UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 29, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
---------------------- ------------------------
Commission file number: 0-24179
-------
KASPER A.S.L., LTD.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-3497645
-------- ----------
(State of Incorporation) (IRS Employer Identification No)
77 METRO WAY, SECAUCUS, NEW JERSEY 07094
-----------------------------------------------------------------------
(Address and zip code of principal executive office)
(201) 864-0328
-----------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of August 16, 2002 was 6,800,000.
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
PART I - FINANCIAL INFORMATION - The financial statements for the first
quarter of 2002 have subsequently been reviewed by Ernst & Young LLP.
No amendment to the previous quarterly report on Form 10-Q for the
quarter ended March 30, 2002 is required.
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at June 29, 2002, December 29, 2001
and June 30, 2001....................................................................................3
Condensed Consolidated Statements of Operations for the Thirteen weeks and Twenty-Six weeks
ended June 29, 2002 and June 30, 2001................................................................4
Condensed Consolidated Statements of Cash Flows for the Twenty-Six weeks ended
June 29, 2002 and June 30, 2001 .....................................................................5
Notes to Condensed Consolidated Financial Statements ................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................................22
SIGNATURES................................................................................................................23
EXHIBIT INDEX.............................................................................................................24
2
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
------------------ ------------------- ------------------
ASSETS JUNE 29, DECEMBER 29, JUNE 30,
2002 2001 2001
------------------ ------------------- ------------------
Current Assets:
Cash and cash equivalents................................... $ 39,272 $ 6,405 $ 3,278
Restricted cash............................................. 50,848 -- 1,000
Accounts receivable, net of reserves of $33,757, $41,838
and $31,330, respectively................................... 5,731 4,333 20,828
Inventories, net............................................ 38,353 73,699 96,695
Prepaid expenses and other current assets................... 6,413 4,226 6,194
Deferred taxes.............................................. -- -- 5,004
------------------ ------------------- ------------------
Total Current Assets........................................ 140,617 88,663 132,999
------------------ ------------------- ------------------
Property, plant and equipment, at cost less accumulated
depreciation and amortization of $18,507, $16,438 and
$15,734, respectively....................................... 18,579 15,637 19,663
Reorganization value in excess of identifiable assets, net of
accumulated amortization.................................... 50,245 50,245 51,873
Trademarks, net of accumulated amortization....................... 103,162 103,162 104,796
Other assets, at cost less accumulated amortization............... 988 983 6,019
------------------ ------------------- ------------------
Total Assets..................................................... $313,591 $258,690 $315,350
================== =================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Not Subject to Compromise:
Accounts payable............................................ $15,079 $24,899 $23,677
Accrued expenses and other current liabilities.............. 13,887 17,682 12,491
Interest payable............................................ 561 28,483 20,192
Taxes payable............................................... 8,653 537 1,873
Deferred royalty income..................................... 2,969 -- 207
Reclassified long-term debt................................. -- 110,000 110,000
DIP credit agreement........................................ 78,002 -- --
Bank revolver............................................... -- 59,048 64,020
------------------ ------------------- ------------------
Total Current Liabilities......................................... 119,151 240,649 232,460
Long-Term Liabilities Not Subject to Compromise:
Deferred royalty income..................................... 15,000 -- --
Other long-term liabilities................................. -- -- 3,951
------------------ ------------------- ------------------
Total Liabilities Not Subject to Compromise....................... 134,151 240,649 236,411
Liabilities Subject to Compromise................................. 149,491 -- --
------------------ ------------------- ------------------
Total Liabilities................................................. 283,642 240,649 236,411
Commitments and Contingencies
Shareholders' Equity:
Common Stock, 6,800,000 shares issued and outstanding....... 68 68 68
Preferred Stock, none issued and outstanding................ -- -- --
Capital in excess of par value.............................. 120,350 120,139 119,932
Accumulated deficit......................................... (89,840) (101,490) (40,420)
Cumulative other comprehensive loss......................... (629) (676) (641)
------------------ ------------------- ------------------
Total Shareholders' Equity........................................ 29,949 18,041 78,939
------------------ ------------------- ------------------
Total Liabilities and Shareholders' Equity........................ $313,591 $258,690 $315,350
================== =================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these balance sheets.
3
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------- -----------------------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2002 2001 2002 2001
------------------- ------------------- ------------------- ---------------------
Net sales........................................ $67,774 $ 75,514 $ 181,390 $ 198,196
Royalty income................................... 4,042 3,308 7,727 6,741
------------------- ------------------- ------------------- ---------------------
Total revenue.................................... 71,816 78,822 189,117 204,937
Cost of sales.................................... 36,695 56,216 113,537 145,520
------------------- ------------------- ------------------- ---------------------
Gross profit..................................... 35,121 22,606 75,580 59,417
Operating expenses (income):
Selling, general and administrative expenses..... 23,824 24,725 47,779 50,603
Depreciation and amortization.................... 1,028 2,971 2,057 5,856
Restructuring charges (credits).................. (2,476) 1,136 (1,934) 2,497
------------------- ------------------- ------------------- ---------------------
Total operating expenses......................... 22,376 28,832 47,902 58,956
------------------- ------------------- ------------------- ---------------------
Operating income (loss).......................... 12,745 (6,226) 27,678 461
Interest and financing costs..................... 1,570 7,283 5,122 14,339
------------------- ------------------- ------------------- ---------------------
Income (loss) before reorganization costs and
provision for income taxes....................... 11,175 (13,509) 22,556 (13,878)
Reorganization costs............................. 841 -- 2,469 --
------------------- ------------------- ------------------- ---------------------
Income (loss) before provision for income taxes.. 10,334 (13,509) 20,087 (13,878)
Provision for income taxes....................... 4,340 372 8,437 722
------------------- ------------------- ------------------- ---------------------
Net income (loss)................................ $ 5,994 $ (13,881) $ 11,650 $ (14,600)
=================== =================== =================== =====================
Basic and diluted earnings (loss) per common
share............................................ $0.88 $(2.04) $1.71 $(2.15)
=================== =================== =================== =====================
Weighted average number of shares used in
computing basic and diluted earnings (loss)
per common share............................... 6,800,000 6,800,000 6,800,000 6,800,000
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
4
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
TWENTY-SIX WEEKS
ENDED
------------------------------------------------
JUNE 29, 2002 JUNE 30, 2001
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $11,650 $(14,600)
---------------------- ----------------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,057 4,808
Amortization of reorganization value in excess of identifiable
assets............................................................... -- 1,630
Income applicable to minority interest.................................... -- 115
Non-cash restructuring costs.............................................. (1,074) --
(Increase) decrease in:
Accounts receivable, net.................................................. (1,398) 4,647
Inventories, net.......................................................... 35,346 13,877
Prepaid expenses and other assets......................................... (2,187) (2,071)
(Decrease) increase in:
Accounts payable, accrued expenses and other current liabilities.......... (3,220) (9,624)
Interest payable.......................................................... 1,159 8,629
Deferred royalty income................................................... 17,969 (207)
Income taxes payable...................................................... 8,116 220
---------------------- ----------------------
Total adjustments............................................................ 56,768 22,024
---------------------- ----------------------
Net cash provided by operating activities.................................... 68,418 7,424
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures net of proceeds from sales of fixed assets........... (3,610) (693)
---------------------- ----------------------
Net cash used in investing activities..................................... (3,610) (693)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under bank revolver........................... 18,954 (6,238)
---------------------- ----------------------
Net cash provided by (used in) financing activities....................... 18,954 (6,238)
Effect of exchange rate changes on restricted and unrestricted cash and cash
equivalents.................................................................. (47) (62)
---------------------- ----------------------
Net increase in restricted and unrestricted
cash and cash equivalents.................................................... 83,715 431
Restricted and unrestricted cash and cash
equivalents, at beginning of period.......................................... 6,405 3,847
---------------------- ----------------------
Restricted and unrestricted cash and cash
equivalents, at end of period................................................ $90,120 $4,278
====================== ======================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
5
KASPER A.S.L., LTD. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited condensed consolidated financial statements of Kasper
A.S.L., Ltd. and its wholly-owned subsidiaries (the "Company") have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all normal and recurring adjustments
and accruals considered necessary for a fair presentation of the Company's
financial position at June 29, 2002 and the results of operations for the
thirteen and twenty-six weeks ended June 29, 2002 and June 30, 2001 and cash
flows for the twenty-six weeks ended June 29, 2002 and June 30, 2001 have been
included. These statements should be read in conjunction with the audited
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Operating results for the thirteen and twenty-six weeks ended June
29, 2002 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 28, 2002.
The consolidated financial statements include the accounts of Kasper A.S.L.,
Ltd. and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
NOTE 2. REORGANIZATION CASE
On February 5, 2002 (the "Filing Date"), the Company and substantially all of
its domestic subsidiaries (collectively, the "Debtors"), filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court") (Case Nos. 02-B10497,
02-B10500, and 02-B10502 through 10505 (ALG)) (the "Chapter 11 Cases"). Pursuant
to an order of the Bankruptcy Court, the Chapter 11 Cases were consolidated for
procedural purposes only and are being jointly administered by the Bankruptcy
Court. The Company's international subsidiaries were not included in the
filings. The Company will continue to operate in the ordinary course of business
as debtor-in-possession under the jurisdiction of the Bankruptcy Court and has
filed a preliminary plan of reorganization, based on negotiations with an ad hoc
committee of its note holders (the "Ad Hoc Committee") under the Company's
$110.0 million Senior Notes due 2004 (the "Senior Notes").
On the Filing Date, the Company obtained a $35 million debtor-in-possession
financing facility (the "DIP Credit Agreement") from its existing bank group led
by JPMorgan Chase Bank ("Chase"). The DIP Credit Agreement also provides for a
term loan for the purpose of refinancing the pre-petition obligations
outstanding under the Chase Facility (as defined herein), which on the Filing
Date totaled approximately $92.0 million, including approximately $14.6 million
in stand-by letters of credit. On July 12, 2002, the DIP Credit Agreement was
amended to convert the Chase Facility term loan to a revolving credit agreement
(See Note 13). The DIP Credit Agreement is intended to assure that the Company
has the ability to pay for all new supplier shipments received, to invest in
department store boutiques, and substantially upgrade operating systems to
achieve further efficiencies. On February 26, 2002, the Bankruptcy Court entered
a final order approving the DIP Credit Agreement.
The accompanying condensed consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy
Court, its ability to comply with the DIP Credit Agreement, its ability to
generate sufficient cash flows from operations, securing post-emergence
financing and the success of future operations. These conditions create
substantial doubt regarding the ability of the Company to continue as a going
concern. The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of these uncertainties.
6
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Additionally, the amounts reported
on the condensed consolidated balance sheet could materially change because of
changes in business strategies and the effects of any proposed plan of
reorganization. In the Chapter 11 Cases, substantially all unsecured liabilities
as of the Filing Date are subject to compromise or other treatment under a plan
of reorganization which must be confirmed by the Bankruptcy Court after
submission to any required vote by affected parties. For financial reporting
purposes, those liabilities and obligations whose treatment and satisfaction is
dependent on the outcome of the Chapter 11 Cases, have been segregated and
classified as liabilities subject to compromise in the accompanying condensed
consolidated balance sheets. Generally, all actions to enforce or otherwise
effect repayment of pre-Chapter 11 liabilities as well as all pending litigation
against the Debtors are stayed while the Debtors continue their business
operations as debtors-in-possession. The ultimate amount of and settlement terms
for such liabilities are subject to approval of a plan of reorganization and
accordingly are not presently determinable. The principal categories of
obligations classified as liabilities subject to compromise under the Chapter 11
Cases as of June 29, 2002 are identified below:
JUNE 29,
2002
(in thousands)
13.0% Senior Notes due 2004 $110,000
Interest accrued on above Senior Notes 29,096
Accounts payable 3,949
Other accrued expenses 6,446
--------
Total liabilities subject to compromise $149,491
========
For the first half of 2002, the Company recognized $2.5 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 $9.0 million for the first half of 2002 had it not have
been for the Chapter 11 Cases.
A restructuring of the Company's debt, under the preliminary plan of
reorganization, can be expected to result in the cancellation of indebtedness
("COD"), which if it occurs in the course of a proceeding pursuant to Chapter 11
of the United States Bankruptcy Code, would be nontaxable. If the COD is not
taxable, the Company will be required to reduce its net operating loss carry
forwards and other tax attributes such as the tax basis in its assets by an
amount equal to the COD. As a result, and in contemplation of the successful
completion of the proposed plan of reorganization, it is unlikely that the
Company will have any remaining U.S. net operating loss carryovers to offset
future taxable earnings after the reorganization.
NOTE 3. RESTRICTED CASH
Restricted cash at June 29, 2002 of $50.8 million represents funds maintained in
a collateral account. (See Note 13).
NOTE 4. INVENTORIES, NET
Inventories, net of reserves, are valued at lower of cost (first-in, first-out)
or market and consist of the following:
7
JUNE 29, 2002 DECEMBER 29, 2001 JUNE 30, 2001
------------- ----------------- -------------
(in thousands)
Raw materials $8,651 $ 10,090 $39,709
Finished goods 29,702 63,609 56,986
-------- -------- -------
Total inventories $38,353 $73,699 $96,695
======== ======== =======
NOTE 5. INCOME (LOSS) PER SHARE
The computation of basic and diluted income (loss) per common share is based
upon the weighted average number of common shares outstanding during the period.
The gains and losses resulting from changes in exchange rates from year to year
have been reported in other comprehensive income.
8
NOTE 6. DEBT
POST-PETITION FINANCING -
On the Filing Date, the Company obtained a $35 million DIP Credit Agreement from
its existing bank group led by Chase. The DIP Credit Agreement also provides for
a term loan for the purpose of refinancing the pre-petition obligations
outstanding under the Chase Facility. The DIP Credit Agreement is intended to
provide the Company with the ability to pay for all new supplier shipments
received, to invest in department store boutiques and substantially upgrade
operating systems to achieve further efficiencies. On February 26, 2002, the
Bankruptcy Court entered a final order approving the DIP Credit Agreement. The
DIP Credit Agreement expires February 5, 2003.
The DIP Credit Agreement provides for the maintenance of certain covenants and
places a limit on the amount of capital expenditures the Company may incur. It
also provides for a monthly limit on the total outstanding amount of borrowings
under the facility through February 5, 2003 and places a $1.5 million limit on
the issuance of new standby letters of credit. In connection with the agreement,
the Company paid $875,000 in facility, advisory and structuring fees. The DIP
Credit Agreement also provides for an annual administrative agency fee of
$100,000 and an annual collateral monitoring fee of $100,000, both to be paid
quarterly. As of June 29, 2002, the Company was in compliance with the covenants
under the DIP Credit Agreement.
At June 29, 2002, there were no direct borrowings under Tranche A of the DIP
Credit Agreement, representing post-petition borrowings and $78.0 million
outstanding under Tranche B, representing pre-petition borrowings under the
Chase Facility term loan. On July 12, 2002 the DIP Credit Agreement was amended
to convert the Chase Facility term loan to a revolving credit agreement. See
Note 13. Accordingly on July 23, 2002 the $78.0 million outstanding under
Tranche B was paid down. In addition, at June 29, 2002, there was $29.6 million
outstanding in letters of credit under the DIP Credit Agreement, of which $17.1
million was under Tranche A and $12.5 million was under Tranche B. In addition
to unrestricted cash and cash equivalents on hand of $39.3 million, the Company
had approximately $7.9 million available for future borrowings as of June 29,
2002.
NOTE 7. INCOME TAXES
The Company is currently undergoing an examination by the Internal Revenue
Service ("IRS") for the tax years ended 1997, 1998, 1999, and 2000. The IRS has
issued a proposed adjustment, which would result in additional income taxes in
prior years resulting in a reduction in net operating loss carry forwards, which
were $70.0 million at December 29, 2001, and the write-down of certain tax
assets. The Company is vigorously contesting the proposed adjustment and
therefore no provision has been made for such adjustment.
In July 2002, New Jersey restructured the Corporation Business Tax, which will
adversely impact the tax provision of companies who transact business in New
Jersey. The Company will reflect the impact in the third quarter 2002.
NOTE 8. CHANGE IN ESTIMATE
During the second quarter of 2002, the Company determined that, due to improved
sell-through in its wholesale segment, certain allowance reserves amounting to
$9.7 million as of December 29, 2001 were no longer required. As a result of
this change in estimate, the Company reversed this reserve which benefited gross
margin for the second quarter and first half 2002. The Company also determined
that, due to weak sell-through in its dress and certain sportswear businesses,
certain additional allowance reserves amounting to $10.0 million were required
in its wholesale segment as of June 29, 2002 and recorded such reserves to the
detriment of gross margin for the second quarter and first half 2002.
During the second quarter of 2002, the Company determined that, due primarily to
improved margins of its wholesale off-price sales, certain inventory reserves
amounting to $2.0 million as of December 29, 2001 were no longer required. As a
result of this change in estimate, the Company reversed this reserve, which
benefited gross margin for the second quarter and first half 2002.
During the first half of 2002, the Company utilized in its production process
certain raw materials that were aged as of December 29, 2001 that, as part of
the Company's normal valuation process, had been reserved. As a result of the
utilization of the previously reserved raw materials, the Company recognized
this change in estimate as a benefit to gross margin of $1.3 million in the
second quarter of 2002 and $1.7 million in the first half of 2002.
9
NOTE 9. SEGMENT INFORMATION
The Company's primary segment is the design, distribution and wholesale sale of
women's career suits, dresses and sportswear principally to major department
stores and specialty shops. In addition, as of June 29, 2002, the Company
operated 58 Kasper retail stores, 8 Anne Klein retail stores and one Anne Klein
New York full price store, as another distribution channel for its products. The
Company's licensing operations are also considered a segment for reporting
purposes. For the purposes of decision-making and assessing performance,
management includes its international operations in its wholesale segment, as
they are deemed immaterial for segment reporting.
The Company measures segment profit as earnings before interest, taxes,
depreciation, amortization and restructuring ("EBITDAR"). All intercompany
revenues and expenses are eliminated in computing revenues and EBITDAR.
Information on segments and a reconciliation to the consolidated financial
statements is as follows:
THIRTEEN WEEKS ENDED JUNE 29, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $52,714 $15,060 $4,042 $71,816
EBITDAR 6,155 2,032 3,110 11,297
Depreciation and amortization 1,028
Restructuring credit (2,476)
-----------------
Operating income $12,745
=================
THIRTEEN WEEKS ENDED JUNE 30, 2001:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $56,614 $18,900 $3,308 $78,822
EBITDAR (5,750) 621 3,010 (2,119)
Depreciation and amortization 2,971
Restructuring charge 1,136
-----------------
Operating loss $(6,226)
=================
TWENTY-SIX WEEKS ENDED JUNE 29, 2002:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $151,518 $29,872 $7,727 $189,117
EBITDAR 19,179 2,622 6,000 27,801
Depreciation and amortization 2,057
Restructuring credit (1,934)
-----------------
Operating income $27,678
=================
TWENTY-SIX WEEKS ENDED JUNE 30, 2001:
WHOLESALE RETAIL LICENSING CONSOLIDATED
------------------ ----------------- ----------------- -----------------
(in thousands)
Revenues $163,022 $35,174 $6,741 $204,937
EBITDAR 3,197 (391) 6,008 8,814
Depreciation and amortization 5,856
Restructuring charge 2,497
-----------------
Operating income $461
=================
10
NOTE 10. RESTRUCTURING
The Company continues to carry out its restructuring plans established in the
fourth quarter of 2000 with certain modifications. During the fourth quarter of
2001, the Company recorded a charge of $4.9 million for lease cancellation costs
and asset write downs in connection with the decision to exit certain retail
store leases and certain office space in fiscal 2002. During the second quarter
of 2002 the Company reevaluated its decision to exit certain office space and as
a result, recognized a restructuring credit of $2.5 million. The Company
incurred additional restructuring charges of $592,000 in the first half of 2002
relating to professional fees.
Estimated occupancy
costs, severance and
Professional Fees asset write-downs Total
-------------------- ------------------------- -----------------------
(in thousands)
Balance at December 30, 2000 $ --- $ --- $ ---
2001 restructuring charge 4,297 4,904 9,201
2001 payments/write-downs (4,196) (1,802) (5,998)
------------ ------------ ------------
Balance at December 29, 2001 $ 101 $ 3,102 $ 3,203
------------ ------------ ------------
2002 restructuring charge (credit) 592 (2,526) (1,934)
2002 (payments) reversals (693) 1,060 367
------------ ------------ ------------
Balance at June 29, 2002 $ -- $ 1,636 $ 1,636
============ ============ ============
NOTE 11. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 142
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives and requires that these assets be
reviewed for impairment upon adoption with completion of testing within one year
of adoption and at least annually thereafter. The Company, as required, adopted
SFAS No. 142 beginning December 30, 2001. Application of the nonamortization
provisions of SFAS No. 142 will result in a reduction of amortization expense of
approximately $3.3 million in 2002. Such amortization expense totaled $3.3
million in 2001. The Company is testing goodwill, trademarks and intangibles for
impairment using the two-step process prescribed in SFAS No. 142. The first step
is a screen for potential impairment, while the second step measures the amount
of impairment, if any. The Company has completed the first step of the initial
required impairment tests of goodwill, trademarks and intangibles determining
that certain reporting units with aggregate goodwill, trademarks and intangibles
of approximately $153.4 million must undergo the second step of the impairment
testing process which will likely result in an impairment of these intangibles.
The Company expects to complete the second step by December 28, 2002 and the
impairment charge will be reflected as the cumulative effect of a change in
accounting principle. As the Company has not yet completed the testing, it has
not yet determined what the effect of these tests will be on its earnings and
financial position. In addition to the transitional test discussed above, the
Company will be required to complete its annual goodwill impairment test later
in 2002 and there can be no assurance that this will not lead to impairment
charges in excess of any that might be required in connection with the
transitional testing.
NOTE 12. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 144
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" and provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. Adoption of SFAS No. 144 on December 30, 2001 did not
have an impact on the Company's consolidated financial statements.
11
NOTE 13. SUBSEQUENT EVENT
On July 12, 2002, the DIP Credit Agreement was amended to convert the Chase
Facility term loan to a revolving credit agreement. Accordingly, on July 23,
2002, the Company paid down Tranche B of the DIP Credit Agreement representing
the pre-petition borrowings under its Chase Facility term loan of $78.0 million.
NOTE 14. NEW ACCOUNTING PRONOUCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sales-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The Company will adopt the provisions of SFAS No. 145 upon its
effective date and is currently assessing the impact it will have 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. We do not expect the adoption of this
standard to have a material effect on our results of operations.
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
foregoing condensed consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations in the Company's Annual Report on Form 10-K for the year ended
December 29, 2001. This discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties. Actual results and
the timing of certain events may differ significantly from those projected in
such forward-looking statements due to a number of factors, including those set
forth at the end of this Item.
OVERVIEW
On February 5, 2002, the Company and substantially all of its domestic
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code. The Company will continue to operate in the ordinary course
of business as debtor-in-possession under the jurisdiction of the Bankruptcy
Court and has filed a preliminary plan of reorganization, based on negotiations
with the Ad Hoc Committee under the Company's Senior Notes.
The Company's condensed consolidated financial statements are presented in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7), and have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern, which principles, except as otherwise disclosed, assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating under the jurisdiction of
Chapter 11 of the Bankruptcy Code and the Bankruptcy Court, and continuation of
the Company as a going concern is contingent upon, among other things, its
ability to formulate a plan of reorganization which will gain approval of the
requisite parties under the Bankruptcy Code and confirmation by the Bankruptcy
Court, its ability to comply with the DIP Credit Agreement, its ability to
generate sufficient cash flows from operations and obtain post-emergence
financing. These conditions create substantial doubt regarding the ability of
the Company to continue as a going concern. The Company's condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Additionally, the amounts reported
on the condensed consolidated balance sheet could materially change because of
changes in business strategies and the effects of any proposed plan of
reorganization. In the Chapter 11 Cases, substantially all unsecured liabilities
as of the Filing Date are subject to compromise or other treatment under a plan
of reorganization which must be confirmed by the Bankruptcy Court after
submission to any required vote by affected parties. For financial reporting
purposes, those liabilities and obligations whose treatment and satisfaction is
dependent on the outcome of the Chapter 11 Cases have been segregated and
classified as liabilities subject to compromise in the Company's condensed
consolidated balance sheets. Generally, all actions to enforce or otherwise
effect repayment of pre-Chapter 11 liabilities as well as all pending litigation
against the Debtors are stayed while the Debtors continue their business
operations as debtors-in-possession. The ultimate amount of and settlement terms
for such liabilities are subject to approval of a plan of reorganization and
accordingly are not presently determinable. Pursuant to SOP 90-7, professional
fees associated with the Chapter 11 Cases are expensed as incurred and reported
as reorganization charges.
A restructuring of the Company's debt, under the preliminary plan of
reorganization, can be expected to result in the cancellation of indebtedness
("COD"), which if it occurs in the course of a proceeding pursuant to Chapter 11
of the United States Bankruptcy Code, would be nontaxable. If the COD is not
taxable, the Company will be required to reduce its net operating loss carry
forwards and other tax attributes such as the tax basis in its assets by an
amount equal to the COD. As a result, and in contemplation of the successful
completion of the proposed plan of reorganization, it is unlikely that the
Company will have any remaining U.S. net operating loss carryovers to offset
future taxable earnings after the reorganization.
The Company has recorded reorganization value in excess of identifiable assets
(goodwill), net of $50.2 million and trademarks, net of $103.2 million. The
Company adopted SFAS No. 142 beginning December 30, 2001. As described in Note
11 to Notes to Condensed Consolidated Financial Statements, the Company has
determined that the impairment testing process will likely result in an
impairment of these intangibles. The likely impairment charge will be reflected
13
as the cumulative effect of a change in accounting principle. The Company also
expects to emerge from Chapter 11 Bankruptcy protection at which time it will
apply "fresh start" accounting. Under fresh start accounting rules, assets and
liabilities, including reorganization value and goodwill, will be recorded at
fair market value. Accordingly, there can be no assurance that this will not
lead to additional adjustments to the Company's recorded intangible assets.
RESULTS OF OPERATIONS
REVENUES BY SEGMENT
(000'S EXCEPT PERCENTAGES)
SECOND QUARTER FIRST HALF
------------------------------------------------------ -------------------------------------------------------
% % % %
2002 OF TOTAL 2001 OF TOTAL 2002 OF TOTAL 2001 OF TOTAL
-------------- --------------- --------------- --------------
Wholesale $ 52,714 73.4% $ 56,614 71.8% $ 151,518 80.1% $163,022 79.5%
Retail 15,060 21.0% 18,900 24.0% 29,872 15.8% 35,174 17.2%
-------------- ------ --------------- ------ --------------- ------ -------------- ------
Net Sales 67,774 94.4% 75,514 95.8% 181,390 95.9% 198,196 96.7%
Licensing 4,042 5.6% 3,308 4.2% 7,727 4.1% 6,741 3.3%
-------------- ------ --------------- ------ --------------- ------ -------------- ------
Total Revenue $ 71,816 100.0% $ 78,822 100.0% $ 189,117 100.0% $204,937 100.0%
============== ====== =============== ====== =============== ====== ============== ======
EBITDAR BY SEGMENT
(000'S EXCEPT PERCENTAGES)
SECOND QUARTER FIRST HALF
------------------------------------------------------- -------------------------------------------------------
% % % %
2002 OF TOTAL 2001 OF TOTAL 2002 OF TOTAL 2001 OF TOTAL
-------------- --------------- --------------- --------------
Wholesale $ 6,155 54.5% $ (5,750) (271.3)% $ 19,179 69.0% $ 3,197 36.2%
Retail 2,032 18.0% 621 29.3% 2,622 9.4% (391) (4.4)%
Licensing 3,110 27.5% 3,010 142.0% 6,000 21.6% 6,008 68.2%
-------------- ------ --------------- ------ --------------- ------ -------------- ------
Total $ 11,297 100.0% $ (2,119) 100.0% $ 27,801 100.0% $ 8,814 100.0%
============== ====== =============== ====== =============== ====== ============== ======
THIRTEEN WEEKS ENDED JUNE 29, 2002 AS COMPARED TO THIRTEEN WEEKS ENDED JUNE 30,
2001
TOTAL REVENUE
Net Sales for the thirteen weeks ended June 29, 2002 (the "second quarter 2002")
were $67.8 million as compared to $75.5 for the thirteen weeks ended June 30,
2001 (the "second quarter 2001"). Wholesale sales decreased primarily due to
planned reductions in certain of the business lines.
Retail sales decreased to $15.1 million in the second quarter 2002 from $18.9
million in the second quarter 2001, primarily due to the closing of 27 retail
stores over the last 12 months as part of the Company's restructuring plans.
Comparable store sales decreased 4.3% in the second quarter 2002 compared to the
second quarter 2002 as a result of continued weakness in the retail environment.
Royalty revenue increased to $4.0 million in the second quarter 2002 from $3.3
million in the second quarter 2001 as a result of higher royalty percentage
rates and higher licensee sales volume.
GROSS PROFIT
Gross Profit as a percentage of total revenue increased to 48.9% for the second
quarter 2002, compared to 28.7% for the second quarter 2001. Wholesale gross
profit as a percentage of sales increased to 43.9% in the second quarter 2002
from 20.4% in the second quarter 2001, the result of a decrease in off-price
sales and better margins resulting from off-price sales, a reduction in
allowances as a percentage of net sales, the classification of sample expenses
in selling, general and administrative expenses in 2002 as opposed to cost of
sales in 2001, and cost savings from sourcing and internal production process
improvements which favorably impacted cost of goods sold. During the second
quarter of 2002, the Company determined that, due to improved sell-through in
its wholesale segment, certain allowance reserves amounting to $9.7 million as
of December 29, 2001 were no longer required. As a result of this change in
estimate, the Company reversed this reserve, which benefited gross margin for
14
the second quarter 2002. The Company also determined that, due to weak
sell-through in its dress and certain sportswear businesses, certain additional
allowance reserves amounting to $10.0 million were required in its wholesale
segment as of June 29, 2002 and recorded such reserves to the detriment of gross
margin for the second quarter 2002.
During the second quarter of 2002, the Company determined that, due primarily to
improved margins of its wholesale off-price sales, certain inventory reserves
amounting to $2.0 million as of December 29, 2001 were no longer required. As a
result of this change in estimate, the Company reversed this reserve, which
benefited gross margin for the second quarter 2002.
In addition, the Company utilized in its production process certain raw
materials that were aged as of December 29, 2001 that, as part of the Company's
normal valuation process, had been reserved. As a result of the utilization of
the previously reserved raw materials, the Company recognized this change in
estimate as a benefit to gross margin of $1.3 million in the second quarter of
2002.
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid off employees as a result of its 2001 reductions in force. As a result, the
Company realized a benefit relating to cost of sales of approximately $450,000
in the second quarter 2002.
Retail gross profit as a percentage of sales increased to 52.8% in the second
quarter 2002 from 41.0% in the second quarter 2001 due to the closing of under
performing stores, the reduction in the price which the Company's wholesale
division transfers goods to its retail division, along with the cost savings
passed on from wholesale as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $23.8 million in the
second quarter 2002 as compared to $24.7 million in the second quarter 2001. The
closing of the 27 retail stores resulted in a decrease of $1.2 million in
selling, general and administrative expenses partially offset by an increase in
combined wholesale and licensing expenses and the classification of sample
expenses in selling, general and administrative expenses in 2002 as opposed to
cost of sales in 2001. Additionally, the Company obtained a favorable decision
with respect to a severance dispute with certain union employees in which the
arbitrator ruled that the Company is not obligated to pay severance to any of
the permanently laid off employees as a result of its 2001 reductions in force.
As a result, The Company realized a benefit relating to selling, general and
administrative expenses of approximately $150,000 in the second quarter 2002.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, RESTRUCTURING AND
REORGANIZATION
Earnings before interest, taxes, depreciation, amortization, restructuring and
reorganization, ("EBITDAR") increased to $11.3 million in the second quarter
2002 from a loss of $2.1 million in the second quarter 2001. Wholesale EBITDAR
increased approximately $11.9 million over the second quarter 2001 primarily as
a result of the increase in gross profit. Retail experienced an increase in
EBITDAR of approximately $1.4 million as a result of the closing of under
performing stores and the cost savings mentioned above. Licensing EBITDAR
increased slightly primarily due to the increase in licensing revenue.
RESTRUCTURING CHARGES
The Company recorded a $2.5 million restructuring credit in the second quarter
2002 and a $1.1 million charge in the second quarter 2001. During the fourth
quarter of 2001, the Company recorded a charge of $4.9 million for lease
cancellation costs and asset write-downs in connection with the decision to exit
certain retail store leases and certain office space in fiscal 2002. During the
second quarter 2002, the Company reevaluated its decision to exit certain office
space and as a result, recognized a restructuring credit of $2.5 million. This
credit was partially offset by approximately $50,000 in restructuring charges
related primarily to professional fees. The second quarter 2001 charges
consisted primarily of professional fees.
AMORTIZATION OF REORGANIZATION ASSET
As a result of the Company's 1997 spin-off under Leslie Fay's reorganization
plan, the portion of the Company's reorganization value not attributable to
specific identifiable assets has been reported as "reorganization value in
excess of identifiable assets" (the "Reorganization Asset"). In accordance with
Statement of Financial Standards "SFAS" No.142, "Goodwill and Other Intangible
Assets" ("SFAS 142") the Company ceased recording amortization relating to this
asset effective December 30, 2001. Accordingly, the Company incurred no
15
amortization charges for the second quarter 2002 and approximately $815,000 in
the second quarter 2001. The Company is currently evaluating this asset and has
determined that it is likely that impairment has occurred. See Note 11 of Notes
to Condensed Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization
Asset, totaled $1.0 million in the second quarter 2002 and $2.2 million in the
second quarter 2001. In accordance with SFAS 142, the Company ceased recording
amortization on its trademarks effective December 30, 2001. Trademark
amortization in the second quarter 2001 was approximately $817,000. The
remaining expense relates to the depreciation and amortization of fixed assets.
The decrease in depreciation, aside from trademark amortization, relates to the
closing of the retail stores and the related asset write-downs that occurred in
the fourth quarter 2001.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $1.6 million in the second quarter
2002 from $7.3 million in the second quarter 2001. Interest expense is comprised
of the interest expense on the Senior Notes prior to February 5, 2002, along
with interest on the Chase Facility and DIP Credit Agreement, factoring fees and
changes in fair value of the Company's interest rate swap.
As a result of the Chapter 11 Cases, interest on the Senior Notes stopped
accruing as of February 5, 2002. Accordingly, the Company did not incur interest
in the second quarter 2002 compared to $4.1 million for the second quarter 2001.
Included in interest expense for the second quarter 2001 was $530,000 in unpaid
default interest on the Senior Notes. Default interest began to accrue at a rate
equal to 14.75% per annum on the unpaid interest on the Senior Notes on
September 30, 2000 because the Company did not make the semi-annual interest
payment, which became due on such date. As a result of the Chapter 11 Cases, the
Company determined that the capitalized bondholder consent fee was impaired and
wrote-off the remaining $1.1 million at the end of fiscal 2001. Accordingly, the
Company incurred no amortization in the second quarter 2002 versus $115,000 in
the second quarter 2001.
Interest under the Chase Facility and DIP Credit Agreement totaled approximately
$1.6 million in the second quarter 2002, a decrease of $270,000 from the second
quarter 2001 as a result of the decrease in borrowings. The related bank fees
were determined to have been impaired as a result of the Chapter 11 Cases and
were written off at the end of fiscal 2001. Accordingly, no amortization expense
was recorded during the second quarter 2002 versus approximately $260,000 in the
second quarter 2001.
Factoring fees were approximately $220,000 in the second quarter 2002 and
$410,000 in the second quarter 2001. Partially offsetting the decrease in the
interest expense in the second quarter 2002 was the increase in market valuation
of the Company's interest rate swap of approximately $260,000. The change in the
fair value of the interest rate swap increased interest by $520,000 during the
second quarter 2001. As of June 29, 2002, the interest rate swap expired.
REORGANIZATION CHARGES
The Company recorded $841,000 in reorganization charges in the second quarter of
2002. These charges related primarily to professional fees and bank fees
associated with the Company's reorganization as a result of the Chapter 11
Cases.
INCOME TAXES
Provision for income taxes was $4.3 million for the second quarter 2002 compared
to $372,000 for the second quarter 2001. These amounts differ from the amount
computed by applying the federal income tax statutory rate of 34% to income
before taxes primarily because of state and foreign taxes.
The Company is currently undergoing an examination by the Internal Revenue
Service ("IRS") for the tax years ended 1997, 1998, 1999, and 2000. The IRS has
issued a proposed adjustment, which would result in additional income taxes in
prior years resulting in a reduction in net operating loss carry forwards and
the write down of certain tax assets. The Company is vigorously contesting the
proposed adjustment and therefore no provision has been made for such
adjustment.
In July 2002, New Jersey restructured the Corporation Business Tax, which will
adversely impact the tax provision of companies who transact business in New
Jersey. The Company is in the process of evaluating the impact of this change on
its effective tax rate.
16
TWENTY-SIX WEEKS ENDED JUNE 29, 2002 AS COMPARED TO TWENTY-SIX WEEKS ENDED JUNE
30, 2001
TOTAL REVENUE
Net sales for the twenty-six weeks ended June 29, 2002 (the "first half 2002")
were $181.4 million as compared to $198.2 for the twenty-six weeks ended June
30, 2001 (the "first half 2001"). Wholesale sales decreased primarily due to
planned reductions in certain of the business lines.
Retail sales decreased to $29.9 million in the first half 2002 from $35.2
million in the first half 2001, primarily due to the closing of 27 retail outlet
stores over the last 12 months as part of the Company's restructuring plans.
Comparable store sales decreased 3.3% in the first half 2002 compared to the
first half 2001 as a result of continued weakness in the current retail
environment.
Royalty revenue increased to approximately $7.7 million in the first half 2002
from $6.7 million in the first half 2001 as a result of higher royalty
percentage rates and higher licensee sales volume.
GROSS PROFIT
Gross profit as a percentage of total revenue increased to 40.0% for the first
half 2002, compared to 29.0% for the first half 2001. Wholesale gross profit, as
a percentage of sales, increased to 34.9% in the first half 2002 from 24.0% in
the first half 2001, the result of cost savings from sourcing and internal
production process improvements which favorably impact cost of goods sold, an
overall reduction in allowances as a percentage of net sales, and the
classification of sample expenses in selling, general and administrative
expenses in 2002 as opposed to cost of sales in 2001. During the second quarter
of 2002, the Company determined that, due to improved sell-through in its
wholesale segment, certain allowance reserves amounting to $9.7 million as of
December 29, 2001 were no longer required. As a result of this change in
estimate, the Company reversed this reserve which benefited gross margin for the
first half 2002. The Company also determined that, due to weak sell-through in
its dress and certain sportswear businesses, certain additional allowance
reserves amounting to $10.0 million were required in its wholesale segment as of
June 29, 2002 and recorded such reserves to the detriment of gross margin for
the first half 2002.
During the second quarter of 2002, the Company determined that, due primarily to
improved margins of its wholesale off-price sales, certain inventory reserves
amounting to $2.0 million as of December 29, 1001 were no longer required. As a
result of this change in estimate, the Company reversed this reserve, which
benefited gross margin for the first half 2002.
During the first half of 2002, the Company utilized in its production process
certain raw materials that were aged as of December 29, 2001 that, as part of
the Company's normal valuation process, had been reserved. As a result of the
utilization of the previously reserved raw materials, the Company recognized
this change in estimate as a benefit to gross margin of $1.7 million in the
first half of 2002.
Additionally, the Company obtained a favorable decision with respect to a
severance dispute with certain union employees in which the arbitrator ruled
that the Company is not obligated to pay severance to any of the permanently
laid off employees as a result of its 2001 reductions in force. As a result, the
Company realized a benefit relating to cost of sales of approximately $450,000
in the first half 2002.
Retail gross profit as a percentage of sales increased to 50.0% in the first
half 2002 from 38.6% in the first half 2001, due the closing of under performing
stores, the reduction in the price which the Company's wholesale division
transfers goods to its retail division, and the cost savings passed on from
wholesale, as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $47.8 million in the
first half 2002 as compared to $50.6 million in the first half 2001, a decrease
of $2.8 million. Combined wholesale and licensing selling, general and
administrative expenses decreased approximately $1.1 million from the first half
2001, primarily as a result of the Company's restructuring efforts and partially
offset by the classification of sample expenses in selling, general and
administrative expenses in 2002 as opposed to cost of sales in 2001. The closing
of the 27 retail stores resulted in a decrease of an additional $1.7 million in
selling, general and administrative expenses. Additionally, the Company obtained
a favorable decision with respect to a severance dispute with certain union
employees in which the arbitrator ruled that the Company is not obligated to pay
severance to any of the permanently laid off employees as a result of its 2001
reductions in force. As a result, The Company realized a benefit relating to
selling, general and administrative expenses of approximately $150,000 in the
first half 2002.
17
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, RESTRUCTURING AND
REORGANIZATION
EBITDAR increased to $27.8 million in the first half 2002 from $8.8 million in
the first half 2001. Wholesale EBITDAR increased $16.0 million over the first
half 2001 primarily as a result of the increase in gross profit and decrease in
expenses. Retail experienced a $3.0 million increase in EBITDAR as a result of
the closing of the under performing stores and the cost savings mentioned above.
Licensing EBITDAR remained relatively constant from the prior year due to an
increase in expenses, which substantially offset the increase in licensing
revenue.
RESTRUCTURING CHARGES
The Company recorded a $1.9 million restructuring credit in the first half 2002
and a $2.5 million charge in the first half 2001. During the fourth quarter of
2001, the Company recorded a charge of $4.9 million for lease cancellation costs
and asset write-downs in connection with the decision to exit certain retail
store leases and certain office space in fiscal 2002. During the second quarter
2002, the Company reevaluated its decision to exit certain office space and as a
result, recognized a restructuring credit of $2.5 million. This credit was
partially offset by approximately $592,000 in restructuring charges related
primarily to professional fees. The first half 2001 charges consisted primarily
of professional fees.
AMORTIZATION OF REORGANIZATION ASSET
As a result of the Company's implementation of SFAS 142, the Company incurred no
amortization charges for the first half 2002 compared to approximately $1.6
million in the first half 2001. The Company is currently evaluating this asset
and has determined that it is likely that impairment has occurred. See Note 11
of Notes to Condensed Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization, excluding the amortization of the Reorganization
Asset, totaled $1.8 million in the first half 2002 and $3.8 million in the first
half 2001. In accordance with SFAS 142, the Company ceased recording
amortization on its trademarks effective December 30, 2001. Trademark
amortization in the second half 2001 was approximately $1.6 million. The
remaining expense relates to the depreciation and amortization of fixed assets.
The decrease in depreciation, aside from trademark amortization, relates to the
closing of the retail stores and the related asset write-downs. See Note 11 of
Notes to Condensed Consolidated Financial Statements.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased to $5.1 million in the first half 2002
from $14.3 million in the first half 2001, a decrease of approximately $9.2
million. Interest expense is comprised of the interest expense on the Senior
Notes prior to February 5, 2002, along with interest on the Chase Facility and
DIP Credit Agreement, factoring fees and changes in fair value of the Company's
interest rate swap.
As a result of the Chapter 11 Cases, interest on the Senior Notes stopped
accruing as of February 5, 2002. Accordingly, the Company incurred interest of
$1.7 million for the first half 2002 compared to $7.9 million for the first half
2001. Included in interest expense for the first half 2002 was $300,000 in
unpaid default interest on the Senior Notes and $790,000 in the first half 2001.
As a result of the capitalized bondholder consent fee was write-off at the end
of fiscal 2001, the Company incurred no amortization in the first half 2002
versus $230,000 in the first half 2001.
Interest under the Chase Facility totaled approximately $3.1 million in the
first half 2002, and $4.4 million in the first half 2001, a decrease of $1.3
million as a result of the decrease in borrowings. As a result of the write-down
of the related bank fees at the end of fiscal 2001, no amortization expense was
recorded during the first half 2002 versus approximately $495,000 in the first
half 2001.
Factoring fees were approximately $627,000 in the first half 2002 and $807,000
in the first half 2001. Somewhat offsetting the decrease in the interest expense
in the first half 2002 was the increase in market valuation of the Company's
interest rate swap of approximately $508,000. The interest rate swap added
approximately $520,000 in interest during the first half 2001. As of June 29,
2002, the interest rate swap expired.
18
REORGANIZATION CHARGES
The Company recorded $2.5 million in reorganization charges in the first half of
2002. These charges related primarily to professional fees and bank fees
associated with the Company's reorganization as a result of the Chapter 11
Cases.
INCOME TAXES
Provision for income taxes was $8.4 million for the first half 2002 compared to
$722,000 for the first half 2001. These amounts differ from the amount computed
by applying the federal income tax statutory rate of 34% to income before taxes
because of state and foreign taxes.
The Company is currently undergoing an examination by the IRS for the tax years
ended 1997, 1998, 1999, and 2000. The IRS has issued a proposed adjustment,
which would result in additional income taxes in prior years resulting in a
reduction in net operating loss carry forwards and the write-down of certain tax
assets. The Company is vigorously contesting the proposed adjustment and
therefore no provision has been made for such adjustment
In July 2002, New Jersey restructured the Corporation Business Tax, which will
adversely impact the tax provision of companies who transact business in New
Jersey. The Company is in the process of evaluating the impact of this change on
its effective tax rate.
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 $68.4 million during the first
half 2002 compared to $7.4 million during the first half 2001. The improvement
in cash flows from operating activities is partly the result of a $20.0 million
prepayment of royalties received during the first quarter 2002 from one of the
Company's licensees. The royalty prepayment is non-refundable and is to be
applied to guaranteed minimum royalty payments and excess royalties due through
the term of the contract. In addition, the improvement in the Company's cash
flow is the result of lower inventory levels and the income generated during the
quarter. The improvement is also the result of pre-petition liabilities, which,
as a result of the Chapter 11 Cases, are generally not settled until a plan of
reorganization has been approved. The increase in cash used in investing
activities resulted from greater capital expenditures in the first half 2002
compared to the first half of 2001 relating to the opening of the Company's
first full price Anne Klein New York store in New York City in February 2002,
department store boutiques and on-going systems implementation. Cash flows from
financing activities increased from prior year due to additional borrowings
prior to the Filing Date when the outstanding balance was converted to a term
loan. On July 23, 2002, the Company amended its DIP Credit Agreement and paid
down Tranche B of the DIP Credit Agreement representing the pre-petition
borrowings under its Chase Facility term loan of $78.0 million. (See Note 11 of
Notes to Condensed Consolidated Financial Statements).
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").
Additionally, on the Filing Date, the Company obtained a $35 million DIP Credit
Agreement from its existing bank group led by Chase. The DIP Credit Agreement
also provides for a term loan for the purpose of refinancing the pre-petition
obligations outstanding under the Chase Facility. The DIP Credit Agreement is
intended to provide the Company with the ability to pay for all new supplier
shipments received, to invest in retail operations, and substantially upgrade
operating systems to achieve further efficiencies. On February 26, 2002, the
Bankruptcy Court entered a final order approving the DIP Credit Agreement. The
DIP Credit Agreement expires February 5, 2003.
The DIP Credit Agreement provides for the maintenance of certain covenants and
places a limit on the amount of capital expenditures. It also provides for a
monthly limit on the total outstanding amount of borrowings under the facility
through 2002 and places a $1.5 million limit on the issuance of new standby
letters of credit. In connection with the agreements the Company paid $875,000
in facility, advisory and structuring fees. The DIP Credit Agreement also
provides for an annual administrative agency fee of $100,000 and an annual
collateral monitoring fee of $100,000, both to be paid quarterly.
19
At June 29, 2002, there were no direct borrowings under Tranche A of the DIP
Credit Agreement, representing post-petition borrowings and $78.0 million under
Tranche B, representing pre-petition borrowings under the Chase Facility term
loan. In addition, there was $29.6 million outstanding in letters of credit
under the DIP Credit Agreement, of which $17.1 million was under Tranche A and
$12.5 million was under Tranche B. In addition to $39.3 million of unrestricted
cash and cash equivalents on hand, the Company had approximately $7.9 million
available for future borrowings as of June 29, 2002. Restricted cash at June 29,
2002 of $50.8 million represents funds maintained in a collateral account. The
DIP Agreement was amended to convert the Chase Facility term loan to a revolving
credit agreement. (See Note 11 to Notes to Condensed Consolidated Financial
Statements). Accordingly, on July 23, 2002, the Company paid down Tranche B of
the DIP Credit Agreement representing the pre-petition borrowings under its
Chase Facility term loan of $78.0 million.
Pursuant to the Leslie Fay reorganization plan, the Company issued $110 million
in Senior Notes. The Senior Notes initially bore interest at 12.75% per annum
and mature on March 31, 2004. Beginning January 1, 2000, the interest rate
increased to 13.75%. The Company stopped accruing interest on the Senior Notes
on the Filing Date. Interest was payable semi-annually on March 31 and September
30. Interest relating the Senior Notes totaled $1.9 million for the first half
2002 and $7.9 million for the first half 2001. At June 29, 2002, the Senior
Notes have been classified as liabilities subject to compromise.
On October 4, 1999, the Company entered into a factoring agreement with the CIT
Group/Commercial Services, Inc. ("CIT"). CIT collects the Company's receivables
and in turn remits the funds to the Company. Any amounts unpaid after 90 days on
approved sales are guaranteed to be paid to the Company by CIT. The agreement
has no expiry date but may be terminated upon 90 days written notice by the
Company and upon 60 days written notice by CIT. On November 10, 2000, the
factoring agreement was amended to change the fee structure from a flat rate
monthly fee to a floating rate monthly fee based on a percentage of the amount
of each account factored. For its services, CIT charges the Company 0.30% of the
gross face amount of each account factored and an additional 0.25% of the gross
face amount of each account whose terms exceed 60 days. In addition, for each
six-month period beginning December 1, 2000, there is a minimum factoring fee of
$675,000. On February 5, 2002, the Company entered into an amended agreement
with CIT. The terms of the amended agreement remained substantially the same
with the exception of the reduction of the six-month minimum factoring fee to
$500,000 and the requirement of a 90-day termination notice by CIT, except upon
the occurrence of default by the Company, including a default under the DIP
Credit Agreement or failure to pay any obligation under the CIT agreement, for
which no notice is needed.
Capital expenditures were $3.6 million and $693,000 for the first half 2002 and
first half 2001, respectively. Capital expenditures represent funds spent for
information systems, new retail stores, including the new Anne Klein New York
full price store opened in February 2002, department store boutiques, warehouse
improvements, showroom improvements, overseas facilities development and general
improvements.
The Company is currently implementing a fully integrated management information
system, which the Company believes will enhance its ability to conduct business
and reduce the risk of system failure. Any unforeseen difficulty or significant
delay in the implementation or operation of existing or new systems, the
integration of management and other personnel or the training of personnel,
could adversely affect the Company's business, financial condition and operating
results.
The Company currently anticipates that it will be in a position to satisfy its
ongoing cash requirements, in the near term, through cash from operations,
borrowings under the DIP Credit Agreement and, from time to time, amounts
received in connection with strategic transactions, including, among other
things, licensing arrangements. Events that may impact the Company's ability to
meet its ongoing cash requirements in the near term include, but are not limited
to, failure to have its plan of reorganization approved by the Bankruptcy Court,
future events that may have the effect of reducing available cash balances (such
as unexpected operating losses, or increased capital or other expenditures), and
future circumstances that might reduce or eliminate the availability of external
financing. In addition, the ongoing promotional environment of department stores
has impacted the industry. If the current trend persists, the Company's
financial results could continue to be negatively impacted.
20
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended. Those statements appear in a number of places in this
report, including in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," and include all discussions of trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies as well as statements that contain such
forward-looking statements as "believes," "anticipates," "could," "estimates,"
"expects," "intends," "may," "plans," "predicts," "projects," "will," and
similar terms and phrases, including the negative thereof. In addition, from
time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Furthermore, forward-looking
statements may be included in our other filings with the Securities and Exchange
Commission as well as in press releases or oral statements made by or with the
approval of the Company's authorized executive officers.
We caution you to bear in mind that forward-looking statements, by their very
nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this report are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations include but are not limited
to, the following cautionary statements ("Cautionary Statements"):
o the success of the Company's overall business strategy, including
successful implementation of the Company's restructuring plan and
successful implementation of the Company's plan of reorganization;
o the impact that public disclosure of the Company's Chapter 11 filing
may have on the Company's relationships with its principal customers
and suppliers;
o the risk that the bankruptcy court overseeing the Company's Chapter 11
proceedings may not confirm any reorganization plan proposed by the
Company;
o actions that may be taken by creditors and other parties-in-interest
that may have the effect of preventing or delaying confirmation of a
plan of reorganization in connection with the Company's Chapter 11
proceedings;
o the risk that the cash generated by the Company from operations and the
cash received by the Company under its DIP Credit Agreement (defined
elsewhere herein) will not be sufficient to fund the operations of the
Company until such time as the Company's plan of reorganization is
approved by the bankruptcy court;
o the ability of the Company to achieve its covenants under the DIP
Credit Agreement;
o unforeseen complications resulting from the Company's implementation of
upgrades to its management information systems.
o the ability of the Company to adapt to changing consumer preferences
and tastes;
o global economic conditions and the implications thereon after the
terrorist attacks on September 11, 2001;
o potential fluctuations in the Company's operating costs and results;
o potential exchange rate fluctuations;
o the Company's concentration of revenues in department stores located in
the United States and;
o the Company's dependence on a limited number of suppliers.
All subsequent written or oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 First Amendment, dated as of July 12, 2002 (the "First
Amendment"), to the Revolving Credit and Guaranty Agreement
(the "Credit Agreement"), dated as of February 5, 2002, among
Kasper A.S.L., Ltd., a Delaware corporation (the "Borrower"),
a debtor and debtor-in-possession in a case pending under
Chapter 11 of the Bankruptcy Code, and certain of the direct
or indirect subsidiaries of the Borrower signatory hereto
(each a "Guarantor", collectively the "Guarantors" and,
together with the Borrower, the "Debtors"), each of which
Borrower Guarantor is a debtor and debtor-in-possession in a
case pending under Chapter 11 of the Bankruptcy Code (the
cases of the Borrower and the Borrowers Guarantors, each a
"Case" and collectively, the "Cases"), JPMorgan Chase Bank, a
New York banking corporation (the "Agent"), each of the other
financial institutions from time to time party hereto
(together with the Agent, the "Banks").
(b) Reports on Form 8-K:
On May 2, 2002 the Company filed a current report on Form 8-K to
disclose that the Company had dismissed its independent auditors,
Arthur Andersen LLP and engaged the services of Ernst & Young LLP as
its new independent auditors.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KASPER A.S.L., LTD.
(Registrant)
Dated: August 19, 2002
/s/ John D. Idol
---------------------------------------------------
John D. Idol
Chairman and Chief Executive Officer
/s/ Joseph B. Parsons
---------------------------------------------------
Joseph B. Parsons
Executive Vice President - Chief Financial Officer
23
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 First Amendment to Revolving Credit and Guaranty
Agreement, dated July 12, 2002.
24