WARNACO’S OUTLOOK CLOUDY
Byline: Karyn Monget / Vicki M. Young
NEW YORK — The Warnaco Group’s troubles were put into a new perspective Wednesday when Deloitte & Touche, the company’s auditor, raised “substantial doubt” about the firm’s “ability to continue as a going concern” because of a working capital deficit and the uncertainty of negotiations with lenders to win additional financing waivers.
Deloitte made those comments as part of its independent auditors’ report to the Warnaco board and its shareholders. The Deloitte letter, dated March 29 and incorporating an April 13 date for certain footnotes, and Warnaco’s annual report for the year ended Dec. 31, were filed late Tuesday with the Securities and Exchange Commission. Citing “professional standards,” a Deloitte spokesman declined comment.
According to Stanley Silverstein, Warnaco’s general counsel, “Warnaco continues to be in discussions with its lenders to secure permanent amendments to the bank agreements. If these amendments had been in place, there would have been no ‘going concern’ qualification [in the Deloitte letter]. The waiver through May 16 is the first step toward the amendments.”
Warnaco stock fell to 67 cents Wednesday, down 20 cents, on the New York Stock Exchange.
The SEC filing also included an acknowledgement by Warnaco that the Commission is “conducting an investigation” to determine whether there have been any violations of federal securities laws in connection with the “preparation and publication of various financial statements and reports.” Warnaco said it is cooperating with the investigation.
As reported, Warnaco was in danger of being in default of certain covenants related to its $2.56 billion line of credit. It negotiated an initial waiver with its lenders until April 16, and then last Friday received another extension until May 16.
However, because the waivers do not extend through the end of 2001, the SEC filing said, “the debt has been classified as a current liability.” If Warnaco is not successful in its negotiations, 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 $1.43 billion,” the filing said. Excluding the reclassification, working capital was $30.2 million, the filing said.
However, in a March 29 conference call, she did not rule out selling assets. Sources familiar with Warnaco’s current infrastructure — including a few Warnaco insiders and a few potential buyers of Warnaco assets — say the only way to resolve Warnaco’s woes would be the sale of a prized property, particularly Calvin Klein Underwear, the licensed Calvin Klein Jeanswear business, or both. The Klein businesses generated combined wholesale revenues in fiscal 2000 of $943.2 million from $1.1 billion in fiscal 1999, according to the firm’s 10-K.
A strategic acquisition of one or more of Warnaco’s bread-and-butter brands is possible only for the biggest players in the corporate world. The most logical U.S. suitors in the diversified apparel field are VF Corp., Sara Lee Corp. and Kellwood Co, each of which has been active in mergers and acquisitions over the past decade.