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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
COMMISSION FILE NO. 0-24179
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KASPER A.S.L., LTD.
DELAWARE 22-3497645
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
77 METRO WAY 07094
SECAUCUS, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 864-0328
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes {X} No {_}
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. {X}
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes { } No {X}
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant at June 28, 2002 was approximately $576,539. Such aggregate
market value is computed by reference to the last sales price of the Common
Stock on such date.
There were 6,800,000 shares of Common Stock outstanding at April 8,
2003.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
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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 the continuation of the Company's Chapter 11 proceedings
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 Citicorp 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 Citicorp 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 the risk of global political unrest including terrorism and war and its
impact on consumer confidence and spending and disruption in the receipt
and delivery of merchandise;
o the risk of work stoppages by any Company suppliers or service providers,
such as, for example, the recent West Coast port workers lock-out;
o the risk of significant disruption in the Company's relationships with its
suppliers, manufacturers and employees;
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 carryforwards, the
write-down of certain tax assets, and the payment of interest;
o potential exchange rate fluctuations;
o the Company's concentration of revenues in department stores located in the
United States;
o the Company's dependence on a limited number of suppliers; and
o unforeseen difficulties or significant delays resulting from the Company's
implementation or operation of existing or new management information
systems, including the integration of management and other personnel or the
training of personnel.
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
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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 April 8, 2003, the Company operated 73 retail outlet 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.
CHAPTER 11 CASES
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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 (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 (Case Nos. 02-B10497, 02-B10500, and 02-B10502 through 10505
(ALG)) (the "Chapter 11 Cases") 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.
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.
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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.
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 $110.0 million Senior Notes due 2004
(the "Senior Notes"); (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 hearing to consider the Plan was scheduled for December 5, 2002 (the
"Scheduled Hearing"). On December 4, 2002, the Company received a proposal to
acquire the Company for $88 million in cash (the "Management Proposal") from a
management group led by John D. Idol, the Company's Chief Executive Officer (the
"Management Group"), and Parthenon Capital, LLC ("Parthenon"). The Scheduled
Hearing was postponed to allow the Company to consider the Management Proposal.
Under the Management Proposal, no payment would be made to the Company's
existing stockholders. The Management Proposal was modified on December 10, 2002
to increase the amount of the cash payment to $100 million.
On September 20, 2002, the Board of Directors of the Company formed a special
committee of independent directors (the "Special Committee") in connection with
the Company's exploration of strategic alternatives, including a possible sale
of the Company. The Special Committee was formed in anticipation of potential
offers to purchase the Company, and to avoid potential conflicts of interest in
the event such an offer was made by the Company's management. On December 23,
2002, the Special Committee, consisting of Salvatore Salibello and Denis Taura,
with the support of the Creditor's Committee, engaged Peter J. Solomon Company
("Solomon") to advise the Special Committee in connection with exploring
strategic alternatives. Solomon, on behalf of the Special Committee, is
soliciting preliminary indications of interest from potential purchasers of the
Company, including the Management Group and Parthenon. Such proposals will be
considered by the Special Committee and representatives of the Creditors'
Committee. However, there is no assurance that a transaction will be
consummated. Solomon, on behalf of the Special Committee, continues to explore
strategic alternatives to date.
POST-PETITION FINANCING
- -----------------------
On the Filing Date, the Company obtained a $35 million debtor-in-possession
financing facility (the "Chase DIP") from its then existing bank group led by
JPMorgan Chase Bank ("Chase"). The Chase DIP Credit Agreement also provided for
a term loan for the purpose of refinancing the pre-petition obligations
outstanding under the credit facility entered into by the Company on July 9,
1999 with a bank group led by Chase (the "Chase Facility"), which on the Filing
Date totaled approximately $91.6 million. The Chase DIP was intended to assure
that the Company had the ability to pay for all new supplier shipments received,
to invest in retail operations, 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 Chase DIP. On January
30, 2003, the Company obtained a $100 million debtor-in-possession financing
facility (the "Citicorp DIP Credit Agreement") from its new bank group led by
Citicorp USA, Inc. ("Citicorp"). The Citicorp DIP Credit Agreement replaced the
Chase DIP. There were no borrowings
4
under the Chase DIP at December 28, 2002 and there were no borrowings under the
Citicorp DIP Credit Agreement as of March 30, 2003.
Additional information with respect to the Chase DIP and the Citicorp DIP Credit
Agreement is contained in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
- ---------------------------------------------
Kasper's business consists of three integrated operations: wholesale, retail and
licensing. During fiscal 2002, approximately 95% 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 13 of Notes to Consolidated Financial Statements
included elsewhere herein.
WHOLESALE
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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 3,900 retail locations throughout the United States, Europe,
the Middle East, Southeast Asia and Canada. 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
2002, 2001 and 2000 fiscal years were approximately 67%, 65% and 60%,
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
2002, 2001 and 2000 fiscal years were approximately 28%, 27% and 33%,
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 2002, 2001 and 2000 fiscal years were approximately 5%,
8% and 7%, 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
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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's suit business 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 Albert Nipon and Kasper garments.
RETAIL
- ------
The Company's retail store program establishes another distribution channel for
its products. At December 28, 2002, the Company operated 58 Kasper retail
stores, 10 Anne Klein retail stores and one full price Anne Klein store, which
in total represented approximately 17%, 20% and 19% of total net sales of the
Company for the 2002, 2001 and 2000 fiscal years, respectively. These stores are
generally located in outlet center malls throughout the United States. The
Company opened its full price Anne Klein store in February 2002, located in New
York City.
LICENSING
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As of December 28, 2002, 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 28, 2002, the Company had 13 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 28, 2002, the Company had three licensing arrangements under its
Kasper trademarks pursuant to which third-party licensees produce merchandise
under the these trademarks, in accordance with designs supplied or approved by
the Company. Licenses included women's coats, men's casual pants and handbags,
portfolios and wallets.
DESIGN
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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
6
produced and incorporated into the product line, and the design and sourcing
departments begin to develop or work with contractors to develop preliminary
production samples. After approval of the samples, production begins. As a line
of products is being finalized, customer reaction is evaluated and samples are
modified as appropriate.
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
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The Company primarily contracts for the cutting and sewing of its garments with
contractors located principally in the Philippines, Hong Kong, Thailand and
China. Purchases of services or finished goods from the Company's four principal
contractors accounted for approximately 47% of the Company's total finished
goods purchases in fiscal 2002. 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 a dedicated manufacturing facility
in China. Finished goods produced in the Company's China factory accounted for
approximately 10%, 7% and 5% of total finished goods production during fiscal
2002, 2001 and 2000, respectively. The Company's production and sourcing staffs
in Hong Kong, Thailand, China 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 delivery. The inability of
certain contractors to provide needed services on a timely basis could
materially adversely affect the Company's operations and financial condition.
The Company has historically manufactured finished goods on a cut, make and trim
("CMT") basis whereby the Company purchases piece goods and trim and contracts
for the cutting and sewing of the garments. Starting in 2001, the Company began
transitioning to the purchase of finished goods ("FOB") whereby the contractor
is responsible for all manufacturing processes including the purchase of piece
goods and trim. The Company's FOB production by units was approximately 51% and
29% in 2002 and 2001, respectively. The Company expects the percent of FOB
production to increase in 2003.
QUALITY CONTROL
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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 commences and perform random in-line quality control audits
during production and perform final inspection 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
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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 43% of the Company's total purchases of raw materials for fiscal
2002. 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.
7
DISTRIBUTION
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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. The
Company also has a distribution center in Montreal, through which the Company
distributes all the Brands throughout Canada.
CUSTOMERS
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The Company sells approximately 95% of its wholesale products within the United
States. The Company distributes its products through approximately 3,900 retail
locations throughout the United States, Canada, Europe and Asia. Department
stores accounted for approximately 71%, 69% and 66% of the Company's gross sales
for the 2002, 2001 and 2000 fiscal years, respectively. In fiscal 2002,
Federated Department Stores, May Merchandising Co. and Dillard's Department
Stores accounted for approximately 20%, 20% 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 gross 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 80% of the Company's gross sales
during fiscal 2002. 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, Anne Klein New York, A.K. Anne
Klein, the Lion Head Design, Kasper and Le Suit, as well as many derivatives of
those trademarks (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 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.
8
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 30, 2003, the Company had unfilled customer orders of approximately
$159.2 million, compared to approximately $95.6 million of such orders at March
29, 2002. The increase over prior year is the result of an earlier market for
Fall goods, resulting in an earlier receipt of orders. 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 28, 2002, the Company had approximately 1,041 employees in the
United States comprised of 722 full-time employees and 319 part-time employees.
Approximately 216 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 13 employees in the United Kingdom, 38 employees
in Canada and 90 employees in the Far East, as well as 1,058 contract employees
in its dedicated factory in China.
9
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
Montreal, Canada 36,600 April 2004 Canadian showroom, offices and distribution
center
London, U.K. 3,200 July 2008 European showroom and offices
Kwai Chung, New Territories, 27,000 September 2003 AEL warehouse and offices
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 28, 2002, the Company operated 58 Kasper ASL retail
stores and 10 Anne Klein retail outlet stores throughout the United States. The
majority of all newly entered leases are for a period of five to ten 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.
ITEM 3. LEGAL PROCEEDINGS
See the section entitled "Chapter 11 Cases" under Item 1. "Business" for a
discussion of the Chapter 11 Cases.
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 no provision
has been made therefor. In connection with the proposed adjustment, on August 7,
2002 the IRS filed proof of claim in the Bankruptcy Cases in the amount of
approximately $4.7 million (the "IRS Claim"), on the basis that the Debtors
improperly made amortization deductions during the years 1997 through 1999. The
IRS Claim seeks priority under section 507(a)(8) of the Bankruptcy Code. On
November 22, 2002, the Debtors filed an Objection to the IRS Claim pursuant to
section 505 of the Bankruptcy Code, by which they requested the Court to
disallow the IRS Claim in its entirety based on a determination of federal
income tax liability pursuant to section 505(a)(1) of the Bankruptcy Code. The
Debtors assert that the tax returns and the deductions claimed therein were
proper and correct and, therefore, they are not liable for any additional taxes
over and above those reported in the consolidated annual tax returns. Unless the
10
parties are able to agree on a resolution of the dispute, the issues are
expected to be decided by the Bankruptcy Court within the next 6 months, and no
assurance can be given as to the outcome of the dispute.
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, subsequently
approved by the Bankruptcy Court, pursuant to which, inter alia, the Company
paid Mr. Levine $199,999 and Mr. Levine withdrew all claims in the Chapter 11
Cases.
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.
The Company is not involved in any other legal proceedings of significance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, 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 or
the OTC Bulletin Board, as applicable.
---------------------------------- ----------------------- --------------------
Period High Low
---------------------------------- ----------------------- --------------------
2002 First Quarter $ 0.19 $ 0.01
Second Quarter 0.31 0.00
Third Quarter 0.50 0.15
Fourth Quarter 0.15 0.05
---------------------------------- ----------------------- --------------------
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
---------------------------------- ----------------------- --------------------
The closing sales price of the Company's Common Stock on April 8, 2003 was $0.60
per share, and there were approximately 1,139 holders of record. The Company has
not declared or paid any cash dividends on its Common Stock during fiscal years
2002 and 2001, 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 provides for the
distribution 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. Solomon continues to explore strategic alternatives and
there can be no assurance that there will be a distribution to holders of shares
of the Company's stock. See Item 1. Chapter 11 Cases.
Reference is made to the section entitled Equity Compensation Plan Information
in Item 12 to this Form 10-K, which information is hereby incorporated by
reference.
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.
The selected consolidated financial information for the fiscal years ended
January 2, 1999, January 1, 2000, December 30, 2000, December 29, 2001 and
December 28, 2002 is derived from the Company's audited Consolidated 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
28, 2002.
The following selected financial information for the years ended December 28,
2002 and 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 Citicorp 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
12
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)
FISCAL YEAR ENDED (1)
-------------------------------------------------------------------
JAN.2, JAN.1, DEC.30, DEC.29, DEC.28,
1999 2000 2000 2001 2002
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
-------------------------------------------------------------------
Net sales....................................................... $ 312,089 $ 311,209 $400,797 $368,593 $358,037
Royalty income.................................................. 852 7,033 14,908 15,268 17,719
-------- -------- -------- -------- --------
Total revenue................................................... 312,941 318,242 415,705 383,861 375,756
Cost of sales................................................... 219,060 219,520 295,139 299,722 222,903
Gross profit.................................................... 93,881 98,722 120,566 84,139 152,853
Selling, general and administrative expenses.................... 62,836 76,152 104,961 104,007 90,884
Restructuring and other charges (credits) (2)................... --- --- 2,344 9,201 (2,495)
Amortization of reorganization asset (3)........................ 3,258 3,258 3,258 3,258 ---
Depreciation and amortization (4)............................... 4,537 6,018 8,087 10,292 5,357
Interest and financing costs.................................... 17,788 20,494 25,576 31,301 6,848
Reorganization costs (5)........................................ --- --- --- --- 5,166
Income (loss) before income taxes and cumulative effect of
change in accounting principle.................................. 5,462 (7,200) (23,660) (73,920) 47,093
Income tax provision (benefit).................................. 2,292 (2,426) 1,528 1,750 10,249
Cumulative effect of change in accounting principle............. --- --- --- --- (30,400)
-------- -------- -------- -------- --------
Net income (loss)............................................... $ 3,170 $ (4,774) $ (25,188) $(75,670) $ 6,444
======== ======== ========= ========= ========
Net income (loss) per share..................................... $ 0.47 $ (0.70) $ (3.70) $ (11.13) $ 0.95
Net income (loss) per share before cumulative effect of change in
accounting principle............................................ $ 0.47 $ (0.70) $ (3.70) $ (11.13) $ 5.42
Weighted average number of shares outstanding................... 6,800 6,800 6,800 6,800 6,800
BALANCE SHEET DATA: AS OF:
-----------------------------------------------------------------
JAN.2, JAN.1, DEC.30, DEC.29, DEC.28
1999 2000 2000 2001 2002
---- ---- ---- ---- ----
-----------------------------------------------------------------
Working Capital (6)............................................. $116,011 $94,715 $(89,980) $(151,986) $37,078
Reorganization value in excess of identifiable assets, net...... 60,021 56,763 53,503 50,245 19,844
Total Assets.................................................... 269,358 329,765 337,117 258,690 236,839
Long-term Debt (6).............................................. 117,569 163,444 --- --- ---
Shareholders' Equity............................................ 124,050 119,140 93,601 18,041 24,942
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 2, 1999, January 1, 2000, December 30, 2000, December 29,
2001 and December 28, 2002 each include the Company's results of operations
for 52 weeks.
(2) Beginning with the fourth quarter of fiscal 2000, the Company has incurred
restructuring and other charges in connection with the Company's bankruptcy
filing preparation. 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 Company's bankruptcy filing
preparation. During fiscal 2002 the Company reversed approximately $3.1
million of these charges relating to lease termination costs and therefore
incurred a net credit.
(3) 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 was 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. 142, the Company
discontinued amortizing this asset.
(4) Included in Depreciation and Amortization for the fiscal years ended
January 2, 1999, January 1, 2000, December 30, 2000 and December 29, 2001
is the amortization of trademarks.
(5) As of the filing date, the Company has incurred costs associated with the
Chapter 11 Cases. These costs are related primarily to professional fees
and bank fees associated with the Company's reorganization.
(6) 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.
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 Information."
OVERVIEW
The Company utilizes a 52-53 week fiscal year ending on the Saturday nearest
December 31. Accordingly, fiscal years 2002, 2001 and 2000 ended on December 28,
2002 ("fiscal 2002"), December 29, 2001 ("fiscal 2001") and December 30, 2000
("fiscal 2000"), respectively.
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. 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 Citicorp 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.
Beginning in the fourth quarter of 2000 and continuing throughout fiscal 2002,
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 and fiscal 2002
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.
RESULTS OF OPERATIONS
TOTAL REVENUE BY SEGMENT
(IN THOUSANDS EXCEPT PERCENTAGES)
FISCAL % FISCAL % FISCAL %
2002 OF TOTAL 2001 OF TOTAL 2000 OF TOTAL
-------------------------------- -------------------------------- --------------------------------
Wholesale $ 298,491 79.4% $ 296,492 77.2% $ 325,593 78.3%
Retail 59,546 15.8% 72,101 18.8% 75,204 18.1%
---------------- ----------------- ----------------
NET SALES 358,037 95.2% 368,593 96.0% 400,797 96.4%
Licensing 17,719 4.8 % 15,268 4.0 % 14,908 3.6 %
---------------- ----------------- ----------------
TOTAL REVENUE $ 375,756 100.0% $ 383,861 100.0% $ 415,705 100.0%
16
FISCAL 2002 COMPARED TO FISCAL 2001
TOTAL REVENUE
The Company's net sales in fiscal 2002 were $358.0 million as compared to $368.6
million for fiscal 2001. Sales from the Company's wholesale operations
("Wholesale") increased to $298.4 million in fiscal 2002 from $296.5 million in
fiscal 2001. During fiscal 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 net
sales for fiscal 2002.
Net sales at the Company's retail stores ("Retail") decreased to $59.5 million
in fiscal 2002 from $72.1 million in fiscal 2001, primarily due to the net
closing of 22 under-performing stores over the last 12 months. Comparable store
sales for fiscal 2002 decreased by approximately 4.0% compared to fiscal 2001.
The decrease is the result of the continued weakness in the current retail
environment.
Royalty revenue from the Company's licensing activities ("Licensing") increased
to $17.7 million in fiscal 2002 from $15.3 million in fiscal 2001 primarily as a
result of higher royalty percentage rates.
GROSS PROFIT
Gross profit as a percentage of total revenue increased to 40.7% for fiscal
2002, compared to 21.9% for fiscal 2001. Wholesale gross profit, as a percentage
of net sales, increased to 34.4% in fiscal 2002 from 14.1% in fiscal 2001.
Included in cost of sales in fiscal 2001 was approximately $2.7 million in
sample costs, which, beginning in fiscal 2002 was classified as selling, general
and administrative expense. As discussed in Total Revenue, the company recorded
a change in estimate and reversed $9.7 in allowance reserves, which favorably
impacted gross profit. In addition, during fiscal 2001, the Company recorded
inventory reserves of approximately $17.7 million, to reflect at net
realizable value, finished goods merchandise 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, negatively impacting fiscal 2001 gross
margin.
During fiscal 2002, the Company determined that, due primarily to improved
margins of its wholesale off-price sales, certain finished goods 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 fiscal 2002.
In addition, in fiscal 2002, the Company utilized in its production process
certain raw materials that, as part of the Company's normal valuation process,
had been reserved for 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 fiscal 2002.
Excluding these reversals and charges, Wholesale gross profit for fiscal 2001
would have been 18.2% compared to 30.8% in fiscal 2002, reflecting the cost
savings from sourcing and internal production process improvements which
favorably impacted cost of goods sold and an overall reduction in allowances as
a percentage of net sales.
Retail gross profit as a percentage of net sales increased to 54.6% in fiscal
2002 from 37.5% in fiscal 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, and the cost savings passed on from wholesale as
discussed above.
Licensing contributed to the Company's overall increased gross margin due to the
greater contribution of royalty revenue as a percentage of total revenue.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses ("SG&A") decreased to
$90.9 million in fiscal 2002 compared to $104.0 million in fiscal 2001. Combined
Wholesale and Licensing SG&A decreased approximately $10.1 million from fiscal
2002, primarily as a result of the Company's restructuring efforts. Included in
fiscal 2002 SG&A is approximately $2.4 million of sample costs, which, prior to
fiscal 2001, was included in cost of sales. Fiscal 2001 Wholesale SG&A included
severance costs of approximately $3.5 million. During fiscal 2002, the Company
reversed approximately $1.3 million of severance reserves that were determined,
upon the favorable resolution of various disputes, to be unnecessary. Included
in fiscal 2002 SG&A, is an incremental bonus expense of approximately $2.8
million over fiscal 2001, representing the management incentive bonus program
initiated in fiscal 2002. Retail SG&A decreased approximately $3.0 million over
the prior year as a result of the net closing of 22 under performing stores.
RESTRUCTURING AND OTHER CHARGES (CREDITS)
The Company recorded a net $2.5 million restructuring and other credit in fiscal
2002 and a $9.2 million charge in fiscal 2001. During fiscal 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 retail stores and office space and as a result,
recognized a credit of $3.1 million. This credit was partially offset by
approximately $603,000 in charges related primarily to professional fees. The
remaining fiscal 2001 restructuring and other charges of $4.3 million consisted
primarily of professional fees relating to the Company's bankruptcy filing.
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"). 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
asset effective December 30, 2001. Accordingly, the Company incurred no
amortization charges for fiscal 2002 and approximately $3.3 million in fiscal
2001. As a result of the impairment review required under SFAS 142, during
fiscal 2002, the Company determined that this asset was impaired and recorded a
non-cash, non-operating charge of $30.4 million to reduce the carrying value to
fair value. See Note 6 of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization
Asset, totaled $5.3 million in fiscal 2002 and $10.3 million in fiscal 2001. In
accordance with SFAS 142, the Company ceased recording amortization on its
trademarks effective December 30, 2001. Trademark amortization in fiscal 2001
was approximately $3.2 million. During fiscal 2001, the Company wrote down
approximately $1.1 million of fixed assets in connection with the closing of
retail stores, which was included in depreciation expense for the year. Also
included in depreciation and amortization in fiscal 2001 was approximately
$500,000 in write-offs of goodwill due to the impairment calculated in
accordance with SFAS No. 121. The remaining decrease in depreciation relates to
the reduced fixed asset base as a result of the closing of the retail stores.
18
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to approximately $6.8 million in fiscal
2002 from $31.3 million in fiscal 2001, a decrease of $24.5 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, amortization of related bank fees and bondholder consent fees,
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 fiscal 2002 compared to $16.4 million for fiscal 2001. Included
in Senior Notes interest expense for fiscal 2002 was approximately $300,000 in
unpaid default interest and $2.1 million in fiscal 2001.
At the end of fiscal 2001, as a result of the Chapter 11 Cases, the Company
determined that the value of the capitalized Consent Fee (defined elsewhere
within) had been impaired. Accordingly, included in interest for fiscal 2001 was
approximately $1.1 million in unamortized Consent Fees that were written off at
the end of fiscal 2001, along with $460,000 in amortization. The Company
incurred no Consent Fee amortization in fiscal 2002.
Interest under the Chase Facility and Chase DIP totaled approximately $4.0
million in fiscal 2002, and $7.7 million in fiscal 2001, a decrease of $3.7
million as a result of the decrease in borrowings. In fiscal 2002, the Company
paid $100,000 in bank fees related to the Chase DIP, which is being amortized
over the remaining life of the Chase DIP, and resulted in approximately $86,000
of amortization charges in fiscal 2002. As a result of the Chapter 11 Cases, the
Company determined that the value of the capitalized bank fees paid in
connection with the Chase Facility were impaired. Accordingly, at the end of
2001, the Company wrote off approximately $2.4 million in unamortized bank fees
and incurred approximately $1.1 million in amortization.
Factoring fees were approximately $1.2 million in fiscal 2002 and $1.5 million
in fiscal 2001. The interest rate swap added approximately $521,000 in interest
expense in fiscal 2001. As of June 29, 2002, the interest rate swap expired.
Interest expense in fiscal 2002 was offset by approximately $200,000 in interest
income as a result of the excess cash position experienced by the Company during
parts of the year.
REORGANIZATION COSTS
The Company recorded $5.2 million in reorganization costs in fiscal 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
Income tax expense was $10.2 million in fiscal 2002 and $1.8 million in fiscal
2001. Fiscal 2002 tax expense is primarily related to federal, state and foreign
taxes. For the tax year ended December 28, 2002, the Company utilized
approximately $35.0 million in net operating loss carryforwards against fiscal
2002 taxable income. 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 2002 income tax expense of $10.2 represents
an effective tax rate of approximately 21.8% on the Company's pretax book income
before extraordinary items and cumulative effects of accounting change. During
the first, second and third quarters, the Company's effective tax rate was
approximately 42%. The difference between the 2002 effective tax rate of 21.8%
and the estimated annual rate, as reported quarterly, of 42% was principally
caused by adjustments in the fourth quarter relating to the usage of net
19
operating losses ("NOLs"), the cumulative effect of an accounting change and the
provision of taxes related to potential identified exposures.
The Company had approximately $74.0 million of NOL carryforwards as of December
29, 2001. Due to an audit of the Company's 1997 through 2000 tax years by the
Internal Revenue Service and certain provisions in the tax law which limits the
usage of NOLs, the availability of these NOLs to offset taxable income during
the first three quarters of fiscal 2002 was uncertain. As a result, no provision
for the utilization of these NOLs was made during the first three quarters of
fiscal 2002. During the fourth quarter of fiscal 2002, new information became
available which indicated that a portion of the NOLs not subject to the Internal
Revenue Service's audit could be used to offset taxable income. As a result
approximately $35.0 million of NOLs were used in the fourth quarter of fiscal
2002 to offset 2002 taxable income. The remaining NOLs of approximately $39.0
million as December 28, 2002 are offset by a full valuation allowance due to the
continuing uncertainty regarding their utilization.
NET INCOME (LOSS)
Net income was $6.4 million in fiscal 2002 compared to a loss of $75.7 million
in fiscal 2001, an increase of approximately $82.1 million. The increase is the
result of the increased margins, decreased SG&A, and reduced interest and
financing costs, along with the non-recurring write-offs, write-downs, reserves
and other costs incurred in 2001, as discussed above.
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. Wholesale sales 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.
Retail net sales 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 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 21.9%
for fiscal 2001, compared to 30.0% 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 reserves
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.
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.
20
Retail gross profit as a percentage of sales remained stable at 37.5% and 37.2%
in fiscal 2001 and fiscal 2000, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's 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.
RESTRUCTURING AND OTHER CHARGES
The Company recorded $9.2 million in restructuring and other charges 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 and other charges included $1.1 million in
severance costs. See Note 9 to Notes to Consolidated Financial Statements
included elsewhere herein.
AMORTIZATION OF REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS
In connection with the Reorganization Asset, the Company incurred amortization
charges in both fiscal 2001 and 2000 totaling approximately $3.3 million. In
accordance with SFAS No. 142, the Company ceased 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. 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 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
21
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 $7.7 million in fiscal 2001, a
decrease of $900,000 over the prior year, the result of decreased borrowings.
The related bank fees were 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 are 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, along with $521,000 in interest expense related to the
increase in market valuation of the Company's interest rate swap.
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 $74.0 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.
NET LOSS
Net loss for fiscal 2001 was 75.7 million compared to a loss of $25.2 million in
fiscal 2000 a decrease of approximately $50.5 million. The decrease is the
result of the weak and promotional retail environment, inventory reserves,
amortization write-offs and the increase in restructuring and other charges
during fiscal 2001, as discussed above.
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.
22
Net cash provided by operating activities was $85.7 million during fiscal 2002
as compared to $17.0 million during fiscal 2001. The improvement in the
Company's operating cash flow 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 $4.9 million had been recognized as royalty income as of
December 28, 2002. 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, which expires in 2006. 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 $17.7 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. In
addition, the Company received a $1.0 million payment from a buying agent in
consideration for the exclusive right to act as its buying agent for the
Company's sportswear business, which also contributed to the operating cash flow
improvement. See Note 9 of Notes to Consolidated Financial Statements. As of
December 28, 2002, the Company had recognized $78,000 of the payment as other
income, which reduced SG&A. The increase in cash used in investing activities
resulted from greater capital expenditures in fiscal 2002 compared to fiscal
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. The increase in cash used in financing
activities was due to the repayment of pre-petition borrowings under the Chase
DIP Credit Agreement and the decreased borrowings during the year.
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.
On July 9, 1999, the Company entered into 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 Revolving Credit
Agreement from its existing bank group (the "Chase DIP"). The Chase DIP also
provided for a term loan for the purpose of refinancing the pre-petition
obligations outstanding under the Chase Facility. On July 12, 2002, the Chase
DIP was amended to convert the term loan to a revolving credit agreement.
The Chase DIP provided, among other things, for the maintenance of certain
financial ratios and covenants, and set limits on capital expenditures and
dividends to shareholders. The Chase DIP was scheduled to expire on February 5,
2003. Availability under the Chase DIP was limited to a borrowing base
calculated upon eligible accounts receivable, inventory, trademarks and letters
of credit. Interest on outstanding borrowings was determined based on stated
margins (2.0% on December 28, 2002) above the prime rate at Chase. For fiscal
2002, the weighted average interest rate on the Chase Facility and Chase DIP was
6.67%.
The Company paid approximately $2.4 million in commitment and related fees in
connection with the Chase Facility in July 1999, along with $875,000 and
$675,000 in connection with amendments on November 20, 2000 and June 19, 2001,
respectively. These fees were capitalized and amortized as interest and
financing costs over the remaining life of the Chase Facility. As a result of
the Chapter 11 Cases, the Company determined that the value of these capitalized
23
bank fees had been impaired. Accordingly, at the end of 2001, the Company wrote
off the unamortized bank fees totaling approximately $2.4 million. In connection
with the Chase DIP, the Company paid $875,000 in facility, advisory and
structuring fees, along with an annual administrative agency fee of $100,000 and
an annual collateral monitoring fee of $100,000. These fees were expensed as
incurred and included as part of reorganization costs. In connection with the
July 12, 2002 amendment, the Company paid $100,000 in bank fees, which were
capitalized and amortized over the remaining life of the Chase DIP, totaling
$85,000 in 2002.
As of December 28, 2002, there were no direct borrowings and $38.1 million
outstanding in letters of credit under the Chase DIP. In addition to $24.9
million of unrestricted cash and cash equivalents on hand, the Company had
approximately $34.9 million available for future borrowings as of December 28,
2002.
On January 30, 2003, the Company obtained a $100 million debtor-in-possession
financing facility (the "Citicorp DIP Credit Agreement") from its new bank group
led by Citicorp USA, Inc. ("Citicorp"). The Citicorp DIP Credit Agreement
replaced the Chase DIP and permits up to $60.0 million available for issuance of
letters of credit, of which $15.0 million will be available for stand-by letters
of credit and up to $10.0 million for discretionary swing loans.
The Citicorp DIP Credit Agreement provides, among other things, for the
maintenance of certain financial ratios and covenants, and set limits on capital
expenditures and dividends to shareholders. The Citicorp DIP Credit Agreement,
has a term ending on the earliest to occur of (i) the six month anniversary of
the closing date, (ii) the effective date of the Plan, or (iii) the occurrence
of an Event of Default. Availability under the Citicorp DIP Credit Agreement is
limited to a borrowing base calculated upon eligible accounts receivable,
eligible inventory, eligible documentary letters of credit and trademarks, in
each case, less appropriate reserves. Interest on outstanding borrowings is
determined based on stated margins above the Base Rate Loans and Eurodollar Rate
Loans maintained by Citicorp on the terms and subject to the conditions of the
agreement.
The Company paid approximately $1.6 million in commitment and related fees in
connection with the Citicorp DIP Credit Agreement in January 2003. On March 14,
2003 the Company obtained an amendment to the Citicorp DIP Credit Agreement,
which allowed the DIP portion of the credit agreement to be extended to December
31, 2003 as well as amended certain financial covenants. There were no
incremental bank fees associated with this amendment.
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 $1.7 million for fiscal 2002 and
$16.4 million for fiscal 2001, including $300,000 and $2.1 million in default
interest, respectively. At December 28, 2002, the Senior Notes have been
classified as liabilities subject to compromise.
As a result of certain amendments to the Senior Notes, in July 1999, the Company
paid to each registered note holder, $0.02 in cash for each $1.00 in principal
amount of Senior Notes held by such registered holder, totaling $2.2 million
(the "Consent Fee"). The Consent Fee was being amortized over the remaining life
of the Senior Notes and was included in interest and financing costs. As a
result of the Chapter 11 Cases, the Company determined that the value of the
capitalized Consent Fee was impaired. Accordingly, at the end of 2001, the
Company wrote off approximately $1.1 million in unamortized Consent Fees.
24
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 Chase
DIP or failure to pay any obligation under the CIT agreement, for which no
notice is needed.
Capital expenditures were $8.1 million, $3.0 million and $6.1 million for fiscal
2002, fiscal 2001 and fiscal 2000, respectively. Capital expenditures represent
spending associated with information systems, new retail stores including the
new Anne Klein New York full price store, department store boutiques, warehouse
improvements, showroom improvements, overseas facilities development and general
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.
On December 2, 2002, the Company received a $1.0 million payment from a buying
agent in consideration for the exclusive right to act as its buying agent for
the Company's sportswear business.
The Company is currently implementing a fully integrated management information
system, which the Company believes will enhance its ability to conduct business
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 Citicorp 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.
25
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
- --------------------------------------------------
A summary of the Company's long-term obligations at December 28, 2002 is as
follows:
Future Payments Due by Period
(in thousands)
-----------------------------------------------------------------------------------
Total Less than 1 1 - 3 Years 4 - 5 Years After 5
Year Years
------------- -------------- ------------- ------------- -------------
Operating lease obligations $ 71,989 $10,973 $29,145 $ 12,601 $ 19,270
The above summary does not include employment contracts or short-term
obligations entered into by the Company in the ordinary course of business for
purchase of product for resale or for purchase of raw materials to be used in
the Company's manufacturing operations. These purchase obligations involve
product to be received into inventory over the next one to six months, with the
longer periods resulting from the lead times required when using certain foreign
manufacturers and suppliers. Outstanding letters of credit of $38.1 million at
December 28, 2002 represent a portion of these future purchase obligations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 01-9, "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 adopted the required accounting beginning fiscal 2002 and the impact
of this required accounting does not have a material impact on the revenue and
expense classifications in the Company's Consolidated Statements of Operations.
In June 2001, the Financial Accounting Standards Board (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, the impact of which did not have a significant effect on
the Company's results of operations or financial position.
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. SFAS No. 145 is effective for financial statements issued after May
15, 2002. The Company adopted the provisions of SFAS No. 145 upon its effective
26
date, the impact of which did not have a significant effect on the Company's
results of operations or financial position.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 effective December 28, 2002.
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 substantially all domestic 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
27
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.
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.
Market Value Assessments of the Reorganization Asset and Other Intangible Assets
- - Timing and Amount of Future Impairment Charges
Before the implementation of SFAS No. 142, the values of the reorganization
asset and other intangible assets were written off over the period of expected
benefit through regular amortization charges. Under SFAS No. 142, these
intangibles will no longer be written off through periodic charges to the income
statement over the defined period. Future impairment charges will be required as
and when the value of the acquired business becomes less than its book value.
The determination of the value of the businesses is highly subjective, as it is
determined largely by projections of future profitability and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
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 15 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 18, 2002, the Company dismissed its independent auditors, Arthur
Andersen LLP ("Arthur Andersen") and engaged the services of Ernst & Young LLP
("E&Y") as its new independent auditors effective immediately, and authorized
E&Y's engagement to serve as independent auditors for the fiscal year ending
December 28, 2002. These actions followed the Company's decision to seek
proposals from independent accountants to audit the financial statements of the
Company, and were approved by the Company's Board of Directors upon the
recommendation of its Audit Committee.
During the two most recent fiscal years of the Company ended December 29, 2001,
and the subsequent interim period through April 18, 2002, there were no
disagreements between the Company and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to Arthur Andersen's
satisfaction, would have caused Arthur Andersen to make reference to the subject
matter of the disagreement in connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of Regulation
S-K occurred within the two most recent fiscal years of the Company ended
December 29, 2001 or within the interim period through April 18, 2002.
None of the audit reports of Arthur Andersen on the consolidated financial
statements of the Company as of and for the fiscal years ended December 30, 2000
and December 29, 2001 contained an adverse opinion or a disclaimer of opinion
28
nor was any such audit report qualified or modified as to uncertainty, audit
scope or accounting principles, except that such audit reports contained a
qualified opinion as to going concern.
During the two most recent fiscal years of the Company ended December 29, 2001,
and the subsequent interim period through April 18, 2002, the Company did not
consult with E&Y regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers as of April 8, 2003 are as
follows:
Name Age Position
- ---- --- --------
John D. Idol 44 Chairman of the Board and Chief Executive Officer
Martin Bloom 69 Director
H. Sean Mathis 55 Director
Salvatore M. Salibello 57 Director
Denis J. Taura 63 Director
Joseph B. Parsons 49 Executive Vice President, Chief Financial Officer
& Treasurer
Laura Lentini 39 Senior Vice President - Corporate Controller
Richard M. Owen 46 Senior Vice President, Worldwide Manufacturing
and Operations
Lee S. Sporn 43 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 a Managing Director of Morgan Joseph & Co., Inc., an investment-banking firm,
since March 2003. From September 2002 to March 2003, Mr. Mathis served as a
Special Advisor of Financo Inc., an investment-banking firm. Prior to this,
Mr. Mathis was 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. Mr. Mathis served
as a Director of Allied Digital Technologies, Corp. from 1993 to 1998, and a
Director of ARCH Wireless, a communications company, from 1999 to 2002. In 2001,
ARCH Wireless filed for protection under the United States federal bankruptcy
laws. He currently serves as a Director of Thousand Trails, Inc., an operator of
recreational parks and NTL Europe, Inc., a European cable and media 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 D. Taura &
Associates, a consulting firm. Mr. Taura currently serves as a Director of
Darling International, Inc. and Safeguard Business Systems, Inc.
JOSEPH B. PARSONS joined the Company as Executive Vice President, Chief
Financial Officer and Treasurer in March 2002. Prior to joining the Company, Mr.
Parsons was employed by Donna Karan International Inc., a publicly traded
30
apparel company, from January 1993 through November 2001, most recently as Chief
Financial and Operations Officer. Prior to that, Mr. Parsons was employed by
Crystal Brands, Inc. from 1989 through 1993 and KPMG Peat Marwick from 1979
through 1989.
LAURA LENTINI joined the Company as Corporate Controller in February 2001,
became Vice President in June 2001 and Senior Vice President in July 2002. Prior
to joining the Company, Ms. Lentini served as Corporate Controller of McNaughton
Apparel Group, Inc., a publicly traded apparel company, 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.
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.
On September 20, 2002, the Board of Directors of the Company formed a special
committee of certain independent directors (the "Special Committee") in
connection with the Company's exploration of strategic alternatives, including a
possible sale of the Company. The Special Committee, currently composed of
Messrs. Salibello and Taura, was formed in anticipation of potential offers to
purchase the Company, and to avoid potential conflicts of interest in the event
such an offer was made by the Company's management.
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.
31
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that no Forms 5 were required for those persons. The Company believes that its
Insiders complied with all applicable Section 16(a) filing requirements for
fiscal 2002.
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
28, 2002, December 29, 2001 and December 30, 2000, for the Chief Executive
Officer and all executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
------------------- ---------
COMPENSATION
------------
NAME AND PRINCIPAL STOCK APPRECIATION ALL OTHER
------------------ ------------------ ---------
POSITION YEAR SALARY BONUS RIGHTS (#) COMPENSATION ($)
-------- ---- ------ ----- ---------- ----------------
John D. Idol (1)
Chairman of the Board and
Chief Executive Officer 2002 $1,000,000 $1,399,050 --- $ 333,333 (2)
2001 434,615 343,151 340,000 166,668 (2)
Joseph B. Parsons (3)
Executive Vice President, Chief 2002 $ 307,692 $ 307,692 --- ---
Financial Officer & Treasurer
Laura Lentini (4)
Senior Vice President - Corporate 2002 $ 210,077 $ 63,083 --- ---
Controller 2001 158,058 50,000 --- ---
Richard M. Owen (5)
Senior Vice President - Worldwide 2002 $ 250,000 $ 75,000 --- ---
Manufacturing and Operations 2001 48,077 --- --- ---
Lee S. Sporn (6)
Senior Vice President - General 2002 $ 300,000 $ 90,000 --- ---
Counsel & Secretary 2001 86,539 30,000 --- ---
- --------------------------------
(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. Parsons joined the Company in March 2002. Mr. Parson's annual salary is
$400,000.
(4) Ms. Lentini joined the Company in February 2001. Ms. Lentini's annual
salary is $235,000.
(5) Mr. Owen joined the Company in October 2001.
(6) Mr. Sporn joined the Company in September 2001.
32
OPTION/STOCK APPRECIATION RIGHT GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options or stock appreciation rights ("SAR")
to the Named Executive Officers during fiscal 2002.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUE TABLE
There are no options held by the Named Executive Officers of the Company. As a
result of the Chapter 11 Cases, the SAR's outstanding at the end of fiscal 2001
were cancelled on February 5, 2002, pursuant to the terms of the SAR's.
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. Effective December 28, 2002, all outstanding stock options were
voluntarily cancelled pursuant to an agreement between the Company and the
option holders. 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 and Mr. Idol are parties to an employment agreement dated July 18,
2001 (the "Idol Employment Agreement"), 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. Subject to a minimum bonus in 2002 of
$750,000, the agreement provides for a bonus in each year equal to 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 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").
Pursuant to an amendment to the Idol Employment agreement dated October 31, 2002
(the "Amendment"), upon the effective date of a plan of reorganization with
respect to the Company approved by the Bankruptcy Court (the "Effective Date"),
the Company is obligated to issue to Mr. Idol restricted shares of its common
stock (i) having a value of $1.0 million in full satisfaction of the Note and
(ii) having a value of two and one-half percent (2-1/2%) of the number of shares
issued under the Plan of reorganization, based on the value ascribed to shares
of the common stock of the Company for purposes of issuing and distributing its
common stock on the Effective Date pursuant to the Plan (the "Ascribed Value").
One-half (50%) of the restricted shares shall vest (meaning that they shall
become transferable) on the second anniversary of the Effective Date and
twenty-five percent (25%) shall vest on each of the third and fourth
anniversaries of the Effective Date; provided in each case, that, at least once
during the period on and after the Effective Date, for a period of twenty (20)
consecutive trading days, the closing sales price of a share of such stock is at
least one hundred and fifty percent (150%) of the Ascribed Value. Any restricted
shares that are not vested shall become vested on the date of Mr. Idol's death,
Total Disability, termination without Cause or resignation for Good Reason, or
upon a Change in Control of the Company (as all such terms are defined in the
Idol Employment Agreement), or on the tenth (10th) anniversary of the date the
shares are issued.
33
The Company is also obligated to grant to Mr. Idol on the Effective Date options
to purchase shares of the Company's common stock (on a fully diluted basis)
equal to two and one-half percent (2-1/2%) of the total number of shares issued
under the Plan. The per share exercise price under the options shall be an
amount equal to $80 million divided by the total number of shares issued under
the Plan. The options shall vest ratably on each of first four anniversaries of
the Effective Date, provided that (A) (i) Mr. Idol is employed on such date and
(ii) at least once during the period on and after the Effective Date, for a
period of twenty (20) consecutive trading days, the closing sales price of a
share of such stock is at least one hundred and fifty percent (150%) of the
Ascribed Value, and (B) if earlier, the options shall fully vest on the date of
Mr. Idol's death, Total Disability, termination of employment without Cause or
resignation for Good Reason or upon a Change of Control or on the tenth
anniversary of the date the options are issued. The non-vested portion of the
options shall be cancelled upon termination for Cause or resignation for Good
Reason. All outstanding options (including vested options) shall terminate on
the first anniversary of Mr. Idol's death or Total Disability or on the 90th day
following any other termination of employment.
In addition, in the event of a transaction which results in a Change of Control
before the restricted stock and stock options are issued, on the date of such
Change of Control, Mr. Idol is entitled to (in lieu of the restricted stock and
stock options): (i) a lump sum payment equal to one million dollars ($1,000,000)
plus accrued interest in cash (in full satisfaction of the Note), plus (ii) an
amount equal to two and one-half percent (2 1/2%) of the aggregate amount which,
by virtue of such transaction, will be available for distribution under the Plan
in satisfaction of all senior notes claims, general unsecured claims and
convenience claims (the "Distributable Amount"), plus (iii) an amount equal to
two and one-half percent (2 1/2%) of the amount by which the Distributable
Amount exceeds eighty million dollars ($80,000,000).
The Company has entered into an employment agreement with Joseph B. Parsons,
dated March 25, 2002, which provides for his employment as Executive Vice
President, Chief Financial Officer through March 25, 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 $400,000,
subject to annual review, and provides for his participation in the current
bonus plan and any successor plan. In the event Mr. Parsons is terminated
without Cause or he resigns with Good Reason (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 (reduced by any
compensation actually received by Mr. Parsons from other employment during such
period). By an amendment dated October 31, 2002, if such termination without
Cause occurs, or if Mr. Parsons resigns due to his responsibilities having been
significantly reduced or made inconsistent with his title, within 12 months
following a Change of Control (as defined in the agreement), he is entitled to a
supplemental severance payment in an amount equal to his then annual base
salary, payable within twenty (20) days after such termination (without
reduction).
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. Effective July 8, 2002, Ms. Lentini's annual
salary was increased to $235,000. 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 (reduced by any compensation actually received by Ms.
Lentini from other employment during such period). By an amendment dated January
15, 2003, if such termination without Cause occurs, or if Ms. Lentini resigns
due to her responsibilities having been significantly reduced or made
inconsistent with her title, within 12 months following a Change of Control (as
defined in the agreement), she is entitled to a supplemental severance payment
in an amount equal to her then annual base salary, payable within twenty (20)
days after such termination (without reduction).
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
34
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 (reduced by any compensation
actually received by Mr. Owen from other employment during such period). By an
amendment dated January 16, 2003, if such termination without Cause occurs, or
if Mr. Owen resigns due to his responsibilities having been significantly
reduced or made inconsistent with his title, within 12 months following a Change
of Control (as defined in the agreement), he is entitled to a supplemental
severance payment in an amount equal to his then annual base salary, payable
within twenty (20) days after such termination (without reduction).
The employment agreement with Mr. Sporn, dated August 27, 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 an amendment to the agreement dated October 10, 2001, Mr. Sporn is entitled
to 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 (reduced by any compensation actually received by Mr. Sporn
from other employment during such period). By an amendment dated October 31,
2002, if such termination without Cause occurs, or if Mr. Sporn resigns due to
his responsibilities having been significantly reduced or made inconsistent with
his title, within 12 months following a Change of Control (as defined in the
agreement), he is entitled to a supplemental severance payment in an amount
equal to his then annual base salary, payable within twenty (20) days after such
termination (without reduction).
The amended agreements of each of Mr. Parsons and Mr. Sporn provide that, as of
the Effective Date, the Company is obligated to grant shares of restricted stock
having a value of one percent (1%) for Mr. Parsons, and five-tenths of one
percent (0.5%) for Mr. Sporn, of the number of shares issued under the Plan of
reorganization, based on the Ascribed Value of the shares (as described above
with respect to the Idol Employment Agreement). One-half (50%) of the restricted
shares shall vest (meaning they shall become transferable) on the second (2nd)
anniversary of the Effective Date and twenty-five percent (25%) shall vest on
each of the third and fourth anniversaries of the Effective Date; provided in
each case, that, at least once during the period on and after the Effective
Date, for a period of twenty (20) consecutive trading days, the closing sales
price of a share of such stock is at least one hundred and fifty percent (150%)
of the Ascribed Value. Any restricted shares that are not vested shall become
vested upon a Change of Control of the Company (as defined in the agreements) or
on the tenth anniversary of the date the shares are issued. The Company is also
obligated to grant options to purchase shares of the Company's common stock (on
a fully diluted basis) equal to one percent (1%) for Mr. Parsons, and
five-tenths of one percent (0.5%) for Mr. Sporn, of the total number of shares
issued under the Plan. The per share exercise price under the options shall be
an amount equal to $80 million divided by the total number of shares issued
under the Plan. The options vest ratably on each of first four anniversaries of
the Effective Date, provided that (A) (i) Mr. Parsons or Mr. Sporn, as
applicable, is employed on such date and (ii) at least once during the period on
and after the Effective Date, for a period of twenty (20) consecutive trading
days, the closing sales price of a share of such stock is at least one hundred
and fifty percent (150%) of the Ascribed Value, and (B) if earlier, the options
shall fully vest on any Change of Control or on the tenth anniversary of the
date the options are issued. The non-vested portion of such options shall be
cancelled upon the termination of employment of Mr. Parsons or Mr. Sporn, as
applicable.
35
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 April 1, 2003, no shares had been granted under the 1999
Plan. The 1999 Plan terminates on July 28, 2009.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 8, 2003, 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
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF COMMON STOCK
------------------------------------ ------------------ ---------------
John D. Idol --- --
Martin Bloom 10,000 *
H. Sean Mathis --- --
Salvatore M. Salibello 100 --
Denis J. Taura --- --
Joseph B. Parsons --- --
Laura Lentini 5,000 *
Richard M. Owen --- --
Lee S. Sporn --- --
Whippoorwill Associates, Inc. 1,208,524 (1) 17.8%
11 Martine Avenue
White Plains, NY 10606
Bay Harbour Management, L.C. 1,021,277 (2) 15.0%
777 South Harbour Island Boulevard
Suite 270
Tampa, FL 33602
Lonestar Partners, L.P. 674,000 (3) 9.9%
8 Greenway Plaza
Suite 800
Houston, TX 77046
ING Equity Partners, L.P. I 646,201 (4) 9.5%
135 East 57 Street
New York, NY 10022
357,304 (5) 5.3%
Harvard Management Company
660 Atlantic Avenue
Boston, MA 02210
Officers and Directors as a group (9 persons) 15,100 *
- --------------------------
* Less than one percent
(1) 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.
37
(2) 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 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.
(3) Based on information contained in a Schedule 13D, filed with the Commission
on June 12, 2002.
(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.
Equity Compensation Plan Information
- -------------------------------- ---------------------------- ------------------------ ----------------------------
Number of securities
Number of securities to be remaining available for
issued upon exercise of Weighted-Average future issuance under
outstanding options, exercise price of equity compensation plans
warrants outstanding options, (excluding securities
Plan Category and rights warrants and rights reflected in column (a))
------------- ---------- ------------------- ------------------------
Equity compensation plans
approved by security holders.... - - 2,500,000
- -------------------------------- ---------------------------- ------------------------ ----------------------------
Equity compensation plans not
approved by security holders.... - - 2,500,000 (1)
- -------------------------------- ---------------------------- ------------------------ ----------------------------
(1) Available for issuance under the Company's 1997 Management Stock Option
Plan (the "1997 Plan"). Employees of and consultants to the Company and any
of its affiliates who are responsible for or contribute to the management,
growth and profitability of the business of the Company and its affiliates
are eligible to be granted stock options under the 1997 Plan (no grant
shall be made under the plan to a director who is not an employee of the
Company or any of its affiliates). The 1997 provides that it be
administered by a committee of the Board consisting of no less than two
outside directors. The 1997 Plan terminates on December 2, 2007. Further
information regarding the 1997 Plan may be found under Note 15 of the
financial statements attached hereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. 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 annual report on Form 10-K, 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 the 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 annual report on Form 10-K.
38
PART IV
ITEM 15. 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:
See Index to Exhibits following the signatures and certifications hereto.
(B) REPORTS ON FORM 8-K:
None.
39
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS PAGE
- ---------------------------- ----
Report of Independent Auditors.................................................................................... F-2
Report of Independent Public Accountants.......................................................................... F-4
Consolidated Balance Sheets at December 28, 2002 and December 29, 2001............................................ F-5
Consolidated Statements of Operations for the Fiscal Years Ended
December 28, 2002, December 29, 2001 and December 30, 2000.......................................... F-6
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 28, 2002, December 29, 2001 and December 30, 2000.......................................... F-7
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 28, 2002, December 29, 2001 and December 30, 2000...........................................F-8
Notes to Consolidated Financial Statements.........................................................................F-10
Schedule II - Valuation and Qualifying Accounts....................................................................F-30
F-1
Report of Independent Auditors
To the Shareholders and Board of Directors of Kasper A.S.L., Ltd. and
Subsidiaries:
We have audited the accompanying consolidated balance sheet of Kasper A.S.L.,
Ltd. and subsidiaries as of December 28, 2002 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. 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 audit. The
consolidated financial statements of Kasper A.S.L. Ltd. and subsidiaries as of
and for the years ended December 29, 2001 and December 30, 2000, were audited by
other auditors who have ceased operations. Those auditors expressed a qualified
opinion regarding the Company's ability to continue as a going concern on those
financial statements in their report dated March 22, 2002, before the revisions
and disclosures described below.
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 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 28, 2002 and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States.
As described in Note 6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective December 30, 2001.
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 condition
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 possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
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.
F-2
As discussed above, the financial statements of Kasper A.S.L. Ltd. and
subsidiaries as of and for the years ended December 29, 2001 and December 30,
2000 were audited by other auditors who have ceased operations. As described in
Note 6, these financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards (Statement)
No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company
as of December 30, 2001. Our audit procedures with respect to the disclosures in
Note 6 with respect to 2001 and 2000 included (a) agreeing the previously
reported net loss to the previously issued financial statements and the
adjustments to reported net loss representing amortization expense (including
any related tax effects) recognized in those periods related to goodwill and
intangible assets that are no longer being amortized to the Company's underlying
records obtained from management, and (b) testing the mathematical accuracy of
the reconciliation of adjusted net loss to reported net loss, and the related
net loss-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in
Note 6 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the 2001 and 2000 financial statements of the Company other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 and 2000 financial statements
taken as a whole.
/s/ Ernst & Young LLP
New York, New York
March 17, 2003
F-3
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
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with our filing on Form 10-K for the fiscal year ended December 29,
2001. This audit report has not been reissued by Arthur Andersen LLP in
connection with this filing on Form 10-K. See Exhibit 23 for further discussion.
F-4
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
Current Assets:
Cash and cash equivalents............................................... $ 24,941 $ 6,405
Accounts receivable, net of allowances of $34,679 and
$41,838, respectively................................................. 14,479 4,333
Inventories, net........................................................ 48,302 73,699
Prepaid expenses and other current assets............................... 5,441 4,226
------------ ------------
Total Current Assets......................................................... 93,163 88,663
------------ ------------
Property, plant and equipment, at cost less accumulated depreciation
and amortization of $21,538 and $16,438, respectively................... 19,673 15,637
Reorganization value in excess of identifiable assets, net of
accumulated amortization of $14,937 in 2001............................. 19,844 50,245
Trademarks, net of accumulated amortization of $11,200 and
$11,200, respectively................................................... 103,162 103,162
Other assets, at cost less accumulated amortization of $357 and
$271, respectively...................................................... 997 983
------------ ------------
Total Assets................................................................. $236,839 $258,690
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................ $28,592 $24,899
Accrued expenses and other current liabilities.......................... 22,213 17,682
Interest payable........................................................ 182 28,483
Taxes payable........................................................... -- 537
Deferred royalty income................................................. 5,098 --
Reclassified long-term debt............................................. -- 110,000
Bank revolver........................................................... -- 59,048
------------ ------------
Total Current Liabilities.................................................... 56,085 240,649
Long-Term Liabilities Not Subject to Compromise:
Deferred royalty income................................................. 10,000 --
Other long-term liabilities............................................. 738 --
------------ ------------
Total Liabilities Not Subject to Compromise.................................. 66,823 240,649
Liabilities Subject to Compromise............................................ 145,074 --
------------ ------------
Total Liabilities............................................................ 211,897 240,649
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.......................................... 120,561 120,139
Accumulated deficit..................................................... (95,046) (101,490)
Cumulative other comprehensive loss..................................... (641) (676)
------------ ------------
Total Shareholders' Equity................................................... 24,942 18,041
------------ ------------
Total Liabilities and Shareholders' Equity................................... $236,839 $ 258,690
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
F-5
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
---------------------------------------------------------------
FISCAL YEAR
ENDED
---------------------------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2002 2001 2000
------------------- ------------------- --------------------
Net sales.............................................. $358,037 $368,593 $400,797
Royalty income......................................... 17,719 15,268 14,908
------------------- ------------------- --------------------
Total revenue.......................................... 375,756 383,861 415,705
Cost of sales.......................................... 222,903 299,722 295,139
------------------- ------------------- --------------------
Gross profit........................................... 152,853 84,139 120,566
Operating expenses:
Selling, general and administrative expenses........... 90,884 104,007 104,961
Restructuring and other (credits) charges.............. (2,495) 9,201 2,344
Depreciation and amortization.......................... 5,357 13,550 11,345
------------------- ------------------- --------------------
Total operating expenses............................... 93,746 126,758 118,650
------------------- ------------------- --------------------
Operating income (loss)................................ 59,107 (42,619) 1,916
Interest and financing costs (2002 excludes $16,821
relating to stayed interest)........................... 6,848 31,301 25,576
------------------- ------------------- --------------------
Income (loss) before reorganization costs, income
taxes and cumulative effect of change in accounting
principle.............................................. 52,259 (73,920) (23,660)
Reorganization costs................................... 5,166 -- --
------------------- ------------------- --------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle............... 47,093 (73,920) (23,660)
Income taxes........................................... 10,249 1,750 1,528
------------------- ------------------- --------------------
Income (loss) before cumulative effect of change in
accounting principle................................... 36,844 (75,670) (25,188)
Cumulative effect of change in accounting principle.... 30,400 -- --
------------------- ------------------- --------------------
Net income (loss)...................................... $6,444 $(75,670) $(25,188)
=================== =================== ====================
Basic and diluted earnings (loss) per common share..... $ 0.95 $ (11.13) $ (3.70)
=================== =================== ====================
Basic and diluted earnings (loss) per common share
before cumulative effect of change in accounting
principle.............................................. $ 5.42 $ (11.13) $ (3.70)
=================== =================== ====================
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
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
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
RETAINED
CAPITAL IN CUMULATIVE OTHER EARNINGS /
EXCESS OF COMPREHENSIVE (ACCUMULATED
COMMON STOCK PAR VALUE LOSS DEFICIT) TOTAL
-------------- ------------------ ------------------- ----------------- -------------
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)
-------------- ------------------ ------------------- ----------------- -------------
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)
-------------- ------------------ ------------------- ----------------- -------------
BALANCE AT DECEMBER 29, 2001 $ 68 $ 120,139 $ (676) $ (101,490) $ 18,041
============== ================== =================== ================= =============
Stock award -- 422 -- -- 422
Translation adjustment -- -- 35 -- 35
Net income for the period -- -- -- 6,444 6,444
-------------- ------------------ ------------------- ----------------- -------------
BALANCE AT DECEMBER 28, 2002 $ 68 $ 120,561 $ (641) $ (95,046) $ 24,942
============== ================== =================== ================= =============
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
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FISCAL YEAR
ENDED
----------------------------------------------------------------
DECEMBER 28, 2002 DECEMBER 29, 2001 DECEMBER 30, 2000
-------------------- -------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 6,444 $ (75,670) $ (25,188)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting principle........... 30,400 -- --
Depreciation and amortization................................. 5,357 10,680 9,052
Amortization of reorganization value in excess of
identifiable assets........................................ -- 3,258 3,258
Loss applicable to minority interest.......................... -- -- (35)
Write-down of net book value of property, plant and equipment. 382 2,872 --
Write-off of unamortized financing fees....................... -- 3,544 --
Interest rate swap............................................ (521) 521 --
Deferred taxes................................................ -- 1,652 361
Deferred royalty income....................................... (4,902) -- --
Deferred other................................................ (78) -- --
Restructuring and other credits, net.......................... (1,229) -- --
(Increase) decrease in:
Accounts receivable, net...................................... (10,146) 21,142 732
Inventories................................................... 25,397 36,873 (15,504)
Prepaid expenses and other current assets..................... (1,215) 576 1,073
Other assets.................................................. (14) (641) (1,250)
Increase (decrease) in:
Accounts payable, accrued expenses and other liabilities...... 19,335 (3,625) 7,234
Interest payable.............................................. (27,780) 16,920 7,531
Taxes payable................................................. (537) (1,116) 1,059
Deferred royalty income....................................... 20,000 -- --
-------------------- -------------------- ---------------------
Total adjustments................................................ 54,449 92,656 13,511
-------------------- -------------------- ---------------------
Net cash provided by (used in) operating activities before
reorganization items.......................................... 60,893 16,986 (11,677)
-------------------- -------------------- ---------------------
OPERATING CASH FLOWS FROM REORGANIZATION ITEMS:
Payment of reorganizations costs ............................. (4,317) -- --
Interest expense not paid..................................... 29,096 -- --
-------------------- -------------------- ---------------------
Net cash provided by reorganization items........................ 24,779 -- --
-------------------- -------------------- ---------------------
Net cash provided by (used in) operating activities.............. 85,672 16,986 (11,677)
-------------------- -------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from sales of fixed
assets..................................................... (8,092) (2,995) (6,025)
Minority interest purchase.................................... -- (126) --
-------------------- -------------------- ---------------------
Net cash used in investing activities............................ (8,092) (3,121) (6,025)
-------------------- -------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (pay down) borrowings under Bank Revolver................. (59,048) (11,210) 16,814
-------------------- -------------------- ---------------------
Net cash (used in) provided by financing activities.............. (59,048) (11,210) 16,814
-------------------- -------------------- ---------------------
Effect of exchange rate changes on cash and cash equivalents..... 4 (97) (351)
-------------------- -------------------- ---------------------
Net increase (decrease) in cash and cash equivalents............. 18,536 2,558 (1,239)
Cash and cash equivalents, at beginning of period................ 6,405 3,847 5,086
-------------------- -------------------- ---------------------
Cash and cash equivalents, at end of period...................... $24,941 $6,405 $3,847
==================== ==================== =====================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-8
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FISCAL YEAR
ENDED
---------------------------------------------------------
DECEMBER 28, 2002 DECEMBER 29, 2001 DECEMBER 30, 2000
---------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR
Interest $ 4,467 $ 9,652 $10,240
Income taxes 1,295 1,198 1,046
NONCASH INVESTING
Goodwill -- -- (130)
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-9
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
28, 2002 ("2002"), December 29, 2001 ("2001") and December 30, 2000 ("2000"),
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.
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.
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 expects to continue to operate in the ordinary course of
business as debtor-in-possession under the jurisdiction of the Bankruptcy Court.
The accompanying 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 Citicorp 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 consolidated financial statements do not include
F-10
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 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 accompanying 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 December 28, 2002 are
identified below:
DECEMBER 28,
2002
----
(in thousands)
13.0% Senior Notes due 2004 $ 110,000
Interest accrued on above Senior Notes 29,096
Accounts payable 3,889
Other accrued expenses 2,089
------------
Total liabilities subject to compromise $ 145,074
============
For 2002 the Company recognized $5.2 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 $18.5
million for 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, may 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
excluded from the Company's gross income in the year of the forgiveness.
However, the Company will be required to reduce its basis in its tax attributes,
which include net operating loss carry-forwards and general business and other
credits and tax basis in its assets by an amount equal to the COD. The reduction
of these tax attributes results in the Company not being able to shelter future
taxable income in the amount equal to the COD.
F-11
NOTE 3. 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.
(C) FAIR VALUE OF 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, inventory reserves and legal and tax
contingency reserves. Actual results could ultimately differ from those
estimates.
(E) REORGANIZATION VALUE
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142"), the Company ceased recording amortization relating to the
reorganization value in excess of identifiable assets, effective December 30,
2001. Prior to such date, reorganization value in excess of identifiable assets
was being amortized using the straight-line method over 20 years. The Company,
under the requirements of SFAS No. 142, reviewed this asset for impairment and
determined that the asset has been impaired. See Note 6 of Notes to Consolidated
Financial Statements for more information.
(F) TRADEMARKS
In accordance with SFAS No. 142, the Company ceased recording amortization on
its trademarks with indefinite lives, effective December 30, 2001. The Company,
under the requirements of SFAS No. 142, 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 substantialy all domestic
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
F-12
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
Furniture, 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. The impact of SFAS No. 133 does not have a material effect on the
Company's consolidated financial statements.
(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) ADVERTISING
Costs associated with advertising campaigns are expensed during the period when
the advertising takes place, and are included in the accompanying Consolidated
Statements of Operations in selling, general and administrative expenses. Costs
associated with cooperative advertising programs under which the Company, at its
discretion, agrees to share costs, under negotiated contracts, of customers'
advertising and promotional expenditures, are expensed when the related revenues
are recognized. Beginning in 2002, these costs have been recorded as a reduction
of net sales. Prior to 2002, these expenses are included in the accompanying
Consolidated Statements of Operations in selling, general and administrative
expenses. Total advertising expenses were $5.1 million in 2002, $5.3 million in
2001 and $7.9 million in 2000.
F-13
(N) SHIPPING AND HANDLING
The costs associated with shipping goods to customers are recorded as a
component of selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations. In fiscal years 2002, 2001 and 2000
shipping and handling costs were $1.7 million, $1.6 million and $1.7 million,
respectively.
(O) INCOME TAXES
Deferred income taxes are recorded 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.
(P) 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. The Company has adopted the disclosure requirements of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure".
Had compensation cost for these plans been determined consistent with SFAS No.
123, as amended by SFAS No. 148, net income and earnings per share would have
been reduced to the following pro forma amounts:
Fiscal Year Fiscal Year Fiscal Year
Ended December Ended December Ended December
28, 2002 29, 2001 30, 2000
------------------ ------------------ ----------------
(in thousands except per share amounts)
Net income (loss) as reported $ 6,444 $ (75,670) $ (25,188)
Less:
Stock based employee compensation expense
determined under the fair value
method, net of related tax effect -- 52 159
Net income (loss) as adjusted 6,444 (75,722) (25,347)
Basic and diluted EPS as reported 0.95 (11.13) (3.70)
Basic and diluted EPS as adjusted 0.95 (11.14) (3.73)
(Q) 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 2002, 2001 and 2000, options outstanding during the period using the
treasury stock method were excluded from the net income (loss) per share
computation of diluted earnings per share, as they were antidilutive.
(R) 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
F-14
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.
(S) RECLASSIFICATION
Certain amounts reflected in 2001 and 2000 financial statements have been
reclassified to conform to the presentation of similar items in 2002.
(T) NEW ACCOUNTING STANDARDS
In November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 01-9, "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 only impacted revenue and expense classifications and did not
change reported net income. In accordance with the consensus reached, the
Company adopted the required accounting beginning with fiscal 2002 and the
impact of this required accounting does not have a material impact on the
revenue and expense classifications in the Company's Consolidated Statements of
Operations.
In June 2001, the Financial Accounting Standards Board (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 adopted the provisions of SFAS No. 144
for fiscal year 2002, the impact of which did not have a significant effect on
the Company's results of operations or financial position.
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. SFAS 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, the impact of which did not have a significant effect on the Company's
results of operations or financial position.
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.
F-15
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 effective December 28, 2002.
NOTE 4. INVENTORIES:
Inventories consist of the following:
December 28, December 29,
2002 2001
------------ ------------
(in thousands)
Raw materials $ 6,482 $ 10,371
Finished goods 41,820 63,328
------------ ------------
Total inventories $ 48,302 $ 73,699
============ ============
In connection with the Company's restructuring efforts and management's focus on
improving operational efficiency and cash flow, during 2001, management
reassessed the value of its inventories. During the third and fourth quarters of
2001, the Company recorded inventory reserves aggregating approximately $17.7
million, to reflect at net realizable value, the merchandise that the Company
expected to sell off-price in the case of finished goods, along with the
acceleration of the expected liquidation of raw materials. During 2002, the
Company recorded a change in estimate and reversed $3.7 million, in aggregate,
of these reserves. See Note 17 of Notes to Consolidated Financial Statements for
more information.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 28, December 29, Estimated
2002 2001 Useful Lives
------------ ----------- ------------
(in thousands)
Machinery, equipment and fixtures $ 25,871 $18,892 3-10 years
Leasehold improvements 15,089 12,124 Life of lease
Construction in progress 251 1,059 N/A
------------ -----------
Property, plant and equipment, at cost 41,211 32,075
Less: Accumulated depreciation and
amortization (21,538) (16,438)
------------ -----------
Total property, plant and equipment,
net $ 19,673 $15,637
============ ===========
NOTE 6. REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS AND OTHER
INTANGIBLE ASSETS
In June 2001, the FASB issued 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 resulted in a reduction of amortization expense of
approximately $6.8 million in 2002. Such amortization expense totaled $7.3 and
$6.8 million in 2001 and 2000, respectively. SFAS No., 142 requires that the
F-16
Company's Reorganization Value in Excess of Identifiable Assets (the
"Reorganization Asset") and other indefinitely lived intangible assets
(collectively, the "Intangibles") be tested for impairment using the two-step
process. The first step is to determine the fair value of the reporting unit,
which may be calculated using a discounted cash flow methodology, and compare
this value to its carrying value. If the fair value exceeds the carrying value,
no further work is required and no impairment loss would be recognized. The
second step is an allocation of the fair value of the reporting unit to all of
the reporting unit's assets and liabilities under a hypothetical purchase price
allocation. As of the date the Company adopted SFAS No. 142, the Company was
experiencing substantial operating losses; highly leveraged; unable to make its
semi-annual interest payments on its Senior Notes; undergoing a corporate
restructuring of which success was uncertain; had diminimus market
capitalization and; on the verge of filing bankruptcy. These circumstances led
to a significant diminution of the Company's fair vale and the failure of step
one of SFAS No. 142. Based on the evaluation, along with continuing difficulties
being experienced in the industry, the Company recorded a non-cash charge of
$30.4 million to reduce the carrying value of the Reorganization Asset to the
estimated fair value. This non-cash charge is reported as a cumulative effect of
an accounting change in the accompanying statement of operations. The Company
utilized the discounted cash flow methodology to estimate fair value. The
evaluation of reporting units on a fair value basis, as required from the
implementation of SFAS No. 142, indicated that the implied Reorganization Asset
of the Kasper Wholesale segment was $30.4 million less than its carrying value.
If the Intangibles had not been amortized in 2001 and 2000, the Company's
adjusted net income (loss) and earnings (loss) per share would have been as
follows:
Fiscal Year
---------------------------------------------------
2002 2001 2000
--------------- ------------- -------------
(in thousands)
Reported net income (loss) $36,844 $(75,670) $(25,188)
Amortization of Intangibles --- 7,295 6,774
--------------- ------------- -------------
Adjusted net income (loss) before cumulative effect
of accounting change 36,844 (68,375) (18,414)
Cumulative effect of accounting change ( 30,400) --- ---
--------------- ------------- -------------
Adjusted net income (loss) $6,444 $(68,375) $(18,414)
=============== ============= =============
Diluted earnings per common share:
Reported income (loss) before cumulative effect of
accounting change $5.42 $(11.13) $ (3.70)
Intangibles amortization, net of tax --- 1.07 0.99
Cumulative effect of accounting change (4.47) --- ---
--------------- ------------- -------------
Adjusted net income (loss) $0.95 $(10.06) $(2.71)
=============== ============= =============
NOTE 7. DEBT:
CREDIT FACILITY -
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 Revolving Credit Agreement from its existing
bank group (the "Chase DIP"). The Chase DIP also provided for a term loan for
the purpose of refinancing the pre-petition obligations outstanding under the
Chase Facility. On July 12, 2002, the Chase DIP was amended to convert the tem
loan to a revolving credit agreement.
The Chase DIP provided, among other things, for the maintenance of certain
financial ratios and covenants, and set limits on capital expenditures and
F-17
dividends to shareholders. The Chase DIP was scheduled to expire on February 5,
2003. Availability under the Chase DIP was limited to a borrowing base
calculated upon eligible accounts receivable, inventory, trademarks and letters
of credit. Interest on outstanding borrowings was determined based on stated
margins above the prime rate at Chase, which on December 28, 2002, was 2.0%
above the prime rate. For fiscal 2002, the weighted average interest rate on the
Chase Facility and Chase DIP was 6.67%.
The Company paid approximately $2.4 million in commitment and related fees in
connection with the Chase Facility in July 1999, along with $875,000 and
$675,000 in connection with amendments on November 20, 2000 and June 19, 2001,
respectively. These fees were capitalized and amortized as interest and
financing costs over the remaining life of the Chase Facility. As a result of
the Chapter 11 Cases, the Company determined that the value of these capitalized
bank fees had been impaired. Accordingly, at the end of 2001, the Company wrote
off the unamortized bank fees totaling approximately $2.4 million. In connection
with the Chase DIP, the Company paid $875,000 in facility, advisory and
structuring fees, along with an annual administrative agency fee of $100,000 and
an annual collateral monitoring fee of $100,000. These fees were expensed as
incurred and included as part of reorganization costs. In connection with the
July 12, 2002 amendment, the Company paid $100,000 in bank fees, which were
capitalized and amortized over the remaining life of the Chase DIP, totaling
$85,000 in 2002.
As of December 28, 2002, there were no direct borrowings and $38.1 million
outstanding in letters of credit under the Chase DIP. In addition to $24.9
million of unrestricted cash and cash equivalents on hand, the Company had
approximately $34.9 million available for future borrowings as of December 28,
2002.
On January 30, 2003, the Company obtained a $100 million debtor-in-possession
financing facility (the "Citicorp DIP Credit Agreement") from its new bank group
led by Citicorp USA, Inc. ("Citicorp"). The Citicorp DIP Credit Agreement
replaced the Chase DIP and permits up to $60.0 million available for issuance of
letters of credit, of which $15.0 million will be available for stand-by letters
of credit and up to $10.0 million for discretionary swing loans.
The Citicorp DIP Credit Agreement provides, among other things, for the
maintenance of certain financial ratios and covenants, and set limits on capital
expenditures and dividends to shareholders. The Citicorp DIP Credit Agreement,
has a term ending on the earliest to occur of (i) the six month anniversary of
the closing date, (ii) the effective date of the Plan, or (iii) the occurrence
of an Event of Default. Availability under the Citicorp DIP Credit Agreement is
limited to a borrowing base calculated upon eligible accounts receivable,
eligible inventory, eligible documentary letters of credit and trademarks, in
each case, less appropriate reserves. Interest on outstanding borrowings is
determined based on stated margins above the Base Rate Loans and Eurodollar Rate
Loans maintained by Citicorp on the terms and subject to the conditions of the
agreement.
The Company paid approximately $1.6 million in commitment and related fees in
connection with the Citicorp DIP Credit Agreement in January 2003. On March 14,
2003 the Company obtained an amendment to the Citicorp DIP Credit Agreement
which allowed the DIP portion of the credit agreement to be extended to December
31, 2003, as well as amended certain financial covenants. There were no
incremental bank fees associated with this amendment.
F-18
SENIOR NOTES -
Pursuant to the Leslie Fay (the Company's parent prior to its spin-off in 1997)
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 $1.7 million for fiscal 2002 and $16.4 million for fiscal 2001,
including $300,000 and $2.1 million in default interest, respectively. At
December 28, 2002, the Senior Notes and related unpaid interest have been
classified as liabilities subject to compromise.
As a result of certain amendments to the Senior Notes, in July 1999, the Company
paid to each registered note holder, $0.02 in cash for each $1.00 in principal
amount of Senior Notes held by such registered holder, totaling $2.2 million
(the "Consent Fee"). The Consent Fee was being amortized over the remaining life
of the Senior Notes and was included in interest and financing costs. As a
result of the Chapter 11 Cases, the Company determined that the value of the
capitalized Consent Fee was impaired. Accordingly, at the end of 2001, the
Company wrote off approximately $1.1 million in unamortized Consent Fees.
NOTE 8. DEFERRED ROYALTY INCOME
In connection with the renewal of a licensing agreement, 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 the term of
the contract, which expires in 2006. The payment has been recorded as deferred
royalty income and income will be recognized as earned based upon actual sales
information provided by the licensee. As of December 28, 2002, $4.9 million had
been recognized as royalty income.
NOTE 9. DEFERRED OTHER
By an agreement dated as of August 1, 2002, AEL granted to Broadway Industry &
Commerce Development Co. Ltd. ("Broadway"), the exclusive right to act as its
buying agent for sportswear in specified countries in Asia and the Middle East,
through December 31, 2007 (the "Broadway Agreement"). In consideration of such
exclusive rights, Broadway paid AEL $1.0 million on December 2, 2002, and is
obligated to make a second payment of $1.0 million at such point as the
aggregate of all orders placed by Broadway on behalf of AEL reaches $32.0
million. AEL has the right at any time to terminate the term upon a change of
control of AEL or if AEL determines that Broadway is not rendering effective
services. However, if AEL makes such election, it is obligated to repay to
Broadway an amount equal to the amount paid by Broadway for its exclusive
rights, plus additional compensation for early termination. By a letter
agreement dated October 23, 2002 (and authorized by the Bankruptcy Court on
November 26, 2002), the Company and the parent company of Broadway provided
mutual guarantees of their respective subsidiaries' obligations under the
Broadway Agreement. As of December 28, 2002, $78,000 had been recognized as
other income, reducing selling, general and administrative expenses.
NOTE 10. RESTRUCTURING AND OTHER CHARGES (CREDITS)
In the fourth quarter of 2000, the Company began preparations for its bankruptcy
filing, and in doing so, incurred various consulting, legal and other fees
related to such filing. These fees, along with other charges taken to exit
certain retail store leases and certain office space prior to the Filing Date,
have been classified as restructuring and other charges on the accompanying
Consolidated Statements of Operations. For 2002, the Company recognized a net
restructuring and other credit of $2.5 million. This credit resulted from the
reevaluation of the decision to exit certain retail store leases and certain
office space for which the Company reversed a charge of $3.1 million, partially
offset by $603,000 of restructuring and other charges related primarily to
professional fees. For 2001 and 2000, the Company recognized restructuring and
other charges of $9.2 million and $2.3 million, respectively. These amounts
relate to professional fees, estimated lease contract termination costs, asset
write-downs and severance costs.
F-19
Estimated occupancy costs,
severance and asset
write-downs
Professional Fees (reversals) Total
-----------------------------------------------------------------
(in thousands)
2000 restructuring and other charges $ 1,244 $ 1,100 $ 2,344
2000 payments/write-downs (1,244) (1,100) (2,344)
-------- -------- -------
Balance at December 30, 2000 --- --- ---
2001 restructuring and other charges 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 restructuring and other charges (credits) 603 (3,098) (2,495)
2002 (payments) reversals (704) 956 252
-------- -------- -------
Balance at December 28, 2002 $ --- $ 960 $ 960
======== ======== =======
NOTE 11. INCOME TAXES:
As of December 28, 2002, December 29, 2001 and December 30, 2000, the provision
for income taxes consisted of:
December 28, December 29, December 30,
2002 2001 2000
------------ ------------ ------------
(in thousands)
Current:
Federal $ 2,156 $ (602) $ 6
State 3,096 (197) 121
Foreign 4,997 897 1,401
------------ ------------ ------------
Total Current: $ 10,249 $ 98 $ 1,528
------------ ------------ ------------
Deferred:
Federal --- 1,652 ---
State --- --- ---
------------ ------------ ------------
Income tax provision $ 10,249 $ 1,750 $ 1,528
============ ============ ============
The Company's federal tax returns for the 1997 through 2000 tax years are under
examination by the Internal Revenue Service. As of December 28, 2002, the
outcome of this audit was uncertain; however, the Company believes it has
adequately provided against any exposure, in the unlikely event the Company
fails to meet its burden of proof under the examination. See Note 12 of Notes to
Consolidated Financial Statements for further information. For the tax year
ended December 28, 2002, the Company utilized approximately $35.0 million in net
operating loss carryforwards against fiscal 2002 taxable income. Current state
tax expense includes approximately $1.6 million relating to income tax
liabilities in New Jersey and California as a result of the suspension of net
operating loss carryforwards by those states for the 2002 tax year.
The Company is in an accumulated loss position for both financial reporting and
income tax purposes. For the years ended December 28, 2002 and December 29,
2001, the Company had net operating loss carryforwards of approximately $39.0
and $74.0 million, respectively. For financial reporting purposes, the tax
benefit of the Company's net operating loss carryforwards 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-20
Deferred tax (assets) liabilities are comprised of the following:
December 28, December 29,
2002 2001
------------ ------------
(in thousands)
Deferred tax assets
Accounts receivable reserve $(7,062) $ (14,191)
Inventory, net (445) (4,280)
Net operating loss (13,274) (23,814)
Depreciation/Amortization (2,093) ---
Deferred revenue (5,133) ---
Other accruals (2,022) (4,458)
------------ ------------
Total deferred tax assets (30,029) (46,743)
------------ ------------
Deferred tax liabilities
Amortization --- 5,499
------------ ------------
Total deferred tax liabilities --- 5,499
------------ ------------
Valuation allowance 30,029 41,244
------------ ------------
Net deferred tax assets $ --- $ ---
============ ===========
For the fiscal year ended December 28, 2002, 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, provision of taxes related to
potential identified exposures and foreign taxes. The difference between the
Company's effective income tax rate and the statutory federal income tax rate
for fiscal years ended December 28, 2002, December 29, 2001 and December 30,
2000, is as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 28, 2002 December 29, 2001 December 30, 2000
----------------- ----------------- -----------------
(in thousands, except percentages)
Income tax provision $ 10,249 $ 1,750 $ 1,528
----------------- ----------------- -----------------
Income (loss) before taxes and effect
of cumulative change in accounting principle $ 47,093 $ (73,920) $ (23,660)
----------------- ----------------- -----------------
Federal statutory rate 34.0% ( 34.0)% (34.0)%
Valuation allowance (23.8) 34.0 34.0
Foreign taxes (net) 10.6 1.2 5.9
Net state tax 4.3 (0.3) 0.5
Other (3.3) 1.5 ---
----------------- ----------------- -----------------
Effective tax rate 21.8 % 2.4 % 6.4 %
================= ================= =================
NOTE 12. 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.
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
F-21
issued a proposed adjustment, which would result in additional income taxes in
prior years resulting in a reduction in net operating loss carryforwards, which
were approximately $39.0 million and $74.0 million at December 28, 2002 and
December 29, 2001, respectively, 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. In connection with the
proposed adjustment, on August 7, 2002 the IRS filed proof of claim in the
Bankruptcy Cases in the amount of approximately $4.7 million (the "IRS Claim"),
on the basis that the Debtors improperly made amortization deductions during the
years 1997 through 1999. The IRS Claim seeks priority under section 507(a)(8) of
the Bankruptcy Code. On November 22, 2002, the Debtors filed an Objection to the
IRS Claim pursuant to section 505 of the Bankruptcy Code, by which they
requested the Court to disallow the IRS Claim in its entirety based on a
determination of federal income tax liability pursuant to section 505(a)(1) of
the Bankruptcy Code. The Debtors assert that the tax returns and the deductions
claimed therein were proper and correct and, therefore, they are not liable for
any additional taxes over and above those reported in the consolidated annual
tax returns. Unless the parties are able to agree on a resolution of the
dispute, the issues are expected to be decided by the Bankruptcy Court within
the next 6 months, and no assurance can be given as to the outcome of the
dispute.
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, subsequently
approved by the Bankruptcy Court, pursuant to which, inter alia, the Company
paid Mr. Levine $199,999 and Mr. Levine withdrew all claims in the Chapter 11
Cases. Accordingly, the Company reversed this accrual in the fourth quarter 2002
by $1.1 million.
Apart from the proceedings in the Bankruptcy Court, the Company is not involved
in any legal proceedings of significance.
EMPLOYMENT AGREEMENTS -
The Company and Mr. Idol are parties to an employment agreement dated July 18,
2001 (the "Idol Employment Agreement"), 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. Subject to a minimum bonus in 2002 of
$750,000, the agreement provides for a bonus in each year equal to 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 to Mr. Idol an
unsecured promissory note in the principal amount of $1.0 million, payable, with
interest accruing at 9% per annum, on July 18, 2004 (the "Note").
Pursuant to an amendment to the Idol Employment agreement dated October 31, 2002
(the "Amendment"), upon the effective date of a plan of reorganization with
respect to the Company approved by the Bankruptcy Court (the "Effective Date"),
the Company is obligated to issue to Mr. Idol restricted shares of its common
stock (i) having a value of $1.0 million in full satisfaction of the Note and
(ii) having a value of two and one-half percent (2-1/2%) of the number of shares
issued under the Plan of reorganization, based on the value ascribed to shares
of the common stock of the Company for purposes of issuing and distributing its
common stock on the Effective Date pursuant to the Plan (the "Ascribed Value").
One-half (50%) of the restricted shares shall vest (meaning that they shall
become transferable) on the second anniversary of the Effective Date and
twenty-five percent (25%) shall vest on each of the third and fourth
anniversaries of the Effective Date; provided in each case, that, at least once
during the period on and after the Effective Date, for a period of twenty (20)
consecutive trading days, the closing sales price of a share of such stock is at
least one hundred and fifty percent (150%) of the Ascribed Value. Any restricted
F-22
shares that are not vested shall become vested on the date of Mr. Idol's death,
Total Disability, termination without Cause or resignation for Good Reason, or
upon a Change in Control of the Company (as all such terms are defined in the
Idol Employment Agreement), or on the tenth (10th) anniversary of the date the
shares are issued.
The Company is also obligated to grant to Mr. Idol on the Effective Date options
to purchase shares of the Company's common stock (on a fully diluted basis)
equal to two and one-half percent (2-1/2%) of the total number of shares issued
under the Plan. The per share exercise price under the options shall be an
amount equal to $80 million divided by the total number of shares issued under
the Plan. The options shall vest ratably on each of first four anniversaries of
the Effective Date, provided that (A) (i) Mr. Idol is employed on such date and
(ii) at least once during the period on and after the Effective Date, for a
period of twenty (20) consecutive trading days, the closing sales price of a
share of such stock is at least one hundred and fifty percent (150%) of the
Ascribed Value, and (B) if earlier, the options shall fully vest on the date of
Mr. Idol's death, Total Disability, termination of employment without Cause or
resignation for Good Reason or upon a Change of Control or on the tenth
anniversary of the date the options are issued. The non-vested portion of the
options shall be cancelled upon termination for Cause or resignation for Good
Reason. All outstanding options (including vested options) shall terminate on
the first anniversary of Mr. Idol's death or Total Disability or on the 90th day
following any other termination of employment.
In addition, in the event of a transaction which results in a Change of Control
before the restricted stock and stock options are issued, on the date of such
Change of Control, Mr. Idol is entitled to (in lieu of the restricted stock and
stock options): (i) a lump sum payment equal to one million dollars ($1,000,000)
plus accrued interest in cash (in full satisfaction of the Note), plus (ii) an
amount equal to two and one-half percent (2 1/2%) of the aggregate amount which,
by virtue of such transaction, will be available for distribution under the Plan
in satisfaction of all senior notes claims, general unsecured claims and
convenience claims (the "Distributable Amount"), plus (iii) an amount equal to
two and one-half percent (2 1/2%) of the amount by which the Distributable
Amount exceeds eighty million dollars ($80,000,000).
The Company has entered into employment agreements with certain executive
officers (including that described above), which provide for minimum annual
compensation of approximately $2.2 million through December 2003 and
approximately $2.7 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 28, 2002
are summarized as follows:
Equipment
Fiscal Year Ended Real Estate & Other
- ---------------------------------- -------------------- -------------------
(in thousands)
2003 $ 10,853 $ 120
2004 10,219 112
2005 9,562 15
2006 9,237 --
2007 7,028 --
Thereafter 24,843 --
-------------------- -------------------
Total minimum lease payments $ 71,742 $ 247
==================== ===================
Base rent expense for the fiscal years ended December 28, 2002, December 29,
2001 and December 30, 2000, amounted to approximately $11.1 million, $13.1
million and $11.9 million, respectively.
As discussed in Note 10 of Notes to Consolidated Financial Statements, the
Company recorded a charge in 2001, which included approximately $2.7 million for
cost associated with exiting leased properties. As a result of the Chapter 11
F-23
filing on February 5, 2002, management calculated this reserve amount using the
parameters prescribed by the Bankruptcy Court guidelines with respect to lease
rejections. During 2002, the Company reevaluated its decision to exit certain
retail stores and office space and as a result, recognized a credit of $1.4
million relating to lease costs.
CONCENTRATIONS OF CREDIT RISK -
Financial instruments that potentially expose the Company to concentrations of
credit risk, consist primarily of trade accounts receivable. The Company's
customers are not concentrated in any specific geographic region within the
United States, but are concentrated in the retail apparel business. The Company
has established an allowance for possible losses based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
For the years ended December 28, 2002, December 29, 2001 and December 30, 2000,
sales to the same three customers accounted for approximately 20%, 20% and 16%,
21%, 16% and 17%, 21%, 16% and 15%, respectively.
NOTE 13. 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 69 retail stores
throughout the United States along with one full price Anne Klein retail store
in New York City, as another distribution channel for its products. The Company
also 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, reorganization, restructuring and other charges and
cumulative effect of change in accounting principle ("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 28, 2002
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ------------------ -----------------------------------------
(in thousands)
Revenues $298,491 $59,546 $17,719 $375,756
EBITDAR 39,677 7,569 14,723 61,969
Restructuring and other credits (2,495)
Depreciation and amortization 5,357
-------------------
Operating income $59,107
Total Assets $124,915 $8,762 $103,162 $236,839
Capital Expenditures 7,280 843 -- 8,123
F-24
FISCAL YEAR ENDED DECEMBER 29, 2001
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ------------------ -----------------------------------------
(in thousands)
Revenues $ 296,492 $ 72,101 $ 15,268 $ 383,861
EBITDAR (35,175) 971 14,336 (19,868)
Restructuring and other charges 9,201
Depreciation and amortization 13,550
-------------------
Operating loss $ (42,619)
Total Assets $ 143,211 $12,317 $ 103,162 $ 258,690
Capital Expenditures 2,137 858 -- 2,995
FISCAL YEAR ENDED DECEMBER 30, 2000
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ------------------ -----------------------------------------
(in thousands)
Revenues $325,593 $75,204 $14,908 $415,705
EBITDAR 2,023 481 13,101 15,605
Restructuring and other charges 2,344
Depreciation and amortization 11,345
-------------------
Operating income $ 1,916
Total Assets $ 210,902 $19,785 $ 106,430 $ 337,117
Capital Expenditures 4,170 1,855 -- 6,025
NOTE 14. 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 28, 2002, December
29, 2001 and December 30, 2000 were approximately $220,000, $206,000 and
$400,000, respectively. The Company did not make discretionary matching
contributions during the first quarter of 2001, and reduced the amount of the
matching contribution beginning in the second quarter of 2001, accounting for
the decrease from 2000.
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 $1.3
million, $2.2 million and $2.5 million to the plan in 2002, 2001 and 2000,
respectively.
NOTE 15. 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
F-25
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
had an exercise price of $14.00 per share and vested ratably over the first
three anniversaries following the date of grant. The Director Options expired on
the fifth anniversary of the date of grant. Director Options are not
transferable by the optionee other than by will or the laws of descent and
distribution or to facilitate estate planning, and each option is exercisable
during the lifetime of the optionee only by such optionee. At the date of
issuance, the fair market value per share was $15.50.
On July 30, 1998, the Board of Directors approved the grant of stock options to
purchase 20,000 shares of Common Stock to each of its two newly elected
directors under the same terms of the Director Options granted on June 10, 1997.
In addition, the Director Options granted to the two outgoing directors became
fully vested as of that date. The market value per share on July 30, 1998 was
$13.00. Effective December 28, 2002, all outstanding stock options were
voluntarily cancelled pursuant to an agreement between the Company and the
option holders.
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.
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 28, 2002, December 29, 2001 and December
30, 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 28, 2002 December 29, 2001 December 30, 2000
------------------------------- ------------------------------- ------------------------------
Shares Weighted Shares Weighted Shares Weighted
(000) Average Exercise (000) Average Exercise (000) Average
Price Price Exercise Price
--------- ----------------- --------- ----------------- --------- -----------------
Outstanding beginning of year 140 $ 14 182 $ 14 182 $ 14
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Cancelled 40 -- -- -- -- --
Expired 100 14 42 14 -- --
--------- ----------------- --------- ----------------- --------- -----------------
Outstanding end of year -- $ -- 140 $ 14 182 $ 14
--------- ----------------- --------- ----------------- --------- -----------------
Exercisable end of year -- $ -- 140 $ 14 169 $ 14
Weighted average of fair
value of options granted $ -- $ 7.23 $ 6.79
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 and 2000, respectively: risk-free interest
rate of 5.8% for the Management Plan and 6.4% and 5.6% for the Director Options;
F-26
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.
NOTE 16. UNAUDITED QUARTERLY RESULTS:
Unaudited quarterly financial information for 2002 and 2001 is set forth as
follows:
FIRST QUARTER
2002 (RESTATED) SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ------------------------------------ ---------------- --------------- ---------------- ----------------
(in thousands except per share data)
Net sales $ 113,616 $ 67,774 $ 97,786 $ 78,861
Gross profit 40,463 35,121 43,502 33,767
Net (loss) income (24,742) 5,994 9,971 15,221
Net (loss) income per share (3.64) 0.88 1.47 2.24
2001 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH 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)
The first quarter 2002 was restated as a result of the Company's adoption of
SFAS No. 142 and reflects the non-cash charge of $30.4 million to reduce the
carrying value of the Reorganization Asset to its estimated fair value. See Note
6 of Notes to Consolidated Financial Statements for further information. The
Company incurred a significantly larger net loss in the third and fourth
quarters of 2001 than in 2002, excluding the cumulative effect of change in
accounting principle as it continued its restructuring plan. The Company
experienced a significant increase in gross profit in 2002 as a result of (i) a
higher level of promotional allowances especially in light of the weak retail
environment; and (ii) a substantial write-down of raw material inventories in
conjunction with a planned strategic change in the garment procurement process,
both of which occurred in 2001. The Company also had higher restructuring and
other charges and interest costs from multiple bank amendments, higher
borrowings, professional fees and the write-off of deferred financing costs in
2001.
NOTE 17. 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 in 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 in 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 $1.7 million in 2002.
F-27
NOTE 18. SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION:
The following presents the condensed financial statements of the Company and its
subsidiaries, as of and for the year ending December 28, 2002, that filed
voluntary petitions under Chapter 11:
Entities in
CONDENSED BALANCE SHEET Bankruptcy
- --------------------------------------------------------------------- -------------------
(in thousands)
ASSETS
Current Assets:
Cash $22,896
Accounts receivable, net 12,709
Inventories, net 46,726
Prepaid expenses and other current assets 4,701
-------------------
Total Current Assets 87,032
-------------------
Property, plant and equipment, net 18,064
Intangibles and other assets, net 123,020
Investment in subsidiaries 47,796
-------------------
Total Assets $ 275,912
===================
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities $58,228
Payable to wholly-owned entities not in bankruptcy 67,861
Long-term liabilities not subject to compromise 10,000
Liabilities subject to compromise 145,074
-------------------
Total Liabilities 281,163
Shareholders' Equity (5,251)
-------------------
Total Liabilities and Equity $ 275,912
===================
Entities in
CONDENSED STATEMENT OF OPERATIONS Bankruptcy
- --------------------------------------------------------------------- -------------------
(in thousands)
Total revenue $ 368,192
Cost of sales 226,409
-------------------
Gross profit 141,783
Selling, general and administrative expenses 85,319
Restructuring and other credits (2,495)
Depreciation and amortization 4,676
-------------------
Total operating expenses 87,500
-------------------
Operating income 54,283
Interest and financing costs 6,834
Reorganization costs 5,166
Income taxes 9,209
Cumulative effect of accounting change 30,400
-------------------
Net income $2,674
===================
F-28
Entities in
CONDENSED STATEMENT OF CASH FLOWS Bankruptcy
- ------------------------------------------------------------------- -------------------
(in thousands)
Cash Flows from Operating Activities $ 85,917
Cash Flows used in Investing Activities (7,060)
Cash Flows used in Financing Activities (59,048)
-------------------
Net increase in cash and cash equivalents 19,809
Cash and cash equivalents, beginning of period 3,087
-------------------
Cash and cash equivalents, end of period $22,896
===================
F-29
SCHEDULE II
KASPER A.S.L., LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Costs (Charged
Beginning of to) Reversed from Balance at
Description Period Expense Deductions End of Period
- ---------------------------------------- ----------------------- -------------------- ------------------- ---------------
FISCAL YEAR ENDED DECEMBER 28, 2002:
Allowance for doubtful accounts $ (292) $ (11) --- $ (303)
Allowance for customer deductions (38,797) (62,611) 55,448 (31,634)
Restructuring and other charges (3,203) 2,495 (252) (960)
Taxation valuation allowance (41,244) --- 11,215 (30,029)
FISCAL YEAR ENDED DECEMBER 29, 2001:
Allowance for doubtful accounts $ (192) $ (123) $ 23 $ (292)
Allowance for customer deductions (23,560) (97,064) 112,301 (38,797)
Restructuring and other charges --- (9,201) 5,998 (3,203)
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) (74,955) 82,508 (23,560)
Restructuring and other charges --- (2,344) 2,334 ---
Taxation valuation allowance --- (9,028) --- (9,028)
(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-30
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 14, 2003
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 14, 2003
Chief Executive Officer
(Principal Executive Officer)
/s/ Joseph B. Parsons
- ----------------------------------------
Joseph B. Parsons Executive Vice President, Chief April 14, 2003
Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
/s/ Martin Bloom
- ----------------------------------------
Martin Bloom Director April 14, 2003
/s/ H. Sean Mathis
- ----------------------------------------
H. Sean Mathis Director April 14, 2003
F-31
/s/ Salvatore M. Salibello
- ----------------------------------------
Salvatore M. Salibello Director April 14, 2003
/s/ Denis J. Taura
- ----------------------------------------
Denis J. Taura Director April 14, 2003
F-32
CERTIFICATIONS
--------------
I, John D. Idol, certify that:
1. I have reviewed this annual report on Form 10-K of Kasper A.S.L., Ltd.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: April 14, 2003
/s/ John D. Idol
--------------------------
John D. Idol
Chief Executive Officer
I, Joseph B. Parsons, certify that:
1. I have reviewed this annual report on Form 10-K of Kasper A.S.L., Ltd.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: April 14, 2003
/s/ Joseph B. Parsons
--------------------------------------------
Joseph B. Parsons
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------------ ------------------------------------------------------------------
3.1 (4) Amended and Restated Certificate of Incorporation as filed on May
30, 1997.
3.2 (4) Amendment to Certificate of Incorporation as filed on November 5,
1997.
3.3 (21) Second Amended and Restated By-laws
4.1 (1) 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 (9) Second Supplemental Indenture, dated as of June 16, 1999, to the
Indenture, dated as of June 1, 1997 and effective as of June 4,
1997, as amended, between the Company and IBJ Whitehall Bank &
Trust Company, as trustee.
4.3 (2) Form of Senior Note issued under the Indenture.
4.4 (6) Specimen Certificate of the Company's Common Stock.
10.1 (8) 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(13) Amendment Agreement No. 1 to the Amended and Restated Credit
Agreement, dated December 22, 1999.
10.12(15) Amendment Agreement No. 2 to the Amended and Restated Credit
Agreement, dated June 29, 2000.
10.13 (16) Amendment Agreement No. 3 to the Amended and Restated Credit
Agreement, dated November 13, 2000.
10.14 (18) Waiver Agreement to the Amended and Restated Credit Agreement,
dated March 28, 2001.
10.15 (20) Amendment Agreement No. 4 to the Amended and Restated Credit
Agreement, dated June 19, 2001.
10.16 (17) Consulting Agreement dated October 25, 2000, between the Company
and Alvarez and Marsal, Inc.
10.17 (19) Consulting Agreement dated April 11, 2001, between the Company
and Alvarez and Marsal, Inc.
10.18 (23) 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.
Exhibit
Number Description
- ------------- -----------------------------------------------------------------
10.19 (30) First Amendment to Revolving Credit and Guaranty Agreement,
dated July 12, 2002.
10.19(a)(31) Debtors' First Amended and Restated Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code.
10.19(b)(32) First Amended and Restated Disclosure Statement, dated November
6, 2002.
10.20 (4) Employment Agreement, dated June 4, 1997 between the Company and
Arthur S. Levine.
10.21 (22) Employment Agreement, dated July 18, 2001 between the Company
and John D. Idol.
10.21(a) Amendment to Employment Agreement, between the Company and John
D. Idol, dated October 31, 2002.
10.22 (24) Employment Agreement, dated March 1, 2002 between the Company
and Laura Lentini Iaffaldano.
10.22(a) Amendment to Employment Agreement, between the Company and Laura
Lentini Iaffaldano, dated January 15, 2003.
10.23 (25) Employment Agreement, dated October 10, 2001 between the Company
and Richard Owen.
10.23(a) Amendment to Employment Agreement, between the Company and
Richard Owen, dated January 16, 2003.
10.24 (26) Employment Agreement, dated August 27, 2001 between the Company
and Lee Sporn.
10.24(a) Amendment to Employment Agreement, between the Company and Lee
Sporn, dated October 31, 2002.
10.25 (29) Employment Agreement, dated March 25, 2002 between the Company
and Joseph B. Parsons.
10.25(a) Amendment to Employment Agreement, between the Company and
Joseph B.Parsons, dated October 31, 2002.
10.26 Secured Super-Priority Debtor-In-Possession Revolving Credit
Agreement, dated as of January 9, 2003, among the Company, the
guarantors named therein, the lenders named therein and Citicorp
USA, Inc., as administrative agent, arranger and book manager.
10.26(a) Amendment No. 1 to Secured Super-Priority Debtor-In-Possession
Revolving Credit Agreement, March 14, 2003.
10.3 (5) Lease Modification Agreement and Lease Agreement, each dated
August 20, 1996, between the Company and Import Hartz Associates
10.31 (14) First Lease Modification Agreement, dated April 30, 1999, by and
between the Company and Import Hartz Associates.
10.4 (4) Acquisition Agreement dated June 2, 1997, by and among the
Company, ASL/K Licensing Corp., Herbert Kasper and Forecast
Designs, Inc.
10.41 (4) 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.
Exhibit
Number Description
- ------------- -----------------------------------------------------------------
10.6 (4) 1997 Management Stock Option Plan.
10.61 (12) 1999 Share Incentive Plan.
10.7 (4) Form of Stock Option Agreement issued to Directors.
10.8 (11) Letter Agreement, dated as of September 13, 1999, between the
Company and Whippoorwill Associates, Inc., as agent for
various discretionary accounts.
10.9 (10) 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.
16 (28) Letter of Arthur Andersen LLP
21 Subsidiaries of the Registrant.
23 Notice Regarding Consent of Arthur Andersen LLP
24 Power of Attorney (included in signature page).
99 (27) Letter To Commission Pursuant To Temporary Note 3t.
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.
- -----------------------------
(1) Incorporated by reference to Exhibit No. 1 to the Company's Report on Form
8-K filed with the Commission on July 14, 1997.
(2) Incorporated by reference to Exhibit No. 2 to the Company's Report on Form
8-K filed with the Commission on July 14, 1997.
(3) Incorporated by reference to Exhibit No. 3 to the Company's Report on Form
8-K filed with the Commission on July 14, 1997.
(4) 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.
(5) 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.
(6) Incorporated by referenced to the Company's Form 8-A filed with the
Commission on May 1, 1998.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) Incorporated by reference to Annex A of the Company's Definitive Proxy
Statement filed with the Commission on January 28, 2000.
(13) Incorporated by reference to Exhibit No. 10.11 to the Company's Report on
Form 10-K filed with the Commission on March 31, 2000.
(14) Incorporated by reference to Exhibit No. 10.31 to the Company's Report on
Form 10-K filed with the Commission on March 31, 2000.
(15) 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.
(16) 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.
(17) Incorporated by reference to Exhibit No. 10.14 to the Company's Report on
Form 10-K filed with the Commission on March 30, 2001.
(18) Incorporated by reference to Exhibit No. 10.15 to the Company's Report on
Form 10-K filed with the Commission on March 30, 2001.
(19) 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.
(20) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on
Form 8-K filed with the Commission on June 29, 2001.
(21) 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.
(22) 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.
(23) Incorporated by reference to Exhibit No. 10.17 to the Company's Report on
Form 10-K filed with the Commission on April 15, 2002.
(24) Incorporated by reference to Exhibit No. 10.22 to the Company's Report on
Form 10-K filed with the Commission on April 15, 2002.
(25) Incorporated by reference to Exhibit No. 10.23 to the Company's Report on
Form 10-K filed with the Commission on April 15, 2002.
(26) Incorporated by reference to Exhibit No. 10.24 to the Company's Report on
Form 10-K filed with the Commission on April 15, 2002.
(27) Incorporated by reference to Exhibit No. 99 to the Company's Report on Form
10-K filed with the Commission on April 15, 2002.
(28) Incorporated by reference to Exhibit No. 16.1 to the Company's Report on
Form 8-K/A filed with the Commission on May 2, 2002.
(29) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on
Form 10-Q filed with the Commission on May 20, 2002.
(30) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on
Form 10-Q filed with the Commission on August 19, 2002.
(31) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on
Form 10-Q filed with the Commission on November 18, 2002.
(32) Incorporated by reference to Exhibit No. 10.2 to the Company's Report on
Form 10-Q filed with the Commission on November 18, 2002.