ITEM 1. BUSINESS
GENERAL - -------
Kasper, a Delaware corporation incorporated in 1997, is one of the leading women's branded apparel companies in the United States. The Company designs, markets, sources, manufactures and distributes women's suits, sportswear and dresses. The Company's brands include such well-recognized names as Albert Nipon(R), Anne Klein New York(TM), A.K. Anne Klein(TM), Kasper(R), and Le Suit(R) (collectively, the "Brands", and Anne Klein New York(TM) and A.K. Anne Klein(TM), the "Anne Klein Brands"). In addition, the Company has granted licenses for the manufacture and distribution of certain other products under the Brands (other than Le Suit(R)), including, but not limited to, women's watches, jewelry, handbags, small leather goods, footwear, coats, eyewear and swimwear, and men's apparel. The Company's long-established position as a market leader in women's suits was complemented in 1999 with the purchase of trademarks owned by Anne Klein Company LLC, which provided for a base for the Company's expansion into sportswear.
Contributing to the Company's on-going diversification are the Company-owned retail stores, which provide an additional distribution channel for its products. As of April 8, 2003, the Company operated 73 retail outlet stores under the Kasper and Anne Klein names, which not only sell company produced apparel, but also showcase and sell licensed products. In February 2002, the Company opened its first full price Anne Klein store in New York City.
CHAPTER 11 CASES - ----------------
The following discussion provides general background information regarding the Chapter 11 filing, but is not intended to be an exhaustive summary. Detailed information can be obtained at the Bankruptcy Court web site at www.nysb.uscourts.gov. - ----------------------
On February 5, 2002 (the "Filing Date"), the Company along with A.S.L. Retail Outlets, Inc., ASL/K Licensing Corp., Kasper Holdings, Inc., AKC Acquisition, Ltd. and Lion Licensing, Ltd., all wholly owned subsidiaries of the Company (sometimes hereinafter collectively referred to as the "Debtors"), filed voluntary petitions (Case Nos. 02-B10497, 02-B10500, and 02-B10502 through 10505 (ALG)) (the "Chapter 11 Cases") under Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Pursuant to an order of the Bankruptcy Court, the individual Chapter 11 Cases were consolidated for procedural purposes only and are being jointly administered by the Bankruptcy Court. The Company's international operations were not included in the filings. The Company will continue to operate in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court.
Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect pre-petition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. The rights of and ultimate payments by the Company under pre-petition obligations may be substantially altered. This could result in claims being liquidated in the Chapter 11 Cases at less (and possibly substantially less) than 100% of their face value. In addition, as debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory, pre-petition contracts and unexpired leases. In this context, assumption means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and rejection means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 Cases unless such claims had been secured on a pre-petition basis prior to the Filing Date.
Although the Debtors are authorized to operate their businesses as debtors-in-possession, they may not engage in transactions outside the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Court and obtaining Bankruptcy Court approval when necessary.
At the commencement of the Chapter 11 Cases, the Company filed a preliminary plan of reorganization. The United States Trustee thereafter appointed the Official Committee of Unsecured Creditors (the "Creditors' Committee"), and based on negotiations with the Creditors' Committee, the Company filed a First Amended and Restated Joint Plan of Reorganization (the "Plan") and First Amended and Restated Disclosure Statement (the "Disclosure Statement") on November 6, 2002. In essence, the Plan provides for (i) payment in full of federal, state, and local tax claims and other administrative and priority claims; (ii) payment in full or refinancing of the DIP Credit Agreement; (iii) reinstatement or payment in full of, or surrender of collateral securing, allowed miscellaneous secured claims and capitalized lease obligations; (iv) distributions of shares of stock in the reorganized Company to the holders of allowed general unsecured claims and the holders of the Company's $110.0 million Senior Notes due 2004 (the "Senior Notes"); (v) a distribution of cash in the amount of 70% of allowed convenience claims; and (vi) distributions of warrants to purchase shares of stock in the reorganized Company to the holders of shares of stock in the Company on the record date established in the Chapter 11 Cases.
A hearing to consider the Plan was scheduled for December 5, 2002 (the "Scheduled Hearing"). On December 4, 2002, the Company received a proposal to acquire the Company for $88 million in cash (the "Management Proposal") from a management group led by John D. Idol, the Company's Chief Executive Officer (the "Management Group"), and Parthenon Capital, LLC ("Parthenon"). The Scheduled Hearing was postponed to allow the Company to consider the Management Proposal. Under the Management Proposal, no payment would be made to the Company's existing stockholders. The Management Proposal was modified on December 10, 2002 to increase the amount of the cash payment to $100 million.
On September 20, 2002, the Board of Directors of the Company formed a special committee of independent directors (the "Special Committee") in connection with the Company's exploration of strategic alternatives, including a possible sale of the Company. The Special Committee was formed in anticipation of potential offers to purchase the Company, and to avoid potential conflicts of interest in the event such an offer was made by the Company's management. On December 23, 2002, the Special Committee, consisting of Salvatore Salibello and Denis Taura, with the support of the Creditor's Committee, engaged Peter J. Solomon Company ("Solomon") to advise the Special Committee in connection with exploring strategic alternatives. Solomon, on behalf of the Special Committee, is soliciting preliminary indications of interest from potential purchasers of the Company, including the Management Group and Parthenon. Such proposals will be considered by the Special Committee and representatives of the Creditors' Committee. However, there is no assurance that a transaction will be consummated. Solomon, on behalf of the Special Committee, continues to explore strategic alternatives to date.
POST-PETITION FINANCING - -----------------------
On the Filing Date, the Company obtained a $35 million debtor-in-possession financing facility (the "Chase DIP") from its then existing bank group led by JPMorgan Chase Bank ("Chase"). The Chase DIP Credit Agreement also provided for a term loan for the purpose of refinancing the pre-petition obligations outstanding under the credit facility entered into by the Company on July 9, 1999 with a bank group led by Chase (the "Chase Facility"), which on the Filing Date totaled approximately $91.6 million. The Chase DIP was intended to assure that the Company had the ability to pay for all new supplier shipments received, to invest in retail operations, department store boutiques and substantially upgrade operating systems to achieve further efficiencies. On February 26, 2002, the Bankruptcy Court entered a final order approving the Chase DIP. On January 30, 2003, the Company obtained a $100 million debtor-in-possession financing facility (the "Citicorp DIP Credit Agreement") from its new bank group led by Citicorp USA, Inc. ("Citicorp"). The Citicorp DIP Credit Agreement replaced the Chase DIP. There were no borrowings
under the Chase DIP at December 28, 2002 and there were no borrowings under the Citicorp DIP Credit Agreement as of March 30, 2003.
Additional information with respect to the Chase DIP and the Citicorp DIP Credit Agreement is contained in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS - ---------------------------------------------
Kasper's business consists of three integrated operations: wholesale, retail and licensing. During fiscal 2002, approximately 95% of the Company's wholesale net sales were derived from sales within the United States. Financial information with regard to the Company's wholesale, retail and licensing segments, including revenues, earnings before interest, taxes, depreciation and amortization, and segment assets, appears in Note 13 of Notes to Consolidated Financial Statements included elsewhere herein.
WHOLESALE - ---------
The Company's wholesale business designs, sources, manufactures and distributes to wholesale customers, women's apparel under various labels owned by the Company for the bridge, better and mass markets. The Company's products are sold to approximately 3,900 retail locations throughout the United States, Europe, the Middle East, Southeast Asia and Canada. The Company participates in three principal areas of the women's wholesale apparel market: suits, sportswear and dresses.
SUITS
The women's suit market is generally defined as tailored jackets, skirts and pants, sold as a set. The Company manufactures suits under the Albert Nipon brand for the specialty store bridge market. The Company manufactures the Kasper and Le Suit brands for the department store better market. The Company believes it has a dominant share of the women's suit market for department stores within the United States. Additionally, the Company manufactures for the mass market by using private label programs for such accounts as Sears and J.C. Penney's. Suit sales, as a percentage of the Company's net domestic wholesale sales, for the 2002, 2001 and 2000 fiscal years were approximately 67%, 65% and 60%, respectively.
SPORTSWEAR
Sportswear includes groups of skirts, pants, jackets, blouses and sweaters which, while sold as separates, are coordinated as to styles, color palettes and fabrics and are designed to be worn together or as separates. Products offered in this area of the market are suitable for both a working environment and casual wear. The Company offers a collection of sportswear under the Anne Klein New York brand name, which is priced for the bridge market. The Company also produces A.K. Anne Klein and Kasper & Company for the better market. Sportswear sales, as a percentage of the Company's net domestic wholesale sales, for the 2002, 2001 and 2000 fiscal years were approximately 28%, 27% and 33%, respectively.
DRESSES
The Company produces a collection of dresses under the Kasper brand name, targeted to sell at better prices. The Company's strategy is to leverage its position in the career suit market by designing and marketing dresses suitable for the career woman. The Kasper dress division offers a wide variety of high quality dresses at affordable prices, including career and classic, desk to dinner dresses. Dress sales, as a percentage of the Company's net domestic wholesale sales, for the 2002, 2001 and 2000 fiscal years were approximately 5%, 8% and 7%, respectively.
INTERNATIONAL OPERATIONS
The Company's wholesale business includes two wholly owned subsidiaries, Kasper Holdings Inc. and Kasper A.S.L. Europe, Ltd. (collectively, "International"). Kasper Holdings Inc. owns Kasper Canada ULC and Anne Klein ULC, which together
own 100% of Kasper Partnership G.P., a Canadian Partnership (70% and 30%, respectively), through which the Company sells and distributes all the Brands in Canada. Kasper A.S.L. Europe, Ltd. sells and distributes all the Brands in Europe. The Company's wholly owned subsidiary, Asia Expert Limited, a Hong Kong corporation ("AEL"), is the owner of Tomwell Ltd., also a Hong Kong corporation. Generally, AEL acts as a buying agent for the Company's suit business for which it receives an arms-length commission. AEL also provides a quality control function at the sewing contractors in China, Hong Kong and other parts of the Far East as part of its buying service. Tomwell Ltd. operates the Company's China factory, which began production in May 1998, and also provides beading services for Albert Nipon and Kasper garments.
RETAIL - ------
The Company's retail store program establishes another distribution channel for its products. At December 28, 2002, the Company operated 58 Kasper retail stores, 10 Anne Klein retail stores and one full price Anne Klein store, which in total represented approximately 17%, 20% and 19% of total net sales of the Company for the 2002, 2001 and 2000 fiscal years, respectively. These stores are generally located in outlet center malls throughout the United States. The Company opened its full price Anne Klein store in February 2002, located in New York City.
LICENSING - ---------
As of December 28, 2002, the Company had four licensing arrangements under its Albert Nipon(R) trademark. Licenses included men's tailored clothing, neckwear, small leather goods, and ladies' and girls' coats and outerwear.
As of December 28, 2002, the Company had 13 domestic and three international licensing agreements under its Anne Klein Brands and related logos. The domestic licensees are granted the exclusive right to manufacture and sell watches, jewelry, handbags, small leather goods, footwear, coats, eyewear and swimwear under specified Anne Klein trademarks, in accordance with designs supplied or approved by the Company. The international licensees distribute specified apparel and accessories under the Anne Klein marks in Japan, Korea, and Central and South America.
As of December 28, 2002, the Company had three licensing arrangements under its Kasper trademarks pursuant to which third-party licensees produce merchandise under the these trademarks, in accordance with designs supplied or approved by the Company. Licenses included women's coats, men's casual pants and handbags, portfolios and wallets.
DESIGN - ------
The Company designs its products based on seasonal plans that reflect prior seasons' experience, current design trends, economic conditions and management's estimates of the product's future performance. Product lines are developed primarily for the two major selling seasons, spring and fall. The Company also produces lines for the transitional periods within these seasons. As "seasonless" fabrics become increasingly popular in women's apparel, the Company has integrated these fabrics into its product lines.
The average lead-time from the selection of fabric to the production and shipping of finished goods ranges from approximately eight to nine months. Although the Company retains significant flexibility to change production scheduling, the majority of production, for other than private label goods, begins before the Company has received customer orders.
The Company's design teams travel around the world to select fabrics and colors and stay abreast of the latest trends and innovations. In addition, the Company monitors the sales of its products to determine changes in consumer trends. In-house designers use a computer-aided design ("CAD") system to customize designs. The Company's designers meet regularly with the piece goods and sales departments to review design concepts, fabrics and styles.
Each of the Company's product lines has its own design team which is responsible for the development and coordination of the product offerings within each line. Once colors and fabrics are selected, production and showroom samples are
produced and incorporated into the product line, and the design and sourcing departments begin to develop or work with contractors to develop preliminary production samples. After approval of the samples, production begins. As a line of products is being finalized, customer reaction is evaluated and samples are modified as appropriate.
After production samples are approved for production, various patterns that will be used to cut the fabric are produced by the Company's team of experienced pattern makers. This process is aided by the use of a computerized marker and grading system.
MANUFACTURING - -------------
The Company primarily contracts for the cutting and sewing of its garments with contractors located principally in the Philippines, Hong Kong, Thailand and China. Purchases of services or finished goods from the Company's four principal contractors accounted for approximately 47% of the Company's total finished goods purchases in fiscal 2002. Apparel sold by the Company is manufactured in accordance with its designs, detailed specifications and production schedules. In May 1998, the Company began production in a dedicated manufacturing facility in China. Finished goods produced in the Company's China factory accounted for approximately 10%, 7% and 5% of total finished goods production during fiscal 2002, 2001 and 2000, respectively. The Company's production and sourcing staffs in Hong Kong, Thailand, China and the Philippines oversee all aspects of apparel manufacturing and production, including quality control, as well as researching and developing new sources of supply for manufacturing, textiles and trim. Although the Company does not have any long-term agreements with any of its manufacturing contractors, it has had long-term mutually satisfactory relationships with its four principal contractors and has engaged each of them for more than 15 years. The Company allocates product manufacturing among contractors based on the contractors' capabilities, the availability of production capacity and quota, quality, pricing and delivery. The inability of certain contractors to provide needed services on a timely basis could materially adversely affect the Company's operations and financial condition.
The Company has historically manufactured finished goods on a cut, make and trim ("CMT") basis whereby the Company purchases piece goods and trim and contracts for the cutting and sewing of the garments. Starting in 2001, the Company began transitioning to the purchase of finished goods ("FOB") whereby the contractor is responsible for all manufacturing processes including the purchase of piece goods and trim. The Company's FOB production by units was approximately 51% and 29% in 2002 and 2001, respectively. The Company expects the percent of FOB production to increase in 2003.
QUALITY CONTROL - ---------------
The Company's comprehensive quality control program is designed to ensure that purchased piece goods and finished goods meet the Company's exacting standards. Production samples are submitted to the Company for approval prior to production. The Company maintains a quality control staff who, in addition to the contractors' own quality control staff, inspect prototypes of each garment before production commences and perform random in-line quality control audits during production and perform final inspection after production before the garments leave each contractor's premises. In addition, inspectors perform quality control at the Company's distribution center in New Jersey, where a sampling of each style is measured against detailed specifications, and undergoes a thorough inspection and is then steamed or pressed, as necessary. The Company believes that its policy of inspection at the offshore contractors' facilities, together with the inspection and refinishing at its distribution center, are essential to maintaining the quality and reputation that its garments enjoy.
SUPPLIERS - ---------
Generally, the raw materials required for the manufacturing of the Company's products are purchased from the Far East and Europe, directly by the Company or by its manufacturing facilities. Raw materials, which are in most instances made and/or colored especially for the Company, consist principally of piece goods and yarn. Purchases from the Company's four major suppliers accounted for approximately 43% of the Company's total purchases of raw materials for fiscal 2002. The Company's transactions with its suppliers are based on written instructions issued by the Company and, except for these instructions, the Company has no written agreements with its suppliers. However, the Company has experienced little difficulty in satisfying its raw material requirements and considers its sources of supply adequate. The inability of certain suppliers to provide needed items on a timely basis could materially adversely affect the Company's operations, business and financial condition.
DISTRIBUTION - ------------
The Company operates a 400,000 square foot distribution center in Secaucus, New Jersey. The majority of apparel produced for the Company is processed through the Company's distribution center before delivery to the retail customer. The Company also has a distribution center in Montreal, through which the Company distributes all the Brands throughout Canada.
CUSTOMERS - ---------
The Company sells approximately 95% of its wholesale products within the United States. The Company distributes its products through approximately 3,900 retail locations throughout the United States, Canada, Europe and Asia. Department stores accounted for approximately 71%, 69% and 66% of the Company's gross sales for the 2002, 2001 and 2000 fiscal years, respectively. In fiscal 2002, Federated Department Stores, May Merchandising Co. and Dillard's Department Stores accounted for approximately 20%, 20% and 16% of gross sales, respectively. Sales to any individual divisional unit of either Federated Department Stores, Dillard's Department Stores or May Merchandising Co. did not exceed 16% of gross sales. While the Company believes that purchasing decisions are generally made independently by each department store, in some cases the trend may be toward more centralized purchasing decisions. The Company's 10 largest customers accounted for approximately 80% of the Company's gross sales during fiscal 2002. A decision by one or more of such substantial customers, whether motivated by fashion concerns, financial issues or difficulties, or otherwise, to decrease the amount of merchandise purchased from the Company or to cease carrying the Company's products could have a materially adverse effect on the financial condition and operations of the Company.
TRADEMARKS - ----------
The Company owns and/or uses a variety of trademarks in connection with its products and businesses, including Albert Nipon, Anne Klein New York, A.K. Anne Klein, the Lion Head Design, Kasper and Le Suit, as well as many derivatives of those trademarks (collectively, the "Marks"). The Company believes its ability to market its products under the Marks is a substantial factor in the success of the Company's products. The Company has registered or applied for registration for many of its trademarks, including certain of the Marks listed above, for use on apparel and footwear and other products such as accessories, watches and jewelry in the United States and in many foreign territories. The Company relies primarily upon a combination of trademark, copyright, know-how, trade secrets, and contractual restrictions to protect its intellectual property rights. The Company believes that such measures afford only limited protection and, accordingly, there can be no assurance that the actions taken by the Company to establish and protect its trademarks, including the Marks, and other proprietary rights will prevent imitation of its products or infringement of its intellectual property rights by others, or prevent the loss of revenue or other damages caused thereby. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or obtain and use information that the Company regards as proprietary. In addition, there can be no assurance that one or more parties will not assert infringement claims against the Company; the cost of responding to any such assertion could be significant, regardless of whether the assertion is valid.
IMPORTS AND IMPORT RESTRICTIONS - -------------------------------
The Company's transactions with its foreign manufacturers and suppliers are subject to the risks of doing business abroad. Imports into the United States are affected by, among other things, the cost of transportation and the imposition of import duties and restrictions.
The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries, including Taiwan, the Philippines, South Korea, Thailand, Indonesia and Hong Kong. These agreements impose quotas on the amounts and types of merchandise that may be imported into the United States from these countries. Such agreements also allow the United States to impose restraints at any time on the importation of categories of merchandise that, under the terms of the agreements, are not currently subject to specified limits.
The Company monitors duty, tariff and quota-related developments and continually seeks to minimize its potential exposure to quota-related risks through, among other measures, geographical diversification of its manufacturing sources, the maintenance of an overseas office, allocation of production to merchandise categories where more quota is available and shifting production among countries and manufacturers.
The Company's imported products are also subject to United States customs duties and, in the ordinary course of business, subjects the Company to claims by the United States Customs Service for duties and other charges. The Company carefully monitors duty rates and classification decisions to ensure that it receives the lowest duty rates to which it is entitled under the law.
Because the Company's foreign manufacturers are located at significant distance from the Company, the Company is generally required to incur greater lead time for orders manufactured overseas, which reduces the Company's manufacturing flexibility. Foreign imports are also affected by the high cost of transportation into the United States. These costs are generally offset by the lower labor costs.
In addition to the factors outlined above, the Company's future import operations may be adversely affected by political instability resulting in the disruption of trade from exporting countries, any significant fluctuation in the value of the dollar against foreign currencies and restrictions on the transfer of funds.
BACKLOG - -------
As of March 30, 2003, the Company had unfilled customer orders of approximately $159.2 million, compared to approximately $95.6 million of such orders at March 29, 2002. The increase over prior year is the result of an earlier market for Fall goods, resulting in an earlier receipt of orders. These amounts include both confirmed and unconfirmed orders. The Company generally receives orders approximately three to six months prior to the time the products are delivered to stores. All such orders are subject to cancellation for late delivery. The amount of unfilled orders at a particular time is affected by a number of factors, including the timing of the market weeks for particular lines, during which a significant percentage of our orders are received, and the scheduling of the manufacture and shipping of the product, which in some instances is dependent on the desires of the customer. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. There can be no assurance that cancellations, rejections and returns will not reduce the amount of sales realized from the backlog of orders.
COMPETITION - -----------
Competition is strong in the areas of the fashion industry in which the Company operates. The Company competes with numerous designers and manufacturers of apparel and accessory products, domestic and foreign, some of which account for a significant percentage of total industry sales, and may be significantly larger and have substantially greater resources than the Company. The Company's business depends, in part, on its ability to shape and stimulate consumer tastes and demands by producing innovative, attractive, and exciting fashion products, as well as its ability to remain competitive in the areas of design, quality and price.
EMPLOYEES - ---------
At December 28, 2002, the Company had approximately 1,041 employees in the United States comprised of 722 full-time employees and 319 part-time employees. Approximately 216 of the Company's employees are members of UNITE, the union representing the Needle Trades, Industrial and Textile Employees, which has a three-year labor agreement with the Company expiring on May 31, 2003. The Company considers its relations with its employees to be satisfactory. In addition, the Company employs 13 employees in the United Kingdom, 38 employees in Canada and 90 employees in the Far East, as well as 1,058 contract employees in its dedicated factory in China.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases the following properties:
In addition, as of December 28, 2002, the Company operated 58 Kasper ASL retail stores and 10 Anne Klein retail outlet stores throughout the United States. The majority of all newly entered leases are for a period of five to ten years, some with options to renew. The average store size is approximately 2,800 square feet, ranging from a minimum of 1,700 square feet to a maximum of 4,700 square feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
See the section entitled "Chapter 11 Cases" under Item 1. "Business" for a discussion of the Chapter 11 Cases.
The Company is currently undergoing an examination by the Internal Revenue Service ("IRS") for the tax years ended 1997, 1998, 1999, and 2000. The IRS has issued a proposed adjustment, which would result in additional income taxes in prior years resulting in a reduction in net operating loss carry forwards, which were $70.0 million at December 29, 2001, the write-down of certain tax assets and the payment of interest. The proposed adjustment would disallow deductions amounting to approximately $26.7 million in the 1997 through 2000 fiscal years. The Company is vigorously contesting the proposed adjustment and no provision has been made therefor. In connection with the proposed adjustment, on August 7, 2002 the IRS filed proof of claim in the Bankruptcy Cases in the amount of approximately $4.7 million (the "IRS Claim"), on the basis that the Debtors improperly made amortization deductions during the years 1997 through 1999. The IRS Claim seeks priority under section 507(a)(8) of the Bankruptcy Code. On November 22, 2002, the Debtors filed an Objection to the IRS Claim pursuant to section 505 of the Bankruptcy Code, by which they requested the Court to disallow the IRS Claim in its entirety based on a determination of federal income tax liability pursuant to section 505(a)(1) of the Bankruptcy Code. The Debtors assert that the tax returns and the deductions claimed therein were proper and correct and, therefore, they are not liable for any additional taxes over and above those reported in the consolidated annual tax returns. Unless the
parties are able to agree on a resolution of the dispute, the issues are expected to be decided by the Bankruptcy Court within the next 6 months, and no assurance can be given as to the outcome of the dispute.
On January 11, 2002, counsel for Arthur S. Levine sent a letter to the Company alleging that the Company is obligated, under the terms of Mr. Levine's employment contract as the former Chairman and Chief Executive Officer of the Company, to pay severance and related costs. Mr. Levine asserted claims in the Chapter 11 Cases totaling approximately $1.3 million. On November 4, 2002, the Company entered into a settlement agreement with Mr. Levine, subsequently approved by the Bankruptcy Court, pursuant to which, inter alia, the Company paid Mr. Levine $199,999 and Mr. Levine withdrew all claims in the Chapter 11 Cases.
The Company is party to certain legal proceedings arising in the ordinary course of business. While the outcome of these proceedings cannot at this time be predicted with certainty, the Company does not expect any of the legal proceedings to have a material adverse effect on its financial condition or results of operations. As a result of the Chapter 11 Cases, litigation relating to pre-petition claims against the Debtors is stayed; however, litigants may seek to obtain relief from the Bankruptcy Court to pursue their pre-petition claims.
The Company is not involved in any other legal proceedings of significance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, no matter was submitted to a vote of the Company's security holders by means of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.01 par value common stock ("Common Stock") was traded on The NASDAQ National Market(R) under the symbol "KASP" from August 8, 1998 until February 13, 2001. On February 13, 2001, the Company announced that it was seeking quotation of its shares of Common Stock on the OTC Bulletin Board in lieu of its NASDAQ listing, due to the fact that it no longer met certain NASDAQ listing requirements. NASDAQ trading was discontinued effective prior to the opening of trading on February 14, 2001. After such date, the Company's Common Stock has traded in the over the counter market and quotations are available on the OTC Bulletin Board.
The high and low prices for the Company's Common Stock for each quarter indicated are set forth below. The prices reflect the high and low sales price for the Common Stock as reported by the NASDAQ Stock Market's National Market or the OTC Bulletin Board, as applicable.
---------------------------------- ----------------------- -------------------- Period High Low
---------------------------------- ----------------------- -------------------- 2002 First Quarter $ 0.19 $ 0.01 Second Quarter 0.31 0.00 Third Quarter 0.50 0.15 Fourth Quarter 0.15 0.05 ---------------------------------- ----------------------- --------------------
2001 First Quarter $ 0.31 $ 0.09 Second Quarter 0.18 0.08 Third Quarter 0.74 0.13 Fourth Quarter 0.29 0.10 ---------------------------------- ----------------------- --------------------
The closing sales price of the Company's Common Stock on April 8, 2003 was $0.60 per share, and there were approximately 1,139 holders of record. The Company has not declared or paid any cash dividends on its Common Stock during fiscal years 2002 and 2001, and does not anticipate paying cash dividends in the foreseeable future. In addition, certain of the Company's debt instruments and agreements with lending institutions limit the Company's ability to declare any dividends for the duration of such agreements. The proposed Plan provides for the distribution of warrants to purchase shares of stock in the reorganized Company to the holders of shares of stock in the Company on the record date established in the Chapter 11 Cases. Solomon continues to explore strategic alternatives and there can be no assurance that there will be a distribution to holders of shares of the Company's stock. See Item 1. Chapter 11 Cases.
Reference is made to the section entitled Equity Compensation Plan Information in Item 12 to this Form 10-K, which information is hereby incorporated by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained elsewhere in this report.
The selected consolidated financial information for the fiscal years ended January 2, 1999, January 1, 2000, December 30, 2000, December 29, 2001 and December 28, 2002 is derived from the Company's audited Consolidated Financial Statements. Certain amounts in prior fiscal years have been reclassified to conform to the presentation of similar items for the fiscal year ended December 28, 2002.
The following selected financial information for the years ended December 28, 2002 and December 29, 2001 has been prepared on a going concern basis. The Chapter 11 Cases raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependant upon the acceptance of a plan of reorganization by the Bankruptcy Court and the Company's creditors, securing exit financing upon emergence from bankruptcy, compliance with all debt covenants under the Citicorp DIP Credit Agreement, the ability to generate sufficient cash flows from operations, and the success of future operations. There can be no assurance that the Company will be successful in achieving these uncertainties. As a result, the
independent auditors have qualified their opinion relative to the uncertainty of the Company to continue as a going concern. The following selected financial information does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustments that might become necessary should the Company be unable to continue as a going concern in its present form.
SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA (in thousands, expect per share data)
(1) The change in the fiscal year-end from year to year is based on the Company's internal policy to close the fiscal year-end on the Saturday closest to December 31 of each year. As such, data for the fiscal years ended January 2, 1999, January 1, 2000, December 30, 2000, December 29, 2001 and December 28, 2002 each include the Company's results of operations for 52 weeks.
(2) Beginning with the fourth quarter of fiscal 2000, the Company has incurred restructuring and other charges in connection with the Company's bankruptcy filing preparation. The costs include those related to professional fees, severance, asset write-downs, lease and contract termination costs, as well as other expenses associated with the Company's bankruptcy filing preparation. During fiscal 2002 the Company reversed approximately $3.1 million of these charges relating to lease termination costs and therefore incurred a net credit.
(3) For "fresh start" reporting purposes, any portion of the Company's reorganization value not attributable to specific identifiable assets is reported as "reorganization value in excess of identifiable assets." This asset was being amortized on a straight-line basis over a 20-year period beginning June 4, 1997. Effective December 30, 2001, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, the Company discontinued amortizing this asset.
(4) Included in Depreciation and Amortization for the fiscal years ended January 2, 1999, January 1, 2000, December 30, 2000 and December 29, 2001 is the amortization of trademarks.
(5) As of the filing date, the Company has incurred costs associated with the Chapter 11 Cases. These costs are related primarily to professional fees and bank fees associated with the Company's reorganization.
(6) As a result of the defaults on the Senior Notes and on the Chase Facility, the $110.0 million Senior Notes and the $59.0 million and $70.3 million outstanding under the Chase Facility, respectively, have been reclassified as short-term liabilities as of December 29, 2001 and December 30, 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth under "Disclosure Regarding Forward Looking Information."
OVERVIEW
The Company utilizes a 52-53 week fiscal year ending on the Saturday nearest December 31. Accordingly, fiscal years 2002, 2001 and 2000 ended on December 28, 2002 ("fiscal 2002"), December 29, 2001 ("fiscal 2001") and December 30, 2000 ("fiscal 2000"), respectively.
On February 5, 2002, the Company and certain of its domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The Company will continue to operate in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy. For additional information with respect to the Chapter 11 Cases, see Item 3. "Legal Proceedings".
The Company's ability to continue as a going concern is dependent upon the acceptance of a plan of reorganization by the Bankruptcy Court and the Company's creditors, securing exit financing upon emergence from bankruptcy, compliance with all debt covenants under the Citicorp DIP Credit Agreement, the ability to generate sufficient cash flows from operations and the success of future operations. There can be no assurance that the Company will be successful in resolving these uncertainties. As a result, the independent auditors have qualified their opinion relative to the uncertainty of the Company to continue as a going concern. The financial information contained herein does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustments that might become necessary should the Company be unable to continue as a going concern in its present form.
Beginning in the fourth quarter of 2000 and continuing throughout fiscal 2002, the Company has been undertaking a substantial restructuring of its businesses. This includes, but is not limited to, (i) reducing general and administrative costs through the streamlining of its back-office operations, (ii) focusing on the profitability of each operating unit and examining its cost structure to enhance operating efficiencies through the closing of under performing retail stores, and (iii) adopting a more disciplined inventory management approach. Accordingly, the Company's results of operations for fiscal 2001 and fiscal 2002 reflect these reductions, and charges that may, in some cases, be non-recurring.
The terrorist attacks of September 11, 2001 and the resulting decrease in consumer spending have clearly had a negative impact on the United States economy. In response to the general sense of economic uncertainty, retailers in the distribution channels to which we sell our products have reduced orders and have reacted with extremely aggressive promotional activity.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
TOTAL REVENUE
The Company's net sales in fiscal 2002 were $358.0 million as compared to $368.6 million for fiscal 2001. Sales from the Company's wholesale operations ("Wholesale") increased to $298.4 million in fiscal 2002 from $296.5 million in fiscal 2001. During fiscal 2002, the Company determined that, due to improved sell-through in its wholesale segment, certain allowance reserves amounting to $9.7 million as of December 29, 2001 were no longer required. As a result of this change in estimate, the Company reversed this reserve, which benefited net sales for fiscal 2002.
Net sales at the Company's retail stores ("Retail") decreased to $59.5 million in fiscal 2002 from $72.1 million in fiscal 2001, primarily due to the net closing of 22 under-performing stores over the last 12 months. Comparable store sales for fiscal 2002 decreased by approximately 4.0% compared to fiscal 2001. The decrease is the result of the continued weakness in the current retail environment.
Royalty revenue from the Company's licensing activities ("Licensing") increased to $17.7 million in fiscal 2002 from $15.3 million in fiscal 2001 primarily as a result of higher royalty percentage rates.
GROSS PROFIT
Gross profit as a percentage of total revenue increased to 40.7% for fiscal 2002, compared to 21.9% for fiscal 2001. Wholesale gross profit, as a percentage of net sales, increased to 34.4% in fiscal 2002 from 14.1% in fiscal 2001. Included in cost of sales in fiscal 2001 was approximately $2.7 million in sample costs, which, beginning in fiscal 2002 was classified as selling, general and administrative expense. As discussed in Total Revenue, the company recorded a change in estimate and reversed $9.7 in allowance reserves, which favorably impacted gross profit. In addition, during fiscal 2001, the Company recorded inventory reserves of approximately $17.7 million, to reflect at net realizable value, finished goods merchandise that the Company expected to sell off-price, as well as the expected liquidation of raw materials in connection with the Company's restructuring efforts, negatively impacting fiscal 2001 gross margin.
During fiscal 2002, the Company determined that, due primarily to improved margins of its wholesale off-price sales, certain finished goods inventory reserves amounting to $2.0 million as of December 29, 2001 were no longer required. As a result of this change in estimate, the Company reversed this reserve, which benefited gross margin for fiscal 2002.
In addition, in fiscal 2002, the Company utilized in its production process certain raw materials that, as part of the Company's normal valuation process, had been reserved for as of December 29, 2001. As a result of the utilization of the previously reserved raw materials, the Company recognized this change in estimate as a benefit to gross margin of $1.7 million in fiscal 2002.
Excluding these reversals and charges, Wholesale gross profit for fiscal 2001 would have been 18.2% compared to 30.8% in fiscal 2002, reflecting the cost savings from sourcing and internal production process improvements which favorably impacted cost of goods sold and an overall reduction in allowances as a percentage of net sales.
Retail gross profit as a percentage of net sales increased to 54.6% in fiscal 2002 from 37.5% in fiscal 2001, due to the closing of under performing stores, the reduction in the price which the Company's wholesale division transfers goods to its retail division, and the cost savings passed on from wholesale as discussed above.
Licensing contributed to the Company's overall increased gross margin due to the greater contribution of royalty revenue as a percentage of total revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses ("SG&A") decreased to $90.9 million in fiscal 2002 compared to $104.0 million in fiscal 2001. Combined Wholesale and Licensing SG&A decreased approximately $10.1 million from fiscal 2002, primarily as a result of the Company's restructuring efforts. Included in fiscal 2002 SG&A is approximately $2.4 million of sample costs, which, prior to fiscal 2001, was included in cost of sales. Fiscal 2001 Wholesale SG&A included severance costs of approximately $3.5 million. During fiscal 2002, the Company reversed approximately $1.3 million of severance reserves that were determined, upon the favorable resolution of various disputes, to be unnecessary. Included in fiscal 2002 SG&A, is an incremental bonus expense of approximately $2.8 million over fiscal 2001, representing the management incentive bonus program initiated in fiscal 2002. Retail SG&A decreased approximately $3.0 million over the prior year as a result of the net closing of 22 under performing stores.
RESTRUCTURING AND OTHER CHARGES (CREDITS)
The Company recorded a net $2.5 million restructuring and other credit in fiscal 2002 and a $9.2 million charge in fiscal 2001. During fiscal 2001, the Company recorded a charge of $4.9 million for lease cancellation costs and asset write-downs in connection with the decision to exit certain retail store leases and certain office space in fiscal 2002. During 2002, the Company reevaluated its decision to exit certain retail stores and office space and as a result, recognized a credit of $3.1 million. This credit was partially offset by approximately $603,000 in charges related primarily to professional fees. The remaining fiscal 2001 restructuring and other charges of $4.3 million consisted primarily of professional fees relating to the Company's bankruptcy filing.
AMORTIZATION OF REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS
As a result of the Company's 1997 spinoff under Leslie Fay's reorganization plan, the portion of the Company's reorganization value not attributable to specific identifiable assets has been reported as "reorganization value in excess of identifiable assets" (the "Reorganization Asset"). In accordance with Statement of Financial Standards "SFAS" No.142, "Goodwill and Other Intangible Assets" ("SFAS 142") the Company ceased recording amortization relating to this asset effective December 30, 2001. Accordingly, the Company incurred no amortization charges for fiscal 2002 and approximately $3.3 million in fiscal 2001. As a result of the impairment review required under SFAS 142, during fiscal 2002, the Company determined that this asset was impaired and recorded a non-cash, non-operating charge of $30.4 million to reduce the carrying value to fair value. See Note 6 of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization Asset, totaled $5.3 million in fiscal 2002 and $10.3 million in fiscal 2001. In accordance with SFAS 142, the Company ceased recording amortization on its trademarks effective December 30, 2001. Trademark amortization in fiscal 2001 was approximately $3.2 million. During fiscal 2001, the Company wrote down approximately $1.1 million of fixed assets in connection with the closing of retail stores, which was included in depreciation expense for the year. Also included in depreciation and amortization in fiscal 2001 was approximately $500,000 in write-offs of goodwill due to the impairment calculated in accordance with SFAS No. 121. The remaining decrease in depreciation relates to the reduced fixed asset base as a result of the closing of the retail stores.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to approximately $6.8 million in fiscal 2002 from $31.3 million in fiscal 2001, a decrease of $24.5 million. Interest expense is comprised of the interest expense on the Senior Notes prior to February 5, 2002, along with interest on the Chase Facility and DIP Credit Agreement, amortization of related bank fees and bondholder consent fees, factoring fees and changes in fair value of the Company's interest rate swap.
As a result of the Chapter 11 Cases, interest on the Senior Notes stopped accruing as of February 5, 2002. Accordingly, the Company incurred interest of $1.7 million for fiscal 2002 compared to $16.4 million for fiscal 2001. Included in Senior Notes interest expense for fiscal 2002 was approximately $300,000 in unpaid default interest and $2.1 million in fiscal 2001.
At the end of fiscal 2001, as a result of the Chapter 11 Cases, the Company determined that the value of the capitalized Consent Fee (defined elsewhere within) had been impaired. Accordingly, included in interest for fiscal 2001 was approximately $1.1 million in unamortized Consent Fees that were written off at the end of fiscal 2001, along with $460,000 in amortization. The Company incurred no Consent Fee amortization in fiscal 2002.
Interest under the Chase Facility and Chase DIP totaled approximately $4.0 million in fiscal 2002, and $7.7 million in fiscal 2001, a decrease of $3.7 million as a result of the decrease in borrowings. In fiscal 2002, the Company paid $100,000 in bank fees related to the Chase DIP, which is being amortized over the remaining life of the Chase DIP, and resulted in approximately $86,000 of amortization charges in fiscal 2002. As a result of the Chapter 11 Cases, the Company determined that the value of the capitalized bank fees paid in connection with the Chase Facility were impaired. Accordingly, at the end of 2001, the Company wrote off approximately $2.4 million in unamortized bank fees and incurred approximately $1.1 million in amortization.
Factoring fees were approximately $1.2 million in fiscal 2002 and $1.5 million in fiscal 2001. The interest rate swap added approximately $521,000 in interest expense in fiscal 2001. As of June 29, 2002, the interest rate swap expired.
Interest expense in fiscal 2002 was offset by approximately $200,000 in interest income as a result of the excess cash position experienced by the Company during parts of the year.
REORGANIZATION COSTS
The Company recorded $5.2 million in reorganization costs in fiscal 2002. These costs related primarily to professional fees and bank fees associated with the Company's reorganization as a result of the Chapter 11 Cases.
INCOME TAXES
Income tax expense was $10.2 million in fiscal 2002 and $1.8 million in fiscal 2001. Fiscal 2002 tax expense is primarily related to federal, state and foreign taxes. For the tax year ended December 28, 2002, the Company utilized approximately $35.0 million in net operating loss carryforwards against fiscal 2002 taxable income. Fiscal 2001 tax expense includes the impact of recording a valuation allowance on the previously recorded net deferred tax assets and recognition of foreign taxes. Fiscal 2002 income tax expense of $10.2 represents an effective tax rate of approximately 21.8% on the Company's pretax book income before extraordinary items and cumulative effects of accounting change. During the first, second and third quarters, the Company's effective tax rate was approximately 42%. The difference between the 2002 effective tax rate of 21.8% and the estimated annual rate, as reported quarterly, of 42% was principally caused by adjustments in the fourth quarter relating to the usage of net
operating losses ("NOLs"), the cumulative effect of an accounting change and the provision of taxes related to potential identified exposures.
The Company had approximately $74.0 million of NOL carryforwards as of December 29, 2001. Due to an audit of the Company's 1997 through 2000 tax years by the Internal Revenue Service and certain provisions in the tax law which limits the usage of NOLs, the availability of these NOLs to offset taxable income during the first three quarters of fiscal 2002 was uncertain. As a result, no provision for the utilization of these NOLs was made during the first three quarters of fiscal 2002. During the fourth quarter of fiscal 2002, new information became available which indicated that a portion of the NOLs not subject to the Internal Revenue Service's audit could be used to offset taxable income. As a result approximately $35.0 million of NOLs were used in the fourth quarter of fiscal 2002 to offset 2002 taxable income. The remaining NOLs of approximately $39.0 million as December 28, 2002 are offset by a full valuation allowance due to the continuing uncertainty regarding their utilization.
NET INCOME (LOSS)
Net income was $6.4 million in fiscal 2002 compared to a loss of $75.7 million in fiscal 2001, an increase of approximately $82.1 million. The increase is the result of the increased margins, decreased SG&A, and reduced interest and financing costs, along with the non-recurring write-offs, write-downs, reserves and other costs incurred in 2001, as discussed above.
FISCAL 2001 COMPARED TO FISCAL 2000
TOTAL REVENUE
The Company's net sales in fiscal 2001 were $368.6 million as compared to $400.8 million for fiscal 2000. Wholesale sales decreased to $296.5 million in fiscal 2001 from $325.6 million in fiscal 2000, primarily as a result of the weaker economic environment and high level of promotional activity experienced in department stores for which additional markdowns and allowances were given, along with a decrease in volume of the Anne Klein Brands.
Retail net sales decreased to $72.1 million in fiscal 2001 from $75.2 million in fiscal 2000, a decrease of $3.1 million due to the closing of four under-performing stores over the last 12 months. Comparable store sales for fiscal 2001 decreased by approximately 7.4% compared to fiscal 2000. The decrease is the result of the weakened retail environment and by the impact of the events of September 11, 2001.
Royalty income from Licensing increased slightly to $15.3 million in fiscal 2001 from $14.9 million in fiscal 2000.
GROSS PROFIT
The Company's gross profit as a percentage of total revenue decreased to 21.9% for fiscal 2001, compared to 30.0% for fiscal 2000. In connection with the Company's restructuring efforts and management's focus on improving operational efficiency and cash flow, management has reassessed the value of its inventories. As a result, the Company has accelerated its plans to liquidate on-hand inventory, including both finished goods and raw material. During the third and fourth quarters of 2001, the Company recorded inventory reserves aggregating approximately $17.7 million, to reflect at net realizable value, the merchandise that the Company expects to sell off-price in the case of finished goods, along with the acceleration of the expected liquidation of raw materials. Wholesale gross profit as a percentage of net sales decreased to 14.1% in fiscal 2001 from 23.9% in fiscal 2000. Excluding this charge, Wholesale gross profit for fiscal 2001 would have been 20.1% as compared to 23.9% in fiscal 2000, reflecting the ongoing promotional activity in selected seasonal merchandise offerings resulting in higher product line markdowns and allowances.
Retail gross profit as a percentage of sales remained stable at 37.5% and 37.2% in fiscal 2001 and fiscal 2000, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's SG&A decreased to $104.0 million in fiscal 2001 as compared to $105.0 million in fiscal 2000, even with a number of charges relating to the streamlining efforts of the Company. Fiscal 2001 Wholesale expenses were approximately $77.2 million versus $77.9 million in the prior year, reflecting severance costs of approximately $3.5 million offset by cost savings of approximately $4.2 million from the Company's restructuring efforts. Retail SG&A increased approximately $500,000 over the prior year. Licensing division operations accounted for a decrease of approximately $800,000 in administrative expenses during fiscal 2001, relating in part to costs which are now included in Wholesale.
RESTRUCTURING AND OTHER CHARGES
The Company recorded $9.2 million in restructuring and other charges in fiscal 2001 compared to a $2.3 million charge in fiscal 2000 in order to cover the estimated costs of streamlining operating and administrative functions. These amounts include professional fees, which are expensed as incurred and totaled $4.3 million and $1.2 million in fiscal 2001 and fiscal 2000, respectively. In addition, during fiscal 2001 the Company has taken a charge of $4.9 million for lease cancellation costs and asset write-downs in connection with the decision to exit approximately 25 retail store leases and certain office space, in fiscal 2002. Lease costs have been reserved for in accordance with Bankruptcy Court guidelines. Fiscal 2000 restructuring and other charges included $1.1 million in severance costs. See Note 9 to Notes to Consolidated Financial Statements included elsewhere herein.
AMORTIZATION OF REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS
In connection with the Reorganization Asset, the Company incurred amortization charges in both fiscal 2001 and 2000 totaling approximately $3.3 million. In accordance with SFAS No. 142, the Company ceased recording amortization effective December 30, 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization Asset, totaled $10.3 million in fiscal 2001, up from $8.1 million in fiscal 2000 and consists of the amortization charges associated with the trademarks as well as fixed asset depreciation. As of December 29, 2001, the Company has made the decision to exit approximately 25 of the Company's retail store leases. In accordance with the provisions of SFAS No. 121, the Company wrote down approximately $1.1 million of fixed assets in connection with the closing of the retail stores, which has been included in depreciation. Included in depreciation and amortization in fiscal 2001 is approximately $500,000 in write-offs of goodwill, which resulted from the FSA acquisition in fiscal 1999. The write-off was due to the impairment in value calculated in accordance with SFAS No. 121, as the remaining retail locations would not generate sufficient cash flows to support the carrying value of the costs recorded. The remaining increase relates to depreciation and amortization associated with capital expenditures in fiscal 2001.
INTEREST AND FINANCING COSTS
Interest and financing costs increased to approximately $31.3 million in fiscal 2001 from $25.6 million in fiscal 2000, an increase of $5.7 million. Interest expense is comprised of the interest expense on the Senior Notes and the amortization of the related bondholder consent fee paid on July 9, 1999, along with interest expense on the Chase Facility, the amortization of the related bank fees and factoring fees.
Beginning January 1, 2000, interest on the Senior Notes increased to 13.0% from 12.75% per annum. Interest is payable semi-annually on March 31 and September 30. Interest expense on the Senior Notes totaled $16.4 million for fiscal 2001
and $14.6 million for fiscal 2000. Fiscal 2001 interest expense includes approximately $2.1 million in unpaid default interest on the Senior Notes compared to $260,000 in fiscal 2000, resulting in the $1.8 million increase. Default interest began to accrue at a rate equal to 14.75% per annum on the unpaid interest on the Senior Notes on September 30, 2000 because the Company has not made its semi-annual interest payments, which as of December 29, 2001 total $23.8 million. There are no principal payments due until maturity, which is March 31, 2004.
Amortization of the bondholder consent fee, which is being amortized over the remaining life of the Senior Notes beginning July 9, 1999, totaled approximately $460,000 in both fiscal 2001 and fiscal 2000. As a result of the Chapter 11 Cases, the Company has determined that the value of the capitalized Consent Fee has been impaired. Accordingly, at the end of 2001, the Company wrote off approximately $1.1 million in unamortized Consent Fees.
Interest under the Chase Facility totaled $7.7 million in fiscal 2001, a decrease of $900,000 over the prior year, the result of decreased borrowings. The related bank fees were being amortized over the remaining life of the Chase Facility, and resulted in approximately $1.1 million and $650,000 of amortization charges in fiscal 2001 and fiscal 2000, respectively. The increase in bank fees over the prior year is the result of an $875,000 bank fee relating to an amendment in November 2000 and a $675,000 amendment fee in June 2001. As a result of the Chapter 11 Cases, the Company has determined that the value of the capitalized bank fees paid in connection with the Chase Facility has been impaired. Accordingly, at the end of 2001, the Company wrote off approximately $2.4 million in unamortized bank fees.
The remaining increase interest and financing costs are related primarily to factoring fees which increased from $1.1 million in fiscal 2000 to $1.5 million for fiscal 2001, due to an increase in the fee structure under the Company's factoring agreement, along with $521,000 in interest expense related to the increase in market valuation of the Company's interest rate swap.
INCOME TAXES
Income tax expense was $1.8 million in fiscal 2001 and $1.5 million in fiscal 2000. Fiscal 2001 tax expense includes the impact of recording a valuation allowance on the previously recorded net deferred tax assets and recognition of foreign taxes. Fiscal 2000 tax expense is primarily related to foreign taxes. The difference between the Company's federal statutory tax rate of 34%, as well as its state and local taxes, when compared to its effective tax rate is principally comprised of a valuation allowance. The Company is in an accumulated loss position for both financial reporting and income tax purposes. It has net operating loss carryforwards of approximately $74.0 million as of December 29, 2001. For financial reporting purposes, the tax benefit of the Company's net operating loss carryforward and other deferred tax assets, are offset by a valuation allowance due to the uncertainty of the Company's ability to realize future taxable income.
NET LOSS
Net loss for fiscal 2001 was 75.7 million compared to a loss of $25.2 million in fiscal 2000 a decrease of approximately $50.5 million. The decrease is the result of the weak and promotional retail environment, inventory reserves, amortization write-offs and the increase in restructuring and other charges during fiscal 2001, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity historically have been cash flows from operations, vendor credit terms and credit facilities. The Company's capital requirements primarily result from working capital needs, department store boutiques, retail stores including full price shops and other corporate activities.
Net cash provided by operating activities was $85.7 million during fiscal 2002 as compared to $17.0 million during fiscal 2001. The improvement in the Company's operating cash flow is partly the result of a $20.0 million prepayment of royalties received during the first quarter 2002 from one of the Company's licensees, of which $4.9 million had been recognized as royalty income as of December 28, 2002. The royalty prepayment is non-refundable and is to be applied to guaranteed minimum royalty payments and excess royalties due through the term of the contract, which expires in 2006. In addition, the improvement in the Company's cash flow is the result of lower inventory levels and the income generated during the year, offset by the $17.7 million write down of inventory to net realizable value in the prior year. The improvement is also the result of pre-petition liabilities, which, as a result of the Chapter 11 Cases, are generally not settled until a plan of reorganization has been approved. In addition, the Company received a $1.0 million payment from a buying agent in consideration for the exclusive right to act as its buying agent for the Company's sportswear business, which also contributed to the operating cash flow improvement. See Note 9 of Notes to Consolidated Financial Statements. As of December 28, 2002, the Company had recognized $78,000 of the payment as other income, which reduced SG&A. The increase in cash used in investing activities resulted from greater capital expenditures in fiscal 2002 compared to fiscal 2001 relating to the opening of the Company's first full price Anne Klein New York store in New York City in February 2002, department store boutiques and on-going systems implementation. The increase in cash used in financing activities was due to the repayment of pre-petition borrowings under the Chase DIP Credit Agreement and the decreased borrowings during the year.
Net cash provided by operating activities was $17.0 million in fiscal 2001 as compared to cash used in operations of $11.7 million during fiscal 2000. The improvement in cash flows from operating activities is largely the result of the write-down and utilization of inventory. Operating cash flow improved also as a result of the non-payment of Senior Notes interest, and the lower net accounts receivable balance at fiscal year end as a result of higher allowance reserves, and was partially offset by the net loss for fiscal 2001. The decrease in cash used in investing activities resulted from greater capital expenditures in fiscal 2000 relating to the warehouse expansion and showroom improvements. The decrease in cash flows from financing activities is the result of the greater cash infusion needed in the prior year in order to fund the start-up of the new Anne Klein Brands.
On July 9, 1999, the Company entered into the Chase Facility in order to, among other things, fund the Company's working capital requirements and to finance the Company's purchase of the Anne Klein trademarks (the "Trademark Purchase"). On the Filing Date, the Company obtained a $35 million DIP Revolving Credit Agreement from its existing bank group (the "Chase DIP"). The Chase DIP also provided for a term loan for the purpose of refinancing the pre-petition obligations outstanding under the Chase Facility. On July 12, 2002, the Chase DIP was amended to convert the term loan to a revolving credit agreement.
The Chase DIP provided, among other things, for the maintenance of certain financial ratios and covenants, and set limits on capital expenditures and dividends to shareholders. The Chase DIP was scheduled to expire on February 5, 2003. Availability under the Chase DIP was limited to a borrowing base calculated upon eligible accounts receivable, inventory, trademarks and letters of credit. Interest on outstanding borrowings was determined based on stated margins (2.0% on December 28, 2002) above the prime rate at Chase. For fiscal 2002, the weighted average interest rate on the Chase Facility and Chase DIP was 6.67%.
The Company paid approximately $2.4 million in commitment and related fees in connection with the Chase Facility in July 1999, along with $875,000 and $675,000 in connection with amendments on November 20, 2000 and June 19, 2001, respectively. These fees were capitalized and amortized as interest and financing costs over the remaining life of the Chase Facility. As a result of the Chapter 11 Cases, the Company determined that the value of these capitalized
bank fees had been impaired. Accordingly, at the end of 2001, the Company wrote off the unamortized bank fees totaling approximately $2.4 million. In connection with the Chase DIP, the Company paid $875,000 in facility, advisory and structuring fees, along with an annual administrative agency fee of $100,000 and an annual collateral monitoring fee of $100,000. These fees were expensed as incurred and included as part of reorganization costs. In connection with the July 12, 2002 amendment, the Company paid $100,000 in bank fees, which were capitalized and amortized over the remaining life of the Chase DIP, totaling $85,000 in 2002.
As of December 28, 2002, there were no direct borrowings and $38.1 million outstanding in letters of credit under the Chase DIP. In addition to $24.9 million of unrestricted cash and cash equivalents on hand, the Company had approximately $34.9 million available for future borrowings as of December 28, 2002.
On January 30, 2003, the Company obtained a $100 million debtor-in-possession financing facility (the "Citicorp DIP Credit Agreement") from its new bank group led by Citicorp USA, Inc. ("Citicorp"). The Citicorp DIP Credit Agreement replaced the Chase DIP and permits up to $60.0 million available for issuance of letters of credit, of which $15.0 million will be available for stand-by letters of credit and up to $10.0 million for discretionary swing loans.
The Citicorp DIP Credit Agreement provides, among other things, for the maintenance of certain financial ratios and covenants, and set limits on capital expenditures and dividends to shareholders. The Citicorp DIP Credit Agreement, has a term ending on the earliest to occur of (i) the six month anniversary of the closing date, (ii) the effective date of the Plan, or (iii) the occurrence of an Event of Default. Availability under the Citicorp DIP Credit Agreement is limited to a borrowing base calculated upon eligible accounts receivable, eligible inventory, eligible documentary letters of credit and trademarks, in each case, less appropriate reserves. Interest on outstanding borrowings is determined based on stated margins above the Base Rate Loans and Eurodollar Rate Loans maintained by Citicorp on the terms and subject to the conditions of the agreement.
The Company paid approximately $1.6 million in commitment and related fees in connection with the Citicorp DIP Credit Agreement in January 2003. On March 14, 2003 the Company obtained an amendment to the Citicorp DIP Credit Agreement, which allowed the DIP portion of the credit agreement to be extended to December 31, 2003 as well as amended certain financial covenants. There were no incremental bank fees associated with this amendment.
Pursuant to the Leslie Fay reorganization plan, the Company issued $110 million in Senior Notes. The Senior Notes initially bore interest at 12.75% per annum and mature on March 31, 2004. Beginning January 1, 2000, the interest rate increased to 13.0%. The Company stopped accruing interest on the Senior Notes on the Filing Date. Interest was payable semi-annually on March 31 and September 30. Interest relating the Senior Notes totaled $1.7 million for fiscal 2002 and $16.4 million for fiscal 2001, including $300,000 and $2.1 million in default interest, respectively. At December 28, 2002, the Senior Notes have been classified as liabilities subject to compromise.
As a result of certain amendments to the Senior Notes, in July 1999, the Company paid to each registered note holder, $0.02 in cash for each $1.00 in principal amount of Senior Notes held by such registered holder, totaling $2.2 million (the "Consent Fee"). The Consent Fee was being amortized over the remaining life of the Senior Notes and was included in interest and financing costs. As a result of the Chapter 11 Cases, the Company determined that the value of the capitalized Consent Fee was impaired. Accordingly, at the end of 2001, the Company wrote off approximately $1.1 million in unamortized Consent Fees.
On October 4, 1999, the Company entered into a factoring agreement with the CIT Group/Commercial Services, Inc. ("CIT"). CIT collects the Company's receivables and in turn remits the funds to the Company. Any amounts unpaid after 90 days on approved sales are guaranteed to be paid to the Company by CIT. The agreement has no expiration date but may be terminated upon 90 days written notice by the Company and upon 60 days written notice by CIT. On November 10, 2000, the factoring agreement was amended to change the fee structure from a flat rate monthly fee to a floating rate monthly fee based on a percentage of the amount of each account factored. For its services, CIT charges the Company 0.30% of the gross face amount of each account factored and an additional 0.25% of the gross face amount of each account whose terms exceed 60 days. In addition, for each six-month period beginning December 1, 2000, there is a minimum factoring fee of $675,000. On February 5, 2002, the Company entered into an amended agreement with CIT. The terms of the amended agreement remained substantially the same with the exception of the reduction of the six-month minimum factoring fee to $500,000 and the requirement of a 90-day termination notice by CIT, except upon the occurrence of default by the Company, including a default under the Chase DIP or failure to pay any obligation under the CIT agreement, for which no notice is needed.
Capital expenditures were $8.1 million, $3.0 million and $6.1 million for fiscal 2002, fiscal 2001 and fiscal 2000, respectively. Capital expenditures represent spending associated with information systems, new retail stores including the new Anne Klein New York full price store, department store boutiques, warehouse improvements, showroom improvements, overseas facilities development and general improvements.
On March 12, 2002, the Company received a prepayment of royalties of $20.0 million from one of its licensees. The royalty prepayment is non refundable and is to be applied to guaranteed minimum royalty payments and excess royalties due through December 31, 2006.
On December 2, 2002, the Company received a $1.0 million payment from a buying agent in consideration for the exclusive right to act as its buying agent for the Company's sportswear business.
The Company is currently implementing a fully integrated management information system, which the Company believes will enhance its ability to conduct business and reduce the risk of system failure. Any unforeseen difficulty or significant delay in the implementation or operation of existing or new systems, the integration of management and other personnel or the training of personnel, could adversely affect the Company's business, financial condition and operating results.
The Company currently anticipates that it will be in a position to satisfy its ongoing cash requirements, in the near term, through cash from operations, borrowings under the Citicorp DIP Credit Agreement and, from time to time, amounts received in connection with strategic transactions, including, among other things, licensing arrangements. Events that may impact the Company's ability to meet its ongoing cash requirements in the near term include, but are not limited to, failure to have the Plan approved by the Bankruptcy Court, future events that may have the effect of reducing available cash balances (such as unexpected operating losses, or increased capital or other expenditures), and future circumstances that might reduce or eliminate the availability of external financing. In addition, the ongoing promotional environment of department stores has impacted the industry. If the current trend persists, the Company's financial results could continue to be negatively impacted.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS - --------------------------------------------------
A summary of the Company's long-term obligations at December 28, 2002 is as follows:
The above summary does not include employment contracts or short-term obligations entered into by the Company in the ordinary course of business for purchase of product for resale or for purchase of raw materials to be used in the Company's manufacturing operations. These purchase obligations involve product to be received into inventory over the next one to six months, with the longer periods resulting from the lead times required when using certain foreign manufacturers and suppliers. Outstanding letters of credit of $38.1 million at December 28, 2002 represent a portion of these future purchase obligations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - -----------------------------------------
In November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 01-9, "Accounting for Consideration Given to a Reseller of the Vendor's Products." This issue addresses the recognition, measurement and income statement classification of consideration from a vendor to a customer in connection with the customer's purchase or promotion of the vendor's products. This consensus is expected to only impact revenue and expense classifications and not change reported net income. In accordance with the consensus reached, the Company adopted the required accounting beginning fiscal 2002 and the impact of this required accounting does not have a material impact on the revenue and expense classifications in the Company's Consolidated Statements of Operations.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. Management does not expect the impact of SFAS No. 143 to be material to the Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long Lived Assets". SFAS No. 144 addresses financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 also extends the reporting requirements to report separately as discontinued operations, components of an entity that have either been disposed of or classified as held-for-sale. The Company has adopted the provisions of SFAS No. 144 for fiscal 2002, the impact of which did not have a significant effect on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that statement, SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sales-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued after May 15, 2002. The Company adopted the provisions of SFAS No. 145 upon its effective
date, the impact of which did not have a significant effect on the Company's results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which changes the accounting for costs such as lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity initiated after December 31, 2002. The standard requires companies to recognize the fair value of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company does not expect the adoption of this standard to have a material effect on the results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS No. 148 effective December 28, 2002.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES - -------------------------------------------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, are presented in the Notes to Consolidated Financial Statements.
Critical accounting policies are those that are most important to the portrayal of the Company's financial condition and the results of operations, and require management's most difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's most critical accounting policies, discussed below, pertain to revenue recognition, accounts receivable and inventories. In applying such policies management must use some amounts that are based upon its informed judgments and best estimates. Because of the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. The Company is not aware of any reasonably likely events or circumstances, which would result in different amounts being reported that would materially affect its financial condition or results of operations.
Revenue Recognition
Sales are recognized upon shipment of products to customers and, in the case of sales by Company owned retail stores, when goods are sold to customers. Royalty revenues are recognized when earned based upon each respective licensing agreement. Sales are recorded net of returns, discounts and allowances. Allowances for estimated uncollected accounts and discounts are provided when sales are recorded.
Accounts Receivable
Under the factoring agreement, CIT purchases substantially all domestic accounts receivable from the Company and remits the funds to the Company when collected. Any amounts unpaid after 90 days are guaranteed to be paid to the Company by CIT. Accounts Receivable, as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements that are not purchased by CIT, and assessments of
collectibility based on historic trends. Costs associated with allowable customer markdowns and operational charge backs, are included as a reduction to net sales and are part of the provision for allowances included in Accounts Receivable. These provisions result from divisional seasonal negotiations as well as historic deduction trends and the evaluation of current market conditions.
Inventories
Inventories are stated at lower of cost (using the first-in, first-out method) or market. The Company continually evaluates the composition of its inventories assessing slow-turning, ongoing product as well as prior seasons fashion product. The Company makes certain assumptions to adjust inventory based on historical experience and current information, including the value of current open orders, in order to assess that inventory is recorded properly at the lower of cost or market.
Market Value Assessments of the Reorganization Asset and Other Intangible Assets - - Timing and Amount of Future Impairment Charges
Before the implementation of SFAS No. 142, the values of the reorganization asset and other intangible assets were written off over the period of expected benefit through regular amortization charges. Under SFAS No. 142, these intangibles will no longer be written off through periodic charges to the income statement over the defined period. Future impairment charges will be required as and when the value of the acquired business becomes less than its book value. The determination of the value of the businesses is highly subjective, as it is determined largely by projections of future profitability and cash flows.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Financial Statement Schedule of the Company attached hereto and listed on the index to financial statements set forth in Item 15 of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 18, 2002, the Company dismissed its independent auditors, Arthur Andersen LLP ("Arthur Andersen") and engaged the services of Ernst & Young LLP ("E&Y") as its new independent auditors effective immediately, and authorized E&Y's engagement to serve as independent auditors for the fiscal year ending December 28, 2002. These actions followed the Company's decision to seek proposals from independent accountants to audit the financial statements of the Company, and were approved by the Company's Board of Directors upon the recommendation of its Audit Committee.
During the two most recent fiscal years of the Company ended December 29, 2001, and the subsequent interim period through April 18, 2002, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Arthur Andersen's satisfaction, would have caused Arthur Andersen to make reference to the subject matter of the disagreement in connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the two most recent fiscal years of the Company ended December 29, 2001 or within the interim period through April 18, 2002.
None of the audit reports of Arthur Andersen on the consolidated financial statements of the Company as of and for the fiscal years ended December 30, 2000 and December 29, 2001 contained an adverse opinion or a disclaimer of opinion
nor was any such audit report qualified or modified as to uncertainty, audit scope or accounting principles, except that such audit reports contained a qualified opinion as to going concern.
During the two most recent fiscal years of the Company ended December 29, 2001, and the subsequent interim period through April 18, 2002, the Company did not consult with E&Y regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers as of April 8, 2003 are as follows:
Name Age Position - ---- --- -------- John D. Idol 44 Chairman of the Board and Chief Executive Officer Martin Bloom 69 Director H. Sean Mathis 55 Director Salvatore M. Salibello 57 Director Denis J. Taura 63 Director Joseph B. Parsons 49 Executive Vice President, Chief Financial Officer & Treasurer Laura Lentini 39 Senior Vice President - Corporate Controller Richard M. Owen 46 Senior Vice President, Worldwide Manufacturing and Operations Lee S. Sporn 43 Senior Vice President, General Counsel & Secretary
The term of office of each director of the Company expires on the date of the next Annual Meeting of Stockholders and until their respective successors are elected and qualified. The Company's directors and executive officers are as follows:
JOHN D. IDOL has served as the Chairman of the Board and Chief Executive Officer of the Company since July 2001. Prior to joining the Company, Mr. Idol was employed by Donna Karan International Inc., a publicly traded apparel company, from July 1997 through July 2001, most recently as Chief Executive Officer and Director. Prior to that, Mr. Idol was employed by Polo Ralph Lauren Corporation, a publicly traded apparel company, from 1984 through July 1997, ultimately serving as Group President, Product Licensing and the Home Collection.
MARTIN BLOOM has been a director of the Company since June 2000. Mr. Bloom is the Chairman of MBI International, Inc., an international consulting firm, the Chairman of Geomar Philms, Inc., a producer of educational films, and a director of Kellwood Company, a manufacturer of apparel and related soft goods for men, women and children. Prior thereto, Mr. Bloom held various positions with the May Department Stores Company, ultimately serving from 1985 to July 1996 as President and Chief Executive Officer of the international division.
H. SEAN MATHIS has been a director of the Company since March 2000. Mr. Mathis is a Managing Director of Morgan Joseph & Co., Inc., an investment-banking firm, since March 2003. From September 2002 to March 2003, Mr. Mathis served as a Special Advisor of Financo Inc., an investment-banking firm. Prior to this, Mr. Mathis was President of Litchfield Asset Holdings, Inc., an investment advisory company he founded in 1983. He served as Chairman of the Board of Allis Chalmers, Inc., an industrial manufacturer, from 1996 to 1999. Mr. Mathis served as a Director of Allied Digital Technologies, Corp. from 1993 to 1998, and a Director of ARCH Wireless, a communications company, from 1999 to 2002. In 2001, ARCH Wireless filed for protection under the United States federal bankruptcy laws. He currently serves as a Director of Thousand Trails, Inc., an operator of recreational parks and NTL Europe, Inc., a European cable and media company.
SALVATORE M. SALIBELLO has been a director of the Company since July 1998. Mr. Salibello is a certified public accountant and founded Salibello & Broder, an accounting/consulting firm, in 1978 and currently serves as its Managing Partner.
DENIS J. TAURA has been a director of the Company since July 1998. He is a certified public accountant and a partner in Taura Flynn & Associates, a firm specializing in reorganization and management consulting, which he founded in 1998. From September 1991 to March 1998, he served as Chairman of D. Taura & Associates, a consulting firm. Mr. Taura currently serves as a Director of Darling International, Inc. and Safeguard Business Systems, Inc.
JOSEPH B. PARSONS joined the Company as Executive Vice President, Chief Financial Officer and Treasurer in March 2002. Prior to joining the Company, Mr. Parsons was employed by Donna Karan International Inc., a publicly traded
apparel company, from January 1993 through November 2001, most recently as Chief Financial and Operations Officer. Prior to that, Mr. Parsons was employed by Crystal Brands, Inc. from 1989 through 1993 and KPMG Peat Marwick from 1979 through 1989.
LAURA LENTINI joined the Company as Corporate Controller in February 2001, became Vice President in June 2001 and Senior Vice President in July 2002. Prior to joining the Company, Ms. Lentini served as Corporate Controller of McNaughton Apparel Group, Inc., a publicly traded apparel company, from 1994 to 2001. Ms. Lentini worked in the audit department of KPMG Peat Marwick from 1986 to 1993. Ms. Lentini is a certified public accountant.
RICHARD M. OWEN joined the Company in October 2001 as Senior Vice President, Worldwide Manufacturing and Operations. Prior to joining the Company, Mr. Owen was employed by Liz Claiborne for 14 years, where he held a variety of positions, most recently, Vice President, Worldwide Manufacturing Operations.
LEE S. SPORN joined the Company in September 2001 as Senior Vice President, General Counsel and Secretary. Prior to this he was employed by Polo/Ralph Lauren from 1990 to 2001, serving, ultimately, as Vice President, Intellectual Property and Associate General Counsel.
COMMITTEES - ----------
On June 10, 1997, the Board of Directors established an Audit Committee and a Compensation Committee.
The Company's Audit Committee is currently composed of Messrs. Bloom, Mathis, Salibello and Taura. The function of the Audit Committee is to make recommendations concerning the selection each year of independent auditors of the Company, to review the effectiveness of the Company's internal accounting methods and procedures, and to determine, through discussions with the independent auditors, whether any restrictions or limitations have been placed upon them in connection with the scope of their audit or its implementation.
The Compensation Committee is currently composed of Messrs. Bloom, Mathis, Salibello and Taura. The function of the Compensation Committee is to review and recommend to the Board of Directors policies, practices and procedures relating to compensation of key employees and to administer employee benefit plans.
On October 10, 2000, the board established a Restructuring Committee. The Restructuring Committee is currently composed of Messrs. Mathis, Salibello and Idol. The function of the Restructuring Committee is to monitor and oversee negotiations between and among the Company, its lenders, noteholders and other parties whose interests in the Company will be affected by a restructuring of the Company's debt obligations.
On September 20, 2002, the Board of Directors of the Company formed a special committee of certain independent directors (the "Special Committee") in connection with the Company's exploration of strategic alternatives, including a possible sale of the Company. The Special Committee, currently composed of Messrs. Salibello and Taura, was formed in anticipation of potential offers to purchase the Company, and to avoid potential conflicts of interest in the event such an offer was made by the Company's management.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE - -------------------------------------------------------
Section 16(a) of the Securities and Exchange Act of 1934, as amended ("Section 16(a)") requires the Company's directors and certain of its officers and persons who own more than 10% of its Common Stock (collectively, "Insiders"), to file reports of ownership and changes in their ownership of Common Stock with the Securities and Exchange Commission (the "Commission"). Insiders are required by Commission regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that no Forms 5 were required for those persons. The Company believes that its Insiders complied with all applicable Section 16(a) filing requirements for fiscal 2002.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual compensation paid by the Company for services rendered during the fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000, for the Chief Executive Officer and all executive officers (the "Named Executive Officers").
- -------------------------------- (1) Mr. Idol joined the Company in July 2001. Mr. Idol's employment agreement provides for an annual salary of $1,000,000 and a bonus in fiscal 2001 in the amount of $750,000 prorated to reflect the number of days employed during fiscal 2001.
(2) Represents an unsecured promissory note dated July 18, 2001. The note is payable on July 18, 2004, together with interest thereon. Prior to February 5, 2003, the Company has the right to issue shares of its Common Stock having a value of $1,000,000 in exchange for and in full satisfaction of the Note.
(3) Mr. Parsons joined the Company in March 2002. Mr. Parson's annual salary is $400,000.
(4) Ms. Lentini joined the Company in February 2001. Ms. Lentini's annual salary is $235,000.
(5) Mr. Owen joined the Company in October 2001.
(6) Mr. Sporn joined the Company in September 2001.
OPTION/STOCK APPRECIATION RIGHT GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options or stock appreciation rights ("SAR") to the Named Executive Officers during fiscal 2002.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUE TABLE
There are no options held by the Named Executive Officers of the Company. As a result of the Chapter 11 Cases, the SAR's outstanding at the end of fiscal 2001 were cancelled on February 5, 2002, pursuant to the terms of the SAR's.
COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company is paid for service on the Board of Directors a retainer at the rate of $40,000 annually and $1,500 for every Board of Directors meeting in excess of twelve per annum. Each non-employee Director, who held such position prior to January 1, 2000, also received an option to purchase 20,000 shares of common stock at the time of joining the Board of Directors. Such options vest ratably over the first three anniversaries of the date of grant and are exercisable at a price of $14.00 per share. Effective December 28, 2002, all outstanding stock options were voluntarily cancelled pursuant to an agreement between the Company and the option holders. The Company also reimburses each Director for reasonable expenses in attending meetings of the Board of Directors. Directors who are also employees of the Company are not separately compensated for their services as Directors.
EMPLOYMENT AGREEMENTS
The Company and Mr. Idol are parties to an employment agreement dated July 18, 2001 (the "Idol Employment Agreement"), which provides for his employment as the Chairman of the Board of Directors and Chief Executive Officer of the Company through July 18, 2005. The agreement provides for a base salary of $1.0 million per annum, subject to annual review. Subject to a minimum bonus in 2002 of $750,000, the agreement provides for a bonus in each year equal to the sum of (i) fifty percent (50%) of the then current salary rate, if the Company achieves any pre-tax income for such fiscal year, and (ii) five percent (5%) of pre-tax income for such fiscal year between $10 million and $20 million, and (iii) two and one-half percent (2-1/2%) of pre-tax income for such fiscal year in excess of $20 million (up to a maximum of $500,000), up to a bonus cap of $1.5 million. In addition, pursuant to the agreement the Company issued to Mr. Idol an unsecured promissory note in the principal amount of $1.0 million, payable with interest at 9% per annum on July 18, 2004 (the "Note").
Pursuant to an amendment to the Idol Employment agreement dated October 31, 2002 (the "Amendment"), upon the effective date of a plan of reorganization with respect to the Company approved by the Bankruptcy Court (the "Effective Date"), the Company is obligated to issue to Mr. Idol restricted shares of its common stock (i) having a value of $1.0 million in full satisfaction of the Note and (ii) having a value of two and one-half percent (2-1/2%) of the number of shares issued under the Plan of reorganization, based on the value ascribed to shares of the common stock of the Company for purposes of issuing and distributing its common stock on the Effective Date pursuant to the Plan (the "Ascribed Value"). One-half (50%) of the restricted shares shall vest (meaning that they shall become transferable) on the second anniversary of the Effective Date and twenty-five percent (25%) shall vest on each of the third and fourth anniversaries of the Effective Date; provided in each case, that, at least once during the period on and after the Effective Date, for a period of twenty (20) consecutive trading days, the closing sales price of a share of such stock is at least one hundred and fifty percent (150%) of the Ascribed Value. Any restricted shares that are not vested shall become vested on the date of Mr. Idol's death, Total Disability, termination without Cause or resignation for Good Reason, or upon a Change in Control of the Company (as all such terms are defined in the Idol Employment Agreement), or on the tenth (10th) anniversary of the date the shares are issued.
The Company is also obligated to grant to Mr. Idol on the Effective Date options to purchase shares of the Company's common stock (on a fully diluted basis) equal to two and one-half percent (2-1/2%) of the total number of shares issued under the Plan. The per share exercise price under the options shall be an amount equal to $80 million divided by the total number of shares issued under the Plan. The options shall vest ratably on each of first four anniversaries of the Effective Date, provided that (A) (i) Mr. Idol is employed on such date and (ii) at least once during the period on and after the Effective Date, for a period of twenty (20) consecutive trading days, the closing sales price of a share of such stock is at least one hundred and fifty percent (150%) of the Ascribed Value, and (B) if earlier, the options shall fully vest on the date of Mr. Idol's death, Total Disability, termination of employment without Cause or resignation for Good Reason or upon a Change of Control or on the tenth anniversary of the date the options are issued. The non-vested portion of the options shall be cancelled upon termination for Cause or resignation for Good Reason. All outstanding options (including vested options) shall terminate on the first anniversary of Mr. Idol's death or Total Disability or on the 90th day following any other termination of employment.
In addition, in the event of a transaction which results in a Change of Control before the restricted stock and stock options are issued, on the date of such Change of Control, Mr. Idol is entitled to (in lieu of the restricted stock and stock options): (i) a lump sum payment equal to one million dollars ($1,000,000) plus accrued interest in cash (in full satisfaction of the Note), plus (ii) an amount equal to two and one-half percent (2 1/2%) of the aggregate amount which, by virtue of such transaction, will be available for distribution under the Plan in satisfaction of all senior notes claims, general unsecured claims and convenience claims (the "Distributable Amount"), plus (iii) an amount equal to two and one-half percent (2 1/2%) of the amount by which the Distributable Amount exceeds eighty million dollars ($80,000,000).
The Company has entered into an employment agreement with Joseph B. Parsons, dated March 25, 2002, which provides for his employment as Executive Vice President, Chief Financial Officer through March 25, 2005 and provides for successive one-year renewal terms thereafter unless terminated by notice from either party. The agreement provides for an annual base salary of $400,000, subject to annual review, and provides for his participation in the current bonus plan and any successor plan. In the event Mr. Parsons is terminated without Cause or he resigns with Good Reason (as defined in the agreement), he is entitled to a severance payment in an amount equal to the aggregate of his then current base salary plus the amount of his bonus, if any, during the preceding year, payable in twelve monthly installments (reduced by any compensation actually received by Mr. Parsons from other employment during such period). By an amendment dated October 31, 2002, if such termination without Cause occurs, or if Mr. Parsons resigns due to his responsibilities having been significantly reduced or made inconsistent with his title, within 12 months following a Change of Control (as defined in the agreement), he is entitled to a supplemental severance payment in an amount equal to his then annual base salary, payable within twenty (20) days after such termination (without reduction).
The employment agreement with Ms. Lentini, dated March 1, 2002, provides for her employment as Vice President, Controller, through March 1, 2005, and provides for successive one-year renewal terms thereafter unless terminated by notice from either party. The agreement provides for an annual base salary of $187,000, subject to annual review, and provides for her participation in the current bonus plan and any successor plan. Effective July 8, 2002, Ms. Lentini's annual salary was increased to $235,000. In the event Ms. Lentini is terminated without Cause (as defined in the agreement), she is entitled to a severance payment in an amount equal to one-half of her then current annual base salary, payable in six monthly installments (reduced by any compensation actually received by Ms. Lentini from other employment during such period). By an amendment dated January 15, 2003, if such termination without Cause occurs, or if Ms. Lentini resigns due to her responsibilities having been significantly reduced or made inconsistent with her title, within 12 months following a Change of Control (as defined in the agreement), she is entitled to a supplemental severance payment in an amount equal to her then annual base salary, payable within twenty (20) days after such termination (without reduction).
The employment agreement with Mr. Owen, dated October 10, 2001, provides for his employment as Senior Vice President, Worldwide Manufacturing & Operations through October 10, 2004, and provides for successive one-year renewal terms
thereafter unless terminated by notice from either party. The agreement provides for an annual base salary of $250,000, subject to annual review, and provides for his participation in the current bonus plan and any successor plan. In the event Mr. Owen is terminated without Cause (as defined in the agreement), he is entitled to a severance payment in an amount equal to his then current annual base salary, payable in twelve monthly installments (reduced by any compensation actually received by Mr. Owen from other employment during such period). By an amendment dated January 16, 2003, if such termination without Cause occurs, or if Mr. Owen resigns due to his responsibilities having been significantly reduced or made inconsistent with his title, within 12 months following a Change of Control (as defined in the agreement), he is entitled to a supplemental severance payment in an amount equal to his then annual base salary, payable within twenty (20) days after such termination (without reduction).
The employment agreement with Mr. Sporn, dated August 27, 2001, provides for his employment as Senior Vice President, General Counsel & Secretary through September 17, 2004, and provides for successive one-year renewal terms thereafter unless terminated by notice from either party. The agreement provides for an annual base salary of $300,000, subject to annual review, and provides for his participation in the current bonus plan and any successor plan. Pursuant to an amendment to the agreement dated October 10, 2001, Mr. Sporn is entitled to receive a $60,000 bonus upon the completion of the Company's restructuring or upon a sale or merger of the Company. In the event Mr. Sporn is terminated without Cause (as defined in the agreement), he is entitled to a severance payment in an amount equal to the aggregate of his then current base salary plus the amount of his bonus, if any, during the preceding year, payable in twelve monthly installments (reduced by any compensation actually received by Mr. Sporn from other employment during such period). By an amendment dated October 31, 2002, if such termination without Cause occurs, or if Mr. Sporn resigns due to his responsibilities having been significantly reduced or made inconsistent with his title, within 12 months following a Change of Control (as defined in the agreement), he is entitled to a supplemental severance payment in an amount equal to his then annual base salary, payable within twenty (20) days after such termination (without reduction).
The amended agreements of each of Mr. Parsons and Mr. Sporn provide that, as of the Effective Date, the Company is obligated to grant shares of restricted stock having a value of one percent (1%) for Mr. Parsons, and five-tenths of one percent (0.5%) for Mr. Sporn, of the number of shares issued under the Plan of reorganization, based on the Ascribed Value of the shares (as described above with respect to the Idol Employment Agreement). One-half (50%) of the restricted shares shall vest (meaning they shall become transferable) on the second (2nd) anniversary of the Effective Date and twenty-five percent (25%) shall vest on each of the third and fourth anniversaries of the Effective Date; provided in each case, that, at least once during the period on and after the Effective Date, for a period of twenty (20) consecutive trading days, the closing sales price of a share of such stock is at least one hundred and fifty percent (150%) of the Ascribed Value. Any restricted shares that are not vested shall become vested upon a Change of Control of the Company (as defined in the agreements) or on the tenth anniversary of the date the shares are issued. The Company is also obligated to grant options to purchase shares of the Company's common stock (on a fully diluted basis) equal to one percent (1%) for Mr. Parsons, and five-tenths of one percent (0.5%) for Mr. Sporn, of the total number of shares issued under the Plan. The per share exercise price under the options shall be an amount equal to $80 million divided by the total number of shares issued under the Plan. The options vest ratably on each of first four anniversaries of the Effective Date, provided that (A) (i) Mr. Parsons or Mr. Sporn, as applicable, is employed on such date and (ii) at least once during the period on and after the Effective Date, for a period of twenty (20) consecutive trading days, the closing sales price of a share of such stock is at least one hundred and fifty percent (150%) of the Ascribed Value, and (B) if earlier, the options shall fully vest on any Change of Control or on the tenth anniversary of the date the options are issued. The non-vested portion of such options shall be cancelled upon the termination of employment of Mr. Parsons or Mr. Sporn, as applicable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently composed of Messrs. Bloom, Mathis, Salibello and Taura. No executive officer of the Company serves as a member of the Board of Directors or Compensation Committee of any entity, which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee.
1999 SHARE INCENTIVE PLAN
On March 14, 2000, the Company's shareholders approved the Company's 1999 Share Incentive Plan (the "1999 Plan"). Pursuant to the terms of the 1999 Plan, the 1999 Plan became effective as of July 28, 1999, the date on which the 1999 Plan was approved by the Compensation Committee. The 1999 Plan is intended to provide incentives which will attract, retain and motivate highly competent persons as non-employee Directors, officers and key employees of, and consultants to, the Company and its subsidiaries and affiliates.
Participants in the 1999 Plan will consist of such Directors, officers and key employees of, and such consultants to, the Company and its subsidiaries and affiliates as the Compensation Committee in its sole discretion determines to be responsible for the success and future growth and profitability of the Company and whom the Compensation Committee may designate from time to time to receive benefits under the 1999 Plan. All of the Company's non-employee Directors will be eligible to participate in the 1999 Plan. Currently, there are four non-employee Directors. The number of officers and key employees who are eligible to participate in the 1999 Plan is estimated to be 100. An estimate of the number of consultants who are eligible to participate in the 1999 Plan has not been made.
The 1999 Plan provides for the grant of any or all of the following types of benefits: (1) stock options, including incentive stock options and non-qualified stock options; (2) stock appreciation rights; (3) stock awards; (4) performance awards; and (5) stock units.
The maximum number of shares of common stock that may be granted under the 1999 Plan is 2,500,000 and the maximum number of shares that may be granted to an individual participant shall not exceed 1,500,000. The unanimous consent of the Compensation Committee is required for the grant of options to any recipient if the aggregate number of shares held by that recipient is equal to or greater than 20,000. As of April 1, 2003, no shares had been granted under the 1999 Plan. The 1999 Plan terminates on July 28, 2009.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of April 8, 2003, based upon the most recent information available to the Company for (i) each person known by the Company who owns beneficially more than five percent of the Common Stock, (ii) each of the Company's Named Executive Officers and directors and (iii) all executive officers and directors of the Company as a group. Unless otherwise indicated, each stockholder's address is c/o the Company, 77 Metro Way, Secaucus, New Jersey 07094.
- -------------------------- * Less than one percent
(1) Based on information contained in a Schedule 13G, filed with the Commission on August 7, 2001. These shares of Common Stock are owned by various limited partnerships, a limited liability company, a trust and third party accounts for which Whippoorwill Associates, Inc. has discretionary authority and acts as general partner or investment manager.
(2) Based on information contained in a Form 4, filed with the Commission on July 10, 2000. These shares of Common Stock are also indirectly owned by Tower Investment Group, Inc. ("Tower"), the majority stockholder of Bay Harbour Management, L.C., Steven A. Van Dyke, a stockholder and President of Tower, and Douglas P. Teitelbaum, a stockholder of Tower, each of whom may also be deemed to be a beneficial owner of such shares of Common Stock.
(3) Based on information contained in a Schedule 13D, filed with the Commission on June 12, 2002.
(4) Includes 20,000 shares of Common Stock issuable upon exercise of currently exercisable Director Options, which were issued to ING Equity Partners, L.P. I ("ING") pursuant to Mr. Trouveroy's previous status as a non-employee Director of the Company, a position for which he was designated by ING.
(5) Based on information contained in a Schedule 13G, filed with the Commission on February 11, 2000.
(1) Available for issuance under the Company's 1997 Management Stock Option Plan (the "1997 Plan"). Employees of and consultants to the Company and any of its affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company and its affiliates are eligible to be granted stock options under the 1997 Plan (no grant shall be made under the plan to a director who is not an employee of the Company or any of its affiliates). The 1997 provides that it be administered by a committee of the Board consisting of no less than two outside directors. The 1997 Plan terminates on December 2, 2007. Further information regarding the 1997 Plan may be found under Note 15 of the financial statements attached hereto.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this annual report on Form 10-K, the Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and the Company's principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures are effective.
(b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this annual report on Form 10-K.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
The Consolidated Financial Statements are set forth in the Index to Consolidated Financial Statements and Financial Statement Schedules on page hereof.
(2) Financial Statement Schedule:
The Financial Statement Schedule is set forth in the Index to Financial Statements and Financial Statement Schedules on page hereof.
(3) Exhibits:
See Index to Exhibits following the signatures and certifications hereto.
(B) REPORTS ON FORM 8-K:
None.
Report of Independent Auditors
To the Shareholders and Board of Directors of Kasper A.S.L., Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Kasper A.S.L., Ltd. and subsidiaries as of December 28, 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The consolidated financial statements of Kasper A.S.L. Ltd. and subsidiaries as of and for the years ended December 29, 2001 and December 30, 2000, were audited by other auditors who have ceased operations. Those auditors expressed a qualified opinion regarding the Company's ability to continue as a going concern on those financial statements in their report dated March 22, 2002, before the revisions and disclosures described below.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
As described in Note 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective December 30, 2001.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company filed a petition for reorganization under chapter 11 of the U.S. Bankruptcy Code on February 5, 2002. This condition raises substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon acceptance of a plan of reorganization by the Court and the Company's creditors, compliance with all debt covenants under the debtor-in-possession financing, securing post-emergence financing and the success of future operations. The ultimate outcome of these matters is not presently determinable. The consolidated financial statements do not include any adjustments relating to these uncertainties or the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
As discussed above, the financial statements of Kasper A.S.L. Ltd. and subsidiaries as of and for the years ended December 29, 2001 and December 30, 2000 were audited by other auditors who have ceased operations. As described in Note 6, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of December 30, 2001. Our audit procedures with respect to the disclosures in Note 6 with respect to 2001 and 2000 included (a) agreeing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing amortization expense (including any related tax effects) recognized in those periods related to goodwill and intangible assets that are no longer being amortized to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss, and the related net loss-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 6 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.
/s/ Ernst & Young LLP
New York, New York March 17, 2003
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Kasper A.S.L., Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Kasper A.S.L., Ltd. (a Delaware corporation) and subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 29, 2001, December 30, 2000 and January 1, 2000. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 29, 2001 and December 30, 2000 and the results of their operations and their cash flows for the years ended December 29, 2001, December 30, 2000 and January 1, 2000, in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company filed a petition for reorganization under chapter 11 of the U.S. Bankruptcy Code on February 5, 2002. This raises substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon acceptance of a plan of reorganization by the Court and the Company's creditors, compliance with all debt covenants under the debtor-in-possession financing, securing post-emergence financing and the success of future operations. The ultimate outcome of these matters is not presently determinable. The consolidated financial statements do not include any adjustments relating to these uncertainties or the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York March 22, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with our filing on Form 10-K for the fiscal year ended December 29, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23 for further discussion.
KASPER A.S.L., LTD. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
KASPER A.S.L., LTD. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
KASPER A.S.L., LTD. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
KASPER A.S.L., LTD. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
KASPER A.S.L., LTD. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
KASPER A.S.L., LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION:
The Consolidated Financial Statements included herein have been prepared by Kasper A.S.L., Ltd. and subsidiaries (Kasper A.S.L., Ltd. being sometimes referred to, and together with its subsidiaries collectively referred to, as the "Company" or "Kasper" as the context may require) in accordance with accounting principles generally accepted in the United States applicable to a going concern, which principles assume that assets will be realized and liabilities will be discharged in the normal course of business. The Company's fiscal year ends on the Saturday closest to December 31st. The fiscal years ended December 28, 2002 ("2002"), December 29, 2001 ("2001") and December 30, 2000 ("2000"), each included 52 weeks.
The Consolidated Financial Statements herein presented include the operations of two related Hong Kong corporations, Asia Expert Limited ("AEL") and Tomwell Limited ("Tomwell"). These two Hong Kong corporations procure and arrange for the manufacture of apparel products in the Far East solely for the benefit of Kasper. The Consolidated Financial Statements also include the financial statements of Kasper A.S.L. Europe, Ltd., Kasper Holdings Inc., ASL Retail Outlets, Inc. ("ASL Retail"), ASL/K Licensing Corp., AKC Acquisition, Ltd. and Lion Licensing, Ltd., all of which are wholly-owned subsidiaries of the Company. Kasper Holdings Inc. owns Kasper Canada ULC and Anne Klein ULC, which together own 100% of Kasper Partnership G.P., a Canadian Partnership (70% and 30%, respectively) through which the Company conducts sales and distribution activity in Canada. Prior to October 2001, Kasper Canada ULC was a 70% owner of Kasper Partnership G.P. In October 2001 Anne Klein ULC purchased the remaining 30% from the minority owner for approximately $920,000.
The consolidated financial statements include the accounts of Kasper A.S.L., Ltd. and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
NOTE 2. REORGANIZATION CASE:
On February 5, 2002 (the "Filing Date"), the Company and substantially all of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Case Nos. 02-B10497, 02-B10500, and 02-B10502 through 10505 (ALG)) (the "Chapter 11 Cases"). Pursuant to an order of the Bankruptcy Court, the Chapter 11 Cases were consolidated for procedural purposes only and are being jointly administered by the Bankruptcy Court. The Company's international subsidiaries were not included in the filings. The Company expects to continue to operate in the ordinary course of business as debtor-in-possession under the jurisdiction of the Bankruptcy Court.
The accompanying consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the ordinary course of business. The Company is currently operating under the jurisdiction of Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a going concern is contingent upon, among other things, its ability to formulate a plan of reorganization which will gain approval of the requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy Court, its ability to comply with the Citicorp DIP Credit Agreement (as defined below), its ability to generate sufficient cash flows from operations, securing post-emergence financing and the success of future operations. These conditions create substantial doubt regarding the ability of the Company to continue as a going concern. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.
While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. Additionally, the amounts reported on the consolidated balance sheet could materially change because of changes in business strategies and the effects of a plan of reorganization. In the Chapter 11 Cases, substantially all unsecured liabilities as of the Filing Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 Cases, have been segregated and classified as liabilities subject to compromise in the accompanying consolidated balance sheets. Generally, all actions to enforce or otherwise effect repayment of pre-Chapter 11 liabilities as well as all pending litigation against the Debtors are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for such liabilities are subject to approval of a plan of reorganization and accordingly are not presently determinable. The principal categories of obligations classified as liabilities subject to compromise under the Chapter 11 Cases as of December 28, 2002 are identified below:
DECEMBER 28, ---- (in thousands)
13.0% Senior Notes due 2004 $ 110,000 Interest accrued on above Senior Notes 29,096 Accounts payable 3,889 Other accrued expenses 2,089 ------------ Total liabilities subject to compromise $ 145,074 ============
For 2002 the Company recognized $5.2 million in reorganization charges. These amounts relate primarily to professional fees and bank fees. Interest expense, including default interest, under the Senior Notes would have amounted to $18.5 million for 2002 had it not have been for the Chapter 11 Cases.
At the commencement of the Chapter 11 Cases, the Company filed a preliminary plan of reorganization. The United States Trustee thereafter appointed the Official Committee of Unsecured Creditors (the "Creditors' Committee"), and based on negotiations with the Creditors' Committee, the Company filed a First Amended and Restated Joint Plan of Reorganization (the "Plan") and First Amended and Restated Disclosure Statement (the "Disclosure Statement") on November 6, 2002. In essence, the Plan provides for (i) payment in full of federal, state, and local tax claims and other administrative and priority claims; (ii) payment in full or refinancing of the DIP Credit Agreement; (iii) reinstatement or payment in full of, or surrender of collateral securing, allowed miscellaneous secured claims and capitalized lease obligations; (iv) distributions of shares of stock in the reorganized Company to the holders of allowed general unsecured claims and the holders of the Company's Senior Notes due 2004; (v) a distribution of cash in the amount of 70% of allowed convenience claims; and (vi) distributions of warrants to purchase shares of stock in the reorganized Company to the holders of shares of stock in the Company on the record date established in the Chapter 11 Cases.
A restructuring of the Company's debt, under the Plan, may result in the cancellation of indebtedness ("COD"), which if it occurs in the course of a proceeding pursuant to Chapter 11 of the United States Bankruptcy Code, would be excluded from the Company's gross income in the year of the forgiveness. However, the Company will be required to reduce its basis in its tax attributes, which include net operating loss carry-forwards and general business and other credits and tax basis in its assets by an amount equal to the COD. The reduction of these tax attributes results in the Company not being able to shelter future taxable income in the amount equal to the COD.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) BUSINESS
The Company is principally engaged in the design, manufacturing and sale of women's apparel.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Kasper include the accounts of all majority-owned companies. All significant intercompany balances and transactions have been eliminated in consolidation.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected at fair value because of the short term maturity of these instruments. The Company's debt has been reflected at its book value, which does not reflect the fair value of the liability that may result from the Company's plan of reorganization if and when it is approved by the Bankruptcy Court.
(D) USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. As such, the most significant uncertainty in the Company's assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, inventory reserves and legal and tax contingency reserves. Actual results could ultimately differ from those estimates.
(E) REORGANIZATION VALUE
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), the Company ceased recording amortization relating to the reorganization value in excess of identifiable assets, effective December 30, 2001. Prior to such date, reorganization value in excess of identifiable assets was being amortized using the straight-line method over 20 years. The Company, under the requirements of SFAS No. 142, reviewed this asset for impairment and determined that the asset has been impaired. See Note 6 of Notes to Consolidated Financial Statements for more information.
(F) TRADEMARKS
In accordance with SFAS No. 142, the Company ceased recording amortization on its trademarks with indefinite lives, effective December 30, 2001. The Company, under the requirements of SFAS No. 142, continually evaluates, based upon income and/or cash flow projections and other factors as appropriate, whether events and circumstances have occurred that indicate that the remaining estimated useful life of this asset warrants revision or that the remaining balance of this asset may not be recoverable.
(G) CASH AND CASH EQUIVALENTS
All highly liquid investments with a remaining maturity of three months or less at the date of acquisition are classified as cash and cash equivalents.
(H) CREDIT RISK
The Company has a factoring agreement with The CIT Group/Commercial Services, Inc. ("CIT"). Under such agreement, CIT purchases substantialy all domestic receivables from the Company and remits the funds to the Company when collected. Any amounts unpaid after 90 days are guaranteed to be paid to the Company by CIT. Accounts receivable, as shown on the consolidated balance sheets, is net of allowances
and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements that are not purchased by CIT, and assessments of collectibility based on historic trends. Costs associated with allowable customer markdowns and operational charge backs, are included as a reduction to net sales and are part of the provision for allowances included in Accounts Receivable. These provisions result from divisional seasonal negotiations as well as historic deduction trends and the evaluation of current market conditions.
(I) INVENTORIES
Inventories are valued at the lower of cost (using the first-in, first-out method) or market. The Company continually evaluates the composition of its inventories assessing slow-turning, ongoing product as well as prior seasons fashion product. The Company makes certain assumptions to adjust inventory based on historical experience and current information, including the value of current open orders, in order to assess that inventory is recorded properly at the lower of cost or market.
(J) PROPERTY, PLANT AND EQUIPMENT
Furniture, fixtures, equipment, software and leasehold improvements are stated at cost. Major replacements or betterments are capitalized. Maintenance and repairs are charged to earnings as incurred. For financial statement purposes, depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the useful life or the life of the lease.
(K) DERIVATIVE INSTRUMENTS
The Company has adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet, measured at fair value. If certain conditions are met, whereby the derivative instrument has been designated as a fair value hedge, the derivative instrument and the hedged item are marked to fair value through earnings. If the derivative is designated and qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is recorded in comprehensive income and reclassified into earnings in the period during which the hedged item affects earnings. Accounting for qualifying hedges requires that a company must formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. For derivatives not accounted for as hedges, fair value adjustments are recorded to earnings. The impact of SFAS No. 133 does not have a material effect on the Company's consolidated financial statements.
(L) REVENUE RECOGNITION
Sales are recognized upon shipment of products to wholesale customers and, in the case of sales by Company owned retail stores, when goods are sold to retail customers. Royalty revenues are recognized when earned based upon each respective licensing agreement. Allowances for estimated uncollected accounts and discounts are provided when sales are recorded.
(M) ADVERTISING
Costs associated with advertising campaigns are expensed during the period when the advertising takes place, and are included in the accompanying Consolidated Statements of Operations in selling, general and administrative expenses. Costs associated with cooperative advertising programs under which the Company, at its discretion, agrees to share costs, under negotiated contracts, of customers' advertising and promotional expenditures, are expensed when the related revenues are recognized. Beginning in 2002, these costs have been recorded as a reduction of net sales. Prior to 2002, these expenses are included in the accompanying Consolidated Statements of Operations in selling, general and administrative expenses. Total advertising expenses were $5.1 million in 2002, $5.3 million in 2001 and $7.9 million in 2000.
(N) SHIPPING AND HANDLING
The costs associated with shipping goods to customers are recorded as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. In fiscal years 2002, 2001 and 2000 shipping and handling costs were $1.7 million, $1.6 million and $1.7 million, respectively.
(O) INCOME TAXES
Deferred income taxes are recorded at currently enacted statutory rates on the differences in the basis of assets and liabilities for tax and financial reporting purposes. When recorded, deferred income taxes are classified in the balance sheet as current or non-current based upon the expected future period in which such deferred income taxes are anticipated to reverse.
(P) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"("APB No. 25"). Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure".
Had compensation cost for these plans been determined consistent with SFAS No. 123, as amended by SFAS No. 148, net income and earnings per share would have been reduced to the following pro forma amounts:
(Q) EARNINGS PER COMMON SHARE
Basic and Fully Diluted Earnings Per Common Share ("EPS") are computed under the provisions of SFAS No. 128, "Earnings Per Share". Under this standard, Basic EPS is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the effect of potential dilution from the exercise of outstanding dilutive stock options and warrants into common stock using the treasury stock method. For 2002, 2001 and 2000, options outstanding during the period using the treasury stock method were excluded from the net income (loss) per share computation of diluted earnings per share, as they were antidilutive.
(R) FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation". All balance sheet accounts have been translated using the exchange rate in effect at the balance sheet date. Income statement amounts have been translated using the
average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive loss.
(S) RECLASSIFICATION
Certain amounts reflected in 2001 and 2000 financial statements have been reclassified to conform to the presentation of similar items in 2002.
(T) NEW ACCOUNTING STANDARDS
In November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 01-9, "Accounting for Consideration Given to a Reseller of the Vendor's Products." This issue addresses the recognition, measurement and income statement classification of consideration from a vendor to a customer in connection with the customer's purchase or promotion of the vendor's products. This consensus only impacted revenue and expense classifications and did not change reported net income. In accordance with the consensus reached, the Company adopted the required accounting beginning with fiscal 2002 and the impact of this required accounting does not have a material impact on the revenue and expense classifications in the Company's Consolidated Statements of Operations.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. Management does not expect the impact of SFAS No. 143 to be material to the Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long Lived Assets". SFAS No. 144 addresses financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 also extends the reporting requirements to report separately as discontinued operations, components of an entity that have either been disposed of or classified as held-for-sale. The Company adopted the provisions of SFAS No. 144 for fiscal year 2002, the impact of which did not have a significant effect on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that statement, SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sales-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued after May 15, 2002. The Company adopted the provisions of SFAS No. 145 upon its effective date, the impact of which did not have a significant effect on the Company's results of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which changes the accounting for costs such as lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity initiated after December 31, 2002. The standard requires companies to recognize the fair value of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company does not expect the adoption of this standard to have a material effect on the results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS No. 148 effective December 28, 2002.
NOTE 4. INVENTORIES:
Inventories consist of the following:
December 28, December 29, 2002 2001 ------------ ------------ (in thousands)
Raw materials $ 6,482 $ 10,371 Finished goods 41,820 63,328 ------------ ------------ Total inventories $ 48,302 $ 73,699 ============ ============
In connection with the Company's restructuring efforts and management's focus on improving operational efficiency and cash flow, during 2001, management reassessed the value of its inventories. During the third and fourth quarters of 2001, the Company recorded inventory reserves aggregating approximately $17.7 million, to reflect at net realizable value, the merchandise that the Company expected to sell off-price in the case of finished goods, along with the acceleration of the expected liquidation of raw materials. During 2002, the Company recorded a change in estimate and reversed $3.7 million, in aggregate, of these reserves. See Note 17 of Notes to Consolidated Financial Statements for more information.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 28, December 29, Estimated 2002 2001 Useful Lives ------------ ----------- ------------ (in thousands)
Machinery, equipment and fixtures $ 25,871 $18,892 3-10 years
Leasehold improvements 15,089 12,124 Life of lease
Construction in progress 251 1,059 N/A ------------ ----------- Property, plant and equipment, at cost 41,211 32,075
Less: Accumulated depreciation and amortization (21,538) (16,438) ------------ ----------- Total property, plant and equipment, net $ 19,673 $15,637 ============ ===========
NOTE 6. REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment upon adoption with completion of testing within one year of adoption and at least annually thereafter. The Company, as required, adopted SFAS No. 142 beginning December 30, 2001. Application of the non-amortization provisions of SFAS No. 142 resulted in a reduction of amortization expense of approximately $6.8 million in 2002. Such amortization expense totaled $7.3 and $6.8 million in 2001 and 2000, respectively. SFAS No., 142 requires that the
Company's Reorganization Value in Excess of Identifiable Assets (the "Reorganization Asset") and other indefinitely lived intangible assets (collectively, the "Intangibles") be tested for impairment using the two-step process. The first step is to determine the fair value of the reporting unit, which may be calculated using a discounted cash flow methodology, and compare this value to its carrying value. If the fair value exceeds the carrying value, no further work is required and no impairment loss would be recognized. The second step is an allocation of the fair value of the reporting unit to all of the reporting unit's assets and liabilities under a hypothetical purchase price allocation. As of the date the Company adopted SFAS No. 142, the Company was experiencing substantial operating losses; highly leveraged; unable to make its semi-annual interest payments on its Senior Notes; undergoing a corporate restructuring of which success was uncertain; had diminimus market capitalization and; on the verge of filing bankruptcy. These circumstances led to a significant diminution of the Company's fair vale and the failure of step one of SFAS No. 142. Based on the evaluation, along with continuing difficulties being experienced in the industry, the Company recorded a non-cash charge of $30.4 million to reduce the carrying value of the Reorganization Asset to the estimated fair value. This non-cash charge is reported as a cumulative effect of an accounting change in the accompanying statement of operations. The Company utilized the discounted cash flow methodology to estimate fair value. The evaluation of reporting units on a fair value basis, as required from the implementation of SFAS No. 142, indicated that the implied Reorganization Asset of the Kasper Wholesale segment was $30.4 million less than its carrying value. If the Intangibles had not been amortized in 2001 and 2000, the Company's adjusted net income (loss) and earnings (loss) per share would have been as follows:
NOTE 7. DEBT:
CREDIT FACILITY -
On July 9, 1999, the Company entered into a credit facility with a bank group led by Chase (the "Chase Facility") in order to, among other things, fund the Company's working capital requirements and to finance the Company's purchase of the Anne Klein trademarks (the "Trademark Purchase"). On the Filing Date, the Company obtained a $35 million DIP Revolving Credit Agreement from its existing bank group (the "Chase DIP"). The Chase DIP also provided for a term loan for the purpose of refinancing the pre-petition obligations outstanding under the Chase Facility. On July 12, 2002, the Chase DIP was amended to convert the tem loan to a revolving credit agreement.
The Chase DIP provided, among other things, for the maintenance of certain financial ratios and covenants, and set limits on capital expenditures and
dividends to shareholders. The Chase DIP was scheduled to expire on February 5, 2003. Availability under the Chase DIP was limited to a borrowing base calculated upon eligible accounts receivable, inventory, trademarks and letters of credit. Interest on outstanding borrowings was determined based on stated margins above the prime rate at Chase, which on December 28, 2002, was 2.0% above the prime rate. For fiscal 2002, the weighted average interest rate on the Chase Facility and Chase DIP was 6.67%.
The Company paid approximately $2.4 million in commitment and related fees in connection with the Chase Facility in July 1999, along with $875,000 and $675,000 in connection with amendments on November 20, 2000 and June 19, 2001, respectively. These fees were capitalized and amortized as interest and financing costs over the remaining life of the Chase Facility. As a result of the Chapter 11 Cases, the Company determined that the value of these capitalized bank fees had been impaired. Accordingly, at the end of 2001, the Company wrote off the unamortized bank fees totaling approximately $2.4 million. In connection with the Chase DIP, the Company paid $875,000 in facility, advisory and structuring fees, along with an annual administrative agency fee of $100,000 and an annual collateral monitoring fee of $100,000. These fees were expensed as incurred and included as part of reorganization costs. In connection with the July 12, 2002 amendment, the Company paid $100,000 in bank fees, which were capitalized and amortized over the remaining life of the Chase DIP, totaling $85,000 in 2002.
As of December 28, 2002, there were no direct borrowings and $38.1 million outstanding in letters of credit under the Chase DIP. In addition to $24.9 million of unrestricted cash and cash equivalents on hand, the Company had approximately $34.9 million available for future borrowings as of December 28, 2002.
On January 30, 2003, the Company obtained a $100 million debtor-in-possession financing facility (the "Citicorp DIP Credit Agreement") from its new bank group led by Citicorp USA, Inc. ("Citicorp"). The Citicorp DIP Credit Agreement replaced the Chase DIP and permits up to $60.0 million available for issuance of letters of credit, of which $15.0 million will be available for stand-by letters of credit and up to $10.0 million for discretionary swing loans.
The Citicorp DIP Credit Agreement provides, among other things, for the maintenance of certain financial ratios and covenants, and set limits on capital expenditures and dividends to shareholders. The Citicorp DIP Credit Agreement, has a term ending on the earliest to occur of (i) the six month anniversary of the closing date, (ii) the effective date of the Plan, or (iii) the occurrence of an Event of Default. Availability under the Citicorp DIP Credit Agreement is limited to a borrowing base calculated upon eligible accounts receivable, eligible inventory, eligible documentary letters of credit and trademarks, in each case, less appropriate reserves. Interest on outstanding borrowings is determined based on stated margins above the Base Rate Loans and Eurodollar Rate Loans maintained by Citicorp on the terms and subject to the conditions of the agreement.
The Company paid approximately $1.6 million in commitment and related fees in connection with the Citicorp DIP Credit Agreement in January 2003. On March 14, 2003 the Company obtained an amendment to the Citicorp DIP Credit Agreement which allowed the DIP portion of the credit agreement to be extended to December 31, 2003, as well as amended certain financial covenants. There were no incremental bank fees associated with this amendment.
SENIOR NOTES -
Pursuant to the Leslie Fay (the Company's parent prior to its spin-off in 1997) reorganization plan, the Company issued $110 million in Senior Notes. The Senior Notes initially bore interest at 12.75% per annum and mature on March 31, 2004. Beginning January 1, 2000, the interest rate increased to 13.0%. The Company stopped accruing interest on the Senior Notes on the Filing Date. Interest was payable semi-annually on March 31 and September 30. Interest relating the Senior Notes totaled $1.7 million for fiscal 2002 and $16.4 million for fiscal 2001, including $300,000 and $2.1 million in default interest, respectively. At December 28, 2002, the Senior Notes and related unpaid interest have been classified as liabilities subject to compromise.
As a result of certain amendments to the Senior Notes, in July 1999, the Company paid to each registered note holder, $0.02 in cash for each $1.00 in principal amount of Senior Notes held by such registered holder, totaling $2.2 million (the "Consent Fee"). The Consent Fee was being amortized over the remaining life of the Senior Notes and was included in interest and financing costs. As a result of the Chapter 11 Cases, the Company determined that the value of the capitalized Consent Fee was impaired. Accordingly, at the end of 2001, the Company wrote off approximately $1.1 million in unamortized Consent Fees.
NOTE 8. DEFERRED ROYALTY INCOME
In connection with the renewal of a licensing agreement, on March 12, 2002 the Company received a prepayment of royalties of $20.0 million from one of its licensees. The royalty prepayment is non-refundable and is to be applied to guaranteed minimum royalty payments and excess royalties due through the term of the contract, which expires in 2006. The payment has been recorded as deferred royalty income and income will be recognized as earned based upon actual sales information provided by the licensee. As of December 28, 2002, $4.9 million had been recognized as royalty income.
NOTE 9. DEFERRED OTHER
By an agreement dated as of August 1, 2002, AEL granted to Broadway Industry & Commerce Development Co. Ltd. ("Broadway"), the exclusive right to act as its buying agent for sportswear in specified countries in Asia and the Middle East, through December 31, 2007 (the "Broadway Agreement"). In consideration of such exclusive rights, Broadway paid AEL $1.0 million on December 2, 2002, and is obligated to make a second payment of $1.0 million at such point as the aggregate of all orders placed by Broadway on behalf of AEL reaches $32.0 million. AEL has the right at any time to terminate the term upon a change of control of AEL or if AEL determines that Broadway is not rendering effective services. However, if AEL makes such election, it is obligated to repay to Broadway an amount equal to the amount paid by Broadway for its exclusive rights, plus additional compensation for early termination. By a letter agreement dated October 23, 2002 (and authorized by the Bankruptcy Court on November 26, 2002), the Company and the parent company of Broadway provided mutual guarantees of their respective subsidiaries' obligations under the Broadway Agreement. As of December 28, 2002, $78,000 had been recognized as other income, reducing selling, general and administrative expenses.
NOTE 10. RESTRUCTURING AND OTHER CHARGES (CREDITS)
In the fourth quarter of 2000, the Company began preparations for its bankruptcy filing, and in doing so, incurred various consulting, legal and other fees related to such filing. These fees, along with other charges taken to exit certain retail store leases and certain office space prior to the Filing Date, have been classified as restructuring and other charges on the accompanying Consolidated Statements of Operations. For 2002, the Company recognized a net restructuring and other credit of $2.5 million. This credit resulted from the reevaluation of the decision to exit certain retail store leases and certain office space for which the Company reversed a charge of $3.1 million, partially offset by $603,000 of restructuring and other charges related primarily to professional fees. For 2001 and 2000, the Company recognized restructuring and other charges of $9.2 million and $2.3 million, respectively. These amounts relate to professional fees, estimated lease contract termination costs, asset write-downs and severance costs.
NOTE 11. INCOME TAXES:
As of December 28, 2002, December 29, 2001 and December 30, 2000, the provision for income taxes consisted of:
The Company's federal tax returns for the 1997 through 2000 tax years are under examination by the Internal Revenue Service. As of December 28, 2002, the outcome of this audit was uncertain; however, the Company believes it has adequately provided against any exposure, in the unlikely event the Company fails to meet its burden of proof under the examination. See Note 12 of Notes to Consolidated Financial Statements for further information. For the tax year ended December 28, 2002, the Company utilized approximately $35.0 million in net operating loss carryforwards against fiscal 2002 taxable income. Current state tax expense includes approximately $1.6 million relating to income tax liabilities in New Jersey and California as a result of the suspension of net operating loss carryforwards by those states for the 2002 tax year.
The Company is in an accumulated loss position for both financial reporting and income tax purposes. For the years ended December 28, 2002 and December 29, 2001, the Company had net operating loss carryforwards of approximately $39.0 and $74.0 million, respectively. For financial reporting purposes, the tax benefit of the Company's net operating loss carryforwards and other deferred tax assets, are offset by a valuation allowance due to the uncertainty of the Company's ability to realize future taxable income.
Deferred tax (assets) liabilities are comprised of the following:
December 28, December 29, 2002 2001 ------------ ------------ (in thousands) Deferred tax assets Accounts receivable reserve $(7,062) $ (14,191) Inventory, net (445) (4,280) Net operating loss (13,274) (23,814) Depreciation/Amortization (2,093) --- Deferred revenue (5,133) --- Other accruals (2,022) (4,458) ------------ ------------ Total deferred tax assets (30,029) (46,743) ------------ ------------ Deferred tax liabilities Amortization --- 5,499 ------------ ------------ Total deferred tax liabilities --- 5,499 ------------ ------------ Valuation allowance 30,029 41,244 ------------ ------------ Net deferred tax assets $ --- $ --- ============ ===========
For the fiscal year ended December 28, 2002, the difference between the Company's federal statutory tax rate of 34%, as well as its state and local taxes, net of federal tax benefit, when compared to its effective tax rate is principally comprised of a valuation allowance, provision of taxes related to potential identified exposures and foreign taxes. The difference between the Company's effective income tax rate and the statutory federal income tax rate for fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000, is as follows:
NOTE 12. COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS -
As discussed in Note 2, on February 5, 2002, the Company and several of its subsidiaries filed voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code. All civil litigation commenced against the Debtors prior to that date has been stayed under the Bankruptcy Code; however, litigants may seek to obtain relief from the Bankruptcy Court to pursue their pre-petition claims.
The Company is currently undergoing an examination by the Internal Revenue Service ("IRS") for the tax years ended 1997, 1998, 1999, and 2000. The IRS has
issued a proposed adjustment, which would result in additional income taxes in prior years resulting in a reduction in net operating loss carryforwards, which were approximately $39.0 million and $74.0 million at December 28, 2002 and December 29, 2001, respectively, the write-down of certain tax assets and the payment of interest. The proposed adjustment would disallow deductions amounting to approximately $26.7 million in the 1997 through 2000 fiscal years. The Company is vigorously contesting the proposed adjustment. In connection with the proposed adjustment, on August 7, 2002 the IRS filed proof of claim in the Bankruptcy Cases in the amount of approximately $4.7 million (the "IRS Claim"), on the basis that the Debtors improperly made amortization deductions during the years 1997 through 1999. The IRS Claim seeks priority under section 507(a)(8) of the Bankruptcy Code. On November 22, 2002, the Debtors filed an Objection to the IRS Claim pursuant to section 505 of the Bankruptcy Code, by which they requested the Court to disallow the IRS Claim in its entirety based on a determination of federal income tax liability pursuant to section 505(a)(1) of the Bankruptcy Code. The Debtors assert that the tax returns and the deductions claimed therein were proper and correct and, therefore, they are not liable for any additional taxes over and above those reported in the consolidated annual tax returns. Unless the parties are able to agree on a resolution of the dispute, the issues are expected to be decided by the Bankruptcy Court within the next 6 months, and no assurance can be given as to the outcome of the dispute.
On January 11, 2002, counsel for Arthur S. Levine sent a letter to the Company alleging that the Company is obligated, under the terms of Mr. Levine's employment contract as the former Chairman and Chief Executive Officer of the Company, to pay severance and related costs. Mr. Levine asserted claims in the Chapter 11 Cases totaling approximately $1.3 million. On November 4, 2002, the Company entered into a settlement agreement with Mr. Levine, subsequently approved by the Bankruptcy Court, pursuant to which, inter alia, the Company paid Mr. Levine $199,999 and Mr. Levine withdrew all claims in the Chapter 11 Cases. Accordingly, the Company reversed this accrual in the fourth quarter 2002 by $1.1 million.
Apart from the proceedings in the Bankruptcy Court, the Company is not involved in any legal proceedings of significance.
EMPLOYMENT AGREEMENTS -
The Company and Mr. Idol are parties to an employment agreement dated July 18, 2001 (the "Idol Employment Agreement"), which provides for his employment as the Chairman of the Board of Directors and Chief Executive Officer of the Company through July 18, 2005. The agreement provides for a base salary of $1.0 million per annum, subject to annual review. Subject to a minimum bonus in 2002 of $750,000, the agreement provides for a bonus in each year equal to the sum of (i) fifty percent (50%) of the then current salary rate, if the Company achieves any pre-tax income for such fiscal year, and (ii) five percent (5%) of pre-tax income for such fiscal year between $10 million and $20 million, and (iii) two and one-half percent (2-1/2%) of pre-tax income for such fiscal year in excess of $20 million (up to a maximum of $500,000), up to a bonus cap of $1.5 million. In addition, pursuant to the agreement the Company issued to Mr. Idol an unsecured promissory note in the principal amount of $1.0 million, payable, with interest accruing at 9% per annum, on July 18, 2004 (the "Note").
Pursuant to an amendment to the Idol Employment agreement dated October 31, 2002 (the "Amendment"), upon the effective date of a plan of reorganization with respect to the Company approved by the Bankruptcy Court (the "Effective Date"), the Company is obligated to issue to Mr. Idol restricted shares of its common stock (i) having a value of $1.0 million in full satisfaction of the Note and (ii) having a value of two and one-half percent (2-1/2%) of the number of shares issued under the Plan of reorganization, based on the value ascribed to shares of the common stock of the Company for purposes of issuing and distributing its common stock on the Effective Date pursuant to the Plan (the "Ascribed Value"). One-half (50%) of the restricted shares shall vest (meaning that they shall become transferable) on the second anniversary of the Effective Date and twenty-five percent (25%) shall vest on each of the third and fourth anniversaries of the Effective Date; provided in each case, that, at least once during the period on and after the Effective Date, for a period of twenty (20) consecutive trading days, the closing sales price of a share of such stock is at least one hundred and fifty percent (150%) of the Ascribed Value. Any restricted
shares that are not vested shall become vested on the date of Mr. Idol's death, Total Disability, termination without Cause or resignation for Good Reason, or upon a Change in Control of the Company (as all such terms are defined in the Idol Employment Agreement), or on the tenth (10th) anniversary of the date the shares are issued.
The Company is also obligated to grant to Mr. Idol on the Effective Date options to purchase shares of the Company's common stock (on a fully diluted basis) equal to two and one-half percent (2-1/2%) of the total number of shares issued under the Plan. The per share exercise price under the options shall be an amount equal to $80 million divided by the total number of shares issued under the Plan. The options shall vest ratably on each of first four anniversaries of the Effective Date, provided that (A) (i) Mr. Idol is employed on such date and (ii) at least once during the period on and after the Effective Date, for a period of twenty (20) consecutive trading days, the closing sales price of a share of such stock is at least one hundred and fifty percent (150%) of the Ascribed Value, and (B) if earlier, the options shall fully vest on the date of Mr. Idol's death, Total Disability, termination of employment without Cause or resignation for Good Reason or upon a Change of Control or on the tenth anniversary of the date the options are issued. The non-vested portion of the options shall be cancelled upon termination for Cause or resignation for Good Reason. All outstanding options (including vested options) shall terminate on the first anniversary of Mr. Idol's death or Total Disability or on the 90th day following any other termination of employment.
In addition, in the event of a transaction which results in a Change of Control before the restricted stock and stock options are issued, on the date of such Change of Control, Mr. Idol is entitled to (in lieu of the restricted stock and stock options): (i) a lump sum payment equal to one million dollars ($1,000,000) plus accrued interest in cash (in full satisfaction of the Note), plus (ii) an amount equal to two and one-half percent (2 1/2%) of the aggregate amount which, by virtue of such transaction, will be available for distribution under the Plan in satisfaction of all senior notes claims, general unsecured claims and convenience claims (the "Distributable Amount"), plus (iii) an amount equal to two and one-half percent (2 1/2%) of the amount by which the Distributable Amount exceeds eighty million dollars ($80,000,000).
The Company has entered into employment agreements with certain executive officers (including that described above), which provide for minimum annual compensation of approximately $2.2 million through December 2003 and approximately $2.7 million through 2005. The agreements also provide for bonus payments upon the attainment of certain targets as provided in the applicable agreements.
LEASES -
The Company rents real and personal property under leases expiring at various dates through 2012. Certain of the leases stipulate payment of real estate taxes and other occupancy expenses.
Minimum annual rental commitments under leases in effect at December 28, 2002 are summarized as follows: Equipment Fiscal Year Ended Real Estate & Other - ---------------------------------- -------------------- ------------------- (in thousands)
2003 $ 10,853 $ 120 2004 10,219 112 2005 9,562 15 2006 9,237 -- 2007 7,028 -- Thereafter 24,843 -- -------------------- ------------------- Total minimum lease payments $ 71,742 $ 247 ==================== ===================
Base rent expense for the fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000, amounted to approximately $11.1 million, $13.1 million and $11.9 million, respectively.
As discussed in Note 10 of Notes to Consolidated Financial Statements, the Company recorded a charge in 2001, which included approximately $2.7 million for cost associated with exiting leased properties. As a result of the Chapter 11
filing on February 5, 2002, management calculated this reserve amount using the parameters prescribed by the Bankruptcy Court guidelines with respect to lease rejections. During 2002, the Company reevaluated its decision to exit certain retail stores and office space and as a result, recognized a credit of $1.4 million relating to lease costs.
CONCENTRATIONS OF CREDIT RISK -
Financial instruments that potentially expose the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region within the United States, but are concentrated in the retail apparel business. The Company has established an allowance for possible losses based upon factors surrounding the credit risk of specific customers, historical trends and other information. For the years ended December 28, 2002, December 29, 2001 and December 30, 2000, sales to the same three customers accounted for approximately 20%, 20% and 16%, 21%, 16% and 17%, 21%, 16% and 15%, respectively.
NOTE 13. SEGMENT INFORMATION
The Company's primary segment is the design, distribution and wholesale sale of women's career suits, dresses and sportswear principally to major department stores and specialty shops. In addition, the Company operates 69 retail stores throughout the United States along with one full price Anne Klein retail store in New York City, as another distribution channel for its products. The Company also considers Licensing to be a reportable segment. For the purposes of decision-making and assessing performance, the Company includes the operations of AEL in its wholesale segment. International operations are not significant for segment reporting and have been included in the wholesale segment.
The Company measures segment profit as earnings before interest, taxes, depreciation, amortization, reorganization, restructuring and other charges and cumulative effect of change in accounting principle ("EBITDAR"). All intercompany revenues and expenses are eliminated in computing revenues and EBITDAR. Information on segments and a reconciliation to the consolidated financial statements is as follows:
NOTE 14. RETIREMENT PLANS:
DEFINED CONTRIBUTION PLAN
Kasper established a 401(k) Savings Plan for its employees on June 4, 1997. It is open to employees over the age of 21, who have completed at least six consecutive months of service. The Company makes a discretionary matching contribution up to a percentage of employee contributions. Total contributions to the plan may not exceed the amount permitted pursuant to the Internal Revenue Code. Contributions to the plan for the years ended December 28, 2002, December 29, 2001 and December 30, 2000 were approximately $220,000, $206,000 and $400,000, respectively. The Company did not make discretionary matching contributions during the first quarter of 2001, and reduced the amount of the matching contribution beginning in the second quarter of 2001, accounting for the decrease from 2000.
MULTI-EMPLOYER BENEFIT PLAN
Certain union employees of the Company participate in a union sponsored, collectively bargained multi-employer pension plan. This plan is not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. The Company has no present intention of withdrawing from this plan, nor has the Company been informed that there is any intention to terminate such plan. The Company funded approximately $1.3 million, $2.2 million and $2.5 million to the plan in 2002, 2001 and 2000, respectively.
NOTE 15. STOCK OPTION PLANS:
MANAGEMENT STOCK OPTION PLAN -
On December 2, 1997, the Board of Directors approved the 1997 Management Stock Option Plan (the "Management Plan"). At that time, the Company issued options to
upper management (the "Management Options") to purchase 1,753,459 shares of Common Stock, which upon issuance would represent approximately 20.5% of the Company's outstanding Common Stock. Such options were exercisable at $14.00 per share and vested as follows: 25% vested immediately with 15% vesting annually thereafter on June 4 from the years 1998 to 2002. On November 10, 1999, 1,710,692 of the Management Options were voluntarily cancelled pursuant to an agreement between the Company and the option holders. The remaining 42,767 expired on October 30, 2001.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN -
On June 10, 1997, the Board of Directors approved the grant of stock options ("Director Options") to purchase 20,000 shares of Common Stock to each of its then, five non-employee directors for a total of 100,000 options. Each option had an exercise price of $14.00 per share and vested ratably over the first three anniversaries following the date of grant. The Director Options expired on the fifth anniversary of the date of grant. Director Options are not transferable by the optionee other than by will or the laws of descent and distribution or to facilitate estate planning, and each option is exercisable during the lifetime of the optionee only by such optionee. At the date of issuance, the fair market value per share was $15.50.
On July 30, 1998, the Board of Directors approved the grant of stock options to purchase 20,000 shares of Common Stock to each of its two newly elected directors under the same terms of the Director Options granted on June 10, 1997. In addition, the Director Options granted to the two outgoing directors became fully vested as of that date. The market value per share on July 30, 1998 was $13.00. Effective December 28, 2002, all outstanding stock options were voluntarily cancelled pursuant to an agreement between the Company and the option holders.
The Company has elected to account for its stock based compensation awards to employees and directors under the accounting prescribed by APB No. 25, under which no compensation cost has been recognized.
The option price under the Management Plan exceeded the stock's market price on the date of grant. The option price under the Director Options granted on June 4, 1997 was less than the stock's market price on the date of grant. The option price under the Director Options granted on July 30, 1998 was greater than the stock's market price on the date of grant. A summary of the status of the Company's two stock plans at December 28, 2002, December 29, 2001 and December 30, 2000 and changes during the years then ended are presented in the table and narrative below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001 and 2000, respectively: risk-free interest rate of 5.8% for the Management Plan and 6.4% and 5.6% for the Director Options;
expected stock price volatility of 43% for all years for both the Management Plan and the Director Plan; and expected dividend yield of 0% and expected lives of 5 years for both plans.
NOTE 16. UNAUDITED QUARTERLY RESULTS:
Unaudited quarterly financial information for 2002 and 2001 is set forth as follows:
The first quarter 2002 was restated as a result of the Company's adoption of SFAS No. 142 and reflects the non-cash charge of $30.4 million to reduce the carrying value of the Reorganization Asset to its estimated fair value. See Note 6 of Notes to Consolidated Financial Statements for further information. The Company incurred a significantly larger net loss in the third and fourth quarters of 2001 than in 2002, excluding the cumulative effect of change in accounting principle as it continued its restructuring plan. The Company experienced a significant increase in gross profit in 2002 as a result of (i) a higher level of promotional allowances especially in light of the weak retail environment; and (ii) a substantial write-down of raw material inventories in conjunction with a planned strategic change in the garment procurement process, both of which occurred in 2001. The Company also had higher restructuring and other charges and interest costs from multiple bank amendments, higher borrowings, professional fees and the write-off of deferred financing costs in 2001.
NOTE 17. CHANGE IN ESTIMATE:
During the second quarter of 2002, the Company determined that, due to improved sell-through in its wholesale segment, certain allowance reserves amounting to $9.7 million as of December 29, 2001 were no longer required. As a result of this change in estimate, the Company reversed this reserve, which benefited gross margin in 2002.
During the second quarter of 2002, the Company determined that, due primarily to improved margins of its wholesale off-price sales, certain inventory reserves amounting to $2.0 million as of December 29, 2001 were no longer required. As a result of this change in estimate, the Company reversed this reserve, which benefited gross margin in 2002.
During the first half of 2002, the Company utilized in its production process certain raw materials that, as part of the Company's normal valuation process, had been reserved as of December 29, 2001. As a result of the utilization of the previously reserved raw materials, the Company recognized this change in estimate as a benefit to gross margin of $1.7 million in 2002.
NOTE 18. SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION:
The following presents the condensed financial statements of the Company and its subsidiaries, as of and for the year ending December 28, 2002, that filed voluntary petitions under Chapter 11:
SCHEDULE II KASPER A.S.L., LTD. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands)
(1) The increase in the tax valuation allowance for fiscal 2001 includes the impact of reserving for additional deferred tax assets generated in fiscal 2001. The net cost included in income tax provision expense is approximately $1.6 million for fiscal 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KASPER A.S.L., LTD. (Registrant)
By: /s/ John D. Idol ------------------------------------- John D. Idol Chairman of the Board and Chief Executive Officer
Dated: April 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CERTIFICATIONS --------------
I, John D. Idol, certify that:
1. I have reviewed this annual report on Form 10-K of Kasper A.S.L., Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ John D. Idol -------------------------- John D. Idol Chief Executive Officer
I, Joseph B. Parsons, certify that:
1. I have reviewed this annual report on Form 10-K of Kasper A.S.L., Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Joseph B. Parsons -------------------------------------------- Joseph B. Parsons Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description - ------------ ------------------------------------------------------------------
3.1 (4) Amended and Restated Certificate of Incorporation as filed on May 30, 1997.
3.2 (4) Amendment to Certificate of Incorporation as filed on November 5, 1997.
3.3 (21) Second Amended and Restated By-laws
4.1 (1) Indenture dated as of June 4, 1997, by and between the Company and IBJ Schroder Bank & Trust Company, as trustee.
4.2 (3) Supplemental Indenture, dated as of June 30, 1997, by and between the Company and IBJ Schroder Bank & Trust Company, as trustee.
4.21 (9) Second Supplemental Indenture, dated as of June 16, 1999, to the Indenture, dated as of June 1, 1997 and effective as of June 4, 1997, as amended, between the Company and IBJ Whitehall Bank & Trust Company, as trustee.
4.3 (2) Form of Senior Note issued under the Indenture.
4.4 (6) Specimen Certificate of the Company's Common Stock.
10.1 (8) Amended and Restated Credit Agreement, dated as of July 9, 1999, among the Company, as Borrower, the guarantors named therein, the lenders named therein, The Chase Manhattan Bank, as administrative and collateral agent, and The CIT Group / Commercial Services, Inc., as collateral monitor.
10.11(13) Amendment Agreement No. 1 to the Amended and Restated Credit Agreement, dated December 22, 1999.
10.12(15) Amendment Agreement No. 2 to the Amended and Restated Credit Agreement, dated June 29, 2000.
10.13 (16) Amendment Agreement No. 3 to the Amended and Restated Credit Agreement, dated November 13, 2000.
10.14 (18) Waiver Agreement to the Amended and Restated Credit Agreement, dated March 28, 2001.
10.15 (20) Amendment Agreement No. 4 to the Amended and Restated Credit Agreement, dated June 19, 2001.
10.16 (17) Consulting Agreement dated October 25, 2000, between the Company and Alvarez and Marsal, Inc.
10.17 (19) Consulting Agreement dated April 11, 2001, between the Company and Alvarez and Marsal, Inc.
10.18 (23) Revolving Credit and Guaranty Agreement, dated as of February 5, 2002, among the Company, as Borrower, the guarantors named therein, the lenders named therein, JPMorgan Chase Bank, as administrative, documentation and collateral agent, J.P. Morgan Securities Inc., as book manager and lead arranger and The CIT Group/Commercial Services, Inc., as collateral monitor.
Exhibit Number Description - ------------- ----------------------------------------------------------------- 10.19 (30) First Amendment to Revolving Credit and Guaranty Agreement, dated July 12, 2002.
10.19(a)(31) Debtors' First Amended and Restated Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code.
10.19(b)(32) First Amended and Restated Disclosure Statement, dated November 6, 2002.
10.20 (4) Employment Agreement, dated June 4, 1997 between the Company and Arthur S. Levine.
10.21 (22) Employment Agreement, dated July 18, 2001 between the Company and John D. Idol.
10.21(a) Amendment to Employment Agreement, between the Company and John D. Idol, dated October 31, 2002.
10.22 (24) Employment Agreement, dated March 1, 2002 between the Company and Laura Lentini Iaffaldano.
10.22(a) Amendment to Employment Agreement, between the Company and Laura Lentini Iaffaldano, dated January 15, 2003.
10.23 (25) Employment Agreement, dated October 10, 2001 between the Company and Richard Owen.
10.23(a) Amendment to Employment Agreement, between the Company and Richard Owen, dated January 16, 2003.
10.24 (26) Employment Agreement, dated August 27, 2001 between the Company and Lee Sporn.
10.24(a) Amendment to Employment Agreement, between the Company and Lee Sporn, dated October 31, 2002.
10.25 (29) Employment Agreement, dated March 25, 2002 between the Company and Joseph B. Parsons.
10.25(a) Amendment to Employment Agreement, between the Company and Joseph B.Parsons, dated October 31, 2002.
10.26 Secured Super-Priority Debtor-In-Possession Revolving Credit Agreement, dated as of January 9, 2003, among the Company, the guarantors named therein, the lenders named therein and Citicorp USA, Inc., as administrative agent, arranger and book manager.
10.26(a) Amendment No. 1 to Secured Super-Priority Debtor-In-Possession Revolving Credit Agreement, March 14, 2003.
10.3 (5) Lease Modification Agreement and Lease Agreement, each dated August 20, 1996, between the Company and Import Hartz Associates
10.31 (14) First Lease Modification Agreement, dated April 30, 1999, by and between the Company and Import Hartz Associates.
10.4 (4) Acquisition Agreement dated June 2, 1997, by and among the Company, ASL/K Licensing Corp., Herbert Kasper and Forecast Designs, Inc.
10.41 (4) Employment, Consulting and Non-Competition Agreement dated as of June 4, 1997, by and among Sassco Fashions, Ltd., ASL/K Licensing Corp. and Herbert Kasper.
Exhibit Number Description - ------------- ----------------------------------------------------------------- 10.6 (4) 1997 Management Stock Option Plan.
10.61 (12) 1999 Share Incentive Plan.
10.7 (4) Form of Stock Option Agreement issued to Directors.
10.8 (11) Letter Agreement, dated as of September 13, 1999, between the Company and Whippoorwill Associates, Inc., as agent for various discretionary accounts.
10.9 (10) Lease, dated as of June 4, 1996, among 11 West 42nd Limited Partnership as Landlord, and Anne Klein & Company and Mark of the Lion Associates, as tenants.
16 (28) Letter of Arthur Andersen LLP
21 Subsidiaries of the Registrant.
23 Notice Regarding Consent of Arthur Andersen LLP
24 Power of Attorney (included in signature page).
99 (27) Letter To Commission Pursuant To Temporary Note 3t.
99.1 Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C.ss.1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C.ss.1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
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(1) Incorporated by reference to Exhibit No. 1 to the Company's Report on Form 8-K filed with the Commission on July 14, 1997.
(2) Incorporated by reference to Exhibit No. 2 to the Company's Report on Form 8-K filed with the Commission on July 14, 1997.
(3) Incorporated by reference to Exhibit No. 3 to the Company's Report on Form 8-K filed with the Commission on July 14, 1997.
(4) Incorporated by reference to the Company's Registration Statement on Form S-1 (Commission File No. 333-41629) filed with the Commission on December 5, 1997.
(5) Incorporated by referenced to the Company's Amendment No. 2 to Registration Statement on Form S-1 (Commission File No. 333-41629) filed with the Commission on April 3, 1998.
(6) Incorporated by referenced to the Company's Form 8-A filed with the Commission on May 1, 1998.
(7) Incorporated by reference to Exhibit No. 21.1 to the Company's Report on Form 10-K filed with the Commission on March 31, 1999.
(8) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 8-K filed with the Commission on July 13, 1999.
(9) Incorporated by reference to Exhibit No. 10.2 to the Company's Report on Form 8-K filed with the Commission on July 13, 1999.
(10) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on August 17, 1999.
(11) Incorporated by reference to Exhibit No. 10.3 to the Company's Report on Form 8-K/A filed with the Commission on September 22, 1999.
(12) Incorporated by reference to Annex A of the Company's Definitive Proxy Statement filed with the Commission on January 28, 2000.
(13) Incorporated by reference to Exhibit No. 10.11 to the Company's Report on Form 10-K filed with the Commission on March 31, 2000.
(14) Incorporated by reference to Exhibit No. 10.31 to the Company's Report on Form 10-K filed with the Commission on March 31, 2000.
(15) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on August 11, 2000.
(16) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 8-K filed with the Commission on November 20, 2000.
(17) Incorporated by reference to Exhibit No. 10.14 to the Company's Report on Form 10-K filed with the Commission on March 30, 2001.
(18) Incorporated by reference to Exhibit No. 10.15 to the Company's Report on Form 10-K filed with the Commission on March 30, 2001.
(19) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on May 15, 2001.
(20) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 8-K filed with the Commission on June 29, 2001.
(21) Incorporated by reference to Exhibit No. 3.1 to the Company's Report on Form 10-Q filed with the Commission on August 14, 2001.
(22) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on November 19, 2001.
(23) Incorporated by reference to Exhibit No. 10.17 to the Company's Report on Form 10-K filed with the Commission on April 15, 2002.
(24) Incorporated by reference to Exhibit No. 10.22 to the Company's Report on Form 10-K filed with the Commission on April 15, 2002.
(25) Incorporated by reference to Exhibit No. 10.23 to the Company's Report on Form 10-K filed with the Commission on April 15, 2002.
(26) Incorporated by reference to Exhibit No. 10.24 to the Company's Report on Form 10-K filed with the Commission on April 15, 2002.
(27) Incorporated by reference to Exhibit No. 99 to the Company's Report on Form 10-K filed with the Commission on April 15, 2002.
(28) Incorporated by reference to Exhibit No. 16.1 to the Company's Report on Form 8-K/A filed with the Commission on May 2, 2002.
(29) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on May 20, 2002.
(30) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on August 19, 2002.
(31) Incorporated by reference to Exhibit No. 10.1 to the Company's Report on Form 10-Q filed with the Commission on November 18, 2002.
(32) Incorporated by reference to Exhibit No. 10.2 to the Company's Report on Form 10-Q filed with the Commission on November 18, 2002.