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 1, 2000 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. [ ]
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
24, 2000 was approximately $15,825,670.
There were 5,073,138 shares of Common Stock outstanding at March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
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None
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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 the 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 department store retailers of such products. The Leslie Fay business has been
in continuous operation as an apparel company since 1947.
On June 4, 1997, the Company reorganized following a voluntary petition
under Chapter 11 of the Bankruptcy Code. (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 February 15, 2000, the Company entered into a license agreement with
the licensing subsidiary of Liz Claiborne, Inc. 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 Fall 2000 season that begins to ship in
June 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 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. While the Company anticipates adding about $25 million in net sales for
2000 from this transaction, a modest dilutive effect on earnings for 2000 may
occur. Beyond 2000, the Company expects significant sales growth and improved
profitability.
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PRODUCTS
During 1999, 1998, and 1997, respectively, dresses accounted for
approximately 73%, 64% and 57% 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 27%,
36% and 43%, respectively. During 2000, dresses are expected to account for
approximately 78% of total sales and sportswear 22%. The increase in the
expected dress sales ratio will result mostly from the addition of the Liz
Claiborne and Elisabeth Dress lines (See "Recent Developments").
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 "David Warren", "Warren Petite", "Rimini", "Reggio",
and "Leslie Fay Evening" brands. At this time, these products are offered in
misses, petite and large sizes.
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.
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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 during 1999 included women's socks, legwear, handbags and small
leather goods.
On February 15, 2000, the Company acquired a license to produce and
distribute the Liz Claiborne and Elisabeth Dress and Petite Dress merchandise
lines (See "Recent Developments").
MARKETS AND DISTRIBUTION
The Company's products were sold during 1999 principally to department
and specialty stores located throughout the United States. Excluding the sales
of the Sold Product Lines, during 1999, 1998, and 1997, the Company's Dress and
Sportswear lines' products were sold to 1,515, 1,012 and 788 customers,
respectively. Dillard's Department Stores, Inc. accounted for 31%, 30% and 33%,
Federated Department Stores, Inc. accounted for 10%, 7%, and 6%, May Department
Stores, Inc. accounted for 10%, 7%, and 5%, and JC Penney accounted for 8%, 11%
and 12% 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., Federated Department Stores,
Inc., May 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. On February 20,
2000, the Company had an employee sales force consisting of 2 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 newspapers and trade publications.
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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 1999,
products representing approximately 89% 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 1999, three operating subsidiaries of Cambridge Corp. manufactured
41% of the Company's total production. No other contractor produced more than
10% of the Company's total production. The Company has had satisfactory,
long-standing relationships with most of its contractors. In 1999, none of the
Company's contracted production was produced by contractors who worked
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.
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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 that 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 which are controlled and regulated. 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.
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The Company does not "hedge" its foreign purchases as all contracts are
quoted in United States Dollars. The typical contract extends for sixty days.
Prices are re-negotiated with each new contract.
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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 24, 2000, the Company had unfilled orders of approximately
$72,836,000 of which $12,285,000 are for dresses ordered under the licensed
brands "Liz Claiborne Dresses", "Liz Claiborne Petite Dresses", "Elisabeth
Dresses" and "Elisabeth Petite Dresses" (See "Recent Developments"). The Company
had $49,681,000 of unfilled orders at a comparable date in 1999. 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 1, 2000, the purchased accounts
receivable represent 96% 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
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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 it is considered one of the major resources to
department store 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 February 2000, the Company employed 444 persons, of whom
approximately 28% were in production, 31% in distribution, 13% in merchandising
and design, 7% in sales and 21% in administrative and financial operations.
Approximately 39% 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 "Filing Date"), 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.
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("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 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. In August 1999, the Plan Administrator elected to receive $7.00 per share
in cash for 140,660 of the remaining undistributed shares in connection with the
merger transaction with an affiliate of Three Cities Research, Inc. ("Three
Cities") summarized in Note 10 of the Notes to Consolidated Financial
Statements. As of March 24, 2000, the Plan Administrator still maintains
possession of 39,420 undistributed shares of common stock of the Company.
Distribution of the remaining shares and cash held in trust is anticipated in
the near future.
The gain on the disposition of the assets and liabilities of the Sassco
Fashions product line was 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). The Company leases a
major distribution and
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administrative center (194,685 square feet) in Laflin, Pennsylvania under a
lease expiring in July 2001.
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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The Company and several of its subsidiaries filed voluntary petitions
in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code in April 1993.
By an order dated April 21, 1997 (the "Confirmation Order"), the Bankruptcy
Court confirmed the Plan. The Plan was consummated on June 4, 1997. Certain
alleged creditors who asserted age and other discrimination claims against the
Company and whose claims were expunged (the "Claimants") pursuant to an order of
the Bankruptcy Court (see below) appealed the Confirmation Order to the United
States District Court for the Southern District of New York. The Company moved
to dismiss the appeal from the Confirmation Order and the motion was granted and
the appeal was dismissed. An appeal to the United States Court of Appeals for
the Second Circuit from the order dismissing the appeal taken by the Claimants
subsequently was withdrawn, without prejudice, and may be refiled in the future.
In addition, the Claimants and two other persons commenced a separate adversary
proceeding in the Bankruptcy Court to revoke the Confirmation Order. The Company
has moved to dismiss the adversary proceeding to revoke the Confirmation Order
and that motion has been fully briefed, but has not yet been argued to the
Bankruptcy Court. However, that matter is now moot based upon the proceedings
described in the next paragraph and the Claimants' lack of standing.
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 took a further appeal to the
United States Court of Appeals for the Second Circuit, which affirmed the
decision of the United States District Court in a summary order dated June 28,
1999. On September 27, 1999, the Claimants filed a petition for certiorari
review by the United States Supreme Court for relief. The petition for
certiorari was denied on January 10, 2000.
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
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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
in the near future.
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In February 1993, the Securities and Exchange Commission obtained an
order directing a private investigation of the Company in connection with, among
other things, the filing by the Company of annual and other reports that may
have contained misstatements, and the purported failure of the Company to
maintain books and records that accurately reflected its financial condition and
operating results. To the Company's knowledge, this investigation has been
dormant for several years.
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. In
October 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 began March 1, 2000.
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, is the only entity authorized to prosecute, compromise and
settle or discontinue the derivative action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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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 1998 and 1999 adjusted to give retroactive effect to a 2 for 1
split of the Company's common stock effected in July 1998:
Period High Low
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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
Second Quarter 6.88 4.25
Third Quarter 7.13 4.63
Fourth Quarter 6.94 4.38
2000 First Quarter $ 7.00 $ 4.06
(through March 24, 2000)
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On March 24, 2000, the high bid price was $5.63 and the low asked price
was $5.44. As of March 24, 2000, there were approximately 1,154 holders of
record of the common stock of the Company.
The Company did not pay any dividends on, or make any other
distributions with respect to, its common stock during 1998 or 1999.
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").
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On each of June 3, 1998 and August 23, 1999, 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.
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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 Predessor Company
------------------- -----------------
For The Periods Ended
Pro Forma
Fifty-Two Fifty-Two Fifty-Three Thirty-One Twenty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 1, January 2, January 3, January 3, Pro Forma June 4,
2000 1999 1998 (a) 1998 (b) 1996(a) 1997 (c) 1996 1995
(Audited) (Audited) (Unaudited) (Audited) (Unaudited) (Audited) (Audited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $197,446 $152,867 $132,160 $ 73,091 $110,053 $197,984 $429,676 $442,084
Operating Income 14,139 13,020 11,782 4,322 4,079 14,355 17,965 1,235
Reorganization Costs -- -- -- -- -- 3,379(d) 5,144 (d) 16,575 (d)
Interest Expense and
Financing Costs 2,258 950 1,113 336 2,298 1,372 3,932 (e) 3,262 (e)
Tax Provision
(Benefit) 2,654 3,212 2,684 677 130 451 (839)(f) (761) (f)
Other Non-Recurring
Items 911(g) -- -- -- -- 36,341 (h) -- --
Net Income (Loss) $8,316 $8,858 $7,985 $3,309 $1,651 $145,494 $9,728 ($17,841)
Net Income (Loss) per
Share - Basic $1.46 $1.35 $1.17(i) $0.49 (i) $0.24 (i) -- $0.52 (i) ($0.95)
- Diluted $1.39 $1.31 $1.16(i) $0.48 (i) $0.24 (i) -- $0.52 (i) ($0.95)(i)
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of As of
01/01/2000 01/02/99 01/03/98 06/04/97 12/28/96 12/30/95
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $69,000 $67,804 $61,051 $77,789 $237,661 $245,980
Assets of Product
Lines
Held for Sale and -- -- -- -- 3,003 (j) 326 (j)
Disposition
Long-Term Debt
(Including Capital
Lease) 4,052 17 49 108 -- (k) -- (k)
</TABLE>
-16-
<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
-17-
<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 and 1995 while
operating as a debtor in possession. Included in 1997, 1996 and 1995 is
a provision of $0, $652,000 and $3,181,000, 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. 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) of the Notes to
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 and 1995.
(g) The Company incurred $911,000 of other non-recurring, non-operating
legal and administrative expense related to the merger with an
affiliate of Three Cities.
(h) 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.
(i) 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 1995 and 1996, was canceled under the Plan and the new
stock was not issued until June 4, 1997.
-18-
<PAGE>
(j) 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.
(k) Amount excludes long-term debt classified in liabilities subject to
compromise.
-19-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS.
- - --------------
(A) RESULTS OF OPERATIONS
FIFTY-TWO WEEKS ENDED JANUARY 1, 2000 AS COMPARED TO FIFTY-TWO WEEKS ENDED
- - --------------------------------------------------------------------------------
JANUARY 2, 1999
- - ---------------
The Company recorded net sales of $197,446,000 for the fifty-two weeks
ended January 1, 2000, compared with of $152,867,000 for the fifty-two weeks
ended January 2, 1999, a net increase of $44,579,000, or 29.2%. Net sales for
the Warren brands were $45,584,000 and $3,260,000 for the fifty-two weeks ended
January 1, 2000 and January 2, 1999, respectively, an increase of $42,324,000.
This increase resulted from the effect of a full year's operation by the Company
vs. two months in the prior year as well as greater demands at the retail level.
On a comparable basis, after excluding the effect of the Warren brands, the
remaining businesses had an increase in net sales of $2,255,000, or 1.5%, for
the fifty-two weeks ended January 1, 2000 as compared to the fifty-two weeks
ended January 2, 1999. This increase was due to a 3.7% increase within the
Sportswear product line while volume within Leslie Fay Dress product line
remained consistent with the prior year.
Gross profit for the fifty-two weeks ended January 1, 2000 was
$48,756,000 or 24.7% of net sales compared with $37,320,000 or 24.4% for the
fifty-two weeks ended January 2, 1999. Excluding the effect of the Warren
brands, the gross profit of the remaining comparable businesses decreased by
$2,162,000 for the fifty-two weeks ended January 1, 2000 versus the prior year
and the gross margin percent decreased to 22.6% from 24.4%. The Leslie Fay Dress
line's gross profit decreased $729,000 to 24.2% from 25.0% mostly due to
additional discounts given to closeout excess inventories. The Sportswear line's
gross profit decreased $1,443,000 to 19.7% of sales from 23.1% due to inventory
liquidation in the Leslie Fay Sportswear and Haberdashery brands. The Company
plans to consolidate the Leslie Fay Sportswear and Haberdashery brands into a
Haberdashery by Leslie Fay Sportswear brand in the future to better service the
retail needs of its customers without duplicate product offerings.
Selling, warehouse, general and administrative expenses were 19.2% and
18.4% of net sales for the fifty-two weeks ended January 1, 2000 and January 2,
1999, respectively. Expenses are up primarily due to the additional operating
expenses related to the Warren brands, which have a higher expense ratio than
the other operating brands of the Company. The full year effect of increased
costs incurred to extend the Company's lease for showroom and office space in
New York in 1998 and additional co-op and direct advertising expenses incurred
to promote the Company's product offerings in both the day and evening wear
dress markets also generated increased expenses over the prior year.
-20-
<PAGE>
Depreciation and amortization expense for the fifty-two weeks ended
January 1, 2000 and January 2, 1999 was $1,367,000 and $406,000, respectively,
an increase of $961,000. Of this increase, $704,000 resulted primarily from the
depreciation generated by the build up of the Company's asset base that was
written-off at June 4, 1997 under fresh-start reporting. This increase in
depreciation expense is expected to increase during the next three years until
the Company completes a full five-year cycle of capital asset acquisition post
emergence from bankruptcy. The remaining $257,000 increase resulted from a full
year's amortization of the excess of purchase price over net assets acquired for
the Warren brands. This excess is being amortized over a fifteen year life
ending in October 2013. The Company realized income of $4,572,000 from
amortization of the excess revalued net assets acquired over equity (see Note 2
of Notes to Consolidated Financial Statements) for both the fifty-two weeks
ended January 1, 2000 and January 2, 1999.
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 $1,380,000 and $1,724,000 for the fifty-two weeks ended January 1, 2000 and
January 2, 1999, respectively.
Other income was $1,498,000 and $1,334,000 for the fifty-two weeks
ended January 1, 2000 and January 2, 1999, respectively. The increase is due to
the revenues generated from the licensing agreements acquired as part of the
acquisition of the Warren trademarks as well as revenues generated from expanded
licensing of the Leslie Fay trademark.
Interest expense and financing costs, net of interest income, was
$2,258,000 and $950,000 for the fifty-two weeks ended January 1, 2000 and
January 2, 1999, respectively. The interest expense and financing fees incurred
during the fifty-two weeks ended January 1, 2000 were higher than those incurred
during the fifty-two weeks ended January 2, 1999 due to additional usage of the
Company's credit facility to support the working capital needs of the Warren
brands during their full year with the Company.
The Company incurred $911,000 of other non-recurring, non-operating
legal and administrative expenses related to the merger with an affiliate of
Three Cities. .
The provision for taxes was $2,654,000 and $3,212,000 for the fifty-two
weeks ended January 1, 2000 and January 2, 1999, respectively.
-21-
<PAGE>
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. 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 the 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 line's gross profit increased
$639,000 to 23.7% of sales from 21.8%.
-22-
<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 were up mostly due to
the additional operating expenses related to the Warren brands, which have a
higher expense ratio than the Company's other operating brands, 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 of Notes to Consolidated Financial Statements). 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 of Notes to
Consolidated Financial Statements).
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.
-23-
<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.
(B) LIQUIDITY AND CAPITAL RESOURCES
On June 2, 1997, the Company obtained $30,000,000 of post-emergence
financing (see Note 7 of Notes to Consolidated Financial Statements), 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 $12,185,000 committed for letters of credit, a net
borrowing availability under its Credit Agreement of $24,815,000 on January 1,
2000, net of the $5,000,000 minimum excess availability required under the CIT
Credit agreement. Peak borrowing during the fiscal year ended January 1, 2000
was $16,157,000. As of March 24, 2000, there were approximately $10,265,984 in
direct borrowings under the revolving line of credit and the Company was
utilizing approximately $14,139,969 of the CIT Credit Agreement for letters of
credit.
At January 1, 2000, there were no direct borrowings outstanding under
the CIT Credit Agreement and cash and cash equivalents amounted to $5,466,000.
Of this amount, $3,432,000 will be used to pay remaining administrative claims
as defined in the Plan. Working capital increased $1,722,000, to $37,300,000 at
January 1, 2000 from January 2, 1999. The primary changes in the components of
working capital were: an increase in cash and cash equivalents of $1,253,000; an
increase in accounts receivable of $780,000; a decrease in inventories of
$4,401,000; an increase of $1,732,000 in prepaid expenses and other current
assets and a decrease in current liabilities of $2,358,000. The increase in cash
and cash equivalents resulted mostly from the lower investment in inventory at
January 1, 2000 versus January 2, 1999. The decreased inventory levels were due
to the later receipt of the Resort and Spring seasons product lines versus the
prior year. No significant orders were lost as a result of the timing of the
receipt of these goods. The increase in prepaid expenses resulted mostly from
excess federal and state income taxes paid. These prepaid taxes will be applied
to the Company's first quarter 2000 tax liabilites or refunds will be requested
with the filing of the 1999 income tax returns. The decrease in current
liabilities is predominately a result of lower accounts payable due to lower
inventory levels at year end.
-24-
<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 for federal purposes, 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 1, 2000, the remaining
aggregate loss utilization limitation through fiscal year 2011 is approximately
$18,000,000.
Capital expenditures were $2,040,000 for the fifty-two weeks ended
January 1, 2000, of which $75,000 relates to capital leases entered into during
December 1999. The anticipated capital expenditures of $3,550,000 for the 2000
fiscal year include: approximately $750,000 for the capital requirements for
accommodating the Liz Claiborne Dress brands with showroom and office space in
New York; $1,250,000 to improve management information, production and
distribution systems; an estimated $1,000,000 to create the first phase of the
Company's planned internet web site; approximately $275,000 for improvements to
the Company's distribution facility and approximately $275,000 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 2000.
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 the CIT Credit Agreement
with CIT which was amended on October 27, 1998 to extend the agreement from June
2, 1999 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% (8.25% at January 1,2000) and the CIT Credit Agreement requires a
fee, payable monthly, on average outstanding letters of credit at a rate of 2%
annually. There were no direct borrowings outstanding under the CIT Credit
Agreement and approximately $12,185,000 was committed under unexpired letters of
credit as of January 1, 2000.
The CIT Credit Agreement has been modified five times 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 as well as the Liz
Claiborne Licensing Agreement, 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:
|X| 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 to
$25,000,000 from $20,000,000. The limit on inventory based collateral has
been raised to $21,000,000 from $12,000,000 and will increase by $1,000,000
automatically each fiscal year.
-25-
<PAGE>
|X| The interest rate on direct borrowings has been reduced from prime plus 100
basis points to prime less 25 basis points.
|X| The Company may pay dividends or repurchase stock as long as the amount
paid after August 25, 1999 does not exceed, in the aggregate, the sum of
$2,000,000 plus one half of the net income exceeding $1,000,000 on a
cumulative basis for the period commencing with the fiscal quarter ending
October 2, 1999 and ending with the fiscal quarter preceding the date of
the proposed dividend payment or stock repurchase. Borrowing availability
before and after the making of any such dividend or stock repurchase can
not be less than $5,000,000. As of March 24, 2000, approximately $3,034,000
of this amount remains available.
|X| The Company issued a five-year term note payable in the amount of
$5,000,000 at an interest of prime plus 200 basis points.
|X| 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.
|X| The Company may, with CIT's approval, acquire new businesses.
|X| The Company may terminate the CIT Credit Agreement early.
To support the working capital requirements of the Liz Claiborne
license (see Recent Developments), the Company is negotiating an increase to its
credit agreement.
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 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
have been amortized as interest and financing costs over the two years of the
original CIT Credit Agreement.
-26-
<PAGE>
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.
A review and verification of the Company's systems and technology
supporting Year 2000 compliance issues was successfully completed. The review
identified changes in the Company's hardware and software as well as sensitive
operating equipment that was up graded and tested prior to year-end.
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. Since there was no material difference in the actual cost and that
which was previously disclosed, there was no remediation dividend affecting
financial comparisons. 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.
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 operationns, general economic conditions and the
achievement and maintenance of profitable operations and positive cash flow.
-27-
<PAGE>
TEM 7A. 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.
-28-
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- - -------------------------------------------------------------
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
Principal Occupation and Director
Name and Age Offices with the Company Since
- - ------------ ------------------------ -----
<S> <C> <C>
John J. Pomerantz (66) Chairman of the Board and Chief Executive Officer 1984
of the Company
John A. Ward (46) President of the Company 1997
Clifford B. Cohn (48) Principal of Cohn & Associates (2)(3) 1997
Mark Kaufman (43) Senior Vice President of Amroc Investments (2)(3) 1997
Bernard Olsoff (71) Former Chief Executive Officer and President of 1998
Frederick Atkins, Inc. (1)(2)
Robert L. Sind (66) President of Recovery Management 1997
Corporation (1)(2)(3)
H. Whitney Wagner (44) Managing Director of Three Cities Research, Inc. 1999
(1)(2)
Thomas G. Weld (37) Managing Director of Three Cities Research, Inc. 1999
(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.
-29-
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Name Positions with the Company Age
- - ---- -------------------------- ---
<S> <C> <C>
John J. Pomerantz Chairman of the Board and 66
Chief Executive Officer
John A. Ward President and Chief Operating Officer46
Dominick Felicetti Senior Vice President-Manufacturing 46
and Sourcing
Warren T. Wishart Senior Vice President-Administration 47
and Finance, Secretary and
Chief Financial Officer
</TABLE>
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 has been 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 Directors 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. Mr. Cohn has been a Director of GlassTech, Inc.
since 1998, and was Director of Publicker Industries from 1980 to 1999, Vice
President of PubliCARD from 1982 to 1984 and Director of Kasper A.S.L., Ltd.
from 1997 to 1998.
-30-
<PAGE>
Mark Kaufman has been a Senior Vice President of Amroc Investments
since January 1999. Prior to joining Amroc, Kaufman was a Vice President of
Dickstein Partners, Inc. from July 1992. From 1990 to July 1992, 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 Officer until his retirement in
April 1997. Prior to joining Atkins, he was President of May Merchandising
Corporation , a subsidary of May Department Stores Company, 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 Senior Vice President at The Londontown Manufacturing Company, Chief
Financial Officer at Beker Industries Corporation and Chief Operating Officer at
both Nice-Pak Products, Inc. and Marker International. He is also a Director of
Northside Center for Child Development, Inc. (a not for profit organization) of
which he is also Treasurer and Chairman of the Finance Committee.
H. Whitney Wagner is Managing Director of Three Cities Research, Inc.
which he joined in 1983. Mr. Wagner is responsible for deal origination and also
focuses on the development and execution of exit strategies. Previously, he was
an officer in the corporate division of Chemical Bank. Mr. Wagner currently
serves as a director of Factory 2-U Stores.
Thomas G. Weld is Managing Director of Three Cities Research, Inc.
which he joined in 1993. Mr. Weld focuses on the development and execution of
growth strategies for portfolio companies. Prior to joining Three Cities
Research, Inc., he worked on a variety of client engagements focused on profit
improvement as a consultant with McKinsey & Company.
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 of 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.
-31-
<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 1, 2000 except that H.
Whitney Wagner, a director of the Company, filed a late Form 5 reflecting an
option to purchase 10,000 shares of the Company's Common Stock.
ITEM 11. EXECUTIVE COMPENSATION.
- - -------- -----------------------
Summary of Cash and Certain Other Information. The following table
shows, for 1999, 1998 and 1997, the compensation paid or accrued by the Company
and its subsidiaries to the Chief Executive Officer and the other most highly
compensated executive officers of the Company during 1999 (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
Name and Principal Stock Underlying LTIP All Other
Position Year Salary (2) Bonus Awards Options (#) Payouts Compensation
- - -------- ---- ---------- ----- ------ ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Pomerantz 1999 $500,000 $440,000 -- -- -- $ 3,450 (3)
Chairman of the ----
Board of Directors and 1998 $498,654 $350,000 -- 117,042 -- $ 2,650 (3)
Chief Executive Offcier ----
1997 $611,129 $300,000 -- 263,756 -- $ 8,699 (4)
----
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
- - ---------------------------- --------- ------------- ------------ ------------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Ward 1999 $450,000 $350,000 -- -- -- $ 3,450 (3)
President ----
1998 $449,039 $280,000 -- 91,440 -- $ 2,650 (3)
----
1997 $462,692 $225,000 -- 140,120 -- $ 2,650 (4)
----
- - ---------------------------- --------- ------------- ------------ ------------- ---------------- ---------- ---------------
Dominick Felicetti 1999 $350,000 $285,000 -- -- -- $ 3,450 (3)
Senior Vice President - ----
Senior Vice President - 1998 $349,519 $230,000 -- 78,638 -- $ 2,650 (3)
Manufacturing and ----
Sourcing 1997 $337,500 $200,000 -- 140,120 -- $ 1,938 (4)
----
- - ---------------------------- --------- ------------- ------------ ------------- ---------------- ---------- ---------------
Warren T. Wishart 1999 $225,000 $250,000 -- -- -- $ 3,450 (3)
Senior Vice President- ----
Administration and - 1998 $224,519 $200,000 -- 78,638 -- $ 2,650 (3)
Finance, Chief ----
Financial Officer and 1997 $207,692 $180,000 -- 140,120 -- $102,650(4)
Treasurer ----
- - ---------------------------- --------- ------------- ------------ ------------- ---------------- ---------- ---------------
</TABLE>
(1) In 1999, 1998 and 1997, 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. 1999 and 1998 were 52 week years. Amounts
represent salaries paid during the above calendar years.
(3) For 1999 and 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") for such year.
(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.
-33-
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options were granted in fiscal 1999.
<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 1999 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 31,
1999 (the last trade day prior to January 1, 2000) was $6.1250.
<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 None 232,600/148,198 $ 705,941/449,787
John A. Ward None None 138,199/93,361 $ 419,437/283,348
Dominick Felicetti None None 131,798/86,960 $ 400,013/263,924
Warren T. Wishart None None 131,798/86,960 $ 400,013/263,924
</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
-34-
<PAGE>
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.
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.
SEVERANCE AGREEMENTS
None
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is charged with
determining the compensation of officers. During 1999, the Compensation
Committee consisted of H. Whitney Wagner (from June 29, 1999), Robert L. Sind
(from June 29, 1999), Bernard Olsoff (from June 29, 1999), Chaim Edelstein (from
November 10, 1998 through June 29, 1999), Clifford B. Cohn (through June 29,
1999) and Mark B. Dickstein (through May 12, 1999).
-35-
<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 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 24, 2000. To the knowledge of the Company, each of such stockholders has
sole voting and investment power as to the shares shown unless otherwise noted.
<TABLE>
<CAPTION>
Number of Shares Percentage of Ownership of
Names and Address of Beneficial Owners Beneficially Owned Common Stock
-------------------------------------- ------------------ ------------
<S> <C> <C>
Three Cities Research, Inc. 3,512,566 (1) 69.2%
650 Madison Avenue
New York, New York 10022
John J. Pomerantz 2,400,600 (2) 45.2%
c/o The Leslie Fay Company, Inc.
1412 Broadway
New York, New York 10018
Constable Asset Management, Ltd. 441,407 (3) 8.7%
Constable Partners, L.P.
5 Radnor Corp. Center
100 Matsonford Rd.
Suite 520
Radnor, Pennsylvania 19087
</TABLE>
- - --------------------------------------------------------------------------------
(1) Includes 1,215,081 and 2,054,885 shares of Common Stock directly owned by
Three Cities Fund II, L.P. ("Fund II") and Three Cities Offshore II, C.V.
("Offshore II"), respectively. Pursuant to Rule 13d-5 under the Securities
Exchange Act of 1934, as amended, Fund II and Offshore II may each be considered
the beneficial owner of 3,512,564 shares of Common Stock. TCR Associates, L.P.
("TCR Associates") is the sole general partner of Fund II and may be deemed the
beneficial owner of all of the shares beneficially owned by Fund II. Three
Cities Research, Inc. ("TCR") is the sole general partner of TCR Associates and
is the investment advisor to Fund II and Offshore II. Pursuant to a management
agreement, TCR has voting and dispositive power over all of the shares of Common
Stock beneficially owned by Fund II and Offshare II and may be deemed the
beneficial owner of all of such shares. TCR Offshore Associates ("TCR Offshore")
is the sole general partner of Offshore II and may be deemed the beneficial
owner of all of the shares of Common stock beneficially owned by Offshore II.
Three Cities Associates, N.V. ("TCA, N.V.") is the sole general partner of TCR
Offshore and may be deemed the beneficial owner of all of the shares of Common
Stock beneficially owned by TCR
-36-
<PAGE>
Offshore. J. William Uhrig is the sole stockholder, President and sole director
of TCA, N.V. and, pursuant to Rules 13d-3 and 13d-5 under the Securities
Exchange Act of 1934, as amended, may be deemed the beneficial owner of all of
the shares beneficially owned by TCA, N.V. The information provided above was
obtained from Amendment No. 1 to a Schedule 13D filed with the Securities and
Exchange Commission on August 30, 1999. Also includes 242,600 shares of Common
Stock beneficially owned by John J. Pomerantz, as described in note (2) below.
(2) Includes 232,600 shares of Common Stock issuable upon exercise of presently
exercisable stock options and 2,158,000 shares beneficially owned by Three
Cities. Mr. Pomerantz has entered into a letter agreement dated July 26, 1999
with Fund II and Offshore II containing certain agreements as to the election of
directors of the Company.
(3) Consists of 441,407 and 356,789 shares of Common Stock as to which John
Constable d/b/a/ Constable Asset Management, Ltd. and Constable Partners, L.P.,
respectively, have shared voting and dispositive power. John Constable is the
General Partner of Constable Partners, L.P. The information provided above was
obtained from a Schedule 13G filed with the Securities and Exchange Commission
on December 10, 1999.
-37-
<PAGE>
(b) The following table sets forth certain information as of March 24, 2000 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. To the knowledge of the Company, each of such persons
has sole voting and investment power as to the shares shown unless otherwise
noted.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Ownership of
Name and Address of Beneficial Owners Beneficially Owned Common Stock
- - ------------------------------------- ------------------ ------------
<S> <C> <C>
John J. Pomerantz 2,400,600 (1) 45.2%
John A. Ward 138,199 (2) 2.7%
Dominick Felicetti 133,798 (3) 2.6%
Warren T. Wishart 131,798 (2) 2.5%
Clifford B. Cohn 17,200(4) (8)
Robert L. Sind 17,200(4) (8)
Mark Kaufman 12,600 (5) (8)
Bernard Olsoff 7,300(6) (8)
H. Whitney Wagner 12,000 (8)
Thomas G. Weld 12,000 (8)
Officers and Directors as a group 2,882,695 (7) 50.2%
</TABLE>
- - --------------------------------------------------------------------------------
(1) Includes 232,600 shares of Common Stock issuable upon exercise of
presently exercisable stock options and 2,158,000 shares beneficially
owned by Three Cities. Mr. Pomerantz has entered into a letter
agreement dated July 26, 1999 with Fund II and Offshore II containing
certain agreements as to the election of directors of the Company.
-38-
<PAGE>
(2) Consists of shares of Common Stock issuable upon exercise of presently
exercisable stock options.
(3) Includes 131,798 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(4) Includes 13,200 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(5) Includes 6,600 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(6) Includes 3,300 shares of Common Stock issuable upon exercise of
presently exercisable stock options.
(7) Includes 670,695 shares of Common Stock issuable upon exercise of
presently exercisable stock options and 2,158,600 shares beneficially
owned by Three Cities as to which Mr. Pomerantz shares certain voting
rights as to the election of directors.
(8) Less than 1% of the outstanding shares of Common Stock .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - -------- -----------------------------------------------
None.
-39-
<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 1999, the Company has
not filed any Current Reports on Form 8-K.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of New
York, State of New York, on the 31st day of March, 2000.
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 Exchange 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 March 31, 2000
- - -----------------------------------------
John J. Pomerantz Chairman of the Board of
Directors
/s/Warren T. Wishart Chief Financial and Accounting Officer March 31, 2000
- - ---------------------------------------
Warren T. Wishart
/s/John A. Ward Director March 31, 2000
- - ---------------------------------------
John A. Ward
/s/Clifford B. Cohn Director March 31, 2000
- - ---------------------------------------
Clifford B. Cohn
/s/Mark Kaufman Director March 31, 2000
- - ---------------------------------------
Mark Kaufman
/s/Bernard Olsoff Director March 31, 2000
- - ---------------------------------------
Bernard Olsoff
Robert L. Sind Director March __, 2000
- - ---------------------------------------
Robert L. Sind
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/H. Whitney Wagner Director March 31, 2000
- - ---------------------------------------
H. Whitney Wagner
/s/Thomas G. Weld Director March 31, 2000
- - ---------------------------------------
Thomas G. Weld
</TABLE>
-42-
<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
F-1
<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 1, 2000 and January 2, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the fiscal years ended January 1, 2000, and January 2, 1999, the
thirty-one weeks ended January 3, 1998, and the twenty-two weeks ended June 4,
1997. These consolidated 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 consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 1, 2000 and January 2, 1999 and the results of
their operations and their cash flows for the fiscal years ended January 1,
2000, and January 2, 1999, the thirty-one weeks ended January 3, 1998, and the
twenty-two weeks ended June 4, 1997 in conformity with accounting principles
generally accepted in the United States.
F-2
<PAGE>
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the 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 audits 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.
Arthur Andersen LLP
New York, New York
February 29, 2000
F-3
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents....................................... $2,034 $ 946
Restricted cash and cash equivalents............................ 3,432 3,267
Accounts receivable- net of allowances for possible losses of
$5,468 and $6,825, respectively.............................. 16,952 16,172
Inventories..................................................... 34,226 38,627
Prepaid expenses and other current assets....................... 2,702 970
------ ------
Total Current Assets......................................... 59,346 59,982
Property, plant and equipment, at cost, net of accumulated
depreciation of $1,535 and $409, respectively................ 3,695 2,781
Excess of purchase price over net assets acquired, net of
accumulated amortization of $357 and $50, respectively....... 4,330 4,490
Deferred charges and other assets............................... 1,629 551
------ ------
Total Assets.................................................... $69,000 $67,804
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt................................................. $ 1,000 $ 1,162
Accounts payable................................................ 9,454 12,070
Accrued expenses and other current liabilities.................. 8,121 7,486
Accrued expenses and other current confirmation liabilities..... 3,432 3,267
Income taxes payable............................................ - 371
Current portion of capitalized leases........................... 40 48
------ ------
Total Current Liabilities.................................... 22,047 24,404
Long term note payable.......................................... 4,000 -
Excess of revalued net assets acquired over equity under fresh start
reporting, net of accumulated amortization of $11,811
and $7,239, respectively..................................... 1,897 6,469
Long term debt-capitalized leases............................... 52 17
Deferred liabilities............................................ 863 477
------ ------
Total Liabilities............................................... 28,859 31,367
------ ------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 500 shares authorized, no
shares issued and outstanding................................... -- --
Common stock, $.01 par value; 20,000 shares authorized,
6,870 and 6,858 shares issued, respectively..................... 69 69
Capital in excess of par value..................................... 31,212 28,824
Retained earnings................................................. 20,483 12,167
------ ------
Subtotal........................................................ 51,764 41,060
Treasury stock, at cost; 1,817 and 817 shares, respectively........ 11,623 4,623
----- --- ------ -----
Total Stockholders' Equity...................................... 40,141 36,437
------ ------
Total Liabilities and Stockholders' Equity......................... $69,000 $67,804
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR
REORGANIZED COMPANY COMPANY
------------------- -------
FIFTY-TWO FIFTY-TWO THIRTY-ONE TWENTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 1, JANUARY 2, JANUARY 3, JUNE 4,
2000 1999 1998 1997
<S> <C> <C> <C> <C>
Net Sales.............................................. $197,446 $152,867 $73,091 $197,984
Cost of Sales.......................................... 148,690 115,547 58,719 147,276
-------- -------- ------- --------
Gross profit........................................ 48,756 37,320 14,372 50,708
-------- -------- ------- --------
Operating Expenses:
Selling, warehouse, general and
administrative expenses....................... 37,940 28,076 13,299 35,459
--
Non-cash stock based compensation................... 1,380 1,724 351
Depreciation and amortization expense............... 1,367 406 14 2,090
-------- -------- ------- --------
Total operating expenses........................ 40,687 30,206 13,664 37,549
Other (income)...................................... (1,498) (1,334) (1,196)
(947)
Amortization of excess revalued net assets acquired
over equity..................................... (4,572) (4,572) ( 2,667) --
-------- -------- ------- --------
Total operating expenses, net....................... 34,617 24,300 10,050 36,353
-------- -------- ------- --------
Operating income.................................... 14,139 13,020 4,322 14,355
Interest and Financing Costs (excludes
contractual Interest of $-0-, $-0-, $-0-
and $7,513, respectively)........................... 2,258 950 336 1,372
Other Expenses........................................ 911 -- -- --
-------- -------- ------- --------
Income before reorganization costs, taxes, gain
on sale, fresh-start revaluation and
extraordinary item........................ 10,970 12,070 3,986 12,983
Reorganization Costs................................... -- -- -- 3,379
-------- -------- ------- --------
Income before taxes, gain on sale, fresh-start
revaluation and extraordinary item.............. 10,970 12,070 3,986 9,604
Provision for taxes................................... 2,654 3,212 677 451
-------- -------- ------- --------
Net Income before gain on sale, fresh-start
revaluation and extraordinary item 8,316 8,858 3,309 9,153
Gain on disposition of Sassco Fashions line (net of
$3,728 of income taxes), loss on revaluation of assets
pursuant to adoption of fresh-start reporting and
extraordinary gain on debt discharge -- -- -- 136,341
-------- -------- ------- --------
Net Income ......................................... $8,316 $8,858 $3,309 $145,494
========= ========= ========= =========
Net Income per Share - Basic....................... $1.46 $1.35 $0.49 *
========= ========= ========= =========
- Diluted .................... $1.39 $1.31 $0.48 *
========= ========= ========= =========
Weighted Average Shares Outstanding - Basic............ 5,688,347 6,553,637 6,800,000 *
========= ========= ========= =========
- Diluted........... 5,967,711 6,777,614 6,917,130 *
</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-5
<PAGE>
<TABLE>
<CAPTION>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK
SHARES PAR VALUE PAR VALUE EARNINGS SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 28, 1996 20,000,000 $20,000 $49,012 ($202,105) 1,228,164 ($12,966)
Comprehensive Income
Net Income -- -- -- 145,494 -- --
Revaluation Adjustment -- -- -- 56,611 -- --
Extinguishment of Old Stock (20,000,000) (20,000) (49,012) -- (1,228,164) 12,966
New Stock Issuance 3,400,000 34 24,966 -- -- --
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 $ -- -- $ --
Balance at June 4, 1997 6,800,000 $68 $24,932 $ -- -- $
--
Net Income -- -- -- 3,309 -- --
Use of Pre-Consummation Deferred Taxes -- -- 554 -- -- --
SFAS No. 123 - Stock Option Compensation -- -- 351 -- -- --
BALANCE AT JANUARY 3, 1998 6,800,000 $68 $25,837 $3,309 -- $ --
Net Income -- -- -- 8,858 -- --
New Stock Issuance 58,238 1 231 -- -- --
Treasury Stock Repurchase -- -- -- -- 817,100 (4,623)
Use of Pre-Consummation Deferred Taxes -- -- 1,084 -- -- --
SFAS No. 123 - Stock Option Compensation -- -- 1,672 -- -- --
BALANCE AT JANUARY 2, 1999 6,858,238 $69 817,100 ($4,623)
$28,824 $12,167
Net Income -- -- -- 8,316 -- --
New Stock Issuance 12,000 -- 82 -- -- --
Treasury Stock Repurchase -- -- -- -- 1,000,000 ($7,000)
Use of Pre-Consummation Deferred Taxes -- -- 997 -- -- --
SFAS No. 123 - Stock Option Compensation -- -- 1,309 -- -- --
BALANCE AT JANUARY 1, 2000 6,870,238 $69 1,817,100 ($11,623)
$31,212 $20,483
</TABLE>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS' TOTAL
COMPREHENSIVE (DEFICIT) COMPREHENSIVE
INCOME EQUITY INCOME
$581 ($145,478)
-- 145,494 $145,494
-- 56,611
(581) (56,627)
-- 25,000
-- --
$ -- $25,000
$ -- $25,000
-- 3,309 $3,309
-- 554
-- 351
$ -- $29,214
-- 8,858 $8,858
-- 232
-- (4,623)
-- 1,084
-- 1,672
$ -- $36,437
-- 8,316 $8,316
-- 82
-- ($7,000)
-- 997
-- 1,309
$ -- $40,141
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
- - -----------------------------------------------------------------------------------------------------------------------------------
FIFTY-TWO FIFTY-TWO THIRTY-ONE WEEKS TWENTY-TWO
WEEKS ENDED WEEKS ENDED ENDED JANUARY 3, WEEKS ENDED
JANUARY 1, JANUARY 2, 1998 JUNE 4,
2000 1999 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $8,316 $8,858 $3,309 $145,494
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 1,433 445 14 2,222
Amortization of excess net assets acquired over equity (4,572) (4,572) (2,667) --
Provision for possible losses on accounts receivable.. -- (22) (182) 199
Provision for stock based compensation and stock
option grants......................................... 1,380 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................................. (780) (8,155) 6,845 (1,248)
Inventories......................................... 4,401 (10,354) (7,586) 25,538
Prepaid expenses and other current assets........... (1,769) (148) 377 (66)
Deferred charges and other assets................... (1,078) (402) (149) 125
Accounts payable, accrued expenses and other current
liabilities..................................... (1,109) 359 (6,544) (4,167)
Income taxes payable................................ (371) 346 (806) (1,515)
Deferred liabilities................................ 386 334 143 374
Changes due to reorganization activities:
Gain on disposition of Sassco Fashions line,
fresh-start -- -- -- (136,341)
revaluation and extraordinary gain on debt
discharge
Reorganization costs................................ -- -- -- 3,379
Payment of reorganization costs..................... -- -- -- (917)
Use of pre-consummation deferred taxes.............. 997 1,084 554 --
----- ------- ------ ------
Total adjustments................................. (1,082) (16,372) (12,639) (112,764)
----- ------- ------ ------
Net cash provided by (used in) operating activities 7,234 (7,514) (9,330) 32,730
----- ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (1,965) (2,331) (859) (3,731)
Net cash paid for acquisition........................... (97) (1,250) -- --
Merger costs............................................ (874) -- -- --
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........... (2,936) (3,581) (859) (13,627)
----- ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................... 65,851 1,162 -- --
Repayment of borrowings ................................ (66,179) -- -- --
Proceeds from notes payable ............................ 5,000 -- -- --
Repayment of notes payable ............................ (834) -- -- --
Treasury stock repurchase............................... (7,000) (4,623) --
Proceeds from new stock issuance and options exercised.. -- 180 -- --
Capital leases ......................................... (48) (144) (135) --
Proceeds (payments) of obligations under Plan
of Reorganization, net........ 165 (1,080) (10,943) --
----- ------- ------ ------
Net cash (used in) financing activities....... (3,045) (4,505) (11,078) --
----- ------- ------ ------
Net increase (decrease) in cash and cash equivalents... 1,253 (15,600) (21,267) 19,103
Cash and cash equivalents, at beginning of period....... 4,213 19,813 41,080 21,977
----- ------- ------ ------
Cash and cash equivalents, at end of period............. $5,466 $4,213 $19,813 $41,080
====== ====== ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated financial statements.
F-7
<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 1, 2000,
January 2, 1999 and January 3, 1998 included 52, 52 and 53 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-8
<PAGE>
In the Chapter 11 cases, substantially all liabilities as of April 5,
1993 (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. In August 1999, the Plan Administrator elected
to receive $7.00 per share in cash for 140,660 of the remaining undistributed
shares in connection with the merger transaction with an affiliate of Three
Cities Research, Inc. ("Three Cities") summarized in Note 10. As of January 1,
2000, the Plan Administrator still maintains possession of 39,420 undistributed
shares of common stock of the Company. The existing stockholders of the Company
at June 4, 1997 did not retain or receive any value for their equity interest in
the Company.
F-11
<PAGE>
In accordance with the Plan, the remaining liabilities subject to
compromise were discharged and the Company recognized a gain of $73,541,000,
which is reflected as an extraordinary gain on debt discharge in the
consolidated statement of operations for the twenty-two weeks ended June 4,
1997.
Fresh-Start Reporting
- - ---------------------
Pursuant to the guidelines provided by SOP 90-7, 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. Cancellation of the old common stock pursuant to the Plan against
the accumulated deficit.
2. Allocation of the fair market value of the identifiable net
assets in excess of the reorganization value (negative goodwill)
in accordance with the purchase method of accounting. The
negative goodwill amount remaining after reducing non-current
assets acquired to zero was recorded as a deferred credit,
"Excess of revalued net assets acquired over equity under
fresh-start reporting" and is being amortized over three (3)
years.
The resulting charge of $27,010,000 from all the fresh-start
adjustments, including the write-off of all revalued noncurrent assets (but
excluding the write-off of the old stock for $56,611,000), is presented as "loss
on revaluation of assets pursuant to adoption of fresh-start reporting" in the
consolidated statement of operations for the twenty-two weeks ended June 4,
1997.
The fresh-start reporting reorganization value of $25,000,000 was
established as the midpoint of a range ($20,000,000 - $30,000,000) established
by the Company's financial advisors. The calculation of the range was based on a
five-year analysis of the Company's projected operations for the remaining
operating product lines (fiscal years ended 1996 - 2001), which was prepared by
management, and a discounted cash flow methodology was applied to those numbers.
The five-year cash flow projections were based on estimates and
assumptions about circumstances and events that had 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-12
<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.
(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 1, 2000,
$3,432,000 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.
(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. 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-13
<PAGE>
(F) EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED -
The excess of purchase price over net assets acquired of $4,330,000,
which is net of accumulated amortization, as of January 1, 2000 resulted from
the acquisition by the Company of certain specific assets and liabilities of The
Warren Apparel Group Ltd. on October 27, 1998. 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.
The Company reviews goodwill on a periodic basis to assess
recoverability from future operations using undiscounted cash flows. Impairments
are recognized in operating results to the extent that carrying value exceeds
fair value.
(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 ending in May 2000.
(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.
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 years ended January 1, 2000, January 2, 1999 and the thirty-one
weeks ended January 3, 1998, the basic weighted average common shares
outstanding was 5,688,347, 6,553,637 and 6,800,000, respectively. The weighted
average shares outstanding assuming dilution was 5,967,711, 6,777,614 and
6,917,130 as of January 1, 2000, January 2, 1999 and January 3, 1998,
respectively. The differences of 279,364, 223,977 and 117,130, respectively,
relate to incremental shares issuable relating to dilutive stock options
calculated using the treasury stock method.
F-14
<PAGE>
(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 $4,687,000, which the Company elected to amortize over a
fifteen year period.
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 was paid over one 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 as of January 1, 2000 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 1,880
-----
Total purchase price $5,659
Fair value of assets acquired, primarily inventory (972)
-----
Excess of purchase price over net assets acquired $4,687
======
F-15
<PAGE>
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 former owners of the Warren business were unable to provide the 1998
financial statements in order for the Company 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
5. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
---- ----
<S> <C> <C>
(In thousands)
Raw materials $14,338 $10,763
Work in process 3,654 2,613
Finished goods 16,234 25,251
------ ------
Total inventories $34,226 $38,627
======= =======
</TABLE>
F-16
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
January 1, January 2, Estimated
2000 1999 Useful Life
---- ---- -----------
(In thousands)
<S> <C> <C> <C>
Machinery, equipment and fixtures $4,287 $2,651 5 - 10 years
Building and leasehold improvements 682 238 Various
Construction in progress 261 301 N/A
------ ------
Property, plant and equipment, at cost 5,230 3,190
Less: Accumulated depreciation
and amortization (1,535) (409)
------ ------
Total property, plant and equipment, net $ 3,695 $ 2,781
======== ========
</TABLE>
7. DEBT:
(A) CIT CREDIT AGREEMENT -
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 .25% (8.25% at
January 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 $29,815,000
on January 1, 2000 and peak borrowing during the fifty-two weeks ended January
1, 2000 was $16,157,000. There were no direct borrowings outstanding under the
CIT Credit Agreement and approximately $12,185,000 was committed under unexpired
letters of credit as of January 1, 2000. Additionally, the Company borrowed,
through a five-year term note payable, $5,000,000 at an interest rate of prime
plus 200 basis points (10.25% at January 1, 2000), which was used to repurchase
1,000,000 shares of the Company's common stock. (See Note 10.).
F-17
<PAGE>
The CIT Credit Agreement has been modified five times through August
25, 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
as well as the Liz Claiborne Licensing Agreement, 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:
|X| 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 to
$25,000,000 from $20,000,000. The limit on inventory based collateral has
been raised to $21,000,000 from $12,000,000 and will increase by $1,000,000
automatically each fiscal year.
|X| The interest rate on direct borrowings has been reduced from prime plus 100
basis points to prime less 25 basis points.
|X| The Company may pay dividends or repurchase stock as long as the amount
paid after August 25, 1999 does not exceed, in the aggregate, the sum of
$2,000,000 plus one half of the net income exceeding $1,000,000 on a
cumulative basis for the period commencing with the fiscal quarter ending
October 2, 1999 and ending with the fiscal quarter preceding the date of
the proposed dividend payment or stock repurchase. Borrowing availability
before and after the making of any such dividend or stock repurchase can
not be less than $5,000,000. As of January 1, 2000, approximately
$3,034,000 of this amount remains available.
|X| The Company issued a five-year term note payable in the amount of
$5,000,000 at an interest of prime plus 200 basis points.
|X| 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.
|X| The Company may, with CIT's approval, acquire new businesses.
|X| 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 all requirements
contained in the CIT Credit Agreement.
F-18
<PAGE>
(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 in commitment and related fees in
connection with the credit facilities for the twenty-two weeks ended June 4,
1997. 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 -
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 was made on this note in four equal quarterly
installments ended on October 27, 1999.
(D) LONG-TERM NOTES PAYABLE -
The Company borrowed $5,000,000 and issued a term note payable to CIT
as part of the fifth amendment to its credit agreement (see Note 7(a)) on August
25, 1999 to partially fund the Company's common stock repurchase on August 25,
1999 (see Note 10). The note bears interest at prime plus 200 basis points
(10.25% as of January 1, 2000). The note matures on June 5, 2004 and the
principal is to be paid on a sixty-month straight-line amortization schedule
with the balance of the note due at maturity. Interest on the outstanding
principal is due and payable monthly.
F-19
<PAGE>
8. INCOME TAXES:
For the fifty-two, fifty-two, thirty-one and twenty-two weeks ended
January 1, 2000, January 2, 1999, January 3, 1998 and June 4, 1997,
respectively, the Company recognized the following tax provision (benefit).
<TABLE>
<CAPTION>
(In thousands)
Fifty-Two Fifty-Two Thirty-One Twenty-Two Weeks
Weeks Ended Weeks Ended Weeks Ended Ended June
January 1, January 2, January 3, 4,
2000 1999 1998 1997
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal $ 3,046 $ 1,851 $ 460 $ 1,400
State 216 733 217 2,428
Foreign -- -- -- 351
------- ------- ----- -------
3,262 2,584 677 4,179
------- ------- ----- -------
Deferred:
Federal ( 1,469) ( 334) -- --
State ( 136) ( 122) -- --
Foreign -- -- -- --
------- ------- ----- -------
( 1,605) ( 456) -- --
------- ------- ----- -------
Deferred Non-Cash
Pre-Emergence Tax Provision:
Federal 374 675 -- --
State 623 409 -- --
------- ------- ----- -------
997 1,084 -- --
------- ------- ----- -------
Total tax provision for income taxes
2,654 3,212 677 4,179
Less: Taxes on sale
of Sassco Fashions line
-- -- -- (3,728)
------- ------- ----- -------
Tax provision
for income taxes $ 2,654 $ 3,212 $ 677 $ 451
= ======= = ======= = ===== =====
</TABLE>
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.
F-20
<PAGE>
The reconciliation between the Company's effective income tax rate and
the statutory Federal income tax rate is as follows:
<TABLE>
<CAPTION>
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Fifty-Two Fifty-Two Thirty-One Twenty-Two Weeks
Weeks Ended Weeks Ended Weeks Ended Ended June 4,
January 1, January 2, January 3, 1997
2000 1999 1998
--------------- ---------------- ----------
<S> <C> <C> <C> <C>
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Effective Tax Rate 24.2% 26.6% 17.0% 2.8%
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Net state tax ( 4.2%) ( 5.6%) ( 5.4%) ( 1.3%)
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Net foreign tax -- -- -- ( 0.2%)
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Intangibles 14.2% 12.9% 23.4% --
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Utilization of net operating
losses -- -- -- 35.0%
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Other ( 0.2%) 0.1% -- (1.3%)
---- ------- ----- ---- ------ ---- ---- ------
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
- - -------------------------------------- -------------------- --------------------- -------------------- ---- ------------------ ----
Federal statutory rate 34.0% 34.0% 35.0% 35.0%
=== ===== === ===== ==== ===== ==== =====
- - -------------------------------------- -------------------- --------------------- -------------------- ---- -----
</TABLE>
<TABLE>
<CAPTION>
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 1, January 2, January 3,
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
1998
2000 1999
<S> <C> <C> <C>
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Customer reserves and allowances $ 7,881 $ 6,620 $ 4,108
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Depreciation 14,699 14,487 6,713
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Inventory 5,417 5,240 2,553
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Worker's compensation
insurance 133 181 572
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Vacation pay accrual 724 646 490
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Other 4,892 3,106 608
---- ------- ---- ------- -------- ---
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
Total temporary differences $33,746 $30,280 $ 15,044
======= ======= ========
- - ---------------------------------------------- ------------------ ------------------- ------------------- --
- - --------------------------------------------- ------------------- ------------------- ------------------- -------------------
Tax effect of temporary differences $ 13,498 $ 12,718 $5,265
- - --------------------------------------------- ------------------- ------------------- ------------------- -------------------
- - --------------------------------------------- ------------------- ------------------- -------------------
Valuation allowance (13,498) (12,718) (5,265)
-------- - -------- --- -------
- - --------------------------------------------- ------------------- ------------------- -------------------
- - --------------------------------------------- ------------------- ------------------- -------------------
Deferred tax assets recognized $ -- $ -- $ --
========== ========== =====
- - --------------------------------------------- ------------------- ------------------- -------------------
</TABLE>
F-21
<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 1, 2000, the remaining aggregate loss
utilization limitation through fiscal year 2011 is approximately $18,000,000. As
such, the NOL available to the Company, after taking into account the
aforementioned limitation, is $18,000,000 as of January 1, 2000. 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, fifty-two, thirty-one and twenty-two weeks ended
January 1, 2000, January 2, 1999, January 3, 1998 and June 4, 1997, amounted to
$3,292,000, $2,540,000, $1,365,000 and $4,599,000, respectively.
Minimum annual rental commitments under operating and capitalized
leases in effect at January 1, 2000 are summarized as follows:
Capitalized
Fiscal Real Equipment Equipment
Years Estate & Other (including interest)
----- ------ ------- --------------------
(In thousands)
2000 $ 2,334 $ 274 $ 104
2001 2,056 251 106
2002 1,819 64 106
2003 2,013 2 19
2004 2,013 -- --
Thereafter 8,141 -- --
------- ------- -------
Total minimum lease payments $18,376 $ 591 $ 335
======= ======= =======
F-22
<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. By an order dated April 21, 1997 (the
"Confirmation Order"), the Bankruptcy Court confirmed the Plan. The Plan was
consummated on June 4, 1997. Certain alleged creditors who asserted age and
other discrimination claims against the Company and whose claims were expunged
(the "Claimants") pursuant to an order of the Bankruptcy Court (see below)
appealed the Confirmation Order to the United States District Court for the
Southern District of New York. The Company moved to dismiss the appeal from the
Confirmation Order and the motion was granted and the appeal was dismissed. An
appeal to the United States Court of Appeals for the Second Circuit from the
order dismissing the appeal taken by the Claimants subsequently was withdrawn,
without prejudice, and may be refiled in the future. In addition, the Claimants
and two other persons commenced a separate adversary proceeding in the
Bankruptcy Court to revoke the Confirmation Order. The Company has moved to
dismiss the adversary proceeding to revoke the Confirmation Order and that
motion has been fully briefed, but has not yet been argued to the Bankruptcy
Court. However, that matter is now moot based upon the proceedings described in
the next paragraph and the Claimants' lack of standing.
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 took a further appeal to the
United States Court of Appeals for the Second Circuit, which affirmed the
decision of the United States District Court in a summary order dated June 28,
1999. On September 27, 1999, the Claimants filed a petition for certiorari
review by the United States Supreme Court for relief. The petition for
certiorari was denied on January 10, 2000.
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
in the near future.
In February 1993, the Securities and Exchange Commission obtained an
order directing a private investigation of the Company in connection with, among
other things, the filing by the Company of annual and other reports that may
have contained misstatements, and the purported failure of the Company to
maintain books and records that accurately reflected its financial condition and
operating results. To the Company's knowledge, this investigation has been
dormant for several years.
F-23
<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. In
October 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 is expected to begin March 1,
2000.
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, is the only entity authorized to prosecute, compromise and
settle or discontinue the derivative action.
(C) MANAGEMENT AGREEMENTS -
The Company is currently committed to management contracts with several
officers and key employees with annual salaries of $2,134,000 and $1,805,000 for
fiscal 2000 and 2001, respectively.
(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 1, 2000, three customers accounted for
31%, 10% and 10% of the Company's sales. 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.
F-24
<PAGE>
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 1, 2000 and January 2, 1999 the Company's accounts receivables included
$16,297,000 and $14,915,000, respectively, 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. In
August 1999, the Plan Administrator elected to receive $7.00 per share in cash
for 140,660 of the remaining undistributed shares in connection with the merger
transaction with an affiliate of Three Cities. 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. 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 these shares have
been issued.
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.
On August 25, 1999, following the approval of more than two-thirds of
the stockholders of the Company, the Company completed a merger transaction with
an affiliate of Three Cities. In connection with the merger, holders of common
stock of the Company had the right to elect to receive cash for their shares.
The holders of 2,111,966 shares of the Company's common stock received $7.00 in
cash per share for their shares. Three Cities provided $7,783,762 in return for
1,111,966 shares of the Company while the remaining 1,000,000 shares were placed
in the Company's treasury. The $7,000,000 of cash required of the Company to
consummate the cash election was financed through a $5,000,000 five-year note,
(see Note 7) and through additional borrowings under the Company's credit line.
The merger transaction also affected a modification of the Certificate
of Incorporation of the Company that changed certain provisions regarding the
approval of certain business combination transactions.
F-25
<PAGE>
The Company may pay cash dividends or repurchase its stock under the
CIT Credit Agreement (see Note 7) as long as those disbursements do not cause
the Company to be in violation of the restrictive covenants, there remains no
less than $5,000,000 of unused borrowing capacity and the cumulative stock
repurchase or distribution of dividends does not exceed the dividend and stock
repurchase basket described in Note 7. At the end of the fiscal year ended
January 1, 2000 the Company may borrow up to $3,034,000 for stock repurchase or
dividend distribution. The Company has no plans to pay cash dividends in the
foreseeable future.
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:
<TABLE>
<CAPTION>
Weighted Average Option
Number of Shares Price Per Share
---------------- ---------------
<S> <C> <C>
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
-----------
Granted 38,500 6.40
-----------
Outstanding at January 1, 2000 1,376,874 3.59
-----------
</TABLE>
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-seven managers were granted 167,000 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). 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 six 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 1, 2000 and
January 2, 1999, 870,446 and 381,878 options, respectively, were exercisable.
F-26
<PAGE>
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 1, 2000 and 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
4.8%, 5.4% and 6.4%, respectively, expected life of 5 years for all periods, and
volatility of 43%, 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.
A summary of stock options outstanding and exercisable as of January 1, 2000,
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING LIFE WEIGHED AVERAGE NUMBER WEIGHED AVERAGE
PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------ ----------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.09 1,149,874 7.61 $3.09 700,396 $3.09
$5.75 - $7.44 227,000 8.39 6.14 170,050 $6.03
</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
----
Discount rate 7.5%
Long-term rate of return on assets 8.8%
F-27
<PAGE>
Net periodic pension cost recognized in the thirty-one and twenty-two
weeks ended January 3, 1998 and June 4, 1997 was as follows:
THIRTY-ONE WEEKS TWENTY-TWO
ENDED WEEKS ENDED
JANUARY 3 JUNE 4,
1998 1997
Service costs $ -- $ --
Interest cost 47 38
Actual return on assets (74) (98)
Recognition of partial settlement
of pension obligations -- --
Net amortization and deferral 27 60
------ --- ------
Net periodic pension cost $___-- $ --
======= =======
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, fifty-two,
thirty-one and twenty-two weeks ended January 1, 2000, January 2, 1999, January
3, 1998 and June 4, 1997 amounted to $295,000, $211,000, $75,000 and $113,000,
respectively.
(C) OTHER -
The Company participates in a multi-employer pension plan. The plans
provide defined benefits to unionized employees. The amount of contributions to
the pension fund for the continuing operations in 1999, 1998 and 1997 amounted
to $457,000, $362,000 and $364,000 respectively.
The Company does not provide post-employment or post-retirement
benefits other than the plans described above.
F-28
<PAGE>
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.
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-29
<PAGE>
The unaudited pro forma adjustments presented in the statement are as
follows:
<TABLE>
<CAPTION>
Column Heading Explanation
-------------- -----------
<S> <C> <C>
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.
</TABLE>
F-30
<PAGE>
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
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 2,090 (1,078) (41) (971) --
expense...............................
-------------- ---------------- -------------- ---------------- ---------------------
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 -- -- -- (1,905) (1,905)
equity................................
-------------- ---------------- -------------- ---------------- ---------------------
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 (595) -- -- 777
Contractual interest)........... 1,372
-------------- ---------------- -------------- ---------------- ---------------------
Income (loss) before reorganization 12,983 (9,455) 495 2,658 6,681
costs,
taxes, gain on sale, fresh start
revaluation and extraordinary item
Reorganization Costs.................. 3,379 -- 14 (3,393) --
-------------- ---------------- -------------- ---------------- ---------------------
Income (loss) before taxes, gain on
sale, 9,604 (9,455) 481 6,051 6,681
fresh start revaluation
and
extraordinary item....................
Taxes................................. 451 (342) -- 1,898 2,007
-------------- ---------------- -------------- ---------------- ---------------------
Net Income (loss) before gain on
sale, 9,153 (9,113) 481 4,153 4,674
fresh start revaluation
and
extraordinary item....................
Gain on disposition of Sassco
Fashions line, loss on
revaluation of assets
pursuant to adoption of 136,341 (89,810) -- (46,531) --
fresh-start reporting and
extraordinary gain on debt
discharge.............................
-------------- ================ ============== ================ =====================
Net Income (loss)................. $145,494 ($98,923) $481 ($42,378) $4,674
============== ================ ============== ================ =====================
Net Income (loss) per Share
- Basic * $0.69
and Diluted...........................
Weighted Average Common *
Shares Outstanding - Basic 6,800,000
and Diluted...........................
</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-31
<PAGE>
14. REORGANIZATION COSTS:
The Predecessor Company recognized reorganization costs during the
twenty-two weeks ended June 4, 1997 as follows:
(In thousands)
Twenty-Two
Weeks Ended June
4,
1997
Professional fees and other
costs $2,951
Plan administration costs 1,000
Interest income ( 572)
------
Total reorganization costs $3,379
======
15. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
The components of accrued expenses and other current liabilities are as
follows:
<TABLE>
<CAPTION>
(In thousands)
January 1, January 2,
2000 1999
---- ----
<S> <C> <C>
Bonus and Profit Sharing $ 2,261 $ 1,274
Accrued Acquisition Costs (see Note 4) 251 1,175
Duty 1,510 806
Vacation 724 635
Professional Fees 321 389
Other 3,054 3,207
----- -----
Total $ 8,121 $ 7,486
======= =======
</TABLE>
F-32
<PAGE>
<PAGE>
16. SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for interest and income taxes for the
fifty-two, fifty-two, thirty-one and twenty-two weeks ended January 1, 2000,
January 2, 1999, January 3, 1998 and June 4, 1997 were as follows:
<TABLE>
<CAPTION>
(In thousands)
Fifty-Two Fifty-Two Thirty-One Twenty-Two
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 1, 2000 January 2, 1999 January 3, 1998 June 4, 1997
--------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Interest $ 2,213 $ 953 $ 367 $ 1,412
Income taxes 4,224 2,892 928 (2,694)
</TABLE>
During December 1999, the Company entered into a capital lease for
approximately $75,000 for the purchase of computer equipment.
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 is currently analyzing the impact of this new pronouncement
on its financial position and results of operations.
F-33
<PAGE>
18. UNAUDITED QUARTERLY RESULTS:
Unaudited quarterly financial information for 1999 and 1998 is set forth as
follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
1999 March June September December
---- ----- ---- --------- --------
<S> <C> <C> <C> <C>
Net sales $61,144 $38,450 $58,622 $39,230
Gross profit 16,684 9,843 14,766 7,463
Net income (loss) 4,281 968 3,142 (75)
Net income (loss) per share
- Basic $0.71 $0.16 $0.56 ($0.01)
- Diluted $0.70 $0.15 $0.52 ($0.01)
1998 March June September December
---- ----- ---- --------- --------
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)
</TABLE>
F-34
<PAGE>
19. SUBSEQUENT EVENTS:
On February 15, 2000, the Company entered into a license agreement with
the licensing subsidiary of Liz Claiborne, Inc. 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 Fall 2000 season that begins to ship in
June 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 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.
F-35
<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
<S> <C> <C> <C> <C> <C> <C>
FIFTY-TWO WEEKS ENDED
JANUARY 1, 2000
Reserve for Allowances --
$6,600 $6,600 $24,220 ($25,578) $5,242
Other Receivable Reserves 24 -- 24 -- 24
--
Reserve for Doubtful Accounts 70 -- 70 -- 70
--
Reserve for Returns 131 131 1,216 (1,215) 132
Total Receivable Reserves $6,825 $ $6,825 $25,436 ($26,793) $5,468
====== ========= ======== ======= ======== ======
FIFTY-TWO WEEKS ENDED
JANUARY 2, 1999
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
====== ========= ======== ======= ======== ======
F-36
<PAGE>
SCHEDULE II (continued)
THE LESLIE FAY COMPANY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
RESERVES BEGINNING
RELATED TO BALANCE
BALANCE AT SOLD RELATED TO BALANCE AT
DESCRIPTION BEGINNING PRODUCT CONTINUING COSTS DEDUCTIONS END
OF PERIOD LINES OPERATIONS CHARGED TO OF PERIOD
EXPENSE
<S> <C> <C> <C> <C> <C> <C>
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
============ ========= ----------== --------===== ========== ============
TWENTY-TWO WEEKS ENDED
JUNE 4, 1997
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
============ ========= ----------== --------===== ========== ============
</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-37
<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 1, 2000 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
-----------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
2.1 Amended Joint Plan of Reorganization.(2)
3.1* Amended and 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.(10)
4.1 Specimen Copy of Stock Certificate for shares of Common Stock of the registrant.(11)
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)
4.6 Fourth Amendment dated March 29, 1999 to the Revolving Credit Agreement between LFM and CIT.(9)
4.7 Fifth Amendment dated August 25, 1999 to the Revolving Credit Agreement between LFM and CIT.(9)
10.1 Employment Agreement dated as of January 4, 1998 between the registrant and John J.
Pomerantz.(7)(12)
10.1(a) Amendment No. 1 dated as of January 1999 to Employment Agreement dated
as of January 4, 1998 between the registrant and John J. Pomerantz. (9) (12)
10.2 Employment Agreement dated as of January 4, 1998 between the registrant and John Ward.(7) (12)
10.2(a) Amendment No. 1 dated as of January 1999 to Employment Agreement dated as of January 4, 1998
between the registrant and John Ward. (9) (12)
10.3 Employment Agreement dated as of January 4, 1998 between the registrant and Dominick
Felicetti.(7) (12)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.3(a) Amendment No. 1 dated as of January 1999 to Employment Agreement dated as of January 4, 1998
between the registrant and Dominick Felicetti. (9) (12)
10.4 Employment Agreement dated as of January 4, 1998 between the registrant and Warren T.
Wishart.(7) (12)
10.4(a) Amendment No. 1 dated as of January 1999 to Employment Agreement dated as of January 4, 1998
between the registrant and Warren T. Wishart.(9) (12)
10.5 1997 Management Stock Option Plan.(5) (12)
10.6 1997 Non-Employee Director Stock Option and Stock Incentive Plan.(6) (12)
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
- - --------------------------------------------------------------------------------
</TABLE>
*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.
<PAGE>
(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 the Quarterly Report on Form 10-Q for the
fiscal quarter ended October 2, 1999.
(10) Incorporated by reference to the Annual Report on Form 10-K for the
fiscal year ended December 28, 1996.
(11) Incorporated by reference to Post-Effective Amendment No. 1 to the
registrant's Registration Statement on Form S-1.
(12) Management contract or compensation plan or arrangement required to be
noted as provided in Item 14 (a) (3).
EXHIBIT 3.1
-----------
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE LESLIE FAY COMPANY, INC.
ARTICLE I
The name of the Corporation is:
"The Leslie Fay Company, Inc."
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is: 15 East North Street, Dover, Kent County, Delaware 19901.
The name of the registered agent of the Corporation in the State of Delaware at
such address is: United Corporate Services, Inc.
ARTICLE III
The purpose of the Corporation shall be to engage in any
lawful act or activity for which corporations may be organized and incorporated
under the General Corporation Law of the State of Delaware.
ARTICLE IV
(1) 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").
(2) Preferred Stock. The Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is hereby authorized
to create and provide for the issuance of shares of Preferred Stock in series
and, by filing a certificate pursuant to the applicable law of the State of
Delaware (hereinafter referred to as a "Preferred Stock Designation"), to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, power, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
A-1
<PAGE>
The authority of the Board of Directors with respect to each
series shall include, but not be limited to, determination of the following:
(1) The designation of the series, which may be by
distinguishing number, letter or title.
(2) The number of shares of the series, which number the
Board of Directors may thereafter (except where otherwise provided in the
Preferred Stock Designation) increase or decrease (but not below the number of
shares thereof then outstanding).
(3) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series.
(4) The dates at which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for
shares of the series.
(6) The terms and amount of any sinking fund provided for
the purchase or redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(8) Whether the shares of the series shall be convertible
into or exchangeable for shares of any other class or series, or any other
security, of the Corporation or any other corporation, and, if so, the
specification of such other class or series of such other security, the
conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates at which such shares shall be convertible or
exchangeable and all other terms and conditions upon which such conversion may
be made.
(9) Restrictions on the issuance of shares of the same
series or of any other class or series.
(10) The voting rights, if any, of the holders of shares of
the series.
(11) Such other powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof as the Board of Directors shall determine.
A-2
<PAGE>
(3) Common Stock. The Common Stock shall be subject to the
express terms of the Preferred Stock and any series thereof. Each share of
Common Stock shall be equal to each other share of Common Stock. The holders of
shares of Common Stock shall be entitled to one vote for each such share upon
all questions presented to the stockholders.
(4) Vote. Except as may be provided in this Certificate of
Incorporation or in a Preferred Stock Designation, or as may be required by
applicable law, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, and holders of shares of
Preferred Stock shall not be entitled to receive notice of any meeting of
stockholders at which they are not entitled to vote.
(5) Record Holders. The Corporation shall be entitled to treat
the person in whose name any share of its stock is registered as the owner
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to, or interest in, such share on the part of any other person,
whether or not the Corporation shall have notice thereof, except as expressly
provided by applicable law.
ARTICLE V
(6) In furtherance and not in limitation of the powers
conferred by law, the Board of Directors is expressly authorized and empowered:
(1) to adopt, amend or repeal the By-laws of the
Corporation, provided, however, the By-laws may also be altered,
amended or repealed by the affirmative vote of the holders of at least
66-2/3 percent of the voting power of the then outstanding Voting Stock
(as hereinafter defined), voting together as a single class; and
(2) from time to time to determine whether and to what
extent, and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation, or any of them,
shall be open to inspection of stockholders; and, except as so
determined, or as expressly provided in this Certificate of
Incorporation or in any Preferred Stock Designation, no stockholder
shall have any right to inspect any account, book or document of the
Corporation other than such rights as may be conferred by applicable
law.
(7) The Corporation may in its By-laws confer powers upon the
Board of Directors in addition to the foregoing and in addition to the powers
and authorities expressly conferred upon the Board of Directors by applicable
law. Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least 66-2/3 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with subparagraph (i) of paragraph (A) of this Article V. For the
purposes of this Certificate of Incorporation,
A-3
<PAGE>
"Voting Stock" shall mean the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors of the
Corporation.
ARTICLE VI
(8) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specific circumstances, the
number of directors of the Corporation shall be fixed by the By-laws of the
Corporation and may be increased or decreased from time to time in such a manner
as may be prescribed by the By-laws.
(9) Unless and except to the extent that the By-laws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
(10) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances, and
unless the Board of Directors otherwise determines or the By-laws otherwise
provide, vacancies resulting from death, resignation, retirement,
disqualification, removal from office or other cause, and newly created
directorships resulting from any increase in the authorized number of directors,
may be filled only by the affirmative vote of a majority of the remaining
directors, though less than a quorum of the Board of Directors, and directors so
chosen shall hold office until the next annual meeting of stockholders and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the Whole Board
shall shorten the term of any incumbent director.
(11) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specific circumstances, any
director may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least 66-2/3 percent of the voting
power of the then outstanding Voting Stock, voting together as a single class.
(12) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
66-2/3 percent of the voting power of the then outstanding Voting Stock, voting
together as a single class, shall be required to amend or repeal, or adopt any
provision inconsistent with, this Article VI.
A-4
<PAGE>
ARTICLE VII
Section 2. Vote Required for Certain Business Combinations.
------------------------------------------------
(1) Higher Vote for Certain Business Combinations. In addition
to any affirmative vote required by law or this Certificate of Incorporation or
by any Preferred Stock Designation, and except as otherwise expressly provided
in Section 2 of this Article VII:
(1) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (a) any Interested Stockholder
(as hereinafter defined) or (b) any other person (whether or not itself
an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate (as hereinafter defined) of an
Interested Stockholder; or
(2) any sale, lease exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to
or with any Interested Stockholder, including all Affiliates of the
Interested Stockholder, of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value (as hereinafter
defined) of $10,000,000 or more; or
(3) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any
securities of the Corporation or any Subsidiary to any Interested
Stockholder, including all Affiliates of any Interested Stockholder, in
exchange for cash, securities or other property (or a combination
thereof) having an aggregate Fair Market Value of $10,000,000 or more;
or
(4) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by or on behalf
of an Interested Stockholder or any Affiliates of an Interested
Stockholder; or
(5) any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its Subsidiaries
or any other transaction (whether or not an Interested Stockholder is a
party thereto) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Corporation or any
Subsidiary which is Beneficially Owned (as hereinafter defined) by any
Interested Stockholder or any Affiliate of any Interested Stockholder;
shall require the affirmative vote of the holders of at least 66 2/3 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class, and the affirmative vote of the holders of more than 50 percent of
the voting power of the Voting Stock voting on such
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<PAGE>
matter that is not owned directly or indirectly by an Interested Stockholder or
any Affiliate of any Interested Stockholder. Such affirmative votes shall be
required notwithstanding any other provision of this Certificate of
Incorporation, any Preferred Stock Designation or any provision of law or of any
agreement with any national securities exchange or otherwise which might
otherwise permit a lesser vote or no vote.
(2) Definition of "Business Combination." The term "Business
Combination" as used in this Article VII shall mean any transaction described in
any one or more of clauses (i) through (v) of paragraph (A) of this Section 1.
Section 3. When Higher Vote is Not Required. The provisions of
Section 1 of this Article VII shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such affirmative
vote as is required by law or any other provision of this Certificate of
Incorporation and any Preferred Stock Designation, if, in the case of a Business
Combination that does not involve any cash or other consideration being received
by the stockholders of the Corporation, the condition specified in the following
paragraph (A) is met or, in the case of any other Business Combination, the
conditions specified in either of the following paragraph (A) or (B) are met:
(1) Approval by Independent Directors. The Business
Combination shall have been approved by at least 75% of the Independent
Directors; provided, however, that this condition shall not be capable of
satisfaction unless there are at least three Independent Directors.
(2) Price and Procedure Requirements. All of the following
conditions shall have been met:
(1) The consideration to be received by holders of shares
of a particular class (or series) of outstanding capital stock
(including Common Stock and other than Excluded Preferred Stock (as
hereinafter defined)) shall be in cash or in the same form as the
Interested Stockholder or any of its Affiliates has previously paid for
shares of such class (or series) or capital stock. If the Interested
Stockholder or any of its Affiliates have paid for shares of any class
(or series) of capital stock with varying forms of consideration, the
form of consideration to be received per share by holders of shares of
such class (or series) of capital stock shall be either cash or the
form used to acquire the largest number of shares of such class (or
series) of capital stock previously acquired by the Interested
Stockholder.
(2) The aggregate amount of (x) the cash and (y) the Fair
Market Value, as of the date (the "Consummation Date") of the
consummation of the Business Combination, of the consideration other
than cash to be received per share by holders of Common Stock in such
Business Combination shall be at least equal to the higher of the
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following (in each case appropriately adjusted in the event of any
stock dividend, stock split, combination of shares or similar event):
(a) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder or
any of its Affiliates for any shares of Common Stock acquired by
them within the two-year period immediately prior to the date of
the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or in any transaction in
which the Interested Stockholder became an Interested
Stockholder, whichever is higher, plus interest compounded
annually from the first date on which the Interested Stockholder
became an Interested Stockholder (the "Determination Date")
through the Consummation Date at the publicly announced base rate
of interest of Citibank, N.A. (or such other major bank
headquartered in the City of New York as may be selected by the
Independent Directors) from time to time in effect in the City of
New York, less the aggregate amount of any cash dividends paid,
and the Fair Market Value of any dividends paid in other than
cash, on each share of Common Stock from the Determination Date
through the Commission Date in an amount up to but not exceeding
the amount of interest so payable per share of Common Stock; and
(b) the Fair Market Value per share of Common Stock on
the Announcement Date or the Determination Date, whichever is
higher.
(3) The aggregate amount of (x) the cash and (y) the Fair
Market Value, as of the Consummation Date, of the consideration other
than cash to be received per share by holders of shares of any class (or
series), other than Common Stock or Excluded Preferred Stock, of
outstanding capital stock shall be at least equal to the highest of the
following (in each case appropriately adjusted in the event of any stock
dividend, stock split, combination of shares or similar event), it being
intended that the requirements of this paragraph (B)(iii) shall be
required to be met with respect to every such class (or series) or
outstanding capital stock whether or not the Interested Stockholder or
any of its Affiliates has previously acquired any shares of a particular
class (or series) of capital stock:
(a) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder
or any of its Affiliates for any shares of such class (or
series) of capital stock acquired by them within the two-year
period immediately prior to the Announcement Date or in any
transactions in which it became an Interested Stockholder,
whichever is higher, plus
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interest compounded annually from the Determination Date
through the Consummation Date at the publicly announced base
rate of interest of Citibank, N.A. (or such other major bank
headquartered in the City of New York as may be selected by
the Independent Directors) from time to time in effect in the
City of New York, less the aggregate amount of any cash
dividends paid, and the Fair Market Value of any dividends
paid in other than cash, on each share of such class (or
series) of capital stock from the Determination Date through
the Consummation Date in an amount up to but not exceeding the
amount of interest so payable per share of such class (or
series) of capital stock;
(b) the Fair Market Value per share of such
class (or series) of capital stock on the Announcement Date or
on the Determination Date, whichever is higher, and
(c) the highest preferential amount per
share, if any, to which the holders of shares of such class
(or series) of capital stock would be entitled in the event of
and voluntary or involuntary liquidation, dissolution or
winding up of the Corporation.
(4) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (a)
except as approved by a majority of the Independent Directors, there shall have
been no failure to declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on any outstanding Preferred
Stock; (b) there shall have been (I) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of the
Independent Directors, and (II) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has the effect
of reducing the number of outstanding shares of Common Stock, unless the failure
so to increase such annual rate is approved by a majority of the Independent
Directors; and (c) neither such Interested Stockholder nor any of its Affiliates
shall have become the beneficial owner of any additional shares of Voting Stock
except as part of the transaction which results in such Interested Stockholder
becoming an Interested Stockholder; provided, however, that no approval by
Independent Directors shall satisfy the requirements of this subparagraph (iv)
unless at the time of such approval there are at least three Independent
Directors.
(5) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder and any of its Affiliates shall not
have received the benefit, directly or indirectly (except proportionately,
solely in such Interested Stockholder's or Affiliate's capacity as a stockholder
of the Corporation), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax
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advantages provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(6) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (or
any subsequent provisions replacing such Act, rules or regulations) shall be
mailed to all stockholders of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
(7) Such Interested Stockholder shall have supplied the
Corporation with such information as shall have been requested pursuant to
Section 4 of this Article VII within the time period set forth therein.
Section 4. For the purposes of this Article VII:
-------------------------------------
(1) A "person" means any individual, limited partnership,
general partnership, corporation or other firm or entity.
(2) "Interested Stockholder" means any person (other than the
Corporation or any Subsidiary) who or which:
(1) is the beneficial owner (as hereinafter defined),
directly or indirectly, of ten percent or more of the voting power
of the outstanding Voting Stock; or
(2) is an Affiliate or an Associate of the Corporation and
at any time within the two-year period immediately prior to the date
in question was the beneficial owner, directly or indirectly, of ten
percent or more of the voting power of the then-outstanding Voting
Stock; or
(3) is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within the two-year
period immediately prior to the date in question beneficially owned
by any Interested Stockholder, if such assignment or succession
shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of
the Securities Act of 1933, as amended, or any successor act
thereto.
(3) A person shall be a "beneficial owner" of, or shall
"Beneficially Own", any Voting Stock:
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<PAGE>
(1) which such person or any of its Affiliates or
Associates (as hereinafter defined) beneficially owns, directly or
indirectly within the meaning of Rule 13d-3, or any successor rule
thereto, under the Securities Exchange Act of 1934, as amended, or
any successor act thereto; or
(2) which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant
to any agreement, arrangement or understanding or upon the exercise
of conversion rights, exchange rights, warrants or options or
otherwise or (b) the right to vote pursuant to any agreement,
arrangement or understanding (but neither such person nor any such
Affiliate or Associate shall be deemed to be the beneficial owner of
any shares of Voting Stock solely by reason of a revocable proxy
granted for a particular meeting of stockholders, pursuant to a
public solicitation of proxies for such meeting, and with respect to
which shares neither such person nor any such Affiliate or Associate
is otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly,
within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934, as amended, or any successor rule thereto, by any other
person with which such person or any of its Affiliates or Associates
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (other than solely by reason of a
revocable proxy as described in subparagraph (ii) of this paragraph
(3)) or disposing of any shares of Voting Stock;
provided, however, that in the case of any employee stock ownership or similar
plan of the Corporation or of any Subsidiary in which the beneficiaries thereof
possess the right to vote any shares of Voting Stock held by such plan, no such
plan nor any trustee with respect thereto (nor any Affiliate of such trustee),
solely by reason of such capacity of such trustee, shall be deemed, for any
purposes hereof, to beneficially own any shares of Voting Stock held under any
such plan.
(4) For the purposes of determining whether a person is an
Interested Stockholder pursuant to paragraph (2) of this Section 3, the number
of shares of Voting Stock deemed to be outstanding shall include shares deemed
owned through application of paragraph (3) of this Section 3 but shall not
include any other unissued shares of Voting Stock which may be issuable pursuant
to any agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
(5) "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, or any
successor rule thereto.
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<PAGE>
(6) "Subsidiary" means any person of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph (2) of this Section 3, the term "Subsidiary"
shall mean only a person of which a majority of each class of equity security is
owned, directly or indirectly, by the Corporation.
(7) "Independent Director" means any member of the Board of
Directors of the Corporation who is unaffiliated with the Interested Stockholder
and independent of management and free from any relationship that, in the
opinion of the Whole Board, would interfere with the exercise of independent
judgment.
(8) "Fair Market Value" means: (i) in the case of stock, the
highest closing sale price during the 30-day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New York
Stock Exchange Listed Stocks, or, if such stock is not listed on such Exchange,
on the principal United States securities exchange registered under the
Securities Exchange Act of 1934, as amended, on which stock is listed, or, if
such stock is not listed on any such exchange, the highest closing bid quotation
with respect to a share of such stock during the 30-day period preceding the
date in question on the National Association of Securities Dealers, Inc.
Automated Quotations System or any system then in use, or if no such quotations
are available, the fair market value on the date in question of a share of such
stock as determined by the Board of Directors in accordance with Section 4 of
this Article VII; and (ii) in the case of property other than cash or stock, the
fair market value of such property on the date in question as determined by the
Board of Directors in accordance with Section 4 of this Article VII.
(9) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in paragraphs (B)(ii) of Section 2 of this Article VII shall include the
shares of Common Stock and/or the shares of any other class (or series) of
outstanding capital stock retained by the holders of such shares.
(10) "Whole Board" means the total number of directors which
this Corporation would have if there were no vacancies.
(11) "Excluded Preferred Stock" means any series of Preferred
Stock with respect to which the Preferred Stock Designation creating such series
expressly provides that the provisions of this Article VII shall not apply.
A-11
<PAGE>
Section 5. (a) A majority of the Whole Board, but only if a
majority of the Whole Board shall then consist of Independent Directors or, if a
majority of the Whole Board shall not then consist of Independent Directors, a
majority of the Independent Directors, shall have the power and duty to
determine, on the basis of information known to them after reasonable inquiry,
all facts necessary to determine compliance with this Article VII, including,
without limitation, (i) whether a person is an Interested Stockholder, (ii) the
number of shares of Voting Stock beneficially owned by any person, (iii) whether
a person is an Affiliate or Associate of another, (iv) whether the applicable
conditions set forth in paragraph (B) of Section 2 of this Article VII have been
met with respect to any Business Combination, (v) the Fair Market Value of stock
or other property in accordance with paragraph (8) of Section 3 of this Article
VII, and (vi) whether the assets which are the subject of any Business
Combination referred to in paragraph (1)(A)(ii) of Section 1 of this Article VII
have, or the consideration to be received for the issuance or transfer of
securities by the Corporation or any Subsidiary in any Business Combination
referred to in paragraph (1)(A)(iii) of Section 1 of this Article VII has, an
aggregate Fair Market Value of $10,000,000 or more.
(b) A majority of the Whole Board shall have the right to
demand, but only if a majority of the Whole Board shall then consist of
Independent Directors, or, if a majority of the Whole Board shall not then
consist of Independent Directors, a majority of the then Independent Directors
shall have the right to demand, that any person who it is reasonably believed is
an Interested Stockholder (or holds of record shares of Voting Stock
Beneficially Owned by any Interested Stockholder) supply this Corporation with
complete information as to (i) the record owner(s) of all shares Beneficially
Owned by such person who it is reasonably believed is an Interested Stockholder,
(ii) the number of, and class or series of, shares Beneficially Owned by such
person who it is reasonably believed is an Interested Stockholder and held of
record by each such record owner and the number(s) of the stock certificate(s)
evidencing such shares, and (iii) any other factual matter relating to the
applicability or effect of this Article VII, as may be reasonably requested of
such person, and such person shall furnish such information within 10 days after
receipt of such demand.
Section 6. No Effect on Fiduciary Obligations of Interested
Stockholders. Nothing contained in this Article VII shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
Section 7. When Stockholder Approval is Required.
Notwithstanding any other provisions of this Certificate of Incorporation
(including, without limitation, Sections 1 and 2 of this Article VII), but in
addition to any affirmative vote required by law or this Certificate of
Incorporation or by any Preferred Stock Designation:
(1) any merger or consolidation of the Corporation with any
person (whether or not an Interested Stockholder); or
A-12
<PAGE>
(2) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one transaction or a series of transactions) to
or with any person (whether or not an Interested Stockholder or Affiliate
thereof) of all or substantially all of the assets of the Corporation;
shall require the affirmative vote of the holders of at least 66-2/3 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class. Such affirmative vote shall be required notwithstanding any other
provision of this Certificate of Incorporation, any Preferred Stock Designation
or any provision of law or of any agreement with any national securities
exchange or otherwise which might otherwise permit a lesser vote or no vote.
Section 8. Amendment, Repeal, etc. (a) Notwithstanding any
other provisions of this Certificate of Incorporation or the By-laws of the
Corporation (and notwithstanding the fact that a lesser percentage may be
permitted by law, this Certificate of Incorporation, any Preferred Stock
Designation or the By-laws of the Corporation), but in addition to any
affirmative vote of the holders of any particular class of Voting Stock required
by law, this Certificate of Incorporation or any Preferred Stock Designation,
the affirmative vote of the holders of at least 66 2/3 percent of the voting
power of the shares of the then outstanding Voting Stock voting together as a
single class, including the affirmative vote of the holders of more than 50
percent of the voting power of the Voting Stock voting on such matter that is
not owned directly or indirectly by any Interested Stockholder or any Affiliate
of any Interested Stockholder, shall be required to amend or repeal, or adopt
any provisions inconsistent with, Sections 1 through 5 and this clause (a) of
Section 7 of this Article VII; and (b) the affirmative vote of the holders of at
least 66-2/3 percent of the voting power of the shares of the then outstanding
Voting Stock voting together as a single class shall be required to amend or
repeal, or adopt any provisions inconsistent with, Section 6 and this clause (b)
of Section 7 of this Article VII.
ARTICLE VIII
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or modification of this Article
VIII shall not adversely affect any right or protection of a director of the
Corporation existing hereunder in respect of any act or omission occurring to
such repeal or modification.
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ARTICLE IX
Each person who is or was or had agreed to become a director
or officer of the Corporation, or each such person who is or was serving or who
had agreed to serve at the request of the Board of Directors or an officer of
the Corporation as an employee or agent of the Corporation or as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise (including the heirs, executor, administrators or
estate of such person), shall be indemnified by the Corporation, in accordance
with the By-laws of the Corporation, to the fullest extent permitted from time
to time by the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment) or any other applicable laws as presently or hereafter in
effect. The Corporation may, by action of the Board of Directors, provide
indemnification to employees and agents of the Corporation, and to persons
serving as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, at the request of the Corporation, with the
same scope and effect as the foregoing indemnification of directors and
officers. The Corporation shall be required to indemnify any person seeking
indemnification of directors and officers. The Corporation shall be required to
indemnify any person seeking indemnification in connection with a proceeding (or
part thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors or is a proceeding to enforce such
person's claim to indemnification pursuant to the rights granted by this
Certificate of Incorporation or otherwise by the Corporation. Without limiting
the generality or the effect of the foregoing, the Corporation may enter into
one or more agreements with any person which provide for indemnification greater
or different than that provided in this Article IX. Any amendment or repeal of
this Article IX shall not adversely affect any right or protection existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal.
ARTICLE X
In furtherance and not in limitation of the powers conferred
by law or in this Certificate of Incorporation, the Board of Directors (and any
committee of the Board of Directors) is expressly authorized, to the extent
permitted by law, to take such action or actions as the Board of Directors or
such committee may determine to be reasonably necessary or desirable to (A)
encourage any person (as defined in Article VII of this Certification of
Incorporation) to enter into negotiations with the Board of Directors and
management of the Corporation with respect to any transaction which may result
in a change in control of the Corporation which is proposed or initiated by such
person or (B) contest or oppose any such transaction which the Board of
Directors or such committee determines to be unfair, abusive or otherwise
undesirable with respect to the Corporation and its business, assets or
properties or the stockholders of the Corporation, including, without
limitation, the adoption of such plans or the issuance of such rights, options,
capital stock, notes, debentures or other evidences of indebtedness or other
securities of the Corporation, which rights, options, capital stock, notes,
A-14
<PAGE>
evidences of indebtedness and other securities (i) may be exchangeable for or
convertible into cash or other securities on such terms and conditions as may be
determined by the Board of Directors or such committee and (ii) may provide for
the treatment of any holder or class of holders thereof designated by the Board
of Directors or any such committee in respect of the terms, conditions,
provisions and rights of such securities which is different from, and unequal
to, the terms, conditions, provisions and rights applicable to all other holders
thereof.
ARTICLE XI
Except as may be expressly provided in this Certification of
Incorporation, the Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, or any Preferred Stock Designation, and any other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted, in the manner now or hereafter prescribed herein or by
law; and all rights, preferences and privileges of whatsoever nature conferred
upon stockholders, directors or any other persons whomsoever by and pursuant to
this Certificate of Incorporation in its present form or as hereafter amended as
granted subject to the right reserved in this Article XI; provided, however,
that any amendment or repeal of Article VIII or Article IX of this Certificate
of Incorporation shall not adversely affect any right or protection existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal; and provided, further, that no Preferred Stock Designation shall be
amended after the issuance of any shares of the series of Preferred Stock
created thereby, except in accordance with the terms of such Preferred Stock
Designation and the requirements of applicable law.
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 No. 333-62371 on Form S-8.
/s/ Arthur Andersen LLP
New York, New York
March 31, 2000
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