UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 27, 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
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) Yes No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.01 par
value, outstanding as of November 10, 2003 was 6,800,000.
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
PART I - FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 27, 2003, December 28, 2002
and September 28, 2002.................................................................................. 3
Condensed Consolidated Statements of Operations for the Thirteen weeks and
Thirty-nine weeks ended September 27, 2003 and September 28, 2002....................................... 4
Condensed Consolidated Statements of Cash Flows for the
Thirty-nine weeks ended September 27, 2003 and September
28, 2002................................................................................................. 5
Notes to Condensed Consolidated Financial Statements .................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 15
Item 4. Controls and Procedures................................................................................. 23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................................ 24
SIGNATURES
EXHIBIT INDEX
2
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
-------------------- ------------------ -------------------
ASSETS SEPTEMBER 27, DECEMBER 28, SEPTEMBER 28,
2003 2002 2002
-------------------- ------------------ -------------------
(UNAUDITED) (AUDITED) (UNAUDITED)
(RESTATED)
Current Assets:
Cash and cash equivalents...................................... $2,652 $ 24,941 $ 4,237
Accounts receivable, net of reserves of $33,980, $34,679
and $37,941, respectively.................................. 67,145 14,479 33,155
Inventories, net............................................... 46,578 48,302 36,973
Prepaid expenses and other current assets...................... 5,518 5,441 7,423
-------------------- ------------------ -------------------
Total Current Assets........................................... 121,893 93,163 81,788
-------------------- ------------------ -------------------
Property, plant and equipment, at cost less accumulated
depreciation and amortization of $25,820, $21,538 and
$19,548, respectively.......................................... 19,971 19,673 19,731
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.................. 2,162 997 1,039
-------------------- ------------------ -------------------
Total Assets........................................................ $267,032 $236,839 $225,564
==================== ================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Not
Subject to Compromise:
Accounts payable............................................... $23,552 $28,592 $17,962
Accrued expenses and other current liabilities................. 17,687 13,095 30,970
Interest payable............................................... 99 182 189
Deferred income taxes.......................................... 5,426 9,118 766
Deferred royalty income........................................ 5,000 5,098 5,000
DIP facility................................................... 1,524 -- --
-------------------- ------------------ -------------------
Total Current Liabilities............................................ 53,288 56,085 54,887
Long-Term Liabilities Not Subject to Compromise:
Deferred royalty income........................................ 6,622 10,000 11,733
Other long-term liabilities.................................... 604 738 --
-------------------- ------------------ -------------------
Total Liabilities Not Subject to Compromise.......................... 60,514 66,823 66,620
Liabilities Subject to Compromise.................................... 143,111 145,074 149,171
-------------------- ------------------ -------------------
Total Liabilities.................................................... 203,625 211,897 215,791
Commitments and Contingencies
Shareholders' Equity:
Common Stock, 6,800,000 shares issued and outstanding.......... 68 68 68
Preferred Stock, none issued................................... -- -- --
Capital in excess of par value................................. 120,880 120,561 120,455
Accumulated deficit............................................ (58,100) (95,046) (110,280)
Cumulative other comprehensive income (loss)................... 559 (641) (470)
-------------------- ------------------ -------------------
Total Shareholders' Equity........................................... 63,407 24,942 9,773
-------------------- ------------------ -------------------
Total Liabilities and Shareholders' Equity........................... $267,032 $236,839 $225,564
==================== ================== ===================
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 THIRTY-NINE WEEKS ENDED
-------------------------------- --------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
(RESTATED)
Net sales.............................................. $ 122,491 $ 97,786 $ 310,435 $ 279,174
Royalty income......................................... 5,491 4,533 13,673 12,260
---------------- ---------------- --------------- ---------------
Total revenue.......................................... 127,982 102,319 324,108 291,434
Cost of sales.......................................... 78,335 58,817 197,399 172,354
---------------- ---------------- --------------- ---------------
Gross profit........................................... 49,647 43,502 126,709 119,080
Operating expenses (income):
Selling, general and administrative expenses........... 25,878 23,475 76,838 71,261
Depreciation and amortization.......................... 2,052 1,120 5,022 3,178
Restructuring and other (credits) charges.............. (261) 11 (261) (1,923)
---------------- ---------------- --------------- ---------------
Total operating expenses............................... 27,669 24,606 81,599 72,516
---------------- ---------------- --------------- ---------------
Operating income....................................... 21,978 18,896 45,110 46,564
Interest and financing costs (excludes $5,157 and
$4,630 of stayed interest in third quarter 2003
and 2002, respectively and $15,207 and $11,927 in
YTD 2003 and 2002, respectively)..................... 857 1,043 2,566 6,164
---------------- ---------------- --------------- ---------------
Income before reorganization costs, income taxes
and cumulative effect of change in accounting
principle............................................ 21,121 17,853 42,544 40,400
Reorganization costs................................... 1,271 667 6,323 3,134
---------------- ---------------- --------------- ---------------
Income before income taxes and cumulative effect of
change in accounting principle........................ 19,850 17,186 36,221 37,266
Income tax (benefit) provision......................... (7,601) 7,215 (725) 15,655
---------------- ---------------- --------------- ---------------
Income before cumulative effect of change in
accounting principle.................................. 27,451 9,971 36,946 21,611
Cumulative effect of change in accounting principle -- -- -- 30,400
---------------- ---------------- --------------- ---------------
Net income (loss)...................................... $ 27,451 $ 9,971 $ 36,946 $ (8,789)
================ ================ =============== ===============
Basic and diluted earnings (loss) per common share..... $4.04 $ 1.47 $ 5.43 $ (1.29)
================ ================ =============== ===============
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)
THIRTY-NINE WEEKS
ENDED
------------------------------------------
SEPTEMBER 27, SEPTEMBER 28,
2003 2002
------------------- -------------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 36,946 $ (8,789)
------------------- -------------------
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............................................. 4,660 3,121
Write-off of net book value of property, plant and equipment.............. 362 --
Interest rate swap........................................................ -- 516
Deferred income taxes..................................................... (3,692) 229
Deferred royalty income................................................... (3,476) (3,267)
Deferred other............................................................ (134) --
Non-cash restructuring and other costs.................................... 505 (1,308)
(Increase) decrease in:
Accounts receivable, net.................................................. (52,666) (28,822)
Inventories, net.......................................................... 1,724 36,726
Prepaid expenses and other assets......................................... (101) (3,197)
Increase (decrease) in:
Accounts payable, accrued expenses and other current liabilities.......... 5,965 19,288
Interest payable.......................................................... (83) (28,294)
Deferred royalty income................................................... -- 20,000
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Total adjustments............................................................ (46,936) 45,392
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Net cash (used in) provided by operating activities before
reorganization items........................................................ (9,990) 36,603
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OPERATING CASH FLOWS FROM REORGANIZATION ITEMS:
Decrease in liabilities subject to compromise............................. (1,963) --
Payment of reorganization items........................................... (6,674) (2,862)
Interest expense not paid................................................. -- 29,096
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Net cash (used in) provided by operating activities.......................... (18,627) 62,837
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures net of proceeds from sales of fixed assets........... (5,260) (5,744)
------------------- -------------------
Net cash used in investing activities..................................... (5,260) (5,744)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under bank revolver........................... 1,524 (59,048)
------------------- -------------------
Net cash provided by (used in) financing activities....................... 1,524 (59,048)
Effect of exchange rate changes on cash and cash equivalents................. 74 (213)
------------------- -------------------
Net decrease in cash and cash equivalents.................................... (22,289) (2,168)
Cash and cash equivalents, at beginning of period............................ 24,941 6,405
------------------- -------------------
Cash and cash equivalents, at end of period.................................. $ 2,652 $ 4,237
=================== ===================
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 September 27, 2003 and the results of operations for the
thirteen and thirty-nine weeks ended September 27, 2003 (the "third quarter
2003" and "YTD 2003", respectively) and September 28, 2002 (the "third quarter
2002" and "YTD 2002", respectively) and cash flows for the thirty-nine weeks
ended September 27, 2003 and September 28, 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 third quarter 2003 and YTD 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 the Bankruptcy Code, 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 September 27, 2003 are identified below:
SEPTEMBER 27,
2003
----
(in thousands)
13.0% Senior Notes due 2004 $110,000
Interest accrued on above Senior Notes 29,096
Accounts payable 3,482
Other accrued expenses 533
---------
Total liabilities subject to compromise $ 143,111
=========
For YTD 2003 and YTD 2002, the Company recognized $6.3 million and $3.1 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 $15.2 million and $13.6 million for YTD 2003 and YTD 2002, respectively, had
it not have been for the Chapter 11 Cases. As of September 27, 2003, the
cumulative stayed interest not recognized by the Company since the Filing Date
totaled $32.0 million, including default interest.
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 (as amended from time to time,
the "Plan") and First Amended and Restated Disclosure Statement (as amended from
time to time, 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, 2003, 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 $11.5 million at
closing, for an aggregate value of $215.5 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 the Plan that requires, among other things, the approval of the
requisite majority of the Company's creditors and confirmation by the Bankruptcy
Court.
Following the confirmation of the Jones Purchase Agreement, it became apparent
that equity interest holders would be entitled to a distribution of a portion of
the proceeds resulting from the sale of the Company to Jones. Accordingly, the
U.S. Trustee appointed an equity committee (the "Equity Committee") on October
9, 2003. On November 10, 2003, the Creditors' Committee and the Equity Committee
reached a comprehensive agreement on the distribution of the proceeds pursuant
to the Plan, net of administrative expenses, priority tax claims and certain
other claims.
On November 10, 2003, Jones agreed to increase the Jones Bid by $17.0 million
subject to the fulfillment of certain conditions including: the support
for the Plan by the Creditors' Committee and certain large holders of the
Company's Senior Notes; the support for the Plan by the Equity Committee and
certain large holders of the common stock of the Company; the confirmation of
the Company's Plan; and, closing of the sale to Jones by December 5, 2003. The
adjusted purchase price consists of $221.0 million in cash and the assumption of
pre-paid royalties projected to be $11.5 million at closing, for an aggregate
value of $232.5 million, plus the assumption of certain other liabilities,
subject to adjustments.
The Bankruptcy Court entered an order, dated October 15, 2003, approving the
amended Disclosure Statement filed by the Company and setting November 19, 2003
as the confirmation hearing date of the Plan.
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:
SEPTEMBER 27, DECEMBER 28, SEPTEMBER 28,
2003 2002 2002
---- ---- ----
(in thousands)
Raw materials $2,981 $6,482 $ 5,365
Finished goods 43,597 41,820 31,608
------- ------- -------
Total inventories $46,578 $48,302 $36,973
======= ======= =======
8
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
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 the transitional testing date of December 30, 2001,
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
YTD 2002. YTD 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
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.
9
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. As of September 27, 2003,
there was $1.5 million outstanding in direct borrowings and $28.3 million
outstanding in letters of credit under the Citicorp DIP Credit Agreement. The
Company had approximately $47.3 million available for future borrowings as of
September 27, 2003.
NOTE 6. INCOME TAXES
The Company is in an accumulated loss position for both financial reporting and
income tax purposes. For financial statement 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. As a result the Company has net operating loss
carryforwards of approximately $28.0 million coming into the 2003 tax year.
As a result of the resolution with the IRS (see Note 9), net operating losses
that were previously unavailable, due to the proposed IRS audit adjustments, are
now being utilized. The Company has adjusted its estimate of the annual
effective tax rate to a 2% benefit after giving effect to both the resolution of
uncertainties related to the proposed IRS adjustment as well as the reversal of
certain tax reserves totaling $3.7 million. As a result, for YTD and third
quarter 2003, the change in the Company's effective tax rate resulting from
these changes produced a tax benefit of approximately $725,000 and $7.6 million,
respectively.
NOTE 7. 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 8. 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 YTD 2002. The Company also determined that, due to weak
sell-through in its dress and certain sportswear businesses, certain additional
allowance reserves amounting to $10.0 million were required in its wholesale
segment as of June 29, 2002 and recorded such reserves to the detriment of gross
margin for YTD 2002.
10
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 YTD 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 $1.7 million for YTD
2002.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has undergone 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 third quarter, the Company reached a resolution of its dispute with
the IRS and, on October 17, 2003 signed a Stipulation Resolving IRS Claim (the
"Stipulation"). The Stipulation will result in the disallowance of certain
deductions amounting to approximately $8.0 million in the 1997 through 2001 tax
years which will result in a reduction in the Company's net operating loss
carryforwards in the same amount. As a result, the Company expects to incur
additional federal and state income taxes, including interest, of approximately
$400,000. The Stipulation is subject to approval of the Joint Committee on
Taxation of the Congress of the United States.
NOTE 10. SEGMENT INFORMATION
The Company's primary segment is the design, distribution and wholesale sale of
women's career suits, dresses and sportswear principally to major department
stores and specialty shops. In addition, as of September 27, 2003, the Company
operated 70 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 YTD 2003, the Company began the selling, 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 SEPTEMBER 27, 2003:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 104,366 $ 18,125 $ 5,491 $ 127,982
------------------ ------------------ ----------------- -----------------
EBITDAR 16,549 2,415 4,805 23,769
Depreciation and amortization 2,052
Restructuring and other credits (261)
-----------------
Operating income $ 21,978
=================
11
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 83,941 $ 13,845 $ 4,533 $ 102,319
------------------ ------------------ ----------------- -----------------
EBITDAR 13,831 2,366 3,830 20,027
Depreciation and amortization 1,120
Restructuring and other charges 11
-----------------
Operating income $ 18,896
=================
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $ 263,499 $ 46,936 $13,673 $324,108
------------------ ------------------ ----------------- -----------------
EBITDAR 33,209 5,155 11,507 49,871
Depreciation and amortization 5,022
Restructuring and other credits (261)
-----------------
Operating income $45,110
=================
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
(Restated)
Revenues $ 235,458 $ 43,716 $ 12,260 $ 291,434
------------------ ------------------ ----------------- -----------------
EBITDAR 33,001 4,988 9,830 47,819
Depreciation and amortization 3,178
Restructuring and other credits (1,923)
-----------------
Operating income $ 46,564
=================
NOTE 11. RESTRUCTURING AND OTHER (CREDITS) CHARGES
The Company continues to carry out its restructuring plans established in the
fourth quarter of 2000 with certain modifications. During the fourth quarter of
2001, the Company recorded a charge of $4.9 million for lease cancellation costs
and asset write downs in connection with the decision to exit certain retail
store leases and certain office space in fiscal 2002. During the third quarter
2003, the Company decided that approximately $261,000 of this reserve was no
longer needed, and as a result recognized a restructuring credit. 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 $603,000 in YTD 2002
relating to professional fees.
Estimated
occupancy costs,
Professional severance and asset
Fees 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 payments --- (461) (461)
2003 reversals --- (261) (261)
-------- -------- --------
Balance at September 27, 2003 $ --- $ 238 $ 238
-------- -------- --------
12
NOTE 12. SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
The following presents the condensed financial statements of the Company and its
subsidiaries, as of September 27, 2003 and December 28, 2002 and for YTD and
third quarter 2003 and 2002, that filed voluntary petitions under Chapter 11:
CONDENSED BALANCE SHEETS SEPTEMBER 27, 2003 DECEMBER 28, 2002
- --------------------------------------------------------------------- -------------------- -------------------
(Unaudited)
ASSETS (in thousands)
Current Assets:
Cash and cash equivalents $ 930 $22,896
Accounts receivable, net 60,619 12,709
Inventories, net 44,978 46,726
Prepaid expenses and other current assets 4,816 4,701
-------------------- -------------------
Total Current Assets 111,343 87,032
-------------------- -------------------
Property, plant and equipment, net 18,278 18,064
Intangibles and other assets, net 124,185 123,020
Investment in subsidiaries 47,796 47,796
-------------------- -------------------
Total Assets $301,602 $ 275,912
==================== ===================
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities $54,156 $58,228
Payable to wholly-owned entities not in bankruptcy 72,231 67,861
------------------- -------------------
Total Current Liabilities 126,387 126,089
------------------- -------------------
Long-term liabilities not subject to compromise 6,622 10,000
Liabilities subject to compromise 143,111 145,074
------------------- -------------------
Total Liabilities 276,120 281,163
Shareholders' Equity (Deficit) 25,482 (5,251)
------------------- -------------------
Total Liabilities and Equity $301,602 $ 275,912
=================== ===================
CONDENSED STATEMENTS OF OPERATIONS YTD 2003 YTD 2002
- --------------------------------------------------------------------- ------------------- --------------------
(Unaudited)
(in thousands)
Total revenue $315,521 $ 285,018
Cost of sales 202,319 174,548
------------------- --------------------
Gross profit 113,202 110,470
Selling, general and administrative expenses 71,663 67,790
Depreciation and amortization 4,517 2,747
Restructuring and other credits (261) (1,923)
------------------- --------------------
Total operating expenses 75,919 68,614
------------------- --------------------
Operating income 37,283 41,856
Interest and financing costs 2,497 6,156
Reorganization costs 6,323 3,134
Income taxes (1,949) 15,100
Cumulative effect of accounting change -- 30,400
------------------- --------------------
Net income (loss) $30,412 $ (12,934)
=================== ====================
13
CONDENSED STATEMENTS OF OPERATIONS THIRD QUARTER 2003 THIRD QUARTER 2002
- --------------------------------------------------------------------- -------------------- -------------------
(Unaudited)
(in thousands)
Total revenue $ 123,948 $ 99,288
Cost of sales 79,619 60,467
-------------------- -------------------
Gross profit 44,329 38,821
Selling, general and administrative expenses 24,081 22,234
Depreciation and amortization 1,877 971
Restructuring and other charges (261) 11
-------------------- -------------------
Total operating expenses 25,697 23,216
-------------------- -------------------
Operating income 18,632 15,605
Interest and financing costs 823 1,038
Reorganization costs 1,271 667
Income taxes (7,973) 6,940
-------------------- -------------------
Net income $ 24,511 $ 6,960
==================== ===================
CONDENSED STATEMENT OF CASH FLOWS YTD 2003
- ------------------------------------------------------------------- -------------------
(Unaudited)
(in thousands)
Cash Flows used in Operating Activities $ (15,711)
Cash Flows used in Investing Activities (4,731)
Cash Flows used in Financing Activities (1,524)
-------------------
Net decrease in cash and cash equivalents (21,966)
Cash and cash equivalents, beginning of period 22,896
-------------------
Cash and cash equivalents, end of period $ 930
===================
14
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)
THIRD QUARTER YTD
------------------------------------------------------ -------------------------------------------------------
% % % %
2003 OF TOTAL 2002 OF TOTAL 2003 OF TOTAL 2002 OF TOTAL
-------------- --------------- --------------- --------------
Wholesale $104,366 81.5% $ 83,941 82.0% $263,499 81.3% $ 235,458 80.8%
Retail 18,125 14.2% 13,845 13.5% 46,936 14.5% 43,716 15.0%
-------------- --------------- --------------- --------------
Net Sales 122,491 95.7% 97,786 95.5% 310,435 95.8% 279,174 95.8%
Licensing 5,491 4.3% 4,533 4.5% 13,673 4.2% 12,260 4.2%
-------------- --------------- --------------- --------------
Total Revenue $127,982 100.0% $ 102,319 100.0% $324,108 100.0% $ 291,434 100.0%
============== =============== =============== ==============
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003 AS COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 28, 2002
TOTAL REVENUE
Net Sales for the thirteen weeks ended September 27, 2003 (the "third quarter
2003") were $122.5 million as compared to $97.8 for the thirteen weeks ended
September 28, 2002 (the "third quarter 2002"). Sales from the Company's
wholesale operations ("Wholesale") increased 24.3% to $104.4 million in the
third quarter 2003 from $83.9 in the third quarter 2002.
The increase in wholesale net sales is due primarily to volume increases in all
of the Company's lines, including the new Anne Klein Handbag line.
Sales at the Company's retail stores ("Retail") increased to $18.1 million in
the third quarter 2003 from $13.8 million in the third quarter 2002 due to a
comparable store sales increase of 18.2% in the third quarter 2003 compared to
the third quarter 2002, as well as an additional 13 open stores from year to
year.
Royalty revenue increased to $5.5 million in the third quarter 2003 from $4.5
million in the third quarter 2002, as a result of higher licensee sales
volume.
15
GROSS PROFIT
Gross profit as a percentage of total revenue decreased to 38.8% for the third
quarter 2003, compared to 42.5% for the third quarter 2002. Wholesale gross
profit as a percentage of sales decreased to 32.8% in the third quarter 2003
from 36.1% in the third quarter 2002, primarily as a result of greater off-price
sales at lower gross margins for the Kasper lines, and a decrease in full price
sales margins as a result of greater dilution due to promotional activity in the
Kasper suit, Nipon and AK Anne Klein businesses.
Retail gross profit as a percentage of sales decreased to 54.9% in the third
quarter 2003 from 62.4% in the third quarter 2002, primarily as a result of
costing variances and favorable inventory shrink that positively impacted the
third quarter 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased to $25.9 million
in the third quarter 2003 as compared to $23.5 million in the third quarter
2002. As a result of the additional 13 retail stores opened over the prior year,
Retail incurred an additional $1.3 million in SG&A. International operations
added approximately $550,000 in expenses as a result of the growth of the Anne
Klein lines in Canada and Europe. Wholesale and licensing SG&A increased
approximately $550,000 as a result of expenses relating to the new Anne Klein
handbag line totaling $348,000 and overall increases associated with higher
sales volume.
RESTRUCTURING AND OTHER CHARGES
During the third quarter 2003, the Company decided that approximately $261,000
of restructuring reserves relating to retail store closing costs were no longer
needed, and as a result recognized a restructuring credit. The Company incurred
$11,000 in restructuring and other charges in the third quarter 2002. This
charge consisted primarily of professional fees associated with the Company's
bankruptcy filing.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $2.1 million in the third quarter 2003 and
$1.1 million in the third 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. In
addition, during the third quarter 2003, the Company wrote-off the net book
value of abandoned fixed assets totaling $362,000.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $857,000 in the third quarter 2003
from $1.0 million in the third 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 2002, in fair value of
the Company's interest rate swap.
Interest under the Chase DIP and Citicorp DIP Credit Agreement, as applicable,
totaled approximately $330,000 in the third quarter 2003 and $643,000 in the
third 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 third quarter 2003. Bank
fees in the third quarter 2002 totaled $43,000.
Factoring fees were approximately $349,000 in the third quarter 2003 and
$335,000 in the third quarter 2002. Other interest, partially offset by interest
income totaled $50,000 in the third quarter 2003 and $21,000 in the third
quarter 2002.
REORGANIZATION CHARGES
The Company recorded $1.3 million and $667,000 in reorganization charges in the
third quarter 2003 and third quarter 2002, respectively. These charges related
primarily to professional fees and, in 2002, bank fees associated with the
Company's reorganization as a result of the Chapter 11 Cases.
16
INCOME TAXES
The Company recorded an income tax benefit of $7.6 million for the third quarter
2003 compared to a provision of $7.2 million for the third quarter 2002. The
Company is in an accumulated loss position for both financial reporting and
income tax purposes. For financial statement 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. As a result of the resolution with the IRS
(see Note 9 of Notes to Condensed Consolidated Financial Statements), net
operating losses which were previously unavailable, due to proposed IRS audit
adjustments, are now being utilized. The Company has adjusted its estimate of
the annual effective tax rate to a 2% benefit after giving effect to both the
resolution of uncertainties related to the proposed IRS adjustment as well as
the reversal of certain tax reserves totaling $3.7 million, resulting in a tax
benefit for the third quarter 2003. For the third quarter 2002, the provision
differs 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 $27.5 million in the third quarter 2003 compared to $10.0 million
in the third quarter 2002. The improvement is the result of the increase in
sales volume royalty income, reduced interest and financing costs and income tax
benefit, partially offset by increased SG&A costs and decreased margins.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003 AS COMPARED TO THIRTY-NINE WEEKS
ENDED SEPTEMBER 28, 2002
TOTAL REVENUE
Net sales for the thirty-nine weeks ended September 27, 2003 ("YTD 2003") were
$310.4 million as compared to $279.2 million for the thirty-nine weeks ended
September 28, 2002 ("YTD 2002"). Wholesale sales increased to $263.5 million
from $235.5 million. 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 YTD 2002.
The increase in wholesale net sales is primarily due to overall volume increases
in all of the Company's lines, including the new Anne Klein Handbag line.
Retail sales increased to $46.9 million in YTD 2003 from $43.7 million in YTD
2002. The increase in sales is the result of an additional 13 open stores from
year to year, along with a comparable store sales increase of 4.2% for YTD 2003
compared to YTD 2002, somewhat offset by the closing of 24 underperforming
stores in the first quarter 2002, which contributed $1.8 million in sales in YTD
2002.
Royalty revenue increased to approximately $13.7 million in YTD 2003 from $12.3
million in YTD 2002 as a result of higher licensee sales volume.
GROSS PROFIT
Gross profit as a percentage of total revenue decreased to 39.1% for YTD 2003,
compared to 40.9% for YTD 2002. Wholesale gross profit, as a percentage of
sales, decreased to 33.0% in YTD 2003 from 35.3% in YTD 2002.
As discussed above, during YTD 2002 the Company reversed a $9.7 million reserve
relating to certain allowance reserves established at the end of 2001,
benefiting gross profit for YTD 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 YTD 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 YTD
2002.
17
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid-off employees as a result of its 2001 reductions in force. As a result, the
Company realized a benefit relating to cost of sales of approximately $450,000
in YTD 2002.
Excluding these reversals, YTD 2002 consolidated gross profit, as a percentage
of total revenue, would have been 37.3% and wholesale gross margins would have
been 30.8%. The improvement in gross profit after adjustments is the result of
higher gross margins on off-price sales and increased profitability of the
Company's Hong Kong operations.
Retail gross profit as a percentage of sales increased to 55.8% in YTD 2003 from
54.0% in YTD 2002, due to the closing of under-performing stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $76.8 million in YTD
2003 as compared to $71.3 million in YTD 2002, an increase of $5.5 million. As a
result of the additional 13 retail stores open from year to year, Retail
incurred an additional $2.4 million in SG&A. International operations added
approximately $1.7 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 $1.4 million as a result of severance paid during the second
quarter 2003, the start-up of the Anne Klein Handbag line which contributed an
additional $650,000 in SG&A 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 YTD 2002.
RESTRUCTURING AND OTHER CREDITS
During YTD 2003, the Company decided that approximately $261,000 of
restructuring reserves relating to retail store closing costs were no longer
needed, and as a result recognized a restructuring credit. The Company recorded
a $1.9 million restructuring credit in YTD 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 YTD 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 $603,000 in restructuring charges related primarily to
professional fees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $5.0 million in YTD 2003 and $3.2 million
in YTD 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. In addition, during YTD
2003, the Company wrote-off the net book value of leasehold improvements
relating to department store shop boutiques totaling $362,000.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $2.6 million in YTD 2003 from $6.2
million in YTD 2002, a decrease of approximately $3.6 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 YTD 2003 compared to $1.7 million for YTD 2002. Included
in Senior Notes interest expense for YTD 2002 was approximately $308,000 in
unpaid default interest on the Senior Notes.
18
Interest under the Chase Facility (defined elsewhere), Chase DIP and Citicorp
DIP Credit Agreement, as applicable, totaled approximately $1.2 in YTD 2003 and
$4.0 million in YTD 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 $351,000 of amortization charges in YTD 2003. YTD 2002 bank fees
totaled $43,000.
Factoring fees were approximately $898,000 in YTD 2003 and $962,000 in YTD 2002.
Offsetting interest expense in YTD 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. Other interest expense, totaling $160,000 and
$139,000 in YTD 2003 and YTD 2002 was offset by interest income of $68,000 and
$177,000, respectively.
REORGANIZATION CHARGES
The Company recorded $6.3 million and $3.1 million in reorganization charges in
YTD 2003 and YTD 2002, respectively. During YTD 2003, the Company incurred
approximately $2.6 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 an income tax benefit of $725,000 for YTD 2003 compared to
a provision of $15.7 million for YTD 2002. The Company is in an accumulated loss
position for both financial reporting and income tax purposes. For financial
statement 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. As a result of the resolution with the IRS (see Note 9 of Notes to
Condensed Consolidated Financial Statements), net operating losses which were
previously unavailable, due to proposed IRS audit adjustments, are now being
utilized. The Company has adjusted its estimate of the annual effective tax rate
to a 2% benefit after giving effect to both the resolution of uncertainties
related to the proposed IRS adjustment as well as the reversal of certain tax
reserves totaling $3.7 million, resulting in a tax benefit for YTD 2003. For YTD
2002, the provision differs 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 $36.9 million in YTD 2003 compared to a loss of $8.8 million in
YTD 2002, an increase of approximately $45.7 million. The improvement is the
result of the increased sales volume and reduced interest and financing costs,
along with the cumulative effect of change in accounting principle recorded in
YTD 2002 and income tax benefit, partially offset by the increased SG&A
expenses, reorganization costs and the reserve reversals that occurred in YTD
2002. See Note 4 of Notes to Condensed Consolidated Financial Statements for
more information on the cumulative effect of change in accounting principle.
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 $18.6 million during YTD 2003 compared
to cash provided of $62.8 million during YTD 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 smaller decrease for YTD
2003 as compared to YTD 2002. The increase in accounts receivable is primarily
the result of increased sales and a shift in the timing of shipments.
Incremental sales in August and September of 2003 were approximately $24.0
million more than for the same period in 2002. The decrease in cash used in
investing activities resulted from slightly less capital expenditures in YTD
2003 compared to YTD 2002. Cash flows from financing activities increased due to
the Company's borrowed position at the end of the third quarter 2003 and the
repayment of pre-petition borrowings during YTD 2002.
19
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 September 27, 2003,
there was $1.5 million outstanding in direct borrowings and $28.3 million
outstanding in letters of credit under the Citicorp DIP Credit Agreement. The
Company had approximately $47.3 million available for future borrowings as of
September 27, 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 13.0%. The Company stopped accruing interest on the Senior Notes on
the Filing Date. Interest relating the Senior Notes totaled $1.7 million for YTD
2002, including $300,000 in default interest. At September 27, 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
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.
20
Capital expenditures were $5.3 million and $5.7 million for YTD 2003 and YTD
2002, respectively, and 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.
21
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 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.
22
ITEM 4.
CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officer, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of September 27, 2003. Based on their evaluation, the Company's
principal executive and principal financial officer concluded that the Company's
disclosure controls and procedures were effective as of September 27, 2003.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended September 27, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of the Chief Executive Officer of the Company pursuant
to Rule 13a-14(a) of the Exchange Act
31.2 Certification of the Chief Financial Officer of the Company pursuant
to Rule 13a-14(a) of the Exchange Act
32.1 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
32.2 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
99.1 Press Release of the Company dated November 12, 2003
(b) Reports on Form 8-K:
On August 8, 2003 the Company filed a current report on Form 8-K to
disclose that it had signed a definitive agreement to be acquired by
Jones Apparel Group, Inc.
On August 25, 2003, the Company filed a current report on Form 8-K
attaching the press release announcing its financial results for the
second quarter ended June 28, 2003.
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KASPER A.S.L., LTD.
(Registrant)
Dated: November 12, 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
25
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
31.1 Certification of the Chief Executive Officer of the Company
pursuant to Rule 13a-14(a) of the Exchange Act
31.2 Certification of the Chief Financial Officer of the Company
pursuant to Rule 13a-14(a) of the Exchange Act
32.1 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
32.2 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
99.1 Press Release of the Company dated November 12, 2003
26