<PAGE>
================================================================================
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 AUGUST 2, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-86154
BRYLANE INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3794198
(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 as of
August 2, 1997 was 19,471,445 shares.
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<PAGE>
BRYLANE INC.
FORM 10-Q
For the Quarterly Period Ended
August 2, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
a) Report of Independent Accountants 3
b) Consolidated Balance Sheets
February 1, 1997 and August 2, 1997 (unaudited) 4
c) Consolidated Statements of Income (unaudited)
Thirteen weeks ended August 3, 1996 and
August 2, 1997 and twenty-six weeks ended
August 3, 1996 and August 2, 1997 5
d) Consolidated Statements of Cash Flows (unaudited)
Twenty-six weeks ended August 3, 1996 and
August 2, 1997 6
e) Consolidated Statements of Partnership/Stockholder's
Equity February 3, 1996, February 1, 1997 and
twenty-six weeks ended August 2, 1997 (unaudited) 7
f) Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
</TABLE>
Page 2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Brylane Inc.
We have reviewed the accompanying consolidated balance sheet of Brylane Inc. as
of August 2, 1997 and the related consolidated statements of income for the
thirteen and twenty-six weeks then ended and the consolidated statement of cash
flows for the twenty-six weeks then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Indianapolis, Indiana
August 20, 1997
Page 3
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. - FINANCIAL STATEMENTS
- ------------------------------
BRYLANE INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
February 1, August 2,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 3,285 $ --
Accounts receivable, deferred billing (net)......................................... 22,750 7,503
Accounts receivable, other.......................................................... 32,107 9,401
Inventories......................................................................... 168,821 188,543
Paper inventory..................................................................... 9,790 18,059
Catalog costs....................................................................... 31,222 24,676
Other............................................................................... 6,252 5,252
----------- -----------
TOTAL CURRENT ASSETS 274,227 253,434
Property and equipment, net........................................................... 75,970 76,338
Organization and deferred financing costs............................................. 11,114 3,979
Intangibles and other assets.......................................................... 343,243 337,825
Deferred income taxes................................................................. -- 17,551
Deferred offering costs............................................................... 680 --
----------- -----------
TOTAL ASSETS $ 705,234 $ 689,127
=========== ===========
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 93,928 $ 109,370
Accrued interest.................................................................... 8,612 6,223
Accrued expenses.................................................................... 45,356 41,675
Income taxes payable................................................................ -- 2,364
Reserve for returns................................................................. 18,603 11,285
Short-term debt..................................................................... -- 20,000
Current portion of long-term debt................................................... 26,000 9,028
----------- -----------
TOTAL CURRENT LIABILITIES 192,499 199,945
Long-term debt........................................................................ 401,362 255,251
Other long-term liabilities........................................................... 6,010 7,390
----------- -----------
TOTAL LIABILITIES 599,871 462,586
Convertible redeemable preferred stock................................................ 1,500 1,500
Partnership/stockholders' equity:
General partner of Brylane, L.P., 2,562,500 units................................... 25,625 --
Limited partners of Brylane, L.P., 12,908,945 units at February 1, 1997............. 159,855 --
Common stock, $.01 par value 40,000,000 shares authorized;
19,471,445 shares issued and outstanding.......................................... -- 195
Additional paid in capital.......................................................... -- 290,339
Reduction for predecessor cost - carryover basis.................................... (152,067) (152,067)
Loans to management investors....................................................... (2,490) (2,490)
Retained earnings................................................................... 72,940 89,064
----------- -----------
Total partnership/stockholders' equity........................................ 103,863 225,041
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 705,234 $ 689,127
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
Page 4
<PAGE>
BRYLANE INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------------- -----------------------------
August 3, August 2, August 3, August 2,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................................. $ 157,945 $ 274,656 $ 308,625 $ 603,457
Cost of goods sold...................................... 77,236 144,239 149,898 313,286
----------- ----------- ----------- -----------
Gross margin.............................................. 80,709 130,417 158,727 290,171
Operating expenses:
Catalog and advertising................................. 41,470 54,540 88,988 137,879
Fulfillment............................................. 10,106 28,345 18,380 56,415
Support services........................................ 11,157 21,740 21,701 43,750
Intangibles and organization cost amortization.......... 1,409 2,734 2,818 5,466
----------- ----------- ----------- -----------
Total operating expenses.................................. 64,142 107,359 131,887 243,510
----------- ----------- ----------- -----------
Operating income.......................................... 16,567 23,058 26,840 46,661
Interest expense, net..................................... 5,235 6,157 10,791 13,685
----------- ----------- ----------- -----------
Income before income taxes
and extraordinary charge................................ 11,332 16,901 16,049 32,976
Provision for income taxes................................ 28 6,253 57 12,742
----------- ----------- ----------- -----------
Income before extraordinary charge........................ 11,304 10,648 15,992 20,234
Extraordinary charge related to early
retirement of debt, net of tax.......................... - - - 4,110
----------- ----------- ----------- -----------
Net income................................................ $ 11,304 $ 10,648 $ 15,992 $ 16,124
=========== =========== =========== ===========
Primary earnings per share:
Income per share before extraordinary charge............ $ 0.84 $ 0.53 $ 1.19 $ 1.04
Extraordinary charge per share.......................... - - - 0.21
----------- ----------- ----------- -----------
Net income per share.................................... $ 0.84 $ 0.53 $ 1.19 $ 0.83
=========== =========== =========== ===========
Weighted average shares outstanding..................... 13,421,003 20,107,351 13,419,588 19,452,313
Supplemental data (Note 7):
Historical income before provision for
income taxes and extraordinary charge.............. $ 11,332 $ 16,901 $ 16,049 $ 32,976
Supplemental provision for income taxes................. 4,193 6,253 5,938 12,201
----------- ----------- ----------- -----------
Supplemental income before extraordinary charge......... 7,139 10,648 10,111 20,775
Extraordinary charge related to early
retirement of debt, net of tax..................... - - - 4,110
----------- ----------- ----------- -----------
Supplemental net income................................. $ 7,139 $ 10,648 $ 10,111 $ 16,665
=========== =========== =========== ===========
Supplemental earnings per share......................... $ 0.53 $ 0.53 $ 0.75 $ 0.86
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
Page 5
<PAGE>
BRYLANE INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
---------------------------
August 3, August 2,
1996 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 15,992 $ 16,124
Impact of other operating activities on cash flows:
Depreciation................................................................... 2,148 5,143
Non-recurring inventory charge................................................. -- 3,315
Extraordinary charge related to early retirement of debt....................... -- 6,524
Non-cash compensation expense.................................................. -- 349
Amortization:
Intangibles and organization costs........................................... 2,818 5,466
Deferred financing costs (included in interest expense)...................... 734 784
Discount on notes (included in interest expense)............................. 48 48
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 515 9,148
Inventories.................................................................. (7,858) (23,037)
Catalog costs and paper inventory............................................ 5,795 (1,723)
Accounts payable and accrued expenses........................................ 4,703 11,347
Accrued interest............................................................. (733) (2,389)
Income taxes payable......................................................... 2,364
Other assets and liabilities................................................. 1,064 (2,728)
-------- ---------
Net cash provided by operating activities.......................................... 25,226 30,735
-------- ---------
INVESTING ACTIVITIES:
Capital expenditures............................................................. (2,056) (7,322)
Purchase price adjustment related to Chadwick's acquistion....................... -- 28,805
-------- ---------
Net cash provided by (used in) investing activities................................ (2,056) 21,483
-------- ---------
FINANCING ACTIVITIES:
Payments on 1996 and 1997 bank credit facility.................................. (6,748) (344,793)
Proceeds from issuance of 1997 Bank Credit Facility.............................. -- 181,663
Borrowings on revolver........................................................... -- 20,000
Proceeds from initial public offering............................................ -- 96,000
Offering fees and expenses....................................................... -- (8,170)
Debt issuance fees and expenses.................................................. -- (203)
Tax distributions to partners of Brylane, L.P.................................... (4,087) --
Proceeds from the sale, net of repurchase, of partnership interests,
net of management notes........................................................ 77 --
-------- ---------
Net cash used in financing activities.............................................. (10,758) (55,503)
-------- ---------
Cash and cash equivalents, at beginning of year.................................... 7,469 3,285
-------- ---------
Cash and cash equivalents, at end of period........................................ $ 19,881 $ --
======== =========
Supplemental disclosure of cash flow information:
Interest paid.................................................................... $ 11,049 $ 16,848
======== =========
Income taxes paid................................................................ $ -- $ 7,966
======== =========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements
Page 6
<PAGE>
BRYLANE INC.
CONSOLIDATED STATEMENTS OF PARTNERSHIP/STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------
<TABLE>
<CAPTION>
General Partner
Limited Partners Common Stock Additional
------------------------- -------------------------- Paid in
Units Amount Shares Amount Capital
------------ ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, February 3, 1996.............................. 12,902,500 $130,829
Net income.......................................... - -
Sale of units....................................... 2,573,945 51,441
Repurchase of units................................. (5,000) (60)
Exchange of stock options........................... - 3,270
Tax distributions payable to partners............... - -
---------- -------- ---------- ------------ ---------
Balance, February 1, 1997.............................. 15,471,445 185,480
Net income.......................................... - -
Proceeds from Initial Public Offering............... - - 4,000,000 $ 40 $ 95,960
Initial Public Offering expenses.................... - - - - (8,850)
Exchange of partnership units for common stock...... (15,471,445) (185,480) 15,471,445 155 185,325
Recognition of deferred tax asset................... - - - - 17,551
Exchange of stock options........................... - - - - 353
---------- -------- ---------- ------------ --------
Balance August 2, 1997(unaudited)...................... 0 $ 0 19,471,445 $195 $290,339
========== ========= ========== ============ ========
Reduction for
Predecessor
Cost - Loans to
Carryover Management Retained
Basis Investors Earnings Total
------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, February 3, 1996.............................. $(152,067) $(2,515) $50,940 $ 27,187
Net income.......................................... - - 26,952 26,952
Sale of units....................................... - 25 - 51,466
Repurchase of units................................. - - - (60)
Exchange of stock options........................... - - - 3,270
Tax distributions payable to partners............... - - (4,952) (4,952)
--------- ------- ------- --------
Balance, February 1, 1997.............................. (152,067) (2,490) 72,940 103,863
Net income.......................................... - - 16,124 16,124
Proceeds from Initial Public Offering............... - - - 96,000
Initial Public Offering expenses.................... - - - (8,850)
Exchange of partnership units for common stock...... - - - -
Recognition of deferred tax asset................... - - - 17,551
Exchange of stock options........................... - - - 353
--------- ------- ------- --------
Balance August 2, 1997(unaudited)...................... $(152,067) $(2,490) $89,064 $225,041
========= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
Page 7
<PAGE>
BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS:
Brylane Inc. ("Brylane" or the "Company") is a leading catalog retailer of
value-priced apparel, with a focused portfolio of catalogs that includes Lane
Bryant, Roaman's, Jessica London and KingSize serving the special size market,
and Lerner, Chadwick's of Boston, Sue Brett and Bridgewater, serving the women's
regular-size apparel market. Brylane also markets certain of its catalogs under
the "Sears" name to customers of Sears, Roebuck and Co. under an exclusive
licensing arrangement with Sears Shop at Home Services, Inc.
Brylane's merchandising strategy is to provide value-priced, private label
and branded apparel with a consistent quality and fit, to concentrate on apparel
with limited fashion risk, and to offer a broader selection of sizes, styles and
colors than can be found at most retail stores and in other competing catalogs.
Each of Brylane's catalogs offers its customers basic, traditional and classic
apparel.
(2) ORGANIZATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION:
On February 26, 1997, in connection with the initial public offering of
Brylane Inc. ("Initial Public Offering"), Brylane, L.P. (the "Partnership")
became a wholly-owned subsidiary of Brylane Inc. pursuant to the First Amended
and Restated Incorporation and Exchange Agreement (the "Exchange Agreement"),
whereby certain affiliates of Freeman Spogli & Co. ("FS&Co."), The Limited, Inc.
("The Limited"), M&P Distributing Co., WearGuard Corporation ("WearGuard"),
Leeway & Co., and NYNEX exchanged their shares of common stock of VP Holding
Corporation or ownership interests in the Partnership, except for the TJX
noteholder ("TJX Noteholder"), for 14,926,778 shares of $.01 par value common
stock ("Common Stock") of Brylane Inc. (the "Exchange Transaction").
Additionally, pursuant to their respective stock subscription agreements with VP
Holding Corporation, members of management and others exchanged their shares of
common stock of VP Holding Corporation for an aggregate of 544,667 shares of
Common Stock of Brylane Inc. In connection with the Exchange Transaction,
Brylane, L.P. retained all of its assets, operations and liabilities.
On February 26, 1997, Brylane Inc. offered 4,000,000 shares of Common Stock
to the public through its Initial Public Offering. Brylane Inc. is a registrant
pursuant to Section 12 of the Exchange Act and is thereby required to provide
continuous financial reporting to its stockholders. As discussed above, Brylane
Inc. does not maintain any separate assets, operations or liabilities, except
for assets and liabilities related to income taxes, as all activities are
conducted within Brylane, L.P. Therefore, the historical balance sheet as of
February 1, 1997 and the historical statements of income for the thirteen and
twenty-six weeks ended August 3, 1996 and cash flows for the twenty-six weeks
ended August 3, 1996 of Brylane, L.P. are included herein for comparative
purposes.
The consolidated financial statements of Brylane Inc. include the accounts
of VP Holding Corporation and its wholly-owned subsidiaries, VGP Corporation and
VLP Corporation and Brylane, L.P. 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., K.S. Management
Services, Inc., C.O.B. Management Services, Inc. and Chadwick's Tradename Sub,
Inc. These entities are collectively referred to as Brylane or the Company. The
effect of transactions between the consolidated entities has been eliminated.
Each of the wholly-owned subsidiaries and partnerships of Brylane, L.P. has
guaranteed the 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, and therefore, that information provided in separate financial statements
of the subsidiary guarantors is not deemed material to the readers of the
financial statements. Financial statements of Brylane, L.P. have been filed with
the Securities and Exchange Commission under File Number 33-69532.
Page 8
<PAGE>
BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(3) ACQUISITION:
In December 1996, Brylane, L.P. completed the acquisition of certain assets
of the Chadwick's of Boston catalog division ("Chadwick's") of Chadwick's, Inc.,
a wholly-owned subsidiary of The TJX Companies ("TJX") (the "Chadwick's
Acquisition"). Chadwick's is a catalog business devoted to selling off-price
women's career, casual and social apparel. The Chadwick's Acquisition included
the purchase of inventory, property, plant and equipment, customer lists,
trademarks, goodwill and the assumption of certain liabilities relating to the
business by the Partnership. In addition, the parties entered into a services
agreement, as well as an inventory purchase agreement pursuant to which TJX has
committed to purchase certain amounts of Chadwick's excess inventory through
January 2000.
Brylane paid to TJX $193.9 million (which is net of a purchase price
adjustment of $28.8 million received on May 16, 1997 and is subject to certain
further post-closing adjustments) and issued to TJX a $20.0 million Convertible
Redeemable Note due 2006. In order to fund a portion of the cash paid in
connection with the Chadwick's Acquisition and to repay its existing
indebtedness under its 1993 bank credit facility, the Partnership entered into
the 1996 Bank Credit Facility. In addition, the Partnership received an
aggregate of $51.3 million in new equity from certain affiliates of FS&Co.,
Leeway & Co., NYNEX and WearGuard.
(4) LONG-TERM DEBT:
In connection with the Chadwick's Acquisition, the Partnership entered into
a Credit Agreement dated December 9, 1996 among Brylane, Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"), as administrative agent, Merrill Lynch
Capital Corporation ("Merrill Lynch"), as documentation agent, and the other
lenders party thereto, and guaranteed by each of the Company's subsidiaries (the
"1996 Bank Credit Facility"). The proceeds of the term loans of the 1996 Bank
Credit Facility were used to fund a portion of the cash paid upon the closing of
the Chadwick's Acquisition (including related fees and expenses) as well as to
repay Brylane's then existing indebtedness under its 1993 bank credit facility.
In connection with Brylane Inc.'s Initial Public Offering on February 26, 1997,
and the use of the net proceeds received therefrom and contributed by Brylane
Inc. to the Partnership, the Company repaid $89.3 million in indebtedness under
its 1996 Bank Credit Facility. In addition, the Company made $12.0 million of
prepayments on the 1996 Bank Credit Facility during the thirteen weeks ended May
3, 1997.
On April 30, 1997, the Partnership entered into a credit agreement among
Brylane, Morgan Guaranty, as administrative agent, Merrill Lynch, as
documentation agent, and the lenders party thereto, and guaranteed by each of
the Company's subsidiaries (the "1997 Bank Credit Facility") which consists of
(i) a $111.7 million four-year nine-month term loan (the "Tranche A Term Loan"),
(ii) a $70.0 million five-year and ten-month term loan (the "Tranche B Term
Loan", and collectively with the Tranche A Term Loan, the "Term Loans"), and
(iii) a $125.0 million four-year nine-month revolving credit facility (the
"Revolving Credit Facility") with a $75.0 million sublimit for letters of
credit. The proceeds of the Term Loans of the 1997 Bank Credit Facility were
used to repay Brylane's existing indebtedness under the 1996 Bank Credit
Facility. The Revolving Credit Facility can be used for letters of credit and
general corporate purposes, including working capital needs. The Term Loans
require scheduled quarterly principal payments over their terms. In addition,
Brylane is obligated to make certain mandatory prepayments of the Term Loans and
the Revolving Credit Facility under certain circumstances. Borrowings under the
Term Loans and the Revolving Credit Facility bear interest at one of two rates
selected by the Partnership (i) a margin over the higher of (A) Morgan
Guaranty's prime rate or (B) the federal funds rate plus 0.5% or (ii) a margin
over LIBOR (as defined) for specified interest periods. The margin for each rate
may vary based on the ratio of the Partnership's net debt to operating cash flow
ratio. The Tranche A Term Loan currently bears interest at LIBOR plus 0.875% and
the Tranche B Term Loan currently bears interest at LIBOR plus 1.625%. The Term
Loans began amortizing on August 1, 1997, with aggregate scheduled principal
payments of $3.6 million during the remainder of fiscal 1997. As a result of
this transaction, the Company recorded an extraordinary charge for previously
capitalized
Page 9
<PAGE>
BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
fees associated with the 1996 Bank Credit Facility in its consolidated statement
of income for the thirteen weeks ended May 3, 1997.
The Company made $62.1 million of prepayments on the Tranche A Term Loan of
the 1997 Bank Credit Facility during the twenty-six weeks ended August 2, 1997.
In addition, the Company made $1.8 million of scheduled payments on the Term
Loans of the 1997 Bank Credit Facility during the thirteen weeks ended August 2,
1997. As of August 2, 1997, Brylane had $20.0 million of borrowings under the
Revolving Credit Facility and, after giving effect to the issuance of letters of
credit for $53.2 million which the Company intends to pay through funds
generated from operations, had additional capacity under the Revolving Credit
Facility of approximately $51.8 million.
(5) NET INCOME PER SHARE:
Net income per share is computed based upon the weighted average number of
outstanding common shares, including the effect of stock options based on the
treasury stock method. In accordance with Securities and Exchange Commission
rules, options granted in the one year period prior to the filing of the
registration statement related to the initial public offering are included as
outstanding for all periods presented using the treasury stock method.
(6) INCOME TAXES:
Brylane Inc. accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Pursuant to SFAS No. 109, deferred tax assets and liabilities result from
differences between financial reporting and tax basis of assets and liabilities,
measured using enacted tax rates and laws in effect when the differences
reverse. Upon consummation of the Exchange Transaction, Brylane Inc. recorded a
deferred income tax benefit of $17.6 million and during the quarter income tax
expense of $6.3 million.
The deferred tax asset represents the tax effect at current rates of
temporary differences associated with the difference between the book and tax
basis of the partners in their investment in Brylane, L.P., and represents
estimated future tax benefits to Brylane Inc. arising from those assets.
(7) SUPPLEMENTAL NET INCOME AND EARNINGS PER SHARE:
Supplemental net income of Brylane Inc. represents the results of
operations adjusted to reflect a provision for income tax on historical income
before income taxes, which gives effect to the change in the consolidated
entities tax status to a C-corporation subsequent to the public sale of its
Common Stock. The difference between the proforma income tax rates utilized and
the federal statutory rate of 35% relates primarily to state income taxes, net
of federal tax benefit.
Supplemental earnings per share of Brylane Inc. represents supplemental net
income divided by the weighted average partnership units outstanding prior to
the Initial Public Offering and the weighted average common stock and equivalent
units outstanding thereafter. In accordance with Securities and Exchange
Commission rules, options granted in the one year prior to the filing of the
registration statement related to the initial public offering are included as
outstanding for all periods presented using the treasury stock method assuming
the offering price of $24 per share.
(8) RECLASSIFICATIONS:
Certain reclassifications have been made to the consolidated statements of
cash flows for the twenty-six weeks ended August 3, 1996 to conform with the
financial statement presentation adopted for the fiscal year ending February 1,
1997. Such reclassifications had no effect on previously reported net income.
Page 10
<PAGE>
BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(9) UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the twenty-six weeks ended August 3,
1996 and August 2, 1997 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 Inc.'s Form 10-K for the fiscal year ended
February 1, 1997. 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.
Page 11
<PAGE>
BRYLANE INC.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
As a result of the Chadwick's Acquisition and the application of purchase
accounting related thereto, the Company's gross margin for the twenty-six weeks
ended August 2, 1997 reflects a non-recurring inventory charge of $3.3 million
related to the write-up of the Chadwick's inventory. In addition, as a result of
the formation of Brylane, L.P. and the related acquisition of the Lane Bryant,
Roaman's and Lerner catalog businesses by certain affiliates of FS&Co. and of
The Limited (the "Brylane Acquisition"), the acquisition by Brylane of the
KingSize catalog division of WearGuard Corporation (the "KingSize Acquisition"),
and the Chadwick's Acquisition and the application of purchase accounting
related thereto, the results of operations for the twenty-six weeks ended August
2, 1997 reflect amortization of intangible assets related to the Brylane
Acquisition, the KingSize Acquisition and the Chadwick's Acquisition of $2.1
million, $0.7 million and $2.6 million, respectively.
The Company's results of operations in the future will continue to reflect
the amortization of intangible assets related to the Brylane Acquisition, the
KingSize Acquisition and the Chadwick's Acquisition of $4.2 million per year,
$1.4 million per year and $5.3 million per year, respectively, and step-up
depreciation associated with the write-up of certain fixed assets in connection
with the Brylane Acquisition of $0.4 million per year. During the thirteen weeks
ended August 2, 1997, the Company prepaid $50.0 million on the Tranche A Term
Loan of the 1997 Bank Credit Facility (as defined herein). As a result of these
prepayments, the Company's interest expense for the remainder of fiscal 1997
should be reduced.
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Such statements are
subject to a number of risks and uncertainties, including among other things,
competition, risks associated with the Sears Agreement, the impact of increases
in costs of postage, paper and printing, control of the Company by FS&Co. and
The Limited, dependence on suppliers, risks generally associated with
acquisitions, and risks related to unionized employees. Actual results in the
future could differ materially from those described in the forward-looking
statements as a result of such risk factors. The Company undertakes no
obligation to publicly release the result of any revisions of these forward-
looking statements that may be made to reflect any future events or
circumstances.
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 for Brylane Inc. as filed
with the Securities and Exchange Commission on May 2, 1997 (File No. 33-86154).
Page 12
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain operating data of Brylane Inc. for
the periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
August 3, August 2, August 3, August 2,
1996 1997 1996 1997
--------- --------- --------- ---------
(in thousands) (in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales............................... $157,945 $274,656 $308,625 $603,457
Gross profit............................ 80,709 130,417 158,727 290,171
Operating expenses:
Catalog and advertising............ 41,470 54,540 88,988 137,879
Fulfillment........................ 10,106 28,345 18,380 56,415
Support services................... 11,157 21,740 21,701 43,750
Amortization of acquisitions
intangibles and organization
costs............................. 1,409 2,734 2,818 5,466
-------- -------- -------- --------
Operating income........................ 16,567 23,058 26,840 46,661
Add back: Non-recurring inventory
charge(1)......................... -- 829 -- 3,315
Add back: Amortization of
acquisitions intangibles and
organization costs(2)............. 1,409 2,734 2,818 5,466
Add back: Non-cash compensation
expense(3)........................ -- 174 -- 349
-------- -------- -------- --------
Operating income before acquisitions
related and non-recurring adjustments.. $ 17,976 $ 26,795 $ 29,658 $ 55,791
======== ======== ======== ========
</TABLE>
The following table sets forth certain operating data of Brylane Inc.
expressed as a percentage of net sales for the period indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
August 3, August 2, August 3, August 2,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Gross profit............................ 51.1 47.5 51.4 48.1
Operating expenses:
Catalog and advertising............ 26.3 19.9 28.8 22.9
Fulfillment........................ 6.4 10.3 6.0 9.4
Support services................... 7.1 7.9 7.0 7.2
Amortization of acquisitions
intangibles and organization
costs............................. 0.9 1.0 0.9 0.9
----- ----- ----- -----
Operating income........................ 10.4 8.4 8.7 7.7
Add back: Non-recurring inventory
charge(1)......................... -- 0.3 -- 0.5
Add back: Amortization of
acquisitions intangibles and
organization costs(2)............. 0.9 1.0 0.9 0.9
Add back: Non-cash compensation
expense(3)........................ -- 0.1 -- 0.1
----- ----- ----- -----
Operating income before acquisitions
related and non-recurring adjustments.. 11.3% 9.8% 9.6% 9.2%
===== ===== ===== =====
</TABLE>
Notes on page 15
Page 13
<PAGE>
The following table sets forth certain historical operating data of Brylane
and Chadwick's on an unaudited combined basis for the thirteen and twenty-six
weeks ended August 3, 1996 to include net sales, cost of sales and operating
expenses for Chadwick's as if the Chadwick's Acquisition had occurred on
February 4, 1996 (the first day of fiscal 1996). The unaudited combined
information is included for comparative purposes only and is not meant to be
indicative of what the consolidated statements of operations data would have
been had the transaction occurred at February 4, 1996.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
Combined Combined
August 3, August 2, August 3, August 2,
1996 1997 1996 1997
--------- --------- --------- ---------
(in thousands) (in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales............................... $250,850 $274,656 $533,526 $603,457
Gross profit............................ 121,272 130,417 260,357 290,171
Operating expenses:
Catalog and advertising............ 59,733 54,540 134,866 137,879
Fulfillment........................ 22,854 28,345 43,232 56,415
Support services................... 19,134 21,740 37,926 43,750
Amortization of acquisitions
intangibles and organization
costs............................. 2,732 2,734 5,464 5,466
-------- -------- -------- --------
Operating income........................ 16,819 23,058 38,869 46,661
Add back: Non-recurring inventory
charge(1)......................... -- 829 -- 3,315
Add back: Amortization of
acquisitions intangibles and
organization costs(2)............. 2,732 2,734 5,464 5,466
Add back: Non-cash compensation
expense(3)........................ -- 174 -- 349
-------- -------- -------- --------
Operating income before acquisitions
related and non-recurring adjustments.. $ 19,551 $ 26,795 $ 44,333 $ 55,791
======== ======== ======== ========
</TABLE>
The following table expresses the above operating data as a percentage of
net sales for the periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
Combined Combined
August 3, August 2, August 3, August 2,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Gross profit............................ 48.3 47.5 48.8 48.1
Operating expenses:
Catalog and advertising............ 23.8 19.9 25.3 22.9
Fulfillment........................ 9.1 10.3 8.1 9.4
Support services................... 7.6 7.9 7.1 7.2
Amortization of acquisitions
intangibles and organization
costs............................. 1.1 1.0 1.0 0.9
----- ----- ----- -----
Operating income........................ 6.7 8.4 7.3 7.7
Add back: Non-recurring inventory
charge(1)......................... -- 0.3 -- 0.5
Add back: Amortization of
acquisitions intangibles and
organization costs(2)............. 1.1 1.0 1.0 0.9
Add back: Non-cash compensation
expense(3)........................ -- 0.1 -- 0.1
----- ----- ----- -----
Operating income before acquisitions
related and non-recurring adjustments.. 7.8% 9.8% 8.3% 9.2%
===== ===== ===== =====
</TABLE>
Notes on page 15
Page 14
<PAGE>
(1) The non-recurring inventory charge resulted from increasing inventory by
$4,972,000 for the Chadwick's Acquisition to reflect the fair market value of
the inventory at December 9, 1996, the closing date of the Chadwick's
Acquisition. The increase in inventory value related to the Chadwick's
Acquisition was amortized into cost of goods sold in the amount of $1,657,000 in
fiscal 1996 and $2,486,000 and $829,000 in the thirteen weeks ended May 3, 1997
and August 2, 1997, respectively.
(2) Represents amortization of goodwill and other intangible assets related to
the Brylane Acquisition of $125,450,000 over a 30-year composite life and of
organizational costs of $300,000 over five years and subsequent to October 1,
1995, includes amortization related to the KingSize Acquisition of goodwill of
$50,762,000 over a 40-year life, of customer file of $520,000 over an eight-year
life, and of a noncompetition agreement of $300,000 over a five-year life.
Subsequent to December 9, 1996, includes amortization related to the Chadwick's
Acquisition of goodwill of $179,485,000 over a 40-year life, and of customer
file of $4,020,000 over a five-year life.
(3) Represents non-cash compensation expense related to amendments to options
granted under the Brylane, L.P. 1993 Partnership Unit Option Plan.
THIRTEEN WEEKS ENDED AUGUST 2, 1997 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 3,
1996
NET SALES:
Net sales as reported for the thirteen weeks ended August 2, 1997 increased
to $274.7 million from $157.9 million in the comparable period of fiscal 1996.
The increase in net sales came principally from the inclusion of the net sales
of the recently acquired Chadwick's of Boston catalog and also from the
Company's other catalog titles.
Net sales on a combined basis including Chadwick's for the thirteen weeks
ended August 3, 1996, increased 9.5% to $274.7 million from $250.9 million. Such
sales gain was due to an increase in the average order size across all catalogs
as well as a slight increase in circulation as compared to the comparable period
in fiscal 1996.
GROSS PROFIT:
Gross profit for the thirteen weeks ended August 2, 1997 increased to
$130.4 million (47.5% of net sales) from $80.7 million (51.1% of net sales) for
the same period of fiscal 1996. The lower gross profit margin as a percent of
net sales is due to the inclusion of the Chadwick's catalogs with lower initial
mark-ups on merchandise sold as compared to the Company's other catalog titles
and to a non-recurring inventory charge of $0.8 million (0.3% of net sales)
relating to the step-up of the value of inventory in connection with the
Chadwick's Acquisition.
Gross profit on a combined basis including Chadwick's for the thirteen
weeks ended August 3, 1996 and eliminating the effects of the non-recurring
inventory charge in the thirteen weeks ended August 2, 1997, increased to $131.2
million (47.8% of net sales) from $121.3 million (48.3% of net sales). The gross
profit margin as a percent of net sales decreased 0.5 percentage points due to
higher planned markdowns and a change in the mailing date of a Fall catalog. The
catalog was previously mailed in July last year and was moved to August this
year and has sales with higher gross profit margins.
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 names of prospective customers. For the thirteen weeks
ended August 2, 1997, catalog and advertising expense increased to $54.5 million
(19.9% of net sales) from $41.5 million (26.3% of net sales) for the same period
of fiscal 1996. The decrease on a percent of net sales basis was primarily due
to the inclusion of the Chadwick's catalog and its associated catalog and
advertising expense and net sales.
Catalog and advertising expense on a combined basis including Chadwick's
for the thirteen weeks ended August 3, 1996, decreased on a percent of net sales
basis to 19.9% ($54.5 million) in 1997 from 23.8% ($59.7 million) in 1996. This
decrease on a percent of net sales basis is primarily due to the
Page 15
<PAGE>
renegotiation of certain printing contracts, reduced paper costs and an increase
in the sales productivity per catalog.
FULFILLMENT EXPENSE:
Fulfillment expense includes distribution center, telemarketing, credit
services and customer service expenses, partially offset by net merchandise
postage revenue. Fulfillment expense as reported in the thirteen weeks ended
August 2, 1997 increased to $28.3 million (10.3% of net sales) from $10.1
million (6.4% of net sales) for the same period in fiscal 1996. The increase on
a percent of net sales basis was primarily due to increased fulfillment costs
associated with the acquisition of Chadwick's.
Fulfillment expense on a combined basis including Chadwick's for the
thirteen weeks ended August 3, 1996, increased on a percent of net sales basis
to 10.3% ($28.3 million) in 1997 from 9.1% ($22.9 million) in 1996. This
increase on a percent of net sales basis was primarily due to increased payroll
in the distribution center, telemarketing and other areas to meet increased
customer demand and to ensure a high level of customer service.
SUPPORT SERVICES EXPENSE:
Support services expense includes staffing and other administrative
overhead costs associated with the operation of the business and the license
fees associated with the Company's agreements with Sears Shop At Home. Support
services expense as reported for the thirteen weeks ended August 2, 1997
increased to $21.7 million (7.9% of net sales) from $11.2 million (7.1% of net
sales) for the same period in fiscal 1996. The increase on a percent of net
sales basis was primarily due to the inclusion of Chadwick's and its associated
overhead costs and net sales.
Support services expense on a combined basis including Chadwick's for the
thirteen weeks ended August 3, 1996, increased as a percent of net sales to 7.9%
($21.7 million) in 1997 from 7.6% ($19.1 million) in 1996. This increase in
support services expense as a percent of net sales is primarily due to an
increase in incentive compensation due to the strong performance of the business
during the Spring selling season and an increase in staffing to support the
growth of the business.
AMORTIZATION EXPENSE:
Acquisition related intangibles and organization cost amortization expense
in the thirteen weeks ended August 2, 1997 included $1.1 million related to the
Brylane Acquisition, $0.3 million related to the KingSize Acquisition and $1.3
million related to the Chadwick's Acquisition. Acquisition related intangibles
and organization cost amortization expense in the thirteen weeks ended August 3,
1996 included $1.1 million related to the Brylane Acquisition and $0.3 million
related to the KingSize Acquisition.
OPERATING INCOME:
Operating income before acquisitions-related and non-recurring adjustments
for the thirteen weeks ended August 2, 1997 increased to $26.8 million (9.8% of
net sales) from $18.0 million (11.3% of net sales) for the same period of fiscal
1996. As a percent of net sales, operating income decreased primarily as a
result of the increase in fulfillment and support services expense partially
offset by the decrease in catalog and advertising expense, as described above.
Operating income on a combined basis including Chadwick's for the thirteen
weeks ended August 3, 1996, increased to $26.8 million (9.8% of net sales) in
1997 from $19.6 million (7.8% of net sales) in 1996. As a percent of net sales,
operating income increased primarily as a result of the decrease in catalog and
advertising expense, partially offset by the increase in fulfillment and support
services expense, as discussed above.
Page 16
<PAGE>
INTEREST EXPENSE:
Interest expense, net, in the thirteen weeks ended August 2, 1997 increased
to $6.2 million (2.2% of net sales) from $5.2 million (3.3% of net sales) for
the same period of fiscal 1996 due to the increased borrowings of $210.0 million
incurred in connection with the Chadwick's Acquisition, offset by the prepayment
of debt from the proceeds of the Initial Public Offering and other prepayments
on the 1997 Bank Credit Facility and lower interest rates on the term loans of
the 1997 Bank Credit Facility (as defined below).
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE:
Income as reported before income taxes and extraordinary charge increased
to $16.9 million ($0.84 per share) for the thirteen weeks ended August 2, 1997
from $11.3 million ($0.84 per share) for the same period of fiscal 1996. This
increase was due to the inclusion of Chadwick's.
INCOME TAXES:
Income taxes for the thirteen weeks ended August 2, 1997 were $6.3 million
or 37.0% of income before extraordinary charge. The difference between the
effective tax rate on supplemental net income of 37% and the federal statutory
rate of 35% relates primarily to state income taxes, net of federal tax benefit.
NET INCOME:
Net income decreased to $10.6 million ($0.53 per share) for the thirteen
weeks ended August 2, 1997 from $11.3 million ($0.84 per share) for the same
period of fiscal 1996. The decrease in net income is due to the recognition of
income tax expense related to the change in tax status from a partnership to a
corporation on February 26, 1997, the closing date of the Initial Public
Offering.
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED
AUGUST 3, 1996
NET SALES:
Net sales as reported for the twenty-six weeks ended August 2,1997
increased to $603.5 million from $308.6 million in the comparable period of
fiscal 1996. The increase in net sales came principally from the inclusion of
the net sales of the recently acquired Chadwick's of Boston catalog and also
from the Company's other catalog titles.
Net sales on a combined basis including Chadwick's for the twenty-six weeks
ended August 3, 1996, increased 13.1% to $603.5 million from $533.5 million.
Such sales gain was due, primarily, to an increase in circulation and in an
increase in the average order size across all catalogs as compared to the
comparable period in fiscal 1996.
GROSS PROFIT:
Gross profit for the twenty-six weeks ended August 2, 1997 increased to
$290.2 million (48.1% of net sales) from $158.7 million (51.4% of net sales) for
the same period of fiscal 1996. The lower gross profit margin as a percent of
net sales is due to the inclusion of the Chadwick's catalogs with lower initial
mark-ups on merchandise sold as compared to the Company's other catalog titles
and to a non-recurring inventory charge of $3.3 million (0.5% of net sales)
relating to the step-up of the value of inventory in connection with the
Chadwick's Acquisition.
Gross profit on a combined basis including Chadwick's for the twenty-six
weeks ended August 3, 1996 and eliminating the effects of the non-recurring
inventory charge in the twenty-six weeks ended August 2, 1997, increased to
$293.5 million (48.6% of net sales) from $260.4 million (48.8% of net sales).
The gross profit margin as a percent of net sales decreased 0.2 percentage
points due to higher
Page 17
<PAGE>
planned markdowns and a change in the mailing date of a Fall catalog. The
catalog was previously mailed in July last year and was moved to August this
year and has sales with higher gross profit margins.
CATALOG AND ADVERTISING EXPENSE:
For the twenty-six weeks ended August 2, 1997, catalog and advertising
expense increased to $137.9 million (22.9% of net sales) from $89.0 million
(28.8% of net sales) for the same period of fiscal 1996. The decrease on a
percent of net sales basis was primarily due to the inclusion of the Chadwick's
catalog and its associated catalog and advertising expense and net sales.
Catalog and advertising expense on a combined basis including Chadwick's
for the twenty-six weeks ended August 3, 1996, decreased on a percent of net
sales basis to 22.9% ($137.9 million) in 1997 from 25.3% ($134.9 million) in
1996. This decrease on a percent of net sales basis is primarily due to the
renegotiation of certain printing contracts, reduced paper costs and an increase
in the sales productivity per catalog.
FULFILLMENT EXPENSE:
Fulfillment expense as reported in the twenty-six weeks ended August 2,
1997 increased to $ 56.4 million (9.4% of net sales) from $18.4 million (6.0% of
net sales) for the same period in fiscal 1996. The increase on a percent of net
sales basis was primarily due to increased fulfillment costs associated with the
acquisition of Chadwick's.
Fulfillment expense on a combined basis including Chadwick's for the
twenty-six weeks ended August 3, 1996, increased on a percent of net sales basis
to 9.4% ($56.4 million) in 1997 from 8.1% ($43.2 million) in 1996. This increase
on a percent of net sales basis was primarily due to increased payroll in the
distribution center, telemarketing and other areas to meet increased customer
demand and to ensure a high level of customer service.
SUPPORT SERVICES EXPENSE:
Support services expense as reported for the twenty-six weeks ended August
2, 1997 increased to $43.8 million (7.2% of net sales) from $21.7 million (7.0%
of net sales) for the same period in fiscal 1996. The increase on a percent of
net sales basis was primarily due to the inclusion of Chadwick's and its
associated overhead costs and net sales.
Support services expense on a combined basis including Chadwick's for the
twenty-six weeks ended August 3, 1996, increased as a percent of net sales to
7.2% ($43.8 million) in 1997 from 7.1% ($37.9 million) in 1996. This slight
increase in support services expense as a percent of net sales is primarily due
to an increase in incentive compensation due to the strong performance of the
business during the Spring selling season and an increase in staffing to support
the growth of the business.
AMORTIZATION EXPENSE:
Acquisition related intangibles and organization cost amortization expense
in the twenty-six weeks ended August 2, 1997 included $2.1 million related to
the Brylane Acquisition, $0.7 million related to the KingSize Acquisition and
$2.6 million related to the Chadwick's Acquisition. Acquisition related
intangibles and organization cost amortization expense in the twenty-six weeks
ended August 3, 1996 included $2.1 million related to the Brylane Acquisition
and $0.7 million related to the KingSize Acquisition.
OPERATING INCOME:
Operating income before acquisitions-related and non-recurring adjustments
in the twenty-six weeks ended August 2, 1997 increased to $55.8 million (9.2% of
net sales) from $29.7 million (9.6% of net sales) for the same period of fiscal
1996. As a percent of net sales, operating income decreased
Page 18
<PAGE>
primarily as a result of the increase in fulfillment and support service
expenses partially offset by the decrease in catalog and advertising expense, as
described above.
Operating income on a combined basis including Chadwick's for the twenty-
six weeks ended August 3, 1996, increased to $55.8 million (9.2% of net sales)
in 1997 from $44.3 million (8.3% of net sales) in 1996. As a percent of net
sales, operating income increased primarily as a result of the decrease in
catalog and advertising expense, partially offset by the increase in fulfillment
and support service expenses, as described above.
INTEREST EXPENSE:
Interest expense, net, in the twenty-six weeks ended August 2, 1997
increased to $13.7 million (2.3% of net sales) from $10.8 million (3.5% of net
sales) for the same period of fiscal 1996 due to the increased borrowings of
$210.0 million incurred in connection with the Chadwick's Acquisition, offset by
the prepayment of debt from the proceeds of the Initial Public Offering and
other prepayments on the 1997 Bank Credit Facility and lower interest rates on
the term loans of the 1997 Bank Credit Facility (as defined below).
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE:
Income as reported before income taxes and extraordinary charge increased
to $33.0 million ($1.70 per share) for the twenty-six weeks ended August 2, 1997
from $16.0 million ($1.20 per share) for the same period of fiscal 1996. This
increase was due to the inclusion of Chadwick's.
INCOME TAXES:
Income taxes for the twenty-six weeks ended August 2, 1997 were $12.7
million or 38.5% of income before extraordinary charge. Income taxes on
supplemental income before extraordinary charge were $12.2 million or 37.0%. The
difference between the effective income tax rate as reported and the effective
tax rate on supplemental net income relates primarily to the allocation of loss
to the Partnership for the period prior to the Initial Public Offering. The
difference between the effective tax rate on supplemental net income of 37% and
the federal statutory rate of 35% relates primarily to state income taxes, net
of federal tax benefit.
EXTRAORDINARY CHARGE:
An extraordinary charge of $4.1 million ($0.21 per share), net of tax, was
recorded in the twenty-six weeks ended August 2, 1997 as a result of the early
retirement of the debt under the 1996 Bank Credit Facility.
NET INCOME:
After giving effect to the extraordinary charge, net income increased to
$16.1 million ($0.83 per share) for the twenty-six weeks ended August 2, 1997
from $16.0 million ($1.19 per share) for the comparable period of fiscal 1996.
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, the KingSize Acquisition and the Chadwick's Acquisition,
the Company's liquidity requirements have also included servicing the debt
incurred to finance these acquisitions.
Cash flow provided by operating activities increased to $30.7 million for
the twenty-six weeks ended August 2, 1997, from $25.2 million for the twenty-six
weeks ended August 3, 1996. This increase was
Page 19
<PAGE>
due to an increase in net income, before non-cash related expenses, of $37.8
million for the twenty-six weeks ended August 2, 1997 compared to $21.7 million
in the twenty-six weeks ended August 3, 1996. The Company used all its available
cash during the twenty-six weeks ended August 2, 1997 to reduce bank debt by
$73.9 million, which included prepayments of $10.0 million on the 1996 Bank
Credit Facility and $62.1 on the 1997 Bank Credit Facility, and spent $7.3
million for capital expenditures, as discussed below. In addition, in July 1997
the Company borrowed $20.0 million on its Revolving Credit Facility in order to
satisfy its short-term working capital needs.
Capital expenditures were $7.3 million in the twenty-six weeks ended August
2, 1997 compared to $2.1 million in the same period in fiscal 1996. The increase
is primarily due to the capital expenditures related to Chadwick's which was
acquired in December 1996. The Company's capital expenditures for the remainder
of fiscal 1997 are estimated to be $5.2 million. Brylane plans to fund its
capital expenditures for fiscal 1997 using cash generated from operations.
In connection with the Chadwick's Acquisition, the Partnership entered into
a Credit Agreement dated December 9, 1996 among Brylane, Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"), as administrative agent, Merrill Lynch
Capital Corporation ("Merrill Lynch"), as documentation agent, and the other
lenders party thereto, and guaranteed by each of the Company's subsidiaries (the
"1996 Bank Credit Facility"). The proceeds of the term loans of the 1996 Bank
Credit Facility were used to fund a portion of the cash paid upon the closing of
the Chadwick's Acquisition (including related fees and expenses) as well as to
repay Brylane's then existing indebtedness under its 1993 bank credit facility.
In connection with Brylane Inc.'s Initial Public Offering on February 26, 1997,
and the use of the net proceeds received therefrom and contributed by Brylane
Inc. to the Partnership, the Company repaid $89.3 million in indebtedness under
its 1996 Bank Credit Facility. In addition, the Company made $12.0 million of
prepayments on the 1996 Bank Credit Facility during the thirteen weeks ended May
3, 1997.
On April 30, 1997, the Partnership entered into a credit agreement among
Brylane, Morgan Guaranty, as administrative agent, Merrill Lynch, as
documentation agent, and the lenders party thereto, and guaranteed by each of
the Company's subsidiaries (the "1997 Bank Credit Facility") which consists of
(i) a $111.7 million four-year nine-month term loan (the "Tranche A Term Loan"),
(ii) a $70.0 million five-year and ten-month term loan (the "Tranche B Term
Loan", and collectively with the Tranche A Term Loan, the "Term Loans"), and
(iii) a $125.0 million four-year nine-month revolving credit facility (the
"Revolving Credit Facility") with a $75.0 million sublimit for letters of
credit. The proceeds of the Term Loans of the 1997 Bank Credit Facility were
used to repay Brylane's existing indebtedness under the 1996 Bank Credit
Facility. The Revolving Credit Facility can be used for letters of credit and
general corporate purposes, including working capital needs. The Term Loans
require scheduled quarterly principal payments over their terms. In addition,
Brylane is obligated to make certain mandatory prepayments of the Term Loans and
the Revolving Credit Facility under certain circumstances. Borrowings under the
Term Loans and the Revolving Credit Facility bear interest at one of two rates
selected by the Partnership (i) a margin over the higher of (A) Morgan
Guaranty's prime rate or (B) the federal funds rate plus 0.5% or (ii) a margin
over LIBOR (as defined) for specified interest periods. The margin for each rate
may vary based on the ratio of the Partnership's net debt to operating cash flow
ratio. The Tranche A Term Loan currently bears interest at LIBOR plus 0.875% and
the Tranche B Term Loan initially bears interest at LIBOR plus 1.625%. The Term
Loans began amortizing on August 1, 1997, with aggregate scheduled principal
payments of $3.6 million during the remainder of fiscal 1997.
The Company prepaid $62.1 million on the Tranche A Term Loan of the 1997
Bank Credit Facility during the twenty-six weeks ended August 2, 1997. In
addition, the Company made $1.8 million of scheduled payments on the Term Loans
of the 1997 Bank Credit Facility during the thirteen weeks ended August 2, 1997.
As of August 2, 1997, Brylane had $20.0 million of borrowings under the
Revolving Credit Facility and, after giving effect to the issuance of letters of
credit for $53.2 million which the Company intends to pay through funds
generated from operations, had additional capacity under the Revolving Credit
Facility of approximately $51.8 million.
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. The 1997 Bank Credit Facility,
and the Indenture dated as of August 30, 1993 among Brylane and Brylane Capital
Corp.,
Page 20
<PAGE>
as Issuers, the subsidiaries of Brylane, as Guarantors, and United 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 Partnership's ability to
incur debt, make distributions, incur liens, make capital expenditures and make
investments or acquisitions. Brylane's estimated capital expenditures were in
compliance with the Covenants.
In connection with the Chadwick's Acquisition, Brylane, L.P. entered into
an Accounts Receivable Purchase Agreement dated as of December 9, 1996 with
Alliance Data Systems Corporation ("ADS") (as amended on January 27, 1997, the
"Receivables Purchase Agreement") pursuant to which ADS has agreed to purchase
from the Company eligible customer accounts receivable generated through
Chadwick's deferred billing programs. ADS' commitment to purchase receivables is
limited to $100.0 million outstanding at any time. ADS will purchase the
receivables on a limited recourse basis at a discount from face value. The
Company pays transaction costs including a fee of $.03 per purchased account,
and carrying costs equal to, at the Company's election, LIBOR plus 95 basis
points or the lesser of (a) a defined prime rate plus 15 basis points and (b)
the federal funds rate plus 110 basis points. The receivables purchase facility
has a three-year term and is subject to early termination upon occurrence of
certain events, including chargebacks and customer default ratios above
specified levels or an uncured default by the Partnership under its 1997 Bank
Credit Facility.
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 1997 Bank Credit
Facility), and planned capital expenditures for the foreseeable future. In
addition, the Company will have availability under the Revolving Credit Facility
to finance seasonal capital needs.
Page 21
<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 by Brylane Inc. during
the quarter ended August 2, 1997.
Page 22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 5, 1997 BRYLANE INC.
By: /s/ Robert A. Pulciani
---------------------------------
Robert A. Pulciani
Executive Vice President, Chief
Financial Officer and Secretary and
Treasurer of Brylane Inc.
(On behalf of the Registrant and as the
principal financial and accounting
officer of the Registrant)
Page 23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAY-04-1997
<PERIOD-END> AUG-02-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 18,835
<ALLOWANCES> 1,931
<INVENTORY> 188,543
<CURRENT-ASSETS> 253,434
<PP&E> 141,983
<DEPRECIATION> 65,645
<TOTAL-ASSETS> 689,127
<CURRENT-LIABILITIES> 199,945
<BONDS> 255,251
0
1,500
<COMMON> 195
<OTHER-SE> 224,846
<TOTAL-LIABILITY-AND-EQUITY> 689,127
<SALES> 274,656
<TOTAL-REVENUES> 274,656
<CGS> 144,239
<TOTAL-COSTS> 144,239
<OTHER-EXPENSES> 104,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,157
<INCOME-PRETAX> 16,901
<INCOME-TAX> 6,253
<INCOME-CONTINUING> 10,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,648
<EPS-PRIMARY> .53
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