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 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-86154
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<S> <C>
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
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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 dring 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] or No __
The number of shares of the registrant's common stock outstanding as of
August 28, 1998 was 18,477,150 shares.
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BRYLANE INC.
Form 10-Q
For the Quarterly Period Ended
August 1, 1998
<S> <C>
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page
-------
Part I - Financial Information
Item 1 - Financial Statements
a) Report of Independent Accountants. . . . . . . . . . . . . . . . . 3
b) Consolidated Balance Sheets
August 1, 1998 (unaudited) and January 31, 1998 . . . . . . . . . 4
c) Consolidated Statements of Income (unaudited)
Thirteen weeks ended August 1, 1998 and August 2, 1997 and
Twenty-six weeks ended August 1, 1998 and August 2, 1997. . . . . 5
d) Consolidated Statements of Cash Flows (unaudited)
Twenty-six weeks ended August 1, 1998 and August 2, 1997. . . . . 6
e) Consolidated Statements of Partnership/Stockholders' Equity
Year ended January 31, 1998 and twenty-six weeks ended
August 1, 1998 (unaudited). . . . . . . . . . . . . . . . . . . . 7
f) Notes to Unaudited Consolidated Financial Statements . . . . . . . 8 - 9
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 10 - 15
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 16
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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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 1, 1998, the related consolidated statements of income for the
thirteen and twenty-six weeks then ended, the consolidated statement of cash
flows for the twenty-six weeks then ended and the consolidated statements of
partnership/stockholders' equity for the twenty-six weeks ended August 1, 1998.
These consolidated 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/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
September 2, 1998
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PART I - FINANCIAL INFORMATION
- ---------------------------------------------------
ITEM 1 - Financial Statements
- ---------------------------------------------------
BRYLANE INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and per share data)
August 1, 1998 January 31, 1998
-------------- ----------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . $ -- $ 5,083
Deferred receivables (net of allowance for
doubtful accounts of $1,155 and $1,474,
respectively) . . . . . . . . . . . . . . . . 15,631 8,194
Accounts receivable, other . . . . . . . . . . . 7,937 7,851
Inventories. . . . . . . . . . . . . . . . . . . 253,001 219,553
Catalog costs and paper inventory. . . . . . . . 58,421 51,982
Other. . . . . . . . . . . . . . . . . . . . . . 6,583 6,426
---------------- ------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . 341,573 299,089
Property and equipment, net . . . . . . . . . . . . 80,246 77,095
Intangibles and deferred financing fees . . . . . . 327,220 333,319
Deferred income taxes . . . . . . . . . . . . . . . 10,697 10,697
---------------- ------------------
TOTAL ASSETS . . . . . . . . . . . . . . . $ 759,736 $ 720,200
================ ==================
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . $ 131,086 $ 139,480
Accrued expenses . . . . . . . . . . . . . . . . 29,607 38,705
Reserve for returns. . . . . . . . . . . . . . . 9,646 17,844
Revolving line of credit - current portion . . . 54,000 19,000
Current portion of long-term debt. . . . . . . . 15,000 10,000
---------------- ------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . 239,339 225,029
Long-term debt. . . . . . . . . . . . . . . . . . . 299,507 329,753
Other long-term liabilities . . . . . . . . . . . . 10,574 9,010
---------------- ------------------
TOTAL LIABILITIES. . . . . . . . . . . . . 549,420 563,792
Convertible redeemable preferred stock. . . . . . . -- 1,370
Stockholders' equity:
Common stock, $.01 par value 40,000,000 shares
authorized; 20,977,150 shares issued and
18,477,150 shares outstanding at August 1,
1998; 19,910,519 shares issued and 17,410,519
shares outstanding at January 31, 1998. . . . 210 199
Additional paid in capital . . . . . . . . . . . 181,154 150,168
Retained earnings. . . . . . . . . . . . . . . . 143,952 119,671
Treasury stock, 2,500,000 shares at cost . . . . (115,000) (115,000)
---------------- ------------------
Total stockholders' equity. . . . . . . 210,316 155,038
---------------- ------------------
TOTAL LIABILITIES AND EQUITY . . . . . . . $ 759,736 $ 720,200
================ ==================
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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BRYLANE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except shares and per share data)
(Unaudited)
<S> <C> <C> <C> <C>
Thirteen Thirteen Twenty-six Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
--------------- --------------- --------------- ---------------
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
--------------- --------------- --------------- ---------------
Net sales . . . . . . . . . . . . . . . . . . . . $ 300,532 $ 274,656 $ 648,136 $ 603,457
Cost of goods sold . . . . . . . . . . . . . . 152,522 144,239 328,939 313,286
--------------- --------------- --------------- ---------------
Gross margin. . . . . . . . . . . . . . . . . . . 148,010 130,417 319,197 290,171
Operating expenses:
Catalog and advertising. . . . . . . . . . . . 63,788 54,540 149,782 137,879
Fulfillment. . . . . . . . . . . . . . . . . . 33,696 28,345 63,862 56,415
Support services . . . . . . . . . . . . . . . 20,916 21,740 45,320 43,750
Intangibles and organization cost amortization 2,825 2,734 5,649 5,466
--------------- --------------- --------------- ---------------
Total operating expenses. . . . . . . . . . . . . 121,225 107,359 264,613 243,510
--------------- --------------- --------------- ---------------
Operating income. . . . . . . . . . . . . . . . . 26,785 23,058 54,584 46,661
Interest expense, net . . . . . . . . . . . . . . 7,332 6,157 15,102 13,685
--------------- --------------- --------------- ---------------
Income before income taxes
and extraordinary charge . . . . . . . . . . . 19,453 16,901 39,482 32,976
Provision for income taxes. . . . . . . . . . . . 7,490 6,253 15,201 12,742
--------------- --------------- --------------- ---------------
Income before extraordinary charge. . . . . . . . 11,963 10,648 24,281 20,234
Extraordinary charge related to early
retirement of debt, net of tax . . . . . . . . -- -- -- 4,110
--------------- --------------- --------------- ---------------
Net income. . . . . . . . . . . . . . . . . . . . $ 11,963 $ 10,648 $ 24,281 $ 16,124
=============== =============== =============== ===============
Basic earnings per share:
Income per share before extraordinary charge . $ 0.65 $ 0.55 $ 1.34 $ 1.04
Extraordinary charge per share . . . . . . . . -- -- -- 0.21
--------------- --------------- --------------- ---------------
Net income per share . . . . . . . . . . . . . $ 0.65 $ 0.55 $ 1.34 $ 0.83
=============== =============== =============== ===============
Diluted earnings per share:
Income per share before extraordinary charge . $ 0.64 $ 0.53 $ 1.31 $ 1.00
Extraordinary charge per share . . . . . . . . -- -- -- 0.20
--------------- --------------- --------------- ---------------
Net income per share . . . . . . . . . . . . . $ 0.64 $ 0.53 $ 1.31 $ 0.80
=============== =============== =============== ===============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . 18,447,040 19,471,445 18,165,966 19,471,445
Diluted. . . . . . . . . . . . . . . . . . . . 18,658,223 20,618,618 18,568,508 20,580,336
<FN>
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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BRYLANE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 1, 1998 August 2, 1997
---------------- ----------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,281 $ 16,124
Impact of other operating activities on cash flows:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 5,701 5,143
Amortization. . . . . . . . . . . . . . . . . . . . . . . . 6,148 6,298
Non-recurring inventory charge. . . . . . . . . . . . . . . -- 3,315
Extraordinary charge related to early retirement of debt. . -- 6,524
Non-cash compensation expense . . . . . . . . . . . . . . . 26 349
Loss on sale of assets. . . . . . . . . . . . . . . . . . . 37 --
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . (7,523) 9,148
Inventories. . . . . . . . . . . . . . . . . . . . . . . (33,448) (23,037)
Catalog costs and paper inventory. . . . . . . . . . . . (6,439) (1,723)
Accounts payable . . . . . . . . . . . . . . . . . . . . (8,394) 15,442
Accrued expenses . . . . . . . . . . . . . . . . . . . . 147 (3,706)
Reserve for returns. . . . . . . . . . . . . . . . . . . (8,198) (7,318)
Other assets and liabilities . . . . . . . . . . . . . . 2,519 4,176
---------------- ----------------
Net cash (used in) provided by operating activities. . . . . . (25,143) 30,735
---------------- ----------------
INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . (10,014) (7,322)
Purchase price adjustment related to Chadwick's Acquisition -- 28,805
Proceeds from sale of asset . . . . . . . . . . . . . . . . 13 --
---------------- ----------------
Net cash (used in)provided by investing activities . . . . . . (10,001) 21,483
---------------- ----------------
FINANCING ACTIVITIES:
Payments on debt. . . . . . . . . . . . . . . . . . . . . . (5,000) (324,793)
Additions to debt . . . . . . . . . . . . . . . . . . . . . 25,000 181,663
Proceeds from initial public offering . . . . . . . . . . . -- 96,000
Offering fees and expenses. . . . . . . . . . . . . . . . . -- (8,170)
Debt issuance fees and expenses . . . . . . . . . . . . . . -- (203)
Cash payments on management notes . . . . . . . . . . . . . 985 --
Proceeds received from exercise of options. . . . . . . . . 9,076 --
---------------- ----------------
Net cash provided by (used in) financing activities. . . . . . 30,061 (55,503)
---------------- ----------------
Cash and cash equivalents, at beginning of year. . . . . . . . 5,083 3,285
---------------- ----------------
Cash and cash equivalents, at end of period. . . . . . . . . . $ -- $ --
================ ================
<FN>
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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BRYLANE INC.
CONSOLIDATED STATEMENTS OF PARTNERSHIP/STOCKHOLDERS' EQUITY
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Common Common Additional Treasury Treasury
Equity Stock Stock Paid in Retained Stock Stock
(Note A) Shares Amount Capital Earnings Shares Amount
--------- ---------- ------- ------------ ---------- ----------- ----------
Balance, February 1, 1997. . . . . . . . . . $ 30,923 - - - $ 72,940 - -
Net income. . . . . . . . . . . . . . . . - - - - 47,035 - -
Tax distributions made to partners. . . . - - - - (304) - -
Proceeds from Initial Public Offering . . - 4,000,000 $ 40 $ 95,960 - - -
Initial Public Offering expenses. . . . . - - - (8,850) - - -
Exchange of partnership units for common
stock. . . . . . . . . . . . . . . . . . (33,413) 15,471,445 155 33,258 - - -
Purchase of treasury stock. . . . . . . . - - - - - (2,500,000) $(115,000)
Recognition of deferred tax asset and
opening income tax adjustment. . . . . . - - - 18,142 - - -
Loans to management investors . . . . . . 2,490 - - (2,490) - - -
Repayment of management notes . . . . . . - - - 1,465 - - -
Conversion of convertible note. . . . . . - 352,908 4 9,701 - - -
Conversion of preferred stock . . . . . . - 6,500 - 130 - - -
Exercise of stock options . . . . . . . . - 79,666 - 1,144 - - -
Tax benefit related to issuance of shares
under employee benefit plans . . . . . . - - - 1,008 - - -
Exchange of stock options . . . . . . . . - - - 700 - - -
--------- ---------- ------- ------------ ---------- ----------- ----------
Balance, January 31, 1998. . . . . . . . . . - 19,910,519 199 150,168 119,671 (2,500,000) (115,000)
Net income. . . . . . . . . . . . . . . . - - - - 24,281 - -
Exercise of stock options . . . . . . . . - 623,767 6 9,070 - - -
Tax benefit related to options
exercised. . . . . . . . . . . . . . . . - - - 9,245 - - -
Conversion of convertible note. . . . . . - 374,364 4 10,291 - - -
Conversion of preferred stock . . . . . . - 68,500 1 1,369 - - -
Stock options outstanding, net. . . . . . - - - 26 - - -
Repayment of management notes . . . . . . - - - 985 - - -
--------- ---------- ------- ------------ ---------- ----------- ----------
Balance, August 1, 1998 (unaudited). . . . . $ - 20,977,150 $ 210 $ 181,154 $ 143,952 (2,500,000) $(115,000)
========= ========== ======= ============ ========== =========== ==========
<S> <C>
Total
----------
Balance, February 1, 1997. . . . . . . . . . $ 103,863
Net income. . . . . . . . . . . . . . . . 47,035
Tax distributions made to partners. . . . (304)
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 and
opening income tax adjustment. . . . . . 18,142
Loans to management investors . . . . . . -
Repayment of management notes . . . . . . 1,465
Conversion of convertible note. . . . . . 9,705
Conversion of preferred stock . . . . . . 130
Exercise of stock options . . . . . . . . 1,144
Tax benefit related to issuance of shares
under employee benefit plans . . . . . . 1,008
Exchange of stock options . . . . . . . . 700
----------
Balance, January 31, 1998. . . . . . . . . . 155,038
Net income. . . . . . . . . . . . . . . . 24,281
Exercise of stock options . . . . . . . . 9,076
Tax benefit related to options
exercised. . . . . . . . . . . . . . . . 9,245
Conversion of convertible note. . . . . . 10,295
Conversion of preferred stock . . . . . . 1,370
Stock options outstanding, net. . . . . . 26
Repayment of management notes . . . . . . 985
----------
Balance, August 1, 1998 (unaudited). . . . . $ 210,316
==========
<FN>
Note A : The beginning balance includes general and limited partnership
interests, reduction for predecessor cost-carryover basis and loans to
management investors.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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BRYLANE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS:
Brylane Inc., a Delaware corporation ("Brylane" or the "Company"), is a
leading catalog retailer of special-size and regular-size women's and men's
apparel. The women's catalogs market apparel in the budget and low to moderate
price range and the men's catalogs market apparel in the moderate price range.
Brylane services the special-size customer through its Lane Bryant, Roaman's,
Jessica London and KingSize (men's) catalogs, and the regular-size customer
through its Chadwick's, Lerner, Bridgewater and Brett (men's) catalogs. Brylane
also markets apparel to these same customer segments through four catalogs which
it distributes under licensing arrangements with Sears Shop at Home Services,
Inc. ("Sears").
Brylane's merchandising strategy is to provide value-priced, private label
apparel with a consistent quality and fit, to concentrate on apparel with
limited fashion risk and to offer a broader selection of sizes and styles in
special-size apparel than can be found at most retail stores and in other
competing catalogs. Each of Brylane's catalogs offers its customers
contemporary, traditional and basic apparel.
(2) BASIS OF PRESENTATION:
The consolidated financial statements at August 1, 1998 are unaudited and
have been prepared from the books and records of the Company in accordance with
generally accepted accounting principles and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for a
fair presentation of financial position and operating results for the interim
periods are reflected. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's most recent Annual Report on Form 10-K, which includes financial
statements for the year ended January 31, 1998.
(3) SIGNIFICANT STOCKHOLDER - PINAULT-PRINTEMPS-REDOUTE:
On April 3, 1998, Pinault-Printemps-Redoute, S.A., a company organized
under the laws of France ("PPR"), through an affiliate, REDAM LLC, a Delaware
limited liability company, acquired 43.7% of the outstanding common stock from
certain stockholders of the Company. Concurrently, the Company and PPR entered
into a governance agreement (the "Governance Agreement") that includes a
standstill period of three years which limits PPR's ability to acquire
additional common stock to approximately 47.5% of the outstanding shares and
restricts PPR from taking certain other actions. PPR has increased its
ownership of common stock as of August 17, 1998 to 46.7% of the common stock
outstanding.
(4) COMMITMENTS AND CONTINGENCIES:
Brylane is involved in various legal proceedings that are incidental to the
conduct of its business. Although the amount of any liability with respect to
these proceedings cannot be determined, in the opinion of management after
consultation with legal counsel, any such liability will not have a material
adverse effect on the financial position or results of operations of Brylane.
The Company is under audit by the Indiana Department of Revenue ("IDR") and
had anticipated an assessment of approximately $2.3 million, net of federal tax
benefit. The Company has continued its negotiations with the IDR, and, in the
opinion of management, there is a reasonable possibility that this matter could
be resolved in the near term. While no resolution has been finalized, the
obligation, if any, should be substantially reduced.
8
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(5) ADOPTION OF A NEW ACCOUNTING STANDARD:
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The standard is effective for
fiscal years beginning after December 15, 1998, with early adoption encouraged.
The Company applied the new rules prospectively beginning in the first quarter
of 1998 and, based on current circumstances, does not believe the application of
the new rules will have a material impact on the consolidated financial
statements.
(6) RECLASSIFICATIONS:
Certain amounts in the prior period financial statements have been
reclassified to be consistent with the current period presentation. Such
reclassifications had no effect on previously reported net income.
9
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ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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 PPR, risks associated
with acquisition 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 or other risks. The Company
undertakes no obligation to publicly release the results of any revisions of
these forward-looking statements that may be made to reflect any future events
or circumstances.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
The following table sets forth certain operating data of Brylane Inc. for the periods indicated.
<S> <C> <C> <C> <C> <C> <C>
Thirteen Thirteen Twenty-six
Weeks Ended Weeks Ended Weeks Ended
---------------- ---------------- ----------------
(Dollars In (Dollars In (Dollars In
thousands) thousands) thousands)
(Unaudited) (Unaudited) (Unaudited)
August 1, 1998 August 2, 1997 August 1, 1998
---------------- ---------------- ----------------
Net sales . . . . . . . . . . . . . $ 300,532 100.0% $ 274,656 100.0% $ 648,136 100.0%
Gross margin. . . . . . . . . . . . 148,010 49.2 130,417 47.5 319,197 49.2
Operating expenses:
Catalog and advertising. . . . . 63,788 21.2 54,540 19.9 149,782 23.1
Fulfillment. . . . . . . . . . . 33,696 11.2 28,345 10.3 63,862 9.8
Support services . . . . . . . . 20,916 7.0 21,740 7.9 45,320 7.0
Amortization of acquisitions
intangibles and organization
costs . . . . . . . . . . . . 2,825 0.9 2,734 1.0 5,649 0.9
---------------- ------ ---------------- ------ ---------------- ------
Operating income. . . . . . . . . . 26,785 8.9 23,058 8.4 54,584 8.4
Add back:
Non-recurring inventory
charge (1) . . . . . . . . . -- -- 829 0.3 -- --
Compensation expense (2) . . . -- -- 174 0.1 -- --
Operating adjustments (3). . . 765 0.3 -- -- 2,375 0.4
---------------- ------ ---------------- ------ ---------------- ------
Operating income before
acquisitions related and
non-recurring adjustments . . . . $ 27,550 9.2% $ 24,061 8.8% $ 56,959 8.8%
================ ====== ================ ====== ================ ======
<S> <C> <C>
Twenty-six
Weeks Ended
----------------
(Dollars In
thousands)
(Unaudited)
August 2, 1997
----------------
Net sales . . . . . . . . . . . . . $ 603,457 100.0%
Gross margin. . . . . . . . . . . . 290,171 48.1
Operating expenses:
Catalog and advertising. . . . . 137,879 22.9
Fulfillment. . . . . . . . . . . 56,415 9.4
Support services . . . . . . . . 43,750 7.2
Amortization of acquisitions
intangibles and organization
costs . . . . . . . . . . . . 5,466 0.9
---------------- ------
Operating income. . . . . . . . . . 46,661 7.7
Add back:
Non-recurring inventory
charge (1) . . . . . . . . . 3,315 0.5
Compensation expense (2) . . . 349 0.1
Operating adjustments (3). . . -- --
---------------- ------
Operating income before
acquisitions related and
non-recurring adjustments . . . . $ 50,325 8.3%
================ ======
<FN>
(1) The non-recurring inventory charge resulted from increasing inventory by
$5.0 million 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 and was completely amortized into cost of goods sold at January 31,
1998.
(2) Represents non-cash compensation expense related to amendments to options
granted under the Brylane, L.P. 1993 Partnership Unit Option Plan.
(3) Represents $0.5 million in merchandise loss related to the discontinuance
of the Sue Brett catalog concept and $0.3 million related to the relocation
costs for the KingSize business from Hingham, Massachusetts to New York for the
thirteen weeks ended August 1, 1998. For the twenty-six weeks ended August 1,
1998, includes $1.1 million in merchandise loss related to the discontinuance of
Sue Brett, $0.5 million in expenses associated with the canceled common stock
registration and $0.7 million of relocation costs for the KingSize business.
</TABLE>
10
PAGE
<PAGE>
THIRTEEN WEEKS ENDED AUGUST 1, 1998 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 2,
1997
NET SALES:
Net sales increased 9.4% for the thirteen weeks ended August 1, 1998 to
$300.5 million from $274.7 million in the comparable period of fiscal 1997. The
increase in net sales is primarily related to an increase in sales volume due to
both a 5.5% and a 4.2% increase in circulation and average order size,
respectively.
GROSS MARGIN:
Gross margin for the thirteen weeks ended August 1, 1998 increased to
$148.0 million (49.2% of net sales) from $130.4 million (47.5% of net sales) for
the same period of fiscal 1997. Excluding the non-recurring inventory charge of
$0.8 million (0.3% of net sales) related to the step-up in the value of
inventory in connection with the Chadwick's acquisition, last year's gross
margin would have been $131.2 million (47.8% of net sales). The increase in the
gross margin as a percent of net sales in fiscal 1998 is due primarily to higher
initial mark-ups created by favorable merchandise sourcing from direct offshore
purchases.
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 1, 1998, catalog and advertising expense increased to $63.8 million
(21.2% of net sales) from $54.5 million (19.9% of net sales) for the same period
of fiscal 1997. The increase in expense is primarily due to an increase in
circulation and higher paper costs.
FULFILLMENT EXPENSE:
Fulfillment expense includes distribution center, telemarketing, credit
services and customer service expenses, reduced by net merchandise postage
revenue. Fulfillment expense as reported in the thirteen weeks ended August 1,
1998 increased to $33.7 million (11.2% of net sales) from $28.3 million (10.3%
of net sales) for the same period in fiscal 1997. The increase in fulfillment
expense relates to the start up of additional distribution operations as well as
an increase in credit service expenses primarily related to chargebacks
associated with the deferred billing programs.
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 1, 1998
decreased to $20.9 million (7.0% of net sales) from $21.7 million (7.9% of net
sales) for the same period in fiscal 1997. The decrease was primarily due to
lower incentive compensation expense, partially offset by higher staffing costs
to support growth initiatives in the quarter ended August 1, 1998.
AMORTIZATION EXPENSE:
Amortization expense for the thirteen weeks ended August 1, 1998, increased
to $2.8 million (0.9% of net sales) from $2.7 million (1.0% of net sales) for
the same period in fiscal 1997. The increase in the amortization expense is due
to increased amortization of the remaining net book value of certain trademarks
which was accelerated concurrent with changes in ownership which occurred in
conjunction with the Company's secondary offering in October, 1997.
OPERATING INCOME:
Operating income before acquisitions-related and non-recurring adjustments
in the thirteen weeks ended August 1, 1998 increased to $26.8 million (8.9% of
net sales) from $23.1 million (8.4% of net sales) for the same period of fiscal
1997. Operating income improved by $3.7 million due to an increase in revenues
as a result of higher sales volume, and an increase in gross margin as a result
of favorable merchandise sourcing partially offset by higher catalog and
operating expenses.
INTEREST EXPENSE:
Interest expense, net, for the thirteen weeks ended August 1, 1998
increased to $7.3 million compared to $6.2 million for the comparable period in
1997. Interest expense increased by $1.1 million due to higher average
outstanding debt balances partially offset by slightly lower interest rates on
the term loans of the 1997 Bank Credit Facility and the term loan of the Amended
1997 Bank Credit Facility.
11
<PAGE>
<PAGE>
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE:
Income before income taxes and extraordinary charge increased to $19.5
million for the thirteen weeks ended August 1, 1998 from $16.9 million for the
same period of fiscal 1997. The improvement in income is due to an increase in
revenues as a result of higher sales volume, and an increase in gross margin as
a result of favorable merchandise sourcing, partially offset by higher catalog,
operating and interest expenses.
INCOME TAXES:
The provision for income taxes is based on current estimates by management
of the annual effective tax rate. The effective tax rate was 38.5% for the
thirteen weeks ended August 1, 1998 compared to 37.0% for the thirteen weeks
ended August 2, 1997.
NET INCOME:
Net income increased to $12.0 million ($0.64 per share on a diluted basis)
for the thirteen weeks ended August 1, 1998 from $10.6 million ($0.53 per share
on a diluted basis) for the comparable period in fiscal 1997. The increase was
primarily due to an increase in revenues as a result of higher sales volume, and
an increase in gross margin as a result of favorable merchandise sourcing
partially offset by higher catalog, operating and interest expenses.
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
2, 1997
NET SALES:
Net sales increased 7.4% for the twenty-six weeks ended August 1, 1998 to
$648.1 million from $603.5 million in the comparable period of fiscal 1997. The
increase in net sales is primarily related to an increase in sales volume due to
both a 6.3% and a 3.5% increase in circulation and average order size,
respectively.
GROSS MARGIN:
Gross margin for twenty-six weeks ended August 1, 1998 increased to $319.2
million (49.2% of net sales) from $290.2 million (48.1% of net sales) for the
same period of fiscal 1997. Excluding the non-recurring inventory charge of
$3.3 million (0.5% of net sales) related to the step-up in the value of
inventory in connection with the Chadwick's acquisition, last year's gross
margin would have been $293.5 million (48.6% of net sales). The increase in the
gross margin as a percent of net sales in fiscal 1998 is due primarily to higher
initial mark-ups created by favorable merchandise sourcing from direct offshore
purchases.
CATALOG AND ADVERTISING EXPENSE:
Catalog and advertising expense for the twenty-six weeks ended August 1,
1998, increased to $149.8 million (23.1% of net sales) from $137.9 million
(22.9% of net sales) for the same period of fiscal 1997. The increase as a
percent of net sales was primarily due to an increase in circulation and higher
paper costs.
FULFILLMENT EXPENSE:
Fulfillment expense in the twenty-six weeks ended August 1, 1998 increased
to $63.9 million (9.8% of net sales) from $56.4 million (9.4% of net sales) for
the same period in fiscal 1997. The increase in fulfillment expense relates to
the start up of additional distribution operations as well as an increase in
credit service expenses primarily related to the chargebacks associated with the
deferred billing program.
SUPPORT SERVICES EXPENSE:
Support services expense for the twenty-six weeks ended August 1, 1998
increased to $45.3 million (7.0% of net sales) from $43.8 million (7.2% of net
sales) for the same period in fiscal 1997. The increase was primarily due to
expenses associated with the canceled common stock registration and the
relocation costs for the KingSize business.
AMORTIZATION EXPENSE:
Amortization expense for the twenty-six weeks ended August 1, 1998,
increased to $5.6 million (0.9% of net sales) from $5.5 million (0.9 of net
sales) for the same period in fiscal 1997. The increase in the amortization
expense is due to increased amortization of the remaining net book value of
certain trademarks which was accelerated concurrent with changes in ownership
which occurred in conjunction with the Company's secondary offering in October,
1997.
12
<PAGE>
<PAGE>
OPERATING INCOME:
Operating income before acquisitions-related and non-recurring adjustments
in the twenty-six weeks ended August 1, 1998 increased to $54.6 million (8.4% of
net sales) from $46.7 million (7.7% of net sales) for the same period of fiscal
1997. Operating income improved by $7.9 million due to an increase in revenues
as a result of higher sales volume, and an increase in gross margin as a result
of favorable merchandise sourcing partially offset by higher catalog and
operating expenses.
INTEREST EXPENSE:
Interest expense, net, in the twenty-six weeks ended August 1, 1998
increased to $15.1 million compared to $13.7 million for the comparable period
in fiscal 1997. Excluding interest income of $1.0 million related to a purchase
price adjustment associated with the Chadwick's Acquisition last year, interest
expense increased by $0.4 million which was due to both higher average
outstanding debt balances partially offset by slightly 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 before income taxes and extraordinary charge increased to $39.5
million in the twenty-six weeks ended August 1, 1998 from $33.0 million for the
same period of fiscal 1997. The improvement in income is due to an increase in
revenues as a result of higher sales volume, and an increase in gross margin as
a result of favorable merchandise sourcing partially offset by higher catalog,
operating and interest expenses.
INCOME TAXES:
The provision for income taxes is based on current estimates by management
of the annual effective tax rate. The effective tax rate was 38.5% for the
twenty-six weeks ended August 1, 1998 compared to 38.6% for the twenty-six weeks
ended August 2, 1997.
NET INCOME:
Net income increased to $24.3 million ($1.31 per share on a diluted basis)
for the twenty-six weeks ended August 1, 1998 from $16.1 million ($0.80 per
share on a diluted basis) for the comparable period in fiscal 1997 (excluding
the extraordinary charge of $4.1 million for the write-off of debt issuance
costs, the net income for the twenty-six weeks in fiscal 1997 was $20.2 million
or $1.00 per share on a diluted basis). The increase was primarily due to an
increase in revenues as a result of higher sales volume, and an increase in
gross margin as a result of favorable merchandise sourcing partially offset by
higher catalog, operating and interest expenses.
POSTAL RATE INCREASE:
The United States Postal Service announced a postal rate increase
commencing on January 10, 1999. Brylane expects the magnitude of the postal
increase on catalog postage and merchandise postage to be 3.0% and 9.0%
respectively. The Company estimates the annual effect on net income to be $3.0
million, after tax, or approximately $0.15 per share on a diluted basis.
Currently, the Company is examining ways to mitigate the costs associated with
the postal increase through either price increases and\or reductions in other
costs.
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 includes servicing debt incurred to finance the
repurchase of common stock in the third quarter of fiscal 1997.
13
<PAGE>
<PAGE>
Operating activities resulted in cash used of $25.1 million for the
twenty-six weeks ended August 1, 1998 compared to cash provided of $30.7 million
for the same period in fiscal 1997. Cash used by operations was primarily due
to higher deferred receivables due to the increased use of deferred billing
options in this season's mailings over the prior year. Also, cash was used to
increase inventory levels due to earlier purchasing of Fall/Winter inventory
targeted to improve the in-stock position of the Company's catalogs, to fund
future catalogs' paper and production costs and to reduce accounts payable due
to higher direct offshore purchases.
Investing activities resulted in net cash used of $10.0 million in the
twenty-six weeks ended August 1, 1998 compared to a net source of cash of $21.5
million in the same period in fiscal 1997. The Company's capital expenditures
for the remainder of fiscal 1998 are estimated to be $5.8 million. Brylane
plans to fund its capital expenditures for fiscal 1998 using cash generated from
operations.
Financing activities for the twenty-six weeks ended August 1, 1998 resulted
in net cash provided of $30.1 million compared with a net use of cash of $55.5
million in the prior year. The Company received proceeds of $9.1 million
related to the exercise of stock options and $1.0 million from the payment of
management notes related to stock subscriptions in the twenty-six weeks ended
August 1, 1998. As a result of stock option exercises, a $9.2 million tax
benefit was recorded as additional paid in capital. The Company has made two
scheduled payments totaling $5.0 million on the Term Loan and net borrowings of
$25.0 million on the revolver for the twenty-six weeks ended August 1, 1998.
The Revolving Credit Facility can be used for general corporate purposes,
including working capital needs, letters of credit and permitted acquisitions.
As of August 1, 1998, Brylane had $244.0 million in borrowings under the Amended
1997 Bank Credit Facility and, after giving effect to the issuance of letters of
credit in the amount of $47.9 million which the Company intends to pay using
funds generated from operations, had additional capacity under the Revolving
Credit Facility of approximately $78.1 million.
The Company intends to redeem all of its $125 million 10% Senior
Subordinated Notes due 2003 at the stated call price of 105%, plus accrued
interest, on September 21, 1998. In connection with the redemption the Company
has received a commitment to amend and restate its existing credit facility to
$500 million, in order to, among other things, permit the redemption by
increasing the existing term loan for the Senior Subordinated Notes and provide
funds for general corporate purposes. The redemption is expected to result in
an after tax annual benefit of approximately $2.5 million, or approximately
$0.13 per share on a diluted basis in reduced interest costs. The Company will
incur an extraordinary charge pertaining to the refinancing of the Senior
Subordinated Notes and from amending and restating the Amended 1997 Bank Credit
Facility of approximately $6.7 million, net of tax, or approximately $0.36 per
share on a diluted basis.
On August 31, 1998, the Company announced that its Board of Directors
(including its independent directors) authorized the purchase of up to $40.0
million of its Common Stock. The repurchase program authorizes management, at
its discretion, to make purchases in the open market or in privately negotiated
block transactions.
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, funding of the purchases of
common stock for treasury, debt service on its indebtedness (including scheduled
prepayments under the Bank Credit Facility, as it will be amended and restated),
and planned capital expenditures for the foreseeable future. In addition, the
Company will have availability under the Revolving Credit Facility to finance
capital needs.
14
<PAGE>
<PAGE>
COMPUTERIZED OPERATIONS AND THE YEAR 2000:
The year 2000 issue ("Y2K") is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or produce erroneous results, leading to
disruptions in operations. In 1996, the Company developed a Year 2000 audit
compliance and certification program. The Company identified three major areas
that are critical for successful Y2K compliance: (1) financial and
informational system applications, (2) telemarketing and distribution
applications and (3) third-party relationships.
In the financial and information systems area, a number of applications
have been identified as not being compliant and by the end of this fiscal year
will have been corrected utilizing internal resources with some third-party
consulting. Final work is also being completed with its telemarketing and
distribution applications. Brylane is not presently aware of any Y2K issues
with any of its third party providers whose services are critical to the
Company.
The estimated and actual costs associated with this effort have not been,
and are not expected to be, material to operations. Brylane also anticipates
simulating a Y2K compliance test on a separate disaster recovery computer system
by late fiscal 1998. Brylane has and will continue to monitor all aspects
pertaining to Year 2000 compliance.
15
<PAGE>
<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.
None
16
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities 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 8, 1998 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)
17
Exhibit 11. Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
BRYLANE INC.
COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<S> <C> <C> <C>
Thirteen Weeks Ended Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- --------------------- ----------------------
August 1, 1998 August 2, 1997 August 1, 1998
--------------------- --------------------- ----------------------
Computation of Basic Earnings Per Share
- -------------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 11,963 $ 10,648 $ 24,281
Weighted average number of basic shares outstanding . . 18,447,040 19,471,445 18,165,966
Basic earnings per share. . . . . . . . . . . . . . . . $ 0.65 $ 0.55 $ 1.34
Computation of Diluted Earnings Per Share
- -------------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 11,963 $ 10,648 $ 24,281
Add: Interest on convertible debt, net of income taxes -- 188 --
--------------------- -------------------- ----------------------
Adjusted net income . . . . . . . . . . . . . . . . . . 11,963 10,836 24,281
Weighted average number of basic shares outstanding . . 18,447,040 19,471,445 18,165,966
Add:
Issuance of shares upon conversion
of convertible redeemable preferred stock . . 30,110 75,000 49,305
Shares purchased under the treasury
stock method. . . . . . . . . . . . . . . . . 181,073 34,900 280,076
Issuance of shares upon the conversion
of the convertible note . . . . . . . . . . . -- 727,273 73,161
--------------------- -------------------- ----------------------
Total weighted average number of dilutive shares. . . . 18,658,223 20,618,618 18,568,508
Diluted earnings per share. . . . . . . . . . . . . . . $ 0.64 $ 0.53 $ 1.31
<S> <C>
Twenty-six Weeks Ended
----------------------
August 2, 1997
----------------------
Computation of Basic Earnings Per Share
- -------------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 16,124
Weighted average number of basic shares outstanding . . 19,471,445
Basic earnings per share. . . . . . . . . . . . . . . . $ 0.83
Computation of Diluted Earnings Per Share
- -------------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 16,124
Add: Interest on convertible debt, net of income taxes 375
----------------------
Adjusted net income . . . . . . . . . . . . . . . . . . 16,499
Weighted average number of basic shares outstanding . . 19,471,445
Add:
Issuance of shares upon conversion
of convertible redeemable preferred stock . . 75,000
Shares purchased under the treasury
stock method. . . . . . . . . . . . . . . . . 306,618
Issuance of shares upon the conversion
of the convertible note . . . . . . . . . . . 727,273
----------------------
Total weighted average number of dilutive shares. . . . 20,580,336
Diluted earnings per share. . . . . . . . . . . . . . . $ 0.80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> MAY-03-1998
<PERIOD-END> AUG-01-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 24723
<ALLOWANCES> 1155
<INVENTORY> 253001
<CURRENT-ASSETS> 341573
<PP&E> 105976
<DEPRECIATION> 25730
<TOTAL-ASSETS> 759736
<CURRENT-LIABILITIES> 239339
<BONDS> 299507
0
0
<COMMON> 210
<OTHER-SE> 210106
<TOTAL-LIABILITY-AND-EQUITY> 759736
<SALES> 300532
<TOTAL-REVENUES> 300532
<CGS> 152522
<TOTAL-COSTS> 152522
<OTHER-EXPENSES> 118400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7332
<INCOME-PRETAX> 19453
<INCOME-TAX> 7490
<INCOME-CONTINUING> 11963
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11963
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
</TABLE>
