<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
90 PARK AVENUE
NEW YORK, NEW YORK 10016
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(212) 661-1300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
THE WARNACO GROUP, INC.
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: VICE PRESIDENT AND GENERAL COUNSEL
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common Stock as of
May 12, 2000 is as follows: 53,243,388.
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, JANUARY 1,
2000 2000
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,023 $ 9,328
Accounts receivable less reserves of $21,513 and $32,872,
respectively 342,995 314,961
Marketable securities 700 72,921
Inventories 734,705 734,439
Other current assets 70,748 66,015
----------- -----------
Total current assets 1,151,171 1,197,664
Property, plant and equipment (net of accumulated depreciation
of $167,424 and $152,946, respectively) 346,195 326,352
----------- -----------
Other assets:
Excess of cost over net assets acquired - net 837,573 842,262
Other assets - net 338,375 337,997
Deferred income taxes 68,737 58,710
----------- -----------
Total other assets 1,244,685 1,238,969
----------- -----------
$ 2,742,051 $ 2,762,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 11,554 $ 11,052
Short-term debt 160,966 133,752
Accounts payable 547,425 599,768
Accrued liabilities 109,550 111,262
Accrued income tax payable 16,700 16,217
Deferred income taxes 7,468 7,468
----------- -----------
Total current liabilities 853,663 879,519
----------- -----------
Long-term debt 1,179,264 1,187,951
----------- -----------
Other long-term liabilities 54,945 29,295
----------- -----------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities ($120,000 -- par value) of Designer Finance Trust Holding
Solely Convertible Debentures 103,025 102,904
----------- -----------
Stockholders' equity:
Common stock: $.01 par value 654 654
Additional paid-in capital 961,368 961,368
Accumulated other comprehensive income (loss) (12,902) 24,877
Deficit (75,212) (99,461)
Treasury stock, at cost (313,138) (313,138)
Unearned stock compensation (9,616) (10,984)
----------- -----------
Total stockholders' equity 551,154 563,316
----------- -----------
$ 2,742,051 $ 2,762,985
=========== ===========
</TABLE>
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
-2-
<PAGE>
THE WARNACO GROUP, INC
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
APRIL 1, APRIL 3,
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenues $ 606,988 $ 444,103
Cost of goods sold 425,418 290,014
--------- ---------
Gross profit 181,570 154,089
Selling, general and administrative expenses 138,238 101,874
Other operating expenses 6,547 -
--------- ---------
Operating income 36,785 52,215
Investment income (42,782) --
Interest expense 33,852 16,833
--------- ---------
Income before provision for income taxes 45,715 35,382
Provision for income taxes 17,143 12,490
--------- ---------
Net income $ 28,572 $ 22,892
========= =========
Basic earnings per common share $ 0.54 $ 0.39
========= =========
Diluted earnings per common share $ 0.53 $ 0.39
========= =========
Cash dividends declared per share of common stock $ 0.09 $ 0.09
========= =========
Shares used in computing earnings per share:
Basic 52,787 58,092
========= =========
Diluted 53,425 59,354
========= =========
</TABLE>
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
APRIL 1, APRIL 3,
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net income $ 28,572 $ 22,892
Adjustments to reconcile net income
to net cash from operating activities:
Pre-tax gain on sale of investment (42,782) -
Depreciation and amortization 23,055 13,785
Amortization of unearned stock compensation 1,368 1,431
Deferred income taxes 14,390 11,442
Change in operating assets and liabilities:
Accounts receivable (28,034) (62,801)
Inventories (266) (73,691)
Other current assets (3,861) (9,662)
Accounts payable and accrued liabilities (55,346) (30,529)
Accrued income taxes 483 119
--------- ---------
Net cash from operating activities (62,421) (127,014)
--------- ---------
Cash flow from investing activities:
Disposals of fixed assets 367 -
Purchase of property, plant & equipment (34,850) (1,765)
Proceeds from sale of marketable securities 50,357 -
Increase in intangible and other assets (3,997) (10,223)
--------- ---------
Net cash from investing activities 11,877 (11,988)
--------- ---------
Cash flow from financing activities:
Net borrowing under credit facilities 24,748 197,604
Proceeds from the exercise of stock options - 63
Proceeds from termination of interest rate swaps 26,076 -
Purchase of treasury shares - (38,917)
Repayments of debt (3,913) (3,500)
Cash dividends paid (4,791) (5,304)
Other (174) (453)
--------- ---------
Net cash from financing activities 41,946 149,493
--------- ---------
Effect on cash due to currency translation 1,293 (3,922)
--------- ---------
Increase (decrease) in cash (7,305) 6,569
Cash at beginning of period 9,328 9,495
--------- ---------
Cash at end of period $ 2,023 $ 16,064
========= =========
</TABLE>
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
-4-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all adjustments (all of
which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of April 1, 2000 as well as its results of
operations and cash flows for the periods ended April 1, 2000 and April 3, 1999.
Operating results for interim periods may not be indicative of results for the
full fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K/A for the fiscal year ended January 1, 2000. Certain amounts for prior
periods have been reclassified to be comparable with the current period
presentation.
Impact of New Accounting Standards: In March 2000, the Emerging Issues Task
Force issued Issue 00-7 "Accounting application of EITF Issue No. 96-13,
`Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock,' to Equity Derivative Transactions That
Require Net Cash Settlement If Certain Events Occur". This EITF will require the
Company to mark to market the Equity Forward Purchase Transaction Agreements
the ("Equity Agreements") entered into in the first quarter of fiscal 2000
unless the Company amends such agreements by December 31, 2000 to remove
provisions which require net cash settlement.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the FASB issued SFAS 137
"Deferral of the effective date of FASB Statement No. 133" delaying the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
The Company is evaluating the application of the new statement and the impact
on the Company's consolidated financial position, liquidity, cash flows and
results of operations.
Long-term debt: As of April 1, 2000, the Company has excluded short-term
obligations totaling $483,008 from current liabilities because it intends to
refinance this obligation on a long-term basis. The Company has the ability to
consummate the refinancing by utilizing long-term commitments in place as of
April 1, 2000.
Other operating expense: In the first quarter of fiscal 2000, the Company
recorded severance costs of $6,547 related to cost saving initiatives and
programs involving 136 employees. The Company paid $3,894 in severance during
the first quarter and $2,653 was accrued at April 1, 2000 for remaining
severance obligations which are expected to be paid by the end of fiscal 2000.
NOTE 2 - EQUITY
As of April 1, 2000 and January 1, 2000, Class A common stock outstanding was
53,231,173 shares, net of 12,163,650 shares held in treasury and 53,229,388
shares, net of 12,163,650 held in treasury, respectively. The Company may
repurchase an additional 10.3 million shares under the existing stock repurchase
program.
-5-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
In connection with the Company's Stock Buyback Program, the Company entered into
Equity Agreements with two banks for terms of up to two and one-half years. The
Equity Agreements allow for the purchase by the Company of up to 5.2 million
shares of the Company's Common Stock. The Equity Agreements are required to be
settled by the Company, in a manner elected by the Company, on a physical
settlement, cash settlement or net share settlement basis within the duration
of the Equity Agreements. The Equity Agreements require net cash settlement in
an event of default, as defined. As of April 1, 2000, the banks had purchased
5.2 million shares under the Equity Agreements. As of April 1, 2000, the prices
at which the Company would effect physical settlement or settle in cash or in
net shares with the two banks under the Equity Agreements are $10.46 and $12.39.
Dividends on the shares outstanding under the Equity Agreements are reimbursed
to the Company. If these Equity Agreements were settled on a net cash basis at
April 1, 2000, the Company would be entitled to receive $2,000 based on
the closing price of the Company's stock.
NOTE 3 - RESTRUCTURING, SPECIAL CHARGES AND OTHER NON-RECURRING ITEMS
1998
As a result of a strategic review of the Company's businesses, manufacturing and
other facilities, product lines and styles and worldwide operations following
significant acquisitions in 1996 and 1997, in the fourth quarter of 1998 the
Company initiated the implementation of programs designed to streamline
operations and improve profitability. These programs resulted in charges
related to costs to exit certain product lines and styles, as well as facilities
and realignment of manufacturing and distribution activities, including charges
related to inventory write-downs and employee termination and severance
benefits. In the first quarter of fiscal 2000, the Company paid in cash the
remaining $337 reserve related to employee termination and severance.
NOTE 4 - FINANCIAL INSTRUMENTS
During 1998 and 1999, the Company invested $7,575 to acquire an interest in
InterWorld Corporation, a leading provider of E-Commerce software systems and
other applications for electronic commerce sites. In the first quarter of fiscal
2000 the Company sold its investment in InterWorld Corporation resulting in a
realized pre-tax gain of $42,782 ($25,862 net of taxes), which is recorded as
investment income.
In the first quarter of fiscal 2000, the Company received cash proceeds of
$26,076 from the termination of certain interest rate swaps. Three of these
swaps had converted variable rate borrowings of $610,000 to a fixed rate of
5.99% through September 2004 while a fourth swap had converted variable rate
borrowings of $75,000 to a fixed rate of 6.66% through September 2003. The
$26,076 gain from the termination of these swaps will be recognized in
interest income over the remaining life of the swaps.
The Company entered into five new interest rate swaps during the first quarter
of fiscal 2000 which convert variable rate borrowings of $637,000 to an
average fixed rate of 6.65% for periods ranging from nine to twelve months.
-6-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 5 - ACQUISITIONS
AUTHENTIC FITNESS CORPORATION
In December 1999, the Company acquired all of the outstanding common stock of
Authentic Fitness Corporation ("Authentic Fitness") for $437,100, excluding debt
assumed of approximately $154,170 and other costs incurred in the acquisition of
$3,255. The acquisition (all of which was financed) was accounted for as a
purchase. Accordingly, the accompanying consolidated financial statements
include the results of operations for Authentic Fitness commencing on December
16, 1999. The preliminary allocation of the total purchase price, exclusive of
cash acquired of approximately $7,000, to the fair value of the net assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Fair value of assets acquired...........................$ 674,256
Liabilities assumed..................................... (79,731)
---------
Purchase price -- net of cash balances..................$ 594,525
=========
</TABLE>
Included in intangible and other assets for the Authentic Fitness acquisition is
$372,700 of goodwill which is being amortized over 40 years. The final
assessment of the purchase accounting will be completed during fiscal 2000.
The following summarized unaudited pro forma information combines financial
information of the Company with Authentic Fitness for the three months ended
April 1, 2000 and April 3, 1999, respectively, assuming the acquisition had
occurred as January 2, 1999. The unaudited pro-forma information does not
reflect any cost savings or other benefits anticipated by the Company's
management as a result of the acquisition. The unaudited pro-forma information
reflects interest expense on the additional financing of $437,100 incurred for
the acquisition and the amortization of goodwill using a 40-year life.
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
April 1, April 3,
2000 1999
------------- -------------
<S> <C> <C>
Statement of Income Data:
Net revenues $607.0 $586.7
Net income $ 28.6 $ 29.9
======= =======
Basic earnings per common share $ 0.54 $ 0.52
======= =======
Diluted earnings per common share $ 0.53 $ 0.50
======= =======
</TABLE>
The unaudited pro-forma combined information is not necessarily indicative of
the results of operations of the combined companies, had the acquisition
occurred on the dates specified above, nor is it indicative of future results of
operations for the combined companies at any future date or for any future
periods.
-7-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
A.B.S. CLOTHING COLLECTION, INC.
In September 1999, the Company acquired the outstanding common stock of A.B.S.
Clothing Collection, Inc. ("ABS"). ABS is a leading contemporary designer of
casual sportswear and dresses sold through better department and specialty
stores. The purchase price consisted of a cash payment of $29,500, shares of the
Company's common stock with a fair market value of $2,200 and a deferred cash
payment of $22,800 and other costs incurred in the acquisition of approximately
$1,208. The acquisition was accounted for as a purchase. The preliminary
allocation of the purchase price to the fair value of assets acquired and
liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $59,720
Liabilities assumed (4,012)
-------
Purchase price $55,708
=======
</TABLE>
The acquisition did not have a material pro-forma impact on 1999 consolidated
earnings. Included in intangibles and other assets for the A.B.S. acquisition is
$54,068 of goodwill, which is being amortized over 20 years. The final
assessment of the purchase accounting will be completed during fiscal 2000.
NOTE 6 - INVENTORY
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
APRIL 1, JANUARY 1,
2000 2000
------------- --------------
<S> <C> <C>
Finished goods $564,666 $563,583
Work in process 96,062 89,422
Raw materials 73,977 81,434
--------- ---------
$734,705 $734,439
========= =========
</TABLE>
-8-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 7 - SUMMARIZED FINANCIAL INFORMATION - DESIGNER HOLDINGS LTD.
The following is summarized unaudited financial information of the Company's
wholly-owned subsidiary, Designer Holdings Ltd, as of April 1, 2000 and January
1, 2000 and for the three months ended April 1, 2000 and April 3, 1999,
respectively, which is presented as required by reason of the public preferred
securities issued by Designer Holdings. Designer Holdings, acquired by the
Company in the fourth quarter of 1997, develops, manufactures and markets
designer jeanswear and sportswear for men, women and juniors and holds a 40-year
extendable license from Calvin Klein, Inc. to develop, manufacture and market
designer jeanswear and jeans related sportswear collections in North, South and
Central America under the Calvin Klein Jeans(R), CK Calvin Klein Jeans(R), and
CK/Calvin Klein/Khakis(R) labels. In the first quarter fiscal 2000 the Company
paid in cash the remaining $209 reserve related to employee severance and other
related costs.
The information below is not indicative of the future operating results.
<TABLE>
<CAPTION>
BALANCE SHEET SUMMARY:
APRIL 1, JANUARY 1,
2000 2000
------------ -------------
<S> <C> <C>
Current assets $183,336 $160,296
Noncurrent assets 497,505 549,090
Current liabilities 65,770 107,408
Noncurrent liabilities 33,761 29,168
Redeemable preferred securities 103,025 102,904
Stockholders' equity 478,285 469,906
<CAPTION>
INCOME STATEMENT SUMMARY: THREE MONTHS ENDED
--------------------------------
APRIL 1, APRIL 3,
2000 (a) 1999 (a)
------------ -------------
Net revenues $118,791 $119,750
Cost of goods sold 82,989 80,363
Net income 8,379 11,001
</TABLE>
(a) Excludes net revenues of $20,230 and $15,640 for the three months of fiscal
2000 and 1999 respectively, reported as Retail Store division net revenues.
As a result of the integration of Designer Holdings into the operations of
the Company, cost of goods sold and net income associated with these net
revenues cannot be separately identified.
-9-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 1, APRIL 3,
2000 1999
-------------- --------------
<S> <C> <C>
Cash paid for:
Interest, including $365 and $770 capitalized in the first
quarter of fiscal 2000 and 1999, respectively $34,723 $16,311
Income taxes, net of refunds received 2,374 3,800
</TABLE>
NOTE 9 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
APRIL 1, APRIL 3,
2000 1999
--------------- ---------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net income $28,572 $22,892
======= =======
Denominator for basic earnings per share -- weighted
average shares 52,787 58,092
------- -------
Effect of dilutive securities:
Employee stock options 14 216
Restricted stock shares 430 445
Shares under equity agreements 194 601
-------- -------
Dilutive potential common shares 638 1,262
-------- -------
Denominator for diluted earnings per share -
weighted average adjusted shares 53,425 59,354
======== =======
Basic earnings per share $ 0.54 $ 0.39
======= =======
Diluted earnings per share $ 0.53 $ 0.39
======= =======
</TABLE>
Options to purchase shares of common stock that were outstanding during the
three month period of fiscal 2000 and 1999 but were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price of the common shares are shown below.
<TABLE>
<CAPTION>
APRIL 1, APRIL 3,
2000 1999
-------------- --------------
<S> <C> <C>
Number of shares under option 14,123,556 12,638,208
Range of exercise prices $13.13-$42.88 $25.50-$42.88
</TABLE>
-10-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
Incremental shares issuable on the assumed conversion of the preferred
securities (1,653,177 shares) were not included in the computation of diluted
earnings per share for any of the periods presented, as the impact would have
been antidilutive.
NOTE 10 - BUSINESS SEGMENTS
The Company operates in three segments: Sportswear and Accessories, Intimate
Apparel, and Retail Stores.
The Sportswear and Accessories segment designs, manufactures, imports and
markets moderate to premium priced men's, women's, junior's and children's
sportswear and Jeanswear, men's accessories and men's, women's, junior's and
children's active apparel under the Chaps by Ralph Lauren'r', Calvin Klein'r',
Catalina'r', A.B.S. by Allen Schwartz'r', Speedo'r', Oscar de la Renta'r', Anne
Cole'r', Cole of California'r', Sandcastle'r', Sunset Beach'r', Ralph Lauren'r',
Polo Sport Ralph Lauren'r', Polo Sport-RLX'r' and White Stag'r' brand names.
The Intimate Apparel segment designs, manufactures and markets moderate to
premium priced intimate apparel for women under the Warner's'r', Olga'r', Calvin
Klein'r', Lejaby'r', Van Raalte'r', Fruit of the Loom'r', Weight Watchers'r' and
Bodyslimmers'r' brand names, and men's underwear under the Calvin Klein'r'
brand name.
The Retail Store segment which is comprised of both outlet as well as full-price
retail stores, principally sells the Company's products to the general public
through 142 stores under the Speedo Authentic Fitness'r' name as well as 124
Company outlet stores for the disposition of excess and irregular inventory. The
Company does not manufacture or source products exclusively for the outlet
stores.
Information by business segment is set forth below:
<TABLE>
<CAPTION>
SPORTSWEAR
AND INTIMATE RETAIL
ACCESSORIES APPAREL STORES TOTAL
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Three months ended April 1, 2000:
- -----------------------------------------------
Net revenues $359,024 $199,899 $48,065 $606,988
Adjusted EBITDA 69,900 26,100 (9,100) 86,900
Depreciation 4,800 5,700 800 11,300
Adjusted EBIT 65,100 20,400 (9,900) 75,600
Three months ended April 3, 1999:
- -----------------------------------------------
Net revenues $208,262 $210,661 $25,180 $444,103
Adjusted EBITDA 33,800 47,700 700 82,200
Depreciation 2,200 4,400 600 7,200
Adjusted EBIT 31,600 43,300 100 75,000
</TABLE>
-11-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
A reconciliation of total segment Adjusted EBIT to total consolidated income
before taxes and cumulative effect of a change in accounting principle for the
three months ended April 1, 2000 and April 3, 1999, respectively, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
APRIL 1, APRIL 3,
2000 1999
------------ --------------
<S> <C> <C>
Total adjusted EBIT for reportable segments $ 75,600 $75,000
General corporate expenses not allocated 20,513 16,185
Other operating expenses 6,547 -
Depreciation of Corporate assets and amortization 11,755 6,600
Investment income (42,782) -
Interest expense 33,852 16,833
------------- ------------
Income before provision for income taxes $ 45,715 $35,382
============= ============
</TABLE>
NOTE 11 - COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 1, APRIL 3,
2000 1999
-------------- -------------
<S> <C> <C>
Net income $ 28,572 $22,892
-------------- -------------
Other comprehensive income (loss):
Foreign currency translation adjustments 1,293 (5,388)
Change in unrealized gains (64,635) 962
Income tax (expense)/benefit 25,563 (346)
---------------- --------------
Total other comprehensive (loss) (37,779) (4,772)
---------------- --------------
Comprehensive income (loss) $ (9,207) $18,120
================ ==============
</TABLE>
-12-
<PAGE>
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
(UNAUDITED)
The components of accumulated other comprehensive income (loss) as of April 1,
2000 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
APRIL 1, JANUARY 1,
2000 2000
----------------- ----------------
<S> <C> <C>
Foreign currency translation adjustments $(12,796) $(14,089)
Unrealized holding gains, net (106) 38,966
----------------- ----------------
Total accumulated other comprehensive income (loss) $(12,902) $24,877
================= ================
</TABLE>
NOTE 12 - LEGAL PROCEEDINGS
Between October 12, and October 13, 1999, six putative class action complaints
were filed in Delaware Chancery Court against the Company, Authentic Fitness
Corporation and certain of their officers and directors in connection with the
Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended Complaint")
was filed and on January 6, 2000 the court designated the Amended Complaint as
the operative complaint for a consolidated action captioned: In Re Authentic
Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC (consolidated).
In the Amended Complaint (and all six complaints made virtually identical
claims), plaintiffs allege an unlawful scheme by certain of the defendants, in
breach of their fiduciary duties, to allow the Company to acquire Authentic
Fitness shares for inadequate consideration. Plaintiffs are seeking to have the
court declare the action a proper class action, to declare that the defendants
have breached their fiduciary duties to the class, and in the event the
transaction is consummated, recission thereof and damages awarded to the Class.
The Company believes the claims to be without merit and intends to vigorously
defend these actions.
The Company is not a party to any other litigation, other than routine
litigation incidental to the business of the Company, that individually or in
the aggregate is material to the business of the Company.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS.
STATEMENT OF OPERATIONS (SELECTED DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
APRIL 1, APRIL 3,
2000 1999
--------------- ----------------
(Amounts in millions of dollars)
(Unaudited)
<S> <C> <C>
Net revenues $ 607.0 $ 444.1
Cost of goods sold 425.4 290.0
--------------- ----------------
Gross profit 181.6 154.1
% of net revenues 29.9 % 34.7 %
Selling, general and administrative expenses 138.3 101.9
Other operating expense 6.5 -
--------------- ----------------
Operating income 36.8 52.2
% to net revenues 6.1 % 11.8 %
Investment income (42.7) -
Interest expense 33.8 16.8
Provision for income taxes 17.1 12.5
--------------- ----------------
Net income $ 28.6 $ 22.9
=============== ================
</TABLE>
Net revenues increased $162.9 million or 36.7% to $607.0 million in the first
quarter of fiscal 2000 compared with $444.1 million in the first quarter of
fiscal 1999. Net revenues contributed by the 1999 acquisitions of Authentic
Fitness $(146.3) million, Chaps Canada $(3.2) million, and ABS $(11.6) million
amounted to $161.1 million. Discontinued brands accounted for a reduction in
net revenues of $2.2 million. In addition, the strength of the U.S. dollar
against the Euro accounted for a reduction of $3.8 million in net revenues.
Excluding the impact of all of these items, net revenues from continuing brands
increased approximately 2.0%.
SPORTSWEAR AND ACCESSORIES DIVISION. Net revenues increased $150.8 million
or 72.4% to $359.0 million in the first quarter of fiscal 2000 compared
with $208.3 million in the first quarter of fiscal 1999. Net revenues
contributed by the 1999 acquisitions of Authentic Fitness $(132.1) million,
Chaps Canada $(3.2) million and ABS $(11.6) million amounted to $146.9
million. Excluding acquisitions, net revenues increased $3.9 million or
1.9%. The increase in net revenue for continuing brands was generated by
the Chaps Division, which increased $3.9 million, and the CK Accessories
Division which increased $4.3 million. These increases were partially
offset in the Calvin Klein Jeans Division whose net revenues decreased by
$4.3 million primarily in its juniors business.
INTIMATE APPAREL DIVISION. Net revenues decreased $10.8 million or 5.1% to
$199.9 million in the first quarter of fiscal 2000 compared with $210.7
million in the first quarter of fiscal 1999. Discontinued brands accounted
for a reduction in net revenues of $2.2 million and the loss of three major
customers in 1999 (Uptons, Eaton's and Mercantile) accounted for a loss of
$8.0 million of net revenues. In addition, the strength of the U.S. dollar
against the Euro accounted for a reduction of $3.8 million in
- 14 -
<PAGE>
net revenues. Excluding the impact of all of these items, net revenues from
continuing brands increased 1.5%. Warner's and Olga decreased $9.4 million
primarily due to the loss the three major customers. Calvin Klein underwear
increased $3.5 million in the first quarter 1999. Lejaby net revenues
decreased $3.7 million due to the effect of the weakness of the Euro
against the U.S. dollar.
RETAIL STORE DIVISION. Net revenues increased $22.9 million or 90.9% to
$48.1 million in the first quarter of fiscal 2000 compared with $25.2
million in the first quarter of fiscal 1999. The acquisition of Authentic
Fitness contributed $14.2 million to net revenues. Excluding net revenues
of Authentic Fitness net revenues increased $8.7 million or 35.1% due to
a significant effort made to liquidate excess inventory and improve cash
flow.
Gross profit increased $27.5 million or 17.8% to $181.6 million in the first
quarter of fiscal 2000 compared with $154.1 million in the first quarter of
fiscal 1999. Gross margin was 29.9% in the first quarter of fiscal 2000 compared
with 34.7% in the first quarter of fiscal 1999. The decrease in gross margin is
attributable to markdowns taken in the first quarter of fiscal 2000 to reduce
inventories and improve cash flow.
SPORTSWEAR AND ACCESSORIES DIVISION Gross profit increased $49.2 million or
75.3% to $114.5 million in the first quarter of fiscal 2000 compared with
$65.3 million in the first quarter 1999. Gross margins were 31.9% in the
first quarter fiscal 2000 compared with 31.4% in the first quarter fiscal
1999. The increase in gross margin is due to higher margins in the
Authentic Fitness brands partially offset by markdowns taken in the first
quarter fiscal 2000 primarily to reduce Calvin Klein juniors inventories
and improve cash flow.
INTIMATE APPAREL DIVISION. Gross profit decreased $29.2 million or 36.8% to
$50.2 million in the first quarter of fiscal 2000 compared with $79.4
million in the first quarter 1999. Gross margins were 25.1% in the first
quarter fiscal 2000 compared with 37.7% in the first quarter fiscal 1999.
The decrease in gross margin is due to markdowns taken in the first quarter
fiscal 2000 to reduce inventories and improve cash flow.
RETAIL STORE DIVISION. Gross profit increased $7.5 million or 79.8% to
$16.9 million in the first quarter of fiscal 2000 compared with $9.4
million in the first quarter fiscal 1999. Gross margins were 35.1% in the
first quarter fiscal 2000 compared with 37.3% in the first quarter fiscal
1999. The decrease in gross margin is due to markdowns taken in the first
quarter of fiscal 2000 to reduce inventories and improve cash flow,
partially offset by higher margins in the Authentic Fitness retail stores.
Selling, general and administrative expenses increased $36.4 million or 35.7% to
$138.2 million as compared to $101.9 million in first quarter fiscal 1999.
Selling, general and administrative expenses as a percentage of net revenue were
22.8% in the first quarter of fiscal 2000 compared with 22.9% in the first
quarter fiscal 1999. The decreased selling, general and administrative expenses
as a percent of net sales is due primarily to cost saving initiatives
implemented in the Company, partially offset by higher depreciation and
amortization expense related to additional goodwill for acquisitions and
depreciation for systems implemented in fiscal 1999.
OPERATING PROFIT
SPORTSWEAR AND ACCESSORIES DIVISION. Operating profit increased $33.5
million or 106.0% to $65.1 million in the first quarter of fiscal 2000
compared with $31.6 million in the first quarter of fiscal 1999. The
increase in operating profit primarily was due to the acquisition of
Authentic Fitness, Chaps Canada and ABS.
INTIMATE APPAREL DIVISION. Operating profit decreased $22.9 million or
52.9% to $20.4 million in the first quarter of fiscal 2000 compared with
$43.3 million in the first quarter of fiscal 1999. The decrease
- 15 -
<PAGE>
in operating profit primarily was due to markdowns taken and other costs
incurred in the first quarter of fiscal 2000 to reduce inventories and
improve cash flow.
RETAIL STORE DIVISION. Operating loss increased $10.0 million to ($9.9)
million in the first quarter of fiscal 2000 compared with $0.1 million in
the first quarter fiscal 1999. The decrease in operating profit was due to
markdowns taken and other costs incurred in the first quarter of fiscal
2000 to reduce inventories and improve cash flow.
OTHER OPERATING EXPENSE. The Company recorded severance costs in the first
quarter of fiscal 2000, of $6.5 million related to cost saving initiatives and
programs involving 136 employees. The Company paid $3.9 million in severance
during the first quarter and $2.6 million was accrued at April 1, 2000 for
remaining severance obligations which are expected to be paid by the end
of fiscal 2000.
The Company earned $42.7 million ($25.9 net of taxes) in the first quarter of
fiscal 2000 from the sale of its equity investment in InterWorld Corporation.
Interest expense increased $17.0 million to $33.8 million in the first quarter
of fiscal 2000 compared with $16.8 million in the first quarter of fiscal 1999.
The increase reflects the funding of the Company's 1999 acquisitions and stock
buyback program, which totaled more than $800 million.
The provision for income taxes for the first quarter of fiscal 2000 reflects an
estimated full year effective tax rate of 37.5% compared to a full year
effective rate of 34.3% for fiscal 1999. The estimated full year effective
tax rate for fiscal 2000 is higher due to the increase in non-deductible
expenses resulting from the Company's 1999 acquisitions.
Net income for the first quarter fiscal 2000 was $28.6 million compared with net
income of $22.9 million in the first quarter of fiscal 1999.
CAPITAL RESOURCES AND LIQUIDITY.
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of its working capital needs, primarily inventory
and accounts receivable. The Company's borrowing requirements are seasonal, with
peak working capital needs generally arising during the first half of the fiscal
year. The Company typically generates nearly all of its operating cash flow in
the fourth quarter of the fiscal year reflecting third and fourth quarter
shipments and the sale of inventory built during the first six months of the
fiscal year.
Cash used in operations was $62.4 million in the first quarter of fiscal 2000
compared with cash used in operations of $127.0 million in the first quarter
of fiscal 1999. The substantial improvement in cash used by operating activities
of $64.6 million reflects the successful effort to liquidate inventory, which
improved by $73.4 million. The Company normally uses the greatest amount of cash
on working capital in the first quarter due to seasonal inventory requirements.
Cash provided by investing activities was $11.9 million for the first quarter of
fiscal 2000 compared with cash use of $(12.0) million in the first quarter of
fiscal 1999. The fiscal 2000 first quarter includes proceeds from the sale of
the Company's equity investment in InterWorld Corporation for $50.4 million.
Capital expenditures in the quarter were $34.9 million compared to $1.8 million
in the comparable 1999 period. The first quarter of fiscal 2000 includes amounts
for information systems implementations of $13.4 million and store fixture
programs of $12.0 million.
Cash provided by financing activities was $41.9 million in the first quarter of
fiscal 2000 compared with $149.5 million in the first quarter of fiscal 1999.
The increase in the Company's revolving credit balance during the first quarter
of fiscal 2000 of $24.7 million was substantially less than the $197.6 million
increase
- 16 -
<PAGE>
in the first quarter of fiscal 1999 due to the improvement in cash used by
operating activities as previously discussed. In addition, the Company received
$26.1 million in the first quarter 2000 from the termination of certain interest
rate swaps. The Company paid $38.9 million in the first quarter of 1999 for the
purchase of its shares in treasury. The Company paid $4.8 million of dividends
in the first quarter of fiscal 2000 compared to $5.3 million in the first
quarter of fiscal 1999.
The Company believes that funds available under its existing credit arrangements
and cash flow to be generated from future operations will be sufficient to meet
the working capital, share repurchase and capital expenditure needs of the
Company, including dividends and interest and principal payments on outstanding
debt obligations for the next twelve months and for the next several years.
NEW ACCOUNTING STANDARDS
In March 2000, the Emerging Issues Task Force issued Issue 00-7 "Accounting
application of EITF Issue No. 96-13, `Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to
Equity Derivative Transactions That Require Net Cash Settlement If Certain
Events Occur". This EITF will require the Company to mark to market the Equity
Forward Purchase Transaction Agreements entered into in the first quarter of
fiscal 2000 unless the Company amends such agreements by December 31, 2000 to
remove provisions which require net cash settlement.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the FASB issued SFAS 137
"Deferral of the effective date of FASB Statement No. 133" delaying the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
The Company is evaluating the application of the new statement and the impact
on the Company's consolidated financial position, liquidity, cash flows and
results of operations.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes forward-looking statements within the meaning of Section
27A of Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended which represent the Company's expectations or
beliefs concerning future events that involve risks and uncertainties, including
those associated with the effect of national and regional economic conditions,
the overall level of consumer spending, the performance of the Company's
products within the prevailing retail environment, customer acceptance of both
new designs and newly-introduced product lines, and financial difficulties
encountered by customers. All statements other than statements of historical
facts included in this quarterly report, including, without limitation, the
statements under Management's Discussion and Analysis of Financial Condition,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates, and selectively uses financial instruments to
manage these risks. The Company does not enter into financial instruments for
speculation or for trading purposes.
- 17 -
<PAGE>
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest rates
based primarily on its financing activities. The Company enters into interest
rate swap agreements, which have the effect of converting the Company's variable
rate obligations to fixed rate obligations, to reduce the impact of interest
rate fluctuations on cash flow and interest expense. As of April 1, 2000,
approximately $643.5 million of interest-rate sensitive obligations were swapped
to achieve an average fixed rate of 6.65%, limiting the Company's risk to any
future shift in interest rates. As of April 1, 2000, the net fair value asset of
all financial instruments (primarily interest rate swap agreements) with
exposure to interest rate risk was approximately $0.2 million. As of
April 1, 2000, the Company had approximately $1,325.6 million of obligations
subject to variable interest rates in excess of such obligations that had been
swapped to achieve a fixed rate. A hypothetical 10% adverse change in interest
rates as of April 1, 2000 would have had a $2.2 million unfavorable impact on
the Company's pre-tax earnings and cash flow over the three-month period.
Foreign Exchange Risk
The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
Hong Kong dollar, British pound and the Euro. The Company enters into foreign
currency forward and option contracts to mitigate the risk of doing business in
foreign currencies. The Company hedges currency exposures of firm commitments
and anticipated transactions denominated in non-functional currencies to protect
against the possibility of diminished cash flow and adverse impacts on earnings.
As of April 1, 2000, the net fair value asset of financial instruments with
exposure to foreign currency risk was $0.3 million. The potential decrease in
fair value resulting from a hypothetical 10% adverse change in quoted foreign
currency exchange rates would be approximately $1.7 million.
Equity Price Risk
The Company is subject to market risk from changes in its stock price as a
result of the Equity Agreements. The Equity Agreements allow for the
purchase by the Company of up to 5.2 million shares of the Company's Common
Stock from two banks. The Equity Agreements are required to be settled by the
Company, in a manner elected by the Company, on a physical settlement, cash
settlement or net share settlement basis within the duration of the Equity
Agreements. The Equity Agreements require net cash settlement in an event of
default, as defined. As of April 1, 2000, the banks had purchased 5.2 million
shares under the Equity Agreements. As of April 1, 2000, the prices at which the
Company would effect physical settlement or settle in cash or in net shares with
the two banks under the Equity Agreements are $10.46 and $12.39. Dividends on
the shares outstanding under the Equity Agreements are reimbursed to the
Company. If these Equity Agreements were settled on a net cash basis at April 1,
2000, the Company would be entitled to receive $2.0 million based on the closing
price of the Company's stock. Assuming a hypothetical 10% adverse change in the
Company's stock price, the Company would be required to make a payment of $3.6
million if these Equity Agreements were settled on a net cash basis at April 1,
2000.
- 18 -
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Between October 12, and October 13, 1999, six putative class action complaints
were filed in Delaware Chancery Court against the Company, Authentic Fitness
Corporation and certain of their officers and directors in connection with the
Company's proposed acquisition of Authentic Fitness.
On December 20, 1999, an Amended Class Action Complaint ("Amended Complaint")
was filed and on January 6, 2000 the court designated the Amended Complaint as
the operative complaint for a consolidated action captioned: In Re Authentic
Fitness Corporation Shareholders Litigation, C.A. No. 17464-NC (consolidated).
In the Amended Complaint (and all six complaints made virtually identical
claims), plaintiffs allege an unlawful scheme by certain of the defendants, in
breach of their fiduciary duties, to allow the Company to acquire Authentic
Fitness shares for inadequate consideration. Plaintiffs are seeking to have the
court declare the action a proper class action, to declare that the defendants
have breached their fiduciary duties to the class, and in the event the
transaction is consummated, recission thereof and damages awarded to the Class.
The Company believes the claims to be without merit and intends to vigorously
defend these actions.
The Company is not a party to any other litigation, other than routine
litigation incidental to the business of the Company, that individually or in
the aggregate is material to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Company held on May 4, 2000, the
shareholders voted on the following proposals:
PROPOSAL 1 -- Election of Directors
- ------------------------------------------------------
<TABLE>
<CAPTION>
FOR WITHHOLD AUTHORITY
Nominee listed at left to vote for Nominee listed at left
---------------------------- --------------------------------------
<S> <C> <C>
Linda J. Wachner 43,485,158 1,968,122
Andrew G. Galef 43,503,346 1,949,934
Stuart D. Buchalter 43,500,702 1,952,578
</TABLE>
PROPOSAL 2 -- Shareholder Proposal on Vendor Standards
- ------------------------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
2,803,484 27,299,325 1,522,648
- 19 -
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.37 -- Scotia Capital (U.S.A.) Inc. ("Party A"), The Warnaco Group,
Inc. ("Party B") Equity Forward Purchase Transaction.
10.38 -- SunTrust Bank ("Party A"), The Warnaco Group, Inc. ("Party B")
Equity Forward Purchase Transaction.
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on January 18, 2000 relating to the merger of
A Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of Warnaco, and Authentic Fitness Corporation, a Delaware Corporation
("Authentic Fitness").
A report on Form 8-K/A was filed on February 29, 2000, relating to the merger of
A Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Warnaco, and Authentic Fitness Corporation, a Delaware corporation ("Authentic
Fitness").
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WARNACO GROUP, INC.
Date: May 16, 2000 by: /s/ WILLIAM S. FINKELSTEIN
-----------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and Accounting
Officer
Date: May 16, 2000 By: /s/ STANLEY P. SILVERSTEIN
-----------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
- 21 -
STATEMENT OF DIFFERENCES
------------------------
Characters normally expressed as subscript shall be expressed as baseline
characters.
<PAGE>
[LOGO FOR SCOTIA CAPITAL]
SCOTIA CAPITAL (USA) INC.
ONE LIBERTY PLAZA, 165 BROADWAY, 26TH FLOOR, NEW YORK, NEW YORK 10006
December 10, 1999
The Warnaco Group, Inc.
90 Park Avenue
New York, New York 10016
Attention: Mr. Bill Finkelstein
Dear Sirs:
RE: SCOTIA CAPITAL (U.S.A.) INC. ("PARTY A")
THE WARNACO GROUP, INC. ("PARTY B")
EQUITY FORWARD PURCHASE TRANSACTION
The purpose of this facsimile is to set forth the terms and
conditions of the Transaction entered into between Party A and Party B on the
Trade Date specified below (the "Transaction"). This facsimile constitutes a
"Confirmation" as referred to in the ISDA Master Agreement specified below.
This Confirmation is subject to and incorporates the definitions
contained in the 1991 ISDA Definitions, as supplemented by the 1998 Supplement
(the "1991 ISDA Definitions"), and the 1996 ISDA Equity Derivatives Definitions
(the "Equity Definitions") (each as published by the International Swaps and
Derivatives Association, Inc. ("ISDA")) (collectively, the "ISDA Definitions").
This Confirmation is also subject to, and incorporates, the definitions
contained in Section 14 of the form of the 1992 ISDA Master Agreement
(Multicurrency - Cross Border) (the "Section 14 Definitions"), but without any
Schedule or other modification thereto, as published by ISDA (the "ISDA
Agreement"). In the event of any inconsistency between the ISDA Definitions, the
Section 14 Definitions and this Confirmation, this Confirmation will govern. In
the event of any inconsistency between the ISDA Definitions and the Section 14
Definitions, the Section 14 Definitions will govern. Until such time as an ISDA
Agreement is entered into between you and us, this Confirmation evidences a
complete and binding agreement between you and us as to the terms of the
Transaction to which this Confirmation relates. Upon execution by you and us of
an ISDA Agreement, with such ISDA Agreement incorporating such modifications as
you and we shall in good faith agree, this Confirmation will supplement, form
part of, and be subject to, such ISDA Agreement. All provisions contained in the
ISDA Agreement shall, upon its execution, govern this Confirmation except as
expressly modified below.
The following provisions in paragraphs 1 through 5 will govern the
Transaction evidenced hereby until such time as an ISDA Agreement is entered
into between you and us where upon such provisions shall be replaced by the
terms of the ISDA Agreement:
1
<PAGE>
2
1. MANNER OF PAYMENTS
Each party will make each payment specified in this Confirmation as being
payable by it, not later than the due date for value on that date in the place
specified below, in freely transferable funds and in the manner customary for
such payments in the required currency. If on any date amounts would otherwise
be payable in the same currency by each party to the other, then, on such date,
each party's obligation to make payment of any such amount will be automatically
satisfied and discharged and, if the aggregate amount that would otherwise have
been payable by one party exceeds the aggregate amount that would otherwise have
been payable by the other party, replaced by an obligation upon the party by
whom the larger aggregate amount would have been payable to pay to the other
party the excess of the larger aggregate amount over the smaller aggregate
amount.
2. DEFAULT
(a) If, at any time, an Event of Default has occurred and is then
continuing with respect to a party hereto (such party being hereinafter referred
to as the "Defaulting Party"), then the other party (hereinafter referred to as
the "Non-defaulting Party"), shall have the right to early terminate and
liquidate the Transaction evidenced hereby, together with all other Specified
Transactions entered into between Party A and Party B (collectively the
"Terminated Transactions") and determine a net amount due in respect of the
Terminated Transactions in accordance with the early termination payment
calculation provisions of Section 6(e)(i)(3) of the ISDA Agreement based on a
payment measure of Market Quotation and a payment method of Second Method. For
purposes of giving effect to the foregoing, the Termination Currency shall be
United States Dollars. For purposes hereof, "Event of Default" means, in the
context of Party A, (i) the failure to make, when due, any payment required of
it under this Confirmation and such failure is not remedied within three
Business Days following written notice of such failure, or (ii) the occurrence
with respect to Party A of any of the Bankruptcy events set out in Section
5(a)(vii) of the ISDA Agreement. In the context of Party B, "Event of Default"
means (i) the failure to make, when due, any payment required of it under this
Confirmation and such failure is not remedied within three Business Days
following written notice of such failure, (ii) the occurrence with respect to
Party B of any of the Bankruptcy events set out in Section 5(a)(vii) of the ISDA
Agreement, (iii) the occurrence of an "Event of Default" as such term is defined
in a Credit Agreement, dated as of November 19, 1999, made by and among Warnaco
Inc., The Warnaco Group, Inc., certain banks and financial institutions, as the
"Initial Lenders", The Bank of Nova Scotia and Salomon Smith Barney, Inc., as
"Co-Lead Arrangers" and "Co-Book Managers", Citibank, N.A., as "Syndication
Agent", Societe Generale and Commerzbank AG, as "Co-Documentation Agents" and
The Bank of Nova Scotia as "Administrative Agent", as amended and supplemented
from time to time (the "Credit Agreement"), (iv) Party B at any time during the
Term hereof effects with one or more counterparties (other than Party A),
forward equity purchase transactions pertaining to the purchase of Shares (as
defined below) on a forward basis having an aggregate forward purchase price
which, when combined with the product of the Number of Shares multiplied by the
Forward Price as on the Termination Date (each as defined below), exceeds USD
150,000,000 (the "Forward Price Limit"); provided, however, that an Event of
Default shall not be constituted pursuant to this Section 2(a)(iv) unless Party
B's breach of the Forward Price Limit is continuing as of the tenth Business Day
following the date on which such breach occurred; (v) the joint and several
guarantee, dated December 10, 1999, in the form appended hereto as Exhibit A
(the "Guarantee") made by the parties set out in the signature page thereof (the
"Guarantors") (x) fails or ceases to be in full force and effect prior to the
satisfaction by Party B of all of its obligations to Party A hereunder; or (z)
any of the Guarantors disaffirms, repudiates or rejects, in whole or in part, or
challenges the validity of the
<PAGE>
3
Guarantee; (vi) the occurrence of a default, event of default or other similar
condition or event (however described) in respect of Party B under any forward
equity purchase transaction pertaining to Shares which may now or hereafter be
entered into between Party B and any third party and such third party has
exercised any rights under such forward equity purchase transaction, which are
predicated upon the occurrence of such default, event of default or similar
condition or event, to terminate such transaction prior to its scheduled
termination date. Party B hereby covenants and agrees to notify Party A
immediately upon the occurrence of any such event and the exercise of such
termination rights.
(b) The Non-defaulting Party may exercise its right to early
termination and liquidate the Terminated Transactions by written notice to the
Defaulting Party, which notice shall set forth the amount of the termination
payment derived by the Non-defaulting Party as set forth above; provided that,
in the event the Defaulting Party becomes subject to a Bankruptcy in the nature
of any one of the events specified in Section 5(a)(vii) (1), (3), (4), (5), (6)
or, to the extent analogous thereto, (8), of the ISDA Agreement and any court,
tribunal or regulatory authority with competent jurisdiction acting pursuant to
any bankruptcy or insolvency law or other similar law affecting the Defaulting
Party makes an order which has or purports to have the effect of prohibiting the
Non-defaulting Party from terminating the Terminated Transactions at any time
after the occurrence of any such events, then the Terminated Transactions shall
be deemed to have been terminated immediately upon the occurrence of any of the
events specified in Section 5(a)(vii) (1), (3), (5), (6) or, to the extent
analogous thereto, (8) and as of the time immediately preceding the institution
of the relevant proceeding or the presentation of the relevant petition in
respect of Section 5(a)(vii) (4) or, to the extent analogous thereto, (8).
(c) In the event the termination payment derived in accordance with
the foregoing represents an amount owing by the Non-defaulting Party to the
Defaulting Party, the Non-defaulting Party shall have the right to set off such
termination payment against any amounts payable (whether at such time or in the
future or upon the occurrence of a contingency) by the Defaulting Party to the
Non-Defaulting Party (irrespective of the currency or the place of payment of
the obligation) under any other agreement between the Defaulting Party and the
Non-Defaulting Party (the "Other Agreement Amount"). For this purpose, the
termination payment or the Other Agreement Amount may be converted into the
currency in which the other is denominated by the Non-defaulting Party acting in
a commercially reasonable manner. If all or part of the Other Agreement Amount
is not then due, such Other Agreement Amount, or part thereof, may be
present-valued by the Non-defaulting Party acting in a commercially reasonable
manner. If all or part of the Other Agreement Amount is unascertained, the
Non-defaulting Party may in good faith estimate such amount and set-off in
respect of the estimate subject to accounting to the Defaulting Party when the
obligation is ascertained.
3. BASIC REPRESENTATIONS
Each of the parties hereto makes to the other each of the "Basic
Representations" contained in Section 3(a) and (c) of the ISDA Agreement.
4. TRANSFERABILITY
Neither this Confirmation nor any interest or obligation in or under
this Confirmation may be transferred (whether by way of security or otherwise)
by either party without the prior written consent of the other party and any
purported transfer in violation hereof shall be void.
<PAGE>
4
5. JURISDICTION
The Confirmation will be governed and construed in accordance with
the laws of the State of New York, without reference to the choice of law
doctrine. With respect to any suit, action or proceedings relating to this
Confirmation ("Proceedings"), each party irrevocably:
(i) submits to non-exclusive jurisdiction of the courts of the
State of New York; and
(ii) waives any objection which it may have at any time to the
laying of venue of any Proceedings brought in any such court,
waives any claim that such Proceedings have been brought in an
inconvenient forum and further waives the right to object,
with respect to such Proceedings, that such court does not
have any jurisdiction over such party. Nothing in this
Confirmation precludes either party from bringing Proceedings
in any other jurisdiction nor will the bringing of Proceedings
in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
6. TERMS
The terms of the particular Transaction to which this Confirmation
relates are as follows:
I. General Terms
Trade Date: December 10, 1999
Effective Date: December 10, 1999
Termination Date: February 28, 2002
Optional Termination Date: Any Business Day during the Term hereof after
the Accumulation Period End Date, as selected
by Party B in accordance with the Notice
provision of the Settlement Terms set out
below, provided that Party B may designate no
more than four Optional Termination Dates per
Calculation Period; provided further, however,
that in the event Party B designates an
Optional Termination Date in respect of which
Party B has elected settlement in accordance
with the Net Share Settlement or Cash
Settlement provisions set out below, Party B
shall not designate any further Optional
Termination Dates in respect of which Party B
intends to elect settlement by way of Net Share
Settlement or Cash Settlement until such time
as the settlement process specified below
(including the Make-whole provisions) in
respect of the initial Optional Termination
Date has been completed.
<PAGE>
5
Forward Purchase Seller: Party A
Forward Purchase Buyer: Party B
Exchange: New York Stock Exchange
Shares: The Warnaco Group, Inc. common shares, par
value $0.01 (Exchange designation "WAC"), CUSIP
No. 934390105, quoted in USD on the Exchange.
Accumulation Period: The period commencing on and including the
Effective Date to and including the earlier of
(x) the date by which Party A, or any U.S.
subsidiary of The Bank of Nova Scotia acquiring
Shares in respect of this Transaction (the
"Hedge Subsidiary"), has, by means of one or
more purchase transactions effected on the
Exchange through such period, either (i)
accumulated 2,600,000 Shares, or (ii) incurred
an aggregate purchase price equal to USD
47,000,000; or (y) the third Business Day
following the date on which Party B's notice to
Party A, given in accordance with Section 12 of
the ISDA Agreement, requesting the termination
of the Accumulation Period becomes effective in
accordance with Section 12 (the date on which
such accumulation is achieved, such aggregate
purchase price is incurred, or the third
Business Day following the effective date of
such notice (whichever is sooner) being the
"Accumulation Period End Date").
Notwithstanding the foregoing, Party B shall
have no right to terminate the Accumulation
Period until Party A has accumulated at least
1,000,000 Shares.
Party A shall provide to Party B, no sooner
than the third and no later than the fifth
Business Day following the trade date of each
purchase transaction, notice setting out the
purchase transaction effected by Party A or the
Hedge Subsidiary on the relevant trade date.
Party A shall notify Party B of Party A's
calculation of the Initial Price on or before
the third Business Day following the
Accumulation Period End Date.
Number of Shares: In respect of any Business Day within the Term
hereof, the aggregate number of Shares yielded
pursuant to Party A's or the Hedge Subsidiary's
purchase program as referenced in the
"Accumulation Period" provision above, less the
aggregate of the Relevant Share Numbers for all
previous partial settlements (as contemplated
by the Settlement Terms) effected prior to the
relevant date of determination.
Business Days: London and New York
<PAGE>
6
Period End Dates: The Period End Dates shall be the last Business
Day of February, May, August and November,
beginning after the Accumulation Period End
Date, up to and including the Termination Date
or the Optional Termination Date.
Overnight Rate: "Fed Funds O/N" ASK (offer) rate as quoted on
Telerate Page 4833 as of 16:10 (New York time)
on the relevant day of determination.
Spread: Plus 137.5 basis points (1.375%); provided,
however, that if at any time during the Term
hereof Party B enters into a transaction with
any other counterparties having terms which are
substantially similar to the terms hereof, the
Spread applicable to this Transaction shall be
the higher of (i) the Spread set out above, or
(ii) the Spread provided for in such similar
transaction.
Daily Forward Amount: For each day of the Accumulation Period, the
Calculation Agent shall determine an amount
(the "Daily Forward Amount") in accordance with
the following formula:
[Daily Forward Amount i-1+ (Number of Settled
Shares i x WAP i)] x [1 + (Accumulation Period
Floating Rate i / 360)]
where, "Daily Forward Amount i-1" means the
Daily Forward Amount determined in respect of
the day preceding the relevant day of
determination, "Number of Settled Shares i"
means the number of Shares settled by Party A
or the Hedge Subsidiary on the relevant date of
determination; "WAP i" means the weighted
average of the respective purchase prices per
Share, each in USD, including a commission of
USD 0.045 per Share, of all Share purchase
transactions settled by Party A or the Hedge
Subsidiary on the relevant date of
determination, which weighted average shall be
determined by multiplying each purchase price
by the number of Shares to which such purchase
price is applicable, aggregating the products
thereof and dividing such sum by the total
number of purchased Shares; and "Accumulation
Period Floating Ratei" means the Overnight Rate
in effect as of the relevant date of
determination, plus the Spread noted above. For
purposes of giving effect to the foregoing,
Overnight Rate for any day that is a not
Business Day shall be the Overnight Rate in
effect on the first Business Day preceding such
day.
Initial Price: The Initial Price shall be the Daily Forward
Amount determined in respect of the
Accumulation Period End Date divided by the
Number of Shares.
<PAGE>
7
Forward Period: The period commencing on, but excluding, the
Accumulation Period End Date, to but excluding
the Termination Date.
Forward Rate: "Zero Coupon USD Swap Rate" quoted on the day
which is two London Banking Days prior to the
first Business Day of the Forward Period (the
"Determination Date"), for a Designated Maturity
equal to the actual number of days in Forward
Period, plus Spread.
Zero Coupon
USD Swap Rate: The fixed rate of interest (a) that would be
paid by the Fixed Rate Payer on a USD interest
rate swap in which (i) the Floating Rate Payer
makes quarterly payments, in arrears, on the
Period End Dates at the 3-month USD-LIBOR-BBA
rate (appropriately interpolated in the event
the first Calculation Period following the
Accumulation Period is less than three months);
(ii) the Fixed Rate Payer's payments are
compounded quarterly and paid on the Termination
Date only; (iii) the Day Count Fraction for both
Fixed and Floating Rate Payers is Actual / 360
and (b) which would impart to same swap a
mark-to-market value of zero at inception.
Forward Price: The Forward Price on each Optional Termination
Date or the Termination Date, shall be
calculated as follows:
[1 + (Forward Rate x Day Count / 360)] x
Initial Price
where "Day Count" is the number of days in the
period commencing on and including the
Accumulation Period End Date to but excluding
the Optional Termination Date or Termination
Date, as applicable.
II. Settlement Terms
Settlement: This Transaction may be settled, in whole or in
part, on any Optional Termination Date, and, in
the event of a partial settlement, the
unsettled portion shall remain, during the Term
hereof, a Transaction for purposes of the ISDA
Agreement. Otherwise, this Transaction shall
terminate, and the each party's obligations in
respect thereof shall be settled as provided
for herein following the occurrence of the
Termination Date. Settlement shall be effected
in accordance with the settlement mechanism
selected by Party B in its notice given in
accordance with the Notice provision set out
below. All partial settlements shall be
effected in a minimum amount of 100,000 Shares
and additional integral multiples of 1000
Shares.
<PAGE>
8
Relevant Share Number: The Number of Shares or, in the context of any
partial settlement to be effected on any
Optional Termination Date, the number of Shares
specified or deemed specified by Party B in its
notice given pursuant to the Notice provision
set out below.
Physical Settlement: Where Physical Settlement is applicable, on the
Optional Termination Date or Termination Date,
Party A or its Hedge Subsidiary shall deliver
to Party B Shares equal to the Relevant Share
Number, and Party B shall pay to Party A an
amount, in USD, equal to the product of the
Forward Price, as determined on the Optional
Termination Date or the Termination Date, as
applicable, multiplied by the Relevant Share
Number (the "Settlement Price"). Any delivery
made pursuant to this provision shall be on a
delivery versus payment basis and the due date
of such delivery shall be subject to adjustment
in accordance with Section 6.2 of the Equity
Definitions in the event of the occurrence of a
Settlement Disruption Event.
Disposition Period: Where Cash Settlement or Net Share Settlement
is elected or otherwise applies, on the
Optional Termination Date or Termination Date
(as applicable) (the "Commencement Date"),
Party A or the Hedge Subsidiary shall commence
selling the Shares acquired by Party A or the
Hedge Subsidiary during the Accumulation
Period. The following definitions will apply to
this sale program. (I) "Final Trading Date":
the earlier of (1) the date on which Party A,
or the Hedge Subsidiary, has effected
transactions on the Exchange by which it has
completed the sale of Shares equal to the
Relevant Share Number, (2) the 90th calendar
day following the Commencement Date, and, in
the case of Net Share Settlement only, (3) the
date on which Party A, or the Hedge Subsidiary,
has effected transactions on the exchange such
that the Daily Settlement Amount (as defined
below) is an amount less than or equal to zero
(a "Zero Settlement Amount"); provided,
however, that Party A and the Hedge Subsidiary
shall be deemed not to have effected
transactions such that the absolute value of a
negative Daily Settlement Amount is equal to or
greater than the closing price for one Exchange
Board Lot (100) of Shares, as reported by the
Exchange in respect of the Final Trading Date.
(II) "Final Settlement Date": the day on which
any sale transaction effected on the Exchange
on the Final Trading Date would settle. (III)
"Disposition Settlement Day": each day of the
period commencing on, and including, the
Commencement Date to, and including, the Final
Settlement Date. (IV) "Disposition Trading
Day": in respect of any Disposition Settlement
Day, the day on which any sale transaction
effected on the Exchange that settles on such
Disposition Settlement Day is effected. (V)
"Disposition
<PAGE>
9
Period": the period beginning with the
Commencement Day, and continuing up to and
including the Final Settlement Date.
Notwithstanding the foregoing, the Disposition
Period shall not be less than 15 days and Party
A shall, in effecting sales, observe the volume
constraints prescribed by Rule 10b-18 under the
Securities Exchange Act of 1934 as if those
constraints applied to sales of securities.
Daily Settlement Amount: Where Cash Settlement or Net Share Settlement
is applicable, for each day beginning with the
Commencement Day, Party A shall determine an
amount (the "Daily Settlement Amount"), in USD,
in accordance with the following formulae:
SA 0 = Forward Price x Relevant Share Number
SA i = SA i-1 x (1+ ON i-1/360) - Number of
Settled Shares i x VWAP i
where "Number of Settled Shares i" means the
number of Shares the sale of which is settled
by Party A or its Hedge Subsidiary, on the
relevant day of determination, "VWAP i" means
the modified volume-weighted average per-Share
price as determined by means of the Bloomberg
service, for trading in the Shares on the
Disposition Trading Day whose corresponding
Disposition Settlement Day is the relevant day
of determination, and adjusted by Party A to
(i) include a commissions of USD 0.045 per
Share (ii) exclude the first trade in the
Shares effected on the Exchange on such
Disposition Trading Day; and (iii) exclude all
trades in Shares effected on the Exchange on
such Disposition Trading Day within 60 minutes
of the close of trading on such day, "SA o"
means the Daily Settlement Amount determined in
respect of the Commencement Date, Forward Price
is as determined on the Optional Termination
Date or the Termination Date, as applicable,
"SA i" means the Daily Settlement Amount
determined in respect of the relevant day of
determination, "SA i-1" means the Daily
Settlement Amount determined for the day
preceding the relevant day of determination,
and ON i-1 means a rate of interest equal to
the Overnight Rate in effect as of the day
preceding the relevant day of determination,
plus the Spread.
The Daily Settlement Amount determined in
respect of the Final Settlement Date shall be
the Final Settlement Amount. For purposes of
giving effect to the foregoing, "Number of
Settled Shares i" and "VWAP i" shall be deemed
to be zero on any day in the Disposition Period
which is not an Exchange Business Day.
Notice of Sale Transactions: Party A shall provide to Party B, on or before
the first Business Day following the trade date
of each sale transaction, notice setting
<PAGE>
10
out the sale transactions effected by Party A
or the Hedge Subsidiary on the relevant trade
date and Party A's calculation of the Daily
Settlement Amount in respect of such trade
date.
Cash Settlement: Where Cash Settlement is applicable, if the
Final Settlement Amount as determined above is
negative, Party A shall pay to Party B the
absolute value of such amount on the Final
Settlement Date. If such amount is positive,
Party B shall pay to Party A such amount on the
later of (i) the Final Settlement Date or (ii)
the first Business Day following the date on
which Party A's notice to Party B that such
Final Settlement Amount is owing by Party B
becomes effective in accordance with Section 12
of the ISDA Agreement.
Net Share Settlement: Where Net Share Settlement is applicable, if
the Final Settlement Amount is a Zero
Settlement Amount, then Party A or its Hedge
Subsidiary shall deliver to Party B (1) Shares
equal in number to the number of unsold Hedge
Shares, and (2) the absolute value of the Final
Settlement Amount, in USD, on or before the Net
Share Settlement Date. If the Final Settlement
Amount is positive, Party A shall determine a
number of Shares (the "Initial Settlement
Number") in accordance with the following
formula:
Final Settlement Amount / Closing Price
where "Closing Price" is the closing price of
the Shares as reported by the Exchange on the
Final Settlement Date, and Party B shall, at
its option, either (i) deliver to Party A
Shares equal in number to such Initial
Settlement Number (such Shares being the
"Settlement Shares") or (ii) pay to Party A an
amount in USD equal to the Final Settlement
Amount, on or before the Net Share Settlement
Date.
If, pursuant to the preceding paragraph, Party
B has elected to deliver Settlement Shares, on
the Net Share Settlement Date, Party A or its
hedge subsidiary shall commence selling the
Settlement Shares and shall continue
calculating the Daily Settlement Amount as
specified above. On each day until the earlier
of 90 calendar days following the Net Share
Settlement Date or the day on which the Daily
Settlement Amount is a Zero Settlement Amount,
(such day being the "Make-Whole Period End
Date" and the period commencing on the Net
Share Settlement Date up to such day being the
"Make-Whole Period"), Party A shall calculate
(i) an amount (the "Daily Make-Whole Amount")
according to the formula:
<PAGE>
11
Daily Settlement Amount - Closing Price
x Remaining Number of Shares
and (ii) a number of shares (the "Daily
Make-Whole Number") according to the formula:
Daily Make-Whole Amount / Closing Price
where "Closing Price" is the closing price of
the Shares as reported by the Exchange on the
day of determination, and Remaining Number of
Settlement Shares is (i) the Initial Settlement
Number; (ii) minus the aggregate of all Shares
sold, on a settlement basis, pursuant to this
provision during the Make-Whole Period, (iii)
plus the aggregate of all Make-Whole Shares, as
defined below, delivered to Party A pursuant to
this provision (iv) minus the aggregate of all
Shares delivered by Party A to Party B as
required below in the event of a negative Daily
Make-Whole Amount. If, on (a) the tenth
Business Day following the Net Share Settlement
Date and any following tenth Business Day
during the Make-Whole Period, the Daily
Make-Whole Amount is greater than 1,000,000, or
(b) on any Business Day during the Make-Whole
Period the Daily Make-Whole Amount is greater
than 4,000,000, Party B shall either (i)
deliver to Party A, Shares equal in number to
the Daily Make-Whole Number (such Shares being
the "Make-Whole Shares") on or before the first
Business Day following the relevant day of
demand; or, at the option of Party B, (ii) pay
to Party A an amount in USD equal to the Daily
Make-Whole Amount to be paid on or before the
first Business Day following such day of
demand. In the event that Party B elects option
(ii), then the Daily Settlement Amount shall be
adjusted downwards by the Daily Make-Whole
Amount on the day Party A receives the full
payment. If (x) on any tenth Business Day
following the Net Share Settlement Date and any
following tenth Business Day during the
Make-Whole Period, the Daily Make-Whole Amount
is negative and its absolute value is greater
than 1,000,000, or (y) on any Business Day
during the Make-Whole Period, the Daily
Make-Whole Amount is negative and its absolute
value is greater than 4,000,000, Party A shall,
on or before the following Business Day,
deliver to Party B Shares equal in the number
to the absolute value of the Daily Make-Whole
Number.
On the first Business Day following the
Make-Whole Period End Date (the "Final
Make-Whole Settlement Day"), Party A will
deliver to Party B, shares equal in number to
the Remaining Number of Settlement Shares. If
the Daily Settlement Amount, on the Make-Whole
Period End Date (being the "Final Make-Whole
<PAGE>
12
Amount") is positive, then Party B shall pay to
Party A on the Final Make-Whole Settlement Day
an amount in USD equal to the Final Make-Whole
Amount. If the Final Make-Whole Amount is
negative, then Party A shall pay to Party B an
amount in USD equal to the absolute value of
the Final Make-Whole Amount.
Break Funding Amount: On any Optional Termination Date, Party A shall
calculate the Break Funding Amount. If the
Break Funding Amount is positive, then, in
addition to any other amount then payable by
Party B, Party B shall also pay to Party A, on
such date, the Break Funding Amount. If the
Break Funding Amount is negative, then Party A
shall pay to Party B, on such date, the
absolute value of the Break Funding Amount. For
purposes, hereof, "Break Funding Amount" means
the amount, determined by Party A in a
commercially reasonable manner, equal to (1)
the mark-to-market value to Party A as of the
Optional Termination Date, of a swap
incorporating the terms set out in the
definition of Zero Coupon USD Swap Rate as if
(i) Party A were the Floating Rate Payer, (ii)
the Notional Amount were equal to the Initial
Price multiplied by the Relevant Share Number;
(iii) the original term of such swap were equal
to the Term hereof, and (iv) no amounts then
due under such swap remain unpaid, minus (2) an
amount equal to the Relevant Share Number
multiplied by the difference between the Zero
Spread Forward Price calculated as of the
relevant Optional Termination Date and the
Initial Price, where "Zero Spread Forward Price
" is calculated in the same manner as the
Forward Price but for a Spread of 0%.
Net Share Settlement Date: The second Clearance System Business Day
following the Final Settlement Date, subject to
adjustment in accordance with Section 6.2 of
the Equity Definitions in the event of the
occurrence of a Settlement Disruption Event.
Notice: In the event Party B intends to effect a
settlement on any Optional Termination Date,
Party B shall provide Party A with prior
written notice of its intention to exercise its
rights to settle this Transaction on such
Optional Termination Date and such notice must
become effective in accordance with Section 12
of the ISDA Agreement on or before the 3rd day
preceding the Optional Termination Date on
which Party B intends to effect a settlement.
If Party B's notice does not become effective
on or before such 3rd day, Party B shall be
deemed to have elected to effect a settlement
on the next following Optional Termination
Date; provided, however, that no such notice
may be given (i) on any day during the
Accumulation Period; or (ii) following the
occurrence of an Event of Default with respect
to Party B. Other than in the context of any
partial
<PAGE>
13
settlement, Party B shall indicate in such
notice whether settlement will be by Physical
Settlement, Cash Settlement or Net Share
Settlement. In the context of any partial
settlement, Party B shall specify the number of
Shares in respect of which settlement will be
effected. If such notice does not so specify
the manner of settlement, Physical Settlement
shall apply and if such notice does not specify
the number of Shares in respect of which
settlement will be effected, Party B shall be
deemed to have elected to effect settlement in
respect of the full Number of Shares then in
effect. If Party B wishes, in the context of
the Termination Date, to effect settlement
otherwise than by Physical Settlement, Party B
shall so notify Party A and such notice must
become effective in accordance with Section 12
of the ISDA Agreement on or before the 3rd day
prior to the Termination Date failing which
Party B shall be deemed to have elected to
utilize Physical Settlement.
Inability to Sell/Purchase
Shares: If, in the context of Net Share Settlement,
Cash Settlement, or any other provision hereof
which, in order to give effect thereto,
requires Party A to sell Shares (other than to
Party B), (1) Party A is unable to effect a
sale by any reasonably economic, viable or
practicable means, including a private
placement transaction, of the requisite number
of Shares on or before the Final Trading Day
for purposes of determining the Final
Settlement Amount for any reason including,
without limitation, because such Shares have a
prospectus delivery requirement and Party B is
unable to provide Party A with a current
prospectus, or (2) the Disposition Period
otherwise expires prior to Party A being able
to effect the necessary sales, then, Party B
shall be deemed to have elected Physical
Settlement with respect to the unsold portion
of such requisite number of Shares, and Party B
shall, within one Business Day of the date it
is advised by Party A that a sale of all such
Shares was not effected, repurchase the unsold
Shares, for USD, in an amount per Share that,
when combined with all amounts received by
Party A for all effected sales of Shares,
results in Party A receiving an amount equal to
the amount Party A would have received had
Physical Settlement been elected. If, in the
context of Physical Settlement or the
application of the Registration of Shares
provision or any other provision of this
Confirmation which, in order to give effect
thereto, requires delivery of Shares to Party B
by Party A, Party B is unable, due to the
application of applicable law, at the relevant
time to take delivery of such Shares, a
Termination Event shall be deemed to have
occurred for purposes of the ISDA Agreement and
in respect of which (i) Party B shall be the
Affected Party, (ii) this Transaction shall be
the only Affected Transaction, (iii) and the
payment measure shall be Loss (as such terms
are defined in the ISDA Agreement).
<PAGE>
14
Good Delivery: Any party required to deliver Shares hereunder
(the Delivering Party") shall transfer good
title to such Shares, and such Shares shall be
freely transferable (together with any
prospectus required by applicable law) and free
and clear of any liens, charges, claims and
encumbrances. Delivery shall be effected by
book-entry transfer of the Shares to an account
with The Depository Trust Company (the
"Clearance System") in the name of the
recipient (or, where escrow settlement is
applicable, the name of the escrow agent) as is
designated by the recipient.
III. Dividends
If on any day during the Term hereof a cash dividend paid by Party B in
respect of the Shares the record date of which precedes the Termination Date, is
received by Party A or the Hedge Subsidiary, Party A or the Hedge Subsidiary
shall pay to Party B an amount equal to such dividend on or before the second
Business Day immediately following the date of receipt of such dividend by Party
A or the Hedge Subsidiary (such second Business Day being the "Dividend Payment
Date"). Upon the request by Party B (which must be recieved by Party A on or
before 10:00 a.m. (New York time) on the relevant Dividend Payment Date), Party
A shall deliver to Party B the equivalent of such amount in Shares (less a
commission of not more than USD 0.045 per Share) which equivalent shall be based
upon the price at which Party A is then able (acting reasonably) to purchase
Shares plus an amount, in USD, equal to any residual cash in the event that the
foregoing amount cannot be fully converted into whole Shares.
IV. Decline in Share Price/Decline in Credit Rating/Termination of Credit
Agreement
In the event that on any Business Day during the Term of this
Transaction (other than the Accumulation Period) or on any of the five Business
Days preceding such Business Day (i) the closing price per Share as quoted by
the Exchange on such day is USD $7.50 or less, (ii) Standard & Poor's Rating
Service, a division of McGraw-Hill Inc., reports a rating below BBB-, or no
longer assigns a rating, or Moody's Investor Services Inc. reports a rating
below Baa3, or no longer assigns a rating, with respect to Party B's Long-Term
Debt, or (iii) Party B prepays all amounts outstanding under, and terminates,
the Credit Agreement, or provides notice of an intention to prepay all amounts
outstanding under, and terminate, the Credit Agreement or all commitments of the
Lenders thereunder have terminated or expired, Party A may upon notice to Party
B, given in accordance with Section 12 of the ISDA Agreement, and provided an
Event of Default or Termination Event has not occurred with respect to Party A
or is then continuing (and which, in the context of a Termination Event, renders
this Transaction an Affected Transaction) and provided an Early Termination Date
has not been designated in respect of this Transaction, elect to terminate this
Transaction in its entirety. Party B shall, on or before the first Business Day
following the date on which Party A's termination notice becomes effective,
notify Party A of the manner in which this Transaction shall be settled (and,
failing such notification, Party B shall be deemed to have elected Cash
Settlement). If Party B elects Cash Settlement or Net Share Settlement, for
purposes of giving effect to such provisions, the commencement of the
Disposition Period shall be the first Exchange Business Day following the date
on which Party B's election notice became effective. If Party B elects Physical
Settlement, settlement shall be effected on the third Business Day following the
Election Date in accordance with, and subject to, the
<PAGE>
15
Physical Settlement provision set out above. Party B shall provide written
notice to Party A of the occurrence of event (ii) above and, in the event Party
A is, at the relevant time, no longer Administration Agent under the Credit
Agreement, event (iii) above and, for purposes of applying the five-Business Day
period referred to above, the date on which Party B's notice becomes effective
in accordance with Section 12 of the ISDA Agreement shall be deemed to be the
Business Day on which the relevant event occurred; provided, however, that the
failure of Party B to so notify Party A of the occurrence of the relevant event
shall in no way preclude Party A from invoking termination pursuant to this
provision in the event Party A becomes aware of such occurrence by independent
means.
The parties hereto agree that the occurrence of the events (i), (ii) or
(iii) referred to in the preceding paragraph shall in no way be construed as the
occurrence of an Event of Default as contemplated by the ISDA Agreement.
For purposes hereof, "Long-Term Debt" means the then current senior
unsecured, non-credit-enhanced, long-term indebtedness issued by Party B.
V. Adjustments
For purposes of Article 9 of the Equity Definitions, any reference to
the term "Share Swap Transaction" shall be deemed to mean "Forward Purchase
Transaction"; provided, however, that "Potential Adjustment Event" shall exclude
the declaration or payment of any cash dividends in respect of the Shares.
<TABLE>
<S> <C>
Method of Adjustment: Calculation Agent Adjustment
Calculation Agent: Party A
</TABLE>
VI. Extraordinary Events
Consequences of Merger Events:
(a) Share-for-Share: Alternative Obligation
(b) Share-for-Other: Cancellation and Payment
(c) Share-for-Combined: Alternative Obligation
Nationalization or Insolvency: Cancellation and Payment
VII. Regulatory Event
If during the Term of this Transaction, The Warnaco Group, Inc. effects any
action, including any action with respect to its capital structure, the result
of which is that Party A, or the Hedge Subsidiary, then owns more of any class
of outstanding voting shares of Party B pursuant to this transaction than is
permitted by the Bank Holding Company Act of 1956, as amended, or other federal
legislation (the "Regulatory Limit"), then, Party A shall so notify Party B and
Party B shall be deemed to have elected to partially settle this Transaction but
only to the extent to which the Number of Shares exceeds the Regulatory Limit
(which excess shall be the Relevant Share Number for purposes of the Settlement
terms set out above). If Party B elects Physical Settlement, the relevant
portion of this Transaction shall be settled on the first Business Day following
the Election Date subject to adjustment in accordance with Section 6.2 of the
Equity Definitions in the event of
<PAGE>
16
the occurrence of a Settlement Disruption Event (such Business Day being the
Physical Settlement Date). Party B shall specify the mode of settlement on or
before the first Business Day (the "Election Date") following the date on which
Party A's notice to Party B became effective failing which Party B shall be
deemed to have elected Physical Settlement. If Party B elects Net Share
Settlement or Cash-Settlement, for purposes of giving effect thereto, the number
of Shares to be sold shall be the Relevant Share Number and the Commencement
Date of the Disposition Period shall be deemed to be the first Exchange Business
Day following the Election Date. In addition to any other amount then payable by
Party B, Party B shall also pay to Party A, on (i) the Physical Settlement Date,
in the context of a Physical Settlement election; or (ii) on the Net Share
Settlement Date, in the context of a Net Share or Cash Settlement election, the
Break Funding Amount as defined above except that the reference therein to
"Optional Termination Date" shall mean the Election Date.
VIII. Registration of Shares
Notwithstanding any other provision hereof (including, without limitation, any
election of Net Share Settlement or Cash Settlement by Party B but excluding any
election by Party B of Net Share Settlement or Cash Settlement under "Decline in
Share Price/Decline in Credit Rating" above), unless both parties hereto
conclude that a public sale of the Shares acquired by it or the Hedge Subsidiary
in connection with this Transaction does not require registration under the
Securities Act of 1933 (the "Securities Act"), which conclusion shall be
communicated by each party to the other, by means of any of the methods
specified in Section 12 of the ISDA Agreement, as promptly as is reasonable
practicable, and in any event by the first Business Day following a Termination
Date or Optional Termination Date, as applicable, Physical Settlement shall
apply with respect to such Termination Date or Optional Termination Date unless
the following conditions have been satisfied: (i) on the Optional Termination
Date or Termination Date (or, in the context of a Regulatory Event, the Election
Date), as the case may be, a registration statement (a "Registration Statement")
naming as selling shareholders Party A and the Hedge Subsidiary and covering the
public resale of all Shares held by Party A or the Hedge Subsidiary to hedge
this Transaction and all Shares deliverable by Party B to Party A pursuant to
the Net Share Settlement provisions hereof (collectively, the "Registrable
Shares") shall have been filed with, and declared effective by, the Securities
and Exchange Commission under the Securities Act, and no stop order shall be in
effect with respect to such Registration Statement; (ii) a printed prospectus
relating to the Registrable Shares (including any prospectus supplement thereto
and amendments thereof, a "Prospectus") shall have been delivered to Party A and
the Hedge Subsidiary in such quantities as Party A shall have requested no later
than the Optional Termination Date, Termination Date or Election Date; (iii) the
Registration Statement and the Prospectus shall be in form and substance
reasonably satisfactory to Party A; (iv) no later than the Exchange Business Day
before the Optional Termination Date, Termination Date or Election Date, Party A
and Party B shall have entered into an agreement (a "Transfer Agreement") in
connection with the public resale of the Registrable Shares by Party A and the
Hedge Subsidiary substantially similar to underwriting agreements customary for
underwritten offerings of equity securities, in form and substance reasonably
satisfactory to Party A and Party B, providing for (without limitation):
indemnification of, and continuation in connection with the liability of, Party
A and the Hedge Subsidiary, the delivery of customary opinions of counsel and
accountants "comfort letters", the continuous effectiveness of the Registration
Statement until the fortieth day after the Optional Termination Date,
Termination Date or Election Date, or if earlier, such time as all Registrable
Shares have been resold pursuant thereto and all expenses in connection with
such resale, including all registration costs and all fees and expenses of
counsel for each of Party A and Party B, have been paid by Party B; (v) Party A
and the Hedge Subsidiary shall have been afforded a reasonable opportunity to
conduct
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17
a due diligence investigation with respect to The Warnaco Group, Inc. customary
in scope for underwritten offerings of equity securities, and acceptance of the
results of such investigation by Party A and the Hedge Subsidiary cannot be
unreasonably withheld; (vi) all conditions to the obligations of each party
under the Transfer Agreement shall have been satisfied or waived no later than
the Optional Termination Date, Termination Date or Election Date, and (vii) the
representations and warranties of Party B set forth herein and in the Transfer
Agreement shall be true and correct on the date of delivery of Registrable
Shares to purchasers of such Shares as though made at such time, and Party B
shall have performed all its obligations set forth herein and in such Transfer
Agreement to be performed by such time.
If, in the context of the Decline in Share Price/Decline in Credit Rating/
Termination of Credit Agreement provision, Party B has elected Cash Settlement
or in the event Party B has elected Net Share Settlement and Party B is required
to deliver Shares to Party A and any condition specified in items (i)-(vii) of
the previous paragraph shall not have been satisfied in the manner and at the
times specified therein, Party A may determine to (a) have some or all
Registrable Shares sold in one or more transactions exempt from the registration
requirements of the Securities Act, or (b) extend this Transaction in order to
give Party B more time to satisfy such conditions. If Party A chooses the action
set forth in clause (a) above, Party B shall pay all costs of such sales by
Party A, including, without limitation, any applicable sales or purchase taxes,
transfer taxes and commissions. If Party A chooses the action set forth in
clause (b) above, the Calculation Agent will in its reasonable discretion adjust
the terms hereof to take into account any additional costs to Party A and the
Hedge Subsidiary of such extension.
7. ADDITIONAL REPRESENTATIONS
Each party will be deemed to represent to the other on the date of this
Confirmation that, with respect to this Transaction (1) It is entering into this
Transaction for its own account and not with a view to transfer, resale or
distribution, (2) it is an "accredited investor" within the meaning of Rule
510(a) of Regulation D under the Securities Act and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of this Transaction, and (3) it understands and
acknowledges that this Transaction may involve the purchase or sale of a
"security" as defined in the Securities Act and the securities laws of certain
states, and that any such security has not been registered under the Securities
Act or the securities laws of any state and, therefore, may not be sold,
pledged, hypothecated, transferred or otherwise disposed of unless such security
is registered under the Securities Act and any applicable state securities law,
or an exemption from registration is available.
8. ADDITIONAL REPRESENTATIONS AND COVENANTS
(a) Party B Representations
Party B represents to Party A that (1) as of the Trade Date hereof, it
is not in possession of any material non-public information with respect to
itself; (2) as of the Trade Date hereof, it is not entering into this
Transaction for the purpose of manipulating the market price or value of the
Shares; (3) as of the Trade Date hereof, no "restricted period" for purposes of
Rule 102 of Regulation M under the Securities Exchange Act of 1934
(respectively, "Regulation M" and the "Exchange Act") and no tender offer for
Shares (whether by Party B or any other third party) is in effect or (or in the
case of a tender offer by Party B) has been in effect within the preceding ten
Business Days; and (4) it is entering into this Transaction in connection with
its Share repurchase program which was most recently approved by its board of
directors on March 1, 1999
<PAGE>
18
and most recently publicly announced on March 2, 1999, solely for the purposes
stated in such board resolution and public disclosure.
(b) Party B Covenants
Party B covenants to Party A that (1) Party B shall not commence a
"distribution" (as defined in Regulation M) of Shares or a tender offer for
Shares during the Accumulation Period; (2) no "restricted period" for purposes
of Rule 102 of Regulation M will be in effect on any day on which Party A is
required, pursuant to the terms hereof, to deliver Shares to Party B (any such
day being, for purposes of this paragraph, a "Settlement Date", and no tender
offer for Shares by Party B will be in effect on any Settlement Date or within
the preceding ten Business Days of any day thereof; (3) Party B shall not, and
shall cause its affiliated purchasers (as defined in Rule 10b-18 under the
Exchange Act) not to, purchase Shares during the Accumulation Period; (4) Party
B shall not disclose any material non-public information with respect to itself
to Party A without Party A's consent; (5) if at any time during the Disposition
Period Party B comes to have possession of material non-public information with
respect to itself, Party B will notify Party A that a blackout period is in
effect, and when Party B ceases to be in possession of material non-public
information, Party B will notify Party A that the blackout period has ended.
(c) Party A Covenants
Party A covenants to Party B that Party A shall not sell, nor make any
offers to sell during any blackout period or any restricted period in respect of
either of which Party A is in receipt of notice from Party B or Group given in
accordance with Section 12 of the ISDA Agreement.
9. ADDITIONAL AGREEMENT
Each party agrees that it will comply, in connection with this
Transaction and all related or contemporaneous sales and purchases of Shares,
with the applicable provisions of the Securities Act, the Exchange Act, and the
rules and regulations thereunder, including, without limitation, Rules 10b-5
under the Exchange Act, provided that each party shall be entitled to rely
conclusively on any information communicated by the other party concerning such
other party's market activities. Party A represents to Party B and agrees that,
in effecting the purchase transactions referred to opposite "Accumulation
Period", above, Party A shall make bids for and purchases of the Shares only in
accordance with the price, volume, timing, and method of bidding and purchasing
constraints set forth in Rule 10b-18 under the Exchange Act, as if Party A were
the issuer of the Shares and wished to avail itself of the protections afforded
by that rule.
10. THIRD PARTY TERMINATION RIGHTS
Party B hereby covenants and agrees with Party A that in the event that
Party B is now or hereafter becomes party to a forward equity purchase
transaction pertaining to Shares with any other party and such transaction
grants to such other party termination rights which are not included herein or,
if included, which may be invoked prior to the time or point at which such
termination rights may be invoked by Party A pursuant to the terms hereof, Party
B shall immediately notify Party A of the existence of such termination right
and this Confirmation shall be deemed to be automatically amended in order to
incorporate such termination right (together with all attendant definitions and
ancillary provisions contained in such other
<PAGE>
19
transaction which may be necessary to give meaning or effect to such termination
right) for the benefit of Party A hereunder, mutatis mutandis.
11. MISCELLANEOUS
Wire Instructions: Party A:
The Bank of Nova Scotia, New York Agency
One Liberty Plaza, 165 Broadway, 26th Floor
New York, New York
SWIFT Code: NOSCUS33
ABA# 0260-02532
Account No.: 6027-36
Attention: IBD Derivative Products
Party B:
ABA #021000089
Citibank N.A.
New York, NY
for credit to: Warnaco Inc. Account # 3846-9277
12. OFFICES
(a) The Office of Party A for this Transaction is New York; and
(b) The Office of Party B for this Transaction is New York.
<PAGE>
20
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing the copy of this Confirmation enclosed for that purpose
and returning it to us or by sending to us a letter or facsimile substantially
similar to this letter, which letter or facsimile sets forth the material terms
of the Transaction to which this Confirmation relates and indicates agreement to
those terms.
Yours truly,
SCOTIA CAPITAL (U.S.A.) INC.
By:____________________________
Name:
Title:
Confirmed as of the date first above written:
THE WARNACO GROUP, INC.
By:______________________________
Name:
Title:
<PAGE>
1
EXHIBIT A
GUARANTY
GUARANTY (this "Guaranty"), dated as of December 10, 1999, made by certain
of the Persons listed on the signature pages hereof (each Person listed on the
signature pages hereof, a "Guarantor" and collectively, the "Guarantors"), in
favor of THE BANK OF NOVA SCOTIA (the "Bank").
PRELIMINARY STATEMENT. The Warnaco Group, Inc., a Delaware corporation,
("Group") has heretofore entered into an Equity Forward Purchase Transaction
with the Bank as evidenced by way of a Confirmation, dated as of December 10,
1999, (as amended, modified or supplemented from time to time, the
"Transaction"). Group and the Bank may hereafter enter into a 1992 ISDA Master
Agreement (Multicurrency - Cross Border), as published by the International
Swaps and Derivatives Association, Inc., (such agreement, as it may be amended
or supplemented from time to time being the"Master Agreement"). Each Guarantor
has derived and will continue to derive substantial direct and indirect benefits
from the Transaction . It is a condition precedent to the Bank's obligations
under the Transaction that each Guarantor shall have executed and delivered this
Guaranty.
NOW THEREFORE, for good and valuable consideration the receipt of which is
hereby acknowledged, and in order to induce the Bank to enter into and perform
its obligations under the Transaction and, following completion of the Master
Agreement, the Master Agreement, each Guarantor agrees, for the benefit of the
Bank, as follows:
ARTICLE I
GUARANTY PROVISIONS
SECTION I.1 Guaranty. Each Guarantor hereby jointly and severally,
absolutely, unconditionally and irrevocably guarantees the full and punctual
payment when due, whether at stated maturity, by acceleration or otherwise, of
all obligations of Group under the Transaction and the Master Agreement which
Group has incurred or may incur to the Bank in connection with the Transaction
and the Master Agreement and whether for scheduled payments, early termination
payments, interest, fees, expenses or otherwise (collectively, the
"Obligations"); provided, however, that each Guarantor shall be liable under
this Guaranty for the maximum amount of such liability that can be hereby
incurred without rendering this Guaranty, as it relates to such Guarantor,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer, and not for any greater amount. This Guaranty constitutes a guaranty
of payment when due and not of collection, and each Guarantor specifically
agrees that it shall not be necessary or required that the Bank exercise any
right, assert any claim or demand or enforce any remedy whatsoever against Group
or any other person before or as a condition to the obligations of such
Guarantor hereunder.
1
<PAGE>
2
SECTION I.2 Acceleration of Guaranty. Each Guarantor agrees that, in the
event of the dissolution or insolvency of Group or the dissolution of such
Guarantor, or the inability or failure of Group or such Guarantor to pay debts
as they become due, or an assignment by Group or such Guarantor for the benefit
of creditors, or the commencement of any case or proceeding in respect of Group
or such Guarantor under any bankruptcy, insolvency or similar laws, and with
respect to any involuntary case or proceeding, such case or proceeding remains
undismissed for a period of 30 days, and if any such event shall occur at a time
when any of the Obligations may not then be due and payable, such Guarantor will
pay to the Bank forthwith the full amount which would be payable hereunder by
such Guarantor if all such Obligations were then due and payable.
SECTION I.3 Guaranty Absolute, etc. This Guaranty shall in all respects be
a joint and several, continuing, absolute, unconditional and irrevocable
guaranty of payment, and shall remain in full force and effect until all
Obligations of Group have been paid in full and all obligations of each
Guarantor hereunder shall have been paid in full. Each Guarantor guarantees that
the Obligations of Group will be paid strictly in accordance with the terms of
the Transaction, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
Bank. The liability of each Guarantor under this Guaranty shall be joint and
several and shall be absolute, unconditional and irrevocable irrespective of:
(a) any lack of validity, legality or enforceability of the
Transaction or the Master Agreement;
(b) the failure of the Bank
(i) to assert any claim or demand or to enforce any right or
remedy against Group or any other person (including any other
guarantor) under the provisions of the Transaction or the Master
Agreement or otherwise, or
(ii) to exercise any right or remedy against any other guarantor
of the Obligations;
(c) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other extension,
compromise or renewal of any of the Obligations;
(d) any reduction, limitation, impairment or termination of the
Obligations for any reason, including any claim of waiver, release,
surrender, alteration or compromise, and shall not be subject to (and such
Guarantor hereby waives any right to or claim of) any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the
invalidity, illegality, nongenuineness, irregularity, compromise,
unenforceability of, or any other event or occurrence affecting, the
Obligations;
(e) any amendment to, rescission, waiver, or other modification of, or
any consent to departure from, any of the terms of the Transaction or
Master Agreement;
<PAGE>
3
(f) any amendment to or waiver or release or addition of, or consent
to departure from, any other guaranty, held by the Bank securing any of the
Obligations; or
(g) any other circumstance which might otherwise constitute a defense
available to, or a legal or equitable discharge of Group, any surety or any
guarantor.
SECTION I.4 Reinstatement, etc. Each Guarantor agrees that this Guaranty
shall continue to be effective or be reinstated, as the case may be, if at any
time any payment (in whole or in part) of any of the Obligations is rescinded or
must otherwise be restored by the Bank, upon the insolvency, bankruptcy or
reorganization of Group, all as though such payment had not been made.
SECTION I.5 Waiver, etc. Each Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Obligations and this Guaranty and any requirement that the Bank exhaust any
right or take any action against Group or any other person (including any other
guarantor) or entity or any collateral securing the Obligations, as the case may
be.
SECTION I.6 Postponement of Subrogation, etc. None of the Guarantors will
exercise any rights which it may acquire by way of rights of subrogation under
this Guaranty, by any payment made hereunder or otherwise, until the prior
payment, in full and in cash, of all Obligations. Any amount paid to any such
Guarantor on account of any such subrogation rights prior to the payment in full
of all Obligations shall be held in trust for the benefit of the Bank and shall
immediately be paid to the Bank and credited and applied against the
Obligations; provided, however, that if
(a) a Guarantor has made payment to the Bank of all or any part of the
Obligations, and
(b) all Obligations have been paid in full,
the Bank will execute and deliver to such Guarantor appropriate documents
(without recourse and without representation or warranty) necessary to evidence
the transfer by subrogation to such Guarantor of an interest in the Obligations
resulting from such payment by such Guarantor. In furtherance of the foregoing,
for so long as any Obligations remain outstanding, each Guarantor shall refrain
from taking any action or commencing any proceeding against Group (or its
successors or assigns, whether in connection with a bankruptcy proceeding or
otherwise) to recover any amounts in the respect of payments made under this
Guaranty to the Bank.
SECTION I.7 Successors, Transferees and Assigns; Transfers of Notes, etc.
This Guaranty shall:
<PAGE>
4
(a) be binding upon each Guarantor, and its successors, transferees
and assigns; and
(b) inure to the benefit of and be enforceable by the Bank.
Without limiting the generality of clause (b), the Bank may, to the extent
permitted by the terms of the Transaction or the Master Agreement, assign or
otherwise transfer (in whole or in part) held by it to any other person or
entity, and such other person or entity shall thereupon become vested with all
rights and benefits in respect thereof granted to the Bank hereunder.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION II.1 Representations and Warranties. Each Guarantor hereby
represents and warrants unto the Bank:
SECTION II.1.1 Authority. Each Guarantor has full power and authority to
enter into and perform its obligations under this Guaranty.
SECTION II.1.2 Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by each Guarantor of this Guaranty have been duly
authorized by all necessary corporate action (including but not limited to any
consent of stockholders required by law or its organizational documents), and do
not
(a) contravene each Guarantor's organizational documents;
(b) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting each Guarantor;
or
(c) result in, or require the creation or imposition of, any lien,
security interest, encumbrance, pledge or hypothecation on any of such
Guarantor's properties.
SECTION II.1.3 Validity, etc. This Guaranty constitutes the legal, valid
and binding obligations of each Guarantor enforceable in accordance with its
terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws affecting creditors'
rights generally and general principles of equity.
SECTION II.1.4 Authorization, Approval, etc. No authorization, consent,
approval, or other action by, and no notice to, filing with, or license from,
any governmental authority, regulatory body or any other person is required for
due execution, delivery or performance by each Guarantor of this Guaranty.
ARTICLE III
MISCELLANEOUS PROVISIONS
<PAGE>
5
SECTION III.1 Credit Support Document. This Guaranty shall constitute a
Credit Support Document as contemplated by the Master Agreement.
SECTION III.2 Binding on Successors, Transferees and Assigns; Assignment.
In addition to, and not in limitation of, Section 1.7, this Guaranty shall be
binding upon each Guarantor and its successors, transferees and assigns and
shall inure to the benefit of and be enforceable by the Bank and its successors,
transferees and assigns (to the full extent provided pursuant to Section 1.7);
provided, however, that such Guarantor may not assign any of its obligations
hereunder without the prior written consent of the Bank.
SECTION III.3 Amendments, etc. No amendment to or waiver of any provision
of this Guaranty, nor consent to any departure by any Guarantor herefrom, shall
in any event be effective unless the same shall be in writing and signed by the
Bank, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
SECTION III.4 Notices. All notices and other communications provided to any
Guarantor under this Guaranty shall be in writing or by facsimile and addressed,
delivered or transmitted to such Guarantor at 90 Park Avenue, New York, New York
10016, Telecopier No.: 212-687-0480, or at such other address or facsimile
number as may be designated by such Guarantor 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 facsimile, shall be deemed given when
transmitted.
SECTION III.5 No Waiver; Remedies. In addition to, and not in limitation
of, and other provision hereof, no failure on the part of the Bank to exercise,
and no delay in exercising, any right hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
SECTION III.6 Captions. Section captions used in this Guaranty are for
convenience of reference only, and shall not affect the construction of this
Guaranty.
SECTION III.7 Setoff. The Bank shall, upon the occurrence of an Event of
Default as defined in the Transaction or the Master Agreement, 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 any
of the Guarantors then or thereafter maintained with or otherwise held by the
Bank. The rights of the Bank under this Section are in addition to other rights
and remedies (including other rights of setoff under applicable law or
otherwise) which the Bank may have.
SECTION III.8 Severability. Wherever possible each provision of this
Guaranty shall be interpreted in such manner as to be effective and valid under
applicable law, but if any
<PAGE>
6
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
SECTION III.9 Governing Law. THIS GUARANTY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. FOR
PURPOSES OF ANY ACTION OR PROCEEDING INVOLVING THIS GUARANTY, EACH GUARANTOR
HEREBY EXPRESSLY SUBMITS TO THE JURISDICTION OF ALL FEDERAL AND STATE COURTS
LOCATED IN THE STATE OF NEW YORK AND CONSENTS THAT IT MAY BE SERVED WITH ANY
PROCESS OR PAPER BY REGISTERED MAIL OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE
STATE OF NEW YORK.
SECTION III.10 Waiver of Jury Trial. EACH GUARANTOR HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS GUARANTY. EACH GUARANTOR ACKNOWLEDGES AND AGREES THAT IT
HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THE TRANSACTION
AND THE MASTER AGREEMENT.
IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
WARNACO INC.
WARNACO INTERNATIONAL INC.
WARNACO U.S. INC.
MYRTLE AVENUE, INC.
GREGORY STREET, INC.
DESIGNER HOLDINGS, LTD.
OUTLET STORES, INC.
JEANSWEAR HOLDINGS, INC.
CALVIN KLEIN JEANSWEAR COMPANY
CKJ HOLDINGS INC.
By
--------------------------------
Title:
<PAGE>
Dated as of
February 10, 2000
The Warnaco Group, Inc.
90 Park Avenue
New York, New York 10016
Attention: Mr. Bill Finkelstein
Dear Sirs:
RE: SUNTRUST BANK ("PARTY A")
THE WARNACO GROUP, INC. ("PARTY B")
EQUITY FORWARD PURCHASE TRANSACTION
The purpose of this facsimile is to amend and restate the terms and
conditions of the Transaction entered into between Party A and Party B on the
Trade Date specified below and amended by agreement of the parties through
February 25, 2000 (the "Transaction"). This facsimile constitutes a
"Confirmation" as referred to in the ISDA Master Agreement specified below.
This Confirmation is subject to and incorporates the definitions
contained in the 1991 ISDA Definitions, as supplemented by the 1998 Supplement
(the "1991 ISDA Definitions"), and the 1996 ISDA Equity Derivatives Definitions
(the "Equity Definitions") (each as published by the International Swaps and
Derivatives Association, Inc. ("ISDA")) (collectively, the "ISDA Definitions").
This Confirmation is also subject to, and incorporates, the definitions
contained in Section 14 of the form of the 1992 ISDA Master Agreement
(Multicurrency - Cross Border) (the "Section 14 Definitions"), but without any
Schedule or other modification thereto, as published by ISDA (the "ISDA
Agreement"). In the event of any inconsistency between the ISDA Definitions, the
Section 14 Definitions and this Confirmation, this Confirmation will govern. In
the event of any inconsistency between the ISDA Definitions and the Section 14
Definitions, the Section 14 Definitions will govern. Until such time as an ISDA
Agreement is entered into between you and us, this Confirmation evidences a
complete and binding agreement between you and us as to the terms of the
Transaction to which this Confirmation relates. Upon execution by you and us of
an ISDA Agreement, with such ISDA Agreement incorporating such modifications as
you and we shall in good faith agree, this Confirmation will supplement, form
part of, and be subject to, such ISDA Agreement. All provisions contained in the
ISDA Agreement shall, upon its execution, govern this Confirmation except as
expressly modified below.
The following provisions in paragraphs 1 through 5 will govern the
Transaction evidenced hereby until such time as an ISDA Agreement is entered
into between you and us where upon such provisions shall be replaced by the
terms of the ISDA Agreement:
1. MANNER OF PAYMENTS
Each party will make each payment specified in this Confirmation as being
payable by it, not later than the due date for value on that date in the place
specified below, in freely transferable funds and in the manner customary for
such payments in the required currency. If on any date amounts would otherwise
be payable
1
<PAGE>
in the same currency by each party to the other, then, on such date, each
party's obligation to make payment of any such amount will be automatically
satisfied and discharged and, if the aggregate amount that would otherwise have
been payable by one party exceeds the aggregate amount that would otherwise have
been payable by the other party, replaced by an obligation upon the party by
whom the larger aggregate amount would have been payable to pay to the other
party the excess of the larger aggregate amount over the smaller aggregate
amount.
2. DEFAULT
(a) If, at any time, an Event of Default has occurred and is then
continuing with respect to a party hereto (such party being hereinafter referred
to as the "Defaulting Party"), then the other party (hereinafter referred to as
the "Non-defaulting Party"), shall have the right to early terminate and
liquidate the Transaction evidenced hereby, together with all other Specified
Transactions entered into between Party A and Party B (collectively the
"Terminated Transactions") and determine a net amount due in respect of the
Terminated Transactions in accordance with the early termination payment
calculation provisions of Section 6(e)(i)(3) of the ISDA Agreement based on a
payment measure of Market Quotation and a payment method of Second Method. For
purposes of giving effect to the foregoing, the Termination Currency shall be
United States Dollars. For purposes hereof, "Event of Default" means, in the
context of Party A, (i) the failure to make, when due, any payment required of
it under this Confirmation and such failure is not remedied within three
Business Days following written notice of such failure, or (ii) the occurrence
with respect to Party A of any of the Bankruptcy events set out in Section
5(a)(vii) of the ISDA Agreement. In the context of Party B, "Event of Default"
means (i) the failure to make, when due, any payment required of it under this
Confirmation and such failure is not remedied within three Business Days
following written notice of such failure, (ii) the occurrence with respect to
Party B of any of the Bankruptcy events set out in Section 5(a)(vii) of the ISDA
Agreement, (iii) the occurrence of an "Event of Default" as such term is defined
in a Credit Agreement, dated as of November 17, 1999, made by and among Warnaco
Inc., The Warnaco Group, Inc., certain banks and financial institutions, as the
"Initial Lenders", The Bank of Nova Scotia and Salomon Smith Barney, Inc., as
"Co-Lead Arrangers" and "Co-Book Managers", Citibank, N.A., as "Syndication
Agent", Societe Generale and Commerzbank AG, as "Co-Documentation Agents" and
The Bank of Nova Scotia as "Administrative Agent", as amended and supplemented
from time to time (the "Credit Agreement"), (iv) Party B at any time during the
Term hereof effects with one or more counterparties (other than Party A),
forward equity purchase transactions pertaining to the purchase of Shares (as
defined below) on a forward basis having an aggregate forward purchase price
which, when combined with the product of the Number of Shares multiplied by the
Forward Price as on the Termination Date (each as defined below), exceeds USD
150,000,000 (the "Forward Price Limit"); provided, however, that an Event of
Default shall not be constituted pursuant to this Section 2(a)(iv) unless Party
B's breach of the Forward Price Limit is continuing as of the tenth Business Day
following the date on which such breach occurred; (v) the joint and several
guarantee, dated February 10, 2000, in the form appended hereto as Exhibit A
(the "Guarantee") made by the parties set out in the signature page thereof (the
"Guarantors") (x) fails or ceases to be in full force and effect prior to the
satisfaction by Party B of all of its obligations to Party A hereunder; or (z)
any of the Guarantors disaffirms, repudiates or rejects, in whole or in part, or
challenges the validity of the Guarantee; (vi) the occurrence of a default,
event of default or other similar condition or event (however described) in
respect of Party B under any forward equity purchase transaction pertaining to
Shares which may now or hereafter be entered into between Party B and any third
party and such third party has exercised any rights under such forward equity
purchase transaction, which are predicated upon the occurrence of such default,
event of default or similar condition or event, to terminate such transaction
prior to its scheduled termination date. Party B hereby covenants and agrees to
notify Party A immediately upon the occurrence of any such event and the
exercise of such termination rights.
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(b) The Non-defaulting Party may exercise its right to early
termination and liquidate the Terminated Transactions by written notice to the
Defaulting Party, which notice shall set forth the amount of the termination
payment derived by the Non-defaulting Party as set forth above; provided that,
in the event Party A becomes subject to a Bankruptcy in the nature of any one of
the events specified in Section 5(a)(vii) (1), (3), (4), (5), (6) or, to the
extent analogous thereto, (8), of the ISDA Agreement and any court, tribunal or
regulatory authority with competent jurisdiction acting pursuant to any
bankruptcy or insolvency law or other similar law affecting Party A makes an
order which has or purports to have the effect of prohibiting Party B from
terminating the Terminated Transactions at any time after the occurrence of any
such events, then the Terminated Transactions shall be deemed to have been
terminated immediately upon the occurrence of any of the events specified in
Section 5(a)(vii) (1), (3), (5), (6) or, to the extent analogous thereto, (8)
and as of the time immediately preceding the institution of the relevant
proceeding or the presentation of the relevant petition in respect of Section
5(a)(vii) (4) or, to the extent analogous thereto, (8).
(c) In the event the termination payment derived in accordance with
the foregoing represents an amount owing by the Non-defaulting Party to the
Defaulting Party, the Non-defaulting Party shall have the right to set off such
termination payment against any amounts payable (whether at such time or in the
future or upon the occurrence of a contingency) by the Defaulting Party to the
Non-Defaulting Party (irrespective of the currency or the place of payment of
the obligation) under any other agreement between the Defaulting Party and the
Non-Defaulting Party (the "Other Agreement Amount"). For this purpose, the
termination payment or the Other Agreement Amount may be converted into the
currency in which the other is denominated by the Non-defaulting Party acting in
a commercially reasonable manner. If all or part of the Other Agreement Amount
is not then due, such Other Agreement Amount, or part thereof, may be
present-valued by the Non-defaulting Party acting in a commercially reasonable
manner. If all or part of the Other Agreement Amount is unascertained, the
Non-defaulting Party may in good faith estimate such amount and set-off in
respect of the estimate subject to accounting to the Defaulting Party when the
obligation is ascertained.
3. BASIC REPRESENTATIONS
Each of the parties hereto makes to the other each of the "Basic
Representations" contained in Section 3(a) and (c) of the ISDA Agreement.
4. TRANSFERABILITY
Neither this Confirmation nor any interest or obligation in or under
this Confirmation may be transferred (whether by way of security or otherwise)
by either party without the prior written consent of the other party and any
purported transfer in violation hereof shall be void.
5. JURISDICTION
The Confirmation will be governed and construed in accordance with
the laws of the State of New York, without reference to the choice of law
doctrine. With respect to any suit, action or proceedings relating to this
Confirmation ("Proceedings"), each party irrevocably:
(i) submits to non-exclusive jurisdiction of the courts of the
State of New York; and
(ii) waives any objection which it may have at any time to the
laying of venue of any
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Proceedings brought in any such court, waives any claim that
such Proceedings have been brought in an inconvenient forum
and further waives the right to object, with respect to such
Proceedings, that such court does not have any jurisdiction
over such party. Nothing in this Confirmation precludes either
party from bringing Proceedings in any other jurisdiction nor
will the bringing of Proceedings in any one or more
jurisdictions preclude the bringing of Proceedings in any
other jurisdiction.
6. TERMS
The terms of the particular Transaction to which this Confirmation
relates are as follows:
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I. General Terms
Trade Date: February 10, 2000
Effective Date: February 10, 2000
Termination Date: August 31, 2002
Optional Termination Date: Any Business Day during the Term
hereof after the Accumulation Period
End Date, as selected by Party B in
accordance with the Notice provision
of the Settlement Terms set out
below, provided that Party B may
designate no more than four Optional
Termination Dates per Calculation
Period; provided further, however,
that in the event Party B designates
an Optional Termination Date in
respect of which Party B has elected
settlement in accordance with the
Net Share Settlement or Cash
Settlement provisions set out below,
Party B shall not designate any
further Optional Termination Dates
in respect of which Party B intends
to elect settlement by way of Net
Share Settlement or Cash Settlement
until such time as the settlement
process specified below (including
the Make-whole provisions) in
respect of the initial Optional
Termination Date has been completed.
If Party B elects an Optional
Termination Date within 90 days
after the Accumulation Period End
Date, Party B shall pay Party A on
the settlement date for such
Optional Termination Date, an amount
equal to USD 50,000 times the
Relevant Share Number divided by the
Number of Shares as of the
Accumulation Period End Date.
Forward Purchase Seller: Party A
Forward Purchase Buyer: Party B
Exchange: New York Stock Exchange
Shares: The Warnaco Group, Inc. common
shares, par value $0.01 (Exchange
designation "WAC"), CUSIP No.
934390105, quoted in USD on the
Exchange.
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Accumulation Period: The period commencing on and
including the Effective Date to and
including the earlier of (x) the
date by which Party A, or any party
related to Party A which has been
designated by Party A to acquire
Shares in respect of this
Transaction (the "Hedge Entity"),
has, by means of one or more
purchase transactions effected on
the Exchange through such period,
accumulated 2,600,000 Shares; or (y)
the third Business Day following the
date on which Party B's notice to
Party A, given in accordance with
Section 12 of the ISDA Agreement,
requesting the termination of the
Accumulation Period becomes
effective in accordance with Section
12 (the date on which such
accumulation is achieved, such
aggregate purchase price is
incurred, or the third Business Day
following the effective date of such
notice (whichever is sooner) being
the "Accumulation Period End Date").
Notwithstanding the foregoing, Party
B shall have no right to terminate
the Accumulation Period until Party
A has accumulated at least 1,000,000
Shares.
Party A shall provide to Party B, no
sooner than the third and no later
than the fifth Business Day
following the trade date of each
purchase transaction, notice setting
out the purchase transaction
effected by Party A or the Hedge
Entity on the relevant trade date.
Party A shall notify Party B of
Party A's calculation of the Initial
Price on or before the third
Business Day following the
Accumulation Period End Date.
Number of Shares: In respect of any Business Day
within the Term hereof, the
aggregate number of Shares yielded
pursuant to Party A's or the Hedge
Entity's purchase program as
referenced in the "Accumulation
Period" provision above, less the
aggregate of the Relevant Share
Numbers for all previous partial
settlements (as contemplated by the
Settlement Terms) effected prior to
the relevant date of determination.
Business Days: London and New York
Period End Dates: The Period End Dates shall be the
last Business Day of February, May,
August and November, beginning after
the Accumulation Period End Date, up
to and including the Termination
Date or the Optional Termination
Date.
Overnight Rate: "Fed Funds O/N" ASK (offer) rate as
quoted on Telerate Page 4833 as of
16:10 (New York time) on the
relevant day of determination.
Spread: Plus 137.5 basis points (1.375%);
provided, however, that if at any
time during the Term hereof Party B
enters into a transaction with any
other counterparties having terms
which are substantially
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similar to the terms hereof, the
Spread applicable to this
Transaction shall be the higher of
(i) the Spread set out above, or
(ii) the Spread provided for in such
similar transaction.
Daily Forward Amount: For each day of the Accumulation
Period, the Calculation Agent shall
determine an amount (the "Daily
Forward Amount") in accordance with
the following formula:
[Daily Forward Amount i-1+
(Number of Settled Shares i x
WAP i)] x [1 + (Accumulation
Period Floating Rate i / 360)]
where, "Daily Forward Amount i-1"
means the Daily Forward Amount
determined in respect of the day
preceding the relevant day of
determination, "Number of Settled
Shares i" means the number of
Shares settled by Party A or the
Hedge Entity on the relevant date of
determination; "WAP i" means the
weighted average of the respective
purchase prices per Share, each in
USD, including a commission of USD
0.045 per Share, of all Share
purchase transactions settled by
Party A or the Hedge Entity on the
relevant date of determination,
which weighted average shall be
determined by multiplying each
purchase price by the number of
Shares to which such purchase price
is applicable, aggregating the
products thereof and dividing such
sum by the total number of purchased
Shares; and "Accumulation Period
Floating Rate i" means the
Overnight Rate in effect as of the
relevant date of determination, plus
the Spread noted above. For purposes
of giving effect to the foregoing,
Overnight Rate for any day that is a
not Business Day shall be the
Overnight Rate in effect on the
first Business Day preceding such
day.
Initial Price: The Initial Price shall be the Daily
Forward Amount determined in respect
of the Accumulation Period End Date
divided by the Number of Shares.
Forward Period: The period commencing on, but
excluding, the Accumulation Period
End Date, to but excluding the
Termination Date.
Forward Rate: "Zero Coupon USD Swap Rate" quoted
on the day which is two London
Banking Days prior to the first
Business Day of the Forward Period
(the "Determination Date"), for a
Designated Maturity equal to the
actual number of days in Forward
Period, plus Spread.
Zero Coupon
USD Swap Rate: The fixed rate of interest (a) that
would be paid by the Fixed Rate
Payer on a USD interest rate swap in
which (i) the Floating Rate Payer
makes quarterly payments, in
arrears, on the Period End Dates at
the 3-month USD-LIBOR-BBA rate
(appropriately interpolated in the
event the first Calculation Period
following the
</TABLE>
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Accumulation Period is less than
three months); (ii) the Fixed Rate
Payer's payments are compounded
quarterly and paid on the
Termination Date only; (iii) the Day
Count Fraction for both Fixed and
Floating Rate Payers is Actual / 360
and (b) which would impart to same
swap a mark-to-market value of zero
at inception.
Forward Price: The Forward Price on each Optional
Termination Date or the Termination
Date, shall be calculated as
follows:
[1 + (Forward Rate x Day
Count / 360)] x Initial Price
where "Day Count" is the number of
days in the period commencing on and
including the Accumulation Period
End Date to but excluding the
Optional Termination Date or
Termination Date, as applicable.
II. Settlement Terms
Settlement: This Transaction may be settled, in
whole or in part, on any Optional
Termination Date, and, in the event
of a partial settlement, the
unsettled portion shall remain,
during the Term hereof, a
Transaction for purposes of the ISDA
Agreement. Otherwise, this
Transaction shall terminate, and the
each party's obligations in respect
thereof shall be settled as provided
for herein following the occurrence
of the Termination Date. Settlement
shall be effected in accordance with
the settlement mechanism selected by
Party B in its notice given in
accordance with the Notice provision
set out below. All partial
settlements shall be effected in a
minimum amount of 100,000 Shares and
additional integral multiples of
1000 Shares.
Relevant Share Number: The Number of Shares or, in the
context of any partial settlement to
be effected on any Optional
Termination Date, the number of
Shares specified or deemed specified
by Party B in its notice given
pursuant to the Notice provision set
out below.
Physical Settlement: Where Physical Settlement is
applicable, on the Optional
Termination Date or Termination
Date, Party A or its Hedge Entity
shall deliver to Party B Shares
equal to the Relevant Share Number,
and Party B shall pay to Party A an
amount, in USD, equal to the product
of the Forward Price, as determined
on the Optional Termination Date or
the Termination Date, as applicable,
multiplied by the Relevant Share
Number (the "Settlement Price"). Any
delivery made pursuant to this
provision shall be on a delivery
versus payment basis and the due
date of such delivery shall be
subject to adjustment in accordance
with Section 6.2 of the Equity
Definitions in the event of the
occurrence of a Settlement
Disruption Event.
</TABLE>
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Disposition Period: Where Cash Settlement or Net Share
Settlement is elected or otherwise
applies, on the Optional Termination
Date or Termination Date (as
applicable) (the "Commencement
Date"), Party A or the Hedge Entity
shall commence selling the Shares
acquired by Party A or the Hedge
Entity during the Accumulation
Period. The following definitions
will apply to this sale program. (I)
"Final Trading Date": the earlier of
(1) the date on which Party A, or
the Hedge Entity, has effected
transactions on the Exchange by
which it has completed the sale of
Shares equal to the Relevant Share
Number, (2) the 90th calendar day
following the Commencement Date,
and, in the case of Net Share
Settlement only, (3) the date on
which Party A, or the Hedge Entity,
has effected transactions on the
exchange such that the Daily
Settlement Amount (as defined below)
is an amount less than or equal to
zero (a "Zero Settlement Amount");
provided, however, that Party A and
the Hedge Entity shall be deemed not
to have effected transactions such
that the absolute value of a
negative Daily Settlement Amount is
equal to or greater than the closing
price for one Exchange Board Lot
(100) of Shares, as reported by the
Exchange in respect of the Final
Trading Date. (II) "Final Settlement
Date": the day on which any sale
transaction effected on the Exchange
on the Final Trading Date would
settle. (III) "Disposition
Settlement Day": each day of the
period commencing on, and including,
the Commencement Date to, and
including, the Final Settlement
Date. (IV) "Disposition Trading
Day": in respect of any Disposition
Settlement Day, the day on which any
sale transaction effected on the
Exchange that settles on such
Disposition Settlement Day is
effected. (V) "Disposition Period":
the period beginning with the
Commencement Day, and continuing up
to and including the Final
Settlement Date. Notwithstanding the
foregoing, the Disposition Period
shall not be less than 15 days and
Party A shall, in effecting sales,
observe the volume constraints
prescribed by Rule 10b-18 under the
Securities Exchange Act of 1934 as
if those constraints applied to
sales of securities.
Daily Settlement Amount: Where Cash Settlement or Net Share
Settlement is applicable, for each
day beginning with the Commencement
Day, Party A shall determine an amount
(the "Daily Settlement Amount"), in
USD, in accordance with the
following formulae:
SA 0 = Forward Price x Relevant Share
Number SA i = SA i-1 x (1+ ON i-1/360)
- Number of Settled Shares i x P i
where "Number of Settled Shares i"
means the number of Shares the sale
of which is settled by Party A or
its Hedge Entity, on the relevant
day of determination, "P i" means the
greater of (a) the weighted average
of the sale prices per Share,
including a
</TABLE>
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<S> <C>
commission of USD 0.045 per Share,
of all Share sale transactions
settled by Party A or the Hedge
Entity on the relevant day of
determination and (b) the modified
volume-weighted average per-Share
price as determined by means of the
Bloomberg service, for trading in
the Shares on the Disposition
Trading Day whose corresponding
Disposition Settlement Day is the
relevant day of determination, and
adjusted by Party A to (i) include a
commissions of USD 0.045 per Share
(ii) exclude the first trade in the
Shares effected on the Exchange on
such Disposition Trading Day; and
(iii) exclude all trades in Shares
effected on the Exchange on such
Disposition Trading Day within 60
minutes of the close of trading on
such day, "SA 0" means the Daily
Settlement Amount determined in
respect of the Commencement Date,
Forward Price is as determined on
the Optional Termination Date or the
Termination Date, as applicable,
"SA i" means the Daily Settlement
Amount determined in respect of the
relevant day of determination,
"SA i-1" means the Daily Settlement
Amount determined for the day
preceding the relevant day of
determination, and ON i-1 means a
rate of interest equal to the
Overnight Rate in effect as of the
day preceding the relevant day of
determination, plus the Spread.
The Daily Settlement Amount
determined in respect of the Final
Settlement Date shall be the Final
Settlement Amount. For purposes of
giving effect to the foregoing,
"Number of Settled Sharesi" and
"VWAP i" shall be deemed to be zero
on any day in the Disposition Period
which is not an Exchange Business
Day.
Notice of Sale Transactions: Party A shall provide to Party B, on
or before the first Business Day
following the trade date of each
sale transaction, notice setting out
the sale transactions effected by
Party A or the Hedge Entity on the
relevant trade date and Party A's
calculation of the Daily Settlement
Amount in respect of such trade
date.
Cash Settlement: Where Cash Settlement is applicable,
if the Final Settlement Amount as
determined above is negative, Party
A shall pay to Party B the absolute
value of such amount on the Final
Settlement Date. If such amount is
positive, Party B shall pay to Party
A such amount on the later of (i)
the Final Settlement Date or (ii)
the first Business Day following the
date on which Party A's notice to
Party B that such Final Settlement
Amount is owing by Party B becomes
effective in accordance with Section
12 of the ISDA Agreement.
Net Share Settlement: Where Net Share Settlement is
applicable, if the Final Settlement
Amount is a Zero Settlement Amount,
then Party A or its Hedge Entity
shall deliver to Party B (1) Shares
equal in number to the number of
unsold Hedge Shares, and (2) the
absolute value of the Final
Settlement Amount, in USD, on or
before the Net Share
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Settlement Date. If the Final
Settlement Amount is positive, Party
A shall determine a number of Shares
(the "Initial Settlement Number") in
accordance with the following
formula:
Final Settlement Amount / Closing
Price
where "Closing Price" is the closing
price of the Shares as reported by
the Exchange on the Final Settlement
Date, and Party B shall, at its
option, either (i) deliver to Party
A Shares equal in number to such
Initial Settlement Number (such
Shares being the "Settlement
Shares") or (ii) pay to Party A an
amount in USD equal to the Final
Settlement Amount, on or before the
Net Share Settlement Date.
If, pursuant to the preceding
paragraph, Party B has elected to
deliver Settlement Shares, on the
Net Share Settlement Date, Party A
or its Hedge Entity shall commence
selling the Settlement Shares and
shall continue calculating the Daily
Settlement Amount as specified
above. On each day until the earlier
of 90 calendar days following the
Net Share Settlement Date or the day
on which the Daily Settlement Amount
is a Zero Settlement Amount, (such
day being the "Make-Whole Period End
Date" and the period commencing on
the Net Share Settlement Date up to
such day being the "Make-Whole
Period"), Party A shall calculate
(i) an amount (the "Daily Make-Whole
Amount") according to the formula:
Daily Settlement Amount -
Closing Price x
Remaining Number of Shares
and (ii) a number of shares (the
"Daily Make-Whole Number") according
to the formula:
Daily Make-Whole Amount /
Closing Price
where "Closing Price" is the closing
price of the Shares as reported by
the Exchange on the day of
determination, and Remaining Number
of Settlement Shares is (i) the
Initial Settlement Number; (ii)
minus the aggregate of all Shares
sold, on a settlement basis,
pursuant to this provision during
the Make-Whole Period, (iii) plus
the aggregate of all Make-Whole
Shares, as defined below, delivered
to Party A pursuant to this
provision (iv) minus the aggregate
of all Shares delivered by Party A
to Party B as required below in the
event of a negative Daily Make-Whole
Amount. If, on (a) the tenth
Business Day following the Net Share
Settlement Date and any following
tenth Business Day during the
Make-Whole Period, the Daily
Make-Whole Amount is greater than
1,000,000, or (b) on any Business
Day during the Make-Whole Period the
Daily Make-Whole Amount is greater
than 4,000,000,
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Party B shall either (i) deliver to
Party A, Shares equal in number to
the Daily Make-Whole Number (such
Shares being the "Make-Whole
Shares") on or before the first
Business Day following the relevant
day of demand; or, at the option of
Party B, (ii) pay to Party A an
amount in USD equal to the Daily
Make-Whole Amount to be paid on or
before the first Business Day
following such day of demand. In the
event that Party B elects option
(ii), then the Daily Settlement
Amount shall be adjusted downwards
by the Daily Make-Whole Amount on
the day Party A receives the full
payment. If (x) on any tenth
Business Day following the Net Share
Settlement Date and any following
tenth Business Day during the
Make-Whole Period, the Daily
Make-Whole Amount is negative and
its absolute value is greater than
1,000,000, or (y) on any Business
Day during the Make-Whole Period,
the Daily Make-Whole Amount is
negative and its absolute value is
greater than 4,000,000, Party A
shall, on or before the following
Business Day, deliver to Party B
Shares equal in the number to the
absolute value of the Daily
Make-Whole Number.
On the first Business Day following
the Make-Whole Period End Date (the
"Final Make-Whole Settlement Day"),
Party A will deliver to Party B,
shares equal in number to the
Remaining Number of Settlement
Shares. If the Daily Settlement
Amount, on the Make-Whole Period End
Date (being the "Final Make-Whole
Amount") is positive, then Party B
shall pay to Party A on the Final
Make-Whole Settlement Day an amount
in USD equal to the Final Make-Whole
Amount. If the Final Make-Whole
Amount is negative, then Party A
shall pay to Party B an amount in
USD equal to the absolute value of
the Final Make-Whole Amount.
Break Funding Amount: On any Optional Termination Date,
Party A shall calculate the Break
Funding Amount. If the Break Funding
Amount is positive, then, in
addition to any other amount then
payable by Party B, Party B shall
also pay to Party A, on such date,
the Break Funding Amount. If the
Break Funding Amount is negative,
then Party A shall pay to Party B,
on such date, the absolute value of
the Break Funding Amount. For
purposes, hereof, "Break Funding
Amount" means the amount, determined
by Party A in a commercially
reasonable manner, equal to (1) the
mark-to-market value to Party A as
of the Optional Termination Date, of
a swap incorporating the terms set
out in the definition of Zero Coupon
USD Swap Rate as if (i) Party A were
the Floating Rate Payer, (ii) the
Notional Amount were equal to the
Initial Price multiplied by the
Relevant Share Number; (iii) the
original term of such swap were
equal to the Term hereof, and (iv)
no amounts then due under such swap
remain unpaid, minus (2) an amount
equal to the Relevant Share Number
multiplied by the difference between
the Zero Spread Forward Price
calculated as of the relevant
Optional Termination
</TABLE>
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Date and the Initial Price, where
"Zero Spread Forward Price " is
calculated in the same manner as the
Forward Price but for a Spread of
0%.
Net Share Settlement Date: The second Clearance System Business
Day following the Final Settlement
Date, subject to adjustment in
accordance with Section 6.2 of the
Equity Definitions in the event of
the occurrence of a Settlement
Disruption Event.
Notice: In the event Party B intends to
effect a settlement on any Optional
Termination Date, Party B shall
provide Party A with prior written
notice of its intention to exercise
its rights to settle this
Transaction on such Optional
Termination Date and such notice
must become effective in accordance
with Section 12 of the ISDA
Agreement on or before the 3rd day
preceding the Optional Termination
Date on which Party B intends to
effect a settlement. If Party B's
notice does not become effective on
or before such 3rd day, Party B
shall be deemed to have elected to
effect a settlement on the next
following Optional Termination Date;
provided, however, that no such
notice may be given (i) on any day
during the Accumulation Period; or
(ii) following the occurrence of an
Event of Default with respect to
Party B. Other than in the context
of any partial settlement, Party B
shall indicate in such notice
whether settlement will be by
Physical Settlement, Cash Settlement
or Net Share Settlement. In the
context of any partial settlement,
Party B shall specify the number of
Shares in respect of which
settlement will be effected. If such
notice does not so specify the
manner of settlement, Physical
Settlement shall apply and if such
notice does not specify the number
of Shares in respect of which
settlement will be effected, Party B
shall be deemed to have elected to
effect settlement in respect of the
full Number of Shares then in
effect. If Party B wishes, in the
context of the Termination Date, to
effect settlement otherwise than by
Physical Settlement, Party B shall
so notify Party A and such notice
must become effective in accordance
with Section 12 of the ISDA
Agreement on or before the 3rd day
prior to the Termination Date
failing which Party B shall be
deemed to have elected to utilize
Physical Settlement.
Inability to Sell/Purchase Shares: If, in the context of Net Share
Settlement, Cash Settlement, or any
other provision hereof which, in
order to give effect thereto,
requires Party A to sell Shares
(other than to Party B), (1) Party A
is unable to effect a sale by any
reasonably economic, viable or
practicable means, including a
private placement transaction, of
the requisite number of Shares on or
before the Final Trading Day for
purposes of determining the Final
Settlement Amount for any reason
including, without limitation,
because such Shares have a
prospectus delivery requirement and
Party B is unable to provide Party A
with a current prospectus, or (2)
the Disposition Period otherwise
expires prior to Party A being able
to effect the
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
necessary sales, then, Party B shall
be deemed to have elected Physical
Settlement with respect to the
unsold portion of such requisite
number of Shares, and Party B shall,
within one Business Day of the date
it is advised by Party A that a sale
of all such Shares was not effected,
repurchase the unsold Shares, for
USD, in an amount per Share that,
when combined with all amounts
received by Party A for all effected
sales of Shares, results in Party A
receiving an amount equal to the
amount Party A would have received
had Physical Settlement been
elected. If, in the context of
Physical Settlement or the
application of the Registration of
Shares provision or any other
provision of this Confirmation
which, in order to give effect
thereto, requires delivery of Shares
to Party B by Party A, Party B is
unable, due to the application of
applicable law, at the relevant time
to take delivery of such Shares, a
Termination Event shall be deemed to
have occurred for purposes of the
ISDA Agreement and in respect of
which (i) Party B shall be the
Affected Party, (ii) this
Transaction shall be the only
Affected Transaction, (iii) and the
payment measure shall be Loss (as
such terms are defined in the ISDA
Agreement).
Good Delivery: Any party required to deliver Shares
hereunder (the Delivering Party")
shall transfer good title to such
Shares, and such Shares shall be
freely transferable (together with
any prospectus required by
applicable law) and free and clear
of any liens, charges, claims and
encumbrances. Delivery shall be
effected by book-entry transfer of
the Shares to an account with The
Depository Trust Company (the
"Clearance System") in the name of
the recipient (or, where escrow
settlement is applicable, the name
of the escrow agent) as is
designated by the recipient.
</TABLE>
III. Dividends
If on any day during the Term hereof a cash dividend paid by Party B in
respect of the Shares the record date of which precedes the Termination Date, is
received by Party A or the Hedge Entity, Party A or the Hedge Entity shall pay
to Party B an amount equal to such dividend on or before the second Business Day
immediately following the date of receipt of such dividend by Party A or the
Hedge Entity (such second Business Day being the "Dividend Payment Date"). Upon
the request by Party B (which must be recieved by Party A on or before 10:00
a.m. (New York time) on the relevant Dividend Payment Date), Party A shall
deliver to Party B the equivalent of such amount in Shares (less a commission of
not more than USD 0.045 per Share) which equivalent shall be based upon the
price at which Party A is then able (acting reasonably) to purchase Shares plus
an amount, in USD, equal to any residual cash in the event that the foregoing
amount cannot be fully converted into whole Shares.
IV. Decline in Share Price/Decline in Credit Rating/Termination of Credit
Agreement
In the event that on any Business Day during the Term of this
Transaction (other than the Accumulation Period) or on any of the five Business
Days preceding such Business Day (i) the closing price
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<PAGE>
per Share as quoted by the Exchange on such day is USD $5.00 or less, (ii)
Standard & Poor's Rating Service, a division of McGraw-Hill Inc., reports a
rating below BBB-, or no longer assigns a rating, or Moody's Investor Services
Inc. reports a rating below Baa3, or no longer assigns a rating, with respect to
Party B's Long-Term Debt, or (iii) Party B prepays all amounts outstanding
under, and terminates, the Credit Agreement, or provides notice of an intention
to prepay all amounts outstanding under, and terminate, the Credit Agreement or
all commitments of the Lenders thereunder have terminated or expired, Party A
may upon notice to Party B, given in accordance with Section 12 of the ISDA
Agreement, and provided an Event of Default or Termination Event has not
occurred with respect to Party A or is then continuing (and which, in the
context of a Termination Event, renders this Transaction an Affected
Transaction) and provided an Early Termination Date has not been designated in
respect of this Transaction, elect to terminate this Transaction in its
entirety. Party B shall, on or before the first Business Day following the date
on which Party A's termination notice becomes effective, notify Party A of the
manner in which this Transaction shall be settled (and, failing such
notification, Party B shall be deemed to have elected Cash Settlement). If Party
B elects Cash Settlement or Net Share Settlement, for purposes of giving effect
to such provisions, the commencement of the Disposition Period shall be the
first Exchange Business Day following the date on which Party B's election
notice became effective. If Party B elects Physical Settlement, settlement shall
be effected on the third Business Day following the Election Date in accordance
with, and subject to, the Physical Settlement provision set out above. Party B
shall provide written notice to Party A of the occurrence of event (ii) above
and, in the event Party A is, at the relevant time, no longer Administration
Agent under the Credit Agreement, event (iii) above and, for purposes of
applying the five-Business Day period referred to above, the date on which Party
B's notice becomes effective in accordance with Section 12 of the ISDA Agreement
shall be deemed to be the Business Day on which the relevant event occurred;
provided, however, that the failure of Party B to so notify Party A of the
occurrence of the relevant event shall in no way preclude Party A from invoking
termination pursuant to this provision in the event Party A becomes aware of
such occurrence by independent means.
The parties hereto agree that the occurrence of the events (i), (ii) or
(iii) referred to in the preceding paragraph shall in no way be construed as the
occurrence of an Event of Default as contemplated by the ISDA Agreement.
For purposes hereof, "Long-Term Debt" means the then current senior
unsecured, non-credit-enhanced, long-term indebtedness issued by Party B.
V. Adjustments
For purposes of Article 9 of the Equity Definitions, any reference to
the term "Share Swap Transaction" shall be deemed to mean "Forward Purchase
Transaction"; provided, however, that "Potential Adjustment Event" shall exclude
the declaration or payment of any cash dividends in respect of the Shares.
Method of Adjustment: Calculation Agent Adjustment
Calculation Agent: Party A
VI. Extraordinary Events
Consequences of Merger Events:
(a) Share-for-Share: Alternative Obligation
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<PAGE>
(b) Share-for-Other: Cancellation and Payment
(c) Share-for-Combined: Alternative Obligation
Nationalization or Insolvency: Cancellation and Payment
VII. Regulatory Event
If during the Term of this Transaction, The Warnaco Group, Inc. effects any
action, including any action with respect to its capital structure, the result
of which is that Party A, or the Hedge Entity, then owns more of any class of
outstanding voting shares of Party B pursuant to this transaction than is
permitted by the Bank Holding Company Act of 1956, as amended, or other federal
legislation (the "Regulatory Limit"), then, Party A shall so notify Party B and
Party B shall be deemed to have elected to partially settle this Transaction but
only to the extent to which the Number of Shares exceeds the Regulatory Limit
(which excess shall be the Relevant Share Number for purposes of the Settlement
terms set out above). If Party B elects Physical Settlement, the relevant
portion of this Transaction shall be settled on the first Business Day following
the Election Date subject to adjustment in accordance with Section 6.2 of the
Equity Definitions in the event of the occurrence of a Settlement Disruption
Event (such Business Day being the Physical Settlement Date). Party B shall
specify the mode of settlement on or before the first Business Day (the
"Election Date") following the date on which Party A's notice to Party B became
effective failing which Party B shall be deemed to have elected Physical
Settlement. If Party B elects Net Share Settlement or Cash-Settlement, for
purposes of giving effect thereto, the number of Shares to be sold shall be the
Relevant Share Number and the Commencement Date of the Disposition Period shall
be deemed to be the first Exchange Business Day following the Election Date. In
addition to any other amount then payable by Party B, Party B shall also pay to
Party A, on (i) the Physical Settlement Date, in the context of a Physical
Settlement election; or (ii) on the Net Share Settlement Date, in the context of
a Net Share or Cash Settlement election, the Break Funding Amount as defined
above except that the reference therein to "Optional Termination Date" shall
mean the Election Date.
VIII. Registration of Shares
Notwithstanding any other provision hereof (including, without limitation, any
election of Net Share Settlement or Cash Settlement by Party B but excluding any
election by Party B of Net Share Settlement or Cash Settlement under "Decline in
Share Price/Decline in Credit Rating" above), unless both parties hereto
conclude that a public sale of the Shares acquired by it or the Hedge Entity in
connection with this Transaction does not require registration under the
Securities Act of 1933 (the "Securities Act"), which conclusion shall be
communicated by each party to the other, by means of any of the methods
specified in Section 12 of the ISDA Agreement, as promptly as is reasonable
practicable, and in any event by the first Business Day following a Termination
Date or Optional Termination Date, as applicable, Physical Settlement shall
apply with respect to such Termination Date or Optional Termination Date unless
the following conditions have been satisfied: (i) on the Optional Termination
Date or Termination Date (or, in the context of a Regulatory Event, the Election
Date), as the case may be, a registration statement (a "Registration Statement")
naming as selling shareholders Party A and the Hedge Entity and covering the
public resale of all Shares held by Party A or the Hedge Entity to hedge this
Transaction and all Shares deliverable by Party B to Party A pursuant to the Net
Share Settlement provisions hereof (collectively, the "Registrable Shares")
shall have been filed with, and declared effective by, the Securities and
Exchange Commission under the Securities Act, and no stop order shall be in
effect with respect to such Registration Statement; (ii) a printed prospectus
relating to the Registrable Shares (including any prospectus supplement thereto
and amendments thereof, a "Prospectus") shall have been delivered to Party A and
the Hedge Entity
15
<PAGE>
in such quantities as Party A shall have requested no later than the Optional
Termination Date, Termination Date or Election Date; (iii) the Registration
Statement and the Prospectus shall be in form and substance reasonably
satisfactory to Party A; (iv) no later than the Exchange Business Day before the
Optional Termination Date, Termination Date or Election Date, Party A and Party
B shall have entered into an agreement (a "Transfer Agreement") in connection
with the public resale of the Registrable Shares by Party A and the Hedge Entity
substantially similar to underwriting agreements customary for underwritten
offerings of equity securities, in form and substance reasonably satisfactory to
Party A and Party B, providing for (without limitation): indemnification of, and
continuation in connection with the liability of, Party A and the Hedge Entity,
the delivery of customary opinions of counsel and accountants "comfort letters",
the continuous effectiveness of the Registration Statement until the fortieth
day after the Optional Termination Date, Termination Date or Election Date, or
if earlier, such time as all Registrable Shares have been resold pursuant
thereto and all expenses in connection with such resale, including all
registration costs and all fees and expenses of counsel for each of Party A and
Party B, have been paid by Party B; (v) Party A and the Hedge Entity shall have
been afforded a reasonable opportunity to conduct a due diligence investigation
with respect to The Warnaco Group, Inc. customary in scope for underwritten
offerings of equity securities, and acceptance of the results of such
investigation by Party A and the Hedge Entity cannot be unreasonably withheld;
(vi) all conditions to the obligations of each party under the Transfer
Agreement shall have been satisfied or waived no later than the Optional
Termination Date, Termination Date or Election Date, and (vii) the
representations and warranties of Party B set forth herein and in the Transfer
Agreement shall be true and correct on the date of delivery of Registrable
Shares to purchasers of such Shares as though made at such time, and Party B
shall have performed all its obligations set forth herein and in such Transfer
Agreement to be performed by such time.
If, in the context of the Decline in Share Price/Decline in Credit Rating/
Termination of Credit Agreement provision, Party B has elected Cash Settlement
or in the event Party B has elected Net Share Settlement and Party B is required
to deliver Shares to Party A and any condition specified in items (i)-(vii) of
the previous paragraph shall not have been satisfied in the manner and at the
times specified therein, Party A may determine to (a) have some or all
Registrable Shares sold in one or more transactions exempt from the registration
requirements of the Securities Act, or (b) extend this Transaction in order to
give Party B more time to satisfy such conditions. If Party A chooses the action
set forth in clause (a) above, Party B shall pay all costs of such sales by
Party A, including, without limitation, any applicable sales or purchase taxes,
transfer taxes and commissions. If Party A chooses the action set forth in
clause (b) above, the Calculation Agent will in its reasonable discretion adjust
the terms hereof to take into account any additional costs to Party A and the
Hedge Entity of such extension.
7. ADDITIONAL REPRESENTATIONS
Each party will be deemed to represent to the other on the date of this
Confirmation that, with respect to this Transaction (1) It is entering into this
Transaction for its own account and not with a view to transfer, resale or
distribution, (2) it is an "accredited investor" within the meaning of Rule
510(a) of Regulation D under the Securities Act and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of this Transaction, and (3) it understands and
acknowledges that this Transaction may involve the purchase or sale of a
"security" as defined in the Securities Act and the securities laws of certain
states, and that any such security has not been registered under the Securities
Act or the securities laws of any state and, therefore, may not be sold,
pledged, hypothecated, transferred or otherwise disposed of unless such security
is registered under the Securities Act and any applicable state securities law,
or an exemption from registration is available.
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<PAGE>
8. ADDITIONAL REPRESENTATIONS AND COVENANTS
(a) Party B Representations
Party B represents to Party A that (1) as of the Trade Date hereof, it
is not in possession of any material non-public information with respect to
itself; (2) as of the Trade Date hereof, it is not entering into this
Transaction for the purpose of manipulating the market price or value of the
Shares; (3) as of the Trade Date hereof, no "restricted period" for purposes of
Rule 102 of Regulation M under the Securities Exchange Act of 1934
(respectively, "Regulation M" and the "Exchange Act") and no tender offer for
Shares (whether by Party B or any other third party) is in effect or (or in the
case of a tender offer by Party B) has been in effect within the preceding ten
Business Days; and (4) it is entering into this Transaction in connection with
its Share repurchase program which was most recently approved by its board of
directors on March 1, 1999 and most recently publicly announced on March 2,
1999, solely for the purposes stated in such board resolution and public
disclosure.
(b) Party B Covenants
Party B covenants to Party A that (1) Party B shall not commence a
"distribution" (as defined in Regulation M) of Shares or a tender offer for
Shares during the Accumulation Period; (2) no "restricted period" for purposes
of Rule 102 of Regulation M will be in effect on any day on which Party A is
required, pursuant to the terms hereof, to deliver Shares to Party B (any such
day being, for purposes of this paragraph, a "Settlement Date", and no tender
offer for Shares by Party B will be in effect on any Settlement Date or within
the preceding ten Business Days of any day thereof; (3) Party B shall not, and
shall cause its affiliated purchasers (as defined in Rule 10b-18 under the
Exchange Act) not to, purchase Shares during the Accumulation Period; (4) Party
B shall not disclose any material non-public information with respect to itself
to Party A without Party A's consent; (5) if at any time during the Disposition
Period Party B comes to have possession of material non-public information with
respect to itself, Party B will notify Party A that a blackout period is in
effect, and when Party B ceases to be in possession of material non-public
information, Party B will notify Party A that the blackout period has ended.
(c) Party A Covenants
Party A covenants to Party B that Party A shall not sell, nor make any
offers to sell during any blackout period or any restricted period in respect of
either of which Party A is in receipt of notice from Party B or Group given in
accordance with Section 12 of the ISDA Agreement.
9. ADDITIONAL AGREEMENT
Each party agrees that it will comply, in connection with this
Transaction and all related or contemporaneous sales and purchases of Shares,
with the applicable provisions of the Securities Act, the Exchange Act, and the
rules and regulations thereunder, including, without limitation, Rules 10b-5
under the Exchange Act, provided that each party shall be entitled to rely
conclusively on any information communicated by the other party concerning such
other party's market activities. Party A represents to Party B and agrees that,
in effecting the purchase transactions referred to opposite "Accumulation
Period", above, Party A shall make bids for and purchases of the Shares only in
accordance with the price, volume, timing, and method of bidding and purchasing
constraints set forth in Rule 10b-18 under the Exchange Act, as if Party A were
the issuer of the Shares and wished to avail itself of the protections afforded
by that rule.
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<PAGE>
10. THIRD PARTY TERMINATION RIGHTS
Party B hereby covenants and agrees with Party A that in the event that
Party B is now or hereafter becomes party to a forward equity purchase
transaction pertaining to Shares with any other party and such transaction
grants to such other party termination rights which are not included herein or,
if included, which may be invoked prior to the time or point at which such
termination rights may be invoked by Party A pursuant to the terms hereof (with
the exception of item (i) of Section (6)(IV) hereunder, which is specifically
excluded from this Section 10), Party B shall immediately notify Party A of the
existence of such termination right and this Confirmation shall be deemed to be
automatically amended in order to incorporate such termination right (together
with all attendant definitions and ancillary provisions contained in such other
transaction which may be necessary to give meaning or effect to such termination
right) for the benefit of Party A hereunder, mutatis mutandis.
11. MISCELLANEOUS
Wire Instructions: Party A:
SunTrust Bank
ABA#061000104
Account No.: Bond Wire Clearance, 9088000095
Attention: Financial Risk Management, Operations
Party B:
ABA #021000089
Citibank N.A.
New York, NY
for credit to: Warnaco Inc. Account #3846-9277
12. OFFICES
(a) The Office of Party A for this Transaction is Atlanta; and
(b) The Office of Party B for this Transaction is New York.
13. NOTICE ADDRESSES
Notices and communications under this Confirmation should be addressed to:
For Party A:
SunTrust Equitable Securities
303 Peachtree Street, 23rd Floor
Atlanta, Georgia 30308
Attn: Fred D. Woolf, Vice President
For Party B:
The Warnaco Group, Inc.
90 Park Avenue
18
<PAGE>
New York, New York 10016
Attn: Carl Deddens
Telephone: (212) 287-8281
Please confirm that the foregoing correctly sets forth the terms of our
agreement, as amended, by executing the copy of this Confirmation enclosed for
that purpose and returning it to us or by sending to us a letter or facsimile
substantially similar to this letter, which letter or facsimile sets forth the
material terms of the Transaction to which this Confirmation relates and
indicates agreement to those terms.
Yours truly,
SUNTRUST BANK
By:____________________________
Name:
Title:
Confirmed as of the date first above written:
THE WARNACO GROUP, INC.
By:______________________________
Name:
Title:
19
<PAGE>
EXHIBIT A
GUARANTY
GUARANTY (this "Guaranty"), dated as of February 10, 2000, made by certain
of the Persons listed on the signature pages hereof (each Person listed on the
signature pages hereof, a "Guarantor" and collectively, the "Guarantors"), in
favor of SunTrust Bank (the "Bank").
PRELIMINARY STATEMENT. The Warnaco Group, Inc., a Delaware corporation,
("Group") has heretofore entered into an Equity Forward Purchase Transaction
with the Bank as evidenced by way of a Confirmation, dated as of February 10,
2000, (as amended, modified or supplemented from time to time, the
"Transaction"). Group and the Bank may hereafter enter into a 1992 ISDA Master
Agreement (Multicurrency - Cross Border), as published by the International
Swaps and Derivatives Association, Inc., (such agreement, as it may be amended
or supplemented from time to time being the"Master Agreement"). Each Guarantor
has derived and will continue to derive substantial direct and indirect benefits
from the Transaction . It is a condition precedent to the Bank's obligations
under the Transaction that each Guarantor shall have executed and delivered this
Guaranty.
NOW THEREFORE, for good and valuable consideration the receipt of which is
hereby acknowledged, and in order to induce the Bank to enter into and perform
its obligations under the Transaction and, following completion of the Master
Agreement, the Master Agreement, each Guarantor agrees, for the benefit of the
Bank, as follows:
ARTICLE I
GUARANTY PROVISIONS
SECTION I.1 Guaranty. Each Guarantor hereby jointly and severally,
absolutely, unconditionally and irrevocably guarantees the full and punctual
payment when due, whether at stated maturity, by acceleration or otherwise, of
all obligations of Group under the Transaction and the Master Agreement which
Group has incurred or may incur to the Bank in connection with the Transaction
and the Master Agreement and whether for scheduled payments, early termination
payments, interest, fees, expenses or otherwise (collectively, the
"Obligations"); provided, however, that each Guarantor shall be liable under
this Guaranty for the maximum amount of such liability that can be hereby
incurred without rendering this Guaranty, as it relates to such Guarantor,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer, and not for any greater amount. This Guaranty constitutes a guaranty
of payment when due and not of collection, and each Guarantor specifically
agrees that it shall not be necessary or required that the Bank exercise any
right, assert any claim or demand or enforce any remedy whatsoever against Group
or any other person before or as a condition to the obligations of such
Guarantor hereunder.
SECTION I.2 Acceleration of Guaranty. Each Guarantor agrees that, in the
event of the dissolution or insolvency of Group or the dissolution of such
Guarantor, or the inability or failure of Group or such Guarantor to pay debts
as they become due, or an assignment by Group or such Guarantor for the benefit
of creditors, or the commencement of any case or
1
<PAGE>
proceeding in respect of Group or such Guarantor under any bankruptcy,
insolvency or similar laws, and with respect to any involuntary case or
proceeding, such case or proceeding remains undismissed for a period of 30 days,
and if any such event shall occur at a time when any of the Obligations may not
then be due and payable, such Guarantor will pay to the Bank forthwith the full
amount which would be payable hereunder by such Guarantor if all such
Obligations were then due and payable.
SECTION I.3 Guaranty Absolute, etc. This Guaranty shall in all respects be
a joint and several, continuing, absolute, unconditional and irrevocable
guaranty of payment, and shall remain in full force and effect until all
Obligations of Group have been paid in full and all obligations of each
Guarantor hereunder shall have been paid in full. Each Guarantor guarantees that
the Obligations of Group will be paid strictly in accordance with the terms of
the Transaction, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
Bank. The liability of each Guarantor under this Guaranty shall be joint and
several and shall be absolute, unconditional and irrevocable irrespective of:
(a) any lack of validity, legality or enforceability of the
Transaction or the Master Agreement;
(b) the failure of the Bank
(i) to assert any claim or demand or to enforce any right or
remedy against Group or any other person (including any other
guarantor) under the provisions of the Transaction or the Master
Agreement or otherwise, or
(ii) to exercise any right or remedy against any other guarantor
of the Obligations;
(c) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other extension,
compromise or renewal of any of the Obligations;
(d) any reduction, limitation, impairment or termination of the
Obligations for any reason, including any claim of waiver, release,
surrender, alteration or compromise, and shall not be subject to (and such
Guarantor hereby waives any right to or claim of) any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the
invalidity, illegality, nongenuineness, irregularity, compromise,
unenforceability of, or any other event or occurrence affecting, the
Obligations;
(e) any amendment to, rescission, waiver, or other modification of, or
any consent to departure from, any of the terms of the Transaction or
Master Agreement;
(f) any amendment to or waiver or release or addition of, or consent
to departure from, any other guaranty, held by the Bank securing any of the
Obligations; or
(g) any other circumstance which might otherwise constitute a defense
available to, or a legal or equitable discharge of Group, any surety or any
guarantor.
2
<PAGE>
SECTION I.4 Reinstatement, etc. Each Guarantor agrees that this Guaranty
shall continue to be effective or be reinstated, as the case may be, if at any
time any payment (in whole or in part) of any of the Obligations is rescinded or
must otherwise be restored by the Bank, upon the insolvency, bankruptcy or
reorganization of Group, all as though such payment had not been made.
SECTION I.5 Waiver, etc. Each Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Obligations and this Guaranty and any requirement that the Bank exhaust any
right or take any action against Group or any other person (including any other
guarantor) or entity or any collateral securing the Obligations, as the case may
be.
SECTION I.6 Postponement of Subrogation, etc. None of the Guarantors will
exercise any rights which it may acquire by way of rights of subrogation under
this Guaranty, by any payment made hereunder or otherwise, until the prior
payment, in full and in cash, of all Obligations. Any amount paid to any such
Guarantor on account of any such subrogation rights prior to the payment in full
of all Obligations shall be held in trust for the benefit of the Bank and shall
immediately be paid to the Bank and credited and applied against the
Obligations; provided, however, that if
(a) a Guarantor has made payment to the Bank of all or any part of the
Obligations, and
(b) all Obligations have been paid in full,
the Bank will execute and deliver to such Guarantor appropriate documents
(without recourse and without representation or warranty) necessary to evidence
the transfer by subrogation to such Guarantor of an interest in the Obligations
resulting from such payment by such Guarantor. In furtherance of the foregoing,
for so long as any Obligations remain outstanding, each Guarantor shall refrain
from taking any action or commencing any proceeding against Group (or its
successors or assigns, whether in connection with a bankruptcy proceeding or
otherwise) to recover any amounts in the respect of payments made under this
Guaranty to the Bank.
SECTION I.7 Successors, Transferees and Assigns; Transfers of Notes, etc.
This Guaranty shall:
(a) be binding upon each Guarantor, and its successors, transferees
and assigns; and
(b) inure to the benefit of and be enforceable by the Bank.
Without limiting the generality of clause (b), the Bank may, to the extent
permitted by the terms of the Transaction or the Master Agreement, assign or
otherwise transfer (in whole or in part) held by it to any other person or
entity, and such other person or entity shall thereupon become vested with all
rights and benefits in respect thereof granted to the Bank hereunder.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION II.1 Representations and Warranties. Each Guarantor hereby
represents and warrants unto the Bank:
SECTION II.1.1 Authority. Each Guarantor has full power and authority to
enter into and perform its obligations under this Guaranty.
SECTION II.1.2 Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by each Guarantor of this Guaranty have been duly
authorized by all necessary corporate action (including but not limited to any
consent of stockholders required by law or its organizational documents), and do
not
(a) contravene each Guarantor's organizational documents;
(b) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting each Guarantor;
or
(c) result in, or require the creation or imposition of, any lien,
security interest, encumbrance, pledge or hypothecation on any of such
Guarantor's properties.
SECTION II.1.3 Validity, etc. This Guaranty constitutes the legal, valid
and binding obligations of each Guarantor enforceable in accordance with its
terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws affecting creditors'
rights generally and general principles of equity.
SECTION II.1.4 Authorization, Approval, etc. No authorization, consent,
approval, or other action by, and no notice to, filing with, or license from,
any governmental authority, regulatory body or any other person is required for
due execution, delivery or performance by each Guarantor of this Guaranty.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION III.1 Credit Support Document. This Guaranty shall constitute a
Credit Support Document as contemplated by the Master Agreement.
SECTION III.2 Binding on Successors, Transferees and Assigns; Assignment.
In addition to, and not in limitation of, Section 1.7, this Guaranty shall be
binding upon each Guarantor and its successors, transferees and assigns and
shall inure to the benefit of and be enforceable by the Bank and its successors,
transferees and assigns (to the full extent provided pursuant to Section 1.7);
provided, however, that such Guarantor may not assign any of its obligations
hereunder without the prior written consent of the Bank.
SECTION III.3 Amendments, etc. No amendment to or waiver of any provision
of this
4
<PAGE>
Guaranty, nor consent to any departure by any Guarantor herefrom, shall in any
event be effective unless the same shall be in writing and signed by the Bank,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION III.4 Notices. All notices and other communications provided to any
Guarantor under this Guaranty shall be in writing or by facsimile and addressed,
delivered or transmitted to such Guarantor at 90 Park Avenue, New York, New York
10016, Telecopier No.: 212-687-0480, or at such other address or facsimile
number as may be designated by such Guarantor 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 facsimile, shall be deemed given when
transmitted.
SECTION III.5 No Waiver; Remedies. In addition to, and not in limitation
of, and other provision hereof, no failure on the part of the Bank to exercise,
and no delay in exercising, any right hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
SECTION III.6 Captions. Section captions used in this Guaranty are for
convenience of reference only, and shall not affect the construction of this
Guaranty.
SECTION III.7 Setoff. The Bank shall, upon the occurrence of an Event of
Default as defined in the Transaction or the Master Agreement, 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 any
of the Guarantors then or thereafter maintained with or otherwise held by the
Bank. The rights of the Bank under this Section are in addition to other rights
and remedies (including other rights of setoff under applicable law or
otherwise) which the Bank may have.
SECTION III.8 Severability. Wherever possible each provision of this
Guaranty shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.
SECTION III.9 Governing Law. THIS GUARANTY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. FOR
PURPOSES OF ANY ACTION OR PROCEEDING INVOLVING THIS GUARANTY, EACH GUARANTOR
HEREBY EXPRESSLY SUBMITS TO THE JURISDICTION OF ALL FEDERAL AND STATE COURTS
LOCATED IN THE STATE OF NEW YORK AND CONSENTS THAT IT MAY BE SERVED WITH ANY
PROCESS OR PAPER BY REGISTERED MAIL OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE
STATE OF NEW YORK.
SECTION III.10 Waiver of Jury Trial. EACH GUARANTOR HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS GUARANTY. EACH GUARANTOR ACKNOWLEDGES AND AGREES THAT IT
HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS
5
<PAGE>
PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK
ENTERING INTO THE TRANSACTION AND THE MASTER AGREEMENT.
IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
WARNACO INC.
WARNACO INTERNATIONAL INC.
WARNACO U.S. INC.
MYRTLE AVENUE, INC.
GREGORY STREET, INC.
DESIGNER HOLDINGS, LTD.
OUTLET STORES, INC.
JEANSWEAR HOLDINGS, INC.
CALVIN KLEIN JEANSWEAR COMPANY
CKJ HOLDINGS INC.
By
Title:
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE WARNACO GROUP, INC. FOR THE QUARTER ENDED
APRIL 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-06-2001
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 2,023
<SECURITIES> 0
<RECEIVABLES> 364,508
<ALLOWANCES> 21,513
<INVENTORY> 734,705
<CURRENT-ASSETS> 1,151,171
<PP&E> 513,619
<DEPRECIATION> 167,424
<TOTAL-ASSETS> 2,742,051
<CURRENT-LIABILITIES> 853,663
<BONDS> 1,179,264
103,025
0
<COMMON> 654
<OTHER-SE> 550,500
<TOTAL-LIABILITY-AND-EQUITY> 2,742,051
<SALES> 606,988
<TOTAL-REVENUES> 606,988
<CGS> 425,418
<TOTAL-COSTS> 425,418
<OTHER-EXPENSES> 144,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,852
<INCOME-PRETAX> 45,715
<INCOME-TAX> 17,143
<INCOME-CONTINUING> 28,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,572
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
</TABLE>
