<PAGE>
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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 1, 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
November 1, 1997 was 17,354,648 shares.
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<PAGE>
BRYLANE INC.
FORM 10-Q
For the Quarterly Period Ended
November 1, 1997
<TABLE>
<CAPTION>
INDEX 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 November 1, 1997 (unaudited) 4
c) Consolidated Statements of Income (unaudited)
Thirteen weeks ended November 2, 1996 and November 1, 1997 and
thirty-nine weeks ended November 2, 1996 and November 1, 1997 5
d) Consolidated Statements of Cash Flows (unaudited)
Thirty-nine weeks ended November 2, 1996 and November 1, 1997 6
e) Consolidated Statements of Partnership/Stockholder's Equity
February 3, 1996, February 1, 1997 and thirty-nine weeks
ended November 1, 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
a) Exhibit 11. Computation Re Per Share Earnings
Thirteen weeks ended November 2, 1996 and November 1, 1997 and
thirty-nine weeks ended November 2, 1996 and November 1, 1997 23
Signature 24
</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 November 1, 1997 and the related consolidated statements of income for the
thirteen and thirty-nine weeks then ended and the consolidated statement of cash
flows for the thirty-nine 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
November 17, 1997
Page 3
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. - FINANCIAL STATEMENTS
- ------------------------------
BRYLANE INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
February 1, November 1,
1997 1997
----------- ----------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 3,285 $ 21,852
Accounts receivable, deferred billing (net of allowance for doubtful
accounts of $1,975 and $3,071, respectively)............................... 22,750 31,208
Accounts receivable, other.................................................. 32,107 8,592
Inventories................................................................. 168,821 208,301
Paper inventory............................................................. 9,790 18,470
Catalog costs............................................................... 31,222 43,381
Other....................................................................... $ 6,252 $ 5,286
-------- --------
TOTAL CURRENT ASSETS 274,227 337,090
Property and equipment, net................................................... 75,970 76,478
Organization and deferred financing costs..................................... 11,114 4,974
Intangibles and other assets.................................................. 343,243 331,393
Deferred income taxes......................................................... -- 17,551
Deferred offering costs....................................................... 680 --
-------- --------
TOTAL ASSETS $705,234 $767,486
======== ========
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES:
Accounts payable............................................................ $ 93,928 $149,492
Accrued interest............................................................ 8,612 2,735
Accrued expenses............................................................ 45,356 65,428
Income taxes payable........................................................ -- 5,915
Reserve for returns......................................................... 18,603 26,268
Short term debt............................................................. -- 20,000
Current portion of long-term debt........................................... 26,000 7,500
-------- --------
TOTAL CURRENT LIABILITIES 192,499 277,338
Long-term debt................................................................ 401,362 342,229
Other long-term liabilities................................................... 6,010 8,336
-------- --------
TOTAL LIABILITIES 599,871 627,903
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;
19,854,648 shares issued and 17,354,648 shares outstanding................. -- 199
Treasury stock, at cost, 0 and 2,500,000 shares, respectively............... -- (115,000)
Additional paid in capital.................................................. -- 300,564
Reduction for predecessor cost-carryover basis.............................. (152,067) (152,067)
Loans to management investors............................................... (2,490) (1,525)
Retained earnings........................................................... 72,940 105,912
-------- --------
Total partnership/stockholders' equity................................. 103,863 138,083
-------- --------
TOTAL LIABILITIES AND EQUITY $705,234 $767,486
======== ========
</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 Thirty-nine Weeks Ended
--------------------------------- --------------------------------
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 158,384 $ 365,454 $ 467,009 $ 968,911
Cost of goods sold............................. 75,810 185,536 225,708 498,822
-------------- ------------- ------------- -------------
Gross margin..................................... 82,574 179,918 241,301 470,089
Operating expenses:
Catalog and advertising........................ 46,402 90,118 135,390 227,997
Fulfillment.................................... 10,677 31,193 29,057 87,608
Support services............................... 11,294 22,753 32,995 66,503
Intangibles and organization cost amortization. 1,411 2,684 4,229 8,150
-------------- ------------- ------------- -------------
Total operating expenses......................... 69,784 146,748 201,671 390,258
-------------- ------------- ------------- -------------
Operating income................................. 12,790 33,170 39,630 79,831
Interest expense, net............................ 5,409 6,427 16,200 20,112
-------------- ------------- ------------- -------------
Income before income taxes
and extraordinary charge....................... 7,381 26,743 23,430 59,719
Provision for income taxes....................... 68 9,895 125 22,637
-------------- ------------- ------------- -------------
Income before extraordinary charge............... 7,313 16,848 23,305 37,082
Extraordinary charge related to early
retirement of debt, net of tax................. - - - 4,110
-------------- ------------- ------------- -------------
Net income....................................... $ 7,313 $ 16,848 $ 23,305 $ 32,972
============== ============= ============= =============
Primary earnings per share:
Income per share before extraordinary charge... $ 0.54 $ 0.84 $ 1.74 $ 1.89
Extraordinary charge per share................. - - - 0.21
-------------- ------------- ------------- -------------
Net income per share........................... $ 0.54 $ 0.84 $ 1.74 $ 1.68
============== ============= ============= =============
Weighted average shares outstanding............ 13,421,003 20,001,027 13,420,060 19,659,380
Supplemental data (Note 7):
Historical income before provision for
income taxes and extraordinary charge....... $ 7,381 $ 26,743 $ 23,430 $ 59,719
Supplemental provision for income taxes........ 2,731 9,895 8,669 22,096
-------------- ------------- ------------- -------------
Supplemental income before extraordinary charge 4,650 16,848 14,761 37,623
Extraordinary charge related to early
retirement of debt, net of tax.............. - - - 4,110
-------------- ------------- ------------- -------------
Supplemental net income........................ $ 4,650 $ 16,848 $ 14,761 $ 33,513
============== ============= ============= =============
Supplemental earnings per share................ $ 0.35 $ 0.84 $ 1.10 $ 1.70
============== ============= ============= =============
</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>
Thirty-nine Weeks Ended
-------------------------------
November 2, November 1,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................. $ 23,305 $ 32,972
Impact of other operating activities on cash flows:
Depreciation.............................................................. 3,046 7,617
Non-recurring inventory charge............................................ -- 3,315
Extraordinary charge related to early retirement of debt.................. -- 6,524
Non-cash compensation expense............................................. -- 523
Amortization:
Intangibles and organization costs...................................... 4,229 8,150
Deferred financing costs (included in interest expense)................. 1,102 965
Discount on notes (included in interest expense)........................ 73 72
Changes in operating assets and liabilities:
Accounts receivable..................................................... (5,735) (13,747)
Inventories............................................................. (16,660) (42,795)
Catalog costs and paper inventory....................................... 1,176 (20,839)
Accounts payable and accrued expenses................................... 16,605 75,636
Accrued interest........................................................ (3,889) (5,877)
Income taxes payable.................................................... -- 5,915
Other assets and liabilities............................................ 1,104 12,816
------- --------
Net cash provided by operating activities..................................... 24,356 71,247
------- --------
INVESTING ACTIVITIES:
Capital expenditures........................................................ (3,159) (10,319)
Purchase price adjustment related to Chadwick's acquisition................. -- 32,888
------- --------
Net cash provided by (used in) investing activities........................... (3,159) 22,569
------- --------
FINANCING ACTIVITIES:
Payments on 1996 and 1997 bank credit facilities............................ (10,121) (514,662)
Proceeds from issuance of 1997 Bank Credit Facilities....................... -- 416,663
Borrowings on revolver...................................................... -- 50,000
Proceeds from initial public offering....................................... -- 96,000
Offering fees and expenses.................................................. -- (8,170)
Debt issuance fees and expenses............................................. -- (1,394)
Tax distributions to partners of Brylane, L.P. ............................. (7,963) --
Proceeds from the sale, net of repurchase, or partnership interests,
net of management notes................................................... 77 --
Proceeds received from the repayment of management notes.................... -- 965
Proceeds received from the exercise of stock options........................ -- 349
Purchase of treasury stock.................................................. -- (115,000)
------- --------
Net cash used in financing activities......................................... (18,007) (75,249)
------- --------
Cash and cash equivalents, at beginning of year............................... 7,469 3,285
------- --------
Cash and cash equivalents, at end of period................................... $ 10,659 $ 21,852
======= ========
Supplemental disclosure of cash flow information:
Interest paid............................................................... $ 19,285 $ 26,807
======= ========
Income taxes paid........................................................... $ -- $ 14,310
======= ========
Conversion of note into shares of common stock.............................. $ -- $ 9,705
======= ========
</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
Purchase of treasury stock..................... - - (2,500,000) - (115,000)
Recognition of deferred tax asset.............. - - - - 17,551
Repayment of management notes.................. - - - - -
Conversion of convertible note................. - - 352,908 4 9,701
Exercise of stock options...................... - - 30,295 - 349
Exchange of stock options...................... - - - - 528
---------- ---------- ---------- ---------- ----------
Balance November 1, 1997(unaudited)............. 0 $0 17,354,648 $199 $185,564
========== ========== ========== ========== ==========
<CAPTION>
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..................................... - - 32,972 32,972
Proceeds from Initial Public Offering.......... - - - 96,000
Initial Public Offering expenses............... - - - (8,850)
Exchange of partnership units for common stock. - - - -
Purchase of treasury stock..................... - - - (115,000)
Recognition of deferred tax asset.............. - - - 17,551
Repayment of management notes.................. - 965 - 965
Conversion of convertible note................. - - - 9,705
Exercise of stock options...................... - - - 349
Exchange of stock options...................... - - - 528
--------------- --------------- ------------- ------------
Balance November 1, 1997(unaudited).............. $(152,067) $(1,525) $105,912 $138,083
=============== =============== ============= ============
</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 Chadwick's of Boston, Lerner, Bridgewater, Sue Brett and Brett, serving the
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."), certain
affiliates of The Limited, Inc. ("The Limited"), 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
thirty-nine weeks ended November 2, 1996 and cash flows for the thirty-nine
weeks ended November 2, 1996 of Brylane, L.P. are included herein for
comparative purposes.
On October 20, 1997, the Company completed the public offering of 5,000,000
shares of its Common Stock on behalf of certain stockholders (the "Secondary
Offering"). The Company did not receive any proceeds from the offering.
Concurrent therewith, the Company repurchased from these same stockholders
2,500,000 shares of Common Stock at the offering price (the "Common Stock
Repurchase"). In connection with the repurchase, the Company amended its 1997
Bank Credit Facility and borrowed approximately $116.0 million thereunder (see
note 4).
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
Page 8
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BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
(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 $189.8 million (which is net of purchase price
adjustments of $28.8 million received on May 16, 1997 and $4.1 million received
on October 14, 1997) and issued to TJX a $20.0 million Convertible Redeemable
Note due 2006 (approximately $9.7 million of which was converted by TJX into
shares of Common Stock sold by TJX in connection with the Secondary Offering and
Common Stock Repurchase). 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 of its indebtedness
under the 1996 Bank Credit Facility. In addition, the Company made $10.0 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 consisted 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. As a result of this transaction, the Company recorded an
extraordinary charge for previously capitalized fees associated with the 1996
Bank Credit Facility in its consolidated statement of income for the thirteen
weeks ended May 3, 1997.
Page 9
<PAGE>
BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company made $62.1 million of prepayments on the Tranche A Term Loan of
the 1997 Bank Credit Facility during the thirty-nine weeks ended November 1,
1997. In addition, the Company made $1.8 million of scheduled payments on the
Term Loans of the 1997 Bank Credit Facility during the thirty-nine weeks ended
November 1, 1997.
On October 20, 1997, the Partnership amended the 1997 Bank Credit Facility
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 "Amended 1997 Bank Credit Facility") which now
consists of (i) a $175.0 million five-year term loan (the "Term Loan") and (ii)
a $200.0 million (subject to a borrowing base limit) five-year revolving credit
facility (the "Revolving Credit Facility") with a $75.0 million sublimit for
letters of credit and a $15.0 million sublimit for swingline loans. The
proceeds of the Term Loan provided funds to repurchase 2.5 million shares of the
Company's Common Stock as well as to repay Brylane's existing indebtedness under
the 1997 Bank Credit Facility.
The Revolving Credit Facility can be used for letters of credit and other
general corporate purposes, including working capital needs and permitted
acquisitions, and was also available to provide a portion of the funds necessary
to effect the Common Stock Repurchase. The Term Loan requires scheduled
quarterly principal payments over its term. In addition, Brylane is obligated
to make certain mandatory prepayments of the Term Loan and the Revolving Credit
Facility under certain circumstances. Borrowings under the Term Loan and
Revolving Credit Facility bear interest at one of two rates selected by the
Partnership: (i) a margin over the higher of (A) the Prime Rate and (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. The borrowings
under the Term Loan and the Revolving Credit Facility currently bear interest at
LIBOR plus 1.25%. The Term Loan begins amortizing on May 1, 1998; therefore, no
principal payments are scheduled for the remainder of fiscal 1997.
As of November 1, 1997, Brylane had $60.0 million of borrowings under the
Revolving Credit Facility and, after giving effect to the issuance of letters of
credit for $55.9 million which the Company intends to pay through funds
generated from operations, had additional capacity under the Revolving Credit
Facility of approximately $84.1 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. In connection with the Exchange Transaction, Brylane Inc. recorded a
deferred income tax benefit of $17.6 million and during the quarter ended
November 1, 1997 income tax expense of $9.9 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.
Page 10
<PAGE>
BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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) ADOPTION OF ACCOUNTING STANDARD:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
Company will adopt the computation, presentation and disclosure requirements for
earnings per share in the fourth quarter of 1997, the effect of which will not
be material to the Company's consolidated financial statements.
(9) RECLASSIFICATIONS:
Certain reclassifications have been made to the consolidated statements of
cash flows for the thirty-nine weeks ended November 2, 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.
(10) UNAUDITED INTERIM FINANCIAL STATEMENTS:
The financial statements as of and for the thirty-nine weeks ended November
2, 1996 and November 1, 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 Prospectus dated October 14,
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 thirty-nine weeks
ended November 1, 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 thirty-nine weeks ended
November 1, 1997 reflect amortization of intangible assets related to the
Brylane Acquisition, the KingSize Acquisition and the Chadwick's Acquisition of
$3.2 million, $1.0 million and $3.9 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 $5.2 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. As a result of the
Secondary Offering , the termination date of the trademark agreement between The
Limited and Brylane was accelerated to October 20, 2007. The amortization of
intangibles stated above reflects the acceleration of the trademark
amortization.
In connection with certain amendments to options previously granted under
the 1993 Option Plan, the Company incurred non-cash compensation expense
totaling $3.1 million of which $2.4 million was expensed in the fourth quarter
of fiscal 1996 and the remaining $0.7 million will be expensed equally
throughout fiscal 1997.
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 Prospectus for Brylane Inc. as filed with the
Securities and Exchange Commission on October 14 , 1997 (Registration No. 333-
35715).
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 Thirty-Nine Weeks Ended
-------------------------------- ---------------------------------
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
----- ----- ----- -----
(in thousands) (in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales...................................... $158,384 $365,454 $467,009 $968,911
Gross profit................................... 82,574 179,918 241,301 470,089
Operating expenses:
Catalog and advertising................... 46,402 90,118 135,390 227,997
Fulfillment............................... 10,677 31,193 29,057 87,608
Support services.......................... 11,294 22,753 32,995 66,503
Amortization of acquisitions
intangibles and organization costs... 1,411 2,684 4,229 8,150
-------- -------- -------- --------
Operating income............................... 12,790 33,170 39,630 79,831
Add back: Non-recurring inventory
charge(1)............................ -- -- -- 3,315
Add back: Amortization of acquisitions
intangibles and organization costs(2) 1,411 2,684 4,229 8,150
Add back: Non-cash compensation
expense(3)........................... -- 174 -- 523
-------- -------- -------- --------
Operating income before acquisitions related
and non-recurring adjustments......... $ 14,201 $ 36,028 $ 43,859 $ 91,819
======== ======== ======== ========
</TABLE>
The following table sets forth certain operating data of Brylane Inc.
expressed as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- ---------------------------
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 52.1 49.2 51.7 48.5
Operating expenses:
Catalog and advertising................... 29.3 24.7 29.0 23.5
Fulfillment............................... 6.7 8.5 6.2 9.0
Support services.......................... 7.1 6.2 7.1 6.9
Amortization of acquisitions
intangibles and organization costs... 0.9 0.7 0.9 0.8
----- ----- ----- -----
Operating income............................... 8.1 9.1 8.5 8.3
Add back: Non-recurring inventory
charge(1)............................ -- -- -- 0.3
Add back: Amortization of acquisitions
intangibles and organization costs(2) 0.9 0.7 0.9 0.8
Add back: Non-cash compensation
expense(3)........................... -- 0.1 -- 0.1
----- ----- ----- -----
Operating income before acquisitions related
and non-recurring adjustments............ 9.0% 9.9% 9.4% 9.5%
===== ===== ===== =====
</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 thirty-nine
weeks ended November 2, 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 Thirty-Nine Weeks Ended
------------------------------ -----------------------------
Combined Combined
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
-------- -------- -------- --------
(in thousands) (in thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales...................................... $303,803 $365,454 $837,329 $968,911
Gross profit................................... 150,566 179,918 410,923 470,089
Operating expenses:
Catalog and advertising................... 77,594 90,118 212,460 227,997
Fulfillment............................... 22,742 31,193 65,974 87,608
Support services.......................... 20,645 22,753 58,571 66,503
Amortization of acquisitions
intangibles and organization costs... 2,734 2,684 8,198 8,150
-------- -------- -------- --------
Operating income............................... 26,851 33,170 65,720 79,831
Add back: Non-recurring inventory
charge(1)............................ -- -- -- 3,315
Add back: Amortization of acquisitions
intangibles and organization costs(2) 2,734 2,684 8,198 8,150
Add back: Non-cash compensation
expense(3)........................... -- 174 -- 523
-------- -------- -------- --------
Operating income before acquisitions related
and non-recurring adjustments......... $ 29,585 $ 36,028 $ 73,918 $ 91,819
======== ======== ======== ========
</TABLE>
The following table expresses the above operating data as a percentage of
net sales for the periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- ---------------------------
Combined Combined
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 49.6 49.2 49.1 48.5
Operating expenses:
Catalog and advertising................... 25.6 24.7 25.4 23.5
Fulfillment............................... 7.5 8.5 7.9 9.0
Support services.......................... 6.8 6.2 7.0 6.9
Amortization of acquisitions
intangibles and organization costs... 0.9 0.7 1.0 0.8
----- ----- ----- -----
Operating income............................... 8.8 9.1 7.8 8.3
Add back: Non-recurring inventory
charge(1)............................ -- -- -- 0.3
Add back: Amortization of acquisitions
intangibles and organization costs(2) 0.9 0.7 1.0 0.8
Add back: Non-cash compensation
expense(3)........................... -- 0.1 -- 0.1
----- ----- ----- -----
Operating income before acquisitions related
and non-recurring adjustments............ 9.7% 9.9% 8.8% 9.5%
===== ===== ===== =====
</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 $3,315,000 in the thirty-nine weeks ended
November 1, 1997.
(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
4, 1997, includes amortization of the remaining trademark of $7,578,000 over
a ten-year life. 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 $175,715,000 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 NOVEMBER 1, 1997 COMPARED TO THIRTEEN WEEKS ENDED NOVEMBER
2, 1996
NET SALES:
Net sales as reported for the thirteen weeks ended November 1, 1997
increased to $365.5 million from $158.4 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 November 2, 1996, increased 20.3% to $365.5 million from $303.8 million.
Such sales gain was due to an increase in circulation as well as an increase in
the average order size across all businesses as compared to the comparable
period in fiscal 1996.
GROSS PROFIT:
Gross profit for the thirteen weeks ended November 1, 1997 increased to
$179.9 million (49.2% of net sales) from $82.6 million (52.1% 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.
Gross profit on a combined basis including Chadwick's for the thirteen weeks
ended November 2, 1996, increased to $179.9 million (49.2% of net sales) from
$150.6 million (49.6% of net sales). The gross profit margin as a percent of net
sales decreased 0.4% due to higher planned pricing incentives.
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 November 1, 1997, catalog and advertising expense increased to $90.1
million (24.7% of net sales) from $46.4 million (29.3% 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 November 2, 1996, decreased on a percent of net sales
basis to 24.7% ($90.1 million) in 1997 from 25.6% ($77.6 million) in 1996. This
decrease on a percent of net sales basis is primarily due to the renegotiation
of certain printing contracts.
Page 15
<PAGE>
FULFILLMENT EXPENSE:
Fulfillment expense includes distribution center, telemarketing, credit
services and customer service expenses, partially offset by net merchandise
postage income. For the thirteen weeks ended November 1, 1997, fulfillment
expense as reported increased to $31.2 million (8.5% of net sales) from $10.7
million (6.7% 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 inclusion of Chadwick's.
Fulfillment expense on a combined basis including Chadwick's for the
thirteen weeks ended November 2, 1996, increased on a percent of net sales basis
to 8.5% ($31.2 million) in 1997 from 7.5% ($22.7 million) in 1996. This increase
on a percent of net sales basis was primarily due to increased payroll in
distribution, telemarketing and other areas to meet increased customer demand
and to ensure a high level of customer service, as well as increased shipping
promotions.
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 November 1, 1997
increased to $22.8 million (6.2% of net sales) from $11.3 million (7.1% of net
sales) for the same period in fiscal 1996. The decrease 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 November 2, 1996, decreased as a percent of net sales to
6.2% ($22.8 million) in 1997 from 6.8% ($20.6 million) in 1996. This decrease in
support services expense as a percent of net sales is primarily due to expense
management as well as the leveraging resulting from strong sales performance.
AMORTIZATION EXPENSE:
Acquisition related intangibles and organization cost amortization expense
in the thirteen weeks ended November 1, 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 November 2, 1996 included $1.1 million related to the Brylane Acquisition
and $0.3 million related to the KingSize Acquisition.
OPERATING INCOME:
Operating income before acquisition-related and non-recurring adjustments
for the thirteen weeks ended November 1, 1997 increased to $36.0 million (9.9%
of net sales) from $14.2 million (9.0% of net sales) for the same period of
fiscal 1996. As a percent of net sales, operating income increased primarily as
a result of the decrease in catalog and advertising and support services
expenses, partially offset by the increase in fulfillment expense, as described
above.
Operating income before acquisition-related and non-recurring adjustments on
a combined basis including Chadwick's for the thirteen weeks ended November 2,
1996, increased to $36.0 million (9.9% of net sales) in 1997 from $29.6 million
(9.7% 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 and
support services expenses, partially offset by the increase in fulfillment
expense, as discussed above.
Page 16
<PAGE>
INTEREST EXPENSE:
Interest expense, net, in the thirteen weeks ended November 1, 1997
increased to $6.4 million (1.8% of net sales) from $5.4 million (3.4% 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 and the term loan of the Amended
1997 Bank Credit Facility.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE:
Income as reported before income taxes and extraordinary charge increased to
$26.7 million ($1.34 per share) for the thirteen weeks ended November 1, 1997
from $7.4 million ($0.55 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 November 1, 1997 were $9.9 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 increased to $16.8 million ($0.84 per share) for the thirteen
weeks ended November 1, 1997 from $7.3 million ($0.54 per share) for the same
period of fiscal 1996. The increase in net income is due to the increase in
operating income, as discussed above, offset by 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.
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 2, 1996
NET SALES:
Net sales as reported for the thirty-nine weeks ended November 1,1997
increased to $968.9 million from $467.0 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 thirty-nine weeks
ended November 2, 1996, increased 15.7% to $968.9 million from $837.3 million.
Such sales gain was due, primarily, to an increase in circulation as well as an
increase in the average order size across all businesses as compared to the
comparable period in fiscal 1996.
GROSS PROFIT:
Gross profit for the thirty-nine weeks ended November 1, 1997 increased to
$470.1 million (48.5% of net sales) from $241.3 million (51.7% 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,
as well as to a non-recurring inventory charge of $3.3 million (0.3% of net
sales) relating to the step-up of the value of inventory in connection with the
Chadwick's Acquisition.
Page 17
<PAGE>
Gross profit on a combined basis including Chadwick's for the thirty-nine
weeks ended November 2, 1996 and eliminating the effects of the non-recurring
inventory charge in the thirty-nine weeks ended November 1, 1997, increased to
$473.4 million (48.9% of net sales) from $410.9 million (49.1% of net sales).
The gross profit margin as a percent of net sales decreased 0.2% due to higher
planned pricing incentives.
CATALOG AND ADVERTISING EXPENSE:
For the thirty-nine weeks ended November 1, 1997, catalog and advertising
expense increased to $228.0 million (23.5% of net sales) from $135.4 million
(29.0% 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 thirty-nine weeks ended November 2, 1996, decreased on a percent of net
sales basis to 23.5% ($228.0 million) in 1997 from 25.4% ($212.5 million) in
1996. This decrease on a percent of net sales basis is primarily due to the
renegotiation of certain printing contracts and an increase in the sales
productivity per catalog.
FULFILLMENT EXPENSE:
Fulfillment expense as reported in the thirty-nine weeks ended November 1,
1997 increased to $87.6 million (9.0% of net sales) from $29.1 million (6.2% 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
inclusion of Chadwick's.
Fulfillment expense on a combined basis including Chadwick's for the thirty-
nine weeks ended November 2, 1996, increased on a percent of net sales basis to
9.0% ($87.6 million) in 1997 from 7.9% ($66.0 million) in 1996. This increase on
a percent of net sales basis was primarily due to increased payroll in
distribution, telemarketing and other areas to meet increased customer demand
and to ensure a high level of customer service, as well as increased shipping
promotions.
SUPPORT SERVICES EXPENSE:
Support services expense as reported for the thirty-nine weeks ended
November 1, 1997 increased to $66.5 million (6.9% of net sales) from $33.0
million (7.1% of net sales) for the same period in fiscal 1996. The decrease 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
thirty-nine weeks ended November 2, 1996, decreased as a percent of net sales
to 6.9% ($66.5 million) in 1997 from 7.0% ($58.6 million) in 1996.
AMORTIZATION EXPENSE:
Acquisition related intangibles and organization cost amortization expense
in the thirty-nine weeks ended November 1, 1997 included $3.2 million related to
the Brylane Acquisition, $1.0 million related to the KingSize Acquisition and
$3.9 million related to the Chadwick's Acquisition. 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.
Page 18
<PAGE>
OPERATING INCOME:
Operating income before acquisition-related and non-recurring adjustments in
the thirty-nine weeks ended November 1, 1997 increased to $91.8 million (9.5% of
net sales) from $43.9 million (9.4% of net sales) for the same period of fiscal
1996. As a percent of net sales, operating income increased primarily as a
result of the decrease in catalog and advertising and support service expenses,
partially offset by the increase in fulfillment expense, as described above.
Operating income before acquisition-related and non-recurring adjustments on
a combined basis including Chadwick's for the thirty-nine weeks ended November
2, 1996, increased to $91.8 million (9.5% of net sales) in 1997 from $73.9
million (8.8% 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 and support services expenses, partially offset by the increase in
fulfillment expense, as described above.
INTEREST EXPENSE:
Interest expense, net, in the thirty-nine weeks ended November 1, 1997
increased to $20.1 million (2.1% of net sales) from $16.2 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 and the term loan of the Amended
1997 Bank Credit Facility.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE:
Income as reported before income taxes and extraordinary charge increased to
$59.7 million ($3.04 per share) for the thirty-nine weeks ended November 1, 1997
from $23.4 million ($1.75 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 thirty-nine weeks ended November 1, 1997 were $22.6
million or 37.9% of income before extraordinary charge. Income taxes on
supplemental income before extraordinary charge were $22.1 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 thirty-nine weeks ended November 1, 1997 as a result of the
early retirement of the debt outstanding under the 1996 Bank Credit Facility.
NET INCOME:
After giving effect to the extraordinary charge, net income increased to
$33.0 million ($1.68 per share) for the thirty-nine weeks ended November 1, 1997
from $23.3 million ($1.74 per share) for the comparable period of fiscal 1996.
Page 19
<PAGE>
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. The Company's
liquidity requirements have also included servicing the debt incurred to finance
various acquisitions and also includes servicing the debt incurred to finance
the Common Stock Repurchase.
Cash flow provided by operating activities increased to $71.2 million for
the thirty-nine weeks ended November 1, 1997, from $24.4 million for the thirty-
nine weeks ended November 2, 1996. This increase was due primarily to an
increase in net income, before non-cash related expenses, of $60.1 million for
the thirty-nine weeks ended November 1, 1997 compared to $31.8 million in the
thirty-nine weeks ended November 2, 1996. During the thirty-nine weeks ended
November 1, 1997, the Company used the proceeds from its Initial Public Offering
to prepay a portion of its outstanding indebtedness by $89.3 million, and used
cash from operations and the proceeds from a preliminary purchase price
adjustment to further reduce its outstanding indebtedness by $73.9 million
(which included prepayments of $10.0 million on the 1996 Bank Credit Facility
and $62.1 million on the 1997 Bank Credit Facility), as well as to effect $10.3
million in capital expenditures as discussed further below. In addition, in the
thirty-nine weeks ended November 1, 1997, the Company borrowed $50.0 million on
its Revolving Credit Facility in order to satisfy its short-term working capital
needs all of which was repaid by November 1, 1997.
Capital expenditures were $10.3 million in the thirty-nine weeks ended
November 1, 1997 compared to $3.2 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 $2.2 million. Brylane plans to
fund its capital expenditures for the remainder of fiscal 1997 using cash
generated from operations.
In connection with the Chadwick's acquisition, in December 1996 the
Partnership entered into a $408 million credit facility (the "1996 Bank Credit
Facility"). The proceeds 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, the Company prepaid $89.3 million of its
indebtedness under the 1996 Bank Credit Facility. Subsequently, the Company made
an additional $10.0 million of prepayments on the 1996 Bank Credit Facility
prior to April 30, 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 consisted 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 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 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 twenty-six weeks ended August 2,
1997.
To finance the Common Stock Repurchase, on October 20, 1997, the Partnership
amended the 1997 Bank Credit Facility 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, which now
consists of (i) the $175.0 million five-year Term Loan and (ii) the $200.0
million (subject to a borrowing base limit) five-year Revolving Credit Facility
with a $75.0 million sublimit for letters of credit and a $15.0 million sublimit
for swingline loans. The Term Loan provided funds to repurchase 2.5 million
shares of the Company's Common Stock as well as to repay Brylane's existing
indebtedness under the 1997 Bank Credit Facility.
Page 20
<PAGE>
The Revolving Credit Facility can be used for letters of credit and other
general corporate purposes, including working capital needs and permitted
acquisitions, and was also available to provide a portion of the funds necessary
to effect the Common Stock Repurchase. The Term Loan requires scheduled
quarterly principal payments over its term. In addition, Brylane is obligated
to make certain mandatory prepayments of the Term Loan and the Revolving Credit
Facility under certain circumstances. Borrowings under the Term Loan and
Revolving Credit Facility bear interest at one of two rates selected by the
Partnership: (i) a margin over the higher of (A) the Prime Rate and (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. The borrowings
under the Revolving Credit Facility and the Term Loan currently bear interest at
LIBOR plus 1.25%. The Term Loan begins amortizing on May 1, 1998; therefore, no
principal payments are scheduled for the remainder of fiscal 1997. However,
scheduled principal payments on the Term Loan of the Amended 1997 Bank Credit
Facility will aggregate approximately $10.0 million in fiscal 1998.
As of November 1, 1997, Brylane had $60.0 million of borrowings under the
Revolving Credit Facility and, after giving effect to the issuance of letters of
credit for $55.9 million which the Company intends to pay through funds
generated from operations, had additional capacity under the Revolving Credit
Facility of approximately $84.1 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 Amended 1997 Bank Credit
Facility, 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 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 capital
expenditures through the third quarter of fiscal 1997 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. As of November 1, 1997, ADS
had reached this commitment level. Consequently, Brylane's balance sheet at
November 1, 1997 contains approximately $19.0 million of receivables generated
through Chadwick's deferred billing programs. ADS purchases 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 Amended 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 Amended 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.
11 Statement Re Computation of Per Share Earnings
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 November 1, 1997.
Page 22
<PAGE>
EXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
BRYLANE INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------- -----------------------------
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computation of Primary Earnings Per Share
- -----------------------------------------
Net income...................................... $ 7,313 $ 16,848 $ 23,305 $ 32,972
Common shares outstanding:
Weighted average number of common
shares outstanding.......................... 12,905,000 19,531,279 12,904,057 19,125,090
Assumed issuance of shares granted under
stock option plans, less shares assumed
purchased under the treasury stock
method at the average market price
for the period.............................. 516,003 724,418 516,003 569,180
Assumed issuance of shares upon conversion
of convertible redeemable preferred stock... 75,000 75,090
Weighted average treasury shares.............. (329,670) (109,890)
Weighted average number of shares
outstanding, as adjusted.................... 13,421,003 20,001,027 13,420,060 19,659,380
Primary earnings per share...................... $ 0.54 $ 0.84 $ 1.74 $ 1.68
Computation of Fuly Diluted Earnings Per Share
- ----------------------------------------------
Net income...................................... $ 7,313 $ 16,848 $ 23,305 $ 32,972
After tax expenses on convertible note........ 168 550
Net income for fully diluted earnings per share. 7,313 17,016 23,305 33,522
Common shares outstanding:
Weighted average number of common
shares outstanding.......................... 12,905,000 19,531,279 12,904,057 19,125,090
Assumed issuance of shares granted under
stock option plans, less shares assumed
purchased under the treasury stock
method at the greater of average or
ending market price for the period.......... 516,003 724,418 516,003 720,926
Assumed issuance of shares upon conversion
of convertible redeemable preferred stock... 75,000 75,000
Assumed issuance of common shares
upon the conversion of the convertible
note........................................ 374,365 374,365
Weighted average treasury shares.............. (329,670) (109,890)
Weighted average number of shares
outstanding, as adjusted.................... 13,421,003 20,375,392 13,420,060 20,185,491
Fully diluted earnigs per share................... $ 0.54 $ 0.84 $ 1.74 $ 1.66
</TABLE>
Page 23
<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: December 4, 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 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> NOV-01-1997
<CASH> 21,852
<SECURITIES> 0
<RECEIVABLES> 34,279
<ALLOWANCES> 3,071
<INVENTORY> 208,301
<CURRENT-ASSETS> 337,090
<PP&E> 94,940
<DEPRECIATION> 18,462
<TOTAL-ASSETS> 767,486
<CURRENT-LIABILITIES> 277,338
<BONDS> 342,229
0
1,500
<COMMON> 199
<OTHER-SE> 137,884
<TOTAL-LIABILITY-AND-EQUITY> 767,486
<SALES> 365,454
<TOTAL-REVENUES> 365,454
<CGS> 185,536
<TOTAL-COSTS> 185,536
<OTHER-EXPENSES> 144,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,427
<INCOME-PRETAX> 26,743
<INCOME-TAX> 9,895
<INCOME-CONTINUING> 16,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,848
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
</TABLE>
