-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jH7TZlOvjuKP7GdlPNpB31vYKnD6jlNGJRZMq/xv4nNshBS5E7bhwAV9SbyxnoD4 eNkQCTcxAVeJDKw+XlE8Hw== 0000950117-95-000093.txt : 19950414 0000950117-95-000093.hdr.sgml : 19950414 ACCESSION NUMBER: 0000950117-95-000093 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950107 FILED AS OF DATE: 19950407 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARNACO GROUP INC /DE/ CENTRAL INDEX KEY: 0000801351 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 954032739 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10857 FILM NUMBER: 95527727 BUSINESS ADDRESS: STREET 1: 90 PARK AVE STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126611300 FORMER COMPANY: FORMER CONFORMED NAME: W ACQUISITION CORP /DE/ DATE OF NAME CHANGE: 19861117 10-K405 1 WARNACO 10-K ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED JANUARY 7, 1995 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-4715 ------------------------------ THE WARNACO GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4032739 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 90 PARK AVENUE 10016 NEW YORK, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 661-1300 ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------------------------ ------------------------ Class A Common Stock, par value $0.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best knowledge of the registrant, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [x] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 30, 1995 was approximately $655,763,895. The number of shares outstanding of the registrant's Class A Common Stock as of March 30, 1995: 41,734,192. Documents incorporated by reference: The definitive Proxy Statement of The Warnaco Group, Inc. relating to the 1995 Annual meeting of Stockholders is incorporated by reference in Part III hereof. ________________________________________________________________________________ PART I ITEM 1. BUSINESS. (A) GENERAL DEVELOPMENT OF BUSINESS. The Warnaco Group, Inc. ('Company'), a Delaware corporation, was organized in 1986 for the purpose of acquiring Warnaco Inc. ('Warnaco') a publicly traded apparel company. As a result, Warnaco became a wholly owned subsidiary of the Company. The Company designs, manufactures and markets a broad line of women's intimate apparel, such as bras, panties and sleepwear, and men's dress shirts, neckwear, sportswear, underwear, accessories and small leather goods, all of which are sold under a variety of internationally recognized owned and licensed brand names. On March 14, 1994, the Company acquired the worldwide trademarks, rights and business of Calvin Klein'r' men's underwear and licensed the Calvin Klein trademark for men's accessories. In addition, the acquisition included the worldwide trademarks and rights of Calvin Klein women's intimate apparel upon the expiration of an existing license on December 31, 1994. The Company's strategy is to build on the strength of its brand names with consumer oriented marketing programs in its existing department and specialty store channels of distribution and to expand its distribution on a selective basis with specific product lines in mass merchandisers. 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 three divisions, Intimate Apparel, Menswear and Retail Outlet Stores, which accounted for 72%, 23% and 5%, respectively, of net revenues in fiscal 1994 with the intimate apparel division accounting for a larger percentage of the Company's gross profit for the same period. The Intimate Apparel Division designs, manufactures and markets moderate to premium-priced intimate apparel for women under the Warner's'r', Olga'r', Valentino Intimo'r', Scaasi'r', Blanche'r', White Stag'r', Fruit of the Loom'r' and effective January 1, 1995 Calvin Klein brand names. In addition, the intimate apparel division designs, manufactures and markets men's underwear under the Calvin Klein brand name. The intimate apparel division is the leading marketer of bras to department and specialty stores in the United States, accounting for over 31% of such bra sales in 1994, nearly twice its nearest competitor. The Warner's and Olga brand names, which are owned by the Company, are 121 and 54 years old, respectively. The Intimate Apparel Division's strategy is to broaden its channels of distribution and expand its highly recognized brand names worldwide. 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, Venture, Bradlees and Kmart, under the Fruit of the Loom brand name. Additionally, in late 1993, the Company signed a 3-year distribution agreement with Avon Products, Inc. ('Avon') to distribute Warner's and Fruit of the Loom bras on an exclusive basis and Scaasi sleepwear throughout the United States. The Menswear Division designs, manufactures, imports and markets moderate to premium-priced men's apparel and accessories under the Chaps by Ralph Lauren'r', Hathaway'r', Calvin Klein'r' men's underwear and accessories and Catalina'r' brand names. Chaps by Ralph Lauren has increased its net revenues by approximately 426% since 1989 from $23 million to $121 million in 1994, by refocusing its products to the age 25 to 50 consumer and predominantly by using natural fibers in its products. The Menswear Division's strategy is to build on the strength of its brand names and eliminate those businesses whose profit contribution is below the Company's required return. Consistent with this strategy the Company agreed to terminate its licenses to produce Christian Dior'r' men's dress shirts, neckwear and accessories in 1994 and early 1995, sold its Puritan trademark for menswear in the United States and did not renew its license to produce Golden Bear by Jack Nicklaus products. These products accounted for $19.3 and $100.3 million of net revenues for the Menswear Division in 1994 and 1993, respectively. As a result, operating margins in the Menswear Division increased from 9.6% in fiscal 1993 to 12.3% in fiscal 1994. The Company licenses certain of its brand names throughout the world and has been expanding the activities of its wholly owned operating subsidiaries in Canada, Europe and Mexico. International operations generated $94.2 million of net revenues or 12% of the total Company's net revenues in 1994 1 compared to $98.6 million of net revenues in fiscal year 1993 or 14.0% of the total Company net revenues. The total net revenues of the Company's international operations in 1994 were negatively impacted by the generally weak economies in Europe and Canada and the restructuring of the Company's menswear operations. The Company's business strategy with respect to its retail outlet stores division is to provide a channel for disposing of the Company's excess and irregular inventory, thereby limiting its exposure to off-price retailers without increasing the total number of stores to any significant extent. The Company had 53 stores at the end of 1994 compared to 48 stores in 1993 and 52 stores in 1992. The Company's products are distributed to over 5,000 customers operating more than 15,000 department specialty and mass merchandising stores, including such leading retailers in the United States as Dayton-Hudson, Dillard's Department Stores, Federated Department Stores, J.C. Penney, Kmart, The Limited, Victoria's Secret, Macy's, The May Department Stores and Wal-Mart and such leading retailers in Canada as Eaton's and The Hudson Bay Company. The Company's products are also distributed to such leading European retailers as Marks & Spencer, House of Fraser, Harrods, Galeries Lafayette and Au Printemps. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company operates within one dominant industry segment, the manufacture and distribution of apparel, and has no customer which accounted for 10% or more of its net revenues in fiscal 1994. (See Note 7 of Notes to Consolidated Financial Statements on pages F-6 to F-19.) (C) NARRATIVE DESCRIPTION OF BUSINESS. The Company designs, manufactures and markets a broad line of women's intimate apparel and men's apparel and accessories sold under a variety of internationally recognized owned and licensed brand names. The Company operates three divisions, Intimate Apparel, Menswear and Retail Outlet Stores, which accounted for 72%, 23% and 5%, respectively, of net revenues in fiscal 1994. INTIMATE APPAREL The Company designs, manufactures and markets intimate apparel which includes bras, panties, daywear and sleepwear. The Company also designs and markets mens underwear. The Company's bra brands accounted for over 31% of bra sales in department and specialty stores in the United States in 1994, nearly twice its nearest competitor. 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. In order to expand its market penetration the Company (i) entered into a license agreement with Fruit of the Loom, Inc., and in June 1992, began to distribute moderate priced bras, daywear and other related items under this license through the mass merchandise market (ii) in late 1993, the Company signed a 3-year distribution agreement with Avon Products, Inc. to distribute Warner's and Fruit of the Loom bras on an exclusive basis and Scaasi sleepwear throughout the United States and (iii) in March 1994, the Company acquired the worldwide trademarks, rights and businesses of Calvin Klein men's underwear and the worldwide trademarks and rights of Calvin Klein women's intimate apparel upon the expiration of an existing license on December 31, 1994. 2 The intimate apparel division markets its lines under the following brand names:
BRAND NAME PRICE RANGE TYPE OF APPAREL - ----------------------------------- ----------------------------------- --------------------------------- Warner's........................... upper moderate to better intimate apparel Olga............................... better intimate apparel Valentino Intimo................... premium intimate apparel Calvin Klein(1).................... better intimate apparel/men's underwear Scaasi............................. moderate sleepwear Blanche............................ better to premium sleepwear Fruit of the Loom.................. moderate intimate apparel White Stag......................... moderate intimate apparel
- ------------------ (1) On March 14, 1994, the Company acquired the worldwide trademarks, rights and businesses of Calvin Klein men's underwear and the worldwide trademarks and rights of Calvin Klein women's intimate apparel upon the expiration of an existing license on December 31, 1994. The Company owns the Warner's, Olga, Calvin Klein (men's underwear and intimate apparel) and Blanche brand names and trademarks. The Company has a license in perpetuity for the White Stag brand for women's sportswear and intimate apparel. The Company licenses the other brand names under which it markets its product lines. The Company also manufactures intimate apparel on a private and exclusive label basis for certain leading specialty and department stores. The intimate apparel division's revenues are primarily generated by sales of the Company's own brand names. The Warner's brand is 121 years old and the Olga brand is 54 years old and commanded approximately 31% collectively of women's bra sales in United States department and specialty stores in 1994. In August 1991, the Company entered into a 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, Venture, Bradlees and Kmart under the Fruit of the Loom brand name. The license agreement has since been extended to include daywear, full slips, half slips, culottes and petticoats as well as coordinated fashion sets (bras and panties) and certain control bottoms and sleepwear. The Company began shipping Fruit of the Loom products in June 1992. The agreement with Fruit of the Loom, Inc. has allowed the Company to enter the mass merchandise market, which is growing faster than the department and specialty store market. 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, the cotton-lycra bra and the sports bra. The Company also introduced the use of hangers and certain point of sale hangtags 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. Growth in the intimate apparel industry is benefiting from a shift in consumer attitudes. Specifically, because women increasingly view intimate apparel as a fashion-oriented purchase rather than as a purchase of a basic necessity. The shift has been driven by the expansion of intimate apparel specialty stores and catalogs such as Victoria's Secret and an increase in space allocated to intimate apparel by department stores. The Company believes that it is well-positioned to benefit from 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 obtaining the licenses to produce intimate apparel under the Valentino Intimo name in the premium end of the market, by continuing to introduce new products under the Warner's and Olga brands in the better end of the market, by obtaining the license from Fruit of the Loom, Inc. to produce bras, daywear and other related items, by producing White Stag bras for the mass merchandise segment of the market and by acquiring the Calvin Klein trademarks for better priced women's intimate apparel and men's underwear. The Company has further improved its position 3 by continuing to strengthen its relationships with its department store, specialty store, and mass merchandise customers. The Intimate Apparel Division's revenues have increased at a 16% compounded annual growth rate since 1989, to $565.3 million in fiscal 1994, as the Company increased its penetration with existing accounts, expanded sales to new customers by capitalizing on the high growth in such specialty stores as Victoria's Secret and sales of Fruit of the Loom to mass merchandisers such as Wal-Mart, Venture, Bradlees and Kmart and broadened its product lines to include men's underwear. The Company's strong sales increase was accomplished despite the softening of the general retail market due to poor economic conditions and the bankruptcy, reorganization or liquidation of certain major retail store customers during this period. The intimate apparel division has reduced operating expenses as a percentage of net revenue by narrowing its product lines, controlling selling, administrative and general expenses and improving manufacturing efficiency. The Company believes that it is one of the lowest-cost producers of intimate apparel in the United States, producing nearly eight million dozen per year. The Company's bras are sold primarily in the department and specialty stores that have been the Company's traditional customer base for intimate apparel. In June of 1992, the Company expanded into a new channel of distribution, mass merchandisers, with its Fruit of the Loom product line, which offers a range of styles designed to meet the needs of the consumer profile of this market. In late 1993 the Company further expanded its channels of distribution by signing a 3-year agreement with Avon Products, Inc. to distribute Warner's and Fruit of the Loom bras on an exclusive basis, and, Scaasi sleepwear throughout the United States. 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 the panties and daywear product lines. The Intimate Apparel Division has subsidiaries in Canada and Mexico in North America and in the United Kingdom, France, Belgium, Ireland, Spain and Germany in Europe. International sales accounted for approximately 14.8% of the intimate apparel division's net revenues in fiscal 1994. Net revenues attributable to the international divisions of the Intimate Apparel Division were $79.1 million, $84.5 million and $84.1 million in fiscal years 1992, 1993 and 1994, respectively. Management's strategy is to increase its market penetration in Europe and to open additional channels of distribution. In 1994 the Company began distributing its products directly in Spain, Portugal and Italy, having taken back these territories from its previous licensee. In addition, in 1994 the Company entered into a joint venture with News Corp Limited to market, on an exclusive basis, the Company's products over the Satellite Television Asian Region Network ('STAR'), serving Asia and the Middle East. The STAR network reaches over 60 million households in 53 countries in an area that includes two-thirds of the world's population. In addition to the international marketing of its product lines, the Company has licensed its intimate apparel brand names to manufacturers in certain foreign countries. The Company's intimate apparel products are manufactured principally in the Company's facilities in North America, Central America, the Caribbean Basin, Ireland and the United Kingdom. Although the Intimate Apparel Division generally markets its product lines for three retail selling seasons (spring, fall and holiday), its sales and revenues are somewhat seasonal with approximately 57% of net revenues and 58% of operating income generated during the second half of the fiscal year. MENSWEAR The Menswear Division designs, manufactures, imports and markets moderate to better-priced dress shirts and neckwear, sportswear and men's accessories. Management considers the Menswear 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. 4 The Menswear Division markets its lines under the following brand names:
BRAND NAME PRICE RANGE TYPE OF APPAREL - ------------------------------------ ------------------------------------ --------------------------------- Hathaway............................ better dress shirts, neckwear, knit and woven sportshirts and sweaters Calvin Klein........................ better men's underwear and accessories, Chaps by Ralph Lauren............... upper moderate dress shirts, neckwear, knit and woven sportshirts, sweaters and sportswear Catalina............................ moderate men's and women's sportswear, dress shirts and furnishings
The Hathaway brand name is owned by the Company. The Company also owns the trademarks for Calvin Klein men's underwear and women's intimate apparel. The Calvin Klein brand name for accessories, and the Chaps by Ralph Lauren and Catalina brand names are licensed by the Company. The Menswear 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 whose profit contribution is below the Company's required return. In fiscal 1993 and 1994, because of a strategic decision to minimize the percentage of commodity type businesses in the Company's product mix and to improve profitability in this Division, the Company (i) discontinued its manufactured dress shirt, neckwear and accessories business segment under the Christian Dior label (see Note 4 of Notes to Consolidated Financial Statements on pages F-6 to F-19), (ii) sold the Puritan menswear label in the United States to Wal-Mart in December 1993, and (iii) did not renew its Golden Bear by Jack Nicklaus license which expired in June 1994. The Menswear Division's net revenue has decreased from $213.9 million in fiscal year 1989 to $183.8 million in fiscal year 1994 primarily due to the discontinuation of several underperforming businesses including Christian Dior accessories, neckwear, sportswear and dress shirts, Golden Bear by Jack Nicklaus, Pringle and Puritan menswear. The men's business, and the dress shirt business in particular, has been adversely affected during this period by weak retail demand due to poor economic conditions and the bankruptcy, reorganization or liquidation of several of its major retail store customers. In addition, the division has been hurt by a shift in consumer preferences away from apparel made with synthetic or blended fibers, particularly orlon sweaters, and by substantial liquidations of dress shirt, knit shirt and sweater inventories at low prices by certain of the Company's competitors as a result of their financial difficulties. The negative impact of these conditions has been partially offset by the tremendous success of the Chaps by Ralph Lauren brand which has increased its net revenues by approximately 426% since 1989 to $121 million while increasing operating profits over 600% to $17 milllion. Dress Shirts and Neckwear. The Menswear Division designs, manufactures, imports and markets three principal lines of dress shirts: basic, intermediate-fashion and fashion. The average full retail prices of the dress shirts, which are marketed under the Hathaway and Chaps by Ralph Lauren brand names, range from $20 to $45. Substantially all of the division's dress shirts are manufactured at Company owned or leased facilities in North America and the Caribbean Basin. Sportswear. The Menswear Division has substantially revised its sportswear product lines over the past several years. The Chaps by Ralph Lauren line has eliminated many synthetic and blended fabrics from its product lines and updated its styling, which has generated significant net revenue increases as mentioned above. In 1993, the Company entered into a license agreement to produce men's and women's sportswear and men's dress shirts and furnishings bearing the Catalina trademark. Catalina brand products will be sold to the mass merchandise segment of the market. The first shipments of Catalina products were made in the first quarter of 1995. Accessories. The Menswear Division markets (beginning in 1995) men's accessories including small leather goods and belts under the Calvin Klein brand name under an exclusive worldwide license. Management believes that one of the strengths of its accessories lines is the high level of international consumer recognition associated with the Calvin Klein label. The Company's strategy is to expand the 5 accessories business, which on a consistent basis has generated higher margins than other menswear products. International sales accounted for approximately 6% of net revenues of the Menswear Division in l994. Net revenues attributable to international divisions of the Menswear Division were $12.7 million, $14.1 million and $10.2 million in fiscal years l992, 1993 and 1994, respectively. The decrease in international sales in fiscal 1994 compared to fiscal 1993 reflects the Company's strategic decision to restructure its men's dress shirt and neckwear businesses and to terminate its Christian Dior licenses. The Menswear Division's sportswear is sourced principally from the Far East. The Menswear Division manufactures its dress shirts in North America and sources certain styles of dress shirts in the Far East and in the Caribbean Basin. Accessories are sourced in the United States, Europe and the Far East. Neckwear is sourced primarily in the United States. The Menswear Division, like the Intimate Apparel Division, generally markets its apparel products for three retail selling seasons (spring, fall and holiday). The Menswear Division introduces new styles, fabrics and colors based upon consumer preferences and market trends and to coincide with the appropriate retail selling season. The sales of the Menswear Division's product lines follow individual seasonal shipping patterns ranging from one season to three seasons, with multiple releases in some of the Division's more fashion-oriented lines. Consistent with industry and consumer buying patterns, approximately 56% of the Menswear Division's net revenues and 67% of the Menswear Division's operating profit are generated in the second half of the calendar year, reflecting the strength of the fall and holiday shopping seasons. RETAIL OUTLET STORES DIVISION The Retail Outlet Stores Division primarily sells the Company's products to the general public. The Company's business strategy with respect to its retail outlet stores is to provide a channel for disposing of the Company's excess and irregular inventory, thereby limiting its exposure to off-price retailers. The Company's retail outlet stores are situated in areas where they generally do not conflict with the Company's principal channels of distribution. The Company's newer retail outlet stores are principally intimate apparel stores located in outlet malls. The Company has found that it has improved margins by operating retail outlet stores that sell products of only one of the Company's divisions. The Retail Outlet Store Division's EBITDA in fiscal 1994 improved 40% over fiscal 1993 to $2.8 million. The Company operates 53 stores, of which 35 carry intimate apparel only, 3 carry Menswear only and 15 carry both lines. INTERNATIONAL OPERATIONS The Company has subsidiaries in Canada and Mexico in North America and in the United Kingdom, Ireland, Belgium, France, Spain and Germany in Europe which engage in sales and marketing activities. With the exception of the fluctuation of local currencies against the United States dollar, the Company does not believe that the operations in Canada and western Europe are subject to risks which are significantly different from domestic operations. Mexico has historically been subject to high rates of inflation and currency restrictions which may, from time to time impact the Mexican operation. The recent devaluation of the Mexican peso has had a favorable impact on the Company since its Mexican operations produce 25% of the Company's intimate apparel for the U.S. market. The Company also sells directly to customers in Mexico which represents less than 1% of the Company's total sales. The Company maintains manufacturing facilities in Mexico, Honduras, Costa Rica, the Dominican Republic, Canada, Ireland and the United Kingdom and warehousing facilities in Canada, Mexico, the United Kingdom and contracts warehousing in Spain. 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. The recent devaluation of the Mexican peso has had a favorable impact on the Company since its Mexican operations produce 25% of the Company's intimate apparel for the U.S. market. The Company's manufacturing policy is to have many potential sources of manufacturing so that a disruption of production at any one facility will not cause a significant problem. 6 The majority of the Company's imported purchases are invoiced in United States dollars and, therefore, are not subject to short-term currency fluctuations. SALES AND MARKETING The Intimate Apparel and Menswear Divisions sell to over 5,000 customers operating more than 15,000 department, mass merchandise and men's and women's specialty stores throughout North America and Europe. While certain of the Company's department store customers are under common ownership, none of these corporate groups accounted for more than 10% of the Company's net revenues during fiscal 1994. The Company's retail customers are served by approximately 200 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 (commonly referred to as 'EDI') programs with certain of its retailing customers which permit the Company to receive purchase orders electronically from these customers and, in some cases, to transmit invoices electronically. The Company utilizes various forms of advertising media. In l994, the Company spent approximately $37 million or 4.7% of net sales for advertising and promotion of its various product lines. This compares to $32 million or 4.5% of net sales in 1993. This increase was made in order to maintain the Company's strong market position in Warner's and Olga and increase penetration of the Fruit of the Loom and Calvin Klein product lines. The Company participates 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 Menswear Divisions. 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. 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 it has a significant competitive advantage because of high consumer recognition and acceptance of its brand names and its strong presence and strong market share in the major department and specialty store chains. A substantial portion of the Company's sales are of products, such as intimate apparel and mens underwear, that are 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 Menswear Divisions are available from multiple sources. IMPORT QUOTAS A substantial portion of the Company's products 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 U.S. Customs authorities if 7 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. EMPLOYEES The Company and its subsidiaries employ approximately 14,800 employees. Approximately 17% 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 significant interruption of 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 terminated its license agreements with Christian Dior for the production of sportswear in 1992 and for the production of dress shirts, neckwear and accesories in both the United States and Canada in 1994 and 1995. The Company's joint venture agreement with Golden Bear, Inc. expired in June 1994. The Company's exclusive license and design agreements for the Chaps by Ralph Lauren trademark expire on December 31, 1996. These agreements grant the Company an exclusive right to use the Chaps by Ralph Lauren trademark in the United States of America. The Company's license to use the Valentino Intimo trademark for intimate apparel in the United States of America, its territories and possessions, Puerto Rico and Canada, expires on December 31, l997 and, subject to certain conditions, is renewable at the Company's option, for an additional five-year term. The Company has an exclusive license to use the Scaasi trademark in the United States of America, its territories and possessions, Puerto Rico, Canada, Mexico, and numerous Caribbean Islands until December 31, 1999. The Company's exclusive license agreement to use the Fruit of the Loom trademark in the United States of America, its territories and possessions, Canada and Mexico was extended for an additional two year term expiring December 31, 1996. On March 14, 1994, the Company entered into a license agreement with Calvin Klein, Inc. to produce Calvin Klein men's accessories for a period of five years through March 14, 1999 and a further five year renewal period through March 14, 2004, solely at the option of the Company. In December 1993, the Company entered into a license agreement with Authentic Fitness Corporation to produce men's and women's sportswear and men's dress shirts and furnishings under the Catalina label. The Company's exclusive license to use the Catalina trademark worldwide for these products expires in December 2003. 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, Calvin Klein intimate apparel, Hathaway and Blanche. The Company has a license in perpetuity for White Stag women's sportswear and intimate apparel. The Company licenses the Warner's, Hathaway and Calvin Klein 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 licensees, to assure compliance with the Company's overall marketing, merchandising and design strategies, and to ensure uniformity and quality control. Royalty income derived from such licensing was approximately $5.6 million (including assignment fees received in connection with the termination of certain licenses of $3.0 million), $15.0 million (including the sale of the Puritan trademark in the United States for $7.7 million) and $11.5 million (including the sale of certain trademarks to Authentic Fitness Corporation for $6.6 million) in fiscal years 1992, 1993 and 1994, respectively. 8 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 7 of Notes to Consolidated Financial Statements on pages F-6 to F-19. 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 and California, pursuant to leases that expire in 1999 and 2000, respectively. The Company has 16 domestic manufacturing and warehouse facilities located in Alabama, Connecticut, Georgia, Kentucky, Pennsylvania, Maine, California, New York, Puerto Rico and Tennessee and 20 international manufacturing and warehouse facilities located in Costa Rica, the Dominican Republic, Honduras, Mexico, Canada, Spain, the United Kingdom and Ireland. Certain of the Company's manufacturing and warehouse facilities are also used for administrative and retail functions. The Company owns eight of its domestic and three of its international facilities. The balance of the facilities are leased. Lease terms, except for three month-to-month leases, expire from 1995 to 2007. The Company also leases sales offices in a number of major cities, including, Dallas and New York in the United States; Brussels, Belgium; Toronto, Canada; London, England; Dusseldorf, Germany; Madrid, Spain and Paris, France. The sales office leases expire between 1995 and 2001 and are 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. The Company has expanded its production capacity in the Caribbean Basin in the last three years and anticipates additional expansion in Mexico to support the Company's continued growth. In December 1993, the Company sold its Checotah, Oklahoma manufacturing facility to Authentic Fitness Corporation, a related party, (See Note 6 of Notes to Consolidated Financial Statements on pages F-6 to F-19) for its appraised fair market value. Prior to the sale, the facility was being 100% utilized as a contract facility for Authentic Fitness Corporation. In January 1994, the Company's leased warehouse located in Sylmar, California suffered significant structural damage due to the California earthquake and was permanently closed. The Company was able to recover substantially all of its inventory, transfer the inventory to other locations, and begin shipping at normal levels in March, 1994. The Company has earthquake insurance and, other than a deductible of approximately $3 million, which was recorded as a non-recurring expense in the first quarter of fiscal 1994, expects to fully recover its losses (See Note 4 of Notes to Consolidated Financial Statements on pages F-6 to F-19.) ITEM 3. LEGAL PROCEEDINGS. The Company sued VF Corporation and its Spanish subsidiary for breach of contract, fraud, violation of Federal trademark laws and conspiracy in connection with the termination of a licensing agreement in Spain, Portugal and Italy. The Company settled this action in December 1994 on favorable terms. The Company is not a party to any litigation, other than routine litigation incidental to the 9 business of the Company, which is individually or in the aggregate material to the business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company, their ages and their positions are set forth below.
NAME AGE POSITION - --------------------------------------------------- --- --------------------------------------------------- Linda J. Wachner................................... 49 Director, Chairman of the Board, President and Chief Executive Officer Dariush Ashrafi.................................... 48 Director, Senior Vice President and Chief Financial Officer William S. Finkelstein............................. 46 Senior Vice President and Controller Stanley P. Silverstein............................. 42 Vice President, General Counsel and Secretary
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 Travelers Inc. and Authentic Fitness Corporation. Mr. Ashrafi was elected a Director in May 1992 and has been Senior Vice President and Chief Financial Officer of the Company since July 1990. Prior to joining the Company, Mr. Ashrafi was a partner with the international accounting and auditing firm of Ernst & Young beginning in 1983, where he was a member of the Financial Services Group specializing in mergers and acquisitions and was responsible for audits of major clients, including those in the apparel industry. Mr. Finkelstein has been Senior Vice President of the Company since May 1992 and Controller of the Company since November 1988. Mr. Finkelstein served as Vice President of the Company between November 1988 and May 1992 and 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 also serves as a Director of Authentic Fitness Corporation and Herman's Sporting Goods, Inc. 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. 10 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's 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. Amounts have been adjusted to reflect the two-for-one stock split.
PERIOD HIGH LOW - ---------------------------------------------------------------------------------- --------------- --------------- 1992: First Quarter................................................................ $19 $123/16 Second Quarter............................................................... 19 133/4 Third Quarter................................................................ 181/8 14 Fourth Quarter............................................................... 201/2 163/8 1993: First Quarter................................................................ $195/8 $133/8 Second Quarter............................................................... 1815/16 1413/16 Third Quarter................................................................ 171/16 143/8 Fourth Quarter............................................................... 1713/16 141/4 1994: First Quarter................................................................ $155/8 $131/8 Second Quarter............................................................... 175/8 145/8 Third Quarter................................................................ 185/8 145/16 Fourth Quarter............................................................... 191/4 141/8 1995: First Quarter................................................................ $177/8 $147/8
A recent last sales price for the shares of Common Stock as reported on the New York Stock Exchange Composite Tape was $17 7/8 on March 30, 1995. On April 3, 1995 there were 159 holders of Class A Common Stock, based upon the number of holders of record and the number of individual participants in certain security position listings. The Company has not paid dividends on its Common Stock. Prior to fiscal 1994, certain provisions of the Company's debt agreements restricted the Company's ability to pay dividends. In May 1994 the Company received an investment grade senior debt rating from Standard and Poor's and pursuant to the terms of the Company's debt agreements, certain provisions of the Company's debt agreements were automatically modified. As a result, the Company may declare and pay dividends equal to 25% of the Company's earnings accumulated since fiscal 1993. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere herein. The consolidated statement of operations data set forth below with respect to the fiscal years ended January 2, 1993, January 8, 1994 and January 7, 1995 and the consolidated balance sheet data at January 8, 1994 and January 7, 1995 are derived from, and are qualified by reference to, the audited consolidated financial statements included herein and should be read in conjunction with those financial statements and notes thereto. The consolidated statement of operations data for the fiscal years ended January 5, 1991 and January 4, 1992 and the consolidated balance sheet data at January 5, 1991, January 4, 1992 and January 2, 1993 are derived from audited consolidated financial statements not included herein. 11
FISCAL YEAR ENDED ----------------------------------------------------------------------- JANUARY 5, JANUARY 4, JANUARY 2, JANUARY 8, JANUARY 7, 1991 1992(A) 1993 1994(A) 1995(A) ----------------------------------------------------------------------- (IN MILLIONS, EXCEPT RATIOS AND SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues........................ $ 548.1 $ 562.5 $ 625.1 $ 703.8 $ 788.8 Gross profit........................ 190.8 195.4 219.3 236.4 255.8 Income before non-recurring items, interest and income taxes......... 59.9 70.8 89.8 92.2 99.2 Interest expense.................... 68.0 72.3 48.8 38.9 32.5 Income (loss) from continuing operations........................ (7.9 ) (19.5 ) 47.6 53.3 63.3 Preferred stock dividends paid(c)... 5.5 5.5 2.7 -- -- Income (loss) from continuing operations applicable to common stock............................. (13.4 ) (25.0 ) 44.9 53.3 63.3 Net income (loss) applicable to Common Stock(b)................... (22.2 ) (33.9 ) (20.2) 24.1 63.3 Per share amounts:(d) Income (loss) from continuing operations...................... (0.84 ) (1.31 ) 1.18 1.34 1.53 Net income (loss)................. (1.40 ) (1.78 ) (0.53) 0.61 1.53 Weighted average number of shares of Common Stock outstanding.......... 15,871,796 19,059,062 38,109,450 39,770,482 41,285,355 Divisional Summary: Net revenues: Intimate Apparel................ $ 309.1 $ 339.7 $ 384.8 $ 423.2 565.3 Menswear........................ 196.3 180.8 200.0 243.2 183.8 Retail Outlet Stores............ 42.7 42.0 40.3 37.4 39.7 ---------- ---------- ----------- ----------- ---------- $ 548.1 $ 562.5 $ 625.1 $ 703.8 $ 788.8 ---------- ---------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- Percentage of net revenues: Intimate Apparel................ 56.4 % 60.4 % 61.6% 60.1% 71.7 % Menswear........................ 35.8 32.1 32.0 34.6 23.3 Retail Outlet Stores............ 7.8 7.5 6.4 5.3 5.0 ---------- ---------- ----------- ----------- ---------- 100.0 % 100.0 % 100.0% 100.0% 100.0 % ---------- ---------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- Balance Sheet Data (at fiscal year end): Working capital................. $ 69.4 $ 109.3 $ 141.5 $ 122.0 $ 104.5 Total assets.................... 517.3 540.5 629.6 688.6 780.6 Long term debt (excluding current maturities)........... 408.2 344.8 277.6 245.5 206.8 Redeemable preferred stock...... 41.5 41.5 -- -- -- Stockholders' equity (deficit)..................... (91.4 ) (1.7 ) 135.8 159.1 240.5
- ------------------------ (a) See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' for a discussion of certain non-recurring charges incurred in fiscal 1993 and 1994. On September 4, 1991, the Company's Board of Directors determined that the Company should restructure its knitwear operations. The restructuring resulted in a non-recurring charge of approximately $13 million (or $0.68 per share) in fiscal 1991. Such charge was associated with the closing of the Company's knitwear manufacturing facilities and the liquidation of related inventory. In October 1993, the Company decided to discontinue a portion of its men's manufactured dress shirt and neckwear business segment. This resulted in a non-recurring charge of $19.9 million. Also, the Company incurred a $2.6 million non-recurring charge associated with the wind up of a previously discontinued business. The total non-recurring charge recorded in fiscal 1993 was $22.5 million (or $0.56 per share). In fiscal 1994, the Company incurred a $3 million (or $0.07 per share) charge related to the California earthquake. See Note 4 of Notes to Consolidated Financial Statements. (b) Fiscal 1993 includes a $10.5 million charge (or $0.26 per share) for the cumulative effect of the Company changing its method of accounting for postretirement benefits other than pensions. See Note 9 of Notes to Consolidated Financial Statements. (c) The Company has not paid any cash dividends on its Common Stock. 12 (d) All share and per share amounts have been adjusted to reflect the two-for-one stock split effective October 3, 1994 and includes all Common Stock and Common Stock equivalents. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. During the last several years, the Company has implemented a number of strategies designed to reduce operating expenses and refocus its business on less fashion sensitive and higher margin product lines with world brand potential. As a result of this strategic refocusing, and notwithstanding the bankruptcy, reorganization or liquidation of several of the Company's retail customers, including B. Altman & Co., Bonwit Teller, Carter Hawley Hale, Federated Department Stores, Miller & Rhoades, R.H. Macy & Co., Woodward & Lathrop, and P.A. Bergner & Co., and the general softening of the retail market as a result of the economic slowdown from 1989 through 1994, the Company has significantly increased operating income. The Intimate Apparel Division's net revenues have grown since 1989 at a compounded annual growth rate of approximately 16%. Menswear Division net revenues have decreased from $213.9 million in fiscal 1989 to $183.8 million in fiscal 1994, reflecting the Company's strategic decisions to eliminate cash intensive businesses and businesses that did not demonstrate the potential to achieve profitability levels acceptable to management. (See Notes 3 and 4 of Notes to Consolidated Financial Statements on pages F-6 to F-19.) The strategic decisions included (i) not renewing its license with Pringle of Scotland in fiscal 1989, (ii) closing its knitwear manufacturing facilities in 1991, (iii) restructuring the Company's dress shirt and neckwear manufacturing facilities in 1993, (iv) terminating the Christian Dior licenses for dress shirts, neckwear and accessories in 1994 and 1995 and selling the Christian Dior license for sportswear in 1992, (v) selling the Puritan menswear trademark in the United States to Wal-Mart and (vi) not renewing the license for Golden Bear by Jack Nicklaus in 1994. The negative impact on net revenues of the discontinued businesses was partially offset by strong growth in the Company's Chaps by Ralph Lauren line which has increased net revenue over 400% since 1989 and increased operating profit over 600% since 1989. RESULTS OF OPERATIONS The consolidated results of operations for the Company are summarized below. The Divisional Summary includes the Retail Outlet Stores Division for reporting purposes; however, since the Company's business strategy is to use its Retail Outlet Stores as a channel for its excess inventory and the Company does not consider the results of such division to be material, the Retail Outlet Stores Division is not discussed further. STATEMENT OF OPERATIONS (SELECTED DATA)
FISCAL YEAR ENDED -------------------------------------------------------------------------- JANUARY 2, % OF NET JANUARY 8, % OF NET JANUARY 7, % OF NET 1993 REVENUES 1994 REVENUES 1995 REVENUES ---------- -------- ---------- -------- ---------- -------- (IN MILLIONS) Net revenues............................... 625.1 100.0% 703.8 100.0% 788.8 100.0% Cost of goods sold......................... 405.8 64.9% 467.4 66.4% 533.0 67.6% ---------- -------- ---------- -------- ---------- -------- Gross profit............................... 219.3 35.1% 236.4 33.6% 255.8 32.4% Selling, administrative and general expense.................................. 129.5 20.7% 144.2 20.5% 156.6 19.9% ---------- -------- ---------- -------- ---------- -------- Income before non-recurring items, interest and income taxes......................... 89.8 14.4% 92.2 13.1% 99.2 12.5% Non-recurring items(a)..................... -- 22.5 3.0 Interest expense........................... 48.8 38.9 32.5 Income from continuing operations.......... 47.6 53.3 63.3
13 DIVISIONAL SUMMARY
FISCAL YEAR ENDED -------------------------------------------------------------------------- % OF % OF % OF JANUARY 2, GROSS JANUARY 8, GROSS JANUARY 7, GROSS 1993 PROFIT 1994 PROFIT 1995 PROFIT ---------- -------- ---------- -------- ---------- -------- Net revenues: Intimate Apparel...................... $384.8 $423.2 $565.3 Menswear.............................. 200.0 243.2 183.8 Retail Outlet Stores.................. 40.3 37.4 39.7 ---------- ---------- ---------- Net revenues............................... $625.1 $703.8 $788.8 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit: Intimate Apparel...................... $152.9 69.7% $167.7 70.9% $203.5 79.6% Menswear.............................. 52.3 23.9% 53.7 22.7% 38.2 14.9% Retail Outlet Stores.................. 14.1 6.4% 15.0 6.4% 14.1 5.5% ---------- -------- ---------- -------- ---------- -------- Gross profit............................... $219.3 100.0% $236.4 100.0% $255.8 100.0% ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
- ------------ (a) In October 1993, the Company decided to discontinue a portion of its men's manufactured dress shirt and neckwear business segment, which resulted in a non-recurring charge of $19.9 million. Also, the Company incurred a $2.6 million non-recurring charge associated with the wind up of a previously discontinued business. The total non-recurring charge recorded in fiscal 1993 was $22.5 million (or $0.56 per share). In fiscal 1994 the Company recorded a $3 million (or $0.07 per share) non-recurring charge related to the California earthquake. See Note 4 of Notes to Consolidated Financial Statements on pages F-6 to F-19. COMPARISON OF FISCAL 1994 WITH FISCAL 1993 Net revenues increased 12.1% from $703.8 million in fiscal 1993 to $788.8 million in fiscal 1994. The increase in net revenue was accomplished despite a planned reduction of approximately $90 million in discontinued Menswear brands and is attributable to continued growth in the Company's Intimate Apparel Division of 33.6% and continued growth in the Company's Chaps by Ralph Lauren line of 36%. Net revenue includes royalty income of $11.5 million in fiscal 1994 (including the sale of certain trademarks to Authentic Fitness for $6.6 million) compared to $15.0 million in fiscal 1993 (including the sale of the Puritan menswear trademark in the United States for $7.7 million). INTIMATE APPAREL DIVISION. Net revenues increased 33.6% to $565.3 million in fiscal 1994 from the $423.2 million recorded in fiscal 1993. The increase was driven by the acquisition of Calvin Klein which generated net revenues of $61.0 million in fiscal 1994, an increase in Fruit of the Loom net revenues of 95.4% to $64.3 million and increases in Warner's and Olga of 13.2%. MENSWEAR DIVISION. Net revenues for fiscal 1994 decreased to $183.8 million from $243.2 million in fiscal 1993. The decrease in sales is attributable to the Company's strategic decisions in fiscal 1993 and 1994 to (i) terminate the Christian Dior licenses for men's dress shirts, neckwear and accessories, (ii) sell the Puritan menswear trademark in the United States to Wal-Mart and (iii) discontinue the Golden Bear by Jack Nicklaus product line. Without these discontinued brands, Menswear Division net revenues increased 15.3% in fiscal 1994 to $164.5 million from $142.9 million in fiscal 1993. The increase is attributable to continued outstanding growth of 36.0% in Chaps by Ralph Lauren. Gross profit increased to $255.8 million in fiscal 1994 from $236.4 million in fiscal 1993. Gross profit as a percentage of net revenues decreased to 32.4% in fiscal 1994 from 33.6% in fiscal 1993. The decrease in gross profit as a percentage of net revenue reflects the higher mix of Fruit of the Loom sales, the amortization of start-up costs in the Fruit of the Loom business and decreased manufacturing efficiency due to the start-up of four new plants. INTIMATE APPAREL DIVISION. Intimate Apparel Division gross profit increased 21.3% to $203.5 million (36.0% of net revenues) from the $167.7 million (39.6% of net revenues) recorded in fiscal 14 1993. The increase in gross profit reflects the higher net revenues noted above. Gross profit as a percentage of net revenues decreased from 39.6% to 36.0% due to the mix of Fruit of the Loom sales, the amortization of Fruit of the Loom start-up costs, and decreased manufacturing efficiency as noted above. MENSWEAR DIVISION. Menswear Division gross profit decreased to $38.2 million (20.7% of net revenues) from $53.7 million (22.1% of net revenues) last year. The decrease in gross profit reflects the lower sales volume due to discontinued brands, as discussed above. The decrease in gross profit as a percentage of net revenues reflects the favorable impact in fiscal 1993 from the sale of the Puritan menswear trademark in the United States. Selling, administrative and general expenses increased 8.6% in fiscal 1994 to $156.6 million (19.9% of net revenue) from $144.2 million (20.5% of net revenue) in fiscal 1993. The increase in selling, administrative and general expenses reflects volume increases and an increase in marketing expenses of $5.6 million. Marketing expenses increased to 4.7% of net revenue in fiscal 1994 from 4.5% in fiscal 1993 and 3.2% in fiscal 1992. The decrease in selling, administrative and general expenses as a percentage of net revenue reflects continued efforts to control operating expenses by the Company and the favorable impact of increased sales to mass merchandisers and Avon which have lower selling expenses than the Company's traditional channels of distribution. Interest expense decreased 17% to $32.5 million in fiscal 1994 from $38.9 million in fiscal 1993 despite an overall increase in interest rates during 1994. The decrease in interest expense is a result of the refinancing of the Company's credit agreement in the fourth quarter of fiscal 1993, the attainment of an Investment Grade credit rating of BBB- from Standard & Poor's in May 1994, and the renegotiation of the Company's cost of borrowing in June 1994. The combination of the refinancing, the improved credit rating and the renegotiated borrowing rate lowered the Company's cost of borrowing by 75 basis points to LIBOR plus 0.5%. In addition, the Company has purchased agreements which effectively fix the Company's rate of interest on $275 million of debt at approximately 6.2% through fiscal 1995. In January 1994, The Company's leased warehouse located in Sylmar, California suffered significant structural damage due to the California earthquake and was permanently closed. The Company was able to recover substantially all of its inventory, transfer the inventory to other locations, and begin shipping at normal levels in March, 1994. The Company has earthquake insurance and, other than a deductible of approximately $3 million, which was recorded as a non-recurring expense in the first quarter of fiscal 1994, expects to fully recover its losses. The Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, ('Statement No. 109') in 1992. The provision for income taxes for fiscal 1994 reflects the the realization of tax benefits of $22.6 million related to the Company's net operating loss carryforwards which offset substantially all of the Company's income tax provision for fiscal 1994. The Company has utilized substantially all of its net operating loss carryforwards for financial reporting purposes at the end of fiscal 1994. The Company has total deferred tax assets of approximately $38.5 million at the end of fiscal 1994 and as a result will begin reporting fully taxed earnings in fiscal 1995. The Company recognized $31.3 million of income tax benefits related to future periods in fiscal years 1992 and 1993. The Company has net operating loss carryforwards for income tax purposes available to offset future taxable income amounting to approximately $110 million at January 7, 1995. These carryforwards, if fully utilized, will result in a future tax savings of approximately $38.5 million at current U.S. corporate income tax rates. The net operating loss carryforwards expire beginning in 2001 and fully expire in 2007. As a result of the Company's common stock offerings in 1991 and 1992 and other changes in the ownership of the Company's common stock, certain provisions of the Internal Revenue Code will limit the rate at which the Company will be able to utilize its net operating loss carryforwards. The Company believes that it will realize all of the benefits attributable to its net operating loss carryforwards; however, the amount of such benefits that the Company will realize and the period in which any benefit is realized are subject to several factors including the general level of economic activity, the level of earnings and future changes in U.S. corporate income tax laws and regulations (See Note 8 of Notes to Consolidated Financial Statements on pages F-6 to F-19). 15 Income from continuing operations for fiscal 1994 was $63.3 million compared to $53.3 million in fiscal 1993. The increase in income from continuing operations of $10.0 million or 18.8% is attributable to increased operating income and lower interest expense, as noted above. Net income for fiscal 1994 was $63.3 million compared to $24.1 million in fiscal 1993. Net income for fiscal 1993 included an extraordinary item of $18.6 million (without income tax benefit) primarily related to premium payments and the write-off of deferred financing costs associated with the early extinguishment of debt. In addition, fiscal 1993 included a $10.5 million non-cash charge for the cumulative effective of adopting Statement of Financial Accounting Standards No.106. COMPARISON OF FISCAL 1993 WITH FISCAL 1992 Net revenues increased 13% from $625.1 million in fiscal 1992 to $703.8 million in fiscal 1993. The increase in net revenues is primarily attributable to continued growth in the Company's Intimate Apparel Division and growth in the Chaps by Ralph Lauren line of the Menswear Division. INTIMATE APPAREL DIVISION. Net revenues increased 10% to $423.2 million in fiscal 1993 from the $384.8 million recorded in fiscal 1992 despite a $7.5 million negative effect on foreign exchange translation due to the strong dollar versus the pound sterling. The increase is attributable to continued growth in the Company's domestic business, primarily the Warner's and Olga brands of over 8%, and the highly successful introduction of the Fruit of the Loom brand of intimate apparel into the mass merchandise market, which increased 115% to $32.9 million in fiscal 1993, from $15.3 million in fiscal 1992, its first year of operation. MENSWEAR DIVISION. Net revenues for fiscal 1993 increased 22% to $243.2 million from the $200.0 million recorded in fiscal 1992. The increase is primarily attributable to an increase in Chaps by Ralph Lauren net revenues of $30 million or 51% to $89 million and an increase in Puritan net revenues of $33 million including the sale of the trademark in the United States to Wal-Mart for $7.7 million. This was partially offset by a $16 million or 23% decline in the Christian Dior business. Gross profit increased to $236.4 million in fiscal 1993 from $219.3 million in fiscal 1992. Gross profit as a percentage of net revenues decreased to 33.6% in fiscal 1993 from 35.1% in fiscal 1992. The decrease in gross profit as a percentage of net revenues reflects a higher mix of menswear sales compared to the higher margin Intimate Apparel business, startup costs totaling $3.5 million for three new intimate apparel plants in the Caribbean basin and the Miracle Bra program for Victoria's Secret and the selling of excess dress shirt and neckwear inventory at lower margins. INTIMATE APPAREL DIVISION. Intimate Apparel Division gross profit increased 10% to $167.7 million in fiscal 1993 (39.6% of intimate apparel net revenues) from the $152.9 million (39.7% of intimate apparel net revenues) recorded in fiscal 1992. The increase in gross profit primarily reflects higher net revenues noted above. Gross profit as a percentage of net revenues is down slightly due to the start-up costs mentioned above, offset by favorable manufacturing variances. MENSWEAR DIVISION. Menswear Division gross profit increased 3% to $53.7 million in fiscal 1993 (22.1% of menswear net revenues) from $52.3 million (26.1% of menswear net revenues) recorded in fiscal 1992. The decrease in gross margin reflects a considerable softness in the commodity dress shirt and neckwear business and the selling of excess inventory at lower margins. Selling, administrative and general expenses increased to $144.2 million (20.5% of net revenues) in fiscal 1993 from $129.5 million (20.7% of net revenues) in fiscal 1992. The increase in selling, administrative and general expenses reflects volume increases and an increase in advertising and marketing expense to maintain the Company's strong Intimate Apparel market position in department stores and increased penetration of Fruit of the Loom bras in the mass merchandise market. The decrease in selling, administrative and general expenses as a percentage of net revenues reflects continuing efforts by the Company to operate efficiently and control costs and the spreading of certain fixed costs over the higher net revenue base, partially offset by the higher level of advertising and marketing costs. Interest expense decreased 20% to $38.9 million in fiscal 1993 from $48.8 million recorded in fiscal 1992. The decrease in interest expense in fiscal 1993 compared to fiscal 1992 reflects the impact of the 16 Company's recapitalization in March 1992, which included the sale of 10,000,000 shares of common stock and the refinancing of all of the Company's remaining high yield debt in September 1993, which reduced the average rate of interest on the Company's outstanding debt from nearly 14% during 1991 to 7.5% during 1992 to approximately 6% at the end of 1993. The Company's debt at the end of 1993 is substantially all bank debt at a rate of LIBOR plus 1.25%, with $250 million or 62% of total debt locked in at varying rates over the next 2 years. Interest expense for fiscal 1993 includes approximately $3.3 million of non-cash interest compared to $4.3 million for fiscal 1992. The decrease in non-cash interest in fiscal 1993 compared to fiscal 1992 reflects a decrease in accretion related to the Senior Discount Term Notes which were redeemed in full in May 1992 and a reduction in deferred financing cost amortization due to the early repayment of all of the Company's high yield debt obligations during 1992. The non-recurring expense recorded in fiscal 1993 of $22.5 million represents a $19.9 million charge related to anticipated future losses from operations and non-cash writedowns of assets from a portion of the Company's men's manufactured dress shirt and neckwear business segment, which it decided to discontinue in October, 1993 and $2.6 million of costs associated with the windup of the Company's Canadian womenswear business which was discontinued in a prior year. In the fourth quarter of fiscal 1992, the Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, ('Statement No. 109') retroactive to the beginning of the fiscal year. Statement No. 109 requires, among other things, the recognition of deferred tax assets for the future benefit associated with net operating loss carryforwards. Statement No. 109 further provides that companies evaluate all deferred tax assets for the potential to realize such benefits in future periods and to record a valuation allowance offsetting deferred tax assets in certain circumstances. In evaluating the Company's ability to realize the benefits associated with its net operating loss carryforwards, the Company considered the following: (i) the expected impact of temporary (timing) differences between taxable income and income reported for financial statement purposes; (ii) the pro forma impact on the Company's earnings for the three years in the period ending with fiscal 1993 of the Initial Public Offering of 13,800,000 shares of common stock in October 1991, the sale of the 10,000,000 shares of common stock in April 1992, and the refinancing and repayment of certain of the Company's debt obligations during fiscal 1993 and 1992; (iii) income from continuing operations recorded in fiscal 1993 before income taxes, non-recurring and extraordinary items; and (iv) the Company's expected future operating income. Consistent with the provisions of Statement No. 109, the Company reevaluated its deferred tax asset in the fourth quarter of fiscal 1993 and reversed a portion of its valuation allowance amounting to $24.7 million in addition to the $6.6 million benefit it recognized in fiscal 1992. After giving effect to the benefit from the recognition of future net operating loss carryforwards, the Company has approximately $64 million of unrecognized net operating loss carryforwards available for financial reporting purposes at the end of fiscal 1993. The tax benefits that will be realized from the treatment of acquisition related liabilities will be credited against the excess of costs over net assets acquired in the period such benefits accrue. The Company has total net operating loss carryforwards available to offset future taxable income amounting to approximately $170 million at January 8, 1994, a portion of which will be applied to the excess of cost over net assets acquired. These carryforwards, if fully utilized, would result in a future tax saving of approximately $60 million at current U.S. corporate income tax rates. The net operating loss carryforwards expire beginning in 2001 and fully expire in 2007. The principal differences between net operating loss carryforwards for financial reporting and tax purposes are related to liabilities accrued at the date of the Acquisition and the difference in basis for tax and financial reporting purposes of the Activewear Division, which was sold in 1990. 17 As a result of the Common Stock offering in 1991 and 1992 and other ownership changes occurring during the prior three year period, a change of ownership occurred under Internal Revenue Code Section 382, which will effectively limit the rate at which the Company may utilize its net operating loss carryforwards. The Company believes that it will ultimately realize all of the benefits attributable to its net operating loss carryforwards; however, the amount of such benefits that the Company will realize and the period in which any benefit is realized are subject to several factors including the general level of economic activity, the level of earnings, future changes in U.S. corporate income tax laws and regulations, potential Internal Revenue Service audit adjustments and limitations on the ability of the Company to utilize net operating tax carryforwards under the Internal Revenue Code. (See Note 8 of Notes to Consolidated Financial Statements on pages F-6 to F-19.) Income from continuing operations for fiscal 1993 was $53.3 million compared to income from continuing operations of $47.6 million in fiscal 1992. The increase in income from continuing operations of $5.7 million or 12% is attributable to increased operating income, lower interest expense and the income tax benefit recorded partially offset by the $22.5 million non-recurring expense noted above. Extraordinary losses of $(18.6) million (without income tax benefit) recorded in fiscal 1993 and $(57.6) million (without income tax benefit) recorded in fiscal 1992 primarily relate to premium payments and the write-off of deferred financing costs associated with the early extinguishment of debt. In January 1993, the Company adopted Financial Accounting Standards Board Statement No. 106, Accounting for Postretirement Benefits other than Pensions ('Statement No. 106') and accordingly recorded a $(10.5) million non-cash charge associated with the cumulative effect of adopting Statement No. 106. Net income for fiscal 1993 of $24.1 million reflects income from continuing operations of $53.3 million, partially offset by extraordinary charges of $(18.6) million and the $(10.5) million cumulative effect noted above. Net loss for fiscal 1992 of $(17.5) million reflects income from continuing operations of $47.6 million offset by the extraordinary losses for early extinguishment of debt of $(57.6) million and the loss from discontinuing the women's accessories business of $(7.4) million. CAPITAL RESOURCES AND LIQUIDITY On October 14, 1993 the Company refinanced its outstanding credit obligations with a $500 million facility underwritten by The Bank of Nova Scotia and Citibank, N.A., with General Electric Capital Corporation, Credit Suisse, Societe Generale and the Union Bank of Switzerland as co-agents, all of whom were existing lenders to the Company. The new facility reduced the borrowing rate of the Company from LIBOR plus 2.75% to LIBOR plus 1.25%. The agreement also included provisions that further reduced the Company's borrowing rate as the Company's credit rating from certain credit rating agencies improves. In May 1994 the Company received an investment grade senior debt credit rating of BBB-, which decreased the Company's borrowing rate to LIBOR plus 75 basis points pursuant to the provisions of its credit agreement. In June 1994, as a result of the Company's acquisition of the Calvin Klein trademarks, rights and businesses and the continued strong growth of the Company's existing businesses the Company amended its credit agreement to increase the maximum amount available under the Company's revolving line of credit by $35 million to $235 million. In addition, in response to favorable conditions in the credit markets, the Company negotiated a further reduction in its borrowing rate to LIBOR plus 0.5%. These actions have served to significantly reduce the Company's cost of borrowing and have increased the financial flexability of the Company. The reductions in the Company's borrowing rate resulted in interest savings of approximately $10 million in fiscal 1994. On February 1, 1993 the Company entered into an agreement with the Bank of Nova Scotia to provide the Company with a $40 million line of credit to be used for the issuance of commercial letters of credit (the 'L/C Facility'). Letters of credit issued under the L/C Facility are secured by the applicable inventory until such letters of credit have been paid. The facility was subsequently increased to $50 million, with a 90 day term draft acceptance sub-facility of $30 million (subsequently increased to $40 million). The total amount outstanding at any one time under both facilities may not exceed $80 million. 18 In March 1994, the Company acquired the Calvin Klein worldwide trademarks, rights and businesses for men's underwear and acquired a worldwide license for Calvin Klein men's accessories. In addition, the Company acquired the worldwide trademarks and rights of Calvin Klein women's intimate apparel upon the expiration of an existing license on December 31, 1994. The total purchase price was $60.9 million, consisting of a cash payments of $33.1 million, in fiscal 1994, $5.0 million in fiscal 1995 and 1,699,492 shares of Class A common stock of the Company valued at its fair market value of approximately $22.8 million. The Company funded the cash payment by borrowing against the Company's revolving line of credit (see Note 2 of Notes to Consolidated Financial Statements on pages F-6 to F-19). In August 1994, the Company purchased 286,600 shares of its outstanding common stock on the open market at an average price of $17.45 per share. Total cost of the purchase was $5 million and was funded by borrowing against the Company's revolving line of credit. The Company's liquidity requirements arise primarily from its debt service requirements and the funding of the Company's working capital needs, primarily inventory and accounts receivable. The Company's borrowing requirements are seasonal, with peak working capital needs arising at the end of the second quarter and beginning of the third quarter of the fiscal year. The Company typically generates nearly all of its net operating cash flow in the fourth quarter of the fiscal year, reflecting third quarter and fourth quarter shipments and the sale of inventory built during the first half of the fiscal year. (See 'Seasonality'.) Cash provided by operating activities for the 1994 fiscal year totaled approximately $77.8 million compared to $11.9 million in fiscal 1993. The significant improvement is primarily attributable to an improvement in both inventory and accounts receivable efficiencies resulting in a decrease in net working capital changes of $38.1 million compared to 1993 and increased net income. Interest expense for fiscal 1994 totalled $32.5 million, a reduction of 17% from the $38.9 million recorded in fiscal 1993. Interest includes approximately $1.2 million and $3.3 million of non-cash interest in fiscal 1994 and fiscal 1993, respectively. Non-cash interest primarily reflects amortization of deferred debt issue costs. The actual level of interest expense that the Company will incur in fiscal 1995 is dependent on several factors, including the overall level of interest rates, the general level of economic activity, the level of retail sales and the Company's need for working capital to fund growth in its operations. In addition, the Company has purchased interest rate swap agreements which effectively fix the Company's rate of interest on $275 million of debt at approximately 6.2% through fiscal 1995. At January 7, 1995, the Company had approximately $109 million of additional borrowing available under its bank facilities. The Company believes that funds available under its bank facilities together with funds to be generated from future operations will be sufficient to meet the capital expenditure requirements and working capital needs of the Company including interest and debt principal payments for the foreseeable future. Capital expenditures for new facilities, improvements to existing facilities and for machinery and equipment were approximately $13.7 million, $12.4 million and $17.5 million in the 1992, 1993 and 1994 fiscal years, respectively. Depreciation expense was $10.4 million, $9.2 million and $10.8 million in the 1992, 1993 and 1994 fiscal years, respectively. SEASONALITY The operations of the Company are somewhat seasonal, with approximately 57% of net revenues, 61% of operating income before non-recurring items and substantially all of the Company's net cash flow from operating activities generated in the second half of the fiscal year. Generally, the Company's operations during the first half of the year are financed by increased borrowings. The following sets 19 forth the net revenues, income before non-recurring items and cash flow from operating activities generated for each quarter of fiscal 1993 and fiscal 1994.
THREE MONTHS ENDED ---------------------------------------------------------------------------- (IN MILLIONS) APR 3, JUL 3, OCT 2, JAN 8, APR 9, JUL 9, OCT 8, JAN 7, 1993 1993 1993 1994 1994 1994 1994 1995 ------ ------ ------ ------ ------ ------ ------ ------ Net revenues....................... $156.8 $158.3 $184.0 $204.7 $147.7 $190.3 $217.9 $232.9 Operating income before non- recurring items.................. 22.1 16.3 28.2 25.6 20.1 18.1 30.1 30.9 Cash flow from operating activities....................... $(23.4) $(22.7) $ (1.4) $ 59.4 $(41.0) $ 2.9 $ 17.7 $ 98.2
INFLATION The Company does not believe that the relatively moderate levels of inflation which have been experienced 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 efficiency. Mexico historically has been subject to high rates of inflation; however, the effects of high rates of inflation on the operation of the Company's Mexican subsidiaries have not had a material impact on the results of operations of the Company. IMPACT OF NEW ACCOUNTING STANDARDS None. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 is incorporated by reference from page 10 of Item 4 of Part I included herein and from the Proxy Statement of The Warnaco Group, Inc. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is hereby incorporated by reference from the Proxy Statement of The Warnaco Group, Inc. 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. 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. The Consolidated Financial Statements of The Warnaco Group, Inc.
PAGE ---- Report of Independent Auditors............................................................................. F-1 Consolidated Balance Sheets as of January 8, 1994 and January 7, 1995...................................................................................... F-2 Consolidated Statements of Operations for the Years Ended January 2, 1993, January 8, 1994 and January 7, 1995..................................................... F-3 Consolidated Statement of Stockholders' Equity for the Years Ended January 2, 1993, January 8, 1994 and January 7, 1995...................................................................................... F-4 Consolidated Statements of Cash Flow for the Years Ended January 2, 1993, January 8, 1994 and January 7, 1995..................................................... F-5 Notes to Consolidated Financial Statements................................................................. F-6
2. Financial Statement Schedules: II Valuation and Qualifying Accounts and Reserves........................................... S-1
Schedules 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. 3. Exhibits: 3.1 Amended and Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q, filed August 11, 1993.) 3.2 By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 33-45877.) 4.1 Registration Rights Agreement dated March 14, 1994 between the Company and Calvin Klein, Inc. ('CKI'). (Incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q filed May 24, 1994.) 10.1 Credit Agreement dated July 16, 1993 (the 'U.S. $80,000,000 Credit Agreement') among Warnaco Inc., The Bank of Nova Scotia, as agent, and certain other lenders named therein. (Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q filed May 24, 1994.)
21 10.2 Amendment No. 1 to the U.S. $80,000,000 Credit Agreement dated October 14, 1993. (Incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q filed May 24, 1994.) 10.3 Amendment No. 2 to the U.S. $80,000,000 Credit Agreement dated November 5, 1993. (Incorporated herein by reference to Exhibit 10.3 to the Company's Form 10-Q filed May 24, 1994.) 10.4 Amendment No. 3 to the U.S. $80,000,000 Credit Agreement dated January 7, 1994. (Incorporated herein by reference to Exhibit 10.4 to the Company's Form 10-Q filed May 24, 1994.) 10.5 Amendment No. 4 to the U.S. $80,000,000 Credit Agreement dated April 25, 1994. (Incorporated herein by reference to Exhibit 10.5 to the Company's Form 10-Q filed May 24, 1994.) 10.6 Amendment No. 5 to the U.S. $80,000,000 Credit Agreement dated August 12, 1994. (Incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-Q filed August 23, 1994.) 10.7 Amendment No. 6 to the U.S. $80,000,000 Credit Agreement dated November 18, 1994. 10.8 Acquisition Agreement dated March 14, 1994 by and among CKI, the Company and Warnaco Inc. (Incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-Q filed May 24, 1994.) 10.9 Credit Agreement, dated as of December 7, 1994 among Warnaco Inc., the financial institutions parties thereto and The Bank of Nova Scotia. 10.10 U.S. $500,000,000 Credit Agreement dated October 14, 1993 (the 'U.S. $500,000,000 Credit Agreement') among the Company, Warnaco Inc. The Bank of Nova Scotia, as co-managing agent and paying agent, Citicorp U.S.A., as co-managing agent and documentation and collateral agent, and certain other lenders named therein. (Incorporated herein by reference to Exhibit 10-1 to the Company's Form 10-Q filed November 16, 1993.) 10.11 Amendment No. 1 to the U.S. $500,000,000 Credit Agreement dated June 8, 1994. (Incorporated herein by reference to Exhibit 10.9 to the Company's Form 10-Q filed August 23, 1994.) 10.12 Amendment No. 2 to the U.S. $500,000,000 Credit Agreement dated October 28, 1994. 10.13 Amendment No. 3 to the U.S. $500,000,000 Credit Agreement dated December 8, 1994. 10.14 Employment Agreement dated January 6, 1991 between the Company and Linda J. Wachner. (Incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, File No. 33-45877.) 10.15 Incentive Compensation Plan. (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, File No. 33-45877.) 10.16 1991 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, File No. 33-45877.) 10.17 Amended and Restated 1988 Employee Stock Purchase Plan, as amended. (Incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, File No. 33-45877.) 10.18 Warnaco Employee Retirement Plan. (Incorporated herein by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, File No. 33-45877.) 10.19 Executive Management Agreement dated May 9, 1991 between the Company, Warnaco and The Spectrum Group, Inc. (Incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, File No. 33-45877.) 10.20 1993 Stock Plan for non-employee directors. (Incorporated herein by reference to the Company's Proxy Statement for its 1994 Annual Meeting of Shareholders.) 10.21 Amended and Restated 1993 Stock Plan. (Incorporated herein by reference to the Company's Proxy Statement for its 1994 Annual Meeting of Shareholders.) 10.22 The Warnaco Group, Inc. Supplemental Incentive Compensation Plan. (Incorporated herein by reference to the Company's Proxy Statement for its 1994 Annual Meeting of Shareholders.)
22 11.1 Earnings per share. 22.1 Subsidiaries of the Company. (Incorporated by reference to Exhibit 22.1 to the Company's Registration Statement on Form S-1 No. 33-41798) 23.1(a) Consent of Independent Auditors 23.1(b) Consent of Independent Auditors
- ------------------ (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of fiscal 1994. 23 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 7th day of April, 1995. 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.
SIGNATURE TITLE DATE - ------------------------------------------ -------------------------------------------- ------------------- LINDA J. WACHNER Chairman of the Board; Director; April 7, 1995 - ------------------------------------------ President and Chief Executive (LINDA J. WACHNER) Officer (Principal Executive Officer) DARIUSH ASHRAFI Director; Senior Vice April 7, 1995 - ------------------------------------------ President and Chief (DARIUSH ASHRAFI) Financial Officer (Principal Financial Officer) WILLIAM S. FINKELSTEIN Senior Vice President April 7, 1995 - ------------------------------------------ and Controller (WILLIAM S. FINKELSTEIN) (Principal Accounting Officer) JOSEPH A. CALIFANO, JR. Director April 7, 1995 - ------------------------------------------ (JOSEPH A. CALIFANO, JR.) ANDREW G. GALEF Director April 7, 1995 - ------------------------------------------ (ANDREW G. GALEF) STEWART A. RESNICK Director April 7, 1995 - ------------------------------------------ (STEWART A. RESNICK) ROBERT D. WALTER Director April 7, 1995 - ------------------------------------------ (ROBERT D. WALTER)
24 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders The Warnaco Group, Inc. We have audited the accompanying consolidated balance sheets of The Warnaco Group, Inc. as of January 8, 1994 and January 7, 1995, and the related consolidated statements of operations, stockholders' equity and cash flow for each of the three years in the period ended January 7, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Warnaco Group, Inc. at January 8, 1994 and January 7, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 7, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1993. ERNST & YOUNG LLP New York, New York February 23, 1995 F-1 THE WARNACO GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
JANUARY 8, JANUARY 7, 1994 1995 ----------- ----------- ASSETS Current assets: Cash, restricted $886 -- 1993 and $1,918 -- 1994................................... $ 4,651 $ 3,791 Accounts receivable, less allowance for doubtful accounts of $1,413 -- 1993 and $2,858 -- 1994............................................. 126,507 148,659 Inventories........................................................................ 239,503 252,183 Prepaid expenses................................................................... 22,148 15,892 ----------- ----------- Total current assets.......................................................... 392,809 420,525 ----------- ----------- Property, plant and equipment, at cost: Land and land improvements......................................................... 5,676 5,696 Buildings and building improvements................................................ 59,505 62,301 Machinery and equipment............................................................ 73,712 81,138 ----------- ----------- 138,893 149,135 Less: accumulated depreciation and amortization......................................... 65,257 68,203 ----------- ----------- Net property, plant and equipment.................................................. 73,636 80,932 ----------- ----------- Other assets: Deferred financing costs, less accumulated amortization of $356 -- 1993 and $1,589 -- 1994.................................................. 5,626 6,160 Licenses, trademarks, intangible and other assets, at cost, less accumulated amortization of $47,253 -- 1993 and $52,495 -- 1994.............................................. 62,722 118,534 Excess of cost over net assets acquired, less accumulated amortization of $29,535 -- 1993 and $33,420 -- 1994................................... 122,551 115,897 Deferred income tax asset.......................................................... 31,289 38,505 ----------- ----------- Total other assets............................................................ 222,188 279,096 ----------- ----------- $ 688,633 $ 780,553 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under revolving credit facility.......................................... $ 100,523 $ 115,679 Current portion of long-term debt.................................................. 41,547 50,315 Borrowing under foreign credit facilities.......................................... 13,443 9,822 Accounts payable................................................................... 86,403 109,786 Accrued compensation............................................................... 4,807 8,576 Accrued interest................................................................... 5,755 4,083 Other accrued liabilities.......................................................... 15,592 15,179 Federal and other income taxes..................................................... 2,778 2,611 ----------- ----------- Total current liabilities..................................................... 270,848 316,051 ----------- ----------- Long-term debt.......................................................................... 245,518 206,792 Other long-term liabilities............................................................. 13,132 17,238 Stockholders' equity: Preferred Stock; $.01 par value, 10,000,000 shares authorized, none issued in 1993 and 1994, respectively....................................... -- -- Class A Common Stock; $.01 par value, 65,000,000 shares authorized in 1993 and 1994, 40,333,150 and 41,734,192 outstanding in 1993 and 1994, respectively........................................................... 404 421 Capital in excess of par value.......................................................... 315,068 337,872 Cumulative translation adjustment....................................................... 279 (1,732) Accumulated deficit..................................................................... (147,225) (83,897) Treasury stock, at cost................................................................. -- (5,000) Notes receivable for common stock issued................................................ (9,391) (7,192) ----------- ----------- Total stockholders' equity.................................................... 159,135 240,472 ----------- ----------- $ 688,633 $ 780,553 ----------- ----------- ----------- -----------
This statement should be read in conjunction with the accompanying Notes to Consolidated Financial Statements. F-2 THE WARNACO GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED -------------------------------------- JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ---------- ---------- ---------- Net revenues................................................................. $ 625,064 $ 703,769 $ 788,758 ---------- ---------- ---------- Cost of goods sold........................................................... 405,750 467,362 532,998 Selling, administrative and general expenses................................. 129,502 144,219 156,573 Non-recurring expenses....................................................... -- 22,500 3,000 ---------- ---------- ---------- Income before interest and income taxes...................................... 89,812 69,688 96,187 Interest expense............................................................. 48,848 38,935 32,459 ---------- ---------- ---------- Income from continuing operations before income taxes........................ 40,964 30,753 63,728 Provision (benefit) for income taxes......................................... (6,600) (22,500) 400 ---------- ---------- ---------- Income from continuing operations............................................ 47,564 53,253 63,328 Loss from discontinued operations............................................ (7,443) -- -- Extraordinary items.......................................................... (57,576) (18,637) -- Cumulative effect of change in method of accounting for postretirement benefits other than pensions............................................... -- (10,500) -- ---------- ---------- ---------- Net income (loss)............................................................ ($ 17,455) $ 24,116 $ 63,328 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to common stockholders.......................... ($ 20,205) $ 24,116 $ 63,328 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) per common share: Income from continuing operations....................................... $ 1.18 $ 1.34 $ 1.53 Loss from discontinued operations....................................... (0.20) -- -- Extraordinary items..................................................... (1.51) (0.47) -- Cumulative effect of change in method of accounting for postretirement benefits other than pensions.......................................... -- (0.26) -- ---------- ---------- ---------- Net income (loss) per common share........................................... ($ 0.53) $ 0.61 $ 1.53 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding......................... 38,109 39,770 41,285 ---------- ---------- ---------- ---------- ---------- ----------
This statement should be read in conjunction with the accompanying Notes to Consolidated Financial Statements. F-3 THE WARNACO GROUP, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS)
CAPITAL NOTES CLASS A IN CUMULATIVE RECEIVABLE COMMON EXCESS OF TRANSLATION ACCUMULATED TREASURY FOR COMMON STOCK PAR VALUE ADJUSTMENT DEFICIT STOCK STOCK ------- ---------- ----------- ------------ --------- ---------- Balance January 4, 1992.................... $ 306 $153,997 $ 5,990 ($151,136) ($10,865) Sold 10,000,000 shares of Class A common stock net of expenses of $11,190......... 100 161,210 Repayments of employee notes receivable.... (2) 2 475 Net loss................................... (17,455) Preferred dividends........................ (2,750) Change in cumulative translation adjustment............................... (4,030) ------- ---------- ----------- ------------ --------- ---------- Balance January 2, 1993.................... 404 315,209 1,960 (171,341) -- (10,390) Repurchased 57,750 shares of Class A common stock from employees..................... (141) 141 Repayments of employee notes receivable.... 858 Net income................................. 24,116 Change in cumulative translation adjustment............................... (1,681) ------- ---------- ----------- ------------ --------- ---------- Balance January 8, 1994.................... 404 315,068 279 (147,225) -- (9,391) Issued 1,699,492 shares of Class A common stock in connection with the purchase of the Calvin Klein business................ 17 22,804 Repayments of employee notes receivable.... 2,199 Net income................................. 63,328 Change in cumulative translation adjustment............................... (2,011) Purchase of 286,600 shares of Treasury Stock.................................... (5,000) ------- ---------- ----------- ------------ --------- ---------- Balance January 7, 1995.................... $ 421 $337,872 ($1,732) ($83,897) ($ 5,000) ($ 7,192) ------- ---------- ----------- ------------ --------- ---------- ------- ---------- ----------- ------------ --------- ---------- TOTAL -------- Balance January 4, 1992.................... ($ 1,708) Sold 10,000,000 shares of Class A common stock net of expenses of $11,190......... 161,310 Repayments of employee notes receivable.... 475 Net loss................................... (17,455) Preferred dividends........................ (2,750) Change in cumulative translation adjustment............................... (4,030) -------- Balance January 2, 1993.................... $135,842 Repurchased 57,750 shares of Class A common stock from employees..................... -- Repayments of employee notes receivable.... 858 Net income................................. 24,116 Change in cumulative translation adjustment............................... (1,681) -------- Balance January 8, 1994.................... 159,135 Issued 1,699,492 shares of Class A common stock in connection with the purchase of the Calvin Klein business................ 22,821 Repayments of employee notes receivable.... 2,199 Net income................................. 63,328 Change in cumulative translation adjustment............................... (2,011) Purchase of 286,600 shares of Treasury Stock.................................... (5,000) -------- Balance January 7, 1995.................... $240,472 -------- --------
This statement should be read in conjunction with the accompanying Notes to Consolidated Financial Statements. F-4 THE WARNACO GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW INCREASE (DECREASE) IN CASH (IN THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED ------------------------------------------ JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ---------- ---------- ---------- Cash flow from operations: Net income (loss)................................................. ($ 17,455) $ 24,116 $ 63,328 Non-cash items included in net income (loss): Depreciation and amortization.................................. 19,770 18,525 18,798 Interest....................................................... 4,266 3,309 1,233 Extraordinary items............................................ 57,576 18,637 -- Cumulative effect of change in accounting...................... -- 10,500 -- Writedown of fixed assets included in non-recurring expense.... -- 1,159 Increase in deferred income tax asset.......................... (6,589) (24,700) (2,467) Income taxes paid................................................. (3,387) (1,008) (2,547) Other changes in operating accounts............................... (89,944) (38,661) (519) ---------- ---------- ---------- Net cash provided from (used in) operations......................... (35,763) 11,877 77,826 ---------- ---------- ---------- Cash flow from investing activities: Proceeds from the sale of fixed assets............................ 475 1,739 773 Increase in intangibles and other assets.......................... (551) (7,467) (9,936) Purchase of property, plant and equipment......................... (13,651) (12,438) (17,534) Purchase of Calvin Klein net assets............................... -- -- (33,103) ---------- ---------- ---------- Net cash used in investing activities............................... (13,727) (18,166) (59,800) ---------- ---------- ---------- Cash flow from financing activities: Proceeds from sale of Class A Common Stock and repayment of notes receivable from employees...................................... 161,785 858 2,199 Borrowings (repayments) under credit facility..................... 62,572 37,774 14,835 Proceeds from other debt.......................................... 334,132 428,721 8,582 Repayments of debt and redemption of Preferred Stock.............. (485,838) (453,832) (41,841) Increase in deferred financing cost............................... (18,716) (8,360) (1,767) Purchase of treasury shares....................................... -- -- (5,000) Other............................................................. (4,401) 2,016 4,106 ---------- ---------- ---------- Cash provided from (used for) financing activities.................. 49,534 7,177 (18,886) ---------- ---------- ---------- Increase (decrease) in cash......................................... 44 888 (860) Cash at beginning of year........................................... 3,719 3,763 4,651 ---------- ---------- ---------- Cash at end of year................................................. $ 3,763 $ 4,651 $ 3,791 ---------- ---------- ---------- ---------- ---------- ---------- Other changes in operating accounts: Accounts receivable............................................... ($ 35,714) ($ 3,613) ($14,328) Inventories....................................................... (49,899) (30,206) (4,646) Prepaid expenses.................................................. (8,404) (2,119) 6,256 Accounts payable and accrued liabilities.......................... 8,010 7,139 13,810 Federal and other income taxes.................................... (68) 2,876 400 Other............................................................. (3,869) (12,738) (2,011) ---------- ---------- ---------- ($ 89,944) ($ 38,661) ($ 519) ---------- ---------- ---------- ---------- ---------- ----------
This statement should be read in conjunction with the accompanying Notes to Consolidated Financial Statements. F-5 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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') (the 'Acquisition'). Warnaco is the principal operating subsidiary of the Company. Basis of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of The Warnaco Group, Inc. and all subsidiary companies for the years ended January 2, 1993, January 8, 1994 and January 7, 1995. The 1993 fiscal year included 53 weeks of operations. The impact of the additional week of operations was not material to the operations of the Company. Certain amounts have been reclassified to conform to the current year presentation. Translation of Foreign Currencies: Cumulative translation adjustments arise primarily from consolidating foreign operations and are applied directly to stockholders' equity. Inventories: Inventories are stated at the lower of cost, determined on a first-in-first-out basis, or market. Depreciation and Amortization: Provision is made for depreciation of property, plant and equipment computed over the estimated useful lives of the assets using the straight-line method, as summarized below: Buildings...................................................................... 20-40 years Building improvements.......................................................... 2-20 years Machinery and equipment........................................................ 3-10 years
Licenses, trademarks and other intangible assets are amortized over the estimated economic life of the assets which range from 20 to 40 years. The excess of cost over net assets acquired is amortized over 40 years. The carrying value of the excess of cost over net assets acquired will be reviewed if facts and circumstances suggest that it may be impaired. If such a determination is made, the Company will reduce the carrying value of this asset. Deferred financing costs are amortized over the life of the related debt, using the debt outstanding method. Start up costs: The Company defers certain costs associated with the start-up of new manufacturing facilities and certain new businesses. Deferred costs are amortized using the straight-line method principally over five years. Start-up costs, net of accumulated amortization were $11,994,000 and $19,982,000 at January 8, 1994 and January 7, 1995, respectively and are included in other assets. Employee Retirement Plans: The Company has non-contributory pension and profit sharing retirement plans for the benefit of qualifying employees. Contributions are deposited with fund managers who invest the assets of the plans. Income Taxes: The Company adopted Statement of Financial Accounting Standards No. 109 effective with its 1992 fiscal year. Capitalized Leases: The asset values and related amortization of capitalized leases are included with property, plant and equipment and accumulated depreciation and the associated debt is included with long-term debt. Revenue Recognition: The Company recognizes revenue when goods are shipped to customers. Income (Loss) Per Common Share: Income (loss) per common share is based on weighted average common shares outstanding after deducting preferred stock dividends and taking into account potential dilution from common stock equivalents. Concentration of credit risk: The Company sells its products to department stores, specialty outlets, catalogs, direct sellers and mass merchandisers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's expectations. No customer accounted for more than 10% of the Company's net revenues in any of the three years in the period ended January 7, 1995. F-6 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - ACQUISITION On March 14, 1994 the Company acquired certain assets and the worldwide trademarks, rights and businesses of Calvin Klein men's underwear, licensed the Calvin Klein trademark for men's accessories and acquired the worldwide trademarks and rights of Calvin Klein women's intimate apparel upon the expiration of an existing license on December 31, 1994. The purchase price was approximately $60,924,000 and consisted of a cash payments of $33,103,000 in fiscal 1994, $5,000,000 in fiscal 1995 and the issuance of 1,699,492 shares of the Company's common stock valued at the fair market value ($13.43 per share or $22,821,000) for such shares. The acquisition was accounted for under the purchase method of accounting, accordingly, the accompanying financial statements include the results of the Calvin Klein businesses comencing March 15, 1994. The purchase price was allocated to the fair value of assets acquired as summarized below (in millions of dollars): Accounts receivable......................................................... $ 7.4 Inventories................................................................. 7.9 Property and equipment...................................................... 0.2 Licenses, trademarks, intangible and other assets........................... 45.4 ------ Total purchase price........................................................ $ 60.9 ------ ------
NOTE 3 - DISCONTINUED OPERATIONS During the fourth quarter of fiscal 1992, the Company made a strategic decision to discontinue the operations of its women's accessories business. Operating losses for the division for the year ending January 2, 1993 were approximately $2,299,000. Net revenues were $1,835,000 for the year ended January 2, 1993. The total loss related to the women's accessories business also included anticipated losses related to the disposal of assets and losses and expenses associated with the disposal of inventories, termination of employees and remaining minimum royalty obligations of $2,059,000. NOTE 4 - NON-RECURRING EXPENSE On October 3, 1993, the Company made a strategic decision to discontinue a portion of its men's manufactured dress shirt and neckwear business segment. Net revenues for the year ended January 8, 1994 approximated $33,500,000 for this operation. Non-recurring expense includes a $19,900,000 charge for losses and expenses associated with the disposal of assets, liquidation of inventories and termination of employees. In addition, non-recurring expense for the year ended January 8, 1994 includes $2,600,000 of costs associated with the final wind-up of the Company's Canadian womenswear business, which had been discontinued in a prior year. In January 1994, The Company's leased warehouse located in Sylmar, California suffered significant structural damage due to the California earthquake and was permanently closed. The Company was able to recover substantially all of its inventory, transfer the inventory to other locations, and begin shipping at normal levels in March, 1994. The Company has earthquake insurance and, other than a deductible of approximately $3 million, which was recorded as a non-recurring expense in the first quarter of fiscal 1994, expects to fully recover its losses. NOTE 5 - EXTRAORDINARY ITEMS On April 2, 1992 the Company completed a restructuring of its debt obligations which resulted in the (i) redemption of all outstanding shares of Class A and Class B Preferred Stock of the Company, (ii) F-7 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS repayment of all outstanding indebtedness under the Company's Amended and Restated Bank Credit Agreement, (iii) redemption of the entire principal amount outstanding of the Company's 8.64% Senior Discount Term Notes, (iv) redemption of the entire principal amount outstanding of the Company's 12 1/2% Senior Subordinated Notes, (v) redemption of the entire principal amount outstanding of the Company's 12 3/8% mortgage notes and (vi) repayment of certain capital lease obligations. The repayment of the above noted debt obligations prior to their maturity resulted in an extraordinary charge of $46,454,000 due to early extinguishment of debt. On October 1, 1992 the Company amended its Financing Agreement (see Note 11). On November 15, 1992 proceeds from the amended Financing Agreement were used to redeem the entire outstanding principal amount of the Company's 12 1/2% subordinated debentures. The repayment of the debentures, prior to their maturity, resulted in an extraordinary charge of $11,122,000 due to early extinguishment of debt. In October 1993, in conjunction with the 1993 Financing, as more fully described in Note 11, the Company recorded non-cash extraordinary charges of $18,637,000 to write-off deferred financing charges under the previous agreement and record losses under related interest rate swap agreements. Due to the Company's existing net operating loss carryforwards (see Note 8), none of the extraordinary items resulted in any income tax benefit. NOTE 6 - RELATED PARTY TRANSACTIONS In 1990, the Company sold substantially all of the assets of its Activewear Divsion to a newly formed Company, Authentic Fitness Corporation ('Authentic Fitness'). Certain directors and officers of the Company are also directors and officers of Authentic Fitness. The Company maintained an equity interest in Authentic Fitness equal to approximately 3% of the outstanding equity of Authentic Fitness. Authentic Fitness purchases certain occupancy services related to leased facilities, computer service, laboratory testing and transportation services from the Company all of which are charged at the Company's cost. Total charges to Authentic Fitness for these services were approximately $2,312,000, $1,412,000, and $6,292,000 in the years ended January 2, 1993, January 8, 1994 and January 7, 1995, respectively. In 1994 the Company sold certain trademarks and trade names to Authentic Fitness for $6,550,000 (net book value $0), a purchase price determined at arms-length based on an independent third party appraisal. The Company sells certain inventory to Authentic Fitness for sale in its outlet stores, such purchases totaled $2,400,000 in the year ended January 7, 1995 (none in the years ended January 2, 1993 and January 8, 1994). The Company purchases certain design and development and occupancy services related to leased facilities from Authentic Fitness. All sevices are charged at Authentic Fitness' cost. The total amounts paid by the Company to Authentic Fitness for such services were approximately $500,000 and $1,600,000 in the years ended January 8, 1994 and January 7, 1995, respectively (none in the year ended January 2, 1993). The Company purchases certain inventory from Authentic Fitness. Inventory purchases from Authentic Fitness were approximately $5,300,000, $700,000 and $2,547,000 in the years ended January 2, 1993, January 8, 1994 and Janaury 7, 1995, respectively. The Company purchased certain machinery and equipment from Authentic Fitness in fiscal 1994 for a total purchase price of $1,400,000 (none in fiscal years ended January 2, 1993 and January 8, 1994). In December 1993, the Company sold its Checotah, Oklahoma manufacturing facility to Authentic Fitness. The sales price of $3,317,000 was determined by an independent appraisal, and resulted in a gain of $901,000 to the Company. F-8 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A Director of the Company is the sole stockholder, President and a Director of The Spectrum Group, Inc. ('Spectrum'). Spectrum and the Company are parties to an agreement under which Spectrum provides consulting services to the Company. The Spectrum consulting agreement was amended on May 9, 1991 to provide for annual fees of $350,000 or such higher amount, including expenses, not to exceed $500,000 (plus cost of living increases) for a period of five years. The contract expires on May 9, 1996. Amounts charged to expense pursuant to this agreement were $500,000 in each of the three fiscal years ended January 7, 1995. NOTE 7 - SEGMENT REPORTING The Group operates within one industry segment -- the marketing and manufacturing of apparel. The Group has no customer which accounts for ten percent or more of its total revenues. The Group operates in several geographic areas. (IN THOUSANDS)
CANADA AND FOR THE YEAR ENDED JANUARY 2, 1993 UNITED STATES LATIN AMERICA EUROPE CONSOLIDATED - ----------------------------------------------------- ------------- ------------- ------- ------------ Net revenues......................................... $ 533,280 $42,575 $49,209 $625,064 ------------- ------------- ------- ------------ ------------- ------------- ------- ------------ Operating profit..................................... $ 98,449 $ 7,978 $ 2,910 109,337 ------------- ------------- ------- ------------- ------------- ------- General corporate expense -- net..................... (19,525) Interest expense..................................... (48,848) ------------ Income from continuing operations before income taxes.............................................. $ 40,964 ------------ ------------ FOR THE YEAR ENDED JANUARY 8, 1994 - ----------------------------------------------------- Net revenues......................................... $ 605,124 $52,945 $45,700 $703,769 ------------- ------------- ------- ------------ ------------- ------------- ------- ------------ Operating profit..................................... $ 105,438 $ 6,366 $ 3,441 $115,245 ------------- ------------- ------- ------------- ------------- ------- General corporate expense -- net..................... (45,557) Interest expense..................................... (38,935) ------------ Income from continuing operations before income taxes.............................................. $ 30,753 ------------ ------------ Identifiable assets at January 8, 1994............... $ 561,012 $37,072 $27,354 $625,438 ------------- ------------- ------- ------------- ------------- ------- Corporate assets..................................... 63,195 ------------ Total Assets at January 8, 1994...................... $688,633 ------------ ------------ FOR THE YEAR ENDED JANUARY 7, 1995 - ----------------------------------------------------- Net revenues......................................... $ 696,174 $47,668 $44,916 $788,758 ------------- ------------- ------- ------------ ------------- ------------- ------- ------------ Operating profit..................................... $ 113,752 $ 5,937 $ 2,561 $122,250 ------------- ------------- ------- ------------- ------------- ------- General corporate expense -- net..................... (26,063) Interest expense..................................... (32,459) ------------ Income from continuing operations before income taxes.............................................. $ 63,728 ------------ ------------ Identifiable assets at January 7, 1995............... $ 635,888 $30,482 $31,307 697,677 ------------- ------------- ------- ------------- ------------- ------- Corporate assets..................................... 82,876 ------------ Total Assets at January 7, 1995...................... $780,553 ------------ ------------
F-9 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating profit is total revenue less operating expenses. In computing operating profit, none of the following items has been added or deducted: general corporate expenses -- net, interest expense, and income taxes. Non-recurring expense of $22,500,000 in fiscal 1993 and $3,000,000 in fiscal 1994 is included in general corporate expense -- net. Identifiable assets are those assets of the Company that are associated with the operations in each geographic area. Corporate assets are principally property and equipment, deferred financing costs, deferred income tax asset and other assets. NOTE 8 - INCOME TAXES During the fourth quarter of fiscal 1992, retroactive to the beginning of fiscal 1992, the Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes ('Statement No. 109'). The adoption of Statement No. 109 resulted in the recognition of a deferred tax asset amounting to approximately $42,500,000 related to the benefit associated with net operating loss carryforwards to be realized in future periods as of the beginning of fiscal 1992. The deferred tax asset was offset in its entirety by a valuation allowance. During 1992, the Company issued 10,000,000 shares of common stock generating net proceeds of approximately $161,310,000 (the 'Offering'), refinanced or redeemed all of its outstanding high yield debt and repaid certain other debt obligations (see Notes 11 and 12). The completion of the Offering and debt refinancing reduced the Company's annual interest expense and preferred stock dividends, on a pro forma basis, by approximately $34,000,000. As a result of these transactions, in the fourth quarter of 1992, the Company re-evaluated its deferred tax asset and reversed a portion of the valuation allowance related to this asset amounting to $6,589,000. In 1993, the Company recognized an additional deferred tax asset of $1,541,000 (offset in its entirety by a valuation allowance) related to an increase in the Company's statutory tax rate resulting from tax legislation passed in 1993. In the fourth quarter of 1993, the Company re-evaluated its deferred tax asset and reversed an additional portion of its valuation allowance amounting to $24,700,000 related to this asset. The Company recognized income tax benefits of $22,635,000 in the year ended January 7, 1995 which substantially offset the Company's provision for income taxes in fiscal 1994. At January 8, 1994 and January 7, 1995, the Company had deferred income tax assets of $53,924,000 and $38,505,000, respectively, offset by a valuation allowance of $22,635,000 and $0, respectively. Future tax benefits of $3,000,000 were realized in fiscal 1994 from the treatment of acquisition related liabilities and were credited against the excess of costs over net assets acquired. The following presents the U.S. and foreign components of income from continuing operations before income taxes:
FOR THE YEAR ENDED ------------------------------------------ JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS) U.S. income from continuing operations before income taxes.......... $ 40,699 $ 29,750 $ 63,574 Foreign income before taxes......................................... 265 1,003 154 ---------- ---------- ---------- Income from continuing operations before income taxes............... $ 40,964 $ 30,753 $ 63,728 ---------- ---------- ---------- ---------- ---------- ----------
F-10 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The provision for income taxes included in the Consolidated Statements of Operations amounts to:
FOR THE YEAR ENDED ------------------------------------------ JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS) Federal............................................................. $ 13,838 $ 10,413 $ 18,295 State............................................................... (952) 343 4,253 Puerto Rico......................................................... 300 300 -- Foreign............................................................. 641 1,557 487 Recognition of current NOL benefit.................................. (13,838) (10,413) (18,295) Recognition of future NOL benefit -- net of valuation allowances.... (6,589) (24,700) (4,340) ---------- ---------- ---------- ($ 6,600) ($22,500) $ 400 ---------- ---------- ---------- ---------- ---------- ----------
The Company has received grants from the Commonwealth of Puerto Rico which allow the Company to exempt up to 87.5% 90% beginning with fiscal 1994 of income earned in Puerto Rico from taxation. The grants expire December 1, 2003. Tax benefits realized amounted to approximately $1,315,000 ($0.03 per share) and $733,000 ($0.02 per share) for the years ended January 2, 1993 and January 8, 1994, respectively (none for the year ended January 7, 1995). The U.S. Statutory rate was: 1992, 34%; 1993, 35%; and 1994, 35%. The following presents the reconciliation of the provision for income taxes to U.S. Federal income taxes computed at the statutory rate:
FOR THE YEAR ENDED ------------------------------------------ JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS) Income from continuing operations before income taxes............... $ 40,964 $ 30,753 $ 63,728 ---------- ---------- ---------- ---------- ---------- ---------- Provision for income taxes @ the statutory rate..................... 13,928 10,764 22,304 Foreign income taxes @ rates in excess of the statutory rate........ 551 1,206 433 State income taxes (benefit) -- net of federal benefit.............. (952) 343 2,764 Puerto Rico income taxes............................................ 300 300 -- Non-deductible intangible amortization.............................. -- -- 1,321 Current benefit of capital loss carryforward........................ -- -- (3,787) Current benefit for U.S. NOL carryforward........................... (13,838) (10,413) (18,295) Future benefit for U.S. NOL carryforward............................ (6,589) (24,700) (4,340) ---------- ---------- ---------- Provision (benefit) for income taxes................................ ($ 6,600) ($22,500) $ 400 ---------- ---------- ---------- ---------- ---------- ----------
At January 7, 1995, the Company had recognized all available benefits of its net operating loss carryforwards for financial reporting purposes. For tax purposes, the Company has estimated U.S. net operating loss carryforwards of approximately $110,000,000 which expire from 2001 through 2007. As a result of the 1992 public stock offering, the 1991 initial public offering and other ownership changes occurring during the prior three-year period, a change of ownership occurred under Internal Revenue Code Section 382, which effectively limits the rate at which the Company may utilize its net operating loss carryforwards. Nevertheless, the Company expects that it will be able to utilize substantially all of the net operating loss carryforwards it would have used, absent any Section 382 limitation. F-11 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - EMPLOYEE RETIREMENT PLANS PENSIONS The Company has a defined benefit pension plan which covers substantially all non-union domestic employees (the 'Plan'). The Plan is noncontributory and benefits are based upon years of service and average earnings for the six (increasing to ten years by the year 1999 and fifteen years by the year 2004) highest consecutive calendar years of compensation immediately preceding retirement. Pension contributions are also made to foreign plans and directly to union sponsored plans. The funding policy for the Plan is to make, as a minimum contribution, the equivalent of the minimum required by the Employee Retirement Income Security Act of 1974 (ERISA). Pension costs were:
FOR THE YEAR ENDED ------------------------------------------ JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS) Benefits earned..................................................... $1,865 $ 2,004 $ 2,372 Interest cost on projected benefits................................. 7,185 7,367 7,630 Actual (return) loss on investments................................. (7,038) (12,834) 5,085 Net amortization/deferral........................................... (2,000) 3,899 (13,981) ---------- ---------- ---------- Cost of Company plan................................................ 12 436 1,106 Cost of other plans................................................. 277 343 519 ---------- ---------- ---------- Net pension cost.................................................... $ 289 $ 779 $ 1,625 ---------- ---------- ---------- ---------- ---------- ----------
The Plan had projected benefit obligations in excess of Plan assets at January 7, 1995. Plan investments include insurance contracts, fixed income securities and marketable equity securities, including 70,000 and 71,800 shares of the Company's Class A common stock, which had a fair market value of $1,063,000 and $1,239,000 at January 8, 1994 and January 7, 1995, respectively. The Plan also owned 98,000 and 101,300 shares of Authentic Fitness Corporation's common stock which had a fair market value of $1,378,000 and $1,406,000 at January 8, 1994 and January 7, 1995. No such shares were held at January 2, 1993. F-12 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents a reconciliation of the funded status of the Plan at January 8, 1994 and January 7, 1995.
JANUARY 8, JANUARY 7, 1994 1995 ---------- ---------- (IN THOUSANDS) Plan assets at fair value........................................................... $ 100,974 $ 88,618 ---------- ---------- ---------- ---------- Actuarial present value of benefit obligation: Vested............................................................................ 90,567 84,146 Non-vested........................................................................ 1,718 2,101 ---------- ---------- Accumulated benefit obligation...................................................... 92,285 86,247 Effect of projected future salary increases......................................... 8,396 7,663 ---------- ---------- Projected benefit obligation........................................................ 100,681 93,910 ---------- ---------- Plan assets less than (in excess of) projected benefit obligation................... (293) 5,292 Unrecognized net gain (loss)........................................................ 2,436 (2,044) ---------- ---------- Accrued pension cost of Company plan................................................ 2,143 3,248 Accrued pension and profit sharing plan -- others................................... 121 31 ---------- ---------- Amounts accrued for employee retirement plans....................................... $ 2,264 $ 3,279 ---------- ---------- ---------- ---------- Assumptions used for Company pension plans: Discount rate..................................................................... 7.75% 8.75% Rate of increase in compensation levels............................................. 5.25% 5.25%
The actuarial assumption for long term rate of return on plan assets is 9% for all periods presented. OTHER POSTEMPLOYMENT BENEFITS In addition to providing pension benefits, the Company has defined benefit health care and life insurance plans that provide postretirement benefits to retired employees and former directors. The plans are contributory, with retiree contributions adjusted annually, and contain cost sharing features including deductibles and co-insurance. The Company does not fund postretirement benefits. Effective January 3, 1993, the Company adopted Statement on Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions ('SFAS No. 106') and, as a result, recorded an expense for the cumulative effect of a change in the method of accounting for postretirement benefits of $10,500,000 (without income tax benefit). The periodic postretirement benefit cost for the year ended Janaury 8, 1994 and January 7, 1995 consisted of service cost of $103,000 and $83,000 and interest cost of $897,000 and $598,000, respectively. Previously, these benefits were expensed on an as incurred basis. Such expense amounted to $700,000 in 1992. The funded status of the plans is as follows:
JANUARY 8, JANUARY 7, 1994 1995 ---------- ---------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.......................................................................... $ 8,764 $6,620 Actives, fully eligible........................................................... 218 316 Actives, not fully eligible....................................................... 1,964 1,198 Unrecognized net gain (loss) from experience differences and changes in assumptions............................................................ (398) 1,685 ---------- ---------- Amount accrued for postretirement benefit costs..................................... $ 10,548 $9,819 ---------- ---------- ---------- ----------
F-13 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average annual assumed rate of increase in the per capita costs of covered benefits (health care cost trend rate) for the year ended January 8, 1994 was 13% for years 1-4, 10% for years 5-9 and 5% for years thereafter. The weighted average annual assumed rate of increase in the per capita costs of covered benefits (health care cost trend rate) for the year ended January 7, 1995 was 11% for years 1-3, 9% for years 4-8, and 5% for years thereafter. A 1% increase in the trend rate assumption would have increased the cumulative effect adjustment by approximately $442,000 and would increase the periodic postretirement benefit cost by approximately $44,000 and $34,000 for the years ended January 8, 1994 and January 7, 1995, respectively. The weighted average discount rate used in determining the accumulated postretirement benefit obligation is 7.75% and 8.75% at January 8, 1994 and January 7, 1995 respectively, which is consistent with the discount rate used in valuing the Company's pension plan. The Company also sponsors defined contribution plans for substantially all of its employees. Employees can contribute to the plans, on a pre-tax basis, a percentage of their qualifying compensation up to the legal limits allowed. No Company contributions are made to such plans. NOTE 10 - INVENTORIES Inventories consist of the following:
JANUARY 8, JANUARY 7, 1994 1995 ---------- ---------- (IN THOUSANDS) Finished goods...................................................................... $ 120,203 $ 131,450 Work in process..................................................................... 65,285 60,513 Raw materials....................................................................... 54,015 60,220 ---------- ---------- $ 239,503 $ 252,183 ---------- ---------- ---------- ----------
NOTE 11 - DEBT Long-term debt consists of the following:
JANUARY 8, JANUARY 7, 1994 1995 ---------- ---------- (IN THOUSANDS) Term Note due 1995-1999............................................................. $ 272,000 $ 232,000 Capital lease obligations........................................................... 6,356 6,700 Other............................................................................... 8,709 18,407 ---------- ---------- 287,065 257,107 Less: amounts due within one year................................................... 41,547 50,315 ---------- ---------- $ 245,518 $ 206,792 ---------- ---------- ---------- ----------
Approximate maturities of long-term debt are as follows:
AMOUNT YEAR (IN THOUSANDS) -------------- 1995.......................................................... $50,315 1996.......................................................... 49,886 1997.......................................................... 54,453 1998.......................................................... 57,361 1999.......................................................... 43,037 2000 -- Thereafter............................................ 2,055
F-14 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On October 14, 1993 the Company entered into a new financing agreement (the '1993 Financing'), with substantially the same lenders as those in the Company's previous financing agreement. The 1993 Financing provided for a revolving loan of up to $200 million (subsequently increased to $235 million) and a term note of $300 million at the lender's base rate plus 0.5%. It also provided for a LIBOR option at a rate of LIBOR plus 1.25%. LIBOR and base interest rates change as the Company's debt ratings from S&P or Moody's ('Rating Agencies') change. In May 1994 the Company obtained a senior credit rating of BBB- from the Rating Agencies, which reduced the interest rate payable on the Company's outstanding debt to LIBOR plus 75 basis points. In addition, in June 1994 the Company's negotiated a further reduction in the interest rate on the Company's outstanding debt obligations to LIBOR plus 0.5%. Certain provisions in the 1993 Financing require the Company to fix the interest rate on not less than $125 million of the Company's $500 million (subsequently increased to $535 million) facility. As a result, the Company entered into agreements which effectively fixed the Company's interest rate on $25 million at 6.31%, $150 million at 6.57% and $100 million at 4.29%. The agreements expire in October 1995, October 1996 and January 1996. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements. The risk associated with these agreements is the cost of replacing them at current market rates, in the event of default by the counterparties. Management believes that such risk is remote. Interest expense over the life of the interest rate swap agreements would be approximately $1,821,000 higher if the Company had to pay interest at the three month libor rate (.4375% as of January 7, 1995) on amounts covered by the interest rate swap agreements. Amounts drawn under the revolving credit facility are not limited by any borrowing base. Substantially all of the Company's assets are pledged as security against various financing agreements. Pursuant to the provisions of the 1993 Financing all collateral will be automatically and completely released upon the Company's achievement of a specified credit rating from the Rating Agencies. The Company is also required to pay a .25% commitment fee to the bank on its unused portion of the revolving credit facility which at January 7, 1995, amounted to approximately $109,000,000. The 1993 Financing contains various covenants concerning capital expenditures and additional debt and requires the Company to meet certain defined financial tests, which as of January 7, 1995, were as follows: (1) interest coverage ratio of 3.3 to 1; (2) minimum adjusted net worth -- $165,000,000; (3) fixed charge coverage ratio of 1.25 to 1; (4) leverage ratio of 0.625 to 1 and (5) minimum earnings before interest, taxes, depreciation and amortization (EBITDA) of $108,000,000. At January 7, 1995, the Company was in compliance with all of the covenants under the 1993 Financing. The Company believes that the fair market value of its outstanding variable rate debt is approximately equal to the outstanding principal amount thereof as (i) substantially all of the Company's debt bears interest at floating rates (market) and (ii) there are no prepayment premiums required by any of the Company's material debt agreements. On April 2, 1992 the Company entered into a Financing Agreement (the 'Financing') that provided for a revolving loan of up to $125 million (subsequently increased to $200,000,000 in May 1993) and a term loan of $225 million (subsequently increased to $325 million in October 1992) at the lender's base rate plus 1.5% for advances under the revolving credit facility and base rate plus 2% for advances under the term loan. The Financing also provides for a LIBOR option at a rate of LIBOR plus 2.5% for the revolving loan and LIBOR plus 3% for the term loan. The Financing was replaced by the 1993 Financing. Cash interest paid amounted to $44,535,000, $37,069,000 and $30,680,000 in the years ended January 2, 1993, January 8, 1994 and January 7, 1995, respectively. The Company issues stand-by and commercial letters of credit guaranteeing the Company's performance under certain purchase agreements. The letters of credit are issued under the terms of the F-15 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1993 Financing and the L/C Facility (discussed below). Certain obligations for letters of credit reduce amounts available under the revolving loan portion of the 1993 Financing. At January 8, 1994 and January 7, 1995 the Company had outstanding letters of credit totalling approximately $16,159,000 and $42,515,000, respectively, of which $4,309,000 and $10,599,000, respectively, reduced amounts available under the revolving credit facilities outstanding at those dates. In addition, on February 1, 1993 the Company entered into an agreement with a bank to provide the Company with an additional credit facility of $40,000,000 for the issuance of commercial letters of credit (the 'L/C Facility'). This facility was subsequently increased to $50,000,000, and expanded to include a 90 day term draft acceptance sub-facility of $30,000,000, which was subsequently increased to $40,000,000. Total amounts outstanding under these facilities may not exceed $80,000,000. Letters of credit issued under the L/C Facility are secured by the applicable inventory until such letters of credit are paid and amounted to $11,850,000 and $31,916,000 at January 8, 1994 and January 7, 1995, respectively. The L/C Facility is for a term of one year and does not require the Company to pay a commitment fee on the unused portion. The Company is required to maintain compensating balances securing certain credit arrangements. Such balances amounted to $112,000 and $114,000 at January 8, 1994 and January 7, 1995, respectively. In addition, the Company classifies lock box receipts not available until the next business day as restricted cash. Such balances amounted to $774,000 and $1,804,000 at January 8, 1994 and January 7, 1995, respectively. NOTE 12 - CAPITAL STOCK On August 25, 1994 the Company's Board of Directors authorized a two-for-one stock split for stockholders of record on September 8, 1994 and effective October 3, 1994. The split increased the number of outstanding shares of Class A Common Stock and outstanding options by 100%. Exercise prices for outstanding options were adjusted to reflect the split. All outstanding shares and per share information has been restated to reflect the split as if it had occurred at the beginning of each period presented. On May 14, 1993, the stockholders of the Company approved amendments to the Company's Amended and Restated Certificate of Incorporation which authorized the issuance of up to 10,000,000 shares of preferred stock with a par value of $.01 and increased the authorized number of shares of common stock from 40,000,000 to 65,000,000. On April 2, 1992, the Company sold 10,000,000 shares of Class A Common Stock to the public at an offering price of $17.25 per share. Net proceeds of the offering were approximately $161,310,000 and were used to repay certain indebtedness and redeem the Company's Class A and Class B Preferred Stock. Prior to May 1994, dividends to common stockholders were restricted under certain covenants of the debt agreements. The provisions of the debt agreements restricting the Company's ability to pay dividends were automatically modified upon the Company's achievement of an investment grade senior debt rating of BBB- from Standard & Poor's and, as a result, the Company may declare and pay dividends equal to 25% of the Company's earnings accumulated since fiscal 1993. In 1988, the Company adopted the 1988 Employee Stock Purchase Plan ('Stock Purchase Plan'). The Stock Purchase Plan provides for sales of up to 4,800,000 shares of Class A Common Stock of the Company to certain key employees. At January 8, 1994 and January 7, 1995, 4,533,150 and 4,521,300 shares were issued and outstanding pursuant to grants under the Stock Purchase Plan, respectively. The Stock Purchase Plan is administered by the Employee Stock Purchase Plan Administrative Committee of the Board of Directors which has full authority to determine the number of shares granted or sold, vesting requirements, voting requirements and conditions of any stock purchase agreement between the Company and a key employee. F-16 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All shares were sold at amounts determined to be equal to the fair market value of the shares. The shares are subject to vesting requirements and restrictions on the transfer of ownership. In addition, certain employees elected to pay for the shares granted by executing a Promissory Note payable to the Company. Notes totalling $8,394,000 and $6,561,000 at January 8, 1994 and January 7, 1995 are non-interest bearing, while the balance earn interest at approximately 8%. The note maturities range from five to ten years. Notes receivable from employees are deducted from stockholders' equity and are principally owed by officers and directors of the Company. During 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 to cover grants to be made under the plan. The Option Plan is administered by a committee of the Board of Directors of the Company which determines the number of stock options to be granted under the Option Plan, and the terms and conditions of such grants. The Option Plan provides for the granting of qualified stock options within the meaning of Internal Revenue Code Section 422 and non-qualified stock options. In addition, the Option 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 Option Plan. On May 14, 1993, the stockholders approved the adoption of The Warnaco Group, Inc. 1993 Stock Plan ('Stock Plan'). The Stock Plan provided for the issuance of up to 2,000,000 shares of 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 Plan whereby the number of shares issuable under the Stock Plan is automatically increased each year by 3% of the outstanding number of shares of Class A Common Stock of the Company as of the beginning of each fiscal year. The total number of shares available for issuance under the Plan as of January 8, 1995 was 4,462,021. The Compensation Committee of the Board of Directors has the sole and complete authority to make awards under the Stock Plan and to determine the specific terms and conditions of such awards, except that the exercise price of any award may not be less than the fair market value of the Company's common stock at the date of the grant. 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 up to 400,000 non-qualified stock options to directors of the Company who are not employees 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 market value of the Company's Common Stock at the date of the grant. The 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) 10,000 shares of common stock immediately following each Annual Shareholders' Meeting as of the date of such meeting. F-17 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options issued, cancelled and outstanding (no options have been exercised) under the Stock Plan, the Option Plan and the Director Plan at January 7, 1995 are summarized below:
PRICE RANGE SHARES ----------------- --------- Outstanding January 4, 1992.............................................. -- -- Options granted.......................................................... $ 17.31 850,500 Options cancelled........................................................ 17.31 (38,500) ----------------- --------- Outstanding January 3, 1993.............................................. 17.31 812,000 Options granted.......................................................... 15.81 - 18.31 2,410,000 Options cancelled........................................................ 15.81 - 18.31 (243,000) ----------------- --------- Outstanding January 8, 1994.............................................. 15.81 - 18.31 2,979,000 Options granted.......................................................... 13.13 - 17.38 670,000 Options cancelled........................................................ 13.38 - 17.38 (162,000) ----------------- --------- Outstanding January 7, 1995.............................................. $ 13.13 - 18.31 3,487,000 ----------------- --------- ----------------- ---------
Under the above plans options to purchase a total of 3,487,000 shares of common stock were outstanding, 2,279,916 of which were exercisable. Options are exercisable for a period of ten years from date of grant and vest when granted in the case of the Director Plan and from the grant date to four years for the Stock Plan and Option Plan. Options expire from February 14, 2002 to August 17, 2004. The Company has reserved 6,362,021 shares of Class A common stock for the above plans. In August 1994 the Company purchased 286,600 shares of its outstanding common stock on the open market at an average price of $17.45 per share. Total cost of the purchase was $5,000,000 and was funded by increasing amounts outstanding under the Company's revolving line of credit. NOTE 13 - LEASES Rental expense was $13,942,000, $14,213,000 and $15,100,000 for the years ended January 2, 1993, January 8, 1994 and January 7, 1995, respectively. The following is a schedule of future minimum rental payments required under operating leases with terms in excess of one year, as of January 7, 1995.
RENTAL PAYMENTS ------------------------ (IN THOUSANDS) REAL ESTATE EQUIPMENT ----------- --------- 1995................................................................ $ 9,508 $ 3,227 1996................................................................ 7,471 2,809 1997................................................................ 6,798 2,148 1998................................................................ 5,904 1,855 1999................................................................ 5,293 1,524 2000-thereafter..................................................... 19,573 2,365
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS The following summarizes the unaudited quarterly results of operations of the Company for the 1993 and 1994 fiscal years. F-18 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 8, 1994 -------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues..................................................... $156,750 $158,329 $183,957 $204,733 Gross profit..................................................... 54,797 48,095 62,699 70,816 Income from continuing operations................................ 10,752 5,519 17,206 19,776 Extraordinary items.............................................. (18,637) Cumulative effect of change in method of accounting for postretirement benefits........................................ (10,500) Net income....................................................... $ 252 $ 5,519 $ 17,206 $ 1,139 -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations per common share............... $ 0.27 $ 0.14 $ 0.44 $ 0.49 -------- -------- -------- -------- -------- -------- -------- --------
YEAR ENDED JANUARY 7, 1995 -------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues..................................................... $147,731 $190,302 $217,872 $232,853 Gross profit..................................................... 50,376 56,990 69,896 78,498 Income from continuing operations................................ 8,961 9,086 21,711 23,570 Net income....................................................... 8,961 $ 9,086 21,711 23,570 -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations per common share............... $ 0.22 $ 0.22 $ 0.52 $ 0.57 -------- -------- -------- -------- -------- -------- -------- --------
F-19 SCHEDULE II THE WARNACO GROUP, INC. VALUATION & QUALIFYING ACCOUNTS & RESERVES (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) OTHER END OF YEAR - ---------------------------------------------- ---------- ---------- ------------- ------ ----------- Year Ended January 2, 1993 Allowance for doubtful accounts............. $1,993 $ 913 $ 1,136 $ $ 1,770 ---------- ---------- ------------- ------ ----------- ---------- ---------- ------------- ------ ----------- Year Ended January 8, 1994 Allowance for doubtful accounts............. $1,770 $1,199 $ 1,556 $ $ 1,413 ---------- ---------- ------------- ------ ----------- ---------- ---------- ------------- ------ ----------- Year Ended January 7, 1995 Allowance for doubtful accounts............. $1,413 $1,965 $ 520 $ $ 2,858 ---------- ---------- ------------- ------ ----------- ---------- ---------- ------------- ------ -----------
- ------------------ (1) Uncollectible accounts written off, net of recoveries. The above reserves are deducted from the related assets in the consolidated balance sheets. S-1 STATEMENT OF DIFFERENCES ------------------------ The registered trademark symbol shall be expressed as 'r' EXHIBIT INDEX
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE - ------- ---------------------------------------------------------------------------------------- ------------- 10.7 -- Amendment No. 6 to the U.S. $80,000,000 Credit Agreement dated November 18, 1994. 10.9 -- Credit Agreement, dated as of December 7, 1994 among Warnaco Inc., the financial institutions parties thereto and The Bank of Nova Scotia. 10.12 -- Amendment No. 2 to the U.S. $500,000,000 Credit Agreement dated October 28, 1994. 10.13 -- Amendment No. 3 to the U.S. $500,000,000 Credit Agreement dated December 8, 1994. 11.1 -- Calculation of Income (Loss) per common share. 23.1(a) -- Consent of Independent Auditors 23.1(b) -- Consent of Independent Auditors
EX-10 2 EXHIBIT 10.7 [EXECUTION COPY] SIXTH AMENDMENT TO CREDIT AGREEMENT This SIXTH AMENDMENT TO CREDIT AGREEMENT, dated as of November 18, 1994 (this "Amendatory Agreement"), among WARNACO INC. (the "Borrower"), the various financial institutions signatories hereto (the "Lenders") and THE BANK OF NOVA SCOTIA, as agent (the "Agent") for the Lenders, W I T N E S S E T H: WHEREAS, the Borrower, the Lenders and the Agent are parties to a Credit Agreement, dated as of July 16, 1993 (as amended or otherwise modified to the date hereof, the "Existing Credit Agreement"); WHEREAS, the Borrower has requested that the Lenders amend the Existing Credit Agreement in certain respects; and WHEREAS, the Lenders have agreed, subject to the terms and conditions hereinafter set forth, to amend the Existing Credit Agreement in certain respects as provided below (the Existing Credit Agreement, as so amended by this Amendatory Agreement, being referred to as the "Credit Agreement"); NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto agree as follows: PART I DEFINITIONS SUBPART 1.1. Certain Definitions. The following terms (whether or not underscored) when used in this Amendatory Agreement shall have the following meanings (such meanings to be equally applicable to the singular and plural form thereof): "Agent" is defined in the preamble. "Amendatory Agreement" is defined in the preamble. "Amendment No. 6" is defined in Subpart 3.1. "Borrower" is defined in the preamble. "Credit Agreement" is defined in the third recital. "Existing Credit Agreement" is defined in the first recital. "Lenders" is defined in the preamble. "Sixth Amendment Effective Date" is defined in Subpart 3.1. SUBPART 1.2. Other Definitions. Terms for which meanings are provided in the Existing Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used in this Amendatory Agreement with such meanings. PART II AMENDMENTS TO THE EXISTING CREDIT AGREEMENT Effective on (and subject to the occurrence of) the Sixth Amendment Effective Date, the Existing Credit Agreement is hereby amended in accordance with Subparts 2.1 through 2.2; except as so amended, the Existing Credit Agreement shall continue in full force and effect. SUBPART 2.1. Amendments to Article I. Article I of the Existing Credit Agreement is hereby amended in accordance with Subparts 2.1.1 through 2.1.2. SUBPART 2.1.1. Section 1.1 of the Existing Credit Agreement is hereby amended by inserting the following definitions in such Section in the appropriate alphabetical sequence: "Amendment No. 6" means the Sixth Amendment, dated as of November 18, 1994, to this Agreement among the Borrower, the Lenders and the Agent. "Sixth Amendment Effective Date" is defined in Subpart 3.1 of Amendment No. 6. SUBPART 2.1.2. The definition of "Applicable Margin" appearing in Section 1.1 of the Existing Credit Agreement is hereby amended (a) by deleting the table contained in such Section and substituting the following table in place thereof: -2- "Implied Debt Rating Base Rate Loans LIBO Rate Loans BB or below 0.500% 1.000% BB+ 0.250% 0.875% BBB- 0.000% 0.500% BBB or above 0.000% 0.450%"; and (b) by deleting the figure "1.500%" in the last sentence of such definition and substituting therefor the figure "1.000%". SUBPART 2.2. Amendment to Article III. Section 3.3.1 of the Existing Credit Agreement is hereby amended (a) by deleting the table contained in such Section and inserting the following table in place thereof: Rate for "Implied Debt Rating Letters of Credit BB or below 0.750% BB+ 0.625% BBB- 0.450% BBB or above 0.375%"; and (b) by deleting the figure "1.000%" appearing in the second sentence of such Section, and substituting the figure "0.750%" in place thereof. PART III CONDITIONS TO EFFECTIVENESS SUBPART 3.1. Sixth Amendment Effective Date. This Amendatory Agreement (and the amendments and modifications contained herein) shall become effective, and shall thereafter be referred to as "Amendment No. 6", on the date (the "Sixth Amendment Effective Date") when all of the conditions set forth in this Subpart 3.1 have been satisfied. SUBPART 3.1.1. Execution of Counterparts. The Agent shall have received counterparts of this Amendatory Agreement, duly executed and delivered on behalf of the Borrower and each of the Lenders. SUBPART 3.1.2. Amendment No. 2 to U.S. Credit Agreement. All of the conditions to the effectiveness of Amendment No. 2, dated as of November 18, 1994, to the U.S. Credit Agreement shall have been satisfied in full. -3- SUBPART 3.1.3. Legal Details, etc. All documents executed or submitted pursuant hereto shall be satisfactory in form and substance to the Agent and its counsel. The Agent and its counsel shall have received all information and such counterpart originals or such certified or other copies or such materials, as the Agent or its counsel may reasonably request, and all legal matters incident to the transactions contemplated by this Amendatory Agreement shall be satisfactory to the Agent and its counsel. SUBPART 3.1.4. Amendment Fee. The Agent shall have received an amendment fee in the amount of $100,000, payable to each Lender in accordance with such Lender's Percentage. PART IV MISCELLANEOUS SUBPART 4.1. Cross-References. References in this Amendatory Agreement to any Part or Subpart are, unless otherwise specified or otherwise required by the context, to such Part or Subpart of this Amendatory Agreement. SUBPART 4.2. Loan Document Pursuant to Existing Credit Agreement. This Amendatory Agreement is a Loan Document executed pursuant to the Existing Credit Agreement and shall be construed, administered and applied in accordance with all of the terms and provisions of the Existing Credit Agreement. SUBPART 4.3. Successors and Assigns. This Amendatory Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SUBPART 4.4. Counterparts. This Amendatory Agreement may be executed by the parties hereto in several counterparts, each of which when executed and delivered shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SUBPART 4.5. Governing Law. THIS AMENDATORY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. SUBPART 4.6. No Default, etc. In order to induce the Lenders to execute and deliver this Amendatory Agreement and to amend the Existing Credit Agreement as set forth above, the Borrower hereby represents and warrants to the Lenders that both before and after giving effect to the effectiveness of this Amendatory Agreement the following statements are true and correct: -4- (a) no event or circumstances has occurred and is continuing which constitutes a Default, or which when considered by itself or together with other past or then existing events or circumstances, constitutes or would constitute a material adverse change in the business prospects or financial condition of the Borrower and its Subsidiaries taken as a whole; (b) no event of default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an event of default has occurred and is continuing in the performance of any affirmative and negative covenants contained in Article V of the U.S. Credit Agreement; and (c) none of the events described in clauses (a), (e), (f), (g), (h), (k), (l), (m) or (n) of Section 6.01 of the U.S. Credit Agreement has occurred and is continuing. SUBPART 4.7. Acknowledgment of the Lenders. By its signature below each Lender acknowledges and agrees that the "U.S. Credit Agreement" means the U.S. Credit Agreement, after giving effect to the provisions of (i) Amendment No. 1, dated as of June 8, 1994, among the Borrower and the other parties signatories thereto, and (ii) Amendment No. 2 to the U.S. Credit Agreement, dated as of October 24, 1994 and effective as of November 18, 1994, among the Borrower and the other parties signatories thereto. -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendatory Agreement to be executed by their respective officers as of the day and year first above written. WARNACO INC. By _____________________________________ Title: THE BANK OF NOVA SCOTIA, as Agent, as Issuer and as Lender By _____________________________________ Title: MITSUI NEVITT CAPITAL CORPORATION By _____________________________________ Title: SOCIETE GENERALE, NEW YORK BRANCH By _____________________________________ Title: -6- EX-10 3 EXHIBIT 10.9 [EXECUTION COPY] U.S. $10,000,000 CREDIT AGREEMENT, dated as of December 8, 1994, among WARNACO INC., as the Borrower, CERTAIN COMMERCIAL LENDING INSTITUTIONS, as the Lenders, and THE BANK OF NOVA SCOTIA, as the Agent for the Lenders. TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Defined Terms . . . . . . . . . . . . . . . . . . 1 1.2. Use of Defined Terms. . . . . . . . . . . . . . . 9 1.3. Cross-References. . . . . . . . . . . . . . . . . 9 1.4. Accounting and Financial Determinations . . . . . 9 ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES 2.1. Commitment. . . . . . . . . . . . . . . . . . . . 9 2.1.1. Commitment. . . . . . . . . . . . . . . . . . . . 9 2.1.2. Lenders Not Permitted or Required To Make Loans Under Certain Circumstances . . . . . . . . . . 10 2.2. Reduction of Commitment Amount. . . . . . . . . . 11 2.3. Borrowing Procedure . . . . . . . . . . . . . . . 11 2.4. Continuation and Conversion Elections . . . . . . 11 2.5. Funding . . . . . . . . . . . . . . . . . . . . . 11 2.6. Notes . . . . . . . . . . . . . . . . . . . . . . 12 2.7. Extension of Commitment Termination Date. . . . . 12 ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES 3.1. Repayments and Prepayments. . . . . . . . . . . . 13 3.2. Interest Provisions . . . . . . . . . . . . . . . 13 3.2.1. Rates . . . . . . . . . . . . . . . . . . . . . . 14 3.2.2. Post-Maturity Rates . . . . . . . . . . . . . . . 15 3.2.3. Payment Dates . . . . . . . . . . . . . . . . . . 15 3.3. Commitment Fee. . . . . . . . . . . . . . . . . . 15 ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS 4.1. LIBO Rate Lending Unlawful. . . . . . . . . . . . 16 4.2. Deposits Unavailable. . . . . . . . . . . . . . . 16 4.3. Increased LIBO Rate Loan Costs, etc.. . . . . . . 16 4.4. Funding Losses. . . . . . . . . . . . . . . . . . 17 4.5. Increased Capital Costs, etc. . . . . . . . . . . 17 4.6. Taxes . . . . . . . . . . . . . . . . . . . . . . 18 4.7. Payments, Computations, etc.. . . . . . . . . . . 20 -i- 4.8. Sharing of Payments . . . . . . . . . . . . . . . 21 4.9. Setoff. . . . . . . . . . . . . . . . . . . . . . 21 4.10. Use of Proceeds . . . . . . . . . . . . . . . . . 22 ARTICLE V CONDITIONS PRECEDENT 5.1. Initial Credit Extension. . . . . . . . . . . . . 22 5.1.1. Resolutions, etc. . . . . . . . . . . . . . . . . 22 5.1.2. Delivery of Note. . . . . . . . . . . . . . . . . 22 5.1.3. No Default, etc.. . . . . . . . . . . . . . . . . 22 5.1.4. No Material Adverse Change. . . . . . . . . . . . 23 5.1.5. Opinion of Counsel. . . . . . . . . . . . . . . . 23 5.1.6. Closing Fees, Expenses, etc.. . . . . . . . . . . 23 5.1.7. Delivery of Guaranty. . . . . . . . . . . . . . . 23 5.2. All Credit Extensions . . . . . . . . . . . . . . 23 5.2.1. Compliance with Warranties, No Default, etc.. . . 23 5.2.2. Borrowing Request . . . . . . . . . . . . . . . . 24 5.2.3. Satisfactory Legal Form . . . . . . . . . . . . . 24 ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1. Organization, etc.. . . . . . . . . . . . . . . . 25 6.2. Due Authorization, Non-Contravention, etc.. . . . 25 6.3. Government Approval, Regulation, etc. . . . . . . 25 6.4. Validity, etc.. . . . . . . . . . . . . . . . . . 25 6.5. No Material Adverse Change. . . . . . . . . . . . 26 6.6. Litigation, Labor Controversies, etc. . . . . . . 26 6.7. Regulations G, U and X. . . . . . . . . . . . . . 26 6.8. Accuracy of Information . . . . . . . . . . . . . 26 ARTICLE VII COVENANTS 7.1. Affirmative Covenants . . . . . . . . . . . . . . 27 7.1.1. Financial Information, Reports, Notices, etc. . . 27 7.1.2. Corporate Existence . . . . . . . . . . . . . . . 28 ARTICLE VIII EVENTS OF DEFAULT 8.1. Listing of Events of Default. . . . . . . . . . . 28 8.1.1. Non-Payment of Obligations. . . . . . . . . . . . 28 8.1.2. Breach of Warranty. . . . . . . . . . . . . . . . 28 -ii- 8.1.3. Non-Performance of Certain Covenants and Obligations . . . . . . . . . . . . . . . . . . 28 8.1.4. Non-Performance of Other Covenants and Obligations . . . . . . . . . . . . . . . . . . 29 8.1.5. Default Under U.S. Credit Agreement . . . . . . . 29 8.1.6. Bankruptcy, Insolvency, etc.. . . . . . . . . . . 29 8.1.7. Impairment of Guaranty. . . . . . . . . . . . . . 29 8.2. Action Upon Bankruptcy. . . . . . . . . . . . . . 29 8.3. Action Upon Other Event of Default. . . . . . . . 29 ARTICLE IX THE AGENT 9.1. Actions . . . . . . . . . . . . . . . . . . . . . 30 9.2. Copies, etc.. . . . . . . . . . . . . . . . . . . 30 9.3. Exculpation . . . . . . . . . . . . . . . . . . . 31 9.4. Successor . . . . . . . . . . . . . . . . . . . . 31 9.5. Loans Made by Scotiabank. . . . . . . . . . . . . 31 9.6. Credit Decisions. . . . . . . . . . . . . . . . . 32 ARTICLE X MISCELLANEOUS PROVISIONS 10.1. Waivers, Amendments, etc. . . . . . . . . . . . . 32 10.2. Notices . . . . . . . . . . . . . . . . . . . . . 33 10.3. Payment of Costs and Expenses . . . . . . . . . . 33 10.4. Indemnification . . . . . . . . . . . . . . . . . 34 10.5. Survival. . . . . . . . . . . . . . . . . . . . . 34 10.6. Severability. . . . . . . . . . . . . . . . . . . 35 10.7. Headings. . . . . . . . . . . . . . . . . . . . . 35 10.8. Execution in Counterparts, Effectiveness, etc.. . 35 10.9. Governing Law; Entire Agreement . . . . . . . . . 35 10.10. Successors and Assigns. . . . . . . . . . . . . . 35 10.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes . . . . . . . 36 10.11.1. Assignments . . . . . . . . . . . . . . . . . . . 36 10.11.2. Participations. . . . . . . . . . . . . . . . . . 37 10.12. Other Transactions. . . . . . . . . . . . . . . . 38 10.13. Forum Selection and Consent to Jurisdiction . . . 38 10.14. Waiver of Jury Trial. . . . . . . . . . . . . . . 39 10.15. Usury Restraint . . . . . . . . . . . . . . . . . 39 -iii- SCHEDULE I - Disclosure Schedule EXHIBIT A - Form of Note EXHIBIT B - Form of Borrowing Request EXHIBIT C - Form of Continuation/Conversion Notice EXHIBIT D - Form of Lender Assignment Agreement EXHIBIT E - Form of Opinion of Counsel to the Borrower EXHIBIT F - Form of Guaranty -iv- CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of December 8, 1994, among WARNACO INC., a Delaware corporation (the "Borrower"), the various financial institutions as are or may become parties hereto (collectively, the "Lenders"), and THE BANK OF NOVA SCOTIA ("Scotiabank"), as agent (the "Agent") for the Lenders, W I T N E S S E T H: WHEREAS, the Borrower desires to obtain Commitments from the Lenders pursuant to which Loans will be made by the Lenders to the Borrower from time to time prior to the Commitment Termination Date; WHEREAS, the Lenders are willing, on the terms and subject to the conditions hereinafter set forth (including Article V), to extend such Commitments and to make such Loans to the Borrower; and WHEREAS, the proceeds of Loans will be used to repay obligations arising as a result of disbursements made under letters of credit that are issued from time to time in connection with the Borrower's and its wholly-owned Subsidiaries' worldwide sourcing of merchandise; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.1. Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Agent pursuant to Section 9.4. "Agreement" means, on any date, this Credit Agreement as originally in effect on the Effective Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Alternate Base Rate" means, on any date and with respect to all Base Rate Loans, a fluctuating rate of interest per annum equal to the higher of (a) the rate of interest most recently announced by Scotiabank at its Domestic Office as its base rate for Dollar loans; and (b) the Federal Funds Rate most recently determined by the Agent plus 1/2 of 1%. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by Scotiabank in connection with extensions of credit. Changes in the rate of interest on that portion of any Loans maintained as Base Rate Loans will take effect simultaneously with each change in the Alternate Base Rate. The Agent will give notice promptly to the Borrower of changes in the Alternate Base Rate. "Assignee Lender" is defined in Section 10.11.1. "Authorized Officer" means, relative to the Borrower, those of its officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to Section 5.1.1. "Base Rate Loan" means a Loan bearing interest at a fluctuating rate determined by reference to the Alternate Base Rate. "Borrower" is defined in the preamble. "Borrowing" means the making of Loans by the Lenders of the same type and, in the case of LIBO Rate Loans, having the same Interest Period in accordance with Section 2.1. "Borrowing Request" means a loan request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B hereto. "Business Day" means (a) any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York; and (b) relative to the making, continuing, prepaying or repaying of any LIBO Rate Loans, any day on which dealings in Dollars are carried on in the London interbank market. "Commitment" means relative to any Lender, such Lender's obligation to make Loans pursuant to Section 2.1.1. "Commitment Amount" means $10,000,000, as such amount may be reduced by Section 2.2. -2- "Commitment Termination Date" means the earliest of (a) June 29, 1995, as such date may be extended pursuant to the terms of this Agreement; (b) the date on which the Commitment Amount is terminated in full or reduced to zero pursuant to Section 2.2; and (c) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described in clause (b) or (c), the Commitment shall terminate automatically and without any further action. "Commitment Termination Event" means (a) the occurrence of any event or condition described in clause (f) of Section 6.01 of the U.S. Credit Agreement; (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of the Loans to be due and payable pursuant to Section 8.3, or (ii) in the absence of such declaration, the giving of notice by the Agent, acting at the direction of the Required Lenders, to the Borrower that the Commitments have been terminated; or (c) the termination of, or any refinancing, refunding, replacement, renewal or restatement of, the U.S. Credit Agreement. "Continuation/Conversion Notice" means a notice of continuation or conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit C hereto. "Credit Extension" means the advancing of any Loans by the Lenders in connection with a Borrowing. "Default" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default. "Disbursement" is defined in the L/C Agreement. -3- "Dollar" and the sign "$" mean lawful money of the United States. "Domestic Office" means, relative to any Lender, the office of such Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender (or any successor or assign of such Lender) within the United States as may be designated from time to time by notice from such Lender, as the case may be, to each other Person party hereto. "Effective Date" means the date this Agreement becomes effective pursuant to Section 10.8. "Event of Default" is defined in Section 8.1. "Excess" is defined in Section 10.15. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. If for any reason the Agent shall have determined (which determination shall be conclusive, absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including without limitation, the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms hereof, the rate announced by the Agent at its New York Agency as its "Base Rate New York" shall be the Alternate Base Rate until the circumstances giving rise to such inability no longer exists. "Fiscal Quarter" means any quarter of a Fiscal Year. "Fiscal Year" means the fiscal year of the Borrower ending on or about December 31 of each year. "F.R.S. Board" means the Board of Governors of the Federal Reserve System or any successor thereto. -4- "GAAP" has the meaning set forth in the U.S. Credit Agreement. "Group" means The Warnaco Group, Inc., a Delaware corporation. "Guaranty" means the Guaranty, dated as of the date hereof, in substantially the form of Exhibit F hereto, executed and delivered by Group pursuant to Section 5.1.7, as amended or otherwise modified pursuant to the terms thereof. "herein", "hereof", "hereto", "hereunder" and similar terms contained in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "including" means including without limiting the generality of any description preceding such term. "Indebtedness" of any Person means, without duplication: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as capitalized lease liabilities; (d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade debt incurred in the ordinary course of business), and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; and (e) all contingent liabilities of such Person in respect of any of the foregoing. "Indemnified Liabilities" is defined in Section 10.4. "Indemnified Parties" is defined in Section 10.4. -5- "Interest Period" means, relative to any LIBO Rate Loans, the period beginning on (and including) the date on which such LIBO Rate Loan is made or continued as, or converted into, a LIBO Rate Loan pursuant to Section 2.3 or 2.4 and ending on (but excluding) the day which numerically corresponds to such date one or, two or three months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), in each case as such Loan may be made or as the Borrower may select in its relevant notice pursuant to Section 2.3 or 2.4; provided, however, that (a) Interest Periods commencing on the same date for Loans comprising part of the same Borrowing shall be of the same duration; (b) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day (unless such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day); and (c) no Interest Period may end later than the date set forth in clause (a) of the definition of "Commitment Termination Date", as such date may be extended from time to time pursuant to the terms of this Agreement. "L/C Agreement" means the Credit Agreement, dated as of July 16, 1993 (as amended, supplemented, amended and restated or otherwise modified from time to time), among the Borrower, certain commercial lending institutions parties thereto and The Bank of Nova Scotia, as agent for such commercial lending institutions. "Lender Assignment Agreement" means a Lender Assignment Agreement substantially in the form of Exhibit D hereto. "Letter of Credit" is defined in the L/C Agreement. "Lenders" is defined in the preamble. "LIBO Rate" is defined in Section 3.2.1. "LIBO Rate Loan" means a Loan bearing interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the LIBO Rate (Reserve Adjusted). "LIBO Rate (Reserve Adjusted)" is defined in Section 3.2.1. -6- "LIBOR Office" means, relative to any Lender, the office of such Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of any Lender as designated from time to time by notice from such Lender to the Borrower and the Agent, whether or not outside the United States, which shall be making or maintaining LIBO Rate Loans hereunder. "LIBOR Reserve Percentage" is defined in Section 3.2.1. "Lien" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loan" is defined in Section 2.1.1. "Loan Document" means this Agreement, each Note, the Guaranty and each other agreement, document or instrument delivered in connection with this Agreement, whether or not specifically mentioned herein. "Maximum Rate" is defined in Section 10.15. "Note" means any promissory note of the Borrower payable to the order of a Lender, in the form of Exhibit A hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Loans made by such Lender, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Obligor" means the Borrower and Group. "Obligations" means all obligations (monetary or otherwise) of any Obligor arising under or in connection with this Agreement, the Notes and each other Loan Document. "Organic Document" means, relative to any Obligor, its certificate of incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. "Participant" is defined in Section 10.11.2. "Percentage" means, on any date, relative to any Lender the percentage set forth opposite its signature hereto or set forth in a Lender Assignment Agreement, as such percentage may be adjusted from time to time pursuant to the terms hereof or a -7- Lender Assignment Agreement executed by such Lender and its Assignee Lender and delivered pursuant to Section 10.11.1. "Person" means any natural person, corporation, partnership, firm, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Quarterly Payment Date" means the last day of each March, June, September and December or, if any such day is not a Business Day, the next succeeding Business Day. "Reimbursement Obligation" is defined in the L/C Agreement. "Required Lenders" means, at any time, Lenders holding Loans representing at least 51% of the aggregate principal amount of the Loans then outstanding and, if no Loans are outstanding, 51% of the Commitments. "Scotiabank" is defined in the preamble. "Stated Maturity Date" means, in the case of any Loan, the date that is 90 days after the Commitment Termination Date; provided, however, that in the case of a Commitment Termination Event of the type described in clause (c) of the definition of "Commitment Termination Event", the Stated Maturity Date shall be the date on which such event occurs. "Stated Rate" is defined in Section 10.15. "Subsidiary" means, with respect to any Person, any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Taxes" is defined in Section 4.6. "type" means, relative to any Loan, the portion thereof, if any, being maintained as a Base Rate Loan or a LIBO Rate Loan. "United States" or "U.S." means the United States of America, its fifty States and the District of Columbia. "U.S. Credit Agreement" means the Credit Agreement, dated as of October 14, 1993 (as amended or otherwise modified to the date -8- hereof), among the Borrower, The Warnaco Group, Inc., the Banks named therein, The Bank of Nova Scotia and Citicorp USA, Inc., as Managing Agents, Citicorp USA, Inc., as Documentation Agent and Collateral Agent, and The Bank of Nova Scotia, as Paying Agent, Swing Line Bank and an Issuing Bank, as amended, restated or waived from time to time with the consent of the Required Lenders hereunder solely for purposes of this Agreement, and regardless of whether such U.S. Credit Agreement is terminated, unless in connection with such termination a replacement credit facility satisfactory to the Required Lenders hereunder is entered into in which case, the affirmative and negative covenants in such facility shall become the subject of this Agreement. "Usury Restraint" is defined in Section 10.15. Section 1.2. Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in each Note, Borrowing Request, Continuation/ Conversion Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. Section 1.3. Cross-References. Unless otherwise specified, references in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. Section 1.4. Accounting and Financial Determinations. Unless otherwise specified, all accounting terms used herein shall be interpreted, all accounting determinations and computations hereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, GAAP. ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES Section 2.1. Commitment. On the terms and subject to the conditions of this Agreement (including Article V), each Lender severally agrees as follows. Section 2.1.1. Commitment. From time to time on any Business Day occurring prior to the Commitment Termination Date, each Lender severally agrees, subject to the terms of this Agreement (including Article V) that it will make loans (relative -9- to such Lender, its "Loans") to the Borrower equal to its Percentage of the aggregate amount of the Borrowing of Loans requested by the Borrower to be made on such day or otherwise required to be made pursuant to the terms of Section 2.3. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Loans. Notwithstanding anything contained herein to the contrary, so long as any Lender whose Percentage to make Loans is less than 51% shall be in default in its obligation to fund its pro rata share of any Loans (as notified to such Lender by the Agent, the Agent agreeing to use good faith efforts to give such notification promptly following the occurrence of such default) or shall have rejected its obligations under its Commitment, then such Lender whose Percentage to make Loans is less than 51% shall not be entitled to receive any payments of principal of or interest on its pro rata share of the Loans or its share of any commitment or other fees payable hereunder unless and until (x) the Loans of all the other Lenders and all interest thereon have been paid in full, (y) such failure to fulfill its obligation to fund is cured or (z) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, and for purposes of voting or consenting to matters with respect to the Loan Documents, such Lender shall be deemed not to be a "Lender" hereunder and such Lender's Percentage shall each be deemed to be zero (0). No Commitment of any Lender shall be increased or otherwise affected by any such failure or rejections by any other Lender. Any payments of principal of or interest on Obligations which would, but for this Section, be paid to any Lender, shall be paid to the Lenders who shall not be in default under their respective Commitments and who shall not have rejected any Commitment, for application to the Obligations in such manner and order (pro rata among such Lenders) as shall be determined by the Agent. The parties hereto acknowledge and agree that a Lender's failure to make a Loan based on the Borrower's failure to satisfy one or more of the conditions precedent to the making of Loans set forth in Article V shall not be construed as such Lender being in default of its obligations to fund its pro rata share of Loans or a rejection of such Lender's obligations under its Commitment. Section 2.1.2. Lenders Not Permitted or Required To Make Loans Under Certain Circumstances. No Lender shall be permitted or required to make any Loan if, after giving effect thereto, the aggregate outstanding principal amount of all Loans (a) made by all Lenders would exceed the then effective Commitment Amount; or -10- (b) made by such Lender would exceed such Lender's Percentage multiplied by the Commitment Amount. Section 2.2. Reduction of Commitment Amount. The Borrower may, from time to time on any Business Day, voluntarily reduce the Commitment Amount; provided, however, that all such reductions shall require at least three Business Days' prior notice to the Agent and be permanent. Section 2.3. Borrowing Procedure. By delivering a Borrowing Request to the Agent on or before 2:00 p.m., New York time, on a Business Day, the Borrower may from time to time irrevocably request, on not less than three nor more than five Business Days' notice (in the case of LIBO Rate Loans) and on the date of such Borrowing (in the case of Base Rate Loans), that a Borrowing be made in an amount not to exceed the full amount of a Disbursement under a Letter of Credit. Proceeds of such Loans shall be used only to fund the Reimbursement Obligations in respect of Letters of Credit under which a Disbursement was made on the date of the Loan. On the terms and subject to the conditions of this Agreement, each Borrowing shall be comprised of the type of Loans, and shall be made on the Business Day, specified in such Borrowing Request. Section 2.4. Continuation and Conversion Elections. By delivering a Continuation/Conversion Notice to the Agent on or before 10:00 a.m., New York time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than three nor more than five Business Days' notice that all, or any portion of any Loans be, in the case of Base Rate Loans, converted into LIBO Rate Loans or, in the case of a LIBO Rate Loan, converted into a Base Rate Loan or continued as a LIBO Rate Loan (in the absence of delivery of a Continuation/Conversion Notice with respect to any LIBO Rate Loan at least three Business Days before the last day of the then current Interest Period with respect thereto, such LIBO Rate Loan shall, on such last day, automatically convert to a Base Rate Loan unless such Loan is otherwise required to be paid pursuant to the terms of this Agreement (including the first sentence of Section 3.1)); provided, however, that no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, LIBO Rate Loans when any Default has occurred and is continuing. Section 2.5. Funding. Each Lender may, if it so elects, fulfill its obligation to make, continue or convert LIBO Rate Loans hereunder by causing one of its foreign branches or affiliates (or an international banking facility all of the capital stock or other ownership interests of which are wholly- owned by such Lender) to make or maintain such LIBO Rate Loan; -11- provided, however, that such LIBO Rate Loan shall nonetheless be deemed to have been made and to be held by such Lender, and the obligation of the Borrower to repay such LIBO Rate Loan shall nevertheless be to such Lender for the account of such foreign branch, affiliate or international banking facility; provided, further that the Borrower shall not be required to pay any amount under this Section or Section 4.6 that is greater than the amount which it would have been required to pay had such Lender not caused such branch, affiliate or facility to make or maintain such LIBO Rate Loan. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of Section 4.1, 4.2, 4.3 or 4.4, it shall be conclusively assumed that such Lender elected to fund all LIBO Rate Loans by purchasing Dollar deposits in its LIBOR Office's interbank eurodollar market. Section 2.6. Notes. Each Lender's Loans under the Commitment shall be evidenced by a Note payable to the order of such Lender in a maximum principal amount equal to such Lender's Percentage of Loans multiplied by the Commitment Amount. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Note (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date of, the outstanding principal of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower. Section 2.7. Extension of Commitment Termination Date. The Commitment Termination Date may be extended by the Lenders in their sole and absolute discretion upon written request of the Borrower received at least 60 days but not more than 90 days prior to the then effective Commitment Termination Date (as such date may have been extended). The Lenders shall give written notice to the Borrower of their decision and, if approved, of the new Commitment Termination Date; provided, that notwithstanding any other provision in this Agreement to the contrary, in no event shall the modified Commitment Termination Date exceed 364 days from the then expiring Commitment Termination Date. The Lenders shall give written notice to the Borrower of their decision within 30 days of request. In the absence of notice by any one of the Lenders, the then effective Commitment Termination Date shall not be extended and shall terminate and expire as otherwise provided in this Agreement. -12- ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES Section 3.1. Repayments and Prepayments. The Borrower shall repay in full the entire unpaid principal amount of each Loan upon the earlier of (i) at the election of the Borrower, no later than 90 days following the date of the making of such Loan (or, if different, on the last day of the Interest Period for such Loan) and (ii) the Stated Maturity Date therefor. Prior thereto, the Borrower (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; provided, however, that (i) no such prepayment of any LIBO Rate Loan may be made on any day other than the last day of the Interest Period for such Loan; and (ii) all such voluntary prepayments shall require at least one Business Day's prior written notice to the Agent; (b) shall, on each date when any reduction in the Commitment Amount shall become effective, make a mandatory prepayment of the aggregate outstanding principal amount of all Loans then outstanding in an amount equal to the excess, if any, of the aggregate outstanding principal amount of all Loans over the Commitment Amount, as so reduced; and (c) shall, immediately upon any acceleration of the Stated Maturity Date of any Obligations pursuant to Section 8.2 or Section 8.3, repay all Obligations, unless, pursuant to Section 8.3, only a portion of all Obligations is so accelerated. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. No voluntary prepayment of principal of any Loans shall cause a reduction in the Commitment Amount. Section 3.2. Interest Provisions. Interest on the outstanding principal amount of Loans shall accrue and be payable in accordance with this Section 3.2. -13- Section 3.2.1. Rates. Loans comprising a Borrowing shall accrue interest at a rate per annum: (a) on that portion maintained from time to time as a Base Rate Loan, equal to the sum of the Alternate Base Rate from time to time in effect plus 3/4 of 1%; or (b) on that portion maintained as a LIBO Rate Loan, during each Interest Period applicable thereto, equal to the sum of the LIBO Rate (Reserve Adjusted) for such Interest Period plus 1.250%. The "LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made, continued or maintained as, or converted into, a LIBO Rate Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined pursuant to the following formula: LIBO Rate = LIBO Rate ------------------------------- (Reserve Adjusted) 1.00 - LIBOR Reserve Percentage The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans will be determined by the Agent on the basis of the LIBOR Reserve Percentage in effect on, and the applicable rates furnished to and received by the Agent from Scotiabank, two Business Days before the first day of such Interest Period. "LIBO Rate" means, relative to any Interest Period for LIBO Rate Loans, the rate of interest equal to the average of the rates per annum at which Dollar deposits in immediately available funds are offered to Scotiabank's LIBOR Office in the London interbank market as at or about 11:00 a.m. London time two Business Days prior to the beginning of such Interest Period for delivery on the first day of such Interest Period, and in an amount approximately equal to the amount of Scotiabank's LIBO Rate Loan and for a period approximately equal to such Interest Period. "LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO Rate Loans, the reserve percentage, if any (expressed as a decimal) equal to the maximum aggregate reserve requirements (including all basic, emergency, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) specified under regulations issued from time to time by the F.R.S. Board and then applicable to assets or liabilities consisting of and including "Eurocurrency Liabilities", as currently defined in Regulation D of the F.R.S. Board, having a term approximately equal or comparable to such Interest Period. -14- All LIBO Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such LIBO Rate Loan. Section 3.2.2. Post-Maturity Rates. After the date any principal amount of any Loan is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of the Borrower shall have become due and payable, the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to the greater of (i) the Alternate Base Rate plus a margin of 3%, and (ii) the then applicable interest rate plus a margin of 1%. Section 3.2.3. Payment Dates. Interest accrued on each Loan shall be payable, without duplication: (a) on the Stated Maturity Date therefor; (b) on the date of any optional or required payment or prepayment, in whole or in part, of principal outstanding on such Loan (including, with respect to LIBO Rate Loans, on the last day of each applicable Interest Period for such LIBO Rate Loan); (c) with respect to any Loans maintained as Base Rate Loans, on each Quarterly Payment Date and, with respect to any Base Rate Loans converted into LIBO Rate Loans on a day when interest would not otherwise have been payable pursuant to the terms hereof, on the date of such conversion; and (d) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 8.2 or Section 8.3, immediately upon such acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. Section 3.3. Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Lender, for the period (including any portion thereof when its Commitment is suspended by reason of the Borrower's inability to satisfy any condition of Article V) commencing on the Effective Date and continuing through (but excluding) the Commitment Termination Date, a commitment fee at the rate of 1/4 of 1% per annum on such Lender's Percentage of the average daily unused portion of the -15- Commitment Amount. Such commitment fees shall be non-refundable and shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing with the first such day following the Effective Date and on the Commitment Termination Date. ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS Section 4.1. LIBO Rate Lending Unlawful. If any Lender shall determine (which determination shall, upon notice thereof to the Borrower, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a LIBO Rate Loan, the obligations the Lenders to make, continue, maintain or convert into any such Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Borrower that the circumstances causing such suspension no longer exist, and all LIBO Rate Loans shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. Section 4.2. Deposits Unavailable. If any Lender shall have determined that (a) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to it in its relevant market; or (b) by reason of circumstances affecting such Lender's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then, upon notice from such Lender to the Borrower and the Agent, the obligations of the Lenders under Section 2.3 and Section 2.4 to make or continue any Loans as, or to convert any Loans into, LIBO Rate Loans shall forthwith be suspended until such Lender shall notify the Borrower and the Agent that the circumstances causing such suspension no longer exist. Section 4.3. Increased LIBO Rate Loan Costs, etc. The Borrower agrees to reimburse each Lender for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender in respect of, making or continuing (or of its obligation to make or continue) any Loans as, or of converting (or of its obligation to convert) any Loans into, LIBO -16- Rate Loans. Each Lender shall promptly notify the Borrower and the Agent in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five Business Days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. Section 4.4. Funding Losses. In the event any Lender shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a LIBO Rate Loan, but excluding the loss of any anticipated or expected profits in respect of such LIBO Rate Loan) as a result of (a) any conversion or repayment or prepayment of the principal amount of any LIBO Rate Loans on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to Section 3.1 or otherwise; (b) any Loans not being made as LIBO Rate Loans in accordance with the Borrowing Request therefor; or (c) any Loans not being continued as, or converted into, LIBO Rate Loans in accordance with the Continuation/ Conversion Notice therefor, then, upon the written notice of such Lender to the Borrower and the Agent, the Borrower shall, within five Business Days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. Section 4.5. Increased Capital Costs, etc. If the implementation of or, after the date hereof, the introduction or any change in the interpretation of, or any change in its application to the Borrower and/or the Lenders of, any law or any regulation or guideline issued by any central bank or other governmental authority (whether or not having the force of law), including any eurocurrency or other reserve or special deposit requirement or any tax (other than tax which is on a Lender's general net or gross income or in respect of a Lender's franchise -17- taxes) or any capital requirement, has, due to a Lender's compliance, the effect, directly or indirectly, of (i) increasing the cost to such Lender of performing its obligations hereunder or under any Loan; (ii) reducing any amount received or receivable by such Lender or its effective return hereunder or in respect of any Loan or on its capital; or (iii) causing such Lender to make any payment or to forgo any return based on any amount received or receivable by such Lender hereunder or in respect of any Loan, then upon demand from time to time the Borrower shall pay such amount as shall compensate such Lender for any such cost, reduction, payment or foregone return upon receipt of the certificate referred to in the last sentence of this paragraph. Any certificate of any Lender in respect of the foregoing will be conclusive and binding upon the Borrower, except for manifest error, and shall set forth a determination of the amounts owing to such Lender in good faith using any reasonable averaging and attribution methods. Anything in this Agreement or any Loan Document to the contrary notwithstanding, no Lender shall be indemnified for, exculpated from, or relieved from liability, under this Agreement or any Loan Document, for any act or omission constituting gross negligence or wilful misconduct. Section 4.6. Taxes. (a) Each payment made by the Borrower under this Agreement shall be made free and clear of, and without deduction for, any present or future withholding or other taxes imposed on such payments by or on behalf of any government or any political subdivision or agency thereof or therein, except for any income, franchise and other taxes imposed on the Lender (which for purposes of this Section 4.6 shall include any branch, affiliate or international banking facility created by a Lender to make or maintain a LIBO Rate Loan pursuant to Section 2.5) by the jurisdiction under the laws of which such Lender is organized or any political subdivision or agency thereof or by the jurisdiction of such Lender's branch or lending office or principal place of business (all such non-excluded taxes being hereinafter referred to as "Taxes"). Whenever any Taxes are payable by the Borrower with respect to any payments hereunder, the Borrower shall promptly furnish to the Agent for the account of the applicable Lender official receipts (to the extent that the relevant governmental authority delivers such receipts) evidencing payment of any such Taxes so withheld or deducted. (b) Each Lender that is not a "United States person" (as such term is defined in Section 7701(a)(3) of the Internal Revenue Code of 1986) shall submit to the Borrower on or before the Effective Date (or, in the case of a Person that becomes a Lender after the Effective Date by assignment or pursuant to Section 2.5 promptly upon such assignment or funding) two duly completed and signed copies of either (1) Form 1001 of the United -18- States Internal Revenue Service entitling such Lender to a complete exemption from withholding on all amounts to be received by such Lender pursuant to this Agreement or (2) Form 4224 of the United States Internal Revenue Service relating to all amounts to be received by such Lender pursuant to this Agreement. Each such Lender shall, from time to time after submitting either such form, submit to the Borrower and the Agent such additional duly completed and signed copies of one or the other such forms (or such successor forms or other documents as shall be adopted from time to time by the relevant United States taxing authorities) as may be (1) reasonably requested in writing by the Borrower or the Agent and (2) appropriate under then current United States law or regulations to avoid United States withholding taxes on payments in respect of any amounts to be received by such Lender pursuant to this Agreement. Upon the reasonable request of the Borrower or the Agent, each Lender that has not provided the forms or other documents, as provided above, on the basis of being a "United States person" shall submit to the Borrower and the Agent a certificate to the effect that it is such a "United States person". (c) If any Lender which is not a "United States person" determines that it is unable to submit to the Borrower and the Agent any form or certificate that such Lender is requested to submit pursuant to the preceding paragraph, or that it is required to withdraw or cancel any such form or certificate, or that any such form or certificate previously submitted has otherwise become ineffective or inaccurate, such Lender shall promptly notify the Borrower and the Agent of such fact. (d) The Borrower shall not be required to pay any additional amount in respect of Taxes to any Lender if and only to the extent that (A) such Lender is subject to such Taxes on the Effective Date (or in the case of a Person that became a Lender after the Effective Date by assignment or pursuant to Section 2.5 on the date of such assignment or funding) or would be subject to such Taxes on such date if a payment under this Agreement has been received by it on such date; (B) such Lender becomes subject to such Taxes subsequent to the date referred to in clause (A) above (or in the case of a Lender which is not a "United States person", the first date on which it delivers the appropriate form or certificate to the Borrower as referred to in clause (b) of this Section) as a result of a change in the circumstances of such Lender (other than a change in applicable law), including without limitation a change in the residence, place of incorporation or principal place of business of the Lender, a change in the branch or lending office of the Lender participating in the transactions set forth herein or as a result of the sale by the Lender of participating interests in such Lender's creditor position(s) hereunder; or (C) such Taxes would not have been incurred but for the failure of such Lender to file -19- with the appropriate tax authorities and/or provide to the Borrower any form or certificate that it was required so to do pursuant to clause (b) of this Section, unless the Lender is not entitled to provide such form or certificate as a result of a change in applicable law after the Effective Date (or in the case of a Person that became a Lender after the Effective Date by assignment or pursuant to Section 2.5 the date of such assignment or funding). (e) Within thirty (30) days after the written reasonable request of the Borrower, each Lender shall execute and deliver to the Borrower such certificates, forms or other documents which can be furnished consistent with the facts and which are reasonably necessary to assist the Borrower in applying for refunds of Taxes paid by the Borrower hereunder or making payment of Taxes hereunder; provided, however, that no Lender shall be required to furnish to the Borrower any financial information with respect to itself or other information which it considers confidential. (f) The Borrower shall have the right to require any Lender which is not a "United States person" to which the Borrower is required to make additional payments pursuant to Section 4.6 hereof on account of Taxes (or would, upon payment to such Lender of an amount hereunder, be so required) to assign such Lender's total Loans and Commitments to one or more banks or financial institutions identified by the Borrower and acceptable to the Agent at a purchase price equal to the then outstanding amount of all principal, interest, fees and other amounts then owed to such Lender. Section 4.7. Payments, Computations, etc. Unless otherwise expressly provided herein, all payments by the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Agent for the account of the Lenders entitled to receive such payment. All such payments required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 11:00 a.m., New York time, on the date due, in same day or immediately available funds, to such account as the Agent shall specify from time to time by notice to the Borrower. To the extent the Agent receives such funds prior to 12:00 noon, New York time, the Agent shall promptly remit in same day funds to each Lender its share, if any, of such payments received by the Agent for the account of such Lender. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days. Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by clause (b) of the definition of the term -20- "Interest Period") be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. Section er voluntary, involuntary, by application of setoff or otherwise) in excess of its Percentage of payments then or therewith obtained by all Lenders, such Lender shall purchase from the other Lenders such participations as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (a) the amount of such selling Lender's required repayment to the purchasing Lender to (b) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.9) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. Section 4.9. Setoff. Each Lender shall, upon the occurrence of any event or condition described in clause (f) of Section 6.01 of the U.S. Credit Agreement or, with the consent of the Required Lenders, upon the occurrence of any other Event of Default, have the right to appropriate and apply to the payment of the Obligations owing to it (whether or not then due) any and all balances, credits, deposits, accounts or moneys of the -21- Borrower then or thereafter maintained with or otherwise held by such Lender; provided, however, that any such appropriation and application shall be subject to the provisions of Section 4.8. Each Lender agrees promptly to notify the Borrower and the Agent after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. Section 4.10. Use of Proceeds. The Borrower shall apply the proceeds of each Credit Extension in accordance with the third recital and Section 2.3. ARTICLE V CONDITIONS PRECEDENT Section 5.1. Initial Credit Extension. The obligations of the Lenders to make the initial Credit Extension shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 5.1. Section 5.1.1. Resolutions, etc. The Agent shall have received from each Obligor four originally executed copies of a certificate, dated the date of the initial Borrowing, of such Obligor's Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Note, the Guaranty and each other Loan Document to be executed by it; and (b) the incumbency and signatures of those of such Obligor's officers authorized to act with respect to this Agreement, the Notes, the Guaranty and each other Loan Document executed by it, upon which certificates each Lender may conclusively rely until it shall have received a further certificate of the Secretary of such Obligor canceling or amending such prior certificate. Section 5.1.2. Delivery of Note. Scotiabank shall have received its Note duly executed and delivered by the Borrower. Section 5.1.3. No Default, etc. No default shall have occurred and be continuing in the performance of any affirmative or negative covenants contained in the U.S. Credit Agreement, none of the events described in clauses (a), (b), (d), (f), (g), -22- (h), (i), (j), (k), or (l) of Section 10.1 of the U.S. Credit Agreement shall have occurred, and no Event of Default shall have occurred or would occur under the U.S. Credit Agreement or would result from the making of any Loan. Section 5.1.4. No Material Adverse Change. Since January 8, 1994, there shall have been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole. Section 5.1.5. Opinion of Counsel. The Agent shall have received an opinion letter, dated the date of the initial Borrowing and addressed to the Agent and all Lenders, from Skadden, Arps, Slate, Meagher & Flom, counsel to the Borrower, substantially in the form of Exhibit E hereto. Section 5.1.6. Closing Fees, Expenses, etc. The Agent shall have received for its own account, or for the account of each Lender, as the case may be, all fees, costs and expenses, if then invoiced, (i) previously agreed to between the Agent and the Borrower and (ii) as otherwise due and payable pursuant to Section 10.3. Section 5.1.7. Delivery of Guaranty. The Agent shall have received the Guaranty, duly executed and delivered by Group. Section 5.2. All Credit Extensions. The obligation of each Lender to make any Credit Extension (including the initial Credit Extension) shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. Section 5.2.1. Compliance with Warranties, No Default, etc. Both before and after giving effect to any Credit Extension the following statements shall be true and correct (a) no event or circumstances has occurred and is continuing, or would result from the making of such Credit Extension, which constitutes a Default, or which when considered by itself or together with other past or then existing events or circumstances, constitutes or would constitute a material adverse change in the business prospects or financial condition of the Borrower and its Subsidiaries taken as a whole; (b) no event of default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an event of default shall have occurred and be continuing in the performance of any affirmative and negative covenants contained in Article V of the U.S. Credit Agreement and regardless of whether such U.S. Credit -23- Agreement is terminated, unless in connection with such termination a replacement credit facility which the Required Lenders hereunder have approved is entered into in which case, the affirmative and negative covenants in such facility shall become the subject of this clause (b); and (c) none of the events described in clauses (a), (e), (f), (g), (h), (k), (l), (m) or (n) of Section 6.01 of the U.S. Credit Agreement (without giving effect to any termination of the U.S. Credit Agreement, unless in connection with such termination a replacement credit facility to which the Required Lenders hereunder have approved, in which case the analogous provisions of such replacement credit facility shall become the subject of this clause (c)), shall have occurred and be continuing. Section 5.2.2. Borrowing Request. The Agent shall have received a Borrowing Request (in the form of Exhibit B hereto) for such Credit Extension. Each of the delivery of a Borrowing Request and the acceptance by the Borrower of the proceeds of the Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Credit Extension (both immediately before and after giving effect to such Credit Extension and the application of the proceeds thereof) the statements made in (i) Section 5.2.1 and the representations and warranties contained in Article VI of this Agreement, and (ii) in the case of the initial Loan, the statements made in Section 5.1.3 and Section 5.1.4, are in each case true and correct. Section 5.2.3. Satisfactory Legal Form. All documents executed or submitted pursuant hereto by or on behalf of the Borrower or any of its Subsidiaries shall be satisfactory in form and substance to the Agent; the Agent shall have received all information, approvals, opinions, documents or instruments as the Agent may reasonably request. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Agent to enter into this Agreement and to make Loans and issue Letters of Credit hereunder, the Borrower represents and warrants unto the Agent and each Lender as set forth in this Article VI. -24- Section 6.1. Organization, etc. The Borrower is a corporation validly organized and existing and in good standing under the laws of the State of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect (as defined in the U.S. Credit Agreement), and has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its Obligations under this Agreement, the Notes and each other Loan Document to which it is a party and to own and hold under lease its property and to conduct its business substantially as currently conducted by it. Section 6.2. Due Authorization, Non-Contravention, etc. The execution, delivery and performance by the Borrower of this Agreement, the Notes and each other Loan Document executed or to be executed by it, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower; or (c) result in, or require the creation or imposition of, any Lien on any of the Borrower's properties. Section 6.3. Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrower of this Agreement, the Notes or any other Loan Document to which it is a party. Neither the Borrower nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 6.4. Validity, etc. This Agreement constitutes, and the Note and each other Loan Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium and other similar laws -25- affecting the enforcement of creditors rights generally and by general equity principles. Section 6.5. No Material Adverse Change. Since January 8, 1994, there has been no material adverse change in the business, prospects or financial condition of the Borrower and its Subsidiaries, taken a whole. Section 6.6. Litigation, Labor Controversies, etc. There is no pending or, to the knowledge of the Borrower, threatened litigation, action, proceeding, or labor controversy affecting the Borrower and its Subsidiaries, taken as a whole, or any of their respective properties, businesses, assets or revenues, which could reasonably be expected to materially adversely affect the financial condition, business or prospects of the Borrower and its Subsidiaries, taken as a whole, or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document. Section 6.7. Regulations G, U and X. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Loans will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation G, U or X. Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. Section 6.8. Accuracy of Information. All factual information heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Agent or any Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified and as of the date of execution and delivery of this Agreement by the Agent and such Lender, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. The parties acknowledge and agree that nothing contained in this Section shall constitute a representation or warranty by the Borrower as to the future financial performance or the results of operations of the Borrower; provided, however, that any projections delivered pursuant to this Agreement have been (and will be) prepared on the basis of the assumptions accompanying them, and such projections and assumptions, as of the date of preparation thereof and as of the date hereof, are reasonable and represent the Borrower's good faith estimate of its future financial performance. -26- ARTICLE VII COVENANTS Section 7.1. Affirmative Covenants. The Borrower agrees with the Agent and each Lender that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.1. Section 7.1.1. Financial Information, Reports, Notices, etc. Unless the information set forth below is otherwise delivered to a Lender under the terms of the U.S. Credit Agreement, the Borrower will furnish, or will cause to be furnished, to each Lender and the Agent copies of the following financial statements, reports, notices and information: (a) unaudited, quarterly, consolidated and/or consolidating financial statements of the Borrower within 45 days of the end of each of the first 3 Fiscal Quarters of each of its Fiscal Years, certified by an Authorized Officer of the Borrower; (b) audited, annual, consolidated and/or consolidating financial statements of the Borrower within 90 days of each Fiscal year; (c) on each date that a financial statement of the Borrower is deliverable to the Lenders, the certificate of the Borrower, signed by an Authorized Officer of the Borrower certifying that no Default or Event of Default under this Agreement has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement setting forth details of such Default or Event of Default and the actions that the Borrower has taken or proposes to take with respect thereto; (d) on each date that a financial statement of the Borrower is deliverable to the Lenders such financial calculations as are provided pursuant to the U.S. Credit Agreement; (e) as soon as possible and in any event within two Business Days after the occurrence of each Default, a statement of an Authorized Officer of the Borrower setting forth details of such Default and the action which the Borrower has taken and proposes to take with respect thereto; -27- (f) as soon as possible and in any event within two Business Days after (x) the occurrence of any adverse development with respect to any litigation, action, proceeding, or labor controversy described in Section 6.6 or (y) the commencement of any labor controversy, litigation, action, proceeding of the type described in Section 6.6, notice thereof and copies of all documentation relating thereto; (g) promptly after the sending or filing thereof, copies of all Forms 10Q and 10K reports and registration statements which the Borrower files with the Securities and Exchange Commission or any national securities exchange; and (h) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. Section 7.1.2. Corporate Existence. The Borrower will at all times maintain and preserve its corporate existence. ARTICLE VIII EVENTS OF DEFAULT Section 8.1. Listing of Events of Default. Each of the following events or occurrences described in this Section 8.1 shall constitute an "Event of Default". Section 8.1.1. Non-Payment of Obligations. The Borrower shall default in the payment or prepayment when due of (i) any principal of or interest on any Loan or (ii) any fee or of any other Obligation, and in each case such default in payment or prepayment shall continue unremedied for more than one Business Day from the date such payment or prepayment was due. Section 8.1.2. Breach of Warranty. Any representation or warranty of any Obligor made or deemed to be made hereunder or in any other Loan Document executed by it (including any certificates delivered pursuant to Article V) is or shall be incorrect when made or deemed made in any material respect. Section 8.1.3. Non-Performance of Certain Covenants and Obligations. The Borrower shall default in the due performance and observance of any of its obligations under Section 7.1.2 or under any other covenant which is impossible to remedy. -28- Section 8.1.4. Non-Performance of Other Covenants and Obligations. Any Obligor shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document executed by it, and such default shall continue unremedied for a period of ten Business Days after notice thereof shall have been given to such Obligor by the Agent or any Lender. Section 8.1.5. Default Under U.S. Credit Agreement. Any Event of Default (as defined in the U.S. Credit Agreement) or any replacement credit facility shall have occurred, and any or all of the Indebtedness of the Borrower thereunder shall have become due and payable in accordance with Sections 6.01 or 6.02 thereof (or similar section of any replacement credit facility). Section 8.1.6. Bankruptcy, Insolvency, etc. Any event or condition described in clause (f) of Section 6.01 of the U.S. Credit Agreement (or similar provision of any replacement credit facility) shall have occurred and be continuing. Section 8.1.7. Impairment of Guaranty. The Guaranty shall, in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of Group, or Group shall, directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability. Section 8.2. Action Upon Bankruptcy. If any Event of Default described in Section 8.1.6 shall occur, the Commitments (if not theretofore terminated) shall automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, without notice or demand. Section 8.3. Action Upon Other Event of Default. If any Event of Default (other than any Event of Default described in Section 8.1.6) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare all or any portion of the outstanding principal amount of the Loans and other Obligations in respect of the Loans or otherwise to be due and payable and/or the Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment, and/or, as the case may be, the Commitments shall terminate. -29- ARTICLE IX THE AGENT Section 9.1. Actions. Each Lender hereby appoints Scotiabank as its Agent under and for purposes of this Agreement, the Notes and each other Loan Document. Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement, the Notes and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, pro rata according to such Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement, the Notes and any other Loan Document, including reasonable attorneys' fees, and as to which the Agent is not reimbursed by the Borrower; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or wilful misconduct. The Agent shall not be required to take any action hereunder, under the Notes or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement, the Notes or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. Section 9.2. Copies, etc. The Agent shall give prompt notice to each Lender of each notice or request required or permitted to be given to the Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each document or instrument received for its account and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. -30- Section 9.3. Exculpation. Neither the Agent nor any of its directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Loan Document, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Loan Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. Section 9.4. Successor. The Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Required Lenders may appoint another Lender as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of (a) this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement; and (b) Section 10.3 and Section 10.4 shall continue to inure to its benefit. Section 9.5. Loans Made by Scotiabank. Scotiabank shall have the same rights and powers with respect to (x) the Loans -31- made by it or any of its affiliates, and (y) the Notes held by it or any of its affiliates, as any other Lender and may exercise the same as if it were not the Agent. Scotiabank and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if Scotiabank were not the Agent hereunder. Section 9.6. Credit Decisions. Each Lender acknowledges that it has, independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitment. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. ARTICLE X MISCELLANEOUS PROVISIONS Section 10.1. Waivers, Amendments, etc. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however, that no such amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this Section 10.1, change the definition of "Required Lenders", increase the Commitment Amount or the Percentage of any Lender, release the Guarantor from its obligations under the Guaranty, reduce any fees described in Article III or extend the Commitment Termination Date shall be made without the consent of each Lender and each holder of a Note; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or -32- rate of interest on any Loan) shall be made without the consent of the holder of that Note evidencing such Loan; or (d) affect adversely the interests, rights or obligations of the Agent in its capacity as the Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on any Obligor in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Agent, any Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. Section 10.2. Notices. All notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by Telex or by facsimile and addressed, delivered or transmitted to such party at its address, Telex or facsimile number set forth below its signature hereto or set forth in the Lender Assignment Agreement or at such other address, Telex or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by Telex or facsimile, shall be deemed given when transmitted (answer confirmed in the case of Telexes). Section 10.3. Payment of Costs and Expenses. The Borrower agrees to pay on demand all reasonable expenses of the Agent (including the reasonable fees and out-of-pocket expenses of counsel to the Agent and of local counsel, if any, who may be retained by counsel to the Agent) in connection with (a) the negotiation, preparation, execution and delivery of this Agreement and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Loan Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated, and -33- (b) the preparation and review of the form of any document or instrument relevant to this Agreement or any other Loan Document. The Borrower covenants to pay on demand all reasonable costs and expenses of the Agent and the Lenders incurred in the enforcement of the Agent's or any Lender's rights under this Agreement and any Loan Document. All payments to be made to the Agent and the Lenders hereunder shall, subject to Section 4.6, be made for value on the date due and free of any withholding tax or levy, other than taxes imposed on the net income of the Agent or a Lender, and the Borrower covenants that such taxes or levies, other than as excepted, shall be paid by the Borrower. The provisions of this paragraph will survive payment in full hereunder. Section 10.4. Indemnification. In consideration of the execution and delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; or (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (including any action brought by or on behalf of the Borrower as the result of any determination by the Required Lenders pursuant to Article V not to make any Credit Extension); except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or wilful misconduct. Section 10.5. Survival. The obligations of the Borrower under Sections 4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under Section 9.1, shall in each case survive any termination of this Agreement, the payment in full of -34- all Obligations and the termination of all Commitments. The representations and warranties made by the Borrower in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. Section 10.6. Severability. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. Section 10.7. Headings. The various headings of this Agreement and of each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. Section 10.8. Execution in Counterparts, Effectiveness, etc. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be executed by the Borrower and the Agent and be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterparts hereof executed on behalf of the Borrower and each Lender (or notice thereof satisfactory to the Agent) shall have been received by the Agent and notice thereof shall have been given by the Agent to the Borrower and each Lender. Section 10.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. This Agreement, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. Section 10.10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that: (a) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Agent and all Lenders; and -35- (b) the rights of sale, assignment and transfer of the Lenders are subject to Section 10.11. Section 10.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes. Each Lender may assign, or sell participations in, its Loans and Commitments to one or more other Persons in accordance with this Section 10.11. Section 10.11.1. Assignments. Any Lender, (a) with the written consents of the Borrower and the Agent (which consents shall not be unreasonably delayed or withheld) may at any time assign and delegate to one or more commercial banks or other financial institutions; and (b) with notice to the Borrower and the Agent, but without the consent of the Borrower or the Agent, may assign and delegate to any of its affiliates or to any other Lender or any Lender under the U.S. Credit Agreement (each Person described in either of the foregoing clauses as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee Lender"), all or a fraction of such Lender's total Loans and Commitments; provided, that after giving effect to such assignment or transfer, such Lender and its Assignee Lender shall each hold not less than $5,000,000 of Loans and/or Commitments; provided, further, that the Borrower shall not be required to pay an amount under Section 4.6 that is greater than the amount which it would have been required to pay had no assignment been made and further, provided, however, that, the Borrower and the Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until (c) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agent by such Lender and such Assignee Lender, (d) such Assignee Lender shall have executed and delivered to the Borrower and the Agent a Lender Assignment Agreement, accepted by the Agent, and (e) the processing fees described below shall have been paid. From and after the date that the Agent accepts such Lender Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the -36- extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the other Loan Documents, and (y) the assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents. Within five Business Days after its receipt of notice that the Agent has received an executed Lender Assignment Agreement with respect to the assignment of Loans, the Borrower shall execute and deliver to the Agent (for delivery to the relevant Assignee Lender) new Notes evidencing such Assignee Lender's assigned Loans and Commitments and, if the assignor Lender has Loans and Commitments hereunder, replacement Notes in the principal amount of the Loans and Commitments retained by the assignor Lender hereunder (such Notes to be in exchange for, but not in payment of, those Notes then held by such assignor Lender). Each such Note shall be dated the date of the predecessor Notes. The assignor Lender shall mark the predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest on that part of the predecessor Notes evidenced by the new Notes, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued interest on that part of the predecessor Notes evidenced by the replacement Notes shall be paid to the assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Notes and in this Agreement. Such assignor Lender or such Assignee Lender must also pay a processing fee to the Agent upon delivery of any Lender Assignment Agreement in the amount of $2,500. Any attempted assignment and delegation not made in accordance with this Section 10.11.1 shall be null and void. Nothing in this Section shall prevent or prohibit any Lender from pledging its rights (but not its obligations to make Loans and to issue or participate in Letters of Credit) under this Agreement and/or its Loans and/or Notes hereunder to a Federal Reserve Bank in support of borrowing made by such Lender from such Federal Reserve Bank. Section 10.11.2. Participations. Any Lender may at any time sell to one or more commercial banks or other Persons (each of such commercial banks and other Persons being herein called a "Participant") participating interests in any of the Loans, Commitments, or other interests of such Lender hereunder; provided, however, that (a) no participation contemplated in this Section 10.11 shall relieve such Lender from its Commitments or its other obligations hereunder or under any other Loan Document, -37- (b) such Lender shall remain solely responsible for the performance of its Commitments and such other obligations, (c) the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents, (d) no Participant, unless such Participant is an affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, take any actions of the type described in clause (b) or (c) of Section 10.1, and (e) the Borrower shall not be required to pay any amount under Section 4.6 that is greater than the amount which it would have been required to pay had no participating interest been sold. Section 10.12. Other Transactions. Nothing contained herein shall preclude the Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its affiliates in which the Borrower or such affiliate is not restricted hereby from engaging with any other Person. Section 10.13. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT -38- PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. Section 10.14. Waiver of Jury Trial. THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS, THE ISSUER OR THE BORROWER. THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT THEY HAVE RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THE BORROWER ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT, THE ISSUER AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. Section 10.15. Usury Restraint. The provisions of this Agreement shall be subject to any applicable law, regulation, order, rule or direction (a "Usury Restraint") which prohibits or restricts the charging, receipt or retention of interest or other amounts at the rates and amounts set forth herein (the "Stated Rate") in excess (the "Excess") of the maximum rates or amount (the "Maximum Rate") stipulated in the Usury Restraint. The provisions of this Agreement shall not require the payment or permit the collection of interest in excess of the Maximum Rate from time to time. If the Lenders comply (whether or not required to do so at law) with such Usury Restraint then, to the extent permitted by law, a subsequent reduction in the Stated Rate below the Maximum Rate shall be deemed not to reduce the Stated Rate below the Maximum Rate until the total amount of interest and other amounts earned and retained, measured by a dollar amount, equals the amount of interest and other amounts which would have been earned and retained hereunder, inclusive of the Excess, measured by a dollar amount, if the Stated Rate had not been held at the Maximum Rate or any amount had not been refunded to the Borrower. -39- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. WARNACO INC. By _________________________________ Title: Address: 90 Park Avenue New York, New York 10016 Facsimile No.: 212-687-0480 Attention: Chief Financial Officer THE BANK OF NOVA SCOTIA, as Agent By _________________________________ Title: Vice President Address: One Liberty Plaza New York, New York 10006 Facsimile No.: 212-225-5090 Attention: Kevin Clark -40- PERCENTAGE LENDERS LOANS 100% THE BANK OF NOVA SCOTIA By _________________________________ Title: Vice President Domestic Office: One Liberty Plaza New York, New York 10006 Facsimile No.: 212-225-5090 Attention: Kevin Clark LIBOR Office: One Liberty Plaza New York, New York 10006 Facsimile No.: 212-225-5090 Attention: Kevin Clark -41- EX-10 4 EXHIBIT 10.12 EXECUTION COPY AMENDMENT NO. 2 This AMENDMENT No. 2, dated as of October 28, 1994 among Warnaco Inc., a Delaware corporation (the "Borrower"), The Warnaco Group, Inc., a Delaware corporation ("Group"), the financial institutions party to the Credit Agreement referred to below (the "Lenders"), The Bank of Nova Scotia ("Scotiabank") and Citicorp USA, Inc. ("Citicorp"), as Managing Agents (the "Managing Agents") for the Lenders thereunder, Citicorp, as Documentation Agent (the "Documentation Agent") and Collateral Agent (the "Collateral Agent") for the Lenders thereunder and Scotiabank, as Paying Agent (the "Paying Agent") for the Lenders thereunder and as Swing Line Bank and an Issuing Bank thereunder. PRELIMINARY STATEMENTS: (1) The Borrower, Group, the Lenders, the Managing Agents, the Documentation Agent, the Collateral Agent and the Paying Agent have entered into a Credit Agreement dated as of October 14, 1993, as amended by Amendment No. 1 dated as of June 8, 1994 (as amended, the "Credit Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein). (2) The Borrower desires to further amend certain provisions of the Credit Agreement. (3) The Lenders are, on the terms and conditions stated below, willing to grant the request of the Borrower and the Borrower and the Lenders have agreed to further amend the Credit Agreement as hereinafter set forth. SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (a) The definition of "Applicable Margin" in Section 1.01 is amended by deleting the table contained therein and substituting therefor the following: Base Rate Eurodollar Rate Implied Debt Rating Advances Advances BB or below 0.500% 1.000% BB+ 0.250% 0.875% BBB- 0.000% 0.500% BBB or above 0.000% 0.450% 2 The definition of "Applicable Margin" is further amended by deleting the figure "1.500%" in the last sentence thereof and substituting therefor the figure "1.000%". (b) Section 2.07(a) is amended by deleting the table contained therein and substituting therefor the following: Implied Debt Rating Commitment Fee Rate BB or below 0.425% BB+ 0.375% BBB- 0.250% BBB or above 0.220% Section 2.07(a) is further amended by deleting the figure "0.500%" in the second sentence thereof and substituting therefor the figure "0.425%". (c) Section 2.11(e) is amended by deleting from the first sentence thereof the phrase "form 1001 or 4224, as appropriate, or any successor or alternative" and replacing it with the phrase "form 1001, 4224, or W-8, as appropriate, or any successor or other". (d) Section 2.11(e) is further amended by adding after the first sentence thereof the following sentence: "In addition, if a Lender provides a form W-8 (or any successor or related form) to the Documentation Agent and the Borrower pursuant to the preceding sentence, such Lender shall also provide a certificate stating that such Lender is not a "bank" within the meaning of section 881(c)(3)(A) of the Internal Revenue Code of 1986 and shall promptly notify the Documentation Agent and the Borrower if such Lender determines that it is no longer able to provide such certification." (e) Section 2.13(e) is amended by deleting the table contained therein and substituting therefor the following: Rate for Standby Rate for Documentary Implied Debt Rating Letters of Credit Letters of Credit BB or below 1.000% 0.750% BB+ 0.875% 0.625% BBB- 0.500% 0.450% BBB or above 0.450% 0.375% 3 Section 2.13(e) is further amended by deleting the figures "1.500%" and "1.250%" in the second sentence thereof and substituting therefor the figures "1.000%" and "0.750%", respectively. (f) Section 5.02(b)(v) is amended in full to read as follows: "(v) Debt of Group or the Borrower in respect of (A) interest rate Hedge Agreements in an aggregate notional amount at any time outstanding not to exceed the aggregate amount of Debt outstanding under this Agreement, provided that the maximum term of such Hedge Agreements shall not exceed three years and (B) foreign exchange Hedge Agreements in an aggregate notional amount not to exceed $50,000,000 at any time outstanding;" (g) Section 5.02(b)(vii) is amended by inserting at the end thereof, immediately before the semi-colon, the following: ", including, without limitation, and without duplication, Debt of Foreign Subsidiaries of the type referred to in clause (i) of the definition of "Debt" guaranteeing such Permitted Foreign Debt Issuances" (h) Section 5.02(b) is further amended by deleting the "and" at the end of clause (xv) thereof, replacing the period at the end of clause (xvi) with a semi-colon and adding the word "and" immediately thereafter, and by adding the following new clause (xvii) at the end thereof: "(xvii) Debt of the Borrower of the type referred to in clause (g) of the definition of "Debt" incurred in connection with Investments permitted by Section 5.02(f)." (i) Section 5.02(d) is amended by replacing the "and" at the end of clause (iii) thereof with a comma, replacing the semi-colon at the end of clause (iv) thereof with a comma and adding the word "and" immediately thereafter, and by adding the following new clause (v): "(v) after the Collateral Release Date, and subject to the provisions of Section 8.13, Group may consolidate with or merge into the Borrower or the Borrower may consolidate with or merge into Group." (j) Section 5.02(f)(i) is amended by deleting from the first sentence thereof the words "in wholly owned Subsidiaries". 4 (k) Section 5.02(g)(ii)(B) is amended in full as follows: "(B) declare and make any dividend payment or other distribution payable in cash on its common stock, or purchase, redeem, retire, defease or otherwise acquire for value any of its common stock (1) so long as the Implied Debt Rating is below BBB- or Group has received a rating lower than Baa3 from Moody's in an aggregate not to exceed in any Fiscal Year 10% of the Consolidated net income of Group and its Subsidiaries for the preceding Fiscal Year and (2) during such time as the Implied Debt Rating is at least BBB- or Group has received a rating from Moody's of at least Baa3, in an aggregate amount for all dividends or other distributions, or purchases, redemptions, retirements, defeasances or acquisitions made since the date of this Agreement not to exceed 25% of the cumulative Consolidated net income of Group and its Subsidiaries during the period beginning with the Fiscal Year ending on or about December 31, 1993 and ending with the Fiscal Year preceding the Fiscal Year in which such dividend payment or other distribution, or purchase, redemption, retirement, defeasance or acquisition is made;" (l) Section 5.02(g)(ii)(E) is amended by deleting therefrom the words "stock-for-stock acquisitions" and replacing them with the word "Investments". (m) Section 5.02(g)(iii)(D)(II) is amended in full to read as follows: "(II) to pay dividends permitted to be paid by Group, or to purchase, redeem, retire, defease or otherwise acquire for value its common stock, as permitted under clause (ii)(B) above." (n) Section 5.02(l)(ii) is amended by (i) deleting the word "and" before the words "any Debt outstanding on the date such Subsidiary first becomes a Subsidiary" and replacing it with a comma, and (ii) deleting the period at the end thereof and replacing it with the following: ", any purchase money Liens permitted under Section 5.02(a)(iv), and any Debt of Foreign Subsidiaries with respect to Permitted Foreign Debt Issuances permitted under Section 5.02(b)(vii), in each case under this subclause (ii) limited solely to the property securing any such Debt." SECTION 2. Conditions of Effectiveness. This Amendment shall become effective when, and only when, on or before October 28, 1994 (or such later date as may be 5 agreed between the Borrower and the Documentation Agent), the Documentation Agent shall have received (i) counterparts of this Amendment executed by the Borrower, Group and all of the Lenders or, as to any of the Lenders, advice satisfactory to the Documentation Agent that such Lenders have executed this Amendment, (ii) an amendment fee of 12.5 basis points calculated on the sum of the aggregate Revolving Credit Commitments outstanding as of the effective date of this Amendment, plus the then outstanding Term Advances, payable to the Paying Agent for the ratable benefit of the Lenders, and (iii) such other fees as may be set forth in that certain Letter dated October 7, 1994 from the Managing Agents to the Borrower, payable to the Paying Agent for the ratable benefit of the Managing Agents. SECTION 3. Representations and Warranties of the Borrower. Each of the Borrower and Group represents and warrants as follows: (a) Each Loan Party (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) is duly qualified and in good standing as a foreign corporation in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not have a Material Adverse Effect and (iii) has all requisite corporate power and authority to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) The execution, delivery and performance of this Amendment by each Loan Party party hereto and of the Consent by each Loan Party party thereto and of the Loan Documents, as amended hereby, to which such Loan Party is or is to be a party, and the consummation of the transactions contemplated hereby and thereby, are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party's charter or by-laws, (ii) violate any law (including, without limitation, the Securities Exchange Act of 1934 and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970), rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) except for the Liens created by the Collateral Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is 6 required for the due execution, delivery, recordation, filing or performance of this Amendment or the Consent by any Loan Party party thereto, or of any of the Loan Documents, as amended hereby, to which such Loan Party is or is to be a party, or for the consummation of the transactions contemplated hereby or thereby. (d) This Amendment has been, and the Consent when delivered hereunder will have been, duly executed and delivered by each Loan Party party thereto. This Amendment and each of the Loan Documents, as amended hereby, constitute, and the Consent when delivered hereunder will constitute, the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms. (e) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or threatened before any court, governmental agency or arbitrator that (i) purports to affect the legality, validity or enforceability of this Amendment, the Consent or any other Loan Document, as amended hereby or the consummation of the transactions contemplated hereby or thereby or (ii) except as set forth on Schedule 4.01(i) to the Credit Agreement, is or would be reasonably likely to have a Material Adverse Effect. There has been no adverse change in the status, or financial effect on any Loan Party or any of their Subsidiaries, of the Disclosed Litigation from that described on Schedule 4.01(i) to the Credit Agreement on the date thereof or except as has been disclosed to the Agents and the Lenders. SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof " or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement and the Notes, and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Agreements and all of the Collateral described therein do and shall continue to secure the payment of all obligations of the Loan Parties under the Credit Agreement, the Notes and the other Loan Documents, in each case as amended hereby. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender, either Managing Agent, the Documentation Agent, the Collateral Agent or the 7 Paying Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 5. Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses of the Agents in connection with the preparation, execution, delivery, administration, modification and amendment of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agents with respect thereto and with respect to advising the Agents as to its rights and responsibilities hereunder and thereunder. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, reasonable counsel fees an expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 5. SECTION 6. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same amendment. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. SECTION 7. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. WARNACO INC. By __________________________ Title: THE WARNACO GROUP, INC. By __________________________ Title: 8 THE BANK OF NOVA SCOTIA, as Managing Agent, Paying Agent, Swing Line Bank and an Issuing Bank By __________________________ Title: CITICORP USA, INC., as Managing Agent, Documentation Agent and Collateral Agent By __________________________ Title: Lenders THE BANK OF CALIFORNIA, N.A. By __________________________ Title: THE BANK OF NEW YORK By __________________________ Title: THE BANK OF NOVA SCOTIA By __________________________ Title: 9 CHEMICAL BANK By __________________________ Title: CITICORP USA, INC. By __________________________ Title: CREDIT SUISSE By __________________________ Title: By __________________________ Title: THE FUJI BANK, LTD. By __________________________ Title: GENERAL ELECTRIC CAPITAL CORPORATION By __________________________ Title: 10 IBJ SCHRODER BANK AND TRUST CO. By __________________________ Title: PROSPECT STREET SENIOR PORTFOLIO, L.P. By: Prospect Street Senior Loan Corp., Its Managing General Partner By __________________________ Title: RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS B.V. By __________________________ Title: STICHTING RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS 2 (ROSA2) By __________________________ Title: SHAWMUT BANK CONNECTICUT, N.A. By __________________________ Title: 11 SOCIETE GENERALE By __________________________ Title: THE SUMITOMO BANK, LTD., NEW YORK BRANCH By __________________________ Title: UNION BANK OF SWITZERLAND, NEW YORK BRANCH By __________________________ Title: MARINE MIDLAND BANK By __________________________ Title: CONSENT Dated as of October 28, 1994 Each of the undersigned, a wholly owned subsidiary of Warnaco Inc., a Delaware corporation, as a Guarantor under either the Guaranty dated October 14, 1993 or the Guaranty dated April 4, 1994 (collectively, the "Subsidiary Guaranty"), as a Grantor under either the Security Agreement dated October 14, 1993 or the Security Agreement dated April 14, 1994 (collectively, the "Security Agreement") and under either the Trademark, Patent and Copyright Security Agreement dated October 14, 1993 or the Trademark, Patent and Copyright Security Agreement dated April 14, 1994 (collectively, the "Trademark, Patent and Copyright Security Agreement") and as a Pledgor under either the Pledge Agreement dated as of October 14, 1993 or the Pledge Agreement dated as of April 14, 1994 (collectively, the "Pledge Agreement") in favor of the Collateral Agent for the Secured Parties (as defined in the Credit Agreement referred to in the foregoing Amendment No. 2), hereby consents to said Amendment No. 2 and hereby confirms and agrees that (i) each of the Subsidiary Guaranty, the Security Agreement, the Trademark, Patent and Copyright Security Agreement and the Pledge Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, said Amendment No. 2, each reference in each of the Subsidiary Guaranty, the Security Agreement, the Trademark, Patent and Copyright Security Agreement and the Pledge Agreement to the Loan Documents or any thereof, "thereunder", "thereof" or words of like import shall mean and be a reference to the Loan Documents or such Loan Document as amended by said Amendment No. 2 and (ii) the Security Agreement, the Trademark, Patent and Copyright Security Agreement and the Pledge Agreement and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Obligations (as defined therein). WARNACO INTERNATIONAL INC. By __________________________ Title: C.F. HATHAWAY COMPANY By __________________________ Title: 184 BENTON STREET INC. By __________________________ Title: WARNACO MEN'S SPORTSWEAR INC. By __________________________ Title: WARNACO SOURCING INC. By __________________________ Title: WARMANA LIMITED By __________________________ Title: WARNER'S de COSTA RICA INC. (and as successor by merger to Warnaco de Costa Rica Inc.) By __________________________ Title: BLANCHE INC. By __________________________ Title: CALVIN KLEIN MEN'S UNDERWEAR, INC. By __________________________ Title: EX-10 5 EXHIBIT 10.13 EXECUTION COPY AMENDMENT NO. 3 This AMENDMENT No. 3, dated as of December 5, 1994 among Warnaco Inc., a Delaware corporation (the "Borrower"), The Warnaco Group, Inc., a Delaware corporation ("Group"), the financial institutions party to the Credit Agreement referred to below (the "Lenders"), The Bank of Nova Scotia ("Scotiabank") and Citicorp USA, Inc. ("Citicorp"), as Managing Agents (the "Managing Agents") for the Lenders thereunder, Citicorp, as Documentation Agent (the "Documentation Agent") and Collateral Agent (the "Collateral Agent") for the Lenders thereunder and Scotiabank, as Paying Agent (the "Paying Agent") for the Lenders thereunder and as Swing Line Bank and an Issuing Bank thereunder. PRELIMINARY STATEMENTS: (1) The Borrower, Group, the Lenders, the Managing Agents, the Documentation Agent, the Collateral Agent and the Paying Agent have entered into a Credit Agreement dated as of October 14, 1993, (as amended or waived prior to the date hereof, the "Credit Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein). (2) The Borrower desires to further amend certain provisions of the Credit Agreement. (3) The Lenders are, on the terms and conditions stated below, willing to grant the request of the Borrower and the Borrower and the Lenders have agreed to further amend the Credit Agreement as hereinafter set forth. SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (a) Section 5.02(a)(vii)(A) is amended by deleting the words "to secure payment of Debt permitted under Section 5.02(b)(vi)(A)" and substituting therefor the following: "to secure payment of Debt incurred or issued pursuant to Section 5.02(b)(vi)(A) in an aggregate principal amount not to exceed $30,000,000". (b) Section 5.02(b)(vi)(A) is amended by deleting the figure "$30,000,000" set forth therein and substituting therefor the figure "$40,000,000". (c) Section 5.02(b)(vi)(A) is further amended by adding the following words at the end thereof: 2 "provided, further, that Group may guaranty such Debt provided that the aggregate principal amount of such guaranty shall not exceed $10,000,000, and". SECTION 2. Conditions of Effectiveness. This Amendment shall become effective as of the date first above written when, and only when, on or before December 16, 1994 (or such later date as may be agreed between the Borrower and the Documentation Agent), the Documentation Agent shall have received (i) counterparts of this Amendment executed by the Borrower, Group and the Required Lenders or, as to the Required Lenders, advice satisfactory to the Documentation Agent that such Lenders have executed this Amendment and (ii) counterparts of the Consent attached hereto, executed by each of the Loan Parties (other than the Borrower and Group). SECTION 3. Representations and Warranties of the Borrower. Each of the Borrower and Group represents and warrants as follows: (a) Each Loan Party (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) is duly qualified and in good standing as a foreign corporation in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not have a Material Adverse Effect and (iii) has all requisite corporate power and authority to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) The execution, delivery and performance of this Amendment by each Loan Party party hereto and of the Consent by each Loan Party party thereto and of the Loan Documents, as amended hereby, to which such Loan Party is or is to be a party, and the consummation of the transactions contemplated hereby and thereby, are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party's charter or by-laws, (ii) violate any law (including, without limitation, the Securities Exchange Act of 1934 and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970), rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties or (iv) except for the Liens created by the Collateral Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. 3 (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery, recordation, filing or performance of this Amendment or the Consent by any Loan Party party thereto, or of any of the Loan Documents, as amended hereby, to which such Loan Party is or is to be a party, or for the consummation of the transactions contemplated hereby or thereby. (d) This Amendment has been, and the Consent when delivered hereunder will have been, duly executed and delivered by each Loan Party party thereto. This Amendment and each of the Loan Documents, as amended hereby, constitute, and the Consent when delivered hereunder will constitute, the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms. (e) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or threatened before any court, governmental agency or arbitrator that (i) purports to affect the legality, validity or enforceability of this Amendment, the Consent or any other Loan Document, as amended hereby or the consummation of the transactions contemplated hereby or thereby or (ii) except as set forth on Schedule 4.01(i) to the Credit Agreement, is or would be reasonably likely to have a Material Adverse Effect. There has been no adverse change in the status, or financial effect on any Loan Party or any of their Subsidiaries, of the Disclosed Litigation from that described on Schedule 4.01(i) to the Credit Agreement on the date thereof or except as has been disclosed to the Agents and the Lenders. SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof " or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement and the Notes, and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Agreements and all of the Collateral described therein do and shall continue to secure the payment of all obligations of the Loan Parties under the Credit Agreement, the Notes and the other Loan Documents, in each case as amended hereby. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender, either Managing Agent, the Documentation Agent, the Collateral Agent or the 4 Paying Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 5. Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses of the Agents in connection with the preparation, execution, delivery, administration, modification and amendment of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agents with respect thereto and with respect to advising the Agents as to its rights and responsibilities hereunder and thereunder. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, reasonable counsel fees an expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 5. SECTION 6. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same amendment. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. SECTION 7. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. WARNACO INC. By __________________________ Title: THE WARNACO GROUP, INC. By __________________________ Title: 5 THE BANK OF NOVA SCOTIA, as Managing Agent, Paying Agent, Swing Line Bank and an Issuing Bank By __________________________ Title: CITICORP USA, INC., as Managing Agent, Documentation Agent and Collateral Agent By __________________________ Title: Lenders THE BANK OF CALIFORNIA, N.A. By __________________________ Title: THE BANK OF NEW YORK By __________________________ Title: THE BANK OF NOVA SCOTIA By __________________________ Title: 6 CHEMICAL BANK By __________________________ Title: CITICORP USA, INC. By __________________________ Title: CREDIT SUISSE By __________________________ Title: By __________________________ Title: THE FUJI BANK, LTD. By __________________________ Title: GENERAL ELECTRIC CAPITAL CORPORATION By __________________________ Title: 7 MARINE MIDLAND BANK By __________________________ Title: PROSPECT STREET SENIOR PORTFOLIO, L.P. By: Prospect Street Senior Loan Corp., Its Managing General Partner By __________________________ Title: RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS B.V. By __________________________ Title: SHAWMUT BANK CONNECTICUT, N.A. By __________________________ Title: SOCIETE GENERALE By __________________________ Title: THE SUMITOMO BANK, LTD., NEW YORK BRANCH By __________________________ Title: 8 UNION BANK OF SWITZERLAND, NEW YORK BRANCH By __________________________ Title: CONSENT Dated as of December 5, 1994 Each of the undersigned, a wholly owned subsidiary of Warnaco Inc., a Delaware corporation, as a Guarantor under either the Guaranty dated October 14, 1993 or the Guaranty dated April 4, 1994 (collectively, the "Subsidiary Guaranty"), as a Grantor under either the Security Agreement dated October 14, 1993 or the Security Agreement dated April 14, 1994 (collectively, the "Security Agreement") and under either the Trademark, Patent and Copyright Security Agreement dated October 14, 1993 or the Trademark, Patent and Copyright Security Agreement dated April 14, 1994 (collectively, the "Trademark, Patent and Copyright Security Agreement") and as a Pledgor under either the Pledge Agreement dated as of October 14, 1993 or the Pledge Agreement dated as of April 14, 1994 (collectively, the "Pledge Agreement") in favor of the Collateral Agent for the Secured Parties (as defined in the Credit Agreement referred to in the foregoing Amendment No. 3), hereby consents to said Amendment No. 3 and hereby confirms and agrees that (i) each of the Subsidiary Guaranty, the Security Agreement, the Trademark, Patent and Copyright Security Agreement and the Pledge Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, said Amendment No. 3, each reference in each of the Subsidiary Guaranty, the Security Agreement, the Trademark, Patent and Copyright Security Agreement and the Pledge Agreement to the Loan Documents or any thereof, "thereunder", "thereof" or words of like import shall mean and be a reference to the Loan Documents or such Loan Document as amended by said Amendment No. 3 and (ii) the Security Agreement, the Trademark, Patent and Copyright Security Agreement and the Pledge Agreement and all of the Collateral described therein do, and shall continue to, secure the payment of all of the Obligations (as defined therein). WARNACO INTERNATIONAL INC. By __________________________ Title: C.F. HATHAWAY COMPANY By __________________________ Title: 184 BENTON STREET INC. By __________________________ Title: WARNACO MEN'S SPORTSWEAR INC. By __________________________ Title: WARNACO SOURCING INC. By __________________________ Title: WARMANA LIMITED By __________________________ Title: WARNER'S de COSTA RICA INC.(and as successor by merger to Warnaco de Costa Rica Inc.) By __________________________ Title: BLANCHE INC. By __________________________ Title: CALVIN KLEIN MEN'S UNDERWEAR, INC. By __________________________ Title: EX-11 6 EXHIBIT 11.1 EXHIBIT 11.1 THE WARNACO GROUP, INC. CALCULATION OF INCOME (LOSS) PER COMMON SHARE
FOR THE YEAR ENDED ----------------------------------------- JANUARY 2, JANUARY 8, JANUARY 7, 1993 1994 1995 ----------- ----------- ----------- Income (loss) from continuing operations............................ $47,564,000 $53,253,000 $63,328,000 Preferred stock dividends........................................... 2,750,000 -- -- ----------- ----------- ----------- Income (loss) from continuing operations pertaining to common shareholders...................................................... $44,814,000 $53,253,000 $63,328,000 ----------- ----------- ----------- ----------- ----------- ----------- Loss from discontinued operations................................... ($7,443,000) -- -- ----------- ----------- ----------- ----------- ----------- ----------- Extraordinary items................................................. ($57,576,000) ($18,637,000) -- ----------- ----------- ----------- ----------- ----------- ----------- Cumulative effect of change in method of accounting for postretirement benefits other than pensions....................... -- ($10,500,000) -- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) applicable to common shareholders................. ($20,205,000) $24,116,000 $63,328,000 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average shares outstanding: Class A common shares outstanding.............................. 33,382,418 35,800,000 35,800,000 Shares issued for purchase of assets........................... -- -- 1,391,342 Common stock equivalents....................................... 4,727,032 3,970,482 4,205,031 Treasury shares repurchased.................................... -- -- (111,018) ----------- ----------- ----------- Total weighted average shares....................................... 38,109,450 39,770,482 41,285,355 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) per common share: Income (loss) from continuing operations....................... $1.18 $1.34 $1.53 Loss from discontinued operations.............................. (0.20) -- -- Extraordinary items............................................ (1.51) (0.47) -- Cumulative effect of change in method of accounting for postretirement benefits...................................... -- (0.26) -- ----------- ----------- ----------- Income (loss) per common share...................................... ($0.53) $0.61 $1.53 ----------- ----------- ----------- ----------- ----------- -----------
EX-23 7 EXHIBIT 23.1(A) EXHIBIT 23.1(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement and related Reoffer Prospectus (Form S-8 No. 33-58146) pertaining to the Amended and Restated 1988 Employee Stock Purchase Plan of The Warnaco Group, Inc. of our report dated February 23, 1995, with respect to the consolidated financial statements and schedule of The Warnaco Group, Inc. included in its Annual Report (Form 10-K) for the year ended January 7, 1995. ERNST & YOUNG LLP New York, New York April 7, 1995 EX-23 8 EXHIBIT 23.1(B) EXHIBIT 23.1(b) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-58148) pertaining to the 1991 Stock Option Plan of The Warnaco Group, Inc. of our report dated February 23, 1995, with respect to the consolidated financial statements and schedule of The Warnaco Group, Inc. included in its Annual Report (Form 10-K) for the year ended January 7, 1995. ERNST & YOUNG LLP New York, New York April 7, 1995 -----END PRIVACY-ENHANCED MESSAGE-----