-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TOh2YtBBDH5N811SO+h9VnjPRw0B2eCugDAJpRgFVUF5Wa/le/LPhpswPHNDQKhG lQZK8aStw4GuuypLE1otHQ== 0000910680-98-000323.txt : 19980820 0000910680-98-000323.hdr.sgml : 19980820 ACCESSION NUMBER: 0000910680-98-000323 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980818 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAY LESLIE CO INC CENTRAL INDEX KEY: 0000796226 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 133197085 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09196 FILM NUMBER: 98693895 BUSINESS ADDRESS: STREET 1: 1412 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2122214000 MAIL ADDRESS: STREET 1: 1412 BROADWAY STREET 2: 1 PASSAN DRIVE CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: FAY LESLIE COMPANIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 THE LESLIE FAY COMPANY, INC. 10-Q ================================================================================ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period ended July 4, 1998 Commission File No. 1-9196 THE LESLIE FAY COMPANY, INC. Delaware 13-3197085 (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1412 Broadway New York, New York 10018 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 221-4000 Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- There were 6,812,000 shares of Common Stock outstanding at August 14, 1998. ================================================================================ THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES INDEX
Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of July 4, 1998 and January 3, 1998.................................................3 Consolidated Statements of Operations for the Twenty-Six, Five and Twenty-Two Weeks Ended July 4, 1998, July 5, 1997 and June 4, 1997, respectively...........4 Consolidated Statements of Operations for the Thirteen, Five and Eight Weeks Ended July, 4, 1998, July 5, 1997 and June 4, 1997, respectively.........................5 Consolidated Statements of Cash Flows for the Twenty-Six, Five and Twenty-Two Weeks Ended July 4, 1998, July 5, 1997 and June 4, 1997, respectively...........6 Notes to Consolidated Financial Statements...............................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................25 PART II - OTHER INFORMATION Item 1. Legal Proceedings.....................................................33 Item 2. Changes in Securities.................................................33 Item 3. Defaults Upon Senior Securities.......................................33 Item 4. Submission of Matters to a Vote of Security Holders...................33 Item 5. Other Information.....................................................35 Item 6. Exhibits and Reports on Form 8-K......................................35 SIGNATURES..............................................................................36 INDEX TO EXHIBITS.....................................................................E-1
-2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements. THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
UNAUDITED AUDITED July 4, January 3, ASSETS 1998 1998 ---------------- ---------------- Current Assets: Cash and cash equivalents $8,568 $18,455 Restricted cash and cash equivalents 3,786 1,358 Restricted short term investments -- 2,989 Accounts receivable- net of allowances for possible losses of $3,207 and $3,236, respectively 12,762 9,747 Inventories 33,585 26,701 Prepaid expenses and other current assets 1,045 807 ---------------- ---------------- Total Current Assets 59,746 60,057 Property, Plant and Equipment, at cost, net of accumulated depreciation of $91 and $14, respectively 1,725 845 Deferred Charges and Other Assets 105 149 ---------------- ---------------- Total Assets $61,576 $61,051 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $6,606 $11,530 Accrued expenses and other current liabilities 4,494 4,542 Accrued expenses and other current confirmation liabilities 3,786 4,347 Income taxes payable 124 25 Current portion of capitalized leases 46 160 ---------------- ---------------- Total Current Liabilities 15,056 20,604 Excess of revalued net assets acquired over equity under fresh-start reporting, net of accumulated amortization of $4,952 and $2,667, respectively 8,755 11,041 Long term debt-capitalized lease 42 49 Deferred liabilities 240 143 ---------------- ---------------- Total Liabilities 24,093 31,837 ---------------- ---------------- Commitments and Contingencies Stockholders' Equity: Preferred stock, $ 01 par value; 500 shares authorized; no shares issued and outstanding -- -- Common stock, $ 01 par value; 20,000 and 9,500 shares authorized, respectively; 6,812 and 6,800 shares issued and outstanding, respectively 68 68 Capital in excess of par value 28,958 25,837 Accumulated retained earnings 8,457 3,309 ---------------- ---------------- Total Stockholders' Equity 37,483 29,214 Total Liabilities and Stockholders' Equity $61,576 $61,051 ================ ================
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements -3-
UNAUDITED AUDITED Reorganized Predecessor Company Company ------------------------------------ -------------- Twenty-Six Five Twenty-Two Weeks Ended Weeks Ended Weeks Ended July 4, July 5, June 4, 1998 1997 1997 -------------- -------------- -------------- Net Sales $73,934 $5,535 $197,984 Cost of Sales 54,447 4,410 147,276 -------------- -------------- -------------- Gross profit 19,487 1,125 50,708 -------------- -------------- -------------- Operating Expenses: Selling, warehouse, general and administrative expenses 14,739 1,632 35,459 Depreciation and amortization expense 70 -- 2,090 -------------- -------------- -------------- Total operating expenses 14,809 1,632 37,549 Other income (575) (118) (1,196) Amortization of excess revalued net assets acquired over equity (2,286) (381) -- -------------- -------------- -------------- Total operating expenses, net 11,948 1,133 36,353 -------------- -------------- -------------- Operating income (loss) 7,539 (8) 14,355 Interest and Financing Costs (excludes contractual interest of $-0-, $-0- and $7,513, respectively) 320 (102) 1,372 -------------- -------------- -------------- Income before reorganization costs, taxes, gain on sale, fresh-start revaluation and extraordinary item 7,219 94 12,983 Reorganization Costs -- -- 3,379 -------------- -------------- -------------- Income before taxes, gain on sale, fresh-start revaluation and extraordinary item 7,219 94 9,604 Provision for taxes 2,072 20 451 -------------- -------------- -------------- Net Income before gain on sale, fresh-start revaluation and extraordinary item 5,147 74 9,153 Gain on disposition of Sassco Fashions Line (net of $3,728 of income taxes), loss on revaluation of assets pursuant to adoption of fresh-start reporting and extraordinary gain on debt discharg -- -- 136,341 -------------- -------------- -------------- Net Income $5,147 $74 $145,494 ============== ============== ============== Net Income per Common Share - Basic $0.76 $0.01 * ============== ============== ============== - Diluted $0.72 $0.01 * ============== ============== ============== Weighted Average Common Shares Outstanding - Basic 6,801,967 6,800,000 * ============== ============== ============== - Diluted 7,149,484 6,800,000 * ============== ============== ==============
* Earnings per share is not presented for the twenty-two weeks ended June 4, 1997 because such presentation would not be meaningful. The old stock was canceled under the plan of reorganization and the new stock was not issued until the consummation date. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -4-
UNAUDITED UNAUDITED Reorganized Predecessor Company Company ------------------------------------ -------------- Thirteen Five Eight Weeks Ended Weeks Ended Weeks Ended July 4, July 5, June 4, 1998 1997 1997 -------------- -------------- -------------- Net Sales $28,676 $5,535 $55,229 Cost of Sales 21,187 4,410 41,289 -------------- -------------- -------------- Gross profit 7,489 1,125 13,940 -------------- -------------- -------------- Operating Expenses: Selling, warehouse, general and administrative expenses 7,203 1,632 12,354 Depreciation and amortization expense 53 -- 846 -------------- -------------- -------------- Total operating expenses 7,256 1,632 13,200 Other income (303) (118) (239) Amortization of excess revalued net assets acquired over equity (1,143) (381) -- -------------- -------------- -------------- Total operating expenses, net 5,810 1,133 12,961 -------------- -------------- -------------- Operating income (loss) 1,679 (8) 979 Interest and Financing Costs (excludes contractual interest of $-0-, $-0- and $3,005, respectively) 130 (102) 504 -------------- -------------- -------------- Income before reorganization costs, taxes, gain on sale, fresh-start revaluation and extraordinary item 1,549 94 475 Reorganization Costs -- -- 2,911 -------------- -------------- -------------- Income (loss) before taxes, gain on sale, fresh-start revaluation and extraordinary item 1,549 94 (2,436) Provision for taxes 171 20 135 -------------- -------------- -------------- Net Income (loss) before gain on sale, fresh-start revaluation and extraordinary item 1,378 74 (2,571) Gain on disposition of Sassco Fashions Line (net of $3,728 of income taxes), loss on revaluation of assets pursuant to adoption of fresh-start reporting and extraordinary gain on debt discharge -- -- 136,341 -------------- -------------- -------------- Net Income $1,378 $74 $133,770 ============== ============== ============== Net Income per Common Share - Basic $0.20 $0.01 * ============== ============== ============== - Diluted $0.19 $0.01 * ============== ============== ============== Weighted Average Common Shares Outstanding - Basic 6,803,956 6,800,000 * ============== ============== ============== - Diluted 7,166,261 6,800,000 * ============== ============== ==============
* Earnings per share is not presented for the eight weeks ended June 4, 1997 because such presentation would not be meaningful. The old stock was canceled under the plan of reorganization and the new stock was not issued until the consummation date. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -5-
UNAUDITED AUDITED Reorganized Predecessor Company Company ------------------------------- --------------- Twenty-Six Five Twenty-Two Weeks Ended Weeks Ended Weeks Ended July 4, 1998 July 5, 1997 June 4, 1997 -------------- --------------- ----------------- Net income $5,147 $74 $145,494 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 76 -- 2,222 Amortization of excess net assets acquired over equity (2,286) (381) -- Provision for possible losses on accounts receivable 19 (99) 199 Provision for compensation under stock option grants 1,080 -- -- Gain on sale of fixed assets -- -- (347) Decrease (increase) in: -- Restricted short term investment 2,989 -- -- Accounts receivable (3,034) 5,079 (1,248) Inventories (6,884) (3,845) 25,538 Prepaid expenses and other current assets (238) (4,252) (66) Deferred charges and other assets 44 (249) 125 (Decrease) increase in: Accounts payable, accrued expenses and other current liabilities (4,972) (1,736) (4,167) Income taxes payable 99 (11) (1,515) Deferred credits and other noncurrent liabilities 97 -- 374 Changes due to reorganization activities: Gain on disposition of Sassco Fashions, fresh-start revaluation charge and extraordinary gain on debt discharge -- -- (136,341) Reorganization costs -- -- 3,379 Payment of reorganization costs -- -- (917) Use of pre-consummation deferred taxes 2,042 -- -- -------------- --------------- ----------------- Total adjustments (10,968) (5,494) (112,764) -------------- --------------- ----------------- Net cash (used in) provided by operating activities (5,821) (5,420) 32,730 -------------- --------------- ----------------- Capital expenditures (956) (140) (3,731) Proceeds from sale of assets -- -- 467 Proceeds from sale of Castleberry -- -- 600 Cash paid to sell/transfer the Sassco Fashions line -- -- (10,963) -------------- --------------- ----------------- Net cash (used in) investing activities (956) (140) (13,627) -------------- --------------- ----------------- -- -- -- -- Repayment - capitalized leases (121) (19) -- Payment of obligations under Plan of Reorganization (561) (436) -- -------------- --------------- ----------------- Net cash (used in) financing activities (682) (455) -- -------------- --------------- ----------------- (7,459) (6,015) 19,103 19,813 41,080 21,977 -------------- --------------- ----------------- $12,354 $35,065 $41,080 ============== =============== ===============
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation: The consolidated financial statements included herein have been prepared by The Leslie Fay Company, Inc. (formerly The Leslie Fay Companies, Inc.) and subsidiaries (The Leslie Fay Company, Inc. being sometimes individually referred to, and together with its subsidiaries collectively referred to, as the "Company" as the context may require), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the Fiscal Year ended January 3, 1998 (the "1997 Form 10-K"). Interim taxes were provided based on the Company's estimated effective tax rate for the year. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year, and the seasonality of the business may make projections of full year results based on interim periods unreasonable. Certain reclassifications have been made to the financial statements for the twenty-two and eight weeks ended July 5, 1997 to conform to the current quarterly presentation. 2. Reorganization Case and Fresh-Start Reporting: On April 5, 1993 ("the Filing Date"), The Leslie Fay Companies, Inc. ("Leslie Fay") and each of Leslie Fay Licensing Corp., Spitalnick Corp. and Hue, Inc., wholly-owned subsidiaries of Leslie Fay (collectively the "Debtors"), filed a voluntary petition under chapter 11 of the Bankruptcy Code (the "Bankruptcy Code"). The Debtors operated their businesses as debtors in possession subject to the jurisdiction and supervision of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Pursuant to an order of the Bankruptcy Court, the individual chapter 11 cases were consolidated for procedural purposes only and were jointly administered by the Bankruptcy Court. On November 15, 1995, Leslie Fay Retail Outlets, Inc.; Leslie Fay Factory Outlet (Alabama), Inc.; Leslie Fay Factory Outlet (California), Inc.; Leslie Fay Factory Outlet (Iowa), Inc.; and Leslie Fay Factory Outlet (Tennessee), Inc., all wholly-owned subsidiaries of Leslie Fay (collectively referred to as the "Retail Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code. The Retail Debtors operated their businesses as debtors in possession following the -7- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES November 15, 1995 filing date while pursuing an orderly liquidation of their assets, also under chapter 11 of the Bankruptcy Code. In the chapter 11 cases, substantially all liabilities as of the Filing Date were subject to compromise under the Plan. As part of the cases, the Debtors and Retail Debtors notified all known claimants for the purpose of identifying all pre-petition claims against them. Pursuant to orders of the Bankruptcy Court, all proofs of claim were required to be filed by December 10, 1993 against the Debtors and December 12, 1995 against the Retail Debtors. Excluded from the requirement to file by the December 10, 1993 bar date, among others, were certain claims by the Internal Revenue Service ("IRS"), which were required to be filed by March 31, 1995. On April 8, 1996, the Debtors and Retail Debtors filed amended schedules of liabilities with the Bankruptcy Court which established May 8, 1996 as the supplemental bar date for certain creditors. On October 31, 1995, the Debtors and the Committee of Unsecured Creditors (the "Creditors Committee") filed the Plan pursuant to chapter 11 of the Bankruptcy Code. The Plan was subsequently amended on March 13, 1996, December 5, 1996, February 3, 1997 and February 28, 1997. On December 5, 1996, the Debtors filed a Disclosure Statement for the Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code (the "Disclosure Statement"), which was also subsequently amended on February 3, 1997 and February 28, 1997. The Plan provided for, among other things, the separation of the Debtors' estates and assets into two separate reorganized entities. Under the Plan, stockholders of the Company would not retain or receive any value for their interest. The Debtors obtained Bankruptcy Court approval of the Disclosure Statement on February 28, 1997. The Plan was approved by the creditors and on April 21, 1997, the Bankruptcy Court confirmed the Plan. On June 4, 1997 (the "Consummation Date"), the Plan was consummated by the Company 1) transferring the equity interest in both the Company and Sassco Fashions, Ltd. ("Sassco"), which changed its name to Kasper A.S.L., Ltd. on November 5, 1997, to its creditors in exchange for relief from the aggregate amount of the claims estimated at $338,000,000; 2) assigning to certain creditors the ownership rights to notes aggregating $110,000,000 payable by Sassco; and 3) transferring the assets (including $10,963,000 of cash) and liabilities of the Company's Sassco Fashions product line to Sassco and the assets and liabilities of its Dress and Sportswear product lines to three wholly-owned subsidiaries of the Company. In addition, the Company retained approximately $41,080,000 in cash of which $23,580,000 was to pay administrative claims as defined in the Plan. As provided for in the Plan, the Company issued seventy-nine (79%) percent of its 6,800,000 new shares ( as adjusted for the July 1, 1998 stock split (see Note 9) ) to its creditors in July 1997. The remaining twenty-one (21%) percent is being held back pending the resolution of certain litigation before the Bankruptcy Court. The existing stockholders of the Company at June 4, 1997 did not retain or receive any value for their equity interest in the Company. Reference is made to the Exhibits contained in the Company's Form 10-K for the fiscal year ended January 3, 1998, and Item 1 - Recent Developments contained in the Company's Form 10-K for the fiscal year ended December 28, 1996 for a copy of the Plan and a summary of Plan provisions, respectively. -8- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES In accordance with the Plan, the remaining Liabilities subject to compromise were discharged and the Company recognized a gain of $73,541,000, which is included in the Extraordinary Gain on Debt Discharge in the consolidated statement of operations for the twenty-two weeks ended June 4, 1997. Fresh-Start Reporting Pursuant to the guidelines provided by SOP 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", the Company adopted fresh-start reporting and reflected the consummation distributions under the Plan in the consolidated balance sheet as of June 4, 1997 (the effective date of the consummation of the Plan for accounting purposes). Under fresh- start reporting, the Company's reorganization value of $25,000,000 was allocated to its net assets on the basis of the purchase method of accounting. The significant fresh-start reporting adjustments are summarized as follows: 1. Cancellation of the old common stock pursuant to the Plan against the accumulated deficit. 2. Allocation of the fair market value of the identifiable net assets in excess of the reorganization value (negative goodwill) in accordance with the purchase method of accounting. The negative goodwill amount remaining after reducing non-current assets acquired to zero was recorded as a deferred credit, "Excess of revalued net assets acquired over equity under fresh-start reporting" and is being amortized over three (3) years. The resulting charge of $27,010,000 from all the fresh-start adjustments, including the write-off of all revalued noncurrent assets (but excluding the write-off of the old stock for $56,611,000), is presented in the "loss on revaluation of assets pursuant to adoption of fresh-start reporting" in the consolidated statement of operations for the twenty-two weeks ended June 4, 1997. The fresh-start reporting reorganization value of $25,000,000 was established as the midpoint of a range ($20,000,000 - $30,000,000) established by the Company's financial advisors. The calculation of the range was based on a five-year analysis of the Company's projected operations for the remaining operating product lines (fiscal years ended 1996 - 2001), which was prepared by management, and a discounted cash flow methodology was applied to those numbers. The five-year cash flow projections were based on estimates and assumptions about circumstances and events that have not yet taken place. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Company, including, but not limited to, those with respect to the future course of the Company's business activity. -9- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Since fresh-start reporting has been reflected in the accompanying consolidated balance sheet as of January 3, 1998, the consolidated balance sheet as of that date is not comparable in material respects to any such balance sheet for any date prior to June 4, 1997. 3. Dispositions: As discussed in Note 2, in connection with the consummation of the Plan, the Company sold or transferred all the assets and liabilities of its Sassco Fashions product line on June 4, 1997 for an estimated exchange value of $230,000,000. This value was the estimated reorganization value of the Sassco Fashions Product line which was calculated in a manner similar to the Company's reorganization value (see Note 2). The resulting gain of $89,810,000, net of taxes of $3,728,000, recorded from these transactions is included in the Gain on the disposition of the Sassco Fashions product line in the consolidated statements of operations for the twenty-two and eight weeks ended June 4, 1997. In addition, on May 26, 1997, the Company sold the assets and liabilities of its Castleberry product line for $600,000. The resulting loss of $1,398,000 on the sale was previously recorded as reorganization expense in fiscal 1996 and therefore, was applied against Accrued expenses and other current liabilities at the time of the sale. The unaudited pro forma consolidated statements of operations for the twenty-two and eight weeks ended June 4, 1997 are presented below and include adjustments to give effect to the sales and the Plan (see Note 2) as if they occurred as of the beginning of the period presented. The unaudited pro forma financial statements have been prepared in accordance with guidelines established by the Securities and Exchange Commission. The historical balances were derived from the consolidated statements of operations for the twenty-two and eight weeks ended June 4, 1997. All significant intercompany transactions have been eliminated. -10- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The unaudited pro forma adjustments presented in the statement are as follows: Column Heading Explanation -------------- ----------- Historical Operations The Consolidated Statement of Operations as it existed prior to the adjustments. Disposition of Sassco The operating results of the Sassco Fashions product line have been eliminated to give effect to the disposition as of the beginning of the period presented, including depreciation expense on its property, plant and equipment, an allocated corporate charge based on workload by department related to the Sassco Fashions line and direct charges associated with financing fees on its factoring agreement and fees incurred on letters of credit issued on its behalf. For the July 5, 1997 period, the gain recorded on the disposition of the Sassco Fashions line has been reversed. Sale of Castleberry The operating results of the Castleberry product line have been eliminated to give effect to the disposition as of the beginning of the period presented, including depreciation expense on its property, plant and equipment and an allocated corporate charge based on workload by department related to the Castleberry line. Fresh-Start Reporting To record the estimated effect of the Plan as if it had been effective as of the beginning of period presented. This includes adjustments for the following items: a) The elimination of the historical depreciation and amortization for the remaining product lines, including the amounts in cost of sales, on the beginning of period asset balances and the recording of the amortization credit for the "Excess of revalued net assets acquired over equity under fresh-start reporting" (assuming a three-year amortization period). b) The elimination of historical reorganization expense that will not be incurred subsequent to the Consummation Date. c) The elimination of the fresh-start revaluation charge and the reversal of the gain on debt discharge pursuant to the Plan. -11- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Twenty-Two Weeks Ended June 4, 1997 ----------------------------------------------------------------------------- Historical Disposition of Sale of Fresh Start Pro Forma Operations Sassco Castleberry Reporting Adjusted Balance -------------- ------------ ----------- --------------- ---------------- Net Sales $197,984 ($136,107) ($2,808) $ -- $59,069 Cost of Sales 147,276 (101,573) (2,262) (32) 43,409 -------------- ------------ ----------- --------------- ------------- Gross profit 50,708 (34,534) (546) 32 15,660 -------------- ------------ ----------- --------------- ------------- Operating Expenses: Selling, warehouse, general and administrative expenses 35,459 (23,666) (1,000) 250 11,043 Depreciation and amortization expense 2,090 (1,078) (41) (971) -- -------------- ------------ ----------- --------------- ------------- Total operating expenses 37,549 (24,744) (1,041) (721) 11,043 Other (income) (1,196) 260 -- -- (936) Amortization of excess revalued net assets acquired over equity -- -- -- (1,905) (1,905) -------------- ------------ ----------- --------------- ------------- Total operating expenses, net 36,353 (24,484) (1,041) (2,626) 8,202 -------------- ------------ ----------- --------------- ------------- Operating income 14,355 (10,050) 495 2,658 7,458 Interest and Financing Costs (excludes contractual interest) 1,372 (595) -- -- 777 -------------- ------------ ----------- --------------- ------------- Income (Loss) before reorganization costs, taxes, gain on sale, fresh-start revaluation, and extraordinary item 12,983 (9,455) 495 2,658 6,681 Reorganization Costs 3,379 -- 14 (3,393) -- -------------- ------------ ----------- --------------- ------------- Income (Loss) before taxes, gain on sale, fresh-start revaluation, and extraordinary item 9,604 (9,455) 481 6,051 6,681 Taxes 451 (342) -- -- 1,898 2,007 Net Income (Loss) before gain on sale, fresh-start revaluation, and extraordinary item 9,153 (9,113) 481 4,153 4,674 Gain on disposition of Sassco Fashions line, loss on revaluation of assets pursuant to adoption of fresh-start reporting and extraordinary gain on debt discharge 136,341 (89,810) -- (46,531) -- -------------- ------------ ----------- --------------- ------------- Net Income (Loss) $145,494 ($98,923) $481 ($42,378) $4,674 ============== ============ =========== =============== ============= Net Income (Loss) per Share - Basic and Diluted * $0.69 ============== ============= Weighted Average Shares Outstanding - Basic and Diluted * 6,800,000 ============== =============
* Earnings per share on a historical basis is based on the old stock outstanding The old stock was canceled under the plan of reorganization and new stock was issued Earnings per share on a pro forma basis is calculated on the new stock outstanding -12- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Eight Weeks Ended June 4, 1997 ----------------------------------------------------------------------------- Historical Disposition of Sale of Fresh Start Pro Forma Operations Sassco Castleberry Reporting Adjusted Balance -------------- ------------ ------------ --------------- ---------------- Net Sales $55,229 ($36,877) ($679) $ -- $17,673 Cost of Sales 41,289 (27,350) (681) (14) 13,244 -------------- ------------ ----------- --------------- ------------- Gross profit 13,940 (9,527) 2 14 4,429 -------------- ------------ ----------- --------------- ------------- Operating Expenses: Selling, warehouse, general and administrative expenses 12,354 (8,416) (449) 100 3,589 Depreciation and amortization expense 846 (435) (11) (400) -- -------------- ------------ ----------- --------------- ------------- Total operating expenses 13,200 (8,851) (460) (300) 3,589 Other (income) (239) 10 -- -- (229) Amortization of excess revalued net assets acquired over equity -- -- -- (762) (762) -------------- ------------ ----------- --------------- ------------- Total operating expenses, net 12,961 (8,841) (460) (1,062) 2,598 -------------- ------------ ----------- --------------- ------------- Operating income 979 (686) 462 1,076 1,831 Interest and Financing Costs (excludes contractual interest) 504 (183) -- -- 321 -------------- ------------ ----------- --------------- ------------- Income (Loss) before reorganization costs, taxes, gain on sale, fresh-start revaluation, and extraordinary item 475 (503) 462 1,076 1,510 Reorganization Costs 2,911 -- 64 (2,975) -- -------------- ------------ ----------- --------------- ------------- Income (Loss) before taxes, gain on sale, fresh-start revaluation, and extraordinary item (2,436) (503) 398 4,051 1,510 Taxes 135 (142) -- -- 321 314 -------------- ------------ ----------- --------------- ------------- Net Income (Loss) before gain on sale, fresh-start revaluation, and extraordinary item (2,571) (361) 398 3,730 1,196 Gain on disposition of Sassco Fashions line, loss on revaluation of assets pursuant to adoption of fresh-start reporting and extraordinary gain on debt discharge 136,341 (89,810) -- (46,531) -- -------------- ------------ ----------- --------------- ------------- Net Income (Loss) $133,770 ($90,171) $398 ($42,801) $1,196 ============== ============ =========== =============== ============= Net Income (Loss) per Share - Basic and Diluted * $0.18 ============= Weighted Average Shares Outstanding - Basic and Diluted * 6,800,000 ============== =============
* Earnings per share on a historical basis is based on the old stock outstanding The old stock was canceled under the plan of reorganization and new stock was issued Earnings per share on a pro forma basis is calculated on the new stock outstanding -13- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 4. Accounts Receivable: On June 2, 1997, a wholly-owed subsidiary of the Company entered into a Factoring Agreement with The CIT Group/Commercial Services, Inc. ("CIT"). Under this agreement, CIT began purchasing the accounts receivable of the Company and remits the proceeds received to the Company as collected. In exchange for collecting the receivables, CIT earns a factoring fee of 0.4% of receivables purchased (with a minimum charge per invoice) as well as an interest charge of prime plus 1% on two days cash collections. 5. Inventories: Inventories consist of the following: Unaudited July 4, January 3, 1998 1998 ---- ---- (In Thousands) Raw materials $10,909 $ 9,638 Work in process 4,927 4,540 Finished goods 17,749 12,523 -------- -------- Total inventories $ 33,585 $ 26,701 ======== ======== 6. Debt: On June 2, 1997, in preparation for the consummation of the Plan, a wholly- owned subsidiary of the Company entered into a two-year financing agreement (the "CIT Credit Agreement") with CIT to provide direct borrowings and the issuance of letters of credit on the Company's behalf in an aggregate amount not to exceed $30,000,000, with a sublimit on letters of credit of $20,000,000. The CIT Credit Agreement became effective on June 4, 1997 with the consummation of the Plan. Direct borrowings bear interest at prime plus 1.0% (9.5% at July 4, 1998) and the CIT Credit Agreement requires a fee, payable monthly, on average outstanding letters of credit at a rate of 2% annually. There were no direct borrowings outstanding under the CIT Credit Agreement and approximately $6,552,000 was committed under unexpired letters of credit as of July 4, 1998. -14- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The CIT Credit Agreement, as amended, contains certain reporting requirements, as well as financial and operating covenants related to capital expenditures, a minimum tangible net worth and the maintenance of a current assets to current liabilities ratio and an interest to earnings ratio and the attainment of minimum earnings. As collateral for borrowings under the CIT Credit Agreement, the Company has granted to CIT a security interest in substantially all of its assets. In addition, the CIT Credit Agreement contains certain restrictive covenants, including limitations on the incurrence of additional liens and indebtedness. The Company is currently in compliance with all requirements contained in the CIT Credit Agreement. The Company previously had a facility for a $60,000,000 credit agreement with The First National Bank of Boston ("FNBB") and BankAmerica Business Credit, Inc. ("BABC"), as Facility Agents, and FNBB as Administrative Agent (the "FNBB Credit Agreement"). In connection with the consummation of the Plan, the Company entered into an agreement (the "Paydown Agreement") with its lenders under the FNBB Credit Agreement to paydown any remaining obligations under the FNBB Credit Agreement and terminate the FNBB Credit Agreement on June 4, 1997. The FNBB Credit Agreement had expired on May 31, 1997, but continued in effect until the consummation of the Plan with the consent of both the lenders and the Company. The FNBB Credit Agreement provided for post-petition direct borrowings and the issuance of letters of credit on the Debtors' behalf in an aggregate amount not to exceed $60,000,000. Beginning January 1, 1997, the sublimit on the revolving line of credit was $20,000,000 and the sublimit for letters of credit was $50,000,000. Interest on direct borrowings was charged at prime plus 1.5% (10.00% at July 5, 1997), and the FNBB Credit Agreement required a fee, payable monthly, on average outstanding letters of credit at a rate of 2% annually. -15- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 7. Income Taxes: The provision for state and foreign income taxes is $2,072,000, $20,000 and $451,000 for the twenty-six, five and twenty-two weeks ended July 4, 1998, July 5, 1997 and June 4, 1997, respectively, and $171,000 and $135,000 for the thirteen and eight weeks ended July 4, 1998 and June 4, 1997, respectively. Federal income taxes for the post-consummation period are substantially offset by the utilization of pre-consummation net operating loss carryovers, which are limited to approximately $1,500,000 in 1998, and post-consummation net operating loss carryforwards without limitation and deductions available for tax purposes. Although there is no 1997 Federal income tax provision currently recognizable on the pre-consummation earnings due to existing net operating loss carryforwards and no Federal income tax benefit currently recognizable, the Company provided $3,728,000 for federal and state income taxes based on the alternative minimum tax regulations for the twenty-two weeks ended June 4, 1997 related to the gain on the sale of the Sassco Fashions product line. These taxes are reflected net of the gain shown in the statement of operations for the twenty-two weeks ended June 4, 1997. 8. Commitments and Contingencies: As discussed in Note 2, on the Filing Dates, the Company and several of its subsidiaries filed voluntary petitions in the Bankruptcy Court under chapter 11 of the Bankruptcy Code. All civil litigation pending against the Company and those referenced subsidiaries prior to those dates was stayed under the Bankruptcy Code. By an order dated April 21, 1997 (the "Confirmation Order"), the Bankruptcy Court confirmed the Plan. The Plan was consummated on June 4, 1997. Certain alleged creditors who asserted age and other discrimination claims against the Company, and whose claims were expunged (the "Claimants") pursuant to an Order of the Bankruptcy Court (see below) appealed the Confirmation Order to the United States District Court for the Southern District of New York. The Company moved to dismiss the appeal from the Confirmation Order and the motion was granted and the appeal was dismissed. An appeal to the United States Court of Appeals for the Second Circuit was taken from the Order dismissing the appeal taken by the Claimants, but subsequently was withdrawn, without prejudice, and may be refiled in the future. In addition, the Claimants and two other persons commenced an adversary proceeding in the Bankruptcy Court to revoke the Confirmation Order. The Company has moved to dismiss the adversary proceeding to revoke the Confirmation Order and that motion has been fully briefed, but has not yet been argued to the Bankruptcy Court. -16- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The Claimants, who are former employees of the Company who were discharged prior to the filing of the chapter 11 cases, asserted age and other discrimination claims, including punitive damage claims against the Company in the approximate aggregate sum of $80 million. Following a trial on the merits, the Bankruptcy Court expunged and dismissed those claims in their entirety. The Claimants appealed that decision to the United States District Court for the Southern District of New York, and the Bankruptcy Court order was affirmed on appeal. Several former employees, who are included among the Claimants in the above-described pending appeal, have commenced an action alleging employment discrimination against certain former officers and directors of the Company in the United States District Court for the Southern District of New York. The Court has dismissed all of the causes of action arising under federal and state statutes, and the only remaining claims are those arising under the New York City Human Rights Law. Discovery is complete and a pre-trial order has been filed. In addition to, and concurrent with, the proceedings in the Bankruptcy Court, the Company is involved in or settled the following legal proceedings of significance: In November 1992, a class action entitled "Stephen Warshaw and Phillis Warshaw v. The Leslie Fay Companies, Inc. et al." was instituted in the United States District Court for the Southern District of New York. In January 1993 and February 1993, the plaintiffs served amended complaints and thereafter twelve other similar actions were commenced against the Company, certain of its officers and directors and its then auditors, BDO Seidman. The complaints in these cases, which purported to be on behalf of all persons who purchased or acquired stock of the Company during the period from February 4, 1992 to and including February 1, 1993, alleged that the defendants knew or should have known material facts relating to the sales and earnings which they failed to disclose and that if these facts had been disclosed, they would have affected the price at which the Company's common stock was traded. A pre-trial order was entered which had the effect of consolidating all of these actions and, in accordance therewith, the plaintiffs have served the defendants with a consolidated class action complaint which, because of the chapter 11 filing by the Company, does not name the Company as a defendant. In March 1994, plaintiffs filed a consolidated and amended class action complaint. This complaint added certain additional parties as defendants, including Odyssey Partners, L.P. ("Odyssey"), and expanded the purported class period from March 28, 1991 to and including April 5, 1993. In March 1995, BDO Seidman filed an answer and cross-claims against certain of the officers and directors of the Company previously named in this action and filed third-party complaints against Odyssey, certain then current and former executives of the Company and certain then current and former directors of the Company. These cross-claims and third-party complaints allege that the Company's senior management and certain of its directors engaged in fraudulent conduct and negligent misrepresentation. BDO Seidman sought contribution from certain of the defendants and each of the third-party defendants if it were found liable in the class action, as -17- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES well as damages. On March 7, 1997, a stipulation and settlement agreement was signed pursuant to which all parties agreed to settle the above described litigation for an aggregate sum of $34,700,000. The officers' and directors' share of the settlement was covered by the Company's officers' and directors' liability insurance. The settlement specifically provides that the officers and directors deny any liability to the plaintiffs and have entered into the settlement solely to avoid substantial expense and inconvenience of litigation. The Company has no obligations under this settlement. The District Court approved this settlement and signed the final order of dismissal on May 8, 1997. The settlement has been fully consummated. In February 1993, the Securities and Exchange Commission obtained an order directing a private investigation of the Company in connection with, among other things, the filing by the Company of annual and other reports that may have contained misstatements, and the purported failure of the Company to maintain books and records that accurately reflected its financial condition and operating results. The Company is cooperating in this investigation. In February 1993, the United States Attorney for the Middle District of Pennsylvania issued a Grand Jury Subpoena seeking the production of documents as a result of the Company's announcement of accounting irregularities. In 1994, Donald F. Kenia, former Controller of the Company, was indicted by a federal grand jury in the Middle District of Pennsylvania and pled guilty to the crime of securities fraud in connection with the accounting irregularities. On or about October 29, 1996, Paul F. Polishan, former Senior Vice President and Chief Financial Officer of the Company, was indicted by the federal grand jury in the Middle District of Pennsylvania for actions relating to the accounting irregularities. The trial of the case against Paul F. Polishan has not yet occurred. -18- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES In March 1993, a stockholder derivative action entitled "Isidore Langer, derivatively on behalf of The Leslie Fay Companies, Inc. v. John J. Pomerantz et al." (the "Derivative Action") was instituted in the Supreme Court of the State of New York, County of New York, against certain officers and directors of the Company and its then auditors. This complaint alleges that the defendants knew or should have known material facts relating to the sales and earnings of the Company which they failed to disclose. The time to answer, move or otherwise respond to the complaint has not yet expired. The plaintiff seeks an unspecified amount of monetary damages, together with interest thereon, and costs and expenses incurred in the action, including reasonable attorneys' and experts' fees. The Company cannot presently determine the ultimate outcome of this litigation, but believes that it should not have any unfavorable impact on the financial statements. Pursuant to the Modification of the Third Amended and Restated Joint Plan of Reorganization filed on April 4, 1997, a Derivative Action Board, comprised of three persons or entities appointed by the Bankruptcy Court, based upon nominations by the Creditors' Committee, shall determine by a majority vote whether to prosecute, compromise and settle or discontinue the Derivative Action. Under the Plan, any recovery in the Derivative Action will be distributed to creditors of the Company and will not inure to the benefit of the Company. On February 23, 1996, Albert Nipon and American Pop Marketing Group, Inc. commenced an action against the Company in the United States Bankruptcy Court, Southern District of New York, seeking, inter alia, a declaratory judgment with respect to the use of the Company's "Albert Nipon" trademark and trade name. The Company has asserted counter claims. Upon a record of stipulated facts and submissions of memorandum of law, an oral argument on this matter was heard on May 9, 1997. On December 23, 1997, the court ruled in favor of the Company finding the plaintiffs in violation of the Federal and New York Trademark Statutes and of unfair competition under common law. The plaintiffs have appealed and the Company has cross appealed to recover its costs and expenses in the litigation. -19- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 9. Stockholders' Equity: On June 3, 1998 the Board of Directors declared a two-for-one split of the Company's common stock to shareholders of record on June 17, 1998 to be distributed on July 1, 1998. An amount equal to the par value of the common shares issued was transferred from capital in excess of par to the common stock account. All references to number of shares, except shares authorized, and to per share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. As provided under the Plan, the authorized common stock of the reorganized Company consisted of 3,500,000 shares of common stock with a par value $.01 per share. The authorized common stock of the reorganized Company was increased to 9,500,000 shares of common stock with a par value of $.01 per share in November 1997 and to 20,000,000 shares with a par value of $.01 per share in June 1998. At June 4, 1997, 6,800,000 shares were issued and outstanding and were being held by the plan administrator in trust. In July 1997, 5,372,254 (approximately 79%) of the shares were distributed. The remaining approximately twenty-one (21%) percent is being held back pending the resolution of certain disputed claims before the Bankruptcy Court. The old common stock was canceled at June 4, 1997 and the old stockholders of the Company did not retain or receive any value for their equity interest. In addition, 500,000 shares of Preferred Stock of the reorganized Company were authorized at June 4, 1997 with a par value of $.01. None of such shares have been issued. The Board of Directors of the Company on April 14, 1998 approved an amendment to the Non-Employee Director Stock Option and Stock Incentive Plan to change each non-employee director's annual compensation to include 2,000 shares of the Company's common stock effective as of June 3, 1998. This amendment was approved at the annual shareholders meeting on June 3, 1998. As a result, twelve thousand shares of the Company's common stock were issued to non-employee directors on June 3, 1998 for the one year period ending June 3, 1999. An amount equal to the par value of the common shares issued was transferred from capital in excess of par to the common stock account. -20- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 10. Stock Option Plan: The Company currently offers stock options under two plans: The 1997 Management Stock Option Plan ("Management Plan") was adopted in June 1997 in connection with the Company's emergence from bankruptcy and provides that options may be granted to key employees (including directors who are employees) of and consultants to the Company. An amendment to this plan was approved by the stockholders at the annual meeting on June 3, 1998. This amendment replaced provisions for granting the "Home Run" options. The 1997 Non-Employee Director Stock Option and Stock Incentive Plan (the "Non- Employee Director Plan") was adopted in June 1997 and provides that options may be granted to non-employee directors of the Company. An amendment to this plan was approved by the stockholders at the annual meeting on June 3, 1998 to provide for the grant of stock to non-employee directors in addition to the grant of stock options. Discussion of Management Plan The Management Plan is designed to attract and retain the best-qualified personnel for positions of substantial responsibility, to provide additional incentive to employees of and consultants to the Company and to promote the success of the Company's business. The aggregate number of shares of Common Stock for which options may be granted under the Management Plan, adjusted for the July 1, 1998 two-for-one stock split, is 2,500,000 shares. The Management Plan is administered by the Compensation Committee of the Board of Directors. Under the Management Plan the following options have been granted: On June 4, 1997, options to purchase 824,242 shares of common stock at an exercise price of $3.09 per share were granted to five senior managers of the Company. Vesting for these stock options occurs with respect to 33% on June 4, 1998, a second 33% on June 4, 1999, and the final 34% on June 4, 2000. Due to the termination of employment of one of these executives, options to purchase 93,412 shares at $3.09 per share have been forfeited. As of August 10, 1998, none of the remaining options have been exercised. During 1997, the Board of Directors authorized the granting to 22 executives of the Company, not including any of the senior managers above, incentive stock options to purchase 76,000 shares at exercise prices of $5.75 and $6.25 per share, the then current market price of the shares. These incentive stock options vest 33% on the first anniversary of the grant, 33% on the second -21- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES anniversary, and the final 34% on the third anniversary of the grant. As of August 10, 1998, none of these stock options have been exercised or forfeited. At the June 3, 1998 annual meeting of stockholders, an amendment to the Management Plan was approved to replace the "Home Run" option provisions that were included as part of the Company's emergence from bankruptcy. These "Home Run" option provisions called for the granting of options to purchase up to 618,182 shares at an exercise price of $3.09 per share in the event of a reorganization, merger, sale or disposition of substantially all the assets of the Company, the underwritten equity offering of 50% or more of the outstanding Common Stock or other similar corporate transaction if the transaction achieved minimum imputed enterprise value targets. These minimum targets escalated at each anniversary of the Company's emergence from bankruptcy. The replacement provision grants the remaining four original senior executives options to purchase 365,758 shares at an exercise price of $3.09. These options were granted as of January 4, 1998. 25% of these vested immediately, with the remaining options vesting in equal installments at each of the following three anniversaries of the January 4, 1998 grant date. As of August 10, 1998, none of these stock options have been exercised or forfeited. Adjusted for the July 1, 1998 two-for-one stock split, there are currently options granted but not exercised under the Management Plan to purchase 1,172,586 shares at a weighted average exercise price of $3.26 per share. Discussion of Non-Employee Director Plan The Non-Employee Director Plan is designed to attract and retain the best-qualified personnel for director positions and to provide for the long-term growth and financial success of the Company's business. The aggregate number of shares of Common Stock for which options may be granted or stock awarded under the Non-Employee Director Plan, adjusted for the July 1, 1998 two-for-one stock split, is 200,000 shares. The Non-Employee Director Plan is administered by the Compensation Committee of the Board of Directors. The Plan calls for the issuance of stock options or stock grants as follows: On June 4, 1997, each of the five original non-employee directors of the Company was granted options to purchase 20,000 shares at an exercise price of $3.09 per share. Each new non-employee director has been granted options to purchase 10,000 shares at an exercise price equal to the fair market value of the Common Stock at the day of the grant. These options vest over three years from the date of the grant, one-third on each of the first anniversary, the second anniversary and the third anniversary. As of August 10, 1998, none of these options have been exercised. There are currently options granted but not exercised under the Non-Employee Director Plan to purchase 140,000 shares at a weighted -22- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES average exercise price of $4.09 per share. The Non-Employee Director Plan also provides that a stock grant for 2,000 shares of Common Stock will be issued to each non-employee director of the Company as of the conclusion of each annual meeting of stockholders of the Company. There are no restrictions on the receipt or sale of the shares, except such as may be imposed by federal or state security laws. This grant of stock is designed to offset the reduction in the portion of directors' fee paid in cash. The Company has granted 12,000 shares of Common Stock to its six non-employee directors. Accounting for Stock Based Compensation On June 4, 1997, effective with the Company's emergence from bankruptcy, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company has recorded $1,080,000 and $351,000 of non-cash compensation expense included in Selling, warehouse, general and administrative expenses for the twenty-six and fifty-three weeks ended July 4, 1998 and January 3, 1998, respectively. These amounts were offset as adjustments to Capital in excess of par value in the consolidated balance sheets at July 4, 1998 and January 3, 1998, respectively. -23- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 11. New Accounting Pronouncements: Effective January 4, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.130, "Reporting Comprehensive Income" which modifies the financial statement presentation of comprehensive income and its components. Adoption of this statement expands and modifies disclosures and accordingly has no effect on the Company's financial position or operating results during the periods presented. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company has not engaged in hedging activities and has not purchased any derivative instruments. The Company believes the adoption of SFAS No. 133 would have no impact on these consolidated financial statements. 12. Net Income (Loss) Per Share: As of July 4, 1998, the basic weighted average common shares outstanding is 6,801,967, and the weighted average shares outstanding assuming dilution is 7,149,484. The difference of 347,517 represents the incremental shares issuable upon exercise of dilutive stock options. -24- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (a) Results of Operations Twenty-six Weeks Ended July 4, 1998 as Compared to Twenty-seven Weeks Ended July 5, 1997 The Company recorded net sales of $73,934,000 for the twenty-six weeks ended July 4, 1998, compared with $203,519,000 for the twenty-seven weeks ended July 5, 1997, a net decrease of $129,585,000 or 63.7%. The primary factors contributing to this decrease were the sale of the Sassco Fashions and Castleberry product lines, the closing of the Outlander product line and the extra week of shipping volume in the first quarter 1997, offset by sales of new product lines in the first half of 1998. The Sassco, Castleberry and Outlander lines generated $136,107,000, $2,808,000 and $2,641,000, respectively, in net sales for the twenty-seven weeks ended July 5, 1997. The extra week's shipping volume in the continuing product lines accounted for $1,225,000 in net sales during the twenty-seven week period ended July 5, 1997. The Company's newly released product line, Haberdashery by Leslie Fay Sportswear, generated net sales of $2,413,000 for the twenty-six week period ending July 4, 1998. After excluding the effect of the above mentioned businesses, the extra week and $13,000 of returns relating to the closed Outlander product line, the continuing product lines had a net sales increase of $10,796,000, or 17.8%, for the twenty-six weeks ended July 4, 1998 as compared to the comparably adjusted period ended July 5, 1997. The Dress product lines generated an increase for the period of $10,231,000 or 24.4% directly as a result of increased production of the Spring and Summer season lines to service anticipated increases in customer demand. Net sales for the comparable continuing Sportswear product lines, excluding the Haberdashery line, increased by $565,000 or 3.0%. -25- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Gross profit for the twenty-six weeks ended July 4, 1998 was $19,487,000 and 26.4% of net sales compared with $51,833,000 and 25.5% for the twenty-seven weeks ended July 5, 1997. The Sassco Fashions, Castleberry and Outlander product lines generated $34,534,000, $546,000 and ($331,000), respectively, in gross profit for the twenty-seven weeks ended July 5, 1997. The extra week of shipping during the quarter ended July 5, 1997 generated $443,000 of gross profit. The newly offered Haberdashery line and discontinued Outlander line generated gross profit (loss) of $831,000 and ($17,000), respectively, for the twenty-six weeks ended July 4, 1998. The comparable continuing businesses increased gross profit by $2,032,000 for the twenty-six weeks ended July 4, 1998 versus the prior year while the gross margin as a percentage of net sales decreased to 26.1% from 27.4%. Increased production of the Spring and Summer seasons as discussed above generated the additional gross margin volume in the Dress and Sportswear product lines. The lower gross profit percentage is due mostly to additional discounts taken in the Dress product line due to higher levels of off-price sales and to discounts offered on late shipments. The gross profit from the Dress line, excluding the effect of the additional week, rose $2,244,000 but the percentage to net sales fell to 27.4% from 28.7%. The gross profit produced by the Sportswear line for the twenty-six weeks ended July 4, 1998, excluding the effect of the extra week and the new product line, decreased by $212,000 and the percentage of net sales decreased to 22.7% from 24.5% for the comparable period ended July 5, 1997. This decrease resulted primarily from the competitive repricing strategy of the Leslie Fay Sportswear product line that was implemented during the second half of 1997. Selling, warehouse, general and administrative ("SG&A") expenses were $14,739,000 or 19.9% of net sales and $37,091,000 or 18.2% of net sales for the twenty-six and twenty-seven weeks ended July 4, 1998 and July 5, 1997, respectively. After excluding the costs associated with the product lines sold, the pro forma remaining business had expenses of $12,675,000 or 19.6% of net sales for the twenty-seven weeks ended July 5, 1997. The expense increase of $2,064,000 was caused by several items that affected direct comparability. In the year ago period, SG&A expenses included a $520,000 reduction resulting from collecting receivables in excess of the bad debt reserve established before the Company emerged from bankruptcy. The year ago period included $814,000 in transitional, bankruptcy-related expenses that were eliminated following the emergence from bankruptcy. Also, the year ago period included revenue payments for support provided the Sassco Fashions product line of $250,000. Adjusting for these items, SG&A expenses for the 1998 period increased by $2,108,000. This year includes an accrual of $1,080,000 for non-cash, stock based compensation for stock options that were granted after the Company's emergence from bankruptcy. Also an additional $303,000 in professional fees have been incurred due to requirements of public filings and investor relations, by contracting Arthur Andersen LLP to also serve as internal auditors for the company, and by contracting an engineering firm to work with the Company to improve operating efficiency. The Company has invested an additional $200,000 in advertising in support of its customers as well as to launch the Haberdashery by Leslie Fay Sportswear product line. Shipping expenses also rose $318,000 despite improved operating productivity due to additional costs caused to ship product received late from the Company's suppliers. The remaining $207,000 increase represents a growth over 1997 of under 2% that supported a 17.8% sales increase. -26- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Other income was $575,000 and $1,314,000 for the twenty-six and twenty-seven weeks ended July 4, 1998 and July 5, 1997, respectively. The decrease is due to the licensing revenues related to trade names which were spun-off with the Sassco Fashions product line, renegotiated minimum payment terms for the HUE legwear license and excess 1996 licensing revenues received and recognized as income during the first quarter of 1997. Depreciation and amortization expense for the twenty-six weeks ended July 4, 1998 was $70,000 due to the write-off of fixed assets at June 4, 1997 under fresh-start reporting. In addition, the Company realized income of $2,286,000 from amortization of excess revalued net assets acquired over equity (see Note 2). Depreciation and amortization expense for the twenty-seven weeks ended July 5, 1997 consisted of depreciation on fixed assets of $1,617,000, including $1,119,000 related to product lines sold, and amortization of the excess purchase price over net assets acquired of $473,000, including $257,000 of amortization related to the lines sold. This amortization expense related to the leveraged buyout of The Leslie Fay Company on June 28, 1984. Interest and financing costs were $320,000 and $1,270,000 for the twenty-six and twenty-seven weeks ended July 4, 1998 and July 5, 1997, respectively. The financing fees under the new CIT Credit Agreement were offset by income earned on the cash invested for the twenty-six weeks ended July 4, 1998. The financing fees incurred were significantly below those incurred during the twenty-seven weeks ended July 5, 1997 due to the higher line needed to finance the operations of the Sassco Fashions and Castleberry product lines. The provision for federal, state and local income taxes was $2,072,000 and $471,000 for the twenty-six and twenty-seven weeks ended July 4, 1998 and July 5, 1997, respectively. The expense was lower for the twenty-seven weeks period ended July 5, 1997 due to the expected availability of the net operating loss carryforwards available in full for the period up to and including the June 4, 1997 Consummation Date (see Note 7). -27- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Thirteen Weeks Ended July 4, 1998 as Compared to Thirteen Weeks Ended July 5, 1997 The Company recorded net sales of $28,676,000 for the thirteen weeks ended July 4, 1998, compared with $60,764,000 for the thirteen weeks ended July 5, 1997, a net decrease of $32,088,000 or 52.8%. The primary factors contributing to this decrease were the sale of the Sassco Fashions and Castleberry product lines and the closing of the Outlander product line, offset by sales of new product lines. The Sassco, Castleberry and Outlander lines generated $36,877,000, $679,000 and $644,000, respectively, in net sales for the thirteen weeks ended July 5, 1997. The Company's newly released product line, Haberdashery by Leslie Fay Sportswear, generated net sales of $1,121,000 for the thirteen week period ending July 4, 1998. On a comparable basis, after excluding the effect of the above mentioned businesses and $7,000 of sales in 1998 related to the closed Outlander product line, the continuing product lines had a net sales increase of $4,984,000, or 22.1%, for the thirteen weeks ended July 4, 1998 as compared to the comparably adjusted period ended July 5, 1997. The Dress product lines generated an increase for the period of $4,700,000 or 27.9% directly as a result of increased production of the Spring and Summer season lines to service anticipated increases in customer demand. Net sales for the comparable continuing Sportswear product lines, excluding the Haberdashery line, increased by $284,000 or 4.9%. Gross profit for the thirteen weeks ended July 4, 1998 was $7,489,000 and 26.1% of net sales compared with $15,065,000 and 24.8% for the thirteen weeks ended July 5, 1997. The Sassco Fashions, Castleberry and Outlander product lines generated $9,527,000, $2,000 and ($97,000), respectively, in gross profit for the thirteen weeks ended July 5, 1997. The newly offered Haberdashery line generated gross profit of $428,000 for the thirteen weeks ended July 4, 1998. The comparable continuing businesses increased gross profit by $1,428,000 for the thirteen weeks ended July 4, 1998 versus the prior year while the gross margin as a percentage of comparable net sales decreased to 25.0% from 25.6%. Increased production of the Spring and Summer seasons as discussed above generated the additional gross margin volume in both the Dress and Sportswear product lines. The lower gross profit percentage is due mostly to additional discounts taken in the Dress product line due to higher levels of off-price sales and to discounts offered on late shipments. The gross profit from the Dress line rose $1,381,000 but the percentage of net sales fell to 25.9% from 26.6%. The gross profit produced by the Sportswear line for the thirteen weeks ended July 4, 1998, excluding the effect of the new product line, increased by $47,000 and the percentage of net sales increased to 22.4% from 22.0% for the comparable period ended July 5, 1997. -28- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES SG&A expenses were $7,203,000 or 25.1% of net sales and $13,986,000 or 23.0% of net sales for the thirteen weeks ended July 4, 1998 and July 5, 1997, respectively. After excluding the costs associated with the product lines sold, the pro forma remaining business had expenses of $5,221,000 or 22.5% of net sales for the comparably adjusted thirteen weeks ended July 5, 1997. The expense increase of $1,982,000 was caused by several items that affected direct comparability. In the year ago period, SG&A expenses included a $520,000 reduction resulting from collecting receivables in excess of the bad debt reserve established before the Company emerged from bankruptcy. The year ago period included $427,000 in transitional, bankruptcy-related expenses that were eliminated following the emergence from bankruptcy. Also, the year ago period included revenue payments for support provided the Sassco Fashions product line of $100,000. Adjusting for these items, SG&A expenses for the 1998 period increased by $1,789,000. This year includes an accrual of $684,000 for non-cash, stock based compensation for stock options that were granted after the Company's emergence from bankruptcy. Also an additional $259,000 in professional fees have been incurred due to requirements of public filings and investor relations, by contracting of Arthur Andersen LLP to also serve as internal auditors for the Company, and by contracting an engineering firm to work with the Company to improve operating efficiency. The Company has invested an additional $117,000 in advertising in support of its customers as well as to launch the Haberdashery by Leslie Fay Sportswear product line. Shipping expenses also rose $243,000 despite improved operating productivity due to additional costs caused to ship product received late from the Company's suppliers. The quarter also included an $85,000 increase reflecting new contracts for the four senior managers which included base salary increases effective January 4, 1998. The remaining $401,000 increase represents a growth over 1997 of under 8% that supported a 22.1% sales increase. Other income was $303,000 and $357,000 for the thirteen weeks ended July 4, 1998 and July 5, 1997, respectively. The decrease is due to the renegotiated minimum payment terms for the HUE legwear license. Depreciation and amortization expense for the thirteen weeks ended July 4, 1998 was $53,000 due to the write-off of fixed assets at June 4, 1997 under fresh-start reporting. In addition, the Company realized income of $1,143,000 from amortization of excess revalued net assets acquired over equity (see Note 2). Depreciation and amortization expense for the thirteen weeks ended July 5, 1997 consisted of depreciation on fixed assets of $657,000, including $344,000 related to product lines sold, and amortization of the excess purchase price over net assets acquired of $189,000, including $102,000 of amortization related to the lines sold. This amortization expense related to the leveraged buyout of The Leslie Fay Company on June 28, 1984. Interest and financing costs were $130,000 and $402,000 for the thirteen weeks ended July 4, 1998 and July 5, 1997, respectively. The financing fees under the new CIT Credit Agreement were offset by income earned on the cash invested for the thirteen weeks ended July 4, 1998. The financing fees incurred were significantly below those incurred during the thirteen weeks ended July -29- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 5, 1997 due to the higher line needed to finance the operations of the Sassco Fashions and Castleberry product lines. The provision for federal, state and local income taxes was $171,000 and $155,000 for the thirteen weeks ended July 4, 1998 and July 5, 1997, respectively. (b) Liquidity and Capital Resources On June 2, 1997, the Company obtained $30,000,000 of post-emergence financing (see Note 6), which became effective with the consummation of the Plan on June 4, 1997. The CIT Credit Agreement provides a working capital facility commitment of $30,000,000, including a $20,000,000 sublimit on letters of credit. As of July 4, 1998 the Company was utilizing approximately $6,552,000 of the CIT Credit Agreement for the letters of credit. At July 4, 1998, there were no cash borrowings outstanding under the CIT Credit Agreement, and the Company's cash and cash equivalents amounted to $12,354,000. Of this amount, $3,786,000 is restricted to pay remaining administrative claims as defined in the Plan. Working capital increased $5,237,000, to $44,690,000 for the twenty-six weeks ended July 4, 1998. The primary changes in the components of working capital were a decrease in cash, cash equivalents and short term investments of $10,448,000, offset by an increase in net accounts receivable and inventories of $3,015,000 and $6,884,000, respectively, and a decrease of $5,533,000 in accounts payable, accrued expenses and other current liabilities. Accounts receivable increased due to additional shipping volume in the Summer season as well as earlier than planned Fall shipments. Inventories sold during the period were offset by new inventory purchases to accommodate the upcoming Fall season. Although, the Company's results of operations indicated an operating income of $7,539,000 for the twenty-six weeks ended July 4, 1998, these results are not necessarily indicative of results for an entire year. Capital expenditures were $956,000 for the twenty-six weeks ended July 4, 1998. Capital expenditures are expected to be $3,000,000 for the fiscal year 1998. The anticipated capital expenditures of $2,044,000 for the remainder of the year are primarily related to improvements in management information systems and fixturing the Company's in-store shops that are planned to be opened in 1998. The Company believes that its financing arrangements and anticipated level of internally generated funds will be sufficient to finance its capital spending during 1998. At its April 14, 1998 meeting, the Company's Board of Directors authorized the repurchase of up to $5,000,000 of the Company's common stock. The repurchase will be based upon the trading price of the stock and will be supervised by a subcommittee of the Board of Directors. While there is no assurance that any stock will be repurchased, any repurchase made would adversely affect the overall liquidity of the Company. -30- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The Company is currently preparing definitive documentation for the purchase of selected assets of The Warren Apparel Group Ltd. a manufacturer of dresses that are sold at "better" price points in departments stores. This acquisition , if completed, will require the modification of the Company's existing credit facility to provide a substantially higher credit line and other modifications to covenants and other terms. The Company is currently negotiating these modifications with its lender. In August 1998 the Company entered into a modification of its lease for its showroom and offices at 1412 Broadway, New York, New York. This modification extended the lease through August 2008 and included the leasing of approximately an additional 20,333 square feet of space. The Company is not restricted from paying cash dividends or repurchasing its stock under the CIT Credit Agreement as long as those disbursements do not cause the Company to be in violation of the restrictive covenants, as amended, and they do not exceed $5,000,000 in either fiscal years 1998 or 1999. (Reference is made to the 1997 Form 10-K Note 6(a) to the Consolidated Financial Statements.) The Company has no plans to pay cash dividends in the foreseeable future. The Company is dependent on a number of automated systems to communicate with its customers and suppliers, to efficiently design, manufacture, import, and distribute its product, as well as to plan and manage the overall business. The Company recognizes the critical importance of maintaining the proper functioning of its systems. In the fourth quarter of 1997, the Company began a review of its systems and technology to address all business requirements, including Year 2000 compliance. This review is substantially complete and a plan has been developed to meet these needs. Overall, the plan identifies numerous changes required to make the Company's systems Year 2000 compliant. These changes will be implemented in 1998 through 1999 at an estimated cost of approximately $1,500,000 plus the utilization of internal staff and other resources. On May 4, 1998, the Company implemented the first phase of its plan by placing in operation a new purchase order management and invoicing system. Through August 10, 1998, the Company implemented the second phase of its plan by placing in operation Year 2000 compliant versions of its accounts payable, general ledger and EDI translation systems. The Company is also dependent on the efforts of its customers, suppliers and software vendors. The Company's upgrade of its electronic data intercharge software will need to be tested with the Company's customers to confirm proper functioning. The Company's customers and suppliers are also required to implement projects to make their systems and communications Year 2000 compliant. Failure to complete their efforts in a timely way could disrupt the Company's operations including the ability to receive and ship its product as well as to invoice its customers. Finally, the Company's plan is based upon the representation of the vendors that market the software packages selected by the Company. There is no guarantee that these new systems will be compliant -31- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES under all the circumstances and volume stresses that may actually be required by the Company's operations through Year 2000. A number of statements contained herein are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. These risks and uncertainties include, but are not limited to, the uncertainty of potential manufacturing difficulties, the dependence on key personnel, the possible impact of competitive products and pricing, the Company's continued ability to finance its operations, general economic conditions and the achievement and maintenance of profitable operations and positive cash flow. -32- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Company has previously reported the proceedings under chapter 11 of the Bankruptcy Code and other pending legal proceedings in Item 3. - "Legal Proceedings" in the 1997 Form l0-K. The Company's Plan of Reorganization was approved by the creditors and on April 21, 1997, the Bankruptcy Court confirmed the Plan. On June 4, 1997, the Plan was consummated and the Company no longer operates under chapter 11. For information concerning legal proceedings at the end of the second quarter of 1998, reference is made to Note 8 of the Notes to Consolidated Financial Statements contained herein. No other legal proceedings were terminated during the second quarter of 1998 or thereafter, other than ordinary routine litigation incidental to the business of the Company. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. (a) Date of Annual Meeting of Stockholders - June 3, 1998 (b) The Election of Eight Directors. STOCKHOLDER VOTES ----------------- For Withheld --- -------- Clifford B. Cohn 2,455,851 410 Mark B. Dickstein 2,456,258 3 Chaim Y. Edelstein 2,456,258 3 Mark Kaufman 2,456,258 3 Bernard Olsoff 2,456,258 3 John J. Pomerantz 2,456,258 3 Robert L. Sind 2,456,258 3 John A. Ward 2,456,258 3 -33- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES (c) Approval of an amendment to the Amended and Restated Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock from 9,500,000 to 20,000,000 shares. STOCKHOLDER VOTES ----------------- For: 1,877,643 Against: 578,777 Abstentions: 21 Broker Non-Votes: -- (d) Approval of an amendment to the Amended and Restated Certificate of Incorporation of the Company to permit stockholder action by written consent. STOCKHOLDER VOTES ----------------- For: 2,443,808 Against: 12,450 Abstentions: 3 Broker Non-Votes: -- (e) Approval of the provision of the Company's 1997 Management Stock Option Plan limiting the number of shares for which options may be granted to any one employee over the life of such plan and the amendment to such plan to modify the terms of certain options contemplated thereunder. STOCKHOLDER VOTES ----------------- For: 2,265,095 Against: 191,091 Abstentions: 153 Broker Non-Votes: -- (f) Approval of an amendment to the Company's 1997 Non-Employee Director Stock Option and Stock Incentive Plan to permit the grant of stock awards thereunder. STOCKHOLDER VOTES ----------------- For: 2,443,306 Against: 12,790 Abstentions: 153 Broker Non-Votes: -- -34- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES (g) Ratification of the action of the Board of Directors in appointing Arthur Andersen LLP as independent accountants of the Company. STOCKHOLDER VOTES ----------------- For: 2,448,710 Against: 7,547 Abstentions: 3 Broker Non-Votes: -- Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. a) Exhibits Exhibits are set forth on the "Index to Exhibits" on page E-1 hereof. -35- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 18, 1998 THE LESLIE FAY COMPANY, INC. ---------------------------- (Company) By:/s/ Warren T. Wishart ----------------------------------- Warren T. Wishart Senior Vice President - Administration and Finance, Chief Financial Officer and Treasurer -36- INDEX TO EXHIBITS ----------------- Exhibit No. Description - ---------- ----------- 10.10 Employment Agreement dated as of January 4, 1998 between the Company and John J. Pomerantz 10.11 Employment Agreement dated as of January 4, 1998 between the Company and John Ward. 10.12 Employment Agreement dated as of January 4, 1998 between the Company and Warren T. Wishart. 10.13 Employment Agreement dated as of January 4, 1998 between the Company and Dominick Felicetti. 10.14 Amended Lease Agreement dated August 11, 1998 between Fashion Gallery Owners (formerly 1412 Broadway Associates) and the Company, for certain premises located at 1412 Broadway, New York, New York. 27 Financial Data Schedule. E-1 EX-10.10 2 EMPLOYMENT AGREEMENT WITH JOHN POMERANTZ EMPLOYMENT AGREEMENT (John J. Pomerantz) AGREEMENT, dated as of January 4, 1998, between The Leslie Fay Company, Inc., a Delaware corporation, with its principal office at 1412 Broadway, New York, New York (the "Corporation"), and John J. Pomerantz, residing at Hidden Spring Farm, 19 Winfield Avenue, Harrison, New York 10528 (the "Executive"). RECITALS A. The Executive has served as the Chairman and Chief Executive Officer of the Corporation since June 2, 1997, and prior thereto as Chairman and Chief Executive Officer of The Leslie Fay Companies, Inc., predecessor-in-interest to the Corporation ("Old Leslie Fay"). B. The Corporation desires to secure the continued services of the Executive, and the Executive desires to continue to furnish services to the Corporation, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties hereto hereby agree as follows: 1. Definitions. Unless otherwise defined herein, the following terms shall have the respective meanings specified below and be equally applicable to the singular and plural of terms defined: (a) "Adjusted Incentive EBITDA" shall mean, for any fiscal year during the Term, the lesser of (i) Incentive EBITDA and (ii) the projected EBITDA for such fiscal year as set forth in the Corporation's business plan for such fiscal year approved by the Board. (b) "Base Salary" shall have the meaning set forth in Section 5 hereof. (c) "Board" shall mean the Board of Directors of the Corporation. (d) "Bonus" shall mean, for any year during the Term, the Executive's allocable portion of the Cash Bonus Pool for such year, determined in accordance with Section 6 hereof. (e) "Cash Bonus Pool" shall have the meaning set forth in Section 6 hereof. (f) "Cause" shall mean (i) conviction of the Executive in respect of a felony, (ii) perpetration by the Executive of (x) an illegal act which causes significant economic injury to the Corporation or (y) a common law fraud against the Corporation, or (iii) willful violation by the Executive (a "Material Insubordination") of a specific written direction from the Board concerning one or more matters of a material nature for the Corporation or its business or operations (following a warning in writing in respect thereto from the Board). (g) "Change of Control" shall mean the occurrence of any of the following: (i) any person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act), other than Dickstein Partners, Inc. and/or any of its affiliates (as defined in Rule 12b-2 under the Exchange Act), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the aggregate voting power of the capital stock of the Corporation; or (ii) the sale of all or substantially all of the Corporation's assets in one or more related transactions; or (iii) any merger, consolidation, reorganization or similar event of the Corporation or any of its subsidiaries, as a result of which the holders of the voting stock of the Corporation immediately prior to such merger, consolidation, reorganization or similar event do not hold at least fifty-one percent (51%) of the aggregate voting power of the capital stock of the surviving entity. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Compensation Committee" shall mean the compensation committee of the Board, all of whose members are "outside directors" within the meaning of Section 162(m) of the Code. (j) "Corporation Senior Managers" shall mean the Chief Executive Officer, the President, the Senior Vice President--Manufacturing and Sourcing, the Senior Vice President-- Administration and Finance (Chief Financial Officer) and such other employees of the Corporation as determined by the Compensation Committee in consultation with the Chief Executive Officer. (k) "Disabled" shall mean, with respect to the Executive, being physically or mentally disabled, whether totally or partially, so that he is substantially unable to perform his services hereunder for a consecutive period of more than six (6) months or for shorter periods aggregating six months during any twelve-month period. (l) "EBITDA" shall mean for any fiscal year of the Corporation, the consolidated earnings before interest, taxes, depreciation and amortization of the Corporation and its consolidated subsidiaries, and before any non-cash accruals for stock-based compensation, as determined pursuant to generally accepted accounting principles in effect in the United States of America from time to time, provided that for purposes of determining EBITDA hereunder, EBITDA shall be calculated before determination of the Cash Bonus Pool. -2- (m) "Effective Date" shall mean January 4, 1998. (n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (o) "Good Reason" shall mean the continuation of any of the following events for more than ten (10) days after the Corporation's receipt from the Executive of written notice thereof: (i) the Executive shall fail to be reelected as a Director of the Corporation and as Chairman of the Board and Chairman of the Executive Committee of the Board (if any) or shall be removed from any such positions or from the position of Chief Executive Officer of the Corporation at any time during the Term (other than for Cause); (ii)the Executive shall fail to be vested with the powers and authority of Chief Executive Officer of the Corporation as described in Section 4(a) hereof, or the powers and authority of such position or his responsibilities with respect thereto shall be diminished in any material respect; (iii) the Executive shall have assigned to him without his express written consent any duties, functions, authority or responsibilities that are inconsistent with the Executive's positions described in Section 4 hereof; (iv)the Executive's principal place of employment is changed to a location more than twenty-five (25) miles from the prior location without the Executive's prior written consent; (v) any material failure by the Corporation to fulfill any of its obligations under this Agreement (other than pursuant to Section 4(b)), including, without limitation, the failure to make any material payment required to be made by the Corporation pursuant to Sections 5 and 6 hereof within five (5) business days after the date such payment is required to be made; (vi)any purported termination by the Corporation of the Executive's employment otherwise than as expressly permitted by, and in compliance with all conditions and procedures of, this Agreement; (vii) the Corporation shall fail to comply with the provisions of Section 14 or Section 19(a) hereof; or (viii) there shall occur a Change of Control and any designee of the Executive pursuant to Section 4(b) hereof shall fail to be reelected or shall be removed as a Director during the Term, or the size of the Board shall be expanded and the Executive shall not be given reasonable opportunity to designate one or more additional Directors such that -3- the Executive and all Directors designated by the Executive shall comprise at least twenty-eight percent (28%) of the membership of the Board. (p) "Incentive EBITDA" shall mean Eleven Million Five Hundred Thousand Dollars ($11,500,000). (q) "Old Leslie Fay" shall have the meaning set forth in the Recitals. (r) "Target EBITDA" shall mean Five Million Four Hundred Forty-Three Thousand Dollars ($5,443,000). (s) "Term" shall have the meaning set forth in Section 3 hereof. 2. Employment. The Corporation shall employ the Executive, and the Executive shall serve the Corporation, upon the terms and conditions hereinafter set forth. 3. Term. (a) Term of Employment. Subject to the terms and conditions hereinafter set forth, the term of the Executive's employment hereunder shall commence as of the Effective Date and shall continue until the third anniversary of the Effective Date, unless earlier terminated pursuant to the provisions of Section 8, 9 or 10 hereof (the "Term"). (b) Renewal. During the third year of the Term, the Corporation will conduct, in good faith and on a timely basis, negotiations with the Executive concerning the renewal of the Executive's employment with the Corporation. 4. Duties and Extent of Services. (a) Chief Executive Officer. During the Term, the Executive shall serve as Chief Executive Officer of the Corporation faithfully and to the best of his ability, and shall devote substantially all of his business time, energy and skill to such employment, it being understood and agreed that the Executive may serve on the boards of directors or equivalent governing bodies of other business corporations or other business organizations; provided, however, that (i) such other corporations or other organizations are not in direct competition with the Corporation and/or its subsidiaries and (ii) such service does not materially interfere with the performance by the Executive of his duties hereunder. The Executive shall be invested with the duties and authority that are customarily delegated to a chief executive officer of a corporation, and shall report to and be subject to the direction of the Board of Directors of the Corporation. The Executive shall also perform such specific duties and services of a senior executive nature as the Board of Directors of the Corporation shall request, including, without limitation, serving as a senior officer and/or director of any of the Corporation's subsidiaries. -4- (b) Board Membership. Although it is understood that the right to elect directors of the Corporation is by law vested in the stockholders of the Corporation, (i) the Executive shall serve as Chairman of the Board and of the Executive Committee of the Board (if any) and (ii) the Executive shall be entitled to designate one or more additional Directors such that the Executive and all Directors designated by the Executive shall at all times comprise at least twenty-eight percent (28%) of the membership of the Board. For so long as John Ward shall be a Director of the Corporation, Mr. Ward shall be deemed a designee of the Executive for purposes of this Section 4(b). 5. Base Salary. During the Term, the Corporation shall pay the Executive a base salary ("Base Salary") of Five Hundred Thousand Dollars ($500,000), or such higher amount as the Board may from time to time determine, payable in equal weekly installments. 6. Incentive Compensation. (a) Amount. If the Corporation's EBITDA for any fiscal year (except as noted, references in this Section to EBITDA or Incentive EBITDA are to the corresponding quantity for such fiscal year) during the Term is greater than or equal to eighty-five percent (85%) (the "Minimum Percentage") of Target EBITDA, the Corporation shall pay a bonus ("Cash Bonus Pool") to the Corporation Senior Managers in an amount equal to the sum of: (x) nine and six-tenths percent (9.6%) of EBITDA, plus (y) two-tenths percent (0.2%) of the Corporation's EBITDA for each percentage point, if any, of Target EBITDA by which EBITDA exceeds the Minimum Percentage; provided, however, that in no event shall the combined amount under clause (x) above and this clause (y) exceed twelve and one-half percent (12.5%) of EBITDA, plus (z) five percent (5%) of the amount by which EBITDA exceeds the sum of (I) Incentive EBITDA plus (II) the sum for all prior fiscal years (excluding the fiscal year for which the amount of the Cash Bonus Pool is being determined) of the positive difference, if any, for each such fiscal year between (i) Adjusted Incentive EBITDA for such fiscal year and (ii) EBITDA for such fiscal year less (III) any amount under clause (II) applied in any prior year to reduce the amount of the Cash Bonus Pool that would otherwise have been payable in such year. The amount of the Cash Bonus Pool for any fiscal year only a part of which is within the Term shall be equal to the amount of the Cash Bonus Pool that would have been payable for such fiscal year had it been entirely within the Term, times a fraction, the numerator of which is the number of days of such fiscal year occurring during the Term, and the denominator of which is three hundred and sixty-five (365). The Executive and each other Corporation Senior Manager shall be entitled to receive such portion of the Cash Bonus Pool for any fiscal year during the Term as determined by the Chief -5- Executive Officer, but only if approved by the Compensation Committee not later than the end of the first quarter of such fiscal year. Other than with respect to allocation, all of the Corporation Senior Managers shall participate in the Cash Bonus Pool on the same terms and conditions. (b) Manner of Payment. The Cash Bonus Pool for any fiscal year during the Term shall be determined after the close of such fiscal year. However, the Executive shall be permitted to draw during each fiscal year, on a quarterly basis, against his anticipated allocation of the Cash Bonus Pool for such year, as follows: (i) Following each fiscal quarter, the Corporation shall determine a pro-rated Cash Bonus Pool amount for the period from the beginning of the fiscal year through the end of such fiscal quarter, calculated as set forth in clauses (x), (y) and (z) of Section 6(a) hereof. For purposes of such determination, Target EBITDA, Incentive EBITDA, Adjusted Incentive EBITDA and the amount described under subclause (II) of said clause (z), if any, shall be prorated for the relevant year-to-date period. (ii) The Executive shall be permitted to draw up to two-thirds of his allocated amount of the pro-rated Cash Bonus Pool, less the amount of all prior draws for the same fiscal year. (iii) Following the end of the fiscal year, the Corporation shall determine whether the amount of the Cash Bonus Pool allocable to the Executive exceeds or is less than the Executive's draws under the pro-rated Cash Bonus Pool for such fiscal year. (iv) If the allocated amount of the Cash Bonus Pool to which the Executive is entitled exceeds the amount of the Executive's draws for the fiscal year, the Corporation shall pay the difference to the participant not later than ninety (90) after the end of the fiscal year. If the allocated amount of the Cash Bonus Pool to which the Executive is entitled is less than the amount of the Executive's draws for the fiscal year, the Executive shall repay the difference to the Corporation within one hundred twenty (120) days after the Corporation informs the Executive in writing of the deficiency, with a calculation thereof in reasonable detail. The amount required to be repaid shall bear interest at the applicable federal rate from the date of the respective draw(s) until repayment. If the Executive shall dispute the amount of the deficiency, the Executive shall inform the Corporation in writing of such dispute on or before the date payment of the deficiency is otherwise due, shall provide the Corporation with a statement of the basis for the dispute in reasonable detail and shall pay to the Corporation any undisputed amount thereof on or prior to the aforesaid payment date. Thereafter, the Executive and the Corporation shall in good faith attempt to resolve the dispute, but if the dispute cannot be resolved prior to the expiration of thirty (30) days from the aforesaid payment date, the dispute shall be submitted to arbitration in accordance with the procedures set forth in Section 25. -6- (v) The Executive's repayment obligations under the preceding clause (iv) of this Section 6(b) shall be secured by all unexercised options, vested or unvested, to acquire capital stock of the Corporation granted by the Corporation to the Executive. (c) If any payment is required to be made under Section 8, 9 or 10 hereof on the basis of the Cash Bonus Pool for any fiscal year, and the Cash Bonus Pool for such fiscal year cannot be determined until after the time that such payment is otherwise required to be made, then the payment of that amount which is based upon the determination of the Cash Bonus Pool for such fiscal year shall be deferred until after such time as the determination of the Cash Bonus Pool for such fiscal year can reasonably be made, and such payment shall be made as soon thereafter as practicable. (d) Payment of the Cash Bonus Pool shall be subject to the approval of the Corporation's stockholders to the extent necessary such that all payments under the Cash Bonus Pool will be fully deductible under Section 162(m) of the Code, and the Corporation shall used its reasonable best efforts to obtain such approval on a timely basis consistent with the provisions of this Section 6. 7. Employee Benefits. (a) During the Term, the Executive shall receive coverage and/or benefits under any and all medical insurance, life insurance, long-term disability insurance and pension plans and other employee benefit plans of the Corporation generally made available to senior executives of the Corporation from time to time. (b) During the Term, the Corporation shall provide (x) the Executive and members of his immediate family with (i) supplemental disability coverage and (ii) medical insurance for all medical costs and services incurred by the foregoing, including costs of dental, vision and custodial care, and (y) the Executive with the services of an automobile selected by him and a driver for his use. (c) The Executive shall be entitled to paid vacations (taken consecutively or in segments), in accordance with the standard vacation policy of the Corporation for senior executives, but in no event less than four (4) weeks each calendar year during the Term. Such vacations shall be taken at times consistent with the effective discharge of the Executive's duties. (d) During the Term, the Executive shall be accorded office facilities and secretarial assistance commensurate with his position as Chief Executive Officer of the Corporation and adequate for the performance of his duties hereunder. (e) The Executive shall be awarded, as of January 1, 1998, ten year options to acquire 190,399 shares of the Corporation's common stock, par value $.01 per share, under the Corporation's 1997 Management Stock Option Plan, at an exercise price of $6.18 per share, of which options to acquire 131,878 shares will vest in three equal annual installments beginning June 4, 1998 -7- and options to acquire 58,521 shares will vest in four equal installments beginning January 4, 1998, subject to acceleration and expiration as provided in the aforesaid plan. 8. Termination--Death or Disability. (a) In the event of the termination of the Executive's employment because of the death of the Executive during the Term, the Corporation shall pay to any one or more beneficiaries designated by the Executive pursuant to notice to the Corporation, or, failing such designation, to the Executive's estate, (i) the unpaid Base Salary owing to the Employee through the end of the month of his death, in a lump sum within five (5) business days after his death, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (b) In the event that the Executive shall become Disabled, the Corporation shall have the right to terminate the Executive's employment hereunder by giving him written notice of such termination. Upon receipt of such notice, the Executive's employment hereunder shall terminate. In the event of such termination, the Corporation shall pay to the Executive (i) the unpaid Base Salary owing to the Executive through the end of the month of such termination, in a lump sum within five (5) business days of such termination, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (c) If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for any fiscal year prior to the date of his death or termination for disability for which a year-end reconciliation has not been made in accordance with clause (iv) of such Section, any Bonus payment required pursuant to Section 8(a) or 8(b) shall be adjusted, and the Corporation shall make a payment to the Executive or his estate or the Executive or his estate shall make a payment to the Corporation, as required by Section 6(b)(iv). 9. Termination for Cause by Corporation. (a) The Executive's employment hereunder may be terminated by the Corporation for Cause upon compliance with the provisions of Section 9(b) hereof. In the event that Executive's employment hereunder shall validly be terminated by the Corporation for Cause pursuant to this Section 9, the Corporation shall promptly pay accrued but unpaid Base Salary to the date of termination and reimburse or pay any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination, and thereafter shall have no further obligations under this Agreement. Upon termination of the Executive's employment hereunder for Cause, the Executive shall nonetheless remain bound by the obligations provided for in Sections 11 and 12 hereof. For purposes of this Section 9(a), the amount accrued to the Executive under Section 6 hereof shall mean -8- a Bonus accrued but unpaid for all fiscal years prior to the fiscal year in which the termination of the Executive occurs. If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which his termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(a). (b) Termination for Cause shall be effected only by action of a majority of the Board then in office (excluding the Executive) at a meeting duly called and held upon at least ten (10) days' prior written notice to the Executive specifying the particulars of the action or inaction alleged to constitute "Cause" (and at which meeting the Executive and his counsel were entitled to be present and given reasonable opportunity to be heard). 10. Termination for Good Reason by the Executive or Without Cause by the Corporation; Change of Control; Non-Renewal. (a) Termination by Executive for Good Reason. The Executive's employment hereunder may be terminated by the Executive for Good Reason by providing written notice to the Corporation to such effect (such termination to be effective on the date specified in such notice, which date shall not be more than sixty (60) days nor less than thirty (30) days after the date of such notice). (b) Severance. If at any time (other than following a Change of Control) the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, then, in lieu of any other amounts that might otherwise have been payable hereunder, the Corporation shall promptly pay to the Executive: (i) all accrued but unpaid Base Salary and any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination; and (ii) (I) if the termination occurs at any prior to the second anniversary of the Effective Date, an amount equal to twice the Base Salary in effect on the date of termination for each year or partial year remaining during the Term; or (II) if the termination occurs on or after the second anniversary of the Effective Date, an amount equal to (x) twice the Base Salary in effect on the date of termination, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the second year of the Term. If the employment of the Executive is terminated as provided in this Section 9(b) or Section 9(c) below and the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which such termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(b) or Section 9(c) below. -9- (c) Change of Control. If a Change of Control occurs and thereafter the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, the Corporation shall promptly pay to the Executive an amount equal to the greater of: (i) the maximum amount that may be paid to the Executive which, when taken together with all other amounts that would be deemed to be "parachute payments" under Section 280G of the Code (disregarding Section 280G(b)(2)(A)(ii) thereof), would not cause the Corporation to make an "excess parachute payment" to the Executive, within the meaning of Section 280G of the Code; and (ii) the sum of (x) the amount payable to the Executive under Section 10(b) above, and (y) the Gross-Up Payment. (d) Gross-Up Payment. (i) For purposes of Section 10(c), "Gross-Up Payment" means an additional amount such that the net amount retained by the Executive, after deduction of the Excise Tax (as defined below) on any payments or benefits under this Agreement and/or under any option plan or agreement of the Corporation received by the Executive from the Corporation as a result of a Change of Control (within the meaning of section 280G(b)(2) of the Code) (collectively, the "Payments") and any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the Executive with respect thereto (other than such interest, penalties or additions to tax payable solely as a result of action or inaction by the Executive), shall be equal to the total amount of the Payments. "Excise Tax" means the tax imposed by Section 4999 of the Code. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (x) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the Corporation and reasonably acceptable to the Executive ("Independent counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax; (y) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof); and (z) the value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment -10- is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments referred to in Section 10(d)(i) hereof shall be made, subject to applicable withholding requirements, upon the earlier of (x) the payment to the Executive of any Payment or (y) the imposition upon the Executive or payment by the Executive of any Excise Tax. (iii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reasons of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Corporation's receipt of notice of such final determination or opinion. (iv) In the event that the Internal Revenue Service makes any claim, gives notice of any potential claim or institutes a proceeding against the Executive asserting that any Excise Tax or additional Excise Tax is due in respect of the Payments, the Executive shall promptly give the Corporation notice of any such claim, potential claim or proceeding. The Corporation shall have the right to conduct all discussions, negotiations, defenses, actions and proceedings solely to the extent relating to any Excise Tax payable in respect of the Payments, and the Executive shall cooperate with and assist the Corporation, at the Corporation's expense, in any such discussions, negotiations, defenses, actions and proceedings, to the extent reasonably requested by the Corporation. The Executive will not settle any claim or proceeding solely to the extent relating to the Excise Tax payable in respect of the Payments without the consent of the Corporation, which consent shall not be unreasonably withheld. The Executive shall file, at the Corporation's expense, all requests for refunds of the Gross-Up Amount, or any portion thereof, paid to any taxing authority as shall be reasonably requested by the Corporation and shall pay over to the Corporation (net of any tax payable thereon) any such refunds, together with any interest thereon, when and as such refunds and interest are received by the Executive. (v) All fees and expenses of Independent Counsel shall be borne by the Corporation. (e) Non-Renewal. In the event that the employment of the Executive is not renewed by the Corporation following the end of the Term on terms that are no less favorable to the Executive than the terms of this Agreement, the Corporation shall pay to the Executive, promptly after the end of the Term, an amount equal to (x) twice the Base Salary in effect at the end of the Term, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the third year of the Term; provided that such payment shall not be less than three times the Base Salary in effect at the end of the Term. If the Corporation is willing to renew the employment of the Executive at the end of the Term on terms no less favorable to the Executive than the terms of this Agreement but -11- the Executive is unwilling to accept such employment, no amount shall be payable to the Executive under this Section 10(d). 11. Confidential Information. In addition to any other confidentiality obligation the Executive may have to the date hereof, and until the end of the original Term, the Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, any and all confidential information relating to the Corporation and its subsidiaries, including, without limitation, customer lists, financial plans or projections, pricing policies, marketing plans or strategies, business acquisition or divestiture plans, new personnel acquisition plans, designs, and, except in connection with the performance of his duties hereunder, the Executive shall not disclose any such information to anyone outside the Corporation and any of its subsidiaries, except as required by law (provided prior written notice thereof is given by the Executive to the Corporation) or except with the Corporation's prior consent, unless such information is known generally to the public or the trade through sources other than the Executive's unauthorized disclosure. 12. Competitive Activity. The Executive hereby agrees that, during his employment hereunder, and, following a termination of his employment, for the balance of the Term (if any), the Executive shall not, without the prior consent of the Board (i) directly or indirectly, engage or be interested in (as owner, partner, shareholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business wherever located in the world engaged in the manufacture, distribution, design marketing or sale of women's apparel, if such business is a material competitor of the Corporation, or (ii) induce or attempt to persuade any employee of the Corporation or of any subsidiary of the Corporation, or any person who was employed by the Corporation or any subsidiary of the Corporation within the preceding six months, to leave the employ of the Corporation or any subsidiary of the Corporation (but the foregoing shall not be deemed to prevent the Executive in his capacity as Chief Executive Officer of the Corporation from hiring or dismissing any employee of the Corporation or any subsidiary for the benefit of the Corporation). The provisions of clause (i) of the preceding sentence shall not apply in the case of a termination by the Executive for Good Reason or by the Corporation without Cause. Nothing in this Section 12 shall prohibit the Executive from acquiring or holding not more than five percent (5%) of any class of publicly traded securities of any business. 13. Expenses. The Corporation shall reimburse the Executive for all reasonable expenses incurred by the Executive in the performance of the Executive's duties hereunder; provided, however, that, in connection with such reimbursement, the Executive shall account to the Corporation for such expenses in the manner customarily prescribed by the Corporation for its senior executives. 14. Directors' and Officers' Insurance; Indemnification. The Executive shall be provided with directors' and officers' insurance in connection with his employment hereunder and service as a Director as contemplated hereby with such coverage (including with respect to unpaid wages and taxes not remitted when done) as shall be reasonably satisfactory to the Executive and with aggregate limits of liability for all covered officers and directors of not less than Thirty-Five Million Dollars ($35,000,000), and the Corporation shall maintain such insurance in effect for the period of the -12- Executive's employment hereunder and for not less than five (5) years thereafter; provided, however, that, in the event that the Corporation shall not obtain such insurance, it shall provide or cause the Executive to be provided with indemnity (or a combination of indemnity and directors' and officers' insurance) in connection with his employment hereunder with substantially equivalent coverage and amounts, and the Corporation shall maintain such indemnity (or combination of indemnity and directors' and officers' insurance) or cause such indemnity (or such combination) to be maintained for the period of the Executive's employment hereunder and for not less than five (5) years thereafter. 15. No Duty to Mitigate. The Executive shall have no duty to mitigate the severance amounts or any other amounts payable to the Executive hereunder, and such amounts shall not be subject to reduction for any compensation received by the Executive from employment in any capacity or other source following the termination of Executive's employment with the Corporation and its subsidiaries. 16. Entire Agreements; Amendments; No Waiver. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. No failure on the part of either party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any partial exercise of any right hereunder preclude any further exercise thereof. 17. Survival of Provisions. The provisions of Sections 10(d), 11, 12, 23, 25 and 26(a) shall survive the termination or expiration of this Agreement as provided therein. Such provisions are unique and extraordinary, which give them a value peculiar to the Corporation, and cannot be reasonably or adequately compensated in damages for its loss and any breach by the Executive of such provisions shall cause the Corporation irreparable injury and damage. Therefore, the Corporation, in addition to all other remedies available to it, shall be entitled to injunctive and other available equitable relief in any court of competent jurisdiction to prevent or otherwise restrain a breach of such provisions for the purposes of enforcing such provisions. 18. Withholding. The Corporation shall be entitled to withhold from any and all amounts payable to the Executive hereunder such amounts as may from time to time be required to be withheld pursuant to applicable tax laws and regulations. 19. Succession, Assignability and Binding Effect. (a) The Corporation will require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall constitute Good Reason for resignation by the Executive. -13- (b) This Agreement shall inure to the benefit of and shall be binding upon the Corporation and its successors and permitted assigns and upon the Executive and his heirs, executors, legal representatives, successors and permitted assigns; provided, however, that neither party may assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any of its or his rights hereunder without the prior written consent of the other party, and any such attempted assignment, transfer, pledge, encumbrance, hypothecation or other disposition without such consent shall be null and void and without effect. 20. Headings. The paragraph headings contained herein are included solely for convenience of reference and shall not control or affect the meaning or interpretation of any of the provisions of this Agreement. 21. Notices. Any notices or other communications hereunder by either party shall be in writing and shall be deemed to have been duly given if delivered personally to the other party or, if sent by registered or certified mail, upon receipt, to the other party at his or its address set forth at the beginning of this Agreement or at such other address as such other party may designate in conformity with the foregoing. 22. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles thereof relating to the conflict of laws. 23. Legal Fees and Expenses. In order to induce the Executive to enter into this Agreement and to provide the Executive with reasonable assurance that the purposes of this Agreement shall not be frustrated by the cost of its enforcement, the Corporation shall pay and be solely responsible for any attorneys' fees and expenses and court costs incurred by the Executive as a result of the failure by the Corporation to perform this Agreement or any provision hereof to be performed by it or in connection with any action which may be brought, by or in the name or for the benefit of the Corporation or any subsidiary contesting the validity or enforceability of this Agreement or any provision hereof to be performed by the Corporation, which action shall have been dismissed by a final, nonappealable court order. 24. Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 24, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. 25. Arbitration. (a) Disputes Subject to Arbitration. In the event that the Corporation terminates the Executive's employment on the grounds set forth in clause (iii) of the definition of "Cause", the Corporation and the Executive mutually consent to the resolution by arbitration of any dispute between the Corporation and the Executive as to whether such Cause has occurred. Unless the Corporation and the Executive otherwise agree, no other disputes, issues, claims or controversies -14- arising out of the Executive's employment (or its termination), or any other matter whatsoever, shall be submitted to or resolved by arbitration. (b) Arbitration Procedures. (i) The Corporation and the Executive agree that, except as provided in this Agreement, any arbitration shall be in accordance with the then current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA") before an arbitrator who is licensed to practice law in the state in which the arbitration is convened (the "Arbitrator"). The arbitration shall take place in or near the city in which the Executive is or was last employed by the Corporation. (ii) Upon designation as a Dispute, the AAA shall give each party a list of eleven (11) arbitrators drawn from its panel of labor and employment arbitrators. The Corporation and the Executive may strike all names on the list which it deems unacceptable. If only one common name remains on the lists of all parties, said individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternatively until only one remains. If no common name remains on the lists of all parties, the AAA shall furnish an additional list and the parties shall alternate striking names on such second list until an arbitrator is selected. (iii) The Arbitrator shall apply the law of the State of New York applicable to contracts made and to be performed wholly in that state (without giving effect to the principles thereof relating to conflicts of law). The Federal Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability or formation of the term "Cause". The Arbitrator shall render a decision within thirty (30) days of the date upon which the Arbitrator is selected pursuant to Section 25(b)(ii), which decision shall be final and binding upon the parties. In the event that the Arbitrator decides that Material Insubordination has (x) occurred, then the Executive's employment shall be deemed to have been terminated for cause pursuant to Section 9(a) hereof or (y) not occurred, then the Executive's employment shall be deemed to have been terminated without Cause pursuant to Section 10(b) hereof. (iv) The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold prehearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. (v) Either party, at its expense, may arrange for and pay the costs of a court reporter to provide a stenographic report of proceedings. -15- (vi) Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (vii) Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Section 25. Except as otherwise provided in this Section 25, both the Corporation and the Executive agree that neither such party shall initiate or prosecute any lawsuit or administrative action in any way related to any Dispute covered by this Section 25. (viii) The arbitrator shall render an opinion in the form typically rendered in labor arbitrations. (c) Arbitration Fees and Costs. The Corporation and the Executive shall equally share the fees and costs of the Arbitrator. Each party shall deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, ten (10) days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim that affords the prevailing party attorneys' fees, the Arbitrator may award reasonable fees to the prevailing party. (d) Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 25, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. (e) Law Governing. The parties agree that the arbitration provisions set forth in this Section 25 shall be governed by the Federal Arbitration Act, 9 U.S.C.ss.ss. 1-16, ("FAA"). The parties further agree that all Disputes, whether arising under state or federal law, shall be subject to the FAA, notwithstanding any state or local laws to the contrary. 26. Other Matters. (a) Health Insurance. So long as the annual cost thereof does not exceed Twenty Thousand Dollars ($20,000), and unless the employment of the Executive shall be terminated by the Corporation for Cause or by the Executive without Good Reason, the Corporation shall continue in effect, for the rest of the Executive's life, the health insurance provided for the Executive by Old Leslie Fay as of the Effective Date. (b) Prior Employment Agreement. The employment agreement, dated as of June 2, 1997 between the Executive and the Corporation is hereby terminated as of the Effective Date, except that the provisions of section 26(b) of such employment agreement in respect of the Executive's employment contract with Old Leslie Fay shall survive. -16- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. THE LESLIE FAY COMPANY, INC. By: /s/ John A. Ward ------------------------------- Name: John A. Ward Title: President /s/ John J. Pomerantz ------------------------------- John J. Pomerantz Executive -17- EX-10.11 3 EMPLOYMENT AGREEMENT WITH JOHN WARD EMPLOYMENT AGREEMENT (John A. Ward) AGREEMENT, dated as of January 4, 1998, between The Leslie Fay Company, Inc., a Delaware corporation, with its principal office at 1412 Broadway, New York, New York (the "Corporation"), and John A. Ward, residing at 80 Glenville Road, Greenwich, Connecticut 06831 (the "Executive"). RECITALS A. The Executive has served as the President of the Corporation since June 2, 1997, and prior thereto as the Chairman, Leslie Fay Sportswear Group of The Leslie Fay Companies, Inc., predecessor-in-interest to the Corporation. B. The Corporation desires to secure the continued services of the Executive, and the Executive desires to continue to furnish services to the Corporation, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties hereto hereby agree as follows: 1. Definitions. Unless otherwise defined herein, the following terms shall have the respective meanings specified below and be equally applicable to the singular and plural of terms defined: (a) "Adjusted Incentive EBITDA" shall mean, for any fiscal year during the Term, the lesser of (i) Incentive EBITDA and (ii) the projected EBITDA for such fiscal year as set forth in the Corporation's business plan for such fiscal year approved by the Board. (b) "Base Salary" shall have the meaning set forth in Section 5 hereof. (c) "Board" shall mean the Board of Directors of the Corporation. (d) "Bonus" shall mean, for any year during the Term, the Executive's allocable portion of the Cash Bonus Pool for such year, determined in accordance with Section 6 hereof. (e) "Cash Bonus Pool" shall have the meaning set forth in Section 6 hereof. (f) "Cause" shall mean (i) conviction of the Executive in respect of a felony, (ii) perpetration by the Executive of (x) an illegal act which causes significant economic injury to the Corporation or (y) a common law fraud against the Corporation, or (iii) willful violation by the Executive (a "Material Insubordination") of a specific written direction from the Board concerning one or more matters of a material nature for the Corporation or its business or operations (following a warning in writing in respect thereto from the Board). (g) "Change of Control" shall mean the occurrence of any of the following: (i) any person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act), other than Dickstein Partners, Inc. and/or any of its affiliates (as defined in Rule 12b-2 under the Exchange Act), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the aggregate voting power of the capital stock of the Corporation; or (ii) the sale of all or substantially all of the Corporation's assets in one or more related transactions; or (iii) any merger, consolidation, reorganization or similar event of the Corporation or any of its subsidiaries, as a result of which the holders of the voting stock of the Corporation immediately prior to such merger, consolidation, reorganization or similar event do not hold at least fifty-one percent (51%) of the aggregate voting power of the capital stock of the surviving entity. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Compensation Committee" shall mean the compensation committee of the Board, all of whose members are "outside directors" within the meaning of Section 162(m) of the Code. (j) "Corporation Senior Managers" shall mean the Chief Executive Officer, the President, the Senior Vice President--Manufacturing and Sourcing, the Senior Vice President-- Administration and Finance (Chief Financial Officer) and such other employees of the Corporation as determined by the Compensation Committee in consultation with the Chief Executive Officer. (k) "Disabled" shall mean, with respect to the Executive, being physically or mentally disabled, whether totally or partially, so that he is substantially unable to perform his services hereunder for a consecutive period of more than six (6) months or for shorter periods aggregating six months during any twelve-month period. (l) "EBITDA" shall mean for any fiscal year of the Corporation, the consolidated earnings before interest, taxes, depreciation and amortization of the Corporation and its consolidated subsidiaries, and before any non-cash accruals for stock-based compensation, as determined pursuant to generally accepted accounting principles in effect in the United States of America from time to time, provided that for purposes of determining EBITDA hereunder, EBITDA shall be calculated before determination of the Cash Bonus Pool. (m) "Effective Date" shall mean January 4, 1998. (n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. -2- (o) "Good Reason" shall mean the continuation of any of the following events for more than ten (10) days after the Corporation's receipt from the Executive of written notice thereof: (i) the Executive shall fail to be reelected as a Director of the Corporation or shall be removed from such position or from the position of President of the Corporation at any time during the Term (other than for Cause); (ii) the Executive shall fail to be vested with the powers and authority of President of the Corporation as described in Section 4(a) hereof, or the powers and authority of such position or his responsibilities with respect thereto shall be diminished in any material respect; (iii) the Executive shall have assigned to him without his express written consent any duties, functions, authority or responsibilities that are inconsistent with the Executive's positions described in Section 4 hereof; (iv) the Executive's principal place of employment is changed to a location more than twenty-five (25) miles from the prior location without the Executive's prior written consent; (v) any material failure by the Corporation to fulfill any of its obligations under this Agreement (other than pursuant to Section 4(b)), including, without limitation, the failure to make any material payment required to be made by the Corporation pursuant to Sections 5 and 6 hereof within five (5) business days after the date such payment is required to be made; (vi) any purported termination by the Corporation of the Executive's employment otherwise than as expressly permitted by, and in compliance with all conditions and procedures of, this Agreement; or (vii) the Corporation shall fail to comply with the provisions of Section 14 or Section 19(a) hereof. (p) "Incentive EBITDA" shall mean Eleven Million Five Hundred Thousand Dollars ($11,500,000). (q) "Target EBITDA" shall mean Five Million Four Hundred Forty-Three Thousand Dollars ($5,443,000). (r) "Term" shall have the meaning set forth in Section 3 hereof. 2. Employment. The Corporation shall employ the Executive, and the Executive shall serve the Corporation, upon the terms and conditions hereinafter set forth. -3- 3. Term. (a) Term of Employment. Subject to the terms and conditions hereinafter set forth, the term of the Executive's employment hereunder shall commence as of the Effective Date and shall continue until the third anniversary of the Effective Date, unless earlier terminated pursuant to the provisions of Section 8, 9 or 10 hereof (the "Term"). (b) Renewal. During the third year of the Term, the Corporation will conduct, in good faith and on a timely basis, negotiations with the Executive concerning the renewal of the Executive's employment with the Corporation. 4. Duties and Extent of Services. (a) President. During the Term, the Executive shall serve as President of the Corporation faithfully and to the best of his ability, and shall devote substantially all of his business time, energy and skill to such employment, it being understood and agreed that the Executive may serve on the boards of directors or equivalent governing bodies of other business corporations or other business organizations; provided, however, that (i) such other corporations or other organizations are not in direct competition with the Corporation and/or its subsidiaries and (ii) such service does not materially interfere with the performance by the Executive of his duties hereunder. The Executive shall be invested with the duties and authority that are customarily delegated to a president of a corporation, and shall report to and be subject to the direction of the Board of Directors of the Corporation. The Executive shall also perform such specific duties and services of a senior executive nature as the Board of Directors of the Corporation shall request, including, without limitation, serving as a senior officer and/or director of any of the Corporation's subsidiaries. (b) Board Membership. Although it is understood that the right to elect directors of the Corporation is by law vested in the stockholders of the Corporation, the Executive shall serve as a member of the Board of Directors of the Corporation. 5. Base Salary. During the Term, the Corporation shall pay the Executive a base salary ("Base Salary") of Four Hundred Fifty Thousand Dollars ($450,000), or such higher amount as the Board may from time to time determine, payable in equal weekly installments. 6. Incentive Compensation. (a) Amount. If the Corporation's EBITDA for any fiscal year (except as noted, references in this Section to EBITDA or Incentive EBITDA are to the corresponding quantity for such fiscal year) during the Term is greater than or equal to eighty-five percent (85%) (the "Minimum Percentage") of Target EBITDA, the Corporation shall pay a bonus ("Cash Bonus Pool") to the Corporation Senior Managers in an amount equal to the sum of: (x) nine and six-tenths percent (9.6%) of EBITDA, plus -4- (y) two-tenths percent (0.2%) of the Corporation's EBITDA for each percentage point, if any, of Target EBITDA by which EBITDA exceeds the Minimum Percentage; provided, however, that in no event shall the combined amount under clause (x) above and this clause (y) exceed twelve and one-half percent (12.5%) of EBITDA, plus (z) five percent (5%) of the amount by which EBITDA exceeds the sum of (I) Incentive EBITDA plus (II) the sum for all prior fiscal years (excluding the fiscal year for which the amount of the Cash Bonus Pool is being determined) of the positive difference, if any, for each such fiscal year between (i) Adjusted Incentive EBITDA for such fiscal year and (ii) EBITDA for such fiscal year less (III) any amount under clause (II) applied in any prior year to reduce the amount of the Cash Bonus Pool that would otherwise have been payable in such year. The amount of the Cash Bonus Pool for any fiscal year only a part of which is within the Term shall be equal to the amount of the Cash Bonus Pool that would have been payable for such fiscal year had it been entirely within the Term, times a fraction, the numerator of which is the number of days of such fiscal year occurring during the Term, and the denominator of which is three hundred and sixty-five (365). The Executive and each other Corporation Senior Manager shall be entitled to receive such portion of the Cash Bonus Pool for any fiscal year during the Term as determined by the Chief Executive Officer, but only if approved by the Compensation Committee not later than the end of the first quarter of such fiscal year. Other than with respect to allocation, all of the Corporation Senior Managers shall participate in the Cash Bonus Pool on the same terms and conditions. (b) Manner of Payment. The Cash Bonus Pool for any fiscal year during the Term shall be determined after the close of such fiscal year. However, the Executive shall be permitted to draw during each fiscal year, on a quarterly basis, against his anticipated allocation of the Cash Bonus Pool for such year, as follows: (i) Following each fiscal quarter, the Corporation shall determine a pro-rated Cash Bonus Pool amount for the period from the beginning of the fiscal year through the end of such fiscal quarter, calculated as set forth in clauses (x), (y) and (z) of Section 6(a) hereof. For purposes of such determination, Target EBITDA, Incentive EBITDA, Adjusted Incentive EBITDA and the amount described under subclause (II) of said clause (z), if any, shall be prorated for the relevant year-to-date period. (ii) The Executive shall be permitted to draw up to two-thirds of his allocated amount of the pro-rated Cash Bonus Pool, less the amount of all prior draws for the same fiscal year. -5- (iii) Following the end of the fiscal year, the Corporation shall determine whether the amount of the Cash Bonus Pool allocable to the Executive exceeds or is less than the Executive's draws under the pro-rated Cash Bonus Pool for such fiscal year. (iv) If the allocated amount of the Cash Bonus Pool to which the Executive is entitled exceeds the amount of the Executive's draws for the fiscal year, the Corporation shall pay the difference to the participant not later than ninety (90) after the end of the fiscal year. If the allocated amount of the Cash Bonus Pool to which the Executive is entitled is less than the amount of the Executive's draws for the fiscal year, the Executive shall repay the difference to the Corporation within one hundred twenty (120) days after the Corporation informs the Executive in writing of the deficiency, with a calculation thereof in reasonable detail. The amount required to be repaid shall bear interest at the applicable federal rate from the date of the respective draw(s) until repayment. If the Executive shall dispute the amount of the deficiency, the Executive shall inform the Corporation in writing of such dispute on or before the date payment of the deficiency is otherwise due, shall provide the Corporation with a statement of the basis for the dispute in reasonable detail and shall pay to the Corporation any undisputed amount thereof on or prior to the aforesaid payment date. Thereafter, the Executive and the Corporation shall in good faith attempt to resolve the dispute, but if the dispute cannot be resolved prior to the expiration of thirty (30) days from the aforesaid payment date, the dispute shall be submitted to arbitration in accordance with the procedures set forth in Section 25. (v) The Executive's repayment obligations under the preceding clause (iv) of this Section 6(b) shall be secured by all unexercised options, vested or unvested, to acquire capital stock of the Corporation granted by the Corporation to the Executive. (c) If any payment is required to be made under Section 8, 9 or 10 hereof on the basis of the Cash Bonus Pool for any fiscal year, and the Cash Bonus Pool for such fiscal year cannot be determined until after the time that such payment is otherwise required to be made, then the payment of that amount which is based upon the determination of the Cash Bonus Pool for such fiscal year shall be deferred until after such time as the determination of the Cash Bonus Pool for such fiscal year can reasonably be made, and such payment shall be made as soon thereafter as practicable. (d) Payment of the Cash Bonus Pool shall be subject to the approval of the Corporation's stockholders to the extent necessary such that all payments under the Cash Bonus Pool will be fully deductible under Section 162(m) of the Code, and the Corporation shall used its reasonable best efforts to obtain such approval on a timely basis consistent with the provisions of this Section 6. 7. Employee Benefits. (a) During the Term, the Executive shall receive coverage and/or benefits under any and all medical insurance, life insurance, long-term disability insurance and pension plans and -6- other employee benefit plans of the Corporation generally made available to senior executives of the Corporation from time to time. (b) During the Term, the Corporation shall provide (x) the Executive and members of his immediate family with (i) supplemental disability coverage and (ii) medical insurance for all medical costs and services incurred by the foregoing, including costs of dental, vision and custodial care, and (y) the Executive with an automobile allowance equal to $1,140 per month. (c) The Executive shall be entitled to paid vacations (taken consecutively or in segments), in accordance with the standard vacation policy of the Corporation for senior executives, but in no event less than four (4) weeks each calendar year during the Term. Such vacations shall be taken at times consistent with the effective discharge of the Executive's duties. (d) During the Term, the Executive shall be accorded office facilities and secretarial assistance commensurate with his position as President of the Corporation and adequate for the performance of his duties hereunder. (e) The Executive shall be awarded, as of January 1, 1998, ten year options to acquire 115,780 shares of the Corporation's common stock, par value $.01 per share, under the Corporation's 1997 Management Stock Option Plan, at an exercise price of $6.18 per share, of which options to acquire 70,060 shares will vest in three equal annual installments beginning June 4, 1998 and options to acquire 45,720 shares will vest in four equal installments beginning January 4, 1998, subject to acceleration and expiration as provided in the aforesaid plan. 8. Termination--Death or Disability. (a) In the event of the termination of the Executive's employment because of the death of the Executive during the Term, the Corporation shall pay to any one or more beneficiaries designated by the Executive pursuant to notice to the Corporation, or, failing such designation, to the Executive's estate, (i) the unpaid Base Salary owing to the Employee through the end of the month of his death, in a lump sum within five (5) business days after his death, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (b) In the event that the Executive shall become Disabled, the Corporation shall have the right to terminate the Executive's employment hereunder by giving him written notice of such termination. Upon receipt of such notice, the Executive's employment hereunder shall terminate. In the event of such termination, the Corporation shall pay to the Executive (i) the unpaid Base Salary owing to the Executive through the end of the month of such termination, in a lump sum within five (5) business days of such termination, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had -7- occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (c) If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for any fiscal year prior to the date of his death or termination for disability for which a year-end reconciliation has not been made in accordance with clause (iv) of such Section, any Bonus payment required pursuant to Section 8(a) or 8(b) shall be adjusted, and the Corporation shall make a payment to the Executive or his estate or the Executive or his estate shall make a payment to the Corporation, as required by Section 6(b)(iv). 9. Termination for Cause by Corporation. (a) The Executive's employment hereunder may be terminated by the Corporation for Cause upon compliance with the provisions of Section 9(b) hereof. In the event that Executive's employment hereunder shall validly be terminated by the Corporation for Cause pursuant to this Section 9, the Corporation shall promptly pay accrued but unpaid Base Salary to the date of termination and reimburse or pay any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination, and thereafter shall have no further obligations under this Agreement. Upon termination of the Executive's employment hereunder for Cause, the Executive shall nonetheless remain bound by the obligations provided for in Sections 11 and 12 hereof. For purposes of this Section 9(a), the amount accrued to the Executive under Section 6 hereof shall mean a Bonus accrued but unpaid for all fiscal years prior to the fiscal year in which the termination of the Executive occurs. If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which his termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(a). (b) Termination for Cause shall be effected only by action of a majority of the Board then in office (excluding the Executive) at a meeting duly called and held upon at least ten (10) days' prior written notice to the Executive specifying the particulars of the action or inaction alleged to constitute "Cause" (and at which meeting the Executive and his counsel were entitled to be present and given reasonable opportunity to be heard). 10. Termination for Good Reason by the Executive or Without Cause by the Corporation; Change of Control; Non-Renewal. (a) Termination by Executive for Good Reason. The Executive's employment hereunder may be terminated by the Executive for Good Reason by providing written notice to the Corporation to such effect (such termination to be effective on the date specified in such notice, which date shall not be more than sixty (60) days nor less than thirty (30) days after the date of such notice). -8- (b) Severance. If at any time (other than following a Change of Control) the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, then, in lieu of any other amounts that might otherwise have been payable hereunder, the Corporation shall promptly pay to the Executive: (i) all accrued but unpaid Base Salary and any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination; and (ii) (I) if the termination occurs at any prior to the second anniversary of the Effective Date, an amount equal to twice the Base Salary in effect on the date of termination for each year or partial year remaining during the Term; or (II) if the termination occurs on or after the second anniversary of the Effective Date, an amount equal to (x) twice the Base Salary in effect on the date of termination, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the second year of the Term. If the employment of the Executive is terminated as provided in this Section 9(b) or Section 9(c) below and the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which such termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(b) or Section 9(c) below. (c) Change of Control. If a Change of Control occurs and thereafter the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, the Corporation shall promptly pay to the Executive an amount equal to the greater of: (i) the maximum amount that may be paid to the Executive which, when taken together with all other amounts that would be deemed to be "parachute payments" under Section 280G of the Code (disregarding Section 280G(b)(2)(A)(ii) thereof), would not cause the Corporation to make an "excess parachute payment" to the Executive, within the meaning of Section 280G of the Code; and (ii) the sum of (x) the amount payable to the Executive under Section 10(b) above, and (y) the Gross-Up Payment. (d) Gross-Up Payment. (i) For purposes of Section 10(c), "Gross-Up Payment" means an additional amount such that the net amount retained by the Executive, after deduction of the Excise Tax (as defined below) on any payments or benefits under this Agreement and/or under any option plan or agreement of the Corporation received by the Executive from the Corporation as a result of a Change of Control (within the meaning of section 280G(b)(2) of the Code) (collectively, the "Payments") and -9- any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the Executive with respect thereto (other than such interest, penalties or additions to tax payable solely as a result of action or inaction by the Executive), shall be equal to the total amount of the Payments. "Excise Tax" means the tax imposed by Section 4999 of the Code. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (x) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the Corporation and reasonably acceptable to the Executive ("Independent counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax; (y) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof); and (z) the value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments referred to in Section 10(d)(i) hereof shall be made, subject to applicable withholding requirements, upon the earlier of (x) the payment to the Executive of any Payment or (y) the imposition upon the Executive or payment by the Executive of any Excise Tax. (iii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reasons of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Corporation's receipt of notice of such final determination or opinion. (iv) In the event that the Internal Revenue Service makes any claim, gives notice of any potential claim or institutes a proceeding against the Executive asserting that any Excise Tax or additional Excise Tax is due in respect of the Payments, the Executive shall promptly give the Corporation notice of any such claim, potential claim or proceeding. The Corporation shall have the right to conduct all discussions, negotiations, defenses, actions and proceedings solely to the extent -10- relating to any Excise Tax payable in respect of the Payments, and the Executive shall cooperate with and assist the Corporation, at the Corporation's expense, in any such discussions, negotiations, defenses, actions and proceedings, to the extent reasonably requested by the Corporation. The Executive will not settle any claim or proceeding relating solely to the extent to the Excise Tax payable in respect of the Payments without the consent of the Corporation, which consent shall not be unreasonably withheld. The Executive shall file, at the Corporation's expense, all requests for refunds of the Gross-Up Amount, or any portion thereof, paid to any taxing authority as shall be reasonably requested by the Corporation and shall pay over to the Corporation (net of any tax payable thereon) any such refunds, together with any interest thereon, when and as such refunds and interest are received by the Executive. (v) All fees and expenses of Independent Counsel shall be borne by the Corporation. (e) Non-Renewal. In the event that the employment of the Executive is not renewed by the Corporation following the end of the Term on terms that are no less favorable to the Executive than the terms of this Agreement, the Corporation shall pay to the Executive, promptly after the end of the Term, an amount equal to (x) the Base Salary in effect at the end of the Term, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the third year of the Term. If the Corporation is willing to renew the employment of the Executive at the end of the Term on terms no less favorable to the Executive than the terms of this Agreement but the Executive is unwilling to accept such employment, no amount shall be payable to the Executive under this Section 10(d). 11. Confidential Information. In addition to any other confidentiality obligation the Executive may have to the date hereof, and until the end of the original Term, the Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, any and all confidential information relating to the Corporation and its subsidiaries, including, without limitation, customer lists, financial plans or projections, pricing policies, marketing plans or strategies, business acquisition or divestiture plans, new personnel acquisition plans, designs, and, except in connection with the performance of his duties hereunder, the Executive shall not disclose any such information to anyone outside the Corporation and any of its subsidiaries, except as required by law (provided prior written notice thereof is given by the Executive to the Corporation) or except with the Corporation's prior consent, unless such information is known generally to the public or the trade through sources other than the Executive's unauthorized disclosure. 12. Competitive Activity. The Executive hereby agrees that, during his employment hereunder, and, following a termination of his employment, for the balance of the Term (if any), the Executive shall not, without the prior consent of the Board (i) directly or indirectly, engage or be interested in (as owner, partner, shareholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business wherever located in the world engaged in the manufacture, distribution, design marketing or sale of women's apparel, if such business is a material competitor of the Corporation, or (ii) induce or attempt to persuade any employee of the Corporation -11- or of any subsidiary of the Corporation, or any person who was employed by the Corporation or any subsidiary of the Corporation within the preceding six months, to leave the employ of the Corporation or any subsidiary of the Corporation (but the foregoing shall not be deemed to prevent the Executive in his capacity as President of the Corporation from hiring or dismissing any employee of the Corporation or any subsidiary for the benefit of the Corporation). The provisions of clause (i) of the preceding sentence shall not apply in the case of a termination by the Executive for Good Reason or by the Corporation without Cause. Nothing in this Section 12 shall prohibit the Executive from acquiring or holding not more than five percent (5%) of any class of publicly traded securities of any business. 13. Expenses. The Corporation shall reimburse the Executive for all reasonable expenses incurred by the Executive in the performance of the Executive's duties hereunder; provided, however, that, in connection with such reimbursement, the Executive shall account to the Corporation for such expenses in the manner customarily prescribed by the Corporation for its senior executives. 14. Directors' and Officers' Insurance; Indemnification. The Executive shall be provided with directors' and officers' insurance in connection with his employment hereunder and service as a Director as contemplated hereby with such coverage (including with respect to unpaid wages and taxes not remitted when done) as shall be reasonably satisfactory to the Executive and with aggregate limits of liability for all covered officers and directors of not less than Thirty-Five Million Dollars ($35,000,000), and the Corporation shall maintain such insurance in effect for the period of the Executive's employment hereunder and for not less than five (5) years thereafter; provided, however, that, in the event that the Corporation shall not obtain such insurance, it shall provide or cause the Executive to be provided with indemnity (or a combination of indemnity and directors' and officers' insurance) in connection with his employment hereunder with substantially equivalent coverage and amounts, and the Corporation shall maintain such indemnity (or combination of indemnity and directors' and officers' insurance) or cause such indemnity (or such combination) to be maintained for the period of the Executive's employment hereunder and for not less than five (5) years thereafter. 15. No Duty to Mitigate. The Executive shall have no duty to mitigate the severance amounts or any other amounts payable to the Executive hereunder, and such amounts shall not be subject to reduction for any compensation received by the Executive from employment in any capacity or other source following the termination of Executive's employment with the Corporation and its subsidiaries. 16. Entire Agreements; Amendments; No Waiver. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. No failure on the part of either party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any partial exercise of any right hereunder preclude any further exercise thereof. -12- 17. Survival of Provisions. The provisions of Sections 10(d), 11, 12, 23 and 25 shall survive the termination or expiration of this Agreement as provided therein. Such provisions are unique and extraordinary, which give them a value peculiar to the Corporation, and cannot be reasonably or adequately compensated in damages for its loss and any breach by the Executive of such provisions shall cause the Corporation irreparable injury and damage. Therefore, the Corporation, in addition to all other remedies available to it, shall be entitled to injunctive and other available equitable relief in any court of competent jurisdiction to prevent or otherwise restrain a breach of such provisions for the purposes of enforcing such provisions. 18. Withholding. The Corporation shall be entitled to withhold from any and all amounts payable to the Executive hereunder such amounts as may from time to time be required to be withheld pursuant to applicable tax laws and regulations. 19. Succession, Assignability and Binding Effect. (a) The Corporation will require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall constitute Good Reason for resignation by the Executive. (b) This Agreement shall inure to the benefit of and shall be binding upon the Corporation and its successors and permitted assigns and upon the Executive and his heirs, executors, legal representatives, successors and permitted assigns; provided, however, that neither party may assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any of its or his rights hereunder without the prior written consent of the other party, and any such attempted assignment, transfer, pledge, encumbrance, hypothecation or other disposition without such consent shall be null and void and without effect. 20. Headings. The paragraph headings contained herein are included solely for convenience of reference and shall not control or affect the meaning or interpretation of any of the provisions of this Agreement. 21. Notices. Any notices or other communications hereunder by either party shall be in writing and shall be deemed to have been duly given if delivered personally to the other party or, if sent by registered or certified mail, upon receipt, to the other party at his or its address set forth at the beginning of this Agreement or at such other address as such other party may designate in conformity with the foregoing. 22. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles thereof relating to the conflict of laws. -13- 23. Legal Fees and Expenses. In order to induce the Executive to enter into this Agreement and to provide the Executive with reasonable assurance that the purposes of this Agreement shall not be frustrated by the cost of its enforcement, the Corporation shall pay and be solely responsible for any attorneys' fees and expenses and court costs incurred by the Executive as a result of the failure by the Corporation to perform this Agreement or any provision hereof to be performed by it or in connection with any action which may be brought, by or in the name or for the benefit of the Corporation or any subsidiary contesting the validity or enforceability of this Agreement or any provision hereof to be performed by the Corporation, which action shall have been dismissed by a final, nonappealable court order. 24. Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 24, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. 25. Arbitration. (a) Disputes Subject to Arbitration. In the event that the Corporation terminates the Executive's employment on the grounds set forth in clause (iii) of the definition of "Cause", the Corporation and the Executive mutually consent to the resolution by arbitration of any dispute between the Corporation and the Executive as to whether such Cause has occurred. Unless the Corporation and the Executive otherwise agree, no other disputes, issues, claims or controversies arising out of the Executive's employment (or its termination), or any other matter whatsoever, shall be submitted to or resolved by arbitration. (b) Arbitration Procedures. (i) The Corporation and the Executive agree that, except as provided in this Agreement, any arbitration shall be in accordance with the then current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA") before an arbitrator who is licensed to practice law in the state in which the arbitration is convened (the "Arbitrator"). The arbitration shall take place in or near the city in which the Executive is or was last employed by the Corporation. (ii) Upon designation as a Dispute, the AAA shall give each party a list of eleven (11) arbitrators drawn from its panel of labor and employment arbitrators. The Corporation and the Executive may strike all names on the list which it deems unacceptable. If only one common name remains on the lists of all parties, said individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternatively until only one remains. If no common name remains on the lists of all parties, the AAA shall furnish an additional list and the parties shall alternate striking names on such second list until an arbitrator is selected. -14- (iii) The Arbitrator shall apply the law of the State of New York applicable to contracts made and to be performed wholly in that state (without giving effect to the principles thereof relating to conflicts of law). The Federal Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability or formation of the term "Cause". The Arbitrator shall render a decision within thirty (30) days of the date upon which the Arbitrator is selected pursuant to Section 25(b)(ii), which decision shall be final and binding upon the parties. In the event that the Arbitrator decides that Material Insubordination has (x) occurred, then the Executive's employment shall be deemed to have been terminated for cause pursuant to Section 9(a) hereof or (y) not occurred, then the Executive's employment shall be deemed to have been terminated without Cause pursuant to Section 10(b) hereof. (iv) The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold prehearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. (v) Either party, at its expense, may arrange for and pay the costs of a court reporter to provide a stenographic report of proceedings. (vi) Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (vii) Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Section 25. Except as otherwise provided in this Section 25, both the Corporation and the Executive agree that neither such party shall initiate or prosecute any lawsuit or administrative action in any way related to any Dispute covered by this Section 25. (viii) The arbitrator shall render an opinion in the form typically rendered in labor arbitrations. (c) Arbitration Fees and Costs. The Corporation and the Executive shall equally share the fees and costs of the Arbitrator. Each party shall deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, ten (10) days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim that affords the prevailing party attorneys' fees, the Arbitrator may award reasonable fees to the prevailing party. -15- (d) Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 25, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. (e) Law Governing. The parties agree that the arbitration provisions set forth in this Section 25 shall be governed by the Federal Arbitration Act, 9 U.S.C.ss.ss. 1-16, ("FAA"). The parties further agree that all Disputes, whether arising under state or federal law, shall be subject to the FAA, notwithstanding any state or local laws to the contrary. 26. Prior Employment Agreement. The employment agreement, dated as of June 2, 1997 between the Executive and the Corporation is hereby terminated as of the Effective Date. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. THE LESLIE FAY COMPANY, INC. By: /s/ John J. Pomerantz ---------------------------------- Name: John J. Pomerantz Title: Chairman and Chief Executive Officer /s/ John A. Ward -------------------------------------- John A. Ward Executive -16- EX-10.12 4 EMPLOYMENT AGREEMENT WITH WARREN WISHART EMPLOYMENT AGREEMENT (Warren T. Wishart) AGREEMENT, dated as of January 1, 1998, between The Leslie Fay Company, Inc., a Delaware corporation, with its principal office at 1412 Broadway, New York, New York (the "Corporation"), and Warren T. Wishart, residing at 5 Crestview Road, Mountain Lakes, New Jersey 07046 (the "Executive"). RECITALS A. The Executive has served as the Senior Vice President--Administration and Finance, Chief Financial Officer and Treasurer of the Corporation since June 2, 1997, and prior thereto as Senior Vice President, Chief Financial Officer and Treasurer of The Leslie Fay Companies, Inc., predecessor-in-interest to the Corporation. B. The Corporation desires to secure the continued services of the Executive, and the Executive desires to continue to furnish services to the Corporation, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties hereto hereby agree as follows: 1. Definitions. Unless otherwise defined herein, the following terms shall have the respective meanings specified below and be equally applicable to the singular and plural of terms defined: (a) "Adjusted Incentive EBITDA" shall mean, for any fiscal year during the Term, the lesser of (i) Incentive EBITDA and (ii) the projected EBITDA for such fiscal year as set forth in the Corporation's business plan for such fiscal year approved by the Board. (b) "Base Salary" shall have the meaning set forth in Section 5 hereof. (c) "Board" shall mean the Board of Directors of the Corporation. (d) "Bonus" shall mean, for any year during the Term, the Executive's allocable portion of the Cash Bonus Pool for such year, determined in accordance with Section 6 hereof. (e) "Cash Bonus Pool" shall have the meaning set forth in Section 6 hereof. (f) "Cause" shall mean (i) conviction of the Executive in respect of a felony, (ii) perpetration by the Executive of (x) an illegal act which causes significant economic injury to the Corporation or (y) a common law fraud against the Corporation, or (iii) willful violation by the Executive (a "Material Insubordination") of a specific written direction from the Board concerning one or more matters of a material nature for the Corporation or its business or operations (following a warning in writing in respect thereto from the Board). (g) "Change of Control" shall mean the occurrence of any of the following: (i) any person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act), other than Dickstein Partners, Inc. and/or any of its affiliates (as defined in Rule 12b-2 under the Exchange Act), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the aggregate voting power of the capital stock of the Corporation; or (ii) the sale of all or substantially all of the Corporation's assets in one or more related transactions; or (iii) any merger, consolidation, reorganization or similar event of the Corporation or any of its subsidiaries, as a result of which the holders of the voting stock of the Corporation immediately prior to such merger, consolidation, reorganization or similar event do not hold at least fifty-one percent (51%) of the aggregate voting power of the capital stock of the surviving entity. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Compensation Committee" shall mean the compensation committee of the Board, all of whose members are "outside directors" within the meaning of Section 162(m) of the Code. (j) "Corporation Senior Managers" shall mean the Chief Executive Officer, the President, the Senior Vice President--Manufacturing and Sourcing, the Senior Vice President-- Administration and Finance (Chief Financial Officer) and such other employees of the Corporation as determined by the Compensation Committee in consultation with the Chief Executive Officer. (k) "Disabled" shall mean, with respect to the Executive, being physically or mentally disabled, whether totally or partially, so that he is substantially unable to perform his services hereunder for a consecutive period of more than six (6) months or for shorter periods aggregating six months during any twelve-month period. (l) "EBITDA" shall mean for any fiscal year of the Corporation, the consolidated earnings before interest, taxes, depreciation and amortization of the Corporation and its consolidated subsidiaries, and before any non-cash accruals for stock-based compensation, as determined pursuant to generally accepted accounting principles in effect in the United States of America from time to time, provided that for purposes of determining EBITDA hereunder, EBITDA shall be calculated before determination of the Cash Bonus Pool. -2- (m) "Effective Date" shall mean January 1, 1998. (n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (o) "Good Reason" shall mean the continuation of any of the following events for more than ten (10) days after the Corporation's receipt from the Executive of written notice thereof: (i) the Executive shall be removed from the position of Senior Vice President--Administration and Finance, Chief Financial Officer and Treasurer of the Corporation at any time during the Term (other than for Cause); (ii) the Executive shall fail to be vested with the powers and authority of Senior Vice President--Administration and Finance, Chief Financial Officer and Treasurer of the Corporation as described in Section 4(a) hereof, or the powers and authority of such position or his responsibilities with respect thereto shall be diminished in any material respect; (iii) the Executive shall have assigned to him without his express written consent any duties, functions, authority or responsibilities that are inconsistent with the Executive's positions described in Section 4 hereof; (iv) the Executive's principal place of employment is changed to a location more than twenty-five (25) miles from the prior location without the Executive's prior written consent; (v) any material failure by the Corporation to fulfill any of its obligations under this Agreement (other than pursuant to Section 4(b)), including, without limitation, the failure to make any material payment required to be made by the Corporation pursuant to Sections 5 and 6 hereof within five (5) business days after the date such payment is required to be made; (vi) any purported termination by the Corporation of the Executive's employment otherwise than as expressly permitted by, and in compliance with all conditions and procedures of, this Agreement; or (vii) the Corporation shall fail to comply with the provisions of Section 14 or Section 19(a) hereof. (p) "Incentive EBITDA" shall mean Eleven Million Five Hundred Thousand Dollars ($11,500,000). (q) "Target EBITDA" shall mean Five Million Four Hundred Forty-Three Thousand Dollars ($5,443,000). -3- (r) "Term" shall have the meaning set forth in Section 3 hereof. 2. Employment. The Corporation shall employ the Executive, and the Executive shall serve the Corporation, upon the terms and conditions hereinafter set forth. 3. Term. (a) Term of Employment. Subject to the terms and conditions hereinafter set forth, the term of the Executive's employment hereunder shall commence as of the Effective Date and shall continue until the third anniversary of the Effective Date, unless earlier terminated pursuant to the provisions of Section 8, 9 or 10 hereof (the "Term"). (b) Renewal. During the third year of the Term, the Corporation will conduct, in good faith and on a timely basis, negotiations with the Executive concerning the renewal of the Executive's employment with the Corporation. 4. Duties and Extent of Services. During the Term, the Executive shall serve as Senior Vice President--Administration and Finance, Chief Financial Officer and Treasurer of the Corporation faithfully and to the best of his ability, and shall devote substantially all of his business time, energy and skill to such employment, it being understood and agreed that the Executive may serve on the boards of directors or equivalent governing bodies of other business corporations or other business organizations; provided, however, that (i) such other corporations or other organizations are not in direct competition with the Corporation and/or its subsidiaries and (ii) such service does not materially interfere with the performance by the Executive of his duties hereunder. The Executive shall be invested with the duties and authority that are customarily delegated to a senior vice president--administration and finance, chief financial officer and treasurer of a corporation, and shall report to and be subject to the direction of the Board of Directors of the Corporation. The Executive shall also perform such specific duties and services of a senior executive nature as the Board of Directors of the Corporation shall request, including, without limitation, serving as a senior officer and/or director of any of the Corporation's subsidiaries. 5. Base Salary. During the Term, the Corporation shall pay the Executive a base salary ("Base Salary") of Two Hundred Twenty-Five Thousand Dollars ($225,000) during the first two years of the Term and Two HundredFifty Thousand Dollars ($250,000) during the third year of the Term, or such higher amount as the Board may from time to time determine, payable in equal weekly installments. 6. Incentive Compensation. (a) Amount. If the Corporation's EBITDA for any fiscal year (except as noted, references in this Section to EBITDA or Incentive EBITDA are to the corresponding quantity for such fiscal year) during the Term is greater than or equal to eighty-five percent (85%) (the "Minimum -4- Percentage") of Target EBITDA, the Corporation shall pay a bonus ("Cash Bonus Pool") to the Corporation Senior Managers in an amount equal to the sum of: (x) nine and six-tenths percent (9.6%) of EBITDA, plus (y) two-tenths percent (0.2%) of the Corporation's EBITDA for each percentage point, if any, of Target EBITDA by which EBITDA exceeds the Minimum Percentage; provided, however, that in no event shall the combined amount under clause (x) above and this clause (y) exceed twelve and one-half percent (12.5%) of EBITDA, plus (z) five percent (5%) of the amount by which EBITDA exceeds the sum of (I) Incentive EBITDA plus (II) the sum for all prior fiscal years (excluding the fiscal year for which the amount of the Cash Bonus Pool is being determined) of the positive difference, if any, for each such fiscal year between (i) Adjusted Incentive EBITDA for such fiscal year and (ii) EBITDA for such fiscal year less (III) any amount under clause (II) applied in any prior year to reduce the amount of the Cash Bonus Pool that would otherwise have been payable in such year. The amount of the Cash Bonus Pool for any fiscal year only a part of which is within the Term shall be equal to the amount of the Cash Bonus Pool that would have been payable for such fiscal year had it been entirely within the Term, times a fraction, the numerator of which is the number of days of such fiscal year occurring during the Term, and the denominator of which is three hundred and sixty-five (365). The Executive and each other Corporation Senior Manager shall be entitled to receive such portion of the Cash Bonus Pool for any fiscal year during the Term as determined by the Chief Executive Officer, but only if approved by the Compensation Committee not later than the end of the first quarter of such fiscal year. Other than with respect to allocation, all of the Corporation Senior Managers shall participate in the Cash Bonus Pool on the same terms and conditions. (b) Manner of Payment. The Cash Bonus Pool for any fiscal year during the Term shall be determined after the close of such fiscal year. However, the Executive shall be permitted to draw during each fiscal year, on a quarterly basis, against his anticipated allocation of the Cash Bonus Pool for such year, as follows: (i) Following each fiscal quarter, the Corporation shall determine a pro-rated Cash Bonus Pool amount for the period from the beginning of the fiscal year through the end of such fiscal quarter, calculated as set forth in clauses (x), (y) and (z) of Section 6(a) hereof. For purposes of such determination, Target EBITDA, Incentive EBITDA, Adjusted Incentive EBITDA and the amount described under subclause (II) of said clause (z), if any, shall be prorated for the relevant year-to-date period. -5- (ii) The Executive shall be permitted to draw up to two-thirds of his allocated amount of the pro-rated Cash Bonus Pool, less the amount of all prior draws for the same fiscal year. (iii) Following the end of the fiscal year, the Corporation shall determine whether the amount of the Cash Bonus Pool allocable to the Executive exceeds or is less than the Executive's draws under the pro-rated Cash Bonus Pool for such fiscal year. (iv) If the allocated amount of the Cash Bonus Pool to which the Executive is entitled exceeds the amount of the Executive's draws for the fiscal year, the Corporation shall pay the difference to the participant not later than ninety (90) after the end of the fiscal year. If the allocated amount of the Cash Bonus Pool to which the Executive is entitled is less than the amount of the Executive's draws for the fiscal year, the Executive shall repay the difference to the Corporation within one hundred twenty (120) days after the Corporation informs the Executive in writing of the deficiency, with a calculation thereof in reasonable detail. The amount required to be repaid shall bear interest at the applicable federal rate from the date of the respective draw(s) until repayment. If the Executive shall dispute the amount of the deficiency, the Executive shall inform the Corporation in writing of such dispute on or before the date payment of the deficiency is otherwise due, shall provide the Corporation with a statement of the basis for the dispute in reasonable detail and shall pay to the Corporation any undisputed amount thereof on or prior to the aforesaid payment date. Thereafter, the Executive and the Corporation shall in good faith attempt to resolve the dispute, but if the dispute cannot be resolved prior to the expiration of thirty (30) days from the aforesaid payment date, the dispute shall be submitted to arbitration in accordance with the procedures set forth in Section 25. (v) The Executive's repayment obligations under the preceding clause (iv) of this Section 6(b) shall be secured by all unexercised options, vested or unvested, to acquire capital stock of the Corporation granted by the Corporation to the Executive. (c) If any payment is required to be made under Section 8, 9 or 10 hereof on the basis of the Cash Bonus Pool for any fiscal year, and the Cash Bonus Pool for such fiscal year cannot be determined until after the time that such payment is otherwise required to be made, then the payment of that amount which is based upon the determination of the Cash Bonus Pool for such fiscal year shall be deferred until after such time as the determination of the Cash Bonus Pool for such fiscal year can reasonably be made, and such payment shall be made as soon thereafter as practicable. (d) Payment of the Cash Bonus Pool shall be subject to the approval of the Corporation's stockholders to the extent necessary such that all payments under the Cash Bonus Pool will be fully deductible under Section 162(m) of the Code, and the Corporation shall used its reasonable best efforts to obtain such approval on a timely basis consistent with the provisions of this Section 6. -6- 7. Employee Benefits. (a) During the Term, the Executive shall receive coverage and/or benefits under any and all medical insurance, life insurance, long-term disability insurance and pension plans and other employee benefit plans of the Corporation generally made available to senior executives of the Corporation from time to time. (b) During the Term, the Corporation shall provide (x) the Executive and members of his immediate family with (i) supplemental disability coverage and (ii) medical insurance for all medical costs and services incurred by the foregoing, including costs of dental, vision and custodial care, (y) the Executive a general automobile allowance equal to $900 per month and (z) the Executive with an automobile for use primarily in connection with travel to and from the Company's Laflin, Pennsylvania facility and reimbursement for fuel and repair costs and any federal, state or local taxes incurred or payable by the Executive in connection therewith (including by reason of such reimbursement. (c) The Executive shall be entitled to paid vacations (taken consecutively or in segments), in accordance with the standard vacation policy of the Corporation for senior executives, but in no event less than four (4) weeks each calendar year during the Term. Such vacations shall be taken at times consistent with the effective discharge of the Executive's duties. (d) During the Term, the Executive shall be accorded office facilities and secretarial assistance commensurate with his position as Senior Vice President--Administration and Finance, Chief Financial Officer and Treasurer of the Corporation and adequate for the performance of his duties hereunder. (e) The Executive shall be awarded, as of January 1, 1998, ten year options to acquire 109,379 shares of the Corporation's common stock, par value $.01 per share, under the Corporation's 1997 Management Stock Option Plan, at an exercise price of $6.18 per share, of which options to acquire 70,060 shares will vest in three equal annual installments beginning June 4, 1998 and options to acquire 39,319 shares will vest in four equal installments beginning January 4, 1998, subject to acceleration and expiration as provided in the aforesaid plan. 8. Termination--Death or Disability. (a) In the event of the termination of the Executive's employment because of the death of the Executive during the Term, the Corporation shall pay to any one or more beneficiaries designated by the Executive pursuant to notice to the Corporation, or, failing such designation, to the Executive's estate, (i) the unpaid Base Salary owing to the Employee through the end of the month of his death, in a lump sum within five (5) business days after his death, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had occurred, times a fraction, the numerator of which is the number -7- of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (b) In the event that the Executive shall become Disabled, the Corporation shall have the right to terminate the Executive's employment hereunder by giving him written notice of such termination. Upon receipt of such notice, the Executive's employment hereunder shall terminate. In the event of such termination, the Corporation shall pay to the Executive (i) the unpaid Base Salary owing to the Executive through the end of the month of such termination, in a lump sum within five (5) business days of such termination, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (c) If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for any fiscal year prior to the date of his death or termination for disability for which a year-end reconciliation has not been made in accordance with clause (iv) of such Section, any Bonus payment required pursuant to Section 8(a) or 8(b) shall be adjusted, and the Corporation shall make a payment to the Executive or his estate or the Executive or his estate shall make a payment to the Corporation, as required by Section 6(b)(iv). 9. Termination for Cause by Corporation. (a) The Executive's employment hereunder may be terminated by the Corporation for Cause upon compliance with the provisions of Section 9(b) hereof. In the event that Executive's employment hereunder shall validly be terminated by the Corporation for Cause pursuant to this Section 9, the Corporation shall promptly pay accrued but unpaid Base Salary to the date of termination and reimburse or pay any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination, and thereafter shall have no further obligations under this Agreement. Upon termination of the Executive's employment hereunder for Cause, the Executive shall nonetheless remain bound by the obligations provided for in Sections 11 and 12 hereof. For purposes of this Section 9(a), the amount accrued to the Executive under Section 6 hereof shall mean a Bonus accrued but unpaid for all fiscal years prior to the fiscal year in which the termination of the Executive occurs. If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which his termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(a). (b) Termination for Cause shall be effected only by action of a majority of the Board then in office (excluding the Executive) at a meeting duly called and held upon at least ten (10) days' prior written notice to the Executive specifying the particulars of the action or inaction alleged to constitute "Cause" (and at which meeting the Executive and his counsel were entitled to be present and given reasonable opportunity to be heard). -8- 10. Termination for Good Reason by the Executive or Without Cause by the Corporation; Change of Control; Non-Renewal. (a) Termination by Executive for Good Reason. The Executive's employment hereunder may be terminated by the Executive for Good Reason by providing written notice to the Corporation to such effect (such termination to be effective on the date specified in such notice, which date shall not be more than sixty (60) days nor less than thirty (30) days after the date of such notice). (b) Severance. If at any time (other than following a Change of Control) the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, then, in lieu of any other amounts that might otherwise have been payable hereunder, the Corporation shall promptly pay to the Executive: (i) all accrued but unpaid Base Salary and any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination; and (ii) the greater of (I) an amount equal to one and one-half times the Base Salary in effect on the date of termination for each year or partial year remaining during the Term; and (II) (i) the sum of (x) the Base Salary in effect on the date of termination, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the prior year of the Term, multiplied by (ii) the number of years, including any partial year, remaining during the Term. If the employment of the Executive is terminated as provided in this Section 9(b) or Section 9(c) below and the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which such termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(b) or Section 9(c) below. (c) Change of Control. If a Change of Control occurs and thereafter the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, the Corporation shall promptly pay to the Executive an amount equal to the sum of (x) the amount payable to the Executive under Section 10(b) above, and (y) the Gross- Up Payment. (d) Gross-Up Payment. (i) For purposes of Section 10(c), "Gross-Up Payment" means an additional amount such that the net amount retained by the Executive, after deduction of the Excise Tax (as defined below) on any payments or benefits under this Agreement and/or under any option plan or agreement of the Corporation received by the Executive from the Corporation as a result of a Change of Control (within the meaning of section 280G(b)(2) of the Code) (collectively, the "Payments") and -9- any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the Executive with respect thereto (other than such interest, penalties or additions to tax payable solely as a result of action or inaction by the Executive), shall be equal to the total amount of the Payments. "Excise Tax" means the tax imposed by Section 4999 of the Code. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (x) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the Corporation and reasonably acceptable to the Executive ("Independent counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax; (y) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof); and (z) the value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments referred to in Section 10(d)(i) hereof shall be made, subject to applicable withholding requirements, upon the earlier of (x) the payment to the Executive of any Payment or (y) the imposition upon the Executive or payment by the Executive of any Excise Tax. (iii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reasons of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Corporation's receipt of notice of such final determination or opinion. (iv) In the event that the Internal Revenue Service makes any claim, gives notice of any potential claim or institutes a proceeding against the Executive asserting that any Excise Tax or additional Excise Tax is due in respect of the Payments, the Executive shall promptly give the Corporation notice of any such claim, potential claim or proceeding. The Corporation shall have the right to conduct all discussions, negotiations, defenses, actions and proceedings solely to the extent -10- relating to any Excise Tax payable in respect of the Payments, and the Executive shall cooperate with and assist the Corporation, at the Corporation's expense, in any such discussions, negotiations, defenses, actions and proceedings, to the extent reasonably requested by the Corporation. The Executive will not settle any claim or proceeding solely to the extent relating to the Excise Tax payable in respect of the Payments without the consent of the Corporation, which consent shall not be unreasonably withheld. The Executive shall file, at the Corporation's expense, all requests for refunds of the Gross-Up Amount, or any portion thereof, paid to any taxing authority as shall be reasonably requested by the Corporation and shall pay over to the Corporation (net of any tax payable thereon) any such refunds, together with any interest thereon, when and as such refunds and interest are received by the Executive. (v) All fees and expenses of Independent Counsel shall be borne by the Corporation. (e) Non-Renewal. In the event that the employment of the Executive is not renewed by the Corporation following the end of the Term on terms that are no less favorable to the Executive than the terms of this Agreement, the Corporation shall pay to the Executive, promptly after the end of the Term, an amount equal to (x) the Base Salary in effect at the end of the Term, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the third year of the Term. If the Corporation is willing to renew the employment of the Executive at the end of the Term on terms no less favorable to the Executive than the terms of this Agreement but the Executive is unwilling to accept such employment, no amount shall be payable to the Executive under this Section 10(d). 11. Confidential Information. In addition to any other confidentiality obligation the Executive may have to the date hereof, and until the end of the original Term, the Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, any and all confidential information relating to the Corporation and its subsidiaries, including, without limitation, customer lists, financial plans or projections, pricing policies, marketing plans or strategies, business acquisition or divestiture plans, new personnel acquisition plans, designs, and, except in connection with the performance of his duties hereunder, the Executive shall not disclose any such information to anyone outside the Corporation and any of its subsidiaries, except as required by law (provided prior written notice thereof is given by the Executive to the Corporation) or except with the Corporation's prior consent, unless such information is known generally to the public or the trade through sources other than the Executive's unauthorized disclosure. 12. Competitive Activity. The Executive hereby agrees that, during his employment hereunder, and, following a termination of his employment, for the balance of the Term (if any), the Executive shall not, without the prior consent of the Board (i) directly or indirectly, engage or be interested in (as owner, partner, shareholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business wherever located in the world engaged in the manufacture, distribution, design marketing or sale of women's apparel, if such business is a material competitor of the Corporation, or (ii) induce or attempt to persuade any employee of the Corporation -11- or of any subsidiary of the Corporation, or any person who was employed by the Corporation or any subsidiary of the Corporation within the preceding six months, to leave the employ of the Corporation or any subsidiary of the Corporation (but the foregoing shall not be deemed to prevent the Executive in his capacity as Senior Vice President--Administration and Finance, Chief Financial Officer and Treasurer of the Corporation from hiring or dismissing any employee of the Corporation or any subsidiary for the benefit of the Corporation). The provisions of clause (i) of the preceding sentence shall not apply in the case of a termination by the Executive for Good Reason or by the Corporation without Cause. Nothing in this Section 12 shall prohibit the Executive from acquiring or holding not more than five percent (5%) of any class of publicly traded securities of any business. 13. Expenses. The Corporation shall reimburse the Executive for all reasonable expenses incurred by the Executive in the performance of the Executive's duties hereunder; provided, however, that, in connection with such reimbursement, the Executive shall account to the Corporation for such expenses in the manner customarily prescribed by the Corporation for its senior executives. 14. Directors' and Officers' Insurance; Indemnification. The Executive shall be provided with directors' and officers' insurance in connection with his employment hereunder and service as a Director as contemplated hereby with such coverage (including with respect to unpaid wages and taxes not remitted when done) as shall be reasonably satisfactory to the Executive and with aggregate limits of liability for all covered officers and directors of not less than Thirty-Five Million Dollars ($35,000,000), and the Corporation shall maintain such insurance in effect for the period of the Executive's employment hereunder and for not less than five (5) years thereafter; provided, however, that, in the event that the Corporation shall not obtain such insurance, it shall provide or cause the Executive to be provided with indemnity (or a combination of indemnity and directors' and officers' insurance) in connection with his employment hereunder with substantially equivalent coverage and amounts, and the Corporation shall maintain such indemnity (or combination of indemnity and directors' and officers' insurance) or cause such indemnity (or such combination) to be maintained for the period of the Executive's employment hereunder and for not less than five (5) years thereafter. 15. No Duty to Mitigate. The Executive shall have no duty to mitigate the severance amounts or any other amounts payable to the Executive hereunder, and such amounts shall not be subject to reduction for any compensation received by the Executive from employment in any capacity or other source following the termination of Executive's employment with the Corporation and its subsidiaries. 16. Entire Agreements; Amendments; No Waiver. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. No failure on the part of either party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any partial exercise of any right hereunder preclude any further exercise thereof. -12- 17. Survival of Provisions. The provisions of Sections 10(d), 11, 12, 23 and 25 shall survive the termination or expiration of this Agreement as provided therein. Such provisions are unique and extraordinary, which give them a value peculiar to the Corporation, and cannot be reasonably or adequately compensated in damages for its loss and any breach by the Executive of such provisions shall cause the Corporation irreparable injury and damage. Therefore, the Corporation, in addition to all other remedies available to it, shall be entitled to injunctive and other available equitable relief in any court of competent jurisdiction to prevent or otherwise restrain a breach of such provisions for the purposes of enforcing such provisions. 18. Withholding. The Corporation shall be entitled to withhold from any and all amounts payable to the Executive hereunder such amounts as may from time to time be required to be withheld pursuant to applicable tax laws and regulations. 19. Succession, Assignability and Binding Effect. (a) The Corporation will require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall constitute Good Reason for resignation by the Executive. (b) This Agreement shall inure to the benefit of and shall be binding upon the Corporation and its successors and permitted assigns and upon the Executive and his heirs, executors, legal representatives, successors and permitted assigns; provided, however, that neither party may assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any of its or his rights hereunder without the prior written consent of the other party, and any such attempted assignment, transfer, pledge, encumbrance, hypothecation or other disposition without such consent shall be null and void and without effect. 20. Headings. The paragraph headings contained herein are included solely for convenience of reference and shall not control or affect the meaning or interpretation of any of the provisions of this Agreement. 21. Notices. Any notices or other communications hereunder by either party shall be in writing and shall be deemed to have been duly given if delivered personally to the other party or, if sent by registered or certified mail, upon receipt, to the other party at his or its address set forth at the beginning of this Agreement or at such other address as such other party may designate in conformity with the foregoing. 22. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles thereof relating to the conflict of laws. -13- 23. Legal Fees and Expenses. In order to induce the Executive to enter into this Agreement and to provide the Executive with reasonable assurance that the purposes of this Agreement shall not be frustrated by the cost of its enforcement, the Corporation shall pay and be solely responsible for any attorneys' fees and expenses and court costs incurred by the Executive as a result of the failure by the Corporation to perform this Agreement or any provision hereof to be performed by it or in connection with any action which may be brought, by or in the name or for the benefit of the Corporation or any subsidiary contesting the validity or enforceability of this Agreement or any provision hereof to be performed by the Corporation, which action shall have been dismissed by a final, nonappealable court order. 24. Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 24, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. 25. Arbitration. (a) Disputes Subject to Arbitration. In the event that the Corporation terminates the Executive's employment on the grounds set forth in clause (iii) of the definition of "Cause", the Corporation and the Executive mutually consent to the resolution by arbitration of any dispute between the Corporation and the Executive as to whether such Cause has occurred. Unless the Corporation and the Executive otherwise agree, no other disputes, issues, claims or controversies arising out of the Executive's employment (or its termination), or any other matter whatsoever, shall be submitted to or resolved by arbitration. (b) Arbitration Procedures. (i) The Corporation and the Executive agree that, except as provided in this Agreement, any arbitration shall be in accordance with the then current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA") before an arbitrator who is licensed to practice law in the state in which the arbitration is convened (the "Arbitrator"). The arbitration shall take place in or near the city in which the Executive is or was last employed by the Corporation. (ii) Upon designation as a Dispute, the AAA shall give each party a list of eleven (11) arbitrators drawn from its panel of labor and employment arbitrators. The Corporation and the Executive may strike all names on the list which it deems unacceptable. If only one common name remains on the lists of all parties, said individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternatively until only one remains. If no common name remains on the lists of all parties, the AAA shall furnish an additional list and the parties shall alternate striking names on such second list until an arbitrator is selected. -14- (iii) The Arbitrator shall apply the law of the State of New York applicable to contracts made and to be performed wholly in that state (without giving effect to the principles thereof relating to conflicts of law). The Federal Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability or formation of the term "Cause". The Arbitrator shall render a decision within thirty (30) days of the date upon which the Arbitrator is selected pursuant to Section 25(b)(ii), which decision shall be final and binding upon the parties. In the event that the Arbitrator decides that Material Insubordination has (x) occurred, then the Executive's employment shall be deemed to have been terminated for cause pursuant to Section 9(a) hereof or (y) not occurred, then the Executive's employment shall be deemed to have been terminated without Cause pursuant to Section 10(b) hereof. (iv) The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold prehearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. (v) Either party, at its expense, may arrange for and pay the costs of a court reporter to provide a stenographic report of proceedings. (vi) Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (vii) Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Section 25. Except as otherwise provided in this Section 25, both the Corporation and the Executive agree that neither such party shall initiate or prosecute any lawsuit or administrative action in any way related to any Dispute covered by this Section 25. (viii) The arbitrator shall render an opinion in the form typically rendered in labor arbitrations. (c) Arbitration Fees and Costs. The Corporation and the Executive shall equally share the fees and costs of the Arbitrator. Each party shall deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, ten (10) days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim that affords the prevailing party attorneys' fees, the Arbitrator may award reasonable fees to the prevailing party. -15- (d) Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 25, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. (e) Law Governing. The parties agree that the arbitration provisions set forth in this Section 25 shall be governed by the Federal Arbitration Act, 9 U.S.C.ss.ss. 1-16, ("FAA"). The parties further agree that all Disputes, whether arising under state or federal law, shall be subject to the FAA, notwithstanding any state or local laws to the contrary. 26. Prior Employment Agreement. The employment agreement, dated as of June 2, 1997 between the Executive and the Corporation is hereby terminated as of the Effective Date. -16- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. THE LESLIE FAY COMPANY, INC. By: /s/ John J. Pomerantz ----------------------------------- Name: John J. Pomerantz Title: Chairman and Chief Executive Officer /s/ Warren T. Wishart ----------------------------------------- Warren T. Wishart Executive -17- EX-10.13 5 EMPLOYMENT AGREEMENT W/ DOMINICK FELICETTI EMPLOYMENT AGREEMENT (Dominick Felicetti) AGREEMENT, dated as of January 4, 1998, between The Leslie Fay Company, Inc., a Delaware corporation, with its principal office at 1412 Broadway, New York, New York (the "Corporation"), and Dominick Felicetti, residing at 221 Penn Estates, East Stroudsburg, Pennsylvania 18301 (the "Executive"). RECITALS A. The Executive has served as the Senior Vice President--Manufacturing and Sourcing of the Corporation since June 2, 1997, and prior thereto as Senior Vice President of The Leslie Fay Companies, Inc., predecessor-in-interest to the Corporation. B. The Corporation desires to secure the continued services of the Executive, and the Executive desires to continue to furnish services to the Corporation, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties hereto hereby agree as follows: 1. Definitions. Unless otherwise defined herein, the following terms shall have the respective meanings specified below and be equally applicable to the singular and plural of terms defined: (a) "Adjusted Incentive EBITDA" shall mean, for any fiscal year during the Term, the lesser of (i) Incentive EBITDA and (ii) the projected EBITDA for such fiscal year as set forth in the Corporation's business plan for such fiscal year approved by the Board. (b) "Base Salary" shall have the meaning set forth in Section 5 hereof. (c) "Board" shall mean the Board of Directors of the Corporation. (d) "Bonus" shall mean, for any year during the Term, the Executive's allocable portion of the Cash Bonus Pool for such year, determined in accordance with Section 6 hereof. (e) "Cash Bonus Pool" shall have the meaning set forth in Section 6 hereof. (f) "Cause" shall mean (i) conviction of the Executive in respect of a felony, (ii) perpetration by the Executive of (x) an illegal act which causes significant economic injury to the Corporation or (y) a common law fraud against the Corporation, or (iii) willful violation by the Executive (a "Material Insubordination") of a specific written direction from the Board concerning one or more matters of a material nature for the Corporation or its business or operations (following a warning in writing in respect thereto from the Board). (g) "Change of Control" shall mean the occurrence of any of the following: (i) any person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act), other than Dickstein Partners, Inc. and/or any of its affiliates (as defined in Rule 12b-2 under the Exchange Act), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the aggregate voting power of the capital stock of the Corporation; or (ii) the sale of all or substantially all of the Corporation's assets in one or more related transactions; or (iii) any merger, consolidation, reorganization or similar event of the Corporation or any of its subsidiaries, as a result of which the holders of the voting stock of the Corporation immediately prior to such merger, consolidation, reorganization or similar event do not hold at least fifty-one percent (51%) of the aggregate voting power of the capital stock of the surviving entity. (h) "Code" shall mean the Internal Revenue Code of 1986, as amended. (i) "Compensation Committee" shall mean the compensation committee of the Board, all of whose members are "outside directors" within the meaning of Section 162(m) of the Code. (j) "Corporation Senior Managers" shall mean the Chief Executive Officer, the President, the Senior Vice President--Manufacturing and Sourcing, the Senior Vice President-- Administration and Finance (Chief Financial Officer) and such other employees of the Corporation as determined by the Compensation Committee in consultation with the Chief Executive Officer. (k) "Disabled" shall mean, with respect to the Executive, being physically or mentally disabled, whether totally or partially, so that he is substantially unable to perform his services hereunder for a consecutive period of more than six (6) months or for shorter periods aggregating six months during any twelve-month period. (l) "EBITDA" shall mean for any fiscal year of the Corporation, the consolidated earnings before interest, taxes, depreciation and amortization of the Corporation and its consolidated subsidiaries, and before any non-cash accruals for stock-based compensation, as determined pursuant to generally accepted accounting principles in effect in the United States of America from time to time, provided that for purposes of determining EBITDA hereunder, EBITDA shall be calculated before determination of the Cash Bonus Pool. -2- (m) "Effective Date" shall mean January 4, 1998. (n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (o) "Good Reason" shall mean the continuation of any of the following events for more than ten (10) days after the Corporation's receipt from the Executive of written notice thereof: (i) the Executive shall be removed from the position of Senior Vice President--Manufacturing and Sourcing of the Corporation at any time during the Term (other than for Cause); (ii) the Executive shall fail to be vested with the powers and authority of Chief Executive Officer of the Corporation as described in Section 4(a) hereof, or the powers and authority of such position or his responsibilities with respect thereto shall be diminished in any material respect; (iii) the Executive shall have assigned to him without his express written consent any duties, functions, authority or responsibilities that are inconsistent with the Executive's positions described in Section 4 hereof; (iv) the Executive's principal place of employment is changed to a location more than twenty-five (25) miles from the prior location without the Executive's prior written consent; (v) any material failure by the Corporation to fulfill any of its obligations under this Agreement (other than pursuant to Section 4(b)), including, without limitation, the failure to make any material payment required to be made by the Corporation pursuant to Sections 5 and 6 hereof within five (5) business days after the date such payment is required to be made; (vi)any purported termination by the Corporation of the Executive's employment otherwise than as expressly permitted by, and in compliance with all conditions and procedures of, this Agreement; or (vii) the Corporation shall fail to comply with the provisions of Section 14 or Section 19(a) hereof. (p) "Incentive EBITDA" shall mean Eleven Million Five Hundred Thousand Dollars ($11,500,000). (q) "Target EBITDA" shall mean Five Million Four Hundred Forty-Three Thousand Dollars ($5,443,000). -3- (r) "Term" shall have the meaning set forth in Section 3 hereof. 2. Employment. The Corporation shall employ the Executive, and the Executive shall serve the Corporation, upon the terms and conditions hereinafter set forth. 3. Term. (a) Term of Employment. Subject to the terms and conditions hereinafter set forth, the term of the Executive's employment hereunder shall commence as of the Effective Date and shall continue until the third anniversary of the Effective Date, unless earlier terminated pursuant to the provisions of Section 8, 9 or 10 hereof (the "Term"). (b) Renewal. During the third year of the Term, the Corporation will conduct, in good faith and on a timely basis, negotiations with the Executive concerning the renewal of the Executive's employment with the Corporation. 4. Duties and Extent of Services. During the Term, the Executive shall serve as Senior Vice President--Manufacturing and Sourcing of the Corporation faithfully and to the best of his ability, and shall devote substantially all of his business time, energy and skill to such employment, it being understood and agreed that the Executive may serve on the boards of directors or equivalent governing bodies of other business corporations or other business organizations; provided, however, that (i) such other corporations or other organizations are not in direct competition with the Corporation and/or its subsidiaries and (ii) such service does not materially interfere with the performance by the Executive of his duties hereunder. The Executive shall be invested with the duties and authority that are customarily delegated to a senior vice president--manufacturing and sourcing of a corporation, and shall report to and be subject to the direction of the Board of Directors of the Corporation. The Executive shall also perform such specific duties and services of a senior executive nature as the Board of Directors of the Corporation shall request, including, without limitation, serving as a senior officer and/or director of any of the Corporation's subsidiaries. 5. Base Salary. During the Term, the Corporation shall pay the Executive a base salary ("Base Salary") of Three Hundred Fifty Thousand Dollars ($350,000) during the first two years of the Term and Three Hundred Seventy-Five Thousand Dollars ($375,000) during the third year of the Term, or such higher amount as the Board may from time to time determine, payable in equal weekly installments. 6. Incentive Compensation. (a) Amount. If the Corporation's EBITDA for any fiscal year (except as noted, references in this Section to EBITDA or Incentive EBITDA are to the corresponding quantity for such fiscal year) during the Term is greater than or equal to eighty-five percent (85%) (the "Minimum Percentage") of Target EBITDA, the Corporation shall pay a bonus ("Cash Bonus Pool") to the Corporation Senior Managers in an amount equal to the sum of: -4- (x) nine and six-tenths percent (9.6%) of EBITDA, plus (y) two-tenths percent (0.2%) of the Corporation's EBITDA for each percentage point, if any, of Target EBITDA by which EBITDA exceeds the Minimum Percentage; provided, however, that in no event shall the combined amount under clause (x) above and this clause (y) exceed twelve and one-half percent (12.5%) of EBITDA, plus (z) five percent (5%) of the amount by which EBITDA exceeds the sum of (I) Incentive EBITDA plus (II) the sum for all prior fiscal years (excluding the fiscal year for which the amount of the Cash Bonus Pool is being determined) of the positive difference, if any, for each such fiscal year between (i) Adjusted Incentive EBITDA for such fiscal year and (ii) EBITDA for such fiscal year less (III) any amount under clause (II) applied in any prior year to reduce the amount of the Cash Bonus Pool that would otherwise have been payable in such year. The amount of the Cash Bonus Pool for any fiscal year only a part of which is within the Term shall be equal to the amount of the Cash Bonus Pool that would have been payable for such fiscal year had it been entirely within the Term, times a fraction, the numerator of which is the number of days of such fiscal year occurring during the Term, and the denominator of which is three hundred and sixty-five (365). The Executive and each other Corporation Senior Manager shall be entitled to receive such portion of the Cash Bonus Pool for any fiscal year during the Term as determined by the Chief Executive Officer, but only if approved by the Compensation Committee not later than the end of the first quarter of such fiscal year. Other than with respect to allocation, all of the Corporation Senior Managers shall participate in the Cash Bonus Pool on the same terms and conditions. (b) Manner of Payment. The Cash Bonus Pool for any fiscal year during the Term shall be determined after the close of such fiscal year. However, the Executive shall be permitted to draw during each fiscal year, on a quarterly basis, against his anticipated allocation of the Cash Bonus Pool for such year, as follows: (i) Following each fiscal quarter, the Corporation shall determine a pro-rated Cash Bonus Pool amount for the period from the beginning of the fiscal year through the end of such fiscal quarter, calculated as set forth in clauses (x), (y) and (z) of Section 6(a) hereof. For purposes of such determination, Target EBITDA, Incentive EBITDA, Adjusted Incentive EBITDA and the amount described under subclause (II) of said clause (z), if any, shall be prorated for the relevant year-to-date period. (ii) The Executive shall be permitted to draw up to two-thirds of his allocated amount of the pro-rated Cash Bonus Pool, less the amount of all prior draws for the same fiscal year. -5- (iii) Following the end of the fiscal year, the Corporation shall determine whether the amount of the Cash Bonus Pool allocable to the Executive exceeds or is less than the Executive's draws under the pro-rated Cash Bonus Pool for such fiscal year. (iv) If the allocated amount of the Cash Bonus Pool to which the Executive is entitled exceeds the amount of the Executive's draws for the fiscal year, the Corporation shall pay the difference to the participant not later than ninety (90) after the end of the fiscal year. If the allocated amount of the Cash Bonus Pool to which the Executive is entitled is less than the amount of the Executive's draws for the fiscal year, the Executive shall repay the difference to the Corporation within one hundred twenty (120) days after the Corporation informs the Executive in writing of the deficiency, with a calculation thereof in reasonable detail. The amount required to be repaid shall bear interest at the applicable federal rate from the date of the respective draw(s) until repayment. If the Executive shall dispute the amount of the deficiency, the Executive shall inform the Corporation in writing of such dispute on or before the date payment of the deficiency is otherwise due, shall provide the Corporation with a statement of the basis for the dispute in reasonable detail and shall pay to the Corporation any undisputed amount thereof on or prior to the aforesaid payment date. Thereafter, the Executive and the Corporation shall in good faith attempt to resolve the dispute, but if the dispute cannot be resolved prior to the expiration of thirty (30) days from the aforesaid payment date, the dispute shall be submitted to arbitration in accordance with the procedures set forth in Section 25. (v) The Executive's repayment obligations under the preceding clause (iv) of this Section 6(b) shall be secured by all unexercised options, vested or unvested, to acquire capital stock of the Corporation granted by the Corporation to the Executive. (c) If any payment is required to be made under Section 8, 9 or 10 hereof on the basis of the Cash Bonus Pool for any fiscal year, and the Cash Bonus Pool for such fiscal year cannot be determined until after the time that such payment is otherwise required to be made, then the payment of that amount which is based upon the determination of the Cash Bonus Pool for such fiscal year shall be deferred until after such time as the determination of the Cash Bonus Pool for such fiscal year can reasonably be made, and such payment shall be made as soon thereafter as practicable. (d) Payment of the Cash Bonus Pool shall be subject to the approval of the Corporation's stockholders to the extent necessary such that all payments under the Cash Bonus Pool will be fully deductible under Section 162(m) of the Code, and the Corporation shall used its reasonable best efforts to obtain such approval on a timely basis consistent with the provisions of this Section 6. 7. Employee Benefits. (a) During the Term, the Executive shall receive coverage and/or benefits under any and all medical insurance, life insurance, long-term disability insurance and pension plans and -6- other employee benefit plans of the Corporation generally made available to senior executives of the Corporation from time to time. (b) During the Term, the Corporation shall provide (x) the Executive and members of his immediate family with (i) supplemental disability coverage and (ii) medical insurance for all medical costs and services incurred by the foregoing, including costs of dental, vision and custodial care, and (y) the Executive with an automobile allowance equal to $900 per month. (c) The Executive shall be entitled to paid vacations (taken consecutively or in segments), in accordance with the standard vacation policy of the Corporation for senior executives, but in no event less than four (4) weeks each calendar year during the Term. Such vacations shall be taken at times consistent with the effective discharge of the Executive's duties. (d) During the Term, the Executive shall be accorded office facilities and secretarial assistance commensurate with his position as Senior Vice President--Manufacturing and Sourcing of the Corporation and adequate for the performance of his duties hereunder. (e) The Executive shall be awarded, as of January 1, 1998, ten year options to acquire 109,379 shares of the Corporation's common stock, par value $.01 per share, under the Corporation's 1997 Management Stock Option Plan, at an exercise price of $6.18 per share, of which options to acquire 70,060 shares will vest in three equal annual installments beginning June 4, 1998 and options to acquire 39,319 shares will vest in four equal installments beginning January 4, 1998, subject to acceleration and expiration as provided in the aforesaid plan. 8. Termination--Death or Disability. (a) In the event of the termination of the Executive's employment because of the death of the Executive during the Term, the Corporation shall pay to any one or more beneficiaries designated by the Executive pursuant to notice to the Corporation, or, failing such designation, to the Executive's estate, (i) the unpaid Base Salary owing to the Employee through the end of the month of his death, in a lump sum within five (5) business days after his death, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (b) In the event that the Executive shall become Disabled, the Corporation shall have the right to terminate the Executive's employment hereunder by giving him written notice of such termination. Upon receipt of such notice, the Executive's employment hereunder shall terminate. In the event of such termination, the Corporation shall pay to the Executive (i) the unpaid Base Salary owing to the Executive through the end of the month of such termination, in a lump sum within five (5) business days of such termination, and (ii) a Bonus for the year in which such termination occurs, equal to the Bonus (if any) that would have been paid for such year if no such termination had -7- occurred, times a fraction, the numerator of which is the number of months in such year through the end of the month in which such termination occurs, and the denominator of which is twelve (12). (c) If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for any fiscal year prior to the date of his death or termination for disability for which a year-end reconciliation has not been made in accordance with clause (iv) of such Section, any Bonus payment required pursuant to Section 8(a) or 8(b) shall be adjusted, and the Corporation shall make a payment to the Executive or his estate or the Executive or his estate shall make a payment to the Corporation, as required by Section 6(b)(iv). 9. Termination for Cause by Corporation. (a) The Executive's employment hereunder may be terminated by the Corporation for Cause upon compliance with the provisions of Section 9(b) hereof. In the event that Executive's employment hereunder shall validly be terminated by the Corporation for Cause pursuant to this Section 9, the Corporation shall promptly pay accrued but unpaid Base Salary to the date of termination and reimburse or pay any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination, and thereafter shall have no further obligations under this Agreement. Upon termination of the Executive's employment hereunder for Cause, the Executive shall nonetheless remain bound by the obligations provided for in Sections 11 and 12 hereof. For purposes of this Section 9(a), the amount accrued to the Executive under Section 6 hereof shall mean a Bonus accrued but unpaid for all fiscal years prior to the fiscal year in which the termination of the Executive occurs. If the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which his termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(a). (b) Termination for Cause shall be effected only by action of a majority of the Board then in office (excluding the Executive) at a meeting duly called and held upon at least ten (10) days' prior written notice to the Executive specifying the particulars of the action or inaction alleged to constitute "Cause" (and at which meeting the Executive and his counsel were entitled to be present and given reasonable opportunity to be heard). 10. Termination for Good Reason by the Executive or Without Cause by the Corporation; Change of Control; Non-Renewal. (a) Termination by Executive for Good Reason. The Executive's employment hereunder may be terminated by the Executive for Good Reason by providing written notice to the Corporation to such effect (such termination to be effective on the date specified in such notice, which date shall not be more than sixty (60) days nor less than thirty (30) days after the date of such notice). -8- (b) Severance. If at any time (other than following a Change of Control) the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, then, in lieu of any other amounts that might otherwise have been payable hereunder, the Corporation shall promptly pay to the Executive: (i) all accrued but unpaid Base Salary and any other accrued but unpaid amounts due under Sections 6 and 13 hereof as of the date of termination; and (ii) the greater of (I) an amount equal to one and one-half times the Base Salary in effect on the date of termination for each year or partial year remaining during the Term; and (II) (i) the sum of (x) the Base Salary in effect on the date of termination, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the prior year of the Term, multiplied by (ii) the number of years, including any partial year, remaining during the Term. If the employment of the Executive is terminated as provided in this Section 9(b) or Section 9(c) below and the Executive has made interim draws against his Bonus, in accordance with Section 6(b) hereof, for the fiscal year during which such termination occurs, the Executive shall promptly repay the amount of all such draws to the Corporation, and, to the extent not repaid, such amount may be offset by the Corporation against any amounts owing to the Executive under this Section 9(b) or Section 9(c) below. (c) Change of Control. If a Change of Control occurs and thereafter the Executive terminates his employment for Good Reason or the Corporation terminates the Executive's employment without Cause, the Corporation shall promptly pay to the Executive an amount equal to the sum of (x) the amount payable to the Executive under Section 10(b) above, and (y) the Gross- Up Payment. (d) Gross-Up Payment. (i) For purposes of Section 10(c), "Gross-Up Payment" means an additional amount such that the net amount retained by the Executive, after deduction of the Excise Tax (as defined below) on any payments or benefits under this Agreement and/or under any option plan or agreement of the Corporation received by the Executive from the Corporation as a result of a Change of Control (within the meaning of section 280G(b)(2) of the Code) (collectively, the "Payments") and any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the Executive with respect thereto (other than such interest, penalties or additions to tax payable solely as a result of action or inaction by the Executive), shall be equal to the total amount of the Payments. "Excise Tax" means the tax imposed by Section 4999 of the Code. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (x) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the -9- Corporation and reasonably acceptable to the Executive ("Independent counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax; (y) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof); and (z) the value of any noncash benefits or any deferred payment or benefit shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments referred to in Section 10(d)(i) hereof shall be made, subject to applicable withholding requirements, upon the earlier of (x) the payment to the Executive of any Payment or (y) the imposition upon the Executive or payment by the Executive of any Excise Tax. (iii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reasons of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Corporation shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Corporation's receipt of notice of such final determination or opinion. (iv) In the event that the Internal Revenue Service makes any claim, gives notice of any potential claim or institutes a proceeding against the Executive asserting that any Excise Tax or additional Excise Tax is due in respect of the Payments, the Executive shall promptly give the Corporation notice of any such claim, potential claim or proceeding. The Corporation shall have the right to conduct all discussions, negotiations, defenses, actions and proceedings solely to the extent relating to any Excise Tax payable in respect of the Payments, and the Executive shall cooperate with and assist the Corporation, at the Corporation's expense, in any such discussions, negotiations, defenses, actions and proceedings, to the extent reasonably requested by the Corporation. The Executive will not settle any claim or proceeding solely to the extent relating to the Excise Tax payable in respect of the Payments without the consent of the Corporation, which consent shall not be unreasonably withheld. The Executive shall file, at the Corporation's expense, all requests for refunds of the Gross-Up Amount, or any portion thereof, paid to any taxing authority as shall be reasonably requested by the Corporation and shall pay over to the Corporation (net of any tax payable -10- thereon) any such refunds, together with any interest thereon, when and as such refunds and interest are received by the Executive. (v) All fees and expenses of Independent Counsel shall be borne by the Corporation. (e) Non-Renewal. In the event that the employment of the Executive is not renewed by the Corporation following the end of the Term on terms that are no less favorable to the Executive than the terms of this Agreement, the Corporation shall pay to the Executive, promptly after the end of the Term, an amount equal to (x) the Base Salary in effect at the end of the Term, plus (y) the amount of the Bonus, if any, payable to the Executive in respect of the third year of the Term. If the Corporation is willing to renew the employment of the Executive at the end of the Term on terms no less favorable to the Executive than the terms of this Agreement but the Executive is unwilling to accept such employment, no amount shall be payable to the Executive under this Section 10(d). 11. Confidential Information. In addition to any other confidentiality obligation the Executive may have to the date hereof, and until the end of the original Term, the Executive shall keep secret and retain in strictest confidence, and shall not use for his benefit or the benefit of others, any and all confidential information relating to the Corporation and its subsidiaries, including, without limitation, customer lists, financial plans or projections, pricing policies, marketing plans or strategies, business acquisition or divestiture plans, new personnel acquisition plans, designs, and, except in connection with the performance of his duties hereunder, the Executive shall not disclose any such information to anyone outside the Corporation and any of its subsidiaries, except as required by law (provided prior written notice thereof is given by the Executive to the Corporation) or except with the Corporation's prior consent, unless such information is known generally to the public or the trade through sources other than the Executive's unauthorized disclosure. 12. Competitive Activity. The Executive hereby agrees that, during his employment hereunder, and, following a termination of his employment, for the balance of the Term (if any), the Executive shall not, without the prior consent of the Board (i) directly or indirectly, engage or be interested in (as owner, partner, shareholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business wherever located in the world engaged in the manufacture, distribution, design marketing or sale of women's apparel, if such business is a material competitor of the Corporation, or (ii) induce or attempt to persuade any employee of the Corporation or of any subsidiary of the Corporation, or any person who was employed by the Corporation or any subsidiary of the Corporation within the preceding six months, to leave the employ of the Corporation or any subsidiary of the Corporation (but the foregoing shall not be deemed to prevent the Executive in his capacity as Senior Vice President--Manufacturing and Sourcing of the Corporation from hiring or dismissing any employee of the Corporation or any subsidiary for the benefit of the Corporation). The provisions of clause (i) of the preceding sentence shall not apply in the case of a termination by the Executive for Good Reason or by the Corporation without Cause. Nothing in this Section 12 -11- shall prohibit the Executive from acquiring or holding not more than five percent (5%) of any class of publicly traded securities of any business. 13. Expenses. The Corporation shall reimburse the Executive for all reasonable expenses incurred by the Executive in the performance of the Executive's duties hereunder; provided, however, that, in connection with such reimbursement, the Executive shall account to the Corporation for such expenses in the manner customarily prescribed by the Corporation for its senior executives. 14. Directors' and Officers' Insurance; Indemnification. The Executive shall be provided with directors' and officers' insurance in connection with his employment hereunder and service as a Director as contemplated hereby with such coverage (including with respect to unpaid wages and taxes not remitted when done) as shall be reasonably satisfactory to the Executive and with aggregate limits of liability for all covered officers and directors of not less than Thirty-Five Million Dollars ($35,000,000), and the Corporation shall maintain such insurance in effect for the period of the Executive's employment hereunder and for not less than five (5) years thereafter; provided, however, that, in the event that the Corporation shall not obtain such insurance, it shall provide or cause the Executive to be provided with indemnity (or a combination of indemnity and directors' and officers' insurance) in connection with his employment hereunder with substantially equivalent coverage and amounts, and the Corporation shall maintain such indemnity (or combination of indemnity and directors' and officers' insurance) or cause such indemnity (or such combination) to be maintained for the period of the Executive's employment hereunder and for not less than five (5) years thereafter. 15. No Duty to Mitigate. The Executive shall have no duty to mitigate the severance amounts or any other amounts payable to the Executive hereunder, and such amounts shall not be subject to reduction for any compensation received by the Executive from employment in any capacity or other source following the termination of Executive's employment with the Corporation and its subsidiaries. 16. Entire Agreements; Amendments; No Waiver. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof. This Agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. No failure on the part of either party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any partial exercise of any right hereunder preclude any further exercise thereof. 17. Survival of Provisions. The provisions of Sections 10(d), 11, 12, 23 and 25 shall survive the termination or expiration of this Agreement as provided therein. Such provisions are unique and extraordinary, which give them a value peculiar to the Corporation, and cannot be reasonably or adequately compensated in damages for its loss and any breach by the Executive of such provisions shall cause the Corporation irreparable injury and damage. Therefore, the Corporation, in addition to all other remedies available to it, shall be entitled to injunctive and other -12- available equitable relief in any court of competent jurisdiction to prevent or otherwise restrain a breach of such provisions for the purposes of enforcing such provisions. 18. Withholding. The Corporation shall be entitled to withhold from any and all amounts payable to the Executive hereunder such amounts as may from time to time be required to be withheld pursuant to applicable tax laws and regulations. 19. Succession, Assignability and Binding Effect. (a) The Corporation will require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall constitute Good Reason for resignation by the Executive. (b) This Agreement shall inure to the benefit of and shall be binding upon the Corporation and its successors and permitted assigns and upon the Executive and his heirs, executors, legal representatives, successors and permitted assigns; provided, however, that neither party may assign, transfer, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any of its or his rights hereunder without the prior written consent of the other party, and any such attempted assignment, transfer, pledge, encumbrance, hypothecation or other disposition without such consent shall be null and void and without effect. 20. Headings. The paragraph headings contained herein are included solely for convenience of reference and shall not control or affect the meaning or interpretation of any of the provisions of this Agreement. 21. Notices. Any notices or other communications hereunder by either party shall be in writing and shall be deemed to have been duly given if delivered personally to the other party or, if sent by registered or certified mail, upon receipt, to the other party at his or its address set forth at the beginning of this Agreement or at such other address as such other party may designate in conformity with the foregoing. 22. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles thereof relating to the conflict of laws. 23. Legal Fees and Expenses. In order to induce the Executive to enter into this Agreement and to provide the Executive with reasonable assurance that the purposes of this Agreement shall not be frustrated by the cost of its enforcement, the Corporation shall pay and be solely responsible for any attorneys' fees and expenses and court costs incurred by the Executive as a result of the failure by the Corporation to perform this Agreement or any provision hereof to be performed by it or in connection with any action which may be brought, by or in the name or for the -13- benefit of the Corporation or any subsidiary contesting the validity or enforceability of this Agreement or any provision hereof to be performed by the Corporation, which action shall have been dismissed by a final, nonappealable court order. 24. Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 24, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. 25. Arbitration. (a) Disputes Subject to Arbitration. In the event that the Corporation terminates the Executive's employment on the grounds set forth in clause (iii) of the definition of "Cause", the Corporation and the Executive mutually consent to the resolution by arbitration of any dispute between the Corporation and the Executive as to whether such Cause has occurred. Unless the Corporation and the Executive otherwise agree, no other disputes, issues, claims or controversies arising out of the Executive's employment (or its termination), or any other matter whatsoever, shall be submitted to or resolved by arbitration. (b) Arbitration Procedures. (i) The Corporation and the Executive agree that, except as provided in this Agreement, any arbitration shall be in accordance with the then current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA") before an arbitrator who is licensed to practice law in the state in which the arbitration is convened (the "Arbitrator"). The arbitration shall take place in or near the city in which the Executive is or was last employed by the Corporation. (ii) Upon designation as a Dispute, the AAA shall give each party a list of eleven (11) arbitrators drawn from its panel of labor and employment arbitrators. The Corporation and the Executive may strike all names on the list which it deems unacceptable. If only one common name remains on the lists of all parties, said individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternatively until only one remains. If no common name remains on the lists of all parties, the AAA shall furnish an additional list and the parties shall alternate striking names on such second list until an arbitrator is selected. (iii) The Arbitrator shall apply the law of the State of New York applicable to contracts made and to be performed wholly in that state (without giving effect to the principles thereof relating to conflicts of law). The Federal Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability or formation of the term "Cause". The Arbitrator shall render a decision within thirty (30) days of the date upon which the Arbitrator is selected pursuant to Section 25(b)(ii), which decision shall be final and -14- binding upon the parties. In the event that the Arbitrator decides that Material Insubordination has (x) occurred, then the Executive's employment shall be deemed to have been terminated for cause pursuant to Section 9(a) hereof or (y) not occurred, then the Executive's employment shall be deemed to have been terminated without Cause pursuant to Section 10(b) hereof. (iv) The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold prehearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. (v) Either party, at its expense, may arrange for and pay the costs of a court reporter to provide a stenographic report of proceedings. (vi) Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (vii) Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Section 25. Except as otherwise provided in this Section 25, both the Corporation and the Executive agree that neither such party shall initiate or prosecute any lawsuit or administrative action in any way related to any Dispute covered by this Section 25. (viii) The arbitrator shall render an opinion in the form typically rendered in labor arbitrations. (c) Arbitration Fees and Costs. The Corporation and the Executive shall equally share the fees and costs of the Arbitrator. Each party shall deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, ten (10) days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim that affords the prevailing party attorneys' fees, the Arbitrator may award reasonable fees to the prevailing party. (d) Opportunity to Review. The Executive acknowledged that he has been given the opportunity to discuss this Agreement, including this Section 25, with his private legal counsel and has availed himself of that opportunity to the extent he wishes to do so. (e) Law Governing. The parties agree that the arbitration provisions set forth in this Section 25 shall be governed by the Federal Arbitration Act, 9 U.S.C.ss.ss. 1-16, ("FAA"). The parties further agree that all Disputes, whether arising under state or federal law, shall be subject to the FAA, notwithstanding any state or local laws to the contrary. -15- 26. Prior Employment Agreement. The employment agreement, dated as of June 2, 1997 between the Executive and the Corporation is hereby terminated as of the Effective Date. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the day and year first above written. THE LESLIE FAY COMPANY, INC. By: /s/ John J. Pomerantz --------------------------------- Name: John J. Pomerantz Title: Chairman and Chief Executive Officer /s/ Dominick Felicetti -------------------------------------- Dominick Felicetti Executive -16- EX-10.14 6 MODIFICATION OF LEASE AGREEMENT MODIFICATION OF LEASE AGREEMENT MODIFICATION OF LEASE AGREEMENT (this "Agreement") made this 11th day of August, 1998 between FASHION GALLERY OWNERS, LLC, a New York limited liability company, having an office at 1412 Broadway, New York, New York 10018 (hereinafter referred to as "Landlord") and LESLIE FAY MARKETING, INC. (successor-in-interest to THE LESLIE FAY COMPANIES, INC.) having an office at 1412 Broadway, New York, New York 10018 (hereinafter referred to as "Tenant"). WHEREAS, Tenant is currently the tenant of the entire Second and Fourth floors and Storage Room #15 (which space is hereinafter collectively referred to as the "Original Demised Premises") in the building known as 1412 Broadway in the County and State of New York (the "Building"), pursuant to that certain Agreement of Lease dated April 29, 1997 between 1412 Broadway Associates (Landlord's predecessor-in-interest) ("Associates"), as landlord and The Leslie Fay Companies, Inc. (predecessor-in-interest to Tenant), as tenant (the "Lease"), which Lease is to terminate on its terms on April 30, 2002 (the "Original Expiration Date"); WHEREAS, the parties desire to modify the Lease to, among other things, add the entire third floor, substantially as shown on the plan annexed hereto as Exhibit A-1 (which space is hereinafter referred to as the "Additional Premises") in the Building and to extend the Term, upon the terms and conditions hereinafter set forth (each capitalized term not specifically defined herein shall have the same meaning given to it in the Lease). NOW, THEREFORE, in consideration of the mutual premises and conditions the parties agree as follows: 1. Modification of Lease. On the later to occur of (i) the date first set forth above as the date upon which this Agreement was executed and (ii) the "Approval Date" (as defined in Paragraph 15 of this Agreement), (such later date being hereinafter referred to as, the "Effective Date") the Lease shall be deemed modified as follows: A. The Term of the Lease shall be extended to expire at midnight on the expiration of Lease Year Ten, as defined below (the "Extended Expiration Date"), or on such earlier date upon which the Term of this Lease shall expire or be cancelled or terminated pursuant to any of the conditions or covenants of the Lease or pursuant to law and the Extended Expiration Date shall be substituted for the Expiration Date, as applicable, in the Lease. B. With respect to the Additional Premises, "Lease Year One" shall be deemed to commence on the first day of the calendar month following the Effective Date and shall end on the last day of the successive twelve month period. If the Effective Date shall be on the first day of the month, Lease Year One shall commence on such date and shall end on the day immediately preceding the first anniversary of the Effective Date. The term "Lease Year" shall refer to each year of the Term including Lease Year One. Each succeeding Lease Year after Lease Year One shall run for the successive twelve month period from the expiration of the preceding Lease Year and shall be consecutively numbered (i.e. the tenth Lease Year shall be known as Lease Year Ten). From and after the Original Expiration Date, the provisions of this Paragraph B shall also apply to the Original Demised Premises. C. The area of the "Demised Premises", as defined in the Lease shall consist of all of the Original Demised Premises and the Additional Premises (substantially as shown on the plan annexed hereto as Exhibit A-2), and except as specifically provided herein, all references in the Lease to the "Demised Premises" shall mean the Original Demised Premises and the Additional Premises. D. 1. Notwithstanding anything to the contrary contained herein, Base Annual Rent on account of the Original Demised Premises shall continue to be due and payable as set forth in the Lease, except that during the period from the Original Expiration Date through the Extended Expiration Date, Base Annual Rent payable on account of the Original Demised Premises shall be as follows: (a) during the period 5/l/02 through the expiration of Lease Year Four, $1,260,646.00 per annum; (b) for each Lease Year during the period from the commencement of Lease Year Five through the expiration of Lease Year Seven, $1,341,978.00 per annum; and (c) for each Lease Year during the period from the commencement of Lease Year Eight through the Extended Expiration Date, $1,504,642.00 per annum. Notwithstanding the foregoing, there shall be no Base Annual Rent, solely on account of the Original Demised Premises, payable for the two (2) week period immediately prior to the Original Expiration Date; provided, however, that in the event Tenant is dispossessed or this Lease is terminated by reason of Tenant's default, the Base Annual Rent for such period shall be immediately due and payable. 2. This Base Annual Rent solely on account of the Additional Premises and in addition to the Base Annual Rent for the Original Demised Premises shall be as follows: (a) for Lease Year One through Lease Year Two, $589,657.00 per annum; (b) for Lease Year Three through Lease Year Four, $630,323.00 per annum; (c) for Lease Year Five through Lease Year Seven, $670,989.00 per annum; and (d) for Lease Year Eight through Lease Year Ten, $752,321.00 per annum. Notwithstanding the foregoing, there shall be no Base Annual Rent, solely on account of the Additional Premises (except for the increase to Base Annual Rent attributable to electricity pursuant to Section 66.01 of this Lease), payable for the period commencing on the Effective Date and terminating on September 30, 1998; provided, however, that in the event Tenant is dispossessed or this Lease is terminated by reason of Tenant's default, the Base Annual Rent for such period shall be immediately due and payable. Simultaneously with the execution of this Agreement, Tenant has paid to Landlord, if by check subject to collection, one full month of Base Annual Rent for the Additional Premises, which amount shall be credited on a per diem basis toward the payment of the installments of Base Annual Rent first due and payable hereunder. E. For purposes of calculating Additional Rent and other applicable payments for the Additional Premises, the following terms shall have the following meanings (for purposes of calculating Additional Rent and other applicable payments for the Original Demised Premises, such terms shall have the meanings ascribed to them in the Lease): -2- (i) "Base Tax Year" shall mean the Taxes for the twelve month fiscal year commencing on July 1, 1998. (ii) "Tenant's Proportionate Share" shall mean five and ninety hundredths of one percent (5.90%). F. The following provisions shall be added to and made a part of the Lease: "ARTICLE 66 - Cost of Electricity for Additional Premises 66.01 Landlord agrees to supply the Additional Premises, as of the Effective Date, with such electric current as Tenant shall reasonably require (consistent with the existing electrical capacity contained in the Additional Premises) for Tenant's wiring facilities and equipment within the Additional Premises and in consideration thereof, Tenant agrees that the Base Annual Rent reserved in this Lease shall be increased by the sum of Fifty Thousand Eight Hundred Thirty-Two and 50/100ths Dollars ($50,832.50) per annum subject to survey as provided in Section 66.02 hereof (the "Base Charge"). The Base Charge increase to Base Annual Rent shall in no event be subject to reduction pursuant to the provisions of this Article, but shall be subject to increase as hereinafter provided. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Additional Premises not due to the gross negligence or willful misconduct of Landlord or if the same is changed or is no longer available or suitable for Tenant's requirements or is interrupted as a result of any cause not attributable to Landlord. 66.02 (a) Landlord, from time to time during the Term of this Lease, shall have the right to select a reputable independent electrical engineer or consultant (the "Consultant") to prepare surveys of the electrical consumption within the Additional Premises in order to determine whether the Base Charge for electricity (as the same may have been increased by previous surveys and determinations) is less than the Electrical Consumption Charge (as defined in Section 66.03 below) which should be charged to Tenant. If the Base Charge shall be less than the Electrical Consumption Charge, which the Consultant determines to be applicable to Tenant then, effective as of the date of the Consultant's determination, the Base Charge (as the same may have been previously increased pursuant to the provisions hereof) shall be further increased by an amount equal to the excess of (i) the then Electrical Consumption Charge determined to be applicable by the Consultant over (ii) the Base Charge (plus any previous increases to the Base Charge pursuant to the provisions hereof). Notwithstanding the foregoing, the first survey shall not be made during Lease Year One unless Tenant's proposed alterations in the Additional Premises involve an increase in the existing electrical capacity of the Additional Premises of more than 110% above the electrical capacity of the Additional Premises existing as of the Effective Date (of which fact Landlord shall be the sole judge), and any increase to the Base Charge resulting from such survey shall be retroactive to the Commencement Date. (b) Surveys made by the Consultant shall be based upon the use of such electric current on Business Days, and such other days and hours when Tenant uses electricity for lighting -3- and for the operation of the machinery, appliances and equipment used by Tenant in the Additional Premises. (c) The cost of the first survey shall be borne by Landlord. Tenant shall pay the fees of the Consultant making all other surveys if such survey results in an increase in the Electrical Consumption Charge, which increase is not caused by an increase in the Electric Rate. The findings of the Consultant shall be binding and conclusive on Landlord and Tenant; provided, however, that Tenant may dispute the findings of the Consultant in accordance with Section 66.08, below. 66.03 The "Electrical Consumption Charge" for electricity consumed by Tenant within the Additional Premises, as determined by the Consultant, shall be computed by multiplying the Electric Rate (as defined below) by Tenant's consumption of electricity as determined by the Consultant. In no event, however, shall the Electrical Consumption Charge be less than Landlord's actual cost of acquiring and distributing electricity to Tenant. The term "Electric Rate" shall mean, at the time in question, the actual cost to Landlord of acquiring electricity for the Premises, including all surcharges, taxes, fuel adjustments, taxes regularly passed on to customers by the public utility, and other sums payable in respect thereof for the supply of electrical energy to Landlord for the entire Building. 66.04 Tenant's use of electric energy in the Additional Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in, or otherwise serving, the Additional Premises. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electric service, Tenant shall not, without Landlord's prior written consent in each instance (which shall not be unreasonably delayed or withheld), connect any fixtures, appliances or equipment to the Building's electric distribution system other than ordinary office and showroom equipment exclusive of major computers, or make any material alteration or addition to the electric system of the Additional Premises existing on the Effective Date. Landlord agrees not to unreasonably withhold or delay its consent to the installation of additional risers to the Premises, provided that all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant to Landlord within ten (10) days of demand and provided further, that Landlord shall have the right to cause a survey of the Premises to be made by the Consultant, at Tenant's sole cost and expense, to determine the amount of the increase in the Base Annual Rent to reflect the value to Tenant of the potential additional electric energy to be made available to Tenant by the estimated additional capacity of such additional risers of the connected load of such fixtures, appliances or equipment (measured, in respect of risers, at their lowest point in the Building). The amount of such increase shall be determined by the Consultant. Such determination shall be binding and conclusive upon the parties unless disputed by Tenant within thirty (30) days of receipt of such Consultant's report. Landlord, its agents and Consultants may survey the electrical fixtures, appliances and equipment in the Additional Premises and Tenant's use of electric energy therein from time to time after the initial survey described above to ascertain whether Tenant is complying with its obligations under this Section. -4- 66.05 Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law, which floor load is 120 lbs/sq. ft. live load. 66.06 Tenant, at its sole cost and expense, shall furnish and install all replacement lighting, tubes, lamps and bulbs required in the Additional Premises. Tenant, at its sole cost and expense, shall install all replacement ballasts in the Additional Premises using Landlord's designated contractor, provided that the cost is thereof is at commercially competitive rates. 66.07 Landlord reserves the right to discontinue furnishing electric energy to Tenant in the Additional Premises at any time upon not less than thirty (30) days' notice to Tenant so long as: (i) the discontinuance is not discriminatory to Tenant; and (ii) electric service is available from the public utility or otherwise. If Landlord exercises such right this Lease shall continue in full force and effect and shall be unaffected thereby, except that from and after the effective date of such termination (a) Landlord shall not be obligated to furnish electric energy to Tenant and (b) the Base Annual Rent shall be reduced by the Base Charge then in effect. If Landlord so discontinues furnishing electric energy to Tenant, such electric energy may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring to the extent that the same are available, suitable and safe for such purpose. All meters and additional panel boards, feeders, wiring and other conductors and equipment which may be required to obtain electric energy directly from such public utility company shall be furnished and installed by Landlord at Landlord's expense, unless such discontinuance is as a result of a Legal Requirement or Force Majeure, in which event the cost thereof shall be amortized on a straight-line basis over the useful life thereof utilized for federal income tax purposes and Tenant shall be responsible for the payment of the annual amortization amount(s) occurring during the balance of the Term. The change at any time of the character of electric service in the Additional Premises not due to the gross negligence or willful misconduct of Landlord shall not make Landlord liable or responsible to Tenant for any loss, damages or expenses which Tenant may sustain as a result thereof. 66.08 In instances wherein Tenant has the right to dispute the determinations made by the Consultant, Tenant shall only dispute such reports by submitting, within thirty (30) days after receipt of the Consultant's report, a written report by an electrical consultant retained by Tenant at Tenant's expense. In the event that the Consultant and Tenant's electrical consultant cannot mutually agree within thirty (30) days after the submission of Tenant's electrical consultant's report, the matter shall be referred to arbitration in accordance with the rules and regulations of the American Arbitration Association. Until the determination of the consultants or the arbitrators, Tenant shall pay the Electric Charge determined in accordance with the Consultant's report and following such determination, an appropriate adjustment and/or refund shall be made. ARTICLE 67 - Security 67.01 A. Tenant has deposited with Landlord the sum of $294,828.50 as security for the faithful performance and observance by Tenant of the terms, provisions, covenants and conditions -5- of this Lease (the "Security Deposit"). The amount of the Security Deposit shall be increased by Tenant coincident with every increase in Base Annual Rent. It is agreed that in the event Tenant defaults beyond the expiration of any applicable notice and grace periods (provided that Tenant shall have commenced such cure within the applicable grace period and shall thereafter be diligently prosecuting such cure to completion within the applicable grace period) in respect of any of the terms, provisions, covenants and conditions of this Lease including, but not limited to, the payment of Rent, Landlord may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of any Rent or any other sum as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, provisions, covenants, and conditions of this Lease, including but not limited to, any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants, and conditions of this Lease, the Security Deposit shall be returned to Tenant after the date fixed as the end of this Lease and after delivery of possession of the Demised Premises to Landlord in the condition required by, and in accordance with, the terms of this Lease. In the event of a sale of the Building or leasing of the Building, Landlord shall transfer the Security Deposit to the vendee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return of such Security Deposit; and Tenant agrees to look solely to the new landlord for the return of said Security Deposit; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the Security Deposit to a new landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. In the event Landlord applies or retains any portion or all of the Security Deposit, Tenant shall forthwith restore the amount so applied or retained so that at all time the amount deposited shall be as set forth above. Provided Tenant shall not then be in default in the payment of rent or otherwise be in default under this Lease beyond any applicable notice and grace period (provided that Tenant shall have commenced such cure within the applicable grace period and shall thereafter be diligently prosecuting such cure to completion within the applicable grace period), and provided that Landlord shall not have applied all or any portion of the security as provided for under this paragraph, then on the first (1st) anniversary of the Effective Date, the security shall be reduced by an amount equal to $98,276.16 (the "Reduction Amount") and Landlord shall return to Tenant the Reduction Amount, together with interest earned thereon, if any. From and after the first (1st) anniversary of the Effective Date and continuing throughout the balance of the Term, Landlord shall retain an amount equal to four (4) full months of Base Annual Rent then in effect under this Lease with respect to the Additional Premises as the security deposit in accordance with the terms of this Lease. B. Tenant shall have the option to provide such Security Deposit in the form of an irrevocable letter of credit from a commercial bank (the "Issuer") of substantial financial standing and otherwise reasonably acceptable to Landlord from which Landlord may draw in the event of any default by Tenant under the terms of this Lease which continues after notice and the expiration of any applicable grace period. Such letter of credit must be in writing, be in form and content reasonably acceptable to Landlord, signed by the Issuer, made payable to the order of Landlord, be assignable -6- by the beneficiary thereunder. Any fees payable in connection with Landlord's assignment of the letter of credit to any successor landlord or superior mortgagee shall be paid by Tenant. The form of letter of credit annexed hereto as Exhibit B is acceptable to Landlord. Such letter of credit shall, by its terms, be fully effective during a one (1) year period following the date of issuance. Tenant shall arrange for such letter of credit to be renewed, or replaced by an equivalent letter of credit, to provide continuing identical security to Landlord during each subsequent one (1) year period and during any remaining period under the Lease term (the last such extension to provide for the continuance of such letter of credit for at least three months beyond the Expiration Date). Subject to the penultimate sentence of this paragraph, each such renewal or replacement of the letter of credit shall be for the full face amount equivalent to six (6) full months' Base Annual Rent for the Additional Premises then in effect under this Lease regardless of previous draws against any prior letter of credit. The letter of credit shall either provide that it shall be automatically renewed by its terms throughout the duration of this Lease or contain a provision that requires the Issuer to notify the beneficiary at least thirty (30) days prior to the expiration date of the letter of credit that the letter of credit has not been renewed or replaced. No later than twenty (20) days prior to the expiration date of each letter of credit, or renewal or replacement thereof, Tenant shall provide written notice (and supporting documentary evidence signed by the Issuer) to Landlord that the then effective letter of credit has been so renewed or so replaced for the succeeding time period. The failure of Tenant to maintain the letter of credit as herein specified (including the failure to deliver evidence of the renewal or replacement of the letter of credit as herein provided or the failure to increase the undrawn balance of the letter of credit as herein provided) or the Issuer's refusal or failure to permit Landlord to draw against the letter of credit shall, unless Landlord receives a cash Security Deposit or replacement letter of credit from another Issuer as herein provided, be a default under the terms of this Lease with the same effect as a default for failure to pay rent. In addition to all other remedies available to Landlord in the event of default by Tenant under the terms of this Lease beyond the expiration of any applicable notice and grace periods (provided that Tenant shall have commenced such cure within the applicable grace period and shall thereafter be diligently prosecuting such cure to completion within the applicable grace period), Landlord shall have the specific remedy of immediately drawing against the letter of credit in any amount up to and including the full face amount of such letter of credit for payment of any Rent or other sum Landlord may be required to expend by reason of Tenant's default, except that Landlord shall have the right to draw the full face amount of the letter of credit in the event Tenant fails to renew or replace the letter of credit as herein provided, in which event Landlord shall hold such amount as a cash Security Deposit in accordance with the provisions of the first paragraph of this Section 67.01. In the event that Landlord draws against the letter of credit as provided for under this paragraph, other than as a result of Landlord's draw of the full face amount of the letter of credit as a result of Tenant's failure to renew or replace the letter of credit as herein provided, then Tenant shall, upon demand by Landlord, increase the then undrawn balance of the letter of credit to the amount provided for herein. In the event that Tenant fails to so increase the then undrawn balance of the letter of credit as herein provided, then Landlord shall be entitled to draw the remaining balance of the letter of credit. It is specifically agreed and understood that, in the event that Landlord has not received from Tenant either a cash Security Deposit or a letter of credit, in the form and substance required pursuant to the provisions of this paragraph, within ten (10) days following Tenant's execution of this Modification of Lease Agreement ("Amendment"), then this -7- Amendment shall be, at the sole option of Landlord, null and void and of no further force and effect. Notwithstanding the foregoing, provided Tenant shall not then be in default in the payment of rent or otherwise be in default under this Lease beyond any applicable notice and grace period (provided that Tenant shall have commenced such cure within the applicable grace period and shall thereafter be diligently prosecuting such cure to completion within the applicable grace period), and provided that Landlord shall not have drawn down any amount under the letter of credit as provided for under this paragraph, then Tenant shall have the right, on the first (1st) anniversary of the Effective Date, to reduce the face amount of the letter of credit by the Reduction Amount. From and after the first (1st) anniversary of the Effective Date and continuing throughout the balance of the Term, the letter of credit shall be for the full face amount equivalent to four (4) full months of Base Annual Rent then in effect under this Lease for the Additional Premises. 67.02 If the Security Deposit held by Landlord shall be in cash, the same shall be held in an interest-bearing account and any interest earned shall be for the account of Tenant and shall be held by Landlord as an addition to the Security Deposit for the entire Term of the Lease. Landlord shall be entitled to an administrative fee of 1% per annum, or such greater percentage permitted by law, on the amount of the Security Deposit held by Landlord. The administrative fee shall be paid to Landlord at the end of the Term of this Lease or at such other time or times as Landlord shall elect. 67.03 In the event that during the Term of this Lease the Security Deposit held by Landlord (not including interest) is less than four monthly installments of the Base Annual Rent payable with respect to the Additional Premises under Article 3, Tenant shall, on written demand by Landlord, deposit with Landlord on account of the security herein provided for, the difference between the Security Deposit then held by Landlord and a sum equal to four (4) months' installments of Base Annual Rent. 67.04 If Tenant fails to pay any Base Annual Rent or any Additional Rent payable under this Lease within ten (10) days after such payment is due twice in any twelve-month period, Tenant shall furnish Landlord, within ten days after demand by Landlord, with additional monies equal to one month's installment of Base Annual Rent at the rate payable during the last Lease Year which shall be added to and included in the Security Deposit." G. In lieu of a porters wage increase payable on account of the Additional Premises, Tenant shall pay to Landlord, as Additional Rent, during each Lease Year following Lease Year One of the Term for the Additional Premises, an amount equal to three percent (3%) of the Base Annual Rent (as increased from time to time by the escalation described in this subparagraph G) payable for the prior Lease Year on account of the Additional Premises. Such payments shall be made, in equal monthly installments, in advance, on the first day of each and every calendar month throughout the Term of the Lease. Section 38.02 of the Lease shall not be applicable to the Additional Premises. H. Section 39.02 of the Lease is hereby deleted in its entirety. -8- I. Section 41.01(c)(ii) of the Lease is hereby amended by deleting the second sentence thereof in its entirety. J. Section 41.01(d) of the Lease is hereby deleted in its entirety. K. Article 45 of the Lease is hereby deleted in its entirety and the following is inserted in lieu thereof: "ARTICLE 45 - Use of Demised Premises 45.01 Tenant shall use and occupy the Demised Premises for showrooms for the display and sale of women's moderate priced, better or designer apparel and related women's accessories and related women's apparel items, and for design and sample making related thereto and executive and general offices for clothing and accessory lines of Tenant and its affiliated companies and businesses." L. 47.01 of the Lease is hereby amended by deleting the word "two" in the fourth line thereof and substituting in lieu thereof the word "three". 2. Further Modification of Lease. On the Original Expiration Date, the Lease shall be deemed further modified as follows: A. Sections 42.01 and 42.04 of the Lease shall be deleted and thereafter electricity shall be supplied to the Original Demised Premises pursuant to Article 66 of the Lease except that the "Base Charge" applicable solely to the Original Demised Premises (and in addition to the Base Charge applicable to the Additional Premises) shall be $101,665.00 and all references in Article 66 to the Additional Premises shall be deemed to include the Original Demised Premises as the context may require. B. "Base Tax Year" solely on account of the Original Demised Premises (and in addition to the Base Tax Year applicable to the Additional Premises) shall be modified to mean the Taxes for the twelve month fiscal year commencing on July 1, 1998. C. Sections 37.07, 38.02, 38.03 and 38.04 regarding porters wage increase payments shall be deleted and, in lieu thereof, Tenant shall pay to Landlord, as Additional Rent on account of the Original Demised Premises (and in addition to such similar payments applicable to the Additional Premises), during each annual period set forth in paragraphs 1(D)(1)(a) through (c) above an amount equal to three percent (3%) of the Base Annual Rent payable for the prior annual period on account of the Original Demised Premises. Such payment shall be made, in equal monthly installments, in advance, on the first day of each and every calendar month throughout the balance of the Term of the Lease. 3. Delivery of Additional Premises and Landlord's Contribution. Landlord is delivering and Tenant shall accept the Additional Premises "AS IS", together with all fixtures, equipment and -9- improvements existing in the Additional Premises as of the date of this Agreement and Landlord makes no representation as to the repair, condition or working order of the Additional Premises. 4. Tenant's Continuing Obligations. Notwithstanding anything to the contrary contained herein, all of Tenant's existing and future obligations to pay items of Base Annual Rent and Additional Rent under the Lease, as amended hereby, with regard to the Original Demised Premises shall continue and nothing in this Agreement shall affect Tenant's obligations under the Lease including, but not limited to, the obligation to make all payments due under the Lease, as hereby amended, prior to demand and without any set-off or deduction whatsoever. 5. Broker. Each party represents to the other that notwithstanding anything to the contrary contained in the Lease, no broker participated in or brought about this Agreement other than Newmark & Company Real Estate, Inc., and Bruce S. Brickman & Associates, Inc. (collectively, the "Broker") and no broker, other than the Broker, with which either party has dealt is or will be entitled to a commission as a result of the execution or delivery of this Agreement. Each party agrees to indemnify and save the other harmless against any claim or cost or expense due any other broker with which such party has dealt in connection with this Agreement. Landlord shall be responsible for any commission due the Broker. 6. Lease in Full Force. Except as modified hereby, the terms and provisions of the Lease, as heretofore amended, shall continue in full force and effect and, as amended and modified hereby, all of the terms and conditions of the Lease are hereby ratified and confirmed in all respects. 7. Governing Law. This Agreement shall be governed by the laws of the State of New York without giving effect to the principles of conflict of laws. 8. Entire Agreement. This Agreement, together with the Lease, constitutes the sole agreement and contains the entire understanding and agreement of the parties. There are no understandings or agreements of the parties relating to the subject matter of this Agreement other than as expressly set forth herein. 9. No Oral Modifications. This Agreement and the provisions hereof cannot be waived, changed, or terminated except by an agreement in writing signed by the party against whom enforcement of the waiver, change, or termination is sought. 10. No Waiver. The failure of Landlord to insist upon the strict performance by Tenant of any of the obligations of Tenant under this Agreement shall not be deemed to be a waiver of such obligations, and Landlord, notwithstanding any such failure, may thereafter insist upon the strict performance by Tenant of any such obligations. 11. Captions. The captions, headings, and titles in this Agreement are solely for convenience of reference and shall not affect its interpretation. -10- 12. Remedies Not Exclusive. The rights and remedies provided for in this Agreement or that Landlord may have otherwise pursuant to the Lease, at law or in equity, shall be distinct, separate, and cumulative and shall not be deemed to be inconsistent with each other, and none of them, whether or not exercised by Landlord, shall be deemed to be in exclusion of any other, and any two or more of such rights and remedies may be exercised at the same time, all to the extent permitted by law. 13. Invalid Provisions. If any provision of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and shall be valid and enforceable to the fullest extent permitted by law. 14. Successors and Assigns. This Agreement shall bind the parties hereto and their respective heirs, administrators, executors, successors and permitted assigns. 15. Condition Subsequent. This Agreement shall be void ab initio and of no further force and effect unless, within 20 Business Days from the date of full execution of this Agreement, Landlord obtains and delivers to Tenant the written consent of Nomura Asset Capital Corporation, which entity Landlord represents is the only existing mortgagee, or any successor thereof as mortgage holder ("Mortgagee") of the Building as of the date hereof, as evidenced by the execution and delivery by such Mortgagee of that certain Amended and Restated Subordination, Non-Disturbance and Attornment Agreement, substantially in the form annexed hereto as Schedule 1 (the date upon which such agreement is fully executed and delivered to Tenant, herein referred to as the "Approval Date"). Neither Landlord nor Tenant shall have any right to cancel this Agreement during such 20 Business Day period. Tenant shall have the right to enter the Additional Premises during such 20 Business Day period for the purpose of inspecting and measuring the same, provided that Tenant shall indemnify and hold Landlord harmless from and against all loss, cost, claims and damage arising as a result of any such entry. -11- IN WITNESS WHEREOF, Landlord and Tenant have cause this Agreement to be duly executed as of the day and year first above written. LANDLORD: FASHION GALLERY OWNERS, LLC By: Fashion Gallery, LLC, its Manager By: /s/ Bruce S. Brickman -------------------------- Bruce S. Brickman, President TENANT LESLIE FAY MARKETING, INC. By: /s/ Warren Wishart ------------------------------------ Name: Warren Wishart Title: Chief Financial Officer -12- EX-27 7 FINANCIAL DATA SCHEDULE
5 OTHER JAN-02-1999 JAN-04-1998 JUL-04-1998 12,354 0 15,969 3,207 33,585 59,746 1,816 91 61,576 15,056 0 0 0 68 28,958 61,576 73,934 73,934 54,447 11,948 0 0 320 7,219 2,072 5,147 0 0 0 5,147 0.76 0.72
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