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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999 COMMISSION FILE NO. 1-9196
THE LESLIE FAY COMPANY, INC.
DELAWARE 13-3197085
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1412 BROADWAY
NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 221-4000
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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There were 6,041,138 shares of Common Stock outstanding at April 3, 1999.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 3, 1999
and January 2, 1999......................................3
Consolidated Statements of Operations for the
Thirteen Weeks Ended April 3, 1999 and
April 4, 1998, respectively..............................4
Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended April 3, 1999 and
April 4, 1998, respectively...............................5
Notes to Consolidated Financial Statements....................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..........................................15
Item 2. Changes in Securities......................................15
Item 3. Defaults Upon Senior Securities............................15
Item 4. Submission of Matters to a Vote of Security Holders........15
Item 5. Other Information..........................................15
Item 6. Exhibits and Reports on Form 8-K...........................15
SIGNATURES...................................................................16
INDEX TO EXHIBITS...........................................................E-1
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED AUDITED
April 3, January 2,
ASSETS 1999 1999
---------------------- ----------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $ 662 $ 946
Restricted cash and cash equivalents............................... 3,086 3,267
Accounts receivable- net of allowances for possible losses of
$6,542 and $6,825, respectively.................................. 33,465 16,172
Inventories........................................................ 27,883 38,627
Prepaid expenses and other current assets.......................... 957 970
---------------------- ----------------------
Total Current Assets............................................ 66,053 59,982
Property, plant and equipment, at cost, net of accumulated
depreciation of $640 and $409, respectively..................... 3,418 2,781
Excess of purchase price over net assets acquired-net of
accumulated amortization of $126 and $50, respectively.......... 4,414 4,490
Deferred charges and other assets.................................. 547 551
---------------------- ----------------------
Total Assets....................................................... $74,432 $67,804
====================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt.................................................... $ 6,267 $ 1,162
Accounts payable................................................... 9,794 12,070
Accrued expenses and other current liabilities..................... 6,012 7,486
Accrued expenses and other current confirmation liabilities........ 3,086 3,267
Income taxes payable............................................... 2,177 371
Current portion of capitalized leases.............................. 49 48
---------------------- -----------------------
Total Current Liabilities....................................... 27,385 24,404
Excess of revalued net assets acquired over equity under fresh -
start reporting, net of accumulated amortization of $8,382 and
$7,239, respectively.......................................... 5,326 6,469
Long term debt-capitalized leases.................................. 4 17
Deferred liabilities............................................... 590 477
---------------------- -----------------------
Total Liabilities.................................................. 33,305 31,367
====================== =======================
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 500 shares authorized, no
shares issued and outstanding..................................... -- --
Common stock, $.01 par value; 20,000 authorized;
6,858 shares issued.............................................. 69 69
Capital in excess of par value......................................... 29,233 28,824
Retained earnings...................................................... 16,448 12,167
---------------------- ----------------------
Subtotal........................................................... 45,750 41,060
Treasury stock, at cost; 817 shares.................................... 4,623 4,623
---------------------- ----------------------
Total Stockholders' Equity 41,127 36,437
---------------------- ----------------------
Total Liabilities and Stockholders' Equity............................. $74,432 $67,804
====================== ======================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
APRIL 3, APRIL 4,
1999 1998
----------------- ------------------
<S> <C> <C>
Net Sales....................................................... $61,144 $45,258
Cost of Sales................................................... 44,460 33,260
----------------- ------------------
Gross profit................................................. 16,684 11,998
----------------- ------------------
Operating Expenses:
Selling, warehouse, general and
administrative expenses................................ 10,373 7,140
396
Non-cash stock based compensation............................ 301
Depreciation and amortization expense 280 17
----------------- ------------------
Total operating expenses................................. 10,954 7,553
Other (income)............................................... (349) (272)
Amortization of excess revalued net assets acquired
over equity............................................. (1,143) ( 1,143)
----------------- ------------------
Total operating expenses, net................................ 9,462 6,138
----------------- ------------------
7,222 5,860
Operating income.............................................
Interest and Financing Costs.................................... 669 190
----------------- ------------------
Income before taxes.......................................... 6,553 5,670
Provision for taxes.......................................... 2,272 1,901
----------------- ------------------
Net Income .................................................. $4,281 $3,769
================= ==================
Net Income per Share - Basic................................ $0.71 $0.55
================= ==================
- Diluted $0.70 $0.54
================= ==================
Weighted Average Shares Outstanding - Basic 6,041,138 6,800,000
================= ==================
-Diluted 6,144,820 7,042,846
================= ==================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THIRTEEN THIRTEEN
WEEKS ENDED APRIL 3, WEEKS ENDED APRIL 4,
1999 1998
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $4,281 $3,769
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization................................... 307 20
Amortization of excess net assets acquired over equity (1,143) (1,143)
Provision for possible losses on accounts receivable (4) --
Provision for stock based compensation and stock option grants 301 396
Changes in assets and liabilities:
Accounts receivable........................................... (17,289) (16,061)
Inventories................................................... 10,744 1,736
Prepaid expenses and other current assets (9) 157
Deferred charges and other assets............................. 4 39
Accounts payable, accrued expenses and other current
liabilities............................................... (3,750) (1,569)
Income taxes payable.......................................... 1,806 (540)
Deferred liabilities.......................................... 113 59
Changes due to reorganization activities:
Use of pre-consummation deferred taxes 130 1,840
----------------- -----------------
Total adjustments........................................... (8,790) (15,066)
----------------- -----------------
Net cash used in operating activities (4,509) (11,297)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................. (868) (476)
----------------- ------------------
Net cash used in investing activities (868) (476)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings, net .................................... 5,105 --
Repayment of capital leases ...................................... (12) (61)
Payment of obligations under Plan of Reorganization (181) (208)
----------------- ------------------
Net cash provided by (used in) financing activities 4,912 (269)
----------------- ------------------
Net decrease in cash and cash equivalents (465) (12,042)
----------------- ------------------
Cash and cash equivalents, at beginning of period 4,213 19,813
----------------- ------------------
Cash and cash equivalents, at end of period $3,748 $7,771
================= ==================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
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<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 for the Fiscal Year ended January 2, 1999 (the "1998 Form 10-K"). Interim
taxes were provided based on the Company's estimated effective tax rate for the
year.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year, and the seasonality of the business may make projections of full year
results based on interim periods unreasonable.
2. RECENT DEVELOPMENTS:
On May 12, 1999 the Company signed a merger agreement with two private
investment funds managed by Three Cities Research, Inc. ("Three Cities") and a
wholly owned affiliate created by these funds to effect the merger. On this same
date, Three Cities purchased 2,158,000 shares of the Company's common stock from
affiliates of Dickstein Partners, Inc. This investment equals about a 36%
interest in the Company.
Pursuant to this merger, Three Cities may be able to acquire up to
1,111,966 additional shares and the Company may be able to acquire up to
1,000,000 shares of the approximately six million currently outstanding. Under
the merger agreement, the Company's stockholders would have the right either to
keep their shares after the merger or elect to receive cash in the amount of $7
per share for up to 2,111,966 shares. If holders opt to exchange more than
2,111,966 shares, there would be a pro-rata reduction, so that the electing
stockholders would receive cash for some of their shares and would keep the
remainder of their shares. The Company would be the surviving corporation in the
merger and remain as a public company.
Three Cities has agreed not to elect to receive any cash. Affiliates of
Dickstein Partners, Inc. have stated that they currently intend to elect cash
for 250,000 of their remaining 641,736 shares. Officers and directors of the
Company do not intend to elect to receive any cash for their shares or to
exercise their options.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
The Company expects to finance the shares it acquires partly by drawing
on its existing $42,000,000 revolving credit facility agreement with The CIT
Group/Commercial Services, Inc. ("CIT") and partly by drawing on an additional
$5,000,000 5-year long-term debt facility with CIT. This new debt carries an
interest rate of prime plus two percentage points. The Company has a letter of
commitment, subject to conditions, from CIT to provide this financing.
The merger agreement is subject to approval of holders of two-thirds of
the Company's outstanding shares, completion of a final financing agreement and
regulatory approvals. An explanatory proxy statement is expected to be issued to
stockholders in June. The Company expects the merger to take place in late July.
Neither the Company nor its Board od Directors is providing a recommendation as
to whether or not stockholders should elect to exchange their shares for cash.
Three Cities and affiliates of Dickstein Partners, Inc. have agreed to vote
their shares in favor of the merger.
3. INVENTORIES:
Inventories consist of the following:
April 3, January 2,
1999 1999
------------- ---------------
(In thousands)
Raw materials $ 12,228 $ 10,763
Work in process 3,400 2,613
Finished goods 12,255 25,251
--------- ----------
Total inventories $ 27,883 $ 38,627
========= =========
4. DEBT:
On June 2, 1997, in preparation for the consummation of the Amended
Joint Plan of Reorganization (the "Plan"), a wholly-owned subsidiary of the
Company entered into a two-year financing agreement (the "CIT Credit Agreement")
with CIT which was amended on October 27, 1998 to extend the agreement through
June 2, 2001 to provide direct borrowings and to issue letters of credit on the
Company's behalf. Direct borrowings bear interest at prime minus .25% (7.75% at
April 3, 1999) and the CIT Credit Agreement requires a fee, payable monthly, on
average outstanding letters of credit at a rate of 2% annually. The Company had
a net borrowing availability under the CIT Credit Agreement of $27,190,000 on
April 3, 1999 and peak borrowing during the thirteen weeks ended April 3, 1999
was $12,808,000. There were $5,434,000 in direct borrowings outstanding under
the CIT Credit Agreement and approximately $9,376,000 was committed under
unexpired letters of credit as of April 3, 1999.
-7-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
The CIT Credit Agreement has been modified four times through March 29,
1999, to adjust for changes relating to the Company's consolidated balance sheet
as it exited from bankruptcy, reflecting associated "fresh start" accounting
adjustments, increasing the level of capital expenditures to support the
Company's growth and Year 2000 requirements, allowing the Warren acquisition,
permitting the Company's stock buy-back program, extending the CIT Credit
Agreement and increasing the Company's credit line and reducing borrowing costs,
and allowing the early termination of the CIT Credit Agreement at the option of
the Company. Key modifications include:
The committed credit line has been increased to $42,000,000 from
$30,000,000. The sub-limit on letters of credit has also been increased
from $20,000,000 to $25,000,000. The limit on inventory based
collateral has been raised from $12,000,000 to $15,000,000.
The interest rate on direct borrowings has been reduced from prime plus
100 basis points to prime less 25 basis points.
The Company may repurchase its stock or to pay dividends up to an
amount of $10,000,000. As of April 3, 1999, approximately $5,400,000 of
this amount remains available.
Covenants related to capital expenditures, minimum ratio of
consolidated current assets to consolidated current liabilities,
minimum consolidated tangible net worth and minimum consolidated
working capital have been set at levels appropriate for normal business
conditions and the Company's existing stock repurchase program.
The Company may, with CIT's approval, acquire new businesses.
The Company may terminate the CIT Credit Agreement early.
The CIT Credit Agreement, as amended, contains certain reporting
requirements, as well as financial and operating covenants related to capital
expenditures, minimum tangible net worth, maintenance of a current assets to
current liabilities ratio, an interest to earnings ratio and the attainment of
minimum earnings. As collateral for borrowing under the CIT Credit Agreement,
the Company has granted to CIT a security interest in substantially all of its
assets. In addition, the CIT Credit Agreement contains certain restrictive
covenants, including limitations on the incurrence of additional liens and
indebtedness. The Company is currently in compliance with or has obtained the
necessary waivers for all requirements contained in the CIT Credit Agreement.
5. INCOME TAXES:
The provision for state and federal income taxes is $2,272,000 and
$1,901,000 for the thirteen weeks ended April 3, 1999 and April 4, 1998,
respectively. Federal income taxes are substantially offset by the utilization
of pre-consummation net operating loss carryovers, which are limited to
approximately $1,500,000 in 1999.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
6. COMMITMENTS AND CONTINGENCIES:
As noted in the Company's 1998 Form 10-K, the Company and several of
its subsidiaries filed voluntary petitions in the Bankruptcy Court under Chapter
11 of the Bankruptcy Code in April 1993. By an order dated April 21, 1997 (the
"Confirmation Order"), the Bankruptcy Court confirmed the Plan. The Plan was
consummated on June 4, 1997. Certain alleged creditors who asserted age and
other discrimination claims against the Company and whose claims were expunged
(the "Claimants") pursuant to an order of the Bankruptcy Court (see below)
appealed the Confirmation Order to the United States District Court for the
Southern District of New York. The Company moved to dismiss the appeal from the
Confirmation Order and the motion was granted and the appeal was dismissed. An
appeal to the United States Court of Appeals for the Second Circuit from the
order dismissing the appeal taken by the Claimants subsequently was withdrawn,
without prejudice, and may be refiled in the future. In addition, the Claimants
and two other persons commenced a separate adversary proceeding in the
Bankruptcy Court to revoke the Confirmation Order. The Company has moved to
dismiss the adversary proceeding to revoke the Confirmation Order and that
motion has been fully briefed, but has not yet been argued to the Bankruptcy
Court.
The Claimants, who are former employees of the Company and who were
discharged prior to the filing of the Chapter 11 cases, asserted age and other
discrimination claims, including punitive damage claims against the Company in
the approximate aggregate sum of $80 million. Following a trial on the merits,
the Bankruptcy Court expunged and dismissed those claims in their entirety. The
Claimants appealed that decision to the United States District Court for the
Southern District of New York, and on July 17, 1998, that Court affirmed the
decision of the Bankruptcy Court. The Claimants have taken a further appeal to
the United States Court of Appeals for the Second Circuit; that appeal has been
fully briefed and is scheduled for oral argument on June 11, 1999.
Five of the Claimants in the above-described appeal commenced an action
alleging employment discrimination against certain former officers and directors
of the Company in the United States District Court for the Southern District of
New York. The Court dismissed all of the causes of action arising under federal
and state statutes, and the only remaining claims are those arising under the
New York City Human Rights Law. Discovery is complete and it is expected that a
summary judgement motion will be filed by the defending officers and directors
after a final order has been entered in the above-described Bankruptcy Court
matter.
In addition, the Company is involved in the following legal proceedings
of significance:
In February 1993, the Securities and Exchange Commission obtained an
order directing a private investigation of the Company in connection with, among
other things, the filing by the Company of annual and other reports that may
have contained misstatements, and the purported failure of the Company to
maintain books and records that accurately reflected its financial condition and
operating results. To the Company's knowledge, this investigation has been
dormant for several years.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
In February 1993, the United States Attorney for the Middle District of
Pennsylvania issued a Grand Jury Subpoena seeking the production of documents as
a result of the Company's announcement of accounting irregularities. In 1994,
Donald F. Kenia, former Controller of the Company, was indicted by a federal
grand jury in the Middle District of Pennsylvania and pleaded guilty to the
crime of securities fraud in connection with the accounting irregularities. On
or about October 29, 1996, Paul F. Polishan, former Senior Vice President and
Chief Financial Officer of the Company, was indicted by the federal grand jury
in the Middle District of Pennsylvania for actions relating to the accounting
irregularities. The trial of the case against Paul F. Polishan has not yet
occurred.
In March 1993, a stockholder derivative action entitled "Isidore
Langer, derivatively on behalf of The Leslie Fay Companies, Inc. v. John J.
Pomerantz et al." was instituted in the Supreme Court of the State of New York,
County of New York, against certain officers and directors of the Company and
its then auditors. This complaint alleges that the defendants knew or should
have known material facts relating to the sales and earnings of the Company
which they failed to disclose. The time to answer, move or otherwise respond to
the complaint has not yet expired. The plaintiff seeks an unspecified amount of
monetary damages, together with interest thereon, and costs and expenses
incurred in the action, including reasonable attorneys' and experts' fees. The
Company cannot presently determine the ultimate outcome of this litigation, but
believes that it should not have any unfavorable impact on its financial
statements. Pursuant to the Plan, a Derivative Action Board, comprised of three
persons or entities nominated by the Creditors' Committee and appointed by the
Bankruptcy Court, shall determine whether to prosecute, compromise and settle or
discontinue the derivative action.
7. STOCKHOLDERS' EQUITY:
At June 4, 1997, 6,800,000 shares, adjusted retroactively for the July
1, 1998 stock split, were issued and outstanding and were being held by the plan
administrator in trust. In July 1997, 5,372,000 (79%) of the shares were
distributed. During the period from February 15, 1999 through March 5, 1999,
approximately 1,250,000 (88%) of the remaining shares were distributed. The
remaining shares are being held back by the plan administrator until the final
disputed claims are settled before the Bankruptcy Court.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
8. 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 $279,000 and $396,000 of non-cash
stock based compensation expense for the thirteen weeks ended April 3, 1999 and
April 4, 1998, respectively. These amounts were offset as adjustments to Capital
in excess of par value in the consolidated balance sheets.
9. NET INCOME PER SHARE:
For the thirteen weeks ended April 3, 1999 and April 4, 1998, the basic
weighted average common shares outstanding was 6,041,138 and 6,800,000,
respectively, and the weighted average shares outstanding assuming dilution was
6,144,820 and 7,042,846, respectively. The difference of 103,682 and 242,846,
respectively, represents the incremental shares issuable upon exercise of
dilutive stock options.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ ----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
---------------------------------------------
(A) RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 3, 1999 AS COMPARED TO
THIRTEEN WEEKS ENDED APRIL 4, 1998
The Company recorded net sales of $61,144,000 for the thirteen weeks
ended April 3, 1999, compared with $45,258,000 for the thirteen weeks ended
April 4, 1998, a net increase of $15,886,000 or 35.1%. The Dress product lines
net sales, excluding $10,600,000 generated by the recently acquired Warren
brands, increased $2,412,000 or 7.9% directly as a result of increased demand
for and earlier shipment of the spring and summer season product. Net sales for
the Sportswear product lines increased by $2,874,000 or 19.6% as a result of
earlier shipment of the summer season into the first quarter as well as the
growth within the Haberdashery by Leslie Fay brand. These early shipments may
result in a decrease in the second quarter for the Dress and Sportswear product
line net sales.
Gross profit was $16,684,000 and 27.3% of net sales compared with
$11,998,000 and 26.5% for the thirteen weeks ended April 3, 1999 and April 4,
1998, respectively. The gross profit from the Dress line, net of $3,211,000
generated by the recently acquired Warren brands, rose $987,000 and the
percentage to net sales increased to 28.9% from 27.9%. The gross profit produced
by the Sportswear line for the thirteen weeks ended April 3, 1999, increased by
$488,000 and the percentage of net sales decreased to 22.5% from 23.6% for the
comparable period ended April 4, 1998. The decreased gross profit as a
percentage of net sales resulted from additional markdowns to liquidate
inventory.
SG&A expenses were $10,373,000 or 17.0% of net sales and $7,140,000 or
15.8% of net sales for the thirteen weeks ended April 3, 1999 and April 4, 1998,
respectively. The expense increase of $3,233,000 was caused mainly by the
additional operating expenses related to the Warren brands, which have a higher
expense ratio than the other operating brands in the Company, increased
advertising expenses and straight-line costs incurred to extend the Company's
lease for showroom and office space in New York.
Non-cash stock based compensation for stock options and outside
director compensation that was granted after the Company's emergence from
bankruptcy for the thirteen weeks ended April 3, 1999 and April 4, 1998 was
$301,000 and $396,000, respectively.
Other income was $349,000 and $272,000 for the thirteen weeks ended
April 3, 1999 and April 4, 1998, respectively. The increase resulted from
additional licensing contracts under the "Leslie Fay" brand name entered into
during 1998.
Depreciation and amortization expense for the thirteen weeks ended
April 3, 1999 and April 4, 1998, respectively, was $280,000 and $17,000. The
increase was due to the acquisition of additional fixed assets since the
Company's June 4, 1997 emergence from bankruptcy. In addition, the Company
realized income of $1,143,000 for both periods from amortization of excess
revalued net assets acquired over equity.
-12-
<PAGE>
Interest and financing costs were $669,000 and $190,000 for the
thirteen weeks ended April 3, 1999 and April 4, 1998, respectively. The
additional interest was generated as a result of higher borrowings during the
thirteen weeks ended April 3, 1999, which were invested in building the Warren
brands working capital. The financing fees under the new CIT Credit Agreement
were offset by income earned on the cash invested for the thirteen weeks ended
April 3, 1999 and April 4, 1998.
The provision for federal, state and local income taxes was $2,272,000
and $1,901,000 for the thirteen weeks ended April 3, 1999 and April 4, 1998,
respectively. The expense was lower for the thirteen weeks ended April 4, 1998
due to the utilization of pre-consummation net operating loss carryovers
available in full for the period up to and including June 4, 1997, the date on
which the Plan was consummated by the Company.
(B) LIQUIDITY AND CAPITAL RESOURCES
The CIT Credit Agreement provided a working capital facility
commitment of $42,000,000, including a $25,000,000 sublimit on letters of
credit. As of April 3, 1999 the Company was utilizing approximately $9,376,000
of the CIT Credit Agreement for the letters of credit, and there were
outstanding cash borrowings of $5,434,000. The Company had a net borrowing
availability under the CIT Credit Agreement of $27,190,000 on April 3, 1999 and
peak borrowing during the thirteen weeks ended April 3, 1999 was $12,808,000.
At April 3, 1999, the Company's cash and cash equivalents amounted to
$3,748,000 of which $3,086,000 is restricted for payment of the remaining
administrative claims as defined in the Plan. Working capital increased
$3,090,000 to $38,668,000 for the thirteen weeks ended April 3, 1999. The
primary changes in the components of working capital were: a decrease in cash,
cash equivalents and short term investments of $465,000; an increase in net
accounts receivable of $17,293,000; a decrease in inventories of $10,744,000; a
decrease in prepaid expenses and other current assets of $13,000; an increase of
$2,981,000 in total current liabilities. Accounts receivable increased due to
historically large first quarter shipments as well as the additional volume
generated by the Warren brands. The decreased inventory on hand resulted from
the volume of shipments for the period. Total current liabilities increased as a
result of $5,106,000 of additional borrowings under the CIT Credit Agreement
(see Note 4) and additional income tax liabilities of $1,806,000 offset by
decreased accounts payable and other accrued liabilities of 3,931,000.
Although the Company's results of operations indicated operating income
of $4,281,000 for the thirteen weeks ended April 3, 1999, these results are not
indicative of results for an entire year.
Capital expenditures were $868,000 for the thirteen weeks ended April
3, 1999. Capital expenditures are expected to be approximately $3,000,000 for
fiscal year 1999. The anticipated capital expenditures for the remainder of the
year are primarily related to improvements in management information and
distribution systems as well as fixturing the Company's in-store shops that are
planned to be opened in 1999. The Company believes that its financing
arrangements and anticipated level of internally generated funds will be
sufficient to finance its capital spending during the remainder of 1999.
The Company has signed an agreement to acquire up to 1,000,000 shares
of the Company's common stock at $7 per share (See Note 2). The agreement
requires the Company to pay for related professional fees that may approach
$1,000,000. Under the merger agreement, if holders of fewer than 825,000 shares
elect to receive cash, the Company will provide the funds
-13-
<PAGE>
for the full amount (up to $5,800,000). If holders of at least 825,000 shares
but not more than 1,625,000 shares elect to receive cash, then Three Cities will
provide the funds for the entire amount to the Company's stockholders. In this
event, the Company will seek no additional financing from CIT. If holders of
more than 1,625,000 shares elect to receive cash, then the Company and Three
Cities will share the payment under a formula that limits the Company's payment
to $7,000,000.
To finance this possible acquisition of the Company's common stock, the
Company expects to amend its Credit Agreement with CIT. The Company has received
a commitment letter from CIT, subject to conditions. The terms of this letter
would amend the credit agreement to add a $5 million, five-year, long term debt
facility that will pay interest at prime plus 2.0%. Any additional cash
requirements due to the merger agreement will be funded from the Company's
existing $42,000,000 revolving credit line. The interest rate on the revolving
credit line will remain unchanged at prime minus 0.25%. The proposed terms of
the amended financing agreement will add an unused line fee at an annual rate of
0.25% of the amount the revolving credit facility exceeds the total amount of
direct borrowings and the outstanding letters of credit.
The Company believes it has the capacity to carry the additional
indebtedness created by this agreement under the terms proposed by CIT.
The Company is not restricted from paying cash dividends or
repurchasing its stock under the CIT Credit Agreement as long as those
disbursements do not cause the Company to be in violation of the restrictive
covenants contained therein. The Company can not exceed $10,000,000 in stock
repurchases or dividends in total for 1998 and 1999. As noted above, the Company
has already expended $4,623,000 of the $10,000,000 available for the repurchase
of its common shares. The Company has no plans to pay cash dividends in the
foreseeable future. The additional acquisition of stock called for in the merger
agreement discussed above will require modification of the CIT Credit Agreement.
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.
-14-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Certain of these changes were implemented in 1998; the others are being
implemented in 1999 at an estimated total cost of approximately $1,900,000 which
has already been incurred by the Company, plus the utilization of internal staff
and other resources both during these implementations and in the future. On May
4, 1998, the Company implemented the first phase of its plan by placing in
operation a new purchase order management and invoicing system. Through May 1,
1999, the Company implemented the second and third phases of its plan by placing
in operation Year 2000 compliant versions of its accounts payable, accounts
receivable, general ledger and EDI translation systems. In addition, the Company
has begun its own testing to confirm the readiness of its 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 representations as to
Year 2000 compliance of the vendors that market the software packages selected
by the Company. There is no guarantee that these new systems will be compliant
under all the circumstances and volume stresses that may actually be required by
the Company's operations through Year 2000.
In common with other marketers and distributors of apparel products,
the Company believes that the 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.
Certain statements contained in this Form 10-Q, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the effects of future events on the Company's financial performance; the risk
that the Company may not be able to finance its planned growth; risks related to
the industry in which the Company competes, including potential adverse impact
of external factors such as inflation, consumer confidence, unemployment rates
and consumer tastes and preferences; and the risk of potential increase in
market interest rates from current rates. Given these uncertainties, current and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
-15-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
For information concerning legal proceedings at the end of the first
quarter of 1999, reference is made to Note 6 of the Notes to Consolidated
Financial Statements contained herein.
No other legal proceedings were terminated during the first quarter of
1999 or thereafter, other than ordinary routine litigation incidental to the
business of the Company.
ITEM 2. CHANGES IN SECURITIES.
- ------ ---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ------ -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION.
- ------ -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
a) Exhibits
Exhibits are set forth on the "Index to Exhibits" on
page E-1 hereof.
b) Reports on Form 8-K
None
-16-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 18, 1999 THE LESLIE FAY COMPANY, INC.
(Company)
By: /s/ Warren T. Wishart
---------------------------------------
Warren T. Wishart
Senior Vice President - Administration
and Finance, Chief Financial Officer
and Treasurer
-17-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 3,748
<SECURITIES> 0
<RECEIVABLES> 40,007
<ALLOWANCES> 6,542
<INVENTORY> 27,883
<CURRENT-ASSETS> 66,053
<PP&E> 4,058
<DEPRECIATION> 640
<TOTAL-ASSETS> 74,432
<CURRENT-LIABILITIES> 27,385
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 41,058
<TOTAL-LIABILITY-AND-EQUITY> 74,432
<SALES> 61,144
<TOTAL-REVENUES> 61,144
<CGS> 44,460
<TOTAL-COSTS> 9,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 669
<INCOME-PRETAX> 6,553
<INCOME-TAX> 2,272
<INCOME-CONTINUING> 4,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,281
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
</TABLE>
