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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
COMMISSION FILE NO. 0-24179
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KASPER A.S.L., LTD.
DELAWARE 22-3497645
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
77 METRO WAY 07094
SECAUCUS, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 864-0328
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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 / /
There were 6,800,000 shares of Common Stock outstanding at March 26, 1999.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant at March 26, 1999 was approximately $14,667,500. Such aggregate
market value is computed by reference to the last sales price of the Common
Stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL
Kasper A.S.L., Ltd., (the "Company") is one of the largest marketers and
manufacturers of women's suits in the United States. The Company designs,
contracts for the manufacture of, markets and distributes women's suits,
dresses, knitwear and sportswear. From its established position in the "upper
moderate" suit market, under its Kasper ASL-Registered Trademark- brand name,
the Company has diversified into the lower price point "moderate" suit market
under its Le Suit-TM- brand name and to a lesser extent, the higher price point
"bridge" and designer women's suit markets under its Albert
Nipon-Registered Trademark- and Nipon-Registered Trademark- brand names. During
1998, the Company marketed and distributed its products under eight different
brands: (i) Kasper ASL-Registered Trademark- suit, the leading brand name in
"upper moderate" women's suits; (ii) Le Suit-TM-, a line of suits introduced to
create a less expensive alternative to Kasper ASL-Registered Trademark- suits;
(iii) Albert Nipon Suits-Registered Trademark-, a line of suits designed and
marketed to compete in the bridge area of the market; (iv) Albert Nipon
Evening-TM-, a line of beaded and sequined evening suits; (v) Kasper
ASL-Registered Trademark- dresses, a line of "better" career dresses; (vi)
Kasper and Company-Registered Trademark- ASL Sportswear, a line of sportswear
under the Kasper brand name priced between the moderate and better markets;
(vii) Nina Charles-TM-, a better priced knitwear line comprised of two distinct
product classifications; better knit dresses and better knit
sportswear/separates; and (viii) b. bennett-TM-, a line of suits catering to the
younger woman seeking an updated look. In analyzing the performance of the
knitwear division and its capital and operational requirements, the Company
decided to discontinue the Nina Charles-TM- label at wholesale in the United
States for the Fall 1998 season. The Company will continue to market the label
in its retail stores and in Canada and Europe.
The Company also designs and manufactures suits for sale under private
labels for various department stores. Management believes the Company's primary
strengths are the quality, styling, value and brand name recognition of its
products. The Company's products are sold to approximately 1,400 retail accounts
having approximately 2,000 retail locations throughout the United States and
through the Company's chain of 58 retail outlet stores.
Financial information with regard to the Company's wholesale and retail
segments, including revenue, earnings before interest, taxes, depreciation and
amortization, and segment assets, appears in Note 10 to the Company's
consolidated/combined financial statements.
The Company operates five wholly-owned subsidiaries, ASL/K Licensing Corp.,
ASL Retail Outlets, Inc., Kasper A.S.L. Europe Ltd., Kasper Holdings Inc. and
Asia Expert, Ltd. ("AEL"). Kasper Holdings Inc. owns 100% of Kasper Canada ULC
which is a 70% owner of Kasper Partnership, a Canadian partnership through which
the Company conducts sales and distribution activity in Canada.
AEL, a Hong Kong corporation, is the owner of Viewmon Ltd. and Tomwell Ltd.,
each Hong Kong corporations. Generally, AEL acts as a buying agent for the
Company for which it receives an arm's-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. Viewmon Ltd. provides
services regarding the acquisition of quota, while Tomwell Ltd. operates the
Company's China factory, which began production in May 1998, and also provides
beading services for Nipon-Registered Trademark- and Kasper
ASL-Registered Trademark- garments. These subsidiaries receive arm's-length fees
for their services.
Kasper A.S.L. Europe, Ltd. operates a sales office in London, England, where
it sells the Company's products to retailers and distributors throughout the
European continent. ASL Retail Outlets, Inc. operates the chain of 58 retail
outlet stores that sell the Company's products directly to consumers. These
stores purchase the merchandise directly from the Company at an arm's-length
price. ASL/K Licensing Corp. was established to coordinate the licensing of the
Kasper-Registered Trademark- trade name that was acquired on June 4, 1997. In
connection with the separation from The Leslie Fay Companies, Inc. ("Leslie
Fay"), Leslie Fay
2
ITEM 1. BUSINESS (CONTINUED)
transferred all rights and title to the Nipon trademarks to the Company. At the
time of the transfer, there were several licensing agreements in effect,
including men's sportswear, dress slacks, ties, ladies coats, etc. In 1998, the
Company entered into new licensing agreements for the manufacture and
distribution of women's blouses, coats and outerwear under the
Kasper-Registered Trademark- name. In 1998, the Company received approximately
$850,000 in licensing income from licensing agreements.
REORGANIZATION OF LESLIE FAY
In 1980, the Company was acquired by Leslie Fay but continued to operate as
a division of Leslie Fay (the "Sassco Fashions Division") with Arthur S. Levine
remaining in charge of the Sassco Fashions Division. In February 1992, Leslie
Fay announced that its 1990, 1991 and 1992 financial statements were incorrect
due to fraudulent accounting entries. As a result of the misstated financial
statements, Leslie Fay defaulted on its unsecured bank and insurance debt. On
February 26, 1993, the bank creditors informed Leslie Fay that no additional
revolving borrowings could be made and that no new letters of credit would be
issued under the bank facilities until the negotiations for a revised credit
facility were completed. The uncertainty surrounding Leslie Fay's financing
quickly spread to trade creditors, most of whom refused to extend further credit
to Leslie Fay. As a result of its inability to obtain credit, Leslie Fay filed
for protection under Chapter 11 of the Bankruptcy Code on April 3, 1993 with the
United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court").
The reorganization of Leslie Fay (the "Reorganization") occurred when the
Fourth Amended and Restated Joint Plan of Reorganization (the "Reorganization
Plan") became effective on June 4, 1997 (the "Effective Date"). The
Reorganization Plan provided for the Company and a reorganized entity named The
Leslie Fay Company, Inc. to emerge from bankruptcy as separate stand-alone U.S.
corporations, each with its own financing sources. Pursuant to the
Reorganization Plan, the former creditors of Leslie Fay received 6,800,000
shares of common stock, $0.01 par value per share, of the Company (the "Common
Stock") and 12.75% Senior Notes (the "Senior Notes") in the principle aggregate
amount of $110 million. The Company also issued (i) options to certain members
of management (the "Management Options") to purchase 1,753,459 shares of Common
Stock, which upon issuance represented approximately 20.5% of the Company's
outstanding Common Stock; and (ii) options to purchase 100,000 shares of Common
Stock to its non-employee directors (the "Director Options").
Pursuant to the Reorganization Plan, and based on the Company's estimate of
the amount of certain outstanding claims by creditors of Leslie Fay that
ultimately will be allowed by the Bankruptcy Court, the administrator of the
Reorganization Plan (the "Plan Administrator") currently retains approximately
177,268 shares of Common Stock and $2,868,000 principle amount of Senior Notes
for payment of certain classes of claims against Leslie Fay (the "Holdback").
Such shares of Common Stock and Senior Notes are being held in trust by the Plan
Administrator under the Reorganization Plan and are disbursed as such claims are
either settled or dismissed.
PRODUCTS
The Company participates in three principal areas of the women's apparel
market: (i) suits, which include "upper moderate" women's suits sold under the
Kasper ASL-Registered Trademark- brand name; "moderate" women's suits sold under
the Le Suit-TM- brand name; suits sold under the Albert
Nipon-Registered Trademark- brand name that are priced consistent with the
bridge area of the ready-to-wear market; evening suits sold under the
Nipon-Registered Trademark- brand name which compete in the designer market; and
suits sold under the b. bennett-TM- name, a line of suits catering to the
younger woman seeking an updated look; (ii) dresses, which includes Kasper
ASL-Registered Trademark- dresses, a line of "better" career dresses; and (iii)
sportswear, which includes Kasper and Company ASL-Registered Trademark-
sportswear, a line of sportswear under the Kasper brand name priced between the
moderate and better
3
ITEM 1. BUSINESS (CONTINUED)
markets. Career sportswear are marketed as groups of skirts, pants, jackets,
blouses, sweaters and related accessories which, while sold as separates, are
coordinated as to styles, color palettes and fabrics and are designed to be worn
together or as separates.
SUITS
The Company produces suits which are designed to sell primarily in four
price ranges under the brand names Kasper ASL-Registered Trademark-, Le
Suit-TM-, Albert Nipon-Registered Trademark-, and Albert Nipon Evening-TM-.
KASPER ASL-REGISTERED TRADEMARK- SUIT
Kasper ASL-Registered Trademark- is a leading brand name in "upper moderate"
women's suits, with approximately 70% of the "upper moderate" women's suit
market. Suits marketed under the Kasper ASL-Registered Trademark- brand name
represent the core of the Company's business. The Kasper
ASL-Registered Trademark- Suit division seeks to produce a wide variety of high
quality, excellent fitting suits at affordable prices, and produces suits in
petite, misses and large sizes (large sizes are distributed under the Kasper
II-Registered Trademark- brand name). These suits are designed to achieve an
updated classic look that can be worn from one season to the next without
looking dated. In order to maintain a state of newness in its product inventory
and on the retail sales floor, the Kasper ASL-Registered Trademark- Suit
division introduces a new line of suits five times a year. Many of these suits
are made of "seasonless" fabrics that can extend the selling and wearing season
of the garments. Sales of Kasper ASL-Registered Trademark-, as a percentage of
the Company's net domestic wholesale sales for the 1996, 1997 and 1998 fiscal
years were approximately 40.5%, 40.7% and 47.7%, respectively. The retail price
for suits sold under the Kasper ASL-Registered Trademark- brand name is $120 to
$275. The Kasper ASL-Registered Trademark- Suit division has established a
"quick response" program with key accounts. The program is built around four
basic bodies (two skirt suits, one pant suit and a three piece suit with jacket,
skirt and pants) in three basic colors (black, navy and taupe), which are
available in both misses and petite sizes. Under the program, the Kasper
ASL-Registered Trademark- Suit division keeps "quick response" inventory
available throughout the year and automatically replenishes stock based upon
sell-through information received from the key accounts.
LE SUIT-TM-
The Le Suit-TM- line of suits was introduced to create a less expensive
alternative to Kasper ASL-Registered Trademark- Suits. The Le Suit-TM- division
uses the best styles designed for Kasper ASL-Registered Trademark- Suits for the
preceding year with less expensive fabrics maintaining the same level of
quality, fit and construction as Kasper ASL-Registered Trademark- Suits. In
addition to regular sizes, the Le Suit-TM- division also produces suits in
petite and large sizes. The Le Suit-TM- brand offers an alternative to
retailers' private label business. Sales of Le Suit-TM-, as a percentage of the
Company's net domestic wholesale sales, for the 1996, 1997 and 1998 fiscal years
were approximately 16.9%, 16.9% and 20.7%, respectively. The retail price for
suits sold under the Le Suit-TM- brand name is $99 to $189.
ALBERT NIPON-REGISTERED TRADEMARK- SUIT
The Albert Nipon-Registered Trademark- Suit division designs and markets
suits to compete in the bridge area of the market. These suits, which are
primarily distributed to the high-end department and specialty stores, are
designed to provide higher styling and a more sophisticated look than Kasper
ASL-Registered Trademark- Suits and use more expensive fabrics. In addition to
garments in regular sizes, the Albert Nipon-Registered Trademark- division also
produces suits in petite sizes. Sales of Albert Nipon-Registered Trademark-
Suits, as a percentage of the Company's net domestic wholesale sales, for the
1996, 1997 and 1998 fiscal years were approximately 4.5%, 4.0% and 4.8%,
respectively. The retail price for suits sold under the Albert
Nipon-Registered Trademark- brand name is $275 to $450.
4
ITEM 1. BUSINESS (CONTINUED)
ALBERT NIPON EVENING-TM-
The Albert Nipon Evening-TM- division designs and markets primarily beaded
and sequined evening suits and occupies a unique niche in the suit marketplace.
Sales of Albert Nipon Evening-TM- garments, as a percentage of the Company's net
domestic wholesale sales, for the 1996, 1997 and 1998 fiscal years were
approximately 1.5%, 1.6% and 1.3%, respectively. The retail price for garments
sold under the Albert Nipon Evening-TM- brand is $350 to $700.
B. BENNETT-TM-
In Spring 1997, the Company introduced the b. bennett-TM- line of suits.
This product line is targeted to reach the younger woman seeking a more updated
look and offers an alternative to the classic business suit. The b. bennett-TM-
line utilizes distinctive fabrics and trim detail to achieve this look. All
garments have the same level of quality and consistent fit as the Company's
other products. Sales of b. bennett-TM- garments, as a percentage of the
Company's net domestic wholesale sales for the 1997 and 1998 fiscal years were
1.4% each. The retail price for garments sold under the b. bennett-TM- brand
name is $199 to $300.
PRIVATE LABEL
The Company also designs and manufactures suits for sale under private
labels for various department stores. Sales of products for sale under these
private labels, as a percentage of the Company's net domestic wholesale sales,
for the 1996, 1997 and 1998 fiscal years were approximately 14.0%, 9.5% and
6.2%, respectively. The retail price for suits sold under private labels is $139
to $199.
DRESSES
The Company produces collections of dresses under the Kasper
ASL-Registered Trademark- Dresses 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.
KASPER ASL-REGISTERED TRADEMARK- DRESSES
The Company believes that the Kasper ASL-Registered Trademark- Dress
division is one of the largest "better" dress companies in the United States.
The Kasper ASL-Registered Trademark- Dress division has expanded its line and
offers a wide variety of high quality dresses at affordable prices, including
career and classic, desk to dinner dresses. Kasper dresses, like Kasper suits,
are designed with subtle changes from season to season rather than drastic
trends that tend to become outdated quickly. In order to maintain a state of
"newness" in its product line, the Kasper ASL-Registered Trademark- Dress
division introduces a new line of dresses five times a year. Sales of Kasper
ASL-Registered Trademark- Dresses, as a percentage of the Company's net domestic
wholesale sales, for the 1996, 1997 and 1998 fiscal years were approximately
8.2%, 6.8% and 8.7%, respectively. The retail price for dresses sold under the
Kasper ASL-Registered Trademark- Dress brand name is $110 to $180.
SPORTSWEAR
The Company offers a collection of "better" career sportswear under the
brand names Kasper and Company ASL-Registered Trademark- Sportswear. Products
offered in this area of the market are intended for a less formal working
environment, as well as for casual wear.
KASPER AND COMPANY ASL-REGISTERED TRADEMARK- SPORTSWEAR
In 1993, the Company introduced a line of sportswear under the Kasper brand
name priced between the moderate and better markets. This was a logical
extension that enabled the Company to capitalize on
5
ITEM 1. BUSINESS (CONTINUED)
the competitive advantages it had developed with its suit business. The Kasper
and Company ASL-Registered Trademark- Sportswear division designs and markets
blazers, pants, skirts, knit tops and blouses to be sold as separates. The
Kasper and Company ASL-Registered Trademark- Sportswear division uses fabrics of
similar quality as those used for the suits, maintaining the consistency of
excellent fit and quality tailoring. Sales of Kasper and Company
ASL-Registered Trademark- Sportswear, as a percentage of the Company's net
domestic wholesale sales, for the 1996, 1997 and 1998 fiscal years were
approximately 10.6%, 11.8% and 8.3%, respectively. The retail price for garments
sold under the Kasper and Company ASL-Registered Trademark- Sportswear brand
name is $49 to $198.
NINA CHARLES-TM-
Nina Charles-TM- for Kasper ASL, also known for its consistency in quality
and fit, is a better priced knitwear division comprised of two distinct product
classifications: "better" knit dresses and "better" knit sportswear/separates.
Both product lines are designed with a modern approach to career dressing. The
styles are current but avoid fashion extremes. In analyzing the performance of
the knitwear division and its capital and operational requirements, the Company
decided to discontinue the Nina Charles-TM- label at wholesale in the United
States for the Fall 1998 season. The Company will continue to market the label
in its retail stores and in Canada and Europe.
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, 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 good
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 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.
6
ITEM 1. BUSINESS (CONTINUED)
MANUFACTURING
Apparel sold by the Company is manufactured in accordance with its design,
detailed specification and production schedules. In May 1998, the Company began
production in its own manufacturing facility in China. Finished goods produced
in the Company's China factory accounted for less than 2.0% of total finished
goods production during 1998. The Company primarily contracts for the cutting
and sewing of its garments with over 30 contractors located principally in
Taiwan, the Philippines, Hong Kong and China. Purchases of finished goods from
the Company's four major contractors accounted for 28.4%, 11.1%, 11.0% and
10.8%, respectively, of the Company's total finished goods purchases in 1998.
The Company schedules work with its contractors so that each factory, or at
least one floor of each factory, is dedicated 100% to the Company's products,
thereby ensuring quality control and continuous flow of merchandise. The Company
believes that outsourcing allows it to maximize production flexibility while
avoiding significant capital expenditures, work-in-process inventory build-ups
and costs of managing a large production work force. The Company's production
and sourcing staffs in Hong Kong, Taiwan and the Philippines oversee all aspects
of apparel manufacturing and production, including quality control, as well as
researching and developing new sources of supply. 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 flexibility in meeting changing production requirements on
relatively short notice. The Company is able to maintain low cost production
through high unit volume and captive manufacturing facilities as it has products
manufactured 52 weeks per year.
In order to ensure the continuous flow of current merchandise, the Company
maintains an inventory of piece goods in base cloths and colors at its Hong Kong
facility, as well as at various contractors. This enables the Company to
manufacture its products on a consistent basis, keeping manufacturing facilities
busy during the slower time periods thus freeing up these facilities for
manufacture of the more recently designed products with a lesser lead time. By
keeping a steady flow of production to its contractors, the Company is able to
retain its dominant position in the contractors' facilities and allow for the
continuous flow of its product.
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. The Company monitors the quality of its fabrics and approves
"strike-offs" prior to the production of such fabrics. 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 runs are commenced,
and perform random in-line quality control checks during production and 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 each style is measured against detailed specifications, and each
garment undergoes a sewing, button and thread inspection and is then steamed in
a state-of-the-art steam tunnel and pressed. Garments are selected at random
from shipments received in the distribution center and sent to New York for
inspection and approval by production and sales staff before shipment. 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.
7
ITEM 1. BUSINESS (CONTINUED)
The Company permits garments to be returned for credit by its customers for
defective merchandise, incorrect shipments and/or late/early shipments only.
Average total returns of the Company's products for the 1996, 1997 and 1998
fiscal years were less than 2.0% of net sales.
SUPPLIERS
Generally, the raw materials required for the manufacturing of the Company's
products are purchased directly by the Company. 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 25.7%, 25.4%, 5.8% and 5.0%, respectively, of the Company's total
purchases of raw materials for 1998. The Company's transactions with its
suppliers are based on written instructions issued by the Company from time to
time 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.
DISTRIBUTION
The Company operates a 300,000 square foot distribution and refinishing
center in Secaucus, New Jersey. To ensure that each of its retail customers
receives the merchandise ordered in excellent condition, all apparel produced
for the Company is processed through the Company's distribution center before
delivery to the retail customer. No merchandise is drop-shipped directly from
the contractor to the customer.
The Company sells approximately 96% of its products within the United
States. The Company distributes its products through approximately 1,400
department stores and specialty retail accounts throughout the United States and
Canada representing approximately 2,000 locations. Department stores accounted
for approximately 72%, 75% and 74% of the Company's sales for the 1996, 1997 and
1998 fiscal years, respectively. Federated Department Stores, May Merchandising
Co. and Dillards Department Stores accounted for approximately 20%, 19% and 17%
of total sales, respectively. Sales to any individual divisional unit of either
Federated Department Stores, May Merchandising Co. and Dillards Department
Stores did not exceed 12.8% of 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 76% of the Company's
total sales during 1998. 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 materially
adversely affect the financial condition and operations of the Company.
The Company has a direct sales staff in the United States of 56 sales
employees, of which 38 are located in New York and 18 are located in Dallas,
Texas. The Dallas sales staff consists of 3 full-time employees and 15 part-time
employees. All sales personnel are salaried. The Company also uses commissioned
agents at three regional showrooms in the United States. In addition, senior
management is actively involved in selling to major accounts. Products are
marketed to department stores and specialty retailing customers during the
"market weeks," which are generally four to six months in advance of the five
corresponding industry selling seasons. The Company also has a sales office in
London comprised of 6 full-time and 2 part-time employees.
The Company employs a cooperative advertising program with its major retail
accounts, whereby it contributes to the cost of its retail accounts' advertising
programs. An important part of the marketing process includes prominent displays
of the Company's products in retail accounts' sales brochures.
8
ITEM 1. BUSINESS (CONTINUED)
The Company expects that its continuing emphasis on its retail relationships
with strong in-store marketing support will enable it to secure broad retail
distribution for its new and expanding apparel lines with good in-store
placement. The Company's retail relationships are long-standing, at senior
retail management levels. In 1993, the Company began implementing its in-store
Kasper ASL-Registered Trademark- shops, which average 800 square feet and
dominate the retail floor with presentation of an in-depth Kasper
ASL-Registered Trademark- suit line. The Company provides all of the necessary
fixtures in return for store commitments on location and average inventory
levels. At January 2, 1999, the Company had 689 in-store shops. The Company
plans to continue to expand this program to stores that historically have had
strong Kasper-Registered Trademark- sales and are willing to provide prominent
floor placement and commit to minimum average inventory levels.
The Company maintains a staff of 9 regional account managers ("Regional
Managers") who service the department stores carrying the Company's products,
focusing principally on the Kasper ASL-Registered Trademark- suit line. The
regional team acts as a liaison between the New York office and retail accounts
ensuring implementation of financial plans and pricing strategies, maximizing
sales through extensive trend, sales and stock analyses. In addition, the
Regional Managers continually visit each of their assigned stores throughout the
year to: provide assistance in negotiating prime real estate; manage and
motivate the selling specialists; conduct training seminars; provide
merchandising assistance; and interact with and assist the store's customers
both informally and at fashion shows organized by the Regional Managers. Through
monthly written analyses and standardized spreadsheets, the Regional Managers
document opportunities and challenges to optimize sales and margin.
Of the approximately 2,000 stores that carry the Company's products,
Regional Managers track approximately 560 of the largest locations which, in
fiscal 1998, aggregated approximately 70% of the Kasper-Registered Trademark-
suit sales. Approximately 165 selling specialists, at the highest volume
Kasper-Registered Trademark- in-store boutiques, also report weekly to the
Company on sales and inventory positions. Although these selling specialists are
store employees, they are trained by the Company and can earn
Kasper-Registered Trademark- suits from the Company as incentive bonuses for
above average performance and by providing feedback via monthly reports to the
Regional Managers. The Company expects to continue to increase the number of
selling specialists as it identifies motivated sales people who are willing to
assume additional responsibilities. The Company believes that this in-house
marketing support is instrumental in maintaining its competitive position.
MARKETING
The Company believes that the women's suit category will continue to grow
notwithstanding the "casualization" of dress in the workplace. More women are
entering the workforce and the current fashion cycle seems to favor structured
apparel. The Company's principal retail customers, the department and specialty
stores, are continuing to invest in women's suits because this category is
strategically important as a destination department for career women and other
women desiring structured, versatile apparel. The Company's growth in the suit
category has been assisted by its ability to bring its goods to the forefront of
the store by increasing and updating its in-store shops and have been further
enhanced by the development of certain areas of its business including petite
sizes, increasing emphasis on pantsuits and seasonless fabrics.
The Company's marketing strategy is to maintain and grow its suit business,
while continuing to extend its presence in women's apparel by focusing on those
competitive advantages that have made it the leading marketer of women's suits.
The Company believes that its strong Kasper-Registered Trademark- brand name,
coupled with its continuous emphasis on excellent fit, high quality and
excellent price-to-value relationship, will enable it to expand consumer
acceptance of its Kasper-Registered Trademark- dresses and sportswear lines.
9
ITEM 1. BUSINESS (CONTINUED)
The Company's business strategy is directed at maintaining and enhancing its
position as a leader in the United States women's suit market. The Company plans
to introduce new products and expand its retail operations. The major elements
of the Company's business strategy are as follows:
OFFER QUALITY CAREER WEAR AT REASONABLE PRICE POINTS
The Company's products are well recognized for their consistent superior
quality and fit at prices that offer value to the consumer. The Company intends
to continue the evolution of this process whereby the Company's designers work
closely with its merchandising, sales and production teams to offer a product
that is consistent in quality and fit, season after season, and reflects current
fashion influences.
INCREASE STORE PENETRATION
The Company distributes its products through approximately 2,000 department
and specialty stores throughout the United States. The Company believes that it
has opportunities for increased store penetration in the
Kasper-Registered Trademark- dresses and sportswear labels. At the same time,
the Company feels it can expand its penetration of the
Kasper-Registered Trademark- suit label through increased use of in-store shops
throughout the department store channel. In order to build and enhance its
brands, as well as to maximize sales, the Company has and will continue to
increase steadily the number of such in-store shops, which now total 689. To
continue to enhance profitability, the Company is focusing attention on the most
profitable locations in major department and specialty stores.
CONTINUE RETAIL STORE EXPANSION
The Company plans to expand its retail outlet store business by adding
several new outlet stores over the next several years. As of January 2, 1999,
the Company had 58 retail outlet stores throughout the United States. These
stores have provided the Company with an additional distribution channel at
favorable profit margins, and take advantage of the consumer trend toward
shopping in outlet stores. In addition, the Company is exploring the opening of
one or more full price retail outlet stores in key markets, such as New York,
Chicago and San Francisco. The full price stores would be a showcase for the
Company's products that would give additional credence to the Company's
licensing efforts and brand awareness.
DEVELOP NEW LICENSING OPPORTUNITIES
The Company currently has several licensing agreements in place for the
Kasper-Registered Trademark- and Nipon-Registered Trademark- trade names and is
continually seeking additional licensing opportunities. During 1998, the Company
entered into new licensing agreements for the manufacture and distribution of
women's blouses, coats and outerwear under the Kasper-Registered Trademark-
name. In 1998, the Company received approximately $850,000 in licensing income.
EXPAND PRODUCT LINE OFFERINGS
Over the years, the Company has added new product lines such as Le Suit-TM-
to counteract the retailers trend to private label. It has also added the b.
bennett-TM- line of suits, catering to the younger woman, in Spring 1997. The
Company will continue to explore new opportunities for its existing brands as
well as new brands, while seeking potential acquisitions of complimentary
brands.
These strategies are supported by compelling and targeted advertising
initiatives designed to enhance and build on the Company's brand names. In 1998,
the Company initiated an institutional advertising program that included VOGUE,
BRITISH VOGUE, GLAMOUR, IN STYLE AND W. The ads also appear on phone kiosks,
10
ITEM 1. BUSINESS (CONTINUED)
buses and selected billboards in New York. This advertising program enhances the
power of the Kasper-Registered Trademark- brand, which, in turn, can benefit
both in-store sales and licensing efforts.
RETAIL OUTLET STORES
In July 1995, the Company commenced its retail outlet store program to
establish another distribution channel for its products and to take advantage of
the current consumer trend towards shopping at "company outlet" stores. At
January 2, 1999, the Company operated 58 retail outlet stores which represented
approximately 7.1%, 12.4% and 14.8% of total net sales for the 1996, 1997 and
1998 fiscal years, respectively. These stores, which stock current line
merchandise, are generally located in an outlet center mall where other women's
apparel companies have established retail outlet stores. The Company believes
the retail outlet stores help develop customer awareness of the Company's brand
names while allowing management to control the price range of its products. The
Company currently has retail locations in Secaucus, New Jersey, Franklin Mills,
Pennsylvania, Worcester, Massachusetts, Central Valley, New York, Dawsonville,
Georgia, Martinsburg, West Virginia, Clinton, Connecticut, Lancaster,
Pennsylvania, Vero Beach, Florida, Howell, Michigan, Ontario, California,
Orlando, Florida, Burbank, Ohio, Michigan City, Indiana, Grove City,
Pennsylvania, Camarillo, California, Gaffney, South Carolina, Jackson, New
Jersey, Waterloo, New York, Riverhead, New York, Williamsburg, Virginia,
Chattanooga, Tennessee, Hilton Head, South Carolina, Prince William, Virginia,
Myrtle Beach, South Carolina, Reading, Pennsylvania, Sevierville, Tennessee,
Birch Run, Michigan, Kittery, Maine, Commerce, Georgia, Tannersville,
Pennsylvania, Folsom, California, Woodbury, Minnesota, Lebanon, Tennessee,
Wrentham, Massachusetts, Blowing Rock, North Carolina, St. Augustine, Florida,
Hagerstown, Maryland, Gurnee, Illinois, Destin, Florida, Ellenton, Florida,
Sunrise, Florida, Foley, Alabama, Gonzalez, Louisiana, Leesburg, Virginia, Osage
Beach, Missouri, Flemington, New Jersey, Gainesville, Texas, Hillsboro, Texas,
San Marcos, Texas, Castle Rock, Colorado, Pleasant Prairie, Wisconsin,
Jeffersonville, Ohio, Edinburgh, Indiana, Lake Elsinore, California, Las Vegas,
Nevada, Napa, California, Gilroy, California, and Lee, Massachusetts.
INTERNATIONAL OPERATIONS
The Company's wholesale business includes two wholly owned subsidiaries,
Kasper Holdings Inc. and Kasper A.S.L. Europe, Ltd., (collectively referred to
as "International"). Kasper Holdings Inc. owns 100% of Kasper Canada ULC which
is a 70% owner of Kasper Partnership, a Canadian Partnership through which the
Company conducts sales and distribution activity in Canada. Kasper A.S.L.
Europe, Ltd. operates a sales office in London, England, where it sells the
Company's products to retailers and distributors throughout the European
continent. International sales as a percentage of total net wholesale sales for
the 1996, 1997 and 1998 fiscal years were approximately 0.8%, 1.1% and 3.6%,
respectively.
TRADEMARKS
The Company is the holder of several registered marks in the United States,
including Kasper-Registered Trademark-, Kasper ASL-Registered Trademark-, Kasper
II-Registered Trademark-, Kasper ASL Petite-Registered Trademark-, Kasper and
Company-Registered Trademark-, Kasper and Company Petite-Registered Trademark-,
Kasper Dress-Registered Trademark-, Kasper Dress Petite-Registered Trademark-,
Albert Nipon-Registered Trademark-, Nipon Boutique-Registered Trademark-,
Executive Dress by Albert Nipon-Registered Trademark-, Nipon
Night-Registered Trademark-, Albert Nipon Suits-Registered Trademark-, Nipon
Studio-Registered Trademark- (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 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
11
ITEM 1. BUSINESS (CONTINUED)
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.
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, South Korea, and Hong Kong. These agreements, which
have been negotiated bilaterally either under the Arrangement Regarding
International Trade in Textiles, known as the Multifiber Agreement, and other
applicable statutes, impose quotas on the amounts and types of merchandise which
may be imported into the United States from these countries. These 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's imported products are also
subject to United States customs duties which comprise a material portion of the
cost of the merchandise. A substantial increase in customs duties could have an
adverse effect on the Company's operating results.
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 overseas offices, 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 custom
duties and duties imposed in the ordinary course of business. The United States
and the other countries in which the Company's products are manufactured may,
from time to time, impose new quotas, duties, tariffs or other restrictions, or
adversely adjust presently prevailing quotas, duty or tariff levels, which could
adversely affect the Company's operations and its ability to continue to import
products at current or increased levels. The Company cannot predict the
likelihood or frequency of any such events occurring.
Because the Company's foreign manufacturers are located at significant
distances from the Company, the Company is subject to 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 1, 1999, the Company had unfilled customer orders of
approximately $84.9 million, compared to approximately $97.5 million of such
orders at March 1, 1998. The amount of unfilled orders at a particular time is
affected by a number of factors, including 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.
12
ITEM 1. BUSINESS (CONTINUED)
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, none of which accounts
for a significant percentage of total industry sales, but some of which are
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.
The Company competes primarily on the basis of consistency of quality and
fit, design, diversity of its product lines and service to its retail customers.
The Company's principal competitors are Seville, Jones New York, Bicci and Liz
Claiborne and department stores' private labels. The Company believes that its
competitive advantages at the customer and retail levels have served to modulate
its competition in the "upper moderate" women's suit category. These competitive
advantages include excellent quality and consistent fit of the garments with
high price-to-value relationship, long-standing relationships with fabric
suppliers, low-cost but high-quality production through high unit volume and
captive contract manufacturing facilities, and long-standing relationship with
retailers.
EMPLOYEES
At January 2, 1999, the Company had approximately 1,012 employees in the
United States including 704 full-time employees and 308 part-time employees. Of
the 704 full-time employees, approximately 85 are employed in executive,
managerial, administrative, clerical and office positions, approximately 96 in
design, 241 in distribution, 104 in production, 41 in sales and marketing and
137 in retail sales. Of the 308 part-time employees, approximately 293 are
employed in the Company's retail outlet stores and 15 in the Dallas showroom.
Approximately 317 of the Company's 1,012 employees are members of UNITE (the
Union of Needle Trade, Industrial and Textile Employees), which has a 3-year
labor agreement with the Company expiring on May 31, 2000. The Company considers
its relations with its employees to be satisfactory. In addition, the Company
employs 6 full-time and 2 part-time employees in the United Kingdom, as well as
510 employees in the Far East.
RECENT TRANSACTIONS
On March 16, 1999, the Company issued a joint press release with Anne Klein
Company LLC ("Anne Klein") announcing, among other things, that the Company and
Anne Klein signed a definitive agreement for the Company to purchase Anne
Klein's trademarks and selected related assets (the "Purchase Transaction"). The
Company and Anne Klein also jointly announced the signing of a licensing
agreement under which Anne Klein granted to the Company an exclusive,
international license for ANNE KLEIN-Registered Trademark- women's and girl's
sportswear, suits and dresses under the ANNE KLEIN-Registered Trademark-, ANNE
KLEIN II-Registered Trademark- and A LINE ANNE KLEIN-TM- trademarks. Completion
of the Purchase Transaction and the licensing agreement are subject to obtaining
certain required regulatory and other consents and approvals. Completion of the
Purchase Transaction is also subject to attaining financing for the trademark
acquisition.
ITEM 2. PROPERTIES
The Company's principal executive office, warehousing and distribution
facilities are located in a 289,894 square foot facility located in Secaucus,
New Jersey. The Company leases its headquarters facility from Import Hartz
Associates. The lease, which expires in February 2007, requires an annual
average base rent payment of approximately $1.4 million during the term of the
lease.
13
ITEM 2. PROPERTIES (CONTINUED)
In September 1998, the Company moved into a new 41,000 square foot sales,
production and design office located in New York, New York. The Company leases
the space from Green 1412 Broadway, LLC. The lease, which expires in February
2008, provides for an average annual base rent payment of approximately
$976,000.
At January 2, 1999, the Company operated 58 retail outlet stores. The
majority of all the new stores are leased under five-year leases. The average
store size is approximately 2560 square feet, ranging from a minimum of 1500
square feet to a maximum of 3350 square feet.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998 (as hereinafter defined), no matter
was submitted to a vote of the Company's security holders by means of
solicitation of proxies or otherwise.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock had been quoted in the over-the-counter market
under the symbol "SASX" from June 4, 1997, when the Company emerged from
bankruptcy as a separate stand-alone entity as a result of the Reorganization,
until August 7, 1998, at which time the Company's Common Stock commenced trading
on the Nasdaq National Market-Registered Trademark- under the symbol "KASP." The
high and low prices for the Company's Common Stock for each quarter from
inception, June 4, 1997 are set forth below. The prices (i) from June 4, 1997
until August 7, 1998 reflect the high asked and low bid prices for the Common
Stock as provided by www.pcquote.com and reflect interdealer prices, without
retail mark-ups, mark-downs or commissions and may not represent actual
transactions, and (ii) after August 7, 1998, reflect the high and low sales
price for the Common Stock.
PERIOD HIGH LOW
-------------------------------------------------------------------- --------- ---------
1997 Second Quarter...................................................... $18 $12 3/4
Third Quarter....................................................... 17 1/2 13 3/4
Fourth Quarter...................................................... 15 1/8 11
1998 First Quarter....................................................... $13 1/2 $11 3/8
Second Quarter...................................................... 14 1/2 11
Third Quarter....................................................... 14 7 1/2
Fourth Quarter...................................................... 8 4 1/2
As of March 26, 1999, there were 1296 holders of record of the Company's
Common Stock. The Company has not paid any cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain earnings, if any, to finance the growth of
the Company and repay outstanding debt. In addition, certain of the Company's
agreements with lending institutions limit the Company's ability to declare any
dividends for the duration of such agreements.
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/Combined 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 seven months
ended January 3, 1998 and the fiscal year ended January 2, 1999 is derived from
the Company's audited Consolidated Financial Statements. The selected combined
financial information for each of the three years in the period ended December
28, 1996 and for the five months ended June 4, 1997 is derived from the
Company's audited Divisional Combined Financial Statements for the fiscal years
ended December 31, 1994, December 30, 1995 and December 28, 1996 and for the
five months ended June 4, 1997.
15
SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REORGANIZED
PREDECESSOR COMPANY COMPANY (3)
FIVE SEVEN
MONTHS MONTHS FISCAL YEAR
FISCAL YEARS ENDED (2) ENDED ENDED ENDED (2)
------------------------------- --------- --------- -----------
DEC. 31, DEC. 30, DEC. 28, JUNE 4, JAN. 3, JAN. 2,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 250,748 $ 279,974 $ 311,550 $ 136,107 $ 175,602 $ 312,089
Cost of Goods Sold.................... 180,192 207,161 238,268 101,479 127,784 219,060
Gross profit.......................... 70,556 72,813 73,282 34,628 47,818 93,029
Selling, general and administrative
expenses (1)........................ 42,010 49,604 50,263 23,374 31,802 61,984
Amortization of reorganization asset
(4)................................. -- -- -- -- 1,902 3,258
Depreciation and amortization (5)..... 1,486 2,033 2,238 1,191 2,836 5,344
Interest and financing costs.......... 450 525 1,634 667 9,358 16,981
Income before taxes................... 26,610 20,651 19,147 9,396 1,920 5,462
Provision for income taxes (6)........ 10,644 8,260 7,659 3,758 948 2,292
--------- --------- --------- --------- --------- -----------
Net income............................ $ 15,966 $ 12,391 $ 11,488 $ 5,638 $ 972 $ 3,170
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Net income per share (7).............. -- -- -- -- $ 0.14 $ 0.47
Weighted average number of shares
outstanding (7)..................... -- -- -- -- 6,800 6,800
Ratio of Earnings to Fixed
Charges(9).......................... 60:1 40:1 13:1 15:1 1.2:1 1.3:1
OTHER FINANCIAL DATA:
Income before interest, taxes,
depreciation and amortization....... $ 28,546 $ 23,209 $ 23,019 $ 11,254 $ 16,016 $ 31,045
Cash Flows from Operating
Activities.......................... (16,041)
Cash Flows from Investing
Activities.......................... (5,690)
Cash Flows from Financing
Activities.......................... 7,569
AS OF:
-----------------------------------------------------------------------
DEC. 31, DEC. 30, DEC. 28, JUNE 4, JAN. 3, JAN. 2,
1994 1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ---------- -----------
BALANCE SHEET DATA:
Working Capital................................ $ 87,428 $ 109,671 $ 127,900 $ 101,264 $ 100,876 $ 116,011
Reorganization value in excess of identifiable
assets....................................... -- -- -- -- 63,279 60,980
Total Assets................................... 127,931 162,109 172,881 147,050 260,656 269,358
Long-term Debt (8)............................. -- -- -- -- 110,000 117,569
Shareholders' Equity (8)....................... $ 109,563 $ 135,601 $ 157,204 $ 132,363 $ 120,958 $ 124,050
- ------------------------
(1) The Selected Consolidated/Combined Financial Data presented above has been
prepared to show the Company as a freestanding entity apart from Leslie Fay.
Until 1996, the Company was totally dependent upon Leslie Fay for all
administrative support, including accounting, credit, collections and legal
support. As such, the financial statements reflect an allocation of Leslie
Fay's administrative expenses to the Company.
16
(2) 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 December 31, 1994, December 30, 1995, December 28, 1996, January 3,
1998 and January 2, 1999 include the Company's results of operations for 52,
52, 52, 53 and 52 weeks, respectively.
(3) The Company has accounted for the reorganization using the principles of
"fresh start" reporting as required by AICPA Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
("SOP 90-7"). Pursuant to such principles, in general, the Company's assets
and liabilities were revalued. Therefore, due to the restructuring and
implementation of "fresh start" reporting, the consolidated financial
statements for the reorganized company (starting June 4, 1997) are not
comparable to the combined financial statements of the predecessor company.
(4) 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 is being amortized over a 20-year period beginning June 4, 1997.
(5) Included in Depreciation and Amortization for the seven month period ended
January 3, 1998 and the fiscal year ended January 2, 1999 is the
amortization of trademarks and bank fees.
(6) As a division of Leslie Fay, the Company was not subject to Federal, State
and Local income taxes. Effective June 4, 1997, the Company became subject
to such taxes. The effective tax rate used for the historical financial
statements reflects the rate that would have been applicable had the Company
been an independent entity. Provisions for deferred taxes were not reflected
on the Company's books but were reflected on the books and records of Leslie
Fay. Going forward, the Company has recorded deferred taxes in accordance
with the provision of Statement of Accounting Standards Number 109,
Accounting for Income Taxes.
(7) Due to the implementation of the Reorganization and fresh start accounting,
per share data for the predecessor company have been excluded as they are
not comparable.
(8) Pursuant to the Reorganization Plan, the Company issued $110 million in
Senior Notes and 6,800,000 shares of Common Stock of the Company to the
former creditors of Leslie Fay. Prior to the Reorganization, the Company
operated as a division of Leslie Fay. As such, the Shareholders' Equity as
reported was the Company's divisional equity as of the respective date.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
are determined by adding fixed charges and provision for income taxes to net
income. Fixed charges consist of total interest expense for the period.
17
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
ACCOMPANYING CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS AND NOTES THERETO. 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
The Company utilizes a 52-53 week fiscal year ending on the Saturday nearest
December 31. Accordingly, fiscal years 1994, 1995, 1996, 1997 and 1998 ended on
December 31, 1994 ("fiscal 1994"), December 30, 1995 ("fiscal 1995"), December
28, 1996 ("fiscal 1996"), January 3, 1998 ("fiscal 1997"), and January 2, 1999
("fiscal 1998"), respectively.
On June 4, 1997, the Company was separated from Leslie Fay, in accordance
with the Reorganization Plan approved by the Bankruptcy Court. On that date, all
assets and corresponding liabilities associated with the operation of the Sassco
Fashions Division, including the Nipon trademarks, were sold to the Company.
Prior to that date, the Company operated as the Sassco Fashions Division of
Leslie Fay, from the time it was acquired by Leslie Fay in 1980. The Company
received the assets and liabilities of the former Sassco Fashions Division of
Leslie Fay as part of the Reorganization Plan of Leslie Fay. In the aggregate,
$249.6 million of assets, subject to $19.6 million of liabilities, were sold by
Leslie Fay to the creditors in satisfaction of creditor claims of like amount.
The Company in turn transferred to the creditors 6,800,000 shares of Common
Stock with a market value of $120 million and Senior Notes with an aggregate
principal amount of $110 million in exchange for the net assets.
The Company is one of the largest marketers and manufacturers of career
women's suits in the United States. The Company also markets career dresses,
sportswear and knitwear. The Company has grown through the extension of existing
product lines, the introduction of new brands and the expansion of its retail
outlet operations.
The accompanying audited financial statements have been prepared to show the
Company as a freestanding entity apart from Leslie Fay. Until 1996, the Company
was totally dependent upon Leslie Fay for all administrative support, including,
without limitation, accounting, credit, collections, and legal support. As such,
the financial statements reflect an allocation of Leslie Fay administrative
expenses to the Company.
As a division of Leslie Fay, the Company was not subject to federal, state
and local income taxes. Effective June 4, 1997, the Company became subject to
such taxes. The effective tax rate used for the historical financial statements
reflects the rate that would have been applicable, had the Company been
independent. Provisions for deferred taxes were not reflected on the Company's
books, but were reflected on Leslie Fay's books and records. Going forward, the
Company has recorded deferred taxes in accordance with the provision of
Statement of Financial Accounting Standards Number 109, "Accounting for Income
Taxes."
On June 4, 1997, the Company acquired the trade name
Kasper-Registered Trademark- from Forecast Designs, Inc., a company owned by
Herbert Kasper, for $6 million. Prior to June 4, the Company paid royalties for
the use of the Kasper name to Forecast Designs, Inc. In accordance with the
agreement, Forecast Designs, Inc. will retain the right to the licensing income
from pre-existing licenses, which licenses will be transferred to the Company
upon Mr. Kasper's death. The Company will be entitled to 50% of the income
generated by any new licenses. Pursuant to the terms of the acquisition
agreement, the Company also entered into an Employment, Consulting and
Non-Competition Agreement with Herbert Kasper. Such agreement, which has a term
of ten years, provides for the payment to Mr. Kasper of $300,000 in annual
salary and $7,500 for
18
each 1% by which the gross profits from the Company's sales of Kasper women's
apparel, namely suits, dresses and sportswear in each of the six years 1998 to
2003 exceeds the total gross profit derived by the Company from the sale of such
products in the year 1995. Under the terms of the Agreement, Mr. Kasper may and
has been dedicating his business time to the licensing activities of ASL/K
Licensing Corp., which includes meeting with current and prospective licensees
of the Kasper brand name. He also participates in marketing trips and is
involved in the Company's ad campaigns, reviews competitor's products and meets
with prospective wholesale buyers on behalf of the Company. Mr. Kasper may also
perform such other tasks as he and Mr. Levine may agree.
For purpose of comparison, Management's Discussion and Analysis of Financial
Condition and Results of Operations for fiscal 1997 reflects the combined
results of the predecessor company for five months and the reorganized company
for seven months.
RESULTS OF OPERATIONS
NET SALES BY SEGMENT
(000'S EXCEPT PERCENTAGES)
FISCAL 1998 % FISCAL 1997 % FISCAL 1996 %
----------- --------- ----------- --------- ----------- ---------
Wholesale............................................. $ 265,986 85.2% $ 273,096 87.6% $ 289,371 92.9%
Retail................................................ 46,103 14.8% 38,613 12.4% 22,179 7.1%
----------- --------- ----------- --------- ----------- ---------
Total sales........................................... $ 312,089 100.0% $ 311,709 100.0% $ 311,550 100.0%
EBITDA BY SEGMENT
(000'S EXCEPT PERCENTAGES)
FISCAL 1998 % FISCAL 1997 % FISCAL 1996 %
----------- --------- ----------- --------- ----------- ---------
Wholesale............................................. $ 25,748 82.9% $ 23,027 84.4% $ 21,764 94.5%
Retail................................................ 5,297 17.1% 4,243 15.6% 1,255 5.5%
----------- --------- ----------- --------- ----------- ---------
Total sales........................................... $ 31,045 100.0% $ 27,270 100.0% $ 23,019 100.0%
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net Sales in fiscal 1998 were $312.1 million as compared to $311.7 for
fiscal 1997. Wholesale sales decreased to $266.0 million in fiscal 1998 from
$273.1 million in fiscal 1997, a drop of $7.1 million or 2.6%. The extra week's
wholesale sales in fiscal 1997 were $5.2 million, resulting in an overall
decrease of $1.9 million or 0.7% on a comparable 52-week basis. The decision to
discontinue the Nina Charles-TM- label at wholesale in the United States for the
Fall 1998 season resulted in a reduction in sales of $14.1 million. Sales of
Sportswear and Private Label lines declined a combined $19.3 million in fiscal
1998 as a result of continuing competitive pressure in career sportswear and
tighter credit policies impacting the private label business. Counteracting
these declines in the Company's less formal lines were sharp increases in the
more classic, less casual Suit lines, in particular Kasper
ASL-Registered Trademark- and Le Suit-TM-, as well as the Company's Dress line.
Sales of Kasper ASL-Registered Trademark- and Le Suit-TM- contributed an
additional $23.0 million over fiscal 1997, boosted by sales under the Company's
"quick response" program totaling $11.6 million, which increased 82.0% over
fiscal 1997. The Dress line added an additional $4.4 million in sales in fiscal
1998, while Nipon-Registered Trademark- and b. bennett-TM- sales remained
relatively flat, with a combined increase of approximately $300 thousand.
International operations sales totaled $9.6 million in fiscal 1998, an increase
of $3.8 million over fiscal 1997.
19
Sales at the Company's retail outlet stores ("Retail") increased to $46.1
million in fiscal 1998 from $38.6 million in fiscal 1997, an increase of $7.5
million or 19.4%. The extra week's retail sales in fiscal 1997 amounted to $0.8
million, resulting in an overall increase of $8.3 million on a comparable
52-week basis, due primarily to the net addition of 11 stores in fiscal 1998.
Comparable store sales for fiscal 1998 were $36.7 million as compared to $36.5
million for fiscal 1997, an increase of 0.5%, and reflects a general decrease in
consumer spending experienced at outlet centers during the second-half of fiscal
1998.
GROSS PROFIT
Gross Profit as a percentage of net sales increased to 29.8% for fiscal
1998, compared to 26.4% for fiscal 1997. Wholesale gross profit as a percentage
of sales, adjusted for the extra week's sales, increased to 27.8% in fiscal 1998
from 24.8% in fiscal 1997. The improvement over fiscal 1997 can be attributed to
lower supply and production costs in fiscal 1998 due to macroeconomic conditions
in the Far East and was offset partially by higher markdowns and allowances
which reflect the general slowdown in retail sales at the Company's customers'
stores.
Retail gross profit as a percentage of sales, adjusted for the extra week's
sales, increased to 41.4% in fiscal 1998 from 39.2% in fiscal 1997. The increase
is primarily due to a decrease in markdowns and lower supply and production
costs in fiscal 1998 due to macroeconomic conditions in the Far East.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $62.0 million in
fiscal 1998 as compared to $54.1 million in fiscal 1997, adjusted for the extra
week, an increase of $7.9 million or 14.6%. Approximately $3.0 million of this
increase can be attributed to increased selling, administrative and occupancy
costs related to the net addition of 11 retail outlet stores. The consolidation
of Kasper Holdings Inc. in 1998 contributed approximately $1.2 million in
additional selling, general and administrative expenses along with an increase
in other expenses of approximately $500 thousand pertaining to the minority
interest. The remaining increase of $3.2 million can be attributed to domestic
wholesale operations. Advertising expense increased $1.8 million, primarily as a
result of the Company's new advertising campaign that was launched in 1998.
Administrative expenses increased by approximately $2.0 million over the prior
year due to increased professional and consulting fees relating to the
development of a new information system, Year 2000 consulting, and other
expenses as a result of becoming an independent, public company. These increases
are compensated for in part by decreases in selling expenses as a result of the
trademark acquisition and the discontinuance of the Nina Charles-TM- line.
Wholesale shipping, production, design and occupancy expenses, as well as
International expenses, aside from the consolidation of Kasper Holdings Inc.,
remained relatively flat, with incremental increases relating to occupancy
offsetting decreases elsewhere.
Selling, general and administrative expenses include the following: (i)
design expenses; (ii) production expenses, which include purchasing of raw
materials, production planning and scheduling and product costing; (iii) selling
and marketing expenses, including showroom sales personnel and sales
representatives outside the showroom; (iv) administrative expenses, which
include all back office functions such as finance and accounting, human
resources, import management, accounts receivable and payable, etc.; (v)
advertising expenses; (vi) shipping expenses; and (vii) occupancy expenses,
which include costs related to all owned and or leased facilities, including
rent, utilities, etc. These expenses are expected to remain stable in the near
future with the exception of retail occupancy, selling and administrative
expenses related to continued retail expansion.
Prior to the separation from Leslie Fay, Arthur S. Levine was a principal in
two companies, Kerrison Trading Co. ("Kerrison") and Alco Design Associates,
Inc. ("Alco") that provided consulting services with regard to design,
manufacturing and importation of apparel for the Sassco Fashions Division. Those
consulting arrangements ceased as of June 4, 1997. For fiscal 1997, Mr. Levine
received $1,487,920 as
20
compensation for such consulting services. Payments totaling $236,000 were made
to the two companies in August 1997 for services rendered prior to June 4, 1997.
Such payments were included in selling, general and administrative expenses.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA")
increased to $31.0 million in fiscal 1998 from $27.3 million in fiscal 1997, an
increase of $3.7 million or 13.6%. Wholesale EBITDA increased $2.7 million
during the period as a result of increased gross profits from the cost benefits
gained from Far East macroeconomic conditions and better performance of the
Company's products at retail which were partially offset by the increased
selling, general and administrative expenses discussed above. Retail, which also
benefited from the lower supply and production costs from the Far East,
experienced an increase in EBITDA of $1.0 million reflecting the increased sales
and associated selling, general and administrative expenses relating to the
additional 11 new stores during fiscal 1998, as well as lower markdowns.
AMORTIZATION OF REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS
As a result of the Reorganization, 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". This asset
is being amortized over a 20-year period beginning June 4, 1997. Accordingly,
the Company incurred amortization charges in fiscal 1998 totaling approximately
$3.3 million as opposed to approximately $1.9 million in fiscal 1997. The
increase is attributable to a full year of amortization charges in fiscal 1998
versus only seven months in fiscal 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $5.3 million in fiscal 1998 from
$4.0 million in fiscal 1997 primarily as a result of the amortization charges
associated with the Company's trademarks and bank fees associated with the
financing agreement. The trademarks are being amortized over 35 years beginning
June 4, 1997 and resulted in amortization charges for fiscal 1998 of
approximately $1.5 million compared with $850,000 in fiscal 1997. The bank fees
are being amortized over the life of the financing agreement, which is three
years, beginning June 4, 1997 and resulted in approximately $800,000 of
amortization charges for fiscal 1998 versus approximately $470,000 in fiscal
1997. These increases are primarily attributable to a full year of bank fee and
trademark amortization charges in fiscal 1998 versus only seven months in fiscal
1997. The remaining increase relates to depreciation and amortization associated
with capital expenditures in fiscal 1998.
INTEREST AND FINANCING COSTS
Interest and financing costs increased to $17.0 million in fiscal 1998 from
$10.0 million in fiscal 1997, an increase of $7.0 million. The increase is
primarily attributable to the full year's interest expense in fiscal 1998 on the
$110 million in Senior Notes, which were issued on June 4, 1997 versus only
seven months in fiscal 1997. The Senior Notes bear interest at 12.75% per annum
and mature on March 31, 2004. Interest is payable semi-annually on March 31 and
September 30. Interest relating to the Senior Notes totaled $14.0 million for
fiscal 1998 compared to approximately $8.2 million in fiscal 1997. There are no
principal payments due until maturity. To the extent that the Company elects to
undertake a secondary stock offering or elects to prepay certain amounts a
premium will be required to be paid.
The Company assumed from Leslie Fay a factoring/financing agreement with
Heller Financial, Inc. ("Heller"). The agreement was for the sole purpose of
supporting the Sassco Fashions Division. The agreement had a two-year term
expiring in February 1998. It provided for Heller to act as the credit and
collection arm of the Company. The Company would receive funds from Heller as
the receivables were
21
collected. Any amounts unpaid after 120 days would be guaranteed and paid to the
Company by the factor. The cost was .4% for the first $240 million in sales and
.35% for sales above that amount. The agreement was amended in January 1998 to
add an additional 18 months to the term of the arrangement and lower the rate to
.35% for the first $250 million in sales and .3% on the excess over that amount.
Expenses related to the agreement totaled approximately $1.1 million and $1.2
million for fiscal 1998 and fiscal 1997, respectively.
INCOME TAXES
Provision for income taxes was $2.3 million in fiscal 1998. This amount
differs from the amount computed by applying the federal income tax statutory
rate of 34% to income before taxes because of state and foreign taxes. Income
taxes for the periods ended June 4, 1997 and prior were computed using the
effective tax rate that would have been applicable, had the Company been an
independent entity.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net Sales in fiscal 1997 were $311.7 million as compared to $311.6 for
fiscal 1996. Wholesale sales decreased to $273.1 million in fiscal 1997 from
$289.4 million in fiscal 1996, a drop of 5.6%. The extra week's wholesale sales
in fiscal 1997 were $5.2 million, resulting in an overall decrease of $21.5
million on a comparable 52-week basis, which was in line with the Company's
plans to reduce production in fiscal 1997 in order to avoid the excess inventory
situation which occurred in fiscal 1996. The reductions spanned the Company's
product lines, but were more prevalent in the Dress and Private Label lines
which decreased 22.6% and 39.4%, respectively, from the prior year. In addition,
there were sales of the Nina Charles-TM- knitwear line totaling $4.5 million in
the first half of fiscal 1997 and $3.7 million of sales of the b. bennett-TM-
line for the full year of fiscal 1997, as compared to no sales in the same
respective periods in fiscal 1996. The Company has decided to discontinue
marketing the Nina Charles-TM- brand name for wholesale in the United States
beginning with the Fall 1998 season.
Retail sales increased to $38.6 million in fiscal 1997 from $22.2 million in
fiscal 1996, an increase of 74.1% due primarily to the net addition of 8 stores
in fiscal 1997. The extra week's retail sales in fiscal 1997 amounted to $0.8
million, resulting in an overall increase of $15.6 million on a comparable
52-week basis. Comparable store sales for fiscal 1997 were $23.4 million as
compared to $20.6 million for fiscal 1996, an increase of 13.6%.
GROSS PROFIT
Gross Profit as a percentage of net sales increased to 26.4% for fiscal
1997, compared to 23.5% for fiscal 1996. The improvement over fiscal 1996 can be
attributed to the higher percentage of retail sales as well as the improved
performance at the wholesale level. Wholesale gross profit as a percentage of
sales, adjusted for the extra week's sales, increased to 24.8% in fiscal 1997
from 22.0% in fiscal 1996 as a result of lower markdowns given to dispose of
less merchandise at close-out prices. The better margins were primarily
attributed to the Dress and Suit lines, which increased 10.9% and 5.1%,
respectively.
Retail gross profit as a percentage of sales, adjusted for the extra week's
sales, increased to 39.2% in fiscal 1997 from 38.6% in fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $55.2 million in
fiscal 1997 as compared to $50.3 million in fiscal 1996, an increase of $4.9
million or 9.7%. The increase was primarily attributed to an extra week of
selling, general and administrative expenses, which totaled approximately $1.4
million; and increased selling and occupancy costs related to the net addition
of 8 retail outlet stores of approximately
22
$1.8 million and $1.6 million, respectively. Wholesale selling, general and
administrative expenses remained relatively flat, with incremental increases
relating to occupancy offsetting decreases in direct expenses as a result of the
reduction in sales.
For fiscal 1996 and fiscal 1997, Mr. Levine received $3,402,642 and
$1,487,920, respectively, as compensation for consulting services. Payments
totaling $236,000 were made to the two companies in August 1997 for services
rendered prior to June 4, 1997. Such payments were included in selling, general
and administrative expenses.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
EBITDA increased to $27.3 million in fiscal 1997 from $23.0 million in
fiscal 1996, an increase of $4.3 million or 18.7%. Wholesale EBITDA increased
$1.3 million during the period as a result of lower markdowns given to dispose
of less merchandise at close-out prices. Retail EBITDA increased $3.0 million
reflecting the increased sales and associated selling, general and
administrative expenses relating to the additional 8 new stores during fiscal
1997.
AMORTIZATION OF REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS
As a result of the Reorganization, 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". This asset
is being amortized over a 20-year period beginning June 4, 1997. Accordingly,
the Company incurred amortization charges for fiscal 1997 totaling $1.9 million
representing seven months amortization of the reorganization asset.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $4.0 million in fiscal 1997 from
$2.2 million in fiscal 1996 as a result of the amortization charges associated
with the trademarks and bank fees associated with the new financing. The
trademarks are being amortized over 35 years beginning June 4, 1997 and resulted
in amortization charges for fiscal 1997 of $850,000 for the seven months. The
bank fees are being amortized over the life of the financing, which is three
years, and resulted in $471,000 of amortization charges for fiscal 1997. The
remaining increase relates to depreciation and amortization associated with
capital expenditures in fiscal 1997.
INTEREST AND FINANCING COSTS
Interest and financing costs increased to $10.0 million in fiscal 1997 from
$1.6 million in fiscal 1996, an increase of approximately $8.4 million. The
increase is primarily attributable to the seven month's interest expense on the
$110 million in Senior Notes, which were issued on June 4, 1997. The Senior
Notes bear interest at 12.75% per annum and mature on March 31, 2004. Interest
is payable semi-annually on March 31 and September 30. Interest relating to the
Senior Notes for the seven months totaled $8.2 million. There are no principal
payments due until maturity. To the extent that the Company elects to undertake
a secondary stock offering or elects to prepay certain amounts a premium will be
required to be paid.
INCOME TAXES
Provision for income taxes was $900 thousand for the seven months ended
January 3, 1998. This amount differs from the amount computed by applying the
federal income tax statutory rate of 34% to income before taxes because of state
and foreign taxes. Income taxes for the periods ended June 4, 1997 and prior
were computed using the effective tax rate that would have been applicable, had
the Company been an independent entity.
23
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $16.0 million in fiscal 1998 as
compared to cash provided by operations of $49.0 million during fiscal 1997,
primarily as a result of the increase in inventory and the increase in accounts
receivable both of which had decreased in the prior year. The increase in
inventories is primarily due to higher levels of finished goods necessary to
stock the expanding "quick response" replenishment program and the growing
retail store operations, and due to the earlier receipt of inventory to ensure
timely shipments to customers. Inventory in the Company's retail outlet stores
increased by approximately $1.9 million as a result of the net addition of 11
stores in fiscal 1998, as well as overall increases in average store inventory
levels. The swing in accounts receivable from a decrease in fiscal 1997 of $25.2
million to an increase in fiscal 1998 of $750 thousand is the result of higher
sales in the final months of fiscal 1998, reflecting the earlier receipt of
goods and ultimately earlier shipments to customers.
The Company's main sources of liquidity historically have been cash flows
from operations and credit facilities. Prior to June 4, 1997, as a division of
Leslie Fay, the Company either borrowed from, or invested its excess cash with,
Leslie Fay. The Company's capital requirements primarily result from working
capital needs, retail expansion and renovation of department store boutiques and
other corporate activities.
As of June 4, 1997, the Company entered into a $100 million working capital
facility with BankBoston as the agent bank for a consortium of lending
institutions. The facility provides for a sub-limit for letters of credit of $50
million. The working capital facility is secured by substantially all the assets
of the Company. The working capital facility expires in the fiscal year ending
January 1, 2000 and provides for various borrowing rate options, including rates
based upon a fixed spread over LIBOR. The facility provides for the maintenance
of certain financial ratios and covenants and sets limits on the amount of
capital expenditures and dividends to shareholders. Availability under the
facility is limited to a borrowing base calculated upon eligible accounts
receivable, inventory and letters of credit. As of January 2, 1999, there were
direct borrowings of $7.6 million outstanding, $16.4 million in letters of
credit outstanding and $27.2 million available for future borrowings.
Pursuant to the Reorganization Plan, the Company issued $110 million in
Senior Notes. The Senior Notes bear interest at 12.75% per annum and mature on
March 31, 2004. Interest is payable semi-annually on March 31 and September 30.
Interest relating to the Senior Notes for fiscal 1998 totaled $14.0 million.
There are no principal payments due until maturity. To the extent that the
Company elects to undertake a secondary stock offering or elects to prepay
certain amounts a premium will be required to be paid.
The Company assumed from Leslie Fay a factoring/financing agreement with
Heller. The agreement was for the sole purpose of supporting the Sassco Fashions
Division. The agreement had a two year term expiring in February 1998. It
provided for Heller to act as the credit and collection arm of the Company. The
Company would receive funds from Heller as the receivables were collected. Any
amounts unpaid after 120 days would be guaranteed and paid to the Company by the
factor. The cost was .4% for the first $240 million in sales and .35% for sales
above that amount. The agreement was amended in January 1998 to add an
additional 18 months to the term of the arrangement and lower the rate to .35%
for the first $250 million in sales and .3% on the excess over that amount.
Capital expenditures were $5.7 million and $4.7 million for fiscal 1998 and
fiscal 1997, respectively. Capital expenditures for 1998 represent spending
associated with the relocation to a new sales, production and design office,
continued retail outlet store development, overseas facilities development and
computer system improvements. Capital expenditures for the fiscal year ending
January 1, 2000 are anticipated to total approximately $5.0 million and are
expected to cover costs associated with continued retail outlet store
development, computer system improvements and China factory expansion.
On March 16, 1999, the Company issued a joint press release with Anne Klein
announcing, among other things, the Purchase Transaction. The Company and Anne
Klein also jointly announced the signing of a licensing agreement under which
Anne Klein granted to the Company an exclusive, international
24
license for ANNE KLEIN-Registered Trademark- women's and girl's sportswear,
suits and dresses under the ANNE KLEIN-Registered Trademark-, ANNE KLEIN
II-Registered Trademark- and A LINE ANNE KLEIN-TM-trademarks. Completion of the
Purchase Transaction and the licensing agreement are subject to obtaining
certain required regulatory and other consents and approvals. Completion of the
Purchase Transaction is also subject to attaining financing for the trademark
acquisition.
YEAR 2000 COMPLIANCE
STATE OF READINESS
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Company uses software developed and supported by third
parties for all mission critical applications including order entry,
distribution, shipping, electronic data interchange ("EDI"), and for its retail
operations. Each of these software vendors has assured the Company in writing
that the current version of their software has been tested and is Year 2000
compliant. The Company has initiated a testing project that will verify such
assurances. This testing is expected to be completed by the early part of the
second quarter 1999.
The Company is also highly dependent on its customers' ability to transmit
and receive EDI documents such as purchase orders, invoices and advance shipping
notices. The Company is in the process of testing the exchange of electronic
information with a number of retailers in order to ensure Year 2000 compliance
and expects this evaluation to be completed by the early part of the second
quarter 1999.
In addition, the Company may face some risk to the extent that suppliers of
products and others with whom the Company has a material business relationship
will not be Year 2000 compliant. Accordingly, the Company has initiated formal
communications with significant suppliers and third parties in order to
determine the extent to which the Company may be vulnerable to the failure of
these suppliers and third parties to remediate their own Year 2000 issues. The
Company will review and evaluate the responses it receives and periodically
monitor the progress of these suppliers and third parties in addressing their
own Year 2000 issues.
The Company is also reviewing its non-information technology systems to
determine the extent of any changes that may be necessary and currently believes
that minimal changes are necessary for Year 2000 compliance.
COSTS
The total cost associated with the required testing and modifications to
become Year 2000 compliant is not expected to be material to the Company's
financial position. The estimated total cost of the Year 2000 project is
approximately $500,000. This cost estimate may change as the Company progresses
in its Year 2000 project and obtains additional information and conducts further
testing.
RISKS
Despite all efforts, however, there is no assurance that these systems will
be Year 2000 compliant under all the circumstances and volume stresses that may
actually be required. The possible consequences of the Company or its key
vendors, suppliers and customers not being fully year 2000 compliant by January
1, 2000 include, among other things, delays in the delivery of products, delays
in the receipt of goods, invoice and collection errors and inventory
obsolescence. Consequently, the business and results of operations of the
Company could be materially adversely affected by a temporary inability of the
Company to conduct its business in the ordinary course for a period of time
until after January 1, 2000.
25
CONTINGENCY PLANS
As an additional precaution, the Company is developing contingency plans to
mitigate the possible disruption in business operations that may result. These
plans which are dependent in large part to the responses the Company receives
from third parties with whom the Company has a material business relationship
are also expected to be completed during the second quarter 1999. Once
developed, contingency plans and related cost estimates will be continually
refined as additional information becomes available.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
All new standards relating to items that affect the statement of operations
of the Company in accordance with SAB 74 that were issued as of the date of
emergence from bankruptcy have been fully adopted by the Company.
In 1998, AcSEC issued SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5 establishes standards on accounting for start-up and
organization costs and in general, requires such costs to be expensed as
incurred. This standard is required to be adopted on January 1, 1999. The
Company's current policy is to expense such costs as incurred.
CHANGE IN METHOD OF ACCOUNTING
The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's financial statements using the principles
required by the American Institute of Certified Public Accountants' Statement of
Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE ("Fresh Start Accounting"). Pursuant to such principles, the
Company's assets, upon emergence from Chapter 11 are stated at "REORGANIZATION
VALUE", which is defined as the value of the entity before considering
liabilities on a going-concern basis following the reorganization and represents
the estimated amount a willing buyer would pay for the assets of the Company
immediately after the reorganization. The reorganization value for the Company
was determined by reference to the remaining liabilities plus the estimated
value of shareholders' equity of the outstanding shares of the Common Stock. The
reorganization value of the Company was allocated to the assets of the Company
in conformity with the procedures specified by Accounting Principles Board
Opinion No. 16, BUSINESS COMBINATIONS, for transactions reported on the basis of
the purchase method of accounting. In this allocation, identifiable assets were
valued at estimated fair values, and any excess reorganization value has been
recorded as "reorganization value in excess of identifiable assets" (a long-term
intangible asset similar to "goodwill").
IMPACT OF ASIAN FINANCIAL AND CURRENCY CRISIS
To date, the Company has not experienced any difficulty in obtaining needed
raw material from its primary sources of supply in the Far East which are
located in Japan, nor has it experienced any problems with its sewing
contractors in Taiwan, the Philippines, Hong Kong and China. Over the past year,
the region has suffered extreme volatility in its local financial markets and
currency exchanges. As a result, no assurance can be given that the Company will
continue to have an uninterrupted source of supply from the region. 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. During fiscal 1998, the Company experienced favorable pricing as a
result of the Asian financial situation, which may not be sustainable in the
long term.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
typically identified by the words "believe", "expect", "intend", "estimate" and
26
similar expressions. Those statements appear in an number of places in this
report and include statements regarding the intent, belief or current
expectation of the Company or its directors or officers with respect to, among
other things, trends affecting the Company's financial conditions and results of
operations and the Company's business and growth strategies. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those
projected, expressed or implied in the forward-looking statements as a result of
various factors (such factors are referred to herein as "Cautionary
Statements"), including but not limited to the following: (i) the Company's
limited operating history, (ii) potential fluctuations in the Company's annual
operating results, (iii) the Company's concentration of revenues, (iv)
challenges facing the Company related to its rapid growth, (v) the Company's
dependence on a limited number of suppliers and (vi) the ability of the Company
and third parties, including customers or suppliers, to adequately address Year
2000 issues. The accompanying information contained in this report, including
the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations", identifies important factors
that could cause such differences. Such forward-looking statements speak only as
of the date of this report, and the Company cautions potential investors not to
place undue reliance on such statements. The Company undertakes no obligation to
update or revise any forward-looking statements. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not invest in derivative financial instruments or other
market risk sensitive instruments, except for short-term government and
commercial securities. Accordingly, the Company does not believe that it is
exposed to any material market risk with regard to such instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated/Combined Financial Statements and Financial Statement
Schedule of the Company and its subsidiaries attached hereto and listed on the
index to financial statements set forth in Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
The Company's directors, executive officers and key employees are as
follows:
NAME AGE POSITION
- ------------------------------------ ----------- ---------------------------------------------------------
Arthur S. Levine.................... 58 Chairman of the Board and
Chief Executive Officer (1)
William J. Nightingale.............. 69 Director (1)
Salvatore M. Salibello.............. 53 Director (2)
Larry G. Schafran................... 60 Director (1)
Denis J. Taura...................... 59 Director (2)
Olivier Trouveroy................... 43 Director (1)
Gregg I. Marks...................... 46 President
Lester E. Schreiber................. 50 Chief Operating Officer and Director (1)
Mary Ann Domuracki.................. 44 Executive Vice President--Finance and Administration (3)
Dennis P. Kelly..................... 52 Chief Financial Officer
Barbara Bennett..................... 46 Vice President--Design
Peter Eng........................... 44 Vice President--Piece Goods
Peter Huang......................... 63 Director of Production--Taiwan/Philippines
Peter Lee........................... 51 Managing Director--Asia Expert, Ltd.
- ------------------------
(1) Directors of the Company who have served in such capacity since June 1997.
(2) Directors of the Company who have served in such capacity since July 1998.
(3) Mrs. Domuracki joined the Company in January 1999.
DIRECTORS AND EXECUTIVE OFFICERS
Each director of the Company serves on the board of directors until the date
of the next Annual Meeting of Stockholders and until their respective successors
have been duly elected and qualified. The Company's directors and executive
officers are as follows:
ARTHUR S. LEVINE has been the Chairman of the Board and Chief Executive
Officer of the Company since June 1997. He has been in the apparel business his
entire career having started with Stacy Ames. In 1975, Mr. Levine established
Sassco Fashions, Ltd. which he then sold to Leslie Fay in May 1980 and since
that date he has operated the Company as an autonomous entity. Mr. Levine is
responsible for the Company's dominance in the suit business. This has been
accomplished through his emphasis on product, quality, fit and value. His
attention to detail and consistency of product (fit and make) has propelled the
Company to its number one position in the suit marketplace.
WILLIAM J. NIGHTINGALE has been a director of the Company since June 1997.
Mr. Nightingale is currently a Senior Advisor of Nightingale & Associates, LLC,
a general management consulting firm, and has served in various capacities with
the firm, including Chairman and Chief Executive Officer, since July 1975.
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Mr. Nightingale is also a director of Furr's/Bishops, Inc., and Rings End, Inc.;
and a trustee of the Churchill Tax Free Bond Fund, Churchill Cash Reserves
Trust, and Narragansett Tax Free Bond Fund.
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. Prior to founding Salibello & Broder, Mr. Salibello worked at Coopers &
Lybrand LLP and Ernst & Young LLP. He is also a director of Nine West Group,
Inc.
LARRY G. SCHAFRAN has been a director of the Company since June 1997. Mr.
Schafran has served as the managing general partner of L.G. Schafran &
Associates, a real estate investment and development firm, since October 1984.
Mr. Schafran is also Chairman of the Board of Delta-Omega Technologies, Inc., a
specialty chemical company involved in the research, development, manufacturing
and marketing of environmentally safe products that have applications in soil
remediation. He is also a director of Publicard, Inc., a diversified investment
company and an affiliated company of Balfour Investors Incorporated, a
shareholder and noteholder of the Company's securities, as well as a director of
COMSAT Corporation and Terragon Realty Investors, Inc.
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
April 1998. From September 1991 to March 1998, he served as Chairman of D. Taura
& Associates, a consulting-firm. From 1972 to 1991, Mr. Taura was a partner of
KPMG Peat Marwick LLP. Mr. Taura is also a director of Darling International,
Inc.
OLIVIER TROUVEROY has been a director of the Company since June 1997. Since
1992, Mr. Trouveroy has been with ING Equity Partners and its predecessors and
affiliates, and currently serves as a Managing Partner, responsible for
originating, structuring and managing equity and debt investments. From 1990 to
1992, Mr. Trouveroy was a Managing Director in the Corporate Finance Group
("CFG") of General Electric Capital Corporation in charge of CFG's office in
Paris, France. From 1984 to 1990, Mr. Trouveroy held various positions in the
Mergers and Acquisitions department of Drexel Burnham Lambert in New York. Mr.
Trouveroy also serves as a director of e.spire Communications, Inc. and Cost
Plus, Inc.
GREGG I. MARKS, the President of the Company, has been affiliated with the
Company since August 1983 and has held the position of President since January
1989. Mr. Marks has been an integral part of the Company's growth through the
development of numerous marketing strategies. Mr. Marks maintains numerous
relationships with the management of all major customers, balancing the various
product lines of the Company with the needs of the stores, and ultimately, the
consumer. He is directly responsible for the supervision of the Kasper suit line
sales staff and the heads of all other divisions report directly to him. Prior
to joining the Company in August 1983, Mr. Marks served as sales manager at
Suits Galore, a manufacturer of women's suits, for a period of two years.
LESTER E. SCHREIBER has served as Chief Operating Officer since May 1996 and
has been a director of the Company since June 1997. Mr. Schreiber's
responsibilities include the general operations of the Company including the
reprocessing and distribution center and management information systems. Prior
to becoming Chief Operating Officer of the Company, Mr. Schreiber served as Vice
President of Operations from January 1989 to April 1996. Prior to joining the
Company, Mr. Schreiber was Chief Financial Officer and Vice President of
Operations at Maytex Mills, a manufacturer and distributor of household
furnishings from March 1987 to December 1988.
MARY ANN DOMURACKI, Executive Vice President--Finance and Administration,
joined the Company in January 1999. Mrs. Domuracki's responsibilities include
corporate finance and general administrative matters of the Company. Prior to
joining the Company, Mrs. Domuracki worked as a consultant with the financial
advisory firm Conway Del Genio Gries & Co., LLC from April 1998 to December
1998. From June 1987 to March 1998, Mrs. Domuracki held several executive
positions at Danskin, Inc., ultimately
29
serving as Chief Executive Officer and President from April 1996 to March 1998.
Mrs. Domuracki is a certified public accountant.
DENNIS P. KELLY, Chief Financial Officer, has been affiliated with the
Company since May 1995. Mr. Kelly's responsibilities include all financial and
accounting functions of the Company. Prior to joining the Company, Mr. Kelly
worked in several executive positions, most recently as Vice President and
Controller of Crystal Brands, Inc., a diversified apparel and jewelry
manufacturer from October 1985 to February 1995. Mr. Kelly is a certified public
accountant and an attorney.
KEY EMPLOYEES
The following key employees of the Company make significant contributions to
the operations of the Company:
BARBARA BENNETT, Vice President--Design, joined the Company in October 1980.
As head of the Company's in-house design studio, Ms. Bennett is responsible for
coordinating the input she receives from the Company's sales staff, her design
staff, and her analysis of the market to oversee the design of each of the
Company's product lines on a timely basis. Ms. Bennett travels frequently to
Europe and monitors the domestic market to keep abreast of fashion trends. In
addition, Ms. Bennett works with key customers and is involved in the
development of the Company's computer design system. Prior to joining the
Company, Ms. Bennett was a designer at Leslie Fay for two years.
PETER ENG, Vice President--Piece Goods, joined the Company in November 1982.
Mr. Eng is responsible for the development of new fabrics as well as variations
of current fabrics. Mr. Eng travels through Europe in search of new ideas and
trends, and to the Far East to ensure that the fabrics purchased by the Company
meet the Company's specifications. As a result, Mr. Eng has developed key
relationships with the management of the Company's contractors and suppliers.
PETER HUANG, Director of Production--Taiwan/Philippines, has been affiliated
with the Company since April 1977. Through his long-standing relationships with
the Company's production factories and his staff, Mr. Huang is responsible for
the timeliness of the Company's deliveries and ensuring the adherence to the
Company's standards of quality.
PETER LEE, Director--Asia Expert, Ltd., joined the Company in January 1997
as Managing Director of the Hong Kong buying office. Prior to joining the
Company, Mr. Lee served for 25 years as Vice President in charge of
administration and production in Taiwan and the Philippines for Carnival
Textiles, a publicly-traded Taiwan company and one of the Company's largest
suppliers.
COMMITTEES
On June 10, 1997, the Board of Directors established an Audit Committee, a
Compensation Committee and a Finance Committee.
The Company's Audit Committee is currently composed of Messrs. Nightingale,
Salibello and Schafran. 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. Salibello,
Schafran, Taura and Trouveroy. 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.
30
The Finance Committee is currently composed of Messrs. Nightingale,
Salibello, Schafran, Taura and Trouveroy. The function of the Finance Committee
is to evaluate and review on a continuing basis specific financing programs and
requirements to meet the near and long-term needs of the Company; to advise
management on the Company's business plans and budgets; to review the
organization and functions of the Company's finance department; and to
participate in the development and implementation of the investment and the
investor programs.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities 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 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 1998, with the
exception of Messrs. Levine, Schreiber, Cohn, Nightingale, Schafran, Sind,
Trouveroy, Marks, Kelly and Ms. Bennett, each of which filed a late Form 3. Mr.
Nightingale also filed a Form 5 reporting two late transactions. Mr. Marks also
filed two late Forms 4 reporting, in the aggregate, four transactions. Mr.
Schafran also filed a late Form 4 reporting five transactions.
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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, 1996, January 3, 1998 and January 2, 1999 to the Chief
Executive Officer, and the four most highly compensated executive officers/key
employees (the "Named Executive Officers") and to all executive officers of the
Company as a group.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
------------------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ---------------------