- - --------------------------------------------------------------------------------
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period ended October 3, 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 5,994,900 shares of Common Stock outstanding at October 3, 1998
- - --------------------------------------------------------------------------------
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
Page No
-------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets as of October 3, 1998
and January 3, 1998 3
Consolidated Statements of Operations for the
Thirty-Nine, Eighteen and Twenty-Two Weeks Ended
October 3, 1998, October 4, 1997 and June 4, 1997, respectively 4
Consolidated Statements of Operations for the
Thirteen Weeks Ended October 3, 1998 and
October 4, 1997, respectively 5
Consolidated Statements of Cash Flows for the
Thirty-Nine, Eighteen and Twenty-Two Weeks Ended
October 3, 1998, October 4, 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 17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities 25
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
INDEX TO EXHIBITS E-1
</TABLE>
2
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
October 3, January 3,
ASSETS 1998 1998
--------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $557 $18,455
Restricted cash and cash equivalents 3,530 1,358
Restricted short term investments - 2,989
Accounts receivable- net of allowances for possible losses
of $3,470 and $3,236, respectively 32,843 9,747
Inventories 25,116 26,701
Prepaid expenses and other current assets 1,066 807
--------------- -----------
Total Current Assets 63,112 60,057
Property, plant and equipment, at cost, net of
accumulated depreciation of $221 and $14, respectively 2,141 845
Deferred charges and other assets 149 149
--------------- -----------
Total Assets $65,402 $61,051
=============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt $1,494 $ -
Accounts payable 8,570 11,530
Accrued expenses and other current liabilities 4,781 4,542
Accrued expenses and other current confirmation liabilities 3,530 4,347
Income taxes payable 2,740 25
Current portion of capitalized leases 46 160
--------------- -----------
Total Current Liabilities 21,161 20,604
Excess of revalued net assets acquired over equity under fresh-start reporting,
net of accumulated amortization of $6,096 and $2,667, respectively 7,612 11,041
Long term debt-capitalized leases 29 49
Deferred liabilities 366 143
--------------- -----------
Total Liabilities 29,168 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, respectively 68 68
Capital in excess of par value 28,564 25,837
Accumulated retained earnings 12,225 3,309
--------------- -----------
40,857 29,214
Less:
Treasury stock at cost , 817 and -0- common shares, respectively 4,623 -
--------------- ------------
Total Stockholders' Equity 36,234 29,214
--------------- ------------
Total Liabilities and Stockholders' Equity $65,402 $61,051
=============== ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
3
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
Reorganized Predecessor
Company Company
------------------------------ --------------
Thirty-Nine Eighteen Twenty-Two
Weeks Ended Weeks Ended Weeks Ended
October 3, October 4, June 4,
1998 1997 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales $122,723 $47,097 $197,984
Cost of Sales 91,087 36,242 147,276
Gross profit 31,636 10,855 50,708
Operating Expenses:
Selling, warehouse, general and administrative expenses 20,735 7,856 35,459
Non cash stock based compensation 1,430 120
Depreciation and amortization expense 198 3 2,090
Total operating expenses 22,363 7,979 37,549
Other income (877) (462) (1,196
Amortization of excess revalued net assets acquired over equity (3,429) (1,524)
Total operating expenses, net 18,057 5,993 36,353
Operating income 13,579 4,862 14,355
Interest and Financing Costs (excludes contractual interest of
$ 0 and $ 0 and $7,513, respectively) 680 212 1,372
Income before reorganization costs, taxes, gain
on sale, fresh start revaluation and extraordinary item 12,899 4,650 12,983
Reorganization Costs 3,379
Income before taxes, gain on sale,
fresh start revaluation and extraordinary item 12,899 4,650 9,604
Provision for taxes 3,983 65 451
Net Income before gain on sale, fresh start
revaluation and extraordinary item 8,916 4,585 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 discharge - - 136,341
============== ============== =============
Net Income $8,916 $4,585 $145,494
============== ============== =============
Net Income Per Common Share
Basic $1.33 $0.67 *
============== ============== =============
Diluted $1.26 $0.67 *
============== ============== =============
Weighted Average Common Shares Outstanding
Basic 6,718,960 6,800,000 *
============== ============== =============
Diluted 7,065,228 6,842,624 *
============== ============== =============
</TABLE>
* 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
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 3, October 4,
1998 1997
----------------- -----------------
<S> <C> <C>
Net Sales $48,789 $41,562
Cost of Sales 36,640 31,832
----------------- -----------------
Gross Profit 12,149 9,730
----------------- -----------------
Operating Expenses:
Selling, warehouse, general and administrative expenses 7,084 6,224
Non-cash stock based compensation 342 120
Depreciation and amortization expense 128 3
----------------- -----------------
Total operating expenses 7,554 6,347
Other income (302) (344)
Amortization of excess revalued net assets acquired over equity (1,143) (1,143)
----------------- -----------------
Total operating expenses, net 6,109 4,860
----------------- -----------------
Operating income 6,040 4,870
Interest and financing costs 360 314
----------------- -----------------
Income before taxes 5,680 4,556
Provision for taxes 1,911 45
----------------- -----------------
Net Income $3,769 $4,511
================= =================
Net Income Per Common Share
- Basic $0.58 $0.66
================= =================
- Diluted $0.55 $0.66
================= =================
Weighted Average Common Shares Outstanding
- Basic 6,552,033 6,800,000
================= =================
- Diluted 6,842,790 6,877,190
================= =================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
5
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
--------------------------------------- ----------------
Thirty-Nine Eighteen Twenty-Two
Weeks Ended Weeks Ended Weeks Ended
October 3, 1998 October 4, 1997 June 4, 1997
------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $8,916 $4,585 $145,494
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 207 3 2,222
Amortization of excess revalued net assets acquired
over equity (3,429) (1,524) -
Provision for possible losses on accounts receivable (25) (27) 199
Provision for non-cash stock based compensation 1,430 120 -
Gain on sale of fixed assets - - (347)
Decrease (increase) in:
Restricted short term investments 2,989 (2,989) -
Accounts receivable (23,071) (13,239) (1,248)
Inventories 1,585 1,757 25,538
Prepaid expenses and other current assets (259) (94) (66)
Deferred charges and other assets - (216) 125
(Decrease) increase in:
Accounts payable, accrued expenses and other
current liabilities (2,721) (285) (4,167)
Income taxes payable 2,715 (751) (1,515)
Deferred credits and other noncurrent liabilities 223 - 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 1,297 - -
--------------------------------------- ----------------
Total adjustments (19,059) (17,245) (112,764)
--------------------------------------- ----------------
Net cash (used in) provided by operating activities (10,143) (12,660) 32,730
--------------------------------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures (1,503) (378) (3,731)
Treasury stock repurchases (4,623) - 467
Proceeds from sale of Castleberry - - 600
Cash paid to sell/transfer the Sassco Fashions line - - (10,963)
--------------------------------------- ----------------
Net cash (used in) investing activities (6,126) (378) (13,627)
--------------------------------------- ----------------
Cash Flows from Financing Activities:
Short term debt 1,494 - -
Repayment - capitalized leases (134) (76) -
Payment of confirmation liabilities under Plan of Reorganization (817) (17,059) -
--------------------------------------- ----------------
Net cash provided by (used in) financing activities 543 (17,135) -
--------------------------------------- ----------------
Net (decrease) increase in cash and cash equivalents (15,726) (30,173) 19,103
Cash and cash equivalents, at beginning of period 19,813 41,080 21,977
--------------------------------------- ----------------
Cash and cash equivalents, at end of period $4,087 $10,907 $41,080
======================================= ================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
6
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
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/A for the Fiscal Year ended January 3, 1998 (the "1997 Form 10-K/A").
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 eighteen weeks ended October 4, 1997 to conform to the
current quarterly presentation.
7
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
2. Reorganization Case and Fresh-Start Reporting:
On April 5, 1993 ("the Filing Date"), The Leslie Fay Companies, Inc.
("Leslie Fay") and certain of its subsidiaries filed a voluntary petition under
chapter 11 of the Bankruptcy Code (the "Bankruptcy Code").
Substantially all liabilities as of the Filing Date were subject to
compromise. On December 5, 1996, Leslie Fay filed a Disclosure Statement for the
Amended Joint Plan of Reorganization ("the Plan") pursuant to chapter 11 of the
Bankruptcy Code (the "Disclosure Statement"), which was subsequently amended.
The Plan provided for, among other things, the separation of Leslie Fay's
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. Leslie Fay obtained Bankruptcy Court approval of the Disclosure
Statement on February 28, 1997. The creditors approved the Plan 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.
3. 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 purchases 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.
4. Inventories:
Inventories consist of the following:
Unaudited
October 3, January 3,
1998 1998
(In Thousands)
Raw materials $10,189 $ 9,638
Work in process 4,094 4,540
Finished goods 10,833 12,523
-------- --------
Total inventories $ 25,116 $ 26,701
======== ========
8
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
5. Debt:
On June 2, 1997, 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. Direct borrowings bore interest at prime plus 1.0% (9.25% at October 3,
1998) and the CIT Credit Agreement requires a fee, payable monthly, on average
outstanding letters of credit at a rate of 2% annually. There was $1,494,000 in
direct borrowings outstanding under the CIT Credit Agreement and approximately
$6,694,000 was committed under unexpired letters of credit as of October 3,
1998.
On October 27, 1998, an amendment to the June 2, 1997 CIT Credit
Agreement was signed increasing the maximum working capital facility to
$37,000,000 throughout the remainder of 1998 and to $42,000,000 thereafter as
well as increasing the letter of credit sublimit to $25,000,000. The interest
rate on direct borrowings was decreased to prime minus 1/4% (7 3/4% as of
November 13, 1998).
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.
9
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
6. Income Taxes:
The provision for state and federal income taxes is $3,983,000, $65,000
and $451,000 for the thirty-nine, eighteen and twenty-two weeks ended October 3,
1998, October 4, 1997 and June 4, 1997, respectively, and $1,911,000 and $45,000
for the thirteen weeks ended October 3, 1998 and October 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 $2,200,000 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.
7. Commitments and Contingencies:
As discussed in Note 2, 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
subsidiaries prior to such filings 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.
Although 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, by agreement among the parties and the
Bankruptcy Court that matter will be held in abeyance pending the outcome of the
Claimants' appeal to the Second Circuit from the Order entirely disallowing
their claims.
10
<PAGE>
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 on July 21, 1998. The Claimants filed a notice of appeal of the
affirmation of the Bankruptcy Court order on August 17, 1998, and an amended
notice of appeal on September 8, 1998.
Several former employees of the Company, 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 it is
expected that a summary judgment motion will be filed by the Company to dismiss
the action after a final order has been entered in the above described
Bankruptcy Court matter.
In addition to, and concurrent with, the proceedings in the Bankruptcy
Court, the Company is involved in the following legal proceedings of
significance:
In February 1993, the SEC 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 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
11
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
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. 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 appealed and the Company cross-appealed to recover its costs
and expenses in the litigation. The parties to the litigation and Kasper A.S.L.,
Ltd. executed a Settlement Agreement and Release dated as of August 28, 1998
(the "Agreement") dismissing the appeals and cross-appeal with prejudice and
releasing each other from all other claims except with regard to the enforcement
of the Bankruptcy Court's Final Judgement and Order With Injunction dated
January 27, 1998 (the "Final Order"), which Nipon and American Pop agreed to
abide by as part of the settlement. Judge Barbara S. Jones, the United States
District Court Judge to whom the appeals and cross-appeal had been assigned,
approved a Stipulation and Order Dismissing Appeals and Cross-Appeal which
dismissed the appeals and cross-appeal and provided that the District Court
retain jurisdiction over the parties for the purposes of considering
applications to enforce the Final Order. Judge Gallet of the Bankruptcy Court
approved a Stipulation and Order Dismissing Any Remaining Claims, executed by
the parties, which dismissed with prejudice the Company's claims for damages
under the Final Order which had accrued up to the date of the Agreement and any
other claims not resolved by the Final Order, and provided that the Bankruptcy
Court retain jurisdiction over the parties for the purpose of considering
applications to enforce the Final Order. The Board of Directors of the Company
approved the terms of the settlement.
8. Stockholders' Equity:
On June 3, 1998, the Board of Directors declared a two-for-one split of
the Company's common stock to stockholders of record on June 17, 1998 which was
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 value 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.
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
12
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
November 1997 and to 20,000,000 shares with a par value of $.01 per share in
June 1998.
In addition, 500,000 shares of Preferred Stock 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 June 3, 1998. This amendment was
approved at the annual stockholders meeting on June 3, 1998. As a result, 12,000
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 value to the common stock account.
9. Stock Option Plan:
The Company currently has in effect two stock option 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.
13
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
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 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 November 13, 1998,
options for 30,000 shares 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 anniversary, and the final 34% on the third anniversary of the grant.
As of November 13, 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, of which 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 November 13, 1998,
none of these stock options have been exercised or forfeited.
14
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
At October 3, 1998 there were currently outstanding options granted but
not exercised under the Management Plan to purchase 1,142,588 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 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 of the four subsequent non-employee directors 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 November
13, 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 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 issued 12,000 shares of Common Stock to its six non-employee
directors. Through the thirty-nine weeks ended October 3, 1998, the Company
recorded $30,000 of non-cash stock based compensation related to these shares.
15
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
Accounting for Stock Option Compensation
On June 4, 1997, effective with the Company's emergence from
bankruptcy, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No.123, "Accounting for Stock-Based Compensation."
Under SFAS No. 123, the Company has recorded $1,400,000 and $120,000 of non-cash
stock based compensation expense for the thirty-nine and forty weeks ended
October 3, 1998 and October 4, 1997, respectively. These amounts were offset as
adjustments to Capital in excess of par value in the consolidated balance
sheets.
10. New Accounting Pronouncements:
Effective January 4, 1998, the Company adopted the provisions of 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
as the Company has no items that would be considered other comprehensive income.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued, establishing 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.
11. Net Income Per Share:
For the thirty-nine weeks ended October 3, 1998, the basic weighted
average common shares outstanding is 6,718,960, and the weighted average shares
outstanding assuming dilution is 7,065,228. The difference of 346,268 represents
the incremental shares issuable upon exercise of dilutive stock options.
16
<PAGE>
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
Thirty-Nine Weeks Ended October 3, 1998 as Compared to
Forty Weeks Ended October 4, 1997
The Company recorded net sales of $122,723,000 for the thirty-nine
weeks ended October 3, 1998, compared with $245,081,000 for the forty weeks
ended October 4, 1997, a net decrease of $122,358,000 or 49.9%. 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 $5,191,000, respectively, in net
sales for the forty weeks ended October 4, 1997. The extra week's shipping
volume in the continuing product lines accounted for $1,225,000 in net sales
during the forty weeks ended October 4, 1997. The Company's newly released
product line, Haberdashery by Leslie Fay Sportswear, generated net sales of
$5,581,000 for the thirty-nine week period ending October 3, 1998. After
excluding the effect of the above mentioned product lines, the extra week and
$14,000 of returns in 1998 relating to the closed Outlander product line, the
continuing product lines had a net sales increase of $17,406,000, or 17.4%, for
the thirty-nine weeks ended October 3, 1998 as compared to the comparably
adjusted period ended October 4, 1997. The Dress product lines generated an
increase for the period of $15,482,000 or 25.5% directly as a result of
increased production of the Spring through Holiday season lines to service
increased customer demand. Net sales for the comparable continuing Sportswear
product lines, excluding the Haberdashery line, increased by $1,924,000 or 4.9%.
Gross profit for the thirty-nine weeks ended October 3, 1998 was
$31,636,000 and 25.8% of net sales compared with $61,563,000 and 25.1% for the
forty weeks ended October 4, 1997. The Sassco Fashions, Castleberry and
Outlander product lines generated $34,533,000, $545,000 and $217,000,
respectively, in gross profit for the forty weeks ended October 4, 1997. The
extra week of shipping during the quarter ended October 4, 1997 generated
$443,000 of gross profit. The newly offered Haberdashery line and discontinued
Outlander line generated gross profit (loss) of $1,729,000 and ($20,000),
respectively, for the thirty-nine weeks ended October 3, 1998. The comparable
continuing businesses increased gross profit by $4,102,000 for the thirty-nine
weeks ended October 3, 1998 versus the prior year while the gross margin as a
percentage of net sales decreased to 25.5% from 25.9%. Increased production of
the Spring through Holiday 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 $2,924,000 but the percentage to net
17
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
sales fell to 26.1% from 27.9%. The gross profit produced by the Sportswear line
for the thirty-nine weeks ended October 3, 1998, excluding the effect of the
extra week and the new product line, increased by $1,178,000 and the percentage
of net sales increased to 24.5% from 22.7% for the comparable period ended
October 4, 1997.
Selling, warehouse, general and administrative ("SG&A") expenses were
$20,735,000 or 16.9% of net sales and $43,315,000 or 17.7% of net sales for the
thirty-nine and forty weeks ended October 3, 1998 and October 4, 1997,
respectively. After excluding the costs associated with the product lines sold,
the pro forma remaining business had expenses of $18,649,000 or 17.6% of net
sales for the forty weeks ended October 4, 1997. The expense increase of
$2,086,000 was caused by several items that affected direct comparability. In
the prior period, SG&A expenses included a $532,000 reduction resulting from
collecting receivables in excess of the bad debt reserve established before the
Company emerged from bankruptcy. The prior period included $814,000 in
transitional, bankruptcy-related expenses that were eliminated following the
emergence from bankruptcy and 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 $2,118,000. An additional $589,000 in professional
fees was incurred in 1998 in connection with public filings and investor
relations, by outsourcing the internal audit function, contracting consultants
to develop a three year management information plan and by contracting an
engineering firm to work with the Company to improve operating efficiency. The
Company has invested an additional $381,000 in advertising in support of its
customers as well as to launch the Haberdashery by Leslie Fay Sportswear product
line. Shipping expenses also rose $217,000 despite improved operating
productivity due to the additional costs to ship product received late from the
Company's suppliers. Occupancy expenses increased $239,000 as a result of the
costs incurred with obtaining additional space to house the offices of the newly
acquired Warren Group product line and the extension of the lease for the New
York showroom space through August 2008. The remaining $692,000 increase
represents a growth over 1997 of 3.7% that supported a 17.4% sales increase.
Non-cash, stock based compensation for stock options and outside
director compensation that was granted after the Company's emergence from
bankruptcy for the thirty-nine and forty weeks ended October 3, 1998 and October
4, 1997 was $1,430,000 and $120,000, respectively.
Other income was $877,000 and $1,658,000 for the thirty-nine and forty
weeks ended October 3, 1998 and October 4, 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.
18
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
Depreciation and amortization expense for the thirty-nine and forty
weeks ended October 3, 1998 and October 4, 1997 was $198,000 and $2,093,000,
respectively. Depreciation and amortization for the forty weeks ended October 4,
1997 included $1,119,000 related to the Sassco Fashions and Castleberry product
lines sold during 1997. The remaining decrease was due to the write-off of fixed
and intangible assets at June 4, 1997 under fresh-start reporting. In addition,
the Company realized income of $3,429,000 and $1,524,000 for the periods ended
October 3, 1998 and October 4, 1997, respectively, from amortization of excess
revalued net assets acquired over equity.
Interest and financing costs were $680,000 and $1,584,000 for the
thirty-nine and forty weeks ended October 3, 1998 and October 4, 1997,
respectively. The financing fees under the CIT Credit Agreement were offset by
income earned on the cash invested for the thirty-nine weeks ended October 3,
1998. The financing fees incurred were significantly below those incurred during
the forty weeks ended October 4, 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 $3,983,000
and $516,000 for the thirty-nine and forty weeks ended October 3, 1998 and
October 4, 1997, respectively. The expense was lower for the forty weeks ended
October 4, 1997 due to the utilization of pre-consummation net operating loss
carryovers available in full for the period up to and including the June 4, 1997
Consummation Date (see Note 6).
19
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
Thirteen Weeks Ended October 3, 1998 as Compared to
Thirteen Weeks Ended October 4, 1997
The Company recorded net sales of $48,789,000 for the thirteen weeks
ended October 3, 1998, compared with $41,562,0000 for the thirteen weeks ended
October 4, 1997, a net increase of $7,227,000 or 17.4%. The Company's newly
released product line, Haberdashery by Leslie Fay Sportswear, generated net
sales of $3,168,000 for the thirteen week period ending October 3, 1998. The
closed Outlander product line generated $2,550,000 in net sales during the
thirteen weeks ended October 4, 1997. The continuing comparable product lines
had a net sales increase of $6,609,000, or 16.9%, for the thirteen weeks ended
October 3, 1998. The Dress product lines generated an increase for the period of
$5,251,000 or 27.7% directly as a result of increased production of the Fall and
Holiday season lines to service anticipated increases in customer demand. Net
sales for the comparable continuing Sportswear product lines, excluding the
Haberdashery line, increased by $1,359,000 or 6.8% mostly as a result of the
Fall season shipping being completed in the third quarter of 1998. These early
shipments will result in an offsetting decrease in the fourth quarter for
comparable Sportswear product line net sales.
Gross profit for the thirteen weeks ended October 3, 1998 was
$12,149,000 and 24.9% of net sales compared with $9,730,000 and 23.4% for the
thirteen weeks ended October 4, 1997. The Outlander product line generated
$548,000 in gross profit for the thirteen weeks ended October 4, 1997. The newly
offered Haberdashery line generated gross profit of $898,000 for the thirteen
weeks ended October 3, 1998. The comparable continuing businesses increased
gross profit by $2,069,000 for the thirteen weeks ended October 3, 1998 versus
the prior year while the gross margin as a percentage of comparable net sales
increased to 24.7% from 23.5%. Increased production of the Fall and Holiday
seasons for the Dress product line and the complete shipment of the Fall
Sportswear line, as discussed above, generated the additional gross margin
volume. The increased gross margin percent is due to lower costs achieved within
the sportswear product line offset by additional discounts taken in the Dress
product line due to higher levels of off-price sales and additional concessions
to regular accounts. The gross profit from the Dress line rose $680,000 but the
percentage to net sales fell to 23.4% from 26.3%. The gross profit produced by
the Sportswear line for the thirteen weeks ended October 3, 1998, excluding the
effect of the new product line, increased by $1,389,000 and the percentage of
net sales increased to 26.1% from 20.9% for the comparable period ended October
4, 1997.
20
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
SG&A expenses were $7,084,000 or 14.5% of net sales and $6,224,000 or
15.0% of net sales for the thirteen weeks ended October 3, 1998 and October 4,
1997, respectively. The expense increase of $860,000 was caused by several items
that affected direct comparability. In the period ended October 3, 1998, an
additional $286,000 in professional fees has been incurred in connection with
public filings and investor relations, by outsourcing the internal audit
function, contracting consultants to develop a three year management information
plan and by contracting an engineering firm to work with the Company to improve
operating efficiency. The Company has also invested an additional $181,000 in
advertising in support of its customers as well as to launch the Haberdashery by
Leslie Fay Sportswear product line. Occupancy expenses rose $155,000 as a result
of the costs incurred with obtaining additional space to house the offices of
the newly acquired Warren Group product line and the extension of the lease for
the New York showroom space through August 2008. The remaining $238,000 increase
represents a growth over 1997 of 3.8% that supported a 17.4% sales increase.
Non-cash stock based compensation for stock options and outside
director compensation that was granted after the Company's emergence from
bankruptcy for the thirteen weeks ended October 3, 1998 and October 4, 1997 was
$342,000 and $120,000, respectively.
Other income was $302,000 and $344,000 for the thirteen weeks ended
October 3, 1998 and October 4, 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
October 3, 1998 and October 4, 1997, respectively, was $128,000 and $3,000 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 for both periods from
amortization of excess revalued net assets acquired over equity.
Interest and financing costs were $360,000 and $314,000 for the
thirteen weeks ended October 3, 1998 and October 4, 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 October 3, 1998 and October 4,
1997.
The provision for federal, state and local income taxes was $1,911,000
and $45,000 for the thirteen weeks ended October 3, 1998 and October 4, 1997,
respectively. The expense was lower for the thirteen weeks ended October 4, 1997
due to the utilization of pre-consummation net operating loss carryovers
available in full for the period up to and including the June 4, 1997
Consummation Date (see Note 6).
21
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
(b) Liquidity and Capital Resources
On June 2, 1997, the Company obtained $30,000,000 of post-emergence
financing (See Note 5), which became effective with the consummation of the Plan
on June 4, 1997. The CIT Credit Agreement provided a working capital facility
commitment of $30,000,000, including a $20,000,000 sublimit on letters of
credit. As of October 3, 1998 the Company was utilizing approximately $6,694,000
of the CIT Credit Agreement for the letters of credit, and there were
outstanding cash borrowings of $1,494,000.
On October 27, 1998 an amendment to the June 2, 1997 CIT Credit
Agreement was signed increasing the maximum working capital facility to
$37,000,000 throughout the remainder of 1998 and to $42,000,000 thereafter as
well as increasing the letter of credit sublimit to $25,000,000.
At October 3, 1998 the Company's cash and cash equivalents amounted to
$4,087,000 of which $3,530,000 is restricted to pay remaining administrative
claims as defined in the Plan. Working capital increased $2,498,000, to
$41,951,000 for the thirty-nine weeks ended October 3, 1998. The primary changes
in the components of working capital were: a decrease in cash, cash equivalents
and short term investments of $18,715,000; an increase in net accounts
receivable of $23,096,000; a decrease in inventories of $1,585,000; an increase
in prepaid expenses and other current assets of $259,000; and an increase of
$557,000 in total current liabilities. Accounts receivable increased due to
significant seasonal shipping volume in the second and third months of the
thirteen weeks ended October 3, 1998 which are not expected to turn until the
first and second months of the subsequent period. Inventories sold during the
period were offset by new inventory purchases to accommodate the upcoming
Holiday and Spring seasons.
Although the Company's results of operations indicate an operating
income of $13,579,000 for the thirty-nine weeks ended October 3, 1998, these
results are not indicative of results for an entire year.
Capital expenditures were $1,503,000 for the thirty-nine weeks ended
October 3, 1998. Capital expenditures are expected to be approximately
$3,000,000 for the fiscal year 1998. The anticipated capital expenditures of
$1,500,000 for the remainder of the year are primarily related to improvements
in management information systems, fixturing the Company's in-store shops that
are planned to be opened in 1998 and for leasehold improvements to integrate the
additional staffing for the Warren Group product line acquired October 27, 1998
(See below). The Company believes that its financing arrangements and
anticipated level of internally generated funds will be sufficient to finance
its capital spending during 1998.
22
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
In April 1998 the Company's Board of Directors authorized the
repurchase of up to $5,000,000 of the Company's common stock. The Company has
repurchased 817,000 shares of common stock during the period ended October 3,
1998 for $4,623,000. On November 10, 1998 the Company's Board of Directors
authorized the repurchase of up to an additional $5,000,000 of the Company's
common stock. While there is no assurance that any additional stock will be
repurchased, any repurchase made would adversely affect the overall liquidity of
the Company.
Effective October 27, 1998, the Company purchased selected assets of
The Warren Apparel Group Ltd., a manufacturer of dresses that are sold at
"better" price points in department stores. The investment that will be required
throughout the next quarter to build the necessary working capital, comply with
the requirements of the purchase agreement and begin to implement the
integration of operations is expected to exceed $10,000,000. This required
modification of the terms of the Company's existing credit facility to provide a
substantially higher credit line and adjustments to the existing covenants. As
noted above, these modifications were effected on October 27, 1998.
In August 1998 the Company entered into a modification of the 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 office space for the newly acquired Warren
Group product line as noted above.
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 contained therein. The Company can not exceed $10,000,000 in stock
repurchases or dividends in total for 1998 and 1999. As noted above, the Company
has already expended $4,623,000 of the $10,000,000 available for the repurchase
of its common shares. 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 products, 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 complete and a plan has been developed to meet these
needs. Overall, the plan identifies numerous changes required in the Company's
systems (both hardware and software) as well as sensitive operating equipment to
make them Year 2000 compliant. To maintain timely oversight of the
implementation of this plan, the Company's Chief Financial Officer reports
regularly to the Audit Committee of the Company's Board of Directors.
23
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
These changes will be implemented in 1998 and 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 November 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 has
purchased updated pattern making systems and related hardware and has updated
its telecommunications software and hardware.
The Company is also dependent on the efforts of its customers,
suppliers and software vendors. The Company's upgrade of its electronic data
interchange software will need to be tested with the Company's customers to
confirm proper functioning. The Company has contacted its major customers and
suppliers and is cooperating with them to assure Year 2000 readiness. As part of
this effort, the Company has requested that its customers and suppliers complete
questionnaires detailing their assessment of their Year 2000 compliance. 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 products 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 under all the circumstances
and volume stresses that may actually be required by the Company's operations
through Year 2000.
At this stage of the process, the Company believes that it is difficult
to specifically identify the cause of the most reasonable worst case Year 2000
scenario. In common with other marketers and distributors of apparel products,
the Company's most reasonable worst case scenario may be the effects caused by
the failures of third parties and entities with which the Company has no direct
involvement. As involves its own suppliers and customers, the Company is
considering various contingency plans that include manual processing and/or
outsourcing certain activities. More specific contingency plans will be
developed as more information becomes available.
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.
24
<PAGE>
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/A. 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 other legal proceedings at
the end of the third 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 third 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.
- - ------ ---------------------------------------------------
None.
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.
b) Reports on Form 8-K
Since the end of the second quarter of fiscal 1998,
the Company filed a current report on Form 8-K dated
October 28, 1998 reporting on Item 5. The Form 8-K
contained a press release reporting that the Company
had completed its purchase of the apparel business of
The Warren Apparel Group Ltd.
25
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
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: November 17, 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
26
<PAGE>
THE LESLIE FAY COMPANY, INC AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- - ---------- -----------
4.5 Third Amendment dated as of October 27, 1998 to the Revolving
Credit Agreement between Leslie Fay Marketing, Inc. and the
CIT Group/Commercial Services, Inc.
27 Financial Data Schedule.
E-1
Exhibit 4.5
THIRD AMENDMENT dated as of October 27, 1998 (the "Amendment") to REVOLVING
CREDIT AGREEMENT dated as of June 2, 1997 (the "Credit Agreement") between
LESLIE FAY MARKETING, INC. (the "Borrower") and THE CIT GROUP/COMMERCIAL
SERVICES, INC. ("CIT"). Terms which are capitalized in this Amendment and not
otherwise defined shall have the meanings ascribed to them in the Credit
Agreement.
WHEREAS, the Borrower and The Warren Apparel Group, Ltd. ("Warren Apparel") have
entered into an Asset Purchase Agreement dated as of September 25, 1998,
pursuant to which (i) Warren Apparel has agreed to sell to the Borrower, and the
Borrower has agreed to purchase, substantially all of Warren Apparel's inventory
and related intangible assets and (ii) the Borrower has agreed to assume certain
of the obligations of Warren Apparel, all on the terms and subject to the
conditions contained in the Purchase Agreement; and
WHEREAS, the Borrower has requested CIT's consent to the Borrower's consummation
of the transactions hereinabove described, and to the modification of various
terms and provisions contained in the Credit Agreement, including certain of the
financial covenants contained therein; and
WHEREAS, CIT has agreed to consent to the Borrower's consummation of such
transactions, and to such modification of the Credit Agreement, all on the terms
and subject to the fulfillment of the conditions contained in this Amendment;
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
Section One - Amendment. Effective upon the fulfillment of the conditions
contained in Section Four hereof, the Credit Agreement is hereby amended to
provided as follows:
(a) Section 1.01. Certain Definitions. The definitions of the terms
Borrowing Base, Maturity Date, Net Amount of Eligible Accounts Receivable,
Notice of Termination, and Revolving Credit Commitment are deleted in their
entirety, the following are substituted in lieu thereof, and the terms "Loan
Gross-up Method", "Termination Date", "Warren Apparel"; "Warren Apparel
Acquisition" and "Warren Apparel Purchase Agreement", and the definitions
thereof, are added to Section 1.01 in the appropriate alphabetical order, as
follows:
"Borrowing Base" shall mean, as of the Relevant Date, an amount equal to
the difference between:
(i) the sum of (A) 85% of the Net Amount of Eligible Accounts
Receivable, plus (B) the lesser of (1) the sum of (x) 50% of
the Book Value of Eligible Inventory and (y) 50% of the amount
of L/C Inventory, provided that the Inventory with respect
thereto is not otherwise included in the Borrowing Base and
(2) $15,000,000, plus
<PAGE>
(C) 100% of the excess, if any, of the balance in the
Funds-in-Use Account over the debit balance in the Loan
Account, as of the opening of business on such date; and
(ii) such reserves as CIT, in its sole discretion exercised
reasonably, may deem appropriate.
"Loan Gross-up Method" means CIT's current system of operations by which
the calculation, as of any date of determination with respect to Eligible
Accounts Receivable, of the aggregate amount, expressed in dollars, of
discounts granted by the Borrower with respect to such Eligible Accounts
Receivable, is reflected in the Borrower's Loan Account.
"Maturity Date" shall mean, initially, the last day of the Original Term,
and thereafter, the last day of the then current Renewal Term, if CIT
shall have given the Borrower a Notice of Termination prior to such date
within the time period applicable to CIT required pursuant to the
definition of the term Notice of Termination.
"Net Amount of Eligible Accounts Receivable" means the aggregate unpaid
invoice amount of Eligible Accounts Receivable less (i) sales, excise or
similar taxes, returns, discounts (but with respect to such discounts,
only on and after the date upon which the Loan Gross-up Method shall
cease to be used by CIT), chargebacks, claims, advance payments, credits
and allowances of any nature at any time issued, owing, granted,
outstanding, available or claimed, and (ii) in the case of sums due under
the Factoring Agreement, deductions for factoring charges, interest,
discounts ( but with respect to such discounts, only on and after the
date upon which the Loan Gross-up Method shall cease to be used by CIT),
estimated anticipation, chargebacks based upon disputes and returns,
chargebacks of client risk accounts purchased with recourse, and all
other charges, offsets and reserves under the Factoring Agreement.
"Notice of Termination" shall mean, in the case of CIT, the written
notice of CIT delivered to the Borrower at least sixty (60) days prior to
the relevant Maturity Date, pursuant to which CIT shall indicate its
intention to terminate this Agreement effective as of such Maturity Date,
and shall mean, in the case of the Borrower, the written notice of the
Borrower delivered to CIT at least sixty (60) days prior to the
Termination Date stated in such Notice of Termination, pursuant to which
the Borrower shall indicate its intention to terminate the Agreement
effective as of such Termination Date.
"Revolving Credit Commitment" shall mean the commitment of CIT to make
Loans to the Borrower pursuant to Section 2.01(a) hereof in an aggregate
principal amount not to exceed (i) $37,000,000 at all times through and
including December 31, 1998 and (ii) $42,000,000 at all times after
December 31, 1998, as such amounts may be reduced pursuant to the terms
of this Agreement.
2
<PAGE>
"Termination Date" shall mean the date stated by the Borrower in its
Notice of Termination, if the Borrower shall have given CIT a Notice of
Termination prior to such date within the time period applicable to the
Borrower pursuant to the definition of the term Notice of Termination.
"Warren Apparel" shall mean The Warren Apparel Group Ltd., a New York
corporation.
"Warren Apparel Acquisition" shall mean the acquisition by the Borrower
of substantially all of the inventory of Warren Apparel, and certain
intangible assets related thereto, all as more fully set forth in the
Warren Apparel Purchase Agreement.
"Warren Apparel Purchase Agreement" shall mean the Asset Purchase
Agreement, dated as of September 25, 1998, between Warren Apparel and the
Borrower, as the same may be amended, modified, supplemented or restated
from time to time.
(b) Section 2.05. Interest Rate. Section 2.05 is deleted in its entirety,
and the following is substituted in lieu thereof:
"2.05. Interest Rate. Each Loan shall bear interest on the principal
amount thereof from time to time outstanding for each day during each
calendar month, until paid, at a rate per annum for each such day equal
to the Prime Rate in effect on the last day of the previous month (the
"then applicable Prime Rate"), minus an interest rate margin of
one-quarter of one percent (1/4 of 1%). "Prime Rate", as used herein,
shall mean the interest rate per annum publicly announced from time to
time by the Bank in New York, New York as its Prime Rate. In the event of
any change in the Prime Rate, the rate of interest hereunder shall
change, as of the first day of the month following any change, so as to
remain one-quarter of one per cent (1/4 of 1%) below the then applicable
Prime Rate. The Prime Rate is not intended to be the lowest rate of
interest charged by the Bank to its borrowers."
(c) Section 3.01. Letters of Credit. Section 3.01 (a) (i) is amended by
deleting the second sentence thereof, and by substituting the following in lieu
thereof:
"The aggregate Letter of Credit Exposure shall not exceed $25,000,000, of
which not more than $5,000,000 may be Letter of Credit Exposure with
respect to Standby Letters of Credit; provided, however, that the
calculation of such $5,000,000 limit shall exclude the Letter of Credit
Exposure with respect to the "Warren Apparel Stand-by L/C", as such term
is defined in Section Three of the Third Amendment, dated as of October
27, 1998 to this Credit Agreement."
(d) Section 5.01. Term of Agreement. Section 5.01 is deleted in its
entirety, and the following is substituted in lieu thereof:
3
<PAGE>
"5.01. Term of Agreement. Subject to CIT's rights under Article XI
hereof, this Agreement shall be in effect during the period commencing on
the Closing Date and ending on June 2, 2001 (the "Original Term"), and
thereafter shall automatically renew itself for successive one-year
periods (each a "Renewal Term"), unless sooner terminated as provided in
Section 5.02 hereof."
(e) Section 5.02. Termination. Section 5.02 (b) is deleted in its
entirety, and the following is substituted in lieu thereof:
"(b) Termination by the Borrower. Upon delivery to CIT by the Borrower of
a Notice of Termination, this Agreement shall terminate on the
Termination Date specified in such Notice of Termination, provided,
however, that on the Termination Date so specified, the Borrower shall
satisfy in full all of its obligations under Section 5.03 hereof and
under any other Related Document. Any Notice of Termination so given by
the Borrower shall be irrevocable unless CIT otherwise agrees in
writing."
(f) Section 5.03. Effect of Termination. Section 5.03 (a) is amended by
(i) deleting the word "and" at the end of clause (iii) thereof, (ii) deleting
the period at the end of clause (iv) thereof and substituting in lieu thereof a
semi-colon and the world "and" and (iii) inserting the following clause (v)
immediately after clause (iv) thereof:
"(v) if such Notice of Termination is given by the Borrower to CIT, and
the Termination Date specified therein is a date which is (x) prior to
June 2, 1999, the Borrower shall pay to CIT on such Termination Date an
early termination fee in an amount equal to one per cent (1%) of the
"average outstanding amount", as hereinafter defined, or (y) on or after
June 2, 1999 but prior to June 2, 2000, the Borrower shall pay to CIT on
such Termination Date an early termination fee in an amount equal to
one-half of one per cent (1/2 of 1%) of the average outstanding amount.
As used in this Section, the term "average outstanding amount" means, for
the twelve month period ending with the month preceding the Termination
Date specified by the Borrower in its Notice of Termination, the sum of
(A) the average amount of the Loans outstanding at the end of each day
during such period plus (B) the average amount of Letter of Credit
Exposure outstanding at the end of each day during such period."
(g) Section 10.06. Dividends and Related Distributions. Section 10.06 is
deleted in its entirety and the following is substituted in lieu thereof:
"10.06. The Borrower shall not declare, make, pay or agree to pay, any
dividend or other distribution of any nature (whether in cash, property,
securities or otherwise) on account of or in respect of shares of its
capital stock or on account of the purchase, redemption, retirement or
acquisition of any shares of capital stock (or warrants, options or
rights therefor), provided, however, that the Borrower shall be permitted
to pay dividends or repurchase stock in an aggregate amount not to exceed
4
<PAGE>
$10,000,000 during the two year fiscal period ending on December 31,
1999, so long as: (a) at the time of, and after giving effect to, any
such payment of dividends or repurchase of stock, no Event of Default
shall have occurred and be continuing, and (b) the undrawn Availability
before and after the making of any such dividend payment or stock
repurchase shall be not less than $5,000,000.00."
(h) Section 10.15. Minimum Consolidated Tangible Net Worth. Section 10.15
is deleted in its entirety and the following is substituted in lieu thereof:
"10.15 Minimum Consolidated Tangible Net Worth. The Borrower will not
permit the Parent's Consolidated Tangible Net Worth to be less than the
following amounts during and at the end of each of the following fiscal
months: (a) $34 million for each of the fiscal months of April, May,
June, July and August of 1997, (b) $35 million for each of the fiscal
months of September, October and November of 1997, (c) $35 million for
each of the fiscal months of December of 1997 and January, February,
March, April, May, June, July and August of 1998, and (d) $37 million for
each fiscal month thereafter, provided, however, that at all times on and
after the effective date of the Warren Apparel Acquisition, the amount of
$37 million set forth in this clause (d) shall automatically be reduced
to, and at all times thereafter shall be deemed to be, $35 million."
(i) Section 10.16. Minimum Consolidated Working Capital. Section 10.16 is
deleted in its entirety and the following is substituted in lieu thereof:
"10.16 Minimum Consolidated Working Capital. The Borrower will not permit
the Parent's Consolidated Working Capital to be less than the following
amounts during and at the end of each of the following fiscal months: (a)
$33 million for each of the fiscal months of April, May, June, July and
August 1997, (b) $35 million for each of the fiscal months of September,
October, November and December 1997, and January, February, March, April,
May, June and July 1998, (c) $36 million for the fiscal month of August
1998, and (d) $37 million for the fiscal month of September 1998 and for
each fiscal month thereafter, provided, however, that at all times on and
after the effective date of the Warren Apparel Acquisition, the amount of
$37 million set forth in this clause (d) shall automatically be reduced
to, and at all times thereafter shall be deemed to be, $35 million, and
provided further that solely for purposes of determining the Borrower's
compliance with this covenant, the calculation of such Consolidated
Working Capital as of any date of determination shall exclude the
aggregate principal amount of any Loans and Letter of Credit Exposure
outstanding as of such date."
(j) Section 10.17. Minimum Ratio of Consolidated Current Assets to
Consolidated Current Liabilities. Section 10.17 is deleted in its entirety and
the following is substituted in lieu thereof:
5
<PAGE>
"10.17 Minimum Ratio of Consolidated Current Assets to Consolidated
Current Liabilities. The Borrower will not permit the ratio of the
Parent's Consolidated Current Assets to the Parent's Consolidated Current
Liabilities to be less than (a) 2.60 to 1.00 as of the end of the second
fiscal quarter of 1997, (b) 2.60 to 1.00 as of the end of the third
fiscal quarter of 1997, (c) 2.60 to 1.00 as of the end of the fourth
fiscal quarter of 1997, (d) 3.00 to 1.00 as of the end of the first
fiscal quarter of 1998, (e) 3.10 to 1.00 as of the end of the second,
third and fourth fiscal quarters of 1998 and (f) 3.30 to 1.00 as of the
end of each fiscal quarter thereafter, provided, however, that solely for
purposes of determining the Borrower's compliance with this covenant, the
calculation of the Parent's Consolidated Current Liabilities, as of any
date of determination, shall exclude the aggregate principal amount of
any Loans and Letter of Credit Exposure outstanding as of such date."
(k) Section 10.20. Capital Expenditures. Section 10.20 is deleted in its
entirety, and the following is substituted in lieu thereof:
"10.20 Capital Expenditures. The Borrower shall not make Capital
Expenditures in an amount greater than (a) $1.5 million in the aggregate
for the period from the Closing Date through January 3, 1998, (b) $3.0
million in the aggregate for the 1998 fiscal year and (c) $2.5 million in
the aggregate for the 1999 fiscal year, and for each fiscal year
thereafter, provided, however, that if the aggregate amount of Capital
Expenditures actually made during any such fiscal year (or lesser period,
if applicable) shall be less than the limit with respect thereto set
forth above (such limit, without giving effort to any increase therein
pursuant to this proviso, the "base amount"), then the amount of such
short fall (the "rollover amount") may be added to the amount of Capital
Expenditures permitted to be made for the immediately succeeding fiscal
year, provided further that any Capital Expenditures made during any
fiscal year for which any rollover amount shall have been so added shall
be applied first, to the base amount for such year and second, to the
rollover amount added to such fiscal year."
(l) Exhibit A to the Credit Agreement is replaced in its entirety by
Exhibit A annexed to this Amendment.
(m) Schedule 1.01A to the Credit Agreement is replaced in its entirety by
Schedule 1.01A annexed to this Amendment.
(n) Schedule 1.01B to the Credit Agreement is replaced in its entirety by
Schedule 1.01B annexed to this Amendment.
(o) Schedule 7.25 to the Credit Agreement is amended by adding the
following trademark information thereto:
6
<PAGE>
Trademark Appln. */Reg. No. Class
------------------------------------------------------------
DAVID WARREN 1202108 25
DW3 1842411 25
RICHARD WARREN 1417515 25
RIMINI 1424026 25
REGGIO 75/139829 25
Section Two - Consent. Subject to the fulfillment of the conditions contained in
Section Four of this Amendment, CIT hereby consents to (i) the execution and
delivery by the Borrower of the Warren Apparel Purchase Agreement and the other
documents, instruments and agreements executed or delivered by the Borrower in
connection therewith, (ii) the consummation by the Borrower of the Warren
Apparel Acquisition and the other transactions contemplated to occur in
connection therewith, and (iii) the delivery to CIT no later than January 15,
1999 of the estimated operating budget and related projections for the Parent
and its consolidated Subsidiaries for the fiscal year ending December 31, 1999,
notwithstanding the terms of Section 9.01(g)(i), and agrees that the Borrower's
failure to deliver such items to CIT no later than December 1, 1998 shall not be
deemed to be a breach or violation of such Section or an Event of Default.
Section Three - Stand-by Letter of Credit. The Borrower hereby confirms that, in
conjunction with the Warren Apparel Acquisition, pursuant to the Warren Apparel
Purchase Agreement, the Borrower has agreed to obtain for the benefit of CIT,
and to deliver to CIT, a stand-by letter of credit issued for the Borrower's
account (the "Warren Apparel Stand-by L/C"), which letter of credit shall secure
(i) the payment or reimbursement of all documentary Letters of Credit issued
with CIT's assistance for the account of Warren Apparel, outstanding on the
effective date of the Warren Apparel Acquisition, as more particularly described
on the Schedule of Outstanding Warren Apparel L/C's annexed to this Amendment
and (ii) all other obligations, liabilities and indebtedness arising under or
relating to such documentary Letters of Credit.
Section Four - Conditions Precedent. This Amendment shall become effective on
the date when all of the following conditions, the fulfillment of each of which
is a condition precedent to the effectiveness of this Amendment, shall have
occurred.
(a) CIT shall have received a fully executed counterpart or original of
this Amendment, and each of the following agreements, instruments, opinions,
certificates and documents:
(i) an Amended and Restated Note, substantially in the form annexed
hereto as Exhibit A;
7
<PAGE>
(ii) the Warren Apparel Stand-by L/C, on terms and conditions
satisfactory to CIT;
(iii) a Note Pledge and Security Agreement, executed in favor of CIT by
Warren Apparel, as assignor, and confirmed by the Borrower, substantially in the
form annexed hereto as Exhibit B;
(iv) a Confirmation of Continuing Secured Guaranty, executed in favor of
CIT by each Guarantor, substantially in the form annexed hereto as Exhibit C;
(v) financing statements on forms UCC-1 and UCC-3, as applicable, naming
the Borrower as debtor, to be filed in all requisite jurisdictions; and
(vi) a legal opinion, in form and substance satisfactory to CIT, from the
Borrower's counsel.
(b) CIT shall have received a Certificate of the Secretary of the
Borrower (l) relating to the adoption of the resolutions of the Board of
Directors of the Borrower, approving this Amendment, the other documents
executed or to be executed by the Borrower in connection herewith and in
connection with the Warren Apparel Acquisition and (2) certifying that no
amendments have been made to the Certificate of Incorporation and by-laws of the
Borrower since June 2, 1997 and further certifying the names and incumbency of
officers and the names and validity of signatures of such officers.
(c) CIT and its counsel shall have received and reviewed to their
satisfaction the definitive Warren Apparel Purchase Agreement and all ancillary
documents relating thereto, the Warren Apparel Acquisition shall have been
consummated and all conditions precedent to its effectiveness shall have
occurred or, if any such condition shall have been waived, CIT shall have
determined that such waiver is acceptable.
(d) Upon the effectiveness of this Amendment, all representations and
warranties set forth in the Credit Agreement (except for such inducing
representations and warranties that were only required to be true and correct as
of a prior date) shall be true and correct in all material respects on and as of
the effective date hereof, and no Event of Default shall have occurred and be
continuing.
(e) No event or development shall have occurred since the date of
delivery to CIT of the most recent financial statements of the Parent and its
Subsidiaries which event or development has had or is reasonably likely to have
a Material Adverse Effect.
(f) All corporate and legal proceedings and all documents and instruments
executed or delivered in connection with this Amendment shall be satisfactory in
form and substance to CIT and its counsel.
8
<PAGE>
(g) There shall be no action, suit or proceeding pending or threatened
against the Borrower before any court (including any bankruptcy court),
arbitrator or governmental or administrative body or agency which challenges or
relates to the consummation of the Warren Apparel Acquisition, this Amendment or
the other transactions contemplated herein.
(h) CIT shall have received such further agreements, consents,
instruments and documents as may be necessary or proper in the reasonable
opinion of CIT and its counsel to carry out the provisions and purposes of this
Amendment.
Section Five. Representations and Warranties. The Borrower represents
and warrants (which representations and warranties shall survive the execution
and delivery hereof) to CIT that:
(a) The Borrower has the corporate power, authority and legal right to
execute, deliver and perform this Amendment, and the instruments, agreements,
documents and transactions contemplated hereby, and has taken all actions
necessary to authorize the execution, delivery and performance of this
Amendment, and the instruments, agreements, documents and transactions
contemplated hereby;
(b) No consent of any Person (including, without limitation, stockholders
or creditors of the Borrower or creditors of the Parent, as the case may be)
other than CIT, and no consent, permit, approval or authorization of, exemption
by, notice or report to, or registration, filing or declaration with
(collectively a "Consent") any governmental authority, is required in connection
with the execution, delivery, performance, validity or enforceability of this
Amendment, and the instruments, agreements, documents and transactions
contemplated hereby;
(c) This Amendment has been duly executed and delivered on behalf of the
Borrower by its duly authorized officer, and constitutes the legal, valid and
binding obligation of the Borrower, enforceable in accordance with its terms;
(d) The Borrower is not in default under any indenture, mortgage, deed of
trust, or other material agreement or material instrument to which it is a party
or by which it may be bound. Neither the execution and delivery of this
Amendment, nor the consummation of the transactions herein contemplated, nor
compliance with the provisions hereof will (i) violate any law or regulation
applicable to it, or (ii) cause a violation by the Borrower, of any order or
decree of any court or government instrumentality applicable to it, or (iii)
conflict with, or result in the breach of, or constitute a default under, any
indenture, mortgage, deed of trust, or other material agreement or material
instrument to which the Borrower is a party or by which it may be bound, or (iv)
result in the creation or imposition of any lien, charge, or encumbrance upon
any of the property of the Borrower, except in favor of CIT, to secure the
Obligations, or (v) violate any provision of the Certificate of Incorporation,
By-Laws or any capital stock provisions of the Borrower;
9
<PAGE>
(e) No Event of Default has occurred and is continuing; and
(f) Since the date of CIT's receipt of the financial statements of the
Parent and Subsidiaries on a consolidated and consolidating basis as of August
28, 1998, for the eight month period ending on such date, no change or event has
occurred which has had or is reasonably likely to have a Material Adverse
Effect.
Section Six. General Provisions.
(a) Except as herein expressly amended, the Credit Agreement and all
other agreements, documents, instruments and certificates executed in connection
therewith, are ratified and confirmed in all respects and shall remain in full
force and effect in accordance with their respective terms.
(b) The Borrower hereby acknowledges and confirms its understanding of
the Loan Gross-up Method, and agrees that (i) CIT's method of calculating the
aggregate amount of the discounts granted by the Borrower with respect to any
referenced Eligible Accounts Receivable, and reflecting such calculation as a
charge to the Borrower's Loan Account rather than as a reduction to the gross
amount of such Eligible Accounts Receivable, is an appropriate and accurate
method of making such calculation and (ii) CIT may continue in its sole
discretion to employ such methodology with respect to the calculation of and
accounting for discounts granted by the Borrower.
(c) The Borrower hereby covenants and agrees that it shall execute and
deliver to CIT as soon as possible, and in any event not later than thirty (30)
days from the date hereof, a trademark security agreement, in form and substance
satisfactory to CIT, suitable for recordation with the U.S. Patent and Trademark
Office, covering the trademarks described in Section One (o) of this Amendment.
(d) All references in the Related Documents and Loan Documents to the
Credit Agreement shall mean the Credit Agreement as amended as of the effective
date hereof, and as amended hereby and as hereafter amended, supplemented or
modified from time to time. From and after the date hereof, all references in
the Credit Agreement to "this Agreement," "hereof," "herein," or similar terms,
shall mean and refer to the Credit Agreement as amended by this Amendment.
(e) This Amendment may be executed by the parties hereto individually or
in combination, in one or more counterparts, each of which shall be an original
and all of which shall constitute one and the same agreement.
(f) This Amendment shall be governed and controlled by the laws of the
State of New York without reference to its choice of law principles.
10
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
LESLIE FAY MARKETING, INC.
By: /s/ Warren Wishart
-------------------------------
Name: Warren Wishart
Title: Chief Financial Officer
Secretary
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By: /s/ Kelly Colleran
-------------------------------
Name: Kelly Colleran
Title: AVP
11
<PAGE>
SCHEDULE 1.01A
Leslie Fay Marketing, Inc.
Domestic Inventory Locations
Location Name Address County Inventory Description
[to be completed by Borrower]
12
<PAGE>
SCHEDULE 1.01B
License Agreements
[to be completed by Borrower]
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 4,087
<SECURITIES> 0
<RECEIVABLES> 36,313
<ALLOWANCES> 3,470
<INVENTORY> 25,116
<CURRENT-ASSETS> 63,112
<PP&E> 2,362
<DEPRECIATION> 221
<TOTAL-ASSETS> 65,402
<CURRENT-LIABILITIES> 21,161
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 36,166
<TOTAL-LIABILITY-AND-EQUITY> 65,402
<SALES> 122,723
<TOTAL-REVENUES> 122,723
<CGS> 91,087
<TOTAL-COSTS> 18,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 680
<INCOME-PRETAX> 12,899
<INCOME-TAX> 3,983
<INCOME-CONTINUING> 8,916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,916
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.26
</TABLE>
