UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number: 0-24179
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KASPER A.S.L., LTD.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-3497645
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(State of Incorporation) (IRS Employer Identification No)
77 METRO WAY, SECAUCUS, NEW JERSEY 07094
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(Address and zip code of principal executive office)
(201) 864-0328
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(Registrant's telephone number, including area code)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of November 11, 2002 was 6,800,000.
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 28, 2002, December 29, 2001
and September 29, 2001.............................................................................. 1
Condensed Consolidated Statements of Operations for the Thirteen weeks and Thirty-Nine weeks
ended September 28, 2002 and September 29, 2001..................................................... 2
Condensed Consolidated Statements of Cash Flows for the Thirty-Nine weeks ended
September 28, 2002 and September 29, 2001 .......................................................... 3
Notes to Condensed Consolidated Financial Statements ............................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 10
Item 3. Controls and Procedures............................................................................ 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................................ 21
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
-------------------- ------------------- --------------------
ASSETS SEPTEMBER 28, 2002 DECEMBER 29, 2001 SEPTEMBER 29, 2001
-------------------- ------------------- --------------------
Current Assets:
Cash and cash equivalents.................................... $ 4,237 $ 6,405 $ 2,304
Restricted cash.............................................. -- -- 1,000
Accounts receivable, net of reserves of $37,941, $41,838
and $38,785, respectively.................................... 33,155 4,333 45,466
Inventories, net............................................. 36,973 73,699 69,824
Prepaid expenses and other current assets.................... 7,423 4,226 5,781
Deferred taxes............................................... -- -- 5,004
-------------------- ------------------- --------------------
Total Current Assets............................................... 81,788 88,663 129,379
-------------------- ------------------- --------------------
Property, plant and equipment, at cost less accumulated
depreciation and amortization of $19,548, $16,438 and
$16,894, respectively........................................ 19,731 15,637 18,803
Reorganization value in excess of identifiable assets, net of
accumulated amortization..................................... 50,245 50,245 51,059
Trademarks, net of accumulated amortization........................ 103,162 103,162 103,979
Other assets, at cost less accumulated amortization................ 1,039 983 5,541
-------------------- ------------------- --------------------
Total Assets...................................................... $255,965 $258,690 $308,761
==================== =================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Not Subject to Compromise:
Accounts payable............................................. $17,962 $24,899 $20,028
Accrued expenses and other current liabilities............... 31,736 18,219 16,843
Interest payable............................................. 189 28,483 24,471
Deferred royalty income...................................... 5,000 -- --
Reclassified long-term debt.................................. -- 110,000 110,000
Bank revolver................................................ -- 59,048 79,659
-------------------- ------------------- --------------------
Total Current Liabilities.......................................... 54,887 240,649 251,001
Long-Term Liabilities Not Subject to Compromise:
Deferred royalty income...................................... 11,733 -- --
Other long-term liabilities.................................. -- -- 4,156
-------------------- ------------------- --------------------
Total Liabilities Not Subject to Compromise........................ 66,620 240,649 255,157
Liabilities Subject to Compromise.................................. 149,171 -- --
-------------------- ------------------- --------------------
Total Liabilities.................................................. 215,791 240,649 255,157
Commitments and Contingencies
Shareholders' Equity:
Common Stock, 6,800,000 shares issued and outstanding........ 68 68 68
Preferred Stock, none issued and outstanding................. -- -- --
Capital in excess of par value............................... 120,455 120,139 119,932
Accumulated deficit.......................................... (79,879) (101,490) (65,738)
Cumulative other comprehensive loss.......................... (470) (676) (658)
-------------------- ------------------- --------------------
Total Shareholders' Equity......................................... 40,174 18,041 53,604
-------------------- ------------------- --------------------
Total Liabilities and Shareholders' Equity......................... $255,965 $258,690 $308,761
==================== =================== ====================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
1
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------------------------- --------------------------------------------
SEPTEMBER 28, 2002 SEPTEMBER 29, 2001 SEPTEMBER 28, 2002 SEPTEMBER 29, 2001
-------------------- -------------------- ------------------- --------------------
Net sales.............................. $ 97,786 $ 102,928 $ 279,174 $ 301,124
Royalty income......................... 4,533 4,059 12,260 10,800
-------------------- -------------------- ------------------- --------------------
Total revenue.......................... 102,319 106,987 291,434 311,924
Cost of sales.......................... 58,817 93,291 172,354 237,473
-------------------- -------------------- ------------------- --------------------
Gross profit........................... 43,502 13,696 119,080 74,451
Operating expenses (income):
Selling, general and administrative
expenses.............................. 23,475 28,056 71,261 79,993
Depreciation and amortization.......... 1,120 2,983 3,178 8,840
Special charges (credits).............. 11 585 (1,923) 3,082
-------------------- -------------------- ------------------- --------------------
Total operating expenses............... 24,606 31,624 72,516 91,915
-------------------- -------------------- ------------------- --------------------
Operating income (loss)................ 18,896 (17,928) 46,564 (17,464)
Interest and financing costs........... 1,043 7,135 6,164 21,473
-------------------- -------------------- ------------------- --------------------
Income (loss) before reorganization
costs and provision for income taxes.. 17,853 (25,063) 40,400 (38,937)
Reorganization costs................... 667 -- 3,134 --
-------------------- -------------------- ------------------- --------------------
Income (loss) before provision for
income taxes.......................... 17,186 (25,063) 37,266 (38,937)
Provision for income taxes............. 7,215 259 15,655 981
-------------------- -------------------- ------------------- --------------------
Net income (loss)...................... $ 9,971 $ (25,322) $ 21,611 $ (39,918)
==================== ==================== =================== ====================
Basic and diluted earnings (loss)
per common share...................... $ 1.47 $(3.72) $3.18 $(5.87)
==================== ==================== =================== ====================
Weighted average number of shares
used in computing basic and diluted
earnings (loss) per common share...... 6,800,000 6,800,000 6,800,000 6,800,000
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
2
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THIRTY-NINE WEEKS
ENDED
------------------------------------------------
SEPTEMBER 28, 2002 SEPTEMBER 29, 2001
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 21,611 $ (39,918)
---------------------- ----------------------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 3,121 7,276
Amortization of reorganization value in excess of identifiable
assets............................................................... -- 2,444
Income applicable to minority interest.................................... -- 320
Non-cash restructuring costs.............................................. (1,308) --
(Increase) decrease in:
Accounts receivable, net.................................................. (28,822) (19,991)
Inventories, net.......................................................... 36,726 40,748
Prepaid expenses and other assets......................................... (3,197) (2,059)
Income taxes receivable................................................... -- 387
Increase (decrease) in:
Accounts payable, accrued expenses and other current liabilities.......... 16,654 (10,677)
Interest payable.......................................................... 794 12,749
Deferred royalty income................................................... 16,733 --
Other long term liabilities............................................... -- (311)
---------------------- ----------------------
Total adjustments............................................................ 40,701 30,886
---------------------- ----------------------
Net cash provided by (used in) operating activities.......................... 62,312 (9,032)
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures net of proceeds from sales of fixed assets........... (5,744) (992)
Interest rate swap ....................................................... 516 159
---------------------- ----------------------
Net cash (used in) investing activities................................... (5,228) (833)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under bank revolver........................... (59,048) 9,401
---------------------- ----------------------
Net cash (used in) provided by financing activities....................... (59,048) 9,401
Effect of exchange rate changes on restricted and unrestricted cash and cash
equivalents.................................................................. (204) (79)
---------------------- ----------------------
Net decrease in restricted and unrestricted
cash and cash equivalents.................................................... (2,168) (543)
Restricted and unrestricted cash and cash
equivalents, at beginning of period.......................................... 6,405 3,847
---------------------- ----------------------
Restricted and unrestricted cash and cash
equivalents, at end of period................................................ $ 4,237 $ 3,304
====================== ======================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
3
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited condensed consolidated financial statements of Kasper
A.S.L., Ltd. and its wholly-owned subsidiaries (the "Company") have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all normal and recurring adjustments
and accruals considered necessary for a fair presentation of the Company's
financial position at September 28, 2002 and the results of operations for the
thirteen and thirty-nine weeks ended September 28, 2002 and September 29, 2001
and cash flows for the thirty-nine weeks ended September 28, 2002 and September
29, 2001 have been included. These statements should be read in conjunction with
the audited consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Operating results for the thirteen and thirty-nine weeks ended
September 28, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 28, 2002.
The consolidated financial statements include the accounts of Kasper A.S.L.,
Ltd. and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Certain amounts reflected in 2001 have been reclassified to conform to the
presentation of similar items in 2002.
NOTE 2. REORGANIZATION CASE
On February 5, 2002 (the "Filing Date"), the Company and substantially all 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. The Company's international subsidiaries 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.
The accompanying condensed consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy
Court, its ability to comply with the DIP Credit Agreement (as defined below),
its ability to generate sufficient cash flows from operations, securing
post-emergence financing and the success of future operations. These conditions
create substantial doubt regarding the ability of the Company to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of these uncertainties.
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Additionally, the amounts reported
on the condensed consolidated balance sheet could materially change because of
changes in business strategies and the effects of a plan of reorganization. In
the Chapter 11 Cases, substantially all unsecured liabilities as of the Filing
4
Date are subject to compromise or other treatment under a plan of reorganization
which must be confirmed by the Bankruptcy Court after submission to any required
vote by affected parties. For financial reporting purposes, those liabilities
and obligations whose treatment and satisfaction is dependent on the outcome of
the Chapter 11 Cases, have been segregated and classified as liabilities subject
to compromise in the accompanying condensed consolidated balance sheets.
Generally, all actions to enforce or otherwise effect repayment of pre-Chapter
11 liabilities as well as all pending litigation against the Debtors are stayed
while the Debtors continue their business operations as debtors-in-possession.
The ultimate amount of and settlement terms for such liabilities are subject to
approval of a plan of reorganization and accordingly are not presently
determinable. The principal categories of obligations classified as liabilities
subject to compromise under the Chapter 11 Cases as of September 28, 2002 are
identified below:
SEPTEMBER 28,
2002
----
(in thousands)
13.0% Senior Notes due 2004 $ 110,000
Interest accrued on above Senior Notes 29,096
Accounts payable 4,240
Other accrued expenses 5,835
---------
Total liabilities subject to compromise $ 149,171
=========
For the thirty-nine weeks ended September 28, 2002, the Company recognized $3.1
million in reorganization charges. These amounts relate primarily to
professional fees and bank fees. Interest expense, including default interest,
under the Senior Notes would have amounted to $13.6 million for the thirty-nine
weeks ended September 28, 2002 had it not have been for the Chapter 11 Cases.
At the commencement of the Chapter 11 Cases, the Company filed a preliminary
plan of reorganization. The United States Trustee thereafter appointed the
Official Committee of Unsecured Creditors (the "Creditors' Committee"), and
based on negotiations with the Creditors' Committee, the Company filed a First
Amended and Restated Joint Plan of Reorganization (the "Plan") and First Amended
and Restated Disclosure Statement (the "Disclosure Statement") on November 6,
2002. In essence, the Plan provides for (i) payment in full of federal, state,
and local tax claims and other administrative and priority claims; (ii) payment
in full or refinancing of the DIP Credit Agreement; (iii) reinstatement or
payment in full of, or surrender of collateral securing, allowed miscellaneous
secured claims and capitalized lease obligations; (iv) distributions of shares
of stock in the reorganized Company to the holders of allowed general unsecured
claims and the holders of the Company's Senior Notes due 2004; (v) a
distribution of cash in the amount of 70% of allowed convenience claims; and
(vi) distributions of warrants to purchase shares of stock in the reorganized
Company to the holders of shares of stock in the Company on the record date
established in the Chapter 11 Cases.
A restructuring of the Company's debt, under the Plan, can be expected to result
in the cancellation of indebtedness ("COD"), which if it occurs in the course of
a proceeding pursuant to Chapter 11 of the United States Bankruptcy Code, would
be nontaxable. Because the COD is not taxable, the Company will be required to
reduce its net operating loss carry forwards and other tax attributes such as
the tax basis in its assets by an amount equal to the COD. As a result, and in
contemplation of the successful completion of the Plan, it is unlikely that the
Company will have any remaining U.S. net operating loss carryovers to offset
future taxable earnings after the reorganization.
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 the former Chairman and Chief Executive Officer of the
Company, to pay severance and related costs. Mr. Levine asserted claims in the
Chapter 11 Cases totaling approximately $1.3 million. On November 4, 2002, the
Company entered into a settlement agreement with Mr. Levine under which, inter
alia, it would pay Mr. Levine $199,999 and Mr. Levine would withdraw all claims
in the Chapter 11 Cases, which settlement agreement is subject to the approval
of the Bankruptcy Court.
5
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives and requires that these assets be
reviewed for impairment upon adoption with completion of testing within one year
of adoption and at least annually thereafter. The Company, as required, adopted
SFAS No. 142 beginning December 30, 2001. Application of the non amortization
provisions of SFAS No. 142 will result in a reduction of amortization expense of
approximately $7.3 million in 2002. Such amortization expense totaled $7.3
million in 2001. The Company is testing goodwill, trademarks and intangibles for
impairment using the two-step process prescribed in SFAS No. 142. The first step
is a screen for potential impairment, while the second step measures the amount
of impairment. The Company completed the first step of the initial required
impairment tests of goodwill, trademarks and intangibles and determined that
certain reporting units with aggregate goodwill, trademarks and intangibles of
approximately $153.4 million must undergo the second step of the impairment
testing process which will result in an impairment of these intangibles. The
Company expects to complete the second step by December 28, 2002 and the
impairment charge will be reflected as the cumulative effect of a change in
accounting principle. As the Company has not yet completed the testing, it has
not yet determined what the effect of these tests will be on its earnings and
financial position. The Company expects the charge for the impairment to be
approximately $40.0 to $50.0 million. In addition to the transitional test
discussed above, the Company will be required to complete its annual goodwill
impairment test before the end of the fiscal year and there can be no assurance
that this will not lead to impairment charges in excess of any that might be
required in connection with the transitional testing.
NOTE 4. INVENTORIES, NET
Inventories, net of reserves, are valued at lower of cost (first-in, first-out)
or market and consist of the following:
SEPTEMBER 28, 2002 DECEMBER 29, 2001 SEPTEMBER 29, 2001
------------------ ----------------- ------------------
(in thousands)
Raw materials $5,365 $10,090 $19,360
Finished goods 31,608 63,609 50,464
------- -------- -------
Total inventories $36,973 $73,699 $69,824
======= ======== =======
NOTE 5. INCOME (LOSS) PER SHARE
The computation of basic and diluted income (loss) per common share is based
upon the weighted average number of common shares outstanding during the period.
The gains and losses resulting from changes in exchange rates from year to year
have been reported in other comprehensive income.
NOTE 6. DEBT
POST-PETITION FINANCING -
On the Filing Date, the Company obtained a $35 million 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. On July 12, 2002 the DIP Credit Agreement
was amended to convert the term loan to a revolving credit agreement. The DIP
Credit Agreement is intended to provide the Company with the ability to pay for
all new supplier shipments received, to invest in department store boutiques 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 expires February 5, 2003.
The DIP Credit Agreement provides for the maintenance of certain covenants and
places a limit on the amount of capital expenditures the Company may incur. It
also provides for a monthly limit on the total outstanding amount of borrowings
under the facility through February 5, 2003 and places a $1.5 million limit on
6
the issuance of new standby letters of credit. In connection with the agreement,
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. As of September 28, 2002, the Company was in compliance with the
covenants under the DIP Credit Agreement.
At September 28, 2002, there were no direct borrowings and $36.0 million
outstanding in letters of credit under the DIP Credit Agreement. In addition to
cash and cash equivalents on hand of $4.2 million, the Company had approximately
$54.6 million available for future borrowings as of September 28, 2002.
On October 23, 2002 the Company entered into a Joint Proposal Letter (the
"Proposal Letter") with Citicorp USA, Inc., Foothill Capital Corporation and
GMAC Commercial Finance LLC (the "Lenders") which sets forth a proposal under
which the Lenders would establish a senior secured revolving credit facility of
up to $100,000,000 (the "Citicorp Facility") which would initially be used by
the Company to: (i) refinance any amounts outstanding under the DIP Credit
Agreement and (ii) provide financing for working capital, letters of credit,
capital expenditures and other general corporate purposes during the
continuation of Chapter 11 Cases. At such time as the Chapter 11 Cases are
concluded, the Citicorp Facility would convert from a debtor-in-possession
facility into an exit facility. The Proposal Letter does not constitute a
commitment by the Lenders, and the delivery of a commitment to provide the
Citicorp Facility is subject to, among other things, (i) satisfactory completion
of due diligence, (ii) final credit approval by the Lenders and (iii) the
absence of any material adverse condition in loan syndication or financial or
capital market conditions generally. On November 8, 2002, the Bankruptcy Court
approved, and the Company paid, agreed upon work fees to the Lenders so as to
permit the completion of due diligence.
NOTE 7. INCOME TAXES
The Company is currently undergoing an examination by the Internal Revenue
Service ("IRS") for the tax years ended 1997, 1998, 1999, and 2000. The IRS has
issued a proposed adjustment, which would result in additional income taxes in
prior years resulting in a reduction in net operating loss carry forwards, which
were $70.0 million at December 29, 2001, the write-down of certain tax assets
and the payment of interest. The proposed adjustment would disallow deductions
amounting to approximately $26.7 million in the 1997 through 2000 fiscal years.
The Company is vigorously contesting the proposed adjustment and therefore no
provision has been made for such adjustment.
In July 2002, New Jersey restructured the Corporation Business Tax, which will
adversely impact the tax provision of companies who transact business in New
Jersey. The Company has reflected the impact in the third quarter 2002 tax
provision. The incremental tax provision relating to New Jersey state income
taxes is approximately $300,000 in third quarter 2002 and $825,000 in YTD 2002.
NOTE 8. CHANGE IN ESTIMATE
During the second quarter of 2002, the Company determined that, due to improved
sell-through in its wholesale segment, certain allowance reserves amounting to
$9.7 million as of December 29, 2001 were no longer required. As a result of
this change in estimate, the Company reversed this reserve which benefited gross
margin for the second quarter and first half 2002. The Company also determined
that, due to weak sell-through in its dress and certain sportswear businesses,
certain additional allowance reserves amounting to $10.0 million were required
in its wholesale segment as of June 29, 2002 and recorded such reserves to the
detriment of gross margin for the second quarter and first half of 2002.
During the second quarter of 2002, the Company determined that, due primarily to
improved margins of its wholesale off-price sales, certain inventory reserves
amounting to $2.0 million as of December 29, 2001 were no longer required. As a
result of this change in estimate, the Company reversed this reserve, which
benefited gross margin for the second quarter and first half of 2002.
During the first half of 2002, the Company utilized in its production process
certain raw materials that, as part of the Company's normal valuation process,
had been reserved as of December 29, 2001. As a result of the utilization of the
previously reserved raw materials, the Company recognized this change in
estimate as a benefit to gross margin of $1.3 million in the second quarter of
2002 and $1.7 million in the first half of 2002.
7
NOTE 9. 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, as of September 28, 2002, the Company
operated 58 Kasper retail stores, 10 Anne Klein retail stores and one Anne Klein
New York full price store, as another distribution channel for its products. The
Company's licensing operations are also considered a segment for reporting
purposes. For the purposes of decision-making and assessing performance,
management includes its international operations in its wholesale segment, as
they are deemed immaterial for segment reporting.
The Company measures segment profit as earnings before interest, taxes,
depreciation, amortization and reorganization ("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:
THIRTEEN WEEKS ENDED SEPT. 28, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 83,941 $ 13,845 $ 4,533 $ 102,319
EBITDAR 13,831 2,366 3,830 20,027
Depreciation and amortization 1,120
Special charge 11
-----------------
Operating income $ 18,896
=================
THIRTEEN WEEKS ENDED SEPT. 29, 2001:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 85,141 $ 17,787 $ 4,059 $ 106,987
EBITDAR (17,931) (336) 3,907 (14,360)
Depreciation and amortization 2,983
Special charge 585
-----------------
Operating loss $ (17,928)
=================
THIRTY-NINE WEEKS ENDED SEPT. 28, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 235,458 $ 43,716 $ 12,260 $ 291,434
EBITDAR 33,001 4,988 9,830 47,819
Depreciation and amortization 3,178
Special credit (1,923)
-----------------
Operating income $ 46,564
=================
THIRTY-NINE WEEKS ENDED SEPT. 29, 2001:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 248,163 $ 52,961 $ 10,800 $ 311,924
EBITDAR (14,963) (728) 10,149 (5,542)
Depreciation and amortization 8,840
Special charge 3,082
-----------------
Operating loss $ (17,464)
=================
8
NOTE 10. SPECIAL CHARGES
The Company continues to carry out its restructuring plans established in the
fourth quarter of 2000 with certain modifications. During the fourth quarter of
2001, the Company recorded a charge of $4.9 million for lease cancellation costs
and asset write downs in connection with the decision to exit certain retail
store leases and certain office space in fiscal 2002. During the second quarter
of 2002 the Company reevaluated its decision to exit certain office space and as
a result, recognized a special credit of $2.5 million. Additionally, the Company
incurred special charges of $603,000 in the first thirty-nine weeks of 2002
relating to professional fees.
Estimated occupancy
costs, severance and
Professional Fees asset write-downs Total
-------------------- ------------------------- -----------------------
(in thousands)
Balance at December 30, 2000 $ --- $ --- $ ---
2001 special charge 4,297 4,904 9,201
2001 payments/write-downs (4,196) (1,802) (5,998)
----------- ----------- ----------
Balance at December 29, 2001 $ 101 $ 3,102 $ 3,203
----------- ----------- ----------
2002 special charge (credit) 603 (2,526) (1,923)
2002 (payments) reversals (704) 994 290
----------- ----------- ----------
Balance at September 28, 2002 $ -- $ 1,570 $ 1,570
=========== =========== ==========
NOTE 11. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 144
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" and provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. Adoption of SFAS No. 144 on December 30, 2001 did not
have an impact on the Company's consolidated financial statements.
NOTE 12. NEW ACCOUNTING PRONOUCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sales-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. SFAF No. 145 is effective for financial statements issued after May
15, 2002. The Company adopted the provisions of SFAS No. 145 upon its effective
date and does not expect this standard to have a material effect on the results
of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which changes the accounting for costs such
as lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity initiated after December 31, 2002. The standard
requires companies to recognize the fair value of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The Company does not expect the adoption
of this standard to have a material effect on the results of operations.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
foregoing condensed consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations in the Company's Annual Report on Form 10-K for the year ended
December 29, 2001. 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 at the end of this Item.
OVERVIEW
On February 5, 2002, the Company and substantially all 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.
The Company's condensed consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy
Court, its ability to comply with the DIP Credit Agreement, its ability to
generate sufficient cash flows from operations and obtain post-emergence
financing. These conditions create substantial doubt regarding the ability of
the Company to continue as a going concern. The Company's condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Additionally, the amounts reported
on the condensed consolidated balance sheet could materially change because of
changes in business strategies and the effects of a plan of reorganization. In
the Chapter 11 Cases, substantially all unsecured liabilities as of the Filing
Date are subject to compromise or other treatment under a plan of reorganization
which must be confirmed by the Bankruptcy Court after submission to any required
vote by affected parties. For financial reporting purposes, those liabilities
and obligations whose treatment and satisfaction is dependent on the outcome of
the Chapter 11 Cases have been segregated and classified as liabilities subject
to compromise in the Company's condensed consolidated balance sheets. Generally,
all actions to enforce or otherwise effect repayment of pre-Chapter 11
liabilities as well as all pending litigation against the Debtors are stayed
while the Debtors continue their business operations as debtors-in-possession.
The ultimate amount of and settlement terms for such liabilities are subject to
approval of a plan of reorganization and accordingly are not presently
determinable. Pursuant to SOP 90-7, professional fees associated with the
Chapter 11 Cases are expensed as incurred and reported as reorganization
charges.
At the commencement of the Chapter 11 Cases, the Company filed a preliminary
plan of reorganization. The United States Trustee thereafter appointed the
Official Committee of Unsecured Creditors (the "Creditors' Committee"), and
based on negotiations with the Creditors' Committee, the Company filed a First
Amended and Restated Joint Plan of Reorganization (the "Plan") and First Amended
and Restated Disclosure Statement (the "Disclosure Statement") on November 6,
2002. In essence, the Plan provides for (i) payment in full of federal, state,
and local tax claims and other administrative and priority claims; (ii) payment
in full or refinancing of the DIP Credit Agreement; (iii) reinstatement or
payment in full of, or surrender of collateral securing, allowed miscellaneous
secured claims and capitalized lease obligations; (iv) distributions of shares
of stock in the reorganized Company to the holders of allowed general unsecured
claims and the holders of the Company's Senior Notes due 2004; (v) a
distribution of cash in the amount of 70% of allowed convenience claims; and
(vi) distributions of warrants to purchase shared of stock in the reorganized
Company to the holders of shares of stock in the Company on the record date
established in the Chapter 11 Cases.
10
A restructuring of the Company's debt under the Plan can be expected to result
in the cancellation of indebtedness ("COD"), which if it occurs in the course of
a proceeding pursuant to Chapter 11 of the United States Bankruptcy Code, would
be nontaxable. Because the COD is not taxable, the Company will be required to
reduce its net operating loss carry forwards and other tax attributes such as
the tax basis in its assets by an amount equal to the COD. As a result, and in
contemplation of the successful completion of the Plan, it is unlikely that the
Company will have any remaining U.S. net operating loss carryovers to offset
future taxable earnings after the reorganization.
The Company has recorded reorganization value in excess of identifiable assets
(goodwill), net of $50.2 million and trademarks, net of $103.2 million. The
Company adopted SFAS No. 142 beginning December 30, 2001. As described in Note 3
to Notes to Condensed Consolidated Financial Statements, the Company has
determined that the impairment testing process will likely result in an
impairment of these intangibles. The likely impairment charge will be reflected
as the cumulative effect of a change in accounting principle. The Company also
expects to emerge from Chapter 11 Bankruptcy protection at which time it will
expect to apply "fresh start" accounting. Under fresh start accounting rules,
assets and liabilities, including reorganization value and goodwill, will be
recorded at fair market value. Accordingly, there can be no assurance that this
will not lead to additional adjustments to the Company's recorded intangible
assets.
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 the former Chairman and Chief Executive Officer of the
Company, to pay severance and related costs. Mr. Levine asserted claims in the
Chapter 11 Cases totaling approximately $1.3 million. On November 4, 2002, the
Company entered into a settlement agreement with Mr. Levine under which, inter
alia, it would pay Mr. Levine $199,999 and Mr. Levine would withdraw all claims
in the Chapter 11 Cases, which settlement agreement is subject to the approval
of the Bankruptcy Court.
RESULTS OF OPERATIONS
REVENUES BY SEGMENT
(000'S EXCEPT PERCENTAGES)
THIRD QUARTER YEAR TO DATE
------------------------------------------------------ -------------------------------------------------------
% % % %
2002 OF TOTAL 2001 OF TOTAL 2002 OF TOTAL 2001 OF TOTAL
-------------- --------------- --------------- --------------
Wholesale $83,941 82.0% $ 85,141 79.6% $235,458 80.8% $248,163 79.5%
Retail 13,845 13.5% 17,787 16.6% 43,716 15.0% 52,961 17.0%
-------------- --------------- --------------- --------------
Net Sales 97,786 95.5% 102,928 96.2% 279,174 95.8% 301,124 96.5%
Licensing 4,533 4.5% 4,059 3.8% 12,260 4.2% 10,800 3.5%
-------------- --------------- --------------- --------------
Total Revenue $102,319 100.0% $ 106,987 100.0% $291,434 100.0% $311,924 100.0%
============== =============== =============== ==============
EBITDAR BY SEGMENT
(000'S EXCEPT PERCENTAGES)
THIRD QUARTER YEAR TO DATE
------------------------------------------------------- -------------------------------------------------------
% % % %
2002 OF TOTAL 2001 OF TOTAL 2002 OF TOTAL 2001 OF TOTAL
-------------- --------------- --------------- --------------
Wholesale $13,831 69.1% $ (17,931) (124.9%) $33,001 69.0% $ (14,963) (270.0%)
Retail 2,366 11.8% (336) (2.3%) 4,988 10.4% (728) (13.1%)
Licensing 3,830 19.1% 3,907 27.2% 9,830 20.6% 10,149 183.1%
-------------- --------------- --------------- --------------
Total $20,027 100.0% $ (14,360) 100.0% $47,819 100.0% $ (5,542) 100.0%
============== =============== =============== ==============
11
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 AS COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001
TOTAL REVENUE
Net Sales for the thirteen weeks ended September 28, 2002 (the "third quarter
2002") were $97.8 million as compared to $102.9 for the thirteen weeks ended
September 29, 2001 (the "third quarter 2001"). Wholesale sales decreased
primarily due to planned reductions in certain of the business lines.
Retail sales decreased to $13.8 million in the third quarter 2002 from $17.8
million in the third quarter 2001, primarily due to the net closing of 24 retail
stores over the last 12 months as part of the Company's restructuring plans.
Comparable store sales decreased 6.2% in the third quarter 2002 compared to the
third quarter 2001 as a result of continued weakness in the retail environment.
Royalty revenue increased to $4.5 million in third quarter 2002 compared to $4.0
million in the third quarter 2001 as a result of higher royalty percentages.
GROSS PROFIT
Gross Profit as a percentage of total revenue increased to 42.5% for the third
quarter 2002, compared to 12.8% for the third quarter 2001. Wholesale gross
profit as a percentage of sales increased to 36.1% in the third quarter 2002
from 3.7% in the third quarter 2001, the result of a decrease in off-price sales
and better margins from off-price sales and cost savings from sourcing and
internal production process improvements which favorably impacted cost of goods
sold. In addition, during the third quarter 2001, the Company recorded inventory
write-downs of approximately $15.7 million, to reflect at net realizable value,
the merchandise in finished goods that the Company expected to sell off-price,
as well as the expected liquidation of raw materials in connection with the
Company's restructuring efforts.
Retail gross profit as a percentage of sales increased to 62.4% in third quarter
2002 from 36.7% in third quarter 2001 due to the closing of under performing
stores, the reduction in the price which the Company's wholesale division
transfers goods to its retail division, along with the cost savings passed on
from wholesale as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to approximately $23.5
million in the third quarter 2002 as compared to $28.0 million in the third
quarter 2001. The decrease is attributable to reduced expenses in the combined
wholesale and licensing operations, the net closing of 24 retail stores as part
of the Company's restructuring plans and higher administrative expenses in third
quarter 2001.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, SPECIAL CHARGES AND
REORGANIZATION
Earnings before interest, taxes, depreciation, amortization, special charges and
reorganization, ("EBITDAR") increased to $20.0 million in the third quarter 2002
from a loss of $14.4 million in the third quarter 2001. Wholesale EBITDAR
increased approximately $31.8 million over the third quarter 2001 as a result of
decreased expenses, higher gross margins in 2002 and the inventory write-down of
$15.7 million in the third quarter 2001. Retail experienced an increase in
EBITDAR of $2.7 million as a result of the closing of under performing stores
and the cost savings mentioned above. Licensing EBITDAR remained relatively
constant at approximately $3.8 million in third quarter 2002 and $3.9 million in
third quarter 2001.
SPECIAL CHARGES
The Company incurred $11,000 in special charges in the third quarter 2002
compared to $585,000 in the third quarter 2001. The special charges in third
quarter 2002 and 2001 consisted primarily of professional fees and other
expenses associated with the implementation of the Company's restructuring
program.
AMORTIZATION OF REORGANIZATION ASSET
As a result of the Company's 1997 spin-off 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"). In accordance with
Statement of Financial Standards "SFAS" No.142, "Goodwill and Other Intangible
Assets" ("SFAS 142") the Company ceased recording amortization relating to this
12
asset effective December 30, 2001. Accordingly, the Company incurred no
amortization charges for the third quarter 2002 and approximately $815,000 in
the third quarter 2001. The Company is currently evaluating this asset, has
determined that impairment has occurred and expects the charge for impairment to
be approximately $40.0 to $50.0 million. See Note 3 of Notes to Condensed
Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization
Asset, totaled $1.1 million in the third quarter 2002 and $2.2 million in the
third quarter 2001. In accordance with SFAS 142, the Company ceased recording
amortization on its trademarks effective December 30, 2001. Trademark
amortization in the third quarter 2001 was approximately $817,000. The remaining
expense relates to the depreciation and amortization of fixed assets. The
decrease in depreciation, aside from trademark amortization, relates to the
closing of the retail stores and the related asset write-downs that occurred in
the fourth quarter 2001.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $1.0 million in the third quarter 2002
from $7.1 million in the third quarter 2001. Interest expense is comprised of
the interest expense on the Senior Notes prior to February 5, 2002, along with
interest on the Chase Facility and DIP Credit Agreement, factoring fees and
changes in fair value of the Company's interest rate swap.
As a result of the Chapter 11 Cases, interest on the Senior Notes stopped
accruing as of February 5, 2002. Accordingly, the Company did not incur interest
on the Senior Notes in the third quarter 2002 compared to $4.1 million for the
third quarter 2001. Included in interest expense for the third quarter 2001 was
$527,000 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, which became due on such date. As a result of the
Chapter 11 Cases, the Company determined that the capitalized bondholder consent
fee was impaired and wrote-off the remaining $1.1 million at the end of fiscal
2001. Accordingly, the Company incurred no amortization in the third quarter
2002 versus $115,000 in the third quarter 2001.
Interest under the Chase Facility and DIP Credit Agreement totaled approximately
$638,000 in the third quarter 2002, and $1.5 million in the third quarter 2001,
the result of decreased borrowings. In third quarter 2002, the Company paid
$100,000 in bank fees related to the Chase Facility Agreement which is being
amortized over the remaining life of the Chase Facility, and resulted in
approximately $43,000 of amortization charges in the third quarter 2002 and
$308,000 in the third quarter 2001. All prior bank fees were determined to have
been impaired as a result of the Chapter 11 Cases and were written off at the
end of fiscal 2001.
The remaining interest expense relates to factoring fees of approximately
$335,000 in the third quarter 2002 and $386,000 in the third quarter 2001. As of
June 29, 2002 the interest rate swap expired and the Company incurred no
interest expense in the third quarter 2002 compared to $159,000 in the third
quarter 2001.
REORGANIZATION COSTS
The Company recorded $667,000 in reorganization costs in the third quarter of
2002. These costs related primarily to professional fees and bank fees
associated with the Company's reorganization as a result of the Chapter 11
Cases.
INCOME TAXES
Provision for income taxes was $7.2 million for the third quarter 2002 compared
to $259,000 for the third quarter 2001. These amounts differ from the amount
computed by applying the federal income tax statutory rate of 34% to income
before taxes primarily because of state and foreign taxes.
The Company is currently undergoing an examination by the Internal Revenue
Service ("IRS") for the tax years ended 1997, 1998, 1999, and 2000. The IRS has
issued a proposed adjustment, which would result in additional income taxes in
prior years resulting in a reduction in net operating loss carry forwards, which
were $70.0 million at December 29, 2001, the write down of certain tax assets
and the payment of interest. The proposed adjustment would disallow deductions
amounting to approximately $26.7 million in the 1997 through 2000 fiscal years.
The Company is vigorously contesting the proposed adjustment and therefore no
provision has been made for such adjustment.
13
In July 2002, New Jersey restructured the Corporation Business Tax, which will
adversely impact the tax provision of companies who transact business in New
Jersey. The Company has reflected the impact in the third quarter 2002 tax
provision. The incremental tax provision relating to New Jersey state income
taxes is approximately $300,000.
THIRTY-NINE WEEKS ENDED SEPT. 28, 2002 AS COMPARED TO THIRTY-NINE WEEKS ENDED
SEPT. 29, 2001
TOTAL REVENUE
Net sales for the thirty-nine weeks ended September 28, 2002 ("YTD 2002") were
$279.2 million as compared to $301.1 million for the thirty-nine weeks ended
September 29, 2001 ("YTD 2001"). Wholesale sales decreased primarily due to
planned reductions in certain of the business lines.
Retail sales decreased to $43.7 million for YTD 2002 from $53.0 million for YTD
2001, primarily due to the net closing of 24 retail outlet stores over the last
12 months as part of the Company's restructuring plans. Comparable store sales
decreased 4.2% in YTD 2002 compared to YTD 2001 as a result of continued
weakness in the current retail environment.
Royalty revenue increased to approximately $12.3 million in YTD 2002 from $10.8
million in YTD 2001 as a result of higher royalty percentage rates.
GROSS PROFIT
Gross profit as a percentage of total revenue increased to 40.9% for YTD 2002,
compared to 23.8% for YTD 2001. Wholesale gross profit, as a percentage of
sales, increased to 35.3% in YTD 2002 from 17.5% in YTD 2001, the result of cost
savings from sourcing and internal production process improvements which
favorably impacts cost of goods sold and an overall reduction in allowances as a
percentage of net sales. In addition, during YTD 2001, the Company recorded
inventory write-downs of approximately $15.7 million, to reflect at net
realizable value, the merchandise in finished goods that the Company expected to
sell off-price, as well as the expected liquidation of raw materials in
connection with the Company's restructuring efforts. During YTD 2002, the
Company determined that, due to improved sell-through in its wholesale segment,
certain allowance reserves amounting to $9.7 million as of December 29, 2001
were no longer required. As a result of this change in estimate, the Company
reversed this reserve, which benefited gross margin for YTD 2002. The Company
also determined that, due to weak sell-through in its dress and certain
sportswear businesses, certain additional allowance reserves amounting to $10.0
million were required in its wholesale segment and recorded such reserves to the
detriment of gross margin for YTD 2002.
Additionally, the Company determined that, due primarily to improved margins of
its wholesale off-price sales, certain inventory reserves amounting to $2.0
million as of December 29, 2001 were no longer required. As a result of this
change in estimate, the Company reversed this reserve, which benefited gross
margin for YTD 2002.
During YTD 2002, the Company utilized in its production process certain raw
materials that, as part of the Company's normal valuation process, had been
reserved as of December 29, 2001. As a result of the utilization of the
previously reserved raw materials, the Company recognized this change in
estimate as a benefit to gross margin of $1.7 million in YTD 2002.
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid off employees as a result of its 2001 reductions in force. As a result, the
Company realized a benefit relating to cost of sales of approximately $450,000
in YTD 2002.
Retail gross profit as a percentage of sales increased to approximately 54.0% in
YTD 2002 from 38.0% in YTD 2001, due the closing of under performing stores, the
reduction in the price which the Company's wholesale division transfers goods to
its retail division, and the cost savings passed on from wholesale, as discussed
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $71.3 million in YTD
2002 as compared to $80.0 million in YTD 2001, a decrease of $8.7 million.
Combined wholesale and licensing selling, general and administrative expenses
14
decreased approximately $6.5 million from YTD 2001, primarily as a result of the
Company's restructuring efforts. The net closing of the 24 retail stores
resulted in a decrease of an additional $2.2 million in selling, general and
administrative expenses. Additionally, the Company obtained a favorable decision
with respect to a severance dispute with certain union employees in which the
arbitrator ruled that the Company is not obligated to pay severance to any of
the permanently laid off employees as a result of its 2001 reductions in force.
As a result, The Company realized a benefit relating to selling, general and
administrative expenses of approximately $150,000 in YTD 2002.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, SPECIAL CHARGES AND
REORGANIZATION
EBITDAR increased to $47.8 million in YTD 2002 from a loss of $5.5 million in
YTD 2001. Wholesale EBITDAR increased $48.0 million over YTD 2001 as a result of
an increase in gross profit and decrease in expenses in YTD 2002, and the
inventory write-down of $15.7 million in YTD 2001. Retail experienced a $5.7
million increase in EBITDAR as a result of the closing of the under performing
stores and the cost savings mentioned above. Licensing EBITDAR decreased to $9.8
million in YTD 2002 compared to $10.1 million in YTD 2001 due to an increase in
expenses, which substantially offset the increase in licensing revenue.
SPECIAL CHARGES (CREDITS)
The Company recorded a net $1.9 million special credit in YTD 2002 and a $3.1
million charge in YTD 2001. During the fourth quarter of 2001, the Company
recorded a charge of $4.9 million for lease cancellation costs and asset
write-downs in connection with the decision to exit certain retail store leases
and certain office space in fiscal 2002. During 2002, the Company reevaluated
its decision to exit certain office space and as a result, recognized a special
credit of $2.5 million. This credit was partially offset by approximately
$603,000 in special charges related primarily to professional fees. YTD 2001
special charges consisted primarily of professional fees.
AMORTIZATION OF REORGANIZATION ASSET
As a result of the Company's implementation of SFAS 142, the Company incurred no
amortization charges for YTD 2002 compared to approximately $2.5 million in YTD
2001. The Company is currently evaluating this asset, has determined that
impairment has occurred and expects the charge for impairment to be
approximately $40.0 to $50.0 million. See Note 3 of Notes to Condensed
Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization
Asset, totaled $3.2 million in YTD 2002 and $6.3 million in YTD 2001. In
accordance with SFAS 142, the Company ceased recording amortization on its
trademarks effective December 30, 2001. Trademark amortization in YTD 2001 was
approximately $2.5 million. The remaining expense relates to the depreciation
and amortization of fixed assets. The decrease in depreciation, aside from
trademark amortization, relates to the closing of the retail stores and the
related asset write-downs. See Note 3 of Notes to Condensed Consolidated
Financial Statements.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $6.2 million in YTD 2002 from $21.5
million in YTD 2001, a decrease of approximately $15.3 million. Interest expense
is comprised of the interest expense on the Senior Notes prior to February 5,
2002, along with interest on the Chase Facility and DIP Credit Agreement,
factoring fees and changes in fair value of the Company's interest rate swap.
As a result of the Chapter 11 Cases, interest on the Senior Notes stopped
accruing as of February 5, 2002. Accordingly, the Company incurred interest of
$1.7 million for YTD 2002 compared to $12.0 million for YTD 2001. Included in
interest expense for YTD 2002 was $300,000 in unpaid default interest on the
Senior Notes and $1.3 million in YTD 2001. As a result of the capitalized
bondholder consent fee write-off at the end of fiscal 2001, the Company incurred
no amortization in YTD 2002 versus $330,000 in YTD 2001.
Interest under the Chase Facility totaled approximately $3.4 million in YTD
2002, and $5.0 million in YTD 2001, a decrease of $1.6 million as a result of
the decrease in borrowings. In third quarter 2002, the Company paid $100,000 in
bank fees related to the Chase Facility Agreement which is being amortized over
15
the remaining life of the Chase Facility, and resulted in approximately $43,000
of amortization charges in the YTD 2002 and $809,000 in YTD 2001. All prior bank
fees were determined to have been impaired as a result of the Chapter 11 Cases
and were written off at the end of fiscal 2001.
Factoring fees were approximately $962,000 in YTD 2002 and $1.2 million in YTD
2001. Somewhat offsetting the decrease in the interest expense in YTD 2002 was
the increase in market valuation of the Company's interest rate swap of
approximately $508,000. The interest rate swap added approximately $520,000 in
interest during YTD 2001. As of June 29, 2002, the interest rate swap expired.
REORGANIZATION COSTS
The Company recorded $3.1 million in reorganization costs in YTD of 2002.
These costs related primarily to professional fees and bank fees associated
with the Company's reorganization as a result of the Chapter 11 Cases.
INCOME TAXES
Provision for income taxes was $15.7 million for YTD 2002 compared to $981,000
for YTD 2001. These amounts differ from the amount computed by applying the
federal income tax statutory rate of 34% to income before taxes because of state
and foreign taxes.
The Company is currently undergoing an examination by the IRS for the tax years
ended 1997, 1998, 1999, and 2000. The IRS has issued a proposed adjustment,
which would result in additional income taxes in prior years resulting in a
reduction in net operating loss carry forwards, which were $70.0 million at
December 29, 2001, the write-down of certain tax assets and the payment of
interest. The proposed adjustment would disallow deductions amounting to
approximately $26.7 million in the 1997 through 2000 fiscal years. The Company
is vigorously contesting the proposed adjustment and therefore no provision has
been made for such adjustment.
In July 2002, New Jersey restructured the Corporation Business Tax, which will
adversely impact the tax provision of companies who transact business in New
Jersey. The Company has reflected the impact in the third quarter 2002 tax
provision. The incremental tax provision relating to New Jersey state income
taxes is approximately $825,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity historically have been cash flows from
operations, vendor credit terms and credit facilities. The Company's capital
requirements primarily result from working capital needs, department store
boutiques, retail stores including full price shops and other corporate
activities.
Net cash provided by operating activities was $62.3 million during YTD 2002 as
compared to cash used in operations of $9.0 million during YTD 2001. The
improvement in cash flows from operating activities is partly the result of a
$20.0 million prepayment of royalties received during the first quarter 2002
from one of the Company's licensees, of which $3.3 million has been recognized
as income. The royalty prepayment is non-refundable and is to be applied to
guaranteed minimum royalty payments and excess royalties due through the term of
the contract. In addition, the improvement in the Company's cash flow is the
result of lower inventory levels and the income generated during the year,
offset by the $15.7 million write down of inventory to net realizable value in
the prior year. The improvement is also the result of pre-petition liabilities,
which, as a result of the Chapter 11 Cases, are generally not settled until a
plan of reorganization has been approved. The increase in cash used in investing
activities resulted from greater capital expenditures in YTD 2002 compared to
YTD 2001 relating to the opening of the Company's first full price Anne Klein
New York store in New York City in February 2002, department store boutiques and
on-going systems implementation. Cash flows from financing activities increased
from prior year due to the repayment of pre-petition borrowings under the DIP
Credit agreement as a result of the July 23, 2002 DIP Credit agreement
amendment.
On July 9, 1999, the Company entered into a credit facility with a bank group
led by Chase (the "Chase Facility") in order to, among other things, fund the
Company's working capital requirements and to finance the Company's purchase of
the Anne Klein trademarks (the "Trademark Purchase"). On the Filing Date, the
Company obtained a $35 million 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. On July 12, 2002 the DIP Credit Agreement was amended to convert the
term loan to a revolving credit agreement. The DIP Credit Agreement is intended
to provide the Company with the ability to pay for all new supplier shipments
16
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 expires February 5, 2003.
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 the issuance of new standby
letters of credit. 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.
At September 28, 2002, there were no direct borrowings and $36.0 million
outstanding in letters of credit under the DIP Credit Agreement. In addition to
$4.2 million of unrestricted cash and cash equivalents on hand, the Company had
approximately $54.6 million available for future borrowings as of September 28,
2002.
On October 23, 2002 the Company entered into a Joint Proposal Letter (the
"Proposal Letter") with Citicorp USA, Inc., Foothill Capital Corporation and
GMAC Commercial Finance LLC (the "Lenders") which sets forth a proposal under
which the Lenders would establish a senior secured revolving credit facility of
up to $100,000,000 (the "Citicorp Facility") which would initially be used by
the Company to: (i) refinance any amounts outstanding under the DIP Credit
Agreement and (ii) provide financing for working capital, letters of credit,
capital expenditures and other general corporate purposes during the
continuation of Chapter 11 Cases. At such time as the Chapter 11 Cases are
concluded, the Citicorp Facility would convert from a debtor-in-possession
facility into an exit facility. The Proposal Letter does not constitute a
commitment by the Lenders, and the delivery of a commitment to provide the
Citicorp Facility is subject to, among other things, (i) satisfactory completion
of due diligence, (ii) final credit approval by the Lenders and (iii) the
absence of any material adverse condition in loan syndication or financial or
capital market conditions generally. On November 8, 2002, the Bankruptcy Court
approved, and the Company paid, agreed upon work fees to the Lenders so as to
permit the completion of due diligence.
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%. The Company stopped accruing interest on the Senior Notes on
the Filing Date. Interest was payable semi-annually on March 31 and September
30. Interest relating the Senior Notes totaled $1.9 million for YTD 2002 and
$10.7 million for YTD 2001. At September 28, 2002, the Senior Notes have been
classified as liabilities subject to compromise.
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 on
approved sales are guaranteed to be paid to the Company by CIT. The agreement
has no expiration 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 is 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 Agreement or failure to pay any obligation under the CIT agreement, for
which no notice is needed.
Capital expenditures were $5.7 million and $992,000 for YTD 2002 and YTD 2001,
respectively. Capital expenditures represent funds spent for information
systems, new retail stores, including the new Anne Klein New York full price
store opened in February 2002, department store boutiques, warehouse
improvements, showroom improvements, overseas facilities development and general
improvements.
The Company is currently implementing a fully integrated management information
system, which the Company believes will enhance its ability to conduct business
17
and reduce the risk of system failure. Any unforeseen difficulty or significant
delay in the implementation or operation of existing or new systems, the
integration of management and other personnel or the training of personnel,
could adversely affect the Company's business, financial condition and operating
results.
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 requirements in the near term include, but are not limited
to, failure to have the Plan 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.
18
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q 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
Act of 1934, as amended. Those statements appear in a number of places in this
report, including in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," and include all discussions of trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies as well as statements that contain such
forward-looking statements as "believes," "anticipates," "could," "estimates,"
"expects," "intends," "may," "plans," "predicts," "projects," "will," and
similar terms and phrases, including the negative thereof. In addition, from
time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Furthermore, forward-looking
statements may be included in our other filings with the Securities and Exchange
Commission as well as in press releases or oral statements made by or with the
approval of the Company's authorized executive officers.
We caution you to bear in mind that forward-looking statements, by their very
nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this report are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations include but are not limited
to, the following cautionary statements ("Cautionary Statements"):
o 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 the Reorganization Cases may have on the Company's
relationships with its principal customers and suppliers;
o the risk that the Court overseeing the Reorganization Cases 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 Reorganization Cases;
o the risk that the cash generated by the Company from operations and the
cash received by the Company under the DIP Credit Agreement 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 Court;
o the ability of the Company to achieve its covenants under the DIP Credit
Agreement;
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 the risk that the Internal Revenue Service will prevail in its proposed
adjustment resulting in additional income taxes and interest in prior years
thereby necessitating a reduction in net operating loss carry forwards, the
write-down of certain tax assets, and the payment of interest;
o the risk that the Company will not successfully implement its fully
integrated management information system, which could adversely affect the
Company's business, financial condition, and operating results;
o potential exchange rate fluctuations;
o the Company's concentration of revenues in department stores located in the
United States; and
o the Company's dependence on a limited number of suppliers.
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.
19
ITEM 3.
CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to the
Company's management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company's management, including the principal executive officer
and the principal financial officer, recognizes that any set of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this quarterly report on Form 10-Q,
the Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this quarterly report on Form 10-Q.
20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Debtors' First Amended and Restated Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy
Code
10.2 First Amended and Restated Disclosure Statement
Dated November 6, 2002
99.1 Certification of the Chief Executive Officer of
the Company pursuant to 18 U.S.C.ss.1350, as
adopted by Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification of the Chief Financial Officer of
the Company pursuant to 18 U.S.C.ss.1350, as
adopted by Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K:
On August 19, 2002 the Company filed a current report on
Form 8-K attaching copies of the certificates that each of
John D. Idol and Joseph B. Parsons had submitted to the SEC
in connection with the Company's Quarterly Report on Form
10-Q for the period ended June 29, 2002, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KASPER A.S.L., LTD.
(Registrant)
Dated: November 18, 2002
/s/ John D. Idol
-------------------------------------
John D. Idol
Chairman and Chief Executive Officer
/s/ Joseph B. Parsons
-------------------------------------
Joseph B. Parsons
Executive Vice President -
Chief Financial Officer
22
CERTIFICATIONS
I, John D. Idol, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kasper A.S.L.,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 18, 2002
/s/ John D. Idol
-------------------------------
John D. Idol
Chief Executive Officer
I, Joseph B. Parsons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kasper A.S.L.,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 18, 2002
/s/ Joseph B. Parsons
-----------------------------
Joseph B. Parsons
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Debtors' First Amended and Restated Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code
10.2 First Amended and Restated Disclosure Statement Dated
November 6, 2002
99.1 Certification of the Chief Executive Officer of the
Company pursuant to 18 U.S.C.ss. 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer of the
Company pursuant to 18 U.S.C.ss. 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002