UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 28, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number: 0-24179
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KASPER A.S.L., LTD.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-3497645
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(State of Incorporation) (IRS Employer Identification No)
77 METRO WAY, SECAUCUS, NEW JERSEY 07094
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(Address and zip code of principal executive office)
(201) 864-0328
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.01 par
value, outstanding as of August 18, 2003 was 6,800,000.
1
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
PART I - FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at June 28, 2003,
December 28, 2002 and June 29, 2002......................................... 3
Condensed Consolidated Statements of Operations for the
Thirteen weeks and Twenty-six weeks ended June 28, 2003 and
June 29, 2002............................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Twenty-six weeks ended June 28, 2003 and June 29, 2002 .................... 5
Notes to Condensed Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 14
Item 4. Controls and Procedures.................................................... 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................... 23
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
2
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
------------------ ------------------- ------------------
ASSETS JUNE DECEMBER JUNE
28, 2003 28, 2002 29, 2002
------------------ ------------------- ------------------
(UNAUDITED) (AUDITED) (UNAUDITED)
(RESTATED)
Current Assets:
Cash and cash equivalents................................... $ 13,387 $ 24,941 $ 39,272
Restricted cash............................................. 20 -- 50,848
Accounts receivable, net of reserves of $29,324, $34,679
and $33,757, respectively............................... 32,342 14,479 5,731
Inventories, net............................................ 51,640 48,302 38,353
Prepaid expenses and other current assets................... 6,029 5,441 6,413
------------------ ------------------- ------------------
Total Current Assets........................................ 103,418 93,163 140,617
------------------ ------------------- ------------------
Property, plant and equipment, at cost less accumulated
depreciation and amortization of $24,362, $21,538 and
$18,507, respectively....................................... 19,718 19,673 18,579
Reorganization value in excess of identifiable assets, net of
accumulated amortization.................................... 19,844 19,844 19,844
Trademarks, net of accumulated amortization....................... 103,162 103,162 103,162
Other assets, at cost less accumulated amortization............... 2,289 997 988
------------------ ------------------- ------------------
Total Assets..................................................... $248,431 $236,839 $283,190
================== =================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Not Subject to Compromise:
Accounts payable............................................ $26,768 $28,592 $15,079
Accrued expenses and other current liabilities.............. 14,106 13,095 13,887
Interest payable............................................ 72 182 561
Deferred income taxes....................................... 13,987 9,118 8,653
Deferred royalty income..................................... 5,000 5,098 2,969
DIP facility................................................ -- -- 78,002
------------------ ------------------- ------------------
Total Current Liabilities......................................... 59,933 56,085 119,151
Long-Term Liabilities Not Subject to Compromise:
Deferred royalty income..................................... 8,139 10,000 15,000
Other long-term liabilities................................. 647 738 --
------------------ ------------------- ------------------
Total Liabilities Not Subject to Compromise....................... 68,719 66,823 134,151
Liabilities Subject to Compromise................................. 144,462 145,074 149,491
------------------ ------------------- ------------------
Total Liabilities................................................. 213,181 211,897 283,642
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common Stock, 6,800,000 shares issued and outstanding....... 68 68 68
Preferred Stock, none issued and outstanding................ -- -- --
Capital in excess of par value.............................. 120,774 120,561 120,350
Accumulated deficit......................................... (85,550) (95,046) (120,240)
Cumulative other comprehensive loss......................... (42) (641) (630)
------------------ ------------------- ------------------
Total Shareholders' Equity (Deficit).............................. 35,250 24,942 (452)
------------------ ------------------- ------------------
Total Liabilities and Shareholders' Equity........................ $248,431 $236,839 $283,190
================== =================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
3
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------------------- -----------------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2003 2002 2003 2002
------------------ ------------------- -------------------- -------------------
(RESTATED)
Net sales...................................... $ 87,448 $67,774 $ 187,945 $ 181,390
Royalty income................................. 3,817 4,042 8,182 7,727
------------------ ------------------- -------------------- -------------------
Total revenue.................................. 91,265 71,816 196,127 189,117
Cost of sales.................................. 56,540 36,695 119,063 113,537
------------------ ------------------- -------------------- -------------------
Gross profit................................... 34,725 35,121 77,064 75,580
Operating expenses (income):
Selling, general and administrative expenses... 26,024 23,824 50,958 47,779
Depreciation and amortization.................. 1,501 1,028 2,970 2,057
Restructuring and other credits................ -- (2,476) -- (1,934)
------------------ ------------------- -------------------- -------------------
Total operating expenses....................... 27,525 22,376 53,928 47,902
------------------ ------------------- -------------------- -------------------
Operating income............................... 7,200 12,745 23,136 27,678
Interest and financing costs (excludes
$5,157 and $4,630 of stayed interest
in second quarter 2003 and 2002,
respectively and $10,050 and $7,298 in
first half 2003 and 2002, respectively)..... 727 1,570 1,710 5,122
------------------ ------------------- -------------------- -------------------
Income before reorganization costs, income
taxes and cumulative effect of change
in accounting principle..................... 6,473 11,175 21,426 22,556
Reorganization costs........................... 3,906 841 5,053 2,469
------------------ ------------------- -------------------- -------------------
Income before income taxes and cumulative
effect of change in accounting principle.... 2,567 10,334 16,373 20,087
Income taxes................................... 1,077 4,340 6,877 8,437
------------------ ------------------- -------------------- -------------------
Income before cumulative effect of change
in accounting principle..................... 1,490 5,994 9,496 11,650
Cumulative effect of change in accounting
principle................................... -- -- -- 30,400
------------------ ------------------- -------------------- -------------------
Net income (loss).............................. $1,490 $ 5,994 $ 9,496 $(18,750)
================== =================== ==================== ===================
Basic and diluted earnings (loss) per
common share................................ $ 0.22 $0.88 $ 1.40 $(2.76)
================== =================== ==================== ===================
Weighted average number of shares used
in computing basic and diluted earnings
(loss) per common share..................... 6,800,000 6,800,000 6,800,000 6,800,000
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
4
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
TWENTY-SIX WEEKS
ENDED
------------------------------------------------
JUNE 28, 2003 JUNE 29, 2002
---------------------- ----------------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $9,496 $(18,750)
---------------------- ----------------------
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Cumulative effect of change in accounting principle....................... -- 30,400
Depreciation and amortization............................................. 2,970 2,057
Interest rate swap........................................................ -- 521
Deferred income taxes..................................................... 4,869 8,116
Deferred royalty income................................................... (1,959) (2,031)
Deferred other............................................................ (91) --
Non-cash restructuring and other costs.................................... 149 (1,074)
(Increase) decrease in:
Accounts receivable, net.................................................. (17,863) (1,398)
Inventories, net.......................................................... (3,338) 35,346
Prepaid expenses and other assets......................................... (1,408) (2,187)
(Decrease) increase in:
Accounts payable, accrued expenses and other current liabilities.......... 4,696 (1,611)
Interest payable.......................................................... (110) (27,937)
Deferred royalty income................................................... -- 20,000
---------------------- ----------------------
Total adjustments............................................................ (12,085) 60,202
---------------------- ----------------------
Net cash (used in) provided by operating activities before reorganization
items..................................................................... (2,589) 41,452
---------------------- ----------------------
OPERATING CASH FLOWS FROM REORGANIZATION ITEMS:
Payment of liabilities subject to compromise.............................. (612) --
Payment of reorganization items........................................... (5,509) (2,130)
Interest expense not paid................................................. -- 29,096
---------------------- ----------------------
Net cash (used in) provided by operating activities.......................... (8,710) 68,418
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures net of proceeds from sales of fixed assets........... (2,951) (3,610)
---------------------- ----------------------
Net cash used in investing activities..................................... (2,951) (3,610)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank revolver........................................ -- 18,954
---------------------- ----------------------
Net cash provided by financing activities................................. -- 18,954
Effect of exchange rate changes on restricted and unrestricted cash and cash
equivalents............................................................... 127 (47)
---------------------- ----------------------
Net (decrease) increase in restricted and unrestricted cash and cash
equivalents.............................................................. (11,534) 83,715
Restricted and unrestricted cash and cash equivalents, at beginning of
period................................................................... 24,941 6,405
---------------------- ----------------------
Restricted and unrestricted cash and cash equivalents, at end of period...... $13,407 $90,120
====================== ======================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
5
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited condensed consolidated financial statements of Kasper
A.S.L., Ltd. and its wholly-owned subsidiaries (the "Company") have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all normal and recurring adjustments
and accruals considered necessary for a fair presentation of the Company's
financial position at June 28, 2003 and the results of operations for the
thirteen and twenty-six weeks ended June 28, 2003 (the "second quarter 2003" and
"first half 2003", respectively) and June 29, 2002 (the "second quarter 2002"
and "first half 2002", respectively) and cash flows for the twenty-six weeks
ended June 28, 2003 and June 29, 2002 have been included. These statements
should be read in conjunction with the audited consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission. Operating results for the second
quarter 2003 and first half 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 27, 2003. Certain
amounts reflected in 2002 have been reclassified to conform to the presentation
of similar items in 2003.
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 condensed consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy
Court, its ability to comply with the 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 condensed consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of these uncertainties.
6
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Additionally, the amounts reported
on the condensed consolidated balance sheet could materially change because of
changes in business strategies and the effects of a plan of reorganization. In
the Chapter 11 Cases, substantially all unsecured liabilities as of the Filing
Date are subject to compromise or other treatment under a plan of reorganization
which must be confirmed by the Bankruptcy Court after submission to any required
vote by affected parties. For financial reporting purposes, those liabilities
and obligations whose treatment and satisfaction is dependent on the outcome of
the Chapter 11 Cases, have been segregated and classified as liabilities subject
to compromise in the accompanying condensed consolidated balance sheets.
Generally, all actions to enforce or otherwise effect repayment of pre-Chapter
11 liabilities as well as all pending litigation against the Debtors are stayed
while the Debtors continue their business operations as debtors-in-possession.
The ultimate amount of and settlement terms for such liabilities are subject to
approval of a plan of reorganization and accordingly are not presently
determinable. The principal categories of obligations classified as liabilities
subject to compromise under the Chapter 11 Cases as of June 28, 2003 are
identified below:
JUNE 28, 2003
-------------
(in thousands)
13.0% Senior Notes due 2004 $110,000
Interest accrued on above Senior Notes 29,096
Accounts payable 3,637
Other accrued expenses 1,729
--------
Total liabilities subject to compromise $144,462
========
For the first half 2003 and first half 2002, the Company recognized $5.1 million
and $2.5 million in reorganization costs, respectively. These amounts relate
primarily to professional fees, bank fees and, in 2003, lease cancellation
costs. Interest expense, including default interest, under the Senior Notes
would have amounted to $10.1 million and $9.0 million for the first half 2003
and first half 2002, respectively, had it not have been for the Chapter 11
Cases. As of June 28, 2003, the cumulative stayed interest not recognized by the
Company since the Filing Date totaled $26.9 million.
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.
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, solicited
proposals from potential purchasers of the Company, including the Management
Group and Parthenon.
7
On June 12, 3003, the Company entered into an agreement to be acquired by
Kellwood Company ("Kellwood") for $111.0 million in cash, $40.0 million in
Kellwood common stock and the assumption of deferred liabilities, primarily
pre-paid royalties, subject to adjustments as set forth in the purchase
agreement (the "Kellwood Agreement"). The Kellwood Agreement was subject to
higher or better offers and an auction to be conducted pursuant to
Court-approved bidding procedures.
On August 5, 2003, the Company received a bid to be acquired by Jones Apparel
Group, Inc. ("Jones") for $156.0 million in cash and the assumption of deferred
liabilities, primarily pre-paid royalties, subject to adjustments as set forth
in the purchase agreement (the "Jones Bid"). The Jones Bid was subject to higher
or better offers and an auction to be conducted pursuant to Court-approved
bidding procedures.
On August 7, 2003, the auction was conducted pursuant to Court-approved bidding
procedures. As a result of the auction, Jones was determined to have submitted
the highest offer, and the Company entered into an agreement to be acquired by
Jones for $204.0 million in cash and the assumption of deferred liabilities,
primarily pre-paid royalties, projected to be approximately $12.6 million at
closing, for an aggregate value of $216.6 million, subject to adjustments (the
"Jones Purchase Agreement").
The Jones Purchase Agreement was confirmed at a hearing in the Bankruptcy Court
on August 14, 2003 and will be implemented through an amended plan of
reorganization that will require, among other things, the approval of the
requisite majority of the Company's creditors and confirmation by the Bankruptcy
Court.
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.
NOTE 3. INVENTORIES, NET
Inventories, net of reserves, are valued at lower of cost (first-in, first-out)
or market and consist of the following:
JUNE 28, 2003 DECEMBER 28, 2002 JUNE 29, 2002
------------- ----------------- -------------
(in thousands)
Raw materials $ 4,240 $ 6,482 $ 8,651
Finished goods 47,400 41,820 29,702
------- ------- -------
Total inventories $51,640 $48,302 $38,353
======= ======= =======
NOTE 4. REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS AND OTHER
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). 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. SFAS No. 142
requires that the 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
8
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. 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. 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 as of December 28, 2002, in the first quarter 2002. This
non-cash charge is reported as a cumulative effect of an accounting change in
the accompanying statement of operations for the first half 2002. The first half
2002 was restated, as required by SFAS No, 142, to reflect the impairment charge
that was determined prior to the issuance of the Company's financial statements
for the fiscal year ended December 28, 2002.
NOTE 5. 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 then
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 above the prime rate at Chase.
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.
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.
9
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. As of June 28, 2003, there
were no direct borrowings and $31.5 million outstanding in letters of credit
under the Citicorp DIP Credit Agreement. In addition to $13.4 million of
unrestricted cash and cash equivalents on hand, the Company had approximately
$39.8 million available for future borrowings as of June 28, 2003.
NOTE 6. INCOME (LOSS) PER SHARE
The computation of basic and diluted income (loss) per common share is based
upon the weighted average number of common shares outstanding during the period.
The gains and losses resulting from changes in exchange rates from year to year
have been reported in other comprehensive income.
NOTE 7. CHANGE IN ESTIMATE
During the second quarter 2002, the Company determined that, due to improved
sell-through in its wholesale segment, certain allowance reserves amounting to
$9.7 million as of December 29, 2001 were no longer required. As a result of
this change in estimate, the Company reversed this reserve which benefited gross
margin for the second quarter and first half 2002. The Company also determined
that, due to weak sell-through in its dress and certain sportswear businesses,
certain additional allowance reserves amounting to $10.0 million were required
in its wholesale segment as of June 29, 2002 and recorded such reserves to the
detriment of gross margin for the second quarter and first half 2002.
During the second quarter of 2002, the Company determined that, due primarily to
improved margins of its wholesale off-price sales, certain inventory reserves
amounting to $2.0 million as of December 29, 2001 were no longer required. As a
result of this change in estimate, the Company reversed this reserve, which
benefited gross margin for the second quarter and first half 2002.
During the first half 2002, the Company utilized in its production process
certain raw materials that were aged as of December 29, 2001 that, as part of
the Company's normal valuation process, had been reserved. As a result of the
utilization of the previously reserved raw materials, the Company recognized
this change in estimate as a benefit to gross margin of $1.3 million in the
second quarter of 2002 and $1.7 million in the first half 2002.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is currently undergoing an examination by the Internal Revenue
Service ("IRS") for the 1997, 1998, 1999, and 2000 tax years. During the fiscal
year ended December 28, 2002, the IRS issued a proposed adjustment, which would
have resulted in additional federal and state income taxes, including interest,
for the years under exam (the "IRS Claim"). In addition, the proposed adjustment
would have reduced the Company's net operating loss carryforwards, by
approximately $34.1 million resulting from the disallowance of certain
deductions and require the Company to write-down certain tax assets. On November
22, 2002, the Debtors filed an Objection to the IRS Claim pursuant to section
505(a)(8) 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.
During the second quarter 2003, the Company had continuing dialog with the IRS.
Any resolution of the IRS Claim may result in a reduction in the disallowance of
certain deductions and would be documented in a stipulation with the IRS that
would resolve the IRS Claim and be subject to consideration by and receipt of no
adverse criticism of the Joint Committee of the Congress of the United States.
At such time that the resolution with the IRS is documented in a stipulation,
net operating losses that were previously unavailable due to uncertainties
resulting from the proposed IRS audit adjustments, will be utilized resulting in
a lower effective tax rate.
10
NOTE 9. SEGMENT INFORMATION
The Company's primary segment is the design, distribution and wholesale sale of
women's career suits, dresses and sportswear principally to major department
stores and specialty shops. In addition, as of June 28, 2003, the Company
operated 63 Kasper retail stores, 11 Anne Klein retail stores and one Anne Klein
New York full price store, as another distribution channel for its products. The
Company's licensing operations are also considered a segment for reporting
purposes. During the second quarter 2003, the Company began the design and
production of its new handbag line, which has been included in the Company's
wholesale segment. For the purposes of decision-making and assessing
performance, management includes its international operations in its wholesale
segment, as they are deemed immaterial for segment reporting.
The Company measures segment profit as earnings before interest, taxes,
depreciation, amortization and restructuring ("EBITDAR"). All intercompany
revenues and expenses are eliminated in computing revenues and EBITDAR.
Information on segments and a reconciliation to the consolidated financial
statements is as follows:
THIRTEEN WEEKS ENDED JUNE 28, 2003:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $71,288 $16,160 $3,817 $ 91,265
------------------ ------------------ ----------------- -----------------
EBITDAR 3,719 1,922 3,060 8,701
Depreciation and amortization 1,501
-----------------
Operating income $7,200
=================
THIRTEEN WEEKS ENDED JUNE 29, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $52,714 $15,060 $4,042 $71,816
------------------ ------------------ ----------------- -----------------
EBITDAR 6,155 2,032 3,110 11,297
Depreciation and amortization 1,028
Restructuring and other credits (2,476)
-----------------
Operating income $12,745
=================
TWENTY-SIX WEEKS ENDED JUNE 30, 2003:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $159,133 $28,812 $ 8,182 $196,127
------------------ ------------------ ----------------- -----------------
EBITDAR 16,662 2,741 6,703 26,106
Depreciation and amortization 2,970
-----------------
Operating income $23,136
=================
TWENTY-SIX WEEKS ENDED JUNE 29, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $151,518 $29,872 $7,727 $189,117
------------------ ------------------ ----------------- -----------------
EBITDAR 19,179 2,622 6,000 27,801
Depreciation and amortization 2,057
Restructuring and other credits (1,934)
-----------------
Operating income $27,678
=================
11
NOTE 10. RESTRUCTURING AND OTHER CHARGES (CREDITS)
The Company continues to carry out its restructuring plans established in the
fourth quarter of 2000 with certain modifications. During the fourth quarter of
2001, the Company recorded a charge of $4.9 million for lease cancellation costs
and asset write downs in connection with the decision to exit certain retail
store leases and certain office space in fiscal 2002. During the second quarter
of 2002 the Company reevaluated its decision to exit certain office space and as
a result, recognized a restructuring credit of $2.5 million. The Company
incurred additional restructuring charges of $592,000 in the first half of 2002
relating to professional fees.
Estimated occupancy
costs, severance and
Professional Fees asset write-downs Total
------------------- -------------------------- ----------------------
(in thousands)
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
--------- --------- ---------
2003 restructuring charges --- --- ---
2003 payments --- (360) (360)
--------- --------- ---------
Balance at June 28, 2003 $ --- $ 600 $ 600
========= ========= =========
NOTE 11. SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
The following presents the condensed financial statements of the Company and its
subsidiaries, as of June 28, 2003 and December 28, 2002 and for the first half
and second quarter 2003 and 2002, that filed voluntary petitions under Chapter
11:
CONDENSED BALANCE SHEETS June 28, 2003 December 28, 2002
- --------------------------------------------------------------------- ------------------- -------------------
(Unaudited)
ASSETS (in thousands)
Current Assets:
Restricted and unrestricted cash $ 10,840 $22,896
Accounts receivable, net 28,757 12,709
Inventories, net 49,970 46,726
Prepaid expenses and other current assets 5,258 4,701
------------------- -------------------
Total Current Assets 94,825 87,032
------------------- -------------------
Property, plant and equipment, net 18,106 18,064
Intangibles and other assets, net 124,312 123,020
Investment in subsidiaries 47,796 47,796
------------------- -------------------
Total Assets $285,039 $ 275,912
=================== ===================
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities $ 61,793 $58,228
Payable to wholly-owned entities not in bankruptcy 69,782 67,861
------------------- -------------------
Total Current Liabilities 131,575 126,089
------------------- -------------------
Long-term liabilities not subject to compromise 8,139 10,000
Liabilities subject to compromise 144,462 145,074
------------------- -------------------
Total Liabilities 284,176 281,163
Shareholders' Equity 863 (5,251)
------------------- -------------------
Total Liabilities and Equity $ 285,039 $ 275,912
=================== ===================
12
CONDENSED STATEMENTS OF OPERATIONS First Half 2003 First Half 2002
- --------------------------------------------------------------------- ------------------- -------------------
(Unaudited)
(in thousands)
Total revenue $ 191,573 $ 185,730
Cost of sales 122,700 114,081
------------------- -------------------
Gross profit 68,873 71,649
Selling, general and administrative expenses 47,582 45,556
Depreciation and amortization 2,640 1,776
Restructuring and other credits --- (1,934)
------------------- -------------------
Total operating expenses 50,222 45,398
------------------- -------------------
Operating income 18,651 26,251
Interest and financing costs 1,674 5,118
Reorganization costs 5,053 2,469
Income taxes 6,024 8,160
Cumulative effect of accounting change --- 30,400
------------------- -------------------
Net income (loss) $5,900 $(19,896)
=================== ===================
CONDENSED STATEMENTS OF OPERATIONS Second Quarter 2003 Second Quarter 2002
- --------------------------------------------------------------------- ------------------- -------------------
(Unaudited)
(in thousands)
Total revenue $ 89,499 $ 71,025
Cost of sales 58,335 37,466
-------------------- -------------------
Gross profit 31,164 33,559
Selling, general and administrative expenses 24,443 22,804
Depreciation and amortization 1,341 890
Restructuring and other credits --- (2,476)
-------------------- -------------------
Total operating expenses 25,784 21,218
-------------------- -------------------
Operating income 5,380 12,341
Interest and financing costs 724 1,567
Reorganization costs 3,906 842
Income taxes 733 4,257
-------------------- -------------------
Net income $17 $5,675
==================== ===================
CONDENSED STATEMENT OF CASH FLOWS First Half 2003
- ------------------------------------------------------------------- -------------------
(Unaudited)
(in thousands)
Cash Flows used in Operating Activities $(9,326)
Cash Flows used in Investing Activities (2,750)
Cash Flows used in Financing Activities ---
-------------------
Net decrease in cash and cash equivalents (12,076)
Cash and cash equivalents, beginning of period 22,896
-------------------
Cash and cash equivalents, end of period $ 10,820
===================
13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
foregoing condensed consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations in the Company's Annual Report on Form 10-K for the year ended
December 28, 2002. This discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties. Actual results and
the timing of certain events may differ significantly from those projected in
such forward-looking statements due to a number of factors, including those set
forth at the end of this Item.
OVERVIEW
On February 5, 2002, the Company and certain of its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code.
The Company continues to operate in the ordinary course of business as
debtor-in-possession under the jurisdiction of the Bankruptcy.
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.
RESULTS OF OPERATIONS
REVENUES BY SEGMENT
(000'S EXCEPT PERCENTAGES)
SECOND QUARTER FIRST HALF
------------------------------------------------------ -------------------------------------------------------
% % % %
2003 OF TOTAL 2002 OF TOTAL 2003 OF TOTAL 2002 OF TOTAL
-------------- --------------- --------------- --------------
Wholesale $ 71,288 78.1% $ 52,714 73.4% $ 159,133 81.1% $ 151,518 80.1%
Retail 16,160 17.7% 15,060 21.0% 28,812 14.7% 29,872 15.8%
-------------- ------ --------------- ------ --------------- ------ -------------- ------
Net Sales 87,448 95.8% 67,774 94.4% 187,945 95.8% 181,390 95.9%
Licensing 3,817 4.2 % 4,042 5.6% 8,182 4.2% 7,727 4.1%
-------------- ------ --------------- ------ --------------- ------ -------------- ------
Total Revenue $91,265 100.0% $ 71,816 100.0% $196,127 100.0% $ 189,117 100.0%
============== ====== =============== ====== =============== ====== ============== ======
THIRTEEN WEEKS ENDED JUNE 28, 2003 AS COMPARED TO THIRTEEN WEEKS ENDED JUNE
29, 2002
TOTAL REVENUE
Net Sales for the thirteen weeks ended June 28, 2003 (the "second quarter 2003")
were $87.4 million as compared to $67.8 for the thirteen weeks ended June 29,
2002 (the "second quarter 2002"). Sales from the Company's wholesale operations
("Wholesale") increased 35.2% to $71.3 million in the second quarter 2003 from
$52.7 in the second quarter 2002. During the second quarter 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 and gross profit for the second quarter
2002.
The increase in wholesale net sales is due primarily to a shift in shipments
from the first quarter 2003 to the second quarter 2003, increased penetration of
existing doors and new distribution in the Anne Klein business, as well as
increases in the Le Suit, AK Dress and the private label businesses.
14
Sales at the Company's retail stores ("Retail") increased to $16.2 million in
the second quarter 2003 from $15.1 million in the second quarter 2002, primarily
due to an additional eight open stores from year to year. Comparable store sales
increased 0.7% in the second quarter 2003 compared to the second quarter 2002 as
a result of stronger sales at the Company's Anne Klein stores.
Royalty revenue decreased slightly to $3.8 million in the second quarter 2003
from $4.0 million in the second quarter 2002.
GROSS PROFIT
Gross profit as a percentage of total revenue decreased to 38.0% for the second
quarter 2003, compared to 48.9% for the second quarter 2002. Wholesale gross
profit as a percentage of sales decreased to 30.6% in the second quarter 2003
from 43.9% in the second quarter 2002.
As discussed in Total Revenue, during the second quarter 2002 the Company
reversed a $9.7 million reserve relating to certain allowance reserves
established at the end of fiscal 2001, which benefited gross profit for the
second quarter 2002.
During the second quarter 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 profit for the second quarter 2002.
In addition, the Company utilized in its production process certain raw
materials that were aged as of December 29, 2001 that, as part of the Company's
normal valuation process, had been reserved. As a result of the utilization of
the previously reserved raw materials, the Company recognized this change in
estimate as a benefit to gross profit of $1.3 million in the second quarter
2002.
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid off employees as a result of its 2001 reductions in force. As a result, the
Company realized a benefit to cost of sales of approximately $450,000 in the
second quarter 2002.
Excluding these reversals, second quarter 2002 consolidated gross profit, as a
percentage of total revenue, would have been 34.8% and wholesale gross margins
would have been 22.6%.
Retail gross profit as a percentage of sales increased to 56.2% in the second
quarter 2003 from 52.8% in the second quarter 2002 primarily due to lower
product costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased to $26.0 million
in the second quarter 2003 as compared to $23.8 million in the second quarter
2002. As a result of the additional 8 retail stores opened over the prior year,
Retail incurred and additional $1.2 million in SG&A. International operations
added approximately $600,000 in expenses as a result of the growth of the Anne
Klein lines in Canada and Europe. Wholesale and licensing SG&A increased
approximately $400,000 as a result of severance paid during the second quarter
2003. During the second quarter 2002, the Company obtained a favorable decision
with respect to a severance dispute with certain union employees in which the
arbitrator ruled that the Company is not obligated to pay severance to any of
the permanently laid off employees as a result of its 2001 reductions in force.
As a result, the Company realized a benefit relating to selling, general and
administrative expenses of approximately $150,000 in the second quarter 2002.
RESTRUCTURING AND OTHER CREDITS
The Company recorded a $2.5 million restructuring credit in the second quarter
2002. During the fourth quarter 2001, the Company recorded a charge of $4.9
million for lease cancellation costs and asset write-downs in connection with
the decision to exit certain retail store leases and certain office space in
fiscal 2002. During the second quarter 2002, the Company reevaluated its
decision to exit certain office space and as a result, recognized a
restructuring credit of $2.5 million. This credit was partially offset by
15
approximately $50,000 in restructuring charges related primarily to professional
fees associated with the Company's pending bankruptcy filing.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $1.5 million in the second quarter 2003
and $1.0 million in the second quarter 2002. The increase in depreciation
relates to the implementation of the new management information systems and
capital expenditures relating to department store boutiques and new retail
stores.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $727,000 in the second quarter 2003
from $1.6 million in the second quarter 2002. Interest expense is comprised of
the interest expense on the Citicorp DIP Credit Agreement and Chase DIP (both
defined elsewhere within), factoring fees and changes in fair value of the
Company's interest rate swap.
Interest under the Chase DIP and Citicorp DIP Credit Agreement, as applicable,
totaled approximately $443,000 in the second quarter 2003 and $1.6 million in
the second quarter 2002 as a result of the decrease in borrowings and lower
interest rates. In the first quarter 2003, the Company paid approximately $1.6
million in bank fees related to the Citicorp DIP Credit Agreement resulting in
approximately $126,000 of amortization charges in the second quarter 2003.
Factoring fees were approximately $198,000 in the second quarter 2003 and
$219,000 in the second quarter 2002. Offsetting interest expense in the second
quarter 2002 was the increase in market valuation of the Company's interest rate
swap of $260,000. As of June 30, 2002, the interest rate swap expired.
REORGANIZATION CHARGES
The Company recorded $3.9 million and $841,000 in reorganization charges in the
second quarter 2003 and second quarter 2002, respectively. During the second
quarter 2003, the Company incurred approximately $2.5 million in costs relating
to the surrender of leased office space. The remaining costs related primarily
to professional fees and, in 2002, bank fees associated with the Company's
reorganization as a result of the Chapter 11 Cases.
INCOME TAXES
The Company recorded income taxes of $1.1 million for the second quarter 2003
compared to $4.3 million for the second quarter 2002. These amounts differ from
the amount computed by applying the federal income tax statutory rate of 34% to
income before taxes primarily because of state and foreign taxes.
NET INCOME
Net income was $1.5 million in the second quarter 2003 compared to $6.0 million
in the second quarter 2002. The decrease is the result of increased
reorganization costs and the reserve reversals that occurred in the second
quarter 2002, partially offset by reduced interest and financing costs.
TWENTY-SIX WEEKS ENDED JUNE 28, 2003 AS COMPARED TO TWENTY-SIX WEEKS ENDED JUNE
29, 2002
TOTAL REVENUE
Net sales for the twenty-six weeks ended June 28, 2003 (the "first half 2003")
were $187.9 million as compared to $181.4 million for the twenty-six weeks ended
June 29, 2002 (the "first half 2002"). Wholesale sales increased to $159.1
million from $151.5 million. As discussed above, in the first half 2002, the
Company reversed a $9.7 million reserve, which benefited net sales in the first
half 2002.
The increase in wholesale net sales is primarily due to increased penetration of
existing doors and new distribution in the Anne Klein business, as well as
increases in the Le Suit, private label and AK Dress businesses. Somewhat
offsetting the increase in net sales for the first half 2003 was a decrease in
the Kasper suit, dress and sportswear businesses.
16
Retail sales decreased to $28.8 million in the first half 2003 from $29.9
million in the first half 2002, primarily due to the closing of 24 under
performing stores during the first quarter 2002, which contributed $1.8 million
in sales to the first half 2002, offset partially by sales from the additional
eight open stores from year to year. Comparable store sales decreased 3.1% in
the first half 2003 compared to the first half 2002 as a result of first quarter
2003 declines offset partially by second quarter 2003 improvement.
Royalty revenue increased to approximately $8.2 million in the first half 2003
from $7.7 million in the first half 2002 as a result of renegotiated royalty
percentage rates and higher licensee sales volume.
GROSS PROFIT
Gross profit as a percentage of total revenue decreased slightly to 39.3% for
the first half 2003, compared to 40.0% for the first half 2002. Wholesale gross
profit, as a percentage of sales, decreased to 33.1% in the first half 2003 from
34.9% in the first half 2002.
As discussed above, during the first half 2002 the Company reversed a $9.7
million reserve relating to certain allowance reserves established at the end of
2001, benefiting gross profit for the first half 2002.
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
profit for the first half 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 profit for the first half 2002.
During the first half of 2002, the Company utilized in its production process
certain raw materials that were aged as of December 29, 2001 that, as part of
the Company's normal valuation process, had been reserved. As a result of the
utilization of the previously reserved raw materials, the Company recognized
this change in estimate as a benefit to gross profit of $1.7 million in the
first half of 2002.
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid off employees as a result of its 2001 reductions in force. As a result, the
Company realized a benefit relating to cost of sales of approximately $450,000
in the first half 2002.
Excluding these reversals, first half 2002 consolidated gross profit, as a
percentage of total revenue, would have been 34.4% and wholesale gross margins
would have been 27.6%.
Retail gross profit as a percentage of sales increased to 56.4% in the first
half 2003 from 50.0% in the first half 2002, due to the closing of under
performing stores and lower product costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $51.0 million in the
first half 2003 as compared to $47.8 million in the first half 2002, an increase
of $3.2 million. As a result of the additional 8 retail stores open from year to
year, Retail incurred an additional $1.2 million in SG&A. International
operations added approximately $1.2 million in expenses as a result of the
growth of the Anne Klein lines in Canada and Europe. Wholesale and licensing
SG&A increased approximately $800,000 as a result of severance paid during the
second quarter 2003 and overall increases associated with higher sales volume.
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid off employees as a result of its 2001 reductions in force. As a result, The
Company realized a benefit relating to selling, general and administrative
expenses of approximately $150,000 in the first half 2002.
17
RESTRUCTURING AND OTHER CREDITS
The Company recorded a $1.9 million restructuring credit in the first half 2002.
During the fourth quarter of 2001, the Company recorded a charge of $4.9 million
for lease cancellation costs and asset write-downs in connection with the
decision to exit certain retail store leases and certain office space in fiscal
2002. During the second quarter 2002, the Company reevaluated its decision to
exit certain office space and as a result, recognized a restructuring credit of
$2.5 million. This credit was partially offset by approximately $592,000 in
restructuring charges related primarily to professional fees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $3.0 million in the first half 2003 and
$2.1 million in the first half 2002. The increase in depreciation relates to the
implementation of the Company's new management information systems and capital
expenditures relating to department store boutiques and new retail stores.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $1.7 million in the first half 2003
from $5.1 million in the first half 2002, a decrease of approximately $3.4
million.
As a result of the Chapter 11 Cases, interest on the Senior Notes stopped
accruing as of February 5, 2002. Accordingly, the Company did not incur interest
on the Senior Notes in the first half 2003 compared to $1.7 million for the
first half 2002. Included in Senior Notes interest expense for the first half
2002 was approximately $300,000 in unpaid default interest on the Senior Notes.
Interest under the Chase Facility (defined elsewhere), Chase DIP and Citicorp
DIP Credit Agreement, as applicable, totaled approximately $939,000 in the first
half 2003 and $3.3 million in the first half 2002 as a result of the decrease in
borrowings and lower interest rates. In the first quarter 2003, the Company paid
approximately $1.6 million in bank fees related to the Citicorp DIP Credit
Agreement resulting in approximately $225,000 of amortization charges in the
first half 2003.
Factoring fees were approximately $549,000 in the first half 2003 and $627,000
in the first half 2002. Offsetting interest expense in the first half 2002 was
the increase in market valuation of the Company's interest rate swap of
approximately $508,000. As of June 30, 2002, the interest rate swap expired.
REORGANIZATION CHARGES
The Company recorded $5.1 million and $2.5 million in reorganization charges in
the first half 2003 and first half 2002, respectively. During the first half
2003, the Company incurred approximately $2.4 million in costs relating to the
surrender of leased office space. The remaining costs related primarily to
professional fees and, in 2002, bank fees associated with the Company's
reorganization as a result of the Chapter 11 Cases.
INCOME TAXES
Provision for income taxes was $6.9 million for the first half 2003 compared to
$8.4 million for the first half 2002. These amounts differ from the amount
computed by applying the federal income tax statutory rate of 34% to income
before taxes primarily because of state and foreign taxes.
NET INCOME (LOSS)
Net income was $9.5 million in the first half 2003 compared to a loss of $18.8
million in the first half 2002, an increase of approximately $28.2 million. The
increase is the result of reduced interest and financing costs, along with the
cumulative effect of change in accounting principle recorded in the first half
2002, partially offset by the increased reorganization costs and the reserve
reversals that occurred in the second quarter 2002. See Note 4 of Notes to
Condensed Consolidated Financial Statements for more information on the
cumulative effect of change in accounting principle.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity historically have been cash flows from
operations, vendor credit terms and credit facilities. The Company's capital
requirements primarily result from working capital needs, department store
boutiques, retail stores including full price shops and other corporate
activities.
Net cash used in operating activities was $8.7 million during the first half
2003 compared to cash provided of $68.4 million during the first half 2002. The
decrease in cash flows from the prior year is partly the result of the $20.0
million royalty prepayment received during the first quarter of 2002. In
addition, as a result of the Chapter 11 Cases, in 2002 the Company benefited
from the non-payment of pre-petition liabilities, which are generally not
settled until a plan of reorganization has been approved. Inventory levels at
the beginning of 2003 were leaner than at the beginning of 2002, resulting in a
small increase for the first half 2003 as compared to a large decrease in the
first half 2002. The increase in accounts receivable is primarily the result of
increased sales and a shift in the timing of shipments. The decrease in cash
used in investing activities resulted from less capital expenditures in the
first half 2003 compared to the first half 2002. Cash flows from financing
activities decreased as a result of decreased borrowings during the first half
2003.
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 $35 million DIP Revolving Credit Agreement from its then existing
bank group (the "Chase DIP", formerly the "Chase Facility") 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, as amended, 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, as amended, has a term ending on the earliest to occur of (i)
December 31, 2003, (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. As of June 28, 2003, there
were no direct borrowings and $31.5 million outstanding in letters of credit
under the Citicorp DIP Credit Agreement. In addition to $13.4 million of
unrestricted cash and cash equivalents on hand, the Company had approximately
$39.8 million available for future borrowings as of June 28, 2003.
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 13.75%. The Company stopped accruing interest on the Senior Notes
on the Filing Date. Interest relating the Senior Notes totaled $1.7 million for
the first half 2002, including $300,000 in default interest. At June 28, 2003,
the Senior Notes have been classified as liabilities subject to compromise.
On October 4, 1999, the Company entered into a factoring agreement with the CIT
Group/Commercial Services, Inc. ("CIT"). CIT collects the Company's receivables
and in turn remits the funds to the Company. Any amounts unpaid after 90 days on
approved sales are guaranteed to be paid to the Company by CIT. The agreement
has no expiration date but may be terminated upon 90 days written notice by the
Company and upon 60 days written notice by CIT. On November 10, 2000, the
19
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. On January 30, 2003, the Company, in connection with the
replacement of the Chase DIP by Citicorp DIP Credit Agreement, entered into an
amendment with CIT. The terms of this amendment were to incorporate the Citicorp
DIP Credit Agreement as part of the factoring agreement, change the fees charged
by CIT for its services to 0.25% of the gross face amount of each account
factored and reduce each six-month period minimum factoring fee to $375,000 as
of February 1, 2003.
Capital expenditures were $3.0 million and $3.6 million for the first half 2003
and first half 2002, respectively. Capital expenditures represent spending
associated with information systems, new retail stores, department store
boutiques, warehouse and 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.
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.
20
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended. Those statements appear in a number of places in this
report, including in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," and include all discussions of trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies as well as statements that contain such
forward-looking statements as "believes," "anticipates," "could," "estimates,"
"expects," "intends," "may," "plans," "predicts," "projects," "will," and
similar terms and phrases, including the negative thereof. In addition, from
time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Furthermore, forward-looking
statements may be included in our other filings with the Securities and Exchange
Commission as well as in press releases or oral statements made by or with the
approval of the Company's authorized executive officers.
We caution you to bear in mind that forward-looking statements, by their very
nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this report are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations include but are not limited
to, the following cautionary statements ("Cautionary Statements"):
o the success of the Company's overall business strategy, including
successful implementation of the Company's restructuring plan and
successful implementation of the Company's plan of reorganization;
o the impact that the 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, and that the Company will be able to
obtain any extensions as may be necessary should a delay in the
confirmation of a plan cause the plan to be consummated subsequent to the
expiration on December 31, 2003;
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 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;
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, including the decision by the controlling owner of a
group of stores or any other significant customer, whether motivated by
competitive conditions, financial difficulties or otherwise, to decrease
the amount of merchandise purchased from us;
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.
21
ITEM 4.
CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to the
Company's management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company's management, including the principal executive officer
and the principal financial officer, recognizes that any set of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this quarterly report on Form 10-Q,
the Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this quarterly report on Form 10-Q.
22
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment to Employment Agreement, between the Company and
Lee Sporn, dated July 16, 2003
10.2 Amendment to Employment Agreement, between the Company and
Joseph B. Parsons, dated July 16, 2003
99.1 Certification of the Chief Executive Officer of the
Company pursuant to 18 U.S.C.ss. 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer of the
Company pursuant to 18 U.S.C.ss. 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On April 16, 2003, the Company filed a current report on Form 8-K
attaching the press release announcing its financial results for the
fourth quarter and fiscal year ended December 28, 2002.
On May 14, 2003, the Company filed a current report on Form 8-K
attaching the press release announcing its financial results for the
quarter ended March 29, 2003.
On June 13, 2002 the Company filed a current report on Form 8-K to
disclose that it had signed a definitive agreement to be acquired by
Kellwood Company.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KASPER A.S.L., LTD.
(Registrant)
Dated: August 18, 2003
/s/ John D. Idol
--------------------------------------------------
John D. Idol
Chairman and Chief Executive Officer
/s/ Joseph B. Parsons
--------------------------------------------------
Joseph B. Parsons
Executive Vice President - Chief Financial Officer
24
CERTIFICATIONS
--------------
I, John D. Idol, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kasper A.S.L.,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying 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 quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 18, 2003
/s/ John D. Idol
----------------------------
John D. Idol
Chief Executive Officer
I, Joseph B. Parsons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kasper A.S.L.,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying 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 quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 18, 2003
/s/ Joseph B. Parsons
-------------------------------
Joseph B. Parsons
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Amendment to Employment Agreement, between the Company and
Lee Sporn, dated July 16,2003
10.2 Amendment to Employment Agreement, between the Company and
Joseph B. Parsons, dated July 16,2003
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