As filed with the Securities and Exchange Commission on December 9, 1998.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
THE LESLIE FAY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 2335 13-3197085
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1412 Broadway
New York, NY 10018
(212) 221-4000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
John J. Pomerantz, Chairman of the Board
The Leslie Fay Company, Inc.
1412 Broadway
New York, NY 10018
(212) 221-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of communications to:
Michael J. Shef, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone No.: (212) 704-6000
Facsimile No.: (212) 704-6288
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Amount to be Registered Aggregate Offering Price (1) Registration Fee
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<S> <C> <C> <C>
Common Stock, par value $.01 per share 2,525,844 17,529,357 $4,873.16
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of computing the
amount of the registration fee. The fee for the Common Stock was based on
the average of the bid and asked price of the Common Stock on the
over-the-counter market bulletin board on December 4, 1998
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
2,525,844 Shares of Common Stock
THE LESLIE FAY COMPANY, INC.
1412 Broadway
New York, New York 10018
(212) 221-4000
The selling stockholders named in this prospectus are offering to sell an
aggregate of 2,525,844 shares of common stock. Leslie Fay will not receive any
of the proceeds from the offering.
The common stock is traded on the Nasdaq Small Cap Market under the symbol LFAY.
--------------------------
Consider carefully the risk factors beginning on page 8 in this prospectus.
Neither the SEC nor any state securities commission has approved or disapproved
these securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
--------------------------
Prospectus dated December 9, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary..................................................... 3
Risk Factors........................................................... 8
Market Price of the Common Stock....................................... 12
Dividend Policy........................................................ 12
Capitalization......................................................... 13
Selected Financial Data................................................ 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 17
Business............................................................... 29
Management............................................................. 38
Principal Stockholders................................................. 45
Selling Stockholders and Plan of Distribution ......................... 47
Certain Transactions................................................... 48
Description of Capital Stock ......................................... 49
Shares Eligible For Future Sale........................................ 51
Description of Indebtedness ........................................... 51
Legal Matters.......................................................... 52
Experts................................................................ 52
Index to Consolidated Financial Statements.............................F-1
------------------------
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<PAGE>
PROSPECTUS SUMMARY
The following summary highlights certain information contained in this
prospectus. You should carefully review the more detailed information and
financial statements that appear elsewhere. In general, the term "Company"
refers to The Leslie Fay Company, Inc. and its subsidiaries.
The Company
General
The Company principally designs, arranges for the manufacture and sells
diversified lines of moderate and better price women's dresses and sportswear.
The Company's products cover a varied retail price range, offer the consumer a
wide selection of styles, fabrics and colors suitable for different ages, sizes
and fashion preferences and are appropriate for social, business and leisure
activities. The Company believes that it is among the major producers of
moderately priced dresses and sportswear and that it is one of the major
resources to department store retailers of such products. The Leslie Fay
business has been in continuous operation as an apparel company since 1947.
Reorganization Under Chapter 11
On April 5, 1993, The Leslie Fay Companies, Inc. ("Old Leslie Fay") and
certain of its wholly-owned subsidiaries (collectively, the "Debtors") filed a
voluntary petition under chapter 11 of the Bankruptcy Code. On November 15,
1995, certain other wholly-owned subsidiaries of Old Leslie Fay (the "Retail
Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code.
From their respective filing dates until June 4, 1997, the Debtors and the
Retail Debtors operated or liquidated their businesses, as applicable, as
debtors in possession subject to the jurisdiction and supervision of the United
States Bankruptcy Court for the Southern District of New York.
On October 31, 1995, the Debtors and the Committee of Unsecured
Creditors filed a Joint Plan of Reorganization (as subsequently amended, the
"Plan") pursuant to chapter 11 of the Bankruptcy Code. On December 5, 1996, the
Debtors filed a Disclosure Statement for the Amended Joint Plan of
Reorganization pursuant to chapter 11 of the Bankruptcy Code (as subsequently
amended, the "Disclosure Statement"). The Debtors obtained Bankruptcy Court
approval of the Disclosure Statement on February 28, 1997. The Debtors'
creditors approved the Plan, and on April 21, 1997 the Bankruptcy Court
confirmed it.
On June 4, 1997, the Plan was consummated by the Company by (1)
transferring the equity interest in both the Company and Sassco Fashions, Ltd.
("Sassco") to its creditors in exchange for relief from an aggregate amount of
claims estimated at $338,000,000; (2) assigning to certain creditors the
ownership rights to notes aggregating $110,000,000 payable by Sassco; and (3)
transferring the assets and liabilities of the Company's Sassco Fashions product
line to Sassco and the assets and liabilities of its Dress and Sportswear lines
to three wholly-owned subsidiaries of the Company. The Company retained
approximately $41,080,000 in cash, of which $23,580,000 has been or will be used
to pay administrative claims as defined in the Plan.
As provided in the Plan, the creditors of the Company became the
stockholders of Sassco and of the reorganized Company. To effectuate this, the
Company issued approximately seventy-nine (79%) percent of its 3,400,000 new
shares of common stock to its creditors in July 1997. The remaining twenty-one
(21%) percent are being held pending the resolution of certain litigation before
the Bankruptcy Court. The existing
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<PAGE>
stockholders of the Company at June 4, 1997 did not retain or receive any value
for their equity interest in the Company, which was canceled.
The Offering
Common Stock offered by the Selling Stockholders.. 2,525,844 shares of common
stock, $.01 par value
Number of Shares of Common Stock outstanding
before and after the offering................ 6,024,900 shares of common
stock
Trading Symbol.................................... LFAY
Risk Factors...................................... You should note that an
investment in the securities
offered in this prospectus
involves a high degree of
risk. See "Risk Factors".
-4-
<PAGE>
Summary Financial Data
You should read the following summary financial data of the Company in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
-------------------------------------------------------- ---------------------------------------------------------
Thirty-Nine Pro Forma Pro Forma Thirty-One Twenty-Two
Weeks Forty Weeks Fifty-Three Weeks Weeks
Ended Ended Weeks Ended Ended Ended For the Years Ended
------------------------------------------------
October 3, October 4, January 3, January 3, Pro Forma June 4,
1998 1997(a) 1998(a) 1998(b) 1996(a) 1997(c) 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)(unaudited) (audited) (unaudited)
(In thousands, except per share) (In thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales..............$122,723 $106,166 $132,160 $73,091 $110,053 $197,984 $429,676 $442,084 $531,843 $661,779
Operating Income
(Loss)............... 13,579 12,320 11,782 4,322 4,079 14,355 17,965 1,235 (27,278) (32,574)
Reorganization Costs... - - - - - 3,379(d) 5,144(d) 16,575(d) 115,769(d) 45,139(d)
Interest Expense and
Financing Costs...... 680 989 1,113 336 2,298 1,372 3,932(e) 3,262(e) 5,512(e) 25,783
Tax Provision (Benefit) 3,983 2,072 2,684 677 130 451 (839)(f) (761)(f) 981(f) (8,258)(g)
Other Non-Recurring
Items................ - - - - - 136,341(h) - - - -
Net Income (Loss)...... $8,916 $9,259 $7,985 $3,309 $1,651 $145,494 $9,728 $(17,841) $(149,540) $(95,238)
Net Income (Loss) per
Share - Basic....... $1.33 $1.36(i) $1.17(i) $0.49(i) $0.24(i) -(i) $0.52(i) $(0.95)(i) $(7.97)(i) $(5.07)(i)
- Diluted..... $1.26 $1.36(i) $1.16(i) $0.49(i) $0.24(i) -(i) $0.52(i) $(0.95)(i) $(7.97)(i) $(5.07)(i)
As of As of As of As of As of As of As of
10/03/98 01/03/98 06/04/97 12/28/96 12/30/95 12/31/94 01/01/94
-------- -------- -------- -------- -------- -------- --------
Total Assets .......... $65,402 $61,051 $77,789 $237,661 $245,980 $281,634 $421,341
Assets of Product Lines
Held for Sale or
Disposition......... - - - 3,003(j) 326(j) 21,063(j) -
Long-Term Debt
(Including Capital
Leases)............. 29 49 108 - - - 8,022(k)
</TABLE>
- ------------------------------
(a) The unaudited proforma adjustments to the statements are as follows:
Disposition of Sassco:
The operating results of the Sassco Fashions line have been
eliminated to give effect to the disposition as of the beginning of the
period presented, including depreciation expense on its property, plant
and equipment, an allocated corporate charge based on workload by
department related to the Sassco Fashions line and direct charges
associated with financing fees on its factoring agreement and fees
incurred on letters of credit issued on its behalf. For periods
including June 4, 1997, the gain recorded on the disposition of the
Sassco Fashions line has been reversed.
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<PAGE>
Disposition of Castleberry:
The operating results of the Castleberry line have been
eliminated to give effect to the disposition as of the beginning of the
period presented, including depreciation expense on its property, plant
and equipment and an allocated corporate charge based on workload by
department related to the Castleberry line.
Fresh-Start Reporting:
The Company used fresh-start reporting to record the estimated
effect of the Plan as if it had been effective as of the beginning of
period presented. This includes adjustments for the following items:
i) The elimination of the historical depreciation and
amortization for the remaining product lines, including the amounts in
cost of sales, on the beginning of period asset balances and the
recording of the amortization credit for the "Excess of revalued net
assets acquired over equity under fresh-start reporting" (assuming a
three-year amortization period).
ii) The elimination of historical reorganization expense that
will not be incurred after June 4, 1997.
iii) The elimination of the fresh-start revaluation charge and
the reversal of the gain on debt discharge pursuant to the Plan.
(b) Financial information for the thirty-one weeks ended January 3, 1998
represents the consolidated results of the reorganized entity after the
consummation of the Plan.
(c) Financial information for the twenty-two weeks ended June 4, 1997
represents the audited consolidated results prior to the Company's
consummation of the Plan. The income statement information includes the
results of Castleberry and Sassco Fashions lines prior to their sale or
spin-off in connection with the consummation of the Plan.
(d) The Company incurred reorganization costs in 1997, 1996, 1995, 1994 and
1993 while operating as a debtor in possession. Included in 1997, 1996,
1995, 1994 and 1993 is a provision of $0, $652,000, $3,181,000,
$53,000,000, and $1,642,000, respectively, for a write-down of a
portion of the excess purchase price over net assets acquired in the
1984 leveraged buyout of The Leslie Fay Company, related to certain of
the Company's product lines, which the Company believes will be
unrecoverable.
(e) On January 2, 1994, the Company decided not to accrue interest on
approximately $253,000,000 of pre- petition debt. During 1996 and 1995
the Company had direct borrowings under the FNBB Credit Agreement on
one hundred and two (102) days in the second and third quarters of 1996
and ten (10) days in the third quarter of 1995, the highest amounts of
which were $28,672,000 and $3,956,000, respectively. The Company had no
direct borrowings under the predecessor credit agreement in 1994.
Interest on direct borrowings was incurred at a rate of prime plus
1.5%. The terms of the FNBB Credit Agreement are described in Note 6(b)
to the Audited Consolidated Financial Statements.
(f) The Company recognized an income tax credit of $1,103,000 and
$1,811,000 in 1996 and 1995, respectively, representing a reduction of
foreign income tax liabilities as a result of negotiated settlements on
prior years' estimated taxes. The Company only paid state, local and
foreign taxes in 1996, 1995 and 1994. The elimination of the income tax
benefit in 1994, which was realized in 1993, resulted from the complete
utilization of tax refunds from prior years' taxes paid.
(g) In 1993, the Company realized an income tax benefit as a result of the
net losses incurred and the ability to recognize the carryback of those
losses against prior years' taxes paid.
-6-
<PAGE>
(h) Amount consists of the following three components: Gain on
Sale/Transfer of the Sassco Fashions line of $89,810,000 (net of
$3,728,000 of income taxes), charge for Revaluation of Assets and
Liabilities Pursuant to the Adoption of Fresh-Start Reporting of
$(27,010,000) and Gain on Debt Discharge (an extraordinary item) of
$73,541,000.
(i) Net income (loss) per share for the pro forma forty weeks ended October
4, 1997, pro forma fifty-three weeks ended January 3, 1998, thirty-one
weeks ended January 3, 1998 and pro forma 1996 was calculated based on
6,800,000 shares of new common stock, adjusted to give effect to the 2
for 1 stock split effected in July 1998, issued in connection with the
consummation of the Plan. Earnings per common share for the twenty-two
weeks ended June 4, 1997 is not presented because such presentation
would not be meaningful. The old stock of 18,771,836 shares, used in
calculating the net income (loss) per share in 1993 through 1996, was
canceled under the Plan and the new stock was not issued until June 4,
1997.
(j) The Company classified certain product lines as "Assets of Product
Lines Held for Sale or Disposition", as the Company had announced its
intention to dispose of these lines.
(k) All long-term debt except capital leases was reclassified as
"Liabilities subject to compromise" because of the Company's chapter 11
filing.
-7-
<PAGE>
RISK FACTORS
An investment in the common stock offered in this prospectus involves a
high degree of risk. Prospective investors should consider the specific risk
factors set forth below as well as the other information contained in this
prospectus.
Leverage: Restrictive Covenants and Other Terms of Indebtedness
The Company is a party to the CIT Credit Agreement (as defined in Note
6(a) to the Audited Consolidated Financial Statements) which contains a number
of restrictive covenants and events of default, such as covenants limiting
capital expenditures, incurrence of debt and sales of assets. In addition, the
Company is required to achieve certain financial ratios (including ratios of
consolidated current assets to consolidated current liabilities, consolidated
EBITDA to consolidated interest expense, minimum consolidated tangible net worth
and minimum consolidated working capital). CIT has a security interest in
substantially all of the Company's assets as collateral for borrowings under the
CIT Credit Agreement. If the Company cannot achieve the financial results
necessary to maintain compliance with the covenants, CIT could declare the
Company in default and demand that the Company's assets be sold or liquidated to
repay outstanding debt. See "Description of Indebtedness."
Limitation on Payment of Dividends on Capital Stock
Since emerging from bankruptcy, the Company has not paid any dividends
on its common stock and does not anticipate doing so in the foreseeable future.
Moreover, the CIT Credit Agreement limits the amount of dividends the Company
may pay on its common stock. See "Description of Indebtedness." There can be no
assurance that the Company will pay out any return on the investment in its
common stock.
Need for Additional Future Financing
The Company may require additional equity or debt financing for its
future operations. However, the CIT Credit Agreement prohibits the Company from
incurring additional debt. There can be no assurance that the Company will be
able to obtain additional financing on terms acceptable to it or at all. The
unavailablity of additional financing or the inability of the Company to amend
its existing CIT Credit Agreement to permit additional financing could have a
material adverse effect on the Company.
Reliance on Suppliers of Raw Materials
During the fiscal year ended January 3, 1998, the Company (excluding
the Sassco Fashions line) purchased approximately 66% of its raw materials from
7 suppliers. The Company does not have long-term, formal arrangements with any
of its suppliers of raw materials. Although the Company believes that its
sources of supply of raw materials are adequate, the abrupt loss of these
suppliers could have a material adverse effect on the Company's business.
Reliance on Key Trade Vendors
During the fiscal year ended January 3, 1998, the Company (excluding
the Sassco Fashions line) purchased approximately 35% of its finished goods from
4 suppliers. Although the Company believes that alternate sources of finished
goods are available, the abrupt loss of any of these suppliers could have a
material adverse effect on the Company's business.
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<PAGE>
Reliance on Key Retail Customers
During the fiscal year ended January 3, 1998, approximately 63% of the
revenues of the Company (excluding the Sassco Fashions line) resulted from 5
retailers. Approximately 33% of such sales were to Dillards Department Stores,
Inc. and approximately 12% to JC Penney. The remaining three retailers each
generated less than 10% of the Company's revenues. A decision by any of these
retailers to decrease the amount of apparel purchased from the Company or to
cease carrying the Company's products could have a material adverse affect on
the Company's operations, business and financial condition.
Reliance on Key Employees
The success of the Company largely is dependent on the talents, efforts
and experience of the members of the senior management team. In June 1998 the
Company entered into employment agreements expiring on January 3, 2001 with each
member of the senior management team. The Company does not maintain a key person
life insurance policy on the lives of these key executives. The loss of these
key executives could create a loss of continuity in the management of the
business and have a material adverse effect on the Company's operations,
business and financial condition. See "Management--Employment Contracts."
Seasonality
The Company's business is seasonal, with a significant proportion of
sales and operating income being generated in the first and third quarters of
each year. The Company's working capital requirements fluctuate during the year,
increasing substantially during the second and fourth quarters as a result of
higher planned seasonal inventory levels and higher receivables. If the Company
falls significantly short of its anticipated earnings in either the first or
third quarters, it will significantly decrease the working capital available to
the Company in the second and fourth quarters. Due to limitations on borrowing
levels, a decrease in working capital may adversely affect the Company's
purchasing abilities.
Fashion Trends
The Company believes that its success depends in substantial part on
its ability to anticipate, gauge and respond to changing consumer demands and
fashion trends in a timely manner. There can be no assurance that the Company
will continue to be successful in this regard. If the Company misjudges the
market for its products, it may have a significant amount of unsold finished
goods inventory, which could have a material adverse effect on the Company's
operations, business and financial condition.
Competition
The sectors of the apparel industry for which the Company designs,
manufactures and markets products are highly competitive. The Company competes
with many other manufacturers, including manufacturers of one or more apparel
items. In addition, department stores, including some of the Company's major
customers, have from time to time varied the amount of goods manufactured
specifically for them and sold under their own labels. Many such stores have
also changed their manner of presentation of merchandise and in recent years
have become increasingly promotional. Some of the Company's competitors are
larger and have greater resources than the Company. Based upon its knowledge of
the industry, the Company believes that it is a leading producer of moderately
priced dresses in the United States, among the more significant producers of
moderately priced sportswear and one of the major resources of department
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<PAGE>
store retailers of such products. The Company's business is dependent upon its
ability to evaluate and respond to changing consumer demand and tastes and to
remain competitive in the areas of style, quality and price, while operating
within the significant domestic and foreign production and delivery constraints
of the industry.
Imports and Import Restrictions
During 1997 (excluding the Sassco Fashions line) 85% of the Company's
finished goods and approximately 66% of raw materials directly purchased by the
Company were produced in foreign countries, including Taiwan, South Korea, the
Peoples' Republic of China (including Hong Kong), Guatemala and El Salvador.
Political instability that results in the disruption of trade, the imposition of
additional regulations relating to imports, the imposition of additional duties,
taxes and other charges on imports or restrictions on the transfer of funds may
adversely affect the Company's operations. In addition, because of the location
of the Company's suppliers and contractors, the Company may have difficulty
ensuring quality control. The inability of a supplier or contractor to fill
orders for the Company's products in a timely manner could cause the Company to
miss the delivery date requirements of its customers for those items. This could
result in the cancellation of orders, refusal to accept deliveries or a
reduction in sales prices. See "Business--Manufacturing."
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and each of the foreign
countries named above. These agreements impose quotas on the amounts and types
of merchandise which may be imported into the United States from these
countries. These agreements also allow the United States to impose restraints at
any time on the importation of categories of merchandise that, under the terms
of the agreements, are not currently subject to specified limits. The Company's
imported products are also subject to United States customs duties which
comprise a material portion of the cost of the merchandise. A substantial
increase in customs duties could have an adverse effect on the Company's
operating results. The United States and the countries in which the Company's
products are produced or sold may, from time to time, impose new quotas, duties,
tariffs or other restrictions, or adversely adjust prevailing quota, duty or
tariff levels, any of which could have a material adverse effect on the Company.
See "Business--Imports and Import Restrictions."
Tax Considerations
As discussed in Note 7 to the Audited Consolidated Financial
Statements, the Company reported federal consolidated tax net operating loss
("NOL") carryforwards of approximately $50,000,000 as of June 4, 1997. The NOL
is available to offset future taxable income, if any, through 2012. The
utilization of the NOL, however, is subject to limitations, including the annual
limitation of approximately $1,500,000 imposed by Section 382 of the Internal
Revenue Code. If the Company fails to achieve sufficient profits, it will be
unable to fully use the NOLs available to it over the next fifteen (15) years
and will lose the carryforward benefit.
Shares Eligible for Future Sale
There are now and will be outstanding immediately following this
offering 6,024,900 shares of common stock. All of such shares will be tradeable
without restriction. Future sales of substantial amounts of shares of common
stock in the public market, or the perception that such sales could occur, could
adversely affect the price of the shares of common stock in any market that may
develop for the trading of such shares.
See "Shares Eligible for Future Sale."
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<PAGE>
Possible Effects of Blank Check Preferred Stock; Antitakeover Provisions
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the relative voting power or other rights of the
holders of the Company's common stock. The issuance of preferred stock could be
used, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company and could prevent stockholders
from receiving a premium for their shares if a third party tender offer or
change of control transaction occurred. Although the Company has no present
intention to issue any shares of its preferred stock, there can be no assurance
that the Company will not do so in the future. Additionally, if the Company
issues preferred stock, the issuance may have a dilutive effect upon the holders
of the Company's common stock. The Company's Certificate of Incorporation also
provides that certain business combinations with an Interested Stockholder (as
defined therein) require the affirmative vote of the holders of at least eighty
percent (80%) of the then outstanding Company's voting stock not owned directly
or indirectly by any Interested Stockholder or any affiliate of any Interested
Stockholder. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with an "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Capital Stock--Section 203 of the Delaware General Corporation
Law."
Year 2000 Compliance
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 and has identified numerous changes required in the
Company's systems (both hardware and software) as well as sensitive operating
equipment to make them Year 2000 compliant. 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. 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.
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<PAGE>
MARKET PRICE OF THE COMMON STOCK
On December 8, 1998, the common stock of the Company began trading on
the Nasdaq Small Cap market under the symbol "LFAY". Prior thereto, such stock
was traded on the over-the-counter market bulletin board. The following table
sets forth the high bid and low asked prices on the bulletin board for each
quarter during 1996, 1997 and 1998 and, from June 4, 1997, have been adjusted to
give retroactive effect to a 2 for 1 split of the Company's common stock
effected in July 1998:
Period High Low
------- ---- ----
1996 First Quarter $ 0.28 $ 0.06
Second Quarter 0.34 0.09
Third Quarter 0.23 0.05
Fourth Quarter 0.19 0.02
1997 First Quarter $ 0.12 $ 0.01
Second Quarter 0.10 0.02 (a)
(prior to June 4, 1997)
Second Quarter 4.75 3.69
(from June 4, 1997)
Third Quarter 8.07 3.13
Fourth Quarter 8.88 6.00
1998 First Quarter $ 8.44 $ 6.00
Second Quarter 8.81 6.63
Third Quarter 9.38 4.75
Fourth Quarter 8.00 4.38
(through December 4, 1998)
- -------------
(a) The old common stock was canceled on June 4, 1997. The stockholders holding
the old common stock of the Company did not retain any value for their equity.
On December 4, 1998, the high bid price was $7.00 and the low asked
price was $ 6.88. You are encouraged to obtain current trading information. As
of December 4, 1998, there were approximately 1,575 holders of record of the
common stock of the Company.
DIVIDEND POLICY
The Company has not paid any cash dividends on its common stock and
does not anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain earnings, if any, to finance its operations. In
addition, the CIT Credit Agreement limits the amount of dividends the Company
may pay. See "Description of Indebtedness."
-12-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
October 3, 1998.
(in thousands)
----------------
Long-term Debt................................................$ -
----------------
Stockholders' Equity
Preferred Stock --$.01 par value;
500,000 shares authorized;
no shares issued................................... -
Common Stock --$.01 par value;
20,000,000 shares authorized;
6,812,000 shares issued............................ 68
Capital in Excess of Par Value.......................... 28,564
Accumulated Retained Earnings........................... 12,225
----------------
40,857
Less:
Treasury Stock at Cost (817,100 shares
of common stock).......................... 4,623
Total Stockholders' Equity.............................. $ 36,234
----------------
Total Capitalization............................... $ 36,234
================
-13-
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data of the Company in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------------------------------------------- ----------------------------------------------------------
Thirty-Nine Pro Forma Pro Forma Thirty-One Twenty-Two
Weeks Forty Weeks Fifty-Three Weeks Weeks
Ended Ended Weeks Ended Ended Ended For the Years Ended
---------------------------------------------
October 3, October 4, January 3, January 3, Pro Forma June 4,
1998 1997(a) 1998(a) 1998(b) 1996(a) 1997(c) 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (audited)(unaudited)
(In thousands, except per share) (In thousands, except per share)
<S> <C> <C> <C> <C> <C> C> <C> <C> <C> <C>
Net Sales.............$122,723 $106,166 $132,160 $73,091 $110,053 $197,984 $429,67 $442,084 $531,843 $661,779
Operating Income
(Loss).............. 13,579 12,320 11,782 4,322 4,079 14,355 17,965 1,235 (27,278) (32,574)
Reorganization Costs.. - - - - - 3,379(d) 5,144(d) 16,575(d) 115,769(d) 45,139(d)
Interest Expense and
Financing Costs..... 680 989 1,113 336 2,298 1,372 3,932(e) 3,262(e) 5,512(e) 25,783
Tax Provision (Benefit) 3,983 2,072 2,684 677 130 451 (839)(f) (761)(f) 981(f) (8,258)(g)
Other Non-Recurring
Items............... - - - - - 136,341(h) - - - -
Net Income (Loss)..... $8,916 $9,259 $7,985 $3,309 $1,651 $145,494 $9,728 $(17,841) $(149,540) $(95,238)
Net Income (Loss) per
Share - Basic....... $1.33 $1.36(i) $1.17(i) $0.49(i) $0.24(i) -(i) $0.52(i) $(0.95)(i) $(7.97)(i) $(5.07)(i)
- Diluted .... $1.26 $1.36(i) $1.16(i) $0.49(i) $0.24(i) -(i) $0.52(i) $(0.95)(i) $(7.97)(i) $(5.07)(i)
As of As of As of As of As of As of As of
07/04/98 01/03/98 06/04/97 12/28/96 12/30/95 12/31/94 01/01/94
-------- -------- -------- -------- -------- -------- --------
Total Assets ......... $65,402 $61,051 $77,789 $237,661 $245,980 $281,634 $421,341
Assets of Product Lines
Held for Sale or
Disposition........ - - - 3,003(j) 326(j) 21,063(j) -
Long-Term Debt
(Including Capital
Leases)............ 29 49 108 - - - 8,022(k)
</TABLE>
- ----------------------------
(a) The unaudited proforma adjustments to the statements are as follows:
Disposition of Sassco:
The operating results of the Sassco Fashions line
have been eliminated to give effect to the disposition as of
the beginning of the period presented, including depreciation
expense on its property, plant and equipment, an allocated
corporate charge based on workload by department related to
the Sassco Fashions line and direct charges associated with
financing fees on its factoring agreement and fees incurred on
letters of credit issued on its behalf. For periods including
June 4, 1997, the gain recorded on the disposition of the
Sassco Fashions line has been reversed.
-14-
<PAGE>
Disposition of Castleberry:
The operating results of the Castleberry line have
been eliminated to give effect to the disposition as of the
beginning of the period presented, including depreciation
expense on its property, plant and equipment and an allocated
corporate charge based on workload by department related to
the Castleberry line.
Fresh-Start Reporting:
The Company used fresh-start reporting to record the
estimated effect of the Plan as if it had been effective as of
the beginning of period presented. This includes adjustments
for the following items:
i) The elimination of the historical depreciation and
amortization for the remaining product lines, including the
amounts in cost of sales, on the beginning of period asset
balances and the recording of the amortization credit for the
"Excess of revalued net assets acquired over equity under
fresh-start reporting" (assuming a three-year amortization
period).
ii) The elimination of historical reorganization
expense that will not be incurred after June 4, 1997.
iii) The elimination of the fresh-start revaluation
charge and the reversal of the gain on debt discharge pursuant
to the Plan.
(b) Financial information for the thirty-one weeks ended January
3, 1998 represents the consolidated results of the reorganized
entity after the consummation of the Plan.
(c) Financial information for the twenty-two weeks ended June 4,
1997 represents the audited consolidated results prior to the
Company's consummation of the Plan. The income statement
information includes the results of Castleberry and Sassco
Fashions lines prior to their sale or spin-off in connection
with the consummation of the Plan.
(d) The Company incurred reorganization costs in 1997, 1996, 1995,
1994 and 1993 while operating as a debtor in possession.
Included in 1997, 1996, 1995, 1994 and 1993 is a provision of
$0, $652,000, $3,181,000, $53,000,000, and $1,642,000,
respectively, for a write-down of a portion of the excess
purchase price over net assets acquired in the 1984 leveraged
buyout of The Leslie Fay Company, related to certain of the
Company's product lines, which the Company believes will be
unrecoverable.
(e) On January 2, 1994, the Company decided not to accrue interest
on approximately $253,000,000 of pre-petition debt. During
1996 and 1995 the Company had direct borrowings under the FNBB
Credit Agreement on one hundred and two (102) days in the
second and third quarters of 1996 and ten (10) days in the
third quarter of 1995, the highest amounts of which were
$28,672,000 and $3,956,000, respectively. The Company had no
direct borrowings under the predecessor credit agreement in
1994. Interest on direct borrowings was incurred at a rate of
prime plus 1.5%. The terms of the FNBB Credit Agreement are
described in Note 6(b) to the Audited Consolidated Financial
Statements.
(f) The Company recognized an income tax credit of $1,103,000 and
$1,811,000 in 1996 and 1995, respectively, representing a
reduction of foreign income tax liabilities as a result of
negotiated settlements on prior years' estimated taxes. The
Company only paid state, local and foreign taxes in 1996, 1995
and 1994. The elimination of the income tax benefit in 1994,
which was realized in 1993, resulted from the complete
utilization of tax refunds from prior years' taxes paid.
(g) In 1993, the Company realized an income tax benefit as a
result of the net losses incurred and the ability to recognize
the carryback of those losses against prior years' taxes paid.
-15-
<PAGE>
(h) Amount consists of the following three components: Gain on
Sale/Transfer of the Sassco Fashions line of $89,810,000 (net
of $3,728,000 of income taxes), charge for Revaluation of
Assets and Liabilities Pursuant to the Adoption of Fresh-Start
Reporting of $(27,010,000) and Gain on Debt Discharge (an
extraordinary item) of $73,541,000.
(i) Net income (loss) per share for the pro forma forty weeks
ended October 4, 1997, pro forma fifty-three weeks ended
January 3, 1998, thirty-one weeks ended January 3, 1998 and
pro forma 1996 was calculated based on 6,800,000 shares of new
common stock, adjusted to give effect to a 2 for 1 stock split
effected in July 1998, issued in connection with the
consummation of the Plan. Earnings per common share for the
twenty-two weeks ended June 4, 1997 is not presented because
such presentation would not be meaningful. The old stock of
18,771,836 shares, used in calculating the net income (loss)
per share in 1993 through 1996, was canceled under the Plan
and the new stock was not issued until June 4, 1997.
(j) The Company classified certain product lines as "Assets of
Product Lines Held for Sale and Disposition", as the Company
had announced its intention to dispose of these lines.
(k) All long-term debt except capital leases was reclassified as
"Liabilities subject to compromise" because of the Company's
chapter 11 filing.
-16-
<PAGE>
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 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
-17-
<PAGE>
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.
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 to the Unaudited Interim Consolidated Financial
Statements).
-18-
<PAGE>
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.
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.
-19-
<PAGE>
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 to the Unaudited Interim Consolidated Financial
Statements).
Thirty-One Weeks Ended January 3, 1998 as Compared to Thirty-One Weeks Ended
- --------------------------------------------------------------------------------
December 28, 1996
- -----------------
The Company recorded net sales of $73,091,000 for the thirty-one weeks
ended January 3, 1998, compared with $256,225,000 for the thirty-one weeks ended
December 28, 1996, a net decrease of $183,134,000, or 71.5%. The primary factor
contributing to this decrease was the sale of the Sassco Fashions and
Castleberry product lines, which generated $184,495,000 and $4,223,000,
respectively, in net sales for the thirty-one weeks ended December 28, 1996. On
a comparable basis, after excluding the effect of the above mentioned
businesses, the remaining businesses had a net sales increase of $5,584,000, or
8.3%, for the thirty-one weeks ended January 3, 1998 as compared to the
thirty-one weeks ended December 28, 1996, primarily due to the increased volume
of the Dress line. Excluding a decrease of $6,255,000 related to discontinuing
its Outlander labels, sales from continuing businesses grew 20.5% over the
comparable period for 1996. This growth was driven by an increase of 44.5% over
the comparable period of 1996 by the Dress line. After excluding the effect of
the discontinued Outlander labels, the Sportswear line had a sales growth of 1%
over the comparable period for 1996.
Gross profit for the thirty-one weeks ended January 3, 1998 was 19.7%
of net sales compared with 22.2% for the thirty-one weeks ended December 28,
1996 (a decrease of $42,461,000). The Sassco Fashions and Castleberry lines
generated $42,442,000 and $912,000, respectively, in gross profit for the
thirty-one weeks ended December 28, 1996. These product lines had a higher gross
profit percent to net sales than the remaining businesses. The remaining
businesses increased gross profit by $842,000 for the thirty-one weeks ended
January 3, 1998 versus the prior year and the gross margin percent decreased to
19.7% from 20.0%. Excluding the Discontinued Outlander labels, gross profit
percent decreased from 21.6% to 19.8% during the period. The decrease in gross
profit percent was due to the additional markdowns taken to market the
sportswear fall production due to late delivery of a majority of the line. The
Dress line's gross profit increased $3,084,000 or a gross profit percent of
19.3% from 15.9%.
Selling, warehouse, general and administrative expenses were 18.7% and
17.8% for the thirty-one weeks ended January 3, 1998 and December 28, 1996,
respectively. After excluding the costs associated
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<PAGE>
with the product lines sold, the comparable remaining businesses had expenses of
20.3% for the thirty-one weeks ended December 28, 1996. This decrease in the
comparable percentage is a result of the additional sales volume during the
thirty-one weeks ended January 3, 1998 while continuing to reduce overhead
expenses related to downsizing.
Depreciation and amortization expense for the thirty-one weeks ended
January 3, 1998 was only $14,000 due to the write-off of fixed assets at June 4,
1997 under fresh-start reporting. In addition, the Company realized income of
$2,667,000 from amortization of the excess revalued net assets acquired over
equity (see Note 2). Depreciation and amortization expense for the thirty-one
weeks ended December 28, 1996 consisted of depreciation on fixed assets of
$2,214,000, including $956,000 related to product lines sold and amortization of
the excess purchase price over net assets acquired of $670,000, including
$340,000 of amortization related to the lines sold. This amortization expense
related to the leveraged buyout of The Leslie Fay Company on June 28, 1984.
Other income was $947,000 and $2,294,000 for the thirty-one weeks ended
January 3, 1998 and December 28, 1996, respectively. The decrease is primarily
due to the licensing revenues related to trade names which were spun-off with
the Sassco Fashions product line and the expiration of certain licensing
agreements which were not renewed.
Interest expense, net of interest income and financing costs were
$336,000 and $3,095,000 for the thirty-one weeks ended January 3, 1998 and
December 28, 1996, respectively. The financing fees under the new CIT Credit
Agreement (see Note 6) were offset by income earned on the cash invested for the
thirty-one weeks ended January 3, 1998. The financing fees incurred were
significantly below those incurred during the thirty-one weeks ended December
28, 1996 due to the higher line needed to finance the operations of the Sassco
Fashions and Castleberry product lines. In addition, the Company maintained a
higher average cash balance during the period and earned additional interest
income compared to the prior year.
The provision for taxes was $677,000 and ($1,273,000) for the
thirty-one weeks ended January 3, 1998 and December 28, 1996, respectively. The
credit in 1996 relates primarily to foreign taxes on a subsidiary of the Sassco
Fashions line.
Twenty-Two Weeks Ended June 4, 1997 as Compared to Twenty-One Weeks Ended
- --------------------------------------------------------------------------------
May 25, 1996
- ------------
The Company recorded net sales of $197,984,000 for the twenty-two weeks
ended June 4, 1997, compared with $173,451,000 for the twenty-one weeks ended
May 25, 1996, a net increase of $24,533,000, or 14.1%. The additional week
accounted for $10,084,000 of the net sales increase. Additionally, in 1996, the
Sassco Fashions product line began shipping a new product line under the Nina
Charles label and opened additional retail stores over the preceding 17 months,
for a total of 45 stores in operation at June 4, 1997. These new businesses
achieved a net sales volume of $17,843,000 for the twenty-two weeks ended June
4, 1997, or $11,379,000 more than for the twenty-one weeks ended May 25, 1996.
On a comparable basis, after excluding the effect of the above mentioned
additional week and new businesses, the Sassco Fashions line had a net sales
decrease of $8,430,000, or 7.0% for the twenty-two weeks ended June 4, 1997,
compared with the twenty-one weeks ended May 25, 1996. This was primarily a
result of reducing its production in 1997 to limit additional clearance
markdowns. The remaining Leslie Fay businesses accounted for an increase of
$12,542,000, or 29.5%, primarily due to increased volume for its Dress product
line. The net sales of the Castleberry product line declined by $1,042,000.
-21-
<PAGE>
Gross profit for the twenty-two weeks ended June 4, 1997 was 25.6% of
net sales compared with 23.9% in the twenty-one weeks ended May 25, 1996 (an
increase of $9,237,000). The additional week accounted for $1,998,000 of the
increase in gross profit. The additional retail stores and new product lines of
the Sassco Fashions line accounted for $3,364,000 of the increase in gross
profit. The remaining gross profit of Sassco Fashions declined $461,000.
Although the gross margin for the line increased 1.3%, it did not offset the
impact of the net sales volume decrease on gross profit. Increased volume and
better initial pricing (gross margin increased from 22.9% to 26.5% on a
comparable basis) of the Leslie Fay Dress and Sportswear lines also accounted
for $4,885,000 of additional gross profit. The Castleberry line had a decrease
in gross profit of $549,000.
Selling, warehouse, general and administrative expenses for the
twenty-two weeks ended June 4, 1997 decreased to 17.9% of net sales compared
with 19.6% for the twenty-one weeks ended May 25, 1996. The percentage decrease
is primarily due to the additional sales volume generated in the twenty-two
weeks ended June 4, 1997 versus the twenty-one weeks ended May 25, 1996, without
a corresponding increase in expenses. For the period, expenses increased
$2,248,000 over the prior year. Sassco Fashions expenses increased $4,118,000,
of which $1,100,000 was related to the extra week and the remainder was due to
the additional product lines and retail stores opened. The Leslie Fay business
reduced expenses by $1,749,000 or 14.1% below the prior year. This decrease was
offset by approximately $483,000 of expenses incurred in the extra week. The
Castleberry line decreased expenses by approximately $121,000 or 10.4% below the
comparable period in 1996 due to its reduced volume.
Depreciation and amortization consisted primarily of the amortization
of the excess purchase price over net assets acquired and related principally to
the leveraged buyout of The Leslie Fay Company on June 28, 1984.
Interest and financing costs increased to $1,372,000 for the twenty-two
weeks ended June 4, 1997 compared to $837,000 for the twenty-one weeks ended May
25, 1996. The increase was due primarily to the fee to finance the accounts
receivable of the Sassco Fashions product line under an agreement which began in
February 1996.
While operating as a debtor in possession, the Company recognized
reorganization costs of approximately $3,379,000 and $1,560,000 during the
twenty-two weeks ended June 4, 1997 and twenty-one weeks ended May 25, 1996,
respectively, which were comprised of professional fees and other costs of
$2,951,000 and $1,806,000; and plan administration costs of $1,000,000 and $0;
offset by interest income of $572,000 and $246,000.
The provision for taxes was $451,000 and $435,000 for the twenty-two
weeks ended June 4, 1997 and the twenty-one weeks ended May 25, 1996,
respectively. There was no federal income tax provision currently recognizable,
other than that based on the alternative minimum tax regulations, due to
existing net operating loss carryforwards.
Year Ended December 28, 1996 as Compared with the Year Ended December 30, 1995
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The Company recorded net sales of $429,676,000 for the 52 weeks ended
December 28, 1996 compared with $442,084,000 for the 52 weeks ended December 30,
1995, a decrease of 2.8%. Contributing to this decrease was the Company's
decision in the second half of 1995 to close its Leslie Fay Retail Outlet stores
and discontinue its Nipon Studio Sportswear line which, together, had 1995 net
sales of $44,091,000. Also in 1995, the Company opened 23 retail stores under
the name Kasper for ASL and organized an
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operation in Europe to market Kasper suits. In 1996, the Company began shipping
a new line of product under the Nina Charles label and opened 16 additional
stores, bringing the total stores in operation at the end of 1996 to 39. These
new businesses achieved a net sales volume of $35,701,000 in 1996, or
$27,695,000 more than in 1995. After adjusting for these closed and new
businesses, the Company's net sales, on a comparable basis, rose $4,140,000 over
1995, or 1.1%.
Separating this into the Company's key business groups, the Sassco
Fashions product line had 1996 net sales of $311,550,000, which represented a
comparable sales growth of 6.1%, the continuing Leslie Fay Dress and Sportswear
lines had 1996 net sales of $47,237,000 and $62,816,000, or a comparable sales
decline of 10.3% and 5.6%, respectively from 1995, and the Castleberry line had
1996 net sales of $8,073,000, or a decline of 24.2% from 1995. The decline
realized in both the Leslie Fay Dress and Sportswear lines was a result of the
Company's change in business strategy to focus on higher margin customers and
reduce its off-price sales.
The Company had a 1996 gross profit of $98,304,000, which represented
22.9% of net sales. This compared favorably to the gross profit for 1995 of
$96,193,000, and 21.8% of net sales. The discontinued product lines discussed
above accounted for a 1995 gross profit of $11,026,000 while the new businesses
opened in 1996 and 1995 had gross profit of $13,386,000 in 1996 as compared to
$3,003,000 for 1995. Adjusting for these closed and new businesses, on a
comparable basis, the Company's gross profit rose $2,754,000 over 1995 to
$84,918,000 and 21.6% of net sales versus 21.1% for 1995.
Separating this into the Company's key business groups, the Sassco
Fashions line had a gross profit of $73,073,000 and 23.5% of net sales for 1996
and $71,556,000 and 26.7% of net sales for 1995. Adjusting for the new
businesses begun in 1996 and 1995, the comparable gross profit for the Sassco
Fashions line was $59,687,000 and 21.6% of net sales for 1996 and $68,553,000
and 26.4% of net sales for 1995. This deterioration in gross profit resulted
from pricing concessions, especially in the Kasper for ASL and Kasper Dress
businesses. The Leslie Fay Dress and Sportswear product lines had a gross profit
of $9,057,000 and $14,166,000 representing 19.2% and 22.6% of net sales,
respectively for 1996. Removing the lines closed in 1995, the comparable gross
profit for the continuing Leslie Fay Dress and Sportswear lines in 1995 was
($2,167,000) and $12,302,000 or (4.1%) and 18.5% of net sales, respectively. The
1996 improvement in gross profit was the result of the Company's change in its
business strategy to focus on higher margin business, controlling production
levels and lowering production costs in its Dress line by shifting its
manufacturing to third party contractors, both domestic and overseas, following
the closure of the Company's owned manufacturing facility in August 1995. The
Castleberry line had a gross profit of $2,007,000 and 24.9% of net sales in 1996
and $3,476,000 and 32.6% of net sales in 1995. This deterioration was caused by
additional pricing concessions as well as by the unsuccessful launch of the
Adolfo New York label.
Selling, warehouse, general and administrative expenses decreased in
1996 to $79,570,000 and 18.5% of net sales from $92,832,000 and 21.0% of net
sales in 1995. This represents a reduction of expenses of $13,262,000 or 14.3%
from the level of 1995. Additional expenses were incurred in support of the
Sassco Fashions line for the additional Kasper for ASL retail stores, for the
European sales operation organized in 1995, and to support the planned
separation from Leslie Fay. Together, these efforts added $4,528,000 in expense
in 1996 over 1995, a 9.7% increase. The Castleberry line reduced its expenses by
$365,000 or 12.3% of its 1995 expense level. The Leslie Fay businesses reduced
their expenses by $18,791,000 or about 42.6% below their 1995 expense level.
Approximately $13,400,000 of this decrease is the result of the closed Leslie
Fay Retail Outlet and Nipon Studio businesses. The remaining reductions
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occurred in functions that previously supported both the Leslie Fay and Sassco
Fashions lines as well as other areas of the Leslie Fay lines, including
payroll, rent, occupancy and other expenses.
Depreciation and amortization expense included the amortization of the
excess purchase price over net assets acquired and related principally to the
leveraged buyout of The Leslie Fay Company in 1984 and the acquisition of Hue,
Inc. in 1992. Amortization expense was reduced as a result of the write-down of
the asset by $3,181,000 at the end of 1995. This reduction was offset by the
reversal of amortization expense recorded in 1995 related to prior periods.
Interest and financing costs primarily represented the cost of bank and
other borrowings for working capital requirements, long-term debt and the
capitalized lease obligation. Interest and financing costs in 1996 were 0.9% of
net sales, as compared with 0.7% in 1995. This increase was due to 1) a fee of
$1,147,000 for financing the accounts receivable of the Company's Sassco
Fashions line under an agreement which began in February 1996 and 2) higher
interest costs incurred on the direct borrowings under the FNBB Credit Agreement
in 1996 for 102 days to support higher inventory and accounts receivable
balances in the fifty-two weeks ended December 28, 1996, with a maximum
borrowing of $28,672,000 versus direct borrowings for a total of nineteen days
during the fifty-two weeks ended December 30, 1995 with a maximum borrowing of
$3,957,000. Offsetting these increases were reduced financing fees related to
the FNBB Credit Agreement.
While operating as a debtor in possession, the Company incurred
reorganization costs of approximately $5,144,000 in 1996 and $16,575,000 in
1995. Reorganization costs included professional fees and other costs of
$3,719,000 in 1996 and $7,995,000 in 1995, closed facilities and operations
charges of $1,082,000 in 1996 and $10,138,000 in 1995 and a write-off of excess
purchase price of $652,000 in 1996 and $3,181,000 in 1995. The reduced
reorganization costs were related to discontinuing the use of certain
consultants as the Company began executing its restructuring plan and completing
the closing of unprofitable lines and a foreign buying office in 1995, offset by
$2,003,000 accrued in 1996 for losses relating to the sale of the Castleberry
line. In 1996, the Company increased its accrual for employee related benefit
plans by $167,000. The decrease in interest income to $476,000 in 1996 from
$4,739,000 in 1995 was due to less cash available for investing opportunities
and the realization of $2,375,000 in interest income on Federal income taxes
refundable in 1995.
The Company recorded a net benefit for taxes of $(839,000) in 1996
versus $(761,000) in 1995. These benefits of $1,103,000 and $1,811,000,
respectively, represent a reduction of foreign tax liabilities as a result of
negotiated settlements on prior years' estimated taxes. This credit was offset
by Federal tax expense of $130,000 in 1996.
(b) Liquidity and Capital Resources
On June 2, 1997, the Company obtained $30,000,000 of post-emergence
financing (See Note 5 to the Unaudited Interim Consolidated Financial
Statements), 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.
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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.
The Company estimated it had approximately $50,000,000 of NOL available
at June 4, 1997 to offset future taxable income, if any, through fiscal year
2012. The utilization of the NOL, however, is subject to limitations, including
the annual limitation of about $1,500,000 imposed by Section 382 of the Internal
Revenue Code.
Capital expenditures were $859,000 for the thirty-one weeks ended
January 3, 1998 and $3,731,000 for the twenty-two weeks ended June 4, 1997.
Capital expenditures for the twenty-two weeks ended June 4, 1997 included
$3,152,000 of expenditures related to the Sassco Fashions product line. Capital
expenditures for the continuing lines were $1,438,000 for the fiscal year 1997.
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 implementing
new 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.
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 quarter 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 could 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.
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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.
Other than the capital expenditures described above, no other long-term
investment or financing activities are anticipated throughout the remainder of
1998. 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.
On August 18, 1997, CIT waived the provision contained in Section 10.17
of the CIT Credit Agreement that set a minimum ratio of current assets to
current liabilities for the quarter ended July 5, 1997. This waiver was required
due to the later than anticipated consummation of the Plan that caused a higher
level of confirmation expenses to remain unpaid as of July 5, 1997. Such unpaid
confirmation expenses were collateralized by an equal amount of cash and
securities.
The CIT Credit Agreement has been amended on February 23, 1998, March
31, 1998, and October 27, 1998. These amendments are summarized below:
On February 23, 1998, CIT amended several of the covenants contained in
Section 10 of the CIT Credit Agreement to adjust for fresh-start accounting
adjustments made in accordance with generally accepted accounting principles
following the Company's exit from bankruptcy. The covenants were also adjusted
on October 27, 1998 in connection with the Company's purchase of certain assets
of The Warren Apparel Group Ltd.
On February 23, 1998, CIT amended Section 10.20 of the CIT Credit
Agreement to increase the level of allowed annual capital expenditures to
conform to the Company's requirements. The capital expenditure covenant was
again amended on March 31, 1998 to allow the covenant to be increased by the
amount of any capital expenditure "carry over" from the prior year, up to the
level of the prior year's covenant limit. On October 27, 1998 the covenant was
increased by $500,000 for 1998 to permit the capital expenditures needed to
integrate facilities following the purchase of certain assets of The Warren
Apparel Group Ltd.
On March 31, 1998, the CIT Credit Agreement also was amended to permit
the Company to:
o Purchase, acquire or invest in businesses, subject to the approval of
CIT. Such acquisitions or investments may include the assumption of
debt, liens, guarantees, or contingent liabilities.
o Pay dividends or repurchase the Company's common stock provided there
has been no event of default under the CIT Credit Agreement and there
remains after any such dividend payment or stock repurchase no less
than $5,000,000 of undrawn availability. The limit on the aggregate
amount that may be used to pay dividends or repurchase stock was
amended on October 27, 1998 to an aggregate amount of $10,000,000 for
1998 and 1999.
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On October 27, 1998, the CIT Credit Agreement was amended and extended
for an additional two years, through June 2, 2001. This amendment increased the
maximum working capital facility to $37,000,000 throughout the remainder of 1998
and to $42,000,000 thereafter. The sublimit on letters of credit was also
increased to $25,000,000. The increase in the size of the facility was made to
support the Company's growth including the new product lines resulting from The
Warren Apparel Group Ltd. purchase. This amendment also reduced the interest
rate on direct borrowings to prime minus 1/4%. Early termination terms were also
modified to the favor of the Company.
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.
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 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.
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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.
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BUSINESS
General
The Company principally designs, arranges for the manufacture and sells
diversified lines of moderate and better price women's dresses and sportswear.
The Company's products cover a varied retail price range, offer the consumer a
wide selection of styles, fabrics and colors suitable for different ages, sizes
and fashion preferences and are appropriate for social, business and leisure
activities. The Company believes that it is among the major producers of
moderately priced dresses and sportswear, and that it is one of the major
resources to retailers of such products. The Leslie Fay business has been in
continuous operation as an apparel company since 1947.
The Company's business is seasonal in nature, with sales being greatest
in the first and third quarters and least in the fourth quarter. Accordingly,
the inventory levels are highest during the second and fourth quarters.
Reorganization Under Chapter 11
On April 5, 1993, the Debtors filed a voluntary petition under chapter
11 of the Bankruptcy Code. Subsequently, the Retail Debtors filed voluntary
petitions under chapter 11 of the Bankruptcy Code. From their respective filing
dates until June 4, 1997, the Debtors and the Retail Debtors operated or
liquidated their businesses, as applicable, as debtors in possession subject to
the jurisdiction and supervision of the Bankruptcy Court.
On October 31, 1995, the Debtors and the Committee of Unsecured
Creditors filed the Plan pursuant to chapter 11 of the Bankruptcy Code. On
December 5, 1996, the Debtors filed the Disclosure Statement. The Debtors
obtained Bankruptcy Court approval of the Disclosure Statement on February 28,
1997. The Plan was approved by the creditors and on April 21, 1997, the
Bankruptcy Court confirmed the Plan.
On June 4, 1997, the Plan was consummated by the Company 1)
transferring the equity interest in both the Company and Sassco to its creditors
in exchange for relief from the aggregate amount of the claims estimated at
$338,000,000; 2) assigning to certain creditors the ownership rights to notes
aggregating $110,000,000 payable by Sassco; and 3) transferring the assets and
liabilities of the Company's Sassco Fashions product line to Sassco and the
assets and liabilities of its Dress and Sportswear product lines to three wholly
owned subsidiaries of the Company. In addition, the Company retained
approximately $41,080,000 in cash, of which $23,580,000 has been or will be used
to pay administrative claims as defined in the Plan.
As provided in the Plan, the creditors of the Company became the
stockholders of Sassco and of the reorganized Company. To effectuate this, the
Company issued approximately seventy-nine (79%) percent of its 3,400,000 new
shares of common stock to its creditors in July 1997. The remaining twenty-one
(21%) percent are being held pending the resolution of certain litigation before
the Bankruptcy Court. The existing stockholders of the Company at June 4, 1997
did not retain or receive any value for their equity interest in the Company
which was canceled.
The gain on the disposition of the assets and liabilities of the Sassco
Fashions product line is a taxable event. The Company used a substantial portion
of the net operating loss carryforward available to it at December 28, 1996 to
offset a significant portion of the taxes recognized on this transaction.
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Products
During 1997, 1996 and 1995, dresses accounted for approximately 57%,
43% and 41% of the Company's net sales (exclusive of the Sassco Fashions and
Castleberry product lines and the other lines sold or closed during such year
(the "Sold Product Lines")), respectively; and sportswear accounted for 43%, 57%
and 59%, respectively. During 1998, dresses are expected to account for
approximately 63% of total sales while sportswear will make up the remaining
37%.
Dress Product Line. This line sells moderately priced one and two piece
dresses, pant dresses and dresses with coordinated jackets under the "Leslie
Fay", "Leslie Fay Petite", "Leslie Fay Women" and "Leslie Fay Women's Petites"
labels. The line's products are offered in petite, misses and large sizes. With
the purchase of certain assets of The Warren Apparel Group Ltd., the Company has
added five dress lines: "David Warren" and "DW3" which sell better-priced
dresses; "Rimini by Shaw" which sells better to bridge priced evening and social
occasion dresses; "Warren Petites" which sells selected styles from David
Warren, DW3, and Rimini by Shaw in petite size ranges; and "Reggio" which sells
moderately priced evening and social occasion dresses.
Sportswear Product Line. This line markets moderately priced
coordinated sportswear and related separates under the "Leslie Fay Sportswear",
"Leslie Fay Sportswear Petite", "Leslie Fay Sportswear Woman" and "Joan Leslie"
labels. The line's products include skirts, blouses, sweaters, pants and jackets
which are related in color and material and are intended to be sold as
coordinated outfits. The line's products are offered in petite, misses and large
sizes. This line also offered contemporary knitted sportswear, including knitted
separates and dresses under the "Outlander", "Outlander Studio", "Outlander
Petite" and "Outlander Woman" labels, styled to appeal to women of a wide range
of ages and available in misses, petite and large sizes. These labels were
discontinued in the Fall of 1997.
For the Spring of 1998, the Company introduced a new label:
Haberdashery, which represents a coordinated, ready-to-wear, sportswear product
line which also can be sold as separate items.
Design
The styles that are produced under the names used by the Company are
created by the Company's fashion designers or stylists. Each product line of the
Company has its own designers and in some instances uses separate design staffs
for different products within a particular product line. The design staff of a
line meets regularly with representatives of the line's merchandising,
production and sales staff to review the status of each collection and to
discuss adjustments which may be necessary in line composition, fabric
selection, construction and product mix.
The Company's Dress and Sportswear product lines generally offer four
or five seasonal lines: Spring, Summer, Fall I, Fall II and Holiday. These
seasonal lines are typically offered by the Company in ten to twelve week
selling periods.
Trademarks and Licenses
Most of the labels used by the Company are registered trademarks which
are owned by the Company. The Company considers its trademarks and license
agreements to have significant value in the marketing of its products. The
Company has licensed certain of its names and trademarks to various companies
for their use in connection with the manufacture and distribution of their
respective products.
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Markets and Distribution
The Company's products were sold during 1997 principally to department
and specialty stores located throughout the United States. During 1997, 1996 and
1995 the Company's Dress and Sportswear line products were sold to 788, 857 and
1,785 customers, respectively. Management believes that the decline in the
number of customers is primarily attributable to the Company's chapter 11
filing. Dillard's accounted for 33%, 35% and 24% and JC Penney accounted for
12%, 19% and 28%, of the Company's dress and sportswear sales during the
respective periods. No other customer accounted for as much as 10% of the
Company's dress and sportswear sales during these three years. The Company
believes that the loss of Dillard's, JC Penney or certain other major customers
would have a material adverse effect on its operations.
Each line maintains its own sales force and exhibits its products in
its principal showrooms in New York City and additional showrooms in Dallas,
Texas and Atlanta, Georgia. The Sportswear line currently has a sales force
consisting of 3 persons in Dallas and 5 in New York. The Dress line has 8
salespeople, all based out of New York. The Warren Apparel Group line has 9
salespeople in New York and 1 in Dallas. In addition, the Company has contract
commissioned salespeople who have been assigned certain geographic territories
throughout the United States. For further discussion, see "Properties" below.
While in some instances the Company's lines compete with each other, as a
practical matter, such competition is limited because of the differences in
products, price points and market segments.
To most effectively reach its ultimate consumers, the Company assists
retailers in merchandising and marketing the Company's products. The Company
promotes its products through special in-store events, as well as through
various sales, promotions and cooperative advertising.
The Company's products are sold under brand names which are advertised
and promoted in national magazines and trade publications.
Manufacturing
Apparel sold by the Company is produced in accordance with its designs,
specifications and production schedules. Almost all of such apparel is produced
by a large number of independent contractors located domestically and abroad. In
1997, excluding the Sold Product Lines, products representing approximately 84%
of dress and sportswear sales were produced abroad and imported into the United
States from the Caribbean Basin countries of Guatemala and El Salvador and
selected contractors in the Far Eastern countries of Taiwan, South Korea and the
People's Republic of China, including Hong Kong. With the purchase of certain
assets of The Warren Apparel Group Ltd., the Company has added substantial
additional manufacturing capabilities in the Far Eastern countries of South
Korea, the People's Republic of China, including Hong Kong, and Sri Lanka.
In 1997, three operating subsidiaries of Cambridge Corp. and LVTS
Sportswear of Canada manufactured approximately 45% and 10%, respectively, of
the Dress and Sportswear product lines' total production. The Company
historically has had satisfactory, long-standing relationships with most of its
con tractors. In 1997, none of the Company's domestic contracted production was
produced by contractors who work exclusively for the Company. The Company
monitors production at each contractor's facility, in the United States and
abroad, to ensure quality control, compliance with its specifications and fair
labor standards and timely delivery of finished goods to the Company's
distribution centers. The Company believes that because of the number and
geographical diversity of its manufacturing sources, it will continue
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to be able to obtain the services of a sufficient number of independent
suppliers to produce quality products in conformity with its requirements.
The Company manufactures in accordance with plans prepared each season
which are based primarily on projected orders, and to a lesser extent on current
orders and consultations with customers. These plans also take into account
current fashion trends and economic conditions. The average lead time from the
commitment of piece goods through the production and shipping of goods ranges
from two to four months for domestic products and four to six months for
imported products. These lead times impose substantial time constraints on the
Company in that they require production planning and other manufacturing
decisions and piece good commitments to be made substantially in advance of the
receipt of orders from customers for the bulk of the items to be produced.
Usually, a centralized purchasing department, which consults with line
management over most aspects of their product production, manufacturing and
purchasing functions, controls and coordinates the purchase of raw materials.
Raw materials, which are in most instances made and/or colored especially for
the Company, consist principally of piece goods and yarn. The Company purchases
these raw materials from a number of domestic and foreign textile mills and
converters and then supplies the raw materials to its domestic contractors and
certain of its foreign contractors. In some cases, contractors directly purchase
the raw materials in accordance with the Company's specifications. The Company
does not have long-term, formal arrangements with any of its suppliers of raw
materials. The Company, however, has experienced little difficulty in satisfying
its raw material requirements and considers its sources of supply adequate.
Imports and Import Restrictions
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries, including Taiwan, the People's Republic of China (including Hong
Kong), South Korea, Sri Lanka, Guatemala and El Salvador (the principal
countries from which the Company imports goods). These agreements impose quotas
on the amount and type of goods which can be imported into the United States
from these countries. In addition, each of the countries in which the Company's
products are sold have laws and regulations regarding import restrictions and
quotas. Because the United States and other countries in which the Company's
products are manufactured and sold may impose new quotas, duties, tariffs,
surcharges or other import controls or restrictions, or adjust presently
prevailing quota allocations or duty or tariff rates or levels, the Company
intensively monitors import and quota-related developments. The Company
continually seeks to minimize its potential exposure to import and quota-
related risks through allocation of production to merchandise categories that
are not subject to quota pressures, adjustments in product design and
fabrication, shifts of production among countries and manufac turers,
geographical diversification of its sources of supply and other measures. The
United States may enter into bilateral trade agreements with additional
countries and may, in the future, include other types of gar ments in existing
agreements.
The high cost of transportation into the United States and the
increased competition resulting from greater production demands abroad also
affect imports.
The Company's imported products are subject to United States Customs
duties and, in the ordinary course of its business, the Company is from time to
time subject to claims by the United States Customs Service for duties and other
charges.
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<PAGE>
The Company currently imports a substantial majority of its raw
materials, primarily fabric, through two Korean based agents. These agents
secure the manufacture of these raw materials from a number of factories (about
10) located throughout the Far East. The Company's senior management also meets
with these manufacturers prior to placing raw material orders with them. The
Company believes its primary risk is the timely receipt of its raw materials to
allow the timely manufacture and shipment of its finished product. Through the
present time, the Company has received its raw materials in a timely manner. The
Company continually monitors the status of its orders through its Korean agents.
Payment for the raw materials is guaranteed through letters of credit which
require, among other items, timely delivery and satisfaction of quality
standards.
The Company does not "hedge" its foreign purchases as all contracts are
quoted in United States Dollars. The typical contract may extend for sixty days.
Prices are re-negotiated with each new contract.
The Company does not sell its products in the Far East.
The Company's future import operations also may be adversely affected
by: (i) political instability resulting in the disruption of trade from
exporting countries; (ii) the imposition of additional regulations relating to
imports; (iii) duties, taxes and other charges on imports; (iv) any significant
fluctuation in the value of the dollar against foreign currencies; and (v)
restrictions on the transfer of funds.
Backlog
At October 3, 1998, the Company had unfilled orders of approximately
$44,299,000, compared to approximately $47,667,000 of such orders for comparable
continuing businesses at a comparable date in 1997. A number of factors,
including the scheduling of the manufacture and shipment of the product, which
in some instances is dependent on the desires of the customer, affects the
amount of unfilled orders at a particular time. Accordingly, a comparison of
unfilled orders from period to period is not necessarily meaningful and may not
be indicative of eventual actual shipments.
Credit and Collection
Historically, the Company had managed substantially all of its credit
and collection functions internally. It regularly evaluated, approved and
monitored the credit of the Company's customers and was responsible for
collection of accounts receivable. In June 1997, the Company entered into a
factoring agreement with the CIT Group/Commercial Services, Inc. Under this
agreement, for a fee and other considerations, CIT approves credit, purchases
substantially all of the Company's accounts receivable, collects the amounts
due, and guarantees payment for all credit approved orders, less any chargebacks
from the customer, shipped in compliance with the orders.
Competition
The sectors of the apparel industry for which the Company designs,
manufactures and markets products are highly competitive. The Company competes
with many other manufacturers, including manufacturers of one or more apparel
items. In addition, department stores, including some of the Company's major
customers, have from time to time varied the amount of goods manufactured
specifically for them and sold under their own labels. Many such stores have
also changed their manner of presentation of merchandise and in recent years
have become increasingly promotional. Some of the Company's competitors are
larger and have greater resources than the Company. Based upon its knowledge of
the
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<PAGE>
industry, the Company believes that it is a leading producer of moderately
priced dresses in the United States, among the more significant producers of
moderately priced sportswear and one of the major resources of retailers of such
products. With the purchase of certain assets of The Warren Apparel Group Ltd.,
the Company has added several new lines of product which sell "better priced"
career, evening and social occasion dresses and "moderately" priced evening and
social occasion dresses. These new product lines have significant competitors,
some of which are also larger and have greater resources than the Company. The
Company's business is dependent upon its ability to evaluate and respond to
changing consumer demand and tastes and to remain competitive in the areas of
style, quality and price, while operating within the significant domestic and
foreign production and delivery constraints of the industry.
Employees
At November 25, 1998, the Company employed 406 persons, of whom
approximately 28% were in production, 30% in distribution, 14% in merchandising
and design, 9% in sales and 19% in administrative and financial operations.
Approximately 39% of the Company's employees were members of unions, primarily
the Union of Needletrades, Industrial and Textile Employees ("UNITE"), the
successor to the International Ladies' Garment Workers Union. On June 2, 1997,
the Company and UNITE entered into a collective bargaining agreement which will
continue through May 31, 2001. This agreement covers employees engaged in
non-supervisory production, maintenance, packing and shipping. The Company
believes that the relationship with its employees is satisfactory.
Properties
Executive and sales offices, as well as design facilities, are located
in New York City under a lease expiring in 2008 (60,990 square feet). The
Company also leases sales offices and showrooms in Dallas, Texas (5,000 square
feet) and a showroom in Atlanta, Georgia (737 square feet). In addition, the
Company owns a small manufacturing facility in Pittston, Pennsylvania (11,368
square feet) and leases a small manufacturing facility in Guatemala (5,202
square feet). Furthermore, the Company leases in Laflin, Pennsylvania a major
distribution center of approximately 234,688 square feet which expires in 2001
and a storage facility of 6,160 square feet on a month to month basis.
All of the Company's facilities are in good condition. None of the
Company's principal facilities are idle. The machinery and equipment contained
in the Company's facilities is modern and efficient.
Legal Proceedings
As discussed above, the Company and several of its subsidiaries filed
voluntary petitions in the Bankruptcy Court under chapter 11 of the Bankruptcy
Code. All civil litigation commenced against the Company and those subsidiaries
prior to that date 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 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 an adversary proceeding in the Bankruptcy Court
to revoke the Confirmation Order. The
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<PAGE>
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.
Both before and after the filing dates, various class action suits were
commenced on behalf of certain former stockholders of the Company. Any claims
against the Company arising out of these suits were discharged as part of, and
in accordance with the terms of the Plan.
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 have appealed that decision to the United States District Court for
the Southern District of New York, the appeal has been fully briefed and argued
and the parties are awaiting a decision.
Several former employees, who are included among the Claimants in the
above-described pending appeal, have commenced an action alleging employment
discrimination against certain former officers and directors of the Company in
the United States District Court for the Southern District of New York. The
Court has dismissed all of the causes of action arising under federal and state
statutes, and the only remaining claims are those arising under the New York
City Human Rights Law. Discovery is complete and a pre-trial order has been
filed.
In November 1992, a class action entitled "Stephen Warshaw and Phillis
Warshaw v. The Leslie Fay Companies, Inc., et al." was instituted in the United
States District Court for the Southern District of New York. In January 1993 and
February 1993, the plaintiffs served amended complaints and thereafter twelve
other similar actions were commenced against the Company, certain of its
officers and directors and its then auditors, BDO Seidman. The complaints in
these cases, which purported to be on behalf of all persons who purchased or
acquired stock of the Company during the period from February 4, 1992 to and
including February 1, 1993, alleged that the defendants knew or should have
known material facts relating to the sales and earnings which they failed to
disclose and that if these facts had been disclosed, they would have affected
the price at which the Company's common stock was traded. A pre-trial order was
entered which had the effect of consolidating all of these actions and, in
accordance therewith, the plaintiffs served the defendants with a consolidated
class action complaint which, because of the chapter 11 filing by the Company,
did not name the Company as a defendant. In March 1994, plaintiffs filed a
consolidated and amended class action complaint. This complaint added certain
additional parties as defendants, including Odyssey Partners, L.P., and expanded
the purported class period from March 28, 1991 to and including April 5, 1993.
In March 1995, BDO Seidman filed an answer and cross-claims against certain of
the officers and directors of the Company previously named in this action and
filed third-party complaints against Odyssey, certain current and former
executives of the Company and certain current and former directors of the
Company. These cross-claims and third-party complaints alleged that the
Company's senior management and certain of its directors engaged in fraudulent
conduct and negligent misrepresentation. BDO Seidman sought contribution from
certain of the defendants and each of the third-party defendants if it were
found liable in the class action, as well as damages. On March 7, 1997, a
stipulation and agreement was signed pursuant to which all parties agreed to
settle the above described litigation for an aggregate sum of $34,700,000. The
officers' and directors' share of the settlement was covered by the Company's
officers' and directors' liability insurance. The settlement specifically
provided that the officers and directors deny any liability to the plaintiffs
and entered in to the settlement solely to avoid substantial expense and
inconvenience of litigation. The Company had no obligations under this
settlement. The District Court approved this settlement and signed the final
order of dismissal on May 8, 1997. The settlement has been fully consummated.
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<PAGE>
The Company is also 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. The Company is cooperating in this investigation.
In February 1993, the United States Attorney for the Middle District of
Pennsylvania issued a Grand Jury Subpoena seeking the production of documents as
a result of the Company's announcement of accounting irregularities. In 1994,
Donald F. Kenia, former Controller of the Company, was indicted by a Federal
Grand Jury in the Middle District of Pennsylvania and 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 Committee of Unsecured Creditors and
appointed by the Bankruptcy Court, shall determine whether to prosecute,
compromise and settle or discontinue this derivative action.
On February 23, 1996, Albert Nipon and American Pop Marketing Group,
Inc. commenced an action against the Company in the United States Bankruptcy
Court, Southern District of New York seeking, inter alia, a declaratory judgment
with respect to the use of the Company's "Albert Nipon" trademark and trade
name. The Company has asserted counter claims. Upon a record of stipulated facts
and submissions of memorandum of law, an oral argument on this matter was heard
on May 9, 1997. On December 23, 1997, the Court ruled in favor of the Company
and found that the plaintiffs had violated Federal and New York trademark
statutes and unfair competition under common law. The plaintiffs have appealed
and the Company has cross-appealed to recover its costs and expenses in the
litigation.
Recent Developments
On October 27, 1998, the Company purchased certain assets of The Warren
Apparel Group Ltd. Warren is a privately owned manufacturer and wholesaler of
women's career, social and evening dresses sold in department and specialty
stores nationwide primarily under the David Warren, DW3, Warren Petites, Reggio
and Rimini labels. The purchase of Warren will facilitate the Company's return
to the better dress business.
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<PAGE>
Available Information
The Company files reports, proxy statements and other information with
the Securities and Exchange Commission. You may read and copy any report, proxy
statement or other information the Company files with the Commission at the
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's Regional Offices at 75 Park Place, Room 1400, New York, New
York 10007 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800- SEC-0330. In addition, the
Company files electronic versions of these documents on the Commission's
Electronic Data Gathering Analysis and Retrieval System. The Commission
maintains a website at http://www.sec.gov that contains reports, proxy
statements and other information filed with the Commission. Statements contained
in this prospectus that refer to contents of any contract or other document are
not necessarily complete. Such statements are qualified by reference to the copy
of such contract or other document filed as an exhibit to the Registration
Statement.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
<TABLE>
<CAPTION>
Directors of the Company
- ------------------------
Principal Occupation and Director
Name and Age Offices with the Company Since
- ------------ ------------------------ --------
<S> <C> <C>
John J. Pomerantz (65) Chairman of the Board and Chief Executive Officer 1984
of the Company
John A. Ward (45) President of the Company 1997
Clifford B. Cohn (46) Principal of Cohn & Associates (1)(2) 1997
Mark B. Dickstein (39) President of Dickstein Partners Inc. (1)(2) 1997
Chaim Y. Edelstein (55) Private Investor (1)(2) 1998
Mark Kaufman (41) Vice President of Dickstein Partners, Inc. (2)(3) 1997
Bernard Olsoff (69) Private Investor (2)(3) 1998
Robert L. Sind (64) President of Recovery Management 1997
Corporation (2)(3)
</TABLE>
- -----------------------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of the Finance Committee of the Board of Directors.
(3) Member of the Audit Committee of the Board of Directors.
Executive officers of the Company
- ---------------------------------
<TABLE>
<CAPTION>
Name Positions with the Company Age
- ---- -------------------------- ---
<S> <C> <C>
John J. Pomerantz Chairman of the Board and 65
Chief Executive Officer
John A. Ward President 45
Dominick Felicetti Senior Vice President-Manufacturing 44
and Sourcing
Warren T. Wishart Senior Vice President-Administration 46
and Finance, Secretary and
Chief Financial Officer
</TABLE>
-38-
<PAGE>
John J. Pomerantz has been the Chief Executive or Chief Operating
Officer of the Company and its predecessors since 1971, and an executive of the
Company for over 30 years. Mr. Pomerantz was President of the Leslie Fay
business from 1971 until August 1986, when he became Chairman of the Board of
the Company.
John A. Ward joined the Company in August 1989 as head of the Andrea
Gayle division. From July 1991 to June 1993 he was Chairman of the Leslie Fay
Sportswear Group. In June 1993 he became Chairman of the combined Leslie Fay
Dress and Sportswear lines. He was elected a Senior Vice President of the
Company in September 1991 and President of the Company in June 1997. From June
1988 until August 1989 he was Senior Vice President and General Merchandise
Manager for Ready-to-Wear, Men's and Boys' at B. Altman & Co. Before joining the
Company, he had been an executive at Filene's for fifteen years.
Clifford B. Cohn has been a principal with Cohn & Associates law firm
since September 1994. From September 1992 to September 1994, he was a principal
with Sernovitz & Cohn law firm. Mr. Cohn has been a director of a Publicker
Industries, Inc. since 1980. He was Director of Governmental Relations of
Publicker Industries from 1981 to 1982 and Vice President of Governmental
Relations of Publicker Industries from 1982 to 1984.
Mark B. Dickstein has been the sole shareholder, sole director and
President of Dickstein Partners Inc. since prior to 1990 and is primarily
responsible for the operations of Dickstein & Co., L.P., Dickstein Focus Fund
L.P. and Dickstein International Limited. These businesses invest primarily in
risk arbitrage transactions, securities and debt obligations of financially
distressed companies, and other special situations. Mr. Dickstein is a Director
of Hills Stores Company and served as its Chairman of the Board from July 1995
to February 1996. He is also a Director of News Communications Inc.
Chaim Y. Edelstein has been the Chairman of the Board of Hills Stores
Company since February 1996 and has been a director of such company since July
1995. He has been a consultant to Hills Stores Company since July 1995 and was a
consultant to Federated Department Stores, Inc. from February 1994 to March
1995. From 1985 to February 1994, he was Chairman of the Board and Chief
Executive Officer of Abraham & Straus, a division of Federated Department
Stores, Inc. Mr. Edelstein is also a director of the Independence Community
Bank.
Mark Kaufman has been a Vice President of Dickstein Partners, Inc.
since July 1992. Prior to joining Dickstein Partners, beginning in 1990, Mr.
Kaufman was a Senior Vice-President of Oppenheimer & Co., an investment banking
firm. Prior to that, Mr. Kaufman was Vice President of GAF Corp., a chemical and
roofing manufacturer.
Bernard Olsoff was President of Frederick Atkins, Inc., an
international retail merchandising and product development organization for
department stores, from 1987 until April 1997 when he retired. He was also the
Chief Executive Officer of Frederick Atkins from 1994 until his retirement. From
1971 to 1983, Mr. Olsoff was President of May Department Stores Company and May
Merchandising Corporation in New York City. From August 1955 to August 1971 he
was Vice President and General Merchandise Manager of Associated Merchandising
Corporation. Mr. Olsoff is also a director of Elder Beerman Stores, Inc.
Robert L. Sind founded Recovery Management Corporation in 1984.
Recovery Management specializes in developing and implementing hands-on
business, financial and operational turnaround programs and in providing crisis
management to troubled commercial, industrial and real estate clients and their
creditors. Before founding Recovery Management, Mr. Sind served for twenty years
in corporate
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<PAGE>
operating positions managing turnarounds and restructurings for companies such
as Londontown Manufacturing Company, Beker Industries, Marker International and
Nice-Pak Products, Inc. For ten years he also served as investment banker for
distressed companies.
Dominick Felicetti rejoined the Company in May 1995 as Senior Vice
President of Worldwide Sourcing and Manufacturing. From 1994 to 1995 he was Vice
President Manufacturing and Production for S.L. Fashions. Mr. Felicetti was
previously employed by The Leslie Fay Companies, Inc. from 1991 to 1993 as
Director of Technical Services and Production. From 1986 to 1990, he served as
President of American Dress Company and from 1979 to 1986 as Production Manager
for Betsy's Things.
Warren T. Wishart joined the Company in March 1993. He held the
position of Vice President Planning from July 1993 through December 1994. In
January 1995, he became Senior Vice President Finance; in September 1995, he was
appointed Chief Financial Officer and Treasurer of the Company. In June 1997 he
became Senior Vice President - Administration and Finance and Secretary of the
Company. Before joining Leslie Fay Mr. Wishart was Vice President - Strategic
Planning at Galerias Preciados from 1991 to the end of 1992. Prior to that, he
had seventeen years of financial management and business planning experience
with several department stores including Filene's and the L.J. Hooker Retail
Group.
Executive Compensation
Summary of Cash and Certain Other Information. The following table
shows, for 1997, 1996 and 1995, the compensation paid or accrued by the Company
and its subsidiaries to the Chief Executive Officer and the other four most
highly compensated "named executive officers" (as defined in Regulation S-K) of
the Company. All option and market price information has been adjusted to give
retroactive effect to a 2 for 1 split of the Company's common stock effected in
July 1998.
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation (1) Long Term Compensation
-------------------------------------------- -----------------------------------------
Awards Payouts
---------------------- ----------------
Restricted Securities
Name and Principal Stock Underlying LTIP All Other
Position Year Salary (2) Bonus Awards Options (#) Payouts Compensation
- -------- ---- ---------- ----- -------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Pomerantz 1997 $611,129 $300,000 -- 263,756 -- $ 8,699(3)
Chairman of the 1996 $777,915 $171,700 -- -- -- $ 8,938(4)
Board and Chief 1995 $779,934 $ -- -- -- -- $ 8,600(5)
Executive Officer
John A. Ward 1997 $462,692 $225,000 -- 140,120 -- $ 2,650(3)
President 1996 $521,154 $145,600 -- -- -- $ 2,500(4)
1995 $519,231 $ -- -- -- -- $ 2,730(5)
Dominick Felicetti 1997 $337,500 $200,000 -- 140,120 -- $ 1,938(3)
Senior Vice President - 1996 $267,885 $ 91,200 -- -- -- --
Manufacturing and 1995 $167,212 $ 25,000 -- -- -- --
Sourcing
Catherine Bandel - 1997 $273,654 $ 92,300 -- 140,120 -- $ 76,260(3)
Wirtshafter 1996 $300,000 $ 91,200 -- -- -- --
Senior Vice President 1995 $274,038 $ 50,000 -- -- -- --
Warren T. Wishart 1997 $207,692 $180,000 -- 140,120 -- $102,650(3)
Senior Vice President- 1996 $200,000 $ 91,200 -- -- -- $ 2,500(4)
Administration and 1995 $198,461 $ 25,000 -- -- -- $ 3,035(5)
Finance, Chief Financial
Officer and Treasurer
</TABLE>
- --------------
(1) In 1997, 1996 and 1995, perquisites and other personal benefits did not
exceed the lesser of $50,000 or 10% of reported annual salary and
bonuses for any of the named executive officers.
(2) 1997 was a 53 week year. 1996 and 1995 were 52 week years. Amounts
represent salaries paid during the above calendar years.
(3) For 1997, consists of the following: (a) amounts contributed as Company
matching contributions for each named executive officer under the
Company's 401(k) savings plan as follows: Mr. Pomerantz $2,286; Mr.
Ward $2,650; Mr. Felicetti $1,938; Ms. Bandel-Wirtshafter $1,260 and
Mr. Wishart $2,650; (b) amounts paid by the Company for split dollar
life insurance coverage as follows: Mr. Pomerantz $6,413; and (c)
amounts paid by the Company as earned retention as follows: Ms.
Bandel-Wirtshafter $75,000 and Mr. Wishart $100,000.
(4) For 1996, consists of the following: (a) amounts contributed as Company
matching contributions for each named executive officer under the
Company's 401(k) Savings Plan as follows: Mr. Pomerantz $2,286; Mr.
Ward $2,500 and Mr. Wishart $2,500 and (b) amounts paid by the Company
for split dollar life insurance coverage as follows: Mr. Pomerantz
$6,652.
(5) For 1995, consists of the following (a) amounts contributed as Company
matching contributions for each named executive officer under the
Company's 401(k) Savings Plan as follows: Mr. Pomerantz $2,230, Mr.
Ward $2,230 and Mr. Wishart $2,535; (b) amounts contributed by the
Company under
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<PAGE>
the Company's defined benefit cash balance retirement plan as follows:
Mr. Pomerantz, Mr. Ward and Mr. Wishart $500 each; and (c) amounts paid
by the Company for split dollar life insurance coverage as follows: Mr.
Pomerantz $5,870.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information with respect to stock
options granted to the named executive officers during fiscal 1997.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Potential Realizable Value at Assumed
Underlying Granted to Annual Rates of Stock Price
Options Employees in Exercise Expiration Appreciation for Option Term
---------------------------------------
Name Granted Fiscal Year Price (1) Date(2) 0% 5% 10%
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Pomerantz 263,756 29.4% $ 3.09 6/3/07 $199,136 $837,425 $ 1,815,960
John A. Ward 140,120 15.6% $ 3.09 6/3/07 $105,791 $444,881 $ 964,726
Dominick Felicetti 140,120 15.6% $ 3.09 6/3/07 $105,791 $444,881 $ 964,726
Catharine Bandel-
Wirtshafter 140,120 15.6% $ 3.09 6/3/07 $105,791 $444,881 $ 964,726
Warren T. Wishart 140,120 15.6% $ 3.09 6/3/07 $105,791 $444,881 $ 964,726
</TABLE>
- ----------------
(1) The market price per share on the grant date, adjusted for the two-for-one
stock split, was $3.845.
(2) Exercisable as to 33% of such shares commencing on each of June 4, 1998 and
June 4, 1999 and as to the balance on June 4, 2000.
Aggregated Option/SAR Exercise in Last Fiscal Year and Fiscal Year End Value
Table
The following table sets forth information concerning the exercise of
options during 1997 and unexercised options held as of the end of such year with
respect to the named executive officers. The average bid and asked price of a
share of common stock of the Company on the close of business on January 2, 1998
was $7.065.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year-End at Fiscal Year-End
Name Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ---- ------------ -------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
John J. Pomerantz None N/A 0/263,756 $ 0/1,048,430
John A. Ward None N/A 0/140,120 $ 0/556,977
Dominick Felicetti None N/A 0/140,120 $ 0/556,977
Catharine Bandel-Wirtshafter None N/A 0/140,120 $ 0/556,977
Warren T. Wishart None N/A 0/140,120 $ 0/556,977
</TABLE>
- --------------
(1) Aggregate market value of the shares of common stock covered by the options
at fiscal year end less the exercise price of such options.
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<PAGE>
Retirement Plan
Until December 31, 1996, when it was terminated, the Company had in
effect a defined benefit, cash balance retirement plan. Each year the Company
contributed a percentage of earnings to an account for each eligible employee
based on attained age and years of service. The benefit credits were calculated
using a defined formula as follows:
Percent of Pay Percent of Pay
Age Plus Up to One-Half the Over One-Half the
Completed Social Security Social Security
Years of Service Wage Base Wage Base
- ----------------- ------------------- -----------------
Less than 50 2.00% 3.00%
50-59 2.75% 3.75%
60-69 3.75% 4.75%
70-79 5.25% 6.25%
80 or more 7.25% 8.25%
At December 28, 1996, the annual benefits payable upon retirement at
normal retirement age for each of John J. Pomerantz, John Ward, Dominick
Felicetti, Catharine Bandel-Wirtshafter and Warren Wishart were $7,344, $7,014,
$ 0, $ 0 and $1,436, respectively. These projected amounts do not reflect
continued plan credits.
The Company amended the retirement plan to freeze benefit accruals
effective December 31, 1994 and terminated the retirement plan on December 31,
1996. All participants have been paid their accumulated benefits.
Compensation of Directors
Each director who is not a full-time employee of or consultant to the
Company receives an annual director's fee of $12,500 in cash and 2,000 shares of
common stock of the Company. In addition the Chairman of the Audit and
Compensation committees receives an additional $2,500 and members of such
committees receive an additional $1,000. Each initial non-employee director,
upon becoming a director, received stock options to purchase 20,000 shares,
vesting one-third each year. Each subsequent non-employee director, upon
becoming a director, has received or will receive stock options to purchase
10,000 shares, vesting one-third each year.
Employment Contracts
The Company has an employment agreement with John J. Pomerantz expiring
on January 3, 2001, pursuant to which he is employed as Chief Executive Officer
at a base salary of $500,000 per annum.
The Company also has an employment agreement with John A. Ward expiring
on January 3, 2001, pursuant to which he is employed as President of the Company
at a base salary of $450,000 per annum.
The Company also has an employment agreement with Dominick Felicetti
expiring on January 3, 2001, pursuant to which he is employed as Senior Vice
President--Manufacturing and Sourcing at a base salary of $350,000 for the first
two years and $375,000 for the third year.
-43-
<PAGE>
The Company also has an employment agreement with Warren T. Wishart
expiring on January 3, 2001, pursuant to which he is employed as Senior Vice
President--Administration and Finance, Chief Financial Officer and Treasurer at
a base salary of $225,000 for the first two years and $250,000 for the third
year.
In addition, these employment agreements provide for a shared bonus
pool payable to the above named executive officers if EBITDA exceeds $4,626,550.
The bonus pool will equal 9.6% of EBITDA plus an additional 0.2% of EBITDA for
each $54,430 by which EBITDA exceeds $4,626,550 up to a maximum of 12.5% of
EBITDA plus an additional 5% of the amount by which EBITDA exceeds $11,500,000,
subject to certain adjustments.
At the Annual Meeting of Stockholders on June 3, 1998, the
stockholders approved an amendment to the 1997 Management Stock Option Plan. The
amendment replaces the so-called "Home Run" options for 618,182 shares of common
stock which were issuable only if the Company were sold at a certain minimum
price with the grant of stock options to purchase an aggregate of 365,758 shares
of common stock at an exercise price of $3.09 per share which will vest in four
equal annual installments beginning January 4, 1998.
Severance Agreement
In January 1998, the Company entered into a severance agreement with
Catherine Bandel- Wirtshafter pursuant to which she received in a lump sum,
$290,000 representing six (6) months compensation as well as bonus and other
amounts under her employment agreement with the Company dated as of June 4,
1997. In addition, one-third of the options previously granted to her vested on
the effective date of the severance agreement.
Compensation Committee Interlocks and Insider Participation
On June 10, 1997, the Board of Directors appointed a Compensation
Committee consisting of David H. Morse, Clifford B. Cohn and Larry G. Schafran.
The Compensation Committee determines the compensation of officers. On September
22, 1997, Messrs. Morse and Schafran resigned as directors of the Company and
Robert L. Sind and Mark B. Dickstein replaced them on the Compensation
Committee. Before June 4, 1997, during the period the Company was subject to the
jurisdiction of the Bankruptcy Court, issues regarding the compensation of
officers were submitted to the creditors committee and/or the Bankruptcy Court
for approval prior to action by the Compensation Committee. The members of the
Compensation Committee during 1996 and until June 4, 1997 were Ralph Destino,
Peter W. May and Faye Wattleton.
-44-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of December 4, 1998 based upon the
most recent information available to the Company for (i) each person who is
known to the Company to be the beneficial owner of more than 5% of the Company's
common stock, (ii) each director and named executive officer of the Company and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of Ownership
Names and Address of Beneficial Owners Beneficially Owned of Common Stock
--------------------------------------- ------------------ -----------------------
<S> <C> <C>
Mark B. Dickstein 2,525,844(1) 41.9%
c/o Dickstein Partners Inc.
660 Madison Avenue, 16th Floor
New York, NY 10021
John J. Caliolo 1,419,112(2) 23.6%
as Plan Administrator
c/o The Leslie Fay Company, Inc.
1412 Broadway
New York, NY 10018
Pioneering Management Corporation 524,000(3) 8.7%
60 State Street
Boston, MA 02109
John J. Pomerantz 111,130(4) 1.8%
Catharine Bandel-Wirtshafter 46,706(5) (6)
Dominick Felicetti 58,070(7) (6)
Warren T. Wishart 56,070(8) (6)
John A. Ward 57,670(8) (6)
Chaim Y. Edelstein 12,000 (6)
Clifford B. Cohn 8,666(9) (6)
Robert L. Sind 8,666(9) (6)
Mark Kaufman 4,000(10) (6)
Bernard Olsoff 2,000 (6)
Officers and Directors as a group (10 persons) 2,829,984(11) 47.0%
</TABLE>
- ------------------
(1) Includes 1,821,838, 295,226, 326,780 and 82,000 shares of common stock
directly owned by Dickstein & Co., L.P., Dickstein Focus Fund L.P.,
Dickstein International Limited and Mark B. Dickstein, respectively.
Does not include 193,822, 45,374 and 34,696 shares of common stock that
may be purchased by Dickstein & Co., L.P., Dickstein Focus Fund L.P.
and Dickstein International Limited, respectively, on an "if and when
issued" basis from a third-party. Mark B. Dickstein is the
-45-
<PAGE>
sole shareholder, sole director and president of Dickstein Partners
Inc. ("DPI"). DPI is the general partner of Dickstein Partners L.P.
which is the sole general partner of Dickstein & Co., L.P. and
Dickstein Focus Fund. DPI is the adviser for Dickstein International
Limited and makes all investment and voting decisions for that entity.
Also does not include 4,000 shares owned directly by Mark Kaufman, a
Vice President of DPI. The information provided above was obtained from
Schedules 13D dated November 6, 1997 and has been adjusted to give
effect to a 2 for 1 split of the Company's common stock effected in
July 1998.
(2) Shares held for the benefit of the creditors of the Company pending the
resolution of certain creditor claims. These shares include the "if and
when issued" shares described in footnote (1).
(3) The information provided above was obtained from a Schedule 13G dated
April 23, 1998 and has been adjusted to give effect to a 2 for 1 split
of the Company's common stock effected in July 1998.
(4) Includes 101,130 shares of common stock issuable upon exercise of
presently exercisable stock options.
(5) Includes 16,706 shares of common stock issuable upon exercise of
presently exercisable stock options.
(6) Less than 1% of the outstanding common stock.
(7) Includes 56,070 shares of common stock issuable upon exercise of
presently exercisable stock options.
(8) Consists of shares of common stock issuable upon exercise of presently
exercisable stock options.
(9) Includes 6,666 shares of common stock issuable upon exercise of
presently exercisable stock options.
(10) Does not include any of the shares included in footnote (1).
(11) Includes 245,020 shares of common stock issuable upon exercise of
presently exercisable stock options.
-46-
<PAGE>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The Company has issued and outstanding an aggregate of 6,024,900
shares of common stock. The selling stockholders hold 2,525,844 shares of common
stock which are being offered pursuant to this prospectus. The selling
stockholders may sell shares of common stock from time to time by themselves,
their pledgees and/or their donees, in transactions (which may include block
transactions) on the over-the-counter market, in negotiated transactions,
through the writing of options on the common stock or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The selling
stockholders, their pledgees and/or their donees, may sell common stock directly
to purchasers or through broker-dealers that may act as agents or principals.
Such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares of common stock. The Company will bear all expenses in connection with
the registration of the common stock. The selling stockholders shall pay any
underwriting discounts or commissions relating to the common stock sold by them
pursuant to this prospectus.
The selling stockholders, their pledgees and/or their donees and any
broker-dealers that act in connection with the sale of the shares of the common
stock as principals may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commissions received by them and any
profit on the resale of the shares of the common stock as principals might be
deemed to be underwriting discounts and commissions under the Securities Act.
The selling stockholders, their pledgees and/or their donees may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the common stock against certain liabilities, including
liabilities arising under the Securities Act.
The following table sets forth certain information with respect to the
selling stockholders. Beneficial ownership of the common stock by such selling
stockholder after the offering will depend on the number of shares of common
stock sold by each selling stockholder.
<TABLE>
<CAPTION>
Percent of Maximum
Name and Address of Number of Shares Class Prior amount to
Selling Stockholder(s) Prior to Offering to Offering be Sold
- ---------------------- ----------------- ------------ -------------------
<S> <C> <C> <C>
Mark B. Dickstein 82,000(1) 1.4% 82,000
c/o Dickstein Partners Inc.
660 Madison Avenue 16th Floor
New York, NY 10021
Dickstein & Co., L.P. 1,821,838(2) 30.2% 1,821,838
660 Madison Avenue 16th Floor
New York, NY 10021
Dickstein Focus Fund L.P. 295,226(3) 4.9% 295,226
660 Madison Avenue 16th Floor
New York, NY 10021
Dickstein International Limited 326,780(4) 5.4% 326,780
129 Front Street
Hamilton, HM Bermuda
</TABLE>
- ------------------------
-47-
<PAGE>
(1) Does not include 1,821,838, 295,226 and 326,780 shares of common stock
directly owned by Dickstein & Co., L.P., Dickstein Focus Fund L.P. and
Dickstein International Limited, respectively. Does not include
193,822, 45,374 and 34,696 shares of common stock that may be purchased
by Dickstein & Co., L.P., Dickstein Focus Fund L.P. and Dickstein
International Limited, respectively, on an "if and when issued" basis
from a third-party. Mark B. Dickstein is the sole shareholder, sole
director and president of DPI, which is the general partner of
Dickstein Partners L.P. which is the sole general partner of Dickstein
& Co., L.P. and Dickstein Focus Fund. DPI is the adviser for Dickstein
International Limited and makes all investment and voting decisions for
that entity. Also does not include 4,000 shares owned directly by Mark
Kaufman, a Vice President of DPI.
(2) Does not include 193,822 shares of common stock that may be purchased
by Dickstein & Co., L.P. on an "if and when issued" basis from a
third-party.
(3) Does not include 45,374 shares of common stock that may be purchased by
Dickstein Focus Fund L.P. on an "if and when issued" basis from a
third-party.
(4) Does not include 34,696 shares of common stock that may be purchased by
Dickstein International Limited on an "if and when issued" basis from a
third-party.
CERTAIN TRANSACTIONS
Bear Stearns Asset Management, a division of Bear, Stearns & Co. Inc.
("Bear Stearns"), received fees for acting as an investment manager for the
Company's 401(k) Savings Plan and Retirement Plan through February 1998. Michael
L. Tarnopol, a director of the Company until June 1997, is a Senior Managing
Director and a member of the Executive Committee of Bear Stearns and a director
and Executive Vice President of The Bear Stearns Companies, Inc., an affiliate
of Bear Stearns.
-48-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following is a summary description of the Company's capital stock
and certain provisions of the Company's Certificate of Incorporation and Bylaws,
copies of which have been filed as exhibits to the registration statement. The
following discussion is qualified in its entirety by reference to such exhibits.
Common Stock
- ------------
The Company is authorized to issue up to 20,000,000 shares of common
stock, par value $.01 per share. Before this offering, there were issued and
outstanding 6,024,900 shares of common stock. The number of issued and
outstanding shares of common stock will not change as a result of this offering.
Preferred Stock
- ----------------
The Company is authorized to issue up to 500,000 shares of preferred
stock, par value $.01 per share. The Board of Directors may issue preferred
stock in one or more series and may determine the terms of preferred stock at
the time of issuance, without further action by stockholders. Such terms may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions.
No shares of preferred stock are outstanding and the Company has no
present plans to issue preferred stock. The issuance of any such preferred stock
could adversely affect the rights of the holders of common stock and, therefore,
reduce the value of the common stock. The ability of the Board of Directors to
issue preferred stock could discourage, delay, or prevent a takeover of the
Company.
Voting Rights
- -------------
Holders of common stock have one vote for each share held on all
matters submitted to a vote of stockholders. A majority of the outstanding
shares of common stock constitutes a quorum required for a meeting of
stockholders. The shares of common stock do not have cumulative voting rights in
the election of directors. Thus, the holders of more than 50% of the common
stock have the power to elect all the directors, to the exclusion of the
remaining stockholders. See "Principal Stockholders."
The Certificate of Incorporation provides that a Business Combination
with an Interested Stockholder (as said terms are defined therein) must be
approved by the affirmative vote of the holders of at least 80% of the
outstanding voting stock including the affirmative vote of the holders of at
least 80% of the voting stock not owned by the Interested Stockholder or any
affiliate thereof. Such provisions do not apply if the Business Combination has
been approved by a majority of the Continuing Directors or if the consideration
paid in the combination meets certain provisions as more particularly set forth
in the Certificate of Incorporation.
Dividend and Other Rights
- -------------------------
Subject to the prior rights of any series of preferred stock which may
from time to time be outstanding, holders of common stock are entitled to
receive dividends when, as, and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation, dissolution or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. The CIT Credit Agreement,
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<PAGE>
however, limits the amount of dividends the Company may declare. Holders of
common stock have no preemptive rights and have no rights to convert their
common stock into any other securities. The old common stock was canceled on
June 4, 1997. The stockholders holding the old common stock of the Company did
not retain any value for their equity.
Transfer Agent
- --------------
The Transfer Agent and Registrar for the common stock of the Company is
American Stock Transfer & Trust Company.
Section 203 of the Delaware General Corporation Law
- ---------------------------------------------------
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, this statute prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless (i) prior to the date at which the stockholder became an
interested stockholder, the Board of Directors approved either the business
combination or the transaction in which the person became an interested
stockholder; (ii) the stockholder acquires more than 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who are
officers or held in certain employee stock plans) upon consummation of the
transaction in which the stockholder became an interested stockholder; or (iii)
the business combination is approved by the Board of Directors and by at least
66-2/3% of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder) at a meeting of stockholders (and not by
written consent) held on or after the date such stockholder became an interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or at any time within the prior three years did
own) 15% or more of the corporation's voting stock. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
Limitation on Director's Liability
- ----------------------------------
In accordance with the DGCL, the Certificate of Incorporation provides
that the directors of the Company shall not be personally liable to the Company
or its stockholders for monetary damages for breach of duty as a director except
(i) for any breach of the director's duty of loyalty to the Company and its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct, or knowing violation of law; (iii) under Section 174 of
the DGCL, which relates to unlawful payments of dividends and unlawful stock
repurchases and redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit. This provision does not eliminate a
director's fiduciary duties; it merely eliminates the possibility of damage
awards against a director personally which may be occasioned by certain
unintentional breaches (including situations that may involve grossly negligent
business decisions) by the director of those duties. The provision has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission, which might be necessitated by a director's breach of his or her
fiduciary duties. However, equitable remedies may not be available as a
practical matter where transactions (such as merger transactions) have already
been consummated. The inclusion of this provision in the Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its stockholders.
-50-
<PAGE>
Indemnification
- ---------------
The Certificate of Incorporation provides that the Company shall
indemnify its officers, directors, employees and agents to the fullest extent
permitted by the DGCL. Section 145 of the DGCL provides that the Company may
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than a "derivative"
action by or in the right of the Company) by reason of the fact that such person
is or was a director, officer, employee or agent of the Company, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe was unlawful.
A similar standard of care is applicable in the case of derivative actions,
except that no indemnification shall be made where the person is adjudged to be
liable to the Company, unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action was brought
determines that such person is fairly and reasonably entitled to such indemnity
and such expenses.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has an aggregate of 6,024,900 shares of common stock
outstanding. If all of the shares of common stock offered in this prospectus are
sold and are not purchased by "affiliates" of the Company, as such term is
defined under the Securities Act, all of the outstanding shares of common stock
will be freely tradeable without restriction or limitation under the Securities
Act. Sales of such shares in the public market, or the availability of such
shares for sale, could adversely affect the market price for the common stock.
The Company's shares currently trade on the over-the-counter market.
Following this offering, the Company cannot predict the effect, if any, that
sales of common stock or the availability of such shares for sale will have on
the market price prevailing from time to time.
DESCRIPTION OF INDEBTEDNESS
On June 2, 1997, in preparation for the consummation of the Plan, a
wholly-owned subsidiary of the Company entered into a two-year financing
agreement (the "CIT Credit Agreement") with CIT to provide direct borrowings and
the issuance of letters of credit on the Company's behalf in an aggregate amount
not exceeding $30,000,000, with a sublimit on letters of credit of $20,000,000.
The CIT Credit Agreement became effective on June 4, 1997 with the consummation
of the Plan. Until October 27, 1998, direct borrowings bore interest at prime
plus 1.0% (9.5% at October 3, 1998). After October 27, 1998, direct borrowings
will bear interest at prime minus 0.25%. The CIT Credit Agreement requires a
fee, payable monthly, on average outstanding letters of credit at a rate of 2%
annually. There were no direct borrowings outstanding under the CIT Credit
Agreement and approximately $10,481,460 was committed under unexpired letters of
credit as of November 27, 1998.
On October 27, 1998, the CIT Credit Agreement was amended to increase
the maximum working capital facility to $37,000,000 throughout the remainder of
1998 and to $42,000,000 thereafter as well as to
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<PAGE>
increase the letter of credit sublimit to $25,000,000.
The CIT Credit Agreement, as amended, contains certain reporting
requirements, as well as financial and operating covenants, related to capital
expenditures, the minimum net worth and the maintenance of a current assets to
current liabilities ratio, 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 and a limitation on paying dividends. The Company cannot exceed
$10,000,000 in stock repurchases or dividends in total for 1998 and 1999. The
Company has already expended $4,623,000 of the $10,000,000 available for the
repurchases of its common shares. The Company is currently in compliance with
all requirements contained in the CIT Credit Agreement.
LEGAL MATTERS
The validity of the shares of common stock being offered in this
prospectus will be passed upon for the Company by Parker Chapin Flattau &
Klimpl, LLP, New York, New York.
EXPERTS
The financial statements for the thirty-one weeks ended January 3,
1998, the twenty-two weeks ended June 4, 1997, and the fiscal years ended
December 28, 1996 and December 30, 1995 included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included in this prospectus in
reliance upon the authority of said firm as experts in giving said report.
-52-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets F - 2
Consolidated Statements of Operations F - 3
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 6
Report of Independent Public Accountants F - 14
Audited Consolidated Financial Statements:
Consolidated Balance Sheets F - 15
Consolidated Statements of Operations F - 16
Consolidated Statements of Stockholders' (Deficit) Equity F - 17
Consolidated Statements of Cash Flows F - 19
Notes to Consolidated Financial Statements F - 20
Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts F- 46
F-1
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
October 3, January 3,
1998 1998
---------------- -----------------
ASSETS
<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.
F-2
<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, $0- and $7,513, respectively).................... 680 212 1,372
-------------- -------------- -----------------
Income before reorganization costs, taxes, gain on sale,
fresh-start evaluation 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.
F-3
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
UNAUDITED
Thirteen Thirteen
Weeks Ended Weeks Ended
October 3, 1998 October 4, 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.
F-4
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<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>
Cash Flows from Operating Activities:
Net income................................................ $8,916 $4,585 $145,494
Adjustments to reconcile net income to net cash provided by
(used in) 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 investment..................... 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.
F-5
<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.
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
F-6
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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
======== ========
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.
F-7
<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.
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
F-8
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 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.
F-9
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 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.
F-10
<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.
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
F-11
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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.
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.
F-12
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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.
F-13
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
The Leslie Fay Company, Inc.:
We have audited the accompanying consolidated balance sheets of The Leslie Fay
Company, Inc. (a Delaware corporation and formerly The Leslie Fay Companies,
Inc.) and subsidiaries as of January 3, 1998 and December 28, 1996, and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for the thirty-one weeks ended January 3, 1998, the twenty-two
weeks ended June 4, 1997, and the fiscal years ended December 28, 1996 and
December 30, 1995. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 2 to the consolidated financial statements,
effective June 4, 1997, the Company emerged from protection under chapter 11 of
the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was confirmed
by the Bankruptcy Court on April 21, 1997. In accordance with AICPA Statement of
Position 90-7, the Company adopted "Fresh Start Reporting" whereby its assets,
liabilities and new capital structure were adjusted to reflect estimated fair
values as of June 4, 1997. As a result, the consolidated financial statements
for the periods subsequent to June 4, 1997 reflect the Reorganized Company's new
basis of accounting and are not comparable to the Predecessor Company's
pre-reorganization consolidated financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Leslie Fay Company, Inc.
and subsidiaries as of January 3, 1998 and December 28, 1996, and the results of
their operations and their cash flows for the thirty-one weeks ended January 3,
1998, the twenty-two weeks ended June 4, 1997, and the fiscal years ended
December 28, 1996 and December 30, 1995 in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
February 27, 1998, except with respect to
Note 6 as to which the date is March 31, 1998
F-14
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
January 3, December 28,
ASSETS 1998 1996
------------------ ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $18,455 $21,977
Restricted cash and cash equivalents............................... 1,358 --
Restricted short term investments.................................. 2,989 --
Accounts receivable- net of allowances for possible losses of $3,236
and $15,081, respectively....................................... 9,747 63,456
Inventories........................................................ 26,701 104,383
Prepaid expenses and other current assets.......................... 807 2,290
Assets of product lines held for sale or disposition............... -- 3,003
------------------ ------------------
Total Current Assets............................................ 60,057 195,109
Property, plant and equipment, at cost, net of accumulated
depreciation of $14 and $19,549, respectively................... 845 17,575
Excess of purchase price over net assets acquired-net of accumulated
amortization of $-0- and $10,848, respectively.................. -- 23,795
Deferred charges and other assets.................................. 149 1,182
------------------ ------------------
Total Assets....................................................... $61,051 $237,661
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable................................................... $11,530 $20,341
Accrued expenses and other current liabilities..................... 4,542 23,154
Accrued expenses and other current confirmation liabilities........ 4,347 --
Income taxes payable............................................... 25 634
Current portion of capitalized leases.............................. 160 --
Direct liabilities of product lines held for sale or disposition... -- 1,577
------------------ ------------------
Total Current Liabilities....................................... 20,604 45,706
Excess of revalued net assets acquired over equity under fresh-start
reporting, net of accumulated amortization of $2,667 11,041 --
Long term debt-capitalized leases.................................. 49 --
Deferred liabilities............................................... 143 --
Liabilities subject to compromise.................................. -- 337,433
------------------ ------------------
Total Liabilities.................................................. 31,837 383,139
------------------ ------------------
Commitments and Contingencies
Stockholders' (Deficit) Equity:
Preferred stock, $.01 and $-0- par value, respectively ; 500
and -0- shares authorized, respectively ; no shares issued
and outstanding................................................. -- --
Common stock, $.01 and $1 par value, respectively; 9,500 and
50,000 shares authorized, respectively; 3,400 and 20,000
shares issued and outstanding, respectively..................... 34 20,000
Capital in excess of par value..................................... 25,871 49,012
Accumulated retained earnings (deficit)............................ 3,309 (202,105)
Foreign currency translation adjustment............................ -- 581
------------------ ------------------
Subtotal........................................................ 29,214 (132,512)
Treasury stock, at cost -0- and 1,228 shares, respectively......... -- (12,966)
------------------ ------------------
Total Stockholders' (Deficit) Equity 29,214 (145,478)
------------------ ------------------
Total Liabilities and Stockholders' (Deficit) Equity............... $ 61,051 $ 237,661
================== ==================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-15
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
---------------- -------------------------------------------------
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales........................................ $73,091 $197,984 $429,676 $442,084
Cost of Sales.................................... 58,719 147,276 331,372 345,891
---------------- -------------- --------------- ---------------
Gross profit.................................. 14,372 50,708 98,304 96,193
---------------- -------------- --------------- ---------------
Operating Expenses:
Selling, warehouse, general and administrative
expenses.................................. 13,299 35,459 79,570 92,832
Provision for non-cash stock based
compensation.................................. 351 -- -- --
Depreciation and amortization expense......... 14 2,090 4,654 6,154
---------------- -------------- --------------- ---------------
Total operating expenses.................. 13,664 37,549 84,224 98,986
Other (income)................................ (947) (1,196) (3,885) (4,028)
Amortization of excess revalued net assets
acquired over equity...................... (2,667) -- -- --
---------------- -------------- --------------- ---------------
Total operating expenses, net................. 10,050 36,353 80,339 94,958
---------------- -------------- --------------- ---------------
Operating income.............................. 4,322 14,355 17,965 1,235
Interest and Financing Costs (excludes
contractual interest of $-0-, $7,513, $18,031
and $18,031, respectively)..................... 336 1,372 3,932 3,262
---------------- -------------- --------------- ---------------
Income(loss) before reorganization costs, taxes,
gain on sale, fresh-start revaluation and
extraordinary item............................. 3,986 12,983 14,033 (2,027)
Reorganization Costs............................. -- 3,379 5,144 16,575
---------------- -------------- --------------- ---------------
Income (loss) before taxes, gain on sale, fresh-
start revaluation and extraordinary item.. 3,986 9,604 8,889 (18,602)
Provision (benefit) for taxes.................... 677 451 (839) (761)
---------------- -------------- --------------- ---------------
Net Income (loss) before gain on sale, fresh-
start revaluation and extraordinary item.. 3,309 9,153 9,728 (17,841)
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 (Loss)............................. $3,309 $145,494 $9,728 ($17,841)
================ ============== =============== ===============
Net Income (Loss) per Share - Basic........... $0.97 * $0.52 ($0.95)
================ ============== =============== ===============
- Diluted........................... $0.96 * $0.52 ($0.95)
================ ============== =============== ===============
Weighted Average Shares Outstanding - Basic...... 3,400,000 * 18,771,836 18,771,836
================ ============== =============== ===============
- Diluted........................... 3,458,565 * 18,771,836 18,771,836
================ ============== =============== ===============
</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.
F-16
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Excess of
Accumulated
Pension
Capital in Obligation Accumulated
Common Stock Excess of Over Plan (Deficit)
Shares Par Value Par Value Assets Equity
------------- ------------ ------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 20,000,000 $20,000 $49,012 $ -- ($193,992)
Fiscal Year 1995
Net Loss -- -- -- -- (17,841)
Deferred Pension Liability -- -- -- (214) --
Foreign Currency Translation
Adjustments -- -- -- -- --
------------- ------------ ------------ ----------------- --------------
Balance at December 30, 1995 20,000,000 $20,000 $49,012 ($214) ($211,833)
Fiscal Year 1996
Net Income -- -- -- -- 9,728
Deferred Pension Liability Write-Off -- -- -- 214 --
Foreign Currency Translation Adjustments -- -- -- -- --
------------- ------------ ------------ ----------------- --------------
Balance at December 28, 1996 20,000,000 $20,000 $49,012 $ -- ($202,105)
Twenty-Two Weeks Ended June 4, 1997
Net Income -- -- -- -- 145,494
Revaluation Adjustment -- -- -- -- 56,611
Extinguishment of Old Stock (20,000,000) (20,000) (49,012) -- --
New Stock Issuance 3,400,000 34 24,966 -- --
------------- ------------ ------------ ----------------- --------------
Reorganized as of June 4, 1997 3,400,000 $34 $24,966 $ -- $ --
============= ============ ============ ================= ==============
Balance at June 4, 1997 3,400,000 $34 $24,966 $ -- $ --
Thirty-One Weeks Ended January 3, 1998
Net Income -- -- -- -- 3,309
Use of Pre-Consummation
Deferred Taxes -- -- 554 -- --
SFAS No. 123 - Stock Option
Compensation -- -- 351 -- --
------------- ------------ ------------ ----------------- --------------
Balance at January 3, 1998 3,400,000 $34 $25,871 $ -- $3,309
============= ============ ============ ================= ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-17
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(CONTINUED)
(In thousands, except share data)
<TABLE>
<CAPTION>
Foreign Total
Currency Stockholders'
Translation Treasury Stock (Deficit)
--------------------------
Adjustment Shares Amount Equity
------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $11 1,228,164 ($12,966) ($137,935)
Fiscal Year 1995
Net Loss -- -- -- (17,841)
Deferred Pension Liability -- -- -- (214)
Foreign Currency Translation Adjustments 82 -- -- 82
------------- ------------ ----------- ------------------
Balance at December 30, 1995 $93 1,228,164 ($12,966) ($155,908)
Fiscal Year 1996
Net Income -- -- -- 9,728
Deferred Pension Liability Write-Off -- -- -- 214
Foreign Currency Translation Adjustments 488 -- -- 488
------------- ------------ ----------- ------------------
Balance at December 28, 1996 $581 1,228,164 ($12,966) ($145,478)
Twenty-Two Weeks Ended June 4, 1997
Net Income -- -- -- 145,494
Revaluation Adjustment -- -- -- 56,611
Extinguishment of Old Stock (581) (1,228,164) 12,966 (56,627)
New Stock Issuance -- -- -- 25,000
------------- ------------ ----------- ------------------
Reorganized as of June 4, 1997 $ -- -- $ -- $25,000
============= ============ =========== ==================
Balance at June 4, 1997 $ -- -- $ -- $25,000
Thirty-One Weeks Ended January 3, 1998
Net Income -- -- -- 3,309
Use of Pre-Consummation Deferred Taxes -- -- -- 554
SFAS No. 123 - Stock Option
Compensation -- -- -- 351
------------- ------------ ----------- ------------------
Balance at January 3, 1998 $ -- -- $ -- $29,214
============= ============ =========== ==================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-18
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------------- ------------------------------------------------
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
----------------- ------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)....................................... $3,309 $145,494 $9,728 ($17,841)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization......................... 14 2,222 4,971 7,116
Amortization of excess net assets acquired over equity (2,667) -- -- --
Deferred taxes........................................ -- -- (1,103) (1,811)
Provision for possible losses on accounts receivable.. (182) 199 433 1,254
Provision for non-cash stock based compensation....... 351 -- -- --
(Gain) on sale of fixed assets........................ -- (347) -- --
Decrease (increase) in:
Restricted short-term investments................... (2,989) -- -- --
Accounts receivable................................. 6,845 (1,248) (9,296) 494
Inventories......................................... (7,586) 25,538 (5,600) 11,291
Prepaid expenses and other current assets........... 377 (66) 1,950 (16)
Income taxes refundable............................. -- -- 10,345 (1,735)
Deferred charges and other assets................... (149) 125 1,263 1,926
(Decrease) increase in:
Accounts payable, accrued expenses and other current
liabilities....................................... (6,544) (4,167) (11,860) 6,902
Income taxes payable................................ (806) (1,515) (395) (1,113)
Deferred credits and other noncurrent liabilities... 143 374 470 (243)
Changes due to reorganization activities:
Gain on disposition of Sassco Fashions line, fresh-
start revaluation and extraordinary gain on debt
discharge......................................... -- (136,341) -- --
Reorganization costs................................ -- 3,379 5,144 16,575
Payment of reorganization costs..................... -- (917) (7,757) (25,792)
Use of pre-consummation deferred taxes.............. 554 -- -- --
----------------- ------------------------------------------------
Total adjustments................................. (12,639) (112,764) (11,435) 14,848
----------------- ------------------------------------------------
Net cash (used in) provided by operating activities (9,330) 32,730 (1,707) (2,993)
----------------- ------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures.................................... (859) (3,731) (8,640) (3,977)
Proceeds from sale of assets............................ -- 467 -- --
Proceeds from sale of Castleberry....................... -- 600 -- --
Cash paid to sell/transfer the Sassco Fashions line..... -- (10,963) -- --
Proceeds from sale of Next Day Apparel (net of cash
provided of $405)..................................... -- -- -- 3,081
----------------- ------------------------------------------------
Net cash (used in) investing activities........... (859) (13,627) (8,640) (896)
----------------- ------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from borrowings................................ -- -- 55,170 11,940
Repayment of borrowings................................. -- -- (55,170) (8,440)
Repayment of long-term debt............................. (135) -- -- --
Payment of obligations under the Plan of Reorganization. (10,943) -- -- --
----------------- ------------------------------------------------
Net cash (used in) provided by financing activities (11,078) -- -- 3,500
----------------- ------------------------------------------------
Net (decrease) increase in cash and cash equivalents.... (21,267) 19,103 (10,347) (389)
Cash and cash equivalents, at beginning of period....... 41,080 21,977 32,324 32,713
----------------- ------------------------------------------------
Cash and cash equivalents, at end of period............. $19,813 $41,080 $21,977 $32,324
================= ================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-19
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Organization, Restatement of Prior Financial
Statements and Related Events:
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), in accordance with
generally accepted accounting principles, which, for certain financial statement
accounts, requires the use of management's estimates. Actual results could
differ from those estimates. The Company's fiscal year ends on the Saturday
closest to December 31st. The fiscal years ended January 3, 1998, December 28,
1996 and December 30, 1995 included 53, 52 and 52 weeks, respectively.
As a result of the consummation of the Joint Plan of Reorganization
("the Plan" - see Note 2) and the adoption of fresh-start reporting under the
American Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), the Company reported its financial results for the twenty-two
weeks ended June 4, 1997. This period contains financial statements and notes,
including the effects of the adoption of fresh-start reporting and consummation
of the Plan. The significant fresh-start reporting adjustments are summarized in
Note 2.
In the opinion of management, the information furnished reflects all
additional 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. Reorganization Case and Fresh-Start Reporting:
On April 5, 1993 ("the Filing Date"), The Leslie Fay Companies, Inc.
("Leslie Fay") and each of Leslie Fay Licensing Corp., Spitalnick Corp. and Hue,
Inc., wholly-owned subsidiaries of Leslie Fay (collectively the "Debtors"),
filed a voluntary petition under chapter 11 of the Bankruptcy Code (the
"Bankruptcy Code"). The Debtors operated their businesses as debtors in
possession subject to the jurisdiction and supervision of the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
Pursuant to an order of the Bankruptcy Court, the individual chapter 11 cases
were consolidated for procedural purposes only and were jointly administered by
the Bankruptcy Court.
On November 15, 1995, Leslie Fay Retail Outlets, Inc.; Leslie Fay
Factory Outlet (Alabama), Inc.; Leslie Fay Factory Outlet (California), Inc.;
Leslie Fay Factory Outlet (Iowa), Inc.; and Leslie Fay Factory Outlet
(Tennessee), Inc., all wholly-owned subsidiaries of Leslie Fay (collectively
referred to as the "Retail Debtors") filed voluntary petitions under chapter 11
of the Bankruptcy Code. The Retail Debtors operated their businesses as debtors
in possession following the November 15, 1995 filing date while pursuing an
orderly liquidation of their assets, also under chapter 11 of the Bankruptcy
Code.
In the chapter 11 cases, substantially all liabilities as of the Filing
Date were subject to compromise under the Plan. As part of the cases, the
Debtors and Retail Debtors notified all known claimants for the purpose of
identifying all pre-petition claims against them. Pursuant to orders of the
Bankruptcy Court, all proofs of claim
F-20
<PAGE>
were required to be filed by December 10, 1993 against the Debtors and December
12, 1995 against the Retail Debtors. Excluded from the requirement to file by
the December 10, 1993 bar date, among others, were certain claims by the
Internal Revenue Service ("IRS"), which were required to be filed by March 31,
1995. On April 8, 1996, the Debtors and Retail Debtors filed amended schedules
of liabilities with the Bankruptcy Court which established May 8, 1996 as the
supplemental bar date for certain creditors.
On October 31, 1995, the Debtors and the Committee of Unsecured
Creditors (the "Creditors Committee") filed the Plan pursuant to chapter 11 of
the Bankruptcy Code. The Plan was subsequently amended on March 13, 1996,
December 5, 1996, February 3, 1997 and February 28, 1997. On December 5, 1996,
the Debtors filed a Disclosure Statement for the Amended Joint Plan of
Reorganization pursuant to chapter 11 of the Bankruptcy Code (the "Disclosure
Statement"), which was also subsequently amended on February 3, 1997 and
February 28, 1997. The Plan provided for, among other things, the separation of
the Debtors' estates and assets into two separate reorganized entities. Under
the Plan, stockholders of the Company would not retain or receive any value for
their interest. The Debtors obtained Bankruptcy Court approval of the Disclosure
Statement on February 28, 1997. The Plan was approved by the creditors and on
April 21, 1997, the Bankruptcy Court confirmed the Plan.
The total number of claims, after resolution of the claims objection
process, approximated 4,300 and the claims value aggregated approximately
$338,000,000. The principal categories of claims classified as Liabilities
subject to compromise in the consolidated balance sheet at December 28, 1996 are
identified below.
Liabilities Subject to Compromise December 28, 1996
------------------------------------------- --------------------
(In thousands)
Trade and expense payable $ 42,187
Unsecured debt 253,004
Accrued interest 82
Other claims 42,160
---------
Total $337,433
=========
The Company had accrued $13,366,000 in 1993 for interest on
pre-petition debt accrued during the post-petition period, even though all or a
significant portion of such interest may not have been payable or paid as a
consequence of the Bankruptcy Code, which excuses such an obligation under
certain circumstances. For this reason, the Company decided not to accrue
interest on pre-petition debt in 1995 and 1994, and the interest payable was
reflected in pre-petition liabilities at December 29, 1995. The Plan did not
provide for the payment of this interest and, accordingly, this liability was
reclassified to provide for other claims, including an additional withdrawal
liability from a union retirement plan.
On June 4, 1997 (the "Consummation Date"), the Plan was consummated by
the Company 1) transferring the equity interest in both the Company and Sassco
Fashions, Ltd. ("Sassco"), which changed its name to Kasper A.S.L., Ltd. on
November 5, 1997, to its creditors in exchange for relief from the aggregate
amount of the claims estimated at $338,000,000; 2) assigning to certain
creditors the ownership rights to notes aggregating $110,000,000 payable by
Sassco; and 3) transferring the assets (including $10,963,000 of cash) and
liabilities of the Company's Sassco Fashions product line to Sassco and the
assets and liabilities of its Dress and Sportswear product lines to three
wholly-owned subsidiaries of the Company. In addition, the Company retained
approximately $41,080,000 in cash of which $23,580,000 was to pay administrative
claims as defined in the Plan. As provided for in the Plan, the Company issued
seventy-nine (79%) percent of its 3,400,000 new shares to its creditors in July
1997. The remaining twenty-one (21%) percent is being held back pending the
resolution of certain litigation before the Bankruptcy Court. The existing
stockholders of the Company at June 4, 1997 did
F-21
<PAGE>
not retain or receive any value for their equity interest in the Company.
Reference is made to the Exhibits attached hereto, and Item 1 - Recent
Developments contained in the Company's Form 10-K for the fiscal year ended
December 28, 1996 for a copy of the Plan and a summary of Plan provisions,
respectively.
In accordance with the Plan, the remaining Liabilities subject to
compromise were discharged and the Company recognized a gain of $73,541,000,
which is reflected as an Extraordinary Gain on Debt Discharge in the
consolidated statement of operations for the twenty-two weeks ended June 4,
1997.
Fresh-Start Reporting
Pursuant to the guidelines provided by SOP 90-7, the Company adopted
fresh-start reporting and reflected the consummation distributions under its
Plan in the consolidated balance sheet as of June 4, 1997 (the effective date of
the consummation of the Plan for accounting purposes). Under fresh-start
reporting, the Company's reorganization value of $25,000,000 was allocated to
its net assets on the basis of the purchase method of accounting.
The significant fresh-start reporting adjustments are summarized as
follows:
1. Cancellation of the old common stock pursuant to the Plan against
the accumulated deficit.
2. Allocation of the fair market value of the identifiable net assets
in excess of the reorganization value (negative goodwill) in
accordance with the purchase method of accounting. The negative
goodwill amount remaining after reducing non-current assets
acquired to zero was recorded as a deferred credit, "Excess of
revalued net assets acquired over equity under fresh-start
reporting" and is being amortized over three (3) years.
The resulting charge of $27,010,000 from all the fresh-start
adjustments, including the write-off of all revalued noncurrent assets (but
excluding the write-off of the old stock for $56,611,000), is presented as "loss
on revaluation of assets pursuant to adoption of fresh-start reporting" in the
consolidated statement of operations for the twenty-two weeks ended June 4,
1997.
The fresh-start reporting reorganization value of $25,000,000 was
established as the midpoint of a range ($20,000,000 - $30,000,000) established
by the Company's financial advisors. The calculation of the range was based on a
five-year analysis of the Company's projected operations for the remaining
operating product lines (fiscal years ended 1996 - 2001), which was prepared by
management, and a discounted cash flow methodology was applied to those numbers.
The five-year cash flow projections were based on estimates and
assumptions about circumstances and events that have not yet taken place. Such
estimates and assumptions are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the Company,
including, but not limited to, those with respect to the future course of the
Company's business activity.
Since fresh-start reporting has been reflected in the accompanying
consolidated balance sheet as of January 3, 1998, the consolidated balance sheet
as of that date is not comparable in material respects to any such balance sheet
for any period prior to June 4, 1997.
F-22
<PAGE>
3. Summary of Significant Accounting Policies:
(a) Business -
The Company is principally engaged in the design, arrangement for the
manufacture and sale of women's apparel.
(b) Principles of Consolidation -
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Cash Equivalents and Short Term Investments
All highly liquid investments with a remaining maturity of three months
or less at the date of acquisition are classified as cash equivalents. The
carrying amount of cash equivalents approximates fair value. Short term
investments consists of a one year U.S. Treasury Note maturing on June 30, 1998.
This note will be held to maturity and as such is valued at cost. At January 3,
1998, $1,358,000 of restricted cash and $2,989,000 in short term investments
will be used to pay administrative claims as defined in the Plan.
(d) Inventories -
Inventories are valued at the lower of cost (first-in, first-out;
"FIFO") or market.
(e) Property, Plant and Equipment -
Land, buildings, fixtures, equipment and leasehold improvements are
recorded at cost. Property under capital lease is recorded at the lower of the
net present value of the lease payments or the fair market value when acquired.
Major replacements or betterments are capitalized. Maintenance and repairs are
charged to earnings as incurred. For financial statement purposes, depreciation
and amortization are computed using the straight-line method over the estimated
useful lives of the assets.
(f) Excess of Purchase Price Over Net Assets Acquired -
The Excess of purchase price over net assets acquired first arose in
connection with the 1984 leveraged buyout of The Leslie Fay Company and was
allocated based upon the applicable product line's proportionate contribution to
pretax income. The asset was amortized on a straight-line basis, primarily over
a forty year period. On June 4, 1997, in connection with fresh-start reporting
requirements the remaining asset of $10,366,000 and the related ($3,106,000) of
accumulated amortization was written-off as part of the revaluation adjustments
(see Note 2). In 1996, the Company determined the Excess purchase price over net
assets acquired of its Castleberry product line was no longer recoverable based
on an offer to purchase the Castleberry product line in the fourth quarter.
Therefore, the Company recognized reorganization charges of $652,000 to
write-down a portion of the excess purchase price over net assets acquired,
which the Company believed would be unrecoverable in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long- Lived Assets to be Disposed Of."
F-23
<PAGE>
(g) Excess of Revalued Net Assets Acquired over Equity under Fresh-Start
Reporting -
Upon consummation of the Plan, the Company revalued its assets and
liabilities in accordance with the purchase method of accounting. The revalued
net assets under fresh-start reporting exceeded the equity value of the Company
by $13,708,000. This negative goodwill amount is being amortized over a three
(3) year period.
(h) Foreign Currency Translation -
The December 28, 1996 balance sheet accounts of the Company's Canadian
and European subsidiaries were translated into U.S. dollars at the current
exchange rate. Their income statement accounts were translated at the average
exchange rate for the period. Translation adjustments were included in
stockholders' (deficit) equity. The Company's Far East subsidiaries were
financed by U.S. dollar advances and all of their finished goods sales were to
the parent. Accordingly, the functional currency of the Far East subsidiaries
was the U.S. dollar, and remeasurement gains and losses (which were not
material) were included in determining net income for the period. The effect of
exchange rate changes on cash was not significant. All foreign subsidiaries were
either closed or spun-off in reorganization prior to June 4, 1997 (see Note 2).
(i) Income Taxes -
The Leslie Fay Company and its subsidiaries file a consolidated Federal
income tax return and record their tax expense and liabilities under the
liability method (see Note 7). Under this method, any deferred income taxes
recorded are provided for at currently enacted statutory rates on the
differences in the basis of assets and liabilities for tax and financial
reporting purposes. If recorded, deferred income taxes are classified in the
balance sheet as current or non-current based upon the expected future period in
which such deferred income taxes are anticipated to reverse.
No provision has been made for Federal income taxes on approximately
$24,200,000 of foreign earnings of subsidiaries, repatriated as a part of the
Plan as of June 4, 1997, as the Company's net operating loss carryforward was
utilized to offset the extent of the repatriation.
(j) Net Income (Loss) Per Share -
Net income (loss) per share, throughout the periods presented, is based
on the weighted average common shares outstanding and the common stock
equivalents that would arise from the exercise of stock options, if dilutive. In
March 1997, the FASB issued SFAS No. 128 - "Earnings Per Share", which requires
the presentation of net income (loss) per share to be replaced by basic and
diluted earnings per share. "Basic earnings (loss) per share" represents net
income divided by the weighted average shares outstanding and is consistent with
the Company's historical presentations. "Diluted earnings (loss) per share"
represents net income (loss) divided by the weighted average shares outstanding
adjusted for the incremental dilution of outstanding employee stock options and
awards, if dilutive. The Company adopted SFAS No. 128 at June 4, 1997.
Restatement of prior periods is not meaningful due to the consummation of the
Plan, the extinguishment of the existing stock and the issuance of new stock.
Had the provisions of SFAS No. 128 been applied as of December 28, 1996, the
Company believes it would not have a material impact on Net Income (Loss) per
share.
As of January 3, 1998, the basic weighted average common shares
outstanding is 3,400,000, and the weighted average shares outstanding assuming
dilution is 3,458,565. The difference of 58,565 relates to incremental shares
issuable relating to dilutive stock options.
F-24
<PAGE>
(k) Comprehensive Income -
SFAS No.130, "Reporting Comprehensive Income" establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. The objective of SFAS No.130 is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners ("comprehensive income"). Comprehensive income is the total of net
income and all other non-owner changes in equity which is presented in the
consolidated financial statements.
(l) Segment Disclosure -
SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending January 2, 1999. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 relates to
disclosure within the financial statements and is not expected to have a
material effect on the Company's financial statements.
(m) Prior Years' Reclassification -
Certain items previously reported in specific captions in the
accompanying financial statements have been reclassified to conform with the
current year's classifications.
(n) Accounting Estimate -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
4. Inventories:
Inventories, net of assets of product lines held for sale and
disposition (see Note 12) consist of the following:
January 3, December 28,
1998 1996
---- ----
(In thousands)
Raw materials $ 9,638 $ 33,151
Work in process 4,540 2,711
Finished goods 12,523 68,521
--------- ----------
Total inventories $ 26,701 $ 104,383
========= =========
The balances at December 28, 1996 include the inventories related to
the Sassco Fashions product line which was subsequently sold.
F-25
<PAGE>
5. Property, Plant and Equipment:
Property, plant and equipment, net of assets of product lines held for
sale and disposition (see Note 12), consist of the following:
January 3, December 28, Estimated
1998 1996 Useful Life
---- ---- -----------
(In thousands)
Land and buildings $ -- $ 170 25-40 years
Machinery, equipment and fixtures 284 23,395 5 - 10 years
Leasehold improvements 38 9,948 Various
Construction in progress 537 3,611 N/A
------ ---------
Property, plant and equipment, at cost 859 37,124
Less: Accumulated depreciation and
amortization (14) (19,549)
------ ---------
Total property, plant and
equipment, net $ 845 $ 17,575
====== =========
The balances at December 28, 1996 include the property, plant and
equipment related to the Sassco Fashions product line which was sold/transferred
on June 4, 1997 as provided in the Plan. In addition, all non-current assets
were written-off at June 4, 1997 under fresh-start reporting (see Note 2).
6. Debt:
(a) CIT Credit Agreement -
On June 2, 1997, in preparation for the consummation of the Plan, a
wholly-owned subsidiary of the Company entered into a two-year financing
agreement (the "CIT Credit Agreement") with CIT to provide direct borrowings and
to issue letters of credit on the Company's behalf in an aggregate amount not
exceeding $30,000,000, with a sublimit on letters of credit of $20,000,000. The
CIT Credit Agreement became effective on June 4, 1997 with the consummation of
the Plan. Direct borrowings bear interest at prime plus 1.0% (9.5% at January 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 were no direct
borrowings outstanding under the CIT Credit Agreement and approximately
$8,514,000 was committed under unexpired letters of credit as of January 3,
1998.
The CIT Credit Agreement, as amended, contains certain reporting
requirements, as well as financial and operating covenants. Financial covenants
include the attainment of a current assets to current liabilities ratio, an
interest to earnings ratio and minimum earnings. In addition, the CIT Credit
Agreement contains certain restrictive covenants, including limitations on the
incurrence of additional liens and indebtedness, a prohibition on paying
dividends, and limitation on capital expenditures. As collateral for borrowings
under the CIT Credit Agreement, the Company has granted to CIT a security
interest in substantially all of its assets. The Company is currently in
compliance with all requirements contained in the CIT Credit Agreement.
The Company paid $150,000 in commitment and related fees in connection
with the credit facility which was written-off as part of fresh-start reporting.
Another $250,000 in commitment fees was paid in June 1997. These fees are being
amortized as interest and financing costs over the two year term of the CIT
Credit Agreement.
F-26
<PAGE>
The provisions of the Company's Credit Agreement with CIT have been
modified three times:
On August 18, 1997, CIT waived the provision contained in section 10.17
of the Credit Agreement that set a minimum ratio of current assets to current
liabilities for the quarter ended July 5, 1997. This waiver was required due to
the later than anticipated consummation of the Plan of Reorganization that
caused a higher level of confirmation expenses to remain unpaid as of July 5,
1997. Such unpaid confirmation expenses were collateralized by an equal amount
of cash and securities.
On February 23, 1998, CIT amended several of the provisions of the
Credit Agreement in order to adjust for the fresh start accounting adjustments
made in accordance with generally accepted accounting principles following the
Company's exit from bankruptcy. As part of the initial financing agreement
entered into by the Company with CIT on June 2, 1997, CIT had agreed to make the
appropriate amendments caused by "fresh start."
This February 23, 1998 amendment also included an increase in the level
of allowed annual capital expenditures to conform to the Company's requirements.
On March 31, 1998, CIT amended numerous sections of the Credit
Agreement in order to permit the Company to:
o Purchase, acquire or invest in businesses, subject to the approval of
CIT. Such acquisitions or investments may include the assumption of
debt, liens, guarantees, or contingent liabilities.
o Pay dividends or repurchase the Company's common stock up to an
aggregate amount of $5,000,000 in each fiscal year 1998 and 1999. Such
payment may also be limited by not experiencing or incurring an event
of default under the Credit Agreement that includes other restrictive
covenants. Further, such payment must also leave the Company with no
less than $5,000,000 in undrawn availability.
o Incur additional capital expenditures to the extent the prior year's
actual capital expenditures were less than the amount allowed for that
year. The Company's 1997 capital expenditures from June 4, 1997 through
the end of the fiscal year were $859,000. This amount was $641,000
below the 1997 covenant. Effectively, this raises the 1998 limit on
capital expenditures to $3,141,000.
(b) FNBB Credit Agreement/DIP Credit Agreement -
The Company previously had a facility for a $60,000,000 credit
agreement with The First National Bank of Boston ("FNBB") and BankAmerica
Business Credit, Inc. ("BABC"), as Facility Agents and FNBB as Administrative
Agent (the "FNBB Credit Agreement"). In connection with the consummation of the
Plan, the Company entered into an agreement (the "Paydown Agreement") with its
lenders under the FNBB Credit Agreement to paydown any remaining obligations
under the FNBB Credit Agreement and terminate the FNBB Credit Agreement on June
4, 1997. The FNBB Credit Agreement had expired on May 31, 1997, but continued in
effect until the consummation of the Plan with the consent of both the lenders
and the Company.
The FNBB Credit Agreement provided for post-petition direct borrowings
and the issuance of letters of credit on the Debtors' behalf in an aggregate
amount not exceeding $60,000,000, subject to being permanently reduced on a
dollar-for-dollar basis for any net cash proceeds received from the sale of
assets after March 20, 1995 for which the proceeds exceeded $20,000,000 in the
aggregate up to a maximum of $40,000,000 on a cumulative basis. No qualifying
asset sales were made which would have reduced the facility borrowing limits.
Beginning January 1, 1997,
F-27
<PAGE>
the sublimit on the revolving line of credit was $20,000,000 and the sublimit
for letters of credit was $50,000,000.
There were no direct borrowings outstanding under the FNBB Credit
Agreement and approximately $32,169,000 was committed under unexpired letters of
credit as of December 28, 1996.
Direct borrowings bore interest at prime plus 1.5% (9.75% at December
28, 1996) and the FNBB Credit Agreement required a fee, payable monthly, on
average outstanding letters of credit at a rate of 2% annually. The FNBB Credit
Agreement, as amended, contained certain reporting requirements, as well as
financial and operating covenants through December 28, 1996 related to minimum
and maximum inventory levels, capital expenditures and attainment of minimum
earnings before reorganization, interest, taxes and depreciation and
amortization. As collateral for borrowings under the FNBB Credit Agreement, the
Company had granted to FNBB and BABC a security interest in substantially all
assets of the Company. In addition, the FNBB Credit Agreement contained certain
restrictive covenants, including limitations on the incurrence of additional
liens and indebtedness and a prohibition on paying dividends.
The Company incurred $473,000, $1,234,000 and $1,876,000, respectively,
in commitment and related fees in connection with the credit facilities for the
twenty-two, fifty-two and fifty-two weeks ended June 4, 1997, December 28, 1996
and December 30, 1995. These fees were amortized as interest and financing costs
over the terms of the respective agreements.
(c) Senior Debt -
On January 4, 1990, the Company issued $50,000,000 of 9.53% unsecured
Senior Notes ("Senior Notes") and $25,000,000 of 10.54% unsecured Senior
Subordinated Notes ("Subordinated Notes"), pursuant to note agreements. The
Senior Notes and Subordinated Notes were payable in annual installments of
$7,142,857 beginning January 1994 and $8,333,333 beginning January 2000,
respectively. The Company defaulted on these notes with its chapter 11 filings
and these notes were settled as part of the Plan.
As a result of the chapter 11 filings (see Notes 1 and 2), all
long-term debt outstanding at April 5, 1993 was classified as Liabilities
subject to compromise. The Company breached covenants in substantially all of
its then existing debt instruments as a result of the accounting irregularities
and the chapter 11 filing.
F-28
<PAGE>
Debt consisted of the following:
January 3, December 28,
(In thousands) 1998 1996
------ -----
CIT Credit Agreement $ -- $ --
FNBB Credit Agreement -- --
Financing Agreement:
Revolver; variable interest
rates, due through December 31, 1994 -- 78,004
Lines of credit; variable interest rates,
due through December 31, 1994 -- 100,000
------------ ---------
Total debt under financing agreement -- 178,004
------------ ---------
Senior debt:
Senior notes; 9.53% interest rate, due
January 15, 2000 -- 50,000
Senior subordinated notes; 10.54% interest
rate, due January 15, 2002 -- 25,000
------------ ----------
Total senior debt -- 75,000
------------ ----------
Total debt -- 253,004
Less: Liabilities subject to compromise -- 253,004
------------ ----------
Total long-term debt $ -- $ --
=========== ==========
In accordance with the Plan, the Liabilities subject to compromise were
discharged on June 4, 1997.
F-29
<PAGE>
7. Income Taxes:
For the thirty-one, twenty-two, fifty-two and fifty-two weeks ended
January 3, 1998, June 4, 1997, December 28, 1996 and December 30, 1995,
respectively, the following provisions (benefits) for income taxes were made:
<TABLE>
<CAPTION>
(In thousands)
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
----------------- ----------- ----------------- --------------
<S> <C> <C> <C> <C>
Current:
Federal $ 460 $ 1,400 $ 130 $(37)
State 217 2,428 39 100
Foreign -- 351 95 987
---------- -------- --------- -------
677 4,179 264 1,050
---------- -------- --------- -------
Deferred:
Federal -- -- -- --
State -- -- -- --
Foreign -- -- (1,103) ( 1,811)
---------- -------- --------- -------
-- -- (1,103) ( 1,811)
---------- -------- --------- -------
Total tax provision (benefit)
for income taxes 677 4,179 (839) (761)
Less: Taxes on sale
of Sassco Fashions line -- (3,728) -- --
---------- ------- --------- --------
Tax provision (benefit)
for income taxes $ 677 $ 451 $(839) $(761)
========== ======== ========= ========
</TABLE>
The Company recognized Federal and state income taxes for the
thirty-one weeks ended January 3, 1998 of $677,000. There is no Federal tax
provision currently recognizable, other than based on the alternative minimum
tax regulations, due to existing net operating loss carryforwards and the
benefits of significant temporary differences recognized in the period ended
January 3, 1998.
The Company recognized Federal, state and foreign income taxes for the
twenty-two weeks ended June 4, 1997 of $451,000. There is no Federal income tax
provision currently recognizable, other than that based on the alternative
minimum tax regulations, due to existing net operating loss carryforwards. An
additional $3,728,000 of Federal and state taxes were recorded against the Gain
on the disposition of the Sassco Fashions product line. For the fifty-two weeks
ended December 28, 1996 and December 30, 1995, the Company recognized an income
tax credit of $1,103,000 and $1,811,000, respectively, representing a reduction
of foreign income tax liabilities as a result of negotiated settlements on prior
years' estimated taxes, which offset the Federal, state, local and foreign taxes
of $264,000 and $1,050,000 in 1996 and 1995, respectively. In connection with
the adoption of fresh start reporting (see Note 2), the net book values of all
non-current assets existing at the consummation date were eliminated by negative
goodwill. As a consequence, tax benefits realized for book purposes for any
period after the consummation for cumulative temporary differences, net
operating loss carryforwards and tax credit carryforwards existing as of the
consummation date will be reported as an addition to paid-in-capital in excess
of par value rather than as a reduction in the tax provision in the statement of
operations.
F-30
<PAGE>
The difference between the Company's effective income tax rate and the
statutory Federal income tax rate is as follows:
<TABLE>
<CAPTION>
(In thousands, except percentages)
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
---------------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Tax provision (benefit) for
income taxes $ 677 $ 4,179 $( 839) $(761)
Income (Loss) before
provision (benefit) for
income taxes $ 3,986 $149,673 $ 8,889 $(18,602)
======= ======== ======= =========
Effective Tax Rate 17.0% 2.8% 9.4% 4.1%
Net state tax ( 5.4%) ( 1.3%) ( 0.3%) 0.4%
Net foreign tax -- ( 0.2%) 11.3% (11.4%)
Intangibles 23.4% -- ( 7.1%) 7.9%
Operating losses not utilized -- -- -- 34.2%
Utilization of net operating
losses -- 35% 23.2% --
Other -- (1.3%) (1.5%) (0.2%)
-----
Federal statutory rate 35.0% 35.0% 35.0% 35.0%
====== ====== ======= =======
</TABLE>
F-31
<PAGE>
The amounts comprising the temporary differences (the differences
between financial statement carrying values and the tax basis of assets and
liabilities) at the end of the respective periods are as follows:
<TABLE>
<CAPTION>
(In thousands)
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
---------------- ------------------ --------------- -------------
<S> <C> <C> <C> <C>
Customer reserves and allowances $ 4,108 $ 3,812 $ 11,550 $ 12,000
Restructuring and investigation 300 10,963 30,770 37,700
Depreciation 6,713 7,304 1,700 (300)
Inventory 2,553 2,337 12,640 16,500
Multi-employer pension payments -- -- -- (316)
Worker's compensation
insurance 572 572 4,280 2,500
Vacation pay accrual 490 421 1,200 1,300
Others 308 921 1,420 4,500
-------- --------- --------- ----------
Total temporary differences $ 15,044 $ 26,330 $ 63,560 $ 73,884
======== ========= ======== ==========
</TABLE>
The following is a summary of the estimated deferred income taxes,
i.e., future Federal income tax benefits at currently enacted rates, which have
been reflected in the financial statements as indicated below:
<TABLE>
<CAPTION>
(In thousands, except percentages)
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
----------------- ----------------- ---------------- -----------
<S> <C> <C> <C> <C>
Temporary differences $ 15,044 $ 26,330 $ 63,560 $ 73,884
Tax rate 35% 35% 35% 35%
---- ---- ---- ----
Tax effect of temporary differences 5,265 9,216 22,246 25,859
Valuation Allowance (5,265) (9,216) (22,246) (25,859)
-------
Deferred tax assets recognized $ -- $ -- $ -- $ --
------- ------- ------- --------
</TABLE>
At June 4, 1997 there were consolidated tax net operating losses of
approximately $50 million available to offset future taxable income, if any,
through fiscal year 2010. The utilization of these loss carryforwards to offset
future taxable income is subject to limitation under the "change in control"
provision of Section 382 of the Internal Revenue Code. The Company estimated
that the annual limitation imposed on the utilization of these loss
carryforwards by Section 382 will be approximately $1,500,000 per year,
resulting in an aggregate limitation on the use of these loss carryforwards of
approximately $21,000,000 through 2010.
The Company has also generated approximately $9,000,000 of loss
carryforwards during the period ended January 3, 1998 as a result of recognizing
various cumulative temporary differences arising in prior periods. These loss
carryforwards may be available to offset future taxable income, if any, without
limitation.
On February 26, 1996, the Company received $7,970,000 for the refund
from the amended tax returns for 1989 through 1991 plus interest of $2,375,000.
F-32
<PAGE>
8. Commitments and Contingencies:
(a) Leases -
The Company rents real and personal property under leases expiring at
various dates through 2002. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Total rent expense charged to
operations for the thirty-one, twenty-two, fifty-two and fifty-two weeks ended
January 3, 1998, June 4, 1997, December 28, 1996 and December 30, 1995, amounted
to $1,365,000, $4,599,000, $8,007,000 and $13,926,000, respectively. All capital
lease assets were written-off under fresh-start reporting (see Note 2).
Minimum annual rental commitments under operating and capitalized
leases in effect at January 3, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Capitalized
Fiscal Real Equipment Equipment
Years Estate & Other (including interest)
------ ------ --------- -------------------
(In thousands)
<S> <C> <C> <C>
1998 $ 1,431 $ 228 $ 160
1999 1,551 196 54
2000 1,658 181 18
2001 1,377 166 --
2002 342 -- --
--------- -------- --------
Total minimum lease payments $ 6,359 $ 771 $ 232
========= ======== ========
</TABLE>
(b) Legal Proceedings -
As discussed in Notes 1 and 2, on the Filing Dates, the Company and
several of its subsidiaries filed voluntary petitions in the Bankruptcy Court
under chapter 11 of the Bankruptcy Code. All civil litigation commenced against
the Company and those referenced subsidiaries prior to that date had been 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 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 an adversary proceeding in the Bankruptcy Court
to revoke the Confirmation Order. The Company has moved to dismiss the adversary
proceeding to revoke the Confirmation Order and that motion has been fully
briefed, but has not yet been argued to the Bankruptcy Court.
Both prior to and subsequent to the Filing Dates, various class action
suits were commenced on behalf of persons who were stockholders of the Company
prior to April 5, 1993. Any claims against the Company arising out of these
suits were discharged as part of, and in accordance with the terms of the Plan.
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
F-33
<PAGE>
dismissed those claims in their entirety. The Claimants have appealed that
decision to the United States District Court for the Southern District of New
York, the appeal has been fully briefed and argued and the parties are awaiting
a decision.
Several former employees, who are included among the Claimants in the
above-described pending appeal, have commenced an action alleging employment
discrimination against certain former officers and directors of the Company in
the United States District Court for the Southern District of New York. The
Court has dismissed all of the causes of action arising under federal and state
statutes, and the only remaining claims are those arising under the New York
City Human Rights Law. Discovery is complete and a pre-trial order has been
filed.
In addition to, and concurrent with, the proceedings in the Bankruptcy
Court, the Company is involved in or settled the following legal proceedings of
significance:
In November 1992, a class action entitled "Stephen Warshaw and Phillis
Warshaw v. The Leslie Fay Companies, Inc. et al." was instituted in the United
States District Court for the Southern District of New York. In January 1993 and
February 1993, the plaintiffs served amended complaints and thereafter twelve
other similar actions were commenced against the Company, certain of its
officers and directors and its then auditors, BDO Seidman. The complaints in
these cases, which purported to be on behalf of all persons who purchased or
acquired stock of the Company during the period from February 4, 1992 to and
including February 1, 1993, alleged that the defendants knew or should have
known material facts relating to the sales and earnings which they failed to
disclose and that if these facts had been disclosed, they would have affected
the price at which the Company's common stock was traded. A pre-trial order was
entered which had the effect of consolidating all of these actions and, in
accordance therewith, the plaintiffs have served the defendants with a
consolidated class action complaint which, because of the chapter 11 filing by
the Company, does not name the Company as a defendant. In March 1994, plaintiffs
filed a consolidated and amended class action complaint. This complaint added
certain additional parties as defendants, including Odyssey Partners, L.P.
("Odyssey"), and expanded the purported class period from March 28, 1991 to and
including April 5, 1993. In March 1995, BDO Seidman filed an answer and
cross-claims against certain of the officers and directors of the Company
previously named in this action and filed third-party complaints against
Odyssey, certain then current and former executives of the Company and certain
then current and former directors of the Company. These cross- claims and
third-party complaints allege that the Company's senior management and certain
of its directors engaged in fraudulent conduct and negligent misrepresentation.
BDO Seidman sought contribution from certain of the defendants and each of the
third-party defendants if it were found liable in the class action, as well as
damages. On March 7, 1997, a stipulation and agreement was signed pursuant to
which all parties agreed to settle the above described litigation for an
aggregate sum of $34,700,000. The officers' and directors' share of the
settlement is covered by the Company's officers' and directors' liability
insurance. The settlement specifically provides that the officers and directors
deny any liability to the plaintiffs and have entered into the settlement solely
to avoid substantial expense and inconvenience of litigation. The Company has no
obligations under this settlement. The District Court approved this settlement
and signed the final order of dismissal on May 8, 1997. The settlement has been
fully consummated.
In February 1993, the Securities and Exchange Commission obtained an
order directing a private investigation of the Company in connection with, among
other things, the filing by the Company of annual and other reports that may
have contained misstatements, and the purported failure of the Company to
maintain books and records that accurately reflected its financial condition and
operating results. The Company is cooperating in this investigation.
In February 1993, the United States Attorney for the Middle District of
Pennsylvania issued a Grand Jury Subpoena seeking the production of documents as
a result of the Company's announcement of accounting irregularities. In 1994,
Donald F. Kenia, former Controller of the Company, was indicted by a federal
grand jury in the Middle
F-34
<PAGE>
District of Pennsylvania and pled guilty to the crime of securities fraud in
connection with the accounting irregularities. On or about October 29, 1996,
Paul F. Polishan, former Senior Vice President and Chief Financial Officer of
the Company, was indicted by the federal grand jury in the Middle District of
Pennsylvania for actions relating to the accounting irregularities. The trial of
the case against Paul F. Polishan has not yet occurred.
In March 1993, a stockholder derivative action entitled "Isidore
Langer, derivatively on behalf of The Leslie Fay Companies, Inc. v. John J.
Pomerantz et al." (the "Derivative Action") was instituted in the Supreme Court
of the State of New York, County of New York, against certain officers and
directors of the Company and its then auditors. This complaint alleges that the
defendants knew or should have known material facts relating to the sales and
earnings of the Company which they failed to disclose. The time to answer, move
or otherwise respond to the complaint has not yet expired. The plaintiff seeks
an unspecified amount of monetary damages, together with interest thereon, and
costs and expenses incurred in the action, including reasonable attorneys' and
experts' fees. The Company cannot presently determine the ultimate outcome of
this litigation, but believes that it should not have any unfavorable impact on
the financial statements. Pursuant to the Modification of the Third Amended and
Restated Joint Plan of Reorganization filed on April 4, 1997, a Derivative
Action Board, comprised of three persons or entities appointed by the Bankruptcy
Court, upon nomination by the Creditors' Committee, shall determine by a
majority vote whether to prosecute, compromise and settle or discontinue the
Derivative Action.
On February 23, 1996, Albert Nipon and American Pop Marketing Group,
Inc. commenced an action against the Company in the United States Bankruptcy
Court, Southern District of New York seeking, inter alia, a declaratory judgment
with respect to the use of the Company's "Albert Nipon" trademark and trade
name. The Company has asserted counter claims. Upon a record of stipulated facts
and submissions of memorandum of law, an oral argument on this matter was heard
on May 9, 1997. On December 23, 1997, the Court ruled in favor of the Company
finding the plaintiffs in violation of the Federal and New York Trademark
Statutes and of unfair competition under common law. The plaintiffs have
appealed and the Company has cross appealed to recover its costs and expenses in
the litigation.
(c) Management Agreements -
In connection with the Plan, the Company entered into one-year
management contracts with several officers and key employees with annual
salaries of $1,900,000.
(d) Concentrations of Credit Risk -
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist primarily of
trade accounts receivable. The Company's customers are not concentrated in any
specific geographic region, but are concentrated in the retail apparel business.
For the fifty-three weeks ended January 3, 1998, excluding the Sassco Fashion
and Castleberry product lines, three customers of the continuing Leslie Fay
business accounted for 33%, 12% and 8% of the reorganized Company's sales. In
1996 for continuing businesses only, three customers accounted for 35%, 19%, and
4.5% of the Company's sales. The Company has established an allowance for
possible losses based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
On June 2, 1997 the Company entered into a factoring agreement with
CIT, whereby CIT provides a guarantee of collection for all shipments approved
by CIT. Under the factoring agreement these receivables are purchased by CIT. On
January 3, 1998 the Company's accounts receivable included $8,800,000 due from
CIT net of reserves.
F-35
<PAGE>
9. Stockholders' (Deficit) Equity
The authorized common stock of the reorganized Company consists of
9,500,000 shares of common stock with a par value $.01 per share. At June 4,
1997, 3,400,000 shares were issued and outstanding and were being held by the
plan administrator in trust. In July 1997, 2,686,000 (79%) of the shares were
distributed. The remaining twenty-one (21%) percent is being held back for the
benefit of its creditors pending the resolution of certain disputed claims
before the Bankruptcy Court. The old common stock was extinguished at June 4,
1997 and the old stockholders of the Company did not retain or receive any value
for their equity interest.
In addition, 500,000 shares of Preferred Stock of the reorganized
Company were authorized at June 4, 1997 with a par value of $.01. None of such
shares have been issued.
10. Stock Option Plan:
Information regarding the Company's stock option plan is summarized
below:
<TABLE>
<CAPTION>
Number of Shares Option Price Per Share
------------------- ---------------------------
<S> <C> <C> <C>
Outstanding at December 30, 1995 148,875 $3.31 - $14.00
Granted -- -- - --
Exercised or surrendered -- -- - --
Canceled (22,000) 3.50 - 14.00
--------
Outstanding at December 28,1996 126,875 3.31 - 14.00
Termination of old plan (126,875) 3.31 - 14.00
Granted 510,121 6.18 - 12.50
Exercised or surrendered -- -- - --
Canceled -- -- - --
-------
Outstanding at January 3, 1998 510,121 6.18 - 12.50
</TABLE>
The Plan provides stock options to certain senior management equal to
seventeen and one-half (17.5%) percent of the reorganized Company's common stock
outstanding (assuming the exercise of all options). Of this amount, the first
ten (10%) or 412,121 options were granted as of June 4, 1997, one-third of which
will vest on each of the first three anniversaries of the Consummation Date. In
addition, each initial non-employee director of the Company has been granted
10,000 stock options for a total of 50,000 options. The options may be exercised
for $6.18 per share. The Plan provided that additional options of another two
and one-half (2.5%) to seven and one-half (7.5%) percent of common stock (a
maximum of 309,091 options) will be granted upon a sale of the Company where the
imputed enterprise value exceeds $37,500,000. The Company issued 48,000
additional options to non-employee directors and middle management during the
period. These options may be exercised for a price between $11.50 and $12.50 per
share. No options were exercisable at January 3, 1998.
Effective as of the Consummation Date, the Company adopted the
provisions of SFAS No. 123 - "Accounting for Stock-Based Compensation." Under
SFAS No.123 utilizing the fair value based method, compensation cost is measured
at the grant date based upon the value of the award and is recognized over the
service period. The fair value of the options granted on June 4, 1997 was
estimated using the Black-Scholes option pricing model based upon the following
assumptions: risk free interest rate of 6.47%, expected life of 5 years, and
volatility of 34%. The compensation expense of approximately $1.8 million is
being recognized over the service period of three years. Had
F-36
<PAGE>
SFAS No. 123 been adopted prior to the Consummation Date in fiscal years 1995,
1996 and the twenty-two weeks ended June 4, 1997, there would have been no
effect on the Company's financial statements.
The consummation of the Plan terminated all options under a Stock
Option Plan which had provided for the grant of up to an aggregate of 1,000,000
shares of the Company's common stock to its key employees. In December 1992, the
Board of Directors approved an increase in the aggregate number of shares which
could be granted to 1,500,000. This increase was subject to stockholder approval
which was never solicited.
Under the plan, incentive stock options were granted to purchase shares
of common stock at not less than the fair market value of such shares at the
date of the grant. Additionally, non-qualified options were granted to purchase
shares of common stock at an amount not less than 98% of the fair market value
of such shares at the date of grant. In general, the options vested over a four
year period and were exercisable no later than five years from the date of
grant.
11. Retirement Plans:
(a) Defined Benefit Plan -
In January 1992, the Company established a non-contributory defined
benefit pension plan covering certain salaried, hourly and commission-based
employees. Plan benefits are based upon the participants' salaries and years of
service. The plan was amended to freeze benefit accruals effective December 31,
1994 and, in connection with the Company's reorganization, to terminate the plan
effective December 31, 1996. Investments are made primarily in U.S. Government
obligations and common stock. The following major assumptions were used in the
actuarial valuations:
1997 1996 1995
---- ---- ----
Discount rate 7.5% 7.5% 8.8%
Long-term rate of return on assets 8.8% 8.8% 8.8%
Average increase in compensation N/A N/A N/A
Net periodic pension cost recognized in the thirty-one, twenty-two,
fifty-two and fifty-two weeks ended January 3, 1998, June 4, 1997, December 28,
1996 and December 30, 1995 were $0, $0, $195,000 and $341,000, respectively. The
components of this cost are as follows:
<TABLE>
<CAPTION>
(in thousands)
Thirty-one Twenty-two Fifty-two Fifty-two
weeks ended weeks ended weeks ended weeks ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service costs $ -- $ -- $ -- $ --
Interest cost 47 38 127 223
Actual return on assets (74) (98) (111) 417
Recognition of partial settlement
of pension obligations -- -- 106 200
Net amortization and deferral 27 60 73 (499)
--------- --------- --------- ------
Net periodic pension cost $ -- $ -- $ 195 $ 341
========= ========= ========= ======
</TABLE>
F-37
<PAGE>
The following table summarizes the funding status of the plan at January 3,
1998, June 4, 1997, December 28, 1996 and December 30, 1995:
<TABLE>
<CAPTION>
(In thousands)
Thirty-one Twenty-two Fifty-two Fifty-two
weeks ended weeks ended weeks ended weeks ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations
Vested $ -- $(1,867) $(2,034) $(1,639)
Non-vested -- -- ( 97) (196)
-------- -------- -------
Total accumulated benefit obligation $ -- $(1,867) $(2,131) $(1,835)
============ ======== ======== ========
Projected benefit obligation -- (1,867) (2,131) (1,835)
Estimated fair value of assets -- 1,054 1,062 1,359
------------- --------
Excess of projected benefit
obligation over plan assets -- ( 813) (1,069) (476)
Unrecognized prior service costs -- -- -- 262
Unrecognized net loss -- -- -- 313
Additional minimum liability under -- -- -- (575)
------------- -------- -------
SFAS No. 87
Accrued Pension Costs -- $( 813) $(1,069) $(476)
============= ========= ======== =========
</TABLE>
Under the requirements of SFAS No. 87 - "Employers' Accounting for
Pensions", an additional minimum pension liability representing the excess of
accumulated benefits over plan assets and accrued pension costs, was recognized
at December 30, 1995. A corresponding amount was recognized as an intangible
asset to the extent of unrecognized prior service costs with the balance
recorded as a separate reduction of stockholders' equity. As a result of the
plan termination, in the fourth quarter of 1996, the Company recorded an
additional $676,000 as reorganization expense to write-off these assets and
record an additional liability of $813,000 to fully fund the plan.
(b) Defined Contribution Plan -
The Company also maintains a qualified voluntary contributory profit
sharing plan covering certain salaried, hourly and commission-based employees.
Certain Company matching contributions to the plan are mandatory. Other
contributions to the plan are discretionary. Total contributions to the plan may
not exceed the amount permitted as a deduction pursuant to the Internal Revenue
Code. The contributions charged to operations for the thirty-one, twenty-two,
fifty-two and fifty-two weeks ended January 3, 1998, June 4, 1997, December 28,
1996 and December 30, 1995 amounted to $75,000, $113,000, $321,000 and $531,000,
respectively.
(c) Other -
The Company participates in a multi-employer pension plan. Such plans
were underfunded as of January 1, 1994. The plans provide defined benefits to
unionized employees. Amounts charged to operations for contributions to the
pension funds in 1996 and 1995 amounted to approximately $965,000 and
$1,295,000. The Company
F-38
<PAGE>
increased the established reserve within Liabilities subject to compromise in
1996 to the expected settlement of $14,875,000. This claim was settled upon
consummation of the Plan.
The Company does not provide for post-employment or post-retirement
benefits other than the plans described above.
12. Assets of Product Lines Held for Sale or Disposition:
As discussed in Note 2, in connection with the consummation of the
Plan, the Company sold or transferred all the assets and liabilities of its
Sassco Fashions product line on June 4, 1997 for an estimated exchange value of
$230,000,000. This value was the estimated reorganization value of the Sassco
Fashions product line which was calculated in a manner similar to the Company's
reorganization value (see Note 2). The resulting gain of $89,810,000, net of
taxes of $3,728,000, recorded from these transactions is reflected as a Gain
from the sale of the Sassco Fashions line in the consolidated statements of
operations.
The assets and liabilities sold and transferred included cash, accounts
receivable, inventory, property, plant and equipment, other assets (including
the trade name Albert Nipon), accounts payable, accrued expenses and other
liabilities related to the Sassco Fashions line. In addition, the Company
transferred to Sassco its 100% equity interest in several subsidiaries
associated with the Sassco Fashions line. As provided in the Plan, the creditors
of the Company became the shareholders of Sassco.
The gain on the disposition of the assets and liabilities of the Sassco
Fashions line is a taxable event and a substantial portion of the net operating
loss carryforwards available to the Company was utilized to offset a significant
portion of the taxes recognized on this transaction.
In 1996, the Company decided to sell its Castleberry product line and
recorded a restructuring charge of $2,004,000 for its disposition, including
$1,100,000 to increase the reserve to cover the write-off of the Excess of
purchase price over net assets acquired and projected additional losses on the
sale of net assets. On May 26, 1997, the Company sold the assets and liabilities
of its Castleberry line for $600,000. The resulting loss of $1,398,000 on the
sale was applied against Accrued expenses and other current liabilities at the
time of the sale.
F-39
<PAGE>
The components of Assets and Direct liabilities of product lines held
for sale and disposition at December 28, 1996 include:
<TABLE>
<CAPTION>
(In thousands)
Continuing Held
Total Operations For Sale
-------- -------------- --------
<S> <C> <C> <C>
Accounts receivable, net $ 63,930 $ 63,456 $ 474
Inventories 106,836 104,383 2,453
Prepaid expenses and other current assets 2,335 2,290 45
Property, plant and equipment, net 17,606 17,575 31
Deferred charges and other assets 1,182 1,182 --
-------
Total assets of product lines held for sale or disposition $ 3,003
========
Accounts payable $ 20,521 $ 20,341 $ 180
Accrued expenses and other current liabilities 24,551 23,154 1,397
--------
Total direct liabilities of product lines held for
sale or disposition $ 1,577
========
</TABLE>
Unaudited pro forma consolidated statements for the twenty-two weeks
ended June 4, 1997 and for the fiscal year ended December 28, 1996 are presented
below and include adjustments to give effect to the sales and the Plan (see Note
2) as if they occurred as of the beginning of the periods presented. A pro forma
consolidated balance sheet as of June 4, 1997 is not presented because the
transactions recording the Plan and the sale transactions are already reflected
in the balance sheet.
The unaudited pro forma financial statements have been prepared in
accordance with guidelines established by the Securities and Exchange
Commission. The historical balances were derived from the consolidated statement
of operations for the twenty-two weeks ended June 4, 1997 or from the financial
statements of the Company included in the December 28, 1996 Form 10-K. All
significant intercompany transactions have been eliminated.
F-40
<PAGE>
The unaudited proforma adjustments presented in the statements are as
follows:
<TABLE>
<CAPTION>
Column Heading Explanation
-------------- -------------
<S> <C> <C>
Column 1 Historical Operations The Consolidated Statement of Operations as it existed prior
to the adjustments.
Column 2 Disposition of Sassco The operating results of the Sassco Fashions line have been
eliminated to give effect to the disposition as of the
beginning of the period presented, including depreciation
expense on its property, plant and equipment, an allocated
corporate charge based on workload by department related to
the Sassco Fashions line and direct charges associated with
financing fees on its factoring agreement and fees incurred
on letters of credit issued on its behalf. For periods including
June 4, 1997, the gain recorded on the disposition of the
Sassco Fashions line has been reversed.
Column 3 Sale of Castleberry The operating results of the Castleberry line have been
eliminated to give effect to the disposition as of the
beginning of the period presented, including depreciation
expense on its property, plant and equipment and an
allocated corporate charge based on workload by department
related to the Castleberry line.
Column 4 Fresh Start Reporting To record the estimated effect of the Plan as if it had been
effective as of the beginning of period presented. This
includes adjustments for the following items:
a) The elimination of the historical depreciation and
amortization for the remaining product lines, including the
amounts in cost of sales, on the beginning of period asset
balances and the recording of the amortization credit for the
"Excess of revalued net assets acquired over equity under
fresh-start reporting" (assuming a three-year amortization
period).
b) The elimination of historical reorganization expense that
will not be incurred subsequent to the Consummation Date.
c) The elimination of the fresh-start revaluation charge and
the reversal of the gain on debt discharge pursuant to the
Plan.
</TABLE>
F-41
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-two Weeks Ended June 4, 1997
-------------------------------------------------------------------------------------------
Historical Disposition of Sale of Fresh Start Pro Forma
Operations Sassco Castleberry Reporting Adjusted Balance
--------------- --------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Net Sales............................... $197,984 ($136,107) ($2,808) $ -- $59,069
Cost of Sales.......................... 147,276 (101,573) (2,262) (32) 43,409
--------------- --------------- --------------- ---------- -------------
Gross profit........................ 50,708 (34,534) (546) 32 15,660
--------------- --------------- --------------- ---------- -------------
Operating Expenses:
Selling, warehouse, general and
administrative expenses 35,459 (23,666) (1,000) -- 10,793
Non-cash stock based compensation....... -- -- -- 250 250
Depreciation and amortization expense 2,090 (1,078) (41) (971) --
--------------- --------------- --------------- ---------- -------------
Total operating expenses.......... 37,549 (24,744) (1,041) (721) 11,043
Other (income)...................... (1,196) 260 -- -- (936)
Amortization in excess of revalued net
assets acquired over equity........ -- -- -- (1,905) (1,905)
--------------- --------------- --------------- ---------- -------------
Total operating expenses, net........... 36,353 (24,484) (1,041) (2,626) 8,202
---------------- --------------- --------------- ---------- -------------
Operating income........................ 14,355 (10,050) 495 2,658 7,458
Interest and Financing Costs (excludes
contractual interest)............. 1,372 (595) -- -- 777
--------------- --------------- --------------- ---------- -------------
Income (loss) before reorganization costs
taxes, gain on sale, fresh start
revaluation and extraordinary item 12,983 (9,455) 495 2,658 6,681
Reorganization Costs.................... 3,379 -- 14 (3,393) --
--------------- --------------- --------------- ---------- -------------
Income (loss) before taxes, gain on sale,
fresh start revaluation and extraordinary 9,604
item.............................. (9,455) 481 6,051 6,681
Taxes................................... 451 (342) -- 1,898 2,007
--------------- --------------- --------------- ---------- -------------
Net Income (loss) before gain on sale
fresh start revaluation and extraordinary,
item.............................. 9,153 (9,113) 481 4,153 4,674
Gain on disposition of Sassco Fashions line,
loss on revaluation of assets pursuant to
adoption of fresh-start reporting and
extraordinary gain on debt discharge. 136,341 (89,810) -- (46,531) --
--------------- --------------- --------------- ---------- -------------
Net Income (loss)................... $145,494 ($98,923) $481 ($42,378) $4,674
=============== =============== =============== ========== =============
Net Income (loss) per Share
- Basic and Diluted................ * $ 1.38
=============== =============
Weighted Average
Shares Outstanding - Basic and Diluted * 3,400,000
=============== =============
</TABLE>
*Earnings per share for the twenty-two weeks ended June 4, 1997 on a historical
basis is based on the old stock outstanding. The old stock was canceled under
the plan of reorganization and new stock was issued. Earnings per share on a pro
forma basis is calculated on the new stock outstanding.
F-42
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Fifty-two Weeks Ended December 28, 1996
-------------------------------------------------------------------------------------------
Historical Disposition of Sale of Fresh Start Pro Forma
Operations Sassco Castleberry Reporting Adjusted
Balance
--------------- --------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Net Sales............................... $ 429,676 $ (311,550) $ (8,073) $ -- $ 110,053
Cost of Sales.......................... 331,372 (238,477) (6,066) (85) 86,744
--------------- --------------- -------------- -------------- -------------------
Gross profit........................ 98,304 ( 73,073) (2,007) 85 23,309
--------------- --------------- -------------- -------------- -------------------
Operating Expenses:
Selling, warehouse, general and
administrative expenses........... 79,570 (50,936) (2,585) -- 26,049
Non-cash stock based compensation....... -- -- -- 600 600
Depreciation and amortization expense 4,654 (1,982) (31) (2,641) --
--------------- --------------- -------------- -------------- -------------------
Total operating expenses, net........... 84,224 (52,918) (2,616) (2,041) 26,649
Other income........................ (3,885) 1,038 -- -- (2,847)
Amortization in excess revalued net
assets acquired over equity....... -- -- -- (4,572) (4,572)
--------------- --------------- -------------- -------------- -------------------
Total operating expenses................ 80,339 (51,880) (2,616) (6,613) 19,230
--------------- --------------- -------------- -------------- -------------------
Operating income........................ 17,965 (21,193) 609 6,698 4,079
Interest and Financing Costs
(excludes contractual interest)..... 3,932 (1,634) -- -- 2,298
--------------- --------------- -------------- -------------- -------------------
Income (loss) before fresh-start
reorganization costs and taxes..... 14,033 (19,559) 609 6,698 1,781
Reorganization Costs.................... 5,144 -- (2,004) (3,140) --
--------------- --------------- -------------- -------------- -------------------
Income (loss) before taxes.......... 8,889 (19,559) 2,613 9,838 1,781
Taxes................................... (839) 969 -- -- 130
--------------- --------------- -------------- -------------- -------------------
Net Income (loss)................... $9,728 $(20,528) $2,613 $9,838 $1,651
=============== =============== ============== ============== ===================
Net Income (loss) per Share
- Basic and Diluted................ * $.49
=============== ===================
Weighted Average Common * 3,400,000
Shares Outstanding - Basic and Diluted
=============== ===================
</TABLE>
*Earnings per share for the fifty-two weeks ended December 28, 1996 on a
historical basis is based on the old stock outstanding. The old stock was
canceled under the plan of reorganization and new stock was issued. Earnings per
share on a pro forma basis is calculated on the new stock outstanding.
F-43
<PAGE>
13. Reorganization Costs:
The Company recognized reorganization costs during the thirty-one,
twenty-two, fifty-two and fifty-two week periods ended January 3, 1998, June 4,
1997, December 28, 1996 and December 30, 1995 as follows:
<TABLE>
<CAPTION>
(In thousands)
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
Professional fees and other $ 2,951 $ 3,719 $ 7,995
costs
Closed facilities and operations -- -- 1,082 10,138
Write-down of excess purchase -- -- 652 3,181
price
Plan administration costs -- 1,000 -- --
Retirement plan termination -- -- 676 --
Employee retention plan -- -- (509) --
Interest income -- ( 572) (476) (4,739)
--------- -------- --------
Total reorganization costs $ 3,379 $ 5,144 $16,575
========= ======== ========
</TABLE>
At June 4, 1997, costs of $800,000 were accrued to re-engineer the
business processes, review and revise the technology requirements and other
related costs to the downsizing and separation of the businesses and $1,000,000
to administer the Plan.
14. Accrued Expenses and Other Current Liabilities:
The components of Accrued expenses and other current liabilities, net
of direct liabilities of product lines held for sale or disposition (see Note
12), were as follows:
January 3, December 28,
1998 1996
--------------- -----------------
Bonus and Profit Sharing $ 1,240 $ 2,109
Professional Fees 601 375
Vacation 490 1,098
Reorganization Costs 301 9,229
Duty 399 3,626
Other Accrued Confirmation
Expenses 4,046 --
Other 1,812 6,717
-------- ---------
Total $ 8,889 $ 23,154
======== =========
F-44
<PAGE>
15. Supplemental Cash Flow Information:
Net cash paid (received) for interest and income taxes for the
thirty-one, twenty-two, fifty-two and fifty-two weeks ended January 3, 1998,
June 4, 1997, December 28, 1996 and December 30, 1995 were as follows:
Thirty-One Twenty-Two Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 3, June 4, December 28, December 30,
1998 1997 1996 1995
----- ---- ---- ----
Interest $ 367 $ 1,412 $ 1,047 $ 2,542
Income taxes 928 (2,694) (7,311) (218)
16. Unaudited Quarterly Results:
Unaudited quarterly financial information for 1997 and 1996 is set forth as
follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
1997 March June 4 July 5 September December
--------------- ----------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales $142,755 $ 55,229 $ 5,535 $ 41,562 $ 25,994
Gross profit 36,768 13,940 1,125 9,730 3,517
Net income (loss) 11,724 133,770 73 4,511 (1,275)
Net income (loss) per share
- - Basic * * $0.02 $1.33 ($0.38)
- - Diluted * * $0.02 $1.31 ($0.38)
1996 March June September December
--------------- ------------ -------------- -----------------
Net sales $121,202 $ 82,940 $134,907 $ 90,626
Gross profit 29,694 19,525 33,511 15,574
Net income (loss) 5,924 99 8,045 (4,340)
Net income (loss) per share
- Basic * * * *
- Diluted * * * *
</TABLE>
* Earnings per share is not presented 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.
F-45
<PAGE>
SCHEDULE II
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Reserves Beginning
Related to Balance
Balance at Sold Related to Costs Balance at
Beginning Product Continuing Charged to End
Description of Period Lines Operations Expense Deductions of Period
------------ ------------- -------------- -------------- -------------- -------------
Thirty-One Weeks Ended
January 3, 1998
<S> <C> <C> <C> <C> <C> <C>
Reserve for Allowances $2,534 $ -- $2,534 $ 5,505 ($4,941) $3,098
Other Receivable Reserves 88 -- 88 (64) -- 24
Reserve for Discounts (1) 934 -- 934 -- (934) --
Reserve for Doubtful Accounts 230 -- 230 (172) (10) 48
Reserve for Returns 29 -- 29 992 (955) 66
------- ---------- ------- ----------- ---------- ---------
Total Receivable Reserves $ 3,815 $ -- $ 3,815 $ 6,261 ($6,840) $ 3,236
======= ========== ======= =========== ========= =========
Taxation Valuation Allowance $ 9,216 $ -- $ 9,216 $ ($3,951) $ 5,265
======= ========== ======= =========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
Twenty-Two Weeks Ended
June 4, 1997
Reserve for Allowances $8,619 ($6,074) $2,545 $ 2,952 ($2,963) $2,534
Other Receivable Reserves 4,881 (4,212) 669 (581) -- 88
Reserve for Discounts (1) 588 -- 588 3,498 (3,152) 934
Reserve for Doubtful Accounts 895 (349) 546 (360) 44 230
Reserve for Returns 98 (69) 29 488 (488) 29
------- ---------- --------- ----------- ----------- ----------
Total Receivable Reserves $15,081 ($10,704) $ 4,377 $ 5,997 ($6,559) $ 3,815
======= ========= ======== ========== ----------- ==========
Taxation Valuation Allowance $22,246 ($ 8,900) $13,346 $ -- ($4,130) $ 9,216
======= =========== ======== ========== =========== ==========
Fifty-Two Weeks Ended
December 28, 1996
Reserve for Allowances $14,154 $ -- $14,154 $37,384 ($42,919) $8,619
Other Receivable Reserves 5,051 -- 5,051 (170) -- 4,881
Reserve for Discounts (2) 2,280 -- 2,280 27,827 (29,519) 588
Reserve for Doubtful Accounts 1,183 -- 1,183 (1,074) 786 895
Reserve for Returns 423 -- 423 9,354 (9,679) 98
------- ----------- ----------- ----------- ---------- -----------
Total Receivable Reserves $23,091 $ -- $23,091 $73,321 ($81,331) $15,081
======= =========== =========== =========== ========== ===========
Taxation Valuation Allowance $25,859 $ -- $ 25,859 $ -- ($ 3,613) $22,246
======= =========== =========== =========== ========== ===========
</TABLE>
(1) On June 2, 1997, the Company entered into a factoring agreement with
CIT, whereby CIT provides a guarantee of collection of all shipments
approved by CIT. Discounts given are no longer a risk/reserve of the
Company as receivables are sold to CIT net of discounts.
(2) On January 23, 1996, the Company entered into a factoring agreement
with Heller Financial for its Sassco Fashions product line, whereby
Heller provides a guarantee of collection for all shipments approved by
Heller. Discounts given by the Company for its Sassco products
subsequent to January 23, 1996 were no longer a risk/reserve of the
Company as receivables are sold to Heller net of discounts.
F-46
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
The Leslie Fay Company, Inc.
2,525,844
Shares
Common Stock
($.01 par value)
PROSPECTUS
Dealer Prospectus Delivery Obligation Until December 29, 1998, all
dealers that effect transactions in these securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
December 9, 1998
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
-------------------------------------------
The following table sets forth the expenses in connection with the
issuance and distribution of the securities being registered hereby. All such
expenses will be borne by the registrant; none shall be borne by any selling
stockholders.
Securities and Exchange
Commission registration fee $
Legal fees and expenses (1) *
Accounting fees and expenses (1) *
Miscellaneous (1) *
----
Total $ *
====
- -------------------------------
(1) Estimated.
*To be supplied by amendment.
Item 14. Indemnification of Directors, Officers, Employees and Agents.
------------------------------------------------------------
Section 145 of the General Corporation Law of Delaware ("DGCL")
provides that directors, officers, employees or agents of Delaware corporations
are entitled, under certain circumstances, to be indemnified against expenses
(including attorneys' fees) and other liabilities actually and reasonably
incurred by them in connection with any suit brought against them in their
capacity as a director, officer, employee or agent, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. Section 145 also provides that directors, officers, employees and
agents may also be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by them in connection with a derivative suit
bought against them in their capacity as a director, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made without
court approval if such person was adjudged liable to the corporation.
Article Tenth of the registrant's Certificate of Incorporation provides
that the registrant shall indemnify any and all persons whom it shall have power
to indemnify to the fullest extent permitted by the DGCL. Article VI of the
registrant's by-laws provide that the registrant shall indemnify authorized
representatives of the registrant to the fullest extent permitted by the DGCL.
The registrant's by-laws also permit the registrant to purchase insurance on
behalf of any such person against any liability asserted against such person and
incurred by such person in any capacity, or out of such person's status as such,
whether or not the registrant would have the power to indemnify such person
against such liability under the foregoing provision of the by-laws.
The registrant maintains a directors and officers liability insurance
policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy
insures the directors and officers of the registrant against loss arising from
certain claims made against such directors or officers by reason of certain
wrongful acts.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
---------------------------------------
(a) No shares have been sold by the registrant during the last three
years except for those shares issued to its creditors in July 1997 pursuant to
the Plan.
Item 16. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) Exhibits:
The following exhibits are filed as part of this registration
statement:
Exhibit Number Description
- -------------- ------------
2.1 Amended Joint Plan of Reorganization.(2)
3.1(a) Restated Certificate of Incorporation of the
registrant.(2)
3.1(b) Amendment to Restated Certificate of Incorporation of the
registrant.(4)
3.2 Amended and Restated By-laws of the registrant.(2)
4.1* Specimen Copy of Stock Certificate for shares of Common
Stock of the registrant.
4.2 Revolving Credit Agreement dated June 2, 1997 between
Leslie Fay Marketing, Inc. ("LFM") and the CIT
Group/Commercial Services, Inc. ("CIT").(2)
4.3 First Amendment dated February 23, 1998 to the Revolving
Credit Agreement between LFM and CIT.(5)
4.4 Second Amendment dated March 31, 1998 to the Revolving
Credit Agreement between LFM and CIT.(5)
4.5 Third Amendment dated October 28, 1998 to the Revolving
Credit Agreement between LFM and CIT.(9)
5.1* Opinion of Parker Chapin Flattau & Klimpl, LLP as to the
legality of securities being registered.
10.1 Employment Agreement dated as of January 4, 1998 between
the registrant and John J. Pomerantz.(8)
10.2 Employment Agreement dated as of January 4, 1998 between
the registrant and John Ward.(8)
10.3 Employment Agreement dated as of January 4, 1998 between
the registrant and Dominick Felicetti.(8)
10.4 Employment Agreement dated as of January 4, 1998 between
the registrant and Warren T. Wishart.(8)
10.5 1997 Management Stock Option Plan.(6)
II-2
<PAGE>
Exhibit Number Description
- -------------- -----------
10.6 1997 Non-Employee Director Stock Option and Stock
Incentive Plan.(7)
10.7 Factoring Agreement dated June 4, 1997 between LFM and
CIT.(2)
10.8 Lease Agreement dated December 13, 1989 between 1412
Broadway Associates and the Company, modified as of July
31, 1990 and August 1, 1990, for certain premises located
at 1412 Broadway, New York, New York. (1)
10.9 Modification of Lease Agreement dated August 11, 1998
between Fashion Gallery Owners (formerly 1412 Broadway
Associates) and the Company for certain premises located
at 1412 Broadway, New York, New York.(8)
10.10 Lease Agreement dated August 1, 1997 between John J.
Passan and the registrant for certain premises located at
One Passan Drive, Borough of Laflin, Luzerne County,
Pennsylvania.(3)
21.1 List of Subsidiaries.(5)
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Parker Chapin Flattau & Klimpl, LLP (included
in their opinion filed as Exhibit 5.1)
24.1 Power of Attorney (see page II-5 ).
- ------------------------------
*To be filed by amendment.
(1) Incorporated by reference to the Annual report on Form 10-K for the
fiscal year ended December 28, 1996.
(2) Incorporated by reference to Current Report on Form 8-K for an event
dated June 4, 1997.
(3) Incorporated by reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended July 5, 1997.
(4) Incorporated by reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended October 4, 1997
(5) Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended January 3, 1998.
(6) Incorporated by reference to the Company's Registration Statement on
Form S-8 relating to shares under the 1997 Management Stock Option
Plan.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-8 relating to shares under the 1997 Non-Employee Director Stock
Option and Stock Incentive Plan.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended July 4, 1998.
(9) Incorporated by reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended October 3, 1998.
II-3
<PAGE>
(b) Financial Statement Schedules:
See Index to Consolidated Financial Statements
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 14
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by
II-4
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 4th day of December, 1998.
The Leslie Fay Company, Inc.
By: /s/ John J. Pomerantz
----------------------------------
John J. Pomerantz
Chief Executive Officer and
Chairman of the Board of Directors
POWER OF ATTORNEY
The undersigned directors and officers of The Leslie Fay Company, Inc.
hereby constitute and appoint John J. Pomerantz, John A. Ward and Warren T.
Wishart and each of them, with full power to act without the other and with full
power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated
below any and all amendments (including post-effective amendments and amendments
thereto) to this registration statement under the Securities Act of 1933) and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratify and
confirm each and every act and thing that such attorneys-in-fact, or any of
them, or their substitutes, shall lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ John J. Pomerantz Chief Executive Officer and December 4, 1998
--------------------- Chairman of the Board of
John J. Pomerantz Directors
/s/ Warren T. Wishart Chief Financial and December 4, 1998
--------------------- Accounting Officer
Warren T. Wishart
/s/ Clifford B. Cohn Director December 4, 1998
---------------------
Clifford B. Cohn
/s/ Mark B. Dickstein Director December 4, 1998
----------------------
Mark B. Dickstein
/s/ Chaim Y. Edelstein Director December 4, 1998
-----------------------
Chaim Y. Edelstein
/s/ Mark Kaufman Director December 4, 1998
-----------------------
Mark Kaufman
/s/ Bernard Olsoff Director December 4, 1998
-----------------------
Bernard Olsoff
/s/Robert L. Sind Director December 4, 1998
-----------------------
Robert L. Sind
/s/John A. Ward Director December 4, 1998
-----------------------
John A. Ward
II-6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 27, 1998, except with respect to Note 6 as to which the
date is March 31, 1998, included in this registration statement of The Leslie
Fay Company, Inc.'s Form S-1 and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen, LLP
New York, New York
December 7, 1998.
