

30

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

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 142 on
January 6, 2002.

NOTE 14 -- PROPERTY, PLANT AND EQUIPMENT

NOTE 15 -- LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise include debt, accounts payable, accrued
expenses and other liabilities that were settled as part of the Company's
emergence from bankruptcy. Creditors received distributions consisting of cash,
debt securities and common stock in settlement of their bankruptcy claims. The
ratio of cash, debt securities and common stock that individual creditors
received depended upon the priority of the claim made by each creditor. The
Company recorded a gain on the final settlement of these liabilities of
$1,692,696 in the period January 5, 2003 to February 4, 2003. The following
table summarizes liabilities subject to compromise at January 4, 2003, all of
which were discharged upon the Company's emergence from bankruptcy on
February 4, 2003:

(footnotes on next page)

31

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

(footnotes from previous page)

(a) Accounts payable includes $349,737 of trade drafts payable
at January 4, 2003. As a result of the Chapter 11 Cases, no
principal or interest payments were made on unsecured
pre-petition debt.

(b) See Note 16.

(c) Due to the settlement of final claims in connection with the
consummation of the Plan, the total amount of liabilities
subject to compromise discharged on February 4, 2003 was
$2,499,385. See Note 5.

NOTE 16 -- DEBT

SENIOR NOTES

On June 12, 2003, Warnaco completed the sale of $210,000 Senior Notes at
par. The Senior Notes mature on June 15, 2013. The Senior Notes bear interest at
8 7/8% payable semi-annually beginning December 15, 2003. The Senior Notes are
unconditionally guaranteed, jointly and severally, by Warnaco Group and
substantially all of Warnaco's domestic subsidiaries (all of which are 100%
owned, either directly or indirectly, by Warnaco). The Senior Notes are
effectively subordinate in right of payment to existing and future secured debt
(including the Exit Financing Facility) and to the obligations (including trade
accounts payable) of the subsidiaries that are not guarantors of the Senior
Notes. The guarantees of each guarantor are effectively subordinate to that
guarantor's existing and future secured debt (including guarantees of the Exit
Financing Facility) to the extent of the value of the assets securing that debt.
There are no restrictions that prevent the guarantor subsidiaries from
transferring funds or paying dividends to Warnaco. The indenture pursuant to
which the Senior Notes were issued contains covenants which, among other things,
restrict the Company's ability to incur additional debt, pay dividends and make
restricted payments, create or permit certain liens, use the proceeds of sales
of assets and subsidiaries' stock, create or permit restrictions on the ability
of certain of Warnaco's subsidiaries to pay dividends or make other
distributions to Warnaco or to Warnaco Group, enter into transactions with
affiliates, engage in certain business activities, engage in sale and leaseback
transactions and consolidate or merge or sell all or substantially all of its
assets. The Company was in compliance with the

32

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

covenants of the Senior Notes at October 4, 2003. Redemption of the Senior Notes
prior to their maturity is subject to premiums as set forth in the indenture.
Proceeds from the sale of the Senior Notes were used to repay the outstanding
principal balance on the Second Lien Notes of $200,942 and accrued interest
thereon of $1,987. The proceeds were also used to pay underwriting fees, legal
and professional fees and other expenses associated with the offering in an
aggregate amount of approximately $7,071. In connection with the offering of the
Senior Notes, the Company entered into a registration rights agreement with the
initial purchasers of the Senior Notes. The registration rights agreement grants
the holders of the Senior Notes certain exchange and registration rights that
required the Company to file a registration statement with the SEC within 60
days after the issuance of the Senior Notes. If, within the time periods
specified in the registration rights agreement, the Company is unable to
complete a registration and exchange of the Senior Notes or, alternatively,
cause to be declared effective a shelf registration statement for the resale of
the Senior Notes, the Company will be required to pay special interest to the
holders of the Senior Notes. Special interest will accrue at a rate of 0.25% per
annum during the 90-day period immediately following the occurrence of a
registration default and will increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall exceed 1.0% per annum. The
Company filed the required registration statement on August 8, 2003. No
principal payments prior to the maturity date are required.

INTEREST RATE SWAP AGREEMENT

On September 18, 2003, the Company entered into an interest rate swap
agreement with respect to the Company's Senior Notes for a total notional amount
of $50,000. The swap provides that the Company will receive interest of 8 7/8%
and pay a variable rate of interest based upon six month London Interbank
Offered Rate ('LIBOR') plus 4.11% (5.27% at October 4, 2003). As a result of the
swap, the weighted average effective interest rate of the Senior Notes was
reduced to 8.02% as of October 4, 2003. The swap agreement expires on June 15,
2013 (the date on which the Senior Notes mature). The Company designated the
swap a fair value hedge of the changes in fair value of $50,000 aggregate
principal amount of the $21,000 aggregate principal amount of Senior Notes
outstanding. As of October 4, 2003, the fair value of the swap agreement was a
loss of $173, which is offset by a corresponding gain on the hedged debt. No
hedge ineffectiveness is recognized in the consolidated condensed statement of
operations as the provisions of the swap match the provisions of the hedged
debt.

EXIT FINANCING FACILITY

On the Effective Date the Company entered into the $275,000 Exit Financing
Facility. The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. The Exit Financing Facility includes provisions that
allow the Company to increase the maximum available borrowing from $275,000 to
$325,000, subject to certain conditions (including obtaining the agreement of
existing or new lenders to commit to lend the additional amount). Borrowings
under the Exit Financing Facility bear interest at Citibank N.A.'s base rate
plus 1.50% (5.50% at October 4, 2003) or at LIBOR plus 2.50% (approximately
3.65% at October 4, 2003). The Company purchases LIBOR contracts when it expects
borrowing to be outstanding for more than 30 days. The remaining balances bear
interest at the base rate plus 1.50%. Pursuant to the terms of the Exit
Financing Facility, the interest rate the Company will pay on its outstanding
loans will decrease by as much as 0.5% in the event the Company achieves certain
defined ratios. The Exit Financing Facility contains financial covenants that,
among other things, require the Company to maintain a fixed charge coverage
ratio above a minimum level and a leverage ratio below a maximum level and to
limit the amount of the Company's capital expenditures. In addition, the

33

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Exit Financing Facility contains certain covenants that, among other things,
limit investments and asset sales, prohibit the payment of dividends (subject to
limited exceptions) and prohibit the Company from incurring material additional
indebtedness. As of October 4, 2003, the Company was in compliance with the
covenants of the Exit Financing Facility. The Exit Financing Facility is
guaranteed by Warnaco Group and substantially all of Warnaco's domestic
subsidiaries and the obligations under such guarantee, together with the
Company's obligations under the Exit Financing Facility, are secured by a lien
on substantially all of the domestic assets of the Company and its domestic
subsidiaries. Initial borrowings under the Exit Financing Facility on the
Effective Date were $39,200. As of October 4, 2003, the Company had repaid all
amounts owing under the Exit Financing Facility and had approximately $24,952 of
cash available as collateral against outstanding letters of credit of $60,269.
At October 4, 2003, the Company had $151,339 of credit available under the Exit
Financing Facility.

On November 12, 2003, the Company's lenders approved an amendment to the
Exit Financing Facility to modify certain definitions and covenants and to
permit certain asset sales, permit the use of cash balances to fund acquisitions
and allow the Company to repurchase up to $10,000 of the Company's outstanding
Senior Notes after June 30, 2004.

SECOND LIEN NOTES

In accordance with the Plan, on the Effective Date, the Company issued
$200,942 Second Lien Notes to certain pre-petition creditors and others in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 1145(a) of the Bankruptcy Code. The Second Lien Notes were
scheduled to mature on February 4, 2008, subject to, in certain instances,
earlier repayment in whole or in part. The Second Lien Notes bore an annual
interest rate which was the greater of (i) 9.5% plus a margin (initially 0%, and
beginning on August 4, 2003, 0.5% would have been added to the margin every six
months); and (ii) LIBOR plus 5.0% plus a margin (initially 0%, and beginning on
August 4, 2003, 0.5% would have been added to the margin every six months). The
indenture pursuant to which the Second Lien Notes were issued contained certain
covenants that, among other things, limited investments and asset sales and
prohibited the Company from paying dividends (subject to limited exceptions) and
incurring material additional indebtedness. The Second Lien Notes were
guaranteed by most of the Company's domestic subsidiaries and the obligations
under such guarantee, together with the Company's obligations under the Second
Lien Notes, were secured by a second priority lien on substantially the same
assets which secured the Exit Financing Facility. The Second Lien Notes were
payable in equal annual installments of $40,188 beginning in April 2004 through
April 2008. Second Lien Note principal payments could only be made if the
Company achieved a defined fixed charge coverage ratio and had additional
borrowing availability, after the principal payment, of $75,000 or more under
the Exit Financing Facility.

On June 12, 2003, the Company repaid all outstanding principal and accrued
interest on the Second Lien Notes of $202,929 with the proceeds from the
Company's offering of the Senior Notes.

GECC

On June 12, 2002, the Bankruptcy Court approved the Predecessor'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.
The terms of the settlement agreement required the Company to make payments to
GECC totaling $15,200. Obligations to GECC were secured by first priority

34

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

liens on the applicable assets. Amounts payable at February 4, 2003 to GECC were
paid in monthly installments of $750 including interest through September 2003.
All obligations under the GECC settlement agreement had been paid to GECC as of
October 4, 2003.

OTHER DEBT

Certain of the Company's foreign subsidiaries are parties to capital lease
obligations related to certain facilities and equipment. The total amount of
capital lease obligations outstanding at October 4, 2003, February 4, 2003 and
January 4, 2003 related to these leases were approximately $1,178, $1,420 and
$2,679, of which $0, $160 and $162 are included with the current portion of
long-term debt, respectively.

NOTE 17 -- RELATED PARTY TRANSACTIONS

In anticipation of the Company's emergence from bankruptcy protection, the
Company entered into a consulting agreement with Alvarez & Marsal, Inc. ('A&M')
on January 29, 2003 (as supplemented by a March 18, 2003 letter agreement,
collectively the 'A&M Agreement'). The A&M Agreement provides, among other
things, for certain executive services to be provided to the Company (including
but not limited to the services of Antonio C. Alvarez as President and Chief
Executive Officer of the Company through April 30, 2003, James P. Fogarty as
Chief Financial Officer of the Company and other personnel through September 30,
2003) as well as the payment of additional fees upon the consummation of certain
transactions involving the Company and, upon certain conditions, the right to
participate in the Company's Incentive Compensation Plan for certain periods in
fiscal 2003. Pursuant to the A&M Agreement, during the Third Quarter of Fiscal
2003, the Company paid A&M a total amount of $865, consisting of payments for
executive services in the amount of $415 and $450 of transaction bonuses. For
the period February 5, 2003 to October 4, 2003, total payments to A&M under the
A&M Agreement were $2,596, consisting of payments for executive services in the
amount of $1,486 and $1,110 of transaction bonuses. Pursuant to the terms of the
Plan, Mr. Alvarez received Second Lien Notes in the principal amount of $942
(which, together with accrued interest thereon, were repaid with proceeds from
the sale of the Senior Notes on June 12, 2003) and 266,400 shares of new common
stock valued at $2,981 in connection with the Company's emergence from
bankruptcy on February 4, 2003.

NOTE 18 -- SUPPLEMENTAL CASH FLOW INFORMATION

- ---------

(a) Represents debt incurred and assets purchased under the GECC lease
settlement. See Note 16.

35

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

NOTE 19 -- STOCKHOLDERS' EQUITY (DEFICIENCY)

The Successor has authorized an aggregate of 20,000,000 shares of preferred
stock, par value $0.01 per share, of which 112,500 shares are designated as
Series A preferred stock, par value $0.01 per share. There are no shares of
preferred stock issued and outstanding. The Successor has authorized an
aggregate of 112,500,000 shares of New Common Stock of which the Successor
issued 44,999,973 shares pursuant to the terms of the Plan. A further 23,540
shares and 1,670 shares were issued to the Company's directors on May 28, 2003
and July 7, 2003, respectively, as partial compensation for serving as members
on the Board of Directors of the Company. The total number of shares of New
Common Stock issued and outstanding at October 4, 2003 was 45,188,183. On March
12, 2003, pursuant to the terms of the Stock Incentive Plan, the Company issued
496,000 shares of restricted stock to certain of its employees. A further
219,500 shares of restricted stock, net of cancellations, were issued through
October 4, 2003, of which 61,500 were issued during the Third Quarter of Fiscal
2003. The Stock Incentive Plan was approved by shareholders on May 28, 2003. The
fair market value of the New Common Stock on the date of the grants ranged from
$9.55 to $16.95 per share. The restricted shares vest, with respect to 25% of
the shares, six months after the grant date and, with respect to an additional
25% of such shares, each anniversary after the first vesting date for a period
of three years. In addition, the Company granted options for the purchase of
2,862,000 shares, net of cancellations, of New Common Stock at exercise prices
ranging from $9.55 to $16.95 per share, which represents the price per share of
the New Common Stock at the date of grant. Substantially all the options vest,
with respect to 25% of the shares, six months after the grant date and, with
respect to an additional 25% of such shares, each anniversary after the first
vesting date for a period of three years. The options have a ten-year term.
Compensation expense related to the restricted share and option grants to
employees was $2,031 for the Third Quarter of Fiscal 2003 and $4,405 for the
period February 5, 2003 to October 4, 2003. The total fair value of these
options and restricted share grants was $19,070. Stock-based compensation
expense for the Third Quarter of Fiscal 2003 and the period February 5, 2003 to
October 4, 2003 related to grants of stock to the Company's Board of Directors
as partial compensation for their services totaled $40 and $50, respectively.

A summary of the options outstanding under the Stock Incentive Plan is
presented below:

36

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Summary information related to options outstanding at October 4, 2003 is as
follows:

The Company has reserved 5,000,000 shares of New Common Stock for
stock-based compensation awards.

The Predecessor had various stock-based incentive plans in place prior to
February 4, 2003 including options outstanding for the purchase of 3,692,363
shares of Old Common Stock at weighted average exercise prices from $0.67 to
$42.00 per share. All options to purchase shares of Old Common Stock and
restricted shares related to the Old Common Stock were cancelled on February 4,
2003 pursuant to the terms of the Plan.

NOTE 20 -- INCOME (LOSS) PER SHARE

37

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The denominator for the weighted average diluted shares outstanding for the
period February 5, 2003 to October 4, 2003 includes the effect, under the
treasury method, of 552,500 shares of unvested restricted stock and 2,608,000
options. The effect of potentially dilutive securities has been excluded from
the computation of loss per share for the Three and Nine Months Ended
October 5, 2002 and the Three Months Ended October 4, 2003 because the effect
would have been anti-dilutive. Potentially dilutive securities at October 5,
2002 included options to purchase 3,963,213 shares of Old Common Stock, unvested
restricted stock of 19,424 shares and 5,200,000 shares issuable pursuant to the
Equity Agreements.

Options to purchase 254,000 shares of common stock outstanding at October 4,
2003 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. Options to purchase shares of common stock outstanding at October
5, 2002 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. In addition, at October 5, 2002, incremental shares issuable
on the assumed conversion of certain then outstanding Company-obligated
mandatorily redeemable 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.

NOTE 21 -- LEGAL MATTERS

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 (the 'District Court') against the Company and certain of its officers
and directors (the 'Shareholder I Class Action'). The complaints, on behalf of a
putative class of the Company's shareholders who purchased the Old Common Stock
between September 17, 1997 and July 19, 2000 (the 'Class Period'), allege, among
other things, that the defendants violated the Securities Exchange Act of 1934,
as amended (the 'Exchange Act') by artificially inflating the price of the Old
Common Stock and failing to disclose certain information during the Class
Period.

On November 17, 2000, the District 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
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, the plaintiffs filed a notice of
appeal with respect to the District Court's entry of a final judgment in favor
of the individual defendants. On July 7, 2003, the United States Court of
Appeals for the Second Circuit reversed and remanded the District Court's entry
of a final judgment in favor of the individual defendants. On September 15,
2003, the individual defendants filed a renewed motion to dismiss based upon,
among other things, failure to plead actionable fraud, failure to plead fraud
with particularity and failure adequately to plead scienter. On November 13,
2003, the parties to the Shareholder I Class Action entered into a Stipulation
and Agreement of Settlement. On the same day, the court entered a preliminary
order approving the settlement.

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 District Court (the 'Shareholder II Class Action'). The complaints,
on behalf of a putative class of 64 shareholders who purchased the Old Common
Stock between September 29, 2000 and April 18, 2001 (the

38

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

'Second Class Period'), allege, among other things, that defendants violated the
Exchange Act by artificially inflating the price of the Old Common 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
of the Company's current and former officers and directors, 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. On August 21,
2002, the plaintiffs filed a third amended complaint adding the Company's
current independent auditors as a defendant. On June 2, 2003, the District Court
granted the outside directors' motion to dismiss and dismissed the motion to
dismiss of the other individual defendants.

As the Company has been dismissed from both suits, neither the Shareholder
I Class Action nor Shareholder II Class Action has had, or will have, a material
adverse effect on the Company's financial condition, results of operations or
business.

SEC INVESTIGATION

The staff of the Division of Enforcement of the Securities and Exchange
Commission ('SEC') has been conducting an investigation to determine whether
there have been any violations of the Exchange Act, in connection with, among
other things, the preparation and publication by the Company of (i) the
financial statements included in the Company's Annual Reports on Form 10-K for
fiscal 1998, fiscal 1999 and fiscal 2000 and Quarterly Report on Form 10-Q for
the third quarter of fiscal 2000 and (ii) the Company's press release announcing
its results for fiscal 1998. In July 2002, the SEC staff informed the Company
that it intends to recommend that the SEC bring a civil injunctive action
against the Company, alleging violations of the federal securities laws,
including Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
and Rules 10b-5, 12b-20, 13a-1 and 13a-13 promulgated thereunder. The SEC staff
invited the Company to make a Wells Submission describing the reasons why no
action should be brought. In September 2002, the Company filed its Wells
Submission and is continuing discussions with the SEC staff as to a settlement
of this investigation. The Company does not expect the resolution of this matter
to have a material effect on the Company's business, financial condition or
results of operations.

The Company is also aware that the SEC staff has informed certain persons
who were employed by the Company at the time of the preparation of the documents
referred to above (including one current member of management) that it intends
to recommend that the SEC bring a civil injunctive action against such persons
alleging violations of the securities laws. The Company is advised that such
persons also have filed Wells Submissions.

CHAPTER 11 CASES

For a discussion of bankruptcy proceedings under the Bankruptcy Code, see
the discussion of 'Chapter 11 Cases' in Note 1.

39

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

OTHER

In addition to the above, from time to time, the Company is involved in
arbitrations or legal proceedings that arise in the ordinary course of its
business. The Company cannot predict the timing or outcome of these claims and
proceedings. Currently, the Company is not involved in any arbitration and/or
legal proceeding that it expects to have a material effect on its financial
condition, results of operations or business.

NOTE 22 -- SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL INFORMATION

The following tables set forth supplemental consolidating condensed
financial information as of October 4, 2003, February 4, 2003 and January 4,
2003, for the periods January 5, 2003 to February 4, 2003, February 5, 2003 to
October 4, 2003 and for the Nine Months Ended October 5, 2002 for (i) Warnaco
Group, (ii) Warnaco, (iii) the subsidiaries of Warnaco that guarantee the Senior
Notes (the 'Guarantor Subsidiaries'), (iv) the subsidiaries of Warnaco other
than the Guarantor Subsidiaries (the 'Non-Guarantor Subsidiaries') and (v) the
Company on a consolidated basis.

40

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

41

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

42

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

43

THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

44

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Warnaco Group, Inc. ('Warnaco Group' and, together with its
subsidiaries, 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, par value $0.01 per share (the 'New Common Stock').
Except for the historical information contained in this Quarterly Report, this
Quarterly Report, including the following discussion, contains forward-looking
statements that involve risks and uncertainties. See 'Statement Regarding
Forward-Looking Disclosure.'

BANKRUPTCY REORGANIZATION AND TURNAROUND

On June 11, 2001 (the 'Petition Date'), Warnaco Group, 36 of its 37 U.S.
subsidiaries and one of its Canadian subsidiaries, Warnaco of Canada Company
(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 remainder of Warnaco Group's foreign
subsidiaries were not debtors in the Chapter 11 Cases, nor were they subject to
foreign bankruptcy or insolvency proceedings.

On November 9, 2002, the Debtors filed 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 (the 'Plan'). On
January 16, 2003, the Bankruptcy Court entered (i) its Findings of Fact to and
Conclusions of Law Re: Order and Judgment Confirming The First Amended Joint
Plan of Reorganization of The Warnaco Group, Inc. and Its Affiliated Debtors and
Debtors-In-Possession Under Chapter 11 of Title 11 of the United States Code,
dated November 8, 2002, and (ii) an Order and Judgment Confirming The First
Amended Joint Plan of Reorganization of The Warnaco Group, Inc. and Its
Affiliated Debtors and Debtors-In-Possession Under Chapter 11 of Title 11 of the
United States Code, dated November 8, 2002, and Granting Related Relief (the
'Confirmation Order'). On February 4, 2003 (the 'Effective Date'), the Plan
became effective and the Debtors successfully emerged from their bankruptcy
proceedings.

Pursuant to the Plan, the following distributions were made:

(a) Warnaco Group's Class A Common Stock, par value $0.01 per
share ('Old Common Stock'), including all stock options and
restricted shares, was extinguished and holders of the Old
Common Stock received no distribution on account of the Old
Common Stock;

(b) general unsecured claimants received 2.55% (1,147,023
shares) of the reorganized Company's New Common Stock;

(c) the Company's pre-petition secured lenders received their
pro-rata share of $106.1 million in cash, New Warnaco Second
Lien Notes due 2008 (the 'Second Lien Notes') in the
principal amount of $200.0 million and approximately 96.26%
of the New Common Stock (43,318,350 shares);

(d) holders of claims arising from or related to certain
preferred securities received 0.60% of the New Common Stock
(268,200 shares);

(e) pursuant to the terms of his employment agreement, as
modified by the Plan, Antonio C. Alvarez II, the former
President and Chief Executive Officer of the Company,
received an incentive bonus in an aggregate amount of $5.9
million, consisting of $1.95 million in cash, Second Lien
Notes in the principal amount of approximately $0.9 million
and 0.59% of the New Common Stock (266,400 shares valued at
$11.19 per share); and

(f) in addition to the foregoing, allowed administrative and
certain priority claims were paid in full in cash.

45

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to use
judgment in making estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses in the consolidated financial
statements and accompanying notes. The following critical accounting policies
are based on, among other things, judgments and assumptions made by the Company
that involve inherent risks and uncertainties.

Use of Estimates: The Company uses estimates and assumptions in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the 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 ongoing
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.

Revenue Recognition: The Company recognizes revenue when goods are shipped
to customers and title and risk of loss has passed, net of estimated customer
returns, allowances and other discounts. The Company recognizes revenue from its
consignment accounts and retail stores when goods are sold to consumers, net of
allowances for future returns. The determination of allowances and returns
involves the use of significant judgment and estimates by the Company. The
Company bases its estimates of allowance rates on past experience by product
line and account, the financial stability of its customers, the expected rate of
retail sales growth and general economic and retail forecasts. The Company
reviews and adjusts its accrual rates each month based on its current
experience. During the Company's monthly review, the Company also considers its
accounts receivable collection rate and the nature and amount of customer
deductions and requests for promotion assistance. The Company believes it is
likely that its accrual rates will vary over time and could change materially if
the Company's mix of customers, channels of distribution or product mix changes.
The Company's current rates of accrual for sales allowances, returns and
discounts vary by business unit and channel of distribution and range from 5.0%
to 20.0%.

Cost of Goods Sold: Cost of goods sold for the Successor consists of the
cost of products produced or purchased and certain period costs related to the
production and manufacturing process. Product costs include (i) material, direct
labor and overhead (including the costs incurred by external contractors),
(ii) duty, quota and related tariffs, (iii) in-bound freight and traffic costs,
including inter-plant freight, (iv) procurement and material handling costs,
(v) indirect production overhead including inspection, quality control, sample
making/room, production control and planning, cost accounting, and engineering,
and (vi) in-stocking costs in the Company's warehouse (cost to receive, unpack
and stock product available for sale in the Company's distribution center).
Period costs included in costs of goods sold include (a) royalty, (b) design and
merchandising, (c) samples, (d) manufacturing variances (net of amounts
capitalized), (e) loss on seconds and (f) provisions for inventory losses
(including provisions for shrinkage and losses on the disposition of excess and
obsolete inventory). Costs incurred to store, pick, pack and ship inventory to
customers are included in shipping and handling costs and are classified in
selling, general and administrative expenses. The Company's gross profit and
gross margin may not be comparable to those of other companies as some companies
include shipping and handling costs in cost of goods sold. The Predecessor
included design, merchandising, and other product related costs in its
determination of inventory value. Beginning on February 4, 2003 the Company
expenses such costs as incurred.

Accounts Receivable: The Company maintains reserves for estimated amounts
that the Company does not expect to collect from its trade customers. Accounts
receivable reserves include

46

amounts the Company expects its customers to deduct for trade discounts, amounts
for accounts that go out of business or seek the protection of the Bankruptcy
Code and amounts related to charges in dispute with customers. The Company's
estimate of the allowance amounts that are necessary includes amounts for
specific deductions the Company has authorized and an amount for other estimated
losses. Adjustments for specific account allowances and negotiated settlements
of customer deductions are recorded as deductions to revenue in the period the
specific adjustment is identified. The provision for accounts receivable
allowances is affected by general economic conditions, the financial condition
of the Company's customers, the inventory position of the Company's customers
and many other factors. As of October 4, 2003 the Company had approximately
$257.0 million of open trade invoices and other receivables and $11.0 million of
open debit memos. Based upon the Company's analysis of estimated recoveries and
collections associated with the related invoices and debit memos, the Company
had $65.3 million of accounts receivable reserves at October 4, 2003. As of
February 4, 2003, the Company had approximately $281.9 million of open trade
invoices and other receivables and $10.8 million of open debit memos. Based upon
the Company's analysis of estimated recoveries and collections associated with
the related invoices and debit memos, the Company reduced its accounts
receivable balance by $79.7 million to reflect its accounts receivable at fair
value. As of January 4, 2003, the Company had approximately $276.9 million of
open trade invoices and other receivables and $10.4 million of open debit memos.
Based upon the Company's analysis of estimated recoveries and collections
associated with the related invoices and debit memos, the Company had $87.5
million of accounts receivable reserves at January 4, 2003. The net accounts
receivable balance of $213.0 million at February 4, 2003 was estimated to be the
fair value of the Company's accounts receivable at February 4, 2003. The
determination of accounts receivable reserves 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
reserves significantly. The Company has purchased credit insurance to help
mitigate the potential losses it may incur from the bankruptcy, reorganization
or liquidation of some of its customers.

Inventories: The Company values its inventories at the lower of cost,
determined on a first-in, first-out basis, or market. The Company evaluates its
inventories to determine excess units or slow-moving styles based upon
quantities on hand, orders in house and expected future orders. For those items
for which the Company believes it has an excess supply or for styles or colors
that are obsolete, 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. The Company's calculation of the reduction in
carrying value necessary for the disposition of excess inventory is highly
dependent on its projections of future sales of those products and the prices it
is able to obtain for such products. The Company reviews its inventory position
monthly and adjusts its reserves for excess or obsolete goods based on revised
projections and current market conditions for the disposition of excess and
obsolete inventory. If economic conditions worsen the Company may have to
increase its reserve estimates substantially. At October 4, 2003, the Company
had identified inventory with a carrying value of approximately $51.0 million as
potentially excess and/or obsolete. Based upon the estimated recoveries related
to such inventory, as of October 4, 2003, the Company had approximately $25.7
million of inventory reserves for excess, obsolete and other inventory
adjustments. At February 4, 2003, the Company had identified inventory with a
carrying value of approximately $57.2 million as potentially excess and/or
obsolete. Based upon the estimated recoveries related to such inventory, as of
February 4, 2003, the Company reduced its inventory by $32.8 million to reflect
such inventory at fair value. At January 4, 2003, the Company had identified
inventory with a carrying value of approximately $61.5 million as potentially
excess and/or obsolete. Based upon the estimated recoveries related to such
inventory, as of January 4, 2003, the Company had approximately $33.8 million of
inventory reserves for excess, obsolete and other inventory adjustments. The
Company believes that the carrying value of its inventory, net of the
adjustments noted, was equal to its fair value at February 4, 2003.

Long-lived Assets: As of February 4, 2003, the Company adopted fresh start
accounting and its long-lived assets, including property, plant and equipment
were recorded at their fair values based

47

upon the preliminary appraised values of such assets. The Company used the work
of an independent third party appraisal firm to assist it in determining the
fair values of its property, plant and equipment. The Company and the
independent third party appraiser determined the fair value of the Company's
property, plant and equipment using the planned future use of each asset or
group of assets, quoted market prices for assets where a market exists for such
assets, the expected future revenue and profitability of the business unit
utilizing such assets and the expected future life of such assets. In its
determination of fair value, the Company also considered whether an asset would
be sold either individually or with other assets and the proceeds the Company
expects to receive from such a sale. Assumptions relating to the expected future
use of individual assets could affect the fair value of such assets and the
depreciation expense recorded related to such assets in the future.

Intangible assets consist primarily of licenses and trademarks. The Company
used the work of an independent third party appraiser to assist it in
determining the fair value of its trademarks, licenses and other intangible
assets. The fair values were calculated using the discounted estimated future
cash flow to be generated from the sales of products utilizing such trademarks
and/or licenses. The determination of fair value considered the royalty rates
attributable to products of similar types, recent sales or licensing agreements
entered into by companies selling similar products and the expected term during
which the Company expects to earn cash flows from each license or trademark. The
majority of the Company's license and trademark agreements cover periods of time
in excess of forty years. The estimates and assumptions used in the
determination of the value of these intangible assets will not have any effect
on the Company's future earnings unless a future evaluation of trademark or
license value indicates that such asset is impaired. Identifiable intangible
assets with finite useful lives are amortized on a straight-line basis over the
estimated useful lives of the assets. Pursuant to the provisions of Statement of
Financial Accounting Standards ('SFAS') No. 142, Goodwill and Other Intangible
Assets ('SFAS 142'), the Company does not amortize assets with indefinite lives.

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. The estimated remaining useful lives of the Company's
fixed assets and finite lived intangible assets for periods at February 4, 2003
are based upon the remaining useful lives as determined by independent third
party appraisers and the Company. The estimated useful lives of fixed assets and
finite lived intangible assets acquired after February 5, 2003 are based on
their classification and expected usage, as determined by the Company.

Income Taxes: 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 established to
reduce the amount of deferred tax assets to an amount that the Company believes,
based upon objectively verifiable evidence, is realizable. The only objectively
verifiable evidence the Company used in determining the need for a valuation
allowance were the future reversals of existing temporary differences. The
future recognition of deferred tax assets, through a reduction in valuation
allowances that existed at February 4, 2003, will first reduce goodwill. Should
the recognition of deferred tax assets result in the elimination of goodwill,
any additional deferred tax asset recognition will reduce other intangible
assets. Deferred tax assets recognized in excess of the carrying value of
intangible assets will be treated as an increase to additional paid-in capital.

Pension Plan: The Company has a defined benefit pension plan (the 'Pension
Plan') covering certain full-time non-union domestic employees and certain
domestic employees covered by a collective bargaining agreement. The Pension
Plan's third party actuary has determined the total liability attributable to
benefits owed to participants covered by the Pension Plan using assumptions
provided by the Company. The assumptions used can have a significant effect on
the

48

amount of pension expense and pension liability recorded by the Company. The
Pension Plan actuary also determines the annual cash contribution to the Pension
Plan using the assumptions set forth by the Pension Benefit Guaranty
Corporation. The Pension Plan was under-funded as of January 4, 2003,
February 4, 2003 and October 4, 2003. The Pension Plan and the Company's plan of
reorganization contemplate that the Company will continue to fund its minimum
required contributions and any other premiums due under the Employee Retirement
Income Security Act of 1974, as amended ('ERISA') and the United States Internal
Revenue Code of 1986, as amended (the 'Code'). Effective January 1, 2003, the
Pension Plan was amended and, as a result, no future benefits will accrue to
participants in the Pension Plan. As a result of the amendment, the Company will
not record any pension expense for current service costs after January 1, 2003.
As of February 4, 2003 and October 4, 2003, the Company had recorded a Pension
Plan liability equal to the amount that the present value of accumulated benefit
obligations (discounted using an interest rate of approximately 5.3%) exceeded
the fair value of Pension Plan assets as determined by the Pension Plan trustee.
The Company's cash contributions to the Pension Plan for fiscal 2003 will be
approximately $9.4 million and will be approximately $46.3 million in the
aggregate from fiscal 2004 through fiscal 2008. The amount of estimated cash
contributions that the Company will be required to make to the Pension Plan
could increase or decrease depending on the actual return earned by the assets
of the Pension Plan compared to the estimated rate of return on Pension Plan
assets. The accrued long-term Pension Plan liability and accruals for other post
retirement benefits are classified as other long-term liabilities in the
consolidated condensed balance sheet at October 4, 2003. Cash contributions to
the Pension Plan were $7.7 million for the period February 5, 2003 to
October 4, 2003. The remaining contributions to the Pension Plan to be paid in
fiscal 2003 of $1.7 million are classified with accrued liabilities at
October 4, 2003.

Stock-Based Compensation: Effective February 5, 2003, the Successor adopted
the fair value method of accounting for stock options for all options granted by
the Successor after February 4, 2003 pursuant to the prospective method
provisions of SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure ('SFAS 148'). The Company uses the Black-Scholes model to
calculate the fair value of stock option awards. The Black-Scholes model
requires the Company to make significant judgments regarding the assumptions
used within the Black-Scholes model, the most significant of which are the stock
price volatility assumption, the expected life of the option award and the
risk-free rate of return. The Company emerged from bankruptcy on February 4,
2003, and as a result, the Company does not have sufficient stock price history
upon which to base its volatility assumption. In determining the volatility used
in its model, the Company considered the volatility of the stock prices of
selected companies in the apparel industry, the nature of those companies, the
Company's emergence from bankruptcy and other factors in determining its stock
price volatility assumption of 35%. The Company based its estimate of the
average life of a stock option of five years upon the vesting period of 42
months and the option term of ten years. The Company's risk-free rate of return
assumption of 2.55% for options granted in fiscal 2003 is equal to the quoted
yield for five-year U.S. treasury bonds as of March 12, 2003.

Prior to February 5, 2003, the Company followed the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation
('SFAS 123'). SFAS 123 encourages, but does not require, companies to adopt a
fair value based method for determining expense related to stock option
compensation. The Company accounted for stock-based compensation for employees
using the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ('APB 25'), and related
interpretations. Under APB 25, no compensation expense was recognized for
employee share option grants because the exercise price of the options granted
equaled the market price of the underlying shares on the date of grant (the
'intrinsic value method'). Compensation expense related to restricted stock
grants is recognized over the vesting period of the grants.

Advertising Costs: Advertising costs are included in selling, general and
administrative expenses and are expensed when the advertising or promotion is
published or presented to consumers. Cooperative advertising allowances provided
to customers are charged to operations as incurred and are included in selling,
general and administrative expenses. The amounts charged to

49

operations for advertising expense (including cooperative advertising, marketing
and promotion expenses) for the Nine Months Ended October 5, 2002, the period
January 5, 2003 to February 4, 2003 and the period February 5, 2003 to October
4, 2003 were $82.5 million, $7.6 million and $51.8 million, respectively.
Cooperative advertising expense for the Nine Months Ended October 5, 2002, the
period January 5, 2003 to February 4, 2003 and the period February 5, 2003 to
October 4, 2003 was $25.2 million, $1.4 million and $15.5 million, respectively.

Goodwill: Goodwill represents the amount by which the Company's
reorganization value exceeded the fair value of its tangible assets and
identified intangible assets minus its liabilities allocated in accordance with
the provisions of SFAS 141, Business Combinations, as of February 4, 2003.
Pursuant to the provisions of SFAS 142, goodwill is not amortized and is subject
to an annual impairment test which the Company will perform in the fourth
quarter of each fiscal year.

Reorganization Items: In connection with the Chapter 11 Cases, the Company
initiated several strategic and organizational changes to streamline its
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 and fiscal 2002, will not be completed until the end of
fiscal 2003. In connection with these actions, the Company closed all of its
domestic outlet retail stores and reorganized its Speedo Authentic Fitness
retail stores. The Company closed 204 of the 283, or 72.1%, of the retail stores
operated at the beginning of fiscal 2001. The Company closed 86 stores during
fiscal 2001 and 118 stores were closed during fiscal 2002. In the first quarter
of fiscal 2003, three additional Speedo Authentic Fitness retail stores were
closed. The closing of the domestic outlet retail stores and the sale of the
related inventory generated net proceeds of $23.2 million in fiscal 2002.

The Company wrote off $13.3 million of fixed assets and accrued $9.4 million
of lease termination costs related to rejected leases of the closed stores in
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, Bancomext received $0.1 million in cash
for outstanding rent payment and other fees and was granted an unsecured claim
in the amount of $9.5 million in consideration for (i) Bancomext's release of
the lease obligation on a closed facility and (ii) certain amendments to leases
for two other facilities. The Company had accrued $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 $2.6 million
for the total unsecured claim pursuant to the settlement agreement is included
in reorganization items in fiscal 2002. Lease termination costs during
bankruptcy were classified as liabilities subject to compromise.

In the first quarter of fiscal 2002, the Company sold the assets of GJM and
Penhaligon's for net proceeds of $20.5 million in the aggregate. The net loss on
the sale of Penhaligon's and GJM was $2.9 million and is included in
reorganization items in fiscal 2002. In fiscal 2001, the Company recorded an
impairment loss related to the goodwill of GJM of $26.8 million.

On June 12, 2002, the Bankruptcy Court approved the 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
claims under the leases totaled $51.2 million. Under the terms of the settlement
agreement, GECC received $15.2 million payable as follows: (i) prior to the
Effective Date of the Plan, the Company paid GECC monthly installments of $0.55
million, and, (ii) after the Effective Date, the Company was obligated to pay
GECC monthly installments of $0.75 million until the balance was paid in full.
Through June 12, 2002, the Company had paid GECC $5.5 million of the $15.2
million. The remaining amount of the GECC claim of $36.0 million was included in
liabilities subject to compromise as of January 4, 2003. The Company had

50

recorded accrued liabilities related to the GECC leases of $13.0 million prior
to the settlement and recorded $22.9 million as reorganization items in Fiscal
2002. Lease expense included in operating loss incurred prior to the settlement
with GECC was $18.1 million, $16.5 million and $8.2 million in fiscal 2000, 2001
and 2002, respectively. All obligations under the GECC settlement agreement had
been paid to GECC as of October 4, 2003. Liabilities subject to compromise
include debt, accounts payable, accrued expenses and other liabilities that
were settled as part of its emergence from bankruptcy. Creditors received
distributions consisting of cash, debt securities and common stock in settlement
of their bankruptcy claims. The ratio of cash, debt securities and common stock
that individual creditors received depended upon the priority of the claim made
by each creditor. The Company recorded a gain on the final settlement of these
liabilities of $1,692.7 million in the period January 5, 2003 to February 4,
2003.

During fiscal 2001 and fiscal 2002, the Company sold certain personal
property, vacated buildings, surplus land and other assets generating net
proceeds of $6.2 million and $6.8 million, respectively. The losses related to
the write-down of these assets were $3.7 million and $1.0 million for fiscal
2001 and fiscal 2002, respectively. The Company vacated certain leased premises
and rejected those leases (many related to the Retail Stores Group) under the
provisions of the Bankruptcy Code.

During the fourth quarter of fiscal 2002, the Company completed a strategic
review of its Intimate Apparel operations in Europe and formalized a plan to
consolidate its European manufacturing operations and to restructure certain
other manufacturing, sales, and administrative operations in Europe. The Company
expects to incur severance, outplacement, legal, accounting and other expenses
associated with the consolidation covering approximately 350 employees. The
Company recorded a restructuring charge of $8.7 million in the fourth quarter of
fiscal 2002 reflecting the statutory and regulatory defined severance and other
obligations that the Company expected to incur related to the consolidation.
Included in the restructuring charge are $0.1 million of legal and other
professional fees incurred in fiscal 2002 related to the consolidation. During
the first quarter of fiscal 2003, the Company established a minimum level of
benefits to be paid to terminated employees and recorded $6.5 million of
additional costs in connection with the European consolidation. In the period
February 5, 2003 to October 4, 2003, the Company recorded an additional $1.7
million for obligations due under the consolidation plan. The Company expects
that the ultimate costs of the consolidation that have been incurred will be
approximately $17 million.

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
American Institute of Certified Public Accountants Statement of Position ('SOP')
No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code ('SOP 90-7').

Reorganization items included in the consolidated condensed statement of
operations for the periods January 5, 2003 to February 4, 2003 and January 6,
2002 to October 5, 2002 (the 'Nine Months Ended October 5, 2002') were $29.9
million and $79.2 million, respectively. Included in reorganization items are
certain non-cash asset impairment provisions and accruals for items that have
been, or will be, paid in cash. Certain accruals at January 4, 2003 were subject
to compromise under the provisions of the Bankruptcy Code. The Company had
recorded these accruals at the estimated amount the creditor would have been
entitled to claim under the provisions of the Bankruptcy Code. The ultimate
amount of and settlement terms for such liabilities are detailed in the Plan.
See Note 7 of Notes to Consolidated Condensed Financial Statements. Subsequent
to February 4, 2003, to the extent that the Company has incurred reorganization
items in respect of the Chapter 11 Cases, such items have been recorded in
selling, general and administrative expenses. Included in selling, general and
administrative expenses for the period July 6, 2003 to October 4, 2003 (the
'Third Quarter of Fiscal 2003') and period February 5, 2003 to October 4, 2003
are legal and professional fees and certain employee related costs relating to
the Chapter 11 Cases of $0.2 million $4.1 million, respectively.

Restructuring Items: In the Third Quarter of Fiscal 2003, the Company
continued the process of consolidating its manufacturing and distribution
operations in accordance with the Plan. Included in restructuring charges are
accruals for closing and/or consolidating two sewing plants located in Puerto
Cortes, Honduras and Los Angeles, California, one cutting and warehousing
facility in Thomasville, Georgia, distribution facilities in Secaucus,
New Jersey, and Montreal, Canada, and the consolidation of certain manufacturing
operations in France, resulting in total restructuring

51

charges of $5.2 million and $11.4 million for the Third Quarter of Fiscal 2003
and the period February 5, 2003 to October 4, 2003, respectively. Accruals for
restructuring items at February 4, 2003 and charges to the statement of
operations for the period February 5, 2003 to October 4, 2003 primarily relate
to severance and other benefits payable to approximately 1,463 terminated
employees. The Company expects that substantially all payments to terminated
employees will be completed by the end of fiscal 2003. Also included in
restructuring items for the period February 5, 2003 to October 4, 2003 are asset
impairment charges related to the write-down to salvage value of idle plant and
machinery at certain of the distribution and manufacturing facilities and legal
expenses primarily related to the shutdown of the manufacturing operations in
France.

RESULTS OF OPERATIONS

COMPARISON OF THIRD QUARTER OF FISCAL 2003 TO THIRD QUARTER OF FISCAL 2002
AND NINE MONTHS ENDED OCTOBER 4, 2003 TO NINE MONTHS ENDED OCTOBER 5, 2002

STATEMENT OF OPERATIONS (SELECTED DATA)

The following tables summarize the historical results of operations of the
Company for the period July 6, 2003 to October 4, 2003 (the 'Third Quarter of
Fiscal 2003'), the period July 7, 2002 to October 5, 2002 (the 'Third Quarter of
Fiscal 2002'), the period January 5, 2003 to February 4, 2003, the period
February 5, 2003 to October 4, 2003 and the Nine Months Ended October 5, 2002.
The period January 5, 2003 to February 4, 2003 combined with the period
February 5, 2003 to October 4, 2003 constitute a combined presentation of the
'Nine Months Ended October 4, 2003.'

The Third Quarter of Fiscal 2003 and Third Quarter of Fiscal 2002 each
included 13 weeks of operations, the period January 5, 2003 to February 4, 2003
included four weeks of operations and the period February 5, 2003 to October 4,
2003 included 35 weeks of operations. The Nine Months Ended October 4, 2003 and
October 5, 2002 each included 39 weeks of operations. References to the
'Predecessor' refer to the Company prior to February 4, 2003. References to the
'Successor' refer to the Company on and after February 4, 2003 after giving
effect to the implementation of fresh start reporting.

53

NET REVENUES

Net revenues are as follows:

- ---------

(a) Consolidated net revenues for the Three Months and Nine Months Ended
October 5, 2002 included $9.8 million and $42.6 million, respectively, of
revenues from GJM, Penhaligon's, Fruit of the Loom, Weight Watchers, IZKA
and domestic outlet retail stores (the 'discontinued and sold units'). The
absence of net revenues from discontinued and sold units accounted for a
2.9% decrease in net revenues in the Third Quarter of Fiscal 2003 compared
to the Third Quarter of Fiscal 2002 and accounted for the entire 3.8%
decrease in net revenues in the Nine Months Ended October 4, 2003 compared
to the Nine Months Ended October 5, 2002.

The Company's products are widely distributed through many major channels of
trade. The following table summarizes the Company's net revenues by channel of
trade for the Nine Months Ended October 4, 2003 and for the Nine Months Ended
October 5, 2002:

Third Quarter

Net revenues decreased $28.4 million, or 8.6%, to $303.1 million for the
Third Quarter of Fiscal 2003 compared to $331.5 million for the Third Quarter of
Fiscal 2002. In the same period, the absence of net revenues from discontinued
and sold units accounted for a $9.8 million, or 2.9%, decrease in net revenues
for the Third Quarter of Fiscal 2003 compared to the Third Quarter of Fiscal
2002. The remaining decrease in net revenues reflects weakness in
Warner's/Olga/Body Nancy Ganz offset by strength in Calvin Klein underwear and
Lejaby. Sportswear Group net revenues decreased $26.3 million, or 19.0%, to
$112.0 million with weakness in Chaps, Calvin Klein jeans and Calvin Klein
accessories offset by a modest strength in mass sportswear licensing. Swimwear
Group net revenues increased by $2.0 million, or 5.5%, to $38.6 million with
strength in Speedo and Designer swimwear, partially offset by weakness in
Retail.

Nine Months

Net revenues decreased $42.1 million, or 3.8%, to $1,062.6 million for the
Nine Months Ended October 4, 2003 compared to $1,104.7 million for the Nine
Months Ended October 5, 2002. The absence of net revenues from discontinued and
sold units accounted for the entire 3.8% decrease

54

in net revenues for the Nine Months Ended October 4, 2003 compared to the Nine
Months Ended October 5, 2002. Weakness in Warner's/Olga/Body Nancy Ganz net
revenues was offset by strength in Calvin Klein underwear and Lejaby. Sportswear
Group net revenues decreased $32.8 million, or 9.2%, to $323.2 million with
weakness in Chaps, Calvin Klein jeans and Calvin Klein accessories offset by
modest strength in mass sportswear licensing. Swimwear Group net revenues
increased by $26.9 million, or 9.8%, to $300.9 million with strength in Speedo
and Designer swimwear, partially offset by weakness in Retail.

Intimate Apparel Group

Intimate Apparel Group net revenues are as follows:

Third Quarter

Intimate Apparel net revenues decreased $4.2 million, or 2.7%, to $152.5
million for the Third Quarter of Fiscal 2003, from $156.7 million for the Third
Quarter of Fiscal 2002. The absence of net revenues from discontinued and sold
units accounted for a $9.8 million, or 6.2%, decrease in net revenues for the
Third Quarter of Fiscal 2003 compared to the Third Quarter of Fiscal 2002.
Warner's/Olga/Body Nancy Ganz net revenues decreased $5.4 million, reflecting a
decrease of $8.1 million in sales volume offset by improved sales allowance and
markdown experience of $2.7 million. The decrease in sales volume reflects lower
reorders due to a slow sell through at retail as a result of a less favorable
reception of certain product lines coupled with the effect of a soft market.
Management is in the process of addressing product issues and developing and
repositioning the Warner's/Olga/Body Nancy Ganz brands. Net revenues in Calvin
Klein underwear increased 16.7% from $65.4 million for the Third Quarter of
Fiscal 2002 to $76.3 million for the Third Quarter of Fiscal 2003, reflecting
increased off price sales in the United States together with an increase in off
price and concession store sales in the United Kingdom, Belgium and Germany. The
stronger Euro also had a positive effect on net revenues in Europe. Calvin Klein
net revenues in Asia also increased primarily as a result of the addition of new
distributors in Korea, China, Singapore and Malaysia. Lejaby net revenues
increased $2.1 million, or 10.4%, primarily reflecting the positive effect of a
stronger Euro offset by a decrease in sales volume due to a market slow down.
Revenues from sold or discontinued business units decreased $9.8 million
primarily as a result of the decision to close all domestic outlet retail
stores.

Nine Months

Intimate Apparel net revenues decreased $36.3 million, or 7.6%, to $438.5
million for the Nine Months Ended October 4, 2003, from $474.8 million for the
Nine Months Ended October 5, 2002. The absence of net revenues from discontinued
and sold units accounted for a $42.6 million, or 9.0%, decrease in net revenues
for the Nine Months Ended October 4, 2003 compared to the Nine Months Ended
October 4, 2002. Warner's/Olga/Body Nancy Ganz net revenues decreased $34.1
million, reflecting lower reorders due to a slow sell through at retail as a
result of less favorable reception of certain product lines coupled with the
effect of a soft market. In addition, sales

55

allowances and markdowns as a percentage of gross sales increased 1.8%, also
reflecting the soft market. Calvin Klein underwear net revenues increased 20.7%
from $169.2 million for the Nine Months Ended October 5, 2002 to $204.3 million
for the Nine Months Ended October 4, 2003, reflecting increases in the United
States, Europe and Asia due to improved sell through at retail, primarily in the
off price category, coupled with the effect of a stronger Euro. Lejaby net
revenues increased $8.3 million, or 11.8% primarily reflecting the positive
effect of a stronger Euro offset by a decrease in sales volume due to a market
slow down in the second and Third Quarters' of Fiscal 2003. Revenues from sold
or discontinued business units decreased $42.6 million.

Sportswear Group

Sportswear Group net revenues are as follows:

Third Quarter

Sportswear net revenues decreased by $26.3 million, or 19.0%, to $112.0
million for the Third Quarter of Fiscal 2003, from $138.2 million for the Third
Quarter of Fiscal 2002, reflecting an overall weakness in the retail
environment. Calvin Klein jeans net revenues decreased $24.4 million, reflecting
lower sales volumes in both department store and club sales. A portion of the
decrease relates to certain programs in Calvin Klein jeans that were shipped in
the first quarter of fiscal 2003 while the corresponding programs in fiscal 2002
were shipped in the second and third quarters. Chaps net revenues decreased $2.2
million reflecting a softer market in the United States and Canada. In Canada,
net revenues decreased approximately $1.0 million offset by the effect of a
strengthened Canadian dollar of approximately $0.7 million. Net revenues in
Mexico decreased by approximately $1.0 million primarily as a result of the
downsizing and consolidation of operations in that country. Mass sportswear
licensing net revenues increased 26.4% due to increased sales volume experienced
at Wal-Mart during the Third Quarter of Fiscal 2003.

Nine Months

Sportswear net revenues decreased by $32.8 million, or 9.2%, to $323.2
million for the Nine Months Ended October 4, 2003, from $356.0 million for the
Nine Months Ended October 5, 2002. The decrease in Calvin Klein jeans net
revenues is due to lower orders (primarily from department stores and membership
clubs), reflecting a weak status denim market. Chaps net revenues decreased
$0.4, reflecting a decrease of $0.8 million in the United States due to a softer
market, offset by an increase in foreign net revenues of $0.4 million. In
Canada, net revenues increased approximately $1.9 million primarily resulting
from a strengthened Canadian dollar of approximately $1.3 million. Net revenues
in Mexico decreased by approximately $1.4 million primarily as a result of the
downsizing and consolidation of operations in that country.

56

Swimwear Group

Swimwear Group net revenues are as follows:

Third Quarter

Swimwear net revenues increased $2.0 million, or 5.5%, to $38.6 million for
the Third Quarter of Fiscal 2003, from $36.6 million for the Third Quarter of
Fiscal 2002. The increase in swimwear net revenues in the Third Quarter of
Fiscal 2003 primarily reflects earlier shipment of orders in the Third Quarter
of Fiscal 2003 compared to corresponding orders in fiscal 2002 which were
shipped in the fourth quarter. This increase was offset by higher sales
allowance and markdown experience in fiscal 2003 compared to fiscal 2002,
primarily as a result of the elimination of certain reserves in the Third
Quarter of Fiscal 2002 which were no longer required. The decrease in retail net
revenues is primarily due to the closing of 50 stores in fiscal 2002 coupled
with a decrease in same store sales of 1.1%.

Nine Months

Swimwear net revenues increased $26.9 million, or 9.8%, to $300.9 million
for the Nine Months Ended October 4, 2003, from $274.0 million for the Nine
Months Ended October 5, 2002. The increase in net revenues reflects a larger
backlog entering the spring 2003 season, new product lines, an expanded customer
base and lower return levels. Speedo net revenues increased $32.5 million, or
20.2%, to $193.0 million for the Nine Months Ended October 4, 2003 compared to
$160.5 million for the Nine Months Ended October 5, 2002. The increase in Speedo
net revenues primarily reflects increased sales of Speedo fitness swim products
and accessories to department stores, clubs and team dealers. In addition,
designer swimwear net revenues increased $4.2 million, or 4.8%, to $90.8 million
for the Nine Months Ended October 4, 2003 compared to $86.6 million for the Nine
Months Ended October 5, 2002 due to favorable reception at retail, primarily of
the Anne Cole line. Speedo Authentic Fitness retail net revenues decreased $9.7
million, or 36.0%, to $17.2 million for the Nine Months Ended October 4, 2003
compared to $26.9 million for the Nine Months Ended October 5, 2002 reflecting
the closed stores noted above and a decrease of 11.5% in same store sales.

GROSS PROFIT

Gross profit is as follows:

Third Quarter

Gross profit decreased $1.7 million, or 1.8%, to $92.6 million (30.5% of net
revenues) for the Third Quarter of Fiscal 2003 from $94.3 million (28.4% of net
revenues) for the Third Quarter of Fiscal 2002. Gross profit for the Third
Quarter of Fiscal 2002 was reduced by $11.1 million of

57

distribution and other product-related expenses that were classified in cost of
goods sold. Commencing February 4, 2003 (the date the Company emerged from
bankruptcy), the Company classifies these items as selling, general and
administrative expenses. To meaningfully compare gross margin for the Third
Quarter of Fiscal 2003 to the Third Quarter of Fiscal 2002, the change in
classification of these expenses should be considered. Adjusting the Third
Quarter of Fiscal 2002 to reflect this change, gross profit decreased $12.8
million for the Third Quarter of Fiscal 2003 compared to the Third Quarter of
Fiscal 2002. The decline in gross profit was primarily due to lower revenues and
associated profit margins with businesses targeted for repair or repositioning
and lower margins generally. Speedo's gross profit also declined relative to the
Third Quarter of Fiscal 2002 because last year's results reflected the
elimination of reserves in the Third Quarter of Fiscal 2002 which were no longer
required.

Intimate Apparel Group gross profit increased $0.7 million, or 1.4%, to
$53.3 million for the Third Quarter of Fiscal 2003 from $52.6 million for the
Third Quarter of Fiscal 2002. The increase in gross profit reflects the change
in classification of certain product-related costs of $4.6 million (as noted
above) partially offset by a less favorable sales mix of $3.9 million. Gross
margin increased from 33.6% for the Third Quarter of Fiscal 2002 to 35.0% for
the Third Quarter of Fiscal 2003. The increase in gross margin includes the
effect of a 2.6% reduction in the rate of sales allowances and returns coupled
with the positive effect of the change in classification offset by the less
favorable sales mix.

Sportswear Group gross profit decreased $2.1 million, or 7.0%, to $27.8
million for the Third Quarter of Fiscal 2003 from $29.9 million for the Third
Quarter of Fiscal 2002. Gross margin increased from 21.6% for the Third Quarter
of Fiscal 2002 to 24.8% for the Third Quarter of Fiscal 2003. The decrease in
gross profit reflects a less favorable sales mix of $13.2 million, primarily
related to lower sales volume, offset by the change in the classification of
certain product-related costs of $5.8 million. The increase in gross margin
reflects the effect of the change in classification and a 2% decrease in the
rate of sales allowances as a percentage of gross revenues. Gross margin was
also adversely affected by an increase in off price sales as a percentage of
total revenues.

Swimwear Group gross profit decreased $0.4 million, or 3.0%, to $11.4
million for the Third Quarter of Fiscal 2003 from $11.8 million for the Third
Quarter of Fiscal 2002, primarily as a result of a less favorable sales mix of
$1.2 million, partially offset by the change in classification of certain
product-related costs of $0.7 million. Gross margin decreased 2.6% primarily as
a result of the less favorable sales mix coupled with a 0.4% increase in the
rate of sales allowances and returns as a percentage of gross revenues.

Nine Months

Gross profit increased $27.8 million, or 8.6%, to $349.9 million (32.9% of
net revenues) for the Nine Months Ended October 4, 2003 from $322.1 million
(29.2% of net revenues) for the Nine Months Ended October 5, 2002. Gross profit
for the Nine Months Ended October 5, 2002 was reduced by $34.4 million of
distribution and other product-related expenses that were classified in cost of
goods sold. Commencing February 4, 2003 (the date the Company emerged from
bankruptcy), the Company classifies these items as selling, general and
administrative expenses. To meaningfully compare gross margin for the Nine
Months Ended October 4, 2003 to the Nine Months Ended October 5, 2002, the
change in classification of these expenses should be considered. Adjusting the
Nine Months Ended October 5, 2002 to reflect this change, gross profit decreased
$6.6 million for the Nine Months Ended October 4, 2003 compared to the Nine
Months Ended October 5, 2002. The decline in gross profit primarily reflects
lower sales volume.

Intimate Apparel Group gross profit increased $7.3 million, or 4.8%, to
$159.8 million for the Nine Months Ended October 4, 2003 from $152.5 million for
the Nine Months Ended October 5, 2002. Gross margin increased from 32.1% for the
Nine Months Ended October 5, 2002 to 36.5% for the Nine Months Ended October 4,
2003. The increase in gross profit and gross margin reflects the change in
classification discussed above and favorable production and manufacturing
variances

58

aggregating $24.8 million, offset primarily by a less favorable sales mix of
$17.5 million and a reduction in sales volume.

Sportswear Group gross profit increased $1.1 million, or 1.4%, to $79.4
million for the Nine Months Ended October 4, 2003 from $78.3 million for the
Nine Months Ended October 5, 2002. Gross margin increased from 22.0% for the
Nine Months Ended October 5, 2002 to 24.6% for the Nine Months Ended October 4,
2003. The increase in gross profit reflects the change in classification of
certain product-related costs and favorable manufacturing and production
variances aggregating $24.7 million, partially offset by a less favorable sales
mix of $23.6 million. In addition, the Sportswear Group experienced a 1.2%
reduction in the rate of sales allowances and returns as a percentage of gross
revenues during the Nine Months Ended October 4, 2003 compared to the Nine
Months Ended October 5, 2002.

Swimwear Group gross profit increased $19.3 million, or 21.1%, to $110.7
million for the Nine Months Ended October 4, 2003 from $91.4 million for the
Nine Months Ended October 5, 2002. Gross margin increased from 33.4% for the
Nine Months Ended October 5, 2002 to 36.8% for the Nine Months Ended October 4,
2003. The increase in gross profit and gross margin reflects a more favorable
sales mix of $8.4 million as a result of an increase in sales volume and
favorable manufacturing and production variances, combined with the change in
classification of product-related costs noted above aggregating $10.6 million.
The increase in the gross margin also reflects a 0.5% decrease in the rate of
sales allowances and returns as a percentage of gross sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Third Quarter

Selling, general and administrative expenses for the Third Quarter of Fiscal
2003 increased $3.5 million, or 4.1%, to $88.1 million (29.1% of net revenues)
compared to $84.6 million (25.5% of net revenues) for the Third Quarter of
Fiscal 2002. Selling, general and administrative expenses for the Third Quarter
of Fiscal 2003 included certain product related expenses that were included in
cost of goods sold in the Third Quarter of Fiscal 2002. As adjusted for this
change in classification, selling general and administrative expenses declined
$8.0 million compared to the Third Quarter of Fiscal 2002 due primarily to lower
sales volumes, lower depreciation and amortization expense of $4.5 million due
to the revaluation of the Company's fixed and intangible assets at February 4,
2003, and lower selling expenses in the Company's retail stores due to store
closings and reductions in general overhead expenses due to the Company's
ongoing expense management initiatives. These reductions were partially offset
by the inclusion in selling, general and administrative expenses of $2.0 million
of non-cash stock-based compensation expenses related to restricted stock and
stock options granted during fiscal 2003.

Nine Months

Selling, general and administrative expenses for the Nine Months Ended
October 4, 2003 increased $3.9 million, or 1.4%, to $286.3 million (26.9% of net
revenues) compared to $282.4 million (25.6% of net revenues) for the Nine Months
Ended October 5, 2002. Selling, general and administrative expenses for the Nine
Months Ended October 4, 2003 included certain product related costs which were
included in cost of goods sold in the Nine Months Ended October 5, 2002. As
adjusted for this change in classification, selling, general and administrative
expenses declined $30.5 million for the Nine Months Ended October 4, 2003
compared to the Nine Months Ended October 5, 2002. The decline in selling,
general and administrative expenses reflects lower sales volumes, the reduction
in lease expenses of $8.2 million for certain operating leases that were settled
in connection with the Company's bankruptcy, lower depreciation and amortization
expenses of approximately $15.3 million and the Company's expense management
initiatives. These reductions were partially offset by the inclusion in selling,
general and administrative expenses of non-cash stock-based compensation
expenses of $4.4 million related to restricted stock and stock options granted
during fiscal 2003. Selling, general and administrative expenses include $4.2
million of legal and professional fees and certain employee related costs
relating to the Chapter 11 Cases.

59

Comparable expenses in the Nine Months Ended October 5, 2002 were included in
reorganization items.

AMORTIZATION OF SALES ORDER BACKLOG

Using the assistance of a third party appraiser, the Company determined that
the fair value of its order backlog at February 4, 2003 was $12,600. The sales
order backlog was amortized over six months using the straight-line method and
was fully amortized as of October 4, 2003. Amortization of sales order backlog
of $2.0 million and $11.8 million for the Third Quarter of Fiscal 2003 and Nine
Months Ended October 4, 2003, respectively, represents amortization expense of
the appraised value of the Company's existing sales order backlog at
February 4, 2003. Included in the results of discontinued operations for the
Third Quarter of Fiscal 2003 and Nine Months Ended October 4, 2003 is
amortization related to the sales order backlog of the Company's A.B.S by Allen
Schwartz ('ABS') business unit of $133 and $800, respectively.

REORGANIZATION ITEMS

Reorganization items were $29.9 million for the period January 5, 2003 to
February 4, 2003, reflecting the final settlement of bankruptcy claims and lease
terminations of $10.1 million, employee retention and severance claims of $14.5
million, legal and professional fees of $4.5 million and other costs of $0.8
million. Reorganization items for the Nine Months Ended October 5, 2002 were
$79.2 million reflecting the GECC lease settlement of $22.9 million, losses and
write-downs related to sales of fixed assets and sales of business units of
$13.9 million, employee retention and severance of $15.8 million, legal and
professional fees of $20.1 million and lease termination and other costs of $6.5
million.

RESTRUCTURING ITEMS

In the Third Quarter of Fiscal 2003, the Company continued the process of
consolidating its manufacturing and distribution operations in accordance with
the Plan. Included in restructuring charges are accruals for closing and/or
consolidating two sewing plants located in Puerto Cortes, Honduras and Los
Angeles, California, one cutting and warehousing facility in Thomasville,
Georgia, distribution facilities in Secaucus, New Jersey, and Montreal, Canada,
and the consolidation of certain manufacturing operations in France, resulting
in total restructuring charges of $5.2 million and $11.4 million for the Third
Quarter of Fiscal 2003 and the period February 5, 2003 to October 4, 2003,
respectively. Accruals for restructuring items at February 4, 2003 and charges
to the statement of operations for the period February 5, 2003 to October 4,
2003 primarily relate to severance and other benefits payable to approximately
1,463 terminated employees. The Company expects that substantially all payments
to terminated employees will be completed by the end of fiscal 2003. Also
included in restructuring items for the period February 5, 2003 to October 4,
2003 are asset impairment charges related to the write-down to salvage value of
idle plant and machinery at certain of the distribution and manufacturing
facilities and legal

60

expenses primarily related to the shutdown of the manufacturing operations in
France. A summary of restructuring items is as follows:

OPERATING INCOME (LOSS)

The following table presents operating income by group, including
depreciation and amortization expense in each group:

Third Quarter

Operating loss decreased $8.6 million to $2.8 million for the Third Quarter
of Fiscal 2003 compared to an operating loss of $11.4 million for the Third
Quarter of Fiscal 2002. The decrease was primarily due to a decrease of $15.9
million in reorganization and restructuring items from $21.1 million in the
Third Quarter of Fiscal 2002 to $5.2 million in the Third Quarter of Fiscal
2003. The decrease in reorganization and restructuring items was offset by a
decrease in operating income generated by the Company's business groups of $7.5
million and a $2.7 million increase in amortization of intangibles, due
primarily to the amortization of sales order backlog of $2.0 million. The
decrease in corporate expenses of $2.9 million is due primarily to a reduction
in depreciation expense of approximately $3.7 million resulting from adjustments
in the carrying value of the Company's fixed assets to fair value in connection
with the adoption of fresh start reporting on February 4, 2003, offset by an
increase in stock compensation expense of $2.1 million.

Nine Months

Operating income increased $49.9 million to $10.5 million for the Nine
Months Ended October 4, 2003 compared to an operating loss of $39.4 million for
the Nine Months Ended October 5, 2002, primarily reflecting increased operating
income generated by the Company's business groups of $25.8 million and a $37.9
million decrease in reorganization and restructuring items. The $12.9 million
increase in amortization of intangibles reflects the amortization of sales order
backlog of $11.8 million as well as adjustments in the carrying value of the
Company's intangible assets to fair value in connection with the adoption of
fresh start reporting on February 4, 2003. Corporate expenses increased $0.9
million reflecting the recognition of stock compensation expense of $4.4 million
and legal and professional fees and certain employee costs

61

relating to the Chapter 11 Cases of $4.2 million. Comparable expenses in the
Nine Months Ended October 5, 2002 were included in reorganization items. These
increases were partially offset by a reduction in depreciation expense and the
Company's expense management initiatives, as noted above.

Intimate Apparel Group

Intimate Apparel Group operating income is as follows:

Third Quarter

Intimate Apparel Group operating income decreased $1.6 million, or 8.4%, to
$17.0 million (11.2% of net revenues) for the Third Quarter of Fiscal 2003
compared to operating income of $18.6 million (11.8% of net revenues) for the
Third Quarter of Fiscal 2002. The decrease in operating income is primarily
attributable to the $3.6 million decrease in Warner's/Olga/Body Nancy Ganz and
Lejaby operating income partially offset by a $1.7 million increase in the
operating income of Calvin Klein underwear. The decline in operating income of
Warner's/Olga/Body Nancy Ganz primarily reflects the decreased revenue and
associated gross profit resulting from lower sales volume. The increase in
Calvin Klein underwear operating income reflects increased revenues and
associated gross profit as well as the positive effect of a stronger Euro.

Nine Months

The Intimate Apparel Group's operating income increased $8.5 million to
$48.0 million (10.9% of net revenues) for the Nine Months Ended October 4, 2003
compared to operating income of $39.5 million (8.3% of net revenues) for the
Nine Months Ended October 5, 2002. Operating losses from discontinued and sold
units were $0.4 million for the Nine Months Ended October 4, 2003 compared to
$3.8 million for the Nine Months Ended October 5, 2002. The improvement in
operating margin is attributable to the closure of the domestic outlet retail
stores coupled with increased operating margins in Calvin Klein underwear,
partially offset by lower operating margins in Warner's/Olga/Body Nancy Ganz and
Lejaby.

Sportswear Group

Sportswear Group operating income is as follows:

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Third Quarter

Sportswear Group operating income decreased $1.2 million, or 10.4%, to $10.4
million (9.3% of net revenues) for the Third Quarter of Fiscal 2003 compared to
operating income of $11.6 million (8.4% of net revenues) for the Third Quarter
of Fiscal 2002. Calvin Klein jeans operating income decreased $5.8 million
reflecting lower operating margins, an unfavorable mix of off price to regular
sales and the timing of the shipments of certain programs in Calvin Klein jeans
that were shipped in the first quarter of fiscal 2003. Chaps operating income
increased by $3.7 million. The improvement in Chaps operating margin is
attributable to increased gross profit (despite a decrease in net revenues) and
gross profit percentage, coupled with lower selling, general and administrative
expenses.

Nine Months

Sportswear Group operating income increased $2.7 million, or 11.8%, to $26.0
million (8.1% of net revenues) for the Nine Months Ended October 4, 2003
compared to operating income of $23.3 million (6.5% of net revenues) for the
Nine Months Ended October 5, 2002. The improvement in operating margin is
attributable to increased operating margins in Chaps and Calvin Klein
accessories partially offset by lower operating margins in Calvin Klein jeans.
The improvement in Chaps operating margin is attributable to increased gross
profit and gross profit percentage coupled with lower selling, general and
administrative expenses. The decrease in Calvin Klein operating margins reflects
lower sales volumes and an unfavorable mix of off price to regular sales.

Swimwear Group

Swimwear Group operating income (loss) is as follows:

Third Quarter

Swimwear Group operating loss increased $4.7 million, or 121.3%, to $8.6
million (22.2% of net revenues) for the Third Quarter of Fiscal 2003 compared to
an operating loss of $3.9 million (10.6% of net revenues) for the Third Quarter
of Fiscal 2002. The increase in loss reflects lower gross margin percentage,
less favorable sales mix and an increase in the rate of sales allowances and
returns as a percentage of gross revenues.

Nine Months

Swimwear Group operating income increased $14.5 million, or 49.0%, to $44.3
million (14.7% of net revenues) for the Nine Months Ended October 4, 2003
compared to operating income of $29.8 million (10.9% of net revenues) for the
Nine Months Ended October 5, 2002. The increase in Swimwear Group operating
income for the Nine Months Ended October 4, 2003 compared to the Nine Months
Ended October 5, 2002 reflects increased operating margins in the Speedo
business. Increased Speedo operating margin reflects a more efficient
manufacturing and sourcing operation and lower returns and allowances. Swimwear
Group operating income for the Nine Months Ended Fiscal 2002 includes
approximately $2.5 million of bad debt expense primarily associated with certain
Speedo team dealers.

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REORGANIZATION ITEMS -- GAIN ON CANCELLATION OF DEBT AND FRESH START ADJUSTMENTS

The Nine Months Ended October 4, 2003 includes a gain of $1,692.7 million
related to the cancellation of the Company's pre-petition debt and other
liabilities subject to compromise net of the fair value of cash and securities
distributed to the pre-petition creditors. Fresh start adjustments of $765.7
million represent adjustments to the carrying amount of the Company's assets to
fair value in accordance with the provisions of SOP 90-7. See Note 5 of Notes to
the Consolidated Condensed Financial Statements.

INTEREST EXPENSE

During the term of the Chapter 11 Cases, the Company did not accrue interest
on its pre-petition debt and, as a result, the Company's interest expense
consisted of interest on the Debtor-in-Possession Financing Agreement, as
amended and extended (the 'Amended DIP'), and certain foreign debt agreements
subject to standstill agreements that were repaid in connection with the
settlement of the Chapter 11 Cases. As a result of the Company's emergence from
bankruptcy and the issuance of the Second Lien Notes (repaid in connection with
the offering of the Company's 8 7/8% Senior Notes due 2013 (the 'Senior Notes')
issued on June 12, 2003), interest expense for Fiscal 2003 will be higher than
the amounts recorded in Fiscal 2002.

Third Quarter

Interest expense increased $1.7 million, or 39.8%, to $6.0 million for the
Third Quarter of Fiscal 2003 compared with $4.3 million for the Third Quarter of
Fiscal 2002. Interest expense for the Third Quarter of Fiscal 2003 includes
interest of $4.6 million related to the Senior Notes, amortization of deferred
financing costs of $0.5 million and other bank fees and interest of $0.9
million. Interest expense for the Third Quarter of Fiscal 2002 consisted of
amortization of deferred financing costs of $2.2 million, $0.7 million of
interest and fees related to the Amended DIP, $1.7 million related to the
foreign credit facilities repaid as part of the Plan and other interest of $0.1
million. Interest expense was partially offset by interest income of $0.4
million, primarily related to foreign income tax refunds in Europe and interest
income on the Company's cash collateral accounts.

Nine Months

Interest expense increased $3.4 million, or 23.6%, to $17.7 million for the
Nine Months Ended October 4, 2003 from $14.3 million for the Nine Months Ended
October 5, 2002. Interest expense for the Nine Months Ended October 4, 2003
included interest on foreign debt for one month of $1.1 million, interest on the
Second Lien Notes of $6.7 million, interest on the Senior Notes of $5.8 million,
amortization of deferred financing fees of $1.5 million and other interest and
fees of $2.6 million. Interest expense for the Nine Months Ended October 5, 2002
included the amortization of deferred financing costs of $7.0 million related to
fees and charges on the Amended DIP, $4.5 million related to borrowing on the
Amended DIP, interest on foreign debt agreements paid as part of the Plan of
$4.9 million and other interest and fees of $0.8 million. These interest
expenses were partially offset by $2.9 million of interest income 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

Income tax benefit of $1.3 million in the Third Quarter of Fiscal 2003
reflects a benefit of $1.9 million on domestic losses, offset by an income tax
expense of $0.5 million. Income tax expense consists of an income tax expense of
$2.5 million on foreign earnings offset by an income tax benefit of $2.0 million
resulting from a favorable settlement of a foreign tax examination. The
provision for income taxes of $2.6 million during the Third Quarter of Fiscal
2002 consists of taxes

64

on foreign earnings. The increase in the valuation allowance resulted from
adjustments to the preliminary estimates of the fair value of fixed and
intangible assets and to reflect the amount of deferred tax asset that will,
more likely than not, be realized. The decrease in the deferred tax asset
(established during the first quarter of fiscal 2003 for the utilization of
domestic tax losses carried forward for U.S. tax purposes) resulted from a
decrease in the Company's domestic taxable income through the Third Quarter of
Fiscal 2003. The Company has not provided any tax benefit for domestic and
certain foreign losses incurred during the Third Quarter of Fiscal 2003 where it
is more likely than not that the Company will not realize the income tax benefit
for these losses.

Nine Months

The provision for income taxes for the Nine Months Ended October 4, 2003 of
$86.6 million reflects accrued income taxes of $0.9 million on domestic earnings
and an income tax expense of $8.1 million. Income tax expense consists of $10.1
million on foreign earnings, offset by an income tax benefit of $2.0 million
resulting from a favorable settlement of a foreign tax examination, as well as
deferred income taxes of $77.6 million related to the increase in asset values
recorded as part of the Company's adoption of fresh start reporting. The Company
recorded a valuation allowance against the deferred tax assets created in the
Nine Months Ended October 4, 2003 as a result of the fresh start adjustments, as
well as against domestic and certain foreign net operating losses, to the amount
that will, more likely than not, be realized. The provision for income taxes for
the Nine Months Ended October 5, 2002 of $49.8 million reflects accrued income
taxes of $8.0 million on foreign earnings and an increase in our valuation
allowance of $41.8 million associated with impairment losses recorded by the
Company in connection with the adoption of SFAS 142.

DISCONTINUED OPERATIONS

As part of the Company's ongoing restructuring activities, in October 2003,
the Company entered into an agreement to sell its ABS business unit for $15
million in cash and the assumption of $2 milion in liabilities. The sale is
expected to be finalized in the first quarter of fiscal 2004. In addition,
during the Third Quarter of Fiscal 2003, the Company determined that it will not
be seeking lease renewals for five Speedo/Authentic Fitness retail stores. The
operating lease rental agreements on these stores will expire during the first
quarter of 2004.

ABS and the five Speedo/Authentic Fitness retail stores have been accounted
for as discontinued operations in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ('SFAS 144'). Accordingly, the
results of operations, assets and liabilities of these business units are
separately presented in the accompanying consolidated condensed financial
statements. Prior to accounting for ABS and the five Speedo/Authentic Fitness
retail stores as discontinued operations, the results of operations, assets and
liabilities of these business units were included in the results of operations,
assets and liabilities of the Sportswear and Swimwear segments, respectively.

Summarized operating results for the discontinued operations are as follows:

Summarized assets and liabilities of the discontinued operations at October
4, 2003 are presented in the consolidated condensed balance sheet as follows:

65

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 142 effective January 6, 2002. Under the
provisions of SFAS 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 engaged an independent third party appraisal
firm to assist in its determination of the Company's business enterprise value
('BEV') in connection with the preparation of the Plan. The Company allocated
the BEV to its various reporting units and determined that the value of certain
of its 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 142 on January 6, 2002.

CAPITAL RESOURCES AND LIQUIDITY

FINANCING ARRANGEMENTS

Senior Notes

On June 12, 2003, Warnaco Inc. ('Warnaco') completed the sale of $210.0
million Senior Notes at par. The Senior Notes mature on June 15, 2013. The
Senior Notes bear interest at 8 7/8% payable semi-annually beginning
December 15, 2003. The Senior Notes are unconditionally guaranteed, jointly and
severally, by Warnaco Group and substantially all of Warnaco's domestic
subsidiaries (all of which are 100% owned, either directly or indirectly, by
Warnaco). The Senior Notes are effectively subordinate in right of payment to
existing and future secured debt (including the Company's $275.0 million Senior
Secured Revolving Credit Facility (the 'Exit Financing Facility') and to the
obligations (including trade accounts payable) of the subsidiaries that are not
guarantors of the Senior Notes. The guarantees of each guarantor are effectively
subordinate to that guarantor's existing and future secured debt (including
guarantees of the Exit Financing Facility) to the extent of the value of the
assets securing that debt. There are no restrictions that prevent the guarantor
subsidiaries from transferring funds or paying dividends to Warnaco. The
indenture pursuant to which the Senior Notes were issued contains covenants
which, among other things, restrict the Company's ability to incur additional
debt, pay dividends and make restricted payments, create or permit certain
liens, use the proceeds of sales of assets and subsidiaries' stock, create or
permit restrictions on the ability of certain of Warnaco's subsidiaries to pay
dividends or make other distributions to Warnaco or to Warnaco Group, enter into
transactions with affiliates, engage in certain business activities, engage in
sale and leaseback transactions and consolidate or merge or sell all or
substantially all of its assets. The Company was in compliance with the
covenants of the Senior Notes at October 4, 2003. Redemption of the Senior Notes
prior to their

66

maturity is subject to premiums as set forth in the indenture. Proceeds from the
sale of the Senior Notes were used to repay the outstanding principal balance on
the Second Lien Notes of $200.9 million and accrued interest thereon of $2.0
million. The proceeds were also used to pay underwriting fees, legal and
professional fees and other expenses associated with the offering in an
aggregate amount of approximately $7.1 million. In connection with the offering
of the Senior Notes, the Company entered into a registration rights agreement
with the initial purchasers of the Senior Notes. The registration rights
agreement grants the holders of the Senior Notes certain exchange and
registration rights that required the Company to file a registration statement
with the SEC within 60 days after the issuance of the Senior Notes. If, within
the time periods specified in the registration rights agreement, the Company is
unable to complete a registration and exchange of the Senior Notes or,
alternatively, cause to be declared effective a shelf registration statement for
the resale of the Senior Notes, the Company will be required to pay special
interest to the holders of the Senior Notes. Special interest will accrue at a
rate of 0.25% per annum during the 90-day period immediately following the
occurrence of a registration default and will increase by 0.25% per annum at the
end of each subsequent 90-day period, but in no event shall exceed 1.0% per
annum. The Company filed the required registration statement on August 8, 2003.
No principal payments prior to the maturity date are required.

Interest Rate Swap Agreement

On September 18, 2003, the Company entered into an interest rate swap
agreement with respect to the Company's Senior Notes for a total notional amount
of $50,000. The swap provides that the Company will receive interest at 8 7/8%
and pay a variable rate of interest based upon six month London Interbank
Offered Rate ('LIBOR') plus 4.11% (5.27% at October 4, 2003). As a result of the
swap, the weighted average effective interest rate of the Senior Notes was
reduced to 8.02% as of October 4, 2003. The swap agreement expires on June 15,
2013 (the date on which the Senior Notes mature). The Company designated the
swap a fair value hedge of the changes in fair value of $50,000 aggregate
principal amount of the $210,000 aggregate principal amount of Senior Notes
outstanding. As of October 4, 2003, the fair value of the swap agreement was a
loss of $173, which is offset by a corresponding gain on the hedged debt. No
hedge ineffectiveness is recognized in the consolidated condensed statement of
operations, as the provisions of the swap match the provisions of the hedged
debt.

Exit Financing Facility

On the Effective Date, the Company entered into the $275.0 Exit Financing
Facility. The Exit Financing Facility provides for a four-year, non-amortizing
revolving credit facility. The Exit Financing Facility includes provisions that
allow the Company to increase the maximum available borrowing from $275.0
million to $325.0 million, subject to certain conditions (including obtaining
the agreement of existing or new lenders to commit to lend the additional
amount). Borrowings under the Exit Financing Facility bear interest at Citibank
N.A.'s base rate plus 1.50% (5.50% at October 4, 2003) or at LIBOR plus 2.50%
(approximately 3.65% at October 4, 2003). The Company purchases LIBOR contracts
when it expects borrowing to be outstanding for more than 30 days. The remaining
balances bear interest at the base rate plus 1.50%. Pursuant to the terms of the
Exit Financing Facility, the interest rate the Company will pay on its
outstanding loans will decrease by as much as 0.5% in the event the Company
achieves certain defined ratios. The Exit Financing Facility contains financial
covenants that, among other things, require the Company to maintain a fixed
charge coverage ratio above a minimum level and a leverage ratio below a maximum
level and to limit the amount of the Company's capital expenditures. In
addition, the Exit Financing Facility contains certain covenants that, among
other things, limit investments and asset sales, prohibit the payment of
dividends (subject to limited exceptions) and prohibit the Company from
incurring material additional indebtedness. As of October 4, 2003, the Company
was in compliance with the covenants of the Exit Financing Facility. Initial
borrowings under the Exit Financing Facility on the Effective Date were $39.2
million. The Exit Financing Facility is guaranteed by Warnaco Group and
substantially all of the domestic subsidiaries of Warnaco and the obligations
under such guarantee, together with the Company's obligations under the Exit

67

Financing Facility, are secured by a lien on substantially all of the domestic
assets of the Company and its domestic subsidiaries. As of October 4, 2003 the
Company had repaid all amounts owing under the Exit Financing Facility and had
approximately $25.0 million of cash available as collateral against outstanding
letters of credit of $60.3 million. At October 4, 2003, the Company had $151.3
million of credit available under the Exit Financing Facility.

On November 12, 2003, the Company's lenders approved an amendment to the
Exit Financing Facility to modify certain definitions and covenants and to
permit certain asset sales, permit the use of cash balances to fund acquisitions
and allow the Company to repurchase up to $10 million of the Company's
outstanding Senior Notes after June 30, 2004.

Second Lien Notes

In accordance with the Plan, on the Effective Date, the Company issued
$200.9 million Second Lien Notes to certain pre-petition creditors and others in
a transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the 'Securities Act'), pursuant to Section 1145(a) of the
Bankruptcy Code. The Second Lien Notes were scheduled to mature on February 4,
2008, subject to, in certain instances, earlier repayment in whole or in part.
The Second Lien Notes bore an annual interest rate which was the greater of
(i) 9.5% plus a margin (initially 0%, and beginning on August 4, 2003, 0.5%
would have been added to the margin every six months); and (ii) LIBOR plus 5.0%
plus a margin (initially 0%, and beginning on August 4, 2003, 0.5% would have
been added to the margin every six months). The indenture pursuant to which the
Second Lien Notes were issued contained certain covenants that, among other
things, limited investments and asset sales, and prohibited the Company from
paying dividends (subject to limited exceptions) and incurring material
additional indebtedness. The Second Lien Notes were guaranteed by most of the
Company's domestic subsidiaries and the obligations under such guarantee,
together with the Company's obligations under the Second Lien Notes, were
secured by a second priority lien on substantially the same assets which secured
the Exit Financing Facility. The Second Lien Notes were payable in equal annual
installments of $40.2 million beginning in April 2004 through April 2008. Second
Lien Note principal payments could only be made if the Company achieved a
defined fixed charge coverage ratio and had additional borrowing availability,
after the principal payment, of $75 million or more under the Exit Financing
Facility.

On June 12, 2003, the Company repaid all outstanding principal and accrued
interest on the Second Lien Notes of $202.9 million with the proceeds from the
Company's offering of the Senior Notes.

LIQUIDITY

The Company emerged from bankruptcy on February 4, 2003. Initial borrowings
under the Exit Financing Facility were $39.2 million on February 4, 2003, all of
which had been repaid by October 4, 2003. As of October 4, 2003, the Company had
$25.0 million of cash available to collateralize $60.3 million of letters of
credit outstanding.

At October 4, 2003, debt had decreased $35.3 million to $211.2 million from
$246.5 million at February 4, 2003 (the date the Company emerged from
bankruptcy). Cash at October 4, 2003 had increased $23.2 million to $43.9
million from $20.7 million at February 4, 2003. The decrease in debt and
increase in cash reflects strong cash flow from operations in the period
February 5, 2003 to October 4, 2003.

During fiscal 2002, the Company operated under the provisions of the
Bankruptcy Code, which directly affected its cash flows. Operating under the
protection of the Bankruptcy Court, the Company made improvements in its
operations and sold certain assets, thereby improving its cash position
subsequent to June 11, 2001 through February 4, 2003. The Company was not
permitted to pay any pre-petition liabilities without prior approval of the
Bankruptcy Court, including interest or principal on its pre-petition debt
obligations. The Company had $2,486 million of pre-petition liabilities
outstanding at January 4, 2003, including $349.7 million of trade drafts and

68

$164.8 million of accounts payable and accrued liabilities. From June 11, 2001
through January 4, 2003, the Company sold certain personal property, certain
owned buildings and land and other assets for $36.2 million, including $23.2
million from the sale of inventory associated with its closed outlet retail
stores. 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. The Amended DIP terminated on
February 4, 2003.

In addition, during the first quarter of fiscal 2002, the Company sold the
businesses and substantially all of the assets of GJM and Penhaligon's. The
sales of GJM and Penhaligon's generated aggregate net proceeds of $20.5 million
and an aggregate net loss of $2.9 million. 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 were 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 (subsequently returned
in June 2002) for the benefit of pre-petition secured lenders ($9.4 million);
and (iv) create an escrow fund (subsequently returned to the Company in February
2003) for the benefit of the purchasers of GJM and Penhaligon's for potential
indemnification claims and for any working capital valuation adjustments ($1.7
million).

At October 4, 2003, the Company had working capital of $373.8 million
including $43.9 million of cash.

Since the filing of the Company's Annual Report on Form 10-K for fiscal
2002, other than the financial commitments in connection with the sale of the
$210.0 million Senior Notes, there have been no material changes to the
Company's financial commitments that may require the use of funds. The Company
believes that the credit available under the Exit Financing Facility combined
with cash flows to be generated by operations will be sufficient to fund the
Company's operating and capital expenditures requirements for at least the next
two to four years. If the Company requires additional sources of capital it will
consider reducing its capital expenditures, seeking additional financing or
selling assets to meet such requirements.

CASH FLOWS

The following discussion of cash flows includes cash flows for the period
January 5, 2003 to February 4, 2003 combined with cash flows for the period
February 5, 2003 to October 4, 2003 in order to provide comparison to the Nine
Months Ended October 5, 2002. The following table summarizes the cash flows from
the Company's operating, investing and financing activities for the Nine Months
Ended October 4, 2003 and the Nine Months Ended October 5, 2002:

For the Nine Months Ended October 4, 2003, cash provided by operating
activities was $50.6 million compared to $203.2 million in the Nine Months Ended
October 5, 2002. Cash provided by operating activities for the Nine Months Ended
October 4, 2003 reflects positive net income, improvements in accounts
receivable and inventory management partially offset by the seasonal reduction
in accounts payable primarily related to the purchase of swimwear inventory.
Cash provided by operating activities in the Nine Months Ended October 5, 2002
reflects the disposal of excess and obsolete inventory and the collection of old
accounts receivable accomplished as part of

69

the Company's turnaround plan in fiscal 2002 as well as the sale of inventory
related to the closing of the Company's domestic outlet retail stores. For the
Nine Months Ended October 4, 2003, cash used in investing activities was $12.7
million compared to cash provided from investing activities of $22.3 million in
the Nine Months Ended October 5, 2002. During the Nine Months Ended October 4,
2003 cash used in investing activities primarily reflects the purchase of
property, plant and equipment. Cash provided by investing activities during the
Nine Months Ended October 5, 2002 includes proceeds from the sales of the GJM
and Penhaligon's business units of $20.6 million and proceeds from the sale of
other assets of $9.8 million partially offset by capital expenditures of $8.1
million.

Cash used in financing activities for both the Nine Months Ended October 5,
2002 and the Nine Months Ended October 4, 2003 primarily reflects the repayment
of amounts outstanding on the Company's revolving credit agreements. Financing
activities for the Nine Months Ended October 4, 2003 include the realization of
gross proceeds of $210.0 million from the issuance of the Senior Notes in June
2003 offset by the repayment of the principal balance of the Second Lien Notes
of $200.9 million, and the payment of underwriting and professional fees
associated with the issuance of the Senior Notes of approximately $7.1 million.
Cash used in financing activities for the period January 5, 2003 to February 4,
2003 includes the payment of outstanding amounts on certain foreign debt
agreements of $106.1 million in connection with the Company's emergence from
bankruptcy on February 4, 2003 partially offset by initial borrowings of $39.2
million under the Exit Financing Facility.

As of October 4, 2003, the Company had repaid all amounts outstanding under
the Exit Financing Facility and had approximately $25.0 million of cash
available as collateral against outstanding letters of credit of $60.3 million.
Cash in operating accounts primarily represents lockbox 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.

Pursuant to the terms of the Plan, the Company distributed $106.1 million of
cash to its pre-petition secured creditors on February 4, 2003. The source of
the cash distribution was excess cash on hand of $75.5 million and borrowing of
$39.2 million under the Exit Financing Facility. The Company also made $8.6
million of cash distributions for various administrative claims and expenses,
including bank fees associated with the Exit Financing Facility.

NEW ACCOUNTING STANDARDS

In November 2002, the Financial Accounting Standards Board (the 'FASB')
issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
('FIN 45'). This interpretation requires certain disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that the Company has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 are effective for interim and annual periods beginning
after December 15, 2002. The initial recognition and initial measurement
requirements of FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have an effect
on the Company's consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ('SFAS 149'). FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities
('SFAS 133') and No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, establish accounting and reporting standards for
derivative instruments including derivatives embedded in other contracts
(collectively referred to as 'derivatives') and for hedging activities.
SFAS 149 amends SFAS 133 for certain decisions made by the FASB as part of the
Derivatives Implementation Group process. This statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements, and FASB Statements No. 65, Accounting
for Certain Mortgage Banking Activities, No. 91, Accounting for Nonrefundable
Fees and Costs

70

Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from Certain
Required Disclosures about Financial Instruments for Certain Nonpublic Entities.
The provisions of SFAS 149 are effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 did not have a material effect on
the Company's consolidated financial statements.

During May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
('SFAS 150'). SFAS 150 clarifies the accounting for certain financial
instruments that could previously be accounted for as equity. SFAS 150 requires
those instruments be classified as liabilities in statements of financial
position and is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 did not
have a material effect on the Company's consolidated financial statements.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This Quarterly Report may contain 'forward-looking statements' within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, that reflect, when made, the Company's expectations or beliefs concerning
future events that involve risks and uncertainties, including general economic
conditions affecting the apparel industry, changing fashion trends, pricing
pressures which may cause the Company to lower its prices, increases in the
prices of raw materials the Company uses, changing international trade
regulation and elimination of quotas on imports of textiles and apparel, the
Company's history of losses, the changes in the Company's senior management
team, the Company's ability to protect its intellectual property rights, the
Company's dependency on a limited number of customers, the Company's dependency
on the reputation of its brand names, the Company's exposure to conditions in
overseas markets, the competition in the Company's markets, the Company's recent
emergence from bankruptcy, the comparability of financial statements for periods
before and after the Company's adoption of fresh start accounting, the Company's
history of insufficient disclosure controls and procedures and internal controls
and restated financial statements, the Company's future plans concerning
guidance regarding its results of operations, the effect of the SEC's
investigation, the effect of local laws and regulations, shortages of supply of
sourced goods or interruptions in the Company's manufacturing the Company's
level of debt, the Company's ability to obtain additional financing, the
restrictions on the Company's operations imposed by the Exit Financing Facility
and the indenture governing the Senior Notes and the Company's ability to
service its debt. All statements other than statements of historical facts
included in this Quarterly Report, including, without limitation, the statements
under Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. These forward-looking statements may contain the words
'believe,' 'anticipate,' 'expect,' 'estimate,' 'project,' 'will be,' 'will
continue,' 'will likely result,' or other similar words and phrases.
Forward-looking statements and the Company's plans and expectations are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from those anticipated, and the Company's business in general is
subject to certain risks that could affect the value of its 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.

INTEREST RATE RISK

The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. As of October 4, 2003, the
Company did not have any

71

borrowings outstanding under the Exit Financing Facility, however, if the
initial borrowing of $39.2 million at February 4, 2003 had been outstanding for
the entire Third Quarter and Nine Months Ended October 4, 2003, a hypothetical
adverse change in interest rates of 100 basis points as of February 4, 2003
(i.e., an increase from the Company's actual interest rate of 3.65% at
October 4, 2003 to 4.65%) would have resulted in an increase of approximately
$0.1 million and $0.3 million in interest expense for the Third Quarter and Nine
Months Ended October 4, 2003, respectively. A 1% change in interest rates would
not have had any effect on interest related to the Second Lien Notes or the
Senior Notes, as the minimum interest rate on the Second Lien Notes was
significantly higher than current variable interest rate plus the applicable
margin and the interest rate on the Senior Notes is fixed. See Note 16 of Notes
to Consolidated Condensed Financial Statements.

In September 2003 the Company entered into an interest rate swap,
effectively converting $50 million of its fixed rate Senior Notes to variable
rate debt. By entering into the swap agreement the Company agreed to exchange
the difference between the fixed and variable interest rates on the $50 million
notional amount semi-annually. The interest rate swap outstanding on October 4,
2003 meets the requirements of SFAS 133 as a fair value hedge of an aggregate
principal amount of $50 million of the Company's outstanding Senior Notes.
Accordingly, gains and losses arising from the swap are completely offset
against gains or losses on the Senior Notes. The fair value loss on the interest
rate swap on October 3, 2003 was $0.2 million based on quoted market prices. The
swap expires in June 2013. A hypothetical adverse change in interest rates of
100 basis points as of October 4, 2003 (i.e., an increase from the Company's
actual interest rate of 5.27% to 6.27%) would result in an increase in interest
expense of $0.5 million, on an annualized basis, related to the notional amount
of $50 million.

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 4, 2003, the Company had no such
financial instruments outstanding.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.

(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

The Company's independent auditors, Deloitte & Touche LLP ('Deloitte') had
advised the Company's management and its Audit Committee of certain 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.

72

Beginning in fiscal 2001 and continuing through fiscal 2002, the Company
took corrective actions including replacing certain financial staff, hiring
additional financial staff and instituting monthly and quarterly reviews to
ensure timely and consistent application of accounting principles and procedures
and transaction review and approval procedures.

In connection with the audit of the Company's consolidated financial
statements for fiscal 2002, Deloitte did not advise management or the Audit
Committee of any material weaknesses or reportable conditions related to the
Company's internal controls or its operations.

73

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item 1 of Part II is incorporated herein by
reference to Part I, Item 1. Financial Statements Note 21 -- 'Legal Matters.'

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The information required by this Item 2 of Part II is incorporated herein by
reference to the discussion of 'Chapter 11 Cases' in Part I, Item 1. Financial
Statements Note 1 -- 'Nature of Operations and Basis of Presentation.'

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

- ---------

* Previously filed.
'D' Filed herewith.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.

(b) Reports on Form 8-K

On July 8, 2003, the Company filed a Current Report on Form 8-K dated
July 8, 2003. The Report on Form 8-K reported at Item 5 that the Company issued
a press release announcing that it had elected Sheila A. Hopkins to its Board of
Directors, effective July 7, 2003.

On August 11, 2003, the Company filed a Current Report on Form 8-K dated
August 11, 2003. The Report on Form 8-K reported at Item 12 that the Company
issued a press release announcing first half and second quarter results for the
period ended July 5, 2003.

On September 15, 2003, the Company filed a Current Report on Form 8-K dated
September 15, 2003. The Report on Form 8-K reported at Item 5 that the Company
issued a press release announcing that it had named Lawrence Rutkowski as Senior
Vice President and Chief Financial Officer.

On September 22, 2003, the Company filed a Current Report on Form 8-K dated
September 22, 2003. The Report on Form 8-K reported at Item 9 that the Company
issued a press release announcing it had amended its existing license agreement
with Polo/Ralph Lauren Corporation for the Chaps line of men's sportswear.

On November 12, 2003, the Company filed a Current Report on Form 8-K dated
November 12, 2003. The Report on Form 8-K reported at Item 12 that the Company
issued a press release announcing its financial results for the third quarter
and year-to-date period ended October 4, 2003.

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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 18, 2003 /s/ JOSEPH R. GROMEK
.............................................
JOSEPH R. GROMEK
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: November 18, 2003 /s/ LAWRENCE R. RUTKOWSKI
.............................................
LAWRENCE R. RUTKOWSKI
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

76

EXHIBIT INDEX

- ---------

* Previously filed.
'D' Filed herewith.
# Certain information omitted pursuant to a request for
confidential treatment filed separately with the Securities
and Exchange Commission.

77

STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as................................. 'TM'
The registered trademark symbol shall be expressed as...................... 'c'
The section symbol shall be expressed as................................... 'SS'
The dagger symbol shall be expressed as.................................... 'D'