FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 2, 1999 Commission File No. 1-9196
THE LESLIE FAY COMPANY, INC.
Delaware 13-3197085
(State or 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
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, .01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein. [x]
The aggregate market value of the voting stock (based on the average bid and
asked prices of such stock) held by non-affiliates of the registrant at March
25, 1999 was approximately $14,634,000.
There were 6,041,138 shares of Common Stock outstanding at March 25,1999.
Documents Incorporated by Reference
-----------------------------------
None
<PAGE>
PART I
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Item 1. Business.
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The Company is engaged principally in the design, arranging for the
manufacture and sale of diversified lines of women's dresses and sportswear. The
Company's products focus on career, social occasion and evening clothing that
cover a broad retail price range and offer the consumer a wide selection of
styles, fabrics and colors suitable for different ages, sizes and fashion
preferences. The Company believes that it is among the major producers of
moderate-price dresses and that it is considered one of the major resources to
retailers of such products. The Leslie Fay business has been in continuous
operation as an apparel company since 1947.
The Company reorganized following a voluntary petition under Chapter
11 of the Bankruptcy Code on June 4, 1997 (See "Reorganization Under Chapter 11"
below).
The Company's business is seasonal in nature, with sales being greatest
in the first and third quarters. Accordingly, the inventory purchase levels are
highest during the second and fourth quarters.
Recent Developments
On October 27, 1998, the Company purchased certain assets of The Warren
Apparel Group Ltd. ("Warren"). Warren was a privately owned wholesaler of
women's career, social occasion and evening dresses sold in department and
specialty stores nationwide primarily under the "David Warren", "DW3", "Warren
Petites", "Reggio" and "Rimini" brands. The purchase of those assets facilitates
the Company's return to the better dress business.
On March 19, 1999, Dickstein Partners Inc. in an amendment to its
Schedule 13D, reported that it (which, together with its affiliates, owns 46.4%
of the outstanding stock of the Company) proposed that the Company offer to
exchange up to 2,500,000 shares of Common Stock, or approximately 41% of the
outstanding shares, for debt securities of the Company expected to be valued on
a per share basis in excess of the current trading price of the Common Stock.
The exchange offer would replace the Company's existing stock buy-back program.
Dickstein Partners, Inc. and its affiliates indicated in such amendment that
they expected to participate in such an exchange offer, but anticipated that
they would remain substantial stockholders of the Company following consummation
of the offer. The Company's Board of Directors has retained advisors to help it
consider this proposal.
<PAGE>
Products
During 1998, 1997 and 1996, respectively, dresses accounted for
approximately 64%, 57% and 43% of the Company's net sales (exclusive of the
Sassco Fashions and Castleberry product lines and other lines sold or closed
during such years [the "Sold Product Lines"]); and sportswear accounted for 36%,
43% and 57%, respectively. During 1999, dresses are expected to account for
approximately 70% of total sales and sportswear 30%. The increase in the
expected dress sales ratio will result mostly from the addition of the "David
Warren", "Warren Petite", "Rimini" and "Reggio" brands acquired on October 27,
1998 (See "Recent Developments" above).
Dress Product Lines. The Company sells moderately priced one and two
piece dresses, pant dresses and dresses with coordinated jackets under the
"Leslie Fay", "Leslie Fay Petite", "Leslie Fay Women" and "Leslie Fay Women's
Petites" brands. These products are offered in petite, misses and large sizes.
The Company also sells moderate to bridge-priced career, social and evening
occasion dresses under the newly acquired "David Warren", "Warren Petite",
"Rimini" and "Reggio" brands. At this time, these products are offered in petite
and misses size ranges. The Company expects to offer a large size range in 1999.
Sportswear Product Lines. The Company markets moderately priced
coordinated sportswear and related separates under the "Leslie Fay Sportswear",
"Leslie Fay Sportswear Petite", "Leslie Fay Sportswear Woman", "Joan Leslie" and
"Haberdashery by Leslie Fay" brands. The Company's products include skirts,
blouses, sweaters, pants and jackets which are related in color and material and
are intended to be sold as coordinated outfits. These products are offered in
petite, misses and large sizes. The Company also offered contemporary knitted
sportswear, including knitted separates and dresses under the "Outlander",
"Outlander Studio", "Outlander Petite" and "Outlander Woman" brands, styled to
appeal to women of a wide range of ages and available in misses, petite and
large sizes. These Outlander products were discontinued in the Fall of 1997.
Design
The Company's fashion designers or stylists create the styles that are
produced under the brands used by the Company. The Company has its own designers
and in some instances utilizes separate design staffs for different products
within a particular brand. The design staffs work closely with the
merchandising, production and sales staffs to review the status of each
collection and to discuss adjustments which may be necessary in line
composition, pricing, fabric selection, construction and product mix.
The Company's product lines generally offer four or five of the
following seasonal lines: Resort, Spring, Summer, Fall I, Fall II and Holiday.
The Company typically offers these seasonal lines in ten to thirteen week
selling periods.
<PAGE>
Trademarks and Licenses
The brands used by the Company are registered trademarks, all of which
are owned by the Company. The Company considers its trademarks and license
agreements to have significant value in the marketing of its products. The
Company has licensed certain of its names and trademarks to various companies
for their use in connection with the manufacture and distribution of their
respective products. These products are in categories that are not offered by
the Company and currently include women's socks, legwear, handbags and small
leather goods.
Markets and Distribution
The Company's products were sold during 1998 principally to department
and specialty stores located throughout the United States. Excluding the sales
of the Sold Product Lines, during 1998, 1997 and 1996, the Company's Dress and
Sportswear lines' products were sold to 1,012, 788 and 857 customers,
respectively. Management believes that the increase in the number of customers
is primarily attributable to additional customers shipped by the recently
acquired dress brands (See "Recent Developments" above). Dillard's Department
Stores, Inc. accounted for 30%, 33% and 35% and JC Penney accounted for 11%, 12%
and 19% of the Company's dress and sportswear sales during the respective
periods. No other customer accounted for as much as 10% of the Company's dress
and sportswear sales during these three years. The Company believes that the
loss of the Dillard's Department Stores, Inc. or JC Penney businesses would have
a material adverse effect on its operations.
The Company maintains its own employee and commission sales force and
exhibits its products in its principal showroom in New York, New York and
additional showrooms in Dallas, Texas and Atlanta, Georgia. The Company
currently has an employee sales force consisting of 3 people in Dallas and 19 in
New York. For further discussion, see "Properties" below. While in some
instances the Company's brands may compete with each other, as a practical
matter, such competition is limited because of the differences in products,
price points and market segments.
To most effectively reach its ultimate consumers, the Company assists
retailers in merchandising and marketing the Company's products. The Company
promotes its products through special in-store events, as well as through
various sales, promotions and cooperative advertising.
The Company's products are sold under brand names that are advertised
and promoted in national magazines and trade publications.
<PAGE>
Manufacturing
Apparel sold by the Company is produced in accordance with its designs,
specifications and production schedules. All of such apparel is produced by a
number of independent contractors located domestically and abroad. In 1998,
products representing approximately 85% of dress and sportswear sales were
produced abroad and imported into the United States from the Caribbean Basin
countries of Guatemala and El Salvador and selected contractors in the Far
Eastern countries of Taiwan, South Korea and the People's Republic of China,
including Hong Kong.
In 1998, three operating subsidiaries of Cambridge Corp. and Doall
Industries, S.A. DE C.V. manufactured 44% and 15%, respectively, of the
Company's total production. The Company has had satisfactory, long-standing
relationships with most of its contractors. In 1998, none of the Company's
contracted production was produced by contractors who work exclusively for the
Company. The Company monitors production at each contractor's facility, in the
United States and abroad, to ensure quality control, compliance with its
specifications and fair labor standards and timely delivery of finished goods to
the Company's distribution center. The Company believes it will be able to
obtain the services of a sufficient number of independent suppliers to produce
quality products in conformity with its requirements.
The Company manufactures in accordance with plans prepared each season,
which are based primarily on projected orders, and to a lesser extent on current
orders and consultations with customers. These plans take into account current
fashion trends and economic conditions. The average lead time from the
commitment of piece goods through the production and shipping of goods ranges
from two to four months for domestic products and four to six months for
imported products. These lead times impose substantial time constraints on the
Company in that they require production planning and other manufacturing
decisions and piece good commitments to be made substantially in advance of the
receipt of orders from customers for the bulk of the items to be produced.
The purchase of raw materials is controlled and coordinated by a
centralized purchasing function that works with the manufacturing, design, and
sales staffs. Most often, the Company purchases and ships the raw materials to
its domestic contractors and certain of its foreign contractors. Otherwise, the
raw materials are purchased directly by the contractors in accordance with the
Company's specifications. Raw materials, which are in most instances made and/or
colored especially for the Company, consist principally of piece goods and yarn
and are purchased by the Company from a number of domestic and foreign textile
mills and converters. The Company does not have long-term, formal arrangements
with any of its suppliers of raw materials. The Company, however, has
experienced little difficulty in satisfying its raw material requirements and
considers its sources of supply adequate.
<PAGE>
Imports and Import Restrictions
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries, including Taiwan, China (including Hong Kong), South Korea, Guatemala
and El Salvador (the principal countries from which the Company imports goods).
These agreements impose quotas on the amount and type of goods, which can be
imported into the United States from these countries. In addition, each of the
countries in which the Company's products are sold has laws and regulations
regarding import restrictions and quotas. Because the United States and other
countries in which the Company's products are manufactured and sold may, from
time to time, impose new quotas, duties, tariffs, surcharges or other import
controls or restrictions, or adjust presently prevailing quota allocations or
duty or tariff rates or levels, the Company monitors import and quota-related
developments. The Company continually seeks to minimize its potential exposure
to import and quota-related risks through allocation of production to
merchandise categories that are not subject to quota pressures, adjustments in
product design and fabrication, shifts of production among countries and
manufacturers, geographical diversification of its sources of supply and other
measures. The United States may enter into bilateral trade agreements with
additional countries and may, in the future, include other types of garments in
existing agreements.
Imports are also affected by the higher cost and additional time needed
to transport product into the United States and by the increased competition
resulting from greater production demands abroad.
The Company's imported products are subject to United States Customs
duties and, in the ordinary course of its business; the Company is from time to
time subject to claims by the United States Customs Service for additional
duties and other charges.
The Company currently imports a substantial majority of its raw
materials, primarily fabric, and a significant portion of its finished goods
through Far East based service bureaus. These service bureaus secure the
manufacture of raw materials from a number of factories (about 15) located
throughout the Far East. The Company's senior management also meets with these
manufacturers prior to placing orders with them. The Company believes its
primary risk is the timely receipt of its raw materials and finished goods to
allow the timely shipment of its product. Through the present time, the Company
has received its products in a timely manner. The Company monitors the status of
its orders through its Far East service bureaus continually. Payment for the raw
materials and finished goods is guaranteed through letters of credit which
require, among other items, timely delivery and satisfaction of quality
standards.
The Company does not "hedge" its foreign purchases as all contracts are
quoted in United States Dollars. The typical contract may extend for sixty days.
Prices are re-negotiated with each new contract.
<PAGE>
The Company does not sell its products in the Far East.
In addition to the factors outlined above, the Company's future import
operations may be adversely affected by: political or financial instability
resulting in the disruption or delay of trade from exporting countries; the
imposition of additional regulations relating to, or duties, taxes and other
charges on, imports; any significant fluctuation in the value of the dollar
against foreign currencies; and restrictions on the transfer of funds.
Backlog
On March 20, 1999, the Company had unfilled orders of approximately
$58,041,000 of which $9,659,000 are for dresses ordered under the brands "David
Warren", "Warren Petites", "Rimini" and "Reggio" (See "Recent Developments"
above). The Company had $55,750,000 of unfilled orders at a comparable date in
1998. The amount of unfilled orders at a particular time is affected by a number
of factors, including the scheduling of the manufacture and shipment of the
product, which in some instances is dependent on the desires of the customer.
Accordingly, a comparison of unfilled orders from period to period is not
necessarily meaningful and may not be indicative of eventual actual shipments.
Credit and Collection
Historically, the Company had managed substantially all of its credit
and collection functions internally. In connection therewith, it regularly
evaluated, approved and monitored the credit of the Company's customers and was
responsible for collection of accounts receivable. In June 1997, the Company
entered an agreement with the CIT Group/Commercial Services, Inc. (the "CIT
Factoring Agreement"). This agreement provides that CIT purchase the Company's
approved accounts receivable and guarantee collection thereof, except for
disputed amounts. The vast majority of the Company's trade accounts receivable
has been purchased by CIT. As of January 2, 1999, the purchased accounts
receivable represents 92% of the Company's total accounts receivable.
Competition
The sectors of the apparel industry for which the Company designs,
manufactures and markets products are highly competitive. The Company competes
with many other manufacturers, including manufacturers of one or more apparel
items. In addition, department stores, including some of the Company's major
customers, have from time to time varied the amount of goods manufactured
specifically for them and sold under their own brands. Many such stores have
also changed their manner of presentation of merchandise and in recent years
have become increasingly promotional. Some of the Company's competitors are
larger and have greater resources than the Company. Based upon its knowledge of
the industry, the Company believes that it is among the leading producers of
moderate dresses in the United States and that
<PAGE>
it is considered one of the major resources of retailers of such products. The
Company's business is dependent upon its ability to evaluate and respond to
changing consumer demand and tastes and to remain competitive in the areas of
style, quality and price, while operating within the significant domestic and
foreign production and delivery constraints of the industry.
Employees
In March 1999, the Company employed 421 persons, of whom approximately
28% were in production, 30% in distribution, 14% in merchandising and design, 8%
in sales and 20% in administrative and financial operations. Approximately 37%
of the Company's employees were members of unions, primarily the Union of
Needletrades, Industrial and Textile Employees ("UNITE"), the successor to the
International Ladies' Garment Workers Union. On June 2, 1997, the Company and
UNITE reached an agreement on a four-year collective bargaining agreement,
terminating on May 31, 2001 covering non-supervisory production, maintenance,
packing and shipping employees. The Company believes that its relationship with
its employees is satisfactory.
Reorganization Under Chapter 11
On April 5, 1993, The Leslie Fay Companies, Inc. ("Leslie Fay") and
certain of its wholly-owned subsidiaries (collectively, the "Debtors") filed a
voluntary petition under Chapter 11 of the Bankruptcy Code (the "Bankruptcy
Code"). On November 15, 1995, certain other wholly-owned subsidiaries of Leslie
Fay (collectively, the "Retail Debtors") filed voluntary petitions under Chapter
11 of the Bankruptcy Code. From their respective filing dates until June 4,
1997, the Debtors and the Retail Debtors operated or liquidated their
businesses, as applicable, as debtors in possession subject to the jurisdiction
and supervision of the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Court").
On October 31, 1995, the Debtors and the Committee of Unsecured
Creditors (the "Creditors Committee") filed a Joint Plan of Reorganization (as
subsequently amended, the "Plan") pursuant to Chapter 11 of the Bankruptcy Code.
On December 5, 1996, the Debtors filed a Disclosure Statement for the Amended
Joint Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code (as
subsequently amended, the "Disclosure Statement"). The Debtors obtained
Bankruptcy Court approval of the Disclosure Statement on February 28, 1997. The
Plan was approved by the Debtors' 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 by 1) transferring the equity interest in both the Company and
Sassco Fashions, Ltd. ("Sassco"), which has since changed its name to Kasper
A.S.L., Ltd., to its creditors in exchange for relief from an aggregate amount
of claims estimated at $338,000,000; 2) assigning to certain creditors the
ownership rights to notes aggregating $110,000,000 payable by Sassco; and 3)
transferring the assets and liabilities of the Company's Sassco Fashions product
line (as more
<PAGE>
particularly described below) to Sassco and the assets and liabilities of its
Dress and Sportswear product lines to three wholly-owned subsidiaries of the
Company. The Company retained approximately $41,080,000 in cash, of which
$23,580,000 has been or will be used to pay administrative claims as defined in
the Plan. The assets and liabilities of the Sassco Fashions line transferred to
Sassco included cash ($10,963,000), accounts receivable, inventory, property,
plant and equipment, other assets (including the trade name Albert Nipon),
accounts payable, accrued expenses and other liabilities related to the Sassco
Fashions line. In addition, the Company transferred to Sassco its 100% equity
interest in several subsidiaries associated with the Sassco Fashions line. As
provided in the Plan, the creditors of the Company became the stockholders of
Sassco and of the reorganized Company. To effectuate this, the Company issued
approximately seventy-nine (79%) percent of its 6,800,000 new shares of Common
Stock to its creditors in July 1997. The remaining twenty-one (21%) percent was
being held for the benefit of its creditors pending the resolution of certain
litigation before the Bankruptcy Court. The existing stockholders of the Company
at June 4, 1997 did not retain or receive any value for their equity interest in
the Company, which was canceled. An additional distribution of approximately
1,250,000 shares representing 88% of the 21% held for resolution of litigation
was distributed during February and March 1999 with approval of the Bankruptcy
Court. The remaining shares are being held pending the resolution of certain
litigation before the Bankruptcy Court
The gain on the disposition of the assets and liabilities of the Sassco
Fashions product line is a taxable event and a substantial portion of the net
operating loss carryforward available to the Company at December 28, 1996 was
utilized to offset a significant portion of the taxes recognized on this
transaction.
Item 2. Properties.
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Executive and sales offices, as well as design facilities, are located
in New York City under a lease expiring in 2008 (60,990 square feet). The
Company also leases sales offices and showrooms in Dallas, Texas (4,396 square
feet) and a showroom in Atlanta, Georgia (737 square feet). In addition, the
Company operates two small manufacturing support facilities - one located in
Pittston, Pennsylvania and owned by the Company (11,368 square feet) and another
leased by the Company in Guatemala (5,202 square feet). Furthermore, the Company
leases a major distribution and administrative center of approximately 194,685
square feet through August 2008 and a storage facility of 6,160 square feet in
Laflin, Pennsylvania.
All of the Company's facilities are in good condition. None of the
Company's principal facilities are idle. The machinery and equipment contained
in the Company's facilities are modern and efficient.
Item 3. Legal Proceedings.
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As discussed above, 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
<PAGE>
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 a 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.
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, and that appeal is in
the process of being briefed.
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.
The Company is also involved in the following legal proceedings of
significance:
In February 1993, the Securities and Exchange Commission obtained an
order directing a private investigation of the Company in connection with, among
other things, the filing by the Company of annual and other reports that may
have contained misstatements, and the purported failure of the Company to
maintain books and records that accurately reflected its financial condition and
operating results. The Company is cooperating in this investigation.
In February 1993, the United States Attorney for the Middle District of
Pennsylvania issued a Grand Jury Subpoena seeking the production of documents as
a result of the Company's announcement of accounting irregularities. In 1994,
Donald F. Kenia, former Controller of the Company, was indicted by a federal
grand jury in the Middle District of Pennsylvania and pleaded guilty to the
crime of securities fraud in connection with the accounting irregularities.
<PAGE>
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.
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
tradename. The Company asserted counter claims. On December 23, 1997, the Court
ruled in favor of the Company finding the plaintiffs in violation of the Federal
and New York trademark statutes and of unfair competition under common law. The
parties have settled the litigation without cost to the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
On December 8, 1998, the common stock of the Company began trading on
the Nasdaq Small Cap market under the symbol "LFAY". Prior thereto, such stock
was traded on the over-the-counter market bulletin board. The following table
sets forth the high bid and low asked prices on the bulletin board for each
quarter during 1997 and 1998 and, from June 4, 1997, have been adjusted to give
retroactive effect to a 2 for 1 split of the Company's common stock effected in
July 1998:
Period High Low
------ ---- ---
1997 First Quarter $ 0.12 $ 0.01
Second Quarter 0.10 0.02 (a)
(prior to June 4, 1997)
Second Quarter 4.75 3.69
(from June 4, 1997)
Third Quarter 8.07 3.13
Fourth Quarter 8.88 6.00
1998 First Quarter $ 8.44 $ 6.00
Second Quarter 8.81 6.63
Third Quarter 9.38 4.75
Fourth Quarter 8.00 4.38
1999 First Quarter $ 6.75 $ 3.88
(through March 25, 1999)
- --------------------------------------------------------------------------------
(a) The old common stock was canceled on June 4, 1997. The stockholders holding
the old common stock of the Company did not retain any value for their equity.
On March 25, 1999, the high bid price was $4.75 and the low asked price
was $4.38. You are encouraged to obtain current trading information. As of March
25, 1999, there were approximately 1,297 holders of record of the common stock
of the Company.
On June 4, 1997 the Company issued an aggregate of 6,800,000 shares of
Common Stock to its creditors pursuant to its plan of reorganization. Of such
shares, 5,372,000 shares were distributed in July 1997 and 1,250,000 shares were
distributed in February and March 1999 (the shares above are adjusted to reflect
the two-for-one stock split referred to below). No sales commissions were paid
in connection with the transactions. The shares were issued in reliance upon the
exemption from registration afforded by Section 3(a)(10) of the Securities Act
of 1933, as amended (the "Act").
<PAGE>
On June 3, 1998 the Company issued an aggregate of 12,000 shares of
Common Stock, consisting of 2,000 shares to each of its six non-employee
directors, in accordance with the terms of the Company's 1997 Non-Employee
Director Stock Option and Stock Incentive Plan (the shares above are adjusted to
reflect the two-for-one stock split referred to below). No consideration was
paid by such directors for the stock and no sales commissions were paid by the
Company in connection with its issuance. The shares were issued issued in
reliance upon the exemption from registration afforded by Section 4(2) the Act.
On July 1, 1998 the Company effected a two-for-one stock split pursuant
to which it issued 3,406,000 shares of Common Stock. No sales commissions were
paid in connection with this transaction. The shares were issued in reliance
upon the exemption from registration afforded by Section 2(3) of the Act.
<PAGE>
Item 6. Selected Financial Data.
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The following selected financial data of the Company should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Reorganized Company Predecessor Company
--------------------------------------------- | --------------------------------------------------
| For the Years Ended
| ------------------------------
|
Pro Forma |
Fifty-Two Fifty-Three Thirty-One | Twenty-Two
Weeks Ended Weeks Ended Weeks Ended | Weeks Ended
January 2, January 3, January 3, Pro Forma | June 4,
1999 1998 (a) 1998 (b) 1996(a) | 1997 (c) 1996 1995 1994
---- ---- ---- ---- | ---- ---- ---- ----
(Unaudited) (Unaudited) |
|
|
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $152,867 $132,160 $ 73,091 $110,053 | $197,984 $429,676 $442,084 $531,843
|
Operating Income |
(Loss) 13,020 11,782 4,322 4,079 | 14,355 17,965 1,235 (27,278)
|
|
Reorganization Costs -- -- -- -- | 3,379(d) 5,144 (d) 16,575 (d) 115,769 (d)
|
Interest Expense and |
Financing Costs 950 1,113 336 2,298 | 1,372 3,932 (e) 3,262 (e) 5,512 (e)
|
Tax Provision (Benefit) 3,212 2,684 677 130 | 451 (839)(f) (761)(f) 981 (f)
|
|
Other Non-Recurring |
Items -- -- -- -- | 136,341(g) -- -- --
|
Net Income (Loss) $8,858 $7,985 $3,309 $1,651 | $145,494 $9,728 ($17,841) ($149,540)
|
Net Income (Loss) per |
Share - Basic $1.35 $1.17(h) $0.49(h) $0.24(h)| -- $0.52 (h) ($0.95)(h) ($7.97)(h)
- Diluted $1.31 $1.16(h) $0.48(h) $0.24(h)| -- $0.52 (h) ($0.95)(h) ($7.97)(h)
|
|
|
|
As of As of | As of As of As of As of
01/02/99 01/03/98 | 06/04/97 12/28/96 12/30/95 12/31/94
-------- -------- | -------- -------- -------- --------
|
Total Assets $67,804 $61,051 | $77,789 $237,661 $245,980 $281,634
|
Assets of Product |
Lines Held for Sale |
and Disposition -- -- | -- 3,003 (i) 326 (i) 21,063 (i)
|
Long-Term Debt |
(Including Capital |
Lease) 17 49 | 108 -- (j) -- (j) -- (j)
</TABLE>
<PAGE>
Notes to Selected Financial Data
- ---------------------------------
(a) The unaudited pro forma adjustments to the statements are as follows:
Disposition of Sassco:
The operating results of the Sassco Fashions line have been
eliminated to give effect to the disposition as of the beginning of the
period presented, including depreciation expense on its property, plant
and equipment, an allocated corporate charge based on workload by
department related to the Sassco Fashions line and direct charges
associated with financing fees on its factoring agreement and fees
incurred on letters of credit issued on its behalf. For periods
including June 4, 1997, the gain recorded on the disposition of the
Sassco Fashions line has been reversed.
Disposition of Castleberry:
The operating results of the Castleberry line have been
eliminated to give effect to the disposition as of the beginning of the
period presented, including depreciation expense on its property, plant
and equipment and an allocated corporate charge based on workload by
department related to the Castleberry line.
Fresh-Start Reporting:
The Company used fresh-start reporting to record the estimated
effect of the Plan as if it had been effective as of the beginning of
period presented. This includes adjustments for the following items:
i) The elimination of the historical depreciation and
amortization for the remaining product lines, including the amounts in
cost of sales, on the beginning of period asset balances and the
recording of the amortization credit for the "Excess of revalued net
assets acquired over equity under fresh-start reporting" (assuming a
three-year amortization period).
ii) The elimination of historical reorganization expense that
will not be incurred after June 4, 1997.
iii) The elimination of the fresh-start revaluation charge and
the reversal of the gain on debt discharge pursuant to the Plan.
(b) Financial information for the thirty-one weeks ended January 3, 1998
represents the consolidated results of the reorganized entity after the
consummation of the Plan.
(c) Financial information for the twenty-two weeks ended June 4, 1997
represents the audited consolidated results prior to the Company's
consummation of the Plan. The
<PAGE>
income statement information includes the results of Castleberry and
Sassco Fashions lines prior to their sale or spin-off in connection
with the consummation of the Plan.
(d) The Company incurred reorganization costs in 1997, 1996, 1995 and 1994
while operating as a debtor in possession. Included in 1997, 1996, 1995
and 1994 is a provision of $0, $652,000, $3,181,000 and $53,000,000,
respectively, for a write-down of a portion of the excess purchase
price over net assets acquired in the 1984 leveraged buyout of The
Leslie Fay Company, related to certain of the Company's product lines,
which the Company believes will be unrecoverable.
(e) On January 2, 1994, the Company decided not to accrue interest on
approximately $253,000,000 of pre-petition debt. During 1996 and 1995
the Company had direct borrowings under the FNBB Credit Agreement on
one hundred and two (102) days in the second and third quarters of 1996
and ten (10) days in the third quarter of 1995, the highest amounts of
which were $28,672,000 and $3,956,000, respectively. The Company had no
direct borrowings under the predecessor credit agreement in 1994.
Interest on direct borrowings was incurred at a rate of prime plus
1.5%. The terms of the FNBB Credit Agreement are described in Note 7(b)
to the Audited Consolidated Financial Statements.
(f) The Company recognized an income tax credit of $1,103,000 and
$1,811,000 in 1996 and 1995, respectively, representing a reduction of
foreign income tax liabilities as a result of negotiated settlements on
prior years' estimated taxes. The Company only paid state, local and
foreign taxes in 1996, 1995 and 1994. The elimination of the income tax
benefit in 1994 resulted from the complete utilization of tax refunds
from prior years' taxes paid.
(g) Amount consists of the following three components: Gain on
Sale/Transfer of the Sassco Fashions line of $89,810,000 (net of
$3,728,000 of income taxes), charge for Revaluation of Assets and
Liabilities Pursuant to the Adoption of Fresh-Start Reporting of
($27,010,000) and Gain on Debt Discharge (an extraordinary item) of
$73,541,000.
(h) Net income (loss) per share for the pro forma fifty-three weeks ended
January 3, 1998, thirty-one weeks ended January 3, 1998 and pro forma
1996 was calculated based on 6,800,000 shares of new common stock,
adjusted to give effect to the 2 for 1 stock split effected in July
1998, issued in connection with the consummation of the Plan. Earnings
per common share for the twenty-two weeks ended June 4, 1997 is not
presented because such presentation would not be meaningful. The old
stock of 18,771,836 shares, used in calculating the net income (loss)
per share in 1994 through 1996, was canceled under the Plan and the new
stock was not issued until June 4, 1997.
(i) The Company classified certain product lines as "Assets of Product
Lines Held for Sale and Disposition", as the Company had announced its
intention to dispose of these lines.
(j) Amount excludes long-term debt classified in liabilities subject to
compromise.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ ------------------------------------------------------------------------
of Operations.
-------------
(a) Results of Operations
Fifty-two Weeks Ended January 2, 1999 as Compared to Fifty-three Weeks Ended
- --------------------------------------------------------------------------------
January 3, 1998
- ---------------
For purposes of this discussion the fifty-three weeks ended January 3,
1998 was calculated by summarizing the Consolidated Statements of Operations of
the Reorganized Company for the thirty-one weeks ended January 3, 1998 and of
the Predecessor Company for the twenty-two weeks ended June 4, 1997.
The Company recorded net sales of $152,867,000 for the fifty-two weeks
ended January 2, 1999, compared with $271,075,000 for the fifty-three weeks
ended January 3, 1998, a net decrease of $118,208,000, or 43.6%. The primary
factors contributing to this decrease was the sale of the Sassco Fashions and
Castleberry product lines, which generated $136,107,000 and $2,808,000,
respectively, and the discontinuation of the Outlander brand which provided
$5,877,000 in net sales for the fifty-three weeks ended January 3, 1998. The
additional week in the period ended January 3, 1998 generated $1,225,000 of net
sales for the continuing product lines. Offsetting those decreases was
$3,260,000 of additional volume generated by the Dress brands acquired from the
Warren Apparel Group, Ltd. (See "Business - Recent Developments") and $6,608,000
of volume generated by the newly offered Sportswear brand "Haberdashery by
Leslie Fay" during the fifty-two weeks ended January 2, 1999. On a comparable
basis, after excluding the effect of the above mentioned businesses and the
additional week of volume, the remaining businesses had a net sales increase of
$17,941,000, or 14.3%, for the fifty-two weeks ended January 2, 1999 as compared
to the fifty-three weeks ended January 3, 1998. This increase was due to
$19,201,000 or 25.6% of increased volume within Leslie Fay Dress product line
offset by a $1,260,000 or 2.5% decrease within the Sportswear product line.
Gross profit for the fifty-two weeks ended January 2, 1999 was
$37,320,000 or 24.4% of net sales compared with $65,080,000 or 24.0% for the
fifty-three weeks ended January 3, 1998. The Sassco Fashions and Castleberry
lines generated $34,534,000 and $545,000, respectively, in gross profit for the
fifty-three weeks ended January 3, 1998. These product lines had a higher gross
profit percent to net sales than the remaining lines. Also, gross profit of
$321,000 related to the discontinued Outlander brand and $443,000 for the extra
week was generated during the fifty-three weeks ended January 3, 1998. The
remaining comparable businesses, excluding $1,377,000 and $880,000 of gross
profit realized from the new Haberdashery and Warren brands, increased gross
profit by $5,826,000 for the fifty-two weeks ended January 2, 1999 versus the
prior year and the gross margin percent increased to 24.5% from 23.4%. The
Leslie Fay Dress line's gross profit increased $5,187,000 or a gross profit
percent of 25.0% from 24.4%. The Sportswear lines gross profit increased
$639,000 to 23.7% of sales from 21.8%.
<PAGE>
Selling, warehouse, general and administrative expenses were 18.4% and
18.0% of net sales for the fifty-two and fifty-three weeks ended January 2, 1999
and January 3, 1998, respectively. After excluding the costs associated with the
product lines sold, the comparable remaining businesses had expenses of 18.2%
for the fifty-three weeks ended January 3, 1998. Expenses are up mostly due to
the additional operating expenses related to the Warren brands, which have a
higher expense ratio than the other operating brands in the Company, increased
straight-line costs incurred to extend the Company's lease for showroom and
office space in New York and additional costs incurred during the restructuring
of the Sportswear product line during 1998.
Depreciation and amortization expense for the fifty-two weeks ended
January 2, 1999 was $406,000 due to the write-off of fixed assets at June 4,
1997 under fresh-start reporting. In addition, the Company realized income of
$4,572,000 from amortization of the excess revalued net assets acquired over
equity (see Note 2). Depreciation and amortization expense for the fifty-three
weeks ended January 3, 1998 consisted of $2,104,000, including $860,000 of
depreciation related to product lines sold and amortization of the excess
purchase price over net assets acquired of $473,000, including $257,000 of
amortization related to the lines sold. This amortization expense related to the
leveraged buyout of The Leslie Fay Company on June 28, 1984. The remaining
comparative product lines had depreciation expense of $771,000 and realized
income of $2,667,000 from amortization of the excess revalued net assets
acquired over equity during the fifty-three week period ended January 3, 1998
(see Note 2).
The Company's adoption of SFAS No. 123, "Accounting for Stock-Based
Compensation", to value stock options and the issuance of shares of common stock
as partial payment for services rendered by the non-employee members of the
Company's Board of Directors generated non-cash stock based compensation expense
of $1,724,000 and $351,000 for the fifty-two and fifty-three weeks ended January
2, 1999 and January 3, 1998, respectively. There was no non-cash stock based
compensation expense recorded prior to June 4, 1997.
Other income was $1,334,000 and $2,143,000 for the fifty-two and
fifty-three weeks ended January 2, 1999 and January 3, 1998, respectively. The
decrease is primarily due to the licensing revenues related to trade names which
were spun-off with the Sassco Fashions product line and the expiration of
certain licensing agreements which were not renewed.
Interest expense and financing costs, net of interest income was
$950,000 and $1,708,000 for the fifty-two and fifty-three weeks ended January 2,
1999 and January 3, 1998, respectively. The financing fees under the new CIT
Credit Agreement (see Note 7) were offset by income earned on the cash invested
for the fifty-two weeks ended January 2, 1999. The financing fees incurred were
significantly below those incurred during the fifty-three weeks ended January 3,
1998 due to the higher line needed to finance the operations of the Sassco
Fashions and Castleberry product lines. In addition, the Company maintained a
higher average cash balance during the period and earned additional interest
income compared to the prior year.
<PAGE>
The provision for taxes was $3,212,000 and $1,128,000 for the fifty-two
and fifty-three weeks ended January 2, 1999 and January 3, 1998, respectively.
The lower provision in 1997 resulted from net operating loss
("NOL")carryforwards which were available for use for the period through the
Company's emergence from bankruptcy, which are recorded in capital in excess of
par value after the Company emerged from bankruptcy. During the pre-emergence
period, the NOL utilization reduced the provision for taxes.
The Reorganized Company's Thirty-One Weeks Ended January 3, 1998 as Compared to
- --------------------------------------------------------------------------------
the Predecessor Company's Thirty-One Weeks Ended December 28, 1996
- ------------------------------------------------------------------
The Company recorded net sales of $73,091,000 for the thirty-one weeks
ended January 3, 1998, compared with $256,225,000 for the thirty-one weeks ended
December 28, 1996, a net decrease of $183,134,000, or 71.5%. The primary factor
contributing to this decrease was the sale of the Sassco Fashions and
Castleberry product lines, which generated $184,495,000 and $4,223,000,
respectively, in net sales for the thirty-one weeks ended December 28, 1996. On
a comparable basis, after excluding the effect of the above mentioned
businesses, the remaining businesses had a net sales increase of $5,584,000, or
8.3%, for the thirty-one weeks ended January 3, 1998 as compared to the
thirty-one weeks ended December 28, 1996, primarily due to the increased volume
of the Dress line. Excluding a decrease of $6,255,000 related to discontinuing
its Outlander brands, sales from continuing businesses grew 20.5% over the
comparable period for 1996. This growth was driven by an increase of 44.5% over
the comparable period of 1996 by the Leslie Fay Dress line. After excluding the
effect of the discontinued Outlander brands, the Sportswear line had a sales
growth of 1% over the comparable period for 1996.
Gross profit for the thirty-one weeks ended January 3, 1998 was 19.7%
of net sales compared with 22.2% for the thirty-one weeks ended December 28,
1996 (a decrease of $42,461,000). The Sassco Fashions and Castleberry lines
generated $42,442,000 and $912,000, respectively, in gross profit for the
thirty-one weeks ended December 28, 1996. These product lines had a higher gross
profit percent to net sales than the remaining businesses. The remaining
businesses increased gross profit by $842,000 for the thirty-one weeks ended
January 3, 1998 versus the prior year and the gross margin percent decreased to
19.7% from 20.0%. Excluding the Discontinued Outlander brands, gross profit
percent decreased from 21.6% to 19.8% during the period. The decrease in gross
profit percent was due to the additional markdowns taken to market the
sportswear fall production due to late delivery of a majority of the line. The
Leslie Fay Dress line's gross profit increased $3,084,000 or a gross profit
percent of 19.3% from 15.9%.
Selling, warehouse, general and administrative expenses were 18.7% and
17.8% for the thirty-one weeks ended January 3, 1998 and December 28, 1996,
respectively. After excluding the costs associated with the product lines sold,
the comparable remaining businesses had expenses of 20.3% for the thirty-one
weeks ended December 28, 1996. This decrease in the comparable percentage is a
result of the additional sales volume during the thirty-one weeks ended January
3, 1998 while continuing to reduce overhead expenses related to downsizing.
<PAGE>
Depreciation and amortization expense for the thirty-one weeks ended
January 3, 1998 was only $14,000 due to the write-off of fixed assets at June 4,
1997 under fresh-start reporting. In addition, the Company realized income of
$2,667,000 from amortization of the excess revalued net assets acquired over
equity (see Note 2). Depreciation and amortization expense for the thirty-one
weeks ended December 28, 1996 consisted of depreciation on fixed assets of
$2,214,000, including $956,000 related to product lines sold and amortization of
the excess purchase price over net assets acquired of $670,000, including
$340,000 of amortization related to the lines sold. This amortization expense
related to the leveraged buyout of The Leslie Fay Company on June 28, 1984.
Other income was $947,000 and $2,294,000 for the thirty-one weeks ended
January 3, 1998 and December 28, 1996, respectively. The decrease is primarily
due to the licensing revenues related to trade names which were spun-off with
the Sassco Fashions product line and the expiration of certain licensing
agreements which were not renewed.
Interest expense, net of interest income and financing costs were
$336,000 and $3,095,000 for the thirty-one weeks ended January 3, 1998 and
December 28, 1996, respectively. The financing fees under the new CIT Credit
Agreement (see Note 7) were offset by income earned on the cash invested for the
thirty-one weeks ended January 3, 1998. The financing fees incurred were
significantly below those incurred during the thirty-one weeks ended December
28, 1996 due to the higher line needed to finance the operations of the Sassco
Fashions and Castleberry product lines. In addition, the Company maintained a
higher average cash balance during the period and earned additional interest
income compared to the prior year.
The provision for taxes was $677,000 and ($1,273,000) for the
thirty-one weeks ended January 3, 1998 and December 28, 1996, respectively. The
credit in 1996 relates primarily to foreign taxes on a subsidiary of the Sassco
Fashions line.
Twenty-Two Weeks Ended June 4, 1997 as Compared to Twenty-One Weeks Ended May
- --------------------------------------------------------------------------------
25, 1996 for the Predecessor Company
- ------------------------------------
The Company recorded net sales of $197,984,000 for the twenty-two weeks
ended June 4, 1997, compared with $173,451,000 for the twenty-one weeks ended
May 25, 1996, a net increase of $24,533,000, or 14.1%. The additional week
accounted for $10,084,000 of the net sales increase. Additionally, in 1996, the
Sassco Fashions product line began shipping a new product line under the Nina
Charles brand and opened additional retail stores over the preceding 17 months,
for a total of 45 stores in operation at June 4, 1997. These new businesses
achieved a net sales volume of $17,843,000 for the twenty-two weeks ended June
4, 1997, or $11,379,000 more than for the twenty-one weeks ended May 25, 1996.
On a comparable basis, after excluding the effect of the above mentioned
additional week and new businesses, the Sassco Fashions line had a net sales
decrease of $8,430,000, or 7.0% for the twenty-two weeks ended
<PAGE>
June 4, 1997, compared with the twenty-one weeks ended May 25, 1996. This was
primarily a result of reducing its production in 1997 to limit additional
clearance markdowns. The remaining Leslie Fay businesses accounted for an
increase of $12,542,000, or 29.5%, primarily due to increased volume for its
Leslie Fay Dress product line. The net sales of the Castleberry product line
declined by $1,042,000.
Gross profit for the twenty-two weeks ended June 4, 1997 was 25.6% of
net sales compared with 23.9% in the twenty-one weeks ended May 25, 1996 (an
increase of $9,237,000). The additional week accounted for $1,998,000 of the
increase in gross profit. The additional retail stores and new product lines of
the Sassco Fashions line accounted for $3,364,000 of the increase in gross
profit. The remaining gross profit of Sassco Fashions declined $461,000.
Although the gross margin for the line increased 1.3%, it did not offset the
impact of the net sales volume decrease on gross profit. Increased volume and
better initial pricing (gross margin increased from 22.9% to 26.5% on a
comparable basis) of the Leslie Fay Dress and Sportswear lines also accounted
for $4,885,000 of additional gross profit. The Castleberry line had a decrease
in gross profit of $549,000.
Selling, warehouse, general and administrative expenses for the
twenty-two weeks ended June 4, 1997 decreased to 17.9% of net sales compared
with 19.6% for the twenty-one weeks ended May 25, 1996. The percentage decrease
is primarily due to the additional sales volume generated in the twenty-two
weeks ended June 4, 1997 versus the twenty-one weeks ended May 25, 1996, without
a corresponding increase in expenses. For the period, expenses increased
$2,248,000 over the prior year. Sassco Fashions expenses increased $4,118,000,
of which $1,100,000 was related to the extra week and the remainder was due to
the additional product lines and retail stores opened. The Leslie Fay business
reduced expenses by $1,749,000 or 14.1% below the prior year net of
approximately $483,000 of expenses incurred in the extra week. The Castleberry
line decreased expenses by approximately $121,000 or 10.4% below the comparable
period in 1996 due to its reduced volume.
Depreciation and amortization consisted primarily of the amortization
of the excess purchase price over net assets acquired and related principally to
the leveraged buyout of The Leslie Fay Company on June 28, 1984.
Interest and financing costs increased to $1,372,000 for the twenty-two
weeks ended June 4, 1997 compared to $837,000 for the twenty-one weeks ended May
25, 1996. The increase was due primarily to the fee to finance the accounts
receivable of the Sassco Fashions product line under an agreement which began in
February 1996.
While operating as a debtor in possession, the Company recognized
reorganization costs of approximately $3,379,000 and $1,560,000 during the
twenty-two weeks ended June 4, 1997 and twenty-one weeks ended May 25, 1996,
respectively, which were comprised of professional fees and other costs of
$2,951,000 and $1,806,000; and plan administration costs of $1,000,000 and $0;
offset by interest income of $572,000 and $246,000.
<PAGE>
The provision for taxes was $451,000 and $435,000 for the twenty-two
weeks ended June 4, 1997 and the twenty-one weeks ended May 25, 1996,
respectively. There was no federal income tax provision currently recognizable,
other than that based on the alternative minimum tax regulations, due to
existing net operating loss carryforwards.
(b) Liquidity and Capital Resources
On June 2, 1997, the Company obtained $30,000,000 of post-emergence
financing (see Note 7), which became effective with the consummation of the Plan
on June 4, 1997. The CIT Credit Agreement as amended, currently provides a
working capital facility commitment of $42,000,000, including a $25,000,000
sublimit on letters of credit. The Company had a net borrowing availability
under its Credit Agreement of $28,949,000 on January 2, 1999 and peak borrowing
during the fiscal year ended January 2, 1999 was $3,734,000. As of March 26,
1999, there were approximately $2,502,000 in direct borrowings under the
revolving line of credit and the Company was utilizing approximately $8,673,000
of the CIT Credit Agreement for letters of credit.
At January 2, 1999, there was $328,000 in direct borrowings outstanding
under the CIT Credit Agreement and cash and cash equivalents amounted to
$4,213,000. Of this amount, $3,267,000 will be used to pay remaining
administrative claims as defined in the Plan. Working capital decreased
$3,875,000, to $35,578,000 at January 2, 1999 from January 3, 1998. The primary
changes in the components of working capital were: a decrease in cash and cash
equivalents and short-term investments of $18,589,000; an increase in accounts
receivable of $6,425,000; an increase in inventories of $11,926,000; an increase
of $163,000 in prepaid expenses and other current assets; offset by an increase
in current liabilities of $3,800,000. Short-term investments decreased as the
Company liquidated a $2,989,000 one-year US Treasury Note that matured on June
30, 1998, the proceeds from which were and will be used to pay administrative
claims. Cash and cash equivalents decreased primarily as a result of the
accounts receivable and inventory increases discussed below as well as the use
of: $4,623,000 to repurchase 817,100 shares of the Company's outstanding common
stock, $2,331,000 for capital expenditures and $1,250,000 of cash used upon the
acquisition of certain assets of Warren Apparel Group, Ltd. (See "Business -
Recent Developments"). Accounts receivable increased due to the earlier than
normal shipping of the Spring season into the fourth quarter and the additional
volume shipped by the recently acquired brands "David Warren", Warren Petites",
Rimini" and "Reggio" (See "Business - Recent Developments"). Inventories
increased as a result of the earlier production of the Spring lines to
accommodate the earlier shipping windows as well as the investment required to
build the necessary better priced dress products for the new brands. The
increase in current liabilities is predominately a result of the additional
contractor accounts payable related to the higher investment in current season
inventory, $1,175,000 of estimated remaining acquisition expenses and the
assumption of a short-term note payable of $834,000, all of which were a result
of the above mentioned acquisition.
<PAGE>
The Company estimated it had approximately $50,000,000 of NOL available
at June 4, 1997 to offset future taxable income, if any, through fiscal year
2011. The utilization of the NOL, however, is subject to limitations, including
an annual limitation of about $1,500,000 imposed by Section 328 of the Internal
Revenue Code. As of January 2, 1999, the remaining aggregate loss utilization
limitation through fiscal year 2011 is approximately $19,500,000.
Capital expenditures were $2,331,000 for the fifty-two weeks ended
January 2, 1999. The anticipated capital expenditures of $2,990,000 for the 1999
fiscal year include approximately $1,400,000 to improve management information,
production and distribution systems, approximately $670,000 for improvements to
the Company's distribution facility, approximately $550,000 for fixturing the
Company's in-store shops that are planned to be opened in 1999, and
approximately $370,000 for all other purposes. The Company believes that its
financing arrangements and anticipated level of internally generated funds will
be sufficient to finance its capital spending during 1999.
The provisions of the Company's Credit Agreement with CIT have been modified to
the following:
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 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 January 2, 1999) and the CIT Credit
Agreement requires a fee, payable monthly, on average outstanding letters of
credit at a rate of 2% annually. There were $328,000 in direct borrowings
outstanding under the CIT Credit Agreement and approximately $8,099,000 was
committed under unexpired letters of credit as of January 2, 1999.
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, 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.
<PAGE>
The Company may repurchase its stock or pay dividends up to an amount of
$10,000,000. As of March 25, 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, and 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 waiver for all requirements contained in the CIT Credit Agreement.
The Company initially paid $150,000 in commitment and related fees in
connection with the credit facility which was written-off as part of fresh-start
reporting and paid another $250,000 in commitment fees in June 1997. These fees
are being amortized as interest and financing costs over the two years of the
original CIT Credit Agreement.
Year 2000
- ---------
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.
<PAGE>
Certain of these changes were implemented in 1998; the others will be
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 March
19, 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.
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.
<PAGE>
Item 7B. Quantitative and Qualitative Disclosures About Market Risk.
- ------- ----------------------------------------------------------
None.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
See the Consolidated Financial Statements and Financial Statement
Schedule of The Leslie Fay Company, Inc. and Subsidiaries attached hereto and
listed on the index to consolidated financial statements set forth in Item 14 of
this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure.
--------------------
None.
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
<TABLE>
<CAPTION>
Directors of the Company
Principal Occupation and Director
Name and Age Offices with the Company Since
- ------------ ------------------------ ---------
<S> <C> <C>
John J. Pomerantz (65) Chairman of the Board and Chief Executive Officer 1984
of the Company
John A. Ward (45) President of the Company 1997
Clifford B. Cohn (47) Principal of Cohn & Associates (1)(2) 1997
Mark B. Dickstein (40) President of Dickstein Partners Inc. (1)(2) 1997
Chaim Edelstein (56) Former Chairman of the Board of Hills Stores, 1998
Inc. (1) (2)
Mark Kaufman (42) Sr. Vice-President of Amroc Investments (2)(3) 1997
Bernard Olsoff (69) Former Chief Executive Officer and President of 1998
Frederick Atkins, Inc. (2)(3)
Robert L. Sind (64) President of Recovery Management 1997
Corporation (2)(3)
</TABLE>
- --------------------------------------------------------------------------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of the Finance Committee of the Board of Directors.
(3) Member of the Audit Committee of the Board of Directors.
<PAGE>
Executive Officers of the Company
Name Positions with the Company Age
- ---- -------------------------- ---
John J. Pomerantz Chairman of the Board and 65
Chief Executive Officer
John A. Ward President 45
Dominick Felicetti Senior Vice President-Manufacturing 45
and Sourcing
Warren T. Wishart Senior Vice President-Administration 46
and Finance, Secretary and
Chief Financial Officer
Certain Information Concerning Directors, Executive Officers and Significant
Employees of the Company
The term of office of each executive officer of the Company expires on
the date of the organizational meeting of the Board of Directors of the Company
following each Annual Meeting of Stockholders of the Company and when his or her
respective successor is elected and has qualified.
John J. Pomerantz has been the Chief Executive or Chief Operating
Officer of the Company and its predecessors since 1971, and an executive thereof
for over 30 years. Mr. Pomerantz was President of the Leslie Fay business from
1971 until August 1986, when he became Chairman of the Board of the Company.
John A. Ward joined the Company in August 1989 as head of the Andrea
Gayle division. From July 1991 to June 1993 he was Chairman of the Leslie Fay
Sportswear Group. In June 1993 he became Chairman of the combined Leslie Fay
Dress and Sportswear lines. He was elected a Senior Vice President of the
Company in September 1991 and President of the Company in June 1997. From June
1988 until August 1989 he was Senior Vice President and General Merchandise
Manager for Ready-to-Wear, Men's and Boys' at B. Altman & Co. For fifteen years
prior thereto, he had been an executive at Filene's.
Clifford B. Cohn has been a principal with Cohn & Associates law firm
since September 1994. From September 1992 to September 1994, he was a principal
with Sernovitz & Cohn law firm.
<PAGE>
Mark B. Dickstein has been the President of Dickstein Partners Inc.
since 1986 and is primarily responsible for the operations of Dickstein & Co.,
L.P., Dickstein Focus Fund L.P. and Dickstein International Limited, each of
which is a private investment fund. Mr. Dickstein also serves as a Director of
Marvel Enterprises, Inc. and News Communications Inc.
Chaim Y. Edelstein was Chairman of the Board of Hills Stores, Inc. from
February 7, 1996 until December 31, 1998. From 1985 to February 1994 he was
Chairman and Chief Executive Officer of Abraham & Straus, a division of
Federated Department Stores, Inc. Mr. Edelstein is a Director of the
Independence Community Bank.
Mark Kaufman has been a Sr. Vice- President at Amroc Investments since
January 1999. Prior to joining Amroc, beginning in July 1992, Mr. Kaufman was a
Vice President of Dickstein Partners, Inc. Prior to that, beginning in 1990, Mr.
Kaufman was a Senior Vice-President of Oppenheimer & Co., an investment banking
firm. Prior to that, Mr. Kaufman was a Vice President of GAF Corp., a chemical
and roofing manufacturer.
Bernard Olsoff was President and Chief Executive Officer of Frederick
Atkins, Inc. ("Atkins"), an international retail merchandising and product
development organization for department stores. He joined Atkins as Executive
Vice President in 1983 and was named President and Chief Operating Officer in
1987. In January 1994 he became Chief Executive until his retirement in April
1997. Prior to joining Atkins he was President of May Department Stores Company,
May Merchandising Corporation from 1971 to 1983 and Vice President and General
Merchandise Manager of Associated Merchandising Corporation from August 1955 to
August 1971.
Robert L. Sind founded Recovery Management Corporation ("RMC") in 1984.
RMC specializes in developing and implementing hands-on business, financial and
operational turnaround programs and providing crisis management to troubled
commercial, industrial and real estate companies and their creditors.
Previously, Mr. Sind had been an investment banker for ten years and, spanning
over twelve years, held senior corporate operating and financial positions,
including The Londontown Manufacturing Company, Chief Financial Officer at Beker
Industries Corporation and Chief Operating Officer at both Nice-Pak Products,
Inc. and Marker International.
Dominick Felicetti rejoined the Company in May 1995 as Senior Vice
President of Worldwide Sourcing and Manufacturing. From 1994 to 1995 he was Vice
President Manufacturing and Production for S.L. Fashions. Mr. Felicetti was
previously employed by The Leslie Fay Companies, Inc. from December 1991 to July
1993 in the position of Director of Technical Services and Production. Prior to
that, from 1986 to 1990, he served as President of American Dress Company and
from 1979 to 1986 as Production Manager for Betsy's Things.
<PAGE>
Warren T. Wishart joined the Company in March 1993. He held the
position of Vice President - Planning from July 1993 through December 1994. In
January 1995 he became Senior Vice President - Finance. In September 1995 he was
appointed Chief Financial Officer and Treasurer of the Company. In June 1997 he
became Senior Vice President Administration and Finance and Secretary of the
Company. Before joining Leslie Fay Mr. Wishart was Vice President Strategic
Planning of Galerias Preciados from 1991 to the end of 1992. Prior to that, he
had seventeen years of financial management and business planning experience
with several department stores including Filene's and the L.J.
Hooker Retail Group.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16 of the Securities Exchange Act of 1934, as
amended, officers, directors and holders of more than 10% of the outstanding
shares of the Company's Common Stock are required to file periodic reports of
their ownership of, and transactions involving, the Company's Common Stock with
the Securities and Exchange Commission. Based solely on its review of copies of
such reports received by the Company, the Company believes that its reporting
persons have complied with all Section 16 filing requirements applicable to them
with respect to the Company's fiscal year ended January 2, 1999.
<PAGE>
Item 11. Executive Compensation.
Summary of Cash and Certain Other Information. The following table
shows, for 1998, 1997 and 1996, the compensation paid or accrued by the Company
and its subsidiaries to the Chief Executive Officer and the other most highly
compensated "named executive officers" (as defined in Regulation S-K) of the
Company during 1998 (the "Named Officers"). All share, option and exercise and
market price information in this Item 11 has been adjusted to give retroactive
effect to a 2 for 1 split of the Company's common stock effective in July 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation (1) Long Term Compensation
-------------------------------------------------------------
Awards Payouts
-------- ---------
Restricted Securities
Stock Underlying LTIP All Other
Name and Principal Position Year Salary (2) Bonus Awards Options (#) Payouts Compensation
- ---------------------------- --------- ------------- ------------ ------------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Pomerantz 1998 $498,654 $350,000 117,042 $ 2,650 (3)
Chairman of the 1997 $611,129 $300,000 -- 263,756 -- $ 8,699 (4)
Board and Chief 1996 $777,915 $171,700 -- -- -- $ 8,938 (5)
Executive Officer
- --------------------------------------------------------------------------------------------------------------------------
John A. Ward 1998 $449,039 $280,000 91,440 -- $ 2,650 (3)
President 1997 $462,692 $225,000 -- 140,120 -- $ 2,650 (4)
1996 $521,154 $145,600 -- -- -- $ 2,500 (5)
- --------------------------------------------------------------------------------------------------------------------------
Dominick Felicetti 1998 $349,519 $230,000 78,638 -- $ 2,650 (3)
Senior Vice President - 1997 $337,500 $200,000 -- 140,120 -- $ 1,938 (4)
Manufacturing and 1996 $267,885 $ 91,200 -- -- -- --
Sourcing
- --------------------------------------------------------------------------------------------------------------------------
Warren T. Wishart 1998 $224,519 $200,000 78,638 -- $ 2,650 (3)
Senior Vice President- 1997 $207,692 $180,000 -- 140,120 -- $ 102,650 (4)
Administration and 1996 $200,000 $ 91,200 -- -- -- $ 2,500 (5)
Finance, Chief
Financial Officer and
Treasurer
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1998, 1997 and 1996, perquisites and other personal benefits did
not exceed the lesser of $50,000 or 10% of reported annual salary and
bonuses for any of the Named Officers.
(2) 1997 was a 53 week year. 1998 and 1996 were 52 week years. Amounts
represent salaries paid during the above calendar years.
(3) For 1998, consists of amounts contributed as Company matching
contributions for each Named Officer under the Company's 401(k) savings
plan (the "401(k) Plan").
<PAGE>
(4) For 1997, consists of the following: (a) amounts contributed as Company
matching contributions for each Named Officer under the Company's
401(k) Plan as follows: Mr. Pomerantz $2,286; Mr. Ward $2,650; Mr.
Felicetti $1,938 and Mr. Wishart $2,650 and (b) amounts paid by the
Company for split dollar life insurance coverage as follows: Mr.
Pomerantz $6,413; and (c) amount paid by the Company as earned
retention for Mr. Wishart $100,000.
(5) For 1996, consists of the following: (a) amounts contributed as Company
matching contributions for each Named Officer under the Company's
401(k) Plan as follows: Mr. Pomerantz $2,286; Mr. Ward $2,500 and Mr.
Wishart $2,500 and (b) amounts paid by the Company for split dollar
life insurance coverage as follows: Mr. Pomerantz $6,652.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information with respect to stock
options granted to the Named Officers during fiscal 1998:
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
% of Total Potential Realizable Value at
Number of Options Assumed Annual Rates of Stock Price
Securities Granted to Appreciation for Option Term
Underlying Employees Exercise Expiration --------------------------------------
Name Options Granted in Fiscal Year Price (1) Date(2) 0% 5% 10%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Pomerantz 117,042 26.7% $3.09 1/4/08 $508,840 $ 989,005 $1,691,257
John A. Ward 91,440 20.9% $3.09 1/4/08 $397,535 $ 772,668 $1,321,308
Dominick Felicetti 78,638 17.9% $3.09 1/4/08 $341,879 $ 664,491 $1,136,319
Warren T. Wishart 78,638 17.9% $3.09 1/4/08 $341,879 $ 664,491 $1,136,319
</TABLE>
(1) The market price per share as of the grant date was $7.44
(2) Exercisable as to 25% of such shares on each of January 4,
1998, January 4, 1999, January 4, 2000 and January 4, 2001.
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Value
Table
The following table sets forth information with respect to the
Named Officers concerning the exercise of options during 1998 and unexercised
options held as of the end of such year. The average bid and asked price of a
share of Common Stock of the Company on the close of business on December 30,
1998 (the last trade day prior to January 2, 1999) was $6.6875.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at Fiscal Year-End at Fiscal Year-End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ---- ------------ -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
John J. Pomerantz None N/A 116,300/264,500 $ 418,350/951,450
John A. Ward None N/A 69,100/162,460 $ 248,570/584,400
Dominick Felicetti None N/A 65,900/152,860 $ 237,060/549,870
Warren T. Wishart None N/A 65,900/152,860 $ 237,060/549,870
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Aggregate market value of the shares of Common Stock covered by the
options at fiscal year end less the exercise price of such options.
Compensation of Directors
Each director who is not a full-time employee of or consultant to the
Company receives an annual director's fee of $12,500 and 2,000 shares of the
Company's common stock. Each initial non-employee director, upon becoming a
director, received stock options to purchase 20,000 shares, vesting one-third
each year and each subsequent non-employee director, upon becoming a director,
has received or will receive stock options to purchase 10,000 shares, vesting
one-third each year.
Employment Contracts
The Company has an employment agreement with John J. Pomerantz expiring
on January 3, 2001, pursuant to which he is employed as Chief Executive Officer
at a base salary of $500,000 per annum.
The Company also has an employment agreement with John A. Ward expiring
on January 3, 2001, pursuant to which he is employed as President of the Company
at a base salary of $450,000 per annum.
The Company also has an employment agreement with Dominick Felicetti
expiring on January 3, 2001, pursuant to which he is employed as Senior Vice
President--Manufacturing and Sourcing at a base salary of $350,000 for the first
two years and $375,000 for the third year.
<PAGE>
The Company also has an employment agreement with Warren T. Wishart
expiring on January 3, 2001, pursuant to which he is employed as Senior Vice
President--Administration and Finance, Chief Financial Officer and Treasurer at
a base salary of $225,000 for the first two years and $250,000 for the third
year.
In addition, these employment agreements provide for a shared bonus
pool payable to the employees of the Company if EBITDA (as defined in such
agreements) exceeds $4,626,550. The bonus pool will equal 9.6% of EBITDA plus an
additional 0.2% of EBITDA for each $54,430 by which EBITDA exceeds $4,626,550 up
to a maximum of 12.5% of EBITDA plus an additional 5% of the amount by which
EBITDA exceeds $11,500,000, subject to certain adjustments.
At the Annual Meeting of Stockholders on June 3, 1998, the stockholders
approved an amendment to the 1997 Management Stock Option Plan. The amendment
replaced the so-called "Home Run" options for 618,182 shares of common stock
which were issuable only if the Company were sold at a certain minimum price
with the grant of stock options to purchase an aggregate of 365,758 shares of
common stock at an exercise price of $3.09 per share which will vest in four
equal annual installments beginning January 4, 1998.
Severance Agreements
In January 1998, the Company entered into a severance agreement with
Catharine Bandel-Wirtshafter pursuant to which she received in a lump sum
$290,000 representing six (6) months compensation as well as bonus and other
amounts under her employment agreement with the Company dated as of June 4,
1997. In addition, one-third of the options previously granted to her vested on
the effective date of the severance agreement and were exercised during fiscal
1998.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors is charged with
determining the compensation of officers, during 1998 the Compensation Committee
consisted of Robert L. Sind (until June 3, 1998), Bernard Olsoff (from June 3,
1998 through November 10, 1998), Chaim Edelstein (from November 10, 1998),
Clifford B. Cohn and Mark B. Dickstein.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
(a) The following table sets forth certain information with respect to
each person (including any "group" as that term is used in Section 13(d)(3) of
the Securities and Exchange Act of 1934, as amended) who is known to the Company
to be the beneficial owner of more than 5% of the Company's Common Stock as of
March 25, 1999.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Ownership of
Names and Address of Beneficial Owners Beneficially Owned Common Stock
- ---------------------------------------- -------------------- ---------------
<S> <C> <C>
Mark B. Dickstein
c/o Dickstein Partners Inc. 2,803,069 (1) 46.4%
660 Madison Avenue 16th Floor
New York, NY 10021
Pioneering Management Corporation 524,000 (2) 8.7%
60 State Street
Boston, MA 02109
John A. Motulsky 390,700 (3) 6.5%
c/o Stonehill Partners, L.P.
110 East 59th Street
New York, NY 10022
</TABLE>
(1) Includes 2,015,660, 340,600, 361,476 and 82,000 shares of Common Stock
directly owned by Dickstein & Co., L.P., Dickstein Focus Fund L.P.,
Dickstein International Limited and Mark B. Dickstein, respectively.
Includes 3,333 shares of Common Stock issuable upon exercise of
presently exercisable stock options. Mark B. Dickstein is the sole
shareholder, sole director and president of Dickstein Partners Inc.
("DPI"). DPI is the general partner of Dickstein Partners L.P. which is
the sole general partner of Dickstein & Co., L.P. and Dickstein Focus
Fund. DPI is the adviser for Dickstein International Limited and makes
all investment and voting decisions for that entity. The information
provided above was obtained from Amendment 9 to Schedule 13D dated
March 24, 1999.
(2) The information provided above was obtained from a Schedule 13G dated
April 23, 1998.
(3) Includes 111,200, 146,300 and 133,200 shares of Common Stock owned
directly by Stonehill Partners, L.P., Stonehill Institutional Partners,
L.P. and Stonehill Offshore Partners Limited, respectively. John A.
Motulsky is the General Partner of each of Stonehill Partners, L.P. and
Stonehill Institutional Partners, L.P. Mr. Motulsky is a Member of
Stonehill Advisers LLC which is a partner of Stonehill Offshore
Partners Limited. The information provided above was obtained from a
Schedule 13G dated March 12, 1999.
<PAGE>
(b) The following table sets forth certain information as of March 25,
1999 with respect to the beneficial ownership of the Company's Common Stock by
each director, each of the Named Officers and by all directors and executive
officers of the Company as a group. Unless otherwise noted, the address of each
beneficial owner named below is the Company's corporate address.
Number of Shares Ownership of
Names and Address of Beneficial Owners Beneficially Owned Common Stock
- ------------------------------------------- --------------------- --------------
Mark B. Dickstein 2,803,069(1) 46.4%
c/o Dickstein Partners Inc.
660 Madison Avenue 16th Floor
New York, NY 10021
John J. Pomerantz 155,561(2) 2.5%
John A. Ward 91,960(3) 1.5%
Dominick Felicetti 87,559(4) 1.4%
Warren T. Wishart 85,559(3) 1.4%
Chaim Y. Edelstein 12,000 (5)
Clifford B. Cohn 8,666(6) (5)
Robert L. Sind 8,666(6) (5)
Mark Kaufman 7,333(7) (5)
Bernard Olsoff 2,000 (5)
Officers and Directors as a group 3,262,373(8) 50.4%
(10 persons)
- --------------
(1) See footnote (1) to table (a) under the caption "Security Ownership of
Certain Beneficial Owners and Management" for certain information
concerning Mr. Dickstein's beneficial ownership of Common Stock.
(2) Includes 145,561 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(3) Consists of shares of Common Stock issuable upon exercise of presently
exercisable stock options.
(4) Includes 85,559 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(5) Less than 1% of the outstanding Common Stock .
(6) Includes 6,666 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(7) Includes 3,333 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(8) Includes 428,637 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
None.
<PAGE>
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- -----------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements:
The Consolidated Financial Statements are set forth
in the Index to Consolidated Financial Statements and
Financial Statement Schedule on page F-1 hereof.
(2) Financial Statement Schedule:
The Financial Statement Schedule is set forth on the
Index to Consolidated Financial Statements and
Financial Statement Schedule on page F-1 hereof.
(3) Exhibits:
Exhibits are set forth on the "Index to Exhibits" on
page E-1 hereof.
(b) Reports on Form 8-K:
Since the end of the third quarter of 1998, the Company has
not filed any Current Reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
2nd day of April, 1999.
THE LESLIE FAY COMPANY, INC.
By: /s/ John J. Pomerantz
---------------------------
John J. Pomerantz
Chief Executive Officer
and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- -----
<S> <C> <C>
/s/ John J. Pomerantz Chief Executive Officer and April 2, 1999
- ------------------------------------- Chairman of the Board of Directors
John J. Pomerantz
/s/ Warren T. Wishart Chief Financial and Accounting Officer April 2, 1999
- -------------------------------------
Warren T. Wishart
/s/ John A. Ward Director April 2, 1999
- -------------------------------------
John A. Ward
Director
- -------------------------------------
Clifford B. Cohn
/s/ Mark B. Dickstein Director April 2, 1999
- -------------------------------------
Mark B. Dickstein
Director
- -------------------------------------
Chaim Edelstein
<PAGE>
Signatures Title Date
---------- ----- -----
/s/ Mark Kaufman Director April 2, 1999
- --------------------------------------
Mark Kaufman
/s/ Bernard Olsoff Director April 2, 1999
- --------------------------------------
Bernard Olsoff
/s/ Robert L. Sind Director April 2, 1999
- --------------------------------------
Robert L. Sind
</TABLE>
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
Report of Independent Public Accountants F - 2
Consolidated Financial Statements:
Consolidated Balance Sheets F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Stockholders' Equity F - 5
Consolidated Statements of Cash Flows F - 6
Notes to Consolidated Financial Statements F - 7
Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts F - 33
<PAGE>
Report of Independent Public Accountants
- ----------------------------------------
To the Stockholders and Board of Directors of
The Leslie Fay Company, Inc.:
We have audited the accompanying consolidated balance sheets of The Leslie Fay
Company, Inc. (a Delaware corporation and formerly The Leslie Fay Companies,
Inc.) and subsidiaries as of January 2, 1999 and January 3, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the fiscal year ended January 2, 1999, the thirty-one weeks ended
January 3, 1998, the twenty-two weeks ended June 4, 1997, and the fiscal year
ended December 28, 1996. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 2 to the consolidated financial statements,
effective June 4, 1997, the Company emerged from protection under Chapter 11 of
the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was confirmed
by the Bankruptcy Court on April 21, 1997. In accordance with AICPA Statement of
Position 90-7, the Company adopted "Fresh Start Reporting" whereby its assets,
liabilities and new capital structure were adjusted to reflect estimated fair
values as of June 4, 1997. As a result, the consolidated financial statements
for the periods subsequent to June 4, 1997 reflect the Reorganized Company's new
basis of accounting and are not comparable to the Predecessor Company's
pre-reorganization consolidated financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Leslie Fay Company, Inc.
and subsidiaries as of January 2, 1999 and January 3, 1998 and the results of
their operations and their cash flows for the fiscal year ended January 2, 1999,
the thirty-one weeks ended January 3, 1998, the twenty-two weeks ended June 4,
1997, and the fiscal year ended December 28, 1996 in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
March 1, 1999, except with respect to Notes 2 and 10
as to which the date is March 5, 1999 and
Note 7 as to which the date is March 29, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
January 2, January 3,
ASSETS 1999 1998
---------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................... $ 946 $18,455
Restricted cash and cash equivalents.......................... 3,267 1,358
Restricted short term investments............................. -- 2,989
Accounts receivable net of allowances for possible losses of
$6,825 and $3,236, respectively............................ 16,172 9,747
Inventories................................................... 38,627 26,701
Prepaid expenses and other current assets..................... 970 807
------- -------
Total Current Assets...................................... 59,982 60,057
Property, plant and equipment, at cost, net of accumulated
depreciation of $409 and $14, respectively................ 2,781 845
Excess of purchase price over net assets acquirednet of
accumulated amortization of $50 and $-0-, respectively.... 4,490 --
Deferred charges and other assets............................ 551 149
------- -------
Total Assets................................................ $67,804 $61,051
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt............................................. $ 1,162 $ --
Accounts payable............................................ 12,070 11,530
Accrued expenses and other current liabilities.............. 7,486 4,542
Accrued expenses and other current confirmation liabilities. 3,267 4,347
Income taxes payable........................................ 371 25
Current portion of capitalized leases....................... 48 160
------ ------
Total Current Liabilities................................ 24,404 20,604
Excess of revalued net assets acquired over equity under
freshstart reporting, net of accumulated amortization
of $7,239 and $2,667, respectively.................... 6,469 11,041
Long term debtcapitalized leases........................... 17 49
Deferred liabilities....................................... 477 143
------ ------
Total Liabilities.......................................... 31,367 31,837
------ ------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 500 shares authorized, no
shares issued and outstanding............................. -- --
Common stock, $.01 par value; 20,000 and 9,500 shares
authorized, respectively; 6,858 and 6,800 shares issued,
respectively.............................................. 69 68
Capital in excess of par value................................ 28,824 25,837
Retained earnings............................................ 12,167 3,309
------- -------
Subtotal................................................... 41,060 29,214
Treasury stock, at cost; 817 and 0 shares, respectively....... 4,623 --
Total Stockholders' Equity................................. ------- -------
36,437 29,214
------- -------
Total Liabilities and Stockholders' Equity.................... $67,804 $61,051
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Reorganized Company Predecessor Company
------------------------------------------------------------------
|
Fifty-Two Thirty-One | Twenty-Two Fifty-Two
Weeks Ended Weeks Ended | Weeks Ended Weeks Ended
January 2 January 3, | June 4, December 28,
1999 1998 | 1997 1996
-------------- ------------- | ------------- ------------
<S> <C> <C> <C> <C>
Net Sales.............................................. $152,867 $73,091 | $197,984 $429,676
Cost of Sales.......................................... 115,547 58,719 | 147,276 331,372
--------- ------- | -------- --------
Gross profit........................................ 37,320 14,372 | 50,708 98,304
--------- ------- | -------- --------
Operating Expenses: |
Selling, warehouse, general and |
administrative expenses....................... 28,076 13,299 | 35,459 79,570
Noncash stock based compensation.................... 1,724 351 | -- --
Depreciation and amortization expense............... 406 14 | 2,090 4,654
--------- -------- | -------- --------
Total operating expenses...................... 30,206 13,664 | 37,549 84,224
Other (income)...................................... (1,334) (947) | (1,196) (3,885)
|
Amortization of excess revalued net assets acquired |
over equity................................... (4,572) (2,667) | -- --
--------- ------- | -------- --------
Total operating expenses, net....................... 24,300 10,050 | 36,353 80,339
--------- ------- | -------- --------
Operating income.................................... 13,020 4,322 | 14,355 17,965
Interest and Financing Costs (excludes contractual |
interest of $-0-, $-0-, $7,513, and $18,031, |
respectively)................................. 950 336 | 1,372 3,932
--------- ------- | -------- --------
Income before reorganization costs, taxes, gain |
on sale, freshstart revaluation and |
extraordinary item........................ 12,070 3,986 | 12,983 14,033
Reorganization Costs................................... -- -- | 3,379 5,144
-------- -------- | -------- -------
Income before taxes, gain on sale, freshstart |
revaluation and extraordinary item.............. 12,070 3,986 | 9,604 8,889
|
Provision (benefit) for taxes.......................... 3,212 677 | 451 (839)
-------- -------- | -------- -------
Net Income before gain on sale, freshstart |
revaluation and extraordinary item 8,858 3,309 | 9,153 9,728
|
Gain on disposition of Sassco Fashions line (net of |
$3,728 of income taxes), loss on revaluation of assets |
pursuant to adoption of freshstart reporting and |
extraordinary gain on debt discharge -- -- | 136,341 --
-------- -------- | ---------- -----------
Net Income ........................................ $8,858 $3,309 | $145,494 $9,728
=========== =========== | ========== ===========
Net Income per Share -Basic....................... $1.35 $0.49 | * $0.52
=========== =========== | ========== ===========
-Diluted..................... $1.31 $0.48 | * $0.52
=========== =========== | ========== ===========
Weighted Average Shares Outstanding - Basic........... 6,553,637 6,800,000 | * 18,771,836
=========== =========== | ========== ===========
- Diluted......... 6,777,614 6,917,130 | * 18,771,836
=========== =========== | ========== ===========
</TABLE>
*Earnings per share is not presented for the twenty-two weeks ended June 4, 1997
because such presentation would not be meaningful. The old stock was canceled
under the plan of reorganization and the new stock was not issued until the
consummation date.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumu-
lated Total
Other Stock- Total
Common Stock Capital in Treasury Stock Compre- holders' Compre-
----------------------- Excess of Retained ----------------- hensive (Deficit) hensive
Shares Par Value Par Value Earnings Shares Amount Income Equity Income
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 20,000,000 $20,000 $49,012 ($211,833) 1,228,164 ($12,966) ($121) ($155,908)
Comprehensive Income
Net Income -- -- -- 9,728 -- -- -- 9,728 $9,728
Deferred Pension
Liability Write-Off -- -- -- -- -- -- 214 214 214
Foreign Currency
Translation Adjustments -- -- -- -- -- -- 488 488 488
-----------
Total Comprehensive Income $10,430
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1996 20,000,000 $20,000 $49,012 ($202,105) 1,228,164 ($12,966) $581 ($145,478)
Comprehensive Income
Net Income -- -- -- 145,494 -- -- -- 145,494 $145,494
-----------
Revaluation Adjustment -- -- -- 56,611 -- -- -- 56,611
Extinguishment of Old Stock (20,000,000) (20,000) (49,012) -- (1,228,164) 12,966 (581) (56,627)
New Stock Issuance 3,400,000 34 24,966 -- -- -- -- 25,000
As previously reported
2-for-1 stock split
effective July 1, 1998 3,400,000 34 (34) -- -- -- -- --
--------- ------- ------- --------- --------- ------- ---- -------
Reorganized as of June 4, 1997 6,800,000 $68 $24,932 $ -- -- $-- $-- $25,000
================================================================================================================================
Balance at June 4, 1997 6,800,000 $68 $24,932 $ -- -- $-- $-- $25,000
Net Income -- -- -- 3,309 -- -- -- 3,309 $3,309
---------
Use of PreConsummation
Deferred Taxes -- -- 554 -- -- -- -- 554
SFAS No. 123 Stock
Option Compensation -- -- 351 -- -- -- -- 351
- --------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1998 6,800,000 $68 $25,837 $3,309 -- $ -- $ -- $29,214
Net Income -- -- -- 8,858 -- -- -- 8,858 $8,858
---------
New Stock Issuance 58,238 1 231 -- -- -- -- 232
Treasury Stock Repurchase -- -- -- -- 817,100 (4,623) -- (4,623)
Use of PreConsummation
Deferred Taxes -- -- 1,084 -- -- -- -- 1,084
SFAS No. 123 Stock
Option Compensation -- -- 1,672 -- -- -- -- 1,672
================================================================================================================================
Balance at January 2, 1999 6,858,238 $69 $28,824 $12,167 817,100 ($4,623) $ -- $36,437
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Reorganized | Predecessor
Company | Company
-------------------------------| -------------------------------
Fifty-Two Thirty-One | Twenty-Two Fifty-Two
Weeks Ended Weeks Ended | Weeks Ended Weeks Ended
January 2, January 3, | June 4, December 28,
1999 1998 | 1997 1996
-------------------------------| -------------------------------
|
<S> <C> <C> | <C> <C>
Cash Flows from Operating Activities: |
Net income ............................................. $8,858 $3,309 | $145,494 $9,728
Adjustments to reconcile net income to net cash (used in) |
provided by operating activities: |
Depreciation and amortization......................... 445 14 | 2,222 4,971
Amortization of excess net assets acquired over equity (4,572) (2,667) | -- --
Deferred taxes........................................ -- -- | -- (1,103)
Provision for possible losses on accounts receivable.. (22) (182) | 199 433
Provision for stock based compensation and stock option |
grants........................................... 1,724 351 | -- --
Gain on sale of fixed assets.......................... -- -- | (347) --
Changes in assets and liabilities, net of impact of acquisition: |
Restricted short-term investments................... 2,989 (2,989) | -- --
Accounts receivable................................. (8,155) 6,845 | (1,248) (9,296)
Inventories......................................... (10,354) (7,586) | 25,538 (5,600)
Prepaid expenses and other current assets........... (148) 377 | (66) 1,950
Income taxes refundable............................. -- -- | -- 10,345
Deferred charges and other assets................... (402) (149) | 125 1,263
Accounts payable, accrued expenses and other current |
liabilities..................................... 359 (6,544) | (4,167) (11,860)
Income taxes payable................................ 346 (806) | (1,515) (395)
Deferred liabilities................................ 334 143 | 374 470
Changes due to reorganization activities: |
Gain on disposition of Sassco Fashions line, fresh-start |
revaluation and extraordinary gain on debt discharge -- -- | (136,341) --
Reorganization costs................................ -- -- | 3,379 5,144
Payment of reorganization costs..................... -- -- | (917) (7,757)
Use of pre-consummation deferred taxes.............. 1,084 554 | -- --
---------------------- | ----------------------------
Total adjustments.......................... (16,372) (12,639) | (112,764) (11,435)
---------------------- | ----------------------------
Net cash (used in) provided by operating activities (7,514) (9,330) | 32,730 (1,707)
---------------------- | ----------------------------
Cash Flows from Investing Activities: |
Capital expenditures.................................... (2,331) (859) | (3,731) (8,640)
Net cash paid for acquisition........................... (1,250) -- | -- --
Treasury stock repurchase............................... (4,623) -- | -- --
Proceeds from sale of assets............................ -- -- | 467 --
Proceeds from sale of Castleberry....................... -- -- | 600 --
Cash paid to sell/transfer the Sassco Fashions line..... -- -- | (10,963) --
---------------------- | ----------------------------
Net cash (used in) investing activities............. (8,204) (859) | (13,627) (8,640)
---------------------- | ----------------------------
Cash Flows from Financing Activities: |
Proceeds from borrowings, net .......................... 1,162 -- | -- --
Proceeds from new stock issuance and options |
exercised............................................. 180 -- | -- --
Repayment of capital leases ............................ (144) (135) | -- --
Payment of obligations under Plan of Reorganization..... (1,080) (10,943) | -- --
---------------------- | ----------------------------
Net cash provided by (used in) financing activities.. 118 (11,078) | -- --
---------------------- | ----------------------------
Net (decrease) increase in cash and cash equivalents.... (15,600) (21,267) | 19,103 (10,347)
---------------------- | ----------------------------
Cash and cash equivalents, at beginning of period....... 19,813 41,080 | 21,977 32,324
---------------------- | ----------------------------
Cash and cash equivalents, at end of period............. $4,213 $19,813 | $41,080 $21,977
====================== | ============================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-6
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Organization:
The consolidated financial statements included herein have been
prepared by The Leslie Fay Company, Inc. (formerly The Leslie Fay Companies,
Inc.) and subsidiaries (The Leslie Fay Company, Inc. being sometimes
individually referred to, and together with its subsidiaries collectively
referred to, as the "Company" as the context may require), in accordance with
generally accepted accounting principles. The Company's fiscal year ends on the
Saturday closest to December 31st. The fiscal years ended January 2, 1999,
January 3, 1998 and December 28, 1996 included 52, 53 and 52 weeks,
respectively.
As a result of the consummation of the Joint Plan of Reorganization
(the "Plan" - see Note 2) and the adoption of fresh-start reporting under the
American Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), the Company's results for the twenty-two weeks ended June 4, 1997
reflect the effects of the adoption of fresh-start reporting and consummation of
the Plan. The significant fresh-start reporting adjustments are summarized in
Note 2.
2. Reorganization Case and Fresh-Start Reporting:
On April 5, 1993 ("the Filing Date"), The Leslie Fay Companies, Inc.
("Leslie Fay") and each of Leslie Fay Licensing Corp., Spitalnick Corp. and Hue,
Inc., wholly-owned subsidiaries of Leslie Fay (collectively the "Debtors"),
filed a voluntary petition under Chapter 11 of the Bankruptcy Code (the
"Bankruptcy Code"). The Debtors operated their businesses as debtors in
possession subject to the jurisdiction and supervision of the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
Pursuant to an order of the Bankruptcy Court, the individual Chapter 11 cases
were consolidated for procedural purposes only and were jointly administered by
the Bankruptcy Court.
On November 15, 1995, Leslie Fay Retail Outlets, Inc.; Leslie Fay
Factory Outlet (Alabama), Inc.; Leslie Fay Factory Outlet (California), Inc.;
Leslie Fay Factory Outlet (Iowa), Inc.; and Leslie Fay Factory Outlet
(Tennessee), Inc., all wholly-owned subsidiaries of Leslie Fay (collectively
referred to as the "Retail Debtors") filed voluntary petitions under Chapter 11
of the Bankruptcy Code. The Retail Debtors operated their businesses as debtors
in possession following the November 15, 1995 filing date while pursuing an
orderly liquidation of their assets, also under Chapter 11 of the Bankruptcy
Code.
F-7
<PAGE>
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. The total number of
claims, after resolution of the claims objection process, approximated 4,300 and
the claims' value aggregated approximately $338,000,000.
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 6,800,000 new shares to its creditors in July
1997. The remaining twenty-one (21%) percent was issued, but was held back by
the Plan Administrator pending the resolution of certain litigation before the
Bankruptcy Court. During the period of February 15, 1999 through March 5, 1999
approximately 1,250,000 shares were distributed representing 88% of the
previously undistributed shares. The existing stockholders of the Company at
June 4, 1997 did not retain or receive any value for their equity interest in
the Company.
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
F-8
<PAGE>
debt discharge in the consolidated statement of operations for the twenty-two
weeks ended June 4, 1997.
Fresh-Start Reporting
Pursuant to the guidelines provided by SOP 90-7, the Company adopted
fresh-start reporting and reflected the consummation distributions under its
Plan in the consolidated balance sheet as of June 4, 1997 (the effective date of
the consummation of the Plan for accounting purposes). Under fresh-start
reporting, the Company's reorganization value of $25,000,000 was allocated to
its net assets on the basis of the purchase method of accounting.
The significant fresh-start reporting adjustments are summarized as
follows:
1. Cancelation of the old common stock pursuant to the Plan against the
accumulated deficit.
2. Allocation of the fair market value of the identifiable net assets
in excess of the reorganization value (negative goodwill) in
accordance with the purchase method of accounting. The negative
goodwill amount remaining after reducing non-current assets
acquired to zero was recorded as a deferred credit, "Excess of
revalued net assets acquired over equity under fresh-start
reporting" and is being amortized over three (3) years.
The resulting charge of $27,010,000 from all the fresh-start
adjustments, including the write-off of all revalued noncurrent assets (but
excluding the write-off of the old stock for $56,611,000), is presented as "loss
on revaluation of assets pursuant to adoption of fresh-start reporting" in the
consolidated statement of operations for the twenty-two weeks ended June 4,
1997.
The fresh-start reporting reorganization value of $25,000,000 was
established as the midpoint of a range ($20,000,000 - $30,000,000) established
by the Company's financial advisors. The calculation of the range was based on a
five-year analysis of the Company's projected operations for the remaining
operating product lines (fiscal years ended 1996 - 2001), which was prepared by
management, and a discounted cash flow methodology was applied to those numbers.
The five-year cash flow projections were based on estimates and
assumptions about circumstances and events that have not yet taken place. Such
estimates and assumptions are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the Company,
including, but not limited to, those with respect to the future course of the
Company's business activity.
F-9
<PAGE>
3. Summary of Significant Accounting Policies:
(a) Business -
The Company is principally engaged in the design, manufacture and sale
of diversified lines of women's apparel. The Company's products focus on career,
social occasion and evening clothing. The Company currently operates in one line
of business - women's apparel. The operations of the Company are directed
principally by the Chief Executive Officer, with the consensus of the management
team and Board of Directors.
The Company utilizes a common support platform for the management of
its operations, consisting of uniform distribution, inventory, management
strategies and marketing approaches, as well as a shared financial and
accounting organization and universal information systems. All business is
domestic in nature with no sales outside the U.S. Accordingly, there are no
specific operating and geographic segment disclosures, pursuant to Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information," other than the consolidated financial
position and results of operations.
(b) Principles of Consolidation -
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Cash Equivalents and Short Term Investments -
All highly liquid investments with an original maturity of three months
or less at the date of acquisition are classified as cash equivalents. The
carrying amount of cash equivalents approximates fair value. At January 2, 1999,
$3,267,000 of restricted cash, included within cash equivalents on the
consolidated statement of cash flows, will be used to pay administrative claims
as defined in the Plan. At January 3, 1998, short term investments consisted of
a one year U.S. Treasury Note which matured on June 30, 1998. This note was held
to maturity and was valued at cost.
(d) Inventories -
Inventories are valued at the lower of cost (first-in, first-out;
"FIFO") or market.
(e) Property, Plant and Equipment -
Land, buildings, fixtures, equipment and leasehold improvements are
recorded at cost. Property under capital lease is recorded at the lower of the
net present value of the lease payments or the fair market value when acquired.
Major replacements or betterments are capitalized.
F-10
<PAGE>
Maintenance and repairs are charged to earnings as incurred. For financial
statement purposes, depreciation and amortization are computed utilizing the
straight-line method over the estimated useful lives of the assets.
(f) Excess of Purchase Price Over Net Assets Acquired -
The excess of purchase price over net assets acquired first arose in
connection with the 1984 leveraged buyout of The Leslie Fay Company (a
predecessor company of The Leslie Fay Companies, Inc.) and was allocated based
upon the applicable product line's proportionate contribution to pretax income.
The asset was amortized on a straight-line basis, primarily over a forty-year
period. On June 4, 1997, in connection with fresh-start reporting requirements
the remaining asset of $10,366,000 and the related $3,106,000 of accumulated
amortization were written-off as part of the revaluation adjustments (see Note
2). In 1996, the Company determined the excess purchase price over net assets
acquired of its Castleberry product line was no longer recoverable based on an
offer to purchase the Castleberry product line in the fourth quarter. Therefore,
the Company recognized reorganization charges of $652,000 to write-down a
portion of the excess purchase price over net assets acquired, which the Company
believed would be unrecoverable in accordance with SFAS No. 121 - "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
The excess of purchase price over net assets acquired of $4,490,000 as
of January 2, 1999 resulted from the acquisition by the Company of certain
specific assets and liabilities of The Warren Apparel Group Ltd. on October 27,
1998, (see Note 4). The asset is being amortized on a straight-line basis over a
fifteen year period. The Company incorporated those assets acquired, relating to
better priced day, social and evening occasion dresses, into the Dress Product
Line.
(g) Excess of Revalued Net Assets Acquired over Equity under Fresh-Start
Reporting -
Upon consummation of the Plan, the Company revalued its assets and
liabilities in accordance with the purchase method of accounting. The revalued
net assets under fresh-start reporting exceeded the equity value of the Company
by $13,708,000. This negative goodwill amount is being amortized over a three
year period.
(h) Income Taxes -
The Leslie Fay Company and its subsidiaries file a consolidated Federal
income tax return and record their tax expense and liabilities under the
liability method (see Note 8). Under this method, any deferred income taxes
recorded are provided for at currently enacted statutory rates based on the
differences in the basis of assets and liabilities for tax and financial
reporting purposes. If recorded, deferred income taxes are classified in the
balance sheet as current or non-current based upon the underlying asset or
liability.
F-11
<PAGE>
No provision has been made for Federal income taxes on approximately
$24,200,000 of foreign earnings of subsidiaries, repatriated as a part of the
Plan as of June 4, 1997, as the Company's net operating loss carryforward was
utilized to offset the repatriation.
(i) Net Income Per Share -
Net income per share is based on the weighted average common shares
outstanding and the common stock equivalents that would arise from the exercise
of stock options, if dilutive in accordance with SFAS No. 128 - "Earnings Per
Share." Basic earnings per share represents net income divided by the weighted
average shares outstanding. Diluted earnings per share represents net income
divided by the weighted average shares outstanding adjusted for the incremental
dilution of outstanding employee stock options and awards, if dilutive, using
the treasury stock method.
For the year ended January 2, 1999 and the thirty-one weeks ended
January 3, 1998, the basic weighted average common shares outstanding is
6,553,637 and 6,800,000, respectively. The weighted average shares outstanding
assuming dilution is 6,777,614 and 6,917,130 as of January 2, 1999 and January
3, 1998, respectively. The differences of 223,977 and 117,130, respectively,
relate to incremental shares issuable relating to dilutive stock options
calculated using the treasury stock method.
(j) Prior Years' Reclassification -
Certain items previously reported in specific captions in the
accompanying consolidated financial statements have been reclassified to conform
with the current year's presentation.
(k) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
4. Acquisitions:
On October 27, 1998, the Company purchased certain assets of The Warren
Apparel Group Ltd. ("Warren"). Warren was a privately owned wholesaler of
women's career, social occasion and evening dresses sold in department and
specialty stores nationwide primarily under the "David Warren", "DW3", "Warren
Petites", "Reggio" and "Rimini" brands. These brands were merged into the
Company's Dress Product Line. The Company received all rights and ownership of
the trademarks related to the brand names listed above as part of the
transaction. This transaction generated an excess of purchase price over net
assets acquired of $4,540,000 which the Company elected to amortize over a
fifteen year period ending October 2013.
The Company financed the acquisition of Warren through operating cash
flow, and a non-interest bearing note to the former owners of Warren, amounting
to $834,000, which is payable over one
F-12
<PAGE>
year. The Warren acquisition has been accounted for as a purchase, and,
accordingly, the operating results of Warren have been included in the Company's
consolidated financial statements since the date of the acquisition. The
purchase price allocation is preliminary and is subject to refinement during
fiscal 1999.
The preliminary purchase price allocation as of January 2, 1999 is as follows:
(In thousands)
Payment for purchase of Warren assets:
Cash paid at closing $1,250
Note to Warren shareholders 834
Price adjustment due the Company (497)
Assumed liabilities 2,192
Acquisition and integration costs and reserves 1,798
-----
Total purchase price $5,577
Fair value of assets acquired, primarily inventory (1,037)
-------
Excess of purchase price over net assets acquired $4,540
======
The following summarized unaudited pro forma combined results of operations
for the fifty-three week period ended January 3, 1998 has been prepared assuming
the Warren Acquisition occurred at the beginning of fiscal 1997. The Company has
not yet received the information from the former owners of the Warren businesses
to compute the 1998 pro forma combined results. However, unaudited combined net
sales for the fifty-two weeks ended January 2, 1999 were $182,701,000.
The unaudited pro forma information also assumes that the consummation of
the Plan and resulting fresh start adjustments occurred as of the beginning of
fiscal 1997 and, as a result, excludes the operations of all of the businesses
disposed of as a part of the Reorganization. The pro forma information is
provided for informational purposes only and does not contain estimates of
synergies which management believes would have occurred upon consolidation. It
is based on historical information, as well as certain assumptions and
estimates, and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined company:
(In thousands, except per share data)
Unaudited
---------
Net sales $166,598
Net income 6,170
Net income per share:
- Basic $0.91
- Diluted $0.90
F-13
<PAGE>
5. Inventories:
Inventories consist of the following:
January 2, January 3,
1999 1998
---- ----
(In thousands)
Raw materials $10,763 $9,638
Work in process 2,613 4,540
Finished goods 25,251 12,523
-------- --------
Total inventories $ 38,627 $ 26,701
======== ========
6. Property, Plant and Equipment:
Property, plant and equipment consist of the following:
January 2, January 3, Estimated
1999 1998 Useful Life
---- ---- -----------
In thousands)
Machinery, equipment and fixtures $2,651 $ 284 5-10 years
Leasehold improvements 238 38 Various
Construction in progress 301 537 N/A
--------- ------
Property, plant and equipment, at cost 3,190 859
Less: Accumulated depreciation and
amortization (409) (14)
--------- ------
Total property, plant and
equipment, net $ 2,781 $ 845
========= =======
F-14
<PAGE>
7. Debt:
(a) CIT Credit Agreement -
On June 2, 1997, in preparation for the consummation of the Plan, a
wholly-owned subsidiary of the Company entered into a two-year financing
agreement (the "CIT Credit Agreement") with CIT 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 January 2, 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 $28,949,000 on January 2, 1999 and peak
borrowing during the fiscal year ended January 2, 1999 was $3,734,000. There
were $328,000 in direct borrowings outstanding under the CIT Credit Agreement
and approximately $8,099,000 was committed under unexpired letters of credit as
of January 2, 1999.
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 pay dividends up to an amount
of $10,000,000. As of January 2, 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.
F-15
<PAGE>
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.
The Company initially paid $150,000 in commitment and related fees in
connection with the credit facility which was written-off as part of fresh-start
reporting and paid another $250,000 in commitment fees in June 1997. These fees
are being amortized as interest and financing costs over the two years of the
original CIT Credit Agreement.
(b) FNBB Credit Agreement/DIP Credit Agreement -
The Company previously had a facility for a $60,000,000 credit
agreement with The First National Bank of Boston ("FNBB") and BankAmerica
Business Credit, Inc. ("BABC"), as Facility Agents and FNBB as Administrative
Agent (the "FNBB Credit Agreement"). In connection with the consummation of the
Plan, the Company entered into an agreement (the "Paydown Agreement") with its
lenders under the FNBB Credit Agreement to paydown any remaining obligations
under the FNBB Credit Agreement and terminate the FNBB Credit Agreement on June
4, 1997. The FNBB Credit Agreement had expired on May 31, 1997, but continued in
effect until the consummation of the Plan with the consent of both the lenders
and the Company.
Direct borrowings bore interest at prime plus 1.5% (9.75% at December
28, 1996) and the FNBB Credit Agreement required a fee, payable monthly, on
average outstanding letters of credit at a rate of 2% annually.
The Company incurred $473,000 and $1,234,000, respectively, in
commitment and related fees in connection with the credit facilities for the
twenty-two and fifty-two weeks ended June 4, 1997 and December 28, 1996. These
fees were amortized as interest and financing costs over the terms of the
respective agreements.
Interest was not accrued during the periods presented for the
pre-petition debt obligations, as the Company did not believe it would be
required to pay it under the Bankruptcy laws.
(c) Short-Term Notes Payable -
F-16
<PAGE>
Partial payment for the assets acquired from The Warren Apparel Group,
Ltd. (see Note 4) was made in the form of a short-term note payable in the
amount of $834,000. Payment is due on this note in four equal quarterly
installments ending on October 27, 1999.
F-17
<PAGE>
8. Income Taxes:
For the fifty-two, thirty-one, twenty-two and fifty-two weeks ended
January 2, 1999, January 3, 1998, June 4, 1997 and December 28, 1996,
respectively, the Company recognized the following tax provision (benefit).
<TABLE>
<CAPTION>
(In thousands)
Fifty-Two Thirty-One Twenty-Two Weeks Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 2, January 3, June 4, December 28,
1999 1998 1997 1996
------------ ------------ | ---------------- ------------
|
<S> <C> <C> <C> <C>
Current: |
Federal $ 1,851 $ 460 | $ 1,400 $ 130
State 733 217 | 2,428 39
Foreign -- -- | 351 95
------- ------- | -------- --------
2,584 677 | 4,179 264
------- ------- | -------- --------
Deferred: |
|
Federal ( 334) -- | -- --
State ( 122) -- | -- --
Foreign -- -- | -- (1,103)
------- ------- | -------- --------
( 456) -- | -- (1,103)
Deferred NonCash |
PreEmergence Tax Provision: |
|
Federal 675 -- | -- --
State 409 -- | -- --
------- ------- | -------- --------
1,084 -- | -- --
------- ------- | -------- --------
|
Total tax provision (benefit)for |
income taxes 3,212 677 | 4,179 (839)
Less: Taxes on sale |
of Sassco Fashions line -- -- | (3,728) --
------- ------- | -------- --------
Tax provision (benefit) |
for income taxes $3,212 $677 | $451 ($839)
======= ======= | ======== ========
</TABLE>
F-18
<PAGE>
As a consequence of the adoption of fresh-start reporting and SFAS No.
109, any tax benefits realized after the Consummation Date pertaining to
pre-consummation temporary differences, as well as for the pre-consummation net
operating loss carryforwards, are reported as additions to paid-in capital
rather than as reductions in the tax provision.
The reconciliation between the Company's effective income tax rate and
the statutory Federal income tax rate is as follows:
Fifty-Two Thirty-One Twenty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 2, January 3, June 4, December 28,
1999 1998 1997 1996
----------- ----------- | ----------- ------------
|
|
Effective Tax Rate 26.6% 17.0% | 2.8% 9.4%
|
Net state tax ( 5.6%) (5.4%) | ( 1.3%) (0.3%)
Net foreign tax -- -- | ( 0.2%) 11.3%
Intangibles 12.9% 23.4% | -- (7.1%)
Utilization of net operating |
losses -- -- | 35% 23.2%
Other 0.1% -- | (1.3%) (1.5%)
-------- ------- | -------- --------
Federal statutory rate 34.0% 35.0% | 35.0% 35.0%
======== ======== | ======== ========
The amounts comprising the temporary differences, characterized by the
difference between financial statement carrying values and the tax basis of
balance sheet elements, at the end of the respective periods are as follows:
(In thousands)
January 2, January 3,
1999 1998
--------- ---------
Customer reserves and allowances $ 6,620 $ 4,108
Depreciation 14,487 6,713
Inventory 5,240 2,553
Worker's compensation
insurance 181 572
Vacation pay accrual 646 490
Other 3,106 608
-------- --------
Total temporary differences $30,280 $ 15,044
======== ========
Tax effect of temporary differences $ 12,718 $5,265
Valuation allowance (12,718) (5,265)
-------- --------
Deferred tax assets recognized $ -- $ --
======== ========
F-19
<PAGE>
At June 4, 1997 approximately $50,000,000 of consolidated net operating
losses were available to reduce future taxable income through fiscal year 2011.
However, the utilization of such losses is subject to an annual limitation as
set forth in Internal Revenue Code Section 382. The maximum amount of net
operating losses that may be utilized by the Company in any period is annually
limited to $1,500,000. As of January 2, 1999, the remaining aggregate loss
utilization limitation through fiscal year 2011 is approximately $19,500,000. As
such, the NOL available to the Company, after taking into account the
aforementioned limitation, is $19,500,000 as of January 2, 1999. A full
valuation reserve has been established for the deferred tax asset associated
with the net operating loss carryforwards.
9. Commitments and Contingencies:
(a) Leases -
The Company rents real and personal property under leases expiring at
various dates through 2008. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses. Total rent expense charged to
operations for the fifty-two, thirty-one, twenty-two and fifty-two weeks ended
January 2, 1999, January 3, 1998, June 4, 1997 and December 28, 1996, amounted
to $2,540,000, $1,365,000, $4,599,000 and $8,007,000, respectively. All capital
lease assets were written-off under fresh-start reporting (see Note 2).
Minimum annual rental commitments under operating and capitalized
leases in effect at January 2, 1999 are summarized as follows:
Capitalized
Fiscal Real Equipment Equipment
Years Estate & Other (including interest)
------ ------ ---------- --------------------
(In thousands)
1999 $ 2,185 $ 263 $ 54
2000 2,284 209 18
2001 2,025 177 --
2002 1,811 -- --
2003 2,013
2004 and thereafter 10,154 -- --
------- -------- --------
Total minimum lease payments $20,472 $ 649 $ 72
======= ========= ========
F-20
<PAGE>
(b) Legal Proceedings -
As discussed in Notes 1 and 2, on the Filing Dates the Company and
several of its subsidiaries filed voluntary petitions in the Bankruptcy Court
under Chapter 11 of the Bankruptcy Code 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 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.
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, and that appeal is in
the process of being briefed.
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 to, and concurrent with, the proceedings in the Bankruptcy
Court, the Company is involved in or settled the following legal proceedings of
significance:
In February 1993, the Securities and Exchange Commission obtained an
order directing a private investigation of the Company in connection with, among
other things, the filing by the Company of annual and other reports that may
have contained misstatements, and the purported failure of the Company to
maintain books and records that accurately reflected its financial condition and
operating results. The Company is cooperating in this investigation.
F-21
<PAGE>
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.
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
tradename. The Company asserted counter claims. On December 23, 1997, the Court
ruled in favor of the Company finding the plaintiffs in violation of the Federal
and New York trademark statutes and of unfair competition under common law. The
parties have settled the litigation without cost to the Company.
(c) Management Agreements -
The Company entered into two and three year management contracts with
several officers and key employees with annual salaries of $2,564,000,
$2,208,000 and $2,035,000 for fiscal 1999, 2000 and 2001, respectively.
F-22
<PAGE>
(d) Concentrations of Credit Risk -
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist primarily of
trade accounts receivable. The Company's customers are not concentrated in any
specific geographic region, but are concentrated in the retail apparel business.
For the fifty-two weeks ended January 2, 1999, three customers accounted for
30%, 11% and 9% of the Company's sales. For the fifty-three weeks ended January
3, 1998, excluding the Sassco Fashion and Castleberry product lines, three
customers of the continuing Leslie Fay business accounted for 33%, 12% and 8% of
the reorganized Company's sales. The Company has established an allowance for
possible losses based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
On June 2, 1997 the Company entered into a factoring agreement with
CIT, whereby CIT provides a guarantee of collection for all shipments approved
by CIT. Under the factoring agreement these receivables are purchased by CIT. On
January 2, 1999 the Company's accounts receivable included $14,915,000 due from
CIT, net of reserves.
10. Stockholders' Equity
The authorized common stock of the reorganized Company consists of
20,000,000 shares of common stock with a par value of $.01 per share. On June 3,
1998, the Company's Board of Directors approved a two-for-one common stock
split. As a result of the split, the stockholders received one additional share
of common stock for each one they held as of June 17, 1998. The par value
remained $.01 per share. The Consolidated Financial Statements and financial
information contained elsewhere in this report have been adjusted to
retroactively reflect the effects of the common stock split for all periods
presented. At June 4, 1997, 6,800,000 shares, adjusted retroactively for the
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. The old common stock
was extinguished prior to emergence from bankruptcy on June 4, 1997 and the old
stockholders of the Company did not retain or receive any value for their equity
interest.
The Company acquired for cash 817,100 shares of its common stock
outstanding at a cost of $4,623,000 during the third quarter ended October 3,
1998. 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.
F-23
<PAGE>
11. Stock Option Plan:
Information regarding the Company's stock option plan is summarized
below. All shares and option prices have been retroactively adjusted to reflect
the 2-1 stock split on July 1, 1998:
Weighted Average Option
Number of Shares Price Per Share
---------------- -----------------------
Granted (post-emergence) 1,020,236 $3.34
---------
Outstanding at January 3, 1998 1,020,236 3.34
Granted 458,258 3.76
Exercised or surrendered (140,120) 3.09
---------
Outstanding at January 2, 1999 1,338,374 3.51
=========
The Plan provided stock options to certain senior management equal to
seventeen and one-half (17.5%) percent of the Company's common stock issued at
the time of the grant (6.8 million shares adjusted for the 2-1 stock split). Of
this amount, 824,236 options were granted, as of June 4, 1997. One-third of
these options vest on each of the first three anniversaries of the Consummation
Date. On January 4, 1998, the remaining 365,758 options were granted to replace
the options that were part of the Company's exit from bankruptcy, twenty-five
percent of these options were immediately vested with an additional twenty-five
percent vesting on each of the first three anniversaries of the grant date.
Since June 4, 1997 thirty-five managers were granted 148,500 options. One-third
of these options vest on each of the first three anniversaries of the grant
dates. These grants include 25,000 stock options to the two senior managers of
the newly acquired Warren brands (see Note 4). The exercise of these options is
in part contingent upon the Warren brands operating results meeting
predetermined management goals. In addition, the five original non-employee
directors of the Company have been granted 20,000 stock options each. These
options vest one-third on each of the first three anniversaries of the
Consummation Date. The four non-employee directors of the Company that were
elected since have been granted 10,000 stock options that vest one-third at each
anniversary of the date each director joined the Board of Directors. The options
may be exercised for between $3.09 and $7.44 per share. At January 2, 1999 and
January 3, 1998, 381,878 and -0- options, respectively, were exercisable.
Effective as of the Consummation Date, the Company adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
SFAS No.123 utilizing the fair value based method, compensation cost is measured
at the grant date based upon the value of the award and is recognized over the
service period. The fair value of the options granted during the fifty-two weeks
ended January 2, 1999 and during the thirty-one weeks ended January 3, 1998 was
estimated using the Black-Scholes option pricing model based upon the following
weighted-average assumptions: risk free interest rate of 5.4% and 6.4%,
respectively, expected life of 5 years for both periods, and volatility of 39%
and 34%, respectively. Had SFAS No. 123 been adopted prior to the Consummation
Date, there would have been no effect on the Company's financial statements.
F-24
<PAGE>
A summary of stock options outstanding and exercisable as of January 2, 1999,
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------
Weighted average
Range of Number remaining life Weighed average Number Weighed average
exercise prices Outstanding (in years) exercise price exercisable exercise price
- ------------------ ----------- ---------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$3.09 1,149,874 8.61 $3.09 350,198 $3.09
$5.75 - $7.44 188,500 9.22 6.09 31,680 $5.77
</TABLE>
12. Retirement Plans:
(a) Defined Benefit Plan -
In January 1992, the Company established a non-contributory defined
benefit pension plan covering certain salaried, hourly and commission-based
employees. Plan benefits are based upon the participants' salaries and years of
service. The plan was amended to freeze benefit accruals effective December 31,
1994 and, in connection with the Company's reorganization, to terminate the plan
effective December 31, 1996. Investments were made primarily in U.S. Government
obligations and common stock. The following major assumptions were used in the
actuarial valuations:
1997 1996
---- ----
Discount rate 7.5% 7.5%
Long-term rate of return on assets 8.8% 8.8%
Net periodic pension cost recognized in the thirty-one, twenty-two and
fifty-two weeks ended January 3, 1998, June 4, 1997 and December 28, 1996 were
as follows:
Thirty-one Twenty-two Fifty-two
weeks ended weeks ended weeks ended
January 3, June 4, December 28,
1998 1997 1996
---- ---- ----
Service costs $ -- $ -- $ --
Interest cost 47 38 127
Actual return on assets (74) (98) (111)
Recognition of partial settlement
of pension obligations -- -- 106
Net amortization and deferral 27 60 73
----- ---- -----
Net periodic pension cost $ -- $ -- $ 195
===== ==== =====
F-25
<PAGE>
As a result of the plan termination, in the fourth quarter of 1996, the
Company recorded an additional $676,000 as reorganization expense to write-off
these assets and record an additional liability of $813,000 to fully fund the
plan. All payments to participants were made during fiscal 1997.
(b) Defined Contribution Plan -
The Company also maintains a qualified voluntary contributory profit
sharing plan covering certain salaried, hourly and commission-based employees
Certain Company matching contributions to the plan are mandatory. Other
contributions to the plan are discretionary. Total contributions to the plan may
not exceed the amount permitted as a deduction pursuant to the Internal Revenue
Code. The contributions charged to operations for the fifty-two, thirty-one,
twenty-two and fifty-two weeks ended January 2, 1999, January 3, 1998, June 4,
1997 and December 28, 1996 amounted to $211,000, $75,000, $113,000 and $321,000,
respectively.
(c) Other -
The Company participates in a multi-employer pension plan. Such plans
were underfunded as of January 1, 1994. The plans provide defined benefits to
unionized employees. Amounts charged to operations for contributions to the
pension funds in 1996 amounted to approximately $965,000. The Company increased
the established reserve within liabilities subject to compromise in 1996 to the
expected settlement of $14,875,000. This claim was settled upon consummation of
the Plan. The amount of contributions to the pension fund for the continuing
operations in 1998 and 1997 amounted to $362,000 and $364,000 respectively.
The Company does not provide for post-employment or post-retirement
benefits other than the plans described above.
13. Product Lines Sold or Disposed of:
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
disposition of the Sassco Fashions line in the consolidated statements of
operations.
The assets and liabilities sold and transferred included cash, accounts
receivable, inventory, property, plant and equipment, other assets (including
the trade name Albert Nipon), accounts payable, accrued expenses and other
liabilities related to the Sassco Fashions line. In addition, the Company
transferred to Sassco its 100% equity interest in several subsidiaries
associated with the Sassco Fashions line. As provided in the Plan, the creditors
of the Company became the shareholders of Sassco.
F-26
<PAGE>
The gain on the disposition of the assets and liabilities of the Sassco
Fashions line is a taxable event and a substantial portion of the net operating
loss carryforwards available to the Company was utilized to offset a significant
portion of the taxes recognized on this transaction.
In 1996, the Company decided to sell its Castleberry product line and
recorded a restructuring charge of $2,004,000 for its disposition, including
$1,100,000 to increase the reserve to cover the write-off of the Excess of
purchase price over net assets acquired and projected additional losses on the
sale of net assets. On May 26, 1997, the Company sold the assets and liabilities
of its Castleberry line for $600,000. The resulting loss of $1,398,000 on the
sale was applied against Accrued expenses and other current liabilities at the
time of the sale.
Unaudited pro forma consolidated statements for the twenty-two weeks
ended June 4, 1997 are presented below and include adjustments to give effect to
the sales and the Plan (see Note 2) as if they occurred as of the beginning of
the period presented. A pro forma consolidated balance sheet as of June 4, 1997
is not presented because the transactions recording the Plan and the sale
transactions are already reflected in the balance sheet.
The unaudited pro forma financial statements have been prepared in
accordance with guidelines established by the Securities and Exchange
Commission. The historical balances were derived from the consolidated statement
of operations for the twenty-two weeks ended June 4, 1997 . All significant
intercompany transactions have been eliminated.
F-27
<PAGE>
The unaudited pro forma adjustments presented in the statement are as
follows:
Column Heading Explanation
-------------- -----------
Column 1 Historical Operations The Consolidated Statement of
Operations as it existed prior to
the adjustments.
Column 2 Disposition of Sassco The operating results of the Sassco
Fashions line have been eliminated
to give effect to the disposition
as of the beginning of the period
presented, including depreciation
expense on its property, plant and
equipment, an allocated corporate
charge based on workload by
department related to the Sassco
Fashions line and direct charges
associated with financing fees on
its factoring agreement and fees
incurred on letters of credit
issued on its behalf. For periods
including June 4, 1997, the gain
recorded on the disposition of the
Sassco Fashions line has been
reversed.
Column 3 Sale of Castleberry The operating results of the
Castleberry line have been
eliminated to give effect to the
disposition as of the beginning of
the period presented, including
depreciation expense on its
property, plant and equipment and
an allocated corporate charge based
on workload by department related
to the Castleberry line.
Column 4 Fresh Start Reporting To record the estimated effect of
the Plan as if it had been
effective as of the beginning of
period presented. This includes
adjustments for the following
items:
a) The elimination of the
historical depreciation and
amortization for the remaining
product lines, including the
amounts in cost of sales, on the
beginning of period asset balances
and the recording of the
amortization credit for the "Excess
of revalued net assets acquired
over equity under fresh-start
reporting" (assuming a three-year
amortization period).
b) The elimination of historical
reorganization expense that will
not be incurred subsequent to the
Consummation Date.
c) The elimination of the
fresh-start revaluation charge and
the reversal of the gain on debt
discharge pursuant to the Plan.
F-28
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
Twenty-two Weeks Ended June 4, 1997
-----------------------------------------------------------------------------------------
Historical Disposition of Sale of Fresh Start Pro Forma Adjusted
Operations Sassco Castleberry Reporting Balance
-------------- ---------------- -------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales............................. $197,984 ($136,107) ($2,808) $ -- $59,069
Cost of Sales........................ 147,276 (101,573) (2,262) (32) 43,409
-------------- ---------------- -------------- ---------------- ---------------------
Gross profit...................... 50,708 (34,534) (546) 32 15,660
-------------- ---------------- -------------- ---------------- ---------------------
Operating Expenses:
Selling, warehouse, general and
administrative expenses......... 35,459 (23,666) (1,000) 250 11,043
Depreciation and amortization expense 2,090 (1,078) (41) (971) --
-------------- ---------------- -------------- ---------------- ---------------------
Total operating expenses........ 37,549 (24,744) (1,041) (721) 11,043
-------------- ---------------- -------------- ---------------- ---------------------
Other (income) expense............ (1,196) 260 -- -- (936)
Amortization in excess of revalued net
assets acquired over equity....... -- -- -- (1,905) (1,905)
-------------- ---------------- -------------- ---------------- ---------------------
Total operating expenses, net......... 36,353 (24,484) (1,041) (2,626) 8,202
-------------- ---------------- -------------- ---------------- ---------------------
Operating income...................... 14,355 (10,050) 495 2,658 7,458
Interest and Financing Costs (excludes
Contractual interest)........... 1,372 (595) -- -- 777
-------------- ---------------- -------------- ---------------- ---------------------
Income (loss) before reorganization costs,
taxes, gain on sale, fresh start 12,983 (9,455) 495 2,658 6,681
revaluation and extraordinary item
Reorganization Costs................. 3,379 -- 14 (3,393) --
-------------- ---------------- -------------- ---------------- ---------------------
Income (loss) before taxes, gain on sale,
fresh start revaluation and
extraordinary item.............. 9,604 (9,455) 481 6,051 6,681
Taxes................................. 451 (342) -- 1,898 2,007
-------------- ---------------- -------------- ---------------- ---------------------
Net Income (loss) before gain on sale,
fresh start revaluation and
extraordinary item............... 9,153 (9,113) 481 4,153 4,674
Gain on disposition of Sassco Fashions
line, loss on revaluation of assets
pursuant to adoption of fresh-start
reporting and extraordinary gain on
debt discharge................... 136,341 (89,810) -- (46,531) --
-------------- ---------------- -------------- ---------------- =====================
Net Income (loss).................. $145,494 ($98,923) $481 ($42,378) $4,674
==============
Net Income (loss) per Share
- Basic and Diluted.. * $0.69
============== =====================
Weighted Average Common Shares
Outstanding - Basic and Diluted.. * 6,800,000
============== =====================
</TABLE>
*Earnings per share for the twenty-two weeks ended June 4, 1997 on a historical
basis is based on the old stock outstanding. The old stock was canceled under
the plan of reorganization and new stock was issued. Earnings per share on a pro
forma basis is calculated on the new stock outstanding.
F-29
<PAGE>
14. Reorganization Costs:
The Predecessor Company recognized reorganization costs during the
twenty-two and fifty-two week periods ended June 4, 1997 and December 28, 1996
as follows:
(In thousands)
Twenty-Two Fifty-Two
Weeks Ended Weeks Ended
June 4, December 28,
1997 1996
---- ----
Professional fees and other
costs $2,951 $ 3,719
Closed facilities and operations -- 1,082
Write-down of excess purchase -- 652
price
Plan administration costs 1,000 --
Retirement plan termination -- 676
Employee retention plan -- (509)
Interest income (572) (476)
------ -----
Total reorganization costs $3,379 $ 5,144
====== =======
15. Accrued Expenses and Other Current Liabilities:
The components of Accrued expenses and other current liabilities were
as follows:
(In thousands)
January 2, January 3,
1999 1998
--------- ---------
Bonus and Profit Sharing $ 1,274 $ 1,240
Accrued Acquisition Costs 1,175 --
(see Note 4)
Duty 806 399
Vacation 635 490
Professional Fees 389 601
Reorganization Costs -- 301
Other 3,207 1,511
------ -----
Total $ 7,486 $4,542
======= ======
F-30
<PAGE>
16. Supplemental Cash Flow Information:
Net cash paid (received) for interest and income taxes for the
fifty-two, thirty-one, twenty-two and fifty-two weeks ended January 2, 1999,
January 3, 1998, June 4, 1997 and December 28, 1996 were as follows:
(In thousands)
Fifty-Two Thirty-One Twenty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 2, January 3, June 4, December 28,
1999 1998 1997 1996
---- ----- ---- ----
Interest $ 953 $ 367 $ 1,412 $ 1,047
Income taxes 2,892 928 (2,694) (7,311)
The Company issued a short-term non-interest bearing promissory note in
the amount of $834,000 payable in four equal quarterly installments ending on
October 27, 1999 as partial payment for the assets acquired from the Warren
Apparel Group, Ltd. (see Note 4)
17. Other Matters:
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued, establishing accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
The Company has not engaged in hedging activities and has not purchased
any derivative instruments. The Company believes the adoption of SFAS No. 133
would have no impact on these consolidated financial statements.
F-31
<PAGE>
18. Unaudited Quarterly Results:
Unaudited quarterly financial information for 1998 and 1997 is set forth as
follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Quarter Quarter Quarter Quarter
ended ended ended ended
1998 April 4 July 4 October 3 January 2,1999
------- ------ --------- --------------
<S> <C> <C> <C> <C>
Net sales $ 45,258 $28,676 $ 48,789 $30,144
Gross profit 11,998 7,489 12,149 5,684
Net income (loss) 3,769 1,378 3,769 (58)
Net income (loss) per share
- - Basic $0.55 $0.20 $0.58 ($0.01)
- - Diluted $0.54 $0.19 $0.55 ($0.01)
Quarter Two months One month Quarter Quarter
ended ended ended ended ended
1997 April 5 June 4 July 5 October 4 January 3, 1998
------- ------ -------- ---------- ---------------
Net sales $142,755 $55,229 $ 5,535 $ 41,562 25,994
Gross profit 36,768 13,940 1,125 9,730 3,517
Net income (loss) 11,724 133,770 73 4,511 (1,275)
Net income (loss) per share
- - Basic * * $ .01 $ .67 $ (.19)
- - Diluted * * $ .01 $ .66 (.19)
</TABLE>
* Earnings per share is not presented because such presentation would not be
meaningful. The old stock was canceled under the Plan of Reorganization and
the new stock was not issued until the Consummation Date.
F-32
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Reserves Beginning
Related to Balance
Balance at Sold Related to Costs Balance at
Description Beginning Product Continuing Charged to Deductions End
of Period Lines Operations Expense of Period
- --------------------------------------------------------------------------------------------------------------------
Fifty-Two Weeks Ended
January 2, 1999
<S> <C> <C> <C> <C> <C> <C>
Reserve for Allowances $3,098 -- $3,098 $13,879 ($10,377) $ 6,600
Other Receivable Reserves 24 -- 24 -- -- 24
Reserve for Doubtful Accounts 48 -- 48 22 -- 70
Reserve for Returns 66 -- 66 1,394 (1,329) 131
------- -------- ------- ------- -------- -------
Total Receivable Reserves $3,236 $ -- $3,236 $15,295 ($11,706) $ 6,825
======= ========= ======= ======= ======== =======
Taxation Valuation Allowance $5,265 $ -- $5,265 $ 7,453 $ -- $12,718
======= ========= ======= ======= ======== =======
Thirty-One Weeks Ended
January 3, 1998
Reserve for Allowances $2,534 -- $2,534 $5,505 ($4,941) $3,098
Other Receivable Reserves 88 -- 88 (64) -- 24
Reserves for Discounts (1) 934 -- 934 -- (934) --
Reserve for Doubtful Accounts 230 -- 230 (172) (10) 48
Reserve for Returns 29 -- 29 992 (955) 66
------- -------- ------- ------- -------- -------
Total Receivable Reserves $3,815 $ -- $3,815 $6,261 ($6,840) $3,236
======= ========= ======= ======= ======== =======
Taxation Valuation Allowance $9,216 $ -- $9,216 $ -- ($3,951) $5,265
======= ========= ======= ======= ======== =======
</TABLE>
F-33
<PAGE>
SCHEDULE II (continued)
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Reserves Beginning
Related to Balance
Balance at Sold Related to Costs Balance at
Description Beginning Product Continuing Charged to Deductions End
of Period Lines Operations Expense of Period
- --------------------------------------------------------------------------------------------------------------------------
Twenty-Two Weeks Ended
June 4, 1997
<S> <C> <C> <C> <C> <C> <C>
Reserve for Allowances $8,619 ($6,074) $2,545 $2,952 ($2,963) $2,534
Other Receivable Reserves 4,881 (4,212) 669 (581) -- 88
Reserves for Discounts 588 -- 588 3,498 (3,152) 934
Reserve for Doubtful Accounts 895 (349) 546 (360) 44 230
Reserve for Returns 98 (69) 29 488 (488) 29
-------- -------- ------- -------- -------- --------
Total Receivable Reserves $15,081 ($10,704) $4,377 $5,997 ($6,559) $3,815
======== ========= ======= ======== ======== ========
Taxation Valuation Allowance $22,246 ($ 8,900) $13,346 $ -- ($4,130) $9,216
======== ========= ======= ======== ======== ========
Fifty-Two Weeks Ended
December 28, 1996
Reserve for Allowances $14,154 -- $14,154 $37,384 ($42,919) $8,619
Other Receivable Reserves 5,051 -- 5,051 (170) -- 4,881
Reserves for Discounts (2) 2,280 -- 2,280 27,827 (29,519) 588
Reserve for Doubtful Accounts 1,183 -- 1,183 (1,074) 786 895
Reserve for Returns 423 -- 423 9,354 (9,679) 98
-------- -------- ------- -------- -------- --------
Total Receivable Reserves $23,091 -- $23,091 $73,321 ($81,331) $15,081
======== ======== ======= ======== ======== ========
Taxation Valuation Allowance $25,859 $ -- $25,859 $ -- ($3,613) $22,246
======== ======== ======= ======== ======== ========
</TABLE>
(1) On June 2, 1997, the Company entered into a factoring agreement with CIT,
whereby CIT provides a guarantee of collection of all shipments approved by
CIT. Discounts given are no longer a risk/reserve of the Company as receivables
are sold to CIT net of discounts.
(2) On January 23, 1996, the Company entered into a factoring agreement with
Heller Financial for its Sassco Fashions product line, whereby Heller provides
a guarantee of collection for all shipments approved by Heller. Discounts given
by the Company for its Sassco products subsequent to January 23, 1996 were no
longer a risk/reserve of the Company as receivables are sold to Heller net of
discounts.
F-34
<PAGE>
Exhibits
to
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For The Fiscal Year Ended January 2, 1999 Commission File No. 1-9196
THE LESLIE FAY COMPANY, INC.
Delaware 13-3197085
(State or 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
<PAGE>
THE LESLIE FAY COMPANY, INC.
---------------------------
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- -----------
2.1 Amended Joint Plan of Reorganization.(2)
3.1(a) Restated Certificate of Incorporation of the registrant.(2)
3.1(b)* Amendment to Restated Certificate of Incorporation of the
registrant.
3.2(a) Amended and Restated By-laws of the registrant.(2)
3.2(b)* Amendment to Amended and Restated By-laws of the registrant.
4.1 Specimen Copy of Stock Certificate for shares of Common
Stock of the registrant.(9)
4.2 Revolving Credit Agreement dated June 2, 1997 between Leslie
Fay Marketing, Inc. ("LFM") and the CIT Group/Commercial
Services, Inc. ("CIT").(2)
4.3 First Amendment dated February 23, 1998 to the Revolving
Credit Agreement between LFM and CIT.(4)
4.4 Second Amendment dated March 31, 1998 to the Revolving
Credit Agreement between LFM and CIT.(4)
4.5 Third Amendment dated October 28, 1998 to the Revolving
Credit Agreement between LFM and CIT.(8)
10.1 Employment Agreement dated as of January 4, 1998 between the
registrant and John J. Pomerantz.(7)
10.2 Employment Agreement dated as of January 4, 1998 between the
registrant and John Ward.(7)
10.3 Employment Agreement dated as of January 4, 1998 between the
registrant and Dominick Felicetti.(7)
10.4 Employment Agreement dated as of January 4, 1998 between the
registrant and Warren T. Wishart.(7)
10.5 1997 Management Stock Option Plan.(5)
10.6 1997 Non-Employee Director Stock Option and Stock Incentive
Plan.(6)
10.7 Factoring Agreement dated June 4, 1997 between LFM and
CIT.(2)
10.8 Lease Agreement dated December 13, 1989 between 1412
Broadway Associates and the Company, modified as of July 31,
1990 and August 1, 1990, for certain premises located at 141
Broadway, New York, New York.(1)
10.9 Modification of Lease Agreement dated August 11, 1998
between Fashion Gallery Owners (formerly 1412 Broadway
Associates) and the Company for certain premises located at
1412 Broadway, New York, New York.(7)
10.10 Lease Agreement dated August 1, 1997 between John J. Passan
and the registrant for certain premises located at One
Passan Drive, Borough of Laflin, Luzerne County,
Pennsylvania.(3)
21.1 List of Subsidiaries.(4)
23.1* Consent of Arthur Andersen LLP.
27* Financial Data Schedule
- ------------------------------
*filed herewith
(1) Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended December 28, 1996.
(2) Incorporated by reference to Current Report on Form 8-K for an event
dated June 4, 1997.
(3) Incorporated by reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended July 5, 1997.
(4) Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended January 3, 1998.
(5) Incorporated by reference to the registrant's Registration Statement on
Form S-8 relating to shares under the 1997 Management Stock Option
Plan.
(6) Incorporated by reference to the registrant's Registration Statement on
Form S-8 relating to shares under the 1997 Non-Employee Director Stock
Option and Stock Incentive Plan.
(7) Incorporated by reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended July 4, 1998.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for the
fiscal quarter ended October 3, 1998.
(9) Incorporated by reference to Post-Effective Amendment No. 1 to the
registrant's Registration Statement on Form S-1.
Exhibit 3.1 (b)
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE LESLIE FAY COMPANY, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is THE LESLIE FAY COMPANY, INC.
2. The Amended and Restated Certificate of Incorporation of
the Corporation is hereby amended as follows:
(a) Section (A) of Article IV is hereby deleted in its
entirety and the following new Section (A) is hereby substituted in its place:
" (A) Authorized Stock. The total number of shares of
stock which the Corporation shall have authority to issue is twenty
million five hundred thousand (20,500,000), consisting of twenty
million (20,000,000) shares of common stock, par value $.01 per share
("Common Stock"), and five hundred thousand (500,000) shares of
preferred stock, par value $.01 per share ("Preferred Stock")."
(b) Article VI is hereby deleted in its entirety.
3. The amendments to the Amended and Restated Certificate of
Incorporation herein certified have been duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
Signed on July 17, 1998.
/s/ John J. Pomerantz
---------------------------------
John J. Pomerantz
Chief Executive Officer
Attest:
/s/ Warren T. Wishart
- ----------------------------
Warren T. Wishart
Secretary
EXHIBIT 3.2 (b)
AMENDMENT
TO
AMENDED AND RESTATED BY-LAWS
OF
THE LESLIE FAY COMPANY, INC.
(ADOPTED ON MARCH 16, 1999)
The second sentence of paragraph (A)(2) of Section 2.7 is
hereby amended to provide that solely for the 1999 annual meeting of
stockholders, a stockholder's notice, in order to be timely, shall be delivered
to the Secretary at the principal office of the Corporation no later than April
25, 1999.
EXHIBIT 23.1
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333- 62371 and 333-62379.
/s/ Arthur Andersen LLP
- -----------------------
New York, NY
April 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000796226
<NAME> LESLIE FAY COMPANY, INC.
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> Jan-02-1999
<PERIOD-START> Jan-04-1998
<PERIOD-END> Jan-02-1999
<CASH> 4,213
<SECURITIES> 0
<RECEIVABLES> 22,997
<ALLOWANCES> 6,825
<INVENTORY> 38,627
<CURRENT-ASSETS> 59,982
<PP&E> 3,190
<DEPRECIATION> 409
<TOTAL-ASSETS> 67,804
<CURRENT-LIABILITIES> 24,404
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 36,368
<TOTAL-LIABILITY-AND-EQUITY> 67,804
<SALES> 152,867
<TOTAL-REVENUES> 115,547
<CGS> 24,300
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 950
<INCOME-PRETAX> 12,070
<INCOME-TAX> 3,212
<INCOME-CONTINUING> 8,858
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,858
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.31
</TABLE>
