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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
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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
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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.
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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
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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.
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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.
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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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
-------------------------------------------------------------------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
AS OF:
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
FISCAL 1998 % FISCAL 1997 % FISCAL 1996 %
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
EBITDA BY SEGMENT
(000'S EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
FISCAL 1998 % FISCAL 1997 % FISCAL 1996 %
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ----------- ---------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
- ------------------------
(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.
28
<PAGE>
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
<PAGE>
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
<PAGE>
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.
31
<PAGE>
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
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
------------------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------------------------- --------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Arthur S. Levine............................. 1998 $ 2,000,000 $ --(1) -- $ 20,540(2)
Chairman of the Board 1997 1,200,000 -- 1,240,252 1,507,635(3)
and Chief Executive Officer 1996 100,000 65,000 -- 3,418,732(4)
Gregg I. Marks............................... 1998 $ 830,769 $ 115,000 -- $ 16,218(5)
President 1997 500,000 370,000 171,068 16,824(5)
1996 260,000 474,200 -- 11,228(5)
Lester E. Schreiber.......................... 1998 $ 258,173 $ 50,000 -- $ 17,052(6)
Chief Operating Officer 1997 162,580 62,500 85,536 16,382(6)
1996 100,080 131,500 -- 15,310(6)
Dennis P. Kelly.............................. 1998 $ 180,288 $ 5,000 -- $ 720(7)
Chief Financial Officer 1997 150,000 65,000 -- 576(7)
1996 150,000 60,000 -- 348(7)
Barbara Bennett.............................. 1998 $ 623,077 $ 50,000 -- $ 1,591(8)
Vice President--Design 1997 600,000 50,000 171,068 3,218(8)
1996 600,000 50,000 -- 1,477(8)
All Executive Officers as a group (4
persons)................................... 3,269,230 170,004 54,530
1998 $ $ -- $
1997 2,012,580 497,500 1,496,856 1,541,417
1996 610,080 730,700 -- 3,445,618
</TABLE>
- ------------------------
(1) Mr. Levine's employment agreement with the Company provides for a bonus
commencing in fiscal 1998 in an amount between $500,000 and $1.5 million
based upon the fulfillment of certain EBITDA hurdles for fiscal 1998, 1999
and thereafter.
(2) Includes $3,150 in Group Term Life Insurance and $17,390 in automobile
allowance.
(3) Includes $2,325 in Group Term Life Insurance, $17,390 in automobile
allowance and $1,487,920 in consulting fees which Mr. Levine received in
fiscal 1997 as principal of two consulting firms prior to June 4, 1997 at
which time Mr. Levine became Chairman of the Board and Chief Executive
Officer of the Company.
(4) Includes $450 in Group Term Life Insurance, $15,640 in automobile allowance
and $3,402,642 in consulting fees which Mr. Levine received in fiscal 1996
as principal of two consulting firms prior to June 4, 1997 at which time Mr.
Levine became Chairman of the Board and Chief Executive Officer of the
Company.
32
<PAGE>
(5) Includes $1,218, $1,824 and $428 in Group Term Life Insurance and $15,000,
$15,000 and $10,800 in automobile allowance for fiscal 1998, 1997 and 1996,
respectively.
(6) Includes $1,152, $482 and $160 in Group Term Life Insurance and $15,900,
$15,900 and $15,150 in automobile allowance for fiscal 1998, 1997 and 1996,
respectively.
(7) Represents $720, $576 and $348 in Group Term Life Insurance for fiscal 1998,
1997 and 1996, respectively.
(8) Represents $1,218, $1,566 and $1,218 in Group Term Life Insurance and a
clothing allowance of $373, $2,000 and $259 for fiscal 1998, 1997 and 1996,
respectively.
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END VALUE
TABLE
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during 1998 and
unexercised options held as of the end of such year. The price of a share of
Common Stock of the Company as of the close of business on December 31, 1998 was
$5.00. Accordingly, none of the Named Executive Officers would have realized any
value if they had exercised their options on such date.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
------------------- -------------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Arthur S. Levine....................... None N/A 496,101/744,151 $ 0.00/0.00
Gregg I. Marks......................... None N/A 68,427/102,642 0.00/0.00
Lester E. Schreiber.................... None N/A 34,214/51,321 0.00/0.00
Dennis P. Kelly........................ None N/A -- 0.00/0.00
Barbara Bennett........................ None N/A 68,427/102,642 0.00/0.00
</TABLE>
COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company is paid for service on
the Board of Directors at the rate of $40,000 per annum. Each current
non-employee Director also received an option to purchase 20,000 shares of
Common Stock. Such options vest ratably over the first three anniversaries of
the date of grant and are exercisable at a price of $14.00 per share. The
Company also reimburses each Director for reasonable expenses in attending
meetings of the Board of Directors. Directors who are also employees of the
Company are not separately compensated for their services as Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into a five-year employment agreement dated June 4,
1997 with Mr. Levine, which provides for an annual compensation of $2 million.
In addition to the base compensation, the agreement provides for a bonus
commencing in fiscal 1998 in an amount between $500,000 and $1.5 million based
upon the fulfillment of certain EBITDA hurdles for fiscal 1998, 1999 and
thereafter. The Company does not maintain a key person life insurance policy on
the life of Mr. Levine. The loss of Mr. Levine could have a material adverse
effect on the Company's business if a suitable replacement or replacements could
not be promptly found.
The employment agreement requires Mr. Levine to provide at least 30 days'
notice of intent to terminate the agreement. In addition, the employment
agreement provides that following termination, other than termination by Mr.
Levine for "good reason" (as defined in the agreement) or by the Company without
"cause" (as defined in the agreement) Mr. Levine shall not participate or engage
in, either directly or indirectly, any business activity that is directly
competitive with the Company for the balance of the original term of the
employment agreement.
33
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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.
On July 30, 1998, the Board of Directors approved the grant of stock options
to purchase 20,000 shares of Common Stock to each of Messrs. Salibello and Taura
under the same terms of the Director Options granted on June 10, 1997. The
market value per share on July 30, 1998 was $13.00.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding (i) the
beneficial ownership of the Common Stock as of March 26, 1999 based upon the
most recent information available to the Company for (i) each person known by
the Company who owns beneficially more than five percent of the Common Stock,
(ii) each of the Company's named executive officers and directors and (iii) all
executive officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 77 Metro Way,
Secaucus, New Jersey 07094.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OWNERSHIP
NAMES AND ADDRESS OF BENEFICIAL OWNER OWNED OF COMMON STOCK
- ---------------------------------------------------- ----------------- -----------------------
<S> <C> <C>
Arthur S. Levine.................................... 526,941(1) 7.2%
William J. Nightingale.............................. 6,867(2) *
Salvatore M. Salibello.............................. 100 *
Larry G. Schafran................................... 6,867(3) *
Denis J. Taura...................................... -- *
Olivier Trouveroy................................... 631,172(4) 9.3%
Gregg I. Marks...................................... 82,627(5) 1.2%
Lester E. Schreiber................................. 34,614(6) *
Dennis P. Kelly..................................... 200(7) *
Barbara Bennett..................................... 68,417(8) 1.0%
Whippoorwill Associates, Inc........................ 1,352,909 19.9%
11 Martine Avenue
White Plains, NY 10606
Blue Ridge L.P...................................... 730,000(9) 10.7%
660 Madison Avenue
New York, NY 10021
ING Equity Partners, L.P. I......................... 631,172(4) 9.3%
520 Madison Avenue
New York, NY 10022
Bay Harbor Management, L.C.......................... 379,571(10) 5.6%
777 South Harbour Island Boulevard, Ste. 270
Tampa, FL 33602
Officers and Directors as a group (10 persons)...... 1,357,805(11) 18.1%
</TABLE>
- ------------------------
* Less than one percent
34
<PAGE>
(1) Includes 496,101 shares of Common Stock issuable upon exercise of currently
exercisable Management Options, and 25,016 shares issued to Alco Design
Associates, Inc. Does not include approximately 709 shares of Common Stock
which may be distributed to Mr. Levine on an "if and when issued" basis
pursuant to the Holdback.
(2) Includes 6,667 shares of Common Stock issuable upon exercise of currently
exercisable options. Mr. Nightingale disclaims beneficial ownership of 100
shares which are held by his spouse.
(3) Includes 6,667 shares of Common Stock issuable upon exercise of currently
exercisable options. Mr. Schafran disclaims beneficial ownership of 100
shares which are held by his spouse.
(4) Includes 6,667 shares of Common Stock issuable upon exercise of currently
exercisable options which were issued to ING Equity Partners, L.P. I
pursuant to Mr. Trouveroy's status as a non-employee director of the
Company, a position for which he was designated by ING Equity Partners L.P.
I. Mr. Trouveroy, a director of the Company, is a partner of the general
partner of ING Equity Partners, L.P. I. He disclaims beneficial ownership of
all securities listed. Notwithstanding his disclaimer, Mr. Trouveroy may be
deemed to be a beneficial owner to the extent of his pecuniary interests in
the partnership. Does not include approximately 17,195 shares of Common
Stock which may be distributed to ING Equity Partners, L.P. I on an "if and
when issued" basis pursuant to the Holdback.
(5) Includes 68,427 shares of Common Stock issuable upon exercise of currently
exercisable Management Options. Mr. Marks disclaims beneficial ownership of
100 shares held by each of his two daughters.
(6) Includes 34,214 shares of Common Stock issuable upon exercise of currently
exercisable Management Options. Mr. Schreiber disclaims beneficial ownership
of 100 shares held by each of his spouse and two children.
(7) Mr. Kelly disclaims beneficial ownership of 100 shares held by his son.
(8) Includes 68,427 shares of Common Stock issuable upon exercise of currently
exercisable Management Options.
(9) These shares are also indirectly owned by JAG Holdings, LLC, the general
partner of Blue Ridge L.P. and John A. Griffin, the Managing Member of JAG
Holdings LLC, each of whom may also be deemed to be a beneficial owner of
such shares.
(10) These shares are also indirectly owned by Tower Investment Group, Inc., the
majority stockholder of Bay Harbor Management, L.C., Steven A. Van Dyke, a
stockholder and President of Tower Investment Group, Inc., and Douglas P.
Teitelbaum, a stockholder of Tower Investment Group, Inc., each of whom may
also be deemed to be a beneficial owner of such shares.
(11) Includes 687,170 shares of Common Stock issuable upon exercise of currently
exercisable Management and Director Options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by reference
to "Compensation Committee Interlocks and Insider Participation" under Executive
Compensation in Item 11.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
The Consolidated Financial Statements are set forth in the Index to
Consolidated Financial Statements and Financial Statement Schedules on
page F-1 hereof.
(2) Financial Statement Schedule:
The Financial Statement Schedule is set forth in the Index to
Consolidated Financial Statements and Financial Statement Schedules on
page F-1 hereof.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2 (1) Fourth Amended and Restated Joint Plan of Reorganization for Debtors (Leslie Fay Companies, Inc.)
Pursuant to Chapter 11 of the United States Bankruptcy Code Proposed by Debtors and Creditors'
Committee, dated April 18, 1997.
3.1(5) Amended and Restated Certificate of Incorporation as filed on May 30, 1997.
3.2(5) Amendment to Certificate of Incorporation as filed on November 5, 1997.
3.3(5) By-laws, as amended.
4.1(2) Indenture dated as of June 4, 1997 by and between the Registrant and IBJ Schroder Bank & Trust Company,
as trustee.
4.2(3) Supplemental Indenture, dated as of June 30, 1997, by and between the Registrant and IBJ Schroder Bank &
Trust Company, as trustee.
4.3(2) Form of Senior Note issued under the Indenture.
4.4(8) Specimen Certificate of the Company's Common Stock.
10.1(5) Revolving Credit Agreement dated as of June 4, 1997 by and among the Registrant BankBoston N.A.,
BancBoston Securities, Inc., Citicorp USA, Inc., Heller and certain other lenders (without exhibits).
10.2(5) Employment Agreement dated June 4, 1997 between the Registrant and Arthur S. Levine.
10.3(7) Lease Modification Agreement and Lease Agreement, each dated August 20, 1996, between the Registrant and
Import Hartz Associates.
10.4(5) Acquisition Agreement dated June 2, 1997 by and among the Registrant, ASL/K Licensing Corp, Herbert
Kasper and Forecast Designs, Inc.
10.5(5) Employment, Consulting and Non-Competition Agreement dated as of June 4, 1997 by and among Sassco
Fashions, Ltd., ASL/K Licensing Corp. and Herbert Kasper.
10.6(5) 1997 Management Stock Option Plan.
10.7(5) Form of Stock Option Agreement issued to Directors.
21 Subsidiaries of the Registrant
24 (6) Power of Attorney (included in signature page).
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
27 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibit No. 4 to the Registrant's Report on
Form 8-K (Commission File No. 022-22269) filed with the Commission on July
14, 1997 (the "Report on Form 8-K").
(2) Incorporated by reference to Exhibit No. 1 to the Registrant's Report on
Form 8-K.
(3) Incorporated by reference to Exhibit No. 3 the Registrant's Report on Form
8-K.
(4) Incorporated by reference to Exhibit No. 2 to the Registrant's Report on
Form 8-K.
(5) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Commission File No. 333-41629) filed with the Commission on December 5,
1997.
(6) Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No. 333-41629) filed
with the Commission on December 23, 1997.
(7) Incorporated by referenced to the Registrant's Amendment No. 2 to
Registration Statement on Form S-1 (Commission File No. 333-41629) filed
with the Commission on April 3, 1998.
(8) Incorporated by referenced to the Registrant's Form 8-A filed with the
Commission on May 1, 1998.
(b) REPORTS ON FORM 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
January 2, 1999.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Report of Arthur Andersen LLP.............................................................................. F-2
Consolidated Balance Sheets at January 2, 1999 and January 3, 1998......................................... F-3
Consolidated/Combined Statements of Operations for the Fiscal Year Ended January 2, 1999, the Seven Months
Ended January 3, 1998, the Five Months Ended June 4, 1997 and the Fiscal Year Ended December 28, 1996.... F-4
Consolidated/Combined Statements of Shareholders' Equity for the Fiscal Year Ended
January 2, 1999, the Seven Months Ended January 3, 1998, the Five Months Ended June 4, 1997 and the
Fiscal Year Ended December 28, 1996...................................................................... F-5
Consolidated/Combined Statements of Cash Flows for the Fiscal Year Ended January 2, 1999, the Seven Months
Ended January 3, 1998, the Five Months Ended June 4, 1997 and the Fiscal Year Ended December 28, 1996.... F-6
Notes to Consolidated/Combined Financial Statements for the Fiscal Year Ended January 2, 1999, the Seven
Months Ended January 3, 1998, the Five Months Ended June 4, 1997 and the Fiscal Year Ended December 28,
1996..................................................................................................... F-8
Schedule II--Valuation and Qualifying Accounts............................................................. F-25
</TABLE>
F-1
<PAGE>
Arthur Andersen LLP
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Kasper A.S.L., Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Kasper
A.S.L., Ltd. (a Delaware corporation) and subsidiaries (the "Reorganized
Company" see Note 2) as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of operations and shareholders' equity and cash flows
for the year ended January 2, 1999 and the seven-month period ended January 3,
1998. We have also audited the accompanying combined statements of operations
and divisional equity and cash flows of the Predecessor Company for the
five-month period ended June 4, 1997 and the year ended December 28, 1996. These
financial statements and schedule are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 2 to the consolidated/combined balance
sheets effective June 4, 1997, the Reorganized Company emerged from protection
under Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan
which was confirmed by the Bankruptcy Court on April 21, 1997. In accordance
with AICPA Statement of Position 90-7, the Reorganized Company adopted "Fresh
Start Reporting" whereby its assets, liabilities and new capital structure were
adjusted to reflect estimated fair values as of June 4, 1997. As a result, the
consolidated financial statements for the periods subsequent to June 4, 1997
reflect the Reorganized Company's new basis of accounting and are not comparable
to the Predecessor Company's pre-reorganization financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, (a) the financial position of the Reorganized Company
as of January 2, 1999 and January 3, 1998 and the results of their operations
and their cash flows for the year ended January 2, 1999 and the seven-month
period ended January 3, 1998, and (b) the results of the operations and cash
flows of the Predecessor Company for the five month period ended June 4, 1997
and the year ended December 28, 1996, all in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule Valuation and Qualifying
Accounts--Schedule II of this Form 10-K for the year ended January 2, 1999 is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
New York, New York
February 24, 1999 (Except for Note 16, as to which the date is March 16, 1999)
F-2
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................... $ 2,437 $ 16,677
Accounts receivable-net of allowances for possible losses of $16,754 and $18,725,
respectively.......................................................................... 32,721 30,000
Inventories............................................................................. 100,435 78,796
Prepaid expenses and other current assets............................................... 3,125 2,767
Deferred taxes.......................................................................... 2,943 1,695
---------- ----------
Total Current Assets.................................................................... 141,661 129,935
---------- ----------
Property, Plant and Equipment, at cost less accumulated depreciation and amortization of
$5,500 and $2,985, respectively......................................................... 16,881 14,337
Reorganization value in excess of identifiable assets, net of accumulated amortization of
$5,160 and $1,902, respectively......................................................... 60,021 63,279
Trademarks, net of accumulated amortization of $2,307 and $850, respectively.............. 48,693 50,150
Other Assets, at cost less accumulated amortization of $1,449 and $596, respectively...... 2,102 2,955
---------- ----------
Total Assets............................................................................ $ 269,358 $ 260,656
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................................ $ 14,539 $ 17,637
Accrued expenses and other current liabilities.......................................... 6,668 6,703
Interest Payable........................................................................ 3,797 3,555
Income taxes payable.................................................................... 646 1,164
---------- ----------
Total Current Liabilities............................................................... 25,650 29,059
Long-Term Liabilities:
Deferred Taxes.......................................................................... 1,630 639
Long-Term Debt.......................................................................... 110,000 110,000
Bank Revolver........................................................................... 7,569 --
Minority Interest....................................................................... 459 --
---------- ----------
Total Liabilities....................................................................... 145,308 139,698
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....................................................................... 4,142 972
Cumulative Other Comprehensive Income................................................... (92) (14)
---------- ----------
Total Shareholders' Equity.............................................................. 124,050 120,958
---------- ----------
Total Liabilities and Shareholders' Equity.............................................. $ 269,358 $ 260,656
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Consolidated/Combined Financial Statements are an
integral part of these balance sheets.
F-3
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
FISCAL SEVEN
YEAR MONTHS FIVE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED
--------- ----------- ----------- -----------
JANUARY DECEMBER
2, JANUARY 3, JUNE 4, 28,
1999 1998 1997 1996
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales..................................... $312,089 $175,602 $136,107 $311,550
Cost of Sales................................. 219,060 127,784 101,479 238,268
--------- ----------- ----------- -----------
Gross Profit.................................. 93,029 47,818 34,628 73,282
Operating Expenses:
Selling, general and administrative
expenses.................................... 61,984 31,802 23,374 50,263
Depreciation and Amortization................. 8,602 4,738 1,191 2,238
--------- ----------- ----------- -----------
Total operating expenses...................... 70,586 36,540 24,565 52,501
--------- ----------- ----------- -----------
Operating income.............................. 22,443 11,278 10,063 20,781
Interest and Financing Costs.................. 16,981 9,358 667 1,634
--------- ----------- ----------- -----------
Income before provision for income taxes...... 5,462 1,920 9,396 19,147
Provision for Income Taxes.................... 2,292 948 3,758 7,659
--------- ----------- ----------- -----------
Net Income.................................... $3,170 $972 $5,638 $11,488
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Basic earnings per common share............... .47 .14 -- --
--------- ----------- ----------- -----------
Diluted earnings per common share............. .47 .14 -- --
--------- ----------- ----------- -----------
Weighted average number of shares used in
computing Basic earnings per common share... 6,800,000 6,800,000 -- --
Weighted average number of shares used in
computing Diluted earnings per common
share....................................... 6,800,000 6,805,000 -- --
</TABLE>
The accompanying Notes to Consolidated/Combined Financial Statements are an
integral part of these financial statements.
F-4
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
PREDECESSOR COMPANY
<TABLE>
<CAPTION>
DIVISIONAL
EQUITY
----------
<S> <C>
BALANCE AT DECEMBER 30, 1995...................................................... $ 135,601
Net Income for the period......................................................... 11,488
Increase in investment with Leslie Fay............................................ 10,115
----------
BALANCE AT DECEMBER 28, 1996...................................................... $ 157,204
Net Income for the period......................................................... 5,638
Decrease in investment with Leslie Fay............................................ (30,479)
----------
BALANCE AT JUNE 4, 1997........................................................... $ 132,363
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
REORGANIZED COMPANY
<TABLE>
<CAPTION>
CUMULATIVE
CAPITAL IN OTHER
COMMON EXCESS OF COMPREHENSIVE RETAINED
STOCK PAR INCOME EARNINGS TOTAL
------------- ---------- ----------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 4, 1997.................................. $ -- $ -- $ -- $ -- $ --
Common Stock issued to Leslie Fay Creditors.............. 68 119,932 -- -- 120,000
Translation Adjustment................................... -- -- (14) -- (14)
Net Income for the period................................ -- -- -- 972 972
--- ---------- --- ----------- ----------
Comprehensive Income..................................... -- -- -- -- 958
--- ---------- --- ----------- ----------
BALANCE AT JANUARY 3, 1998............................... $ 68 $ 119,932 $ (14) $ 972 $ 120,958
--- ---------- --- ----------- ----------
--- ---------- --- ----------- ----------
Translation Adjustment................................... -- -- (78) -- (78)
Net Income for the period................................ -- -- -- 3,170 3,170
--- ---------- --- ----------- ----------
Comprehensive Income..................................... -- -- -- -- 3,092
--- ---------- --- ----------- ----------
BALANCE AT JANUARY 2, 1999............................... $ 68 $ 119,932 $ (92) $ 4,142 $ 124,050
--- ---------- --- ----------- ----------
--- ---------- --- ----------- ----------
</TABLE>
The accompanying Notes to Consolidated/Combined Financial Statements are an
integral part of these financial statements.
F-5
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
-------------------------- --------------------------
FISCAL YEAR SEVEN MONTHS FIVE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED
----------- ------------- ----------- -------------
JANUARY 2, JANUARY 3, JUNE 4, DECEMBER 28,
1999 1998 1997 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 3,170 $ 972 $ 5,638 $ 11,488
Adjustments to reconcile net income to net cash (used in)/
provided by operating activities:
Depreciation and amortization........................... 5,342 2,762 916 1,546
Amortization of reorganization value in excess of
identifiable assets................................... 3,258 1,902 -- --
Amortization of excess purchase price over net assets
acquired.............................................. -- -- 275 693
Excess of cost over fair value of assets acquired....... -- -- (26) (111)
Income applicable to minority interest.................. 459 -- -- --
Write-off of net book value of property, plant and
equipment............................................. 114 -- -- --
Change in allowance for possible losses on accounts
receivable............................................ (1,971) 4,704 (4,348) 2,836
(Increase) decrease in:
Accounts receivable..................................... (750) 16,178 9,071 (10,290)
Inventories............................................. (21,639) (18,529) 24,158 21
Prepaid expenses and other current assets............... (358) (1,023) (1,080) 101
Deferred taxes.......................................... (1,248) (1,695) -- --
Deferred charges and other assets....................... -- -- -- 1,481
(Decrease) increase in:
Accounts payable, accrued expenses and other current
liabilities........................................... (3,133) 5,421 (1,236) (9,202)
Interest payable........................................ 242 3,513 -- --
Income taxes payable.................................... (518) 515 246 (1,629)
Deferred taxes.......................................... 991 639 -- --
----------- ------------- ----------- -------------
Total adjustments......................................... (19,211) 14,387 27,976 (14,554)
----------- ------------- ----------- -------------
Net cash (used in)/provided by operating activities....... (16,041) 15,359 33,614 (3,066)
----------- ------------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures net of proceeds from the sale of
fixed assets.......................................... (5,690) (1,749) (2,960) (6,982)
----------- ------------- ----------- -------------
Net cash used in investing activities..................... (5,690) (1,749) (2,960) (6,982)
----------- ------------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank Revolver........................................... 7,569 -- -- --
Net (decrease) increase in cash invested with Leslie
Fay................................................... -- -- (30,479) 10,115
----------- ------------- ----------- -------------
Net cash provided by /(used in) financing activities...... 7,569 -- (30,479) 10,115
----------- ------------- ----------- -------------
Effect of exchange rate changes on cash and cash
equivalents............................................. (78) (14) -- --
----------- ------------- ----------- -------------
Net (decrease) increase in cash and cash equivalents...... (14,240) 13,596 175 67
Cash and cash equivalents, at beginning of period......... 16,677 3,081 1,886 1,819
----------- ------------- ----------- -------------
Cash and cash equivalents, at end of period............... $ 2,437 $ 16,677 $ 2,061 $ 1,886
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>
The accompanying Notes to Consolidated/Combined Financial Statements are an
integral part of these financial statements.
F-6
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
-------------------------- --------------------------
FISCAL YEAR SEVEN MONTHS FIVE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED
JANUARY 2, JANUARY 3, JUNE 4, DECEMBER 28,
1999 1998 1997 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
NONCASH OPERATING
Other current assets recorded upon emergence from
Bankruptcy.............................................. $ -- $ (23) $ -- $ --
Other current liabilities recorded upon emergence from
Bankruptcy.............................................. -- 4,923 -- --
Deferred financing costs recorded upon emergence from
Bankruptcy.............................................. -- (2,422) -- --
NONCASH INVESTING
Elimination of divisional equity upon emergence from
Bankruptcy.............................................. -- (132,363) -- --
Elimination of excess of costs over fair value of assets
upon emergence from Bankruptcy.......................... -- 16,066 -- --
Establishment of reorganization in excess of identifiable
assets upon emergence from Bankruptcy................... -- (65,181) -- --
Establishment of Trademark valuation upon emergence from
Bankruptcy.............................................. -- (51,000) -- --
NONCASH FINANCING
Senior notes issued to creditors upon emergence from
Bankruptcy.............................................. -- 110,000 -- --
Issuance of Common Stock to creditors upon emergence from
Bankruptcy.............................................. -- 120,000 -- --
</TABLE>
The accompanying Notes to Consolidated/Combined Financial Statements are an
integral part of these financial statements.
F-7
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION:
The Consolidated/Combined Financial Statements included herein have been
prepared by Kasper A.S.L., Ltd. (name 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). The Company's fiscal year
ends on the Saturday closest to December 31st. The fiscal years ended January 2,
1999 ("1998"), January 3, 1998 ("1997") and December 28, 1996 ("1996"), included
52, 53 and 52 weeks, respectively.
Due to the Company's Reorganization and implementation of Fresh Start
Reporting (see Note 2), the Consolidated Financial Statements for the new
"Reorganized Company" (period starting June 4, 1997, the effective date of the
reorganized Company's emergence from bankruptcy) are not comparable to the
Combined Financial Statements of the "Predecessor Company" (period ending June
4, 1997).
Kasper was a division of The Leslie Fay Companies, Inc. ("Leslie Fay"), 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 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
Consolidated/Combined Financial Statements also include the financial statements
of Kasper A.S.L. Europe, Ltd., Kasper Holdings Inc., ASL Retail Outlets, Inc.
("ASL Retail") and ASL/K Licensing Corp., all of which are wholly owned
subsidiaries of the Company. 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. The portion of
Kasper Partnership pertaining to its minority owner is reflected in the
accompanying financial statements as minority interest. The
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 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 the 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
Prior to June 4, 1997, 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 Leslie Fay 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 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
F-8
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION: (CONTINUED)
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 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 which
consisted of Kasper, AEL, Tomwell, Viewmon, Sassco Europe, Ltd. (now known as
Kasper A.S.L. Europe, Ltd.) and ASL Retail Outlets, Inc.
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 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 emerged as a newly
organized separate entity.
NOTE 2. FRESH START REPORTING:
The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's balance sheet as of June 4, 1997 using 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 the guidelines provided
by SOP 90-7, the Company adopted fresh-start accounting 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.
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 forecasted operations (fiscal
years ended 1997-2001) was prepared by management and a discounted cash flow
methodology was applied to those numbers. An equity value was determined by
calculating the impact of various assumption changes to the five-year forecasts
and adding the forecasted cash flows for the first four years to a
"capitalization" of the fifth year's forecasted cash flow under each assumption.
The fifth year's forecasted 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 forecasts 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.
F-9
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. FRESH START REPORTING: (CONTINUED)
Since fresh-start reporting has been reflected in the accompanying
Consolidated Balance Sheet as of June 4, 1997, the Consolidated Balance Sheet as
of that date is not comparable to prior periods.
The Reorganization and the adoption of Fresh Start Reporting resulted in the
following adjustments to the Company's Consolidated Balance Sheet for the period
ended June 4, 1997:
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED
COMPANY REORGANIZATION FRESH COMPANY
----------- START ADJUSTMENTS -----------
JUNE 4, ---------------------- JUNE 4,
1997 DEBIT CREDIT 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Total current assets.......................................... $ 115,951 $ 1,236(a) $ 1,213(b) $ 115,974
Property and equipment, net................................... 14,002 -- -- 14,002
Excess of purchase price over net assets acquired............. 17,097 -- 16,066(c) 1,031
Reorganization value in excess of identifiable assets......... -- 65,181(d) -- 65,181
Other assets.................................................. -- 53,422(e) -- 53,422
----------- ---------- ---------- -----------
TOTAL ASSETS.................................................. $ 147,050 $ 119,839 $ 17,279 $ 249,610
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities..................................... $ 14,687 -- $ 4,923(f) $ 19,610
Long-term debt................................................ -- -- 110,000(g) 110,000
Common Stock.................................................. -- -- 120,000(h) 120,000
Divisional Equity............................................. 132,363 132,363(i) -- --
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $ 147,050 $ 132,363 $ 234,923 $ 249,610
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
The significant fresh-start reporting adjustments are summarized as follows:
a. Cash and other receivables recorded at closing.
b. Reclass prepaid bank fees to other assets.
c. Elimination of excess of purchase price over net asset acquired.
d. Allocation of the fair market value of identifiable net assets in excess
of the reorganization value in accordance with the purchase method of
accounting. The goodwill will be amortized over twenty (20) years.
e. Recording $51,000,000 of trademark valuation and $2,422,000 in bank
commitment and related fees.
f. To record additional liabilities.
g. Recording of $110,000,000 of ten-year notes that bear interest at 12.75%
per annum with interest payable semiannually in September and March.
h. Recording of the reorganization value of $120,000,000.
i. Elimination of divisional equity and intercompany accounts with Leslie
Fay.
F-10
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) BUSINESS--
The Company is principally engaged in the design and sale of women's
apparel.
(B) PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements of Kasper include the accounts of all
majority-owned companies. All significant intercompany balances and transactions
have been eliminated in consolidation. Minority interest represents the minority
shareholder's proportionate share in the equity or income of the Company's
wholly-owned Kasper Holdings Inc. subsidiary.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS--
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of the fair value of certain
financial instruments. Cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reflected at fair value because of the short
term maturity of these instruments.
(D) USE OF ESTIMATES--
The financial statements are prepared in conformity with generally accepted
accounting principles. Such preparation requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
(E) REORGANIZATION VALUE--
Reorganization value in excess of identifiable assets is being amortized
using the straight-line method over 20 years. The Company, under the
requirements of SFAS No. 121, will continually evaluate, based upon income
and/or cash flow projections and other factors as appropriate, whether events
and circumstances have occurred that indicate that the remaining estimated
useful life of this asset warrants revision or that the remaining balance of
this asset may not be recoverable.
(F) TRADEMARKS--
Trademarks are being amortized using the straight-line method over 35 years
which is the estimated useful life. The Company, under the requirements of SFAS
No. 121, will continually evaluate, based upon income and/or cash flow
projections and other factors as appropriate, whether events and circumstances
have occurred that indicate that the remaining estimated useful life of this
asset warrants revision or that the remaining balance of this asset may not be
recoverable.
(G) CASH AND CASH EQUIVALENTS--
All highly liquid investments with a remaining maturity of three months or
less at the date of acquisition are classified as cash and cash equivalents.
(H) INVENTORIES--
Inventories are valued at the lower of cost (first-in, first-out; "FIFO") or
market.
F-11
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(I) PROPERTY, PLANT AND EQUIPMENT--
Land, buildings, fixtures, equipment and leasehold improvements are stated
at cost. Major replacements or betterments are capitalized. Maintenance and
repairs are charged to earnings as incurred. For financial statement purposes,
depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets.
(J) REVENUE RECOGNITION--
Sales are recognized upon shipment of products to customers and, in the case
of sales by Company owned retail stores, when goods are sold to customers.
Allowances for estimated uncollected accounts and discounts are provided when
sales are recorded.
(K) ADVERTISING COSTS--
Costs for advertising are expensed as incurred and are included under
selling, warehouse, general and administrative expenses.
(L) INCOME TAXES--
Prior to the reorganization, as a division of Leslie Fay, the Company was
not subject to Federal, State and Local income taxes. Concurrent with the
reorganization, the Company became fully subject to such taxes and is subject to
the provisions of SFAS No. 109. Under this method, any deferred income taxes
recorded are provided for at currently enacted statutory rates on the
differences in the basis of assets and liabilities for tax and financial
reporting purposes. When recorded, deferred income taxes are classified in the
balance sheet as current or non-current based upon the expected future period in
which such deferred income taxes are anticipated to reverse.
(M) STOCK-BASED COMPENSATION--
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees"("APB No.25"). Compensation cost for stock options, if
any, is measured as the excess of the quoted market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. The Company elected to account for its
stock-based compensation under APB No. 25, and has adopted the disclosure
requirements of SFAS No. 123.
(N) EARNINGS PER COMMON SHARE--
Basic and Fully Diluted Earnings Per Common Share ("EPS") are computed under
the provisions of SFAS No. 128. Under this standard, Basic EPS is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS includes the effect of
potential dilution from the exercise of outstanding dilutive stock options and
warrants into common stock using the treasury stock method.
F-12
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(O) FOREIGN CURRENCY TRANSLATION--
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with FASB Statement No. 52, "Foreign Currency
Translation". All balance sheet accounts have been translated using the exchange
rate in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported in other comprehensive income. There is no effect on the statements of
operations for all years presented.
(P) RECLASSIFICATION--
Certain amounts reflected in Fiscal 1997 and Fiscal 1996 financial
statements have been reclassified to conform with the presentation of similar
items in Fiscal 1998.
NOTE 4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Raw materials......................................................... $ 38,470 $ 32,121
Finished goods........................................................ 61,965 46,675
---------- -----------
Total inventories................................................. $ 100,435 $ 78,796
---------- -----------
---------- -----------
</TABLE>
NOTE 5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
JANUARY 2, JANUARY 3, USEFUL
1999 1998 LIVES
----------- ----------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Machinery, equipment and fixtures........................................... $ 13,370 $ 11,153 5-10 years
Leasehold improvements...................................................... 8,700 6,078 5 years
Construction in progress.................................................... 311 91 N/A
----------- -----------
Property, plant and equipment, at cost...................................... 22,381 17,322
Less: Accumulated depreciation and amortization............................. (5,500) (2,985)
----------- -----------
Total property, plant and equipment, net.................................... $ 16,881 $ 14,337
----------- -----------
----------- -----------
</TABLE>
NOTE 6. DEBT:
CREDIT AGREEMENT--
On June 4, 1997 the Company entered into a three-year financing agreement
(the "Credit Agreement") with BankBoston ("BOB") to provide direct borrowings
and the issuance of letters of credit on Company's behalf in an aggregate amount
not exceeding $100,000,000, with a sublimit on letters of credit of $50,000,000.
Direct borrowings bear interest at the higher of the annual rate of interest
announced from
F-13
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. DEBT: (CONTINUED)
time to time by BOB as its "Base Rate" or one-half of one percent (0.50%) above
the Federal Funds Effective Rate, plus the Base Rate Applicable Margin of 0.75%.
(9.25% at January 3, 1998) and the Credit Agreement requires a fee, payable
monthly, on average outstanding letters of credit at a rate of 1.75% annually.
At January 2, 1999, there were direct borrowings of approximately $7,569,000
outstanding under the Credit Agreement and approximately $16,385,000 outstanding
in letters of credit under the facility. The Company has approximately
$27,206,000 available for future borrowings as of January 2, 1999.
The Credit Agreement contains certain reporting requirements, as well as
financial and operating covenants related to capital expenditures and the
attainment of a current assets to current liabilities ratio, an interest to
earnings ratio and minimum earnings. As collateral for borrowings under the
Credit Agreement, the Company has granted to BOB a security interest in
substantially all of its assets. In addition, the BOB Credit Agreement contains
certain restrictive covenants, including limitations on the incurrence of
additional liens and indebtedness and a prohibition on paying dividends.
The Company paid $2,422,000 in commitment and related fees in connection
with the credit facility in June 1997. These fees will be amortized as interest
and financing costs over the term of the Credit Agreement (three years).
LONG TERM DEBT--
Pursuant to the reorganization the former creditors of Leslie Fay received
12.75% Senior Notes in the aggregate principal amount of $110,000,000. These
notes bear interest at twelve and three quarter percent (12.75%) and mature on
June 4, 2004. Interest is paid semi-annually on March 31 and September 30. The
Senior Notes contain certain restrictive covenants which include, among others:
(i) generally, no addition to long term debt is allowed until the interest
coverage exceeds 1.75 to 1 for four consecutive quarters; (ii) the Company can
only make investments in certain high quality investments, such as treasury
bills, etc.; (iii) generally, the Company cannot incur any liens upon its
property other than those incurred in the ordinary course of business; and (iv)
the Company cannot make restricted payments including dividends until it is
permitted to incur additional indebtedness in accordance with item (i) above and
the Company has accumulated a minimum amount of funds prior to the restrictive
payment.
NOTE 7. SHAREHOLDERS EQUITY:
As provided under the Plan, the authorized common stock of the reorganized
company consists of 20,000,000 shares of common stock with a par value of $.01
per share. At June 4, 1997, 6,800,000 were issued and outstanding and were being
held by the plan administrator in trust. In July 1997, approximately 5,380,859
of the shares were distributed. 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 Plan Administrator currently retains approximately 1,419,141 shares of
Common Stock and $22,948,279 principal amount of Senior Notes for payment of
certain classes of claims against Leslie Fay. 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. In addition, 1,000,000 shares of Preferred Stock of the new
reorganized Company were authorized at June 4, 1997 with a par value of $.01.
None of the shares have been issued.
F-14
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES:
As a division of Leslie Fay, the Predecessor Company was not subject to
Federal, State and Local income taxes. Provisions for deferred taxes were not
reflected on the Company's books, but were reflected on Leslie Fay's books and
records. Leslie Fay and its subsidiaries filed a consolidated Federal income tax
return. AEL, Tomwell and Viewmon file separate returns in Hong Kong. Income
taxes have been provided herein for the Predecessor Company as if the Company
had filed a separate return in the United States, in addition to the separate
returns mentioned above.
Beginning June 4, 1997, the Reorganized Company became fully subject to such
taxes and accounts for income taxes under the liability method prescribed by
SFAS No. 109. Under this method, any deferred income taxes recorded are provided
for at currently enacted statutory rates on the differences in the basis of
assets and liabilities for tax and financial reporting purposes. When recorded,
deferred income taxes are classified in the balance sheet as current or
non-current based upon the expected future period in which such deferred income
taxes are anticipated to reverse.
The financial statements for the Predecessor Company reflect an effective
tax rate of 40%, which reasonably reflects what the Company's tax rate would
have been as a separate company.
For January 2, 1999 and January 3, 1998, the following provisions for income
taxes were made:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Current:
Federal........................................................... $ 1,590 $ 1,631
State............................................................. 520 276
Foreign........................................................... 439 97
----------- -----------
Total Current:...................................................... $ 2,549 $ 2,004
----------- -----------
Deferred:
Federal........................................................... (257) (1,056)
----------- -----------
Provision for income taxes............................................ $ 2,292 $ 948
----------- -----------
----------- -----------
</TABLE>
F-15
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES: (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets
A/R reserve......................................................... $ (1,757) $ (1,166)
Inventory, net...................................................... (1,018) (529)
Other accruals...................................................... (168) --
----------- -----------
Total deferred tax assets............................................. (2,943) (1,695)
----------- -----------
Deferred tax liabilities
Amortization........................................................ 1,630 601
Compensation costs.................................................. -- 38
----------- -----------
Total deferred tax liabilities........................................ 1,630 639
----------- -----------
Net deferred tax assets............................................... $ (1,313) $ (1,056)
----------- -----------
----------- -----------
</TABLE>
Management has determined based on the Company's history of operating
earnings and its expected income, that operating income will more likely than
not be sufficient to fully utilize these deferred tax assets. Accordingly, a
valuation allowance is not required for the $1.3 million of deferred tax assets
in excess of deferred tax liabilities.
The difference between the Company's effective income tax rate and the
statutory federal income tax rate for fiscal year ended January 2, 1999 and the
seven months ended January 3, 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PERCENTS)
Provision for income taxes................................................. $ 2,292 $ 948
--------- ---------
Income before taxes........................................................ $ 5,462 $ 1,920
--------- ---------
Effective tax rate......................................................... 42.0% 49.4%
Net state tax.............................................................. (6.3) (9.5)
Other...................................................................... (1.7) (5.9)
--------- ---------
Federal statutory rate..................................................... 34.0% 34.0%
--------- ---------
--------- ---------
</TABLE>
NOTE 9. COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS--
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.
F-16
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Confirmation Order, inter alia, dismissed with prejudice all pending
litigation, 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.
GENERAL LITIGATION--
In the ordinary course of business, the Company is exposed to a number of
asserted and unasserted potential claims. In the opinion of Management, the
resolution of these matters is not presently expected to have a material adverse
effect upon the Company's financial position and results of operations.
LEASES--
The Company rents real and personal property under leases expiring at
various dates through 2008. Certain of the leases stipulate payment of real
estate taxes and other occupancy expenses.
Minimum annual rental commitments under leases in effect at January 2, 1999
are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------
<S> <C> <C>
REAL EQUIPMENT
FISCAL YEAR ENDED ESTATE & OTHER
- ----------------------------------------------------------------------- --------- -------------
1999................................................................... $ 6,055 $ 40
2000................................................................... 5,385 --
2001................................................................... 5,027 --
2002................................................................... 4,463 --
2003................................................................... 3,844 --
Later years............................................................ 10,941 --
--------- ---
Total minimum lease payments........................................... $ 35,715 $ 40
--------- ---
--------- ---
</TABLE>
Rent expense for the fiscal year ended January 2, 1999, seven months ended
January 3, 1998, five months ended June 4, 1997 and fiscal year ended December
28, 1996 amounted to $6,563,262, $3,431,529, $3,226,566 and $4,356,709,
respectively.
CONCENTRATIONS OF CREDIT RISK--
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are not concentrated in any specific
geographic region, but are concentrated in the retail apparel business. The
Company has established an allowance for possible losses based upon factors
surrounding the credit risk of specific customers, historical trends and other
information. For the years ended January 2, 1999, January 3, 1998 and December
28, 1996 sales to three customers accounted for approximately 20%, 19% and 17%,
18%, 17% and 14%, and 18%, 15% and 11% of total sales, respectively.
F-17
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS No. 131") which the Company is required to adopt in the current year.
SFAS No. 131 establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by Management in deciding how to allocate
resources and in assessing performance.
The Company's primary segment is the design, distribution and wholesale sale
of women's career suits, dresses and sportswear to principally major department
stores and specialty shops. In addition, the Company operates 58 retail outlet
stores throughout the United States as another distribution channel for its
products. For the purposes of decision-making and assessing performance,
Management includes the operations of AEL in its wholesale segment.
International operations are immaterial for segment reporting and have been
included in the wholesale segment.
The Company measures segment profit as earnings before interest, taxes,
depreciation and amortization ("EBITDA"). All intercompany revenues and expenses
are eliminated in computing revenues and EBITDA. Information on segments and a
reconciliation to the consolidated/combined financial statements is as follows:
FISCAL YEAR ENDED JANUARY 2, 1999
<TABLE>
<CAPTION>
WHOLESALE RETAIL CONSOLIDATED
---------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers............................................. $ 265,986 $ 46,103 $ 312,089
EBITDA....................................................................... 25,748 5,297 31,045
Depreciation and amortization................................................ 8,602
------------
Operating income............................................................. 22,443
Interest and financing costs................................................. 16,981
------------
Income before provision for income taxes..................................... 5,462
Income taxes................................................................. 2,292
------------
Net income................................................................... $ 3,170
------------
------------
Total Assets................................................................. $ 258,397 $ 10,961 $ 269,358
Capital Expenditures......................................................... $ 4,917 $ 773 $ 5,690
</TABLE>
F-18
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SEGMENT INFORMATION (CONTINUED)
SEVEN MONTHS ENDED JANUARY 3, 1998
<TABLE>
<CAPTION>
WHOLESALE RETAIL CONSOLIDATED
---------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers............................................. $ 150,774 $ 24,828 $ 175,602
EBITDA....................................................................... 12,915 3,101 16,016
Depreciation and amortization................................................ 4,738
------------
Operating income............................................................. 11,278
Interest and financing costs................................................. 9,358
------------
Income before provision for income taxes..................................... 1,920
Income taxes................................................................. 948
------------
Net income................................................................... $ 972
------------
------------
Total Assets................................................................. $ 251,888 $ 8,768 $ 260,656
Capital Expenditures......................................................... $ 1,247 $ 502 $ 1,749
</TABLE>
FIVE MONTHS ENDED JUNE 4, 1997
<TABLE>
<CAPTION>
WHOLESALE RETAIL CONSOLIDATED
---------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers............................................. $ 122,322 $ 13,785 $ 136,107
EBITDA....................................................................... 10,112 1,142 11,254
Depreciation and amortization................................................ 1,191
------------
Operating income............................................................. 10,063
Interest and financing costs................................................. 667
------------
Income before provision for income taxes..................................... 9,396
Income taxes................................................................. 3,758
------------
Net income................................................................... $ 5,638
------------
------------
Total Assets................................................................. $ 138,960 $ 8,090 $ 147,050
Capital Expenditures......................................................... $ 2,592 $ 517 $ 3,109
</TABLE>
F-19
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SEGMENT INFORMATION (CONTINUED)
FISCAL YEAR ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
WHOLESALE RETAIL CONSOLIDATED
---------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers............................................. $ 289,371 $ 22,179 $ 311,550
EBITDA....................................................................... 21,764 1,255 23,019
Depreciation and amortization................................................ 2,238
------------
Operating income............................................................. 20,781
Interest and financing costs................................................. 1,634
------------
Income before provision for income taxes..................................... 19,147
Income taxes................................................................. 7,659
------------
Net income................................................................... $ 11,488
------------
------------
Total Assets................................................................. $ 164,931 $ 7,950 $ 172,881
Capital Expenditures......................................................... $ 5,630 $ 1,352 $ 6,982
</TABLE>
NOTE 11. RETIREMENT PLANS:
(A) DEFINED CONTRIBUTION PLAN
Kasper established a 401(k) Savings Plan for its employees on June 4, 1997.
It is open to employees over the age of 21, who have completed at least twelve
consecutive months of service. The Company makes matching contributions up to a
percentage of employee contributions. Total contributions to the plan may not
exceed the amount permitted pursuant to the Internal Revenue Code. Contributions
to the plan for the year ended January 2, 1999 and seven months ended January 3,
1998 were $259,007 and $52,650, respectively.
Leslie Fay also maintained a qualified voluntary contributory profit sharing
plan covering certain salaried, hourly and commission-based employees, including
some employees of the Predecessor Company. Certain matching contributions to the
plan were mandatory. Other contributions to the plan were discretionary. Total
contributions to the plan may not exceed the amount permitted as a deduction
pursuant to the Internal Revenue Code. The contributions charged to Kasper for
the five months ended June 4, 1997 and the year ended December 28, 1996 amounted
to $46,200 and $175,000, respectively.
(B) OTHER
Leslie Fay participates in multi-employer pension plans, which also covered
certain Predecessor Company employees. The plans provide defined benefits to
unionized employees. Amounts charged to Kasper for contributions to the pension
funds for the five months ended June 4, 1997 and the year ended December 28,
1996, amounted to approximately $283,000 and $629,400, respectively.
The Company has not established a multi-employer pension plan subsequent to
June 4, 1997
The Company does not provide for postemployment or postretirement benefits
other than the plans described above.
F-20
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. STOCK OPTION PLANS:
MANAGEMENT STOCK OPTION PLAN--
On December 2, 1997, the Board of Directors approved the 1997 Management
Stock Option Plan (the "Management Plan"). As of January 2, 1999, the Company
had issued Management Options to purchase 1,753,459 shares of Common Stock,
which upon issuance will represent approximately 20.5% of the Company's
outstanding Common Stock. Such options are exercisable at $14.00 per share and
vest as follows: 25% vested immediately with 15% vesting annually thereafter on
June 4 from the years 1998 to 2002. The Management Options expire on June 1,
2004.
The Management Plan provides for the grant to officers and employees of and
consultants to the Company and its affiliates who are responsible for or
contribute to the management, growth and profitability of the Company of options
to purchase Common Stock. The total number of shares of Common Stock for which
options may be granted under the Plan is 2,500,000 shares. No participant may be
granted stock options in excess of 1,500,000 shares of Common Stock over the
life of the Management Plan. Management Options are not transferable by the
optionee other than by will or the laws of descent and distribution or to
facilitate estate planning, and each option is exercisable during the lifetime
of the optionee only by such optionee.
The Management Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"). The Management Options granted as of the
date hereof are nonqualified stock options. The term of each option granted
pursuant to the Management Plan may be established by the Committee, in its sole
discretion: provided, however, that the maximum term of each option granted
pursuant to the Employee Plan is six and one-half years. Options shall become
exercisable at such times and in such installments as the Committee shall
provide in the terms of each individual option agreement.
NON-EMPLOYEE DIRECTOR STOCK OPTIONS--
On June 10, 1997, the Board of Directors approved the grant of stock options
("Director Options") to purchase 20,000 shares of Common Stock to each of its
five non-employee directors for a total of 100,000 options. Each option has an
exercise price of $14.00 per share and will vest ratably over the first three
anniversaries following the date of grant. The Director Options will expire on
the fifth anniversary of the date of grant. Director Options are not
transferable by the optionee other than by will or the laws of descent and
distribution or to facilitate estate planning, and each option is exercisable
during the lifetime of the optionee only by such optionee. At the date of
issuance, the fair market value per share was $15.50.
On July 30, 1998, the Board of Directors approved the grant of stock options
to purchase 20,000 shares of Common Stock to each of its two newly elected
directors under the same terms of the Director Options granted on June 10, 1997.
In addition, the Director Options granted to the 2 outgoing directors became
fully vested as of that date. The market value per share on July 30, 1998 was
$13.00.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement establishes a
fair market value based method of accounting for an employee stock option but
allows companies to continue to measure compensation cost for those plans using
the intrinsic value based method prescribed by APB Opinion No. 25 "Accounting
for Stock Issued to Employees". Companies electing to continue using the
accounting under APB Opinion No. 25 must, however, make pro forma disclosure of
net income and earnings per share as if the fair value based method of
accounting in SFAS No. 123 had been applied. The Company has elected to account
for its stock
F-21
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. STOCK OPTION PLANS: (CONTINUED)
based compensation awards to employees and directors under the accounting
prescribed by APB Opinion No. 25, under which no compensation cost has been
recognized.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SEVEN MONTHS
JANUARY 2, ENDED JANUARY
1999 3, 1998
----------- -------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net Income: As Reported....................................... $ 3,170 $ 972
Pro Forma......................................... 1,562 (1,007)
Basic EPS: As Reported....................................... .47 .14
Pro Forma......................................... .23 (.15)
Diluted EPS: As Reported....................................... .47 .14
Pro Forma......................................... .23 (.15)
</TABLE>
The option price under the Management Plan exceeded the stock's market price
on the date of grant. The option price under the Director Options granted on
June 4, 1997 was less than the stock's market price on the date of grant. The
option price under the Director Options granted on July 30, 1998 was greater
than the stock's market price on the date of grant. A summary of the status of
the Company's two stock plans at January 2, 1999 and January 3, 1998 and changes
during the years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEVEN MONTHS ENDED
JANUARY 2, 1999 JANUARY 3, 1998
------------------------------ ------------------------------
SHARES WEIGHTED AVG. SHARES WEIGHTED AVG.
(000) EXERCISE PRICE (000) EXERCISE PRICE
----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.................................. 1,853 $ 14 -- $ --
Granted........................................................... 40 14 1,853 14
Exercised......................................................... -- -- -- --
Forfeited......................................................... -- -- -- --
Expired........................................................... -- -- -- --
----- --- ----- ---
Outstanding at end of year........................................ 1,893 $ 14 1,853 $ 14
----- --- ----- ---
Exercisable at end of year........................................ 761 $ 14 438 $ 14
----- --- ----- ---
Weighted average of fair value of options granted................. $ 4.66 $ 4.65
</TABLE>
All of the options outstanding at January 2, 1999 have an exercise price of
$14 and a weighted average remaining contractual life of 5.7 years. 761 of these
options are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998, respectively: risk-free interest
rate of 5.8% for the Management Plan and 6.4% and 5.6% for the Director Options;
expected stock price volatility of 34% for the Management Plan and 34% and 40%
for the Director Plan; and expected dividend yield of 0% and expected lives of 5
years for both plans.
F-22
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. INCOME PER SHARE:
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of currently
required Primary EPS with a presentation of Basic EPS. For entities with complex
capital structures, the statement requires the dual presentation of both Basic
EPS and Diluted EPS on the face of the statement of operations. Under this new
standard, Basic EPS is computed on the weighted average number of shares
actually outstanding during the year. Diluted EPS includes the effect of
potential dilution from the exercise of outstanding dilutive stock options and
warrants into common stock using the treasury stock method.
<TABLE>
<CAPTION>
FISCAL YEAR SEVEN MONTHS
ENDED ENDED
JANUARY 2, JANUARY 3,
1999 1998
----------- -------------
<S> <C> <C>
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
NUMERATOR:
BASIC EPS
Income available to common shareholders........................................... $ 3,170 $ 972
Effect of Dilutive Securities:
Non-Employee Director Stock Options........................................... -- --
Management Stock Options...................................................... -- --
----------- ------
DILUTED EPS
Income available to common shareholders........................................... $ 3,170 $ 972
----------- ------
DENOMINATOR:
BASIC EPS
Weighted average shares outstanding............................................... 6,800 6,800
Effect of Dilutive Securities:
Non-Employee Director Stock Options........................................... -- 5
Management Stock Options...................................................... -- --
----------- ------
DILUTED EPS
Weighted average shares outstanding and assumed conversions....................... 6,800 6,805
----------- ------
BASIC EPS........................................................................... .47 .14
DILUTED EPS......................................................................... .47 .14
</TABLE>
The Management Stock Options issued on December 2, 1997 and the Director
Options granted on July 30, 1998 were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares, for the entire time outstanding during the year. All
options were still outstanding at January 2, 1999.
F-23
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid for interest and income taxes were as follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Interest.............................................................. $ 16,866 $ 5,869
Income taxes.......................................................... 3,202 1,462
</TABLE>
NOTE 15. UNAUDITED QUARTERLY RESULTS:
Unaudited quarterly financial information for 1998 and 1997 is set forth as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------- --------- --------- --------- ---------
Net Sales................................................ $ 96,132 $ 62,371 $ 94,080 $ 59,506
Gross Profit............................................. 28,172 17,864 30,828 16,165
Net Income (loss)........................................ 4,008 (2,225) 5,175 (3,788)
Net Income (loss) per share.............................. $ 0.59 $ (0.33) $ 0.76 (0.56)
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------- --------- -------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
COMPANY REORGANIZED COMPANY
-------------------- --------------------------------
Net Sales................................................. $ 99,231 $ 36,876 $ 16,864 $ 103,795 $ 54,943
Gross Profit.............................................. 25,066 9,562 4,709 29,265 13,844
Net Income (loss)......................................... 5,342 296 (1,456) 5,770 (3,342)
Net Income (loss) per share............................... $ -- $ -- $ (0.21) $ 0.85 $ (0.50)
</TABLE>
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.
NOTE 16. SUBSEQUENT EVENTS
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 girls'
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.
Further to the discussion in Note 1, following a distribution during the
first quarter of fiscal 1999, the Plan Administrator retains approximately
177,268 shares of Common Stock and $2,868,000 principle amount of Senior Notes
for payment to certain outstanding classes of claims against Leslie Fay pursuant
to the Reorganization Plan.
F-24
<PAGE>
SCHEDULE II
KASPER A.S.L., LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF COSTS CHARGED DEDUCTIONS END OF
DESCRIPTION PERIOD TO EXPENSE (1) PERIOD
- -------------------------------------------------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JANUARY 2, 1999:
Allowance for possible losses on accounts
receivable.......................................... $ (18,725) $ (60,629) $ 62,600 $ (16,754)
SEVEN MONTHS ENDED JANUARY 3, 1998:
Allowance for possible losses on accounts
receivable.......................................... $ (14,021) $ (36,426) $ 31,722 $ (18,725)
</TABLE>
- ------------------------
(1) Discounts, returns and allowances granted to customers and charged against
reserve.
F-25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
KASPER A.S.L., LTD.
(Registrant)
By: /s/ DENNIS P. KELLY
-----------------------------------------
Dennis P. Kelly
Chief Financial Officer
</TABLE>
Dated: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and
/s/ ARTHUR S. LEVINE Chief Executive Officer
- ------------------------------ (Principal Executive March 30, 1999
Arthur S. Levine Officer)
/s/ DENNIS P. KELLY Chief Financial Officer
- ------------------------------ (Principal Financial and March 30, 1999
Dennis P. Kelly Accounting Officer)
/s/ LESTER E. SCHREIBER Chief Operating Officer and
- ------------------------------ Director March 30, 1999
Lester E. Schreiber
/s/ WILLIAM J. NIGHTINGALE Director
- ------------------------------ March 30, 1999
William J. Nightingale
/s/ SALVATORE M. SALIBELLO Director
- ------------------------------ March 30, 1999
Salvatore M. Salibello
/s/ LARRY G. SCHAFRAN Director
- ------------------------------ March 30, 1999
Larry G. Schafran
Director
- ------------------------------ March , 1999
Denis J. Taura
/s/ OLIVIER TROUVEROY Director
- ------------------------------ March 30, 1999
Olivier Trouveroy
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
Wholly-Owned Subsidiary State of Incorporation
- ----------------------- ----------------------
<S> <C>
Asia Expert Limited Hong Kong
Tomwell Limited Hong Kong
Viewmon Limited Hong Kong
ASL/K Licensing Corp. Delaware
ASL Retail Outlets, Inc. Delaware
Kasper A.S.L. Europe Ltd. Delaware
Kasper Holdings Inc. Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 2,437
<SECURITIES> 0
<RECEIVABLES> 49,475
<ALLOWANCES> 16,754
<INVENTORY> 100,435
<CURRENT-ASSETS> 141,661
<PP&E> 22,381
<DEPRECIATION> 5,500
<TOTAL-ASSETS> 269,358
<CURRENT-LIABILITIES> 25,650
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 123,982
<TOTAL-LIABILITY-AND-EQUITY> 269,358
<SALES> 312,089
<TOTAL-REVENUES> 312,089
<CGS> 219,060
<TOTAL-COSTS> 67,328
<OTHER-EXPENSES> 3,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,981
<INCOME-PRETAX> 5,462
<INCOME-TAX> 2,292
<INCOME-CONTINUING> 3,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,170
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
