ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
The Warnaco Group, Inc. (the 'Company') a Delaware corporation was organized in 1986 for the purpose of acquiring the outstanding shares of Warnaco Inc. ('Warnaco'). As a result of the Company's acquisition of Warnaco, Warnaco became a wholly-owned subsidiary of the Company.
The Company and its subsidiaries design, manufacture and market a broad line of women's intimate apparel, such as bras, panties, sleepwear, shapewear and daywear; men's apparel, such as sportswear, jeanswear, khakis, underwear and accessories, women's and junior's apparel, such as sportswear and jeanswear and active apparel, such as swimwear, swim accessories and fitness apparel all of which are sold under a variety of internationally recognized owned and licensed brand names. During fiscal 1999, the Company acquired Authentic Fitness Corporation ('Authentic Fitness') which designs, manufactures and markets swimwear, swim accessories and active fitness apparel under the Speedo'r', Speedo Authentic Fitness'r', Catalina'r', Anne Cole'r', Cole of California'r', Ralph Lauren'r', Polo Sport Ralph Lauren'r', Polo Sport-RLX'r', Lauren/Ralph Lauren'r', Ralph/Ralph Lauren'r', Oscar de la Renta'r', Sunset Beach'r', and Sandcastle'r' brand names and activewear and swimwear under the White Stag'r' brand name. In fiscal 1999, the Company also acquired Penhaligon's Ltd., a United Kingdom based retailer of perfumes, soaps, toiletries and other products for men and women; IZKA'r', a French retailer of seam-free and seamless women's intimate apparel products; A.B.S. by Allen Schwartz'r', a leading contemporary designer of casual sportswear and dress lines, sold through better department and specialty stores and Chaps Canada, the Canadian Chaps licensee for men's sportswear. In 1999, the Company also entered into an exclusive license agreement with Weight Watchers International, Inc., ('Weight Watchers') to market shapewear and activewear for the mass market under the Weight Watchers'r' label, successfully launching its Shapewear line in June 1999. During fiscal 1998, the Company acquired the sub-license to produce Calvin Klein'r' jeans and jeans-related products for children in the United States, Mexico and Central and South America. The Company also acquired the sub-license to distribute Calvin Klein jeans, jeans-related products and khakis for men and women in Mexico, Central America and Canada. In addition, the Company discontinued several underperforming product lines and styles. During fiscal 1997, the Company acquired Designer Holdings Ltd. ('Designer Holdings'), which develops, manufactures and markets designer jeanswear and sportswear for men, women and juniors, and holds a 40-year extendable license from Calvin Klein, Inc. to develop, manufacture and market designer jeanswear, khakis and jeans related sportswear collections in North, South and Central America under the Calvin Klein Jeans'r', CK/Calvin Klein Jeans'r' and CK/Calvin Klein/Khakis'r' labels.
The Company's strategy is to continue to capitalize on its highly recognized brand names worldwide while broadening its channels of distribution and improving manufacturing efficiencies and cost controls. The Company attributes the strength of its brand names to the quality, fit and design of its products which have developed a high degree of consumer loyalty and a high level of repeat business. The Company operates in three business segments, Intimate Apparel, Sportswear and Accessories and Retail Stores, which accounted for 35.9%, 54.5%, and 9.6%, respectively, of net revenues in fiscal 2000, and 32.4%, 52.9%, and 14.7%, respectively, of the Company's gross profit before charges for the same period.
The Intimate Apparel Division designs, manufactures, imports and markets moderate to premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin Klein'r', Lejaby'r', Van Raalte'r', Weight Watchers'r', Fruit of the Loom'r' and Bodyslimmers'r' brand names. In addition, the Intimate Apparel Division designs, manufactures, imports and markets men's underwear under the Calvin Klein brand name. The Intimate Apparel Division is the leading marketer of Intimate Apparel to department and specialty stores in the United States, as measured by the NPD Group, Inc. ('NPD'), accounting for 35.7% of the women's bra, 26.2% of panty and 20.9% of shapewear market shares in the 2000 calendar year. The Warner's and Olga brand names, which are owned by the Company, have been in business for 127 and 60 years, respectively. All of the Company's Intimate Apparel brands are owned with the exception of Fruit of the Loom bras and Weight Watchers, which are licensed.
The Intimate Apparel Division's strategy is to increase its channels of distribution and expand its highly recognized brand names worldwide. In February 1996, the Company purchased the GJM Group of Companies ('GJM') from Cygne Designs, Inc. GJM is a private label maker of sleepwear and intimate apparel. The acquisition provided the Company with design, marketing and manufacturing expertise in the sleepwear business, broadening the Company's product line and contributing to the Company's base of low cost manufacturing capacity. In June 1996, the Company purchased Bodyslimmers, which also increased the Company's presence in a growing segment of the intimate apparel market. Bodyslimmers is a leading designer and manufacturer of body slimming undergarments targeted at aging baby boomers. In July 1996, the Company acquired the Lejaby/Euralis Group of Companies ('Lejaby'). Lejaby is a leading maker of intimate apparel in Europe. The Lejaby acquisition increased the size of the Company's operations in Western Europe and provides the Company with an opportunity to expand the distribution of its products in the critical European market.
In 1991, the Company entered into a license agreement with Fruit of the Loom, Inc. for the design, manufacture and marketing of moderate priced bras, daywear and other related items to be distributed through mass merchandisers, such as Wal-Mart and Kmart, under the Fruit of the Loom brand name. This license was renewed by the Company in 1994 and was further extended and renewed in 1998. This license expires at the end of 2001 and the Company has notified Fruit of the Loom, Inc. of its intention not to renew it. In late 1994, the Company purchased the Van Raalte trademark for $1.0 million and launched an intimate apparel line through Sears stores in July 1995. In fiscal 1999, the Company entered into the license agreement with Weight Watchers to design, manufacture and market of shapewear and activewear under the Weight Watchers brand name.
The Sportswear and Accessories Division designs, manufactures, imports and markets moderate to premium priced men's apparel and accessories under the Chaps by Ralph Lauren'r', Calvin Klein and Catalina brand names; better to premium priced women's and junior's apparel under the Calvin Klein and A.B.S. by Allen Schwartz'r' brand names; and moderate to better active apparel under the Speedo, Speedo Authentic Fitness, Catalina, Anne Cole, Cole of California, Ralph Lauren, Polo Sport Ralph Lauren, Polo Sport-RLX, Oscar de la Renta, Sunset Beach and Sandcastle brand names. During fiscal 1999, the Company acquired Authentic Fitness Corporation which designs, manufactures and markets swimwear, swim accessories and active fitness apparel under the above listed brand names and activewear and swimwear under the White Stag brand name. In fiscal 1999, the Company also acquired A.B.S. by Allen Schwartz, a leading contemporary designer of casual sportswear and dress lines, sold through better department and specialty stores and Chaps Canada, the Canadian Chaps licensee for men's sportswear. In December 1997, the Company completed the acquisition of Designer Holdings which develops, manufactures and markets designer jeanswear and jeans related sportswear for men, women and juniors under the Calvin Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis labels. The Calvin Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis brands complement the Company's existing product lines, including Calvin Klein underwear for men and women and Calvin Klein men's accessories. During fiscal 1998, the Company expanded the Calvin Klein jeanswear business by acquiring the sub-license to produce Calvin Klein jeans and jeans-related products for children in the United States, Mexico and Central and South America. In addition, the Company acquired the sub-license to distribute Calvin Klein jeans, jeans-related products and khakis for men and women in Mexico, Central America and Canada. Chaps by Ralph Lauren has increased its net revenues approximately 553% since 1991 from $39.0 million to $254.5 million in 2000, predominantly by expanding product classifications and updating its styles. In 1995, the Company extended its Chaps by Ralph Lauren license through December 31, 2008. The Sportswear and Accessories Division's strategy is to build on the strength of its brand names and eliminate those businesses, which generate a profit contribution below the Company's desired return. Consistent with this strategy, the Company has eliminated several underperforming brands since 1992, including its Hathaway business, which was sold to a group of investors in November 1996.
The Company has expanded its brand names throughout the world by increasing the activities of its wholly-owned operating subsidiaries in Canada, Mexico, Europe and Asia. International operations generated $362.5 million, or 16.1% of the Company's net revenues in fiscal 2000, compared with $338.2 million, or 16.0%, of the Company's net revenues in fiscal 1999, and $319.7 million, or 16.4%, of the Company's net revenues in fiscal 1998.
The Company's business strategy with respect to the outlet stores in its Retail Stores Division is to provide a channel for disposing of the Company's excess and irregular inventory. The Company does not manufacture or source products exclusively for its outlet stores. The Company had 132 outlet stores at the end of fiscal 2000 (including 9 stores in Canada, 15 stores in the United Kingdom, one in France, and one in Spain) compared with 124 stores at the end of fiscal 1999 and 114 stores at the end of fiscal 1998. During fiscal 2000 the Company closed 9 under performing stores and plans to close an additional 18 stores in early 2001. During fiscal 1998, the Company announced plans to close 13 underperforming stores, which were all closed by the second quarter of 1999. As a result of the fiscal 1999 acquisition of Authentic Fitness, the Company operates 135 Speedo Authentic Fitness'r' retail stores. The Company operated 145 Speedo Authentic Fitness stores at the end of 1999. The Company's strategy for its full-price Speedo Authentic Fitness stores is to offer a complete line of Speedo and Speedo Authentic Fitness products that sell throughout the year. The Company plans to close approximately 35 underperforming retail stores in 2001.
In fiscal 1998 and fiscal 1999, the Company invested $7.6 million to acquire a 3% equity interest in Interworld Corporation, a leading provider of E-Commerce software systems and other applications for electronic commerce sites. This investment was sold during the first quarter of fiscal 2000 for approximately $50.4 million, realizing a pre-tax $42.8 million gain.
The Company's products are distributed to over 20,000 customers operating more than 50,000 department, specialty and mass merchandise stores, including such leading retailers in the United States as Dayton-Hudson, Macy's and other units of Federated Department Stores, J.C. Penney, The May Department Stores, Kohl's, Sears, Kmart and Wal-Mart and such leading retailers in Canada as The Hudson Bay Company and Zeller's. The Company's products are also distributed to such leading European retailers as House of Fraser, Harrods, Galeries Lafayette, Au Printemps, Karstadt, Kaufhof and El Corte Ingles, and to leading Mexican retailers such as Palacio De Hierro and Liverpool.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates within three business segments. One customer accounted for 10.2% of the Company's net revenues in one of the three years ended in fiscal 2000. See Note 6 to the Consolidated Financial Statements.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
The Company designs, manufactures and markets a broad line of women's intimate apparel, and men's and women's apparel and accessories sold under a variety of internationally recognized brand names owned or licensed by the Company. The Company operates three divisions, Intimate Apparel, Sportswear and Accessories and Retail Stores, which accounted for 35.9%, 54.5% and 9.6% respectively, of net revenues in fiscal 2000.
INTIMATE APPAREL
The Company's Intimate Apparel Division designs, manufactures, and markets women's intimate apparel, which includes bras, panties, sleepwear, shapewear and daywear. The Company also designs and markets men's underwear. The Company's brands accounted for 35.7% of bra, 26.2% of panty and 20.9% of shapewear market shares in the 2000 calendar year in department and specialty stores in the United States. Management considers the Intimate Apparel Division's primary strengths to include its strong brand recognition, product quality and design innovation, low cost production, strong relationships with department and specialty stores and its ability to deliver its merchandise rapidly. Building on the strength of its brand names and reputation for quality, the Company has historically focused its intimate apparel products on the upper moderate to premium priced range distributed through leading department and specialty stores.
The intimate apparel division markets its lines under the following brand names:
The Company owns the Warner's, Olga, Calvin Klein (underwear and intimate apparel), Lejaby, Bodyslimmers and Van Raalte brand names and trademarks which account for approximately 86.4% of the Company's Intimate Apparel net revenues. The Company licenses the other brand names under which it markets its product lines, primarily on an exclusive basis. The Company also manufactures intimate apparel on a private and exclusive label basis for certain leading specialty and department stores. The Warner's and Olga brands have been in business for 127 years and 60 years, respectively.
In August 1991, the Company entered into an exclusive license agreement with Fruit of the Loom, Inc. for the design, manufacture and marketing of moderate priced bras, which are distributed through mass merchandisers, such as Wal-Mart and Kmart, under the Fruit of the Loom brand name. The license agreement has since been extended to include bodywear, coordinating panties, fashion sleepwear, as well as coordinated fashion sets (bras and panties) and certain control bottoms. The Company began shipping Fruit of the Loom products in June 1992. This agreement with Fruit of the Loom expires in December 2001 and the Company has notified Fruit of the Loom, Inc. of its intention not to renew it.
In March 1994, the Company acquired the worldwide trademarks, rights and business of Calvin Klein men's underwear, and effective January 1, 1995, the worldwide trademark, rights and business of Calvin Klein women's intimate apparel. The purchase price was approximately $60.9 million and consisted of cash payments of $33.1 million in fiscal 1994, $5.0 million in fiscal 1995 and the issuance of 1,699,492 shares of the Company's common stock with a then fair market value of $22.8 million for such shares. Since that time, the Company has acquired the business of several former international licensees and distributors of Calvin Klein underwear products including those in Canada, Germany, Italy, Portugal, Scandinavia and Spain. In addition, in 1994 the Company entered into an exclusive worldwide license agreement to produce men's accessories and small leather goods under the Calvin Klein label. The Calvin Klein underwear brand accounted for net revenues of $293.5 million in fiscal 2000, a decrease of 11.4% from the $331.1 million recorded in fiscal 1999, due primarily to women's sleepwear sales in the U.S. market.
In fiscal 1996, the Company acquired GJM, a private label maker of sleepwear and intimate apparel. The acquisition provided the Company with design, marketing and manufacturing expertise in the sleepwear business, broadening the Company's product line and contributing to the Company's base of low cost manufacturing capacity. In June 1996, the Company purchased Bodyslimmers, a leading designer and manufacturer of body slimming undergarments targeted at aging baby boomers. The purchase of Bodyslimmers increased the Company's presence in a growing segment of the intimate apparel market. In July 1996, the Company acquired Lejaby. Lejaby is a leading maker of intimate apparel in Europe. The Lejaby acquisition increased the size of the Company's operations in Western Europe and provides the Company with an opportunity to expand the distribution of its products, including Calvin Klein, in the critical European market. These three divisions contributed $168.6 million in net revenues for fiscal 2000, or 20.9% of the Company's Intimate Apparel net revenues, compared to $196.3 million or 20.8% of the Company's Intimate Apparel net revenue in fiscal 1999. In fiscal 1999, the Company entered into the Weight Watchers license agreement, generating $9.9 million of net revenue in fiscal 2000.
The Company attributes the strength of its brands to the quality, fit and design of its intimate apparel, which has developed a high degree of customer loyalty and a high level of repeat business. The Company believes that it has maintained its leadership position, in part, through product innovation with accomplishments such as introducing the alphabet bra (A, B, C and D cup sizes), the first all-stretch bra, the body stocking, the use of two way stretch fabrics, seamless molded cups for smooth look bras, the cotton-Lycra bra and the sports bra. The Company also introduced the use of hangers and certain point-of-sale hang tags for in-store display of bras, which was a significant change from marketing bras in boxes, and enabled women, for the first time, to see the product in the store. The Company's product innovations have become standards in the industry.
The Company believes that over the past several years a shift in consumer attitudes has stimulated growth in the intimate apparel industry. Women increasingly view intimate apparel as a fashion-oriented purchase rather than as a purchase of a basic necessity. The shift was driven by the expansion of intimate apparel specialty stores and catalogs, and an increase in space allocated to intimate apparel by department stores. The Company believes that it is well-positioned to benefit from any further increased demand for intimate apparel due to its reputation for forward-looking design, quality, fit and fashion and to the breadth of its product lines at a range of price points. Over the past five years, the Company has further improved its position by continuing to introduce new products under its Warner's and Olga brands in the better end of the market, by obtaining the license from Weight Watchers to produce shapewear and activewear, by acquiring the Calvin Klein trademarks for premium priced women's intimate apparel and better priced men's underwear, by purchasing the Van Raalte trademark for introduction of an intimate apparel line through Sears stores in July 1995, and by making strategic acquisitions to expand product lines and distribution channels such as GJM, Lejaby and Bodyslimmers in 1996. The Company has further improved its position by continuing to strengthen its relationships with its department store; specialty store and mass merchandise customers.
The Intimate Apparel Division's net revenues have increased at a compound annual growth rate of 10.1% since 1991, to $806.8 million in fiscal 2000, as the Company has made acquisitions, increased its penetration with existing accounts, expanded sales to new customers such as Van Raalte to Sears and Weight Watchers to mass merchandisers such as Wal-Mart and Kmart and broadened its product lines. The Company believes that it is one of the lowest-cost producers of intimate apparel in the United States, producing nearly six million dozen intimate apparel products per year.
The Company also sees opportunities for continued growth in the Intimate Apparel Division for bras specifically designed for the 'full figure' market, as well as in its panty and daywear product lines. To meet the needs of the customer profile of this market, the Company acquired Bodyslimmers in June 1996 to provide important brand name recognition in this growing segment of the intimate apparel market for department and specialty stores. It also entered into a license agreement with Weight Watchers to market shapewear for the mass market, and in June 1999 began shipping product.
The Intimate Apparel Division has subsidiaries in Canada and Mexico in North America, in the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria, Switzerland and Germany in Europe, in Costa Rica, the Dominican Republic and Honduras in Central America and in the Philippines, Sri Lanka, the People's Republic of China (including Hong Kong) and Japan in Asia. International sales accounted for approximately 32.0% of the Intimate Apparel Division's net revenues in fiscal 2000 compared with 28.7% in fiscal 1999 and 31.1% in fiscal 1998. The Company has acquired the businesses of several former distributors and licensees of its Calvin Klein underwear products in previous years, including those in Canada, Germany, Italy, Portugal, Scandinavia and Spain. The Company's objective in acquiring its former licensees and distributors is to expand its business in foreign markets through a coordinated set of product offerings, marketing and pricing strategies and by consolidating distribution to obtain economies of scale. Net revenues attributable to the international divisions of the Intimate Apparel Division were $257.8 million, $270.9 million and $282.9 million in fiscal 2000, 1999 and 1998, respectively. Management's strategy is to increase its market penetration in Europe, Latin America and Asia and to open additional channels of distribution.
The Company's intimate apparel products are manufactured principally in the Company's facilities in North America, Central America, the Caribbean Basin, France, Ireland, Morocco (joint venture), the Philippines, Sri Lanka and the People's Republic of China (joint venture). Over the last seven years, the
Company had opened or expanded 12 manufacturing facilities. A new cutting facility and distribution facility in Mexico was opened in fiscal 2000. In connection with the start-up of these facilities, the Company incurred substantial direct and incremental plant start-up costs to recruit and train over 39,000 workers. In fiscal 2000, as part of its restructuring program, the Company closed 5 manufacturing facilities and 1 cutting center. (See Note 3 to the Consolidated Financial Statements.)
The Intimate Apparel Division generally markets its product lines for three retail-selling seasons (spring, fall and holiday). Its revenues are consistent throughout the year, with 50% of the Intimate Apparel Division's net revenues occurring in each half of fiscal year 2000.
SPORTSWEAR AND ACCESSORIES
The Sportswear and Accessories Division designs, manufactures, imports and markets moderate to better priced men's and boy's jeanswear, khakis and sportswear, better to premium priced men's accessories, moderate to better priced dress shirts and neckwear, better to premium priced women's and junior's sportswear and jeanswear and moderate to better active apparel. Management considers the Sportswear and Accessories Division's primary strengths to include its strong brand recognition, product quality, reputation for fashion styling, strong relationships with department and specialty stores and its ability to deliver merchandise rapidly.
The Sportswear and Accessories Division markets its lines under the following brand names:
The Calvin Klein, Chaps by Ralph Lauren, Speedo, Oscar de la Renta, Anne Cole, Ralph Lauren, Polo Sport Ralph Lauren, Polo Sport-RLX, Lauren/Ralph Lauren and Ralph/Ralph Lauren brand names are licensed on an exclusive basis by the Company.
The Sportswear and Accessories Division's strategy is to build on the strength of its brand names, strengthen its position as a global apparel company and eliminate those businesses which generate a profit contribution below the Company's required return. The Company (i) acquired Designer Holdings during the fourth quarter of 1997, (ii) acquired the sub-license to produce Calvin Klein jeans and jeans-related products for children in the United States, Mexico and Central and South America in June 1998, (iii) acquired the sub-license to distribute Calvin Klein jeans, jeans-related products and khakis for men and women in Mexico, Central America and Canada in June 1998, (iv) acquired A.B.S by Allen Schwartz during the third quarter of fiscal 1999, (v) acquired the licensee for Chaps Canada in the second quarter of fiscal 1999, and (vi) acquired Authentic Fitness during the fourth quarter of fiscal 1999. The acquisition of Designer Holdings contributed $554.3 million and $634.1 million to net revenues in fiscal 2000 and 1999, respectively. The acquisition of the Calvin Klein jeans children sub-license contributed $37.0 million and $63.1 million to net revenues in fiscal 2000 and 1999, respectively. In addition, the acquisitions of the sub-licenses to produce Jeanswear in Mexico and Canada contributed $25.4 million and $18.4 million to net revenues in fiscal 2000 and 1999, respectively. Authentic Fitness, acquired in December 1999 contributed $355.2 million (excluding Retail) to net revenues in fiscal 2000 and A.B.S. by Allen Schwartz, acquired in September 1999 contributed $44.4 million to net revenues in fiscal 2000.
The Sportswear and Accessories Division's net revenues have increased at a compound annual growth rate of 23.8% since 1991 to $1,227.5 million in fiscal 2000 including acquisitions and dispositions. The reduction in net revenues from discontinued brands has been more than offset by the success of the Chaps by Ralph Lauren brand which has increased its net revenues by approximately 23.2% since fiscal 1991 to $254.5 million in fiscal 2000, and the acquisitions of the Calvin Klein jeanswear and jeans related sportswear brands in 1997 and 1998, and Authentic Fitness and A.B.S. in 1999.
Sportswear. In 1989, the Company began repositioning its Chaps by Ralph Lauren product lines by updating its styling, which has generated significant net revenue increases, as mentioned above. In 1993, the Company entered into a license agreement to design men's and women's sportswear and men's dress shirts and furnishings bearing the Catalina trademark. Catalina products are sold through the mass merchandise segment of the market pursuant to a license agreement, generating royalty income of $5.2 million, $4.4 million and $4.9 million in fiscal 2000, 1999 and 1998, respectively. In 1997, the Company acquired Designer Holdings Ltd., which develops, manufactures and markets Calvin Klein designer jeanswear and sportswear for men, women and juniors in North, South and Central America. During 1998, the Company expanded upon the Calvin Klein jeanswear business by acquiring sub-licenses to distribute Calvin Klein jeans and jeans-related products for children in the United States, Mexico and Central and South America and Calvin Klein jeans, jeans-related products and khakis for men and women in Mexico, Central America and Canada.
In 1999, the Company acquired Authentic Fitness which designs, manufacturers and markets swimwear, swim accessories and active fitness apparel for men, women and children in North America under the Speedo brand and worldwide under all of its other brands. Authentic Fitness generated wholesale net revenues in fiscal 2000 of $355.2 million compared to $36.4 of net revenue generated in fiscal 1999 subsequent to the December 16, 1999 acquisition. In addition, the Company also acquired A.B.S. by Allen Schwartz which designs, manufactures and markets women's and junior's casual sportswear and dresses and Chaps Canada which imports and markets men's sportswear for the Canadian market under the Chaps by Ralph Lauren brand name. A.B.S and Chaps Canada accounted for $56.2 million in fiscal 2000 compared to $19.4 million in fiscal 1999.
Accessories. The Sportswear and Accessories Division markets men's small leather goods and belts and soft side luggage under the Calvin Klein brand name pursuant to a worldwide license. The first shipments of Calvin Klein accessories were made in the third quarter of fiscal 1995 to United States customers. The line has grown to $24.1 million and $22.3 million of net revenues in fiscal 2000 and 1999, respectively. Management believes that one of the strengths of its accessories lines and potential for growth is the high level of international consumer recognition associated with the Calvin Klein label.
International sales accounted for approximately 6.2% of net revenues of the Sportswear and Accessories Division in fiscal 2000, compared with 4.3% and 1.6% in fiscal 1999 and 1998, respectively. Net revenues attributable to international operations of the Sportswear and Accessories Division were
$75.6 million, $44.4 million and $14.0 million in fiscal 2000, 1999 and 1998, respectively. This significant increase in international sales in fiscal 2000 and 1999 reflects the acquisition of Authentic Fitness and sales growth in Chaps and Calvin Klein Jeans in Mexico and Canada. The Company expects to generate future revenue from sales of basic Calvin Klein jeanswear, khakis, jeans related to sportswear and accessories in Central and South America.
Sportswear apparel (knit shirts, sweaters and other apparel) is sourced principally from the Far East. Accessories are sourced from the United States, Europe and the Far East.
The Sportswear and Accessories Division, similar to the Intimate Apparel Division, generally markets its apparel products for three retail selling seasons (spring, fall and holiday). New styles, fabrics and colors are introduced based upon consumer preferences, market trends and to coincide with the appropriate retail selling season. The Company's swimwear products are principally sold in the first two quarters.
RETAIL STORES DIVISION
The Retail Stores Division is comprised of both outlet stores as well as full-price retail stores, selling the Company's products to the general public. The Company's business strategy with respect to its outlet stores is to provide a channel for disposing of the Company's excess and irregular inventory. The Company does not manufacture or source products exclusively for the retail outlet stores. The Company's outlet stores are situated in areas where they generally do not conflict with the Company's principal channels of distribution. As of December 30, 2000, the Company operated 132 outlet stores, 106 in the U.S., 9 in Canada, 15 in the United Kingdom, 1 in France and 1 in Spain. The Company opened 17 stores during fiscal 2000 and closed 9 stores. The Company plans to close an additional 18 stores in the early part of 2001 as part of its restructuring plan. (See Note 3 to the Consolidated Financial Statements.) In addition, the Company operates Speedo Authentic Fitness full-price retail stores designed to appeal to participants in water and land based fitness activities, and to offer a complete line of Speedo and Speedo Authentic Fitness products that sell throughout the year. As of December 30, 2000, the Company operated 135 full-price retail stores, 132 in the U.S. and 3 in Canada. The Company closed 14 Authentic Fitness stores in 2000, and plans to close an additional underperforming 35 stores in 2001.
In fiscal 1999, the Company acquired Penhaligon's Ltd., a United Kingdom based retailer of perfumes, soaps, toiletries and other products for men and women. The Company also acquired IZKA, a French retailer of seam-free and seamless intimate apparel products. These acquisitions generated $10.2 million and $0.7 million respectively, in net revenue in fiscal year 2000.
INTERNATIONAL OPERATIONS
The Company has subsidiaries in Canada and Mexico in North America and in the United Kingdom, France, Belgium, Ireland, Spain, Italy, Austria, Switzerland, the Netherlands and Germany in Europe and Hong Kong and Japan in Asia, which engage in sales, manufacturing and marketing activities. The results of the Company's operations in these countries are influenced by the movement of foreign currency exchange rates. With the exception of the fluctuation in the rates of exchange of the local currencies in which these subsidiaries conduct their business, the Company does not believe that the operations in Canada and Western Europe are subject to risks that are significantly different from those of the domestic operations. Mexico has historically been subject to high rates of inflation and currency restrictions that may, from time to time, impact the Mexican operation. The Company also sells directly to customers in Mexico. Net revenues from these shipments represent approximately 2.0% of the Company's net revenues in fiscal 2000.
The Company maintains manufacturing facilities in Mexico, Honduras, Costa Rica, the Dominican Republic, Ireland, France, Morocco (joint venture), Sri Lanka, the People's Republic of China (joint venture) and the Philippines. The Company maintains warehousing facilities in Canada, Mexico, the United Kingdom, France and Costa Rica and in the Netherlands (joint venture). The Intimate Apparel Division operates manufacturing facilities in Mexico and in the Caribbean Basin pursuant to duty-advantaged (commonly referred to as 'Item 807') programs. Over the last seven years, the Company
had opened or expanded 12 manufacturing facilities and one cutting facility. During 2000 the Company closed five manufacturing facilities, one cutting facility and seven warehouses. (See Note 3 to the Consolidated Financial Statements.) A new cutting facility and distribution facility in Mexico was opened in fiscal 2000. The Company has many potential sources of manufacturing so that a disruption at any one facility would not significantly impact the Company.
The majority of the Company's purchases which are imported into the United States are invoiced in United States dollars and, therefore, are not subject to currency fluctuations. The majority of the transactions denominated in foreign currencies are denominated in the Hong Kong dollar, which currently fluctuates in conjunction with the United States dollar and therefore does not create any currency risk.
SALES AND MARKETING
The Intimate Apparel and Sportswear and Accessories Divisions sell to over 20,000 customers operating more than 50,000 department, mass merchandise and men's and women's specialty store doors throughout North America and Europe.
The Company's retail customers are served by approximately 300 sales representatives. The Company also employs marketing coordinators who work with the Company's customers in designing in-store displays and planning the placement of merchandise. The Company has implemented Electronic Data Interchange ('EDI') programs with most of its retailing customers which permit the Company to receive purchase orders electronically and, in some cases, to transmit invoices electronically. These innovations assist the Company in providing products to customers on a timely basis.
The Company utilizes various forms of advertising media. In fiscal 2000, the Company spent approximately $ 141.3 million, or 6.3% of net revenues, for advertising and promotion of its various product lines, compared with $118.0 million, or 5.6% of net revenues in fiscal 1999, and $102.6 million or 5.3% of net revenues in fiscal 1998. The increase in advertising costs in fiscal 2000 compared with fiscal 1999 and fiscal 1998 reflects the Company's desire to maintain its strong market position in Calvin Klein underwear, jeanswear and accessories, Chaps by Ralph Lauren sportswear and Warner's, Olga, and Bodyslimmers intimate apparel. The Company participates in advertising on a cooperative basis with retailers, principally through newspaper advertisements.
COMPETITION
The apparel industry is highly competitive. The Company's competitors include apparel manufacturers of all sizes, some of which have greater resources than the Company.
The Company also competes with foreign producers, but to date, such foreign competition has not materially affected the Intimate Apparel or Sportswear and Accessories Divisions. In addition to competition from other branded apparel manufacturers, the Company competes in certain product lines with department store private label programs. The Company believes that its manufacturing skills, coupled with its existing Central American and Caribbean Basin manufacturing facilities and selective use of off-shore sourcing, enable the Company to maintain a cost structure competitive with other major apparel manufacturers.
The Company believes that it has a significant competitive advantage because of high consumer recognition and acceptance of its owned and licensed brand names and its strong presence and market share in the major department, specialty and mass merchandise store chains.
A substantial portion of the Company's sales are of products, such as intimate apparel and men's underwear, that are basic and not very susceptible to rapid design changes. This relatively stable base of business is a significant contributing factor to the Company's favorable competitive and cost position in the apparel industry.
RAW MATERIALS
The Company's raw materials are principally cotton, wool, silk, synthetic and cotton-synthetic blends of fabrics and yarns. Raw materials used by the Intimate Apparel and Sportswear and Accessories Division are available from multiple sources.
IMPORT QUOTAS
Substantially all of the Company's Sportswear and Accessories Division's sportswear products, as well as Calvin Klein men's and women's underwear, are manufactured by contractors located outside the United States. These products are imported and are subject to federal customs laws, which impose tariffs as well as import quota restrictions established by the Department of Commerce. While importation of goods from certain countries may be subject to embargo by United States Customs authorities if shipments exceed quota limits, the Company closely monitors import quotas through its Washington, D.C. office and can, in most cases, shift production to contractors located in countries with available quotas or to domestic manufacturing facilities. The existence of import quotas has, therefore, not had a material effect on the Company's business. Substantially all of the Company's Intimate Apparel Division's products, with the exception of Calvin Klein men's and women's underwear, are manufactured in the Company's facilities located in Mexico, the Caribbean Basin, Europe and Asia. The Company's policy is to have many potential manufacturing sources so that a disruption at any one facility will not significantly impact the Company.
EMPLOYEES
As of December 30, 2000, the Company and its subsidiaries employed 21,440 employees. Approximately 25% of the Company's employees, all of whom are engaged in the manufacture and distribution of its products, are represented by labor unions. The Company considers labor relations with employees to be satisfactory and has not experienced any significant interruption of its operations due to labor disagreements.
TRADEMARKS AND LICENSING AGREEMENTS
The Company has license agreements permitting it to manufacture and market specific products using the trademarks of others. The Company's exclusive license and design agreements for the Chaps by Ralph Lauren trademark expire on December 31, 2008. These licenses grant the Company an exclusive right to use the Chaps by Ralph Lauren trademark in the United States, Canada and Mexico. The Company's license to develop, manufacture and market designer jeanswear and jeans related sportswear under the Calvin Klein trademark in North, South and Central America extends for an initial term expiring on December 31, 2034 and is extendable at the Company's option for a further 10 year term expiring on December 31, 2044. The license contains certain financial covenants which require the Company to maintain, inter alia, certain levels of consolidated net worth and certain ratios of debt to consolidated net worth, all as defined therein during the term of the license. In connection with the confidential settlement agreement with Calvin Klein, Inc. described in Item 3. Legal Proceedings, the debt to consolidated net worth financial covenant has been suspended through January 5, 2002. The Company's exclusive worldwide license agreement with Calvin Klein, Inc. to produce Calvin Klein men's accessories expires June 30, 2004. The Company has an exclusive license agreement to use the Fruit of the Loom trademark in the United States of America, its territories and possessions, Canada and Mexico through December 31, 2001. The Company has notified Fruit of the Loom, Inc. of its intention not to renew its Fruit of the Loom license.
The Company has license agreements in perpetuity with Speedo International, Ltd. which permit the Company to design, manufacture and market certain men's, women's and children's apparel including swimwear, sportswear and a wide variety of other products using the Speedo trademark and certain other trademarks including Speedo, Surf Walker, and Speedo Authentic Fitness. The Company's license to use the Speedo trademark and such other trademarks was granted in perpetuity subject to certain conditions and is exclusive in the United States, it territories and possessions, Canada, Mexico and the Caribbean Islands. Speedo International, Ltd. retains the right to use or license such brand
names in other jurisdictions and actively uses or licenses such brand names throughout the world outside of the Company's licensed areas. The agreements provide for minimum royalty payments to be credited against future royalty payments based on a percentage of net sales. The license agreements may be terminated, with respect to a particular territory only in the event the Company does not pay royalties, or abandons, the trademark in such territory. Also, the license agreements may be terminated in the event the Company manufactures or is controlled by a company that manufactures racing/competitive swimwear, swimwear caps or swimwear accessories, under a different trademark, as specifically defined in the license agreements. The Company has certain rights to sublicense the Speedo trademark within the geographic regions covered by the licenses.
In 1992, the Company entered into an agreement with Speedo Holdings B.V., and its successor Speedo International, Ltd. granting certain irrevocable rights to the Company relating to the use of the Authentic Fitness name and service mark, which rights are in addition to the rights under the license agreements with Speedo International, Ltd.
In October 1993, the Company entered into a worldwide license agreement with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide licensing agreement, the Company obtained the exclusive right in perpetuity to use the Anne Cole trademark for women's swimwear, activewear, beachwear and children's swimwear, subject to certain terms and conditions. Under the license, the licensee is required to pay certain minimum guaranteed annual royalties, to be credited against earned royalties, based on a percentage of net sales. The licensor has the right to approve products bearing the licensed trademark as defined in the agreement.
In 1993, the Company entered into a worldwide license agreement with Oscar de la Renta Licensing Corporation for the design, manufacture and marketing of women's and girls' swimwear and activewear under the Oscar de la Renta brand name. The agreement granting the exclusive right to use the Oscar de la Renta trademark is valid for a term up to and including March 31, 2002 and provides for the payment of certain minimum royalty payments to be credited against earned royalty payments for each agreement year.
On February 1, 1998, the Company entered into an exclusive worldwide license agreement with The Polo/Lauren Company, L.P. and PRL USA, Inc. and a design services agreement with Polo/Ralph Lauren Corporation for Ralph Lauren, Polo Sport Ralph Lauren and Polo Sport-RLX brand swimwear for women and girls. Under the license, the Company produces and markets swimsuits, bathing suits and coordinating cover-ups, tops and bottoms for women and girls. First shipments under this license agreement occurred in January 1999. In addition, the agreement added Lauren/Ralph Lauren and Ralph/Ralph Lauren effective January 1, 2001. The initial term of these agreements expire June 30, 2003 and are extendable to June 30, 2008 upon satisfying certain minimum net sales requirements.
In fiscal 1999, the Company entered into an exclusive licensing agreement for an initial term of 5 years, extendable for a further term of 5 years through July 2009 with Weight Watchers International, Inc., to manufacture and market shapewear and activewear for the mass market in the United States and Canada. The Company also has the right of first opportunity and negotiation with respect to other products and territories.
Although the specific terms of each of the Company's license agreements vary, generally such agreements provide for minimum royalty payments and/or royalty payments based on a percentage of net sales. Such license agreements also generally grant the licensor the right to approve any designs marketed by the licensee.
The Company owns other trademarks, the most important of which are Warner's, Olga, Calvin Klein men's underwear and sleepwear, Calvin Klein women's intimate apparel and sleepwear, Van Raalte, Lejaby, Rasurel'r', and Bodyslimmers, Penhaligon's, White Stag, Catalina, A.B.S by Allen Schwartz, Sunset Beach, Sandcastle and Cole of California.
The Company sub-licenses the White Stag and Catalina brand names to domestic and international licensees for a variety of products. These agreements generally require the licensee to pay royalties and fees to the Company based on a percentage of the licensee's net sales. The Company regularly monitors product design, development, quality, merchandising and marketing and schedules meetings throughout the year with third-party licensees to assure compliance with the Company's overall marketing,
merchandising and design strategies, and to ensure uniformity and quality control. The Company, on an ongoing basis, evaluates entering into distribution or license agreements with other companies that would permit such companies to market products under the Company's trademarks. Generally, in evaluating a potential distributor or licensee, the Company considers the experience, financial stability, manufacturing performance and marketing ability of the proposed licensee. Royalty income derived from licensing was approximately $16.5 million, $17.7 million and $21.2 million in fiscal 2000, 1999 and 1998, respectively.
The Company believes that only the trademarks mentioned herein are material to the business of the Company.
BACKLOG
A substantial portion of net revenues is based on orders for immediate delivery and, therefore, backlog is not necessarily indicative of future net revenues.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The information required by this portion of Item 1 is incorporated herein by reference to Note 6 to the Consolidated Financial Statements on pages to.
ITEM 2.
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 90 Park Avenue, New York, New York 10016 and are occupied pursuant to a lease that expires in 2004. In addition to its executive offices, the Company leases offices in Connecticut, California, Washington, D.C. and New York, pursuant to leases that expire between 2003 and 2008.
The Company has 16 domestic manufacturing and warehouse facilities located in California, Connecticut, Georgia, New Jersey, Pennsylvania, South Carolina and 46 international manufacturing and warehouse facilities located in Canada, Costa Rica, the Dominican Republic, France, the Netherlands (joint venture), Honduras, Ireland, Mexico, Morocco (joint-venture), People's Republic of China (joint venture), the Philippines, Sri Lanka, and the United Kingdom. Certain of the Company's manufacturing and warehouse facilities are also used for administrative and retail functions. The Company owns six of its domestic and five of its international facilities. The balance of the facilities are leased. Lease terms, except for month-to-month leases, expire between 2001 and 2020. No facility is underutilized except for the company's former cutting and distribution facilities in Murfreesboro, TN, which is held for sale.
The Company leases sales offices in a number of major cities, including Atlanta, Dallas, Los Angeles and New York in the United States; Brussels, Belgium; Toronto, Canada; Mexico City, Mexico; Paris, France; Cologne, Germany; Hong Kong; Milan, Italy; and Lausanne, Switzerland. The sales office leases expire between 2001 and 2008 and are generally renewable at the Company's option. The Company also occupies offices in London, England subject to a freehold lease, which expires in 2114. The Company currently leases 132 outlet store locations and 135 Speedo Authentic Fitness retail stores sites. Outlet store and retail store leases, expire between 2001 and 2008 and are generally renewable at the Company's option.
All of the Company's production and warehouse facilities are located in appropriately designed buildings, which are kept in good repair. All such facilities have well maintained equipment and sufficient capacity to handle present volumes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On May 30, 2000, Calvin Klein, Inc. ('CKI') and the Calvin Klein Trademark Trust filed a complaint in the U.S. District Court in the Southern District of New York (Calvin Klein Trademark Trust, et al. v. The Warnaco Group, Inc., et al, No. 00 CIV. 4052 (JSR) (S.D.N.Y.)) against The Warnaco Group, Inc., various other Warnaco entities, and Wachner (the 'Warnaco Defendants') alleging, inter alia, claims for breach of contract and trademark violations. The complaint sought, inter alia, termination of certain licensing agreements and trademark rights, injunctive relief and damages.
On June 26, 2000, the Warnaco Defendants filed an answer and certain Warnaco Defendants filed counterclaims (amended on July 31, 2000) against CKI for, inter alia, breach of the jeanswear and men's accessories licenses and breach of fiduciary duty, and against CKI and Calvin Klein personally for tortious interference with business relations, defamation and trade libel. The counterclaims sought, inter alia, damages, injunctive and declaratory relief. Thereafter, certain of the plaintiff's claims and one of the Warnaco Defendant's counterclaims were dismissed.
On January 16, 2001, CKI filed a Complaint in the Supreme Court of the State of New York (County of New York) against CKJ Holdings, Inc. and Calvin Klein Jeanswear Company (collectively the 'Defendants') seeking a declaration that CKI was entitled to terminate the Jeanswear License Agreement dated August 4, 1994, as amended (the 'Jeanswear License'), claiming that the Defendants breached certain financial covenants in the Jeanswear License because the Company's consolidated debt to consolidated net worth ratio allegedly exceeded five to one as of the quarter ending September 30, 2000.
On January 22, 2001, the parties entered into a confidential settlement agreement whereby they agreed, inter alia, to the dismissal of all claims and counterclaims asserted in both actions with prejudice and without the payment of any sum of money by any party to any other party. The parties further agreed to work together for their mutual benefit under their license and other agreements as modified by the terms of the settlement agreement. The Company believes that the settlement agreement will not materially affect the manner in which it conducts its business pursuant to its existing license and other agreements with CKI and the Calvin Klein Trademark Trust.
On September 14, 2000, Speedo International Limited (""SIL'') filed a complaint in the U.S. District Court for the Southern District of New York, styled Speedo International Limited v. Authentic Fitness Corp., et al., No. 00 Civ. 6931 (DAB), against The Warnaco Group, Inc. and various other Warnaco entities (the ""Warnaco Defendants'') alleging claims, inter alia, for breach of contract and trademark violations. The complaint seeks, inter alia, termination of certain licensing agreements, injunctive relief and damages.
On November 8, 2000, the Warnaco Defendants filed an answer and counterclaims against SIL seeking, inter alia, a declaration that the Warnaco Defendants have not engaged in trademark violations and are not in breach of the licensing agreements, and that the licensing agreements in issue may not be terminated.
The Company believes the claims of SIL to be without merit and intends to vigorously defend and pursue its counterclaims.
Between August 22, 2000 and October 26, 2000, seven putative class action complaints were filed in the U.S. District Court for the Southern District of New York against the Company and certain of its officers and directors. On November 17, 2000, the Court consolidated the complaints into a single action, styled In re The Warnaco Group, Inc. Securities Litigation, No. 00-Civ-6266 (LMM), and appointed Lead Plaintiffs and approved Lead Counsel for the putative class. A consolidated amended complaint has been filed. The amended complaint, on behalf of a putative class of shareholders of the Company who purchased Company stock between September 17, 1997 and July 19, 2000 (the 'Class Period'), alleges, inter alia, that defendants violated the Securities Exchange Act of 1934 by artificially inflating the price of the Company's stock by issuing false and misleading statements during the Class Period. The Company believes the claims to be without merit and intends to vigorously defend them.
The staff of the Securities and Exchange Commission (the 'SEC'), has notified the Company that it is conducting an investigation to determine whether there have been any violations of the Securities Exchange Act of 1934 in connection with the preparation and publication of various financial statements and reports. The Company is cooperating in such investigation. The SEC has indicated that its investigation should not be construed as an indication by the SEC or its staff that any violation of law has occurred, nor as an adverse reflection upon any person, entity or security.
On October 13, 2000, a shareholders' derivative complaint was filed on behalf of the Company in the U.S. District Court for the Southern District of New York, styled Widdicombe, derivatively on behalf of The Warnaco Group, Inc. v. Linda J. Wachner, et al., No. 00 Civ. 7816 (LMM), naming certain Company officers and directors as defendants (the 'Individual Defendants') and the Company as a nominal defendant. The complaint asserts claims on the Company's behalf for, inter alia, breach of fiduciary duty, corporate waste and unjust enrichment, and seeks, inter alia, damages, punitive damages, and the imposition of a constructive trust upon the assets of the Individual Defendants. In accordance with a stipulation, an amended complaint may be filed on or before June 8, 2001.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their age and their position are set forth below.
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(1) Effective March 1, 2001, Philip Terenzio succeeded William S. Finkelstein as Chief Financial Officer. -------------------
Mrs. Wachner has been a Director, President and Chief Executive Officer of the Company since August 1987, and the Chairman of the Board since August 1991. Mrs. Wachner was a Director and President of the Company from March 1986 to August 1987. Mrs. Wachner held various positions, including President and Chief Executive Officer, with Max Factor and Company from December 1978 to October 1984. Mrs. Wachner also serves as a Director of The New York Stock Exchange.
Mr. Terenzio has been Senior Vice President and Chief Financial Officer of the Company since March 1, 2001. Prior to joining the Company, from 1998 Mr. Terenzio served as Vice President and Controller at BestFoods. From 1971 to 1998, Mr. Terenzio was at KPMG, independent public accountants where he left as a Partner of the firm.
Mr. Finkelstein has been Senior Vice President of the Company since May 1992 and Chief Financial Officer from May 1995 through February 2001 and Director of the Company since May 1995. Mr. Finkelstein served as Vice President and Controller of the Company from November 1988 until his appointment as Senior Vice President. Mr. Finkelstein served as Vice President of Finance of the Company's Activewear and Olga Divisions from March 1988 until his appointment as Controller of the Company. Mr. Finkelstein served as Vice President and Controller of SPI Pharmaceuticals Inc. from February 1986 to March 1988 and held various financial positions, including Assistant Corporate Controller with Max Factor and Company, between 1977 and 1985. Mr. Finkelstein became the Chief Operating Officer of the Company's Calvin Klein Jeanswear and Underwear Division on March 1, 2001.
Mr. de La Chapelle has been Senior Vice President Legal-Human Resources since February 2000. Prior to joining the Company, from 1966 to 1985 Mr. de La Chapelle served as international counsel for W.R. Grace & Co., Assistant General Counsel for Norton Simon Inc., Senior Vice President and General Counsel for MasterCard Inc. and Senior Executive -- International for Warner Communications Inc. From 1985 to February 2000 Mr. de La Chapelle was affiliated with various private investment banking firms.
Mr. Holst has been Executive Vice President, Finance of the Company since July 2000. Prior to joining the Company, Mr. Holst served as Senior Vice President and Chief Financial Officer for GE American Communications, a division of GE Capital. Mr. Holst served as Vice President -- Finance for GE Capital's Structured Financial Group from 1994-1997 and as a manager in GE Capital Corporate
Controller's office from 1992 to 1994. Mr. Holst held various positions with Arthur Andersen & Co. from 1981 to 1992.
Mr. Silverstein has been Vice President, General Counsel and Secretary of the Company since December 1990. Mr. Silverstein served as Assistant Secretary of the Company from June 1986 until his appointment as Secretary in January 1987.
Mr. Deddens has been Vice President and Treasurer of the Company since March 1996. Prior to joining the Company, Mr. Deddens served as Vice President and Treasurer of Revlon, Inc. from 1991 to 1996 and as Assistant Treasurer from 1987 to 1991. Mr. Deddens held various financial positions with Allied-Signal Corporation and Union Texas Petroleum Corporation from 1981 to 1987.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock, $0.01 par value per share (the 'Common Stock'), is listed on the New York Stock Exchange under the symbol 'WAC'. The table below sets forth, for the periods indicated, the high and low sales prices of the Company's Common Stock, as reported on the New York Stock Exchange Composite Tape.
As of April 11, 2001, there were 266 holders of the Common Stock, based upon the number of holders of record and the number of individual participants in certain security position listings.
In fiscal 1995, the Company initiated a regular cash dividend of $0.28 per share per annum. The initial cash dividend was paid on June 30, 1995. On February 20, 1997, the Company's Board of Directors approved an increase in the Company's quarterly cash dividend to $0.08 per share. On November 21, 1997, the Company's Board of Directors approved an increase in the quarterly cash dividend to $0.09 per share. As required by the Company's credit facilities, the Company suspended payment of its quarterly cash dividend in December 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is consolidated statement of income data with respect to the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000, and consolidated balance sheet data at January 1, 2000 and December 30, 2000. The selected financial data is derived from, and qualified by reference to, the consolidated financial statements included herein and such data should be read in conjunction with those financial statements and notes thereto. The consolidated statement of income data for the fiscal years ended January 4, 1997 and January 3, 1998 and the consolidated balance sheet data at January 4, 1997, January 3, 1998 and January 2, 1999 are derived from consolidated financial statements not included herein.
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(a) Fiscal 1996 includes pre-tax charges related to the sale of the Company's Hathaway dress shirt operations of $38.7 million, consolidation and realignment of the Company's Intimate Apparel Division of $78.1 million and other items of $14.2 million. Total special charges were $131.0 million. In addition, fiscal 1996 includes operating losses of the Hathaway dress shirt operation of $8.6 million.
(b) The fiscal 1996 and 1997 financial statements were restated in fiscal 1998 to reflect $38.0 million ($23.2 million net of income tax benefit or $0.45 per diluted share) and $57.0 million ($35.4 million net of income tax benefit or $0.67 per diluted share), respectively, of charges related to an adjustment for inventory production and inefficiency costs. The restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control systems that have since been corrected. (footnotes continued on next page)
(footnotes continued from previous page)
(c) Fiscal 1997 reflects the acquisition of Designer Holdings during the fourth quarter and includes pre-tax charges related to the merger and integration of 1996 and 1997 acquisitions and the completion in 1997 of certain consolidation and restructuring actions announced in 1996. Total restructuring and special charges were $131.8 million. In addition, fiscal 1997 includes operating losses of the Hathaway dress shirt operation of $4.0 million and non-recurring losses of GJM of $1.1 million for a total of $5.1 million.
(d) Fiscal 1998 includes restructuring and special charges of $89.9 million relating to the Company's continuing strategic review of facilities, products and functions and other items. In addition, fiscal 1998 includes operating losses of the discontinued product lines and styles of $5.3 million. Also included in fiscal 1998 operating earnings is the current year impact related to the change in accounting for pre-operating costs described in footnote (e) below of $40.8 million (see Note 1 to the Consolidated Financial Statements) and charges related to an adjustment for inventory production and inefficiency costs of $49.6 million.
(e) Effective with the 1998 fiscal year, the Company early adopted the provisions of SOP 98-5 which requires, among other things, that certain pre-operating costs, which had previously been deferred and amortized, be expensed as incurred. The Company recorded the impact as the cumulative effect of a change in accounting principle of $46.3 million, net of income tax benefits, or $0.73 per diluted share.
(f) The fiscal 1997 balance sheet data has been restated reducing stockholders' equity by $26 million. This restatement reflects adjustments to accounts receivable and other items-net and has no effect on reported net income for any subsequent year. The fiscal 1996 and 1997 accounts have been restated to reflect these adjustments. The fiscal 1998 and 1999 accounts have been revised to be consistent with the accounting for the matters that resulted in the adjustment to retained earnings. (See Note 1 to the Consolidated Financial Statements.) The Company's previous independent auditors, who audited the Company's financial statements for fiscal 1996 through fiscal 1998, have not issued a consent in respect of such changes.
(g) Fiscal 2000 includes restructuring and special charges of $269.6 million relating to the Company's global initiatives to consolidate operations and discontinue unprofitable product lines. Also included in fiscal 2000 is investment income of $36.9 million relative to a $42.8 million gain on the Company's sale of its investment in the Interworld Corporation, partially offset by a $5.9 million write-down of its Equity Agreements.
(h) Fiscal 2000 includes the impact of a cumulative effect of a change in accounting of $13.1 million, net of taxes or $0.25 per diluted share related to a change in the method of valuation of inventory in the Company's retail outlet stores.
(i) Fiscal 2000 includes a tax provision for the U.S. deferred tax asset valuation allowance of $129.2 million or $2.45 per diluted share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
STRATEGIC ACTIONS
FISCAL 2000 -- RESTRUCTURING AND SPECIAL CHARGES
In response to a difficult retail environment, the Company performed a strategic review of its worldwide businesses, manufacturing, distribution and other facilities and product lines and styles. The Company initiated a global implementation of programs designed to create cost efficiencies through facility consolidations, workforce reductions and the consolidation of the finance, manufacturing and operations functions within the Company and the discontinuance of product lines and styles that were unprofitable. As a result of the initiatives, the Company recorded restructuring and special charges throughout the year in an amount equal to $269.6 million, of which $171.3 million represents non-cash asset write-downs. Of the total amount, $201.3 million is reflected in cost of goods sold and $68.3 million is reflected in selling, general and administrative. The Company anticipates that these initiatives will generate nearly $100 million of annualized savings. The detail of the charge, including costs incurred and reserves remaining for costs estimated to be incurred through completion
of the aforementioned programs are summarized below (see Note 3 to the Consolidated Financial Statements for further details):
FISCAL 1998 -- RESTRUCTURING AND SPECIAL CHARGES
Following significant acquisitions in 1996 and 1997, in the fourth quarter of 1998 the Company initiated the implementation of programs designed to streamline operations and improve profitability. As a result of the decision to implement these programs, the Company recorded restructuring and special charges of approximately $36.9 million related to costs to exit certain facilities and activities, asset impairments and employee termination and severance benefits. Of the total amount of the 1998 charges, $21.8 million is reflected in cost of goods sold and $15.1 million is reflected in selling, administrative and general expenses in the accompanying consolidated statement of operations. The detail of the charges recorded in 1998, including costs incurred through fiscal 2000, are summarized below:
See Note 3 to the Consolidated Financial Statements for further details.
In addition and related to the above actions, the fiscal 1998 operations included $53.0 million related to the first nine months of losses on discontinued product lines, severance associated with reductions in headcount, incremental advertising, allowances and manufacturing variances and $5.3 million related to fourth quarter losses on discontinued product lines. Of the total amount of $58.3 million, $27.0 million is reflected in cost of goods sold and $31.3 million is reflected in selling, administrative and general expenses.
The total restructuring and special charges including the associated operating losses are $95.2 million for fiscal 1998. The Company realized from these programs annual savings of $15.0 million.
RESULTS OF OPERATIONS
The consolidated statements of income for the Company are summarized below.
SELECTED DATA STATEMENT OF INCOME (DOLLARS IN MILLIONS)
DIVISIONAL SUMMARY (DOLLARS IN MILLIONS)
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(a) Includes restructuring and special charges of $201.3 million in fiscal 2000 and $48.8 million in fiscal 1998. Also included in fiscal 1998 is the current year impact related to the change in accounting for pre-operating costs of $40.8 million and a charge for an inventory adjustment related to production and inefficiency costs in fiscal 1998 of $49.6 million.
(b) Includes restructuring and special charges of $68.3 million in fiscal 2000 and $46.4 million in fiscal 1998.
(c) Cost of goods sold, selling, administrative and general expenses and income taxes have been revised in fiscal 1999 with no impact to net income. (See Note 1 to the Consolidated Financial Statements.)
COMPARISON OF FISCAL 2000 TO FISCAL 1999
Net revenues increased $135.7 million or 6.4% to $2,249.9 million in fiscal 2000 compared with $2,114.2 million in fiscal 1999. Included in fiscal 2000 net revenues are the results of Authentic Fitness and A.B.S acquired in December 1999 and September 1999, respectively. Excluding these acquisitions, net revenues in fiscal 2000 were down $271.4 million or 13.2% compared to fiscal 1999. The decrease versus last year resulted from the Company's loss of certain major retail customers such as Uptons, Eatons, Mercantile and SRI through bankruptcy and consolidations (over $150 million of lost revenues). The Company also believes that its business was adversely affected by the negative publicity surrounding its litigation with Calvin Klein, Inc. Fiscal 2000 revenues in its Calvin Klein businesses decreased $134.8 million to $934.2 million from $1,069.0 million in fiscal 1999.
INTIMATE APPAREL DIVISION. Net revenues decreased $136.6 million or 14.5% to $806.8 million in fiscal 2000 compared with $943.4 million in fiscal 1999. The decrease in net revenues resulted from a soft retail environment where many of our customers significantly reduced their purchases as well as several of our major accounts filing for bankruptcy or were consolidated, as discussed above. Calvin Klein Underwear net revenues decreased 11.4% to $293.5 million in fiscal 2000. Warner's/Olga core businesses decreased 14.6% to $296.8 million. Sleepwear decreased 10.2% to $61.4 million. The Bodyslimmers and Weight Watchers shapewear brands decreased 26.3% to $33.7 million. Fruit of the Loom decreased 34.0% to $27.4 million. Lejaby, the Company's European product offering, decreased 13.0%to $83.4 million primarily due to the fluctuation of the Euro in fiscal 2000. However, despite these revenue decreases, Warnaco remains a market leader for Intimate Apparel in department and specialty stores with a 35.7% share in bras, 26.2% share in panties and 20.9% share in shapewear.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues increased $204.7 million or 20.0% to $1,227.5 million in fiscal 2000, compared with $1,022.8 million in fiscal 1999, due to acquisitions, partially offset by decreases in the Company's other businesses. Incremental net revenues contributed by the 1999 Authentic Fitness ($318.8 million) and A.B.S. ($30.7 million) acquisitions were $349.5 million. Excluding these acquisitions, net revenues decreased $144.8 million. The decrease in net revenues in Sportswear and Accessories were also reflective of the soft retail environment, heavy markdowns required to keep pace with the actions of our competitors, the lost retail accounts previously mentioned, as well as the adverse affect on the Calvin Klein businesses from the Company's litigation with Calvin Klein, Inc. Calvin Klein Jeanswear decreased 13.5% to $544.2 million. Chaps decreased 19.8% to $254.5 million and Calvin Klein Accessories increased 7.6% to $24.0 million.
RETAIL STORES DIVISION. Net revenues increased $67.6 million or 45.7% to $215.6 million in fiscal 2000. Incremental net revenues in fiscal 2000 contributed by the Authentic Fitness acquisition were $57.6 million. Excluding the acquisitions, Retail Stores were up 6.9%, primarily in the Outlet Stores where the Company was liquidating excess inventory to generate cash flow.
Gross profit decreased $238.1 million or 34.6% to $450.5 million in fiscal 2000 compared to $688.6 million in fiscal 1999. Gross margins decreased to 20.0% from 32.6%. Included in cost of goods sold in fiscal 2000 are restructuring and special charges of $201.3 million (see Note 3 to the Consolidated Financial Statements). Excluding these charges, gross profit decreased $36.8 million or 5.4%. Gross margins on this basis were 29.0% in fiscal 2000 compared to 32.6% in fiscal 1999. The decrease in gross profit and gross margin resulted from the increased markdowns taken throughout the year to reduce inventory and improve cash flow.
INTIMATE APPAREL DIVISION. Gross profit (excluding restructuring and special charges) decreased $110.9 million or 34.4% to $211.2 million in fiscal 2000 compared with $322.1 million in fiscal 1999. Gross margins on this basis were 26.2% in 2000 compared with 34.1% in 1999. The decrease in gross profit and gross margin resulted from the net revenue decrease and the incremental markdowns mentioned above. In addition, restructuring and special charges as outlined above were $143.1 million in fiscal 2000.
SPORTSWEAR AND ACCESSORIES DIVISION. Gross profit (excluding restructuring and special charges) increased $19.5 million or 5.6% to $344.5 million in fiscal 2000, compared with $325.0 million in fiscal 1999. The increase in gross profit was attributable to the Authentic Fitness and A.B.S.
acquisitions. Gross margins on this basis were 28.1% in fiscal 2000 compared with 31.8% in fiscal 1999. This decrease was attributable to incremental inventory markdowns as previously discussed. In addition, restructuring and special charges as outlined above were $38.4 million in fiscal 2000.
RETAIL STORES DIVISION. Gross profit (excluding restructuring and special charges) increased $54.6 million or 131.6% to $96.1 million in fiscal 2000 compared with $41.5 million in fiscal 1999. Gross margins in fiscal 2000 were 44.6% compared to 28.0% in fiscal 1999. The significant increase in gross profit and gross margin in fiscal 2000 is attributable to the addition of the Speedo Authentic Fitness full-price retail stores, with gross margin of 63.7% which accounted for an incremental $36.7 million. In addition, restructuring and special charges as outlined above were $19.8 million in fiscal 2000.
Selling, administrative and general expenses increased $148.6 million or 31.2% in fiscal 2000 to $625.0 million compared with $476.4 million in fiscal 1999 primarily as a result of the acquisitions noted below. Selling, administrative and general expenses as a percentage of net revenues was 27.8% in fiscal 2000 compared with 22.5% in fiscal 1999. Included in selling, administrative and general expenses in fiscal 2000 are restructuring and special charges of $68.3 million (see Note 3 to the Consolidated Financial Statements). Excluding these charges, selling, administrative and general expenses increased $80.3 million or 16.9%. Selling, administrative and general expenses as a percentage of net revenues on this basis increased to 24.7%. The increase resulted from an increase in the amortization of goodwill and intangibles related to the Authentic Fitness and A.B.S. acquisitions of $15.0 million and the increased costs of the Retail Stores Division primarily associated with the Authentic Fitness acquisition of $59.5 million, which is 46.2% of net revenues, significantly higher than the Company's wholesale divisions.
OPERATING PROFIT
INTIMATE APPAREL DIVISION. Operating profit (excluding restructuring and special charges) decreased $99.2 million or 65.0% to $53.4 million in fiscal 2000, compared with $152.6 million in fiscal 1999. This was attributable to the decrease in net revenues, associated with the lost accounts and soft retail environment and decrease in gross margin due to the additional markdowns taken to reduce inventory levels and improve cash flow. In addition, fiscal 2000 includes restructuring and special charges as outlined above in the amount of $171.5 million.
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit increased $20.7 million or 13.5% to $174.4 million in fiscal 2000 compared with $153.7 million in fiscal 1999. This increase was attributable to the acquisitions of Authentic Fitness and A.B.S., which were acquired in December 1999 and September 1999, respectively. In addition, fiscal 2000 includes restructuring and special charges as outlined above in the amount of $44.1 million.
RETAIL STORES DIVISION. Operating profit decreased $12.3 million to a loss of $3.3 million in fiscal 2000 compared to a profit of $9.0 million in fiscal 1999. The decrease in operating profit resulted from the markdowns taken and other costs incurred to reduce inventories and improve cash flow. In addition, fiscal 2000 includes restructuring and special charges as outlined above in the amount of $25.6 million.
Investment income in the amount of $36.9 million was recorded in fiscal 2000 and reflects the Company's first quarter gain on the sale of its investment in Interworld of $42.8 million, partially offset by a fourth quarter $5.9 million write-down on its Equity Agreements.
Interest expense increased $91.2 million to $172.2 million in fiscal 2000 compared with $81.0 million in fiscal 1999. The increase is attributable to the Company's acquisitions of Authentic Fitness and A.B.S., as well as the Company's stock buy-back program in fiscal 1999 and an increase in the Company's effective borrowing rate commencing effective in the fourth quarter of fiscal 2000.
Income taxes in fiscal 2000 were $21.2 million, which includes a $134.4 million valuation allowance on the Company's deferred tax asset ($129.2 million U.S. and $5.2 million foreign), offset by an income tax benefit of $113.2 million related to the Company's pre-tax loss of $309.9 million or an effective tax rate of 36.5%. This compares to an income tax provision in fiscal 1999 of $33.4 million, or an effective tax rate of 25.5%. The Company has a United States net operating loss carryforward of approximately $836.0 million at December 30, 2000 and a foreign net operating loss carryforward of approximately
$49.3 million available to offset future taxable income. The net operating loss carryforwards expire between 2002 and 2020.
Net loss before cumulative effect of a change in accounting principle is $331.1 million, or a loss of $6.27 per diluted share in fiscal 2000. The net loss before restructuring and special charges, investment income and the provision for deferred tax asset valuation allowance would be $48.2 million or $0.91 per diluted share. This compares to net income in fiscal 1999 of $97.8 million or $1.72 per diluted share.
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Net revenues increased $163.9 million or 8.4% to $2,114.2 million in fiscal 1999 compared with $1,950.3 million in fiscal 1998. Net revenues contributed by the 1999 acquisitions of Authentic Fitness ($40.6), Penhaligon's ($7.9), IZKA ($0.2), Chaps Canada ($5.7) and A.B.S. ($13.7) amounted to $68.1 million. In addition, the Company discontinued several underperforming brands during 1998. These discontinued brands accounted for a reduction in net revenues of $18.4 million in fiscal 1999. Excluding the impact of these items, net revenues from continuing brands were up 5.8%.
INTIMATE APPAREL DIVISION. Net revenues decreased $1.4 million or 0.1%to $943.4 million in fiscal 1999 compared with $944.8 million in fiscal 1998. Discontinued brands accounted for a reduction in net revenues of $18.4 million in fiscal 1999. Excluding the impact of the discontinued brands, net revenues increased 1.9%, despite the loss of three major customers (Uptons, Eaton's and Mercantile), which accounted for a loss of $30.0 million of net revenues in fiscal 1999. Calvin Klein underwear net revenue increased $22.4 million or 7.3% over fiscal 1998, driven by strong growth in the domestic men's business. Sleepwear net revenues increased $16.7 million or 32.4% due to the addition of several new customers, including Wal-Mart. The Bodyslimmers and Weight Watchers shapewear brands increased $21.6 million or 89.6% due to the continued strength of the Bodyslimmers line in department and specialty stores and the successful launch of Weight Watchers in the mass market. These strong performances were partially offset by core Warner's, Olga and private label business decreasing $42.1 million or 10.9% compared to fiscal 1998 results, due to the loss of the customers previously mentioned. Bra market share in department and specialty stores for the year was 39.0% compared with 37.5% in 1998.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues increased $147.5 million or 16.9% to $1,022.8 million in fiscal 1999 compared with $875.3 million in fiscal 1998. Net revenues contributed by the 1999 Authentic Fitness ($36.4), Chaps Canada ($5.7) and A.B.S. ($13.7) acquisitions amounted to $55.8 million. Excluding these acquisitions, net revenues increased $91.7 million or a strong 10.5%. The increase in net revenue was generated by the Calvin Klein Jeanswear Division, which increased $128.5 million or 25.7%, driven primarily by the men's and women's businesses. This increase was partially offset by Chaps, which decreased $33.6 million or 9.6% due primarily to the lost accounts mentioned above, which attributed to over $25.0 million of this decrease.
RETAIL STORES DIVISION. Net revenues increased $17.8 million or 13.7% in fiscal 1999. Net revenues in 1999 contributed by the Authentic Fitness ($4.2), Penhaligon's ($7.9) and IZKA ($0.2) acquisitions were $12.3 million, while the core Warnaco and Calvin Klein outlet stores increased $5.5 million or 4.2%.
Gross profit increased $151.4 million or 28.2% to $688.6 million in fiscal 1999 compared with $537.2 million in fiscal 1998. Gross margins improved 5.1% to 32.6% from 27.5%. Included in cost of goods sold in fiscal 1998 are restructuring and special charges of $21.8 million, other special items of $27.0 million (see discussion of Strategic Actions on page 18), the current year impact of the early adoption of SOP 98-5 of $40.8 million and a charge for an inventory adjustment related to production and inefficiency costs of $49.6 million. Excluding these 1998 items totaling $139.2 million, gross profit increased $12.2 million or 1.8%. Gross margins on this basis were 32.6% in 1999 compared with 34.7% in 1998. The decrease in gross margins from fiscal 1998 was caused by $30.0 million of additional markdowns required to: 1) liquidate inventory planned for lost customers; 2) reduce inventory levels in Intimate Apparel primarily from training new employees in start-up plants; and 3) address softness in the Calvin Klein Junior Jeans business; as well as $10.0 million additional plant start-up costs in the Company's new Intimate Apparel manufacturing facilities in Mexico.
INTIMATE APPAREL DIVISION. Gross profit (excluding restructuring and special items described above) decreased $56.5 million or 14.9% to $322.1 million in fiscal 1999 compared with $378.6 million in fiscal 1998. Gross margins on this basis were 34.1% in 1999 compared with 40.1% in 1998. The decrease in margins resulted from the incremental markdowns and additional plant start-up costs mentioned above. In addition, restructuring and special items described above were $123.3 million in fiscal 1998.
SPORTSWEAR AND ACCESSORIES DIVISION. Gross profit (excluding restructuring and special items described above) increased $67.4 million or 26.2% to $325.0 million in fiscal 1999 compared with $257.6 million in fiscal 1998. The increase in gross profit was due to the increase in net revenues mentioned above. Gross margins in 1999 were 31.8% compared with 29.4% in 1998 with the improvement due to sourcing efficiencies and cost reductions. In addition, restructuring and special items described above were $15.9 million in 1998.
RETAIL STORES DIVISION. Gross profit increased $1.0 million or 2.5% to $41.5 million in fiscal 1999 compared with $40.5 million in fiscal 1998. Gross margins in fiscal 1999 were 28.0% compared to 31.1% in fiscal 1998, with the decrease caused by additional markdowns to liquidate excess inventories.
Selling, administrative and general expenses increased $24.8 million to $476.4 million in fiscal 1999 compared with $451.6 million in fiscal 1998. Selling, administrative and general expenses as a percentage of sales were 22.5%in 1999 compared with 23.1% in 1998. Included in fiscal 1998 results are restructuring and special charges of $15.1 million and other special items of $31.3 million. Excluding restructuring and special charges in 1998, selling, administrative and general expenses were $405.2 million (20.8% of net revenues) in 1998. The increase in selling, administrative and general expenses as a percentage of net revenues, is primarily attributable to: 1) $16.0 million of non-operating incremental costs related to the Calvin Klein Jeans distribution consolidation; 2) a 30 basis-point increase of $15.4 in marketing spending to 5.6% of net revenues; and 3) incremental data processing costs related to Year 2000 conversion as well as the implementation of new systems.
OPERATING PROFIT
INTIMATE APPAREL DIVISION. Operating profit decreased $44.4 million or 22.5% to $152.6 million in fiscal 1999 compared with $197.0 million in fiscal 1998. This was attributable to the additional markdowns and plant start-up costs mentioned above. In addition, fiscal 1998 includes restructuring and special charges as outlined above of $72.4 million and the effect of adopting SOP 98-5 of $40.8 million and a charge for an inventory adjustment related to production and inefficiency costs of $49.6 million.
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit increased $11.9 million or 8.4% to $153.7 million in fiscal 1999 compared with $141.8 million in fiscal 1998. This was attributable to the 16.9% net revenue increase mentioned above, partially offset by the $16.0 million non-operating incremental cost related to the Calvin Klein Jeans distribution consolidation. In addition, restructuring and special charges as outlined above were $2.3 million in fiscal 1998.
RETAIL STORES DIVISION. Operating profit decreased $6.6 million to $9.0 million in fiscal 1999 from $15.6 million in fiscal 1998, with the decrease attributable to markdowns required to liquidate excess inventory. In addition, restructuring and special charges as outlined above were $4.8 million in fiscal 1998.
Interest expense increased $17.2 million to $81.0 million in fiscal 1999 compared with $63.8 million in fiscal 1998. The increase was caused primarily by additional borrowings to finance the Company's stock buyback program and its acquisitions in fiscal 1998 and 1999. (See Notes 2 and 13 to the Consolidated Financial Statements.)
The income tax provision in fiscal 1999 was $33.4 million, or an overall effective tax rate of 25.5%. This compares to an income tax benefit in fiscal 1998 of $17.5 million consisting of a $7.7 million income tax expense on continuing operations and a $25.2 million income tax benefit on the cumulative effect of an accounting change, or an overall effective tax rate of 35.3%. The decrease in the effective tax rate from 35.3% in fiscal 1998 to 25.5% in fiscal 1999 was primarily due to a shift in the amount of income in
foreign jurisdictions with lower tax rates and the impact of state income taxes. The Company has estimated United States net operating loss carryforwards of approximately $421.3 million at January 1, 2000 and foreign net operating loss carryforwards of approximately $33.7 million available to offset future taxable income. The net operating loss carryforwards expire in varying amounts between 2002 and 2018.
Income before cumulative effect of a change in accounting principle improved $83.7 million to $97.8 million or $1.72 per diluted share in fiscal 1999 compared with $14.1 million or $0.22 per diluted share in fiscal 1998 due to the charges included in fiscal 1998 as mentioned above.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity requirements arise primarily from its debt service and the funding of working capital needs, primarily inventory and accounts receivable and capital improvements programs. The Company's borrowing requirements are seasonal, with peak working capital needs generally arising at the end of the second quarter and during the third quarter of the fiscal year. The Company typically generates a substantial amount of its operating cash flow in the fourth quarter of the fiscal year, reflecting second and third quarter shipments and the sale of inventory built during the first half of the fiscal year.
There were no acquisitions in fiscal 2000. During fiscal 1999, the Company acquired Authentic Fitness Corporation, Penhaligon's Ltd., IZKA, A.B.S. by Allen Schwartz, and Chaps Canada.
During fiscal 1998, the Company acquired certain inventory and other assets as well as the sub-license to produce Calvin Klein children's jeans and jeanswear in Canada and Mexico. The total purchase price of these acquisitions was $53.1 million.
As discussed in the Notes 1 and 13 to the consolidated financial statements, the Company was not in compliance with certain covenants of its long-term debt agreements as of December 30, 2000, for which waivers were received through May 16, 2001. As the waivers do not extend through the end of fiscal 2001, the debt has been classified as a current liability in the accompanying consolidated balance sheet. The Company is currently in discussions with its lenders for permanent amendments to the agreements. If the Company is not successful, it would have to refinance its debt with others. The Company's ability to continue to operate as a going concern is dependent upon the outcome of the negotiations or upon its ability to refinance its debt. There can be no assurances that the Company will be able to successfully conclude such negotiations or secure alternative financing. As a result of the reclassification of its long-term debt to current, the Company has a working capital deficit of $1,433.7 million. Excluding the reclassification, working capital was $30.2 million.
Capital Resources. Cash used in operating activities in fiscal 2000 was $13.3 million compared to cash provided by operating activites of $10.0 million in fiscal 1999. The decrease in cash flow from operating activities from fiscal 1999 primarily resulted from: 1) the decrease in net income before cumulative effect of accounting change in fiscal 2000 ($428.9 million) and 2) the decrease in accounts payable and accrued liabilities ($171.2 million) partially offset by 3) a reduction in inventory of $177.6 million; 4) an increase in the provision for inventory write-downs of $173.0 million; 5) an improvement in accounts receivable of $171.2 million; 6) a decrease in prepaid expenses and other assets of $52.7 million related primarily to non-cash write-downs and 7) an increase in non-cash asset write-downs of $22.7 million.
Cash provided from operating activities in fiscal 1999 was $10.0 million compared to $334.7 million in fiscal 1998. The decrease in cash flow from operating activities from 1998 primarily resulted from 1) the decrease in accounts payable and accrued expenses of $194.4 million relating to extended payment terms negotiated in fiscal 1998 and 2) the favorable impact of securitizing accounts receivable in 1998 of $145.1 million. Depreciation and amortization expense was $102.1 million, $61.0 million and $46.5 million in fiscal 2000, 1999 and 1998 respectively. The increase in depreciation and amortization expense in fiscal 2000 reflects amortization of intangible assets acquired in fiscal 1999 and a significant increase in capital spending related to the Company's management information systems in fiscal 1999 and 2000.
The provision for receivable allowances was $262.6 million, $218.1 million and $171.3 million in fiscal 2000, 1999 and 1998 respectively. The increase in fiscal 2000 over 1999 and 1999 over fiscal 1998 represents additional markdowns and allowances. The provision for inventory write-downs was $179.3 million in fiscal 2000, $6.2 million in fiscal 1999 and $25.4 million in fiscal 1998. The increase in fiscal
2000 compared to fiscal 1999 reflected the restructuring and special items in fiscal 2000 (see Note 3 to the Consolidated Financial Statements).
Cash used in investing activities was $67.0 million in fiscal 2000 compared with $736.5 million in fiscal 1999. The decrease in fiscal 2000 relates primarily to cash expended of $625.5 million in fiscal 1999 in connection with the acquisitions of Authentic Fitness and A.B.S. In addition, fiscal 2000 was favorably impacted by the proceeds from the sale of the Company's equity investment in Interworld Corporation of $50.4 million. This was partially offset by the proceeds from sale/lease back transactions in fiscal 1999 of $23.2 million.
Cash used in investing activities was $736.5 million in fiscal 1999 compared with $222.8 million in fiscal 1998. The increase in fiscal 1999 compared to fiscal 1998 relates to an increase in acquisition of businesses of $572.4 million primarily related to the Authentic Fitness acquisition in December 1999.
Capital expenditures were $110.1 million, $109.1 million and $142.8 million in fiscal 2000, 1999 and 1998, respectively.
Cash (used in) provided by financing activities was $82.1 million, $724.7 million and $(116.3) million in fiscal 2000, 1999 and 1998 respectively. The decrease in cash provided by financing activities in fiscal 2000 reflects the decrease in net borrowings under the acquisition loan facility of $584.9 million which was provided in fiscal 1999 to acquire Authentic Fitness. In addition, the decrease resulted from the increase in the payment of $35.9 million for deferred financing fees in connection with the Company's October 6, 2000 refinancing (the 'Refinancing'), partially offset by the Company's proceeds from the termination of interest rate swaps of $26.1 million in fiscal 2000. The Company paid $14.4 million of dividends in fiscal 2000 compared to $20.6 million in fiscal 1999 as the Company suspended its dividend payment in the fourth quarter of fiscal 2000. The increase in the cash provided from financing activities in fiscal 1999 compared to fiscal 1998 reflects borrowing of $586.2 million to acquire Authentic Fitness and an increase in net borrowings of $264.8 million to fund the Company's stock buy-back program and purchase of property, plant and equipment. During the year ended December 30, 2000, the Company repurchased no stock and paid cash dividends of $14.4 million. During the year ended January 1, 2000, the Company repurchased 6.2 million shares of its common stock at a cost of $142.0 million and paid cash dividends of $20.6 million. During the year ended January 2, 1999, the Company repurchased 4.8 million shares of its common stock at a cost of $133.0 million and paid cash dividends of $22.3 million. In exchange for shares received from option holders with a fair market value of $0.7 million, $2.6 million and $38.1 million in fiscal years 2000, 1999 and 1998, respectively, the Company paid $0.7 million, $2.6 million and $38.1 million in fiscal years 2000, 1999 and 1998, respectively, of withholding taxes on options that were exercised during the year.
On October 6, 2000, in connection with the Refinancing, the Company and the lenders under its credit facilities entered into an Agreement, Modification, Restatement and General Provision Agreement (the 'Amendment Agreement') and an Intercreditor Agreement. Pursuant to the Amendment Agreement, the Company's credit facilities were modified so that each now contains identical representations and warranties, covenants, mandatory prepayment obligations, and events of default. The Amendment Agreement also amended uncommitted credit facilities and those which matured prior to August 12, 2002 so that they each would be fully committed and mature on August 12, 2002 (maturities of credit facilities due after August 12, 2002 were unaffected).
The Amendment Agreement increased on a uniform basis and made the margins added to base rate or Eurodollar rate loans uniform under the credit facilities, based upon the debt rating of the Company. As of December 30, 2000, the applicable margin for the base rate advances under the credit facilities was 2.5% and the applicable margin for Eurodollar rate advances under the credit facilities was 3.5%. The Amendment Agreement also uniformly made the fee charged by lenders on letters of credit outstanding and the commitment fee charged by lenders based on the undrawn amount of the credit facilities consistent across the credit facilities. Each of these fees also vary based upon the Company's debt rating.
As part of the Refinancing, obligations under the credit facilities were guaranteed by The Warnaco Group, Inc., by all of its domestic subsidiaries and, on a limited basis, by all of its subsidiaries located in Canada, the United Kingdom, France, Germany, the Netherlands, Mexico, Belgium. Hong Kong and
Barbados. The Company and each of such entities have granted liens on substantially all of its assets to secure these obligations. As a result of the Amendment Agreement, as of December 30, 2000, the Company has committed credit facilities in an aggregate amount of $2,609,237, all of which mature on or after August 12, 2002 with substantially no debt amortization until then. See Note 13 to the Consolidated Financial Statements for further details.
As of January 1, 2000, the Company excluded short-term obligations totaling $487,134 from current liabilities because it intended to refinance the obligations on a long-term basis. The Company consummated the Refinancing in October 2000.
The Company had paid a quarterly cash dividend since June 1995. The dividend payment was raised to $0.08 per share from $0.07 per share in February 1997 and increased to $0.09 per share in January 1998. The Company suspended payment of its cash dividend in December 2000.
At December 30, 2000, the Company had approximately $308.5 million of additional borrowing availability under the revolving loan portions of its United States credit facilities. The Company also has bank credit agreements in Canada, Europe and Asia. At December 30, 2000, the Company had approximately $48.2 million of additional borrowing availability under these agreements. As discussed in Notes 1 and 13 to the Consolidated Financial Statements, the Company has received a waiver through May 16, 2001 of certain financial covenants contained in its credit facilities. The Company continues to discuss with its lenders permanent amendments to such financial covenants. The Company's ability to continue to operate as a going concern is dependent on the outcome of its negotiations with its current lenders, or upon its ability to refinance its debt. There can be no assurances that the Company will be able to successfully conclude such negotiations or secure alternative financing.
YEAR 2000 AND ECONOMIC AND MONETARY UNION ('EMU') COMPLIANCE
The Company is fully Year 2000 compliant with respect to all of its operating systems. The Company did not experience any year 2000 related issues.
In anticipation of the establishment of the European EMU and the introduction of a single European unit of currency (the 'Euro') scheduled for January 1, 1999, Warnaco formed a Steering Committee in December 1997 to (1) identify the related issues and their potential effect on Warnaco, and (2) develop an action plan for EMU compliance.
The steering committee developed and implemented an action plan which included preparation of banking arrangements for use of the Euro, development of dual currency price lists and invoices, modification of prices to mitigate the potential effects of price transparency and implementing necessary computer-related remediation steps. As a result of this plan, as of January 1, 1999, Warnaco was EMU compliant. During 1999 and 2000, the Company experienced no adverse effects on its business as a result of the introduction of the Euro.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes 'forward-looking statements' within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events that involve risks and uncertainties, including the ability of the Company to satisfy the conditions and requirements of the credit facilities of the Company, the effect of national and regional economic conditions, the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, and financial difficulties encountered by customers. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under 'Management's Discussion and Analysis of Financial Condition,' 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.
SEASONALITY
The operations of the Company are somewhat seasonal. In fiscal 2000, approximately 53.5% of net revenues were generated in the first half which required working capital and the use of operating cash flow. Therefore, substantially all of the Company's net cash flow from operating activities were generated in the second half of the year. Generally, the Company's operations during the first half of the year are financed by increased borrowings. The following sets forth the net revenues, operating income and net cash flow from operating activities generated for each quarter of fiscal 2000 and fiscal 1999.
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(a) Net revenue and operating income have been revised with no annual impact to net income to be consistent with the Company's restatement of its January 3, 1998 balance sheet. (See Note 1 to the Consolidated Financial Statements.)
(b) Net revenues, operating income and cash flow from (used in) operating activities have been restated. (See Note 21 to the Consolidated Financial Statements.)
INFLATION
The Company does not believe that the relatively moderate levels of inflation in the United States, Canada and Western Europe have had a significant effect on its net revenues or its profitability. Management believes that, in the past, the Company has been able to offset such effects by increasing prices or by instituting improvements in productivity. Mexico historically has been subject to high rates of inflation; however, the effects of inflation on the operation of the Company's Mexican subsidiaries have not had a material impact on the results of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ('FASB') issued Statement of Financial Accounting Standards ('SFAS') No. 138, 'Accounting for Certain Derivative Instruments and Certain Hedging Activities.' This statement addresses a limited number of issues causing implementation difficulties for entities applying SFAS No. 133. SFAS No. 133 requires that an entity recognize all derivative instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (i) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (ii) a hedge of the exposure to variable cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has evaluated the effects of this statement and concluded that it is immaterial to its consolidated financial position, liquidity, cash flows and results of operations.
In May 2000, the FASB's Emerging Issues Task Force ('EITF') reached a consensus on Issue No. 00-14, 'Accounting for Certain Sales Incentives,' which addresses the accounting for sales incentives, rebates, coupons and free products or services. EITF No. 00-14 was effective for calendar year companies in the fourth quarter of 2000. The adoption of EITF No. 00-14 did not have an impact on the Company's financial position and results of operations.
In March 2000, the Emerging Issues Task Force issued Issue 00-7 'Accounting application of EITF Issue No. 96-13, 'Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock,' to Equity Derivative Transactions That Require Net Cash Settlement If Certain Events Occur'. In July 2000, the EITF issued Issue No. 00-19, 'Determination of Whether Share Settlement is Within the Control of the Company for Purposes of Applying EITF Issue No. 96-13'. EITF 00-19 requires the Company to mark to market any equity derivatives that the net cash settled through charges to earnings.
In December 1999, the Securities and Exchange Commission ('SEC') issued Staff Accounting Bulletin ('SAB') No. 101, 'Revenue Recognition in Financial Statements.' This bulletin summarizes certain of the SEC Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The implementation of this bulletin in the fourth quarter of fiscal 2000 did not have an impact on the Company's results of operations or equity.
In September 2000, the FASB issued SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of FASB Statement No. 125'. SFAS No. 140 revises criteria for accounting for securitizations, other financial-asset transfers and collateral and introduces new disclosures, but otherwise carries forward most of the provisions of SFAS No. 125, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities' without amendment. The Company adopted the disclosure requirements of SFAS No. 140 on December 30, 2000, as required. All other provisions of SFAS No. 140 will be adopted after March 31, 2001, as required by the standard. The Company is currently evaluating the impact of this standard on its financial position and results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates, and selectively uses financial instruments to manage these risks. The Company does not enter into financial instruments for speculation or for trading purposes.
INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in interest rates based primarily on its financing activities. The Company enters into interest rate swap agreements to reduce the impact of interest rate fluctuations on cash flow and interest expense. As of December 30, 2000, approximately $329.5 million of the Company's $1,984.6 million of interest-rate sensitive obligations was swapped to fixed rates. Of the total amount swapped, $190.0 million were swapped to a fixed rate of 6.75%, $80.0 million were swapped to a fixed rate of 6.74%, $53.0 million was swapped to a fixed rate of 6.72% and $6.5 million was swapped to a fixed rate of 6.60%, thereby limiting the Company's risk to any future shift in interest rates. As of December 30, 2000, the net fair value of all financial instruments (primarily interest rate swap agreements) with exposure to interest rate risk was approximately $0.5 million. As of December 30, 2000 the Company had approximately $1,655.1 million of obligations subject to variable interest rates in excess of such obligations that had been swapped to achieve a fixed rate. A hypothetical 10% adverse change in interest rates as of December 30, 2000 would have had a $16.8 million unfavorable impact on the Company's pre-tax earnings and cash flow over a one-year period.
FOREIGN EXCHANGE RISK
The Company has foreign currency exposures related to buying, selling and financing in currencies other than the functional currency in which it operates. These exposures are primarily concentrated in the Canadian dollar, Mexican peso, Hong Kong dollar, British pound, Euro, Costa Rican colon, Honduran lempira, Dominican Republic peso and the Chinese renminbi. The Company enters into foreign currency forward and option contracts to mitigate the risk of doing business in foreign currencies. The Company hedges currency exposures of firm commitments and anticipated transactions denominated in non-functional currencies to protect against the possibility of diminished cash flow and adverse impacts on earnings. As of December 30, 2000, the net fair value of financial instruments with exposure to foreign currency risk, which included currency option and forward contracts, was approximately $.03 million. The potential decrease in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $0.5 million.
EQUITY PRICE RISK
The Company is subject to market risk from changes in its stock price as a result of the Equity Agreements. The Equity Agreements provide for the purchase by the Company of up to 5.2 million shares of the Company's Common Stock from two banks and mature on August 12, 2002. The Equity Agreements are required to be settled by the Company, on a net cash settlement basis within the duration of the Equity Agreements.
As of December 30, 2000, the banks had purchased 5.2 million shares under the Equity Agreements. On September 19, 2000, the Equity Agreements were amended and supplemented to reduce the price at which the Equity Agreements could be settled from $12.90 and $10.90, respectively to $4.50 a share, to provide for an aggregate cash payment by the Company of up to $23.4 million and the issuance of promissory notes in the aggregate principal amount of up to $23.4 million, which mature on the same date and bear the same interest rate as the Company's credit facilities. In return for this reduction, the banks received interest bearing notes payable on August 12, 2002 in an aggregate amount of $40,372 which resulted in a corresponding reduction in stockholders' equity. Dividends on the shares outstanding under the Equity Agreements are reimbursed to the Company. On October 6, 2000, the Company entered into a modification agreement of its credit facilities which prohibited the option of share and physical settlement. If these Equity Agreements were settled on a net cash basis at December 30, 2000, the Company's settlement costs, which are required under the terms of its credit facilities to be in the form of interest bearing notes, would be approximately $14.7 million. The terms of the Equity Agreements allow the banks to sell, under certain conditions, the 5.2 million shares and receive additional interest bearing notes if the sale price is less than $4.50 per share or to pay cash to the Company or reduce the outstanding notes if the sale price is in excess of $4.50. Such additional notes would also mature on August 12, 2002. As a result of the above transactions, the Company charged paid in capital in the amount of $8.8 million to account for the change in value of the Equity Agreements from September 19, 2000 through October 6, 2000 and charged investment expense by $5.9 million to account for the change in value of the Equity Agreements between October 6, 2000 and December 30, 2000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial Statements filed with this report. See Item 14 of Part IV.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PREVIOUS INDEPENDENT ACCOUNTANTS
On November 18, 1999, the Audit Committee of the Board of Directors of the Company approved the appointment of Deloitte & Touche LLP as its independent auditors for fiscal 1999. PricewaterhouseCoopers LLP, the Company's previous auditors, was dismissed.
The report of PricewaterhouseCoopers LLP on the financial statements for the fiscal year ended January 2, 1999 contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audit for the year ended January 2, 1999 and through November 18, 1999, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference thereto in their report on the consolidated financial statements for such years.
For the fiscal year 1998 and through November 18, 1999, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K), except that in connection with the audit of the fiscal 1998 consolidated financial statements, PricewaterhouseCoopers LLP informed management that the intimate apparel division manufacturing cost system may not function to reduce to a relatively low level the risk that errors may occur and not be detected within a timely period. The Company took actions in fiscal 1998 which it believes have effectively addressed these matters.
The Registrant requested and PricewaterhouseCoopers LLP furnished it with a letter addressed to the Securities and Exchange Commission (the 'SEC') stating whether or not it agreed with the above statements. Such letter dated November 26, 1999 was filed as an exhibit to the Company's Form 8-K filed November 26, 1999.
NEW INDEPENDENT ACCOUNTANTS
The Registrant engaged Deloitte & Touche LLP as its new independent accountants on November 18, 1999. During the two most recent fiscal years and through November 18, 1999, the Registrant had not consulted with Deloitte & Touche LLP on any of the matters or events set forth in Item 304(a) 2(i) and (ii) of Regulation S-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference from page 14 of Item 4 of Part I included herein and from the Proxy Statement of The Warnaco Group, Inc., to be filed with the Securities and Exchange Commission within 120 days of the fiscal 2000 year-end relating to the 2001 Annual Meeting of Stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference from the Proxy Statement of The Warnaco Group, Inc., to be filed with the Securities and Exchange Commission within 120 days of the fiscal 2000 year-end, relating to the 2001 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference from the Proxy Statement of The Warnaco Group, Inc., to be filed with the Securities and Exchange Commission within 120 days of the fiscal 2000 year-end, relating to the 2001 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference from the Proxy Statement of The Warnaco Group, Inc., to be filed with the Securities and Exchange Commission within 120 days of the fiscal 2000 year-end, relating to the 2001 Annual Meeting of Stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of The Warnaco Group, Inc.
2. Financial Statement Schedule:
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission which are not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
(1) The Company's previous independent auditors' have not issued a report with respect to the fiscal 1998 Consolidated Financial Statements presented herein.
3. LIST OF EXHIBITS:
(b) Reports on Form 8-K.
The Company filed reports on Form 8-K on January 18, 2000, February 29, 2000, July 20, 2000, October 5, 2000, October 11, 2000 and December 1, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York, on the 17th day of April, 2001.
THE WARNACO GROUP, INC.
By: /S/ LINDA J. WACHNER -------------------------------- Linda J. Wachner Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of The Warnaco Group, Inc.
We have audited the accompanying consolidated balance sheets of The Warnaco Group, Inc. and subsidiaries as of December 30, 2000 and January 1, 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Warnaco Group, Inc. and subsidiaries as of December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective January 2, 2000 the Company changed its method of accounting for its retail outlet store inventories.
The accompanying consolidated financial statements for the year ended December 30, 2000 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company was not in compliance with certain covenants of its long-term debt agreements as of December 30, 2000 as a result of losses in 2000, and the Company has a working capital deficiency as of December 30, 2000. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP New York, New York March 29, 2001 (April 13, 2001 as to Notes 1D and 13)
THE WARNACO GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCLUDING SHARE DATA)
See Notes to Consolidated Financial Statements
THE WARNACO GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCLUDING PER SHARE DATA)
See Notes to Consolidated Financial Statements
THE WARNACO GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCLUDING SHARE DATA)
See Notes to Consolidated Financial Statements
THE WARNACO GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See Notes to Consolidated Financial Statements.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization: The Warnaco Group, Inc. (the 'Company') was incorporated in Delaware on March 14, 1986 and on May 10, 1986 acquired substantially all of the outstanding shares of Warnaco Inc. ('Warnaco'). Warnaco is the principal operating subsidiary of the Company.
B. Nature of Operations: The Company designs, manufactures and markets a broad line of women's intimate apparel, men's apparel such as sportswear, jeanswear, khakis, underwear and accessories, women and juniors apparel such as sportswear and jeanswear and active apparel such as swim apparel, swim accessories and fitness apparel for men, women and children under a number of owned and licensed brand names. The Company's products are sold to department and specialty stores, chain stores, mass merchandise stores, sporting goods stores, and catalog and other retailers throughout the world.
C. Basis of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of the Company and all subsidiary companies for the years ended January 2, 1999 ('fiscal 1998'), January 1, 2000 ('fiscal 1999') and December 30, 2000 ('fiscal 2000'). All significant intercompany accounts and transactions are eliminated in consolidation.
D. Management's Plan: In fiscal 2000 the Company incurred an operating loss of $309,892 before income taxes and cumulative effect of a change in accounting principle and $331,073 before cumulative effect of a change in accounting principle. At December 30, 2000, total stockholder's equity was $77,104. The Company used $13,285 of cash in operating activities during fiscal 2000.
As explained in Note 13 of Notes to Consolidated Financial Statements, the Company was not in compliance with certain covenants of its long-term debt agreements as of December 30, 2000, for which waivers were received through May 16, 2001. As the waivers do not extend through the end of fiscal 2001, the debt has been classified as a current liability in the accompanying consolidated balance sheet. The Company is currently in discussions with its lenders for permanent amendments to the agreements. If the Company is not successful, it would have to refinance its debt with others. The Company's ability to continue to operate as a going concern is dependent on the outcome of these negotiations or upon its ability to refinance its debt. There can be no assurances it will be able to successfully conclude such negotiations or secure alternative financing. As a result of the reclassification of its long-term debt to current, the Company has a working capital deficit of $1,433,706.
The Company continues to review its operating structure in an effort to reduce costs. In addition, the Company has retained financial and legal advisors who are reviewing the financial alternatives available to the Company, including, without limitation, a possible debt restructuring and possible sales of assets.
E. Use of Estimates: The Company utilizes estimates and assumptions in the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
F. Translation of Foreign Currencies: Cumulative translation adjustments, arising primarily from consolidating the net assets and liabilities of the Company's foreign operations at current rates of exchange as of the respective balance sheet date, are applied directly to stockholders' equity and are
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
included as part of accumulated other comprehensive income (loss). Income and expense items for the Company's foreign operations are translated using monthly average exchange rates.
G. Cash and Cash equivalents: Cash and cash equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less.
H. Marketable Securities: Marketable securities are stated at fair value based on quoted market prices. All investments were classified as available-for-sale with any unrealized gains or losses, net of tax, included as a component of stockholders' equity and included in other comprehensive income.
I. Inventories: Inventories are stated at the lower of cost or market, cost being determined principally on a first-in, first-out basis.
J. Property, plant and equipment: Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided over the lesser of the estimated useful lives of the assets or term of the lease, using the straight-line method, as summarized below:
Assets under capital lease and related amortization of capitalized leases are included in property, plant and equipment and accumulated depreciation and the associated liability is included in debt. Depreciation Expense was $23,931, $36,671 and $62,148 for fiscal years 1998, 1999 and 2000, respectively.
K. 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 and related guidance and are amortized under the straight-line method, over the estimated useful life of the software, generally 3 to 7 years. General and administrative costs related to developing or obtaining such software are expensed as incurred.
L. Intangible Assets: Intangible assets consist of goodwill, licenses, trademarks, deferred financing costs and other intangible assets. Goodwill represents the excess of cost over net assets acquired from business acquisitions, and is amortized on a straight-line basis over the estimated useful life, ranging from 20 to 40 years. Deferred financing costs are amortized over the life of the related debt and included in interest expense. Deferred financing costs were $13,399 and $43,132 as of January 1, 2000 and December 30, 2000, respectively. Licenses and trademarks were $272,894 and $269,595 as of January 1, 2000 and December 30, 2000, respectively. Licenses are amortized over the remaining life of the license, which range between 5 and 40 years and trademarks are amortized over the remaining life of the trademark not to exceed 20 years. Other assets of $45,204 at January 1, 2000 and $46,171 at December 30, 2000 include long-term investments, other non-current assets and deposits.
Amortization of intangible and other assets, included in selling, administrative and general expenses was $22,569, $24,285 and $39,931 for fiscal years 1998, 1999 and 2000, respectively.
The Company reviews impairment when changes in circumstances, which include, but are not limited to, the historical and projected operating performance of business operations, specific industry trends and general economic conditions, indicate that the carrying value of business specific intangibles or enterprise level goodwill may not be recoverable. Under these circumstances, the Company estimates future cash flows using the recoverability method (undiscounted and including related interest charges), as a basis for determining any impairment loss. An impairment loss would then be recorded to adjust the carrying value of intangibles to the estimated fair value. The impairment loss taken would be no greater
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
than the amount by which the carrying value of the net assets of the business exceeds its fair value. No such impairment losses have been recorded.
M. Advertising Costs: Advertising costs are included in selling, administrative and general expenses and expensed as incurred. Cooperative advertising allowances provided to customers are charged to operations, as earned, and are included in selling, administrative and general expenses. The amounts charged to operations for advertising costs and cooperative advertising during fiscal 1998, 1999 and 2000 were $102,600, $118,029, and $141,340, respectively.
N. Income Taxes: The provision for income taxes, income taxes payable and deferred income taxes are determined using the liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that a portion of the deferred tax asset balance will not be realized. As of December 30, 2000, unremitted earnings of non-U.S. subsidiaries were approximately $143,300. Since it is the Company's intention to permanently reinvest these earnings, no U.S. taxes have been provided. Management believes that there would be no additional income tax liability on the statutory earnings of foreign subsidiaries, if remitted.
O. Revenue Recognition: The Company recognizes revenue when goods are shipped to customers, net of allowances for returns and other discounts.
P. Stock Options: The Company accounts for options granted using the intrinsic value method. Because the exercise price of the Company's options equals the market value of the underlying stock on the date of grant, no compensation expense has been recognized for any period presented.
Q. Financial Instruments: Derivative financial instruments are used by the Company in the management of its interest rate and foreign currency exposures. The Company does not use derivative financial instruments for speculation or for trading purposes. Gains and losses resulting from effective hedges of existing assets, liabilities or firm commitments are deferred and recognized when the offsetting gains and losses are recognized on the related hedged items. Income and expense are recorded in the same category as that arising from the related asset or liability being hedged. Changes in amounts to be received or paid under interest rate swap agreements are recognized as interest expense. Gains and losses realized on termination of interest rate swap contracts are deferred and amortized over the remaining terms of the original hedged instrument. Premiums paid for foreign currency option contracts are amortized over the life of the option contract. The Company also uses derivative financial instruments to execute purchases of its shares under its stock buyback program (the "Equity Agreements"). The Company is subject to market risk from changes in its stock price as a result of the Equity Agreements. The Equity Agreements provide for the purchase by the Company of up to 5.2 million shares of the Company's common shares. These agreements are required to be settled by the Company, on a net cash basis. On October 6, 2000, the Company entered into a modification agreement of its credit facilities which prohibited the Company's option to net share or physically settle. As a result, the Company charged paid-in-capital in the amount of $8,800 to account for the change in value of the Equity Agreements from their inception to that date. Subsequent to October 6, 2000, the Company is charging investment expense for the change in valuation of Equity Agreements. This charge was $5,900 in fiscal 2000.
A number of major international financial institutions are counterparties to the Company's financial instruments, including derivative financial instruments. The Company monitors its positions with, and the credit quality of, these counterparty financial institutions and does not anticipate non-performance of these counterparties. Management believes that the Company would not suffer a material loss in the event of nonperformance by these counterparties.
Equity Instruments Indexed to the Company's Common Stock: Equity instruments are originally recorded at fair value. Proceeds received upon the sale of equity instruments which are net share settled, at the Company's option and amounts paid upon the purchase of such equity instruments are recorded as a component of stockholders' equity. Subsequent changes in the fair value of these equity instrument contracts are not recognized. Repurchases of common stock pursuant to the terms of the equity instruments are recorded as treasury stock, at cost. If the contracts are ultimately settled in cash, the amount of cash paid or received is recorded in additional paid-in capital. Equity instruments that are net cash settled are recorded as assets or liabilities. Changes in fair value are recorded in the statement of operations.
R. Concentration of Credit Risk: The Company sells its products to department stores, specialty stores, chain stores, sporting goods stores, catalogs, direct sellers and mass merchandisers. The Company performs periodic credit evaluations of its customers' financial condition and generally does
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
not require collateral. The Company has credit insurance covering these customers within agreed upon limits. Credit losses have been within management's expectations.
S. Comprehensive Income: Comprehensive income consists of net income, unrealized gain/(loss) on marketable securities (net of tax), cumulative foreign currency translation adjustments and unfunded minimum pension liability. Because such cumulative translation adjustments are considered a component of permanently invested unremitted earnings of subsidiaries outside the United States, no income taxes are provided on such amounts.
T. Start-Up Costs: In the fourth quarter of fiscal 1998, retroactive to the beginning of the year, the Company early adopted the provisions of SOP 98-5 requiring that pre-operating costs relating to the start-up of new manufacturing facilities, product lines and businesses be expensed as incurred. The Company recognized $46,250, after taxes ($71,484 pre-tax), as the cumulative effect of a change in accounting to reflect the new accounting and write-off the balance of unamortized deferred start-up costs as of the beginning of 1998. Prior to the early adoption of SOP 98-5, start-up costs were deferred and amortized using the straight line method, principally over five years.
U. Change in accounting principle: Effective January 2, 2000, the Company changed its accounting method for valuing its retail outlet store inventory. Prior to the change, the Company valued its retail inventory using average cost. Under its new method, the Company values its retail inventory using the actual cost method. The Company believes its new method is preferable because it results in a better matching of revenue and expense and is consistent with the method used for its other inventories. The cumulative effect of the change as of January 1, 2000 was $13,110, net of tax. The information necessary to determine the pro-forma effect on prior years results of operations is not available.
V. Restatement and reclassifications: The Company restated January 3, 1998 stockholders' equity by $26,000. The restatement reflects adjustments to increase accounts receivable reserves by $51,800 to provide for discounts, returns and allowances not previously reserved, to increase accrued liabilities by $6,300, to decrease inventory by $7,400, to decrease other assets by $9,500, partially offset by an increase to non-current deferred tax asset of $49,000 to tax effect these adjustments and eliminate tax accruals not required. This restatement has no effect on reported net income for any subsequent year. The 1998 and 1999 accounts have been revised to be consistent with the accounting for the matters that resulted in the adjustments to retained earnings, including in 1999, an increase of $12,400 in cost of goods sold, an increase of $5,300 in selling, general and administrative expenses and a decrease of $17,700 in income tax expense.
Certain other 1999 and 1998 amounts have been reclassified to conform to the current presentation.
W. Shipping and handling costs: Such costs are included in selling, administrative and general expenses and approximate 3% of net revenues. The Company does not bill its customers for shipping and handling, and accordingly, has no such revenues.
X. Recent accounting pronouncements: In June 1998 and June 2000, the FASB issued SFAS No. 133 'Accounting for Derivative Instruments and Hedging Activities' and SFAS No. 138, 'Accounting for Certain Derivative Instruments and Certain Hedging Activities'. These statements establish accounting and reporting standards requiring every derivative instrument be recorded on the balance sheet as either a asset or a liability. SFAS Nos. 133 and 138 are effective for fiscal years beginning after June 15, 2000. The adoption of these new standards did not have a material impact on the Company's earnings or financial position.
In May 2000, the FASB's Emerging Issues Task Force ('EITF') reached a consensus on Issue No. 00-14, 'Accounting for Certain Sales Incentives,' which addresses the accounting for sales incentives, rebates, coupons and free products or services. EITF No. 00-14 is effective for calendar year companies in the fourth quarter of fiscal 2000. The Company has evaluated the impact of adoption EITF No 00-14 and has concluded that it has no material impact on the Company's financial position or results of operations.
In March 2000, the Emerging Issues Task Force issued Issue 00-7 'Accounting application of EITF Issue No. 96-13, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to Equity Derivative Transactions That Require Net Cash Settlement If Certain Events Occur'. In July 2000, the EITF issued Issue No. 00-19, 'Determination of Whether
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Share Settlement is Within the Control of the Company for Purposes of Applying EITF Issue No. 96-13'. EITF 00-19 may require the Company to mark to market the Equity Agreements unless the Company amends such agreements by June 30, 2001 to remove provisions, which require net cash settlement. (see Note 15.)
In December 1999, the Securities and Exchange Commission ('SEC') issued Staff Accounting Bulletin ('SAB') No. 101, 'Revenue Recognition in Financial Statements'. This bulletin summarizes certain of the SEC Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The implementation of this bulletin in the fourth quarter of fiscal 2000 did not have an impact on the Company's results of operations or equity.
In September 2000, the FASB issued SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of FASB Statement No. 125'. SFAS No. 140 revises criteria for accounting for securitizations, other financial-asset transfers and collateral and introduces new disclosures, but otherwise carries forward most of the provisions of SFAS No. 125, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities' without amendment. The Company adopted the disclosure requirements of SFAS No. 140 on December 30, 2000, as required. All other provisions of SFAS No. 140 will be adopted after March 31, 2001, as required by the standard. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 2 - ACQUISITIONS
AUTHENTIC FITNESS CORPORATION
In December 1999, the Company acquired all of the outstanding common stock of Authentic Fitness Corporation ('Authentic Fitness') for $437,100 (all of which was financed), excluding debt assumed of approximately $154,170 and other costs incurred in the acquisition of $3,255. The acquisition was accounted for as a purchase. Accordingly, the accompanying consolidated financial statements include the results of operations for Authentic Fitness commencing on December 16, 1999. The allocation of the total purchase price, exclusive of cash acquired of approximately $7,000, to the fair value of the net assets acquired and liabilities assumed is summarized as follows:
Included in intangible and other assets for the Authentic Fitness acquisition is $417,526 of goodwill which is being amortized over 40 years.
The following summarized unaudited pro forma information combines financial information of the Company with Authentic Fitness for the fiscal year ended 1999 assuming the acquisition had occurred as of January 3, 1999. The unaudited pro-forma information does not reflect any cost savings or other benefits anticipated by the Company's management as a result of the acquisition. The unaudited pro-forma information reflects interest expense on the additional financing of $437,100 incurred for the acquisition and the amortization of goodwill using a 40-year life.
A.B.S. CLOTHING COLLECTIONS, INC.
In September 1999, the Company acquired the outstanding common stock of A.B.S. Clothing Collection, Inc. ('ABS'). ABS is a leading contemporary designer of casual sportswear and dresses sold through better department and specialty stores. The purchase price consisted of a cash payment of $29,500, shares of the Company's common stock with a fair market value of $2,200 and a deferred cash payment of $22,800 and other costs incurred in the acquisition of approximately $1,208. The acquisition was accounted for as a purchase. The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is summarized as follows:
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The acquisition did not have a material impact on 1999 consolidated earnings. Included in intangibles and other assets for the A.B.S. acquisition is $54,136 of goodwill, which is being amortized over 20 years.
OTHER ACQUISITIONS -- 1999
During 1999, the Company acquired two other companies and certain other licenses to sell products in Canada, which were not significant and did not have a significant pro forma impact on fiscal 1999 consolidated earnings. The excess purchase price over fair value of the net assets acquired and liabilities assumed on these acquisitions was approximately $5.0 million.
OTHER ACQUISITIONS -- 1998
During 1998, the Company acquired certain inventory and other assets as well as the sub-license to produce Calvin Klein jeans and jeans-related products for children in the United States, Mexico and Central and South America and the sub-license to produce Calvin Klein jeans and related products for children in Canada. Also during 1998, the Company acquired certain assets as well as the sub-license to distribute Calvin Klein jeans, jeans-related products and khakis for men and women in Mexico, Central America and Canada. The total cost of these acquisitions, including related costs and expenses, was $53,100. The allocation of the purchase prices to the fair value of the assets acquired as of January 2, 1999 is summarized below:
The acquisition, which was accounted for as a purchase, did not have a material effect on 1998 consolidated results of operations.
NOTE 3 - SPECIAL CHARGES
FISCAL 2000
In response to a difficult retail environment, the Company performed a strategic review of its worldwide businesses, manufacturing, distribution and other facilities, and product lines and styles and initiated a global implementation of programs designed to create cost efficiencies through plant consolidations, workforce reductions and consolidation of the finance, manufacturing and operations organizations within the Company and the discontinuation of product lines and styles that were unprofitable. As a result of these initiatives the Company recorded special charges of $269,626 during fiscal 2000 related to costs to exit certain facilities and activities and consolidate such operations, including charges related to inventory write-downs and other asset write-offs, facility shutdown and lease obligation costs, employee termination and severance costs, retail outlet store closings and other related costs. The non-cash portion of the charge is $171,317 and the cash portion is $98,309. Of the total amount of charges, $201,279 is reflected in cost of goods sold and $68,347 is reflected in selling,
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
administrative and general expenses. The detail of the charge, including costs incurred and reserves remaining for costs estimated to be incurred through completion of the aforementioned programs are summarized below:
Of the $56,492 remaining balance, $23,858 represents cash charges to be spent in fiscal 2001.
INVENTORY WRITE-DOWNS AND OTHER ASSET WRITE-OFFS $(154,851)
Management's strategic review of the Company's manufacturing, distribution and administrative facilities and product lines and styles resulted in the decision to close seven manufacturing plants, twelve distribution facilities and two administrative facilities as well as the closure of 26 outlet stores. In addition, the Company discontinued the manufacturing of certain raw materials and product styles and wrote-off shop and fixture costs removed from service at certain of its customer's retail locations. Included in the above amount are charges for inventory write-downs of $127,825 and write-off of fixed assets and other assets of $27,026. Of the total charge, $134,901 is included in cost of sales and $19,950 is included in selling, administrative and general expenses.
FACILITY SHUTDOWN AND CONTRACT TERMINATION COSTS $(53,261)
Costs associated with the shutdown of the facilities mentioned above include plant reconfiguration and shutdown costs of $47,751, which were charged to expense as incurred and lease obligation costs of $5,510. Of the total charge, $40,281 is included in cost of sales and $12,980 is included in selling, administrative and general expenses.
EMPLOYEE TERMINATION AND SEVERANCE COSTS $(25,772)
The Company recorded charges of $11,729 to cost of goods sold related to providing severance and benefits to 3,589 manufacturing related employees terminated as a result of the closure of certain facilities. The Company also recorded charges of $14,043 to selling, administrative and general expenses related to providing severance and benefits to 816 distribution and administrative employees terminated.
RETAIL OUTLET STORE CLOSINGS $(20,037)
In an effort to improve the overall profitability of the retail outlet division and to respond to a soft outlet store market, the Company announced plans to close 26 retail outlet stores all of which will be closed by June 30, 2001. Included in the charge are costs for the write-down of inventory of discontinued product lines and styles which the Company intends to liquidate through these stores of $13,697, the write-off of fixed assets associated with these stores of $1,793, the costs of terminating leases of $1,653 and the losses incurred attributable to the stores to be closed of $2,894. Of the total
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
charge, $13,697 is included in cost of sales and $6,340 is included in selling, administrative and general expenses.
LEGAL AND OTHER RELATED COSTS $(15,705)
Also included in the charge are $12,490 of legal expenses related to the Calvin Klein litigation and global initiatives mentioned above and $3,215 of other costs. Of the total charge, $671 is included in cost of sales and $15,033 is included in selling, administrative and general expenses.
Fiscal 1998
Following significant acquisitions in 1996 and 1997, in the fourth quarter of 1998 the Company initiated the implementation of programs designed to streamline operations and improve profitability. These programs resulted in charges of approximately $33,200 related to costs to exit certain product lines and styles, as well as facilities and realignment of manufacturing and distribution activities, including charges related to inventory write-downs and employee termination and severance benefits.
Additionally, in the fourth quarter of fiscal 1998, the Company wrote-off approximately $3,700 which included $3,200 of accounts receivable, consisting of customer bankruptcies of $2,900 and other write-offs of $300.
Of the total $36,900 of 1998 charges, $21,800 is reflected in cost of goods sold and $15,100 is reflected in selling, administrative and general expenses.
The detail of the charges recorded in 1998 are summarized below:
DISCONTINUED PRODUCT LINES AND STYLES AND MANUFACTURING AND DISTRIBUTION REALIGNMENT ($19,800)
Management's review of certain product lines resulted in the decision to discontinue the manufacture and marketing of certain unprofitable product lines during the fourth quarter of 1998, including the Valentino and Marilyn Monroe product lines, as well as certain private label brands. The decision to discontinue these product lines will enable the Company to focus its working capital on more profitable product lines and styles. The Company also announced the realignment of manufacturing and distribution operations as an effort to reduce costs. Included in the amount above are charges for inventory write-downs for obsolete and excess raw materials and finished goods of $13,000 (included in cost of sales).
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Costs for facility shutdowns of $4,300 represent the write-off of unamortized leaseholds and fixed and other assets at the Company's former administrative offices in Connecticut. The cost for facility realignment of $2,500, all of which was incurred in 1998, includes charges for the relocation of and realignment of existing factories and consolidation of warehouse and distribution facilities.
For fiscal 1998, discontinued product lines and styles contributed net revenues of $26,300 and operating losses of $13,400. Fourth quarter operating losses incurred subsequent to the commitment date of the decision to discontinue these product lines and styles were $5,300. These product lines contributed net revenues of $56,800 and operating losses of $700 in fiscal 1997.
RETAIL OUTLET STORE SHUTDOWNS ($4,800)
In an effort to improve the overall profitability of the retail outlet store division, the Company announced plans to close 13 retail outlet stores. Included in the charge are costs for the write-down of inventory of discontinued product lines and styles which the Company intends to liquidate through these stores at close-out prices of $4,100 and costs for terminating leases of $700. The Company closed all of the stores by the second quarter of 1999.
EMPLOYEE TERMINATION AND SEVERANCE ($6,100)
The Company recorded charges of approximately $800 related to the cost of providing severance and benefits to approximately 381 manufacturing related employees terminated as a result of the closure of certain facilities and $5,300 (all of which was charged to expense at the date when 123 managerial and administrative employees were terminated) related to a reduction in work force during the fourth quarter of 1998.
ADDITIONAL COSTS RELATED TO PRIOR STRATEGIC INITIATIVES ($2,500)
The Company expensed as incurred approximately $2,000 of additional costs, (in part due to facilities remediation) related to the final disposition of certain Hathaway assets that were retained following the sale of that division in 1996.
The Company expensed as incurred approximately $500 of additional costs related to the merger integration initiative undertaken in 1997 following the Designer Holdings acquisition. These costs relate principally to settlements on accounts receivable balances with common customers. In the first quarter of 2000, the Company paid in cash the remaining reserves balance of $209 related to the 1997 Designer Holdings acquisition for employee termination and severance.
NOTE 4 - SALE OF ACCOUNTS RECEIVABLE
In October 1998, the Company entered into a revolving receivables securitization facility, which matures on August 12, 2002, whereby it could obtain up to $200,000 of funding from the sale of eligible U.S. trade accounts receivable through a bankruptcy remote special purpose subsidiary. The facility was amended in March 2000 to provide up to $300,000 of funding. The amount of funding varies based upon the availability of the designated pool of eligible receivables and is directly affected by changing business volumes. At December 30, 2000, the Company had sold $454,862 of accounts receivable for which it received proceeds of $249,600 in cash; at January 1, 2000, the Company had sold $383,827 of accounts receivable for which it received proceeds of $195,900 in cash. The Company retains the interest in and subsequent realization of the excess of amounts sold over the proceeds received and provides allowances as appropriate on the entire balance. Due to the short-term nature of the receivables, the Company's retained interest in the pool is valued at historical cost which approximates fair value. Accounts receivable are presented net of the $249,600 and $195,900 for fiscal years 2000 and 1999, respectively, of proceeds from trade receivables sold, with the remaining $205,262 and $187,927, respectively, included in accounts receivable. During fiscal 2000, the Company collected and re-invested on a revolving basis approximately $1,522,812 of receivables. The sale is reflected
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
as a reduction of accounts receivable and the proceeds received are included in cash flows from operating activities. The loss on the sale of receivables for this program totalled $16,156 for fiscal 2000 and is incurred monthly and is based on variable rates indexed to commercial paper and is included in selling, administrative and general expense.
NOTE 5 - RELATED PARTY TRANSACTIONS
Prior to the December 1999 acquisition, Authentic Fitness was considered a related party as certain directors and officers of the Company were also directors and officers of Authentic Fitness. From time to time, the Company and Authentic Fitness jointly negotiated contracts and agreements with vendors and suppliers. In fiscal 1998 and 1999, Authentic Fitness paid the Company $15,566 and $24,614, respectively for certain occupancy services related to leased facilities, computer services, laboratory testing, transportation and contract production services. In fiscal 1998 and 1999, the Company paid Authentic Fitness approximately $462 and $865, respectively, for certain design and occupancy services. The Company also purchased inventory from Authentic Fitness for sale in its retail outlet stores of $11,223 and $16,833 in fiscal 1998 and 1999, respectively. In June 1995, the Company paid $1,000 in connection with and under a sub-license entered into with Authentic Fitness to design, manufacture and distribute certain intimate apparel using the Speedo brand name. The Company recognized royalty expense of $58 and $10 in fiscal 1998 and 1999, respectively.
A former director and a stockholder of the Company is the sole stockholder, President and a director of The Spectrum Group, Inc. ('Spectrum'). The Company recognized consulting expenses of $560, $560 and $560 in fiscal 1998, 1999 and 2000, respectively, pursuant to a consulting agreement with Spectrum that was terminated effective December 31, 2000. Such director resigned from the Board of Directors on March 15, 2001. A director of the Company provided consulting services to the Company from time to time and received $125 for such services in fiscal 1998. Such director's term will expire May 18, 2001 and, in accordance with the Company's retirement policy for directors, such director is not standing for re-election. The Company believes that the terms of the relationships and transactions described above are at least as favorable to the Company as could have been obtained from an unaffiliated third party.
NOTE 6 - BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
BUSINESS SEGMENTS
The Company operates in three segments: Intimate Apparel, Sportswear and Accessories and Retail Stores.
The Company designs, manufactures and markets apparel within the Intimate Apparel and Sportswear and Accessories markets and operates a Retail Store Division, with stores under the Speedo Authentic Fitness name, as well as Company outlet stores for the disposition of excess and irregular inventory.
The Intimate Apparel Division designs, manufactures and markets moderate to premium priced intimate apparel for women under the Warner's, Olga, Calvin Klein, Lejaby, Van Raalte, Fruit of the Loom, Weight Watchers and Bodyslimmers brand names, and men's underwear under the Calvin Klein brand name.
The Sportswear and Accessories Division designs, manufactures, imports and markets moderate to premium priced men's, women's, junior's and children's sportswear and jeanswear, men's accessories and men's, women's, junior's and children's active apparel under the Chaps by Ralph Lauren, Calvin Klein, Catalina, A.B.S by Allen Schwartz, Speedo, Oscar de la Renta, Anne Cole, Cole of California, Sandcastle, Sunset Beach, Ralph Lauren, Polo Sport Ralph Lauren, Polo Sport RLX and White Stag brand names.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The Retail Store division which is comprised of both outlet as well as full-price retail stores, principally sells the Company's products to the general public through 135 stores under the Speedo Authentic Fitness name as well as 132 of the Company's outlet stores for the disposition of excess and irregular inventory. The Company does not manufacture or source products exclusively for the outlet stores. In fiscal 2001 the Company is closing 35 of its Speedo Authentic Fitness stores and 22 of its Company outlet stores as part of its restructuring to reduce its retail operating expenses.
The accounting policies of the segments are the same as those described in the 'Summary of Significant Accounting Policies' in Note 1. Transfers to the Retail stores division occur at standard cost and are not reflected in net revenues of the Intimate Apparel or Sportswear and Accessories segments. The Company evaluates the performance of its segments based on earnings before interest, taxes, amortization of intangibles and deferred financing costs and special charges, as well as the effect of the early adoption of new accounting pronouncements or other changes in accounting and charges in fiscal 1998 related to the restatement for an inventory adjustment for production and inefficiency costs ('Adjusted EBIT'). Information by business segment is set forth below:
A reconciliation of total segment Adjusted EBIT to total consolidated income (loss) before taxes and cumulative effect of a change in accounting principle for fiscal years ended January 2, 1999, January 1, 2000, and December 30, 2000 is as follows:
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
- --------- * Includes corporate items not allocated to business segments, primarily fixed assets related to the Company's management information systems and corporate facilities and goodwill, intangible and other assets.
GEOGRAPHIC INFORMATION
Included in the consolidated financial statements are the following amounts relating to geographic locations:
INFORMATION ABOUT MAJOR CUSTOMERS
In fiscal 2000 and 1999, no customer accounted for more than 10% of the Company's net revenues. In fiscal 1998, the Company had one customer who accounted for approximately $198,282 or 10.2% of net revenues. Such revenues are included in the Intimate Apparel and Sportswear and accessories segments.
NOTE 7 - INCOME TAXES
The following presents the United States and foreign components of income from continuing operations before income taxes and cumulative effect of change in accounting principle and the total provision (benefit) for United States federal and other income taxes:
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The following presents the reconciliation of the provision for income taxes to United States federal income taxes computed at the statutory rate:
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The components of deferred tax assets and liabilities as of January 1, 2000 and December 30, 2000 are as follows:
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(a) See Note 1
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The Company has estimated United States net operating loss carryforwards of approximately $836,000 and foreign net operating loss carryforwards of approximately $49,300 at December 30, 2000. The United States net operating loss carryforwards, if they remain unused, expire as follows:
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. The valuation allowance increased to $161,055 (of which $15,005 relates to foreign entities) in fiscal 2000 from $11,330 (of which $10,776 relates to foreign entities) in fiscal 1999. The Company has recorded a valuation allowance to reduce the amount of the deferred tax asset to an amount that will be more likely than not be realized. The Company increased the valuation allowance after a review of its available tax planning strategies which it considered prudent and feasible following the increase in the net operating loss caused by the fiscal 2000 loss.
A portion of the valuation allowance in the amount of $21,671 (of which $4,841 relates to foreign entities) at December 30, 2000 relates primarily to net deferred tax assets which were recorded in purchase accounting. The recognition of such amount in future years will be allocated to reduce the excess purchase price over the net assets acquired and other non-current intangible assets.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
At December 30, 2000, other current assets include current income taxes receivable of $4,023 (of which $2,090 relates to foreign entities) and current liabilities include income taxes payable of $16,470 (of which $15,882 relates to foreign entities). At January 1, 2000, other current assets include current income taxes receivable of $26,058 (of which $1,015 relates to foreign entities) and current liabilities include income taxes payable of $16,217 (of which $13,641 relates to foreign entities).
NOTE 8 - EMPLOYEE RETIREMENT PLANS
The Company has a defined benefit pension plan, which covers substantially all non-union domestic employees (the 'Pension Benefit Plan'). The Plan is noncontributory and benefits are based upon years of service. The Company also has defined benefit health care and life insurance plans that provide postretirement benefits to retired employees and former directors ('Other Benefit Plans'). The Other Benefit Plans are contributory with retiree contributions adjusted annually.
The components of net periodic benefit cost is as follows:
A reconciliation of the balance of the benefit obligations is as follows:
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
A reconciliation of the change in the fair value of plan assets is as follows:
Pension Benefit Plan assets include fixed income securities and marketable equity securities, including 1,100,800 and 673,100 shares of the Company's Class A Common Stock, which had a fair market value of $13,554 and $1,136 at January 1, 2000 and December 30, 2000, respectively. The Pension Benefit Plan also owned 502,800 shares of Authentic Fitness' common stock at January 2, 1999. Such shares had a fair market value of $9,176 at January 2, 1999. In December 1999 the Company acquired Authentic Fitness and, as a result, the Pension Benefit Plan tendered all such shares. (See Note 2 to the Consolidated Financial Statements.)
The Company contributes to a multi-employer defined benefit pension plan on behalf of union employees of its two manufacturing facilities and a warehouse and distribution facility, which amounts are not significant for the periods presented.
The weighted-average assumptions used in the actuarial calculations were as follows:
For measurement purposes, the weighted average annual assumed rate of increase in the per capita cost of covered benefits (health care cost trend rate) was 9% for the years through 2000 and 5% for the years 2001 and beyond. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
The Company also sponsors a defined contribution plan for substantially all of its domestic employees. Employees can contribute to the plan, on a pre-tax and after-tax basis, a percentage of their qualifying compensation up to the legal limits allowed. The Company contributes amounts equal to 15.0% of the first 6.0% of employee contributions to the defined contribution plan. The maximum
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Company contribution on behalf of any employee is $1,350 in one year. Employees vest in the Company contribution over four years. Company contributions to the defined contribution plan totaled $386, $388 and $552 for the years ended January 2, 1999, January 1, 2000, and December 30, 2000, respectively.
NOTE 9 - MARKETABLE SECURITIES
During the first quarter of fiscal 1999, the Company received shares of marketable securities in exchange for the early termination of a non-compete agreement with the former principal stockholder of its Designer Holdings subsidiary. The fair market value of the securities received was $875, which was recorded as a reduction of goodwill associated with the Designer Holdings acquisition. As of December 30, 2000, the fair market value of the security was $259. During 1998 and 1999, the Company made investments, aggregating $7,650, to acquire an interest in Interworld Corporation, a leading provider of E-Commerce software systems and other applications for electronic commerce sites. These investments were classified as available-for-sale securities and recorded at fair value based on quoted market prices at January 1, 2000. In the first quarter of fiscal 2000, the Company sold its investment in InterWorld resulting in a realized pre-tax gain of $42,782 ($25,862 net of taxes), which is recorded as investment income.
NOTE 10 - INVENTORIES
NOTE 11 - PROPERTY, PLANT AND EQUIPMENT
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 12 - COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) as of January 1, 2000 and December 30, 2000 are as follows:
NOTE 13 - DEBT
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(1) As of January 1, 2000, the Company excluded short-term obligations totaling $487,134 from current liabilities because it intended to refinance these obligations on a long-term basis. The Company consummated the refinancing by utilizing long-term commitments in place in fiscal 2000. As discussed below, these and other obligations were refinanced in October 2000.
AMENDMENT AGREEMENT
On October 6, 2000 the Company and the lenders under its credit facilities entered into an Amendment, Modification, Restatement and General Provisions Agreement (the 'Amendment Agreement') and an Intercreditor Agreement. Pursuant to the Amendment Agreement, the Company's credit facilities were modified so that each now contains identical representations and warranties, covenants, mandatory prepayment obligations, and events of default. The Amendment Agreement also amended uncommitted credit facilities and those which matured prior to August 12, 2002 so that they would mature on August 12, 2002 (maturities of credit facilities due after August 12, 2002 were unaffected).
The Amendment Agreement increased on a uniform basis and made the margins added to base rate or Eurodollar rate loan uniform under the credit facilities, and determined according to the debt
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
rating of the Company. As of December 30, 2000, the applicable margin for base rate advances under the credit facilities was 2.5% and the applicable margin for Eurodollar rate advances under the credit facilities was 3.5%. The Amendment Agreement also made the fee charged based on the letters of credit outstanding and a commitment fee charged based on the undrawn amount of the credit facilities consistent across the credit facilities. Both of these fees also vary according to the Company's debt rating.
As part of the signing of the Amendment Agreement, obligations under the credit facilities were guaranteed by The Warnaco Group, Inc., by all of its domestic subsidiaries and, on a limited basis, by all of its subsidiaries located in Canada, the United Kingdom, France, Germany, the Netherlands, Mexico, Belgium, Hong Kong and Barbados. The Company and each of such entities have granted liens on substantially all of its assets to secure these obligations. As a result of Amendment Agreement, as of December 30, 2000, the Company has committed credit facilities in an aggregate amount of $2,609,237, all of which expire on or after August 12, 2002 with substantially no debt amortization until then.
$600,000 REVOLVING CREDIT FACILITY
Warnaco Inc. is the borrower under a $600,000 Revolving Credit Facility, which includes a $100,000 sub-facility available for letters of credit. This facility expires on August 12, 2002 in accordance with the terms of the Amended and Restated Credit Agreement, originally dated November 17, 1999, as amended on October 6, 2000 which governs the facility. Amounts borrowed under this facility may be borrowed at either base rate or at an interest rate based on the Eurodollar rate plus a margin determined under the Amendment Agreement. As of January 1, 2000 and December 30, 2000, the amount of borrowings outstanding under this facility was $576,667 and $425,680, respectively. Additionally, as of January 1, 2000 and December 30, 2000, the amount of letters of credit outstanding under this facility was $4,076 and $4,739, respectively. The weighted average interest rates under this facility as of January 1, and December 30, 2000 were 6.40% and 10.34%, respectively.
$423,600 REVOLVING CREDIT FACILITY
Warnaco Inc. is also a borrower under a $450,000 Revolving Credit Facility, which was reduced to $423,600 under the Amendment Agreement. The credit agreement governing this facility, dated November 17, 1999, provides that the term of the facility will expire on November 17, 2004. Amounts borrowed under this facility are subject to interest at a base rate or at an interest rate based on the Eurodollar rate plus a margin determined under the Amendment Agreement. As of January 1, 2000, there were no borrowings outstanding under this facility. As of December 30, 2000, the amount of borrowings outstanding under this facility was $284,711 with a weighted average interest rate of 10.47%.
$587,548 TERM LOAN
Warnaco Inc. is also a borrower under a $600,000 Term Loan, dated November 17, 1999, which was reduced to approximately $587,548 under the Amendment Agreement. The maturity of this loan was also extended until August 12, 2002 in conjunction with the Amendment Agreement. Amounts borrowed under this facility are subject to interest at a base rate or an interest rate based on the Eurodollar rate plus a margin determined under the Amendment Agreement. As of January 1, 2000, $586,200 was outstanding under this facility with a weighted average interest rate of 7.15%, and as of December 30, 2000, $587,548 was outstanding under this facility with a weighted average interest rate of 10.23%.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
FRENCH FRANC FACILITIES
Warnaco Inc. and its subsidiaries entered into French Franc facilities in July and August 1996 relating to its acquisition of Lejaby. These facilities, which were amended in April 1998 and in August and November 1999, include a term loan facility in an original amount of 370 million French Francs and a revolving credit facility of 480 million French Francs, which was reduced to 441.6 million French Francs pursuant to the Amendment Agreement. Amounts borrowed under these facilities are subject to interest at an interest rate based on the Eurodollar rate plus a margin determined under the Amendment Agreement. In conjunction with the Amendment Agreement the maturity of the loan was extended to August 12, 2002. As of December 30, 2000, $36,282 equivalent of the term loan was outstanding with a weighted average interest rate of 8.79%. The revolving portion of this facility provides for multi-currency revolving loans to be made to Warnaco and a number of its European subsidiaries. As of January 1, 2000 and December 30, 2000, approximately $55,800 and $54,152 equivalent respectively, of revolving advances were outstanding under this facility with weighted average interest rates of 6.23% and 9.94%, respectively.
$400,000 TRADE CREDIT FACILITY
On October 6, 2000, in conjunction with signing the Amendment Agreement, Warnaco Inc. entered into a new $400,000 Trade Credit Facility, which provides commercial letters of credit for the purchase of inventory from suppliers and offers the Company extended terms for reimbursement therof, for periods of up to 180 days ('Trade Drafts'). Amounts drawn under this facility are subject to interest at an interest rate based on the Eurodollar rate, plus a margin determined under the Amendment Agreement. The Company classifies the 180-day Trade Drafts in trade accounts payable. As of January 1, 2000 and December 30, 2000, the amount of Trade Drafts outstanding under this facility was $346,227 and $163,947, respectively, with a weighted average interest rate of 10.22% as of December 30, 2000. Also at December 30, 2000, the Company had outstanding letters of credit under this facility totaling approximately $81,062.
OTHER FACILITIES
Warnaco Inc. and certain of its foreign subsidiaries have entered into credit agreements that provide for revolving lines of credit and issuance of letters of credit ('Foreign Credit Facilities'). At January 1, 2000 and December 30, 2000, the total amounts of the Foreign Credit Facilities were approximately $163,500 and $192,555, respectively, of which approximately $35,100 and $47,794, respectively was available. The weighted average interest rate under these facilities as of December 30, 2000 was 9.91%.
In July 1998, the Company entered into a term loan agreement with a member of its existing bank group. The balance of this loan as of January 1 and December 30, 2000 was $20,885 and $17,025, respectively. This loan is due to be repaid in equal installments with a final maturity date of August 12, 2002.
As described in Note 15 -- Stockholders Equity, the Company issued $40,372 of notes in conjunction with the amendment of its Equity Agreements. Amounts outstanding under these notes are subject to interest at an interest rate based on the Eurodollar rate, plus a margin determined under the Amendment Agreement. These notes mature on August 12, 2002. As of December 30, 2000, $35,421 was outstanding under these notes. The balance of $14,700 represents the market value adjustment of the Equity Agreements as of December 30, 2000.
RESTRICTIVE COVENANTS
Pursuant to the terms of the Amendment Agreement the Company must maintain certain financial ratios and is prohibited from paying dividends. On March 29, 2001, lenders under Amendment Agreement waived compliance with the financial ratios until April 16, 2001. On April 13, 2001, the lenders extended this waiver until May 16, 2001. Because this waiver expires before the end of fiscal 2001, the Company has reclassified the applicable long-term debt to current. The Company is currently in discussions with the lenders regarding an amendment to the Amendment Agreement to modify the financial ratios.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
INTEREST RATE SWAPS
As of December 30, 2000, the Company had five interest rate swap agreements in place which were used to convert variable interest rate borrowings of $329,500 to fixed interest rates. Under these agreements, borrowings of $190,000 were fixed at 6.75% until maturity in April 2001, borrowings of $80,000 were fixed at 6.74% until maturity in April 2001, borrowings of $53,000 were fixed at 6.72% until maturity in March 2001 and borrowings of $6,500 were fixed at 6.60% until maturity in June 2006.
As of December 30, 2000, the Company had four swap agreements in place, as follows:
As of January 1, 2000, the Company had five swap agreements in place, as follows:
These swaps are utilized to convert floating rate obligations, which include bank debt and trade drafts under the letter of credit facility, to fixed rate obligations. The outstanding variable rate obligations at December 30, 2000 exceed the notional amount of interest rate swap agreements and the Company anticipates that they will continue to do so for at least the remaining term of the swap agreements. The counterparties to all of the Company's interest rate swap agreements are banks who are lenders in the Company's credit agreements. The Company's agreements in place as of January 1, 2000 in the amounts of $75,000, $210,000, $150,000 and $250,000 were terminated in March 2000 for a cash gain of $26,076 which is being amortized over the original life of the agreements.
Differences between the fixed interest rate on each swap and the one month or three month LIBOR rate are settled at least quarterly between the Company and each counterparty. Pursuant to its interest rate swap agreements, the Company made payments totaling $4,853 in the year ended January 1, 2000 and made payments totaling $372 in the year ended December 30, 2000.
The Company's average interest rate on its outstanding debt, after giving effect to the interest rate swap agreements, was approximately 6.52% and 10.19% at January 1, 2000 and December 30, 2000, respectively.
NOTE 14 - MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1996, Designer Holdings issued 2.4 million Company-obligated mandatorily redeemable convertible preferred securities of a wholly owned subsidiary (the 'Preferred Securities') for aggregate gross proceeds of $120,000. The Preferred Securities represent preferred undivided beneficial interests
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
in the assets of Designer Finance Trust ('Trust'), a statutory business trust formed under the laws of the State of Delaware in 1996. Designer Holdings owns all of the common securities representing undivided beneficial interests of the assets of the Trust. Accordingly, the Trust is included in the consolidated financial statements of the Company. The Trust exists for the sole purpose of (i) issuing the Preferred Securities and common securities (together with the Preferred Securities, the 'Trust Securities'), (ii) investing the gross proceeds of the Trust Securities in 6% Convertible Subordinated Debentures of Designer Holdings due 2016 ('Convertible Debentures') and (iii) engaging in only those other activities necessary or incidental thereto. The Company indirectly owns 100% of the voting common securities of the Trust, which is equal to 3% of the Trust's total capital.
Each Preferred Security is convertible at the option of the holder thereof into 0.6888 of a share of Common Stock, par value $.01 per share, of the Company, or 1,653,177 shares of the Company's Common Stock in the aggregate, at an effective conversion price of $72.59 per share of common stock, subject to adjustments in certain circumstances.
The holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of 6% of the liquidation amount of $50.00 per Preferred Security, payable quarterly in arrears. The distribution rate and payment dates correspond to the interest rate and interest payment dates on the Convertible Debentures, which are the sole assets of the Trust. As a result of the acquisition of Designer Holdings by the Company, the Preferred Securities were adjusted to their estimated fair value at the date of acquisition of $100,500, resulting in a decrease in their recorded value of approximately $19,500. This decrease is being amortized, using the effective interest rate method to maturity of the Preferred Securities. As of December 30, 2000, the unamortized balance is $16,613. Such distributions and accretion to redeemable value are included in interest expense.
The Company has the right to defer payments of interest on the Convertible Debentures and distributions on the Preferred Securities for up to twenty consecutive quarters (five years), provided such deferral does not extend past the maturity date of the Convertible Debentures. Upon the payment, in full, of such deferred interest and distributions, the Company may defer such payments for additional five-year periods. The Company has deferred the interest payments under these instruments that were due on December 31, 2000 and March 31, 2001. The Company expects to continue to defer such interest payments under these instruments pursuant to their terms.
The Preferred Securities are mandatorily redeemable upon the maturity of the Convertible Debentures on December 31, 2016, or earlier to the extent of any redemption by the Company of any Convertible Debenture, at a redemption price of $50.00 per share plus accrued and unpaid distributions to the date fixed for redemption. In addition, there are certain circumstances wherein the Trust will be dissolved, with the result that the Convertible Debentures will be distributed pro-rata to the holders of the Trust Securities.
The Warnaco Group, Inc. ('Group') has guaranteed, on a subordinated basis, distributions and other payments due on the Preferred Securities ('Guarantee'). In addition, Group has entered into a supplemental indenture pursuant to which it has assumed, as a joint and several obligor with Designer Holdings, liability for the payment of principal, premium, if any, and interest on the Convertible Debentures, as well as the obligation to deliver shares of Common Stock, par value $.01 per share, of Group upon conversion of the Preferred Securities as described above. The Guarantee, when taken together with Group's obligations in respect of the Convertible Debentures, provides a full and unconditional guarantee of amounts due on the Preferred Securities.
The following is summarized financial information of Designer Holdings as of January 1, 2000 and December 30, 2000 and for each of the three fiscal years in the period ended December 30, 2000, respectively, which is presented as required by reason of the public preferred securities issued by Designer Holdings.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
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(a) Excludes Retail Store divisions net revenues of $84,500, $87,000 and $72,456 for fiscal 1998, 1999 and fiscal 2000 respectively, and cost of goods sold $50,468, $58,050 and $49,025 for the same time period. As a result of the integration of Designer Holdings into the operations of the Company, net income associated with these revenues cannot be separately identified. Excludes restructuring and special charges of $18,074 as described in Note 3.
(b) Net income includes a charge of $54,752 of general corporate expenses.
NOTE 15 - STOCKHOLDERS' EQUITY
Total dividends declared during fiscal years 1998, 1999 and 2000 were $22,423 ($0.36 per share), $20,250 ($0.36 per share) and $12,958 ($0.27 per share), respectively. In December 2000, the Company suspended payment of its quarterly cash dividend.
The Company has 10,000,000 shares of authorized and unissued preferred stock with a par value of $0.01 per share.
In August 1999, the Board of Directors of the Company adopted a rights agreement (the 'Rights Agreement'). Under the terms of the Rights Agreement, the Company declared a dividend distribution of one right for each outstanding share of common stock of the Company to stockholders of record on August 31, 1999. Each right entitles the holder to purchase from the Company a unit consisting of one one-thousandth of a Series A Junior Participating Preferred Stock, par value $.01 per share at a purchase price of $100 per unit. The rights only become exercisable, if not redeemed, ten days after a person or group has acquired 15% or more of the Company's common stock or the announcement of a tender offer that would result in a person or group acquiring 15% or more of the Company's common stock. The Rights Agreement expires on August 31, 2009, unless earlier redeemed or extended by the Company.
Stock Compensation Plans
The Board of Directors and Compensation Committee thereof are responsible for administration of the Company's compensation plans and determine, subject to the provisions of the plans, the number of shares to be issued, the terms of awards, the sale or exercise price, the number of shares awarded and the rate at which awards vest or become exercisable.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
1988 Employee Stock Purchase Plan
In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock Purchase Plan'), which provides for sales of up to 4,800,000 shares of Class A Common Stock of the Company to certain key employees. At January 2, 1999 and January 1, 2000, 4,521,300 shares were issued and outstanding pursuant to grants under the Stock Purchase Plan. All shares were sold at amounts determined to be equal to the fair market value. In addition, certain employees, principally an officer and director of the Company, elected to pay for the shares granted by executing promissory notes payable to the Company. Notes totaling $5,971 were outstanding at January 3, 1998 and were repaid during fiscal 1998. There was no activity under the Stock Purchase Plan during fiscal 2000.
1991 Stock Option Plan
In 1991, the Company established The Warnaco Group, Inc. 1991 Stock Option Plan ('Option Plan') and authorized the issuance of up to 1,500,000 shares of Class A Common Stock pursuant to incentive and non-qualified option grants to be made under the plan. The exercise price on any stock option award may not be less than the fair market value of the Company's Common Stock at the date of the grant. The Option Plan limits the amount of qualified stock options that may become exercisable by any individual during a calendar year. Options generally expire 10 years from the date of grant and vest ratably over 4 years.
1993 Stock Plan
On May 14, 1993, the stockholders approved the adoption of The Warnaco Group, Inc. 1993 Stock Plan ('Stock Plan') which provides for the issuance of up to 2,000,000 shares of Class A Common Stock of the Company through awards of stock options, stock appreciation rights, performance awards, restricted stock units and stock unit awards. On May 12, 1994, the stockholders approved an amendment to the Stock Plan whereby the number of shares issuable under the Stock Plan is automatically increased each year by 3% of the number of outstanding shares of Class A Common Stock of the Company as of the beginning of each fiscal year. The exercise price of any stock option award may not be less than the fair market value of the Company's Common Stock at the date of the grant. Options generally expire 10 years from the date of grant and vest ratably over 4 years.
In accordance with the provisions of the Stock Plan, the Company granted 182,903 and 190,680 shares of restricted stock to certain employees, including certain officers of the Company, during the fiscal years ended January 2, 1999 and January 1, 2000, respectively. During 2000, there were no restricted stock grants. The restricted shares vest over four years. The fair market value of the restricted shares was $7,682 and $5,458 at the dates of grant, for years ended January 2, 1999 and January 1, 2000 respectively. The Company recognizes compensation expense equal to the fair value of the restricted shares over the vesting period. Compensation expense for the fiscal years ended January 2, 1999 January 1, 2000 and December 30, 2000 was $4,978, $6,246 and $4,643, respectively. During 1998, 16,177 shares of non-vested restricted shares were canceled resulting in a reduction in unearned compensation of $667. During 1999 and 2000, there were no restricted shares cancelled. Unearned stock compensation at January 2, 1999, January 1, 2000 and December 30, 2000 was $11,772, $10,984 and $6,341, respectively, and is deducted from stockholders' equity.
1993 Non-Employee Director Stock Plan and 1998 Director Plan
In May 1994, the Company's stockholders approved the adoption of the 1993 Non-Employee Director Stock Plan ('Director Plan'). The Director Plan provides for awards of non-qualified stock options to non-employee directors of the Company. Options granted under the Director Plan are exercisable in whole or in part until the earlier of ten years from the date of the grant or one year from the date on which an optionee ceases to be a Director eligible for grants. Options are granted at the fair
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
market value of the Company's Common Stock at the date of the grant. In May 1998, the Board of Directors approved the adoption of the 1998 Stock Plan for Non-Employee Directors ('1998 Director Plan', and together with the Director Plan, 'Combined Director Plan'). The 1998 Director Plan includes the same features as the Director Plan and provides for issuance of the Company's Common Stock held in treasury. The Combined Director Plan provides for the automatic grant of options to purchase (i) 30,000 shares of Common Stock upon a Director's election to the Company's Board of Directors and (ii) 20,000 shares of Common Stock immediately following each annual shareholder's meeting as of the date of such meeting.
1997 Stock Option Plan
In 1997, the Company's Board of Directors approved the adoption of The Warnaco Group, Inc. 1997 Stock Option Plan ('1997 Plan') which provides for the issuance of incentive and non-qualified stock options and restricted stock up to the number of shares of common stock held in treasury. The exercise price on any stock option award may not be less than the fair market value of the Company's common stock on the date of grant. The Plan limits the amount of qualified stock options that may become exercisable by any individual during a calendar year and limits the vesting period for options awarded under the 1997 Plan.
A summary of the status of the Company's stock option plans are presented below:
In fiscal 1998, 1999 and 2000, in exchange for shares received from holders with a fair value of $38,095, $2,640 and $702, respectively, the Company paid $38,095, $2,640 and $702, respectively of withholding taxes associated with options exercised or shares of restricted stock which vested during the year. Such shares have been included in treasury at cost, which equals fair value at date of option exercise or vesting.
Summary information related to options outstanding and exercisable at December 30, 2000 is as follows:
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The Company has reserved 10,362,646 shares of Class A Common Stock for issuance under the Director Plan, Stock Plan and Option Plan as of December 30, 2000. In addition, there are 12,063,672 shares of Class A Common Stock in treasury stock available for issuance under the 1997 Plan.
The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
The Company's pro forma information is as follows:
These pro forma effects may not be representative of the effects on future years because of the prospective application required by SFAS No. 123, and the fact that options vest over several years and new grants generally are made each year.
The following are the number of shares of common and treasury stock as of January 2, 1999, January 1, 2000 and December 30, 2000.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
Stock Buyback Program
On November 14, 1996, the Board of Directors approved a stock buyback program of up to 2.0 million shares. On May 14, 1997, the Company's Board of Directors approved an increase of this program to 2.42 million shares. On February 19, 1998 and on March 1, 1999, the Company's Board of Directors authorized the repurchase of an additional 10.0 million shares, resulting in a total authorization of 22.42 million shares. During fiscal 1998 and 1999, the Company repurchased 4,794,699 and 6,182,088 shares of its common stock under the repurchase programs at a cost of $135,416 and $144,688, respectively. At December 30, 2000, there were 10,353,894 shares available for repurchase under this program.
The Company has used a combined put-call option contract to facilitate the repurchase of its common stock. This contract provides for the sale of a put option giving the counterparty the right to sell the Company's shares to the Company at a preset price at a future date and for the simultaneous purchase of a call option giving the Company the right to purchase its shares from the counterparty at the same price at the same future date.
At January 2, 1999, the Company held call options and had sold put options (all covered by one contract) covering 1.5 million shares of common stock with an average forward price of $35.35 per share. The equity instruments were exercisable only at expiration of the contracts, with expiration dates ranging from the first through third quarters of fiscal 1999. The equity instruments were settled, at the election of the Company, through physical, net share or net cash settlement. During fiscal 1998 and 1999, the Company repurchased 1,790,455 shares and 1,497,202 shares of common stock at a cost of $65,899 and $52,919, which is reflected in treasury stock. In addition, the Company received a net cash settlement payment of $2,325 under these contracts in fiscal 1998, which was reflected in additional paid-in-capital.
In connection with the Company's stock repurchase program, the Company entered into Equity Forward Purchase Agreements ('Equity Agreements') on December 10, 1999 and February 10, 2000. The Equity Agreements provide for the purchase by the Company of up to 5.2 million shares of the Company's Common Stock from two banks and mature on August 12, 2002. As of December 30, 2000, the banks had purchased 5.2 million shares under the Equity Agreements. On September 19, 2000, the Equity Agreements were amended and supplemented to reduce the price at which the Equity Agreements could be settled from $12.90 and $10.90, respectively to $4.50 a share to provide for an aggregate cash payment by the Company of up to $23.4 million and the issuance of promissory notes in the aggregate principal amount of up to $23.4 million, which mature on the same date and bear the same interest rate as the Company's credit facilities. In return for this reduction the banks received interest bearing notes payable on August 12, 2002 in an initial aggregate amount of $40,372 which resulted in a corresponding reduction in shareholders' equity. As of October 6, 2000, the Company entered into a modification agreement of its credit facilities which prohibited the option of share settlement. As of December 30, 2000,
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
the price at which the Company could effect net cash settlement with the two banks under the Equity Agreements was $4.50. Dividends on the shares outstanding under the Equity Agreements are reimbursed to the Company. If these Equity Agreements were settled on a net cash basis at December 30, 2000, the Company's settlement costs, which are required under the terms of its credit facilities to be in the form of interest bearing notes, would be approximately $14,700. The terms of the Equity Agreements allow the banks to sell, under certain conditions, the 5.2 million shares and receive additional interest bearing notes if the sale price is less than $4.50 per share or to pay cash to the Company or reduce the outstanding notes if the sale price is in excess of $4.50. Such additional notes would also mature on August 12, 2002. As a result of the above transactions, the Company charged paid in capital in the amount of $8,800 to account for the change in value of the Equity Agreements from September 19, 2000 through October 6, 2000 and charged investment expense $5,900 to account for the change in value of the Equity Agreements between October 6, 2000 and December 30, 2000.
NOTE 16 - EARNINGS (LOSS) PER SHARE
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(a) The effect of dilutive securities was not included in the computation of diluted earnings (loss) per share for fiscal year ended December 30, 2000 because the effect would have been anti-dilutive.
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Options to purchase 7,456,708, 7,484,606 and 12,237,437 shares of common stock were outstanding during fiscal years 1998, 1999 and 2000 respectively. These shares were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. The fiscal 2000 options, which expire from February 2010 to May 2010, were still outstanding at the end of fiscal 2000. Incremental shares issuable on the assumed conversion of the Preferred Securities of 1,653,177 shares were not included in the fiscal 1998, 1999 or 2000 computation of diluted earnings per share as the impact would have been anti-dilutive for each period presented.
NOTE 17 - LEASE AND OTHER COMMITMENTS
a. In fiscal 1998 and 1999, the Company sold certain equipment for cash proceeds of $21,713 and $23,185, respectively, which approximated net book value. The equipment was leased back from the purchaser under an operating lease with an initial term of three years and a one-year renewal option. Under the terms of certain operating leases, upon lease termination the Company has the option to acquire the related assets at the then fair value. If the Company does not exercise
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
their option, it guarantees to repay a portion of the residual value loss, if any, incurred by the lessors in remarketing or disposing of such assets upon lease termination or expiration. The Company intends to renew such leases as they come due, and therefore a material payment for this residual value guarantee is unlikely.
The following is a schedule of future minimum rental payments required under operating leases with terms in excess of one year, as of December 30, 2000:
b. The Company has a license agreement that contains certain financial covenants. The covenants require the Company to maintain, inter alia, certain levels of consolidated net worth and certain ratios of debt to consolidated net worth, all as defined therein during the term of the license. In connection with the confidential settlement agreement with Calvin Klein, Inc. this covenant has been suspended through January 5, 2002.
NOTE 18 - FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.
Accounts Receivable. The carrying amount of the Company's accounts receivables approximate fair value.
Marketable Securities. Marketable securities are stated at fair value based on quoted market prices.
Revolving, term loans and other borrowings. The carrying amounts of the Company's outstanding balances under its various Bank Credit Agreements and other outstanding debt approximate the fair value because the interest rate on the outstanding borrowings is variable and there are no prepayment penalties.
Redeemable preferred securities. These securities are publicly traded on the New York Stock Exchange. The fair market value was determined based on the closing price on the last trading date prior to the end of each fiscal year.
Interest rate swap agreements. The Company has entered into interest rate swap agreements, which have the effect of converting the Company's floating rate obligations to fixed rate obligations. The fair value of the Company's interest rate swap agreements at January 1, 2000 and December 30, 2000 are based upon quotes from brokers and represent the cash requirement if the existing agreements had been settled at year-end.
Letters of credit. Letters of credit collateralize the Company's obligations to third parties and have terms ranging from 30 days to one year. The face amounts of the letters of credit are a reasonable estimate of the fair value since the value for each is fixed over its relatively short maturity.
Equity option arrangements. These arrangements can be settled, on a net cash basis. To the extent that the market price of the Company's common stock on the settlement date is higher or lower than the forward purchase price, the net differential can be paid or received by the Company in cash or in the form of interest bearing notes.
Foreign currency transactions. The Company enters into various foreign currency forward and option contracts to hedge certain commercial transactions. The fair value of open foreign currency forward and option contracts is based upon quotes from brokers and reflects the cash benefit if the existing contracts had been sold.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
The carrying amounts and fair value of the Company's financial instruments as of January 1, 2000 and December 30, 2000, are as follows:
(1) The values shown above do not take into account the effect, if any, of the Company's non-compliance with its debt agreements.
FOREIGN CURRENCY-RISK MANAGEMENT
The Company's international operations are subject to certain opportunities and risks, including currency fluctuations and government actions. The Company closely monitors its operations in each country so that it can respond to changing economic and political environments and to fluctuations in foreign currencies. Accordingly, the Company utilizes foreign currency option contracts and forward contracts to hedge its exposure on anticipated transactions and firm commitments, primarily for receivables and payables denominated in currencies other than the entities' functional currencies. The Company also monitors its foreign exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions. Foreign currency instruments generally have maturities that do not exceed twelve months.
The Company has foreign currency instruments, primarily denominated in Canadian dollars, British pounds, Euros and Mexican pesos. At January 1, 2000 and December 30, 2000, the Company had $39,417 and $4,996 in foreign currency instruments outstanding, respectively. For 2000, 1999, and 1998, the net realized gains or losses associated with these types of instruments were not material. The net unrealized gain (loss) as of January 1, 2000 and December 30, 2000, based on the fair market value of the instruments, were not material to each respective period.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 19 - CASH FLOW INFORMATION FOR THE YEAR ENDED
NOTE 20 - LEGAL MATTERS
On May 30, 2000, Calvin Klein, Inc. ('CKI') and the Calvin Klein Trademark Trust filed a complaint in the U.S. District Court in the Southern District of New York (Calvin Klein Trademark Trust, et al. v. The Warnaco Group, Inc., et al, No. 00 CIV. 4052 (JSR) (S.D.N.Y.)) against The Warnaco Group, Inc., various other Warnaco entities, and Wachner (the 'Warnaco Defendants') alleging, inter alia, claims for breach of contract and trademark violations. The complaint sought, inter alia, termination of certain licensing agreements and trademark rights, injunctive relief and damages.
On June 26, 2000, the Warnaco Defendants filed an answer and certain Warnaco Defendants filed counterclaims (amended on July 31, 2000) against Calvin Klein, Inc. for, inter alia, breach of the jeanswear and men's accessories licenses and breach of fiduciary duty, and against CKI and Calvin Klein personally for tortious interference with business relations, defamation and trade libel. Warnaco sought, inter alia, damages, injunctive and declaratory relief. Thereafter, certain of the plaintiff's claims and one of the Warnaco Defendant's counterclaims were dismissed.
On January 16, 2001, CKI filed a Complaint in the Supreme Court of the State of New York (County of New York) (the 'State Action') against CKJ Holdings, Inc. and Calvin Klein Jeanswear Company (collectively the 'Defendants') seeking a declaration that CKI was entitled to terminate the Jeanswear License Agreement dated August 4, 1994, as amended (the 'Jeanswear License'), claiming that the Defendants' breached certain financial covenants in the Jeanswear License because the Company's consolidated debt to consolidated net worth ratio allegedly exceeded five to one as of the quarter ending September 30, 2000.
On January 22, 2001, the parties entered into a confidential settlement agreement whereby they agreed, inter alia, to the dismissal of all claims and counterclaims asserted in both actions with prejudice and without the payment of any sum of money by any party to any other party. The parties further agreed to work together for their mutual benefit under their license and other agreements as modified by the terms of the settlement agreement. The Company believes that the settlement agreement will not materially affect the manner in which it conducts its business pursuant to its existing license and other agreements with CKI and the Calvin Klein Trademark Trust.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
On September 14, 2000, Speedo International Limited ('SIL') filed a complaint in the U.S. District Court for the Southern District of New York, styled Speedo International Limited v. Authentic Fitness Corp., et al., No. 00 Civ. 6931 (DAB), against The Warnaco Group, Inc. and various other Warnaco entities (the 'Warnaco defendants') alleging claims, inter alia, for breach of contract and trademark violations. The complaint seeks, inter alia, termination of certain licensing agreements, injunctive relief and damages.
On November 8, 2000, the Warnaco defendants filed an answer and counterclaims against SIL seeking, inter alia, a declaration that the Warnaco defendants have not engaged in trademark violations and are not in breach of the licensing agreements, and that the licensing agreements in issue may not be terminated.
The Company believes the claims of SIL to be without merit and intends to vigorously defend and pursue its counterclaims.
Between August 22, 2000 and October 26, 2000, seven putative class action complaints were filed in the U.S. District Court for the Southern District of New York against the Company and certain of its officers and directors. On November 17, 2000, the Court consolidated the complaints into a single action, styled In re The Warnaco Group, Inc. Securities Litigation, No. 00-Civ-6266 (LMM), and appointed Lead Plaintiffs and approved Lead Counsel for the putative class. A consolidated amended complaint has been filed. The amended complaint, on behalf of a putative class of shareholders of the Company who purchased Company stock between September 17, 1997 and July 19, 2000 (the 'Class Period'), alleges, inter alia, that defendants violated the Securities Exchange Act of 1934 by artificially inflating the price of the Company's stock by issuing false and misleading statements during the Class Period. The Company believes the claims to be without merit and intends to vigorously defend them.
The staff of the Securities and Exchange Commission (the 'SEC'), has notified the Company that it is conducting an investigation to determine whether there have been any violations of the Securities Exchange Act of 1934 in connection with the preparation and publication of various financial statements and reports. The Company is cooperating in such investigation. The SEC has indicated that its investigation should not be construed as an indication by the SEC or its staff that any violation of law has occurred, nor as an adverse reflection upon any person, entity or security.
On October 13, 2000, a shareholders' derivative complaint was filed on behalf of the Company in the U.S. District Court for the Southern District of New York, styled Widdicombe, derivatively on behalf of The Warnaco Group, Inc. v. Linda J. Wachner, et al., No. 00 Civ. 7816 (LMM), naming certain Company officers and directors as defendants (the 'Individual Defendants') and the Company as a nominal defendant. The complaint asserts claims on the Company's behalf for, inter alia, breach of fiduciary duty, corporate waste and unjust enrichment, and seeks, inter alia, damages, punitive damages, and the imposition of a constructive trust upon the assets of the Individual Defendants. In accordance with a stipulation, an amended complaint may be filed on or before June 8, 2001.
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Note: The sum of the quarter per share amounts does not equal the full year amounts.
The Company's fiscal 2000 quarterly results of operations have been restated with respect to the effects of the change in accounting principle related to the Company's valuation of its retail outlet store inventory, as well as other adjustments principally related to purchase accounting, amortization of deferred financing costs, special charges and depreciation expense.
Net revenues previously reported for the first, second and third quarters were $606,988, $596,559 and $500,049, respectively. The restatements increased net revenues by $150, $137 and $27.
Gross profit previously reported for the first, second and third quarters was $181,570, $98,601 and $57,171, respectively. The restatements increased gross profit by $3,847, decreased gross profit by $230 and increased gross profit by $4,230 for the first, second and third quarters, respectively. Net income (loss) before cumulative effect of accounting change previously reported for the first, second and third quarters was $28,572, ($0.53 per diluted share), $(62,392), ($1.18 per diluted share) and $(96,514), ($1.82 per diluted share), respectively. The restatements decreased net income (loss) before cumulative effect of accounting change by $1,479 ($0.02 per diluted share), $1,077 ($0.02 per diluted share) and increased net income (loss) before cumulative effect of accounting change by $2,556 ($0.05 per diluted share) for the first, second and third quarters, respectively. Net income (loss) previously reported for the first, second and third quarters was $28,572 ($0.53 per diluted share), $(62,392) ($1.18 per diluted share) and $(96,514) ($1.82 per diluted share), respectively. The restatements decreased net income (loss) by
THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
$14,589 ($0.27 per diluted share), $1,077 ($0.02 per diluted share) and increased net income (loss) by $2,556 ($0.05 per diluted share) for the first, second and third quarters respectively.
Included in the quarterly results are restructuring and special charges of $849 included in cost of sales and $5,698 in selling, general and administrative expenses for the first quarter, $88,931 included in cost of sales and $12,921 in selling, general and administrative expenses for the second quarter, $66,548 included in cost of sales and $31,505 in selling, general and administrative expenses for the third quarter and $42,951 included in cost of sales and $18,223 in selling, general and administrative expenses for the fourth quarter.
Note: The sum of the quarter per share amounts does not equal the full year amounts.
The Company's fiscal 1999 quarterly results of operations have been restated as described in Note 1.
Net revenues previously reported for the first, second, third and fourth quarters were $444,103, $484,737, $579,612 and $605,704, respectively. The restatements decreased net revenues by $2,500, increased net revenues by $7,500, decreased net revenues by $2,500 and decreased net revenues by $2,500 for the first, second, third and fourth quarters, respectively.
Gross profit previously reported for the first, second, third and fourth quarters was $154,089, $173,263, $201,488 and $172,167, respectively. The restatements decreased gross profit by $3,300, increased gross profit by $300, decreased gross profit by $3,000 and decreased gross profit by $6,400 for the first, second, third and fourth quarters, respectively. Net income (loss) previously reported for the first, second, third and fourth quarters was $22,892 ($0.39 per diluted share), $27,846 ($0.49 per diluted share), $44,379 ($0.80 per diluted share) and $2,669 ($0.05 per diluted share). The restatements had no impact for the first and third quarters to net income (loss), increased net income by $2,100 ($0.03 per diluted share) and decreased net income by $2,100 ($0.04 per diluted share) for the second and fourth quarters, respectively.
SCHEDULE II
THE WARNACO GROUP, INC. VALUATION & QUALIFYING ACCOUNTS & RESERVES(4) (DOLLARS IN THOUSANDS)
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(1) Includes bad debts, cash discounts, allowances and sales returns.
(2) Reserves related to assets acquired -- See Note 2.
(3) Amounts written-off, net of recoveries.
(4) See Notes 2 and 3 for other restructuring related activity and Note 7 for tax valuation allowance information.
STATEMENT OF DIFFERENCES ------------------------
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S-1