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Will SEC Probe Complicate Warnaco’s Reorganization Plan?

NEW YORK — Warnaco Group chief executive officer Tony Alvarez is about to receive a lesson in juggling.<br><br>It appears increasingly likely that he and his management team will be coping with the scrutiny of a Securities and Exchange Commission...

NEW YORK — Warnaco Group chief executive officer Tony Alvarez is about to receive a lesson in juggling.

It appears increasingly likely that he and his management team will be coping with the scrutiny of a Securities and Exchange Commission investigation into the bankrupt firm’s finances at the same time it is readying a plan of reorganization. After an extension last month, the company now has the exclusive right until Aug. 30 to file such a plan.

As reported, Warnaco acknowledged in its Form 10-K, filed with the SEC last Wednesday, that it had been informed the commission intended to “recommend that the SEC authorize an enforcement action against the company and certain persons” who were employed by or affiliated with the firm before the start of its 1999 fiscal year on Jan. 3, 1999.

Warnaco thus far has declined comment on the latest SEC investigation.

Three consecutive years of earnings restatements began with the 1999 fiscal year and concluded with the first quarter of fiscal 2001, eventually totaling $51 million. Warnaco filed for Chapter 11 bankruptcy protection on June 11, 2001. Analysts and observers had questioned as early as last August whether Warnaco’s continual restatement of its profits would result in increased SEC scrutiny. Observers also questioned late last week whether the latest news of an SEC investigation would further complicate Warnaco’s already-difficult position as Alvarez and his team aim for a reorganization and, eventually, a sale of all or part of the company.

In its 10-K, Warnaco said that, in a review of business operations in June 2001, it “became aware of certain accounting errors involving the recording of intercompany pricing arrangements, the recording of accounts payable primarily related to the purchase of inventory from suppliers and the accrual of certain liabilities.”

These errors were related to the Designer Holdings Ltd. subsidiary as well as to the recording of accounts payable and inventory data discovered in 2001 figures involving its European subsidiaries.

The SEC has declined to comment on the investigation, so it isn’t known whether its eyes are focused on the Designer Holdings unit, the makers of Calvin Klein jeans acquired in 1997 for $354 million, or some of its other domestic units. Authentic Fitness, the Warnaco unit that markets Speedo, was spun off in 1990, went public in 1992 and was then reacquired by Warnaco in 1999.

But this is the second time in 15 months that Warnaco has been probed by the SEC; the group announced in April 2001, prior to its bankruptcy filing, that the commission was “conducting an investigation” to determine whether there had been any violation of federal securities laws in connection with the “preparation and publication of various financial statements and reports.” It could not be learned late last week whether the latest SEC action is in any way related to last year’s investigation.

Accounting and stock scandals have become so prevalent this year that Warnaco just might get a “bye” as federal regulators survey the fiscal landscape. The House Committee on Energy and Commerce is so busy investigating the Enron, WorldCom and Tyco accounting scandals that it isn’t likely to take up Warnaco, according to a committee spokesman.

“There are literally hundreds of companies around the country that have either restated earnings or admitted accounting inconsistencies or irregularities,” the spokesman said. “We can’t investigate them all.”

He said the committee, chaired by Billy Tauzin (R., La.), is concentrating on about a dozen of the largest American corporations with these issues.

“We are unlikely [to investigate Warnaco] unless something really bizarre surfaces,” he said. “We have 100,000 pages of documents in our possession we are reviewing and it’s a very painstaking process because none of the documents we get comes with an index that says ‘see accounting irregularities on page 13.’”

Calls to numerous current and former employees and directors of Warnaco, including chief financial officer James Fogarty, went unreturned on Friday, although one current divisional executive, requesting anonymity, said he hadn’t been contacted by representatives of the SEC or any other federal agency and wasn’t aware of anyone in management who had been.

“I feel lucky that I wasn’t around when this stuff was going on,” he quipped.

Linda Wachner was chairman and ceo of the company at that time and was its indisputable leader. She left that post on Nov. 16, 2001, although she remains on its board. Wachner currently has her own dispute with Warnaco in the form of a claim filed in January in Manhattan bankruptcy court seeking not less than $25.1 million in compensation. Warnaco is fighting the claim. As reported, a Wachner spokesman declined comment last week on the SEC investigation, saying it was a matter for the company.

Warnaco was renowned for its revolving door of senior executives under Wachner’s tenure, although long-serving executives at the group during the period covered by the current SEC action included William S. Finkelstein, its chief financial officer and senior vice president, and Stanley P. Silverstein, Warnaco’s vice president, general counsel and secretary.

Nearly lost in Warnaco’s 10-K filing last week and its revelations of restatements and the SEC investigation were the group’s 2001 financial results. In the fiscal year ended Jan. 5, the firm reported a net loss of $861.2 million, or $16.28 a share, versus a net loss of $390 million, or $7.39, in the prior year.

Fiscal 2000 includes a $13.1 million charge for the cumulative effect of an accounting change which reduced earnings per share by 25 cents, and last year’s number include $177.8 million in pre-tax reorganization items.

Additionally, the largest restatement of earnings due to the accounting irregularities came in 2000. On Wednesday, the company heaped another $45.8 million in red ink onto the year’s losses in its 10-K, translating to 87 cents a share.

Warnaco also reported a $4.1 million reduction in fiscal 1999 net income, which dropped to $93.7 million, or $1.65 a diluted share. Warnaco originally had reported it had net income in fiscal 1999 of $97.8 million on sales of $2.1 billion.

Figures from last year include an increase in net loss of $1.1 million, or 2 cents, related to restatements from the first quarter. That places the grand total for restatements during the three-year period at just over $51 million.

The 10-K details $42.3 million in monies raised through asset sales, including the previously reported divestitures of GJM and Penhaligon’s and the sale of outlet store inventory at approximately book value. After closing 47 outlet stores and opening just one last year, Warnaco operated 86 outlet stores at the start of the current fiscal year. It also operates, after 39 closures last year, 95 Speedo full-price stores.

Sales last year dropped to their lowest level since fiscal 1997. Net revenues totaled $1.67 billion, 25. 7 percent lower than the $2.25 billion reported in 2000. By division, intimate apparel dropped 22.4 percent to $626.3 million from $806.8 million, sportswear and accessories declined 29.2 percent to $869.4 million from $1.23 billion and retail was off 18.6 percent to $175.6 million from $215.6 million in the prior year.

Warnaco was renowned for its revolving door of senior executives under Wachner’s tenure, although long-serving executives at the group during the period covered by the current SEC action included William S. Finkelstein, its chief financial officer and senior vice president, and Stanley P. Silverstein, Warnaco’s vice president, general counsel and secretary.

Nearly lost in Warnaco’s 10-K filing last week and its revelations of restatements and the SEC investigation were the group’s 2001 financial results. In the fiscal year ended Jan. 5, the firm reported a net loss of $861.2 million, or $16.28 a share, versus a net loss of $390 million, or $7.39, in the prior year.

Fiscal 2000 includes a $13.1 million charge for the cumulative effect of an accounting change which reduced earnings per share by 25 cents, and last year’s number include $177.8 million in pre-tax reorganization items.

Additionally, the largest restatement of earnings due to the accounting irregularities came in 2000. On Wednesday, the company heaped another $45.8 million in red ink onto the year’s losses in its 10-K, translating to 87 cents a share.

Warnaco also reported a $4.1 million reduction in fiscal 1999 net income, which dropped to $93.7 million, or $1.65 a diluted share. Warnaco originally had reported it had net income in fiscal 1999 of $97.8 million on sales of $2.1 billion.

Figures from last year include an increase in net loss of $1.1 million, or 2 cents, related to restatements from the first quarter. That places the grand total for restatements during the three-year period at just over $51 million.

The 10-K details $42.3 million in monies raised through asset sales, including the previously reported divestitures of GJM and Penhaligon’s and the sale of outlet store inventory at approximately book value. After closing 47 outlet stores and opening just one last year, Warnaco operated 86 outlet stores at the start of the current fiscal year. It also operates, after 39 closures last year, 95 Speedo full-price stores.

Sales last year dropped to their lowest level since fiscal 1997. Net revenues totaled $1.67 billion, 25. 7 percent lower than the $2.25 billion reported in 2000. By division, intimate apparel dropped 22.4 percent to $626.3 million from $806.8 million, sportswear and accessories declined 29.2 percent to $869.4 million from $1.23 billion and retail was off 18.6 percent to $175.6 million from $215.6 million in the prior year.