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SECURITIES AND EXCHANGE COMMISION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000 COMMISSION FILE NO. 1-9196
THE LESLIE FAY COMPANY, INC.
DELAWARE 13-3197085
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1412 BROADWAY
NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 221-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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There were 5,073,138 shares of Common Stock outstanding at July 1, 2000.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of July 1, 2000 (Unaudited)
and January 1, 2000, respectively...............................................3
Consolidated Statements of Operations (Unaudited) for the
Twenty-six Weeks Ended July 1, 2000 and
July 3, 1999, respectively......................................................4
Consolidated Statements of Operations (Unaudited) for the
Thirteen Weeks Ended July 1, 2000 and
July 3, 1999, respectively.......................................................5
Consolidated Statements of Cash Flows (Unaudited) for the
Twenty-Six Weeks Ended July 1, 2000 and
July 3, 1999, respectively.......................................................6
Notes to Consolidated Financial Statements...........................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................16
Item 2. Changes in Securities......................................................................16
Item 3. Defaults Upon Senior Securities............................................................16
Item 4. Submission of Matters to a Vote of Security Holders........................................16
Item 5. Other Information..........................................................................16
Item 6. Exhibits and Reports on Form 8-K...........................................................16
SIGNATURES..........................................................................................17
INDEX TO EXHIBITS..................................................................................E-1
</TABLE>
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED AUDITED
JULY 1, JANUARY 1,
ASSETS 2000 2000
----------------- -----------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents....................................... $ 894 $ 2,034
Restricted cash and cash equivalents............................ 3,464 3,432
Accounts receivable- net of allowances for possible losses of
$7,279 and $5,468, respectively.............................. 23,667 16,952
Inventories..................................................... 33,152 34,226
Prepaid expenses and other current assets....................... 1,853 2,702
Total Current Assets......................................... 63,030 59,346
Property, plant and equipment, at cost, net of accumulated
depreciation of $2,293 and $1,535, respectively.............. 4,102 3,695
Excess of purchase price over net assets acquired-net of
accumulated amortization of $653 and $357, respectively...... 7,026 4,330
Deferred charges and other assets............................... 3,752 1,629
Total Assets.................................................... $ 77,910 $ 69,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt................................................. $ 3,165 $ 1,000
Accounts payable................................................ 13,903 9,454
Accrued expenses and other current liabilities.................. 7,417 8,121
Accrued expenses and other current confirmation liabilities..... 3,464 3,432
Income taxes payable............................................ 222 --
Current portion of capitalized leases........................... 86 40
Total Current Liabilities.................................... 28,257 22,047
Long term note payable.......................................... 3,500 4,000
Excess of revalued net assets acquired over equity under fresh - start
reporting, net of accumulated amortization of $13,708
and $11,811, respectively.................................... -- 1,897
Other long term liabilities..................................... 1,194 915
Total Liabilities............................................... 32,951 28,859
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 500 shares authorized, no
shares issued and outstanding................................... -- --
Common stock, $.01 par value; 20,000 shares authorized;
6,890 and 6,870 shares issued, respectively.................... 69 69
Capital in excess of par value..................................... 32,669 31,212
Retained earnings.................................................. 23,844 20,483
Subtotal........................................................ 56,582 51,764
Treasury stock, at cost ; 1,817 shares............................. 11,623 11,623
Total Stockholders' Equity...................................... 44,959 40,141
Total Liabilities and Stockholders' Equity......................... $ 77,910 $ 69,000
================= =================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 1, JULY 3,
2000 1999
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<S> <C> <C>
Net Sales....................................................... $112,234 $ 99,594
Cost of Sales.................................................. 87,013 73,067
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Gross profit................................................. 25,221 26,527
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Operating Expenses:
Selling, warehouse, general and
administrative expenses............................... 20,493 19,384
Non-cash stock based compensation............................ 467 630
Depreciation and amortization expense........................ 974 595
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Total operating expenses................................. 21,934 20,609
Other income................................................. (693) (672)
Amortization of excess revalued net assets acquired
over equity............................................ (1,897) (2,286)
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Total operating expenses, net................................ 19,344 17,651
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Operating income............................................. 5,877 8,876
Interest and Financing Costs.................................... 1,543 1,004
Other Expenses.................................................. -- 534
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Income before taxes.......................................... 4,334 7,338
Provision for Taxes............................................. 973 2,089
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Net Income .................................................. $ 3,361 $5,249
========= =========
Net Income per Share - Basic................................. $ 0.66 $ 0.87
========= =========
- Diluted............................... $ 0.63 $ 0.84
========= =========
Weighted Average Shares Outstanding - Basic..................... 5,069,512 6,041,138
========= =========
-Diluted.................... 5,343,487 6,220,849
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
JULY 1, JULY 3,
2000 1999
<S> <C> <C>
Net Sales....................................................... $45,297 $ 38,450
Cost of Sales.................................................. 35,716 28,607
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Gross profit................................................. 9,581 9,843
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Operating Expenses:
Selling, warehouse, general and
administrative expenses............................... 9,889 9,011
Non-cash stock based compensation............................ 217 329
Depreciation and amortization expense........................ 534 315
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Total operating expenses................................. 10,640 9,655
Other income................................................. (346) (323)
Amortization of excess revalued net assets acquired
over equity............................................ (755) (1,143)
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Total operating expenses, net................................ 9,539 8,189
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42 1,654
Operating income.............................................
Interest and Financing Costs.................................... 681 335
Other Expenses.................................................. -- 534
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Income (loss) before taxes................................... (639) 785
Benefit for Taxes............................................... (698) (183)
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Net Income .................................................. $59 $968
========= =========
Net Income per Share - Basic................................. $ 0.01 $ 0.16
========= =========
- Diluted...................... $ 0.01 $ 0.15
========= =========
Weighted Average Shares Outstanding - Basic..................... 5,073,138 6,041,138
========= =========
-Diluted.. 5,189,964 6,290,628
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these consolidated financial statements.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 1, JULY 3,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ....................................................... $ 3,361 $5,249
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 1,054 656
Amortization of excess net assets acquired over equity.......... (1,897) (2,286)
Provision for possible losses on accounts receivable............ (4) (5)
Provision for stock based compensation and stock option grants.. 467 630
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable........................................... (6,223) (1,089)
Inventories................................................... 3,598 3,522
Prepaid expenses and other current assets..................... 856 (458)
Deferred charges and other assets............................. (2,092) (1,505)
Accounts payable, accrued expenses and other current
liabilities............................................... 2,646 (1,722)
Income taxes payable.......................................... 222 1,535
Deferred liabilities.......................................... 158 211
Changes due to reorganization activities:
Use of pre-consummation deferred taxes........................ 927 383
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Total adjustments........................................... (288) (128)
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Net cash provided by operating activities................... 3,073 5,121
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................. (960) (1,514)
Net cash paid for acquisition..................................... (4,943) --
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Net cash used in investing activities....................... (5,903) (1,514)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.......................................... 56,201 28,908
Repayment of borrowings........................................... (54,036) (29,236)
Repayment of notes payable........................................ (500) (417)
Repayment of merger costs......................................... -- (227)
Repayment of capital leases ...................................... (38) (23)
Proceeds from new stock issuance and options exercised ........... 62 --
Proceeds from (payment of) obligations under Plan of Reorganization
33 (639)
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Net cash provided by (used in) financing activities..... 1,722 (1,634)
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Net (decrease) increase in cash and cash equivalents.............. (1,108) 1,973
Cash and cash equivalents, at beginning of period................. 5,466 4,213
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Cash and cash equivalents, at end of period....................... $4,358 $ 6,186
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated financial statements.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The consolidated financial statements included herein have been
prepared by The Leslie Fay Company, Inc. and subsidiaries (The Leslie Fay
Company, Inc. being sometimes individually referred to, and together with its
subsidiaries collectively referred to, as the "Company" as the context may
require), pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from this report, as is
permitted by such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the Fiscal Year ended January 1, 2000
(the "1999 Form 10-K"). Interim taxes were provided based on the Company's
estimated effective tax rate for the year.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year, and the seasonality of the business may make projections of full year
results based on interim periods unreasonable.
2. ACQUISITION:
On February 15, 2000, the Company entered into a license agreement with
the licensing subsidiary of Liz Claiborne, Inc. ("Liz Claiborne") to manufacture
dresses and suits under the Liz Claiborne and Elisabeth trademarks. The Company
also purchased the dress finished goods and raw materials inventory of Liz
Claiborne and agreed to honor related manufacturing commitments that had been
made by Liz Claiborne as of February 15, 2000. Beginning for the Holiday 2000
season that begins to ship in October 2000, the Company will design and arrange
the manufacture of Liz Claiborne and Elisabeth dresses. Liz Claiborne and
Elisabeth dresses are sold in department and specialty stores throughout the
United States and, to a much lesser extent, in Canada, Mexico and other parts of
the world.
The agreements with Liz Claiborne provide that the Company will pay
royalties including guaranteed minimum average annual royalty payments of up to
approximately $2,000,000 throughout the five year initial term of the agreement
against 6% of the net sales of Liz Claiborne and Elisabeth dresses and suits.
The Company also will reimburse Liz Claiborne for certain operating costs on a
transitional basis.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
This transaction generated intangible assets of $1,919,000, which the
Company is amortizing over the initial five-year period of the agreement ending
February 2005. The Liz Claiborne agreement has been accounted for as a purchase,
and accordingly, the operating results of Liz Claiborne Dresses 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 2000. Year to date net sales from the date of
acquisition through July 1, 2000 were $13,065,000.
On May 9, 2000, the Company consummated its agreement to purchase
substantially all the assets of Cynthia Steffe, Inc. Cynthia Steffe also
licensed her trade names to the Company for an indefinite period. Cynthia
Steffe, Inc. markets to both department and specialty stores in the contemporary
and designer sportswear categories. This transaction generated intangible assets
of $1,074,000, which the Company is amortizing over fifteen years ending April
2015. The 1999 Net Sales for Cynthia Steffe, Inc. were approximately $7,000,000.
Cynthia Steffe and Richard Roberts, principals of Cynthia Steffe, Inc., have
entered into employment agreements with the Company.
3. INVENTORIES:
Inventories consist of the following:
(Unaudited)
July 1, January 1,
2000 2000
--------- --------
(In thousands)
Raw materials $15,357 $14,338
Work in process 2,744 3,654
Finished goods 15,051 16,234
--------- --------
Total inventories $33,152 $34,226
========= =======
4. DEBT:
On June 2, 1997, in preparation for the consummation of the Amended
Joint Plan of Reorganization ("the Plan"), a wholly-owned subsidiary of the
Company entered into a two-year financing agreement (the "CIT Credit Agreement")
with CIT, which was amended on August 25, 1999 to extend the agreement through
June 2, 2004, to provide direct borrowings and to issue letters of credit on the
Company's behalf. Direct borrowings bear interest at prime minus 0.25% (9.25% at
July 1, 2000) 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 $28,292,000 on
July 1, 2000, prior to the additional available borrowings as a result of the
modifications discussed below and peak borrowing during the twenty-six weeks
ended July 1, 2000 was $19,424,000. There was $2,165,000 in direct borrowings
outstanding under the CIT Credit Agreement and approximately $11,543,000 was
committed under unexpired letters of credit as of July 1, 2000.
Additionally, the Company borrowed, through a five year term note
payable, $5,000,000
-7-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
at an interest rate of prime plus 200 basis points (11.00% at July 1, 2000)
which was used to repurchase the Company's common stock. As of July 1, 2000 the
principal balance outstanding on the note payable was $4,500,000.
The CIT Credit Agreement has been modified as of August 14, 2000. Key
modifications since January 1, 2000 include:
|X| The committed credit line has been increased to $52,000,000 from
$42,000,000. The sub-limit on letters of credit has also been increased
from $25,000,000 to $30,000,000.
9 The requirement that in order to pay dividends or to repurchase stock
there remain unused credit available of no less than $5,000,000 has
been eliminated.
|X| The covenant related to the maximum capital expenditures was raised to
$4,000,000 for the year ended December 30, 2000 and $2,500,000 for the
fiscal years thereafter.
|X| The Company is permitted to grant stock acquisition loans to four
designated senior officers in the amount of approximately $3,645,000 to
fund the acquisition of shares of capital stock of the Company.
[ ] The Company is authorized to make a loan to the principals of Cynthia
Steffe, Inc. not to exceed $1,000,000 with principal and interest due
May 10, 2010. The loan balance on July 1, 2000 was $746,000.
2 Letters of credit may be issued in support of product which bears the
Liz Claiborne licensed mark for up to 180 days to an aggregate maximum
amount not to exceed $5,000,000.
As collateral for borrowing under the CIT Credit Agreement, the Company
has granted to CIT a security interest in substantially all of its assets. In
addition, the CIT Credit Agreement contains certain restrictive covenants,
including limitations on the incurrence of additional liens and indebtedness.
The Company is currently in compliance with or has obtained written waivers for
all requirements contained in the CIT Credit Agreement.
5. INCOME TAXES:
The provision (benefit) for federal, state and local income taxes is
$973,000 and $2,089,000 for the twenty-six weeks ended July 1, 2000 and July 3,
1999, respectively and ($698,000) and ($183,000) for the thirteen weeks ended
July 1, 2000 and July 3, 1999. Cash federal and state income taxes payable are
partially offset by the utilization of pre-consummation net operating loss
carryforwards. The utilization of pre-consummation net operating loss
carryforwards for federal income tax purposes is limited to approximately
$1,500,000 in 2000.
6. ACCOUNTING FOR STOCK OPTION COMPENSATION:
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No.123, "Accounting for Stock Based Compensation," the Company has
recorded $467,000 and
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
$593,000 of non-cash stock based compensation expense for the twenty-six weeks
ended July 1, 2000 and July 3, 1999, respectively and $217,000 and $314,000 for
the thirteen weeks ended July 1, 2000 and July 3, 1999, respectively. These
amounts were offset as adjustments to Capital in excess of par value in the
Consolidated Balance Sheets.
7. NET INCOME PER SHARE:
For the twenty-six weeks ended July 1, 2000 and July 3, 1999, the basic
weighted average common shares outstanding was 5,069,512 and 6,041,138
respectively, and the weighted average shares outstanding assuming dilution was
5,343,487 and 6,220,849 respectively. The difference of 273,975 and 179,711
respectively, represents the incremental dilution of shares upon exercise of
dilutive stock options.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
----------------------------------------------
(A) RESULTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED JULY 1, 2000 AS COMPARED TO
TWENTY-SIX WEEKS ENDED JULY 3, 1999
The Company recorded net sales of $112,234,000 for the twenty-six weeks
ended July 1, 2000, compared with $99,594,000 for the twenty-six weeks ended
July 3, 1999, a net increase of $12,640,000 or 12.7%. The Dress product lines
net sales, excluding $13,065,000 generated by the recently licensed Liz
Claiborne dress brands, increased $3,326,000 or 4.4% as a result of a 5.4%
decrease in the Leslie Fay dress brands combined with an increase of 31.4% in
the David Warren brands. Net sales for the Sportswear product lines, excluding
$82,000 generated by the recently acquired Cynthia Steffe sportswear brands
decreased by $3,833,000 or 16.3% mostly as a result of the restructuring of the
Leslie Fay Sportswear brands. This restructuring is expected to reduce sales and
improve profitability.
Gross profit was $25,221,000 and 22.5% of net sales compared with
$26,527,000 and 26.6% for the twenty-six weeks ended July 1, 2000 and July 3,
1999, respectively. The gross profit from the Dress line, net of $2,567,000
generated by the recently licensed Liz Claiborne dress brands, declined
$3,722,000 and the percentage of net sales decreased to 22.5% from 28.4%. The
gross profit produced by the Sportswear lines, net of negative margin of $31,000
generated by the recently acquired Cynthia Steffe sportswear brands, for the
twenty-six weeks ended July 1, 2000, decreased by $120,000 and the percentage of
net sales increased to 24.5% from 21.0% for the comparable period ended July 1,
2000. The improved gross profit as a percentage of net sales resulted from the
restructuring of the Leslie Fay Sportswear brand that was implemented in the
fourth quarter of 1999.
SG&A expenses were $20,493,000 or 18.3% of net sales and $19,384,000 or
19.5% of net sales for the twenty-six weeks ended July 1, 2000 and July 3, 1999,
respectively. The expense increase of $1,109,000 was caused mainly by about
$2,000,000 of additional operating expenses related to the Liz Claiborne dress
brands and the Cynthia Steffe brands partially offset by expense savings caused
by the restructuring of the Leslie Fay sportswear brands.
Non-cash stock based compensation for stock options and outside
director compensation for the twenty-six weeks ended July 1, 2000 and July 3,
1999 was $467,000 and $630,000, respectively.
Other income, consisting primarily of royalty income, was $692,000 and
$672,000 for the twenty-six weeks ended July 1, 2000 and July 3, 1999,
respectively.
Depreciation and amortization expense for the twenty-six weeks ended
July 1, 2000 and July 3, 1999, respectively, was $974,000 and $595,000. The
increase was due to the acquisition of fixed assets since the Company's June 4,
1997 emergence from bankruptcy as well as the excess of purchase price over net
assets acquired from The Warren Apparel Group Ltd. and Cynthia Steffe, Inc. as
well as the licensing of the Liz Claiborne dress brands. In addition, the
Company recognized income of $1,897,000 and $2,286,000 for the twenty-six weeks
ended July
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
1, 2000 and July 3, 1999 respectively from amortization of excess revalued net
assets acquired over equity under fresh start reporting. The excess of revalued
net assets was fully amortized in the second quarter of 2000, which will
negatively impact future earnings per share compared to prior periods.
Interest and financing costs were $1,543,000 and $1,004,000 for the
twenty-six weeks ended July 1, 2000 and July 3, 1999, respectively. The
additional interest was generated as a result of rising interest rates and
higher borrowings during the twenty-six weeks ended July 1, 2000, which were
utilized for the Liz Claiborne and Cynthia Steffe transactions. Also, the
Company incurred additional interest expense during the period ended July 1,
2000 as a result of the $5,000,000 term note entered into on August 25, 1999.
The financing fees under the new CIT Credit Agreement were partially offset by
income earned on the cash invested for the twenty-six weeks ended July 1, 2000
and July 3, 1999.
Other expenses of $534,000 were recorded during the twenty-six weeks
ended July 3, 1999 to provide for non-operating legal and financing fees
incurred as a result of the merger transaction with Three Cities Research, Inc.
The provision for federal, state and local income taxes was $973,000
and $2,089,000 for the twenty-six weeks ended July 1, 2000 and July 3, 1999,
respectively.
THIRTEEN WEEKS ENDED JULY 1, 2000 AS COMPARED TO
THIRTEEN WEEKS ENDED JULY 3, 1999
The Company recorded net sales of $45,297,000 for the thirteen weeks
ended July 1, 2000, compared with $38,450,000 for the thirteen weeks ended July
3, 1999, a net increase of $6,847,000 or 17.8%. The Dress product lines' net
sales, excluding $6,911,000 generated by the recently licensed Liz Claiborne
dress brands, increased $1,478,000 or 4.6%. A 22.5% increase in the Warren
brands was offset by a 2.9% decrease in the Leslie Fay dress brands. The Warren
brands acquired in late 1998 had a net sales improvement of 22.5% in the second
quarter of 2000 compared to the second quarter of 1999. The increased volume of
the Warren Group was driven by price concessions on Spring and Summer
merchandise. The lower level of Leslie Fay dress net sales was caused by
additional price concessions to clear product. Net sales for the Sportswear
product lines, excluding $82,000 generated by the recently acquired Cynthia
Steffe sportswear brands decreased by $1,624,000 or 27.1%. This resulted from
the restructuring of the Leslie Fay Sportswear brand and the Leslie Fay
Haberdashery brand that was implemented in the fourth quarter of 1999. This
restructuring was expected to reduce sales and improve gross profit.
Gross profit was $9,581,000 and 21.2% of net sales compared with
$9,843,000 and 25.6% for the thirteen weeks ended July 1, 2000 and July 3, 1999,
respectively. The gross profit from the Dress lines, net of $991,000 generated
by the recently licensed Liz Claiborne dress brands, decreased $959,000 and the
percent to net sales decreased to 23.3% from 27.3% for the comparable period
ended July 3, 1999. The Leslie Fay dress line experienced an improvement in
gross profit contribution of $296,000 and 26.4% of net sales compared with 24.4%
of net sales for the second quarter of 2000 and 1999 respectively. The Warren
Group experienced a decline in Gross Profit of $1,256,000 and 17.2% of net sales
in the second quarter of 2000 when compared to 34.2% of net sales in the second
quarter of 1999. The high level of off-price sales was the primary cause of this
gross profit decline for the Warren Group. The gross profit produced by the
Sportswear lines, net of negative margin of $31,000 generated by the recently
acquired Cynthia Steffe sportswear brands, for the thirteen weeks ended July 1,
2000 decreased
-11-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
by $263,000 and the percent to net sales increased to 16.7% from 16.6% for the
comparable period ended July 3, 1999.
SG&A expenses were $9,889,000 and 21.8% of net sales and $9,011,000 and
23.4% of net sales for the thirteen weeks ended July 1, 2000 and July 3, 1999,
respectively. The expense increase of $878,000 was caused mainly by about
$1,500,000 of additional operating expenses related to the Liz Claiborne dress
brands and the Cynthia Steffe brands partially offset by expense savings caused
by the restructuring of the Leslie Fay sportswear brands.
Non-cash stock based compensation for stock options and outside
director compensation for the thirteen weeks ended July 1, 2000 and July 3, 1999
was $217,000 and $329,000, respectively.
Other income, consisting primarily of royalty income, was $346,000 and
$323,000 for the thirteen weeks ended July 1, 2000 and July 3, 1999,
respectively.
Depreciation and amortization expense for the thirteen weeks ended July
1, 2000 and July 3, 1999, was $534,000 and $315,000 respectively. The increase
was due to the acquisition of fixed assets since the Company's June 4, 1997
emergence from bankruptcy. In addition, the Company recognized income of
$755,000 and $1,143,000 for the thirteen weeks ended July 1, 2000 and July 3,
1999, respectively from amortization of excess revalued net assets acquired over
equity under fresh start reporting. The excess of revalued net assets was fully
amortized in the second quarter of 2000, which will negatively impact future
earnings per share compared to prior periods.
Interest and financing costs were $681,000 and $335,000 for the
thirteen weeks ended July 1, 2000 and July 3, 1999, respectively. The additional
interest was generated as a result of higher borrowings during the thirteen
weeks ended July 1, 2000, which were utilized for the Liz Claiborne and Cynthia
Steffe transactions. Also, the Company incurred additional interest expense
during the period ended July 1, 2000 as a result of the $5,000,000 term note
entered into on August 25, 1999. The financing fees under the new CIT Credit
Agreement were partially offset by income earned on the cash invested for the
thirteen weeks ended July 1, 2000 and July 3, 1999.
The benefit for federal, state and local income taxes was ($698,000)
and ($183,000) for the thirteen weeks ended July 1, 2000 and July 3, 1999,
respectively.
(B) LIQUIDITY AND CAPITAL RESOURCES
The sixth amendment of the CIT Credit Agreement provides a working
capital facility commitment of $52,000,000, including a $30,000,000 sublimit on
letters of credit. As of July 1, 2000 the Company was utilizing approximately
$11,543,000 under the CIT Credit Agreement for letters of credit, and there was
$2,165,000 in outstanding cash borrowings. The Company had a net borrowing
availability under the CIT Credit Agreement of $28,292,000 on July 1, 2000,
prior to the additional available borrowings as a result of the modifications
discussed herein and peak borrowing during the twenty-six weeks ended July 1,
2000 was $19,424,000.
At July 1, 2000, the Company's cash and cash equivalents amounted to
$4,358,000, of which $3,464,000 is restricted for payment of the remaining
administrative claims, which are expected to be made prior to the end of the
fiscal year. Working capital decreased $2,526,000 to
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
$34,773,000 for the twenty-six weeks ended July 1, 2000. The changes in the
components of working capital were: a decrease in cash and cash equivalents of
$1,108,000; an increase in net accounts receivable of $6,715,000; a decrease in
inventories of $1,074,000; a decrease in prepaid expenses and other current
assets of $849,000 and an increase of $6,210,000 in total current liabilities.
Accounts receivable increased due to the additional volume generated by the
recently licensed Liz Claiborne Dress brands. Total current liabilities
increased as a result of additional short term borrowings of $2,165,000,
increased operating accounts payable and other accrued liabilities of $4,045,000
resulting mostly from the timing of liabilities due.
Although the Company's results of operations indicated net income of
$3,361,000 for the twenty-six weeks ended July 1, 2000, these results are not
indicative of results for an entire year.
Capital expenditures were $1,165,000 for the twenty-six weeks ended
July 1, 2000 which included $205,000 of equipment purchased under a capital
lease. Capital expenditures are expected to be $3,050,000 for fiscal year 2000.
The anticipated capital expenditures for the remainder of the year are primarily
related to improvements in management information systems, the Company's first
phase of a planned web site, improvements in the distribution facility, as well
as the Liz Claiborne Dress showrooms and office space. The Company believes that
its financing arrangements and anticipated level of internally generated funds
will be sufficient to finance its capital spending during the remainder of 2000.
The Company may pay cash dividends or repurchase its stock under the
CIT Credit Agreement as long as those disbursements do not cause the Company to
be in violation of the restrictive covenants and the cumulative stock repurchase
or distribution of dividends does not exceed the dividend and stock repurchase
basket. At the end of the fiscal quarter ended July 1, 2000 the Company may
borrow up to $5,661,000 for stock repurchase or dividend distribution. The
Company has no plans to pay cash dividends in the foreseeable future.
The Company did not experience any significant year 2000 problems or
disruptions in the business process caused by its own systems or those of
unrelated third parties. The financial condition or results of operations for
the fiscal year ended January 1, 2000 were not affected by any year 2000
problems. There was no material difference in the actual cost and that which was
previously disclosed. Additionally, there are no remaining contingencies or
reserves relative to year 2000.
There were no significant changes in the Company's inventory level or
cash flow caused by attempts to mitigate the risk of year 2000 related business
interruptions. The revenue patterns of the Company were not affected by any
unusual customer buying levels, either positively or negatively at the end of
fiscal 1999.
There were no significant information technology projects that were
deferred in fiscal 1999 that will require "catch-up" in the year 2000.
The Company also passed through the critical date of February 29, 2000
with no significant issues. The Company will continue to monitor year 2000
issues and will update disclosures appropriately.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Certain statements contained in this Form 10-Q, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the effects of future events on the Company's financial performance; the risk
that the Company may not be able to finance its planned growth; risks related to
the industry in which the Company competes, including potential adverse impact
of external factors such as inflation, consumer confidence, unemployment rates
and consumer tastes and preferences; and the risk of potential increase in
market interest rates from current rates. Given these uncertainties, current and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
None.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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No legal proceedings were terminated during the second quarter of 2000
or thereafter, other than ordinary routine litigation incidental to the business
of the Company.
ITEM 2. CHANGES IN SECURITIES.
------- ----------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
------- --------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------- ----------------------------------------------------
None
ITEM 5. OTHER INFORMATION.
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------- ---------------------------------
a) Exhibits
Exhibits are set forth on the "Index to Exhibits" on page E-1
hereof.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 15, 2000 THE LESLIE FAY COMPANY, INC.
(Company)
By: /s/ Warren T. Wishart
----------------------------------------
Warren T. Wishart
Senior Vice President - Administration
and Finance, Chief Financial Officer
and Treasurer
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
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27 Financial Data Schedule.
E-1
