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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-69532
BRYLANE, L.P.
(Exact name of registrant as specified in its charter)
Delaware 35-1895382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BRYLANE CAPITAL CORP.
(Exact name of co-registrant as specified in its charter)
Delaware 95-4439747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
463 Seventh Avenue
New York, NY 10018
(Address of principal executive offices)
Registrant's telephone number, including area code:
(212) 613-9500
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
___ ___
The number of shares of the registrant's common stock outstanding:
Not Applicable.
Page 1 of 15 pages
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BRYLANE, L.P.
BRYLANE CAPITAL CORP.
FORM 10-Q
For the Quarterly Period Ended
November 2, 1996
<TABLE>
<CAPTION>
INDEX Page
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
a) Consolidated Balance Sheets
February 3, 1996 and November 2, 1996 (unaudited) 3
b) Consolidated Statements of Operations (unaudited)
Thirteen weeks ended October 28, 1995 and November 2, 1996 and
thirty-nine weeks ended October 28, 1995 and November 2, 1996 4
c) Consolidated Statements of Cash Flows (unaudited)
Thirty-nine weeks ended October 28, 1995 and November 2, 1996 5
d) Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
Page 2
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. - FINANCIAL STATEMENTS
- ------------------------------
BRYLANE, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
February 3, November 2,
1996 1996
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................................ $ 7,469 $10,659
Accounts receivable.................................................. 2,387 8,122
Inventories.......................................................... 76,627 93,286
Paper inventory...................................................... 16,102 10,729
Other................................................................ 4,559 5,370
-------- --------
Total current assets 107,144 128,166
Property and equipment, net.............................................. 28,223 28,303
Catalog costs............................................................ 18,131 22,328
Organization and deferred financing costs................................ 8,228 7,082
Intangibles and other assets............................................. 166,177 162,463
-------- --------
Total assets $327,903 $348,342
======== ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable..................................................... $ 47,131 $ 62,467
Accrued interest..................................................... 6,366 2,478
Accrued expenses..................................................... 12,231 11,871
Reserve for returns.................................................. 4,192 5,071
Current portion of long-term debt.................................... 13,720 14,395
-------- --------
Total current liabilities 83,640 96,282
Long-term debt........................................................... 213,020 202,297
Other long-term liabilities.............................................. 4,056 5,556
-------- --------
Total liabilities 300,716 304,135
Partnership equity:
General partner, 2,562,500 units.................................... 25,625 25,625
Limited partners, 10,340,000 units at February 3, 1996 and
10,342,500 units at November 2, 1996.............................. 105,204 105,257
Reduction for predecessor cost - carryover basis.................... (152,067) (152,067)
Loans to management investors....................................... (2,515) (2,490)
Retained earnings................................................... 50,940 67,882
-------- --------
Total partnership equity 27,187 44,207
-------- --------
Total liabilities and equity $327,903 $348,342
======== ========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements.
Page 3
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BRYLANE, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------- ----------------------------
October 28, November 2, October 28, November 2,
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales...................................... $141,226 $158,384 $435,205 $467,009
Cost of goods sold........................... 69,793 75,810 216,892 225,708
Non-recurring inventory charge............... 142 - 142 -
-------- -------- -------- --------
Gross margin................................... 71,291 82,574 218,171 241,301
Operating expenses:
Catalog and advertising...................... 45,255 46,402 127,879 135,390
Fulfillment.................................. 8,633 10,677 26,124 29,057
Support services............................. 9,583 11,294 27,271 32,995
Intangibles and organization cost
amortization................................ 1,177 1,411 3,298 4,229
-------- -------- -------- --------
Total operating expenses....................... 64,648 69,784 184,572 201,671
-------- -------- -------- --------
Operating income............................... 6,643 12,790 33,599 39,630
Interest expense, net.......................... 5,120 5,409 14,882 16,200
-------- -------- -------- --------
Income before income taxes..................... 1,523 7,381 18,717 23,430
Provision for income taxes..................... 41 68 122 125
-------- -------- -------- --------
Net income..................................... $ 1,482 $ 7,313 $ 18,595 $ 23,305
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements.
Page 4
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BRYLANE, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------
October 28, November 2,
1995 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net income................................................................... $ 18,595 $ 23,305
Impact of other operating activities on cash flows:
Depreciation................................................................ 2,593 3,046
Non-recurring inventory charge.............................................. 142 -
Imputed interest............................................................ 185 -
Amortization:
Intangibles and organization costs......................................... 3,298 4,229
Deferred financing costs (included in interest expense).................... 1,101 1,102
Discount on notes (included in interest expense)........................... 72 73
Loss on disposal of assets.................................................. 14 5
Changes in assets and liabilities:
Inventories................................................................ 2,151 (16,660)
Catalog costs and paper inventory.......................................... (9,749) 1,176
Accounts payable and accrued expenses...................................... 10,397 16,605
Accrued interest........................................................... (3,168) (3,889)
Other assets and liabilities............................................... (426) (4,636)
-------- --------
Net cash provided by operating activities..................................... 25,205 24,356
-------- --------
Investing activities:
Capital expenditures......................................................... (6,193) (3,159)
Cash payments in connection with acquisition, net of cash acquired........... (51,975) -
-------- --------
Net cash used in investing activities......................................... (58,168) (3,159)
-------- --------
Financing activities:
Payments on bank credit facility............................................. (19,151) (10,121)
Proceeds from bank credit facility........................................... 35,000 -
Tax distributions to partners................................................ (6,343) (7,963)
Deferred offering costs...................................................... (155) -
Proceeds from the sale, net of repurchase, of partnership interests,
net of management notes..................................................... 112 77
Acquisition related fees and expenses paid at closing........................ (837) -
-------- --------
Net cash provided by (used in) financing activities........................... 8,626 (18,007)
-------- --------
Cash and cash equivalents, at beginning of period............................. 28,495 7,469
-------- --------
Cash and cash equivalents, at end of period................................... $ 4,158 $ 10,659
======== ========
Supplemental disclosure of cash flow information:
Interest paid................................................................ $ 17,741 $ 19,285
======== ========
Supplemental disclosure of noncash financing activity:
Purchase price for King Size acquisition, net of acquisition costs........... $ 57,750
Cash portion of purchase price............................................... 52,500
--------
Partnership units issued for purchase........................................ $ 5,250
========
</TABLE>
Income taxes paid during each of the periods presented were not material.
See Accompanying Notes to Unaudited Financial Statements.
Page 5
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BRYLANE, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS:
Brylane is a leading catalog retailer of special size and regular size
women's apparel, and special size men's apparel. The women's catalogs market
apparel in the budget to low-moderate price range, and the men's catalogs
market apparel in the moderate price range. Brylane services the special size
customer through its Lane Bryant, Roaman's and KingSize (men's) catalogs, and
the regular size women's customer through its Lerner and Sue Brett catalogs.
Brylane also markets apparel to these same customer segments through four
catalogs under licensing arrangements with Sears Shop at Home Services, Inc.
("Sears").
Brylane's merchandising strategy is to provide value-priced, private label
apparel with a consistent quality and fit, to concentrate on apparel with
limited fashion risk, and to offer a broader selection of sizes and styles in
special size apparel than can be found at most retail stores and in other
competing catalogs. Each of Brylane's catalogs offers its customers
contemporary, traditional and basic apparel.
(2) ORGANIZATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION:
In August 1993, certain affiliates of Freeman Spogli & Co. ("FS&Co.") and
of The Limited, Inc. ("The Limited") formed Brylane, L.P. ("Brylane" or the
"Company"), a Delaware limited partnership, and acquired the Lane Bryant,
Roaman's and Lerner catalog businesses (the "Brylane Acquisition") formerly
conducted by certain direct and indirect subsidiaries of The Limited (the
"Predecessor"). The aggregate purchase price was $335 million. The Brylane
Acquisition closed on August 30, 1993. For accounting purposes, the transaction
was accounted for on the effective date of August 1, 1993.
In connection with the Brylane Acquisition, certain affiliates of FS&Co.
and certain management investors contributed $75 million to the capital of
Brylane for a 60% aggregate interest. Certain affiliates of The Limited
contributed substantially all assets and liabilities of the catalog business to
Brylane and received cash of $285 million and a 40% aggregate interest in
Brylane with an assigned value at $50 million. The Limited also received a
warrant (the "Limited Warrant") entitling it to purchase up to 1,250,000 newly
issued partnership units in Brylane, at a price of $10 per unit. At July 27,
1996, the Limited Warrant expired as certain conditions were not met.
The consolidated financial statements include the accounts of Brylane and
its wholly-owned subsidiaries and partnerships, including Brylane Capital Corp.,
B.L. Management Services, Inc., B.L. Catalog Distribution, Inc., B.L. Management
Services Partnership, B.L. Catalog Distribution Partnership, B.N.Y. Service
Corp., and K.S. Management Services, Inc. These entities are collectively
referred to as Brylane or the Partnership. Accounts between the consolidated
entities have been eliminated. Each of the wholly-owned subsidiaries and
partnerships has guaranteed Brylane's 10% Senior Subordinated Notes due 2003
(the "Notes"). Separate financial statements of these subsidiary guarantors have
not been included as the subsidiaries guarantee the Notes on a full,
unconditional, and joint and several basis. Management believes that the
aggregate assets, liabilities, earnings, and equity of the subsidiary guarantors
are currently, both on an individual and a combined basis, inconsequential to
Brylane on a consolidated basis.
Effective July 6, 1996, for business reasons, KingSize Catalog Sales, L.P.,
and KingSize Catalog Sales, Inc. were merged into Brylane. All of the assets and
liabilities of these entities were transferred to Brylane which continues to run
the KingSize Big & Tall catalog business.
(3) KINGSIZE ACQUISITION:
In October 1995, KingSize Catalog Sales, L.P., an Indiana limited
partnership ("KingSize Partnership") and an indirect wholly-owned entity of
Brylane, completed the acquisition of the assets of the KingSize catalog
division of WearGuard Corporation ("WearGuard"), a wholly-owned subsidiary of
ARAMARK Corporation (the "KingSize Acquisition"). The KingSize Acquisition
closed on October 16,
Page 6
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BRYLANE, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1995. For accounting purposes, the transaction was accounted for on the
effective date of October 1, 1995. The business acquired is a catalog business
devoted to big and tall men's apparel, footwear and related accessories. The
KingSize Acquisition included the sale by WearGuard to the KingSize Partnership
of inventory, contracts, customer lists, goodwill, accounts receivable and
certain equipment relating to the operation of the business, and the assumption
of certain liabilities relating to the business by the KingSize Partnership. In
addition, the parties entered into a Noncompetition Agreement dated October 16,
1995.
In connection with the KingSize Acquisition, Brylane paid to WearGuard
$52.5 million in cash and issued to WearGuard 350,000 newly issued limited
partnership units in Brylane (the "Purchase Price"). Brylane financed the cash
portion of the Purchase Price out of available funds as well as additional
borrowings under its bank credit facility (as amended, the "Bank Credit
Facility"). In connection with the KingSize Acquisition, Brylane further amended
its Bank Credit Facility to provide for an additional $35.0 million in available
borrowing capacity. In accordance with Accounting Principles Board Opinion No.
16, interest was imputed for the period from October 1 through October 15, 1995
in the amount of $185,000.
(4) RECLASSIFICATIONS:
Certain items have been reclassified in the accompanying consolidated
financial statements for prior periods in order to conform with the current year
financial statement presentation. Such reclassifications had no effect on
previously reported net income.
(5) UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements for the thirteen weeks ended October 28, 1995 and
the thirty-nine weeks ended October 28, 1995, and as of and for the thirteen
weeks ended November 2, 1996 and the thirty-nine weeks ended November 2, 1996
are unaudited and are presented pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the financial statements should
be read in conjunction with the financial statement disclosures contained in
Brylane's Form 10-K for the fiscal year ended February 3, 1996. In the opinion
of management, the accompanying financial statements reflect all adjustments
necessary (which are of a normal recurring nature, unless separately disclosed)
to present fairly the financial position and results of operations and cash
flows for the interim periods presented, but are not necessarily indicative of
the results of operations and cash flows for a full fiscal year.
(6) SUBSEQUENT EVENTS:
On December 9, 1996, Brylane, L.P. acquired the Chadwick's of Boston
catalog division ("Chadwick's") from The TJX Companies, Inc. (the "Chadwick's
Acquisition"). Chadwick's is the nation's largest catalog retailer of off-priced
women's apparel. Brylane purchased the assets of Chadwick's, excluding certain
accounts receivable, for approximately $223 million in cash and a $20 million
convertible subordinated note. Financing for the transaction was provided
through borrowings under a new credit agreement and $50 million of equity
financing.
Page 7
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BRYLANE, L.P.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following discussion should be read in conjunction with the financial
statements and related notes thereto which appear elsewhere in this Form 10-Q
and in conjunction with the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on May 3, 1996 (File No. 33-69532).
As a result of the Brylane Acquisition and the KingSize Acquisition and the
application of purchase accounting related thereto, the results of operations
for the thirty-nine weeks ended November 2, 1996 reflect amortization of
intangible assets related to the Brylane Acquisition of $3.2 million and related
to the KingSize Acquisition of $1.0 million. Transition costs to move inventory
acquired as a result of the KingSize Acquisition from its pre-acquisition
location in Norwell, Massachusetts to the Company's Indianapolis, Indiana
fulfillment center also negatively impacted the Company's gross margin in the
first quarter by $170,000. There will be no further impact on the Company's
gross margin due to these transition costs. However, the Company's results will
reflect the amortization of intangible assets related to the Brylane Acquisition
of approximately $4.2 million per year, additional depreciation associated with
the write-up of certain fixed assets in connection with the Brylane Acquisition
of $368,000 per year, and the amortization of intangible assets related to the
KingSize Acquisition of approximately $1.4 million per year.
As a result of the Chadwick's Acquisition, and the application of purchase
accounting related thereto, the Company's results in the future may reflect
additional depreciation expense associated with the write-up of fixed assets and
will reflect additional amortization expense associated with the amortization of
the intangible assets. The amount of such amortization and depreciation expense
cannot be determined at this time. Interest expense will also increase as a
result of the increase in long-term debt that occurred in connection with the
acquisition.
Page 8
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain operating data of Brylane for the
periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------- ---------------------------------
Oct. 28, 1995 Nov. 2, 1996 Oct. 28, 1995 Nov. 2, 1996
------------- ------------ ------------- ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net sales............................... $141,226 $158,384 $435,205 $467,009
Gross profit before non-recurring
inventory charge..................... 71,433 82,574 218,313 241,301
Non-recurring inventory charge (a)...... 142 - 142 -
-------- -------- -------- --------
Gross profit............................ 71,291 82,574 218,171 241,301
Operating expenses:
Catalog and advertising............... 45,255 46,402 127,879 135,390
Fulfillment........................... 8,633 10,677 26,124 29,057
Support services...................... 9,583 11,294 27,271 32,995
Amortization of acquisition
intangibles and organization costs
(b) . ............................ 1,177 1,411 3,298 4,229
-------- -------- -------- --------
Operating Income........................ 6,643 12,790 33,599 39,630
Add back: Non-recurring inventory
charge (a)........................... 142 - 142 -
Add back: Amortization of acquisition
intangibles and organization costs
(b) .............................. 1,177 1,411 3,298 4,229
Add back: Step-up depreciation (c)... 92 92 276 276
-------- -------- -------- --------
Operating income before acquisition
related adjustments.................. $ 8,054 $ 14,293 $ 37,315 $ 44,135
======== ======== ======== ========
</TABLE>
The following table sets forth certain operating data of Brylane expressed
as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------- ----------------------------------------
Oct. 28, 1995 Nov. 2, 1996 Oct. 28, 1995 Nov. 2, 1996
--------------------- ------------- ------------------------ -------------
<S> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Gross profit before non-recurring
inventory charge..................... 50.5 52.1 50.2 51.7
Non-recurring inventory charge (a)...... 0.1 - 0.0 -
----- ----- ----- -----
Gross profit............................ 50.4 52.1 50.2 51.7
Operating expenses:
Catalog and advertising............... 32.0 29.3 29.4 29.0
Fulfillment........................... 6.1 6.7 6.0 6.2
Support services...................... 6.8 7.1 6.3 7.1
Amortization of acquisition
intangibles and organization costs.
(b) . ............................ 0.8 0.9 0.8 0.9
----- ----- ----- -----
Operating income........................ 4.7 8.1 7.7 8.5
Add back: Non-recurring inventory
charge (a)........................... 0.1 - 0.0 -
Add back: Amortization of acquisition
intangibles and organization costs
(b) .............................. 0.8 0.9 0.8 0.9
Add back: Step-up depreciation (c)... 0.1 0.0 0.1 0.1
----- ----- ----- -----
Operating income before acquisition
related adjustments.................. 5.7% 9.0% 8.6% 9.5%
===== ===== ===== =====
</TABLE>
- ------------------------
(a) The non-recurring inventory charge during the thirteen weeks and thirty-
nine weeks ended October 28, 1995 resulted from increasing the acquired KingSize
inventory by $569 to reflect its fair value at October 1, 1995, the effective
date of the KingSize Acquisition.
(b) Represents amortization of goodwill and other intangible assets related to
the Brylane Acquisition of $125,450 over a 30-year composite life and
amortization of organizational costs of $300 over five years, and, subsequent to
October 1, 1995, includes amortization related to the KingSize Acquisition of
goodwill of $50,762 over a 40-year life, customer file of $520 over an eight
year life, and a noncompetition agreement of $300 over a five year life.
(c) Property and equipment were written up by $2,943 at the time of the
Brylane Acquisition. This step-up is being depreciated over eight years using
the straight-line method.
Page 9
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THIRTEEN WEEKS ENDED NOVEMBER 2, 1996 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
28, 1995
NET SALES. Net sales for the thirteen weeks ended November 2, 1996 increased
12.1% to $158.4 million from $141.2 million in the comparable period of fiscal
1995. A portion of the increase in net sales came from the acquisition of the
KingSize Big & Tall catalogs. Excluding sales from the KingSize Big & Tall
catalogs, net sales increased 7.4% to $148.5 million in fiscal 1996 from $138.3
million in fiscal 1995.
GROSS PROFIT. Gross profit, excluding the non-recurring inventory charge, for
the thirteen weeks ended November 2, 1996 improved to $82.6 million (52.1% of
net sales) from $71.4 million (50.5% of net sales) for the same period of fiscal
1995. The increase in gross profit as a percent of net sales is primarily due
to higher initial mark-ups resulting from improved merchandise sourcing.
CATALOG AND ADVERTISING EXPENSE. Catalog and advertising expense is comprised
of the costs to produce and distribute catalogs, primarily paper, printing and
catalog mailing costs, and the cost of acquiring new prospect names. For the
thirteen weeks ended November 2, 1996, catalog and advertising expense increased
to $46.4 million (29.3% of net sales) from $45.3 million (32.0% of net sales)
for the same period of fiscal 1995. The decrease in catalog and advertising
expense as a percent of net sales in the thirteen weeks ended November 2, 1996
is due to a decrease in the cost of paper.
FULFILLMENT EXPENSE. Fulfillment expense includes distribution center,
telemarketing, credit services and customer service expenses, partially offset
by net merchandise postage revenue. Fulfillment expense in the thirteen weeks
ended November 2, 1996 increased to $10.7 million (6.7% of net sales) from $8.6
million (6.1% of net sales) for the same period in fiscal 1995. As a percent of
net sales, fulfillment expense was higher due to increased free shipping
promotions used to stimulate sales.
SUPPORT SERVICES EXPENSE. Support services expense includes staffing and
other administrative overhead costs associated with merchandising, advertising,
quality assurance, management information systems, finance, human resources, the
New York and Hingham, Massachusetts offices and the license fees associated with
the Company's agreements with Sears Shop At Home. Support services expense for
the thirteen weeks ended November 2, 1996 increased to $11.3 million (7.1% of
net sales) from $9.6 million (6.8% of net sales) for the same period in fiscal
1995. The increase in support services expense as a percent of net sales is due
to an increase in staffing to support the growth of the business and to an
increase in the license fees paid to Sears due to increased volume, partially
offset by an increase in licensing revenue received from third parties.
AMORTIZATION EXPENSE. Acquisition related intangibles and organization cost
amortization expense in the thirteen weeks ended November 2, 1996 included $1.1
million related to the Brylane Acquisition and $0.3 million related to the
KingSize Acquisition. Acquisition related intangibles and organization cost
amortization expense in the thirteen weeks ended October 28, 1995 included $1.1
million related to the Brylane Acquisition and $0.1 million related to the
KingSize Acquisition. The amortization related to the Brylane Acquisition is
attributable to goodwill and other intangible assets over a 30-year composite
life as well as organization costs over five years. The amortization related to
the KingSize Acquisition is attributable to goodwill over a 40-year life, the
customer file over an eight-year life and a noncompetition agreement over a
five-year life since October 1, 1995, the effective date of the KingSize
Acquisition.
OPERATING INCOME. Operating income before acquisition related amortization in
the thirteen weeks ended November 2, 1996 increased to $14.3 million (9.0% of
net sales) from $8.1 million (5.7% of net sales) for the same period of fiscal
1995. As a percent of net sales, operating income increased as a result of the
decrease in catalog and advertising expense and as a result of the increase in
gross profit as discussed above, partially offset by the increase in fulfillment
and support services expenses.
INTEREST EXPENSE. Interest expense, net, in the thirteen weeks ended November
2, 1996 increased to $5.4 million (3.4% of net sales) from $5.1 million (3.6% of
net sales) for the same period of fiscal 1995 due to the increased borrowings of
$35.0 million incurred in connection with the KingSize Acquisition partially
offset by slightly lower interest rates on the Term Loan.
Page 10
<PAGE>
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 28, 1995
NET SALES. Net sales for the thirty-nine weeks ended November 2, 1996
increased 7.3% to $467.0 million from $435.2 million in the comparable period of
fiscal 1995. The increase in net sales is primarily due to the acquisition of
the KingSize Big & Tall catalogs. Excluding sales from KingSize Big & Tall
catalogs, net sales increased by 1.6% to $439.2 million in fiscal 1996 from
$432.2 million in fiscal 1995.
GROSS PROFIT. Gross profit, excluding the non-recurring inventory charge, for
the thirty-nine weeks ended November 2, 1996 improved to $241.3 million (51.7%
of net sales) from $218.3 million (50.2% of net sales) for the same period of
fiscal 1995. The increase in gross profit as a percent of net sales is
primarily due to higher initial mark-ups resulting from improved merchandise
sourcing.
CATALOG AND ADVERTISING EXPENSE. Catalog and advertising expense for the
thirty-nine weeks ended November 2, 1996 increased to $135.4 million (29.0% of
net sales) from $127.9 million (29.4% of net sales) for the same period of
fiscal 1995. The decrease in catalog and advertising expense as a percent of
net sales in the thirty-nine weeks ended November 2, 1996 is primarily due to
decreased paper costs.
FULFILLMENT EXPENSE. Fulfillment expense in the thirty-nine weeks ended
November 2, 1996 increased to $29.1 million (6.2% of net sales) from $26.1
million (6.0% of net sales) for the same period in fiscal 1995. As a percent of
net sales, fulfillment expense was higher due to increased shipping promotions
used to stimulate sales.
SUPPORT SERVICES EXPENSE. Support services expense for the thirty-nine weeks
ended November 2, 1996 increased to $33.0 million (7.1% of net sales) from $27.3
million (6.3% of net sales) for the same period in fiscal 1995. The increase in
support services expense as a percent of net sales is due to an increase in
staffing to support the growth of the business and to an increase in the license
percentage paid to Sears, (which represents a return to the percentage specified
in the Sears Agreement), as well as increased sales volume, partially offset
by an increase in licensing revenue received from third parties.
AMORTIZATION EXPENSE. Acquisition related intangibles and organization cost
amortization expense in the thirty-nine weeks ended November 2, 1996 included
$3.2 million related to the Brylane Acquisition and $1.0 million related to the
KingSize Acquisition. Acquisition related intangibles and organization cost
amortization expense in the thirty-nine weeks ended October 28, 1995 included
$3.2 million related to the Brylane Acquisition and $0.1 million related to the
KingSize Acquisition.
OPERATING INCOME. Operating income before acquisition related amortization in
the thirty-nine weeks ended November 2, 1996 increased to $44.1 million (9.5% of
net sales) from $37.3 million (8.6% of net sales) for the same period of fiscal
1995. As a percent of net sales, operating income increased as a result of the
increase in gross profit, and to a lesser extent, as a result of the decrease in
catalog and advertising expense as discussed above, partially offset by an
increase in fulfillment and support services expenses.
INTEREST EXPENSE. Interest expense, net, in the thirty-nine weeks ended
November 2, 1996 increased to $16.2 million (3.5% of net sales) from $14.9
million (3.4% of net sales) for the same period of fiscal 1995 due to the
increased borrowings of $35.0 million incurred in connection with the KingSize
Acquisition partially offset by slightly lower interest rates on the Term Loan.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital needs, principally
building inventory to meet increased sales, and its capital expenditure
requirements primarily through funds generated from operations. After the
Brylane Acquisition and the KingSize Acquisition, the Company's liquidity
requirements have also included service on the debt incurred at the time of
these acquisitions and, to a lesser extent, tax distributions to its partners.
Page 11
<PAGE>
Cash flow provided by operating activities decreased to $24.4 million for the
thirty-nine weeks ended November 2, 1996, from $25.2 million for the thirty-
nine weeks ended October 28, 1995. This decrease was primarily due to increased
merchandise inventory owned by the Company at November 2, 1996, partially offset
by a reduction in paper inventory and an increase in accounts payable. The
Company's cash balance was $10.7 million at November 2, 1996, compared to $7.5
million at February 3, 1996. The increase in the cash balance from February 3,
1996 to November 2, 1996 was achieved while using $18.0 million for financing
activities, which included $10.1 million in debt payments and $8.0 million in
tax distributions to partners, as well as $3.2 million in capital expenditures
as discussed below.
Capital expenditures for fiscal 1996 are currently estimated to be $6.3
million, including $2.6 million related to the recently acquired Chadwick's
business. During the thirty-nine weeks ended November 2, 1996 the Company spent
$3.2 million, which included $2.5 million for the replacement of Brylane's
original tilt tray sorter, $400,000 for the addition of conveyors and $300,000
for miscellaneous improvements. During the remainder of fiscal 1996, the
Company will spend an additional $400,000 on the tilt tray sorter (which became
operational in November 1996) and $2.6 million on the Chadwick's business, $1.9
million of which will be spent on a new order entry system for Chadwick's West
Bridgewater telemarketing and fulfillment center. The Company currently
anticipates that its aggregate capital expenditures in fiscal 1997, including
those related to the recently acquired Chadwick's catalog division, will be
approximately $12 million. Of this amount, approximately $3.4 million will be
spent on Chadwick's new order entry system. The remaining $8.6 million will be
spent on routine maintenance and upgrades for both the Chadwick's and Brylane
catalog businesses. Brylane plans to fund its capital expenditures for 1997
using cash generated from operations.
In connection with the Chadwick's Acquisition, the Company entered into a
Credit Agreement dated December 9, 1996 among Brylane and its Subsidiaries,
Morgan Guaranty Trust Company of New York, as administrative agent, Merrill
Lynch Capital Corporation, as documentation agent, and the other lenders parties
thereto (the "New Credit Agreement"), which consisted of (i) a $213 million
five-year term loan, (ii) a $70 million six-year and one quarter term loan, (the
"New Term Loans"), and (iii) a $125 million five-year revolving credit facility
(the "New Revolving Credit Facility") with a $75 million sublimit for letters of
credit. The New Term Loans were used to fund a portion of the cash purchase
price upon the closing of the Chadwick's Acquisition as well as to repay
Brylane's existing indebtedness under its old Bank Credit Facility. The New
Term Loans require scheduled quarterly principal prepayments over their terms.
In addition, Brylane is obligated to make certain mandatory prepayments of the
New Term Loans and the New Revolving Credit Facility under certain
circumstances. The New Revolving Credit Facility may be used for letters of
credit and, if necessary, general corporate purposes, including working capital
needs. The New Term Loans bear interest at one of two rates to be selected by
the Company (i) a margin over the higher of (A) Morgan Guaranty Trust Company of
New York's prime rate of (B) the federal funds rate plus 0.5% of (ii) a margin
over LIBOR (as defined) for specified interest periods. The margin for each
rate varies based on the Company's operating cash flow to net debt ratio. The
New Term Loans begin amortizing in April 1997, and scheduled principal payments
will equal $26 million during fiscal 1997. As of December 11, 1996, Brylane had
no borrowings under the New Revolving Credit Facility and after giving effect to
the issuance of letters of credit for $48.2 million which the Company intends to
pay through funds generated from operations, had additional capacity under the
New Revolving Credit Facility of approximately $76.8 million.
In addition to the New Credit Agreement, the Company entered into an accounts
receivable purchase agreement for three years with Alliance Data Systems
Corporation ("ADS"), under which ADS will purchase certain accounts receivable
arising under the Chadwick's Deferred Billing Program. The maximum amount of
all accounts purchased under this agreement shall not exceed, in the aggregate,
the sum of $100 million at any time. Accounts will be purchased on a limited
recourse basis at a discount from face value. Brylane will pay transaction
costs including a fee of $0.03 per purchased account and carrying costs equal to
LIBOR plus 0.8 percent or a defined prime rate plus 15 basis points.
In connection with the Brylane Acquisition, the Partnership issued $125.0
million aggregate principal amount of its senior subordinated notes (the "Senior
Subordinated Notes"). The Senior Subordinated Notes bear interest at 10% per
annum, payable semi-annually, and mature in 2003. Both the old bank credit
facility and the New Credit Agreement and the Indenture dated as of August 30,
1993 among Brylane and Brylane Capital Corp., as Issuers, the Subsidiaries of
Brylane, as Guarantors, and United
Page 12
<PAGE>
States Trust Company of New York, as Trustee (as supplemented, the "Indenture")
pursuant to which the Senior Subordinated Notes were issued contain covenants
(the "Covenants") that, among other things, restrict the Company's ability to
incur debt, make distributions, incur liens, make capital expenditures and make
investments or acquisitions. During fiscal 1996, Brylane has made tax
distributions to its partners totaling $8.0 million. The Company expects that it
will make total tax distributions to its partners during fiscal 1996 that will
approximate the tax payments the Company would be required to make if it were a
tax paying corporation, rather than a partnership. Brylane's estimated tax
distributions and capital expenditures for fiscal 1996 are in compliance with
the Covenants.
While no assurances can be given in this regard, based on current and
projected operating results, Brylane believes that cash flow from operations
will provide adequate funds for ongoing operations, debt service on its
indebtedness (including scheduled prepayments under the New Credit Agreement),
tax distributions to its partners and planned capital expenditures through the
remaining term of the New Credit Agreement. In addition, the Company will have
availability under the New Revolving Credit Facility.
RECENT DEVELOPMENTS
On December 9, 1996, Brylane, L.P. completed the Chadwick's Acquisition.
Brylane purchased the assets of Chadwick's, excluding certain accounts
receivable, for approximately $223 million in cash and a $20 million convertible
subordinated note. Financing for the transaction was provided through
borrowings under the New Credit Agreement and $50 million of equity financing.
Page 13
<PAGE>
PART II - OTHER INFORMATION
-----------------------------
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------------
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended
November 2, 1996.
Page 14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Dated: December 16, 1996 BRYLANE, L.P.
BRYLANE CAPITAL CORP.
By: /s/ Robert A. Pulciani
-------------------------
Robert A. Pulciani
Authorized Representative of Brylane, L.P.
and Executive Vice President, Chief
Financial Officer and Secretary and
Treasurer of Brylane, L.P. and Brylane
Capital Corp.
(On behalf of the Registrants and as the
principal financial and accounting officer
of each of the Registrants)
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000912276
<NAME> BRYLANE CAPITAL CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> AUG-04-1996
<PERIOD-END> NOV-02-1996
<CASH> 10,659
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<ALLOWANCES> (321)
<INVENTORY> 93,286
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0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 348,342
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