SECURITIES AND EXCHANGE COMMISION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 5,081,138 shares of Common Stock outstanding at September 30, 2000.
================================================================================
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and January 1, 2000, respectively............................................................3
Consolidated Statements of Operations (Unaudited) for the
Thirty-Nine Weeks Ended September 30, 2000 and
October 2, 1999, respectively................................................................4
Consolidated Statements of Operations (Unaudited) for the
Thirteen Weeks Ended September 30, 2000 and
October 2, 1999, respectively.................................................................5
Consolidated Statements of Cash Flows (Unaudited) for the
Thirty-Nine Weeks Ended September 30, 2000 and
October 2, 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.......................................................................................17
Item 6. Exhibits and Reports on Form 8-K........................................................................17
SIGNATURES.......................................................................................................18
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
SEPTEMBER 30, JANUARY 1,
ASSETS 2000 2000
-------- --------
Current Assets:
<S> <C> <C>
Cash and cash equivalents....................................... $ 755 $ 2,034
Restricted cash and cash equivalents............................ 3,461 3,432
Accounts receivable- net of allowances for possible losses of
$7,881 and $5,468, respectively.............................. 44,667 16,952
Inventories..................................................... 25,851 34,226
Prepaid expenses and other current assets....................... 1,810 2,702
-------- --------
Total Current Assets......................................... 76,544 59,346
Property, plant and equipment, at cost, net of accumulated
depreciation of $2,737 and $1,535, respectively.............. 4,488 3,695
Excess of purchase price over net assets acquired-net of
accumulated amortization of $845 and $357, respectively...... 6,852 4,330
Deferred charges and other assets............................... 3,922 1,629
-------- --------
Total Assets.................................................... $ 91,806 $ 69,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt................................................. $ 16,192 $ 1,000
Accounts payable................................................ 11,895 9,454
Accrued expenses and other current liabilities.................. 9,464 8,121
Accrued expenses and other current confirmation liabilities..... 3,461 3,432
Income taxes payable............................................ 662 --
Current portion of capitalized leases........................... 88 40
-------- --------
Total Current Liabilities.................................... 41,762 22,047
Long term note payable.......................................... 3,250 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..................................... 1,229 915
-------- --------
Total Liabilities............................................... 46,241 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;
6,898 and 6,870 shares issued, respectively.................... 69 69
Capital in excess of par value..................................... 32,515 31,212
Retained earnings.................................................. 24,604 20,483
-------- --------
Subtotal........................................................ 57,188 51,764
Treasury stock, at cost ; 1,817 shares............................. 11,623 11,623
-------- --------
Total Stockholders' Equity...................................... 45,565 40,141
-------- --------
Total Liabilities and Stockholders' Equity......................... $ 91,806 $ 69,000
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated balance sheets.
-3-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 30, OCTOBER 2,
2000 1999
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Net Sales....................................................... $173,281 $ 158,216
Cost of Sales.................................................. 133,718 116,923
--------- ---------
Gross profit................................................. 39,563 41,293
--------- ---------
Operating Expenses:
Selling, warehouse, general and
administrative expenses............................... 32,243 29,284
Non-cash stock based compensation............................ 643 1,130
Depreciation and amortization expense........................ 1,566 959
--------- ---------
Total operating expenses................................. 34,452 31,373
Other income................................................. (1,045) (1,054)
Amortization of excess revalued net assets acquired
over equity............................................ (1,898) (3,429)
--------- ---------
Total operating expenses, net................................ 31,509 26,890
--------- ---------
Operating income............................................. 8,054 14,403
Interest and Financing Costs.................................... 2,410 1,661
Other Expenses.................................................. -- 900
--------- ---------
Income before taxes.......................................... 5,644 11,842
Provision for Taxes............................................. 1,523 3,451
--------- ---------
Net Income .................................................. $ 4,121 $8,391
========= =========
Net Income per Share - Basic................................. $ 0.81 $ 1.42
========= =========
- Diluted............................... $ 0.78 $ 1.36
========= =========
Weighted Average Shares Outstanding - Basic..................... 5,070,984 5,900,083
========= =========
-Diluted.................... 5,277,463 6,148,149
========= =========
</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
SEPTEMBER 30, OCTOBER 2,
2000 1999
--------- ---------
<S> <C> <C>
Net Sales...................................................... $61,047 $ 58,622
Cost of Sales.................................................. 46,705 43,856
--------- ---------
Gross profit................................................. 14,342 14,766
--------- ---------
Operating Expenses:
Selling, warehouse, general and
administrative expenses............................... 11,750 9,900
Non-cash stock based compensation............................ 176 500
Depreciation and amortization expense........................ 592 364
--------- ---------
Total operating expenses................................. 12,518 10,764
Other income................................................. (353) (382)
Amortization of excess revalued net assets acquired
over equity............................................ (1,143)
--------- ---------
Total operating expenses, net................................ 12,165 9,239
--------- ---------
Operating income............................................. 2,177 5,527
Interest and Financing Costs.................................... 867 657
Other Expenses.................................................. -- 366
--------- ---------
Income before taxes.......................................... 1,310 4,504
Income tax provision........................................... 550 1,362
--------- ---------
Net Income .................................................. $ 760 $3,142
========= =========
Net Income per Share - Basic................................. $ 0.15 $ 0.56
========= =========
- Diluted............................... $ 0.15 $ 0.52
========= =========
Weighted Average Shares Outstanding - Basic..................... 5,073,929 5,617,973
========= =========
- Diluted................... 5,145,417 6,008,999
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
-5-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 30, OCTOBER 2,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ....................................................... $ 4,121 $ 8,391
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of excess net assets acquired over equity.......... (1,898) (3,429)
Depreciation and amortization................................... 1,691 1,057
Provision for possible losses on accounts receivable............ (3) (6)
Provision for stock based compensation and stock option grants.. 643 1,130
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable........................................... (27,222) (24,055)
Inventories................................................... 10,899 9,946
Prepaid expenses and other current assets..................... 899 (125)
Deferred charges and other assets............................. (2,261) (1,738)
Accounts payable, accrued expenses and other current
liabilities............................................... 2,721 (27)
Income taxes payable.......................................... 662 889
Deferred liabilities.......................................... 215 300
Changes due to reorganization activities:
Use of pre-consummation deferred taxes........................ 598 839
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Total adjustments........................................... (13,056) (15,219)
------- -------
Net cash provided by operating activities................... (8,935) (6,828)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................. (1,789) (1,870)
Net cash paid for acquisition..................................... (5,001) (97)
Treasury stock repurchases........................................ - (7,000)
Merger costs...................................................... - (775)
------- -------
Net cash used in investing activities....................... (6,790) (9,742)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.......................................... 87,934 53,084
Repayment of borrowings........................................... (72,742) (40,457)
Proceeds from notes payable....................................... - 5,000
Repayment of notes payable........................................ (750) (626)
Repayment of capital leases ...................................... (58) (35)
Proceeds from new stock issuance and options exercised ........... 62 -
Interest earned on restricted cash................................ 119 93
Payments made on confirmation liabilities under the Plan
of Reorganization................................................. (90) (398)
------- -------
Net cash provided by financing activities............... 14,475 16,661
------- -------
Net (decrease) increase in cash and cash equivalents.............. (1,250) 91
Cash and cash equivalents, at beginning of period................. 5,466 4,213
------- -------
Cash and cash equivalents, at end of period....................... $4,216 $ 4,304
======= =======
</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
(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.
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 September 30, 2000 were $18,720,000.
-7-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 $1,092,000, which the Company is amortizing over fifteen years. Year to date
net sales from the date of acquisition through September 30, 2000 were
$1,591,000. The full year 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)
September 30, January 1,
2000 2000
------------- ----------
(In thousands)
Raw materials $12,136 $14,338
Work in process 3,482 3,654
Finished goods 10,233 16,234
------ ------
Total inventories $25,851 $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
September 30, 2000) and the CIT Credit Agreement requires a fee, payable
monthly, on average outstanding letters of credit at a rate of 2% annually.
There was $15,192,000 in direct borrowings outstanding under the CIT Credit
Agreement and approximately $8,502,000 was committed under unexpired letters of
credit as of September 30, 2000. On September 30, 2000, the Company had a net
borrowing availability under the CIT Credit Agreement of $28,473,000 in excess
of direct borrowings and amounts committed under the unexpired letters of
credit. The peak credit line utilization during the thirty-nine weeks ended
September 30, 2000 was $30,190,000, which consisted of direct borrowings of
$22,125,000 and unexpired letters of credit of $8,065,000
Additionally, the Company borrowed, through a five year term note
payable, $5,000,000 at an interest rate of prime plus 200 basis points (11.50%
at September 30, 2000) which was used to repurchase the Company's common stock.
As of September 30, 2000 the principal balance outstanding on the note payable
was $4,250,000.
-8-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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
to $30,000,000 from $25,000,000.
|X| 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 September 30, 2000 was $877,000.
|X| 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 for federal, state and local income taxes is $1,523,000
and $3,451,000 for the thirty-nine weeks ended September 30, 2000 and October 2,
1999, respectively and $550,000 and $1,362,000 for the thirteen weeks ended
September 30, 2000 and October 2, 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 $614,000 and $1,010,000 of non-cash stock based compensation expense
for the thirty-nine weeks ended September 30, 2000 and October 2, 1999,
respectively and $147,000 and $417,000 for the thirteen weeks ended September
30, 2000 and October 2, 1999, respectively. These amounts were offset as
adjustments to Capital in excess of par value in the Consolidated Balance
Sheets.
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<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
7. NET INCOME PER SHARE:
For the thirty-nine weeks ended September 30, 2000 and October 2, 1999,
the basic weighted average common shares outstanding was 5,070,984 and 5,900,083
respectively, and the weighted average shares outstanding assuming dilution was
5,277,463 and 6,148,149 respectively. The difference of 206,479 and 248,066
respectively, represents the incremental dilution of shares upon exercise of
dilutive stock options.
8. SUBSEQUENT EVENT:
On November 14, 2000, the Company signed a definitive agreement to sell
the "HUE" trademark to the Kayser-Roth Corporation, the principal licensee of
such trademarks.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------- ----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
----------------------------------------------
(A) RESULTS OF OPERATIONS
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000 AS COMPARED TO
THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999
The Company recorded net sales of $173,281,000 for the thirty-nine
weeks ended September 30, 2000, compared with $158,216,000 for the thirty-nine
weeks ended October 2, 1999, a net increase of $15,065,000 or 9.5%. The Dress
product lines' net sales, excluding $18,720,000 generated by the recently
licensed Liz Claiborne dress brands, increased $1,217,000 or 1.1% as a result of
a 3.3% decrease in the Leslie Fay dress brands combined with an increase of
11.1% in the Warren brands. Net sales for the Sportswear product lines,
excluding $1,591,000 generated by the recently acquired Cynthia Steffe
sportswear brands, decreased by $6,462,000 or 14.5% 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 $39,563,000 and 22.8% of net sales compared with
$41,293,000 and 26.1% for the thirty-nine weeks ended September 30, 2000 and
October 2, 1999, respectively. The gross profit from the Dress lines, excluding
$3,263,000 generated by the recently licensed Liz Claiborne dress brands,
declined $5,953,000 and the percentage of net sales decreased to 22.6% from
28.1%. The gross profit generated by the Leslie Fay Dress lines declined
$2,512,000 and 23.7% of net sales compared to 26.1% of net sales for the
comparable period ended October 2, 1999. The decline in gross profit was due to
both increased allowances and markdowns. The gross profit contributed by the
Warren brands declined $3,441,000 and the percentage of net sales decreased to
20.5% from 32.7% for the comparable period ended October 2, 1999. The decline in
gross profit was due to both increased allowances and markdowns, which was
generated by an increase in off price sales. The gross profit produced by the
Sportswear lines, excluding $262,000 generated by the recently acquired Cynthia
Steffe sportswear brands, for the thirty-nine weeks ended September 30, 2000,
increased by $802,000 and the percentage of net sales increased to 26.7% from
21.0% for the comparable period ended October 2, 1999. 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.
Selling, warehouse, general and administrative expenses were
$32,243,000 or 18.6% of net sales and $29,284,000 or 18.5% of net sales for the
thirty-nine weeks ended September 30, 2000 and October 2, 1999, respectively.
The expense increase of $2,959,000 was caused mainly by $2,928,000 of additional
operating expenses related to the Liz Claiborne dress brands and the Cynthia
Steffe brands partially offset by approximately $1,510,000 of expense savings
caused by the restructuring of the Leslie Fay sportswear brands. Additionally,
there was a one-time charge of $1,500,000 relative to the stockholder-approved
contract for a member of senior management.
Non-cash stock based compensation for stock options and outside
director compensation for the thirty-nine weeks ended September 30, 2000 and
October 2, 1999 was $643,000 and $1,130,000, respectively. The prior year's
expense included a one-time only expense relating to the early vesting of middle
management stock options as a result of the merger transaction with a subsidiary
of Three Cities Research, Inc.
-11-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Other income, consisting primarily of royalty income, was $1,045,000
and $1,054,000 for the thirty-nine weeks ended September 30, 2000 and October 2,
1999, respectively. Upon consummation of the transaction referred to in Note 8
of the Notes to the Consolidated Financial Statements, there will be a
substantial decline in future royalty income.
Depreciation and amortization expense for the thirty-nine weeks ended
September 30, 2000 and October 2, 1999, respectively, was $1,566,000 and
$959,000. 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.
Depreciation and amortization expense for the thirty-nine weeks ended September
30, 2000 for the newly acquired businesses included $324,000 and $43,000 for the
Liz Claiborne license agreement and the Cynthia Steffe brands, respectively.
During the thirty-nine week period $240,000 of additional depreciation expense
was incurred to support technology efforts. In addition, the Company recognized
income of $1,898,000 and $3,429,000 for the thirty-nine weeks ended September
30, 2000 and October 2, 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 $2,410,000 and $1,661,000 for the
thirty-nine weeks ended September 30, 2000 and October 2, 1999, respectively.
Included in the interest and financing cost was $387,000 and $52,000 for the
interest on the $5,000,000 term note entered into on August 25, 1999 for the
period ended September 30, 2000 and October 2, 1999, respectively. The
additional interest was generated as a result of rising interest rates and
higher borrowings during the thirty-nine weeks ended September 30, 2000, which
were utilized for the Liz Claiborne and Cynthia Steffe transactions. The
financing fees under the new CIT Credit Agreement were partially offset by
income earned on the cash invested for the thirty-nine weeks ended September 30,
2000 and October 2, 1999.
Other expenses of $900,000 were recorded during the thirty-nine weeks
ended October 2, 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 $1,523,000
and $3,451,000 for the thirty-nine weeks ended September 30, 2000 and October 2,
1999, respectively.
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000 AS COMPARED TO
THIRTEEN WEEKS ENDED OCTOBER 2, 1999
The Company recorded net sales of $61,047,000 for the thirteen weeks
ended September 30, 2000, compared with $58,622,000 for the thirteen weeks ended
October 2, 1999, a net increase of $2,425,000 or 4.1%. The Dress product lines'
net sales, excluding $5,655,000 generated by the recently licensed Liz Claiborne
dress brands, decreased $2,110,000 or 5.6%. A 1.6% increase in the Leslie Fay
dress brands was offset by a 17.0% decrease in the Warren brands. The decreased
volume of the Warren Group was driven by sales reductions in both the David
Warren and Reggio labels. Net sales for the Sportswear product lines, excluding
$1,509,000 generated by the recently acquired Cynthia Steffe sportswear brands,
decreased by $2,629,000 or 12.5%. 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 is expected to
reduce sales and improve gross profit.
-12-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Gross profit was $14,342,000 and 23.5% of net sales compared with
$14,766,000 and 25.2% for the thirteen weeks ended September 30, 2000 and
October 2, 1999, respectively. The gross profit from the Dress lines, excluding
$696,000 generated by the recently licensed Liz Claiborne dress brands,
decreased $2,231,000 and the percent to net sales decreased to 22.9% from 27.5%
for the comparable period ended October 2, 1999. The Leslie Fay dress line
experienced an improvement in gross profit contribution of $340,000 and 24.6% of
net sales compared with 23.5% of net sales for the third quarter of 2000 and
1999, respectively. The Warren Group experienced a decline in gross profit of
$2,571,000 and 19.5% of net sales in the third quarter of 2000 when compared to
33.8% of net sales in the third 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, excluding $293,000 generated
by the recently acquired Cynthia Steffe sportswear brands, for the thirteen
weeks ended September 30, 2000 increased by $922,000 and the percent to net
sales increased to 29.1% from 21.0% for the comparable period ended October 2,
1999.
Selling, warehouse, general and administrative expenses were
$11,750,000 and 19.2% of net sales and $9,900,000 and 16.9% of net sales for the
thirteen weeks ended September 30, 2000 and October 2, 1999, respectively. The
expense increase of $1,850,000 was caused mainly by about $1,148,000 of
additional operating expenses related to the Liz Claiborne dress brands and the
Cynthia Steffe brands partially offset by expense savings $301,000 from the
restructuring of the Leslie Fay sportswear brands. Additionally, there was a
one-time charge of $1,500,000 relative to the stockholder-approved contract for
a member of senior management.
Non-cash stock based compensation for stock options and outside
director compensation for the thirteen weeks ended September 30, 2000 and
October 2, 1999 was $176,000 and $500,000, respectively. The prior year's
expense included a one-time only expense relating to the early vesting of middle
management stock options as a result of the merger transaction with a subsidiary
of Three Cities Research, Inc.
Other income, consisting primarily of royalty income, was $353,000 and
$382,000 for the thirteen weeks ended September 30, 2000 and October 2, 1999,
respectively. Upon consummation of the transaction referred to in Note 8 of the
Notes to Consolidated Financial Statements, there will be a substantial decline
in future royalty income
Depreciation and amortization expense for the thirteen weeks ended
September 30, 2000 and October 2, 1999, was $592,000 and $364,000, respectively.
The increase was due to the acquisition of fixed assets since the Company's June
4, 1997 emergence from bankruptcy. Depreciation and amortization expense for the
thirteen weeks ended September 30, 2000 for the newly acquired businesses
included $144,000 and $9,000 for the Liz Claiborne license agreement and the
Cynthia Steffe brands, respectively. During the thirteen week period $75,000 of
additional depreciation expense was incurred to support technology efforts. In
addition, the Company recognized income of $1,143,000 for the thirteen weeks
ended October 2, 1999, 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.
-13-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Interest and financing costs were $867,000 and $657,000 for the
thirteen weeks ended September 30, 2000 and October 2, 1999, respectively.
Included in the interest and financing cost was $127,000 and $52,000 for the
interest on the $5,000,000 term note entered into on August 25, 1999 for the
period ended September 30, 2000 and October 2, 1999 respectively. The additional
interest was generated as a result of higher borrowings during the thirteen
weeks ended September 30, 2000, which were invested in building the Liz
Claiborne dress and Cynthia Steffe brands' working capital. The financing fees
under the new CIT Credit Agreement were partially offset by income earned on the
cash invested for the thirteen weeks ended September 30, 2000 and October 2,
1999.
Other expenses of $366,000 were recorded during the thirteen weeks
ended October 2, 1999 to provide for non-operating legal fees incurred as a
result of the Three Cities merger transaction.
The provision for federal, state and local income taxes was $550,000
and $1,362,000 for the thirteen weeks ended September 30, 2000 and October 2,
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 September 30, 2000 the Company was utilizing
approximately $8,502,000 under the CIT Credit Agreement for letters of credit,
and there was $15,192,000 in outstanding cash borrowings. On September 30, 2000,
the Company had a net borrowing availability under the CIT Credit Agreement of
$28,473,000 in excess of direct borrowings and amounts committed under the
unexpired letters of credit. The peak credit line utilization during the
thirty-nine weeks ended September 30, 2000 was $30,190,000, which consisted of
direct borrowings of $22,125,000 and unexpired letters of credit of $8,065,000.
At September 30, 2000, the Company's cash and cash equivalents amounted
to $4,216,000, of which $3,461,000 is restricted to the payment of confirmation
liabilities relative to the Company's 1997 exit from bankruptcy. Working capital
decreased $2,517,000 to $34,782,000 during the thirty-nine weeks ended September
30, 2000. The changes in the components of working capital were: a decrease in
cash and cash equivalents of $1,250,000; an increase in net accounts receivable
of $27,715,000; a decrease in inventories of $8,375,000; a decrease in prepaid
expenses and other current assets of $892,000 and an increase of $19,715,000 in
total current liabilities. The changes in working capital are primarily due to
the seasonality of the business. The over all decrease in working capital was
$2,517,000, which was driven primarily by the dress lines. A reduction of
$5,470,000 from the Sportswear Division was fully offset by the working capital
requirements of the newly acquired businesses. Total current liabilities
increased as a result of additional short term borrowings of $15,192,000 and
increased operating accounts payable and other accrued liabilities of $4,523,000
resulting mostly from the timing of liabilities due.
Although the Company's results of operations indicated net income of
$4,121,000 for the thirty-nine weeks ended September 30, 2000, these results are
not indicative of results for an entire year.
Capital expenditures were $1,789,000 for the thirty-nine weeks ended
September 30, 2000, which included $205,000 of equipment purchased under a
capital lease. Capital expenditures are expected to be $2,200,000 for fiscal
year 2000. The anticipated capital expenditures for the remainder of the year
are primarily related to improvements in management information systems,
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.
-14-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
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 September 30, 2000 the Company
may borrow up to $6,041,000 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 since
the fiscal year ended January 1, 2000 were not affected by any year 2000
problems. There was no material difference between the actual cost to make the
Company's operations year 2000 compliant 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.
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.
-15-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
------- -----------------
ITEM 1. LEGAL PROCEEDINGS.
------- ------------------
No other legal proceedings were terminated during the third 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.
------- ----------------------------------------------------
(a) Date of Annual Meeting of Stockholders - September 21, 2000
(b) Directors Elected at the Annual Meeting - John J. Pomerantz, John A.
Ward, Robert L. Sind, Bernard Olsoff, H. Whitney Wagner and Thomas G.
Weld.
(c) The election of six directors:
STOCKHOLDER VOTES
-----------------
FOR WITHHELD
--- --------
John J. Pomerantz 3,438,784 19,251
John A. Ward 3,438,784 19,251
Robert L. Sind 3,438,784 19,251
Bernard Olsoff 3,438,784 19,251
H. Whitney Wagner 3,438,784 19,251
Thomas G. Weld 3,438,784 19,251
-16-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
Approval of certain provisions of employment arrangements to be entered
into by the Company and the following individuals:
<TABLE>
<CAPTION>
STOCKHOLDER VOTES
-----------------
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
---- ------- ------------ ---------
<S> <C> <C> <C> <C>
John J. Pomerantz 3,463,036 9,306 656 0
John A. Ward 3,468,859 3,483 656 0
Dominick Felicetti 3,469,529 2,813 656 0
Warren T. Wishart 3,469,529 2,813 656 0
</TABLE>
Ratification of the appointment by the Board of Directors of Arthur
Andersen LLP as the Company's independent accountants for the fiscal
year ending December 30, 2000:
STOCKHOLDER VOTES
-----------------
For: 3,471,900
Against: 1,010
Abstentions: 88
Broker non-votes: 0
ITEM 5. OTHER INFORMATION.
------- ------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------- ---------------------------------
a) Exhibits Exhibits are set forth on the "Index to Exhibits" on
page E-1 hereof.
8 Reports on Form 8-K None
-17-
<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: November 14, 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
-18-
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
27 Financial Data Schedule.
E-1
