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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 29, 2001
COMMISSION FILE NO. 0-24179
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. [X]
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 April 10, 2002.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant at April 10, 2002 was approximately $107,000. 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 the
Company's 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.
The Company cautions 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 the Company believes 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 expected results include but are not
limited to, the following cautionary statements ("Cautionary Statements"):
o the success of the Company's overall business strategy, including
successful implementation of the Company's restructuring plan and
successful implementation of the Company's plan of reorganization;
o the impact that public disclosure of the Company's Chapter 11 filing may
have on the Company's relationships with its principal customers and
suppliers;
o the risk that the bankruptcy court overseeing the Company's Chapter 11
proceedings may not confirm any reorganization plan proposed by the
Company;
o actions that may be taken by creditors and other parties-in-interest that
may have the effect of preventing or delaying confirmation of a plan of
reorganization in connection with the Company's Chapter 11 proceedings;
o the risk that the cash generated by the Company from operations and the
cash received by the Company under its DIP Credit Facility (defined
elsewhere herein) will not be sufficient to fund the operations of the
Company until such time as the Company's plan of reorganization is approved
by the bankruptcy court;
o the ability of the Company to achieve its covenants under the DIP Credit
Facility;
o the ability of the Company to adapt to changing consumer preferences and
tastes;
o global economic conditions and the implications thereon after the terrorist
attacks on September 11, 2001;
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; and
o unforeseen complications resulting from the Company's implementation of
upgrades to its management information systems.
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.
2
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 suits, sportswear and
dresses. The Company's brands include such well-recognized names as Albert
Nipon(R), Anne Klein New York(TM), A.K. Anne Klein(TM), Kasper(R), and Le
Suit(R) (collectively, the "Brands", and Anne Klein New York(TM) and A.K. Anne
Klein(TM), the "Anne Klein Brands"). In addition, the Company has granted
licenses for the manufacture and distribution of certain other products under
the Brands (other than Le Suit(R)), including, but not limited to, women's
watches, jewelry, handbags, small leather goods, 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, which provided for a base for the Company's
expansion into sportswear.
Contributing to the Company's on-going diversification are the Company-owned
retail stores, which provide an additional distribution channel for its
products. As of March 29, 2002, the Company operated 67 retail stores under the
Kasper and Anne Klein names, which not only sell company produced apparel, but
also showcase and sell licensed products. In February 2002, the Company opened
its first full price Anne Klein store in New York City.
Commencement of Chapter 11 Cases
On February 5, 2002 (the "Filing Date"), the Company along with A.S.L. Retail
Outlets, Inc., ASL/K Licensing Corp., Kasper Holdings, Inc., AKC Acquisition,
Ltd. and Lion Licensing, Ltd., all wholly owned subsidiaries of the Company
(sometimes hereinafter collectively referred to as the "Debtors"), filed
voluntary petitions under Chapter 11 of the Federal Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). Pursuant to an order of the
Bankruptcy Court, the individual Chapter 11 cases were consolidated for
procedural purposes only and are being jointly administered by the Bankruptcy
Court. The Company's international operations were not included in the filings.
The Company will continue to operate in the ordinary course of business as
debtor-in-possession under the jurisdiction of the Bankruptcy Court and has
filed a preliminary plan of reorganization, based on negotiations with an ad hoc
committee of its noteholders (the "Ad Hoc Committee") representing certain
holders of the Company's $110.0 million Senior Notes due 2004 (the "Senior
Notes"). Additional information with respect to the Chapter 11 cases and the
procedures followed therein is contained in Item 3. "Legal Proceedings".
Post-Petition Financing
On the Filing Date, the Company obtained a $35 million debtor-in-possession
financing facility (the "DIP Credit Agreement") from its existing bank group led
by JPMorgan Chase Bank ("Chase"). The DIP Credit Agreement also provides for a
term loan for the purpose of refinancing the pre-petition obligations
outstanding under the Chase Facility (as defined elsewhere within), which on the
Filing Date totaled approximately $91.6 million. The DIP Credit Agreement is
intended to assure that the Company has the ability to pay for all new supplier
shipments received, to invest in retail operations, and substantially upgrade
operating systems to achieve further efficiencies. On February 26, 2002, the
Bankruptcy Court entered a final order approving the DIP Credit Agreement.
Additional information with respect to the DIP Credit Agreement is contained in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
3
Financial Information About Industry Segments
Kasper's business consists of three integrated operations: wholesale, retail and
licensing. During fiscal 2001, approximately 94% 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, manufactures and distributes
to wholesale customers, women's apparel under various labels owned by the
Company for the bridge, better and mass markets. The Company's products are sold
to approximately 3,000 retail locations throughout the United States, Canada,
Europe and Asia. 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 manufactures suits under the Albert Nipon
brand for the specialty store bridge market. The Company manufactures the Kasper
and Le Suit brands for the department store better market. The Company believes
it has a dominant share of the women's suit market for department stores within
the United States. Additionally, the Company manufactures for the mass market by
using private label programs for such accounts as Sears and J.C. Penney's. Suit
sales, as a percentage of the Company's net domestic wholesale sales for the
2001, 2000 and 1999 fiscal years were approximately 65%, 60% and 79%,
respectively.
Sportswear
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 sportswear under the Anne Klein
New York brand name, which is priced for the bridge market. The Company also
produces A.K. Anne Klein and Kasper & Company for the better market. Sportswear
sales, as a percentage of the Company's net domestic wholesale sales, for the
2001, 2000 and 1999 fiscal years were approximately 27%, 33% and 12%,
respectively.
Dresses
The Company produces a collection of dresses under the Kasper 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 dress division offers a wide variety of high
quality dresses at affordable prices, including career and classic, desk to
dinner dresses. Dress sales, as a percentage of the Company's net domestic
wholesale sales, for the 2001, 2000 and 1999 fiscal years were approximately 8%,
7% and 9%, respectively.
International Operations
The Company's wholesale business includes two wholly owned subsidiaries, Kasper
Holdings Inc. and Kasper A.S.L. Europe, Ltd. (collectively, "International").
Kasper Holdings Inc. owns Kasper Canada ULC and Anne Klein ULC, which together
own 100% of Kasper Partnership G.P., a Canadian Partnership (70% and 30%,
respectively), through which the Company sells and distributes all the Brands in
Canada. Kasper A.S.L. Europe, Ltd. sells and distributes all the Brands in
Europe. The Company's wholly owned subsidiary, Asia Expert Limited, a Hong Kong
corporation ("AEL"), is the owner of Tomwell Ltd., also a Hong Kong corporation.
Generally, AEL acts as a buying agent for the Company
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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.
Retail
The Company's retail store program establishes another distribution channel for
its products. At December 29, 2001, the Company operated 65 Kasper retail stores
and 26 Anne Klein retail stores, which in total represented approximately 20%,
19% and 17% of total net sales of the Company for the 2001, 2000 and 1999 fiscal
years, respectively. These stores are generally located in outlet center malls
throughout the United States. The Company opened one full price Anne Klein store
in February 2002, located in New York City. At the end of fiscal 2001, the
Company made the decision to close approximately 25 retail stores. As of March
29, 2002, 24 retail stores had been closed.
Licensing
As of December 29, 2001, the Company had four licensing arrangements under its
Albert Nipon(R) trademark. Licenses included men's tailored clothing, neckwear,
small leather goods, and ladies' and girls' coats and outerwear.
As of December 29, 2001, the Company had 14 domestic and three international
licensing agreements under its Anne Klein Brands and related logos. The domestic
licensees are granted the exclusive right to manufacture and sell watches,
jewelry, handbags, small leather goods, footwear, coats, eyewear and swimwear
under specified Anne Klein trademarks, in accordance with designs supplied or
approved by the Company. The international licensees distribute specified
apparel and accessories under the Anne Klein marks in Japan, Korea, and Central
and South America.
As of December 29, 2001, the Company had four licensing arrangements under its
Kasper trademarks pursuant to which third-party licensees produce merchandise
under the these trademarks, in accordance with designs furnished or approved by
the Company. Licenses included women's coats, men's woven sport shirts, sweaters
and casual pants and handbags, portfolios and wallets.
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
5
samples, production begins. As a line of products is being finalized, customer
reaction is evaluated and samples are modified as appropriate.
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.
Manufacturing
The Company primarily contracts for the cutting and sewing of its garments with
contractors located principally in Taiwan, the Philippines, Hong Kong and China.
Purchases of finished goods from the Company's four principal contractors
accounted for approximately 44% of the Company's total finished goods purchases
in 2001. Apparel sold by the Company is manufactured in accordance with its
designs, detailed specifications 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 7%, 5%
and 4% of total finished goods production during fiscal 2001, 2000 and 1999,
respectively. The Company's production and sourcing staffs in Hong Kong, 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 for manufacturing, textiles and trim. 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.
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.
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 a sampling of each style is
measured against detailed specifications, and undergoes a thorough inspection
and is then steamed or pressed, as necessary. 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.
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 or
by its manufacturing facilities. 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 45% of the Company's total purchases of raw materials for fiscal
2001. The Company's transactions with its suppliers are based on written
instructions issued by the Company 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.
6
Distribution
The Company operates a 400,000 square foot distribution center in Secaucus, New
Jersey. 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 94% of its products within the United States.
The Company distributes its products through approximately 3,000 retail
locations throughout the United States, Canada, Europe and Asia. Department
stores accounted for approximately 69%, 66% and 71% of the Company's gross sales
for the 2001, 2000 and 1999 fiscal years, respectively. In fiscal 2001,
Federated Department Stores, May Merchandising Co. and Dillard's Department
Stores accounted for approximately 21%, 17% and 16% 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 79% of the Company's total gross sales
during fiscal 2001. 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.
Trademarks
The Company owns and/or uses a variety of trademarks in connection with its
products and businesses, including, Albert Nipon, Nipon Boutique, Executive
Dress by Albert Nipon, Nipon Night, Albert Nipon Suits, Nipon Studio, Anne
Klein, Anne Klein New York, A.K. Anne Klein, the Lion Head Design, Anne Klein2,
Anne Klein II, A Line Anne Klein and the A Anne Klein Logo, Kasper, Kasper ASL,
Kasper Woman, Kasper ASL Petite, Kasper and Company, Kasper and Company Petite,
Kasper Dress and Kasper Dress Petite (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. Imports into the United States
are affected by, among other things, the cost of transportation and the
imposition of import duties and restrictions.
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, the Philippines, South Korea, Thailand, Indonesia 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. Such
agreements also
7
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.
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 an overseas office, allocation of production to merchandise
categories where more quota is available and shifting production among countries
and manufacturers.
The Company's imported products are also subject to United States customs duties
and, in the ordinary course of business, subjects the Company to claims by the
United States Customs Service for duties and other charges. The Company
carefully monitors duty rates and classification decisions to ensure that it
receives the lowest duty rates to which it is entitled under the law.
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 18, 2002, the Company had unfilled customer orders of approximately
$95.6 million, compared to approximately $92.2 million of such orders at March
20, 2001. These amounts include both confirmed and unconfirmed orders. The
Company generally receives orders approximately three to six months prior to the
time the products are delivered to stores. All such orders are subject to
cancellation for late delivery. The amount of unfilled orders at a particular
time is affected by a number of factors, including the timing of the market
weeks for particular lines, during which a significant percentage of our orders
are received, and 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, some of which account for
a significant percentage of total industry sales, and may be 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.
Employees
At December 29, 2001, the Company had approximately 1,170 employees in the
United States including 750 full-time employees and 420 part-time employees.
Approximately 250 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 8 employees in the United Kingdom, 41 employees in
Canada and 1,170 employees in the Far East. As a result of the closing of the
retail stores, the Company expects the number of employees to decrease by
approximately 55 full-time and 50 part-time.
8
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 store,
warehouse and distribution center
New York, New York 41,000 August 2008 Kasper division executive, sales,
production and design offices and
showroom
New York, New York 80,000 June 2012 Kasper corporate, Anne Klein division
executive, sales, production and
design offices and showroom
New York, New York 3,000 November 2011 Anne Klein full price retail store
Kwai Chung, New 27,000 September 2003 AEL warehouse and offices
Territories, Hong Kong
Shenzhen, China 16,000 February 2004 China embroidery factory and dormitory
Shenzhen, China 72,000 February 2005 China garment factory and dormitory
Shenzhen, China 27,000 February 2007 China garment factory and dormitory
In addition, as of December 29, 2001, the Company operated 65 Kasper ASL retail
stores and 26 Anne Klein retail stores throughout the United States. The
majority of all newly entered leases are for a period of five years, some with
options to renew. The average store size is approximately 2,800 square feet,
ranging from a minimum of 1,700 square feet to a maximum of 4,700 square feet.
The Company may, as permitted by the Bankruptcy Code, reject certain leases to
which it is a party. As of December 29, 2001, the Company has made the decision
to exit approximately 25 of the Company's retail store leases and certain office
and showroom space. Of the 25 retail stores, 24 have been closed as of March 29,
2002. In fiscal 2001, the Company has taken a charge of $2.7 million for lease
cancellation costs. Although this amount has been reserved for in accordance
with Bankruptcy Court guidelines, any such amounts due will be treated as
general unsecured claims in the Chapter 11 Cases and, accordingly, the Company's
ultimate liability for these amounts cannot yet be ascertained.
9
ITEM 3. LEGAL PROCEEDINGS
The following discussion provides general background information regarding the
Chapter 11 filing, but is not intended to be an exhaustive summary. Detailed
information can be obtained at the Bankruptcy Court web site at
www.nysb.uscourts.gov.
On February 5, 2002, each of the Debtors filed a voluntary petition for
protection under Chapter 11 of the Bankruptcy Code (Case Nos. 02-B10497,
02-B10500, and 02-B10502 through 10505 (ALG)) (the "Chapter 11 Cases"). The
Chapter 11 Cases were consolidated for procedural purposes only and are being
jointly administered by the Bankruptcy Court.
Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors,
including obligations under debt instruments, generally may not be enforced
against the Debtors, and any actions to collect pre-petition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy Court. The
rights of and ultimate payments by the Company under pre-petition obligations
may be substantially altered. This could result in claims being liquidated in
the Chapter 11 Cases at less (and possibly substantially less) than 100% of
their face value. In addition, as debtors-in-possession, the Debtors have the
right, subject to Bankruptcy Court approval and certain other limitations, to
assume or reject executory, pre-petition contracts and unexpired leases. In this
context, assumption means that the Debtors agree to perform their obligations
and cure all existing defaults under the contract or lease, and rejection means
that the Debtors are relieved from their obligations to perform further under
the contract or lease, but are subject to a claim for damages for the breach
thereof. Any damages resulting from rejection of executory contracts and
unexpired leases will be treated as general unsecured claims in the Chapter 11
Cases unless such claims had been secured on a pre-petition basis prior to the
Filing Date.
Although the Debtors are authorized to operate their businesses as
debtors-in-possession, they may not engage in transactions outside the ordinary
course of business without first complying with the notice and hearing
provisions of the Bankruptcy Court and obtaining Bankruptcy Court approval when
necessary.
Prior to the Filing Date, the Ad Hoc Committee was organized, consisting of, or
authorized to speak on behalf of, entities, which in the aggregate, represent
approximately eighty percent of the Company's Senior Notes. The Ad Hoc Committee
and its professional advisors have had extensive discussions and negotiations
with management of the Debtors over a period of more than a year. On February
19, 2002, the United States Trustee appointed an Official Committee of Unsecured
Creditors (the "Official Committee") consisting of several members of the Ad Hoc
Committee, the indenture trustee and one general unsecured creditor. The
Official Committee has the right to review and object to certain business
transactions and is expected to participate in the final formulation of the plan
of reorganization.
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. As a result of the Chapter 11 Cases, litigation relating
to pre-petition claims against the Debtors is stayed; however, litigants may
seek to obtain relief from the Bankruptcy Court to pursue their pre-petition
claims.
In addition to the proceedings in the Bankruptcy Court, the Company is involved
in the following legal proceedings of significance:
On January 11, 2002, counsel for Arthur S. Levine sent a letter to the Company
alleging that the Company is obligated, under the terms of Mr. Levine's
employment contract as Chairman and Chief Executive Officer of the Company, to
pay approximately $1.2 million in severance and related costs. The Company
anticipates that Mr. Levine will assert a claim for such amount in the
Bankruptcy proceedings.
The Company is party to an arbitration proceeding in which Locals 99, 89-22-1
and 10 of UNITE, the union representing the Needle Trades, Industrial and
Textile Employees (the "Union") has asserted approximately $700,000 in claims
against the Company seeking recovery of severance pay to employees
10
represented by the Union who have been and will be "permanently laid off" as a
result of a reduction in work force and implementation of alleged "changes" in
the way garments are processed in the warehouse.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matter was submitted to a vote of the
Company's security holders by means of proxies or otherwise.
11
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 has traded in the over the counter market and quotations are available on
the OTC Bulletin Board.
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
------ ---- ----
2001 First Quarter $ 0.31 $ 0.09
Second Quarter 0.18 0.08
Third Quarter 0.74 0.13
Fourth Quarter 0.29 0.10
2000 First Quarter $ 2.75 $ 0.19
Second Quarter 3.31 2.13
Third Quarter 2.88 1.69
Fourth Quarter 1.81 0.03
The closing sales price of the Company's Common Stock on April 10, 2002 was
$0.03 per share, and there were approximately 1,150 holders of record. The
Company has not declared or paid any cash dividends on its Common Stock during
fiscal years 2001 and 2000, and does not anticipate paying cash dividends in the
foreseeable future. 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. The proposed plan of
reorganization, as currently contemplated by the Company, would extinguish the
rights of current equity holders of the Company.
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 2 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,
December 30, 2000 and December 29, 2001 is derived from the Company's audited
Consolidated Financial Statements included elsewhere herein. The selected
combined financial information for the five months ended June 4, 1997 is derived
from the Company's audited Divisional Combined Financial Statements. Certain
amounts in prior fiscal years have been reclassified to conform to the
presentation of similar items for the fiscal year ended December 29, 2001.
12
The following selected financial information for the year ended December 29,
2001 has been prepared on a going concern basis. The Chapter 11 Cases raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependant upon the
acceptance of a plan of reorganization by the Bankruptcy Court and the Company's
creditors, securing exit financing upon emergence from bankruptcy, compliance
with all debt covenants under the DIP Credit Agreement, the ability to generate
sufficient cash flows from operations, and the success of future operations.
There can be no assurance that the Company will be successful in achieving these
uncertainties. As a result, the independent auditors have qualified their
opinion relative to the uncertainty of the Company 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.
13
SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA
(in thousands, expect per share data)
Predecessor
Company Reorganized Company (2)
--------------------------------------------------------------------------------
Five Seven
Months Months Fiscal Year Ended (1)
Ended Ended
--------------------------------------------------------------------------------
June 4, Jan. 3, Jan. 2, Jan. 1, Dec. 30, Dec. 29,
1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Net sales ...................................... $ 136,107 $ 175,602 $ 312,089 $ 311,209 $ 400,797 $ 368,593
Royalty income ................................. 286 609 852 7,033 14,908 15,268
--------- --------- --------- --------- --------- ---------
Total revenue .................................. 136,393 176,211 312,941 318,242 415,705 383,861
Cost of sales .................................. 101,479 127,784 219,060 219,520 295,139 299,722
Gross profit ................................... 34,914 48,427 93,881 98,722 120,566 84,139
Selling, general and administrative expenses ... 23,660 32,411 62,836 76,152 104,961 104,007
Restructuring charge (3) ....................... -- -- -- -- 2,344 9,201
Amortization of reorganization asset (4) ....... -- 1,902 3,258 3,258 3,258 3,258
Depreciation and amortization (5) .............. 1,191 2,365 4,537 6,018 8,087 10,292
Interest and financing costs ................... 667 9,829 17,788 20,494 25,576 31,301
Income (loss) before income taxes .............. 9,396 1,920 5,462 (7,200) (23,660) (73,920)
Income tax provision (benefit) (6) ............. 3,758 948 2,292 (2,426) 1,528 1,750
--------- --------- --------- --------- --------- ---------
Net income (loss) .............................. $ 5,638 $ 972 $ 3,170 $ (4,774) $ (25,188) $ (75,670)
========= ========= ========= ========= ========= =========
Net income (loss) per share (7) ................ -- $ 0.14 $ 0.47 $ (0.70) $ (3.70) $ (11.13)
Weighted average number of shares outstanding (7) -- 6,800 6,800 6,800 6,800 6,800
- ------------------------------------------------------------------------------------------------------------------------------------
Other Financial Data:
Earnings before interest, taxes, depreciation,
amortization and restructuring ("EBITDAR") .... $ 11,254 $ 16,016 $ 31,045 $ 22,570 $ 15,605 $ (20,938)
- ------------------------------------------------------------------------------------------------------------------------------------
As of:
Balance Sheet Data:
----------------------------------------------------------------------
June 4, Jan. 3, Jan. 2, Jan. 1, Dec. 30, Dec. 29,
1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ----
----------------------------------------------------------------------
Working Capital (8) .................................. $ 101,264 $ 100,876 $ 116,011 $ 94,715 $ (89,980) $(151,986)
Reorganization value in excess of identifiable assets -- 63,279 60,021 56,763 53,503 50,245
Total Assets ......................................... 147,050 260,656 269,358 329,765 337,117 258,690
Long-term Debt (8) ................................... -- 110,000 117,569 163,444 -- --
Shareholders' Equity (9) ............................. $ 132,363 $ 120,958 $ 124,050 $ 119,140 $ 93,601 $ 18,041
14
(1) 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 January 3, 1998, January 2, 1999, January 1, 2000, December 30, 2000
and December 29, 2001 include the Company's results of operations for 53,
52, 52, 52 and 52 weeks, respectively.
(2) 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).
(3) Beginning with the fourth quarter of fiscal 2000, the Company has incurred
costs in connection with a restructuring. The costs include those related
to professional fees, severance, asset write-downs, lease and contract
termination costs, as well as other expenses associated with the
implementation of the Company's restructuring program.
(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. Effective December 30, 2001, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, the Company
will discontinue amortizing this asset.
(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) 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 SFAS No. 109, Accounting for
Income Taxes.
(7) 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.
(8) As a result of the defaults on the Senior Notes and on the Chase Facility,
the $110.0 million Senior Notes and the $59.0 million and $70.3 million
outstanding under the Chase Facility, respectively, have been reclassified
as short-term liabilities as of December 29, 2001 and December 30, 2000.
(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.
15
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 2001, 2000 and 1999 ended on December 29,
2001 ("fiscal 2001"), December 30, 2000 ("fiscal 2000"), and January 1, 2000
("fiscal 1999"), respectively.
After the end of fiscal 2001, on February 5, 2002, the Company and certain of
its domestic subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code. The Company will continue to operate in the
ordinary course of business as debtor-in-possession under the jurisdiction of
the Bankruptcy Court and has filed a preliminary plan of reorganization, based
on negotiations with the Ad Hoc Committee under the Company's Senior Notes. For
additional information with respect to the Chapter 11 Cases, see Item 3. "Legal
Proceedings".
The Company's ability to continue as a going concern is dependent upon the
acceptance of a plan of reorganization by the Bankruptcy Court and the Company's
creditors, securing exit financing upon emergence from bankruptcy, compliance
with all debt covenants under the DIP Credit Agreement, the ability to generate
sufficient cash flows from operations and the success of future operations.
There can be no assurance that the Company will be successful in resolving these
uncertainties. As a result, the independent auditors have qualified their
opinion relative to the uncertainty of the Company to continue as a going
concern. The financial information contained herein 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.
The Company completed its acquisition of the Anne Klein Trademarks (the
"Trademark Purchase") on July 9, 1999 and the purchase of the Anne Klein retail
stores (the "FSA Acquisition") on November 24, 1999. The results of operations
of the acquired companies are included in the results of operations from the
respective dates of acquisition. Accordingly, the financial position and results
of operations presented and discussed herein may not be comparable between
years.
Beginning in the fourth quarter of 2000 and continuing throughout fiscal 2001,
the Company has been undertaking a substantial restructuring of its businesses.
This includes, but is not limited to, (i) reducing general and administrative
costs through the streamlining of its back-office operations, (ii) focusing on
the profitability of each operating unit and examining its cost structure to
enhance operating efficiencies through the closing of under performing retail
stores, and (iii) adopting a more disciplined inventory management approach.
Accordingly, the Company's results of operations for fiscal 2001 reflect these
reductions, and charges that may, in some cases, be non-recurring.
The terrorist attacks of September 11, 2001 and the resulting decrease in
consumer spending have clearly had a negative impact on the United States
economy. In response to the general sense of economic uncertainty, retailers in
the distribution channels to which we sell our products have reduced orders and
have reacted with extremely aggressive promotional activity.
16
Results of Operations
Total Revenue by Segment
(in thousands except percentages)
Fiscal % Fiscal % Fiscal %
2001 of Total 2000 of Total 1999 of Total
-------------------- -------------------- --------------------
Wholesale $296,492 77.2% $325,593 78.3% $258,836 81.3%
Retail 72,101 18.8% 75,204 18.1% 52,373 16.5%
-------- ----- -------- ----- -------- -----
Net Sales 368,593 96.0% 400,797 96.4% 311,209 97.8%
Licensing 15,268 4.0% 14,908 3.6% 7,033 2.2%
-------- ----- -------- ----- -------- -----
Total revenue $383,861 100.0% $415,705 100.0% $318,242 100.0%
EBITDAR by Segment
(in thousands except percentages)
Fiscal % Fiscal % Fiscal %
2001 of Total 2000 of Total 1999 of Total
--------------------- --------------------- ---------------------
Wholesale $(35,392) 178.1% $ (219) (1.4)% $ 11,276 50.0%
Retail 1,188 (6.0)% 2,723 17.4% 5,744 25.4%
Licensing 14,336 (72.1)% 13,101 84.0% 5,550 24.6%
-------- ----- -------- ----- -------- -----
Total $(19,868) 100.0% $ 15,605 100.0% $ 22,570 100.0%
Fiscal 2001 Compared to Fiscal 2000
Total Revenue
The Company's net sales in fiscal 2001 were $368.6 million as compared to $400.8
million for fiscal 2000. Sales from the Company's wholesale operations
("Wholesale") decreased to $296.5 million in fiscal 2001 from $325.6 million in
fiscal 2000, primarily as a result of the weaker economic environment and high
level of promotional activity experienced in department stores for which
additional markdowns and allowances were given, along with a decrease in volume
of the Anne Klein Brands.
Net sales at the Company's retail stores ("Retail") decreased to $72.1 million
in fiscal 2001 from $75.2 million in fiscal 2000, a decrease of $3.1 million due
to the closing of four under-performing stores over the last 12 months.
Comparable store sales for fiscal 2001 decreased by approximately 7.4% compared
to fiscal 2000. The decrease is the result of the weakened retail environment
and by the impact of the events of September 11, 2001.
Royalty income from the Company's licensing activities ("Licensing") increased
slightly to $15.3 million in fiscal 2001 from $14.9 million in fiscal 2000.
Gross Profit
The Company's gross profit as a percentage of total revenue decreased to 22.8%
for fiscal 2001, compared to 29.0% for fiscal 2000. In connection with the
Company's restructuring efforts and management's focus on improving operational
efficiency and cash flow, management has reassessed the value of its
inventories. As a result, the Company has accelerated its plans to liquidate
on-hand inventory, including both finished goods and raw material. During the
third and fourth quarters of 2001, the Company recorded inventory write-downs
aggregating approximately $17.7 million, to reflect at net realizable value, the
merchandise that the Company expects to sell off-price in the case of finished
goods, along with the acceleration of the expected liquidation of raw materials.
As a result, Wholesale gross profit as a percentage of net sales decreased to
14.1% in fiscal 2001 from 23.9% in fiscal 2000. Excluding this charge, Wholesale
gross profit for fiscal 2001 would have been 20.1% as compared to 23.9% in
fiscal 2000, reflecting the ongoing promotional activity in selected seasonal
merchandise offerings resulting in higher product line markdowns and allowances.
Retail gross profit as a percentage of sales remained constant at 37.2% in both
fiscal 2001 and fiscal 2000.
17
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses ("SG&A") decreased to
$104.0 million in fiscal 2001 as compared to $105.0 million in fiscal 2000, even
with a number of charges relating to the streamlining efforts of the COmpany.
Fiscal 2001 Wholesale expenses were approximately $77.2 million versus $77.9
million in the prior year, reflecting severance costs of approximately $3.5
million offset by cost savings of approximately $4.2 million from the Company's
restructuring efforts. Retail SG&A increased approximately $500,000 over the
prior year. Licensing division operations accounted for a decrease of
approximately $800,000 in administrative expenses during fiscal 2001, relating
in part to costs which are now included in Wholesale.
Earnings before Interest, Taxes, Depreciation, Amortization and Restructuring
Charge
The Company's earnings before interest, taxes, depreciation, amortization and
restructuring charge, ("EBITDAR") was a loss of $19.9 million in fiscal 2001
versus earnings of $15.6 million in fiscal 2000, a decrease of $35.5 million.
Wholesale EBITDAR decreased $35.2 million during the period as a result of
inventory write-downs aggregating approximately $17.7 million along with the
increased markdowns and allowances. Retail experienced a $1.5 million decrease
in EBITDAR reflecting the decreased sales and closing costs in connection with
store closures. Licensing contributed an additional $1.3 million in EBITDAR over
fiscal 2000. Excluding the write-down of inventory and severance costs, EBITDAR
would have been $1.3 million.
Restructuring Charge
The Company recorded a $9.2 million restructuring charge in fiscal 2001 compared
to a $2.3 million charge in fiscal 2000 in order to cover the estimated costs of
streamlining operating and administrative functions. These amounts include
professional fees, which are expensed as incurred and totaled $4.3 million and
$1.2 million in fiscal 2001 and fiscal 2000, respectively. In addition, during
fiscal 2001 the Company has taken a charge of $4.9 million for lease
cancellation costs and asset write-downs in connection with the decision to exit
approximately 25 retail store leases and certain office space, in fiscal 2002.
Lease costs have been reserved for in accordance with Bankruptcy Court
guidelines. Fiscal 2000 restructuring included $1.1 million in severance costs.
See Note 9 to Consolidated Financial Statements included elsewhere herein.
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" (the "Reorganization Asset"). This asset is being
amortized over a 20-year period beginning June 4, 1997. Accordingly, the Company
incurred amortization charges in both fiscal 2001 and 2000 totaling
approximately $3.3 million. In accordance with SFAS No. 142, the Company will
cease recording amortization effective December 30, 2001.
Depreciation and Amortization
Depreciation and amortization, excluding the amortization of the Reorganization
Asset, totaled $10.3 million in fiscal 2001, up from $8.1 million in fiscal 2000
and consists of the amortization charges associated with the trademarks as well
as fixed asset depreciation. As of December 29, 2001, the Company has made the
decision to exit approximately 25 of the Company's retail store leases. In
accordance with the provisions of SFAS No. 121, the Company wrote down
approximately $1.1 million of fixed assets in connection with the closing of the
retail stores, which has been included in depreciation. Trademarks are being
amortized over 35 years. Included in depreciation and amortization in fiscal
2001 is approximately $500,000 in write-offs of goodwill, which resulted from
the FSA acquisition in fiscal 1999. The write-off was due to the impairment in
value calculated in accordance with SFAS No. 121 as the remaining retail
locations would not generate sufficient cash flows
18
to support the carrying value of the costs recorded. The remaining increase
relates to depreciation and amortization associated with capital expenditures in
fiscal 2001.
Interest and Financing Costs
Interest and financing costs increased to approximately $31.3 million in fiscal
2001 from $25.6 million in fiscal 2000, an increase of $5.7 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 $16.4 million for fiscal 2001
and $14.6 million for fiscal 2000. Fiscal 2001 interest expense includes
approximately $2.1 million in unpaid default interest on the Senior Notes
compared to $260,000 in fiscal 2000, resulting in the $1.8 million increase.
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
has not made its semi-annual interest payments, which as of December 29, 2001
total $23.8 million. There are no principal payments due until maturity, which
is March 31, 2004.
Amortization of the bondholder consent fee, which is being amortized over the
remaining life of the Senior Notes beginning July 9, 1999, totaled approximately
$460,000 in both fiscal 2001 and fiscal 2000. As a result of the Chapter 11
Cases, the Company has determined that the value of the capitalized Consent Fee
has been impaired. Accordingly, at the end of 2001, the Company wrote off
approximately $1.1 million in unamortized Consent Fees.
Interest under the Chase Facility totaled $8.2 million in fiscal 2001, a
decrease of $400,000 over the prior year, the result of decreased borrowings.
The related bank fees are being amortized over the remaining life of the Chase
Facility, and resulted in approximately $1.1 million and $650,000 of
amortization charges in fiscal 2001 and fiscal 2000, respectively. The increase
in bank fees over the prior year is the result of an $875,000 bank fee relating
to an amendment in November 2000 and a $675,000 amendment fee in June 2001. As a
result of the Chapter 11 Cases, the Company has determined that the value of the
capitalized bank fees paid in connection with the Chase Facility has been
impaired. Accordingly, at the end of 2001, the Company wrote off approximately
$2.4 million in unamortized bank fees.
The remaining increase interest and financing costs is related primarily to
factoring fees which increased from $1.1 million in fiscal 2000 to $1.5 million
for fiscal 2001, due to an increase in the fee structure under the Company's
factoring agreement.
Income Taxes
Income tax expense was $1.8 million in fiscal 2001 and $1.5 million in fiscal
2000. Fiscal 2001 tax expense includes the impact of recording a valuation
allowance on the previously recorded net deferred tax assets and recognition of
foreign taxes. Fiscal 2000 tax expense is primarily related to foreign taxes.
The difference between the Company's federal statutory tax rate of 34%, as well
as its state and local taxes, when compared to its effective tax rate is
principally comprised of a valuation allowance. The Company is in an accumulated
loss position for both financial reporting and income tax purposes. It has net
operating loss carryforwards of approximately $70.0 million as of December 29,
2001. For financial reporting purposes, the tax benefit of the Company's net
operating loss carryforward and other deferred tax assets, are offset by a
valuation allowance due to the uncertainty of the Company's ability to realize
future taxable income.
19
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. Wholesale sales 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.
Retail net sales 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 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 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.
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 stores and the 29 Anne Klein retail 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.
20
Earnings before Interest, Taxes, Depreciation, Amortization and Restructuring
Charge
Consolidated EBITDAR was $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.
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.
21
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. 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 loss before taxes. The Company has recorded income tax expense
primarily due to state and foreign taxes. The Company is in an accumulated loss
position for both financial reporting and income tax purposes. For financial
reporting purposes, the tax benefit of the Company's net operating loss
carryforward and other deferred tax assets, are offset by a valuation allowance
due to the uncertainty of the Company's ability to realize future taxable
income.
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.
Net cash provided by operating activities was $17.0 million in fiscal 2001 as
compared to cash used in operations of $11.7 million during fiscal 2000. The
improvement in cash flows from operating activities is largely the result of the
write-down and utilization of inventory. Operating cash flow improved also as a
result of the non-payment of Senior Notes interest, and the lower net accounts
receivable balance at fiscal year end as a result of higher allowance reserves,
and was partially offset by the net loss for fiscal 2001. The decrease in cash
used in investing activities resulted from greater capital expenditures in
fiscal 2000 relating to the warehouse expansion and showroom improvements. The
decrease in cash flows from financing activities is the result of the greater
cash infusion needed in the prior year in order to fund the start-up of the new
Anne Klein Brands.
Net cash used in operating activities was $11.7 million in fiscal 2000 as
compared to cash provided by operations of $31.8 million in 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.
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
22
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 29, 2001, was 1.0% above the prime rate. For fiscal 2001, the weighted
average interest rate on the Chase Facility was 7.85%. 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. As of December 29, 2001,
there were direct borrowings of $59.0 million outstanding, $21.9 million in
letters of credit outstanding and $6.6 million available for future borrowings.
On November 20, 2000 and June 19, 2001, the Company entered into amended
agreements with the lenders of the Chase Facility, which amended and waived
compliance with certain financial covenants and 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 agreements 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 anticipated performance levels. The agreement also
provided for a monthly limit on the total outstanding amount of borrowings under
the facility through 2001, reduced the maximum amount of outstanding standby
letters of credit allowed and modifies the interest rate on borrowings. In
connection with the agreements the Company paid $875,000 and $675,000,
respectively, 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 29, 2001, the Company was not in compliance with certain
financial covenants and ratios under the Chase Facility. As a result, as of
December 29, 2001, the $50.9 million outstanding under the Chase Facility has
been reclassified as a short-term liability. As a result of the Chapter 11
Cases, the Company has determined that the value of the capitalized bank fees
paid in connection with the Chase Facility has been impaired. Accordingly, at
the end of 2001, the Company wrote off approximately $2.4 million in unamortized
bank fees.
On the Filing Date, the Company obtained a $35 million debtor-in-possession
financing facility (the "DIP Credit Agreement") from its existing bank group led
by Chase. The DIP Credit Agreement also provides for a term loan for the purpose
of refinancing the pre-petition obligations outstanding under the Chase
Facility, which on the Filing Date totaled approximately $91.6 million. The DIP
Credit Agreement is intended to provide the Company with the ability to pay for
all new supplier shipments received, to invest in retail operations, and
substantially upgrade operating systems to achieve further efficiencies. On
February 26, 2002, the Bankruptcy Court entered a final order approving the DIP
Credit Agreement.
The DIP Credit Agreement provides for the maintenance of EBITDAR covenants and
places a limit on the amount of capital expenditures. It also provides for a
monthly limit on the total outstanding amount of borrowings under the facility
through 2002 and places a $1.5 million limit on outstanding standby letters of
credit allowed. In connection with the agreements the Company paid $875,000 in
facility, advisory and structuring fees. The DIP Credit Agreement also provides
for an annual administrative agency fee of $100,000 and an annual collateral
monitoring fee of $100,000, both to be paid quarterly.
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
23
September 30. Interest relating to the Senior Notes for fiscal 2001 totaled
$16.4 million, including approximately $2.1 million in default interest. There
are no principal payments due until maturity.
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. As a result of the Chapter 11 Cases, the Company
has determined that the value of the capitalized Consent Fee has been impaired.
Accordingly, at the end of 2001, the Company wrote off approximately $1.1
million in unamortized Consent Fees.
As of December 29, 2001, the Company was in default under the terms of its
Senior Notes as the result of non-payment of its September 30, 2001, March 31,
2001 and September 30, 2000 semi-annual interest payments of $7.2 million each.
The entire amount due under the Senior Notes has been reclassified as current in
the accompanying consolidated balance sheet.
It is currently contemplated that the under the Company's proposed plan of
reorganization, the Company's existing debt obligations will be satisfied and
discharged.
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 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 each six-month period
beginning December 1, 2000, there was a minimum factoring fee of $675,000. On
February 5, 2002, the Company entered into an amended agreement with CIT. The
terms of the amended agreement remained substantially the same with the
exception of the reduction of the six-month minimum factoring fee to $500,000
and the requirement of a 90-day termination notice by CIT, except upon the
occurrence of default by the Company, including a default under the DIP Credit
Facility or failure to pay any obligation under the CIT agreement, for which no
notice is needed.
Capital expenditures were $3.0 million, $6.1 million and $6.4 million for fiscal
2001, fiscal 2000 and fiscal 1999, respectively. Capital expenditures represent
spending associated with warehouse expansion, improvements to the Anne Klein
office and showroom space, continued retail store and overseas facilities
development and computer system improvements.
On March 12, 2002, the Company received a prepayment of royalties of $20.0
million from one of its licensees. The royalty prepayment is non refundable and
is to be applied to guaranteed minimum royalty payments and excess royalties due
through December 31, 2006.
The Company currently anticipates that it will be in a position to satisfy its
ongoing cash requirements, in the near term, through cash from operations,
borrowings under the DIP Credit Agreement 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
24
requirements in the near term include, but are not limited to, failure to have
its plan of reorganization approved by the Bankruptcy Court, 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 May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14
("EITF 00-14"), "Accounting for Certain Sales Incentives", effective for periods
beginning after December 15, 2001. EITF 00-14 addresses the recognition,
measurement, and income statement classification for sales incentives that a
vendor voluntarily offers to customers (without charge), which the customer can
use in, or exercise as a result of, a single exchange transaction. Sales
incentives that fall within the scope of EITF 00-14 include offers that a
customer can use to receive a reduction in the price of a product or service at
the point of sale. In accordance with the consensus reached, the Company will
adopt the required accounting beginning fiscal 2002. The Company is currently
evaluating the impact of this required accounting on the Company's Consolidated
Statements of Operations.
In June 2001, the EITF issued EITF Issue No. 00-25 ("EITF 00-25"), "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products", effective for periods beginning after December 15, 2001.
EITF 00-25 addresses whether consideration from a vendor to a reseller is (a) an
adjustment of the selling prices of the vendor's products and, therefore, should
be deducted from revenue when recognized in the vendor's statement of operations
or (b) a cost incurred by the vendor for assets or services received from the
reseller and, therefore, should be included as a cost or expense when recognized
in the vendor's statement of operations. Upon application of EITF 00-25,
financial statements for prior periods presented for comparative purposes should
be reclassified to comply with the income statement display requirements. In
accordance with the consensus reached, the Company will adopt the required
accounting beginning fiscal 2002. The Company is currently evaluating the impact
of this required accounting on the revenue and expense classifications in the
Company's Consolidated Statements of Operations.
In November 2001, the EITF reached a consensus on Issue No. 01-9 (formerly EITF
Issue 00-25), "Accounting for Consideration Given to a Reseller of the Vendor's
Products." This issue addresses the recognition, measurement and income
statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus is expected to only impact revenue and expense classifications
and not change reported net income. In accordance with the consensus reached,
the Company will adopt the required accounting beginning fiscal 2002. The
Company is currently evaluating the impact of this required accounting on the
revenue and expense classifications in the Company's Consolidated Statements of
Operations.
In July 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets." In addition to requiring the use of
the purchase method for all business combinations, SFAS No. 141 requires
intangible assets that meet certain criteria to be recognized as assets apart
from goodwill. SFAS No. 142 addresses accounting and reporting standards for
acquired goodwill and other intangible assets, and generally, requires that
goodwill and indefinite life intangible assets no longer be amortized but be
tested for impairment annually. Finite life intangible assets will continue to
be amortized over their useful lives. The Company will adopt these statements
effective for fiscal 2002. The Company estimates that approximately $6.6 million
of amortization will be eliminated in fiscal 2002 as a result of the adoption of
these statements. Further determination as to any potential impairment of
goodwill and other intangible assets as calculated under the provisions of these
new standards has not yet been determined by the Company.
25
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and is effective for fiscal years beginning
after June 15, 2002. Management does not expect the impact of SFAS No. 143 to be
material to the Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for impairment or disposal of long-lived assets. SFAS No. 144 also
extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company has adopted the provisions of SFAS No.
144 for fiscal 2002, and does not expect that such adoption will have a
significant effect on the Company's results of operations or financial position.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, are presented in the Notes to Consolidated Financial
Statements.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, accounts receivable and inventories. In applying
such policies management must use some amounts that are based upon its informed
judgments and best estimates. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the
critical accounting policies. The Company is not aware of any reasonably likely
events or circumstances, which would result in different amounts being reported
that would materially affect its financial condition or results of operations.
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. Royalty
revenues are recognized when earned based upon each respective licensing
agreement. Sales are recorded net of returns, discounts and allowances.
Allowances for estimated uncollected accounts and discounts are provided when
sales are recorded.
Accounts Receivable
Under the factoring agreement, CIT purchases accounts receivable 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. Accounts
Receivable, as shown on the Consolidated Balance Sheets, is net of allowances
and anticipated discounts. An allowance for doubtful accounts is determined
through analysis of the aging of accounts receivable at the date of the
financial statements that are not purchased by CIT, and assessments of
collectibility based on historic trends. Costs associated with allowable
customer markdowns and operational charge backs, are included as a reduction to
net sales and are part of the provision for allowances included in Accounts
Receivable. These provisions result from divisional seasonal negotiations as
well as historic deduction trends and the evaluation of current market
conditions.
26
Inventories
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons fashion
product. The Company makes certain assumptions to adjust inventory based on
historical experience and current information, including the value of current
open orders, in order to assess that inventory is recorded properly at the lower
of cost or market.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses an interest rate swap to mitigate interest rate risk. This
transaction does not qualify for hedge accounting and accordingly, changes in
fair value are reflected in current earnings. The change in fair value is shown
in the consolidated statement of operations as a component of interest expense.
The following table provides information on the interest rate swap:
Notional Maturity Weighted Average Interest Estimated Fair
Amount Date Rate Value
--------------------------------------------------------------------------------
Received (1) Paid (2)
Interest Rate Swap Agreement $25,000,000 June 30, 2002 5.45% 6.19% $ (521,000)
(1) Weighted average rate received is generally based upon three-month
LIBOR. The rate in effect at December 29, 2001 was 2.59%.
(2) The weighted average rate paid represents the rate contracted for at
the time the off-balance sheet financial instrument was entered into.
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.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The Company's directors and executive officers, as of March 22, 2002 are as
follows:
Name Age Position
---- --- --------
John D. Idol 43 Chairman of the Board and Chief Executive Officer
Martin Bloom 68 Director
H. Sean Mathis 54 Director
Salvatore M. Salibello 56 Director
Denis J. Taura 62 Director
Steven Cohn 47 Chief Restructuring Officer
Laura Lentini 38 Vice President - Controller
Richard M. Owen 45 Senior Vice President, Worldwide Manufacturing and Operations
Lee S. Sporn 42 Senior Vice President, General Counsel & Secretary
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:
John D. Idol has served as the Chairman of the Board and Chief Executive Officer
of the Company since July 2001. Prior to joining the Company, Mr. Idol was
employed by Donna Karan International Inc., a publicly traded apparel company,
from July 1997 through July 2001, most recently as Chief Executive Officer and
Director. Prior to that, Mr. Idol was employed by Polo Ralph Lauren Corporation,
a publicly traded apparel company, from 1984 through July 1997, ultimately
serving as Group President, Product Licensing and the Home Collection.
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.
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.
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
28
D. Taura & Associates, a consulting firm. Mr. Taura is Chairman of the Board and
Chief Executive Officer of Darling International, Inc.
Steven Cohn is a Managing Director of Alvarez & Marsal, Inc. ("A&M"), a
turnaround management consulting firm retained by the Company to assist in the
implementation of its restructuring plan. Mr. Cohn has been a consultant to the
Company since November 2000, and under the terms of his consulting agreement,
was made Chief Restructuring Officer of the Company in May 2001. Mr. Cohn has
been with A&M since 1998. Prior to that he was Chief Financial Officer of
Symphony Fabrics Corp.
Laura Lentini joined the Company as Corporate Controller in February 2001 and
became Vice President in June 2001. Prior to joining the Company, Ms. Lentini
served as Corporate Controller of McNaughton Apparel Group, Inc. from 1994 to
2001. Ms. Lentini worked in the audit department of KPMG Peat Marwick from 1986
to 1993. Ms. Lentini is a certified public accountant.
Richard M. Owen joined the Company in October 2001 as Senior Vice President,
Worldwide Manufacturing and Operations. Prior to joining the Company, Mr. Owen
was employed by Liz Claiborne for 14 years, where he held a variety of
positions, most recently, Vice President, Worldwide Manufacturing Operations.
Lee S. Sporn joined the Company in September 2001 as Senior Vice President,
General Counsel and Secretary. Prior to this he was employed by Polo/Ralph
Lauren from 1990 to 2001, serving, ultimately, as Vice President, Intellectual
Property and Associate General Counsel.
Committees
On June 10, 1997, the Board of Directors established an Audit Committee and a
Compensation Committee.
The Company's Audit Committee is currently composed of Messrs. Bloom, 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. Bloom, Mathis,
Salibello and Taura. 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.
In addition, on October 10, 2000, the board established a Restructuring
Committee. The Restructuring Committee is currently composed of Messrs. Mathis,
Salibello and Idol. 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
29
Company believes that its Insiders complied with all applicable Section 16(a)
filing requirements for fiscal 2001.
30
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
29, 2001, December 30, 2000 and January 1, 2000, for the all individuals serving
as Chief Executive Officer during the last completed fiscal year and all
executive officers (the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long-term
------------------- ---------
Compensation
------------
Stock Appreciation All Other
Name and Principal Rights (#) Compensation ($)
Position Year Salary Bonus ---------- ----------------
-------- ---- ------ -----
John D. Idol (1)
Chairman of the Board
and Chief Executive Officer 2001 $ 434,615 $ 343,151 340,000 $1,000,000(2)
Arthur S. Levine (3)
Chairman of the Board 2001 $1,536,923 $ -- -- --
and Chief Executive 2000 2,000,000 -- -- --
Officer 1999 2,000,000 -- -- --
Steven Cohn (4) 2001 $ -- $ -- -- --
Chief Restructuring Officer 2000 -- -- -- --
Laura Lentini (5)
Vice President - Controller 2001 $ 158,058 $ 50,000
& Treasurer -- --
Richard M. Owen (6)
Senior Vice President -
Worldwide Manufacturing 2001 $ 48,077 $ -- -- --
and Operations
Lee S. Sporn (7) 2001 $ 86,539 $ 30,000 -- --
Senior Vice President -
General Counsel &
Secretary
- -------------
(1) Mr. Idol joined the Company in July 2001. Mr. Idol's employment agreement
provides for an annual salary of $1,000,000 and a bonus in fiscal 2001 in
the amount of $750,000 prorated to reflect the number of days employed
during fiscal 2001.
(2) Represents an unsecured promissory note dated July 18, 2001. The note is
payable on July 18, 2004, together with interest thereon. Prior to February
5, 2003, the Company has the right to issue shares of its Common Stock
having a value of $1,000,000 in exchange for and in full satisfaction of
the Note.
(3) Mr. Levine's employment with the Company ended in September 2001.
(4) Mr. Cohn is a managing director of A&M. The Company engaged A&M as
restructuring consultants. Since November 2000, Mr. Cohn has devoted
substantially all of his time to the implementation of the Company's
restructuring plan. Subsequently, Mr. Cohn was made Chief Restructuring
Officer of the Company in May 2001. During 2001 and 2000, A&M was paid $2.2
million and $338,000, respectively, for its services.
(5) Ms. Lentini joined the Company in February 2001. Ms. Lentini's annual
salary is $187,000.
(6) Mr. Owen joined the Company in October 2001. Mr. Owen's annual salary is
$250,000.
(7) Mr. Sporn joined the Company in September 2001. Mr. Sporn's annual salary
is $300,000.
31
Stock Appreciation Right Grants in Last Fiscal Year
The following table sets forth information with respect to stock appreciation
rights ("SARs") granted to the Named Executive Officers of the Company during
fiscal 2001. No options were granted to the Named Executive Officers during
fiscal 2001.
Potential realizable value at assumed
Individual Grants annual rates of stock price
appreciation for SAR term
---------------------------------------------------------------------------------------------------
Number of Percent of total
securities SARs granted to
underlying SARs employees in Base price Expiration
Name granted (#) fiscal year ($/share) date 5% ($) 10% ($)
---------------------------------------------------------------------------------------------------
John D. Idol 340,000 100% $0.135 July 17, 2008 $64,586 $89,446
Under the terms of the SAR grant, the SAR is automatically cancelled upon the
Company's filing of a petition for reorganization under the Bankruptcy Code.
Accordingly, the SAR was cancelled on February 5, 2002, with no payment required
to be made.
Fiscal Year End Value Table
The following table sets forth information with respect to SAR's held as of
December 29, 2001 by the Named Executive Officers of the Company. There are no
options held by the Named Executive Officers of the Company.
----------------------------------------------------------------------------
Number of unexercised Value of unexercised in-the-
Name SARs at fiscal year end money SARs at fiscal year end
(#) ($)
----------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
John D. Idol --- 340,000 --- --- (1)
(1) The closing sales price of the common stock underlying the SARs as of
December 29, 2001 was $0.10, which is below the base price of .$0.135
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 annually 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 an employment agreement with Mr. Idol dated July
18, 2001, which provides for his employment as the Chairman of the Board of
Directors and Chief Executive Officer of the Company through July 18, 2005. The
agreement provides for a base salary of $1.0 million per annum, subject to
annual review. The agreement provides for a bonus at the annual rate of $750,000
in 2001 (prorated to reflect the number of days Mr. Idol was employed) and a
minimum bonus of $750,000 in 2002. Subject to such minimum, commencing in the
fiscal year ending 2002 the bonus is to be the sum
32
of (i) fifty percent (50%) of the then current salary rate, if the Company
achieves any pre-tax income for such fiscal year, and (ii) five percent (5%) of
pre-tax income for such fiscal year between $10 million and $20 million, and
(iii) two and one-half percent (2-1/2%) of pre-tax income for such fiscal year
in excess of $20 million (up to a maximum of $500,000), up to a bonus cap of
$1.5 million. In addition, pursuant to the agreement the Company issued to Mr.
Idol an unsecured promissory note in the principal amount of $1.0 million,
payable with interest at 9% per annum on July 18, 2004 (the "Note"). The Company
is entitled, through February 5, 2003, to issue shares of its common stock
having a value of $1.0 million in full satisfaction of the Note. The Note, or
the shares issued in exchange therefor, are non-transferable and shall be
cancelled if Mr. Idol is terminated for Cause or terminates his employment
without Good Reason (as defined in the employment agreement). As of the
effective date of a plan of reorganization with respect to the Company approved
by a bankruptcy court, the Company is obligated to grant Mr. Idol options to
purchase an aggregate of two and one-half percent (2.5%) of the outstanding
common stock of the reorganized Company on a fully diluted basis as of such
date. To the extent permitted, options with respect to .5% of the equity shall
be designated as incentive stock options, and the options with respect to the
remaining 2% shall be non-qualified stock options. Each option shall vest in
four equal installments on each of the first 4 anniversaries of the employment
agreement, provided Mr. Idol's remains employed on such dates or, if earlier,
shall fully vest on the date of his death, total disability, termination of
employment without Cause or registration for Good Reason, or on a Change of
Control (all as defined in the employment agreement). Also upon the effective
date of a plan of reorganization, the Company shall grant Mr. Idol 2.5% of the
outstanding common stock of the reorganized Company in restricted stock, which
shall vest 50% after 2 years after such grant, 75% after 3 years, and 100% after
4 years and, as an additional requirement to vesting, the closing stock price
must average at least $15 per share for 20 consecutive trading days during a
period starting one year after commencement of trading of the equity issued in
the bankruptcy. The options will be at the same price used by the bondholders in
converting their debt to equity under the plan or reorganization. In addition,
the Company has granted 340,000 stock appreciation rights (the "SAR") to Mr.
Idol. The SAR provides for a cash payment by the Company when Mr. Idol exercises
the stock option granted. Each such option has a term of seven years, subject to
earlier termination upon certain events. The SAR may be exercised to the extent
vested, which is 25% on each of the first four anniversaries of the date of
grant of the SAR, provided, that Mr. Idol is employed by the Company on such
dates. The SAR fully vests on the date of Mr. Idol's death, total disability,
termination without cause, or resignation without good reason. The payment will
be an amount equivalent to the excess of the then current market price of the
shares issued over the base value of the SAR. Any non-vested portion of the SAR
will be forfeited upon the Mr. Idol's termination for cause or resignation
without good reason. Under the terms of the SAR, the SAR is automatically
cancelled upon the Company's filing of a petition for reorganization under the
Bankruptcy Code. Accordingly, the SAR was cancelled on February 5, 2002, with no
payment required to be made.
The employment agreement with Ms. Lentini, dated March 1, 2002, provides for her
employment as Vice President, Controller, through March 1, 2005, and provides
for successive one-year renewal terms thereafter unless terminated by notice
from either party. The agreement provides for an annual base salary of $187,000,
subject to annual review, and provides for her participation in the current
bonus plan and any successor plan. In the event Ms. Lentini is terminated
without Cause (as defined in the agreement), she is entitled to a severance
payment in an amount equal to one-half of her then current annual base salary,
payable in six monthly installments.
The employment agreement with Mr. Owen, dated October 10, 2001, provides for his
employment as Senior Vice President, Worldwide Manufacturing & Operations
through October 10, 2004, and provides for successive one-year renewal terms
thereafter unless terminated by notice from either party. The agreement provides
for an annual base salary of $250,000, subject to annual review, and provides
for his participation in the current bonus plan and any successor plan. In the
event Mr. Owen is terminated without Cause (as defined in the agreement), he is
entitled to a severance payment in an amount equal to his then current annual
base salary, payable in twelve monthly installments.
33
The employment agreement with Mr. Sporn, dated September 17, 2001, provides for
his employment as Senior Vice President, General Counsel & Secretary through
September 17, 2004, and provides for successive one-year renewal terms
thereafter unless terminated by notice from either party. The agreement provides
for an annual base salary of $300,000, subject to annual review, and provides
for his participation in the current bonus plan and any successor plan. Pursuant
to the agreement, Mr. Sporn received a $30,000 bonus in 2002 and shall receive a
$60,000 bonus upon the completion of the Company's restructuring or upon a sale
or merger of the Company. In the event Mr. Sporn is terminated without Cause (as
defined in the agreement), he is entitled to a severance payment in an amount
equal to the aggregate of his then current base salary plus the amount of his
bonus, if any, during the preceding year, payable in twelve monthly
installments.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is currently composed of Messrs. Bloom, Mathis,
Salibello and Taura. 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.
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 four
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, 2002, no shares had been granted under the 1999
Plan. The 1999 Plan terminates on July 28, 2009.
34
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 29, 2002, 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 Executive 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
------------------------------------ ------------------ ------------
John D. Idol -- --
Martin Bloom 5,000 *
H. Sean Mathis -- --
Salvatore M. Salibello 20,000(1) *
Denis J. Taura 20,000(1) *
Steven Cohn -- --
Laura Lentini 5,000 *
Richard M. Owen -- --
Lee S. Sporn -- --
Whippoorwill Associates, Inc. 1,208,524(2) 17.8%
11 Martine Avenue
White Plains, NY 10606
Bay Harbour Management, L.C 1,021,277(3) 15.0%
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(5) 5.3%
660 Atlantic Avenue
Boston, MA 02210
Officers and Directors as a group (9 persons) 55,000(6) *
- -------------
* Less than one percent
(1) Includes 20,000 shares of Common Stock issuable upon exercise of currently
exercisable Director Options.
(2) Based on information contained in a Schedule 13G, filed with the Commission
on August 7, 2001. 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.
(3) Based on information contained in a Form 4, filed with the Commission on
July 10, 2000. These shares of Common Stock are also indirectly owned by
Tower Investment Group, Inc. ("Tower"), the majority stockholder of Bay
Harbour Management, L.C., Steven A. Van Dyke, a stockholder and President
of
35
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.
(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 previous status as a
non-employee Director of the Company, a position for which he was
designated by ING.
(5) Based on information contained in a Schedule 13G, filed with the Commission
on February 11, 2000.
(6) Includes 40,000 shares of Common Stock issuable upon exercise of currently
exercisable Director Options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements:
The Consolidated Financial Statements are set forth in the Index
to Consolidated 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.
3.4 (24) Second Amended and Restated By-laws
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.
37
Exhibit
Number Description
- ------- ----------------------------------------------------------------------
4.3(2) Form of Senior Note issued under the Indenture.
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(22) Consulting Agreement dated October 25, 2000, between the Company and
Alvarez and Marsal, Inc.
10.15(22) Waiver Agreement to the Amended and Restated Credit Agreement, dated
March 28, 2001
10.16(23) Consulting Agreement dated April 11, 2001, between the Company and
Alvarez and Marsal, Inc.
10.17 Revolving Credit and Guaranty Agreement, dated as of February 5,
2002, among the Company, as Borrower, the guarantors named therein,
the lenders named therein, JPMorgan Chase Bank, as administrative,
documentation and collateral agent, J.P. Morgan Securities Inc., as
book manager and lead arranger and The CIT Group/Commercial
Services, Inc., as collateral monitor (together with Security and
Pledge Agreement and Subsidiary Guaranty).
10.2(5) Employment Agreement, dated June 4, 1997 between the Company and
Arthur S. Levine.
10.21(25) Employment Agreement, dated July 18, 2001 between the Company and
John D. Idol.
38
Exhibit
Number Description
- ------- --------------------------------------------------------------------
10.22 Employment Agreement, dated March 1, 2002 between the Company and
Laura Lentini Iaffaldano.
10.23 Employment Agreement, dated October 10, 2001 between the Company and
Richard Owen.
10.24 Employment Agreement, dated August 27, 2001 between the Company and
Lee Sporn.
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.
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).
99 Letter To Commission Pursuant To Temporary Note 3t
- -------------
(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 "Company'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.
39
(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.
(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.
(22) Incorporated by reference to the Company's Report on Form 10-K filed
with the Commission on March 30, 2001.
(23) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on May 15, 2001.
40
(24) Incorporated by reference to Exhibit No. 3.1 to the Company's Report
on Form 10-Q filed with the Commission on August 14, 2001.
(25) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on November 19, 2001.
(b) Reports on Form 8-K:
None.
41
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements Page
Report of Independent Public Accountants....................................F-2
Consolidated Balance Sheets at December 29, 2001 and December 30, 2000......F-3
Consolidated Statements of Operations for the Fiscal Years Ended
December 29, 2001, December 30, 2000 and January 1, 2000............F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 29, 2001, December 30, 2000 and January 1, 2000............F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 29, 2001, December 30, 2000 and January 1, 2000............F-6
Notes to Consolidated Financial Statements..................................F-8
Schedule II - Valuation and Qualifying Accounts ............................F-25
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 29, 2001 and
December 30, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 29, 2001,
December 30, 2000 and January 1, 2000. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule 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 29,
2001 and December 30, 2000 and the results of their operations and their cash
flows for the years ended December 29, 2001, December 30, 2000 and January 1,
2000, 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 filed a petition for reorganization under
chapter 11 of the U.S. Bankruptcy Code on February 5, 2002. This raises
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon
acceptance of a plan of reorganization by the Court and the Company's creditors,
compliance with all debt covenants under the debtor-in-possession financing,
securing post-emergence financing and the success of future operations. The
ultimate outcome of these matters is not presently determinable. The
consolidated financial statements do not include any adjustments relating to
these uncertainties or the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements 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
March 22, 2002
F-2
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS December 29, December 30,
2001 2000
----------- ------------
Current Assets:
Cash and cash equivalents ........................................ $ 6,405 $ 3,847
Accounts receivable, net of allowances of $41,838 and $26,945,
respectively ................................................... 4,333 25,475
Inventories, net ................................................. 73,699 110,572
Prepaid expenses and other current assets ........................ 4,226 4,802
Deferred taxes, net .............................................. -- 5,004
--------- ---------
Total Current Assets ................................................. 88,663 149,700
--------- ---------
Property, plant and equipment, at cost less accumulated depreciation
and amortization of $16,438 and $13,422, respectively .......... 15,637 21,282
Reorganization value in excess of identifiable assets, net of
accumulated amortization of $14,937 and $11,678, respectively ... 50,245 53,503
Trademarks, net of accumulated amortization of $11,200 and
$7,932, respectively ......................................... 103,162 106,430
Other assets, at cost less accumulated amortization of $271 and
$2,086, respectively ........................................... 983 6,202
--------- ---------
Total Assets ......................................................... $ 258,690 $ 337,117
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................. $ 24,899 $ 34,609
Accrued expenses and other current liabilities ................... 17,682 11,597
Interest payable ................................................. 28,483 11,563
Taxes payable .................................................... 537 1,653
Reclassified long-term debt ...................................... 110,000 110,000
Bank revolver .................................................... 59,048 70,258
--------- ---------
Total Current Liabilities ............................................ 240,649 239,680
Long-Term Liabilities:
Deferred taxes ................................................... -- 3,352
Minority interest ................................................ -- 484
--------- ---------
Total Liabilities .................................................... 240,649 243,516
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 ................................... 120,139 119,932
Accumulated deficit .............................................. (101,490) (25,820)
Cumulative other comprehensive loss .............................. (676) (579)
--------- ---------
Total Shareholders' Equity ........................................... 18,041 93,601
--------- ---------
Total Liabilities and Shareholders' Equity ........................... $ 258,690 $ 337,117
========= =========
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 29, December 30, January 1,
2001 2000 2000
------------ ----------- -----------
Net sales ......................................... $ 368,593 $ 400,797 $ 311,209
Royalty income .................................... 15,268 14,908 7,033
Cost of sales ..................................... 299,722 295,139 219,520
----------- ----------- -----------
Gross profit ...................................... 84,139 120,566 98,722
Operating expenses:
Selling, general and administrative expenses ...... 104,007 104,961 76,152
Restructuring charge .............................. 9,201 2,344 --
Depreciation and amortization ..................... 13,550 11,345 9,276
----------- ----------- -----------
Total operating expenses .......................... 126,758 118,650 85,428
----------- ----------- -----------
Operating (loss) income ........................... (42,619) 1,916 13,294
Interest and financing costs ...................... 31,301 25,576 20,494
----------- ----------- -----------
Loss before income taxes .......................... (73,920) (23,660) (7,200)
Income tax provision (benefit) .................... 1,750 1,528 (2,426)
----------- ----------- -----------
Net loss .......................................... $ (75,670) $ (25,188) $ (4,774)
=========== =========== ===========
Basic and diluted loss per common share ........... $ (11.13) $ (3.70) $ (0.70)
=========== =========== ===========
Weighted average number of shares used in computing
basic and diluted loss 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 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 loss -- -- (351) (25,188) (25,539)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 30, 2000 $ 68 $ 119,932 $ (579) $ (25,820) $ 93,601
========= ========= ========= ========= =========
Stock award -- 207 -- -- 207
Translation adjustment -- -- (97) -- (97)
Net loss for the period -- -- -- (75,670) (75,670)
--------- --------- --------- --------- ---------
Comprehensive income (loss) -- 207 (97) (75,670) (75,560)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 29, 2001 $ 68 $ 120,139 $ (676) $(101,490) $ 18,041
========= ========= ========= ========= =========
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 29, December 30, January 1,
2001 2000 2000
---------------- ---------------- ----------------
Cash Flows from Operating Activities:
Net Loss ............................................. $(75,670) $(25,188) $ (4,774)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 10,680 9,052 6,815
Amortization of reorganization value in excess of
identifiable assets ............................. 3,258 3,258 3,258
(Loss) income applicable to minority interest ..... -- (35) 60
Write-down of net book value of property, plant
and equipment ................................... 2,872 -- --
Write-off of unamortized financing fees ........... 3,544 -- 740
Interest rate swap ................................ 521 -- --
Deferred taxes .................................... 1,652 361 (700)
Decrease (increase) in:
Accounts receivable, net .......................... 21,142 732 6,514
Inventories ....................................... 36,873 (15,504) 7,332
Prepaid expenses and other current assets ......... 576 1,073 (2,650)
Other assets ...................................... (641) (1,250) (1,289)
(Decrease) increase in:
Accounts payable, accrued expenses and other
current liabilities ............................. (3,625) 7,234 16,290
Interest payable .................................. 16,920 7,531 235
Taxes payable ..................................... (1,116) 1,059 (52)
-------- -------- --------
Total adjustments .................................... 92,656 13,511 36,553
-------- -------- --------
Net cash provided by (used in) operating activities .. 16,986 (11,677) 31,779
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures, net of proceeds from sales
of fixed assets ................................. (2,995) (6,025) (5,425)
Minority interest purchase ........................ (126) -- --
FSA acquisition ................................... -- -- (2,488)
Trademark purchase ................................ -- -- (66,956)
-------- -------- --------
Net cash used in investing activities ................ (3,121) (6,025) (74,869)
-------- -------- --------
Cash Flows from Financing Activities:
Net (pay down) borrowings under Bank Revolver ..... (11,210) 16,814 45,875
-------- -------- --------
Net cash (used in) provided by financing activities .. (11,210) 16,814 45,875
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents ....................................... (97) (351) (136)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . 2,558 (1,239) 2,649
Cash and cash equivalents, at beginning of period .... 3,847 5,086 2,437
-------- -------- --------
Cash and cash equivalents, at end of period .......... $ 6,405 $ 3,847 $ 5,086
======== ======== ========
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 29, December 30, January 1,
2001 2000 2000
---------------------------------------
Supplemental Schedule of Cash Flow Information
Cash paid during the year for
Interest $ 9,652 $ 10,240 $ 18,790
Income taxes 1,198 1,046 1,138
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) in accordance with accounting
principles generally accepted in the United States applicable to a going
concern, which principles assume that assets will be realized and liabilities
will be discharged in the normal course of business. The Company's fiscal year
ends on the Saturday closest to December 31st. The fiscal years ended December
29, 2001 ("2001"), December 30, 2000 ("2000") and January 1, 2000 ("1999"), 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 Kasper Canada ULC and Anne Klein ULC, which together
own 100% of Kasper Partnership G.P., a Canadian Partnership (70% and 30%,
respectively) through which the Company conducts sales and distribution activity
in Canada. Prior to October 2001, Kasper Canada ULC was a 70% owner of Kasper
Partnership G.P. In October 2001 Anne Klein ULC purchased the remaining 30% from
the minority owner for approximately $920,000, which represented its
proportionate share of the subsidiary's income included in the Company's
financial statements, at the time, under minority interest of approximately
$800,000 and an additional $120,000 in goodwill.
NOTE 2. REORGANIZATION CASE:
Subsequent to the end of the Company's fiscal year, on February 5, 2002 (the
"Filing Date"), the Company and certain of its domestic subsidiaries
(collectively, the "Debtors"), filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") (Case Nos. 02-B10497, 02-B10500, and 02-B10502 through 10505
(ALG)) (the "Chapter 11 Cases"). Pursuant to an order of the Bankruptcy Court,
the Chapter 11 Cases were consolidated for procedural purposes only and are
being jointly administered by the Bankruptcy Court. International operations
were not included in the filings. The Company will continue to operate in the
ordinary course of business as debtor-in-possession under the jurisdiction of
the Bankruptcy Court and has filed a preliminary plan of reorganization, based
on negotiations with an ad hoc committee of its noteholders (the "Ad Hoc
Committee") under the Company's $110.0 million Senior Notes due 2004 (the
"Senior Notes").
On the Filing Date, the Debtors requested a series of orders from the Court
designed to minimize any disruption of business operations and to facilitate
their reorganization. Such orders authorized the Debtors to, among other things,
satisfy certain pre-Filing Date obligations that were outstanding, including
wages and benefits that were due to employees, as well as obligations to certain
vendors and suppliers that provided goods or services critical to the Debtors'
operations. With respect to such critical goods and services that are governed
by executory contracts between the Debtors and their suppliers, the Debtors
filed, on the Filing Date, and shortly thereafter were granted motions for
authorization to assume such executory contracts and make any necessary cure
payments. Such relief, particularly as it related to the Debtors' executory
contracts, was critical to the Debtors' continued operations and their
successful reorganization. The Debtors also requested and were granted certain
orders from the Court permitting them to continue, on an uninterrupted basis,
their centralized cash management system and procedures, as well as certain
customer service programs that were in effect prior to the commencement of the
Debtors' reorganization cases, such as agreements entitling their customers to
discounts and allowances.
F-8
Pursuant to the Bankruptcy Code, prepetition obligations of the Debtors,
including obligations under debt instruments, generally may not be enforced
against the Debtors, and any actions to collect prepetition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy Court. The
rights of and ultimate payments by the Company under prepetition obligations may
be substantially altered. This could result in claims being liquidated in the
Chapter 11 Cases at less (and possibly substantially less) than 100% of their
face value. Any damages resulting from rejection of executory contracts and
unexpired leases will be treated as general unsecured claims in the Chapter 11
Cases unless such claims had been secured on a prepetition basis prior to the
Filing Date. The Debtors are in the process of reviewing their executory
contracts and unexpired leases to determine which, if any, they will reject. As
of December 29, 2001, the Company has made the decision to exit approximately 25
of the Company's retail store leases and certain office and showroom space. Of
the 25 retail stores, 24 have been closed as of March 29, 2002. In fiscal 2001,
the Company has taken a charge of $2.7 million for lease cancellation costs.
Although this amount has been reserved for in accordance with Bankruptcy Court
guidelines, any such amounts due will be treated as general unsecured claims in
the Chapter 11 Cases and, accordingly, the Company's ultimate liability for
these amounts cannot yet be ascertained. The amount of the claims to be filed by
the creditors could be significantly different than the amount of the
liabilities recorded by the Company.
As of the Filing Date, the significant indebtedness of the Debtors consisted of
the following: (a) approximately $92.0 million in principal amount of
indebtedness under the Chase Facility, plus accrued and unpaid interest thereon,
(b) approximately $138.0 million in amount of Senior Notes, including
approximately $28.0 million of accrued and unpaid interest thereon, (c)
approximately $300,000 in certain equipment financing arrangements, and (d)
approximately $18.0 million in outstanding accounts payable, accrued expenses
and other prepetition general unsecured claims.
Prior to the Filing Date, the Ad Hoc Committee was organized, consisting of or
authorized to speak on behalf of entities, which in the aggregate, represent
approximately eighty percent of the Company's Senior Notes. The Ad Hoc Committee
and its professional advisors have had extensive discussions and negotiations
with management of the Debtors over a period of more than a year. On February
19, 2002, the United States Trustee appointed an Official Committee of Unsecured
Creditors (the "Official Committee") consisting of several members of the Ad Hoc
Committee, the indenture trustee and one certain general unsecured creditor. The
Official Committee has the right to review and object to certain business
transactions and is expected to participate in the final formulation of the plan
of reorganization.
On the Filing Date, the Company obtained a $35 million debtor-in-possession
financing facility (the "DIP Credit Agreement") from its existing bank group led
by JPMorgan Chase Bank ("Chase"). The DIP Credit Agreement also provides for a
term loan for the purpose of refinancing the pre-petition obligations
outstanding under the Chase Facility (as defined in Note 8), which on the Filing
Date totaled approximately $92.0 million. The DIP Credit Agreement is intended
to assure that the Company has the ability to pay for all new supplier shipments
received, to invest in retail operations, and substantially upgrade operating
systems to achieve further efficiencies. On February 26, 2002, the Bankruptcy
Court entered a final order approving the DIP Credit Agreement.
The Company's ability to continue as a going concern is dependent upon the
acceptance of a plan of reorganization by the Bankruptcy Court and the Company's
creditors, securing, compliance with all debt covenants under the DIP Credit
Agreement, the ability to generate sufficient cash flows from operations,
securing post-emergence financing and the success of future operations. There
can be no assurance that the Company will be successful in resolving these
uncertainties. As a result, the independent auditors have qualified their
opinion relative to the uncertainty of the Company to continue as a going
concern. The financial information contained herein 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.
F-9
NOTE 3. DEFAULTS ON DEBT:
As of December 29, 2001, the Company was in default under the terms of its
Senior Notes as the result of non-payment of its September 30, 2001, March 31,
2001 and September 30, 2000 semi-annual interest payments of $7.2 million each.
The entire amount due under the Senior Notes has been reclassified as a current
liability in the accompanying consolidated balance sheet.
As of December 29, 2001, the Company was not in compliance with certain
financial covenants and ratios under the Chase Facility (as defined in Note 8).
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 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Business -
The Company is principally engaged in the design, manufacturing 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. For 2000, 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. The Company's debt has been reflected
at its book value, which does not reflect the fair value of the liability that
may result from the Company's plan of reorganization if and when it is approved
by the Bankruptcy Court.
(d) Use of Estimates -
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to use judgment and
make estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The level of uncertainty in estimates and assumptions
increases with the length of time until the underlying transactions are
completed. As such, the most significant uncertainty in the Company's
assumptions and estimates involved in preparing the financial statements include
allowances for customer deductions, lease cancellation costs and legal and tax
contingency reserves. Actual results could ultimately differ from those
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", continually evaluates, 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-10
(f) Trademarks -
Trademarks are being amortized using the straight-line method over 35 years. The
Company, under the requirements of SFAS No. 121, continually evaluates, 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. Accounts
receivable, as shown on the consolidated balance sheets, is net of allowances
and anticipated discounts. An allowance for doubtful accounts is determined
through analysis of the aging of accounts receivable at the date of the
financial statements that are not purchased by CIT, and assessments of
collectibility based on historic trends. Costs associated with allowable
customer markdowns and operational charge backs, are included as a reduction to
net sales and are part of the provision for allowances included in Accounts
Receivable. These provisions result from divisional seasonal negotiations as
well as historic deduction trends and the evaluation of current market
conditions
(i) Inventories -
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market. The Company continually evaluates the composition of its
inventories assessing slow-turning, ongoing product as well as prior seasons
fashion product. The Company makes certain assumptions to adjust inventory based
on historical experience and current information, including the value of current
open orders, in order to assess that inventory is recorded properly at the lower
of cost or market.
(j) Property, Plant and Equipment -
Buildings, fixtures, equipment, software 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. Leasehold improvements are amortized
over the shorter of the useful life or the life of the lease.
(k) Derivative Instruments -
The Company has adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet, measured at fair value. If certain
conditions are met, whereby the derivative instrument has been designated as a
fair value hedge, the derivative instrument and the hedged item are marked to
fair value through earnings. If the derivative is designated and qualifies as a
cash flow hedge, the effective portion of the change in fair value of the
derivative instrument is recorded in comprehensive income and reclassified into
earnings in the period during which the hedged item affects earnings. Accounting
for qualifying hedges requires that a company must formally document, designate
and assess the effectiveness of the transactions that receive hedge accounting.
For derivatives not accounted for as hedges, fair value adjustments are recorded
to earnings. Reference is made to Note 8 for a discussion of the Company's
derivative instrument and transactions.
F-11
(l) Revenue Recognition -
Sales are recognized upon shipment of products to wholesale customers and, in
the case of sales by Company owned retail stores, when goods are sold to retail
customers. Royalty revenues are recognized when earned based upon each
respective licensing agreement. Allowances for estimated uncollected accounts
and discounts are provided when sales are recorded.
(m) 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.
(n) 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 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.
(o) 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 (loss) 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 2001, 2000 and 1999, options outstanding during the period using the
treasury stock method were excluded from the net loss per share computation of
diluted earnings per share, as they were antidilutive.
(p) 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.
(q) Reclassification -
Certain amounts reflected in 2000 and 1999 financial statements have been
reclassified to conform to the presentation of similar items in 2001.
(r) New Accounting Standards -
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14
("EITF 00-14"), "Accounting for Certain Sales Incentives", effective for periods
beginning after December 15, 2001. EITF 00-14 addresses the recognition,
measurement, and income statement classification for sales incentives that a
vendor voluntarily offers to customers (without charge), which the customer can
use in, or exercise as a result of, a single exchange transaction. Sales
incentives that fall within the scope of EITF 00-14 include offers that a
customer can use to receive a reduction in the price of a product or service at
the point of sale. In accordance with the consensus reached, the Company will
adopt the required accounting beginning
F-12
fiscal 2002. The Company is currently evaluating the impact of this required
accounting on the Company's Consolidated Statements of Operations.
In June 2001, the EITF issued EITF Issue No. 00-25 ("EITF 00-25"), "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products", effective for periods beginning after December 15, 2001.
EITF 00-25 addresses whether consideration from a vendor to a reseller is (a) an
adjustment of the selling prices of the vendor's products and, therefore, should
be deducted from revenue when recognized in the vendor's statement of operations
or (b) a cost incurred by the vendor for assets or services received from the
reseller and, therefore, should be included as a cost or expense when recognized
in the vendor's statement of operations. Upon application of EITF 00-25,
financial statements for prior periods presented for comparative purposes should
be reclassified to comply with the income statement display requirements. In
accordance with the consensus reached, the Company will adopt the required
accounting beginning fiscal 2002. The Company is currently evaluating the impact
of this required accounting on the revenue and expense classifications in the
Company's Consolidated Statements of Operations.
In November 2001, the EITF reached a consensus on Issue No. 01-9 (formerly EITF
Issue 00-25), "Accounting for Consideration Given to a Reseller of the Vendor's
Products." This issue addresses the recognition, measurement and income
statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus is expected to only impact revenue and expense classifications
and not change reported net income. In accordance with the consensus reached,
the Company will adopt the required accounting beginning with fiscal 2002. The
Company is currently evaluating the impact of this required accounting on the
revenue and expense classifications in the Company's Consolidated Statements of
Operations.
In July 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets." In addition to requiring the use of
the purchase method for all business combinations, SFAS No. 141 requires
intangible assets that meet certain criteria to be recognized as assets apart
from goodwill. SFAS No. 142 addresses accounting and reporting standards for
acquired goodwill and other intangible assets, and generally, requires that
goodwill and indefinite life intangible assets no longer be amortized but be
tested for impairment annually. Finite life intangible assets will continue to
be amortized over their useful lives. The Company will adopt these statements
effective fiscal 2002. The Company estimates that approximately $6.6 million of
amortization will be eliminated in fiscal 2002 as a result of the adoption of
these statements. Further determination as to any potential impairment of
goodwill and other intangible assets as calculated under the provisions of these
new standards has not yet been determined by the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and is effective for fiscal years beginning
after June 15, 2002. Management does not expect the impact of SFAS No. 143 to be
material to the Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for impairment or disposal of long-lived assets. SFAS No. 144 also
extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company has adopted the provisions of SFAS No.
144 for fiscal year 2002, and does not expect that such adoption will have a
significant effect on the Company's results of operations or financial position.
NOTE 5. 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
F-13
trademarks and logos, along with the related licensing agreements. The aggregate
purchase price for these assets was $67.9 million and was funded by cash
provided by operations and by the Company's credit facility. The trademarks
acquired are being amortized over 35 years. Trademark amortization is included
in depreciation and amortization in the accompanying financial statements.
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 stores
of Fashions of Seventh Avenue, Inc. and Affiliates ("FSA"), (the "FSA
Acquisition"). The aggregate purchase price was $4.0 million, which included a
cash payment of $300,000 and assumed liabilities of $3.7 million. 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. In connection with the Chapter 11 Cases, the
Company, in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets" (SFAS No. 121"), has determined that the value of the
goodwill recognized in connection with the FSA Acquisition has been impaired.
Accordingly, at the end of 2001, the Company wrote off approximately $480,000 in
unamortized goodwill. This expense has been included in depreciation and
amortization in the accompanying consolidated statement of operations.
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 2, 1999. 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 2, 1999, or which may result in the future.
Fiscal Year Ended
January 1, 2000
(unaudited)
-------------------
(in thousands, except per share data)
Net sales $ 357,051
Royalty income 11,512
Net loss (10,070)
Basic and diluted loss per common share (1.48)
NOTE 6. INVENTORIES:
Inventories consist of the following:
December 29, December 30,
2001 2000
------------ ------------
(in thousands)
Raw materials $ 10,090 $ 39,318
Finished goods 63,609 71,254
-------- --------
Total inventories $ 73,699 $110,572
======== ========
In connection with the Company's restructuring efforts and management's focus on
improving operational efficiency and cash flow, management has reassessed the
value of its inventories. As a result, the Company has accelerated its plans to
liquidate on-hand inventory, including both finished goods and raw material.
During the third and fourth quarters of 2001, the Company recorded inventory
write-downs aggregating approximately $17.7 million, to reflect at net
realizable value, the merchandise that the Company expects to sell off-price in
the case of finished goods, along with the acceleration of the expected
liquidation of raw materials.
F-14
NOTE 7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 29, December 30, Estimated
2001 2000 Useful Lives
------------ ------------ -------------
(in thousands)
Machinery, equipment and fixtures $ 18,683 $ 18,721 5-10 years
Leasehold improvements 12,124 15,622 Life of lease
Construction in progress 1,268 361 N/A
-------- --------
Property, plant and equipment, at cost 32,075 34,704
Less: Accumulated depreciation and
amortization (16,438) (13,422)
-------- --------
Total property, plant and equipment, net $ 15,637 $ 21,282
======== ========
Property, plant and equipment is net of approximately $2.9 million in asset
write-downs as a result of the decision to exit approximately 25 of the
Company's retail store leases and certain office and showroom space.
NOTE 8. 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 Chase (the "Chase Facility") in order to fund the Company's
working capital requirements and to finance the Trademark Purchase. The Chase
Facility provides the Company with a secured revolving credit and letter of
credit facility of up to $160 million. The Chase Facility is secured by
substantially all the assets of the Company. Interest on outstanding borrowing
is determined based on stated margins above the prime rate at Chase, which on
December 29, 2001, was one percent (1.0%) above the prime rate. For 2001, the
weighted average interest rate on the Chase Facility was 7.85%. The Chase
Facility, as amended, 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 29, 2001, the standby letter of credit fee was three and
one-quarter percent (3.25%). The Chase Facility, as amended, has a standby
letter of credit sub-limit of $15 million. At December 29, 2001, there were
direct borrowings of approximately $59.0 million outstanding under the Chase
Facility and approximately $21.9 million outstanding in letters of credit. The
Company had approximately $6.6 million available for future borrowings as of
December 29, 2001. Total interest expense under the Chase Facility for 2001,
2000 and 1999 was $8.2 million, $8.6 million and $3.7 million, respectively.
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 $2.4 million 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. 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.
F-15
On November 20, 2000 and June 19, 2001, the Company entered into amended
agreements with the lenders of the Chase Facility, which amended and waived
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 agreements 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 anticipated performance levels. The agreement also
provided for a monthly limit on the total outstanding amount of borrowings under
the facility through 2001, reduced the maximum amount of outstanding standby
letters of credit allowed and modified the interest rate on borrowings. In
connection with the agreements the Company paid $875,000 and $675,000,
respectively, 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 29, 2001, the Company was not in compliance with certain
financial covenants and ratios under the Chase Facility. As a result of the
Chapter 11 Cases, the Company has determined that the value of the capitalized
bank fees paid in connection with the Chase Facility has been impaired.
Accordingly, at the end of 2001, the Company wrote off approximately $2.4
million in unamortized bank fees. This expense has been included in interest and
financing costs in the accompanying consolidated statement of operations.
Post-Petition Financing -
On the Filing Date, the Company obtained a $35 million debtor-in-possession
financing facility (the "DIP Credit Agreement") from its existing bank group led
by Chase. The DIP Credit Agreement also provides for a term loan for the purpose
of refinancing the pre-petition obligations outstanding under the Chase
Facility, which on the Filing Date totaled approximately $91.6 million. The DIP
Credit Agreement is intended to provide the Company with the ability to pay for
all new supplier shipments received, to invest in retail operations, and
substantially upgrade operating systems to achieve further efficiencies. On
February 26, 2002, the Bankruptcy Court entered a final order approving the DIP
Credit Agreement.
The DIP Credit Agreement provides for the maintenance of certain covenants and
places a limit on the amount of capital expenditures. It also provides for a
monthly limit on the total outstanding amount of borrowings under the facility
through 2002 and places a $1.5 million limit on outstanding standby letters of
credit allowed. In connection with the agreements the Company paid $875,000 in
facility, advisory and structuring fees. The DIP Credit Agreement also provides
for an annual administrative agency of $100,000 and an annual collateral
monitoring fee of $100,000, both to be paid quarterly.
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. There are no principal payments due until maturity. Interest relating to the
Senior Notes for 2001 totaled $16.4 million, which includes approximately $2.1
million in unpaid default interest on the Senior Notes.
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. As a result of the Chapter 11 Cases, the Company
has determined that the value of the capitalized Consent Fee has been impaired.
Accordingly, at the end of 2001, the Company wrote off approximately $1.1
million in
F-16
unamortized Consent Fees. This expense has been included in interest and
financing costs in the accompanying consolidated statement of operations.
As of December 29, 2001, the Company was in default under the terms of its
Senior Notes as the result of non-payment of its September 30, 2001, March 31,
2001 and September 30, 2000 semi-annual interest payments of $7.2 million each.
The entire amount due under the Senior Notes has been reclassified as current in
the accompanying consolidated balance sheet.
Interest Rate Swap -
The Company uses an interest rate swap to mitigate interest rate risk. This
transaction does not qualify for hedge accounting and accordingly, changes in
fair value are reflected in current earnings. The change in fair value is shown
in the consolidated statement of operations as a component of interest expense.
The following table provides information on the interest rate swap:
Notional Maturity Weighted Average Interest Estimated Fair
Amount Date Rate Value
----------------------------------------------------------------------------------
Received (1) Paid (2)
Interest Rate Swap Agreement $25,000,000 June 30, 2002 5.45% 6.19% $ (521,000)
(1) Weighted average rate received is generally based upon three-month
LIBOR. The rate in effect at December 29, 2001 is 2.59%.
(2) The weighted average rate paid represents the rate contracted for at
the time the off-balance sheet financial instrument was entered into.
NOTE 9. RESTRUCTURING
The Company continues to carry out its restructuring plan established in the
fourth quarter of 2000. For 2001 and 2000, the Company recognized $9.2 million
and $2.3 million, respectively, in restructuring charges. These amounts relate
to professional fees, estimated lease contract termination costs, asset
write-downs and severance costs.
Estimated occupancy
Professional costs, severance and
fees asset write-downs Total
------------------------------------------------------
2000 restructuring charge $ 1,244 $ 1,100 $ 2,344
2000 payments/write-downs (1,244) (1,100) (2,344)
------- ------- -------
Balance at December 30, 2000 -- -- --
2001 restructuring charge 4,297 4,904 9,201
2001 payments/write-downs (4,196) -- (4,196)
------- ------- -------
Balance at December 29, 2001 $ 101 $ 4,904 $ 5,005
------- ------- -------
NOTE 10. INCOME TAXES:
The Company is in an accumulated loss position for both financial reporting and
income tax purposes. It has net operating loss carryforwards of approximately
$70.0 million as of December 29, 2001. For financial reporting purposes, the tax
benefit of the Company's net operating loss carryforward and other deferred tax
assets, are offset by a valuation allowance due to the uncertainty of the
Company's ability to realize future taxable income.
F-17
For December 29, 2001, December 30, 2000 and January 1, 2000, the provision
(benefit) for consisted of:
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
Current:
Federal $ (602) $ 6 $(2,481)
State (197) 121 359
Foreign 897 1,401 396
------- ------- -------
Total Current: $ 98 $ 1,528 $(1,726)
------- ------- -------
Deferred:
Federal 1,652 -- (242)
State -- -- (458)
------- ------- -------
Income tax provision (benefit) $ 1,750 $ 1,528 $(2,426)
======= ======= =======
Deferred tax liabilities (assets) are comprised of the following:
December 29, December 30,
2001 2000
------------ ------------
(in thousands)
Deferred tax assets
Accounts receivable reserve $(14,191) $ (4,466)
Inventory, net (4,280) (2,542)
Net operating loss (23,814) (7,528)
Other accruals (4,458) (1,001)
-------- --------
Total deferred tax assets (46,743) (15,537)
-------- --------
Deferred tax liabilities
Amortization 5,499 4,857
Other -- --
-------- --------
Total deferred tax liabilities 5,499 4,857
-------- --------
Valuation allowance 41,244 9,028
======== ========
Net deferred tax assets $ -- $ (1,652)
======== ========
For the fiscal year ended December 29, 2001, 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 29, 2001, December 30, 2000 and January 1, 2000,
is as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 29, 2001 December 30, 2000 January 1, 2000
----------------- ----------------- ---------------
(in thousands, except percentages)
Income tax provision (benefit) $ 1,750 $ 1,528 $ (2,426)
--------- --------- ---------
Loss before taxes $ (73,920) $ (23,660) $ (7,200)
--------- --------- ---------
Federal statutory rate (34.0)% (34.0)% (34.0)%
Valuation allowance 34.0 34.0 --
Net state tax (0.3) 0.5 1.7
Other 2.7 5.9 (1.4)
--------- --------- ---------
Effective tax rate 2.4% 6.4% (33.7)%
========= ========= =========
F-18
NOTE 11. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings -
As discussed in Note 2, on February 5, 2002, the Company and several of its
subsidiaries filed voluntary petitions in the Bankruptcy Court under Chapter 11
of the Bankruptcy Code. All civil litigation commenced against the Debtors prior
to that date has been stayed under the Bankruptcy Code; however, litigants may
seek to obtain relief from the Bankruptcy Court to pursue their pre-petition
claims.
In addition to the proceedings in the Bankruptcy Court, the Company is involved
in the following legal proceedings of significance:
On January 11, 2002, counsel for Arthur S. Levine sent a letter to the Company
alleging that the Company is obligated, under the terms of Mr. Levine's
employment contract as Chairman and Chief Executive Officer of the Company, to
pay approximately $1.2 million in severance and related costs. The Company
anticipates that Mr. Levine will assert a claim for such amount in the
Bankruptcy proceedings.
The Company is party to an arbitration proceeding in which Locals 99, 89-22-1
and 10 of UNITE, the union representing the Needle Trades, Industrial and
Textile Employees (the "Union") has asserted approximately $700,000 in claims
against the Company seeking recovery of severance pay to employees represented
by the Union who have been and will be "permanently laid off" as a result of a
reduction in work force and implementation of alleged "changes" in the way
garments are processed in the warehouse.
Based on a review of the current facts, management has provided for what is
believed to be a reasonable estimate of its exposure to loss associated with
these matters. These amounts are included in selling, general and administrative
expenses in the accompanying statements of operations.
Employment Agreements -
The Company has entered into an employment agreement with a key officer dated
July 18, 2001, which provides for his employment through July 18, 2005. The
agreement provides for a base salary of $1.0 million per annum, subject to
annual review. The agreement provides for a bonus at the annual rate of $750,000
in 2001 (prorated to reflect the number of days the officer was employed) and a
minimum bonus of $750,000 in 2002. Subject to such minimum, commencing in the
fiscal year ending 2002 the bonus is to be the sum of (i) fifty percent (50%) of
the then current salary rate, if the Company achieves any pre-tax income for
such fiscal year, and (ii) five percent (5%) of pre-tax income for such fiscal
year between $10 million and $20 million, and (iii) two and one-half percent
(2-1/2%) of pre-tax income for such fiscal year in excess of $20 million (up to
a maximum of $500,000), up to a bonus cap of $1.5 million. In addition, pursuant
to the agreement the Company issued the officer an unsecured promissory note in
the principal amount of $1.0 million, payable with interest at 9% per annum on
July 18, 2004 (the "Note"). The Company is entitled, through February 5, 2003,
to issue shares of its common stock having a value of $1.0 million in full
satisfaction of the Note. The Note, or the shares issued in exchange therefor,
are non-transferable and shall be cancelled if the officer is terminated for
Cause or terminates his employment without Good Reason (as defined in the
employment agreement). The Note has been recorded as capital in excess of par
and is being recorded ratably over three years from the date of the Note. As of
the effective date of a plan of reorganization with respect to the Company
approved by a bankruptcy court, the Company is obligated to grant the officer
options to purchase an aggregate of two and one-half percent (2.5%) of the
outstanding common stock of the reorganized Company on a fully diluted basis as
of such date. To the extent permitted, options with respect to .5% of the equity
shall be designated as incentive stock options, and the options with respect to
the remaining 2% shall be non-qualified stock options. Each option shall vest in
four equal installments on each of the first 4 anniversaries of the employment
agreement, provided the officer remains employed on such dates or, if earlier,
shall fully vest on the date of his death, total disability, termination of
employment without Cause or registration for Good Reason, or on a Change of
Control (all as defined in the employment agreement). Also upon the effective
date of a plan of reorganization, the Company shall grant the officer 2.5% of
the outstanding common stock of the
F-19
reorganized Company in restricted stock, which shall vest 50% after 2 years
after such grant, 75% after 3 years, and 100% after 4 years and, as an
additional requirement to vesting, the closing stock price must average at least
$15 per share for 20 consecutive trading days during a period starting one year
after commencement of trading of the equity issued in the bankruptcy. The
options will be at the same price used by the bondholders in converting their
debt to equity under the plan or reorganization. In addition, the Company has
granted 340,000 stock appreciation rights (the "SAR") to this officer. The SAR
provides for a cash payment by the Company when the officer exercises the stock
option granted. Each such option has a term of seven years, subject to earlier
termination upon certain events. The SAR may be exercised to the extent vested,
which is 25% on each of the first four anniversaries of the date of grant of the
SAR, provided, that the officer is employed by the Company on such dates. The
SAR fully vests on the date of the officer's death, total disability,
termination without cause, or resignation without good reason. The payment will
be an amount equivalent to the excess of the then current market price of the
shares issued over the base value of the SAR. Any non-vested portion of the SAR
will be forfeited upon the officer's termination for cause or resignation
without good reason. Under the terms of the SAR, the SAR is automatically
cancelled upon the Company's filing of a petition for reorganization under the
Bankruptcy Code. Accordingly, the SAR was cancelled on February 5, 2002, with no
payment required to be made.
The Company has entered into employment agreements with certain executive
officers (including that described above), which provide for minimum annual
compensation of approximately $1.7 million through December 2002 and
approximately $3.9 million through 2005. The agreements also provide for bonus
payments upon the attainment of certain targets as provided in the applicable
agreements.
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 29, 2001
are summarized as follows:
Equipment
Fiscal Year Ended Real Estate & Other
---------------------------------------- ---------------- -----------------
(in thousands)
2002 $11,518 $165
2003 10,626 85
2004 9,383 78
2005 8,089 6
2006 5,890 --
Thereafter 15,376 --
--------------- ----------------
Total minimum lease payments $60,882 $334
================ =================
Base rent expense for the fiscal years ended December 29, 2001, December 30,
2000 and January 1, 2000, amounted to approximately $15.2 million, $11.9 million
and $8.0 million, respectively.
As discussed in Note 9, the Company recorded a restructuring charge in 2001,
which included approximately $2.7 million for cost associated with exiting
leased properties. As a result of the Chapter 11 filing on February 5, 2002,
management calculated this reserve amount using the parameters prescribed by the
Bankruptcy Court guidelines with respect to lease rejections.
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
F-20
factors surrounding the credit risk of specific customers, historical trends and
other information. For the years ended December 29, 2001, December 30, 2000 and
January 1, 2000, sales to three customers accounted for approximately 21%, 16%
and 17%, 21%, 16% and 15% and 23%, 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 91 retail stores
(prior to the 24 store closings completed in the first quarter of 2002)
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 29, 2001
Wholesale Retail Licensing Consolidated
---------- --------- -------------------------
(in thousands)
Revenues $ 296,492 $ 72,101 $ 15,268 $ 383,861
EBITDAR (35,392) 1,188 14,336 (19,868)
Restructuring charge 9,201
Depreciation and amortization 13,550
---------
Operating loss $ (42,619)
Total Assets $ 143,211 $ 12,317 $ 103,162 $ 258,690
Capital Expenditures 2,138 858 -- 2,996
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
Restructuring charge 2,344
Depreciation and amortization 11,345
---------
Operating income $ 1,916
Total Assets $ 210,902 $ 19,785 $ 106,430 $ 337,117
Capital Expenditures 4,220 1,855 -- 6,075
F-21
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
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 six
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 29, 2001, December
30, 2000 and January 1, 2000 were approximately $206,000, $400,000 and $308,000,
respectively. The Company did not make discretionary matching contributions
during the first quarter of 2001, accounting for the decrease from prior year.
Multi-Employer Benefit Plan
Certain union employees of the Company participate in a union sponsored,
collectively bargained multi-employer pension plan. This plan is not
administered by the Company and contributions are determined in accordance with
provisions of negotiated labor contracts. The Company has no present intention
of withdrawing from this plan, nor has the Company been informed that there is
any intention to terminate such plan. The Company funded approximately $2.2
million, $2.5 million and $2.0 million to the plan in 2001, 2000 and 1999,
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 42,767
expired on October 30, 2001.
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
then, 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.
F-22
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 29, 2001 December 30, 2000 January 1, 2000
----------------- ----------------- ----------------
(in thousands except per share amounts)
Net Loss: As Reported $ (75,670) $ (25,188) (4,774)
Pro Forma (75,722) (25,347) (8,116)
Basic and diluted EPS: As Reported (11.13) (3.70) (.70)
Pro Forma (11.14) (3.73) (1.19)
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 29, 2001, December 30, 2000 and January 1,
2000 and changes during the years then ended are presented in the table and
narrative below:
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 29, 2001 December 30, 2000 January 1, 2000
---------------------------- ------------------------ --------------------------
Shares Weighted Shares Weighted Shares Weighted
(000) Average (000) Average (000) Average
Exercise Price Exercise Price Exercise Price
------- --------------- ------ -------------- -------- --------------
Outstanding beginning of year 182 $ 14 182 $ 14 1,893 $ 14
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Cancelled -- -- -- -- 1,711 14
Expired 42 14 -- -- -- --
---- ----- ---- ----- ----- -----
Outstanding end of year 140 $ 14 182 $ 14 182 $ 14
---- ----- ---- ----- ----- -----
Exercisable end of year 140 $ 14 169 $ 14 117 $ 14
Weighted average of fair
value of options granted $7.23 $6.79 $6.79
All of the options outstanding at December 29, 2001 have an exercise price of
$14 and a weighted average remaining contractual life of 0.5 years. All 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 2001, 2000 and 1999, 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% for all years for both the
Management Plan and the Director Plan; and expected dividend yield of 0% and
expected lives of 5 years for both plans.
F-23
NOTE 15. UNAUDITED QUARTERLY RESULTS:
Unaudited quarterly financial information for 2001 and 2000 is set forth as
follows:
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
- -------------------------- ------------- -------------- ------------- -------------
(in thousands except per share data)
Net sales $ 122,681 $ 75,514 $102,928 $67,470
Gross profit 36,812 22,606 13,033 11,688
Net loss (717) (13,881) (25,322) (35,750)
Net loss per share (0.11) (2.04) (3.72) (5.26)
First Second Quarter Third Quarter Fourth Quarter
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)
The Company incurred a significantly larger net loss in the third and fourth
quarters of 2001 than in 2000 as it continued its restructuring plan. The
Company experienced a significant decrease in gross profit as a result of (i)
lower sales volume; (ii) a higher level of promotional allowances especially in
light of the weak retail environment; and (iii) a substantial write-down of raw
material inventories in conjunction with a planned strategic change in the
garment procurement process. The Company also had higher restructuring and
interest costs from multiple bank amendments, professional fees and the
write-off of deferred financing costs.
F-24
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 29, 2001:
Allowance for doubtful accounts $ (192) $ (123) $ 23 $ (292)
Allowance for customer deductions (23,560) (112,301) 97,064 (38,797)
Restructuring charge -- (9,201) 4,196 (5,005)
Taxation valuation allowance (9,028) (32,216)(1) -- (41,244)
Fiscal Year Ended December 30, 2000:
Allowance for doubtful accounts $ (201) $ (112) $ 121 $ (192)
Allowance for customer deductions (16,007) (82,508) 74,955 (23,560)
Restructuring charge -- (2,344) 2,334 --
Taxation valuation allowance -- (9,028) -- (9,028)
Fiscal Year Ended January 1, 2000:
Allowance for doubtful accounts $ (184) $ (221) $ 204 $ (201)
Allowance for customer deductions (11,808) (53,771) 49,572 (16,007)
(1) The increase in the tax valuation allowance for fiscal 2001 includes the
impact of reserving for additional deferred tax assets generated in fiscal
2001. The net cost included in income tax provision expense is approximately
$1.6 million for fiscal 2001.
F-25
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/ John D. Idol
------------------------
John D. Idol
Chairman of the Board and
Chief Executive Officer
Dated: April 15, 2002
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/ John D. Idol
- -------------------------
John D. Idol Chairman of the Board and April 15, 2002
Chief Executive Officer
(Principal Executive Officer)
/s/ Laura Lentini
- -------------------------
Laura Lentini Vice President - Controller April 15, 2002
(Principal Financial and
Accounting Officer)
/s/ Martin Bloom
- -------------------------
Martin Bloom Director April 15, 2002
/s/ H. Sean Mathis
- -------------------------
H. Sean Mathis Director April 15, 2002
F-26
/s/ Salvatore M. Salibello
- --------------------------
Salvatore M. Salibello Director April 15, 2002
/s/ Denis J. Taura
- ---------------------------
Denis J. Taura Director April 15, 2002
F-27
EXHIBIT INDEX
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.
3.4 (24) Second Amended and Restated By-laws
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.
Exhibit
Number Description
- ------- ----------------------------------------------------------------------
4.3(2) Form of Senior Note issued under the Indenture.
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(22) Consulting Agreement dated October 25, 2000, between the Company and
Alvarez and Marsal, Inc.
10.15(22) Waiver Agreement to the Amended and Restated Credit Agreement, dated
March 28, 2001
10.16(23) Consulting Agreement dated April 11, 2001, between the Company and
Alvarez and Marsal, Inc.
10.17 Revolving Credit and Guaranty Agreement, dated as of February 5,
2002, among the Company, as Borrower, the guarantors named therein,
the lenders named therein, JPMorgan Chase Bank, as administrative,
documentation and collateral agent, J.P. Morgan Securities Inc., as
book manager and lead arranger and The CIT Group/Commercial
Services, Inc., as collateral monitor (together with Security and
Pledge Agreement and Subsidiary Guaranty).
10.2(5) Employment Agreement, dated June 4, 1997 between the Company and
Arthur S. Levine.
10.21(25) Employment Agreement, dated July 18, 2001 between the Company and
John D. Idol.
Exhibit
Number Description
- ------- --------------------------------------------------------------------
10.22 Employment Agreement, dated March 1, 2002 between the Company and
Laura Lentini Iaffaldano.
10.23 Employment Agreement, dated October 10, 2001 between the Company and
Richard Owen.
10.24 Employment Agreement, dated August 27, 2001 between the Company and
Lee Sporn.
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.
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).
99 Letter To Commission Pursuant To Temporary Note 3t
- -------------
(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 "Company'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.
(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.
(22) Incorporated by reference to the Company's Report on Form 10-K filed
with the Commission on March 30, 2001.
(23) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on May 15, 2001.
(24) Incorporated by reference to Exhibit No. 3.1 to the Company's Report
on Form 10-Q filed with the Commission on August 14, 2001.
(25) Incorporated by reference to Exhibit No. 10.1 to the Company's Report
on Form 10-Q filed with the Commission on November 19, 2001.
(b) Reports on Form 8-K:
None.