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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
COMMISSION FILE NO. 0-24179
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KASPER A.S.L., LTD.
DELAWARE 22-3497645
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
77 METRO WAY 07094
SECAUCUS, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 864-0328
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 {_}
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. { }
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes {X} No {_}
There were 6,800,000 shares of Common Stock outstanding at March 20, 2001.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant at March 20, 2001 was approximately $304,000. Such aggregate market
value is computed by reference to the last sales price of the Common Stock on
such date.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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Disclosure Regarding Forward-Looking Information
The statements contained in this Annual Report on Form 10-K that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended. Those statements appear in a number of places
in this report, including in "Business", "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations," and
include, but are not limited to, all discussions of trends affecting Kasper
A.S.L., Ltd.'s (the "Company" or "Kasper") financial condition and results of
operations and the Company's business and growth strategies as well as
statements that contain such forward-looking statements as "believes,"
"anticipates," "could," "estimates," "expects," "intends," "may," "plans,"
"predicts," "projects," "will," and similar terms and phrases, including the
negative thereof. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Furthermore, forward-looking statements may be included in our other
filings with the Securities and Exchange Commission as well as in press releases
or oral statements made by or with the approval of the Company's authorized
executive officers.
We caution you to bear in mind that forward-looking statements, by their
very nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this report are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations include but are not limited
to, the following cautionary statements ("Cautionary Statements"):
o general economic conditions;
o the ability of the Company to adapt to changing consumer preferences and
tastes;
o the Company's limited operating history as a stand-alone entity;
o potential fluctuations in the Company's operating costs and results;
o potential exchange rate fluctuations;
o the Company's concentration of revenues;
o the Company's dependence on a limited number of suppliers;
o the Company's dependence on its financing arrangement under the Chase
Facility (defined elsewhere herein) and to achieve ongoing amended covenant
requirements in future periods;
o the ability of the Company to reach an agreement with holders of the Senior
Notes (defined elsewhere herein) on the terms of a financial restructuring
of such Senior Notes; and
o the ability of the Company to successfully integrate the Trademark
Purchase, the FSA acquisition (both defined elsewhere herein) and any
future acquisitions into the Company's existing businesses.
All subsequent written or oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
PART I
ITEM 1. BUSINESS
General
Kasper, a Delaware corporation incorporated in 1997, is one of the leading
women's branded apparel companies in the United States. The Company designs,
markets, sources, manufactures and distributes women's career and special
occasion suits, sportswear and dresses. The Company's brands include such
well-recognized names as Kasper(R), Anne Klein(R), A Line Anne Klein(TM), Anne
Klein2(TM), Albert Nipon(R) and Le Suit(R). In addition, the Company has granted
licenses for the manufacture and distribution of certain other products under
the Anne Klein(R), Anne Klein II(R) and Anne Klein2(TM) (both hereinafter
referred to as "Anne Klein2"), A Line Anne Klein(TM), Kasper(R), and Nipon(R)
brand names, including, but not limited to, women's watches, jewelry, footwear,
coats, eyewear and swimwear and men's apparel. The Company's long-established
position as a market leader in women's suits was complemented in 1999 with the
purchase of trademarks owned by Anne Klein Company LLC.
Contributing to the Company's on-going diversification are the
Company-owned retail outlet stores, which provide an additional distribution
channel for its products. As of December 30, 2000, the Company operated 66
retail outlet stores under the Kasper A.S.L. name and 29 retail outlet stores
under the Anne Klein name, which not only sell company produced apparel, but
also showcase and sell licensed products. In addition to generating sales, the
Company uses its network of retail stores to control, reinforce and capitalize
on the image of its brands. The retail stores enable the Company to track more
closely sales and other product data, which in turn is used to help the
Company's wholesale customers respond more quickly to consumer preferences.
The Company is currently experiencing liquidity issues, which have resulted
in the Company's inability to make interest payments on its Senior Notes and the
anticipation that it will be in default under the Chase Facility during fiscal
2001 because of its inability to satisfy certain financial covenants. Although
the Company expects to reach agreement with the Senior Noteholders and financial
lenders, there is no assurance that the Company will be successful in doing so.
If the Company is unable to reach such agreements, it may be compelled to seek
relief under the United States Bankruptcy Code. In the interim, the Company is
examining all available options. As a result, the independent auditors have
qualified their opinion relative to the uncertainty of the Company to continue
as a going concern.
Financial Information About Industry Segments
Kasper's business consists of three integrated operations: wholesale,
retail and licensing. During fiscal 2000, approximately 96% of the Company's
wholesale net sales were derived from sales within the United States. Financial
information with regard to the Company's wholesale, retail and licensing
segments, including revenues, earnings before interest, taxes, depreciation and
amortization, and segment assets, appears in Note 12 to the Company's
consolidated financial statements included elsewhere herein.
Wholesale
The Company's wholesale business designs, sources and distributes to the
Company's wholesale customers, women's apparel under various labels owned by the
Company. The Company's products are sold to approximately 1,400 retail accounts
having approximately 2,000 retail locations throughout the United States, Canada
and Europe.
The Company participates in three principal areas of the women's wholesale
apparel market: suits, sportswear and dresses.
Suits
The women's suit market is generally defined as tailored jackets, skirts
and pants, sold as a set. The Company's brands encompass a number of segments
within the market from its "upper moderate" Kasper ASL brand and its "moderate"
Le Suit line, to the "bridge" and "better" categories with its Albert Nipon suit
lines. The Company believes it dominates the "moderate" to "upper moderate" suit
market for department stores with an estimated 60% share of the United States
market. During fiscal 2000, the Company launched its Anne Klein suit line for
the Fall 2000 season, which the Company feels, will help it further penetrate
the "bridge" category.
Kasper ASL is the leading brand name in "upper moderate" women's suits,
with approximately 70% of the "upper moderate" women's suit market in the United
States. Suits marketed under the Kasper ASL brand name represent the core of the
Company's business. The Kasper ASL suit brand business seeks to produce a wide
variety of high quality, excellent fitting suits at affordable prices, and
produces suits in petite, misses and large sizes. These suits are designed to
achieve an updated classic look that can be worn from one season to the next
without looking dated. In order to maintain a state of newness in its product
inventory and on the retail sales floor, the Kasper ASL suit division introduces
a new line of suits five times a year. Many of these suits are made of
"seasonless" fabrics that can extend the selling and wearing season of the
garments. Sales of Kasper ASL, as a percentage of the Company's net domestic
wholesale sales for the 2000, 1999 and 1998 fiscal years were approximately 36%,
47% and 48%, respectively.
The Le Suit line of suits was created as a less expensive alternative to
Kasper ASL suits. The Le Suit business uses the best styles designed for Kasper
ASL suits from the preceding year, while maintaining the same level of quality,
fit and construction as Kasper ASL suits, but with less expensive fabrics. In
addition to misses sizes, the Le Suit division also produces suits in petite and
large sizes. The Le Suit brand offers an alternative to retailers' private label
business. Sales of Le Suit, as a percentage of the Company's net domestic
wholesale sales, for the 2000, 1999 and 1998 fiscal years were approximately
16%, 19% and 21%, respectively.
3
The Company also manufactures suits under the Albert Nipon label, and also
designs and manufactures suits for sale under private labels for various
department stores. The Company coordinates with buyers to design and manufacture
private label products in specified colors, fabrics and styles. All garments
manufactured for private label have the same level of quality and consistent fit
as the Company's other products.
Sportswear
Career sportswear includes groups of skirts, pants, jackets, blouses and
sweaters which, while sold as separates, are coordinated as to styles, color
palettes and fabrics and are designed to be worn together or as separates.
Products offered in this area of the market are suitable for both a working
environment and casual wear. The Company offers a collection of career
sportswear under the brand name Kasper and Company ASL Sportswear, which is
priced between the "moderate" and "better" markets. Beginning with the 1999
Resort season, the Company introduced its Anne Klein and A Line Anne Klein
lines, marketed in the "bridge" category of the designer price point. The
Company broadened it's presence in the women's sportswear market with the
introduction of its Anne Klein2 sportswear line in Fall 2000, which competes in
the growing "better" market and further capitalizes on the synergies of Anne
Klein and Kasper.
Anne Klein / A Line Anne Klein
Anne Klein introduced the world to the straightforward concept of separates
dressing: coordinated pieces that mix to create outfits. The Anne Klein
sportswear line includes jackets, skirts, blouses, sweaters, dresses and knits.
In its "classic chic" design philosophy, Anne Klein dresses a successful and
self-assured woman who relies on the brand for clothes and accessories that are
modern, elegant and practical. A Line Anne Klein is sportier than the Anne Klein
line, offering high quality and appropriate casual dressing. Sales of Anne Klein
bridge sportswear lines, which began shipping in November 1999, as a percentage
of the Company's net domestic wholesale sales, for fiscal 2000, were
approximately 14%.
Anne Klein2
Like its flagship brand, Anne Klein2 offers women separates that work
together to create a variety of wardrobe options, addressing her lifestyle in a
comprehensive way. The clothes are distinctive in combining a level of
wearability and appropriateness with an element of novelty that is reflective of
the "better" customer within department stores. Sales of Anne Klein2, which
began shipping in July 2000, as a percentage of the Company's net domestic
wholesale sales, for fiscal 2000, were approximately 8%.
Kasper and Company ASL Sportswear
The Kasper and Company ASL sportswear division designs and markets jackets,
pants, skirts, knit tops and blouses to be sold as separates. The Company's
focus for the line is a "suited separate" concept. The ability to mix sizes and
coordinate jackets with skirts or pants under this concept fulfills the
consumers desire to have both comfortable and versatile clothing. The Kasper and
Company ASL sportswear division uses fabrics of similar quality as those used
for the suits, maintaining the consistency of excellent fit and quality
tailoring. Sales of Kasper and Company ASL sportswear, as a percentage of the
Company's net domestic wholesale sales, for the 2000, 1999 and 1998 fiscal years
were approximately 11%, 9% and 8%, respectively.
4
Dresses
The Company produces collections of dresses under the Kasper ASL dresses
brand name, targeted to sell at "better" prices. The Company's strategy is to
leverage its position in the career suit market by designing and marketing
dresses suitable for the career woman. The Kasper ASL dress division offers a
wide variety of high quality dresses at affordable prices, including career and
classic, desk to dinner dresses. Kasper dresses, like Kasper suits, are designed
with subtle changes from season to season rather than drastic trends that tend
to become outdated quickly.
International Operations
The Company's wholesale business includes two wholly-owned subsidiaries,
Kasper Holdings Inc. and Kasper A.S.L. Europe, Ltd., (collectively referred to
as "International"). Kasper Holdings Inc. owns 100% of Kasper Canada ULC, which
is a 70% owner of Kasper Partnership G.P., a Canadian Partnership through which
the Company conducts sales and distribution activity in Canada. Kasper A.S.L.
Europe, Ltd. operates a sales and distribution office in London, England, where
it sells the Company's products to retailers and distributors throughout the
European continent.
The Company's wholly-owned subsidiary, Asia Expert Limited, ("AEL"), a Hong
Kong corporation, is the owner of Tomwell Ltd., also a Hong Kong corporation.
Generally, AEL acts as a buying agent for the Company for which it receives an
arms-length commission. AEL also provides a quality control function at the
sewing contractors in China, Hong Kong and other parts of the Far East as part
of its buying service. Tomwell Ltd. operates the Company's China factory, which
began production in May 1998, and also provides beading services for Nipon and
Kasper garments. These subsidiaries receive arms-length fees for their services.
Retail
The Company's retail outlet store program establishes another distribution
channel for its products and takes advantage of the current consumer trend
towards shopping at "company outlet" stores. At December 30, 2000, the Company
operated 66 Kasper ASL retail outlet stores and 29 Anne Klein retail outlet
stores, which in total represented approximately 19%, 17% and 15% of total net
sales of the Company for the 2000, 1999 and 1998 fiscal years, respectively.
These stores, which stock current line merchandise, including styles made
exclusively for the stores, are generally located in an outlet center mall where
other women's apparel companies have established retail outlet stores. The Anne
Klein stores, which were acquired in November 1999, stock both Anne Klein
apparel and licensed products. The Company believes the retail outlet stores
help develop customer awareness of the Company's brand names while allowing
management to control the image and price range of its products. The Company
currently has retail locations throughout the United States.
Licensing
Licensing activity has increased significantly within the fashion industry
over the last fifteen years. Companies within the industry began to utilize
licensing as a key growth strategy as various products were added to their
licensed product portfolio. Licensing provides an avenue for highly profitable
growth, as well as serving as a platform to develop a brand franchise or
capitalize on an existing brand franchise. Licensing has become a key marketing
strategy for companies to build strong brand names while controlling costs. The
Company currently licenses its products under its Anne Klein, Anne Klein2, A
Line Anne Klein, Kasper and Nipon trademarks. The Company is continually
identifying and exploring license categories that have significant growth
opportunities. The Company believes that successfully entering these categories
will continue to strengthen the Company's brands.
Each of the licenses provide for the payment of a percentage of the
licensee's sales of the licensed products against a guaranteed minimum royalty,
which generally increases over the term of the agreement. Generally, the
licensees are required to contribute, on either a percentage of sales or fixed
minimum amount, to the ongoing marketing of the licensed brand.
5
Anne Klein, Anne Klein2 and A Line Anne Klein
As of December 30, 2000, the Company had 14 domestic and three
international licensing agreements under the Company's Anne Klein, Anne Klein II
and A Line Anne Klein trademarks and related logos, including the new Anne
Klein2 label which was introduced for Fall 2000. Each of the existing licensees
represents the pinnacle of its product area. The licenses span a wide range of
categories critical to the ongoing strategy of extending product offerings to
meet the needs of the customer, including watches, jewelry, footwear, coats,
eyewear, swimwear, scarves, sleepwear, socks and hosiery, small leather goods,
sewing patterns and umbrellas. The Company has an international master license
with a right to sublicense, which includes women's apparel and accessory
products in Japan and women's apparel in Korea. Sublicensees for accessory
products are granted the exclusive right to use the licensed trademark in
connection with the manufacture, promotion and sale of specified categories of
articles in Japan.
Kasper
As of December 30, 2000, the Company had five licensing arrangements
pursuant to which third party licensees produce merchandise under the Company's
Kasper trademark in accordance with designs furnished or approved by the
Company. Current licenses include women's coats and blouses; men's woven sport
shirts, sweaters and casual pants; and handbags, portfolios and wallets.
Nipon
As of December 30, 2000, the Company had four licensing arrangements under
the Company's Nipon trademark. Current licenses include men's tailored clothing,
neckwear, and small leather goods; and ladies' and girls' coats and outerwear.
Design
The Company designs its products based on seasonal plans that reflect prior
seasons' experience, current design trends, economic conditions and management's
estimates of the product's future performance. Product lines are developed
primarily for the two major selling seasons, spring and fall. The Company also
produces lines for the transitional periods within these seasons. As
"seasonless" fabrics become increasingly popular in women's apparel, the Company
has integrated these fabrics into its product lines.
The average lead-time from the selection of fabric to the production and
shipping of finished goods ranges from approximately eight to nine months.
Although the Company retains significant flexibility to change production
scheduling, the majority of production, for other than private label goods,
begins before the Company has received customer orders.
The Company's design teams travel around the world to select fabrics and
colors and stay abreast of the latest trends and innovations. In addition, the
Company monitors the sales of its products to determine changes in consumer
trends. In-house designers use a computer-aided design ("CAD") system to
customize designs. The Company's designers meet regularly with the piece goods
and sales departments to review design concepts, fabrics and styles.
Each of the Company's product lines has its own design team which is
responsible for the development and coordination of the product offerings within
each line. Once colors and fabrics are selected, production and showroom samples
are produced and incorporated into the product line, and the design and sourcing
departments begin to develop preliminary production samples. After approval of
the samples, production begins. As a line of products is being finalized,
customer reaction is evaluated and samples are modified as appropriate.
6
After production samples are approved for production, various patterns that
will be used to cut the fabric are produced by the Company's team of experienced
pattern makers. This process is aided by the use of a computerized marker and
grading system.
7
Manufacturing
The Company primarily contracts for the cutting and sewing of its garments
with over 30 contractors located principally in Taiwan, the Philippines, Hong
Kong and China. Purchases of finished goods from the Company's four principal
contractors accounted for 43% of the Company's total finished goods purchases in
2000. Apparel sold by the Company is manufactured in accordance with its design,
detailed specification and production schedules. In May 1998, the Company began
production in its own manufacturing facility in China. Finished goods produced
in the Company's China factory accounted for approximately 5% and 4% of total
finished goods production during fiscal 2000 and 1999, respectively. The Company
schedules work with its contractors so that each factory, or at least one floor
of each factory, is dedicated 100% to the Company's products, thereby ensuring
quality control and continuous flow of merchandise. The Company believes that
outsourcing allows it to maximize production flexibility while avoiding
significant capital expenditures, work-in-process inventory build-ups and costs
of managing a large production work force. The Company's production and sourcing
staffs in Hong Kong, Korea, Taiwan and the Philippines oversee all aspects of
apparel manufacturing and production, including quality control, as well as
researching and developing new sources of supply. Although the Company does not
have any long-term agreements with any of its manufacturing contractors, it has
had long-term mutually satisfactory relationships with its four principal
contractors and has engaged each of them for more than 15 years. The Company
allocates product manufacturing among contractors based on the contractors'
capabilities, the availability of production capacity and quota, quality,
pricing and flexibility in meeting changing production requirements on
relatively short notice. The Company seeks to maintain low cost production
through high unit volume and captive manufacturing facilities by manufacturing
products 52 weeks per year.
In order to ensure the continuous flow of current merchandise, the Company
maintains an inventory of piece goods in base cloths and colors at its Hong Kong
facility, as well as at various contractors. This enables the Company to
manufacture its products on a consistent basis, keeping manufacturing facilities
busy during the slower time periods thus freeing up these facilities for
manufacture of the more recently designed products with a lesser lead time. By
keeping a steady flow of production to its contractors, the Company seeks to
maintain its dominant position in the contractor's facility and allow for the
continuous flow of its product.
Quality Control
The Company's comprehensive quality control program is designed to ensure
that purchased piece goods and finished goods meet the Company's exacting
standards. The Company monitors the quality of its fabrics and approves
"strike-offs" prior to the production of such fabrics. Production samples are
submitted to the Company for approval prior to production. The Company maintains
a quality control staff who, in addition to the contractors' own quality control
staff, inspect prototypes of each garment before production runs are commenced
and perform random in-line quality control checks during production and after
production before the garments leave each contractor's premises. In addition,
inspectors perform quality control at the Company's distribution center in New
Jersey, where each style is measured against detailed specifications, and each
garment undergoes a thorough inspection and is then steamed or pressed, as
necessary. Garments are selected at random from shipments received in the
distribution center and sent to New York for inspection and approval by
production and sales staff before shipment. The Company believes that its policy
of inspection at the offshore contractors' facilities, together with the
inspection and refinishing at its distribution center, are essential to
maintaining the quality and reputation that its garments enjoy.
The Company permits garments to be returned for credit by its customers for
defective merchandise, incorrect shipments and/or late/early shipments only.
Returns of the Company's products for each of the 2000, 1999 and 1998 fiscal
years were less than 2.0% of gross sales.
8
Suppliers
Generally, the raw materials required for the manufacturing of the
Company's products are purchased from the Far East and Europe, directly by the
Company. Raw materials, which are in most instances made and/or colored
especially for the Company, consist principally of piece goods and yarn.
Purchases from the Company's four major suppliers, accounted for approximately
47% of the Company's total purchases of raw materials for fiscal 2000. The
Company's transactions with its suppliers are based on written instructions
issued by the Company from time to time and, except for these instructions, the
Company has no written agreements with its suppliers. However, the Company has
experienced little difficulty in satisfying its raw material requirements and
considers its sources of supply adequate. The inability of certain suppliers to
provide needed items on a timely basis could materially adversely affect the
Company's operations, business and financial condition.
Distribution
The Company operates a 400,000 square foot distribution and refinishing
center in Secaucus, New Jersey. To ensure that each of its retail customers
receives the merchandise ordered in excellent condition, the majority of apparel
produced for the Company is processed through the Company's distribution center
before delivery to the retail customer.
Customers
The Company sells approximately 96% of its products within the United
States. The Company distributes its products through approximately 1,400
department stores and specialty retail accounts throughout the United States and
Canada representing approximately 2,000 locations. Department stores accounted
for approximately 66%, 71% and 74% of the Company's gross sales for the 2000,
1999 and 1998 fiscal years, respectively. In fiscal 2000, Federated Department
Stores, Dillard's Department Stores and May Merchandising Co. accounted for
approximately 21%, 16% and 15% of gross sales, respectively. Sales to any
individual divisional unit of either Federated Department Stores, Dillard's
Department Stores or May Merchandising Co. did not exceed 16% of sales. While
the Company believes that purchasing decisions are generally made independently
by each department store, in some cases the trend may be toward more centralized
purchasing decisions. The Company's 10 largest customers accounted for
approximately 77% of the Company's total gross sales during fiscal 2000. A
decision by one or more of such substantial customers, whether motivated by
fashion concerns, financial issues or difficulties, or otherwise, to decrease
the amount of merchandise purchased from the Company or to cease carrying the
Company's products could have a materially adverse effect on the financial
condition and operations of the Company.
Sales
The Company has a direct sales staff in the United States, which is
organized by product and brand. All sales personnel are salaried. With the
exception of the Kasper suit division and Anne Klein apparel division, each
brand and product segment has a separate division manager responsible for sales
and marketing. The President of the Company is the primary manager of the Kasper
suit product line, and the President of Anne Klein apparel is in charge of the
Anne Klein product lines. The divisional managers report primarily to the
President for all matters relating to sales and to the CEO for matters relating
to product line development. The Company also uses commissioned agents for
various special accounts and in certain territories. In addition, senior
management is actively involved in selling to major accounts. The management
team has long-standing relationships with the senior management of their retail
accounts. Products are marketed to department stores and specialty retailing
establishments during the "market weeks," which are generally four to six months
in advance of the five corresponding industry selling seasons. The Company also
has sales offices in London and Canada.
The Company employs a cooperative advertising program with its major retail
accounts, whereby it contributes to the cost of its retail accounts' advertising
programs. An important part of the marketing process includes prominent displays
of the Company's products in retail accounts' sales brochures.
The Company's in-store Kasper ASL shops average 800 square feet and present
an in-depth Kasper suit line. The Company's Anne Klein and A Line Anne Klein
concept shops average 800 square
9
feet and reflect the merchandising concept of the brand and carry a range of the
brands' products. The Company provides all of the necessary fixtures in return
for store commitments regarding location and average inventory levels.
The Company maintains a staff of Regional Account Managers who service the
department stores carrying the Company's products and retail merchandise. The
Regional team acts as a liaison between the New York office and retail accounts
ensuring implementation of financial plans and pricing strategies, maximizing
sales through extensive analyses of sales and stock trends. In addition, the
Regional Managers continually visit each of their assigned stores throughout the
year to: provide assistance in negotiating prime real estate; manage and
motivate the selling specialists; conduct training seminars; provide
merchandising assistance; and interact with and assist the store's customers
both informally and at fashion shows organized by the Regional Managers. Through
monthly written analyses and standardized spreadsheets, the Regional Managers
document opportunities and challenges to optimize sales and margin. Selling
specialists, at the highest volume Kasper and Anne Klein in-store boutiques,
also report weekly to the Company on sales and inventory positions. Although
these selling specialists are store employees, they are trained by the Company
and can earn Company branded products as incentive bonuses for above average
performance and by providing feedback via monthly reports to the Company. The
Company believes that this marketing support is instrumental in maintaining its
competitive position.
Trademarks
The Company owns and/or uses a variety of trademarks in connection with its
products and businesses, including, Kasper, Kasper ASL, Kasper Woman, Kasper ASL
Petite, Kasper and Company, Kasper and Company Petite, Kasper Dress, Kasper
Dress Petite, Albert Nipon, Nipon Boutique, Executive Dress by Albert Nipon,
Nipon Night, Albert Nipon Suits, Nipon Studio, Anne Klein, the Lion Head Design,
Anne Klein2 and Anne Klein II, A Line Anne Klein and the A Anne Klein Logo
(collectively, the "Marks"). The Company believes its ability to market its
products under the Marks is a substantial factor in the success of the Company's
products. The Company has registered or applied for registration for many of its
trademarks, including certain of the Marks listed above, for use on apparel and
footwear and other products such as accessories, watches and jewelry in the
United States and in many foreign territories. The Company relies primarily upon
a combination of trademark, copyright, know-how, trade secrets, and contractual
restrictions to protect its intellectual property rights. The Company believes
that such measures afford only limited protection and, accordingly, there can be
no assurance that the actions taken by the Company to establish and protect its
trademarks, including the Marks, and other proprietary rights will prevent
imitation of its products or infringement of its intellectual property rights by
others, or prevent the loss of revenue or other damages caused thereby. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or obtain and use
information that the Company regards as proprietary. In addition, there can be
no assurance that one or more parties will not assert infringement claims
against the Company; the cost of responding to any such assertion could be
significant, regardless of whether the assertion is valid.
Imports and Import Restrictions
The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. The Company's import operations
are subject to constraints imposed by bilateral textile agreements between the
United States and a number of foreign countries, including Taiwan, South Korea,
and Hong Kong. These agreements impose quotas on the amounts and types of
merchandise that may be imported into the United States from these countries.
These agreements also allow the United States to impose restraints at any time
on the importation of categories of merchandise that, under the terms of the
agreements, are not currently subject to specified limits. Also of significance
to the Company and other domestic textile and apparel companies is the effect of
the World Trade Organization ("WTO") established under the Uruguay Round of
negotiations to revise the General Agreement on Tariffs and Trade with the
responsibility for overseeing international trade in a variety of areas,
including manufacturing, intellectual property and services. The WTO will lead
to the phase-out of
10
textile and apparel quotas over a period of years. Although the Clinton
Administration reached an agreement with China, subject to Congressional
approval, to facilitate China's entry into the WTO and grant it so-called
"Normal Trade Relations" status resulting in more liberal treatment of imports
from China, implementation of this agreement is not likely in 2001.
The Company's imported products are also subject to United States custom
duties and duties imposed in the ordinary course of business. The United States
and the other countries in which the Company's products are manufactured may,
from time to time, impose new quotas, duties, tariffs or other restrictions, or
adversely adjust presently prevailing quotas, duty or tariff levels, which could
adversely affect the Company's operations and its ability to continue to import
products at current or increased levels. The Company cannot predict the
likelihood or frequency of any such events occurring.
The Company monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its manufacturing
sources, the maintenance of overseas offices, allocation of production to
merchandise categories where more quota is available and shifting production
among countries and manufacturers.
Because the Company's foreign manufacturers are located at significant
distance from the Company, the Company is generally required to incur greater
lead time for orders manufactured overseas, which reduces the Company's
manufacturing flexibility. Foreign imports are also affected by the high cost of
transportation into the United States. These costs are generally offset by the
lower labor costs.
In addition to the factors outlined above, the Company's future import
operations may be adversely affected by political instability resulting in the
disruption of trade from exporting countries, any significant fluctuation in the
value of the dollar against foreign currencies and restrictions on the transfer
of funds.
Backlog
As of March 20, 2001, the Company had unfilled customer orders of
approximately $92.2 million, compared to approximately $96.8 million of such
orders at March 22, 2000. The amount of unfilled orders at a particular time is
affected by a number of factors, including the scheduling of the manufacture and
shipping of the product, which in some instances is dependent on the desires of
the customer. Accordingly, a comparison of unfilled orders from period to period
is not necessarily meaningful and may not be indicative of eventual actual
shipments. There can be no assurance that cancellations, rejections and returns
will not reduce the amount of sales realized from the backlog of orders.
Competition
Competition is strong in the areas of the fashion industry in which the
Company operates. The Company competes with numerous designers and manufacturers
of apparel and accessory products, domestic and foreign, none of which accounts
for a significant percentage of total industry sales, but some of which are
significantly larger and have substantially greater resources than the Company.
The Company's business depends, in part, on its ability to shape and stimulate
consumer tastes and demands by producing innovative, attractive, and exciting
fashion products, as well as its ability to remain competitive in the areas of
design, quality and price.
The Company competes primarily on the basis of consistency of quality and
fit, design, diversity of its product lines and service to its retail customers.
The Company believes that its competitive advantages at the customer and retail
levels have served to modulate its competition in the "upper moderate" women's
suit category. These competitive advantages include excellent quality and
consistent fit of the garments with high price-to-value relationship,
long-standing relationships with fabric suppliers, low-cost but high-quality
production through high unit volume and captive contract manufacturing
facilities, and long-standing relationships with retailers.
11
Employees
At December 30, 2000, the Company had approximately 1,600 employees in the
United States including 1,100 full-time employees and 500 part-time employees.
Approximately 400 of the Company's employees are members of UNITE, the union
representing the Needle Trades, Industrial and Textile Employees, which has a
three-year labor agreement with the Company expiring on May 31, 2003. The
Company considers its relations with its employees to be satisfactory. In
addition, the Company employs 5 full-time and 2 part-time employees in the
United Kingdom, 24 full time employees in Canada and 1,050 employees in the Far
East.
ITEM 2. PROPERTIES
The Company leases the following properties:
Location Square Footage Lease Expiration Use
- -------- -------------- ---------------- ------------------------------
Secaucus, New Jersey 400,000 February 2007 Administrative offices, retail
outlet, warehouse and
distribution center
New York, New York 41,000 August 2008 Kasper executive, sales,
production and design offices
and showroom
New York, New York 80,000 June 2012 Anne Klein executive, sales,
production and design offices
and showroom
Kwai Chung, New Territories, 56,000 September 2002 AEL warehouse and offices
Hong Kong
Shenzhen, China 23,000 February 2005 China Garment Factory
New York, New York 3,000 February 2002 Albert Nipon showroom
In addition, as of December 30, 2000, the Company operated 66 Kasper ASL
retail outlet stores and 29 Anne Klein retail outlet stores throughout the
United States. The majority of all newly entered leases are for a period of five
years. The average store size is approximately 2,800 square feet, ranging from a
minimum of 1,700 square feet to a maximum of 4,600 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal proceedings arising in the ordinary
course of business. While the outcome of these proceedings cannot at this time
be predicted with certainty, the Company does not expect any of the legal
proceedings to have a material adverse effect on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matter was submitted to a vote of the
Company's security holders by means of proxies or otherwise.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.01 par value common stock ("Common Stock") was traded on
The Nasdaq National Market(R) under the symbol "KASP" from August 8, 1998 until
February 13, 2001. On February 13, 2001, the Company announced that it was
seeking quotation of its shares of Common Stock on the OTC Bulletin Board in
lieu of its Nasdaq listing, due to the fact that it no longer met certain Nasdaq
listing requirements. Nasdaq trading was discontinued effective prior to the
opening of trading on February 14, 2001. After such date, the Company's Common
Stock is traded in the over the counter market and quotations are expected to be
available on the OTC Bulletin Board. The Company is unable to predict the
effect, if any, of the Nasdaq delisting on the market for and liquidity of its
Common Stock, which will depend upon, among other factors, the availability of
market makers for the Common Stock.
The high and low prices for the Company's Common Stock for each quarter
indicated are set forth below. The prices reflect the high and low sales price
for the Common Stock as reported by the Nasdaq Stock Market's National Market.
Period High Low
------ ---- ---
1999 First Quarter $ 5 1/4 $ 3 5/8
Second Quarter 6 1/8 3 7/8
Third Quarter 6 3 1/2
Fourth Quarter 3 5/8 1 5/8
2000 First Quarter $ 2 3/4 $ 3/16
Second Quarter 3 5/16 2 1/8
Third Quarter 2 7/8 1 11/16
Fourth Quarter 1 13/16 1/32
The closing sales price of the Company's Common Stock on March 20, 2001 was
$ 3/32 per share, and there were approximately 1,145 holders of record. The
Company has not declared or paid any cash dividends on its Common Stock during
fiscal years 2000 and 1999, and does not anticipate paying cash dividends in the
foreseeable future. The Company currently intends to retain earnings, if any, to
finance the growth of the Company and pay outstanding debt and related interest
payments. In addition, certain of the Company's debt instruments and agreements
with lending institutions limit the Company's ability to declare any dividends
for the duration of such agreements.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information is qualified by reference to, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained elsewhere in this
report. On June 4, 1997, the Company was separated from The Leslie Fay
Companies, Inc. ("Leslie Fay"), in accordance with the Reorganization Plan
approved by the U.S. Bankruptcy Court. Prior to that date, the Company operated
as the Sassco Fashions Division of Leslie Fay. As a result, the consolidated
financial statements for the "Reorganized Company" (period starting June 4,
1997) are not comparable to the combined financial statements of the
"Predecessor Company" (period ending June 4, 1997). See Note 3 to Selected
Consolidated/Combined Financial Data.
The selected consolidated financial information for the seven months ended
January 3, 1998 and the fiscal years ended January 2, 1999 and January 1, 2000
is derived from the Company's audited Consolidated Financial Statements included
elsewhere herein. The selected combined financial information for the year ended
December 28, 1996 and for the five months ended June 4, 1997 is derived from the
Company's audited Divisional Combined Financial Statements for the fiscal year
ended December 28, 1996 and for the five months ended June 4, 1997. Certain
amounts in prior fiscal years have been reclassified to conform to the
presentation of similar items for the fiscal year ended December 30, 2000.
13
The following selected financial information for the year ended December
30, 2000 has been prepared on a going concern basis. The defaults on the Senior
Notes and the likelihood of defaults under the Chase Facility during fiscal 2001
raise substantial doubt about the Company's ability to continue as a going
concern. The following selected financial information does not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other adjustments
that might become necessary should the Company be unable to continue as a going
concern in its present form. There can be no assurance that the Company will be
successful in reaching agreements with a substantial majority of holders of its
Senior Notes and with its lenders under the Chase Facility. As a result, the
independent auditors have qualified their opinion relative to the uncertainty of
the Company to continue as a going concern.
14
SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA (1)
(in thousands, expect per share data)
Predecessor Company Reorganized Company (3)
------------------------------------------------------------------------
Five Seven
Fiscal Year Months Months Fiscal Year Ended (2)
Ended (2) Ended Ended
------------------------------------------------------------------------
Dec. 28, June 4, Jan. 3, Jan. 2, Jan. 1, Dec. 30,
1996 1997 1998 1999 2000 2000
Statement of Operations Data:
------------------------------------------------------------------------
Net sales .............................................. $ 311,550 $ 136,107 $ 175,602 $ 312,089 $ 311,209 $ 400,797
Royalty income ......................................... 799 286 609 852 7,033 14,908
Cost of sales .......................................... 238,268 101,479 127,784 219,060 219,520 295,139
Gross profit ........................................... 74,081 34,914 48,427 93,881 98,722 120,566
Selling, general and administrative expenses (1) ....... 51,062 23,660 32,411 62,836 76,152 104,961
Amortization of reorganization asset (4) ............... -- -- 1,902 3,258 3,258 3,258
Depreciation and amortization (5) ...................... 2,238 1,191 2,365 4,537 6,018 8,087
Restructuring charge (6) ............................... -- -- -- -- -- 2,344
Interest and financing costs ........................... 1,634 667 9,829 17,788 20,494 25,576
Income (loss) before taxes ............................. 19,147 9,396 1,920 5,462 (7,200) (23,660)
Income tax provision (benefit) (7) ..................... 7,659 3,758 948 2,292 (2,426) 1,528
--------- --------- --------- --------- --------- ---------
Net income (loss) ...................................... $ 11,488 $ 5,638 $ 972 $ 3,170 $ (4,774) $ (25,188)
========= ========= ========= ========= ========= =========
Net income (loss) per share (8) ........................ -- -- $ 0.14 $ 0.47 $ (0.70) $ (3.70)
Weighted average number of shares outstanding (8) ...... -- -- 6,800 6,800 6,800 6,800
- ------------------------------------------------------------------------------------------------------------------------------------
Other Financial Data:
Earnings before interest, taxes, depreciation,
amortization and restructuring ("EBITDAR") ............ $ 23,019 $ 11,254 $ 16,016 $ 31,045 $ 22,570 $ 15,605
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data: As of:
---------------------------------------------------------------------------
Dec. 28, June 4, Jan. 3, Jan. 2, Jan. 1, Dec. 30,
1996 1997 1998 1999 2000 2000
---------------------------------------------------------------------------
Working Capital ........................................ $ 127,900 $ 101,264 $ 100,876 $ 116,011 $ 94,715 $ (89,980)(10)
Reorganization value in excess of identifiable assets .. -- -- 63,279 60,021 56,763 53,503
Total Assets ........................................... 172,881 147,050 260,656 269,358 329,765 337,117
Longterm Debt .......................................... -- -- 110,000 117,569 163,444 --(10)
Shareholders' Equity (9) ............................... $ 157,204 $ 132,363 $ 120,958 $ 124,050 $ 119,140 $ 93,601
15
(1) The Selected Consolidated/Combined Financial Data presented above has been
prepared to show the Company as a freestanding entity apart from Leslie
Fay. Until 1996, the Company was totally dependent upon Leslie Fay for all
administrative support, including accounting, credit, collections and legal
support. As such, the financial statements reflect an allocation of Leslie
Fay's administrative expenses to the Company.
(2) The change in the fiscal year-end from year to year is based on the
Company's internal policy to close the fiscal year-end on the Saturday
closest to December 31 of each year. As such, data for the fiscal years
ended December 28, 1996, January 3, 1998, January 2, 1999, January 1, 2000
and December 30, 2000 include the Company's results of operations for 52,
53, 52, 52 and 52 weeks, respectively.
(3) The Company has accounted for the reorganization using the principles of
"fresh start" reporting as required by AICPA Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
("SOP 90-7"). Pursuant to such principles, in general, the Company's assets
and liabilities were revalued. Therefore, due to the restructuring and
implementation of "fresh start" reporting, the consolidated financial
statements for the "Reorganized Company" (period starting June 4, 1997) are
not comparable to the combined financial statements of the "Predecessor
Company" (period ended June 4, 1997).
(4) For "fresh start" reporting purposes, any portion of the Company's
reorganization value not attributable to specific identifiable assets is
reported as "reorganization value in excess of identifiable assets." This
asset is being amortized on a straight-line basis over a 20-year period
beginning June 4, 1997.
(5) Included in Depreciation and Amortization for the seven month period ended
January 3, 1998 and the fiscal years ended January 2, 1999, January 1, 2000
and December 30, 2000 is the amortization of trademarks.
(6) The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 2000 for costs incurred in connection with a
restructuring. The costs include those related to professional fees,
severance and contract termination costs, as well as other expenses
associated with the implementation of the Company's restructuring program.
(7) As a division of Leslie Fay, the Company was not subject to Federal, State
or Local income taxes. Effective June 4, 1997, the Company became subject
to such taxes. The effective tax rate used for the historical financial
statements reflects the rate that would have been applicable, had the
Company been an independent entity. Provisions for deferred taxes were not
reflected on the Company's books but were reflected on the books and
records of Leslie Fay. Going forward, the Company has recorded deferred
taxes in accordance with the provisions of Statement of Accounting
Standards Number 109, Accounting for Income Taxes.
(8) Due to the implementation of the reorganization and "fresh start"
accounting principles, share and per share data for the Predecessor Company
have been excluded, as they are not comparable.
(9) Pursuant to the Leslie Fay reorganization plan, the Company issued $110.0
million in Senior Notes and 6,800,000 shares of Common Stock of the Company
to the former creditors of Leslie Fay. Prior to the reorganization, the
Company operated as a division of Leslie Fay. As such, the Shareholders'
Equity of the Predecessor Company as reported was the Predecessor Company's
divisional equity as of the respective date and therefore is not comparable
to the Shareholder's Equity of the Reorganized Company.
(10) As a result of the default on the Senior Notes and the likelihood of
defaults on the Chase Facility during fiscal 2001, the $110.0 million
Senior Notes and the $70.3 million outstanding under the Chase Facility
have been reclassified as short-term liabilities as of December 30, 2000.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere
herein. This discussion contains forward-looking statements based on current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected in such
forward-looking statements due to a number of factors, including those set forth
under "Disclosure Regarding Forward Looking Statements."
Overview
The Company utilizes a 52-53 week fiscal year ending on the Saturday
nearest December 31. Accordingly, fiscal years 1998, 1999 and 2000 ended on
January 2, 1999 ("fiscal 1998"), January 1, 2000 ("fiscal 1999"), and December
30, 2000 ("fiscal 2000"), respectively.
On July 9, 1999, the Company completed the purchase of the Anne Klein
trademarks including Anne Klein, Anne Klein II, and A Line Anne Klein and the
Lion Head Design Logo (the "Trademark Purchase"). The aggregate purchase price
for these assets was $67,900,000. During fiscal 2000, the Company incurred
product development costs relating to the Anne Klein suits and Anne Klein2
sportswear lines, which were delivered to the retail market in July 2000.
Accordingly, the results of operations for fiscal 2000 reflect a full year of
product development costs associated with these lines, with the benefit of
corresponding sales for only six months. In addition, the results of operations
for fiscal 1999 reflect the product development costs related to the new Anne
Klein bridge line for six months with the benefit of sales for only two months,
as the line began shipping in November 1999.
Concurrent with the Trademark Purchase, the Company entered into an Amended
and Restated Credit Facility led by The Chase Manhattan Bank ("Chase") in order
to fund the Company's working capital requirements and to finance the Trademark
Purchase (the "Chase Facility"). The Chase Facility provides the Company with a
revolving credit line of up to $160 million. The Company paid $2,364,000 in
commitment and related fees in connection with the Chase Facility in July 1999.
These fees will be amortized as interest and financing costs over the remaining
life of the financing agreement at the time of the amendment (four and one-half
years). In addition, during fiscal 1999, the Company wrote off approximately
$750,000 in unamortized bank fees remaining under the old facility with
BankBoston, which is included in interest and financing costs.
On June 16, 1999, the Company received consents from a majority of the
aggregate principal amount of its outstanding $110.0 million Senior Notes due
2004 (the "Senior Notes") as of May 21, 1999, to certain amendments to the
Indenture, dated as of June 1, 1997 and effective June 4, 1997 (as amended by
the Supplemental Indenture, dated as of June 30, 1997, the "Indenture"), between
the Company and IBJ Whitehall Bank & Trust Company, as Trustee, governing the
Senior Notes, and had executed a Second Supplemental Indenture (the "Second
Supplemental Indenture") with respect thereto. The primary purpose of the
amendments was to enable the Company to consummate the Trademark Purchase. The
Second Supplemental Indenture, dated as of June 16, 1999, became effective on
July 9, 1999, upon the closing of the Chase Facility. As a result, the Company
was required to pay to each registered holder of Senior Notes as of May 21,
1999, $0.02 in cash for each $1.00 in principal amount of Senior Notes held by
such registered holder as of that date, totaling $2.2 million. In addition, the
interest rate on the Senior Notes increased to 13.0%, beginning January 1, 2000.
On November 24, 1999, the Company completed the purchase of substantially
all the assets and the assumption of certain liabilities of 25 Anne Klein retail
outlet stores from Fashions of Seventh Avenue, Inc. and Affiliates (the "FSA
Acquisition"). The aggregate purchase price was $3,963,000, which included a
cash payment of $300,000 and assumed liabilities of $3,663,000. As a result of
the FSA
17
Acquisition, the Company recognized approximately $1.0 million in goodwill,
which will be amortized over the average life of the leases acquired, which is
four years.
On September 29, 2000, the Company announced that it would not make its
semi-annual interest payment of approximately $7.2 million to the holders of its
Senior Notes. Accordingly, the Company is currently in default under the terms
of the Senior Notes. The Company is currently engaged in discussions with an ad
hoc committee of its noteholders (the "Ad Hoc Committee") to formulate a
financial restructuring that will address current liquidity issues and enhance
the Company's ability to operate under its short- and long-term plans. In
addition, the Company will not make its March 31, 2001 semi-annual interest
payment of approximately $7.2 million to the holders of its Senior Notes.
On November 13, 2000, the Company entered into an amended credit agreement
with the lenders of the Chase Facility, which amended certain financial
covenants and waived all then-existing defaults under the Chase Facility. In an
effort to improve liquidity, the lenders granted the Company an increase in its
trademark advance rate. The amended credit agreement modified certain financial
covenants and ratios including the Company's capitalization ratio, interest
coverage ratio and net worth requirements through the end of fiscal 2003 based
on the Company's current and anticipated performance levels. The amended credit
agreement also provides for a monthly limit on the total outstanding amount of
borrowings under the Chase Facility through the end of fiscal 2001, reduces the
maximum amount of outstanding standby letters of credit allowed and increases
the interest rate on borrowings. In connection with the negotiation and
execution of the amended credit agreement, the Company paid $875,000 in bank
fees, which will be amortized as interest and financing costs over the remaining
life of the Chase Facility at the time of the amendment. Under the amended
credit agreement, the Company was required to retain a consulting firm to assist
the Company in the implementation of a restructuring plan.
As of December 30, 2000, the Company was in default under the Chase
Facility, because it did not satisfy the interest coverage ratio and minimum net
worth requirements there under. On March 28, 2001, these defaults under the
Chase Facility were waived. However, the Company currently anticipates that it
will be in violation of certain covenants under the Chase Facility in 2001. The
Company is currently negotiating with its lenders under the Chase Facility to
further amend certain financial covenants. Although the Company expects to reach
agreement on the terms for such amendments of the Chase Facility, there is no
assurance that the Company will be successful in doing so.
Although the Company expects to reach agreement on the terms of a financial
restructuring with the holders of a substantial majority of the Senior Notes,
and on the terms of an amendment to the Chase Facility, there is no assurance
that the Company will be successful in doing so. If the Company is unable to
reach such agreements, it may be compelled to seek relief under the United
States Bankruptcy Code. In the interim, the Company is examining available
options. The defaults on the Senior Notes and the likelihood of default under
the Chase Facility during fiscal 2001 raise substantial doubt as to the ability
of the Company to continue as a going concern.
The accompanying consolidated financial statements have been prepared on a
going concern basis. The defaults on the Senior Notes and the likelihood of
default under the Chase Facility in fiscal 2001 raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amount and classification of liabilities or any
other adjustments that might become necessary should the Company be unable to
continue as a going concern in its present form.
18
Results of Operations
Total Revenue by Segment
(in thousands except percentages)
Fiscal % Fiscal % Fiscal %
2000 of Total 1999 of Total 1998 of Total
------------------------- -------------------------- --------------------------
Wholesale $325,593 78.3% $258,836 81.3% $265,986 85.0%
Retail 75,204 18.1% 52,373 16.5% 46,103 14.7%
-------- ----- -------- ----- -------- -----
Net Sales 400,797 96.4% 311,209 97.8% 312,089 99.7%
Licensing 14,908 3.6% 7,033 2.2% 852 0.3%
-------- ----- -------- ----- -------- -----
Total revenue $415,705 100.0% $318,242 100.0% $312,941 100.0%
EBITDAR by Segment
(in thousands except percentages)
Fiscal % Fiscal % Fiscal %
2000 of Total 1999 of Total 1998 of Total
------------------------- -------------------------- --------------------------
Wholesale $ (219) (1.4)% $ 11,276 50.0% $ 24,896 80.2%
Retail 2,723 17.4% 5,744 25.4% 5,297 17.1%
Licensing 13,101 84.0% 5,550 24.6% 852 2.7%
-------- ----- -------- ----- -------- -----
Total $ 15,605 100.0% $ 22,570 100.0% $ 31,045 100.0%
Fiscal 2000 Compared to Fiscal 1999
Total Revenues
The Company's net sales in fiscal 2000 were $400.8 million as compared to
$311.2 for fiscal 1999. Sales from the Company's wholesale operations
("Wholesale") increased to $325.6 million in fiscal 2000 from $258.8 million in
fiscal 1999, primarily as a result of the sales generated by the Anne Klein
Bridge and Sportswear lines. Exclusive of the Anne Klein apparel lines,
wholesale sales decreased $1.2 million over fiscal 1999. Due to the high level
of promotional activity experienced in department stores, additional markdowns
and allowances were given, contributing to the decrease in wholesale sales.
Net sales at the Company's retail outlet stores ("Retail") increased to
$75.2 million in fiscal 2000 from $52.4 million in fiscal 1999, an increase of
$22.8 million due primarily to the net addition of 4 Kasper retail stores in
fiscal 2000, along with the 29 Anne Klein retail outlet stores. The 66 Kasper
retail stores accounted for $4.7 million of the increase, while the 29 new Anne
Klein retail stores contributed $18.1 million in sales. Comparable Kasper store
sales for fiscal 2000 were $51.2 million as compared to $49.8 million for fiscal
1999, an increase of approximately 2.8%.
Royalty income from the Company's licensing activities ("Licensing")
increased to $14.9 million in fiscal 2000 from $7.0 million in fiscal 1999
primarily as a result of the Trademark Purchase completed on July 9, 1999.
Gross Profit
The Company's gross profit as a percentage of total revenue decreased to
29.0% for fiscal 2000, compared to 31.0% for fiscal 1999. Wholesale gross profit
as a percentage of sales decreased in fiscal 2000 as a result of the initial
investment in product development costs relating to the Anne Klein2 product
lines prior to their shipment for Fall 2000, along with the ongoing promotional
activity in selected seasonal merchandise offerings resulting in higher product
line markdowns and allowances, and off-price Anne Klein sales.
19
Retail gross profit as a percentage of sales decreased to 37.2% in fiscal
2000 from 41.6% in fiscal 1999. Anne Klein retail stores experienced lower gross
profit margins as a result of an effort to clean out older merchandise and
strategically position the stores for current Anne Klein2 product, thus reducing
consolidated retail margins.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses increased to
$105.0 million in fiscal 2000 as compared to $76.2 million in fiscal 1999, an
increase of $28.8 million. Approximately $18.2 million of this increase can be
attributed to the new Anne Klein wholesale operations, which began incurring
expenses in July 1999. Included in Anne Klein wholesale expenses for fiscal 2000
are a full year of costs relating to product development of the Anne Klein suits
and Anne Klein2 sportswear lines, which began deliveries in the third quarter
2000. There were no such expenses in 1999. In addition, fiscal 2000 expenses
include a full year of expenses relating to the Anne Klein bridge line, as
compared to only six months of expenses in fiscal 1999. Overall, Kasper
wholesale operations expenses were up approximately $1.0 million versus the
prior year primarily as a result of modest increases in production, occupancy,
selling and administrative expenses which were offset in part by decreases in
design, advertising and shipping expenses. Retail store expansion, including the
net addition of 4 Kasper retail outlet stores and the 29 Anne Klein retail
outlet stores accounted for approximately $9.3 million in increased selling,
administrative and occupancy costs. Fiscal 1999 included only one month of
expenses relating to the 25 Anne Klein retail stores acquired as a result of the
FSA Acquisition. Licensing division operations accounted for an increase of
approximately $300,000 in administrative expenses during fiscal 2000, as fiscal
1999 included only six months of such expenses.
Earnings before Interest, Taxes, Depreciation, Amortization and
Restructuring Charge
The Company's earnings before interest, taxes, depreciation, amortization
and restructuring charge, ("EBITDAR") were $15.6 million in fiscal 2000 versus
$22.6 million in fiscal 1999, a decrease of $7.0 million. Wholesale EBITDAR
decreased $11.5 million during the period as a result of product development
costs relating to the new Anne Klein lines prior to the realization of sales,
increased markdowns and allowances, along with the slight increase in Kasper
wholesale operations expenses. Retail experienced a $3.0 million decrease in
EBITDAR reflecting the re-merchandising of the Anne Klein stores and the related
need to clean out older goods. Licensing contributed an additional $7.5 million
in EBITDAR over fiscal 1999, reflecting the benefit of a full year's licensing
activity.
Restructuring Charge
The Company recorded a $2.3 million restructuring charge to cover the
estimated costs of streamlining operating and administrative functions. This
charge includes those related to professional fees, severance and contract
termination costs, and other expenses associated with the implementation of the
Company's restructuring program. See Note 8 to Consolidated Financial
Statements.
Amortization of Reorganization Value in Excess of Identifiable Assets
As a result of the Company's 1997 spinoff under Leslie Fay's reorganization
plan, the portion of the Company's reorganization value not attributable to
specific identifiable assets has been reported as "reorganization value in
excess of identifiable assets". This asset is being amortized over a 20-year
period beginning June 4, 1997. Accordingly, the Company incurred amortization
charges in both fiscal 2000 and 1999 totaling approximately $3.3 million.
20
Depreciation and Amortization
Depreciation and amortization totaled $8.1 million in fiscal 2000, up from
$6.0 million in fiscal 1999 and consists of the amortization charges associated
with the trademarks as well as fixed asset depreciation. As a result of the
Trademark Purchase, the Company incurred an additional $900,000 in amortization
in fiscal 2000. Trademarks are being amortized over 35 years. The remaining
increase relates to depreciation and amortization associated with capital
expenditures in fiscal 2000, including a full year of depreciation on those
acquired through the FSA Acquisition, along with approximately $250,000 of
goodwill amortization as a result of the FSA Acquisition.
Interest and Financing Costs
Interest and financing costs increased to approximately $25.6 million in
fiscal 2000 from $20.5 million in fiscal 1999, an increase of $5.1 million.
Interest expense is comprised of the interest expense on the Senior Notes and
the amortization of the related bondholder consent fee paid on July 9, 1999,
along with interest expense on the Chase Facility, the amortization of the
related bank fees and factoring fees.
Beginning January 1, 2000, interest on the Senior Notes increased to 13.0%
from 12.75% per annum. Interest is payable semi-annually on March 31 and
September 30. Interest expense on the Senior Notes totaled $14.6 million for
fiscal 2000 and $14.0 million for fiscal 1999. Fiscal 2000 interest expense
includes approximately $260,000 in unpaid default interest on the Senior Notes.
Default interest began to accrue at a rate equal to 14.75% per annum on the
unpaid interest on the Senior Notes on September 30, 2000 because the Company
did not make the semi-annual interest payment of approximately $7.2 million,
which became due on such date. There are no principal payments due until
maturity, which is March 31, 2004. To the extent that the Company elects to
undertake a secondary stock offering or elects to prepay certain amounts, a
premium will be required to be paid. Amortization of the bondholder consent fee,
which is being amortized over the remaining life of the Senior Notes beginning
July 9, 1999, totaled approximately $450,000 in fiscal 2000 and $220,000 in
fiscal 1999.
Interest under the Chase Facility totaled $8.6 million in fiscal 2000, an
increase of $4.9 million over the prior year due primarily to the increased
level of borrowing needed to finance the Trademark Purchase and Anne Klein
product development costs. As previously discussed, the Company anticipates that
it will be in violation of certain financial covenants under the Chase Facility
during 2001. The related bank fees are being amortized over the remaining life
of the Chase Facility, four and one half years, beginning July 9, 1999 and
resulted in approximately $650,000 of amortization charges in both fiscal 2000
and fiscal 1999. In addition, during fiscal 1999, the Company wrote off
approximately $750,000 of unamortized bank fees relating to the Company's old
facility with BankBoston. The offsetting decrease relates to miscellaneous
interest and factoring fees.
Income Taxes
Income tax expense was $1.5 million in fiscal 2000, primarily related to
foreign taxes, compared to a benefit of $2.4 million in fiscal 1999. These
amounts differ from the amount computed by applying the federal income tax
statutory rate of 34% to income before taxes because of state and foreign taxes.
Fiscal 1999 Compared to Fiscal 1998
Total Revenues
Net sales in fiscal 1999 were $311.2 million as compared to $312.1 for
fiscal 1998. Wholesale sales decreased to $258.8 million in fiscal 1999 from
$266.0 million in fiscal 1998, a drop of 2.7%. The discontinuance of the Nina
Charles label at wholesale for the Fall 1998 season accounted for $2.5 million
of the $7.2 million decline. Sales of the Company's suit and dress lines were
impacted by higher
21
markdowns in order to move seasonal merchandise and the highly promotional
retail environment during the last six months of 1999. Sales of the Company's
sportswear increased during the Fall season after a planned reduction in the
first six months of the year. Deliveries of the Anne Klein and A Line Anne Klein
resort lines commenced in the fourth quarter of fiscal 1999 and contributed
sales of $6.6 million and $2.1 million, respectively.
Retail sales increased to $52.4 million in fiscal 1999 from $46.1 million
in fiscal 1998, an increase of $6.3 million or 13.7% due to the net addition of
3 Kasper retail stores in fiscal 1999, along with sales of approximately $1.7
million as a result of the purchase of the Anne Klein retail outlet stores on
November 24, 1999. Comparable store sales for fiscal 1999 were $39.8 million as
compared to $39.7 million for fiscal 1998.
Royalty income increased to $7.0 million in fiscal 1999 from $850,000 in
fiscal 1998 primarily as a result of the Trademark Purchase completed on July 9,
1999.
Gross Profit
Gross Profit as a percentage of total revenues increased to 31.0% for
fiscal 1999, compared to 30.0% for fiscal 1998 primarily as a result of the
increase in licensing revenue as a result of the Trademark Purchase. Wholesale
gross profit decreased in fiscal 1999 as a result of the initial investment in
product development costs relating to the Anne Klein and Anne Klein2 product
lines prior to their shipment for Resort and Fall 2000, along with increased
markdowns, as a result of the highly promotional retail environment during 1999.
These decreases were partially offset by improved margins in the Company's
sportswear line. Retail gross profit as a percentage of sales increased to 41.6%
in fiscal 1999 from 41.4% in fiscal 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $76.2 million in
fiscal 1999 as compared to $62.8 million in fiscal 1998, an increase of $13.4
million. Approximately $10.0 million of this increase can be attributed to the
new Anne Klein wholesale operations, which began incurring expenses in July 1999
but realized sales only from Resort deliveries of the Anne Klein line in
November 1999 and has yet to benefit from sales relating to the Anne Klein2
sportswear line which were expected to roll out in Fall 2000. Kasper wholesale
operations were relatively flat versus the prior year. Increases relating to
Year 2000 compliance and remediation expenses were offset by modest variances in
other areas resulting in a net decrease of approximately $400,000. Retail store
expansion, including the net addition of 3 Kasper retail outlet stores and the
25 Anne Klein retail outlet stores acquired from FSA, contributed approximately
$2.3 million in increased selling, administrative and occupancy costs. Licensing
division operations accounted for approximately $1.5 million in administrative
expenses during fiscal 1999 as result of the Trademark Purchase.
Earnings before Interest, Taxes, Depreciation and Amortization
EBITDA was $22.6 million in fiscal 1999 versus $31.0 million in fiscal
1998, a decrease of $8.4 million. Wholesale EBITDA decreased $13.6 million
during the period as a result of product development costs relating to the new
Anne Klein lines prior to the realization of sales, increased markdowns and
allowances and lower sales. Retail experienced a slight increase in EBITDA
reflecting the increased sales relating to store additions offset by associated
selling, general and administrative expenses. Licensing contributed an
additional $4.7 million in EBITDA over fiscal 1998 as the result of the
Trademark Purchase.
22
Amortization of Reorganization Value in Excess of Identifiable Assets
As a result of the Reorganization Plan, the portion of the Company's
reorganization value not attributable to specific identifiable assets has been
reported as "reorganization value in excess of identifiable assets". This asset
is being amortized over a 20-year period beginning June 4, 1997. Accordingly,
the Company incurred amortization charges in both fiscal 1999 and 1998 totaling
approximately $3.3 million.
Depreciation and Amortization
Depreciation and amortization totaled $6.0 million in fiscal 1999, up from
$4.5 million in fiscal 1998 and consists of the amortization charges associated
with the trademarks as well as fixed asset depreciation. As a result of the
Trademark Purchase, the Company incurred an additional $900,000 in amortization
in fiscal 1999. The trademarks are being amortized over 35 years. The remaining
increase relates to depreciation and amortization associated with capital
expenditures in fiscal 1999, along with approximately $120,000 of depreciation
relating to fixed assets acquired from FSA and amortized under the half-year
convention.
Interest and Financing Costs
Interest and financing costs increased to approximately $20.5 million in
fiscal 1999 from $17.8 million in fiscal 1998, an increase of $2.7 million.
Interest is attributable to the expense on the Senior Notes and the amortization
of the related bondholder consent fee paid on July 9, 1999, along with interest
on the financing agreement and the amortization of the associated bank fees. The
Senior Notes bore interest at 12.75% per annum in fiscal 1999 and mature on
March 31, 2004. Beginning January 1, 2000, the interest rate increased to 13.0%.
Interest is payable semi-annually on March 31 and September 30. Interest
relating to the Senior Notes totaled $14.0 million for both fiscal 1999 and
fiscal 1998. There are no principal payments due until maturity. To the extent
that the Company elects to undertake a secondary stock offering or elects to
prepay certain amounts a premium will be required to be paid. Amortization of
the bondholder consent fee, which is being amortized over the remaining life of
the Senior Notes beginning July 9, 1999, totaled approximately $220,000 in
fiscal 1999.
Interest under the financing agreement totaled $3.8 million in fiscal 1999,
an increase of $1.8 million over the prior year due primarily to the increased
borrowings needed to finance the Trademark Purchase.
The associated bank fees are being amortized over the remaining life of the
financing agreement, four and one half years, beginning July 9, 1999 and
resulted in approximately $900,000 of amortization charges in fiscal 1999 and
$800,000 in fiscal 1998 relating to the Company's old facility with BankBoston.
In addition, during fiscal 1999, the Company wrote off approximately $750,000 of
unamortized bank fees relating to the BankBoston facility. The offsetting
decrease relates to miscellaneous interest and factoring fees.
Income Taxes
Income tax benefit was $(2.4) million in fiscal 1999, primarily related to
the carry back of current year losses. This amount differs from the amount
computed by applying the federal income tax statutory rate of 34% to income
before taxes because of state and foreign taxes.
Liquidity and Capital Resources
The Company's main sources of liquidity historically have been cash flows
from operations and credit facilities. The Company's capital requirements
primarily result from working capital needs, expansion of retail operations and
renovation of department store boutiques and other corporate activities.
23
Net cash used in operating activities was $11.7 million in fiscal 2000 as
compared to cash provided by operations of $31.8 million during fiscal 1999. The
decrease was primarily the result of increases in finished goods inventory with
the addition of the new Anne Klein lines and the leaner inventory levels at the
beginning of the year compared to the beginning of fiscal 1999. This along with
the increase in net loss for the year was partially offset by the increase in
interest payable as a result of the non-payment of Senior Notes interest, and
the non-recurrence of certain transactions from fiscal 1999 associated with the
Trademark Purchase. The decrease in cash used in investing and provided by
financing activities is the direct result of the increased cash requirements in
fiscal 1999 needed for the Trademark Purchase and FSA Acquisition.
Net cash provided by operating activities was $31.8 million in fiscal 1999
as compared to cash used by operations of $16.0 million during fiscal 1998. The
increase was primarily the result of the continued focus on controlling
inventory levels along with an increase in accounts payables as a result of
improved trade terms and the addition of Anne Klein, which were partially offset
by the net loss for the year as well as fluctuations in various other accounts
as a result of the Trademark Purchase including deferred income relating to
licensing agreements. The decrease in cash flows from investing activities and
the increase in cash flows financing activities are both the direct result of
the Trademark Purchase and the FSA Acquisition.
Effective June 4, 1997, the Company entered into a $100 million working
capital facility with BankBoston as the agent bank for a consortium of lending
institutions (the "Original Facility").
On July 9, 1999, the Original Facility was refinanced by the Chase Facility
in order to, among other things, fund the Company's working capital requirements
and to finance the Trademark Purchase. The Chase Facility provides the Company
with a revolving credit line of up to $160 million. The Chase Facility provides,
among other things, for the maintenance of certain financial ratios and
covenants, and sets limits on capital expenditures and dividends to
shareholders. The Chase Facility is scheduled to expire on December 31, 2003.
Availability under the Chase Facility is limited to a borrowing base calculated
upon eligible accounts receivable, inventory, trademarks and letters of credit.
Interest on outstanding borrowing is determined based on stated margins above
the prime rate at Chase which on December 30, 2000, was one 1.0% above the prime
rate. For fiscal 2000, the weighted average interest rate on the Chase Facility
was 9.35%. The Company paid approximately $2.4 million in commitment and related
fees in connection with the Chase Facility in July 1999. These fees will be
amortized as interest and financing costs over the remaining life of the Chase
Facility at the time of the amendment (four and one-half years). During fiscal
1999, the Company wrote off approximately $750,000 in unamortized bank fees
remaining under the Original Facility.
The Chase Facility was amended on December 22, 1999 and June 29, 2000 to
modify certain conditions, financial ratios and covenants. The Chase Facility
provides that the interest rate on all outstanding borrowings under the Chase
Facility will fluctuate based on the Company's operating performance.
Accordingly, as of the third quarter 2000, the interest rate increased by 0.25%.
As of December 30, 2000, there were direct borrowings of $70.3 million
outstanding, $24.5 million in letters of credit outstanding and $20.1 million
available for future borrowings.
On November 13, 2000, the Company entered into an amended credit agreement
with the lenders of the Chase Facility, which further amended certain financial
ratios and covenants and waived all then existing defaults under the Chase
Facility. In an effort to improve liquidity, the Company was granted an increase
to its trademark advance rate. The agreement modified certain financial
covenants and ratios including the Company's capitalization ratio, interest
coverage ratio and net worth requirements through 2003 based on the Company's
current and projected performance levels. The agreement also provided for a
monthly limit on the total outstanding amount of borrowings under the Chase
Facility through
24
December 31, 2001, reduced the maximum amount of outstanding standby letters of
credit allowed, and eliminated the lower cost LIBOR based borrowing option.
Under the amended credit agreement, the Company was required to retain a
consulting firm to assist the Company in the implementation of a restructuring
plan. The Company paid $875,000 in bank fees in connection with the negotiation
and execution of the amended credit agreement, which are being amortized over
the remaining life of the facility at the time of the amendment.
As of December 30, 2000, the Company was in default under the Chase
Facility, because it did not meet certain financial covenants there under
including, the interest coverage ratio and minimum net worth requirement. Such
defaults were waived on March 28, 2001. However, it is likely that the Company
will be in default under the Chase Facility in fiscal 2001. The Company is
currently negotiating with the lenders under the Chase Facility to amend certain
financial covenants. Although the Company expects to reach agreement on the
terms of such amendments, no assurance can be given that it will be successful
in doing so. As of December 30, 2000, the $70.3 million outstanding under the
Chase Facility has been reclassified as a short-term liability as a result of
the likelihood of default based on the Company's inability to satisfy certain
financial covenants.
Pursuant to the Leslie Fay reorganization plan, the Company issued $110
million in Senior Notes. The Senior Notes initially bore interest at 12.75% per
annum and mature on March 31, 2004. Beginning January 1, 2000, the interest rate
increased to 13.0%. Interest is payable semi-annually on March 31 and September
30. Interest relating to the Senior Notes for fiscal 2000 totaled $14.6 million,
including approximately $260,000 in default interest. There are no principal
payments due until maturity. To the extent that the Company elects to undertake
a secondary stock offering or elects to prepay certain amounts, a premium will
be required to be paid.
On June 16, 1999, a majority of the aggregate principal amount of its
Senior Notes as of May 21, 1999, consented to certain amendments to the
Indenture and had executed the Second Supplemental Indenture. The primary
purpose of the amendments was to enable the Company to consummate the Trademark
Purchase. On July 9, 1999, as a result of the closing of the Chase Facility, the
Second Supplemental Indenture became effective. As a result, the Company paid to
each registered holder of Senior Notes as of May 21, 1999, $0.02 in cash for
each $1.00 in principal amount of Senior Notes held by such registered holder as
of that date, totaling $2.2 million (the "Consent Fee"). The Consent Fee is
being amortized over the remaining life of the Senior Notes and is included in
interest and financing costs.
On September 29, 2000, the Company announced that it would not make its
semi-annual interest payment of approximately $7.2 million to holders of its
Senior Notes. Accordingly, the Company is currently in default under the terms
of the Senior Notes. The Company is currently engaged in discussions with the Ad
Hoc Committee to formulate a financial restructuring that will address current
liquidity deficiencies and enhance the Company's ability to operate under its
short- and long-term plans. As a result of the default, the $110 million Senior
Notes have been reclassified as short-term debt.
Although the Company expects to reach agreement on the terms of a financial
restructuring with the holders of a substantial majority of the Senior Notes,
and on amendments to the Chase Facility, there is no assurance that the Company
will be successful in doing so. If the Company is unable to reach such
agreements, it may be compelled to seek relief under the United States
Bankruptcy Code. In the interim, the Company is examining all available options.
As previously discussed, the defaults on the Senior Notes and the anticipated
defaults under the Chase Facility raise substantial doubt as to the ability of
the Company to continue as a going concern. As a result, the independent
auditors have qualified their opinion relative to the uncertainty of the Company
to continue as a going concern.
On October 4, 1999, the Company entered into a factoring agreement with The
CIT Group/Commercial Services, Inc. ("CIT"). CIT collects the Company's
receivables and in turn remits the
25
funds to the Company. Any amounts unpaid after 90 days are guaranteed to be paid
to the Company by CIT. The agreement has no expiry date but may be terminated
upon 90 days written notice by the Company and upon 60 days written notice by
CIT. On November 10, 2000, the factoring agreement was amended to change the fee
structure from a flat rate monthly fee to a floating rate monthly fee based on a
percentage of the amount of each account factored. For its services, CIT charges
the Company 0.30% of the gross face amount of each account factored and an
additional 0.25% of the gross face amount of each account whose terms exceed 60
days. In addition, for the six-month period beginning December 1, 2000, there is
a minimum factoring fee of $675,000.
Capital expenditures were $6.1 million, $6.4 million and $5.7 million for
fiscal 2000, fiscal 1999 and fiscal 1998, respectively. Capital expenditures for
2000 and 1999 represent spending associated with warehouse expansion,
improvements to the Anne Klein office and showroom space, continued retail
outlet store and overseas facilities development and computer system
improvements. Capital expenditures for 1998 represent spending associated with
the relocation to a new sales, production and design office, retail outlet store
development, overseas facilities development and computer system improvements.
If the Company and the lenders under the Chase Facility reach an agreement
to amend certain financial covenants under the Chase Facility, the Company
anticipates that it will be in a position to satisfy its ongoing cash
requirements, other than the March 31, 2001 interest payment to the holders of
the Senior Notes, in the near term, through borrowings under the Chase Facility
and, from time to time, amounts received in connection with strategic
transactions, including, among other things, licensing arrangements. Events that
may impact the Company's ability to meet its ongoing cash requirements in the
near term include, but are not limited to, failure to reach an agreement with a
substantial majority of noteholders of its Senior Notes, future events that may
have the effect of reducing available cash balances (such as unexpected
operating losses, or increased capital or other expenditures), and future
circumstances that might reduce or eliminate the availability of external
financing. In addition, the ongoing promotional environment of department stores
has impacted the industry. If the current trend persists, the Company's
financial results could continue to be negatively impacted.
Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In 1999, the FASB approved SFAS No. 137 "Accounting for
Derivative Instruments, and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000. The Company has determined that
there will be no impact on the Company's financial statements as a result of the
adoption of this new pronouncement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not invest in derivative financial instruments or other
market risk sensitive instruments, except for short-term government and
commercial securities. Accordingly, the Company does not believe that it is
exposed to any material market risk with regard to such instruments with the
exception of interest rate risk associated with borrowings under the Chase
Facility.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Financial Statement Schedule
of the Company attached hereto and listed on the index to financial statements
set forth in Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
The Company's directors, executive officers and key employees, as of March
20, 2001 are as follows:
Name Age Position
---- --- --------
Arthur S. Levine 60 Chairman of the Board and Chief Executive Officer
Martin Bloom 67 Director
H. Sean Mathis 53 Director
Salvatore M. Salibello 55 Director
Lester E. Schreiber 52 Chief Operating Officer and Director
Denis J. Taura 61 Director
Olivier Trouveroy 45 Director
Gregg I. Marks 48 President
Gwen Gepfert 43 Chief Financial Officer
Barbara Bennett 48 Senior Vice President - Design
Peter Lee 53 Managing Director - Asia Expert, Ltd.
Wendy R. Chivian 40 President - Anne Klein Apparel
Merle Sloss 53 President - Anne Klein Licensing
Charles Nolan 43 Senior Vice President - Design - Anne Klein
Directors and Executive Officers
The term of office of each director of the Company expires on the date of
the next Annual Meeting of Stockholders and until their respective successors
are elected and qualified. The Company's directors and executive officers are as
follows:
Arthur S. Levine has served as the Chairman of the Board and Chief
Executive Officer of the Company since June 1997. Prior thereto and since 1975,
he was Chief Executive Officer of Sassco Fashions, Ltd. ("Sassco"), the
Company's predecessor, which was sold to Leslie Fay in May 1980.
Martin Bloom has been a director of the Company since June 2000. Mr. Bloom
is the Chairman of MBI International, Inc., an international consulting firm,
the Chairman of Geomar Philms, Inc., a producer of educational films, and a
director of Kellwood Company, a manufacturer of apparel and related soft goods
for men, women and children. Prior thereto, Mr. Bloom held various positions
with the May Department Stores Company, ultimately serving from 1985 to July
1996 as President and Chief Executive Officer of the international division.
H. Sean Mathis has been a director of the Company since March 2000. Mr.
Mathis is the President of Litchfield Asset Holdings, Inc., an investment
advisory company he founded in 1983. He served as Chairman of the Board of Allis
Chalmers, Inc., an industrial manufacturer, from 1996 to 1999, and as Chairman
of Universal Gym Equipment, Inc., a private exercise equipment manufacturer,
from 1996 to 1997. In 1997, Universal Gym Equipment, Inc. filed for protection
under the United States federal bankruptcy laws. Mr. Mathis served as a Director
of Allied Digital Technologies, Corp. from 1993 to 1998; as President of its
predecessor, RCL Acquisition Corp., from 1991 to 1993; and as President and as a
Director of RCL Capital Corp. from 1993 until it was merged into DISC Graphics,
Inc. in November 1995. He currently serves as a Director of Thousand Trails,
Inc., an operator of recreational parks, and ARCH Communications Group, Inc., a
communications company.
27
Salvatore M. Salibello has been a director of the Company since July 1998.
Mr. Salibello is a certified public accountant and founded Salibello & Broder,
an accounting/consulting firm, in 1978 and currently serves as its Managing
Partner.
Lester E. Schreiber has served as Chief Operating Officer since May 1996
and has been a director of the Company since its separation from Leslie Fay in
June 1997. Prior to becoming Chief Operating Officer of the Company, Mr.
Schreiber served as Vice President of Operations from January 1989 to April
1996.
Denis J. Taura has been a director of the Company since July 1998. He is a
certified public accountant and a partner in Taura Flynn & Associates, a firm
specializing in reorganization and management consulting, which he founded in
1998. From September 1991 to March 1998, he served as Chairman of D. Taura &
Associates, a consulting firm. Mr. Taura is Chairman of the Board and Chief
Executive Officer of Darling International, Inc.
Olivier Trouveroy has been a director of the Company since its separation
from Leslie Fay in June 1997. He has served as a Managing Partner of ING Equity
Partners, L.P., a private equity partnership, since July 1994. ING Equity
Partners, L.P. beneficially owns 9.4% of the Common Stock of the Company. Mr.
Trouveroy also serves as a Director of Cost Plus, Inc.
Gregg I. Marks has served as President of the Company since its separation
from Leslie Fay in June 1997, and had been the President of Sassco, since
January 1989, having served in a number of other positions in Sassco since
August 1983.
Gwen Gepfert has served as Chief Financial Officer since March 2000. Prior
to joining the Company, Ms. Gepfert served as Chief Financial Officer of Ariat
International, Inc., a manufacturer and wholesaler of athletic footwear from
June 1995 to September 1999. She served as a strategy consultant for Ariat
International, Inc. from October 1999 to February 2000. From 1988 to 1995, Ms.
Gepfert served in several executive positions at Esprit de Corp., ultimately
serving as Vice President of Finance. Ms. Gepfert is a certified public
accountant.
Key Employees
The following key employees of the Company make significant contributions
to the operations of the Company:
Barbara Bennett has served as Senior Vice President - Design of the Company
since its separation from Leslie Fay in June 1997, and had managed Sassco's
design division since October 1980.
Peter Lee has served as Managing Director - Asia Expert, Ltd. since joining
the Company in January 1997. Prior to joining the Company, Mr. Lee served for 25
years as Vice President in charge of administration and production in Taiwan and
the Philippines for Carnival Textiles, a publicly traded Taiwanese company and
one of the Company's largest suppliers.
Wendy R. Chivian has been the President of Anne Klein Apparel since August
1999. Prior to August 1999, Ms. Chivian was President of DKNY Kids from 1997 to
1999. From 1991 to 1997, she was with Anne Klein & Company, the predecessor to
Anne Klein Company LLC, where she held various senior level positions and most
recently served as Senior Vice President of Sales.
Merle Sloss has been the President of Anne Klein Licensing since December
1999, a position that she also held from 1995 to 1996. Prior to rejoining the
Company, Ms. Sloss served as President of Ralph Lauren Footwear, a division of
Rockport, from 1996 to 1999.
Charles Nolan was named Senior Vice President - Design for the Anne Klein
apparel division in February 2001. Prior to joining the Company, Mr. Nolan had
been a senior designer at Ellen Tracy for ten years.
28
Committees
On June 10, 1997, the Board of Directors established an Audit Committee, a
Compensation Committee and a Finance Committee.
The Company's Audit Committee is currently composed of Messrs. Mathis,
Salibello and Taura. The function of the Audit Committee is to make
recommendations concerning the selection each year of independent auditors of
the Company, to review the effectiveness of the Company's internal accounting
methods and procedures, and to determine, through discussions with the
independent auditors, whether any restrictions or limitations have been placed
upon them in connection with the scope of their audit or its implementation.
The Compensation Committee is currently composed of Messrs. Mathis,
Salibello, Taura and Trouveroy. The function of the Compensation Committee is to
review and recommend to the Board of Directors policies, practices and
procedures relating to compensation of key employees and to administer employee
benefit plans.
The Finance Committee is currently composed of Messrs. Mathis, Salibello,
Taura and Trouveroy. The function of the Finance Committee is to evaluate and
review on a continuing basis specific financing programs and requirements to
meet the near and long-term needs of the Company; to advise management on the
Company's business plans and budgets; to review the organization and functions
of the Company's finance department; and to participate in the development and
implementation of the investment and the investor programs.
In addition, on October 10, 2000, the outside directors established two new
committees: an Operations Committee and a Restructuring Committee.
The Operations Committee is currently composed of Messrs. Bloom, Salibello
and Taura. The function of the Operations Committee is to monitor the
implementation of the Company's business plan to determine if the Company is
achieving the revenue results, expense reductions, margin improvements and other
financial targets set forth therein.
The Restructuring Committee is currently composed of Messrs. Mathis, Taura
and Trouveroy. The function of the Restructuring Committee is to monitor and
oversee negotiations between and among the Company, its lenders, noteholders and
other parties whose interests in the Company will be affected by a restructuring
of the Company's debt obligations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended
("Section 16(a)") requires the Company's directors and certain of its officers
and persons who own more than 10% of its common stock (collectively,
"Insiders"), to file reports of ownership and changes in their ownership of
common stock with the Securities and Exchange Commission (the "Commission").
Insiders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that no Forms 5 were required for those persons, the Company believes that its
Insiders complied with all applicable Section 16(a) filing requirements for
fiscal 2000, with the exception of Mr. Levine with respect to which two filings
on Form 4 were not made on a timely basis.
29
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth information concerning the annual
compensation paid by the Company for services rendered during the fiscal years
ended December 30, 2000, January 1, 2000 and January 2, 1999, and the Chief
Executive Officer, and the four most highly compensated executive officers/key
employees (the "Named Officers").
Summary Compensation Table
Annual Compensation
Name and Principal
Position Year Salary Bonus All Other
-------- ---- ------ ----- ---------
Arthur S. Levine
Chairman of the Board 2000 $2,000,000 $ (1) $23,896(2)
and Chief Executive 1999 2,000,000 --(1) 19,868(2)
Officer 1998 2,000,000 --(1) 20,540(2)
Gregg I. Marks 2000 $ 800,000 $ -- $15,630(3)
President 1999 800,000 200,000 15,924(3)
1998 830,769 200,000 16,218(3)
Lester E. Schreiber 2000 $ 270,000 $ -- $16,510(4)
Chief Operating Officer 1999 269,616 85,000 16,841(4)
1998 258,173 85,000 17,052(4)
Gwen Gepfert 2000 $ 167,212(7) $ -- $ 1,544(5)
Chief Financial Officer 1999 -- -- --
1998 -- -- --
Barbara Bennett 2000 $ 600,000 $ -- $ 2,442(6)
Vice President - Design 1999 600,000 150,000 1,135(6)
1998 623,077 150,000 1,591(6)
- --------------
(1) Mr. Levine's employment agreement with the Company provides for a bonus
commencing in the 1998 fiscal year in an amount between $500,000 and $1.5
million based upon the fulfillment of certain EBITDA hurdles for the fiscal
years 1998, 1999 and thereafter. Such hurdles were not met in fiscal 2000,
fiscal 1999 or fiscal 1998.
(2) Includes $2,772, $2,478 and $3,150 in Group Term Life Insurance and
$21,124, $17,390 and $17,390 in automobile allowance for fiscal years 2000,
1999 and 1998, respectively.
(3) Includes $630, $924 and $1,218 in Group Term Life Insurance and $15,000,
$15,000 and $15,000 in automobile allowance for fiscal years 2000, 1999 and
1998, respectively.
(4) Includes $610, $941 and $1,152 in Group Term Life Insurance and $15,900,
$15,900 and $15,900 in automobile allowance for fiscal years 2000, 1999 and
1998, respectively.
(5) Represents $141 in Group Term Life Insurance and a clothing allowance of
$1,403.
(6) Represents $630, $924 and $1,218 in Group Term Life Insurance and a
clothing allowance of $1,182, $211 and $373 for fiscal years 2000, 1999 and
1998, respectively.
(7) Ms. Gepfert joined the Company in March 2000. Ms Gepfert's annual
compensation is $225,000.
30
Option/SAR Grants in Last Fiscal Year
The Company did not grant any stock options or SAR's to the Named Officers
during 2000.
Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year End Value
Table
No Management Options were issued during 2000.
Compensation of Directors
Each Director who is not an employee of the Company is paid for service on
the Board of Directors a retainer at the rate of $40,000 and $1,500 for every
Board of Directors meeting in excess of twelve per annum. Each non-employee
Director, who held such position prior to January 1, 2000, also received an
option to purchase 20,000 shares of common stock at the time of joining the
Board of Directors. Such options vest ratably over the first three anniversaries
of the date of grant and are exercisable at a price of $14.00 per share. The
Company also reimburses each Director for reasonable expenses in attending
meetings of the Board of Directors. Directors who are also employees of the
Company are not separately compensated for their services as Directors.
Employment Agreements
The Company has entered into a five-year employment agreement dated June 4,
1997 with Mr. Levine, which provides for his employment as Chief Executive
Officer and Chairman of the Board of the Company. The agreement provides for an
annual compensation of $2 million. In addition to the base compensation, the
agreement provides for a bonus commencing in the 1998 fiscal year in an amount
between $500,000 and $1.5 million based upon the fulfillment of certain EBITDA
hurdles for the fiscal years 1998, 1999 and thereafter. The Company does not
maintain a key person life insurance policy on the life of Mr. Levine.
The employment agreement requires Mr. Levine to provide at least 30 days'
notice of intent to terminate the agreement. In addition, the employment
agreement provides that following termination, other than termination by Mr.
Levine for "good reason" (as defined in the agreement) or by the Company without
"cause" (as defined in the agreement) Mr. Levine shall not participate or engage
in, either directly or indirectly, any business activity that is directly
competitive with the Company for the balance of the original term of the
employment agreement.
The agreement provides that, upon termination for cause, Mr. Levine will be
entitled to receive accrued but unpaid salary and benefit payments and expense
reimbursements; provided, however, that if Mr. Levine's termination for cause
arises out of his material insubordination (as defined in the agreement), he
shall also be entitled to any bonus he would have received if he had not been
terminated. The agreement also provides that, upon termination, without good
reason, Mr. Levine will be entitled to receive a severance payment in one lump
sum equal to his base salary for the remainder of his term of employment, plus
any benefits to which he is entitled, and expense reimbursements; provided,
however, that if his termination without good reason occurs following a change
in control (as defined in the agreement), his lump sum payment of base salary
shall be reduced by 43%.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is currently composed of Messrs. Mathis,
Salibello, Taura and Trouveroy. No executive officer of the Company serves as a
member of the Board of Directors or Compensation Committee of any entity, which
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
31
1999 Share Incentive Plan
On March 14, 2000, the Company's shareholders approved the Company's 1999
Share Incentive Plan (the "1999 Plan"). Pursuant to the terms of the 1999 Plan,
the 1999 Plan became effective as of July 28, 1999, the date on which the 1999
Plan was approved by the Compensation Committee. The 1999 Plan is intended to
provide incentives which will attract, retain and motivate highly competent
persons as non-employee Directors, officers and key employees of, and
consultants to, the Company and its subsidiaries and affiliates.
Participants in the 1999 Plan will consist of such Directors, officers and
key employees of, and such consultants to, the Company and its subsidiaries and
affiliates as the Compensation Committee in its sole discretion determines to be
responsible for the success and future growth and profitability of the Company
and whom the Compensation Committee may designate from time to time to receive
benefits under the 1999 Plan. All of the Company's non-employee Directors will
be eligible to participate in the 1999 Plan. Currently, there are five
non-employee Directors. The number of officers and key employees who are
eligible to participate in the 1999 Plan is estimated to be 100. An estimate of
the number of consultants who are eligible to participate in the 1999 Plan has
not been made.
The 1999 Plan provides for the grant of any or all of the following types
of benefits: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights; (3) stock awards;
(4) performance awards; and (5) stock units.
The maximum number of shares of common stock that may be granted under the
1999 Plan is 2,500,000 and the maximum number of shares that may be granted to
an individual participant shall not exceed 1,500,000. The unanimous consent of
the Compensation Committee is required for the grant of options to any recipient
if the aggregate number of shares held by that recipient is equal to or greater
than 20,000. As of March 20, 2001, no shares had been granted under the 1999
Plan. The 1999 Plan terminates on July 28, 2009.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 20, 2001, based upon the most recent
information available to the Company for (i) each person known by the Company
who owns beneficially more than five percent of the Common Stock, (ii) each of
the Company's Named Officers and directors and (iii) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each
stockholder's address is c/o the Company, 77 Metro Way, Secaucus, New Jersey
07094.
Number of Shares Percentage Ownership of
Name and Address of Beneficial Owner Beneficially Owned Common Stock
------------------------------------ ------------------ ------------
Arthur S. Levine 212,740(1) 3.1%
Martin Bloom 10,000 *
H. Sean Mathis -- --
Salvatore M. Salibello 13,334(2) *
Lester E. Schreiber 400(3) *
Denis J. Taura 13,334(2) *
Olivier Trouveroy 646,201(4) 9.5%
Gregg I. Marks 37,200(5) *
Gwen Gepfert -- --
Barbara Bennett -- --
Whippoorwill Associates, Inc. 1,233,585(6) 18.1%
11 Martine Avenue -- --
White Plains, NY 10606 -- --
Bay Harbor Management, L.C 1,083,580(7) 15.9%
777 South Harbour Island Boulevard, Ste. 270 -- --
Tampa, FL 33602 -- --
ING Equity Partners, L.P. I 646,201(4) 9.5%
135 East 57 Street -- --
New York, NY 10022 -- --
Harvard Management Company 357,304(8) 5.3%
660 Atlantic Avenue -- --
Boston, MA 02210 -- --
Officers and Directors as a group (10 persons) 933,209(9) 13.7%
- ----------
* Less than one percent
(1) Does not include approximately 709 shares of Common Stock which may be
distributed to Mr. Levine on an "if and when issued" basis from shares of
Common Stock held for the benefit of creditors (the "Holdback") of the
Company pending the resolution of certain creditor claims.
33
(2) Includes 13,334 shares of Common Stock issuable upon exercise of currently
exercisable Director Options.
(3) Mr. Schreiber disclaims beneficial ownership of 100 shares of Common Stock
held by his spouse and 100 shares of Common Stock held by each of his two
children.
(4) Includes 20,000 shares of Common Stock issuable upon exercise of currently
exercisable Director Options, which were issued to ING Equity Partners,
L.P. I ("ING") pursuant to Mr. Trouveroy's status as a non-employee
Director of the Company, a position for which he was designated by ING. Mr.
Trouveroy is a Managing Partner of ING. He disclaims beneficial ownership
of all shares of Common Stock listed. Notwithstanding his disclaimer, Mr.
Trouveroy may be deemed to be a beneficial owner to the extent of his
pecuniary interests in the partnership. Does not include approximately
17,195 shares of Common Stock which may be distributed to ING on an "if and
when issued" basis pursuant to the Holdback. Mr. Trouveroy's business
address is c/o ING Equity Partners, L.P. I, 520 Madison Avenue (33rd
Floor), New York, New York 10022.
(5) Mr. Marks disclaims beneficial ownership of 100 shares of Common Stock held
by each of his two daughters.
(6) These shares of Common Stock are owned by various limited partnerships, a
limited liability company, a trust and third party accounts for which
Whippoorwill Associates, Inc. has discretionary authority and acts as
general partner or investment manager.
(7) Based on information contained in a Schedule 13G/A, filed with the
Commission on February 14, 2000. These shares of Common Stock are also
indirectly owned by Tower Investment Group, Inc. ("Tower"), the majority
stockholder of Bay Harbor Management, L.C., Steven A. Van Dyke, a
stockholder and President of Tower, and Douglas P. Teitelbaum, a
stockholder of Tower, each of whom may also be deemed to be a beneficial
owner of such shares of Common Stock.
(8) Based on information contained in a Schedule 13, filed with the Commission
on February 11, 2000.
(9) Includes 46,668 shares of Common Stock issuable upon exercise of currently
exercisable Director Options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) Documents filed as part of this report:
(1) Financial Statements:
The Consolidated/Combined Financial Statements are set forth in
the Index to Consolidated/Combined Financial Statements and
Financial Statement Schedules on page F-1 hereof.
(2) Financial Statement Schedule:
The Financial Statement Schedule is set forth in the Index to
Financial Statements and Financial Statement Schedules on page
F-1 hereof.
(3) Exhibits:
Exhibit
Number Description
- --------- -----------------------------------------------------------------
2(1) Fourth Amended and Restated Joint Plan of Reorganization for
Debtors (Leslie Fay Companies, Inc.) Pursuant to Chapter 11 of
the United States Bankruptcy Code Proposed by Debtors and
Creditors' Committee, dated April 18, 1997.
2.1(10) Asset Purchase Agreement, dated as of March 15, 1999, among the
Company, Anne Klein Company LLC and Takihyo Inc.
2.2 (16) Asset Purchase Agreement, dated as of November 24, 1999, among
the Company and A.S.L. Retail Outlets, Inc., as buyers and
Fashions of Seventh Avenue, Inc., Fashions of Destin, Inc.,
Fashions of Michigan, Inc., Fashions of Reno, Inc., Fashions of
Vero Beach, Inc., Anne Klein of Massachusetts, Inc. and Fashions
of Clinton, Inc., as sellers.
3.1 (5) Amended and Restated Certificate of Incorporation as filed on May
30, 1997.
3.2 (5) Amendment to Certificate of Incorporation as filed on November 5,
1997.
3.3 (19) By-laws, as amended.
4.1(2) Indenture dated as of June 4, 1997, by and between the Company
and IBJ Schroder Bank & Trust Company, as trustee.
4.2(3) Supplemental Indenture, dated as of June 30, 1997, by and between
the Company and IBJ Schroder Bank & Trust Company, as trustee.
4.21(12) Second Supplemental Indenture, dated as of June 16, 1999, to the
Indenture, dated as of June 1, 1997 and effective as of June 4,
1997, as amended, between the Company and IBJ Whitehall Bank &
Trust Company, as trustee.
4.3(2) Form of Senior Note issued under the Indenture.
35
Exhibit
Number Description
- --------- -----------------------------------------------------------------
4.4(7) Specimen Certificate of the Company's Common Stock.
10.1(5) Revolving Credit Agreement dated as of June 4, 1997, by and among
the Company BankBoston N.A., BancBoston Securities, Inc.,
Citicorp USA, Inc., Heller and certain other lenders (without
exhibits).
10.1(a)(9) Amendment No. 1 to Revolving Credit Agreement, dated October 4,
1997.
10.1(b)(9) Amendment No. 2 to Revolving Credit Agreement, dated November 11,
1997.
10.1(c)(9) Amendment No. 3 to Revolving Credit Agreement, dated May 29,
1998.
10.1(d)(9) Amendment No. 4 to Revolving Credit Agreement, dated December 31,
1998
10.1(e)(11) Amended and Restated Credit Agreement, dated as of July 9, 1999,
among the Company, as Borrower, the guarantors named therein, the
lenders named therein, The Chase Manhattan Bank, as
administrative and collateral agent, and The CIT Group /
Commercial Services, Inc., as collateral monitor.
10.11(18) Amendment Agreement No. 1 to the Amended and Restated Credit
Agreement, dated December 22, 1999.
10.12(20) Amendment Agreement No. 2 to the Amended and Restated Credit
Agreement, dated June 29, 2000.
10.13(21) Amendment Agreement No. 3 to the Amended and Restated Credit
Agreement, dated November 13, 2000.
10.14 Consulting Agreement dated October 25, 2000, between the Company
and Alvarez and Marsal, Inc.
10.15 Waiver Agreement to the Amended and Restated Credit Agreement,
dated March 28, 2001
10.2(5) Employment Agreement dated June 4, 1997 between the Company and
Arthur S. Levine.
10.3(7) Lease Modification Agreement and Lease Agreement, each dated
August 20, 1996, between the Company and Import Hartz Associates.
10.31(18) First Lease Modification Agreement, dated April 30, 1999, by and
between the Company and Import Hartz Associates.
10.4(5) Acquisition Agreement dated June 2, 1997, by and among the
Company, ASL/K Licensing Corp, Herbert Kasper and Forecast
Designs, Inc.
10.5(5) Employment, Consulting and Non-Competition Agreement dated as of
June 4, 1997, by and among Sassco Fashions, Ltd., ASL/K Licensing
Corp. and Herbert Kasper.
10.6(5) 1997 Management Stock Option Plan.
10.61(17) 1999 Share Incentive Plan
10.7(5) Form of Stock Option Agreement issued to Directors.
36
Exhibit
Number Description
- --------- -----------------------------------------------------------------
10.8(15) Letter Agreement, dated as of September 13, 1999, between the
Company and Whippoorwill Associates, Inc., as agent for various
discretionary accounts.
10.9(13) Lease, dated as of June 4, 1996, among 11 West 42nd Limited
Partnership as Landlord, and Anne Klein & Company and Mark of the
Lion Associates, as tenants.
10.10(14) Omnibus Agreement, dated as of March 15, 1999, among the Company
and Anne Klein Company LLC.
21(8) Subsidiaries of the Registrant.
24(6) Power of Attorney (included in signature page).
27 Financial Data Schedule.
- ----------
(1) Incorporated by reference to Exhibit No. 4 to the Company's Report on
Form 8-K (Commission File No. 022-22269) filed with the Commission on
July 14, 1997 (the "Registrant's Report on Form 8-K").
(2) Incorporated by reference to Exhibit No. 1 to the Company's Report on
Form 8-K.
(3) Incorporated by reference to Exhibit No. 3 to the Company's Report on
Form 8-K.
(4) Incorporated by reference to Exhibit No. 2 to the Company's Report on
Form 8-K.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Commission File No. 333-41629) filed with the Commission on
December 5, 1997.
(6) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No. 333-41629)
filed with the Commission on December 23, 1997.
(7) Incorporated by referenced to the Company's Amendment No. 2 to
Registration Statement on Form S-1 (Commission File No. 333-41629)
filed with the Commission on April 3, 1998.
(8) Incorporated by reference to Exhibit No. 21.1 to the Company's Report
on Form 10-K filed with the Commission on March 31, 1999.
(9) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on May 18, 1999.
(10) Incorporated by reference to Exhibit No. 2 to the Company's Report on
Form 8-K filed with the Commission on July 13, 1999.
(11) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 8-K filed with the Commission on July 13, 1999.
(12) Incorporated by reference to Exhibit No. 10.2 to the Company's Report
on Form 8-K filed with the Commission on July 13, 1999.
37
(13) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on August 17, 1999.
(14) Incorporated by reference to Exhibit No. 10.2 to the Company's Report
on Form 10-Q filed with the Commission on August 17, 1999.
(15) Incorporated by reference to Exhibit No. 10.3 to the Company's Report
on Form 8-K/A filed with the Commission on September 22, 1999.
(16) Incorporated by reference to Exhibit No. 2 to the Company's Report on
Form 8-K filed with the Commission on December 8, 1999.
(17) Incorporated by reference to Annex A of the Company's Definitive Proxy
Statement filed with the Commission on January 28, 2000.
(18) Incorporated by reference to Exhibit No. 21.1 to the Company's Report
on Form 10-K filed with the Commission on March 31, 2000.
(19) Incorporated by reference to Exhibit No. 3.1 to the Company's Report
on Form 10-Q filed with the Commission on May 12, 2000.
(20) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on August 11, 2000.
(21) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 8-K filed with the Commission on November 20, 2000.
(b) Reports on Form 8-K:
On November 20, 2000, the Company filed a current report on Form 8-K
to disclose that it had entered into an amended agreement with its
lenders under the Chase Facility, which amended compliance with
certain financial covenants and waived all existing defaults there
under.
38
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements Page
- ---------------------------- ----
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheets at December 30, 2000 and January 1, 2000.........F-3
Consolidated Statements of Operations for the Fiscal Years Ended
December 30, 2000, January 1, 2000 and January 2, 1999.................F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 30, 2000, January 1, 2000 and January 2, 1999.................F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 30, 2000, January 1, 2000 and January 2, 1999.................F-6
Notes to Consolidated Financial Statements...................................F-8
Schedule II - Valuation and Qualifying Accounts.............................F-22
F-1
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Kasper A.S.L., Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Kasper A.S.L.,
Ltd. (a Delaware corporation) and subsidiaries as of December 30, 2000 and
January 1, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 30, 2000,
January 1, 2000 and January 2, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 30,
2000 and January 1, 2000 and the results of their operations and their cash
flows for the years ended December 30, 2000, January 1, 2000 and January 2,
1999, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company failed to make a required interest payment and
as a result is in default on its $110 million Senior Notes and expects to be in
violation of certain debt covenants under the existing Credit Facility during
fiscal 2001, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule Valuation and Qualifying Accounts -
Schedule II of this Form 10-K for the year ended December 30, 2000 is presented
for the purpose of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York
February 16, 2001 (Except for Note 17, as to which the date is March 28, 2001)
F-2
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS December 30, January 1,
2000 2000
---- ----
Current Assets:
Cash and cash equivalents ...................................................... $ 3,847 $ 5,086
Accounts receivable, net ....................................................... 25,475 26,207
Inventories, net ............................................................... 110,572 95,068
Prepaid expenses and other current assets ...................................... 4,014 3,207
Income taxes receivable ........................................................ 788 2,668
Deferred taxes, net ............................................................ 5,004 5,077
--------- ---------
Total Current Assets ............................................................... 149,700 137,313
--------- ---------
Property, plant and equipment, at cost less accumulated
depreciation and amortization of $13,422 and $9,004, respectively ............. 21,282 19,803
Reorganization value in excess of identifiable assets, net of
accumulated amortization of $11,676 and $8,418, respectively .................. 53,503 56,763
Trademarks, net of accumulated amortization of $7,933 and
$4,668, respectively ....................................................... 106,430 109,565
Other assets, at cost less accumulated amortization of $2,086 and
$717, respectively ........................................................... 6,202 6,321
--------- ---------
Total Assets ....................................................................... $ 337,117 $ 329,765
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................... $ 34,609 $ 28,753
Accrued expenses and other current liabilities ................................. 11,183 8,219
Interest payable ............................................................... 11,563 4,032
Deferred income ................................................................ 414 1,000
Taxes payable .................................................................. 1,653 594
Reclassified longterm debt ..................................................... 110,000 --
Bank revolver .................................................................. 70,258 --
---------
Total Current Liabilities .......................................................... 239,680 42,598
LongTerm Liabilities:
Deferred taxes ................................................................. 3,352 3,064
Deferred income ................................................................ -- 1,000
Longterm debt .................................................................. -- 110,000
Bank revolver .................................................................. -- 53,444
Minority interest .............................................................. 484 519
Total Liabilities .................................................................. 243,516 210,625
Commitments and Contingencies
Shareholders' Equity:
Common Stock, $0.01 par value; 20,000,000 shares
authorized; 6,800,000 shares issued and outstanding ........................ 68 68
Preferred Stock, $0.01 par value; 1,000,000 shares
authorized; none issued and outstanding .................................... -- --
Capital in excess of par value ................................................. 119,932 119,932
Accumulated deficit ............................................................ (25,820) (632)
Cumulative other comprehensive loss ............................................ (579) (228)
--------- ---------
Total Shareholders' Equity ......................................................... 93,601 119,140
--------- ---------
Total Liabilities and Shareholders' Equity ......................................... $ 337,117 $ 329,765
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
F-3
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
----------------------------------------------------------
Fiscal Year
Ended
----------------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------ ---------- -----------
Net sales ................................................... $ 400,797 $ 311,209 $ 312,089
Royalty income .............................................. 14,908 7,033 852
Cost of sales ............................................... 295,139 219,520 219,060
----------- ----------- -----------
Gross profit ................................................ 120,566 98,722 93,881
Operating expenses:
Selling, general and administrative expenses ................ 104,961 76,152 62,836
Depreciation and amortization ............................... 11,345 9,276 7,795
----------- ----------- -----------
Total operating expenses .................................... 116,306 85,428 70,631
Restructuring charge ........................................ 2,344 -- --
----------- ----------- -----------
Operating income ............................................ 1,916 13,294 23,250
Interest and financing costs ................................ 25,576 20,494 17,788
----------- ----------- -----------
(Loss) income before income taxes ........................... (23,660) (7,200) 5,462
Income tax provision (benefit) .............................. 1,528 (2,426) 2,292
----------- ----------- -----------
Net (loss) income ........................................... $ (25,188) $ (4,774) $ 3,170
=========== =========== ===========
Basic (loss) earnings per common share ...................... $ (3.70) $ (.70) $ .47
=========== =========== ===========
Diluted (loss) earnings per common share .................... $ (3.70) $ (.70) $ .47
=========== =========== ===========
Weighted average number of shares used in computing
Basic earnings per common share .......................... 6,800,000 6,800,000 6,800,000
Weighted average number of shares used in computing
Diluted earnings per common share ........................ 6,800,000 6,800,000 6,800,000
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-4
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Cumulative Retained
Capital in Other Earnings/
Common Excess of Comprehensive (Accumulated
Stock Par Value Loss Deficit) Total
--------- --------- --------- --------- ---------
BALANCE AT JANUARY 3, 1998 $ 68 $ 119,932 $ (14) $ 972 $ 120,958
========= ========= ========= ========= =========
Translation adjustment -- -- (78) -- (78)
Net income for the period -- -- -- 3,170 3,170
--------- --------- --------- --------- ---------
Comprehensive loss -- -- (78) 3,170 3,092
--------- --------- --------- --------- ---------
BALANCE AT JANUARY 2, 1999 $ 68 $ 119,932 $ (92) $ 4,142 $ 124,050
========= ========= ========= ========= =========
Translation adjustment -- -- (136) -- (136)
Net loss for the period -- -- -- (4,774) (4,774)
--------- --------- --------- --------- ---------
Comprehensive loss -- -- (136) (4,774) (4,910)
--------- --------- --------- --------- ---------
BALANCE AT JANUARY 1, 2000 $ 68 $ 119,932 $ (228) $ (632) $ 119,140
========= ========= ========= ========= =========
Translation adjustment -- -- (351) -- (351)
Net loss for the period -- -- -- (25,188) (25,188)
--------- --------- --------- --------- ---------
Comprehensive income -- -- (351) (25,188) (25,539)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 30, 2000 $ 68 $ 119,932 $ (579) $ (25,820) $ 93,601
========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-5
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal
Year
Ended
--------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------ ---------- ----------
Cash Flows from Operating Activities:
Net (Loss) Income ...................................................... $(25,188) $ (4,774) $ 3,170
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization ....................................... 9,052 6,815 5,342
Amortization of reorganization value in excess of
identifiable assets ............................................... 3,258 3,258 3,258
(Loss) income applicable to minority interest ....................... (35) 60 459
Write-off of net book value of property, plant and
equipment ......................................................... -- -- 114
Write-off of unamortized financing fees ............................. -- 740 --
Decrease (increase) in:
Accounts receivable, net ............................................ 732 6,514 (2,721)
Inventories ......................................................... (15,504) 7,332 (21,639)
Prepaid expenses and other current assets ........................... (807) 18 (358)
Income taxes receivable ............................................. 1,880 (2,668) --
Deferred taxes ...................................................... 73 (2,134) (1,248)
Other assets ........................................................ (1,250) (1,289) --
Increase (decrease) in:
Accounts payable, accrued expenses and other
current liabilities ............................................... 8,820 14,290 (3,133)
Interest payable .................................................... 7,531 235 242
Deferred income ..................................................... (1,586) 2,000 --
Taxes payable ....................................................... 1,059 (52) (518)
Deferred taxes ...................................................... 288 1,434 991
-------- -------- --------
Total adjustments ...................................................... 13,511 36,553 (19,211)
-------- -------- --------
Net cash (used in) provided by operating activities .................... (11,677) 31,779 (16,041)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures, net ........................................... (6,025) (5,425) (5,690)
FSA acquisition ..................................................... -- (2,488) --
Trademark Purchase .................................................. -- (66,956) --
-------- -------- --------
Net cash used in investing activities .................................. (6,025) (74,869) (5,690)
-------- -------- --------
Cash Flows from Financing Activities:
Net borrowings under Bank Revolver .................................. 16,814 45,875 7,569
-------- -------- --------
Net cash provided by financing activities .............................. 16,814 45,875 7,569
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents ......................................................... (351) (136) (78)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................... (1,239) 2,649 (14,240)
Cash and cash equivalents, at beginning of period ...................... 5,086 2,437 16,677
-------- -------- --------
Cash and cash equivalents, at end of period ............................ $ 3,847 $ 5,086 $ 2,437
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-6
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal
Year
Ended
--------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------ ---------- ----------
Supplemental schedule of noncash investing activities
Noncash investing
Inventories acquired in FSA Acquisition $ -- $(1,965) $ --
Fixed assets acquired in FSA Acquisition -- (1,001) --
Goodwill recorded in FSA Acquisition (130) (997) --
Current liabilities assumed in FSA Acquisition -- 1,475 --
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-7
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION:
The Consolidated Financial Statements included herein have been prepared by
Kasper A.S.L., Ltd. and subsidiaries (Kasper A.S.L., Ltd. being sometimes
referred to, and together with its subsidiaries collectively referred to, as the
"Company" or "Kasper" as the context may require). The Company's fiscal year
ends on the Saturday closest to December 31st. The fiscal years ended December
30, 2000 ("2000"), January 1, 2000 ("1999") and January 2, 1999 ("1998"), each
included 52 weeks.
The Consolidated Financial Statements herein presented include the
operations of two related Hong Kong corporations, Asia Expert Limited ("AEL")
and Tomwell Limited ("Tomwell"). These two Hong Kong corporations procure and
arrange for the manufacture of apparel products in the Far East solely for the
benefit of Kasper. The Consolidated Financial Statements also include the
financial statements of Kasper A.S.L. Europe, Ltd., Kasper Holdings Inc., ASL
Retail Outlets, Inc. ("ASL Retail"), ASL/K Licensing Corp., AKC Acquisition,
Ltd. and Lion Licensing, Ltd., all of which are wholly-owned subsidiaries of the
Company. Kasper Holdings Inc. owns 100% of Kasper Canada ULC, which is a 70%
owner of Kasper Partnership, G.P. ("Kasper Partnership"), a Canadian Partnership
through which the Company conducts sales and distribution activity in Canada.
The portion of Kasper Partnership pertaining to its minority owner is reflected
in the accompanying financial statements as minority interest.
NOTE 2. DEFAULTS ON DEBT:
The Consolidated Financial Statements have been presented on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company reported a net loss
of $25,188,000 for the year ended December 30, 2000 and cumulative losses for
the past two years of $29,962,000. As a result of these continuing losses, the
Company's accumulated deficit now totals $25,820,000 at December 30, 2000.
As of December 30, 2000, the Company was in default under the terms of its
$110 million Senior Notes (the "Senior Notes") as the result of non-payment of
its September 30, 2000 semi-annual interest payment of $7.2 million. The entire
amount due under the Senior Notes has been reclassified as current in the
accompanying consolidated balance sheet. The Company is currently engaged in
discussions with an ad hoc committee of its noteholders (the "Ad Hoc Committee")
to formulate a financial restructuring that will address current liquidity
issues and enhance the Company's ability to operate under its short- and
long-term plans. In addition, the Company will not make its March 31, 2001
semi-annual interest payment of approximately $7.2 million.
As of December 30, 2000, the Company was in default under the Chase
Facility (as defined below), as it failed to meet its interest coverage ratio
and minimum net worth requirements. As discussed in Note 17, these defaults were
waived on March 28, 2001. However, the Company anticipates that it will be in
violation of certain financial covenants in fiscal 2001. The Company is
currently negotiating with its lenders under the Chase Facility to amend certain
covenants. The Company expects to reach agreement on the terms for amendments of
the Chase Facility.
The Company's working capital deficit as of December 30, 2000 totaled
$89,980,000. The Company's continued existence is dependent upon successful
negotiations with the Ad Hoc Committee, its financing agreement under the Chase
Facility and its ability to substantially improve its operating results during
2001. Plans to improve operations include: (i) reducing general and
administrative costs, (ii) focusing on the profitability of each operating unit
and
F-8
continuing to examine the cost structure to enhance operating efficiencies,
(iii) improving working capital through more disciplined inventory management,
and (iv) renegotiating the terms of the Company's existing indebtedness. In
order for the Company to have sufficient liquidity for it to continue as a going
concern in its present form, the Company will need to reach agreement with the
Ad Hoc Committee, and with its lenders on the terms for amendments of the Chase
Facility, as well as achieve ongoing amended covenant requirements under the
Chase Facility and execute planned improvements. Although the Company expects to
reach agreement on the terms of a financial restructuring with the holders of a
substantial majority of the Senior Notes and with its lenders under the Chase
Facility, there is no assurance that the Company will be successful in doing so.
If the Company is unable to reach such agreements, it may be compelled to seek
relief under the United States Bankruptcy Code. In the interim, the Company is
examining all available options.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amount and classification of liabilities or any other adjustments that might
become necessary should the Company be unable to continue as a going concern in
its present form. There can be no assurances that the Company's operations can
be returned to profitability.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Business -
The Company is principally engaged in the design and sale of women's
apparel.
(b) Principles of Consolidation -
The consolidated financial statements of Kasper include the accounts of all
majority-owned companies. All significant intercompany balances and transactions
have been eliminated in consolidation. Minority interest represents the minority
shareholder's proportionate share in the equity or income of the Company's
wholly-owned Kasper Holdings Inc. subsidiary.
(c) Fair Value of Financial Instruments -
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments" requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are reflected at fair value
because of the short term maturity of these instruments.
(d) Use of Estimates -
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States. Such preparation requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates.
(e) Reorganization Value -
Reorganization value in excess of identifiable assets is being amortized
using the straight-line method over 20 years. The Company, under the
requirements of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", will continually evaluate,
based upon operating income and/or cash flow projections and other factors as
appropriate, whether events and circumstances have occurred that indicate that
the remaining estimated useful life of this asset warrants revision or that the
remaining balance of this asset may not be recoverable.
F-9
(f) Trademarks -
Trademarks are being amortized using the straight-line method over 35
years, which is the estimated useful life. The Company, under the requirements
of SFAS No. 121, will continually evaluate, based upon income and/or cash flow
projections and other factors as appropriate, whether events and circumstances
have occurred that indicate that the remaining estimated useful life of this
asset warrants revision or that the remaining balance of this asset may not be
recoverable.
(g) Cash and Cash Equivalents -
All highly liquid investments with a remaining maturity of three months or
less at the date of acquisition are classified as cash and cash equivalents.
(h) Credit Risk -
The Company has a factoring agreement with The CIT Group/Commercial
Services, Inc. ("CIT"). Under such agreement, CIT purchases the receivables from
the Company and remits the funds to the Company when collected. Any amounts
unpaid after 90 days are guaranteed to be paid to the Company by CIT.
(i) Inventories -
Inventories are valued at the lower of cost (first-in, first-out; "FIFO")
or market.
(j) Property, Plant and Equipment -
Land, buildings, fixtures, equipment and leasehold improvements are stated
at cost. Major replacements or betterments are capitalized. Maintenance and
repairs are charged to earnings as incurred. For financial statement purposes,
depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets.
(k) Revenue Recognition -
Sales are recognized upon shipment of products to customers and, in the
case of sales by Company owned retail stores, when goods are sold to customers.
Allowances for estimated uncollected accounts and discounts are provided when
sales are recorded.
(l) Income Taxes -
The Company is subject to the provisions of SFAS No. 109, "Accounting for
Income Taxes". Under this method, any deferred income taxes recorded are
provided for at currently enacted statutory rates on the differences in the
basis of assets and liabilities for tax and financial reporting purposes. When
recorded, deferred income taxes are classified in the balance sheet as current
or non-current based upon the expected future period in which such deferred
income taxes are anticipated to reverse.
(m) Stock-Based Compensation -
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees"("APB No. 25"). Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. SFAS No. 123, "Accounting for Stock-Based
F-10
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. The Company elected to account for its stock-based compensation under APB
No. 25, and has adopted the disclosure requirements of SFAS No. 123.
(n) Earnings Per Common Share -
Basic and Fully Diluted Earnings Per Common Share ("EPS") are computed
under the provisions of SFAS No. 128, "Earnings Per Share"). Under this
standard, Basic EPS is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS includes the effect of potential dilution from the exercise
of outstanding dilutive stock options and warrants into common stock using the
treasury stock method. For fiscal 2000, 1999 and 1998, options outstanding
during the period using the treasury stock method were excluded from the net
income (loss) per share computation of diluted earnings per share, as they were
antidilutive.
(o) Foreign Currency Translation -
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation". All
balance sheet accounts have been translated using the exchange rate in effect at
the balance sheet date. Income statement amounts have been translated using the
average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported in other
comprehensive loss.
(p) Reclassification -
Certain amounts reflected in Fiscal 1999 and Fiscal 1998 financial
statements have been reclassified to conform to the presentation of similar
items in Fiscal 2000.
(q) New Accounting Standards -
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In 1999, the FASB approved SFAS No. 137 "Accounting for
Derivative Instruments, and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133," which amends SFAS No. 133 to be effective for all fiscal years
beginning after June 15, 2000. The Company has determined that there will be no
impact on the Company's financial statements as a result of adopting this
pronouncement.
NOTE 4. ACQUISITIONS:
On March 15, 1999, the Company and Anne Klein Company LLC entered into a
definitive agreement for the Company to purchase the Anne Klein trademarks and
selected related assets (the "Trademark Purchase"). On July 9, 1999, the Company
completed the Trademark Purchase which included the ANNE KLEIN, ANNE KLEIN II
and A LINE ANNE KLEIN trademarks and the "LION HEAD DESIGN" and "A ANNE KLEIN"
logos, along with the related licensing agreements. The aggregate purchase price
for these assets was $67,900,000 and was funded by cash provided by operations
and by the Company's credit facility. The trademarks acquired are being
amortized over their expected useful life, which is 35 years. Trademark
amortization is included in depreciation and amortization in the accompanying
financial statements.
F-11
On November 24, 1999 the Company completed the purchase of substantially
all the assets and the assumption of certain liabilities of 25 Anne Klein retail
outlet stores of Fashions of Seventh Avenue, Inc. and Affiliates ("FSA"), (the
"FSA Acquisition"). The aggregate purchase price was $3,963,000, which included
a cash payment of $300,000 and assumed liabilities of $3,663,000. As a result of
the transaction, the Company recognized approximately $1.0 million in goodwill,
which will be amortized over the average life of the leases acquired, which is
four years, and is included in the accompanying consolidated balance sheet in
other assets. Goodwill amortization is included in depreciation and amortization
in the financial statements.
Both acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the consolidated financial statements include the
results of operations of the acquired businesses from their respective
acquisition dates.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if both acquisitions had
taken place on January 4, 1998. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
January 4, 1998, or which may result in the future.
Fiscal Year Ended Fiscal Year Ended
January 1, 2000 January 2, 1999
--------------- ---------------
(in thousands, except per share data)
Net sales $ 357,051 $ 414,869
Royalty income 11,512 10,789
Net loss (10,070) (15,571)
Basic loss per common share (1.48) (2.29)
Diluted loss per common share (1.48) (2.29)
NOTE 5. INVENTORIES:
Inventories consist of the following:
December 30, January 1,
2000 2000
---- ----
(in thousands)
Raw materials $ 39,318 $ 45,849
Finished goods 71,254 49,219
-------- --------
Total inventories $110,572 $ 95,068
======== ========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 30, January 1, Estimated
2000 2000 Useful Lives
---- ---- ------------
(in thousands)
Machinery, equipment and fixtures $ 18,721 $ 15,947 5-10 years
Leasehold improvements 15,622 10,974 Life of lease
Construction in progress 361 1,886 N/A
-------- --------
Property, plant and equipment, at cost 34,704 28,807
Less: Accumulated depreciation and
amortization (13,422) (9,004)
-------- --------
Total property, plant and equipment, net $ 21,282 $ 19,803
======== ========
F-12
NOTE 7. DEBT:
Credit Facility -
Effective June 4, 1997, the Company entered into a $100 million working
capital facility with BankBoston as the agent bank for a consortium of lending
institutions (the "Original Facility"). The Original Facility was replaced on
July 9, 1999, when the Company entered into an Amended and Restated Credit
Facility led by The Chase Manhattan Bank ("Chase") in order to fund the
Company's working capital requirements and to finance the Trademark Purchase
(the "Chase Facility"). The Chase Facility provides the Company with a secured
revolving credit and letter of credit facility of up to $160 million. Interest
on outstanding borrowing is determined based on stated margins above the prime
rate at Chase, which on December 30, 2000, was one percent (1.0%) above the
prime rate. For fiscal 2000, the weighted average interest rate on the Chase
Facility was 9.35%. The Chase Facility requires a fee, payable quarterly, on
average outstanding letters of credit, of 1.8% per annum for documentary letters
of credit and two and one-half percent (2.5%) plus a stated margin per annum,
for standby letters of credit. At December 30, 2000, the standby letter of
credit fee was three and one-half percent (3.5%). The Chase Facility has a
standby letter of credit sub-limit of $10 million. At December 30, 2000, there
were direct borrowings of approximately $70.3 million outstanding under the
Chase Facility and approximately $24.5 million outstanding in letters of credit.
The Company has approximately $20.1 million available for future borrowings as
of December 30, 2000. Total interest expense under the Chase Facility for fiscal
2000 was $8.6 million.
The Chase Facility provides for the maintenance of certain financial ratios
and covenants, sets limits on capital expenditures and expires on December 31,
2003. In addition, the Chase Facility contains certain restrictive covenants,
including limitations on the incurrence of additional liens and indebtedness and
a prohibition on paying dividends.
The Company paid $2,364,000 in commitment and related fees in connection
with the Chase Facility in July 1999, which is included in other assets in the
accompanying balance sheet. These fees will be amortized as interest and
financing costs over the remaining life of the financing agreement at the time
of the amendment (four and one-half years). In addition, in fiscal 1999, the
Company wrote off approximately $750,000 in unamortized bank fees relating to
the Original Facility, which is included in interest and financing costs. The
Chase Facility was amended on December 22, 1999 and June 29, 2000 to modify
certain conditions, financial ratios and covenants.
On November 20, 2000, the Company entered into an amended agreement with
the lenders of the Chase Facility, which amends and waives compliance with
certain financial covenants and all existing defaults under the Chase Facility.
In an effort to improve liquidity, the Company was granted an increase to its
trademark advance rate. The agreement modifies certain financial covenants and
ratios including the Company's capitalization ratio, interest coverage ratio and
net worth requirements through 2003 based on the Company's current and
anticipated performance levels. The agreement also provides for a monthly limit
on the total outstanding amount of borrowings under the facility through 2001,
reduces the maximum amount of outstanding standby letters of credit allowed and
modifies the interest rate on borrowings. In connection with the agreement, the
Company paid $875,000 in fees, which will be amortized as interest and financing
costs over the remaining life of the financing agreement at the time of the
amendment. As of December 30, 2000, the Company was in default under the Chase
Facility, as it failed to meet its interest coverage ratio and minimum net worth
requirements. As discussed in Note 17, such defaults were waived on March 28,
2001. However, the Company currently anticipates that it will be in violation of
certain covenants under the Chase Facility in fiscal 2001. The Company is
currently negotiating with its lenders under the Chase Facility to amend certain
covenants. As of
F-13
December 30, 2000 the $70.3 million outstanding under the Chase Facility has
been reclassified as a short-term liability as a result of the anticipated
defaults.
Reclassified Long Term Debt -
Pursuant to the Leslie Fay reorganization plan, the Company issued $110
million in Senior Notes. The Senior Notes originally bore interest at 12.75% per
annum and mature on March 31, 2004. Beginning January 1, 2000, the interest rate
increased to 13.0%. Interest is payable semi-annually on March 31 and September
30. Interest relating to the Senior Notes for fiscal 2000 totaled $14.6 million.
There are no principal payments due until maturity. To the extent that the
Company elects to undertake a secondary stock offering or elects to prepay
certain amounts a premium will be required to be paid.
On June 16, 1999, a majority of the aggregate principal amount of its
Senior Notes as of May 21, 1999, consented to certain amendments to the
Indenture and had executed the Second Supplemental Indenture. The primary
purpose of the amendments was to enable the Company to consummate the Trademark
Purchase. On July 9, 1999, as a result of the closing of the Chase Facility, the
Second Supplemental Indenture became effective. As a result, the Company paid to
each registered holder of Senior Notes as of May 21, 1999, $0.02 in cash for
each $1.00 in principal amount of Senior Notes held by such registered holder as
of that date, totaling $2.2 million (the "Consent Fee"). The Consent Fee is
being amortized over the remaining life of the Senior Notes and is included in
interest and financing costs.
On September 29, 2000, the Company announced that it would not make its
semi-annual interest payment of approximately $7.2 million to holders of its
Senior Notes. Accordingly, the Company is currently in default under the terms
of the Senior Notes. The Company is currently engaged in discussions with the Ad
Hoc Committee to formulate a financial restructuring that will address current
liquidity issues and enhance the Company's ability to operate under its short-
and long-term plans. In addition, the Company will not make its March 31, 2001
semi-annual interest payment of approximately $7.2 million. As a result of the
default, the $110.0 million Senior Notes have been reclassified as short-term
debt.
Although the Company expects to reach agreement on the terms of a financial
restructuring with the holders of a substantial majority of the Senior Notes,
and with its lenders on the terms for amendments of the Chase Facility, there is
no assurance that the Company will be successful in doing so. If the Company is
unable to reach such agreements, it may be compelled to seek relief under the
United States Bankruptcy Code. In the interim, the Company is examining all
available options.
NOTE 8. DEFERRED INCOME:
The balance in deferred income represents the unearned portion of a payment
received in connection with a licensing agreement. The proceeds are to be
applied to minimum royalty payments and required advertising and marketing
initiatives. The payment has been recorded as deferred income and income will be
recognized as earned based upon actual sales information provided by the
licensee.
NOTE 9. RESTRUCTURING CHARGE
In December 2000, the Company recorded a $2.3 million restructuring charge.
Principal items included in the charge are $1.2 million in professional fees and
$1.1 million in estimated contract termination, severance and related benefits
for staff reductions.
F-14
NOTE 10. INCOME TAXES:
The Company is in an accumulated loss position for both financial reporting
and income tax purposes. The Company has recorded a valuation allowance on its
deferred tax assets of $9,028. The valuation allowance reduced the deferred tax
asset to an amount that the Company believes more likely than not it will
realize based on the Company's estimated future earnings. If the Company is
unable to generate sufficient taxable income in the future during the loss
carryforward periods, increases in the valuation allowance will be required
through a charge to the tax expense.
For December 30, 2000, January 1, 2000 and January 2, 1999, the following
provision (benefit) for income taxes was made:
December 30, January 1, January 2,
2000 2000 1999
---- ---- ----
Current:
Federal $ 6 $(2,481) $ 1,590
State 121 359 520
Foreign 1,401 396 439
------- ------- -------
Total Current: $ 1,528 $(1,726) $ 2,549
------- ------- -------
Deferred:
Federal -- (242) (257)
State -- (458) --
-------
Income tax provision (benefit) $ 1,528 $(2,426) $ 2,292
======= ======= =======
Deferred tax liabilities (assets) are comprised of the following:
December 30, January 1,
2000 2000
(in thousands)
Deferred tax assets
Accounts receivable reserve $ (4,466) $ (2,472)
Inventory, net (2,542) (1,911)
Net operating loss (7,528) --
Other accruals (1,001) (982)
-------- --------
Total deferred tax assets (15,537) (5,365)
-------- --------
Deferred tax liabilities
Amortization 4,857 3,064
Other -- 288
-------- --------
Total deferred tax liabilities 4,857 3,352
-------- --------
Valuation allowance 9,028 --
======== ========
Net deferred tax assets $ (1,652) $ (2,013)
======== ========
For the fiscal year ended December 30, 2000, the difference between the
Company's federal statutory tax rate of 34%, as well as its state and local
taxes, net of federal tax benefit, when compared to its effective tax rate is
principally comprised of a valuation allowance. The difference between the
Company's effective income tax rate and the statutory federal income tax rate
for fiscal years ended December 30, 2000, January 1, 2000 and January 1, 1999,
is as follows:
F-15
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 30, 2000 January 1, 2000 January 2, 1999
----------------- --------------- ---------------
(in thousands, except percentages)
Income tax provision (benefit) $ 1,528 $ (2,426) $ 2,292
--------- --------- ---------
(Loss) income before taxes $ (23,660) $ (7,200) $ 5,462
--------- --------- ---------
Effective tax rate (6.4)% 33.7% 42.0%
Valuation allowance 34.0 -- --
Net state tax 0.5 1.7 (6.3)
Other 5.9 (1.4) (1.7)
--------- --------- ---------
Federal statutory rate 34.0% 34.0% 34.0%
========= ========= =========
NOTE 11. COMMITMENTS AND CONTINGENCIES:
General Litigation -
In the ordinary course of business, the Company is exposed to a number of
asserted and unasserted potential claims. In the opinion of the Company, the
resolution of these matters is not presently expected to have a material adverse
effect upon the Company's financial position and results of operations.
Employment Agreements -
The Company has an employment and compensation agreement with one key
employee of the Company. This agreement provides for annual compensation of $2.0
million through June 4, 2002, and provides that upon termination, without good
reason, as defined in the respective agreements, the employee will be entitled
to receive a severance payment equal to the employee's base salary for the
remainder of the employment term. The agreement also includes a covenant against
competition with the Company, as well as a change in control provision. As of
December 30, 2000, if the employee were to be terminated without good reason,
under this contract, the Company's liability would be approximately $2.8
million.
Leases -
The Company rents real and personal property under leases expiring at
various dates through 2012. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses.
Minimum annual rental commitments under leases in effect at December 30,
2000 are summarized as follows:
Equipment
Fiscal Year Ended Real Estate & Other
----------------- ----------- -------
(in thousands)
2001 $11,508 $ 109
2002 10,617 58
2003 9,464 --
2004 8,581 --
2005 7,259 --
Thereafter 22,961 --
------- -------
Total minimum lease payments $70,390 $ 167
======= =======
Base rent expense for the fiscal years ended December 30, 2000, January 1,
2000 and January 2, 1999, amounted to approximately $11,884,000, $7,990,000 and
$6,563,000, respectively.
F-16
Concentrations of Credit Risk -
Financial instruments that potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk", consist primarily of trade accounts receivable.
The Company's customers are not concentrated in any specific geographic region,
but are concentrated in the retail apparel business. The Company has established
an allowance for possible losses based upon factors surrounding the credit risk
of specific customers, historical trends and other information. For the years
ended December 30, 2000, January 1, 2000 and January 2, 1999, sales to three
customers accounted for approximately 21%, 16% and 15%, 23%, 19% and 17% and
20%, 19% and 17%, respectively.
NOTE 12. SEGMENT INFORMATION
The Company's primary segment is the design, distribution and wholesale
sale of women's career suits, dresses and sportswear principally to major
department stores and specialty shops. In addition, the Company operates 95
retail outlet stores throughout the United States as another distribution
channel for its products. As a result of the Trademark Purchase, the Company now
considers licensing to be a reportable segment. For the purposes of
decision-making and assessing performance, The Company includes the operations
of AEL in its wholesale segment. International operations are not significant
for segment reporting and have been included in the wholesale segment.
The Company measures segment profit as earnings before interest, taxes,
depreciation, amortization and restructuring ("EBITDAR"). All intercompany
revenues and expenses are eliminated in computing revenues and EBITDAR.
Information on segments and a reconciliation to the consolidated financial
statements is as follows:
Fiscal year ended December 30, 2000
Wholesale Retail Licensing Consolidated
--------- ------ --------- ------------
(in thousands)
Revenues $325,593 $ 75,204 $ 14,908 $415,705
EBITDAR (219) 2,723 13,101 15,605
Depreciation and amortization 11,345
--------
Operating income $ 4,260
Total Assets $210,902 $ 19,785 $106,430 $337,117
Capital Expenditures $ 4,220 $ 1,855 $ -- $ 6,075
Fiscal year ended January 1, 2000
Wholesale Retail Licensing Consolidated
--------- ------ --------- ------------
(in thousands)
Revenues $258,836 $ 52,373 $ 7,033 $318,242
EBITDAR 11,276 5,744 5,550 22,570
Depreciation and amortization 9,276
--------
Operating income $ 13,294
Total Assets $203,432 $ 16,768 $109,565 $329,765
Capital Expenditures $ 4,209 $ 2,217 $ -- $ 6,426
F-17
Fiscal year ended January 2, 1999
Wholesale Retail Licensing Consolidated
--------- ------ --------- ------------
(in thousands)
Revenues $265,986 $ 46,103 $ 852 $312,941
EBITDAR 24,896 5,297 852 31,045
Depreciation and amortization 7,795
--------
Operating income $ 23,250
Total Assets $258,397 $ 10,961 $ -- $269,358
Capital Expenditures $ 4,917 $ 773 $ -- $ 5,690
NOTE 13. RETIREMENT PLANS:
Defined Contribution Plan
Kasper established a 401(k) Savings Plan for its employees on June 4, 1997.
It is open to employees over the age of 21, who have completed at least twelve
consecutive months of service. The Company makes a discretionary matching
contribution up to a percentage of employee contributions. Total contributions
to the plan may not exceed the amount permitted pursuant to the Internal Revenue
Code. Contributions to the plan for the years ended December 30, 2000, January
1, 2000 and January 2, 1999 were approximately $400,000, $308,000 and $259,000,
respectively.
NOTE 14. STOCK OPTION PLANS:
Management Stock Option Plan -
On December 2, 1997, the Board of Directors approved the 1997 Management
Stock Option Plan (the "Management Plan"). At that time, the Company issued
options to upper management (the "Management Options") to purchase 1,753,459
shares of Common Stock, which upon issuance would represent approximately 20.5%
of the Company's outstanding Common Stock. Such options were exercisable at
$14.00 per share and vested as follows: 25% vested immediately with 15% vesting
annually thereafter on June 4 from the years 1998 to 2002. On November 10, 1999,
1,710,692 of the Management Options were voluntarily cancelled pursuant to an
agreement between the Company and the option holders. The remaining shares
expire if not exercised before October 30, 2001.
The Management Plan provides for the grant to officers and employees of and
consultants to the Company and its affiliates who are responsible for or
contribute to the management, growth and profitability of the Company of options
to purchase Common Stock. The total number of shares of Common Stock for which
options may be granted under the Plan is 2,500,000 shares. No participant may be
granted stock options in excess of 1,500,000 shares of Common Stock over the
life of the Management Plan. Management Options are not transferable by the
optionee other than by will or the laws of descent and distribution or to
facilitate estate planning, and each option is exercisable during the lifetime
of the optionee only by such optionee.
The Management Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"). The Management Options granted as of the
date hereof are nonqualified stock options. The term of each option granted
pursuant to the Management Plan may be established by the Committee, in its sole
discretion: provided, however, that the maximum term of each option granted
pursuant to the Employee Plan is six and one-half years. Options shall become
exercisable at such times and in such installments as the Committee shall
provide in the terms of each individual option agreement.
F-18
Non-Employee Director Stock Option Plan -
On June 10, 1997, the Board of Directors approved the grant of stock
options ("Director Options") to purchase 20,000 shares of Common Stock to each
of its five non-employee directors for a total of 100,000 options. Each option
has an exercise price of $14.00 per share and will vest ratably over the first
three anniversaries following the date of grant. The Director Options will
expire on the fifth anniversary of the date of grant. Director Options are not
transferable by the optionee other than by will or the laws of descent and
distribution or to facilitate estate planning, and each option is exercisable
during the lifetime of the optionee only by such optionee. At the date of
issuance, the fair market value per share was $15.50.
On July 30, 1998, the Board of Directors approved the grant of stock
options to purchase 20,000 shares of Common Stock to each of its two newly
elected directors under the same terms of the Director Options granted on June
10, 1997. In addition, the Director Options granted to the two outgoing
directors became fully vested as of that date. The market value per share on
July 30, 1998 was $13.00.
The Company has elected to account for its stock based compensation awards
to employees and directors under the accounting prescribed by APB No. 25, under
which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, net income and earnings per share would have been reduced to the
following pro forma amounts:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 30, January 1, January 2,
2000 2000 1999
---- ---- ----
(in thousands except per share amounts)
Net (Loss) Income: As Reported $ (25,188) $ (4,774) $ 3,170
Pro Forma (25,347) (8,116) 1,660
Basic EPS: As Reported (3.70) (.70) .47
Pro Forma (3.73) (1.19) .24
Diluted EPS: As Reported (3.70) (.70) .47
Pro Forma (3.73) (1.19) .24
The option price under the Management Plan exceeded the stock's market
price on the date of grant. The option price under the Director Options granted
on June 4, 1997 was less than the stock's market price on the date of grant. The
option price under the Director Options granted on July 30, 1998 was greater
than the stock's market price on the date of grant. A summary of the status of
the Company's two stock plans at December 30, 2000, January 1, 2000 and January
2, 1999 and changes during the years then ended are presented in the table and
narrative below:
F-19
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 30, 2000 January 1, 2000 January 2, 1999
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----- -------------- ----- -------------- ----- --------------
Outstanding beginning of year 182 $ 14 1,893 $ 14 1,853 $ 14
Granted -- -- -- -- 40 14
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Cancelled -- -- 1,711 14 -- --
Expired -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Outstanding end of year 182 $ 14 182 $ 14 1,893 $ 14
----- ----- ----- ----- ----- -----
Exercisable end of year 169 $ 14 117 $ 14 761 $ 14
Weighted average of fair
value of options granted $6.79 $6.79 $4.66
All of the options outstanding at December 30, 2000 have an exercise price
of $14 and a weighted average remaining contractual life of 1.5 years. 169 of
these options are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998 respectively: risk-free
interest rate of 5.8% for the Management Plan and 6.4% and 5.6% for the Director
Options; expected stock price volatility of 43% in 2000, 43% in 1999 and 34% in
1998 for both the Management Plan and the Director Plan; and expected dividend
yield of 0% and expected lives of 5 years for both plans.
NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid for interest and income taxes were as follows:
December 30, January 1, January 2,
2000 2000 1999
---- ---- ----
(in thousands)
Interest $10,240 $18,790 $16,866
Income Taxes 1,046 1,138 3,202
NOTE 16. UNAUDITED QUARTERLY RESULTS:
Unaudited quarterly financial information for 2000 and 1999 is set forth as
follows:
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
(in thousands except per share data)
Net Sales $ 107,589 $ 76,897 $ 122,905 $ 93,406
Gross Profit 37,528 24,577 35,748 22,713
Net Income (loss) 1,650 (4,651) (5,334) (16,853)
Net Income (loss) per share 0.24 (0.68) (0.78) (2.48)
F-20
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
(in thousands except per share data)
Net Sales $ 98,286 $ 55,760 $ 87,959 $ 69,204
Gross Profit 32,229 16,632 30,309 19,552
Net Income (loss) 5,147 (3,408) 1,091 (7,604)
Net Income (loss) per share 0.76 (0.50) 0.16 (1.12)
NOTE 17. SUBSEQUENT EVENT:
On March 28, 2001, the Company entered into an agreement with its lenders
under the Chase Facility, which waived all existing defaults there under,
including, but not limited to, the defaults as a result of the failure to
satisfy the interest coverage ratio and minimum net worth requirements as of
December 30, 2000. However, the Company currently anticipates that it will be in
violation of certain covenants under the Chase Facility in 2001. The Company is
currently negotiating with its lenders under the Chase Facility to further amend
certain financial covenants. Although the Company expects to reach agreement on
the terms for such amendments of the Chase Facility, there is no assurance that
the Company will be successful in doing so.
F-21
SCHEDULE II
KASPER A.S.L., LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Costs Balance at
Beginning of Charged to End of
Description Period Expense Deductions Period
----------- ------ ------- ---------- ------
Fiscal Year Ended December 30, 2000:
Allowance for doubtful accounts $ (201) $ (112) $ 121 $ (192)
Restructuring charge -- (2,344) -- (2,344)
Fiscal Year Ended January 1, 2000:
Allowance for doubtful accounts $ (184) $ (221) $ 204 $ (201)
Fiscal Year Ended January 2, 1999:
Allowance for doubtful accounts $ (168) $ (81) $ 65 $ (184)
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Kasper A.S.L., Ltd.
(Registrant)
By: /s/ Gwen Gepfert
-----------------------
Gwen Gepfert
Chief Financial Officer
Dated: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Arthur S. Levine Chairman of the Board and March 29, 2001
- ----------------------- Chief Executive Officer
Arthur S. Levine (Principal Executive Officer)
/s/ Gwen Gepfert Chief Financial Officer March 29, 2001
- ----------------------- (Principal Financial and
Gwen Gepfert Accounting Officer)
/s/ Lester E. Schreiber Chief Operating Officer March 29, 2001
- ----------------------- and Director
Lester E. Schreiber
/s/ Martin Bloom Director March 29, 2001
- -----------------------
Martin Bloom
F-23
/s/ H. Sean Mathis Director March 29, 2001
- -----------------------
H. Sean Mathis
/s/ Salvatore Salibello Director March 29, 2001
- -----------------------
Salvatore M. Salibello
/s/ Denis J. Taura Director March 29, 2001
- -----------------------
Denis J. Taura
/s/ Olivier Trouveroy Director March 29, 2001
- -----------------------
Olivier Trouveroy
F-24
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.14 Consulting Agreement dated October 25, 2000, between the Company
and Alvarez and Marsal, Inc.
10.15 Waiver Agreement to the Amended and Restated Credit Agreement,
dated March 28, 2001