-----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, CQeI8w+6ahaRLfB9ZIp0mfiqJT0TQ0Ye012AuifKI9LKySSQ2lyrRRzfwvV/EVwI uyqnO6YJvXlGs82j9M9JIg== 0000910680-99-000268.txt : 19990818 0000910680-99-000268.hdr.sgml : 19990818 ACCESSION NUMBER: 0000910680-99-000268 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 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: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09196 FILM NUMBER: 99694497 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. FORM 10-Q SECURITIES AND EXCHANGE COMMISION WASHINGTON, DC 20549 -------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999 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 required 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____ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No____ There were 6,041,138 shares of Common Stock outstanding at July 3, 1999. THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES INDEX
Page No. ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of July 3, 1999 (Unaudited) and January 2, 1999...........................................3 Consolidated Statements of Operations (Unaudited) for the Twenty-Six Weeks Ended July 3, 1999 and July 4, 1998, respectively....................................4 Consolidated Statements of Operations (Unaudited) for the Thirteen Weeks Ended July 3, 1999 and July 4, 1998, respectively....................................5 Consolidated Statements of Cash Flows (Unaudited) for the Twenty-Six Weeks Ended July 3, 1999 and July 4, 1998, respectively.....................................6 Notes to Consolidated Financial Statements.........................................7 Item 2...Management's Discussion and Analysis of Financial Condition and Results of Operations.............................13 Item 3...Quantitative and Qualitative Disclosures About Market Risk...............................................18 PART II - OTHER INFORMATION Item 1. Legal Proceedings........................................................19 Item 2. Changes in Securities....................................................19 Item 3. Defaults Upon Senior Securities..........................................19 Item 4. Submission of Matters to a Vote of Security Holders......................19 Item 5. Other Information........................................................19 Item 6. Exhibits and Reports on Form 8-K.........................................19 SIGNATURES........................................................................20 INDEX TO EXHIBITS................................................................E-1
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THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED AUDITED JULY 3, JANUARY 2, ASSETS 1999 1999 ------------ ----------- Current Assets: Cash and cash equivalents....................................... $ 3,558 $ 946 Restricted cash and cash equivalents............................ 2,628 3,267 Accounts receivable- net of allowances for possible losses of $5,651 and $6,825, respectively.............................. 17,266 16,172 Inventories..................................................... 35,105 38,627 Prepaid expenses and other current assets....................... 1,391 970 --------- --------- Total Current Assets......................................... 59,948 59,982 Property, plant and equipment, at cost, net of accumulated depreciation of $913 and $409, respectively.................. 3,791 2,781 Excess of purchase price over net assets acquirednet of accumulated amortization of $202 and $50, respectively....... 4,338 4,490 Deferred charges and other assets............................... 2,056 551 --------- --------- Total Assets.................................................... $ 70,133 $ 67,804 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short term debt................................................. $ 417 $ 1,162 Accounts payable................................................ 10,426 12,070 Accrued expenses and other current liabilities.................. 7,181 7,486 Accrued expenses and other current confirmation liabilities..... 2,628 3,267 Income taxes payable............................................ 1,906 371 Current portion of capitalized leases........................... 42 48 --------- --------- Total Current Liabilities.................................... 22,600 24,404 Excess of revalued net assets acquired over equity under fresh- start reporting, net of accumulated amortization of $9,525 and $7,239, respectively....................................... 4,183 6,469 Long term debtcapitalized leases............................... -- 17 Deferred liabilities............................................ 688 477 --------- --------- Total Liabilities............................................... 27,471 31,367 --------- --------- 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 shares authorized; 6,858 shares issued........................................... 69 69 Capital in excess of par value...................................... 29,800 28,824 Retained earnings................................................... 17,416 12,167 --------- --------- Subtotal........................................................ 47,285 41,060 Treasury stock, at cost; 817 shares................................. 4,623 4,623 --------- --------- Total Stockholders' Equity...................................... 42,662 36,437 --------- --------- Total Liabilities and Stockholders' Equity.......................... $ 70,133 $ 67,804 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. -3-
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) UNAUDITED TWENTY-SIX TWENTY-SIX WEEKS ENDED WEEKS ENDED JULY 3, JULY 4, 1999 1998 ------------ ----------- Net Sales...................................................... $ 99,594 $73,934 Cost of Sales................................................. 73,067 54,447 ---------- --------- Gross profit................................................ 26,527 19,487 ---------- --------- Operating Expenses: Selling, warehouse, general and administrative expenses.............................. 19,384 13,651 Non-cash stock based compensation........................... 630 1,088 Depreciation and amortization expense....................... 595 70 ---------- --------- Total operating expenses................................ 20,609 14,809 Other income................................................ (672) (575) Amortization of excess revalued net assets acquired over equity........................................... (2,286) (2,286) ---------- --------- Total operating expenses, net............................... 17,651 11,948 ---------- --------- Operating income............................................ 8,876 7,539 Interest and Financing Costs................................... 1,004 320 Other Expenses................................................. 534 -- ---------- --------- Income before taxes......................................... 7,338 7,219 Provision for Taxes............................................ 2,089 2,072 ---------- --------- Net Income ................................................. $ 5,249 $5,147 ========== ========= Net Income per Share -Basic............................... $ 0.87 $ 0.76 ========== ========= -Diluted............................. $ 0.84 $ 0.72 ========== ========= Weighted Average Shares Outstanding -Basic..................... 6,041,138 6,801,967 ========== ========= -Diluted................... 6,220,849 7,149,484 ========== =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -4-
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) UNAUDITED THIRTEEN THIRTEEN WEEKS ENDED WEEKS ENDED JULY 3, JULY 4, 1999 1998 ------------ ------------ Net Sales....................................................... $ 38,450 $ 28,676 ------------- ------------ Cost of Sales................................................... 28,607 21,187 Gross profit................................................. 9,843 7,489 ------------- ------------ Operating Expenses: Selling, warehouse, general and administrative expenses............................... 9,011 6,511 Noncash stock based compensation............................ 329 692 Depreciation and amortization expense........................ 315 53 ------------- ------------ Total operating expenses................................. 9,655 7,256 Other income................................................. (323) (303) Amortization of excess revalued net assets acquired over equity............................................. (1,143) ( 1,143) ------------- ------------ Total operating expenses, net................................ 8,189 5,810 ------------- ------------ Operating income............................................. 1,654 1,679 Interest and Financing Costs.................................... 335 130 Other Expenses.................................................. 534 -- ------------- ------------ Income before taxes.......................................... 785 1,549 (Benefit) Provision for Taxes................................... (183) 171 ------------- ------------ Net Income .................................................. $ 968 $1,378 ============= ============ Net Income per Share -Basic.................................. $ 0.16 $ 0.20 ============= ============ -Diluted................................ $ 0.15 $ 0.19 ============= ============ Weighted Average Shares Outstanding -Basic..................... 6,041,138 6,803,956 ============= ============ -Diluted................... 6,290,628 7,166,261 ============= ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -5-
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED TWENTY-SIX TWENTY-SIX WEEKS ENDED WEEKS ENDED JULY 3, JULY 4, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................... $ 5,249 $ 5,147 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................................... 656 76 Amortization of excess net assets acquired over equity.......... (2,286) (2,286) Provision for possible losses on accounts receivable............ (5) 19 Provision for stock based compensation and stock option grants.. 630 1,088 Changes in assets and liabilities: Restricted short term investment.............................. -- 2,989 Accounts receivable........................................... (1,089) (3,034) Inventories................................................... 3,522 (6,884) Prepaid expenses and other current assets..................... (458) (238) Deferred charges and other assets............................. (1,505) 44 Accounts payable, accrued expenses and other current liabilities............................................... (1,722) (4,972) Income taxes payable.......................................... 1,535 99 Deferred liabilities.......................................... 211 97 Changes due to reorganization activities: Use of preconsummation deferred taxes........................ 383 2,034 ---------- ---------- Total adjustments........................................... (128) (10,968) ---------- ---------- Net cash provided by (used in) operating activities......... 5,121 (5,821) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.............................................. (1,514) (956) ---------- ---------- Net cash used in investing activities....................... (1,514) (956) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings.......................................... 28,908 -- Repayment of borrowings ......................................... (29,236) -- Notes payable..................................................... (417) -- Merger Costs...................................................... 227 -- Repayment of capital leases ...................................... (23) (121) Payment of obligations under Plan of Reorganization............... (639) (561) Net cash (used in) financing activities................. (1,634) (682) ---------- ---------- Net increase (decrease) in cash and cash equivalents.............. 1,973 (7,459) ---------- ---------- Cash and cash equivalents, at beginning of period................. 4,213 19,813 ---------- ---------- Cash and cash equivalents, at end of period....................... $6,186 $12,354 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -6- 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. 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 2, 1999 (the "1998 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. 2. RECENT DEVELOPMENTS: On May 12, 1999 the Company signed a merger agreement with two private investment funds managed by Three Cities Research, Inc. ("Three Cities") and a wholly-owned affiliate created by these funds to effect the merger. On this same date, Three Cities purchased 2,158,000 shares of the Company's common stock from affiliates of Dickstein Partners, Inc. This investment equals about a 36% interest in the Company. Pursuant to this merger, Three Cities may be able to acquire up to 1,111,966 additional shares and the Company may be able to acquire up to 1,012,520 shares of the approximately 6,041,000 currently outstanding. Under the merger agreement, the Company's stockholders would have the right either to keep their shares after the merger or elect to receive cash in the amount of $7 per share for up to 2,111,966 shares. If holders opt to exchange more than 2,111,966 shares, there would be a pro-rata reduction, so that the electing stockholders would receive cash for some of their shares and would keep the remainder of their shares. The Company would be the surviving corporation in the merger and remain as a public company. Three Cities has agreed not to elect to receive any cash. Affiliates of Dickstein Partners, Inc. have stated that they currently intend to elect cash for 250,000 of their remaining 641,736 shares. Officers and directors of the Company do not intend to elect to receive any cash for their shares or to exercise or accelerate the vesting of their options. -7- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The Company expects to finance the shares it intends to acquire partly by drawing on its existing $42,000,000 revolving credit facility agreement with The CIT Group/Commercial Services, Inc. ("CIT") and partly by drawing on an additional $5,000,000 5-year long-term debt facility with CIT. This new debt carries an interest rate of prime plus two percentage points. The Company has a letter of commitment, subject to conditions, from CIT to provide this financing. The merger agreement is subject to approval of holders of two-thirds of the Company's outstanding shares, completion of a final financing agreement and regulatory approvals. The stockholder's meeting is scheduled to be held on August 24, 1999. Neither the Company nor its Board of Directors is providing a recommendation as to whether or not stockholders should elect to exchange their shares for cash. Three Cities and affiliates of Dickstein Partners, Inc. have agreed to vote their shares in favor of the merger. 3. INVENTORIES: Inventories consist of the following: July 3, January 2, 1999 1999 ------- --------- (In thousands) Raw materials $14,786 $10,763 Work in process 4,055 2,613 Finished goods 16,264 25,251 -------- ------- Total inventories $35,105 $38,627 ======== ======= 4. DEBT: On June 2, 1997, in preparation for the consummation of the Amended Joint Plan of Reorganization ("the Plan"), a wholly-owned subsidiary of the Company entered into a two-year financing agreement (the "CIT Credit Agreement") with CIT which was amended on October 27, 1998 to extend the agreement through June 2, 2001 to provide direct borrowings and to issue letters of credit on the Company's behalf. Direct borrowings bear interest at prime minus .25% (7.75% at July 3, 1999) and the CIT Credit Agreement requires a fee, payable monthly, on average outstanding letters of credit at a rate of 2% annually. The Company had a net borrowing availability under the CIT Credit Agreement of $23,503,000 on July 3, 1999 and peak borrowing during the twenty-six weeks ended July 3, 1999 was $12,808,000. There were no direct borrowings outstanding under the CIT Credit Agreement and approximately $10,273,000 was committed under unexpired letters of credit as of July 3, 1999. -8- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The CIT Credit Agreement has been modified four times through March 29, 1999, to adjust for changes relating to the Company's consolidated balance sheet as it exited from bankruptcy, reflecting associated "fresh start" accounting adjustments, increasing the level of capital expenditures to support the Company's growth and Year 2000 requirements, allowing the acquisition of certain assets of The Warren Apparel Group Ltd., permitting the Company's stock buy-back program, extending the CIT Credit Agreement, increasing the Company's credit line, reducing borrowing costs, and allowing the early termination of the CIT Credit Agreement at the option of the Company. Key modifications include: |X| The committed credit line has been increased to $42,000,000 from $30,000,000. The sub-limit on letters of credit has also been increased from $20,000,000 to $25,000,000. The limit on inventory based collateral has been raised from $12,000,000 to $15,000,000. |X| The interest rate on direct borrowings has been reduced from prime plus 100 basis points to prime less 25 basis points. |X| The Company may repurchase its stock or to pay dividends up to an amount of $10,000,000. As of July 3, 1999, approximately $5,400,000 of this amount remains available. |X| Covenants related to capital expenditures, minimum ratio of consolidated current assets to consolidated current liabilities, minimum consolidated tangible net worth and minimum consolidated working capital have been set at levels appropriate for normal business conditions and the Company's existing stock repurchase program. |X| The Company may, with CIT's approval, acquire new businesses. |X| The Company may terminate the CIT Credit Agreement early. As collateral for borrowing 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 or has obtained written waivers for all requirements contained in the CIT Credit Agreement. 5. INCOME TAXES: The provision (benefit) for federal, state and local income taxes is $2,089,000 and $2,072,000 for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively and ($183,000) and $171,000 for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively. Federal income taxes are substantially offset by the utilization of pre-consummation net operating loss carryovers, which are limited to approximately $1,500,000 in 1999. -9- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 6. COMMITMENTS AND CONTINGENCIES: As noted in the Company's 1998 Form 10-K, the Company and several of its subsidiaries filed voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code in April 1993. 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 from the order dismissing the appeal taken by the Claimants subsequently was withdrawn, without prejudice, and may be refiled in the future. In addition, the Claimants and two other persons commenced a separate 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. The Claimants, who are former employees of the Company and 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 on July 17, 1998, that Court affirmed the decision of the Bankruptcy Court. The Claimants took a further appeal to the United States Court of Appeals for the Second Circuit, which was dismissed by the Second Circuit on June 28, 1999. Subsequently, the Claimants indicated their intention to petition the United States Supreme Court for relief, but such a petition has not yet been filed. Five of the Claimants in the above-described appeal 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 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 judgement motion will be filed by the defending officers and directors in the near future, based upon the final order of the Second Circuit dismissing all discrimination allegations. In addition, the Company is involved in the following legal proceedings of significance: 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. To the Company's knowledge, this investigation has been dormant for several years. -10- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 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 pleaded 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. 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." 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 its financial statements. Pursuant to the Plan, a Derivative Action Board, comprised of three persons or entities nominated by the Creditors' Committee and appointed by the Bankruptcy Court, is the only entity authorized to prosecute, compromise and settle or discontinue the derivative action. 7. STOCKHOLDERS' EQUITY: At June 4, 1997, 6,800,000 shares, adjusted retroactively for the July 1, 1998 stock split, were issued and outstanding and were being held by the plan administrator in trust. In July 1997, 5,372,000 (79%) of the shares were distributed. During the period from February 15, 1999 through March 5, 1999, approximately 1,250,000 (88%) of the remaining shares were distributed. The remaining shares are being held back by the plan administrator until the final disputed claims are settled before the Bankruptcy Court. -11- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES 8. ACCOUNTING FOR STOCK OPTION COMPENSATION Under the provisions of Statement of Financial Accounting Standards ("SFAS") No.123, "Accounting for Stock Based Compensation," the Company has recorded $593,000 and $1,081,000 of non-cash stock based compensation expense for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively and $314,000 and $685,000 for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively. These amounts were offset as adjustments to Capital in excess of par value in the consolidated balance sheets. 9. NET INCOME PER SHARE: For the twenty-six weeks ended July 3, 1999 and July 4, 1998, the basic weighted average common shares outstanding was 6,041,138 and 6,801,967 respectively, and the weighted average shares outstanding assuming dilution was 6,220,849 and 7,149,484, respectively. The difference of 179,711 and 347,517, respectively, represents the incremental shares issuable upon exercise of dilutive stock options. -12- 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 3, 1999 AS COMPARED TO TWENTY-SIX WEEKS ENDED JULY 4, 1998 The Company recorded net sales of $99,594,000 for the twenty-six weeks ended July 3, 1999, compared with $73,934,000 for the twenty-six weeks ended July 4, 1998, a net increase of $25,660,000 or 34.7%. The Dress product lines net sales, excluding $20,111,000 generated by the recently acquired Warren brands, increased $3,834,000 or 7.4% as a result of increased shipment of the fall season product into the second quarter. Net sales for the Sportswear product lines increased by $1,715,000 or 7.9% mostly as a result of increased growth in the Joan Leslie label. Gross profit was $26,527,000 and 26.6% of net sales compared with $19,487,000 and 26.4% for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively. The gross profit from the Dress line, net of $6,468,000 generated by the recently acquired Warren brands, rose $850,000 and the percentage of net sales decreased to 27.0% from 27.4%. The gross profit produced by the Sportswear line for the twenty-six weeks ended July 3, 1999, decreased by $278,000 and the percentage of net sales decreased to 21.0% from 23.9% for the comparable period ended July 4, 1998. The decreased gross profit as a percentage of net sales resulted from additional markdowns to liquidate inventory. SG&A expenses were $19,384,000 or 19.5% of net sales and $13,651,000 or 18.5% of net sales for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively. The expense increase of $5,733,000 was caused mainly by the additional operating expenses related to the Warren brands, which have a higher expense ratio than the other operating brands in the Company, increased advertising expenses and the straight-line expense of rental costs incurred to extend the Company's lease for showroom and office space in New York. Non-cash stock based compensation for stock options and outside director compensation that was granted after the Company's emergence from bankruptcy for the twenty-six weeks ended July 3, 1999 and July 4, 1998 was $630,000 and $1,088,000, respectively. The prior year's expense included a retroactive adjustment that resulted from stock option changes approved at the annual stockholder meeting. Other income was $672,000 and $575,000 for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively. The increase resulted from additional licensing contracts under the "Leslie Fay" brand name entered into during 1998. Depreciation and amortization expense for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively, was $595,000 and $70,000. The increase was due to the acquisition of fixed assets since the Company's June 4, 1997 emergence from bankruptcy as well as the excess of purchase price over net assets acquired from The Warren Apparel Group Ltd. on October 27, 1998. In addition, the Company recognized income of $2,286,000 for both periods from amortization of excess revalued net assets acquired over equity under fresh start reporting. -13- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Interest and financing costs were $1,004,000 and $320,000 for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively. The additional interest was generated as a result of higher borrowings during the twenty-six weeks ended July 3, 1999, which were invested in building the Warren brands' working capital. The financing fees under the new CIT Credit Agreement were partially offset by income earned on the cash invested for the twenty-six weeks ended July 3, 1999 and July 4, 1998. Other expenses of $534,000 were recorded during the twenty-six weeks ended July 3, 1999 to provide for non-operating legal and financing fees incurred as a result of the merger transaction discussed in "Note 2. Recent Developments". The provision for federal, state and local income taxes was $2,089,000 and $2,072,000 for the twenty-six weeks ended July 3, 1999 and July 4, 1998, respectively. THIRTEEN WEEKS ENDED JULY 3, 1999 AS COMPARED TO THIRTEEN WEEKS ENDED JULY 4, 1998 The Company recorded net sales of $38,450,000 for the thirteen weeks ended July 3, 1999, compared with $28,676,000 for the thirteen weeks ended July 4, 1998, a net increase of $9,774,000 or 34.1%. The Dress product lines net sales, excluding $9,510,000 generated by the recently acquired Warren brands, increased $1,423,000 or 6.6% directly as a result of earlier shipment of the fall season product. Net sales for the Sportswear product lines decreased by $1,159,000 or 16.2% as a result of earlier shipment of the summer season in the first quarter and additional markdowns required to liquidate inventory. Gross profit was $9,843,000 and 25.6% of net sales compared with $7,489,000 and 26.1% for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively. The gross profit from the Dress line, net of $3,257,000 generated by the recently acquired Warren brands, fell $137,000 and the percentage of net sales decreased to 24.4% from 26.6%. The gross profit produced by the Sportswear line for the thirteen weeks ended July 3, 1999 decreased by $766,000 and the percentage of net sales decreased to 16.6% from 24.6% for the comparable period ended July 4, 1998. The decreased gross profit resulted primarily from the earlier shipment of the summer season in the first quarter and the decreased gross profit as a percentage of net sales resulted from additional markdowns to liquidate inventory. SG&A expenses were $9,011,000 or 23.4% of net sales and $6,511,000 or 22.7% of net sales for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively. The expense increase of $2,500,000 was caused mainly by the additional operating expenses related to the Warren brands, which have a higher expense ratio than the other operating brands in the Company, increased advertising expenses and the straight-line expense of rental costs incurred to extend the Company's lease for showroom and office space in New York. 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 July 3, 1999 and July 4, 1998 was $329,000 and $692,000, respectively. The prior year's expense included a retroactive adjustment that resulted from stock option changes approved at the annual stockholder meeting. -14- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES Other income was $323,000 and $303,000 for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively Depreciation and amortization expense for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively, was $315,000 and $53,000. The increase was due to the acquisition of additional fixed assets since the Company's June 4, 1997 emergence from bankruptcy as well as the excess of purchase price over net assets acquired from The Warren Apparel Group Ltd. on October 27, 1998. In addition, the Company recognized income of $1,143,000 for both periods from amortization of excess revalued net assets acquired over equity under fresh start reporting. Interest and financing costs were $335,000 and $130,000 for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively. The additional interest was generated as a result of higher borrowings during the thirteen weeks ended July 3, 1999, which were invested in building the Warren brands' working capital. The financing fees under the new CIT Credit Agreement were partially offset by income earned on the cash invested for the thirteen weeks ended July 3, 1999 and July 4, 1998. Other expenses of $534,000 were recorded during the thirteen weeks ended July 3, 1999 to provide for non-operating legal and financing fees incurred as a result of the merger transaction discussed in "Note 2. Recent Developments". The (benefit) provision for federal, state and local income taxes was ($183,000) and $171,000 for the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively. The benefit recorded during the thirteen weeks ended July 3, 1999 resulted from the loss for tax purposes generated during the period. The amortization of excess revalued net assets over equity of $1,143,000 recognized during the period is not deductible for tax purposes. The non-deductibility of the amortization of excess revalued net assets over equity of $1,143,000 during thirteen weeks ended July 4, 1998 did not generate a loss for tax purposes and therefore a tax provision was necessary. (B) LIQUIDITY AND CAPITAL RESOURCES The CIT Credit Agreement provided a working capital facility commitment of $42,000,000, including a $25,000,000 sublimit on letters of credit. As of July 3, 1999 the Company was utilizing approximately $10,273,000 of the CIT Credit Agreement for the letters of credit, and there were no outstanding cash borrowings. The Company had a net borrowing availability under the CIT Credit Agreement of $23,503,000 on July 3, 1999 and peak borrowing during the twenty-six weeks ended July 3, 1999 was $12,808,000. At July 3, 1999, the Company's cash and cash equivalents amounted to $6,186,000 of which $2,628,000 is restricted for payment of the remaining administrative claims as defined in the Plan. Working capital increased $1,770,000 to $37,348,000 for the twenty-six weeks ended July 3, 1999. The primary changes in the components of working capital were: an increase in cash, cash equivalents and short term investments of $1,973,000; an increase in net accounts receivable of $1,094,000; a decrease in inventories of $3,522,000; an increase in prepaid expenses and other current assets of $421,000; a decrease of $1,804,000 in total current liabilities. Accounts receivable -15- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES increased due to the earlier shipment of fall in the second quarter. This earlier shipment and historically smaller mid-year season volume contributed to the decrease in inventory. The renewal of the Company's annual insurance policies during the second quarter resulted in the increase in prepaid expenses. Total current liabilities decreased as a result of paydown of short term borrowings of $745,000, decreased operating accounts payable and other accrued liabilities of $2,901,000 resulting mostly from the lower inventory levels held, offset by additional income tax liabilities of $1,535,000 and accrued merger costs of $307,000. Although the Company's results of operations indicated net income of $5,249,000 for the twenty-six weeks ended July 3, 1999, these results are not indicative of results for an entire year. Capital expenditures were $1,514,000 for the twenty-six weeks ended July 3, 1999. Capital expenditures are expected to be approximately $3,000,000 for fiscal year 1999. The anticipated capital expenditures for the remainder of the year are primarily related to improvements in management information and distribution systems as well as fixturing the Company's in-store shops that are planned to be opened in 1999. The Company believes that its financing arrangements and anticipated level of internally generated funds will be sufficient to finance its capital spending during the remainder of 1999. The Company signed an Agreement and Plan of Merger between Three Cities and the Company as of May 12, 1999, under which the Company could acquire up to 1,012,520 shares of the Company's common stock at $7 per share (See Note 2). The agreement requires the Company to pay for related professional fees that may approach $1,000,000, $534,000 of which has been incurred in the twenty-six weeks ended July 3, 1999. Under the merger agreement, if holders of fewer than 825,000 shares elect to receive cash, the Company will provide the funds for the full amount (up to $5,800,000). If holders of at least 825,000 shares but not more than 1,625,000 shares elect to receive cash, then Three Cities will provide the funds for the entire amount to the Company's stockholders. In this event, the Company will seek no additional financing from CIT. If holders of more than 1,625,000 shares elect to receive cash, then the Company and Three Cities will share the payment under a formula that limits the Company's payment to $7,087,640. To finance this possible acquisition of the Company's common stock, the Company expects to amend its Credit Agreement with CIT. The Company has received a commitment letter from CIT, subject to conditions. The terms of this letter would amend the credit agreement to add a $5 million, five-year, long term debt facility that will bear interest at prime plus 2.0%. Any additional cash requirements due to the merger agreement will be funded from the Company's existing $42,000,000 revolving credit line. The interest rate on the revolving credit line will remain unchanged at prime minus 0.25%. The proposed terms of the amended financing agreement will add an unused line fee at an annual rate of 0.25% of the amount by which the revolving credit facility exceeds the total amount of direct borrowings and the outstanding letters of credit. The Company believes it has the capacity to carry the additional indebtedness created by this agreement under the terms proposed by CIT. -16- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES The Company may pay cash dividends or repurchase 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 and there remains no less than $5,000,000 of unused borrowing capacity and the cumulative stock repurchase or distribution of dividends does not exceed $10,000,000. 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 additional acquisition of stock called for in the merger agreement discussed above will require modification of the CIT Credit Agreement which will limit the Company's ability to pay cash dividends or repurchase its stock. 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 and implemented 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. Certain of these changes were implemented in 1998; the others have been implemented in 1999 at an estimated total cost of approximately $1,900,000, plus the utilization of internal staff and other resources both during these implementations and in the future. 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 May 1, 1999, the Company implemented the second and third phases of its plan by placing in operation Year 2000 compliant versions of its accounts payable, accounts receivable, general ledger and EDI translation systems. As of July 3, 1999, the Company has completed the installation of Year 2000 compliant versions of its software and operating equipment. In addition, the Company is in the process of testing these systems to confirm the accuracy of their Year 2000 certifications. 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 representations as to Year 2000 compliance 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. -17- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES In common with other marketers and distributors of apparel products, the Company believes that the most reasonable worst case scenario may be the effect caused by the failures of third parties and entities with which the Company has no direct involvement. As it 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. Certain statements contained in this Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the effects of future events on the Company's financial performance; the risk that the Company may not be able to finance its planned growth; risks related to the industry in which the Company competes, including potential adverse impact of external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; and the risk of potential increase in market interest rates from current rates. Given these uncertainties, current and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES - ------ ---------------------------------------- ABOUT MARKET RISK. ----------------- None. -18- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. - ------ ----------------- For information concerning legal proceedings at the end of the second quarter of 1999, reference is made to Note 6 of the Notes to Consolidated Financial Statements contained herein. No other legal proceedings were terminated during the second quarter of 1999 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 None -19- 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: August 17, 1999 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 -20- THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES INDEX TO EXHIBITS ----------------- Exhibit No. Description - ---------- ----------- 27 Financial Data Schedule. -E-1- EX-27 2 FDS
5 THE LESLIE FAY COMPANY INC. 0000796226 OTHER JAN-01-2000 JAN-03-1999 JUL-03-1999 6,186 0 22,917 5,651 35,105 59,948 4,704 913 70,133 22,600 0 0 0 69 42,593 70,133 99,594 99,594 73,067 17,651 534 0 1,004 7,338 2,089 5,249 0 0 0 5,249 0.87 0.84
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