SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended APRIL 4, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to _______________
Commission file number: 0-24179
KASPER A.S.L. LTD.
(Exact name of registrant as specified in its charter)
State of incorporation: DELAWARE IRS Employer Identification No: 22-3497645
-------- ----------
77 Metro Way, Secaucus, New Jersey 07094
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(Address and zip code of principal executive office)
(201) 864-0328
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of June 1, 1998 was 6,800,000.
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at April 4,
1998 and January 3, 1998........................................2
Condensed Consolidated/Combined Statements of
Operations for the Thirteen weeks ended April 4, 1998
and Fourteen weeks ended April 5, 1997..........................3
Condensed Consolidated/Combined Statements of Cash
Flows for the Thirteen weeks ended April 4,
1998 and Fourteen weeks ended April 5, 1997.....................4
Notes to Condensed Consolidated/Combined Financial Statements......5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................16
Item 6. Exhibits and Reports on Form 8-K..................................16
SIGNATURES....................................................................17
EXHIBIT INDEX.................................................................18
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS APRIL 4, JANUARY 3,
1998 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................. $ 2,182 $ 16,677
Accounts receivable-net of allowances for possible losses of
$20,269 and $18,725 respectively .................................... 63,806 30,000
Inventories ............................................................ 75,124 78,796
Prepaid expenses and other current assets .............................. 5,212 4,462
--------- ---------
Total Current Assets ............................................. 146,324 129,935
--------- ---------
Property, Plant and Equipment, at cost less accumulated
depreciation and amortization of $3,708 and $2,985,
respectively ............................................................. 14,458 14,337
Reorganization value in excess of identifiable assets, net of
accumulated amortization of $2,716 and $1,902, respectively .............. 62,465 63,279
Trademarks, net of accumulated amortization of $1,214 and $850,
respectively ............................................................. 49,786 50,150
Other Assets, at cost less accumulated amortization of $811 and
$596, respectively ....................................................... 2,740 2,955
--------- ---------
Total Assets ..................................................... $ 275,773 $ 260,656
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................................... $ 18,533 $ 17,637
Accrued expenses and other current liabilities ......................... 6,377 6,703
Interest Payable ....................................................... 48 3,555
Income taxes payable ................................................... 3,771 1,164
--------- ---------
Total Current Liabilities ........................................ 28,729 29,059
Long-Term Liabilities:
Deferred Taxes ......................................................... 639 639
Long-Term Debt ......................................................... 110,000 110,000
Bank Revolver .......................................................... 10,923 --
Minority Interest ...................................................... 520 --
--------- ---------
Total Liabilities ................................................ 150,811 139,698
Commitments and Contingencies
Shareholders' Equity:
Common Stock, $0.01 par value; 20,000,000 shares
authorized; 6,800,000 shares issued and outstanding ................. 68 68
Preferred Stock, $0.01 par value; 1,000,000 shares
authorized; none issued and outstanding ............................. -- --
Capital in excess of par value ......................................... 119,932 119,932
Retained Earnings ...................................................... 4,980 972
Accumulated Comprehensive Income:
Cumulative Translation Adjustment ...................................... (18) (14)
--------- ---------
Total Shareholders' Equity ....................................... 124,962 120,958
--------- ---------
Total Liabilities and Shareholders' Equity ............................. $ 275,773 $ 260,656
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated/Combined Financial Statements
are an integral part of these balance sheets.
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<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
-------------- | --------------
THIRTEEN WEEKS | FOURTEEN WEEKS
ENDED | ENDED
APRIL 4, | APRIL 5,
1998 | 1997
---------- | ----------
(Unaudited) | (Unaudited)
<S> <C> <C>
Net Sales ........................................ $ 96,132 | $ 99,231
Cost of Sales .................................... 67,960 | 74,165
---------- | ----------
Gross profit ............................... 28,172 | 25,066
Operating Expenses: |
Selling, warehouse, general and |
administrative expenses .......................... 15,089 | 14,988
Depreciation and Amortization .................... 2,059 | 713
---------- | ----------
Total operating expenses ................... 17,148 | 15,701
---------- | ----------
Operating income ................................. 11,024 | 9,365
Interest and Financing Costs ..................... 4,111 | 462
---------- | ----------
Income before provision for income taxes ......... 6,913 | 8,903
Provision for Income Taxes ....................... 2,905 | 3,561
---------- | ----------
Net Income ....................................... $ 4,008 | $ 5,342
========== | ==========
Basic earnings per share ......................... .59 | --
========== |
Diluted earnings per share ....................... .59 | --
========== |
Weighted average number of shares used in |
computing Basic earnings per share ............... 6,800,000 |
Weighted average number of shares used in |
computing Diluted earnings per share ............. 6,800,000 |
</TABLE>
The accompanying Notes to Condensed Consolidated/Combined Financial Statements
are an integral part of these financial statements.
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<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Reorganized| Predecessor
Company | Company
-------- | --------
Thirteen | Fourteen
Weeks | Weeks
Ended | Ended
-------- | --------
April 4, | April 5,
1998 | 1997
-------- | --------
(Unaudited) | (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities: |
Net income ........................................................ $ 4,008 | $ 5,342
Adjustments to reconcile net income to net cash (used in) |
provided by operating activities: |
Depreciation and amortization ................................... 1,302 | 548
Amortization of reorganization value in excess of |
identifiable assets ........................................... 814 | --
Amortization of excess purchase price over net |
assets acquired ............................................... -- | 165
Excess of cost over fair value of assets acquired ............... -- | (23)
Income applicable to minority interest .......................... 520 | --
Change in provision for possible losses on accounts receivable 1,544 | 237
Decrease (increase) in: |
Accounts receivable ....................................... (35,350) | (16,450)
Inventories ............................................... 3,672 | 24,703
Prepaid expenses and other current assets ................. (750) | (948)
Increase (decrease) in: |
Accounts payable, accrued expenses and other |
current liabilities .................................... 570 | (2,272)
Interest Payable .......................................... (3,507) | --
Income taxes payable ...................................... 2,607 | 113
-------- | --------
Total adjustments ...................................... (28,578) | 6,073
-------- | --------
Net cash (used in) / provided by operating activities .. (24,570) | 11,415
-------- | --------
|
Cash Flows from Investing Activities: |
Capital expenditures net of proceeds from the sale of fixed |
assets ....................................................... (844) | (1,762)
-------- | --------
Net cash used in investing activities ........................... (844) | (1,762)
-------- | --------
|
Cash Flows from Financing Activities: |
Bank Revolver ................................................... 10,923 | --
Net (decrease) in cash invested with Leslie Fay ................. -- (9,061)
-------- | --------
Net cash provided by / (used in) financing activities .......... 10,923 | (9,061)
-------- | --------
Effect of exchange rate changes on cash and cash equivalents ........ (4) | --
-------- | --------
Net (decrease) increase in cash and cash equivalents ................ (14,495) | 592
|
Cash and cash equivalents, at beginning of period ................... 16,677 | 1,886
-------- | --------
|
Cash and cash equivalents, at end of period ......................... $ 2,182 | $ 2,478
======== | ========
</TABLE>
The accompanying Notes to Condensed Consolidated/Combined Financial Statements
are an integral part of these financial statements.
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<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The Condensed Consolidated/Combined Financial Statements included
herein have been prepared by Kasper A.S.L., Ltd. (name legally changed from
Sassco Fashions, Ltd. on November 5, 1997) and subsidiaries (Kasper A.S.L., Ltd.
being sometimes referred to, and together with its subsidiaries collectively
referred to, as the "Company" or "Kasper" as the context may require) without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted from this report; as is permitted by
such rules and regulations; however the Company believes that the disclosures
are adequate to make the information presented not misleading. These Condensed
Consolidated/Combined Financial Statements included herein should be read in
conjunction with the Consolidated/Combined Financial Statements and the notes
thereto included in the Company's Registration Statement on Form S-1 for the
Fiscal Year ended January 3, 1998.
In the opinion of management, the accompanying interim Condensed
Consolidated/Combined Financial Statements contain all material adjustments
necessary to present fairly the Condensed Consolidated/Combined financial
condition, results of operations, and changes in financial position of
shareholders' equity of Kasper and its subsidiaries for the interim periods
presented.
Due to the Company's Reorganization and implementation of Fresh Start
Reporting (see Note 2), the Condensed Consolidated/Combined Financial Statements
for the new Reorganized Company (period starting June 5, 1997, the effective
date of the Reorganized Company's emergence from bankruptcy) are not comparable
to those of the Predecessor Company.
A black line has been drawn on the accompanying Condensed
Consolidated/Combined Financial Statements to distinguish between the
Reorganized Company and the Predecessor Company.
NOTE 2. FRESH START REPORTING
Kasper was a division of The Leslie Fay Company, Inc. ("Leslie Fay",
formerly The Leslie Fay Companies, Inc.), a Delaware corporation which operated
its business as a debtor in possession subject to the jurisdiction and
supervision of the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court") until June 4, 1997. The Condensed
Consolidated/Combined Financial Statements herein presented include the
operations of three related Hong Kong corporations, Asia Expert Limited ("AEL"),
Tomwell Limited ("Tomwell"), and Viewmon Limited ("Viewmon"), none of which were
part of the Leslie Fay bankruptcy proceeding. These three Hong Kong corporations
were subsidiaries of Leslie Fay (upon emergence from bankruptcy these entities
became subsidiaries of Kasper) that procure and arrange for the manufacture of
apparel products in the Far East solely for the benefit of Kasper. The Condensed
Consolidated/Combined Financial Statements also include the results of Kasper
Europe, Ltd., Kasper Canada, ASL Retail Outlets, Inc. and ASL/K Licensing Corp.,
all of which are wholly owned subsidiaries of the Company. Kasper Canada is a
70% owner of Kasper Partnership. The portion of Kasper Partnership pertaining to
its minority owner is reflected in the accompanying financial statements as
minority interest. The Condensed Consolidated/Combined Financial Statements of
Kasper, AEL, Tomwell and Viewmon have been prepared on a stand-alone basis in
accordance with generally accepted accounting principles applicable to a going
concern. The Predecessor Company financial
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<PAGE>
data reflects the combined results of Kasper, AEL, Tomwell, and Viewmon. The
financial statements of the Reorganized Company are consolidated as opposed to
combined because as of the date of reorganization, the three Hong Kong
corporations became subsidiaries of Kasper. Prior to the reorganization, these
entities were subsidiaries of Leslie Fay and, accordingly, the financial
statements were combined for those periods. The Company's fiscal year ends on
the Saturday closest to December 31st. The fiscal year ended January 3, 1998
("1997") included 53 weeks.
Leslie Fay was operating its business as a debtor in possession
subject to the jurisdiction of the Bankruptcy Court. On April 5, 1993, Leslie
Fay and certain of its wholly owned subsidiaries filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"),
as a result of the announcement of accounting irregularities, numerous
stockholder and other party lawsuits filed against the Company and its
directors, and the breach of certain provisions of its financing agreement at
the time. On October 31, 1995, the Debtors and the Committee of Unsecured
Creditors (the "Creditors Committee") filed Leslie Fay's Plan of Reorganization
(the "Plan") pursuant to Chapter 11 of the Bankruptcy Code.
The Plan was subsequently amended on March 13, 1996, December 5, 1996,
February 3, 1997 and February 28, 1997. On December 5, 1996, the Debtors filed a
Disclosure Statement for the Amended Joint Plan of Reorganization pursuant to
Chapter 11 of the Bankruptcy Code (the "Disclosure Statement"), which was also
subsequently amended on February 3, 1997 and February 28, 1997. The Plan
provided for, among other things, the separation of the Debtors' estates and
assets into two separate reorganized entities. Under the Plan, stockholders of
the Company would not retain or receive any value for their interest. The
Debtors obtained Bankruptcy Court approval of the Disclosure Statement on
February 28, 1997. The Plan was approved by the creditors and on April 21, 1997,
the Bankruptcy Court confirmed the Plan. Refer to the Condensed Consolidated
Financial Statements of Leslie Fay for the fiscal year ended December 28, 1996,
included in Leslie Fay's Annual Report on Form 10-K, for more information
regarding Leslie Fay's bankruptcy proceedings.
The Plan called for the spin-off of Kasper as a newly organized entity
and which consists of Kasper, AEL, Tomwell, Viewmon, Sassco Europe and ASL
Retail (collectively referred to as "Kasper A.S.L., Ltd. and Subsidiaries).
On June 4, 1997, the Plan was consummated by Leslie Fay 1)
transferring the equity interest in both Leslie Fay and Kasper, to its creditors
in exchange for relief from the aggregate amount of the claims estimated at
$338,000,000; 2) assigning to certain creditors the ownership rights to notes
aggregating $110,000,000 payable by Kasper; and 3) transferring the assets
(including $10,963,000 of cash) and liabilities of the then Sassco division to
Kasper and the assets and liabilities of Leslie Fay's Dress and Sportswear
divisions to three wholly owned subsidiaries of Leslie Fay. In addition, Leslie
Fay retained approximately $41,080,000 in cash, of which $23,580,000 will be
used to pay administrative claims as defined in the Plan. As provided for in the
Plan, the Company has issued approximately eighty (80%) percent of its 6,800,000
of new shares to its creditors in July 1997. The remaining shares will be held
back pending the resolutions of certain litigation before the Bankruptcy Court.
On June 4, 1997, Leslie Fay emerged from bankruptcy and Kasper has emerged as a
newly organized separate entity.
Pursuant to the guidelines provided by SOP 90-7, the Company adopted
fresh-start reporting with a reorganization value of $120,000,000 and allocated
the reorganization value to its net assets on the basis of the purchase method
of accounting.
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<PAGE>
The fresh-start reporting reorganization value of $120,000,000 was
based on averaging several valuation methodologies prepared by an independent
appraiser. A five-year analysis of the Company's actual and projected operations
(fiscal years ended 1997-2001) was prepared by management and a discounted cash
flow methodology was applied to those numbers. A equity value was determined by
calculating the impact of various assumption changes to the five year
projections and adding the projected cash flows for the first four years to a
"capitalization" of the fifth year's projected cash flow under each assumption.
The fifth year's projected cash flow was capitalized into value and discounted
to the present.
The aggregate cash flow value was then discounted to its present
value, using a discount rate of 14%. The reorganization values were then
weighted with a range between $118,000,000 and $123,000,000, and $120,000,000
was established as the Company's reorganization value.
The five-year cash flow projections were based on estimates and
assumptions about circumstances and events that have not yet taken place. Such
estimates and assumptions are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the Company,
including, but not limited to, those with respect to the future course of the
Company's business activity.
NOTE 3. INVENTORIES
Inventories are valued at lower of cost or (first-in, first-out,
"FIFO") market.
Inventories, net of reserves, consist of the following:
APRIL 4, JANUARY 3,
1998 1998
------- -------
(In thousands)
Raw materials $38,388 $32,121
Work in process 3 3
Finished goods 36,733 46,672
------- -------
Total inventories $75,124 $78,796
======= =======
NOTE 4. INCOME PER SHARE
The computation of income per common share is based upon the weighted
average number of common shares outstanding during the period. The pro forma
weighted average number of common shares outstanding and pro forma net income
per common share for the period ended April 5, 1997 have not been presented
because, due to the restructuring and implementation of Fresh Start Reporting
they are not comparable to subsequent periods.
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<PAGE>
NOTE 5. DEBT
At April 4, 1998, there were direct borrowings of $10,923,000
outstanding under the Bank Boston Credit Agreement and approximately $19,341,000
outstanding in letters of credit under the facility. The Company has
approximately $26,600,000 available for future borrowings as of April 4, 1998.
The Company paid $2,422,000 in commitment and related fees in
connection with the credit facility in June 1997. These fees are included in
other assets and will be amortized as interest and financing costs over the term
of the Credit Agreement (three years).
NOTE 6. COMMITMENTS AND CONTINGENCIES
On April 5, 1993, Leslie Fay and several of its subsidiaries filed
voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy
Code. All civil litigation commenced against Leslie Fay and those referenced
subsidiaries prior to that date was stayed under the Bankruptcy Code. By an
order dated April 30, 1997 (the "Confirmation Order"), the Bankruptcy Court
confirmed the Plan. The Plan was consummated on June 4, 1997.
The Confirmation Order, inter alia, dismissed with prejudice all
pending litigation's, and released all claims that could have been brought in
litigation. Both prior to and subsequent to the Filing Dates, various class
action suits were commenced on behalf of certain prior stockholders of the
Company. Any claims against the Company arising out of these suits were
discharged as part of, and in accordance with the terms of the Plan.
Accordingly, whatever the eventual outcome of these cases, there can be no
material financial impact on the Company based on the terms of the Plan.
On November 17, 1997, the Company's wholly-owned subsidiary, Asia
Expert, Ltd. received a letter from the United States Customs Service stating
that a monetary claim in the amount of $694,860 was being contemplated against
Asia Expert, Ltd. as a result of an alleged trans-shipment of goods in late 1995
from China by a contractor. The trans-shipment in question involved a Hong Kong
contractor who allegedly diverted goods that were to be sewn in Hong Kong to
China. Upon completion, the goods were then returned to Hong Kong for shipment
to the United States without disclosing the diversion, which would be a
violation of U.S. Customs laws. However, it is the Company's position that its
subsidiary did not knowingly or intentionally participate in any violation of
U.S. Custom laws and the Company intends to vigorously pursue all appropriate
legal defenses. The Company has conducted its own investigation through its
customs legal counsel. As a result of the investigation, the Company has
obtained an admission from the contractor that actual trans-shipments had
occurred, but that the contractor acted independently and intentionally
misrepresented its actions to the Company. The contractor further confirmed in a
sworn affidavit that these practices were done entirely without the knowledge of
the Company. Based upon these facts, the Company responded to U.S. Customs in a
letter dated January 8, 1998 requesting termination of the proceeding without
the issuance of any penalties. On May 4, 1998, U.S. Customs dismissed the case
without the issuance of any penalties.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 is currently evaluating the estimated impact on adoption, if any.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the foregoing consolidated 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
On June 4, 1997, Kasper A.S.L., Ltd. (the "Company") was separated
from The Leslie Fay Companies, Inc. ("Leslie Fay"), in accordance with the
fourth amended and restated joint plan of reorganization (the "Reorganization
Plan") approved by the U.S. Bankruptcy Court. On that date, all assets and
corresponding liabilities associated with the operation of the Sassco Fashions
Division of Leslie Fay, 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 Fashion
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 its common stock with a market value of $120 million and 12.75% 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 financial statements have been prepared to show the
Company as a free standing entity apart from Leslie Fay. Until 1996, the Company
was totally dependent upon Leslie Fay for all administrative support, including
accounting, credit, collections, legal, etc. 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 will record deferred taxes in accordance with the provision
of Statement of Financial Accounting Standards Number 109, "Accounting for
Income Taxes."
The Company's business is primarily the design, distribution and
wholesale sale of women's career suits, dresses and sportswear to principally
major department stores and specialty shops. Over the last five years, the
Company has increased its share of the wholesale market by expanding into all
markets, including the "lower moderate" (LeSuit), "upper moderate" (Kasper) and
"bridge" (Nipon) markets. The Company has also introduced a career sportswear
label, Kasper and Company(R), and career knitwear under the name Nina
Charles(TM). In analyzing the performance of the knitwear division and its
capital and operational requirements, the Company has 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. For Fall 1998, the Company will incorporate its knitwear
business into its Dress and Sportswear lines.
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<PAGE>
In July 1995, the Company started its retail outlet operations by
acquiring 22 lease properties, which were assigned to the Company by Leslie Fay
on June 4, 1997 pursuant to the Reorganization Plan. As of April 4, 1998, the
Company had 50 retail outlet stores throughout the United States. Sales at the
retail outlet stores totaled $38.6 million in the year ended January 3, 1998.
The stores operate under the name Kasper ASL(R), but also sell the Company's
other labels, including Nipon(R), Kasper and Company(R), Nina Charles(TM), Le
Suit(TM)and b. bennett(TM).
In connection with the separation from Leslie Fay, Leslie Fay
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 1997, the
Company received approximately $900,000 in licensing income from licensing
agreements.
On June 4, 1997, the Company acquired the trade name Kasper(R) 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 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.
The Company has plans to launch an advertising campaign beginning in
1998. Anticipated costs relating to the advertising campaign are $2.0 million.
Costs for advertising are expensed as incurred.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 4, 1998 AS COMPARED TO FOURTEEN WEEKS ENDED APRIL 5,
1997
NET SALES
Net Sales for the thirteen weeks ended April 4, 1998 (the "first
quarter 1998") were $96.1 million as compared to $99.2 for the fourteen weeks
ended April 5, 1997 (the "first quarter 1997"). Wholesale sales decreased to
$87.2 million for the first quarter 1998, from $91.6 million in the first
quarter 1997. However, the extra week's wholesale sales for the first quarter
1997 were $5.4 million, resulting in an overall increase of $1.0 million on a
comparable 13-week basis.
Retail sales increased to approximately $8.9 million in the first
quarter 1998 from approximately $7.6 million in the first quarter 1997, an
increase of approximately 16.8% due primarily to the net addition of 11 retail
outlet stores over the last 12 months. The extra week's retail sales in the
first quarter 1997 amounted to approximately $0.5 million, resulting in an
overall
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<PAGE>
increase of $1.8 million on a comparable 13-week basis. Comparable store sales
for the first quarter 1998 were $7.1 million as compared to $6.8 million for the
first quarter 1997, an increase of 4.4%.
GROSS PROFIT
Gross Profit as a percentage of net sales increased to 29.3% for the
first quarter 1998, compared to 25.3% for the first quarter 1997. The
improvement over the first quarter 1997 can be attributed to the higher retail
sales as well as the improved performance at the wholesale level. Wholesale
gross profit as a percentage of sales increased to 28.2% in the first quarter
1998 from 24.8% in the first quarter 1997.
Retail gross profit as a percentage of sales increased to 39.2% in the
first quarter 1998 from 38.6% in the first quarter 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $15.1
million in the first quarter 1998 as compared to $15.0 million in the first
quarter 1997, an increase of $.1 million. The extra week in the first quarter
1997 contributed an extra $1.1 million in selling, general and administrative
expenses, resulting in an overall increase of $1.2 million on a comparable 13
week period. Approximately $950 thousand of this increase is attributed to
increased selling, administrative and occupancy costs related to the net
addition of 11 retail outlet stores.
The remaining increase is associated with Wholesale operations.
Advertising expenses increased by approximately $550 thousand primarily as a
result of the new advertising campaign. In addition, Kasper operations in Canada
and the U.K. contributed approximately $300 thousand in additional selling,
general and administrative expenses. These increases were offset by a decrease
in royalty expense of approximately $400 thousand as a result of the trademark
acquisition, and an overall decrease of approximately $200 thousand in
administrative expenses as a result of the termination of consulting agreements
and Leslie Fay allocations due to the reorganization.
Selling, general and administrative expenses include the following:
(i) design expenses; (ii) production expenses, which includes 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, 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 advertising which is expected to increase by $2 million dollars in
1998.
AMORTIZATION OF REORGANIZATION ASSET
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 the first quarter 1998 totaling
approximately $800 thousand as opposed to no such expense in the first quarter
1997.
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<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $1.3 million in the first
quarter 1998 from $.7 million in the first quarter 1997 as a result of the
amortization charges associated with the 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 in the first quarter
1998 of approximately $400 thousand. The bank fees are being amortized over the
life of the financing agreement, which is three years, and resulted in
approximately $200 thousand of amortization charges for the first quarter 1998.
INTEREST AND FINANCING COSTS
Interest and financing costs increased to $4.1 million in the first
quarter 1998 from $.5 million in the first quarter 1997, an increase of
approximately $3.6 million. The increase is primarily attributable to the three
months interest expense on the $110 million 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 the Senior Notes for the first quarter 1998 totaled $3.5
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 $ 2.9 million for the first quarter
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, and timing differences relating primarily to customer reserves
and allowances, inventory, depreciation and amortization. Income taxes for
periods prior to June 4, 1997 were computed using the effective tax rate that
would have been applicable, had the Company been an independent entity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities decreased to $24.6 million
during the first quarter 1998 as compared to cash provided by operations of
$11.4 million for the first quarter 1997, primarily as a result of the increase
in accounts receivable.
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.
Effective June 5, 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 fiscal
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 April 4, 1998, there were direct
borrowings of $10.9 million outstanding, $19.3 million in letters of credit
outstanding and $26.6 million available for future borrowings.
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<PAGE>
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 the Senior Notes for the first quarter 1998 totaled $3.5
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 of Leslie Fay. 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 $.8 million and $1.8 million for the first
quarter 1998 and first quarter 1997, respectively. The decrease from the prior
year is a result of the move to the new warehouse facility that took place in
the first quarter 1997. Capital expenditures for the first quarter 1998
represent funds spent for new retail stores, overseas facilities development and
general improvements.
Capital expenditures for 1998 are anticipated to total approximately
$4.8 million and are expected to cover costs associated with a relocation to a
new sales, production and design office, continued retail outlet store
development, overseas facilities development and computer system improvements.
YEAR 2000 COMPLIANCE
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the 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 is utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the year 2000
compliance. The Company presently believes that, with modifications to existing
software and converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
The Company is also dependent on the efforts of its customers,
suppliers and software vendors. The Company's customers and suppliers are also
required to implement projects to make their systems and communications Year
2000 compliant. Failure to complete their efforts in a timely way could disrupt
the Company's operations including the ability to receive and ship its products
as well as to invoice its customers. Finally, the Company's plan is based upon
the representation of the vendors that market the software packages selected by
the Company. There is no guarantee that these new systems will be compliant
under all the circumstances and volume stresses that may actually be required by
the Company's operations through Year 2000.
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<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 is currently evaluating the estimated impact on adoption, if any.
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 amounts allocated to 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.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 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 similar
expressions. Those statements appear in a 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 and history of negative
cash flow and operating losses, (ii) potential fluctuations in the Company's
quarterly operating results, (iii) the
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<PAGE>
Company's concentration of revenues, (iv) challenges facing the Company as it
experiences rapid growth and (v) the Company's dependence on a limited number of
suppliers. 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 17, 1997, the Company's wholly-owned subsidiary, Asia
Expert, Ltd. received a letter from the United States Customs Service (the "U.S.
Custom Service") stating that a monetary claim in the amount of $694,860 was
being contemplated against Asia Expert, Ltd. as a result of an alleged
trans-shipment of goods in late 1995 from China by a contractor. The
trans-shipment in question involved a Hong Kong contractor who allegedly
diverted goods that were to be sewn in Hong Kong to China. Upon completion, the
goods were then returned to Hong Kong for shipment to the United States without
disclosing the diversion, which would be a violation of U.S. Customs laws.
However, it is the Company's position that its subsidiary did not knowingly or
intentionally participate in any violation of U.S. Custom laws and the Company
intends to vigorously pursue all appropriate legal defenses. The Company has
conducted its own investigation through its customs legal counsel. As a result
of the investigation, the Company has obtained an admission from the contractor
that actual trans-shipments had occurred, but that the contractor acted
independently and intentionally misrepresented its actions to the Company. The
contractor further confirmed in a sworn affidavit that these practices were done
entirely without the knowledge of the Company. Based upon these facts, the
Company responded to the U.S. Customs Service in a letter dated January 8, 1998
requesting termination of the proceeding without the issuance of any penalties.
On May 4, 1998, the Company's customs legal counsel received a letter from the
U.S. Customs Service responding to the Company's request. In the letter, the
U.S. Customs Service stated that it has decided to close the case against Asia
Expert, Ltd., based upon its review of the January 8, 1998 letter and the
documentation submitted therewith, as well as the statements made by the
contractor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 EDGAR Data Schedule
(b) Reports on Form 8-K:
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KASPER A.S.L., Ltd.
(Registrant)
/s/ Arthur S. Levine
--------------------------------
Arthur S. Levine
Chairman and Chief Executive Officer
Dated: June 10, 1998 /s/ Dennis P. Kelly
--------------------------------
Dennis P. Kelly
Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 EDGAR Data Schedule
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037067
<NAME> KASPER A.S.L. LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 2,182
<SECURITIES> 0
<RECEIVABLES> 84,075
<ALLOWANCES> 20,269
<INVENTORY> 75,124
<CURRENT-ASSETS> 146,324
<PP&E> 18,166
<DEPRECIATION> 3,708
<TOTAL-ASSETS> 275,773
<CURRENT-LIABILITIES> 28,729
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 124,894
<TOTAL-LIABILITY-AND-EQUITY> 275,773
<SALES> 96,132
<TOTAL-REVENUES> 96,132
<CGS> 67,960
<TOTAL-COSTS> 16,322
<OTHER-EXPENSES> 826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,111
<INCOME-PRETAX> 6,913
<INCOME-TAX> 2,905
<INCOME-CONTINUING> 4,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,008
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
