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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1998
COMMISSION FILE NO. 1-9196
THE LESLIE FAY COMPANY, INC.
Delaware 13-3197085
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1412 Broadway
New York, New York 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 221-4000
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [_]
There were 3,400,000 shares of Common Stock outstanding at May 15, 1998.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 4, 1998
and January 3, 1998......................................... 3
Consolidated Statements of Operations for the
Thirteen Weeks Ended April 4, 1998 and the
Fourteen Weeks Ended April 5, 1997.......................... 4
Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended April 4, 1998 and the
Fourteen Weeks Ended April 5, 1997.......................... 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 22
Item 2. Changes in Securities............................................. 22
Item 3. Defaults Upon Senior Securities................................... 22
Item 4. Submission of Matters to a Vote of Security Holders............... 22
Item 5. Other Information................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURES................................................................... 23
INDEX TO EXHIBITS........................................................... E-1
2
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 6,602 $18,455
Restricted cash and cash equivalents ...................... 1,169 1,358
Restricted short term investments ......................... 2,989 2,989
Accounts receivable- net of allowances for possible losses
of $3,324 and $3,236, respectively .................... 25,808 9,747
Inventories ............................................... 24,965 26,701
Prepaid expenses and other current assets ................. 650 807
------- -------
Total Current Assets ................................... 62,183 60,057
Property, plant and equipment, at cost, net of
accumulated depreciation of $34 and $14, respectively .. 1,301 845
Deferred charges and other assets ......................... 110 149
------- -------
Total Assets .............................................. $63,594 $61,051
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................... $10,162 $11,530
Accrued expenses and other current liabilities ............ 3,721 4,542
Accrued expenses and other current confirmation liabilities 4,158 4,347
Income taxes payable ...................................... 85 25
Current portion of capitalized leases ..................... 95 160
Total Current Liabilities .............................. 18,221 20,604
Excess of revalued net assets acquired over equity under
fresh-start reporting, net of accumulated amortization
of $3,810 and $2,667, respectively ................... 9,898 11,041
Long term debt-capitalized leases ......................... 53 49
Deferred liabilities ...................................... 202 143
------- -------
Total Liabilities ...................................... 28,374 31,837
------- -------
Stockholders' Equity:
Preferred stock, $.01 par value; 500 shares authorized;
no shares issued and outstanding ...................... -- --
Common stock, $.01 par value; 9,500 shares authorized;
3,400 shares issued and outstanding ................... 34 34
Capital in excess of par value ............................ 28,108 25,871
Accumulated retained earnings ............................. 7,078 3,309
------- -------
Total Stockholders' Equity ............................ 35,220 29,214
------- -------
Total Liabilities and Stockholders' Equity ................ $63,594 $61,051
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
3
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------- -------
THIRTEEN FOURTEEN
WEEKS ENDED WEEKS ENDED
APRIL 4, APRIL 5,
1998 1997
------------ ------------
<S> <C> <C>
Net Sales ........................................ $ 45,258 $ 142,755
Cost of Sales .................................... 33,260 105,987
------------ ------------
Gross profit .................................. 11,998 36,768
------------ ------------
Operating Expenses:
Selling, warehouse, general and administrative
expenses..................................... 7,536 23,102
Depreciation and amortization expense ......... 17 1,246
------------ ------------
Total operating expenses ................... 7,553 24,348
Other income .................................. (272) (956)
Amortization of excess revalued net assets..... (1,143) --
------------ ------------
Total operating expenses, net ................. 6,138 23,392
------------ ------------
Operating income .............................. 5,860 13,376
Interest and Financing Costs (excludes contractual
interest of $-0-, and $4,508, respectively) ... 190 868
------------ ------------
Income before reorganization costs and taxes ... 5,670 12,508
Reorganization Costs ............................. -- 468
Income before taxes ............................ 5,670 12,040
Taxes ............................................ 1,901 316
------------ ------------
Net Income .................................... $ 3,769 $ 11,724
============ ============
Net Income per Share - Basic ................... $ 1.11 $ 0.62
============ ============
- Diluted ................. $ 0.92 $ 0.62
============ ============
Weighted Average Shares Outstanding - Basic..... 3,400,000 18,771,836
============ ============
- Diluted... 4,091,500 18,771,836
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
4
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDAIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
------- -------
Thirteen Fourteen
Weeks Ended Weeks Ended
April 4, April 5,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 3,769 $ 11,724
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 20 1,327
Amortization of excess net assets acquired
over equity .................................... (1,143) --
Provision for compensation under stock option
grants.......................................... 396 --
Provision for possible loss on account
receivable...................................... 524 --
(Gain) loss on sale of fixed assets ............... -- (347)
Decrease (increase) in:
Accounts receivable ............................. (16,061) (29,737)
Inventories ..................................... 1,736 28,286
Prepaid expenses and other current assets........ 157 (15)
Deferred charges and other assets ............... 39 (858)
(Decrease) increase in:
Accounts payable, accrued expenses and other
current liabilities .......................... (1,569) (4,711)
Income taxes payable ............................ (540) 9
Deferred credits and other noncurrent
liabilities................................... 59 136
Changes due to reorganization activities:
Reorganization costs ............................ -- 468
Payment of reorganization costs ................. -- (998)
Use of pre-consummation deferred taxes........... 1,840 --
-------- --------
Total adjustments ............................ (15,066) (5,916)
-------- --------
Net cash (used in) provided by operating
activities................................ (11,297) 5,808
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................. (476) (2,024)
Proceeds from sale of assets ......................... -- 467
-------- --------
Net cash (used in) by investing activities.... (476) (1,557)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment - capitalized leases ....................... (61) --
Payment of obligations under Plan of Reorganization... (208) --
-------- --------
Net cash (used in) financing activities....... (269) --
-------- --------
Net (decrease) increase in cash and cash equivalents . (12,042) 4,251
Cash and cash equivalents, at beginning of period .... 19,813 21,977
-------- --------
Cash and cash equivalents, at end of period .......... $ 7,771 $ 26,228
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed 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 condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the Fiscal Year ended January 3, 1998 (the "1997 Form
10-K"). Interim taxes were provided based on the Company's estimated effective
tax rate for the year.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year, and the seasonality of the business may make projections of full year
results based on interim periods unreasonable.
Certain reclassifications have been made to the financial statements
for the fourteen weeks ended April 5, 1997 to conform to the current quarterly
presentation.
2. REORGANIZATION CASE AND FRESH-START REPORTING:
On April 5, 1993 ("the Filing Date"), The Leslie Fay Companies, Inc.
("Leslie Fay") and each of Leslie Fay Licensing Corp., Spitalnick Corp. and Hue,
Inc., wholly-owned subsidiaries of Leslie Fay (collectively the "Debtors"),
filed a voluntary petition under chapter 11 of the Bankruptcy Code (the
"Bankruptcy Code"). The Debtors operated their businesses as debtors in
possession subject to the jurisdiction and supervision of the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
Pursuant to an order of the Bankruptcy Court, the individual chapter 11 cases
were consolidated for procedural purposes only and were jointly administered by
the Bankruptcy Court.
On November 15, 1995, Leslie Fay Retail Outlets, Inc.; Leslie Fay
Factory Outlet (Alabama), Inc.; Leslie Fay Factory Outlet (California), Inc.;
Leslie Fay Factory Outlet (Iowa), Inc.; and Leslie Fay Factory Outlet
(Tennessee), Inc., all wholly-owned subsidiaries of Leslie Fay (collectively
6
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 were required to be filed by December 10,
1993 against the Debtors and December 12, 1995 against the Retail Debtors.
Excluded from the requirement to file by the December 10, 1993 bar date, among
others, were certain claims by the Internal Revenue Service ("IRS"), which were
required to be filed by March 31, 1995. On April 8, 1996, the Debtors and Retail
Debtors filed amended schedules of liabilities with the Bankruptcy Court which
established May 8, 1996 as the supplemental bar date for certain creditors.
On October 31, 1995, the Debtors and the Committee of Unsecured
Creditors (the "Creditors Committee") filed the Plan pursuant to chapter 11 of
the Bankruptcy Code. The Plan was subsequently amended on March 13, 1996,
December 5, 1996, February 3, 1997 and February 28, 1997. On December 5, 1996,
the Debtors filed a Disclosure Statement for the Amended Joint Plan of
Reorganization pursuant to chapter 11 of the Bankruptcy Code (the "Disclosure
Statement"), which was also subsequently amended on February 3, 1997 and
February 28, 1997. The Plan provided for, among other things, the separation of
the Debtors' estates and assets into two separate reorganized entities. Under
the Plan, stockholders of the Company would not retain or receive any value for
their interest. The Debtors obtained Bankruptcy Court approval of the Disclosure
Statement on February 28, 1997. The Plan was approved by the creditors and on
April 21, 1997, the Bankruptcy Court confirmed the Plan.
On June 4, 1997 (the "Consummation Date"), the Plan was consummated
by the Company 1) transferring the equity interest in both the Company and
Sassco Fashions, Ltd. ("Sassco"), which changed its name to Kasper A.S.L., Ltd.
on November 5, 1997, to its creditors in exchange for relief from the aggregate
amount of the claims estimated at $338,000,000; 2) assigning to certain
creditors the ownership rights to notes aggregating $110,000,000 payable by
Sassco; and 3) transferring the assets (including $10,963,000 of cash) and
liabilities of the Company's Sassco Fashions product line to Sassco and the
assets and liabilities of its Dress and Sportswear product lines to three
wholly-owned subsidiaries of the Company. In addition, the Company retained
approximately $41,080,000 in cash of which $23,580,000 was to pay administrative
claims as defined in the Plan. As provided for in the Plan, the Company issued
seventy-nine (79%) percent of its 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 not retain or receive any value
for their equity interest in the Company. Reference is made to the Exhibits
contained in the Company's Form 10-K for the fiscal year ended. January 3, 1998,
and Item 1 - Recent Developments contained in the Company's Form 10-K for the
7
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code", the Company adopted
fresh-start reporting and reflected the consummation distributions under the
Plan in the consolidated balance sheet as of June 4, 1997 (the effective date of
the consummation of the Plan for accounting purposes). Under fresh-start
reporting, the Company's reorganization value of $25,000,000 was allocated to
its net assets on the basis of the purchase method of accounting.
The significant fresh-start reporting adjustments are summarized as
follows:
1. Cancellation of the old common stock pursuant to the Plan against
the accumulated deficit.
2. Allocation of the fair market value of the identifiable net
assets in excess of the reorganization value (negative goodwill)
in accordance with the purchase method of accounting. The
negative goodwill amount remaining after reducing non-current
assets acquired to zero was recorded as a deferred credit,
"Excess of revalued net assets acquired over equity under
fresh-start reporting" and is being amortized over three (3)
years.
The resulting charge of $27,010,000 from all the fresh-start
adjustments, including the write-off of all revalued noncurrent assets (but
excluding the write-off of the old stock for $56,611,000), is presented 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
8
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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.
3. DISPOSITIONS:
As discussed in Note 2, in connection with the consummation of the
Plan, the Company sold or transferred all the assets and liabilities of its
Sassco Fashions product line on June 4, 1997 for an estimated exchange value of
$230,000,000. This value was the estimated reorganization value of the Sassco
Fashions Product line which was calculated in a manner similar to the Company's
reorganization value (see Note 2). The resulting gain of $89,810,000, net of
taxes of $3,728,000, recorded from these transactions is reflected as a Gain on
the disposition of the Sassco Fashions product line in the consolidated
statement of operations for the twenty-two weeks ended June 4, 1997.
In addition, on May 26, 1997, the Company sold the assets and
liabilities of its Castleberry product line for $600,000. The resulting loss of
$1,398,000 on the sale was previously recorded as reorganization expense in
fiscal 1996 and therefore, was applied against Accrued expenses and other
current liabilities at the time of the sale.
The unaudited pro forma consolidated statement of operations for the
fourteen weeks ended April 5, 1997 is presented below and includes adjustments
to give effect to the sales and the Plan (see Note 2) as if they occurred as of
the beginning of the period presented.
The unaudited pro forma financial statement has 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 fourteen weeks ended April 5, 1997. All significant
intercompany transactions have been eliminated.
The unaudited pro forma adjustments presented in the statement are as
follows:
9
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Column Heading Explanation
- -------------- -----------
Historical Operations The Consolidated Statement of Operations as it
existed prior to the adjustments.
Disposition of Sassco The operating results of the Sassco Fashions
product line have been eliminated to give effect to the
disposition as of the beginning of the period presented,
including depreciation expense on its property, plant and
equipment, an allocated corporate charge based on workload
by department related to the Sassco Fashions line and direct
charges associated with financing fees on its factoring
agreement and fees incurred on letters of credit issued on
its behalf. For the April 5, 1997 period, the gain recorded
on the disposition of the Sassco Fashions line has been
reversed.
Sale of Castleberry The operating results of the Castleberry
product line have been eliminated to give effect to the
disposition as of the beginning of the period presented,
including depreciation expense on its property, plant and
equipment and an allocated corporate charge based on
workload by department related to the Castleberry line.
Fresh-Start
Reporting To record the estimated effect of the Plan as if it had been
effective as of the beginning of period presented. This
includes adjustments for the following items:
a) The elimination of the historical depreciation and
amortization for the remaining product lines, including the
amounts in cost of sales, on the beginning of period asset
balances and the recording of the amortization credit for
the "Excess of revalued net assets acquired over equity
under fresh-start reporting" (assuming a three-year
amortization period).
b) The elimination of historical reorganization expense that
will not be incurred subsequent to the Consummation Date.
c) The elimination of the fresh-start revaluation charge and
the reversal of the gain on debt discharge pursuant to the
Plan.
10
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS (In thousands, except
share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
FOURTEEN WEEKS ENDED APRIL 5, 1997
HISTORICAL DISPOSITION SALE OF FRESH-START PRO FORMA
OPERATIONS OF SASSCO CASTLEBERRY REPORTING ADJUSTED BALANCE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales $ 142,755 ($ 99,230) ($ 2,129) $ -- $ 41,396
Cost of Sales 105,987 (74,223) (1,581) (18) 30,165
----------- ----------- ----------- ----------- -----------
Gross profit 36,768 (25,007) (548) 18 11,231
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Selling, warehouse, general and administrative
expenses 23,102 (15,251) (551) 150 7,450
Depreciation and amortization expense 1,246 (642) (30) (574) --
----------- ----------- ----------- ----------- -----------
Total operating expenses 24,348 (15,893) (581) (424) 7,450
Other (income) expense (956) 251 -- -- (705)
Amortization of excess revalued net
Assets acquired over equity -- -- -- (1,143) (1,143)
----------- ----------- ----------- ----------- -----------
Total operating expenses, net 23,392 (15,642) (581) (1,567) 5,602
----------- ----------- ----------- ----------- -----------
Operating income (loss) 13,376 (9,365) 33 1,585 5,629
Interesting and Financing Costs (excludes
Contractual interest) 868 (412) -- -- 456
----------- ----------- ----------- ----------- -----------
Income (loss) before reorganization costs, taxes, gain on 12,508 (8,953) 33 1,585 5,173
sale, fresh-start revaluation
Reorganization Costs 468 -- (50) (418) --
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes, gain on sale, fresh-start
Revaluation 12,040 (8,953) 83 2,003 5,173
Taxes 316 (200) -- 1,577 1,693
----------- ----------- ----------- ----------- -----------
Net income (loss) before gain on sale, fresh-start
revaluation 11,724 (8,753) 83 426 3,480
----------- ----------- ----------- ----------- -----------
Net Income (loss) per Share - Basic * $ 1.02
- Diluted * $ 0.90
Weighted Average
Shares Outstanding - Basic * 3,400,000
- Diluted * 3,862,121
=========== ===========
</TABLE>
*Earnings per share for the fourteen weeks ended April 5, 1997 is not presented
because such presentation would not be meaningful as it 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.
11
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
4. ACCOUNTS RECEIVABLE:
On June 2, 1997, a wholly-owed subsidiary of the Company entered into
a Factoring Agreement with The CIT Group/Commercial Services, Inc. ("CIT").
Under this agreement, CIT began purchasing the accounts receivable of the
Company and remits the proceeds received to the Company as collected. In
exchange for collecting the receivables, CIT earns a factoring fee of 0.4% of
receivables purchased (with a minimum charge per invoice) as well as an interest
charge of prime plus 1% on two days cash collections.
5. INVENTORIES:
Inventories consist of the following:
April 4, January 3,
1998 1998
------- -------
(In Thousands)
Raw materials $11,340 $ 9,638
Work in process 5,265 4,540
Finished goods 8,360 12,523
------- -------
Total inventories $24,965 $26,701
======= =======
6. DEBT:
On June 2, 1997, in preparation for the consummation of the Plan, a
wholly- owned subsidiary of the Company entered into a two-year financing
agreement (the "CIT Credit Agreement") with CIT to provide direct borrowings and
the issuance of letters of credit on the Company's behalf in an aggregate amount
not to exceed $30,000,000, with a sublimit on letters of credit of $20,000,000.
The CIT Credit Agreement became effective on June 4, 1997 with the consummation
of the Plan. Direct borrowings bear interest at prime plus 1.0% (9.5% at April
4, 1998) and the CIT Credit Agreement requires a fee, payable monthly, on
average outstanding letters of credit at a rate of 2% annually. There were no
direct borrowings outstanding under the CIT Credit Agreement and approximately
$9,447,000 was committed under unexpired letters of credit as of April 4, 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.
12
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
The Company previously had a facility for a $60,000,000 credit
agreement with The First National Bank of Boston ("FNBB") and BankAmerica
Business Credit, Inc. ("BABC"), as Facility Agents, and FNBB as Administrative
Agent (the "FNBB Credit Agreement"). In connection with the consummation of the
Plan, the Company entered into an agreement (the "Paydown Agreement") with its
lenders under the FNBB Credit Agreement to paydown any remaining obligations
under the FNBB Credit Agreement and terminate the FNBB Credit Agreement on June
4, 1997. The FNBB Credit Agreement had expired on May 31, 1997, but continued in
effect until the consummation of the Plan with the consent of both the lenders
and the Company.
The FNBB Credit Agreement provided for post-petition direct
borrowings and the issuance of letters of credit on the Debtors' behalf in an
aggregate amount not to exceed $60,000,000. Beginning January 1, 1997, the
sublimit on the revolving line of credit was $20,000,000 and the sublimit for
letters of credit was $50,000,000.
There were no direct borrowings outstanding under the FNBB Credit
Agreement and approximately $19,351,000 was committed under unexpired letters of
credit as of April 5, 1997. There were no unexpired letters of credit
outstanding under the FNBB Credit Agreement at April 4, 1998.
Interest on direct borrowings was charged at prime plus 1.5% (10.00%
at April 5, 1997), and the FNBB Credit Agreement required a fee, payable
monthly, on average outstanding letters of credit at a rate of 2% annually
7. INCOME TAXES:
The provision for state and foreign income taxes is $1,901,000 and
$316,000 for the thirteen and fourteen weeks ended April 4, 1998 and April 5,
1997, respectively. Federal income taxes for the post-consummation period are
primarily offset by the utilization of pre-consummation net operating loss
carryovers, which are limited to approximately $1,500,000 in 1998, and
post-consummation net operating loss carryforwards without limitation and
deductions available for tax purposes. Although there is no 1997 Federal income
tax provision currently recognizable on the pre-consummation earnings due to
existing net operating loss carryforwards and no Federal income tax benefit
currently recognizable, the Company provided $3,728,000 for federal and state
income taxes based on the alternative minimum tax regulations for the twenty-two
weeks ended June 4, 1997 related to the gain on the sale of the Sassco Fashions
product line. These taxes are reflected net of the gain shown in the statement
of operations for the twenty-two weeks ended June 4, 1997.
8. COMMITMENTS AND CONTINGENCIES:
As discussed in Note 2, on the Filing Dates, the Company and several
of its subsidiaries filed voluntary petitions in the Bankruptcy Court under
chapter 11 of the Bankruptcy Code. All civil litigation commenced against the
Company and those referenced subsidiaries prior to that date had
13
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 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
14
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 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
15
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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.
9. STOCKHOLDERS' EQUITY:
As provided under the Plan, the authorized common stock of the
reorganized Company consisted of 3,500,000 shares of common stock with a par
value $.01 per share. The authorized common stock of the reorganized Company was
increased to 9,500,000 shares of common stock with a par value of $.01 per share
in November 1997. 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, 2,686,127
(approximately 79%) of the shares were distributed. The remaining approximately
twenty-one (21%) percent is being held back pending the resolution of certain
disputed claims before the Bankruptcy Court. The old common stock was canceled
at June 4, 1997 and the old stockholders of the Company did not retain or
receive any value for their equity interest.
In addition, 500,000 shares of Preferred Stock of the reorganized
Company were authorized at June 4, 1997 with a par value of $.01. None of such
shares have been issued.
10. STOCK OPTION PLAN:
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
16
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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,
vesting one-third each year for a total of 50,000 options, and each subsequent
non-employee director, upon becoming a director, has received or will receive
stock options to purchase 5,000 shares, vesting one-third each year . The
options may be exercised for between $6.18 and $11.50 per share. The Plan
provided that additional options (the "Home Run 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 has adopted the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" effective as of the Consummation Date. Under SFAS
No. 123, the Company has recorded $396,000 and $351,000 of non-cash compensation
expense included in Selling, warehouse, general and administrative expenses for
the thirteen and fifty-three weeks ended April 4, 1998 and January 3, 1998,
respectively. These amounts were offset as adjustments to Capital in excess of
par value in the consolidated balance sheets at April 4, 1998 and January 3,
1998, respectively.
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 its 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.
At the April 1998 meeting of the Company's Board of Directors, the
Compensation Committee recommended and the Board of Directors approved certain
modifications to the terms of the "Home Run" options. In addition the
Compensation Committee approved in principle new employment contracts for the
Company's four executive officers, John Pomerantz, John Ward, Dominick Felicetti
and Warren Wishart. As a result, the Company has recorded $218,000 in
additional, non-cash compensation expense for these modifications and has
recorded a total of $396,000 of non-cash compensation expense for the first
quarter.
11. COMPREHENSIVE INCOME:
Effective January 4, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No.130, "Reporting Comprehensive
Income" which modifies the financial statement presentation of comprehensive
income and its components. Adoption of this standard had no effect on the
Company's financial position or operating results during the periods presented.
17
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
12. NET INCOME (LOSS) PER SHARE:
As of April 4, 1998, the basic weighted average common shares outstanding
is 3,400,000, and the weighted average shares outstanding assuming dilution is
4,091,500. The difference of 691,500 represents to the incremental shares
issuable upon exercise of dilutive stock options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(A) RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 4, 1998 AS COMPARED TO
FOURTEEN WEEKS ENDED APRIL 5, 1997
The Company recorded net sales of $45,258,000 for the thirteen weeks
ended April 4, 1998, compared with $142,755,000 for the fourteen weeks ended
April 5, 1997, a net decrease of $97,497,000 or 68.3%. 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 quarter 1998. The Sassco, Castleberry and Outlander
lines generated $99,230,000, $2,129,000 and $1,997,000, respectively, in net
sales for the fourteen weeks ended April 5, 1997. The extra week's shipping
volume in the continuing product lines accounted for $1,225,000 in net sales
during the fourteen week period ended April 5, 1997. The Company's newly
released product line, Haberdashery by Leslie Fay Sportswear, generated net
sales of $1,292,000 for the thirteen week period ending April 4, 1998. On a
comparable basis, after excluding the effect of the above mentioned businesses,
the extra week and $21,000 of returns relating to the closed Outlander product
line, the continuing product lines had a net sales increase of $5,813,000, or
15.2%, for the thirteen weeks ended April 4, 1998 as compared to the comparably
adjusted period ended April 5, 1997. The Dress product lines generated an
increase for the period of $5,531,000 or 22.1% directly as a result of increased
production of the Spring season lines to service anticipated increases in
customer demand. Net sales for the comparable continuing Sportswear product
lines, excluding the Haberdashery line, increased by $282,000 or 2.1%.
Gross profit for the thirteen weeks ended April 4, 1998 was
$11,998,000 and 26.5% of net sales compared with $36,768,000 and 25.8% for the
fourteen weeks ended April 5, 1997. The Sassco Fashions, Castleberry and
Outlander product lines generated $25,007,000, $548,000 and ($234,000),
respectively, in gross profit for the fourteen weeks ended April 5, 1997. The
extra week of shipping during the quarter ended April 5, 1997 generated $443,000
of gross profit. The newly offered Haberdashery line generated gross profit of
$403,000 for the thirteen weeks ended April 4, 1998. The comparable continuing
businesses increased gross profit by $612,000 for the thirteen weeks ended April
4, 1998 versus the prior year while the gross margin as a percentage of net
sales decreased to 26.4% from 28.8%. Increased production of the Spring season
as discussed above
18
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
generated the additional gross margin volume in both the Dress and Sportswear
product lines. The lower gross profit percentage is due mostly to additional
discounts taken in the Dress product line due to higher levels of off-price
sales and to discounts offered on late shipments. The gross profit from the
Dress line, excluding the effect of the additional week, rose $863,000 but the
percentage to net sales fell to 27.9% from 30.6%. The gross profit produced by
the Sportswear line for the thirteen weeks ended April 4, 1998, excluding the
effect of the extra week and the new product line, decreased by $251,000 and the
percentage of net sales decreased to 23.0% from 25.4% for the comparable period
ended April 5, 1997. This decrease resulted primarily from the competitive
repricing strategy of the Leslie Fay Sportswear product line that was
implemented during the second half of 1997.
Selling, warehouse, general and administrative expenses were
$7,536,000 or 16.7% of net sales and $23,102,000 or 16.2% of net sales for the
thirteen and fourteen weeks ended April 4, 1998 and April 5, 1997, respectively.
After excluding the costs associated with the product lines sold, the pro forma
remaining business had expenses of $7,450,000 or 17.6% of net sales for the
fourteen weeks ended April 5, 1997. The expense increase of $86,000 includes an
additional accrual for stock based compensation (see Note 10) of $246,000 over
the comparable period in 1997. Adjusting for this, all other selling, warehouse,
general and administrative expenses were down $160,000 or 2.2% below 1997. This
reduced expense relates to costs that were eliminated after the Company exited
from bankruptcy.
Other income was $272,000 and $956,000 for the thirteen and fourteen
weeks ended April 4, 1998 and April 5, 1997, respectively. The decrease is due
to the licensing revenues related to trade names which were spun-off with the
Sassco Fashions product line, renegotiated minimum payment terms for the HUE
legware license and excess 1996 licensing revenues received and recognized as
income during the first quarter of 1997.
Depreciation and amortization expense for the thirteen weeks ended
April 4, 1998 was $20,000 due to the write-off of fixed assets at June 4, 1997
under fresh-start reporting. In addition, the Company realized income of
$1,143,000 from amortization of excess revalued net assets acquired over equity
(see Note 2). Depreciation and amortization expense for the fourteen weeks ended
April 5, 1997 consisted of depreciation on fixed assets of $962,000, including
$518,000 related to product lines sold and amortization of the excess purchase
price over net assets acquired of $284,000, including $154,000 of amortization
related to the lines sold. This amortization expense related to the leveraged
buyout of The Leslie Fay Company on June 28, 1984.
Interest and financing costs were $190,000 and $868,000 for the
thirteen and fourteen weeks ended April 4, 1998 and April 5, 1997, respectively.
The financing fees under the new CIT Credit Agreement were offset by income
earned on the cash invested for the thirteen weeks ended April 4, 1998. The
financing fees incurred were significantly below those incurred during the
fourteen weeks ended April 5, 1997 due to the higher line needed to finance the
operations of the Sassco Fashions and Castleberry product lines.
19
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
The provision for state and foreign income taxes was $1,901,000 and
$316,000 for the thirteen and fourteen weeks ended April 4, 1998 and April 5,
1997, respectively. The expense was lower for the fourteen weeks period ended
April 5, 1997 due to the expected availability of the net operating loss
carryforwards available in full for the period up to and including the June 4,
1997 Consummation Date (see Note 7).
(B) LIQUIDITY AND CAPITAL RESOURCES
On June 2, 1997, the Company obtained $30,000,000 of post-emergence
financing (see Note 6), which became effective with the consummation of the Plan
on June 4, 1997. The CIT Credit Agreement provides a working capital facility
commitment of $30,000,000, including a $20,000,000 sublimit on letters of
credit. As of April 4, 1998 the Company was utilizing approximately $9,447,000
of the CIT Credit Agreement for the letters of credit.
At April 4, 1998, there were no cash borrowings outstanding under the
CIT Credit Agreement, and the Company's cash and cash equivalents amounted to
$7,771,000. Of this amount, $1,169,000 will be restricted to pay remaining
administrative claims as defined in the Plan. Working capital increased
$4,509,000, to $43,962,000 for the thirteen weeks ended April 4, 1998. The
primary changes in the components of working capital were a decrease in cash and
cash equivalents of $12,042,000 offset by: an increase in accounts receivable of
$16,061,000, a decrease in inventories of $1,736,000, a decrease of $1,569,000
in accounts payable, accrued expenses and other current liabilities and a
decrease of $540,000 in income taxes payable. Accounts receivable increased due
to historically large first quarter shipments while inventories sold in the
thirteen weeks were mostly offset by new inventory purchases to accommodate the
upcoming Summer and Fall seasons.
Although, the Company's results of operations indicated an Operating
income of $5,860,000 for the thirteen weeks ended April 4, 1998, these results
are not necessarily indicative of results for an entire year.
Capital expenditures were $476,000 for the thirteen weeks ended April
4, 1998. Capital expenditures are expected to be $3,000,000 for the fiscal year
1998. The anticipated capital expenditures of $2,524,000 for the remainder of
the year are primarily related to improvements in management information systems
and fixturing the Company's in-store shops that are planned to be opened in
1998. The Company believes that its financing arrangements and anticipated level
of internally generated funds will be sufficient to finance its capital spending
during 1998.
At its April 14, 1998 meeting, the Company's Board of Directors
authorized the repurchase of up to $5,000,000 of the Company's common stock. The
repurchase will be based upon the trading price of the stock and will be
supervised by a subcommittee of the Board of Directors. While there is no
assurance that any stock will be repurchased, any repurchase made would
adversely affect the overall liquidity of the Company.
20
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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, as amended, and they do not exceed $5,000,000 in either fiscal years
1998 or 1999. (Reference is made to the 1997 Form 10-K Note 6(a) to the
Consolidated Financial Statements.) The Company has no plans to pay cash
dividends in the foreseeable future.
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.
The Company is dependent on a number of automated systems to
communicate with its customers and suppliers, to efficiently design,
manufacture, import, and distribute its product, as well as to plan and manage
the overall business. The Company recognizes the critical importance of
maintaining the proper functioning of its systems.
In the fourth quarter of 1997, the Company began a review of its
systems and technology to address all business requirements, including Year 2000
compliance. This review is substantially completed and a plan has been developed
to meet these needs. Overall, the plan identifies numerous changes required to
make the Company's systems Year 2000 compliant. These changes will be
implemented through 1999 at an estimated cost of approximately $1,500,000 plus
the utilization of internal staff and other resources. On May 4, 1998, the
Company implemented the first phase of its plan by placing in operation a new
purchase order management and invoicing system.
The Company is also dependent on the efforts of its customers,
suppliers and software vendors. The Company's upgrade of its electronic data
intercharge software will need to be tested with the Company's customers to
confirm proper functioning. The Company's customers and suppliers are also
required to implement projects to make their systems and communications Year
2000 compliant. Failure to complete their efforts in a timely way could disrupt
the Company's operations including the ability to receive and ship its product
as well as to invoice its customers. Finally, the Company's plan is based upon
the representation of the vendors that market the software packages selected by
the Company. There is no guarantee that these new systems will be compliant
under all the circumstances and volume stresses that may actually be required by
the Company's operations through Year 2000.
21
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has previously reported the proceedings under chapter 11
of the Bankruptcy Code and other pending legal proceedings in Item 3. - "Legal
Proceedings" in the 1997 Form l0-K. The Company's Plan of Reorganization was
approved by the creditors and on April 21, 1997, the Bankruptcy Court confirmed
the Plan. On June 4, 1997, the Plan was consummated and the Company no longer
operates under chapter 11. For information concerning legal proceedings at the
end of the first quarter of 1998, reference is made to Note 8 of the Notes to
Consolidated Financial Statements contained herein.
No other legal proceedings were terminated during the first quarter
of 1998 or thereafter, other than ordinary routine litigation incidental to the
business of the Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibits are set forth on the "Index to Exhibits"
on page E-1 hereof.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 18, 1998 THE LESLIE FAY COMPANY, INC.
----------------------------
(Company)
By: /s/ Warren T. Wishart
Warren T. Wishart
Secretary and Chief
Financial Officer
23
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
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<RECEIVABLES> 29,132
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<INVENTORY> 24,965
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