================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
July 9, 1999
KASPER A.S.L., LTD.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 0-24179 22-3497645
-------- ------- ----------
(State of other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification Number)
77 METRO WAY
SECAUCUS, NEW JERSEY 07094
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(201) 864-0328
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
813013 v.1
<PAGE>
EXPLANATORY NOTE
This Current Report on Form 8-K/A amends and restates in its entirety
Item 7 of the Current Report on Form 8-K of Kasper
A.S.L., Ltd. (the "Company"), dated July 13, 1999 (the "Original 8-K").
FORWARD-LOOKING STATEMENTS
The statements contained in this Current Report on Form 8-K/A that
are not historical facts are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Act of 1934, as amended. Those statements appear in a number of
places in this report and include all discussions of trends affecting the
Company's financial conditions and results of operations and the Company's
business and growth strategies as well as statements that contain such
forward-looking statements as "believes," "anticipates," "could," "estimates,"
"expects," "intends," "may," "plans," "predicts," "projects," "will," and
similar terms and phrases, including the negative thereof. In addition, from
time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Furthermore, forward-looking
statements may be included in our other filings with the Securities and Exchange
Commission as well as in press releases or oral statements made by or with the
approval of the Company's authorized executive officers.
We caution you to bear in mind that forward-looking statements, by
their very nature, involve assumptions and expectations and are subject to risks
and uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this report are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations include but are not limited
to, the following cautionary statements ("Cautionary Statements"):
o general economic conditions;
o the ability of the Company to adapt to changing consumer preferences
and tastes;
o the Company's limited operating history;
o potential fluctuations in the Company's operating costs and results;
o the Company's concentration of revenues;
o challenges facing the Company related to its rapid growth;
o the Company's dependence on a limited number of suppliers;
o the ability of the Company and third parties, including customers or
suppliers, to adequately address Year 2000 issues; and
o the ability of the Company to successfully integrate the businesses
acquired from Anne Klein Company LLC into the Company's existing
businesses.
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.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
The following financial statements for the acquired business are filed herewith:
Report of Independent Auditors on Anne Klein Company LLC for the
Fiscal Years ended January 2, 1999 and January 3, 1998
Anne Klein Company LLC Balance Sheets as of January 2, 1999 and
January 3, 1998
Anne Klein Company LLC Statements of Operations, Statements of
Members' Equity and Statements of Cash Flows for the Fiscal Years
ended January 2, 1999 and January 3, 1998
Notes to Financial Statements
Report of Independent Auditors on Anne Klein and Company and
Affiliates for the Fiscal Year ended December 28, 1996
Anne Klein and Company and Affiliates Combined Balance Sheet as of
December 28, 1996
Anne Klein and Company and Affiliates Combined Statement of Income,
Combined Statement of Equity and Combined Statement of Cash Flows for
the Fiscal Year ended December 28, 1996
Notes to Combined Financial Statements
Anne Klein Company LLC Unaudited Condensed Balance Sheet as of July
3, 1999
Anne Klein Company LLC Unaudited Condensed Statement of Operations
and Unaudited Condensed Statement of Cash Flows for the Twenty-six
weeks ended July 3, 1999
Notes to Unaudited Condensed Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma combined condensed consolidated financial
statements are filed herewith:
Pro Forma Combined Condensed Consolidated Balance Sheet as of July 3,
1999
Pro Forma Combined Condensed Consolidated Statement of Operations for
the Twenty-six Weeks ended July 3, 1999
Pro Forma Combined Condensed Consolidated Statement of Operations for
the Fiscal Year ended January 2, 1999
Notes to the Pro Forma Combined Condensed Consolidated Financial
Statements
3
<PAGE>
(c) Exhibits
--------
Exhibit No. Description
----------- -----------
2 Asset Purchase Agreement, dated as of March 15,
1999, among Kasper A.S.L., Ltd., Anne Klein
Company LLC and Takihyo Inc. *
10.1 Amended and Restated Credit Agreement, dated as
of July 9, 1999, among Kasper A.S.L., Ltd., as
Borrower, the guarantors named therein, the
lenders named therein, The Chase Manhattan Bank
as administrative and collateral agent and The
CIT Group/Commercial Services, Inc., as
collateral monitor. *
10.2 Second Supplemental Indenture, dated as of June
16, 1999, to the Indenture, dated as of June 1,
1997 and effective as of June 4, 1997, as
amended, between Kasper A.S.L., Ltd. (f/k/a
Sassco Fashions, Ltd.) and IBJ Whitehall Bank
and Trust Company (f/k/a IBJ Schroder Bank &
Trust Company), as Trustee. *
10.3 Letter Agreement, dated as of September 13,
1999, between Kasper A.S.L, Ltd. and
Whippoorwill Associates, Inc., as agent for
various discretionary accounts.
99 Press Release dated July 12, 1999. *
*Previously filed as part of the Original 8-K.
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Anne Klein Company LLC
We have audited the accompanying balance sheets of Anne Klein Company
LLC as of January 2, 1999 and January 3, 1998 and the related
statements of operations, members' equity and cash flows for the
years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Anne
Klein Company LLC at January 2, 1999 and January 3, 1998 and the
results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
April 23, 1999
5
<PAGE>
ANNE KLEIN COMPANY LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JANUARY 2, 1999 JANUARY 3, 1998
------------------- -------------------
<S> <C> <C>
Current assets:
Cash, including cash equivalents of $2,214,210 in 1998 and $8,953,275
in 1997............................................................ $ 1,706,797 $ 10,148,646
Accounts receivable, net of allowances of $6,703,036 in
1998 and $11,113,723 in 1997...................................... 6,590,688 3,966,641
Inventories (Note B)................................................... 10,962,213 9,425,616
Prepaid expenses and other current assets.............................. 593,458 966,700
------------------- -------------------
Total current assets......................................................... 19,853,156 24,507,603
Due from Parent, noninterest-bearing......................................... 9,162,278 37,393,998
Investment in and amounts due from affiliate (Note C)........................ -- 2,612,404
Equipment and leasehold improvements-at cost, net of
accumulated depreciation, amortization and impairment loss (Notes A and
D)...................................................................... 500,000 4,326,680
Other Assets................................................................. 148,225 236,962
------------------- -------------------
$29,663,659 $69,077,647
=================== ===================
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.................................. $ 9,162,464 $ 11,688,548
Note payable to bank................................................... 7,000,000 --
Current portion of capital lease obligation (Note H)................... 374,760 344,571
------------------- -------------------
Total current liabilities.................................................... 16,537,224 12,033,119
Long term capital lease obligation (Note H).................................. 689,199 1,063,957
Deferred rent (Note H)....................................................... 2,179,426 1,553,330
------------------- -------------------
Total liabilities............................................................ 19,405,849 14,650,406
Members' equity.............................................................. 10,257,810 54,427,241
Commitments and Contingencies (Notes E, G, H and I)
------------------- -------------------
$29,663,659 $69,077,647
=================== ===================
</TABLE>
See notes to financial statements
6
<PAGE>
ANNE KLEIN COMPANY LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JANUARY 2, JANUARY 3,
1999 1998
<S> <C> <C>
Net Sales.............................................. $84,574,200 $84,455,341
Net licensing income (Note F).......................... 9,937,297 10,791,511
------------------- -------------------
Total operating revenues............................... 94,511,497 95,246,852
Cost of goods sold..................................... 58,888,153 57,913,844
------------------- -------------------
35,623,344 37,333,008
Selling, general and administrative expenses........... 39,198,137 40,208,469
Write off of receivables from affiliated companies
(Notes A and C)..................................... 8,119,898 --
Impairment of long-lived assets (Note A)............... 3,141,657 --
Management fee-parent company.......................... 3,600,000 --
------------------- -------------------
Operating loss......................................... (18,436,348) (2,875,461)
Interest income........................................ 189,453 711,786
Interest expense....................................... (205,960) (93,796)
Other income (expense)-net............................. 18,768 (475,628)
------------------- -------------------
(18,434,087) (2,733,099)
Equity in loss of affiliate............................ (735,344) (189,224)
------------------- -------------------
Net loss............................................... $(19,169,431) $(2,922,323)
=================== ===================
</TABLE>
See notes to financial statements.
7
<PAGE>
ANNE KLEIN COMPANY LLC
STATEMENTS OF MEMBERS' EQUITY
Members' equity at December 28, 1996 $ 72,165,247
Net loss (2,922,323)
Less distributions and distributions payable (14,815,683)
------------------------
Members' equity at January 3, 1998 54,427,241
Net loss (19,169,431)
Less distributions (25,000,000)
------------------------
Members' equity at January 2, 1999 $ 10,257,810
========================
See notes to financial statements.
8
<PAGE>
ANNE KLEIN COMPANY LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
JANUARY 2, 1999 JANUARY 3, 1998
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss......................................................... $ (19,169,431) $ (2,922,323)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 723,343 897,619
Provision for bad debts....................................... 188,004 188,004
Write-off of receivables from affiliated companies............ 8,119,898 --
Loss from affiliate........................................... 735,344 189,224
Deferred rent................................................. 626,096 1,553,330
Impairment loss............................................... 3,141,657 --
Changes in operating assets and liabilities:
Accounts receivable........................................... (7,791,678) 2,251,781
Inventories................................................... (1,536,597) (592,896)
Prepaid expenses and other current assets..................... 373,242 (525,370)
Other assets.................................................. 88,737 (29,711)
Accounts payable and accrued expenses............................ (2,526,084) (1,528,671)
------------------- -------------------
Net cash used in operating activities............................ (17,027,469) (519,013)
------------------- -------------------
INVESTING ACTIVITIES
Investments in and amounts due from affiliate, net............ (1,263,221) (771,750)
Purchase of fixed assets, net................................. (38,310) (592,474)
------------------- -------------------
Net cash used in investing activities............................ (1,301,531) (1,364,224)
------------------- -------------------
FINANCING ACTIVITIES
Note payable to bank.......................................... 7,000,000 --
Due from (advances to) Parent, net............................ 3,231,720 (3,994,700)
Repayment of capital lease obligation......................... (344,569) (211,122)
------------------- -------------------
Net cash provided by (used in) financing activities.............. 9,887,151 (4,205,822)
Decrease in cash and cash equivalents............................ (8,441,849) (6,089,059)
Cash and cash equivalents at beginning of year................... 10,148,646 16,237,705
------------------- -------------------
Cash and cash equivalents at end of year......................... $ 1,706,797 $ 10,148,646
=================== ===================
Supplemental disclosures:
Interest paid................................................. $ 205,960 $ 103,069
=================== ===================
Noncash distribution.......................................... $ 25,000,000 $ 14,815,683
=================== ===================
Capital lease obligation entered into during the year......... $ -- $ 1,619,650
=================== ===================
</TABLE>
See notes to financial statements.
9
<PAGE>
ANNE KLEIN COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999
A. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Anne Klein Company LLC (the "Company") is a limited liability company owned
79.33% by Takihyo Inc. ("Takihyo" or "Parent") and 20.67% by minority partners,
who are officers of Takihyo. The Company was formed as a limited liability
company in December 1997. On January 2, 1998, Anne Klein & Company and Mark of
the Lion Associates, majority-owned subsidiaries of Takihyo, Anne Klein Sport
and Special Sales, divisions of Takihyo and Takihyo's investment in Takpac
Company Ltd., which has a majority interest in Anne Klein (HK) Ltd. and
affiliate, were merged into the Company. Since all of these entities were under
common ownership, the transaction has been accounted for in a manner similar to
a pooling of interests and, accordingly, the historical carrying values of the
assets and liabilities of the contributed entities have been carried over.
During 1998 and 1997, the Company made distributions of $25,000,000 and
$14,815,683, respectively, of amounts due from Parent. The accompanying
financial statements include the results of operations of the contributing
entities.
The Company contracts for the manufacture of and distributes fashionable
"bridge" women's apparel. Its sales are principally to large retail chains
located throughout the United States. A significant amount of the Company's
products are produced in Asia, through arrangements with independent
contractors. The Company also oversees its licensing agreements, which include
watches, jewelry, shoes, coats, eyewear and other accessories.
The Company had one customer, in which the minority partners have an ownership
interest, which accounted for approximately 12% and 14% of sales in 1998 and
1997, respectively. The related receivable was $1,824,000 at January 3, 1998. As
a result of the poor financial condition of this customer at January 2, 1999,
the Company determined that the receivable balance of $4,979,617 at January 2,
1999 is uncollectible and has written off the entire amount. In addition, two
other customers accounted for approximately 21% and 11% of sales in 1998 and
three other customers accounted for approximately 24%, 19% and 12% of sales in
1997.
FISCAL YEAR
The Company's year consists of the 52 or 53 weeks ending on the Saturday nearest
December 31.
INVENTORIES
Inventories are stated at the lower of cost (primarily weighted-average method)
or market.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of less than
three months when purchased to be cash equivalents.
10
<PAGE>
A. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation of machinery, equipment and fixtures is computed using
straight-line and accelerated methods based on their estimated useful lives.
Leasehold improvements are amortized using the straight-line method based on the
lesser of the lease term or their useful lives.
INCOME TAXES
No provision has been made in the accompanying financial statements for federal,
state or local income taxes, since such taxes are the liability of the members.
However, the Company is subject to Unincorporated Business Taxes which were $0
and $275,000 in 1998 and 1997, respectively, and are included in other expense.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were
approximately $5,590,000 and $3,551,000 in 1998 and 1997, respectively.
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board ("FASB") Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying value. During fiscal 1998, the
Company recorded an impairment loss of $3,141,657 based on estimated future cash
flows expected to be generated by those assets, which is reflected as a separate
line item in the statement of operations.
B. INVENTORIES
Inventories consist of the following:
January 2, 1999 January 3, 1998
------------------ ------------------
Raw materials $ 1,615,771 $ 2,083,464
Work in process 3,195,212 3,041,835
Finished goods 6,151,230 4,300,317
------------------ ------------------
$10,962,213 $ 9,425,616
================== ==================
11
<PAGE>
C. INVESTMENT IN AND AMOUNTS DUE FROM AFFILIATE
The investment in and amounts due from subsidiary and affiliate relates to the
investment in Takpac Company Ltd. This investment is accounted for under the
equity method. As a result of the continuing losses of Takpac, and the Kasper
Transaction (see Note J), the Company concluded the investment in and amounts
due from affiliate was uncollectible at January 2, 1999, and accordingly wrote
off this amount.
The Company pays Anne Klein (HK) Ltd., the affiliate which oversees production,
an agent's fee for all Hong Kong transactions. The agent's fee, included in
selling, general and administrative expenses, amounted to approximately
$2,213,000 and $2,362,000 in 1998 and 1997, respectively.
D. FIXED ASSETS
Fixed assets include the following:
<TABLE>
<CAPTION>
January 2, 1999 January 3, 1998
---------------- ------------------
<S> <C> <C>
Machinery, equipment and fixtures $2,667,620 $2,807,916
Leasehold improvements 2,498,223 2,472,173
---------------- ------------------
5,165,843 5,280,089
---------------- ------------------
Less: Accumulated depreciation and amortization (4,665,843) (953,409)
---------------- ------------------
$ 500,000 $4,326,680
================ ==================
</TABLE>
E. PENSION AND PROFIT SHARING PLANS
The Company has an employees' profit sharing retirement plan covering
substantially all nonunion employees which provides for annual contributions to
a Trust, in such amount as may be determined. There were no profit sharing
contributions in 1998 or 1997. The plan also includes a 401(k) portion where
employees are allowed to make contributions based on a percentage of salary. The
Company matches up to $500 of employee contributions, which aggregated $76,000
and $82,000 in 1998 and 1997, respectively.
The Company is required to make contributions to a multi-employer union pension
and health and welfare plan. These payments are based on wages paid to the
Company's union employees and amounts paid to contractors utilized by the
Company. The Company does not participate in the management of the plan. Pension
expense approximated $820,000 and $890,000 in 1998 and 1997, respectively.
Under the Employee Retirement Income Security Act of 1974, as amended in 1980,
an employer, upon withdrawal from or termination of a multi-employer plan, is
required to continue funding its proportionate share of the plan's unfunded
vested benefits. As a result of the Kasper Transaction (see Note J), the Company
will withdraw from the plan. The Company's proportionate share of the plan's
unfunded vested benefits, based on information supplied by the union, is
approximately $2,200,000 at January 2, 1999.
12
<PAGE>
F. NET LICENSING INCOME OF ANNE KLEIN STUDIO
Net licensing income consists of the following:
1998 1997
-------------------- -------------------
Net royalty income $ 11,806,797 $ 13,351,806
Operating expenses 1,869,500 2,560,295
==================== ===================
$ 9,937,297 $ 10,791,511
==================== ===================
Net royalty income from two licensees was 32% and 15% in 1998, and 24% from one
licensee in 1997.
G. CREDIT AGREEMENT
The Company's line of credit arrangement expired in June 1998 and was renewed on
a short-term basis. As of January 2, 1999, the Company and affiliated companies
had a line of credit of approximately $29,635,000 of which $16,500,000 was
available for direct borrowings and the remainder for the issuance of letters of
credit, foreign exchange and capital lease obligations. There were direct
borrowings outstanding of $7,000,000 under the line of credit at January 2, 1999
with interest charged at a rate of the lower of the prime rate (7.75% at January
2, 1999) or the money market rate plus 125 basis points. Outstanding letters of
credit were approximately $2,545,645 and $4,049,000 at January 2, 1999 and
January 3, 1998, respectively. Outstanding standby letters of credit were
$6,900,000 at January 2, 1999 and January 3, 1998.
In March, 1999, the Company signed a new credit facility in the aggregate amount
of $23,670,000, which includes a revolver of $16,000,000, an equipment lease of
$770,000, and standby letters of credit of $6,900,000. In addition, there is a
sub limit of $7,000,000 for commercial sight letters of credit. The new facility
matures on December 31, 1999. Interest will be charged at 1.25% above the prime
rate (7.75% at January 2, 1999). The new facility is guaranteed by Takihyo, and
is secured by the inventory, accounts receivable, and the Anne Klein trademarks.
H. COMMITMENTS AND CONTINGENCIES
The Company leases office and computer equipment under agreements which are
classified as capital leases. Machinery, equipment and fixtures includes
approximately $1,620,000 for these leases; lease amortization is included in
depreciation expense. The equipment may be purchased for a nominal amount upon
expiration of the leases.
In addition, the Company is committed to noncancelable operating leases for
office and warehouse space, which expire in 2012 and 2005, respectively. One of
these leases includes scheduled base rent increases over the term of the lease.
The total amount of the base rent payments is being charged to expense on the
straight-line method over the term of the lease. Rent expense (including amounts
allocated from affiliates) amounted to approximately $3,184,000 and $2,944,000
in 1998 and 1997, respectively. Rent expense is comprised of cash paid of
$2,558,000 and $1,391,000 and deferred rent of $626,000 and $1,553,000, for 1998
and 1997, respectively, which represents rent expense in excess of amounts paid.
13
<PAGE>
H. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments as of January 2, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------------- -------------------
<S> <C> <C>
1999 $ 451,000 $ 3,241,000
2000 363,000 3,389,000
2001 300,000 3,607,000
2002 94,000 3,739,000
2003 -- 3,739,000
Thereafter -- 27,848,000
-------------------- -------------------
Total minimum lease payments $ 1,208,000 $ 45,563,000
===================
Less amount representing interest 144,041
--------------------
Present value of net minimum lease payments 1,063,959
Less current portion 374,760
--------------------
$ 689,199
====================
</TABLE>
I. YEAR 2000 (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company is executing the modification using internal staff at a
cost of approximately $300,000 and currently expects the project to be
substantially complete by mid 1999. The Company does not expect this project to
have a significant effect on operations.
J. KASPER TRANSACTION
On March 15, 1999 the Company entered into a license agreement with Kasper
A.S.L., Ltd. ("Kasper") under which Kasper will commence operation of an Anne
Klein apparel division which will design, manufacture, advertise, promote and
sell Anne Klein and A Line Anne Klein bridge apparel beginning with the Resort
1999 season. In addition Kasper agreed to purchase all the trademarks and other
similar intellectual property of the Company for an aggregate amount of
$60,000,000, and operate the licensing business currently operated by the
Company (the "Kasper Transaction"). The Kasper Transaction is expected to close
in July 1999, after financing has been obtained. If financing is not obtained,
Kasper will continue to operate under the licensing agreement. In connection
with the transaction, in March 1999, the Company received an advance from Kasper
of $1,500,000.
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Anne Klein and Company and Affiliates
We have audited the accompanying combined balance sheet of Anne Klein
and Company and Affiliates as of December 28, 1996 and the related
combined statements of income, equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of
Anne Klein and Company and Affiliates at December 28, 1996 and the
combined results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
April 4, 1997
15
<PAGE>
ANNE KLEIN AND COMPANY AND AFFILIATES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS DECEMBER 28, 1996
------------------------
<S> <C>
Current assets:
Cash, including cash equivalents of $16,900,472......................... $ 16,237,705
Accounts receivable, net of allowances of $10,104,765................... 6,406,426
Inventories (Note B).................................................... 8,832,720
Prepaid expenses and other current assets............................... 441,329
------------------------
Total current assets......................................................... 31,918,180
Due from Parent, noninterest-bearing......................................... 50,231,871
Investment in and amounts due from affiliate (Note C)........................ 757,464
Equipment and leasehold improvements-at cost, net of
accumulated depreciation, amortization and impairment loss (Notes A and
D)...................................................................... 3,012,176
Other Assets................................................................. 207,252
------------------------
$ 86,126,943
========================
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.................................. $ 12,908,587
Distribution payable to members........................................ 1,053,109
------------------------
Total current liabilities.................................................... 13,961,696
Commitments and Contingencies (Notes E, G, H and I)
Equity....................................................................... 72,165,247
------------------------
$ 86,126,943
========================
</TABLE>
See notes to financial statements
16
<PAGE>
ANNE KLEIN AND COMPANY AND AFFILIATES
COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
DECEMBER 28,
1996
<S> <C>
Net Sales.............................................. $99,800,625
Net licensing income (Note F).......................... 12,338,597
------------------------
Total operating revenues............................... 112,139,222
Cost of goods sold..................................... 65,218,763
------------------------
46,920,459
Selling, general and administrative expenses........... 39,199,447
------------------------
Income from continuing operations...................... 7,721,012
Discontinued operations (Note I)
Loss from operations of discontinued Anne Klein Collection (2,790,603)
Loss on disposal of Anne Klein Collection.............. (1,967,336)
Other income (deductions):
Interest income..................................... 562,592
Interest expense.................................... (6,062)
Other expense - net ................................ (151,732)
------------------------
3,367,871
Equity in loss of affiliate............................ (414,244)
------------------------
Net income............................................. $ 2,953,627
========================
</TABLE>
See notes to financial statements.
17
<PAGE>
ANNE KLEIN AND COMPANY AND AFFILATES
COMBINED STATEMENT OF EQUITY
Equity at beginning of year $ 74,322,113
Net income 2,953,627
Less distributions and distributions payable (5,110,493)
------------------------
Equity at end of year $ 72,165,247
========================
See notes to financial statements.
18
<PAGE>
ANNE KLEIN AND COMPANY AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------
DECEMBER 28, 1996
---------------------
<S> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 2,953,627
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 1,479,409
Loss from affiliate................................................ 414,244
Changes in operating assets and liabilities:
Decrease in accounts receivable.................................... 2,952,093
Decrease in inventories............................................ 1,434,295
Increase in prepaid expenses....................................... (54,015)
Decrease in other assets........................................... 200,184
Decrease in accounts payable and accrued expenses.................. (1,743,366)
---------------------
Net cash provided by operating activities............................. 7,636,471
---------------------
INVESTING ACTIVITIES
Purchase of fixed assets, net...................................... (2,452,946)
---------------------
Net cash used in investing activities................................. (2,452,946)
---------------------
FINANCING ACTIVITIES
Increase in advances to Parent, net................................ (513,406)
Distributions...................................................... (4,439,127)
---------------------
Net cash used in financing activities................................. (4,952,533)
Increase in cash...................................................... 230,992
Cash and cash equivalents at beginning of year........................ 16,006,713
---------------------
Cash and cash equivalents at end of year.............................. $ 16,237,705
=====================
</TABLE>
See notes to financial statements.
19
<PAGE>
ANNE KLEIN AND COMPANY AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 28, 1996
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND COMBINATION
The combined financial statements include the accounts of Anne Klein & Company
and Mark of the Lion Associates, majority owned subsidiaries of Takihyo, Inc.
("Takihyo" or "Parent"), Anne Klein Sport and Special Sales, divisions of
Takihyo and Takihyo's investment in Takpac Company Ltd., which has a majority
interest in Anne Klein (HK) Ltd. and affiliate (the "Company"). These entities
were merged into Anne Klein LLC.
All significant intercompany balances and transactions have been eliminated in
combination.
ORGANIZATION AND BUSINESS
The Company contracts for the manufacture of and distributes fashionable
"bridge" women's apparel. Its sales are principally to large retail chains
located throughout the United States. A significant amount of the Company's
products are produced in Asia, through arrangements with independent
contractors. The Company also oversees its licensing agreements, which include
watches, jewelry, shoes, coats, eyewear and other accessories.
The Company had one customer, in which the minority partners have an ownership
interest, which accounted for approximately 12% of net sales in 19986. Related
receivables were $1,713,000 at December 28, 1996. In addition, two customers
accounted for approximately 19% and 14% of net sales in 1996.
FISCAL YEAR
The Company's year consists of the 52 or 53 weeks ending on the Saturday nearest
December 31.
INVENTORIES
Inventories are stated at the lower of cost (primarily weighted-average method)
or market.
EQUITY
Equity is comprised of partner's capital for the partnerships and excess of
assets over liabilities for the divisions of Takihyo.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of less than
three months when purchased to be cash equivalents.
20
<PAGE>
A. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation of machinery, equipment and fixtures is computed using
straight-line and accelerated methods based on their estimated useful lives.
Leasehold improvements are amortized using the straight-line method based on the
lesser of the lease term or their useful lives.
INCOME TAXES
No provision has been made in the accompanying financial statements for federal,
state or local income taxes, since such taxes are the liability of the members.
However, the Company is subject to Unincorporated Business Taxes which were
approximately $230,000 and are included in other expense.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses for the year
ended December 28, 1996 were approximately $6,471,000.
LONG-LIVED ASSETS
In 1996, the Company adopted Financial Accounting Standards Board ("FASB")
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires impairment losses to be
recorded on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. The adoption had no material effect on amounts reported.
B. INVENTORIES
Inventories consist of the following:
December 28, 1996
------------------
Raw materials $ 1,821,061
Work in process 3,256,188
Finished goods 3,755,471
------------------
$ 8,832,720
==================
21
<PAGE>
C. INVESTMENT IN AND AMOUNTS DUE FROM AFFILIATE
The investment in and amounts due from subsidiary and affiliate relates to the
investment in Takpac Company Ltd. These investments are accounted for under the
equity method.
D. FIXED ASSETS
Fixed assets include the following:
December 28, 1996
------------------
Construction in progress $ 2,142,095
Machinery, equipment and fixtures 6,691,676
Leasehold improvements 10,017,245
------------------
18,851,016
Less accumulated depreciation and amortization 15,838,840
------------------
$ 3,012,176
==================
E. PENSION AND PROFIT SHARING PLANS
The partnerships' have employees' profit sharing retirement plans covering
substantially all nonunion employees which provides for annual contributions to
a Trust, in such amount as may be determined. There were no profit sharing
contributions in 1996. The Plan also includes a 401K portion where employees are
allowed to make contributions based on a percentage of salary. The Company
matches up to $500 of employee contributions, which aggregated $94,000 in 1996.
The partnerships are required to make contributions to a multi-employer union
pension and health and welfare plan. These payments are based on wages paid to
the partnership's union employees and amounts paid to contractors utilized by
the partnerships. The partnerships do not participate in the management of the
plan and has not been furnished any information with respect to vested and
nonvested benefits and pension plan assets. Pension expense approximated
$1,140,000 in 1996.
Under the Employee Retirement Income Security Act of 1974, as amended in 1980,
an employer, upon withdrawal from or termination of a multi-employer plan, is
required to continue funding its proportionate share of the plan's unfunded
vested benefits. As of December 28, 1996, the partnerships have no intention of
withdrawing from the plan.
F. NET LICENSING INCOME OF ANNE KLEIN STUDIO
Net licensing income consists of the following:
1996
--------------------
Net royalty income $ 14,792,831
Operating expenses 2,454,234
--------------------
$ 12,338,597
====================
Net royalty income from one licensee was 25% of royalty income in 1996.
22
<PAGE>
G. CREDIT AGREEMENT
As of December 28, 1996, the Company and its parent have a line of credit of
approximately $25,000,000 of which $12,000,000 is available for direct
borrowings and the remainder for the issuance of letters of credit and foreign
exchange. Borrowings under this line are guaranteed by Takihyo, Inc. There were
no direct borrowings outstanding under the line of credit at December 28, 1996.
Letters of credit outstanding were approximately $3,401,000 at December 28,
1996.
H. COMMITMENTS AND CONTINGENCIES
Rent expense amounted to approximately $1,995,000, in 1996 (net of sublease
income of $97,000).
Future minimum lease payments as of December 28, 1996 are as follows:
1997 $ 2,022,000
1998 2,904,000
1999 3,241,000
2000 3,389,000
2001 3,607,000
Thereafter 35,330,000
--------------------
Total minimum lease payments $ 50,493,000
====================
I. DISCONTINUED OPERATIONS
During April 1996, the Company discontinued its high-fashion business, Anne
Klein Collection. Accordingly, the operating results of Anne Klein Collection
have been classified as discontinued operations in the financial statements. Net
sales of the division were $3,200,000 in 1996. The loss on disposal relates
primarily to severance and related closing costs. As of December 28, 1996, no
significant assets remain from the division and liabilities representing
primarily accrued expenses of $1,500,000 are included in accounts payable,
accrued expenses and other liabilities.
23
<PAGE>
ANNE KLEIN COMPANY LLC
CONDENSED BALANCE SHEET
(in thousands)
ASSETS JULY 3, 1999
------------------------
Current assets: (Unaudited)
Cash.............................................. $ 5,622
Accounts receivable............................... 2,617
Inventories....................................... 3,541
Prepaid expenses and other current assets......... 311
------------------------
Total current assets................................... 12,091
Due from Parent........................................ 8,714
Fixed Assets, net...................................... 444
Other Assets........................................... 148
========================
Total assets........................................... $21,397
========================
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 5,998
Current portion of capital lease obligation...... 677
Notes payable.................................... 4,000
------------------------
Total current liabilities.............................. 10,675
Long Term Liabilities:
Long-term capital lease obligation............... 166
Deferred rent.................................... 2,411
------------------------
Total liabilities...................................... 13,252
Members' Equity........................................ 8,145
------------------------
$21,397
========================
See notes to financial statements.
24
<PAGE>
ANNE KLEIN COMPANY LLC
CONDENSED STATEMENT OF INCOME
(in thousands)
TWENTY-SIX
WEEKS ENDED
------------------------
JULY 3, 1999
------------
(Unaudited)
Net Sales .............................................. $ 34,300
Net licensing income ................................... 4,479
--------
Total operating revenues ............................... 38,779
Cost of goods sold ..................................... 26,577
--------
12,202
Selling, general and administrative expenses ........... 12,048
--------
Operating Income ....................................... 154
Other income (deductions):
Other expense, net .................................. 468
Management fee- parent company ......................... 1,800
========
Net Loss ............................................... $ (2,114)
========
See notes to financial statements.
25
<PAGE>
ANNE KLEIN COMPANY LLC
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED
---------------------
JULY 3, 1999
---------------------
(Unaudited)
<S> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $(2,114)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization...................................... 60
Deferred rent...................................................... 232
Changes in operating assets and liabilities:
Decrease in accounts receivable.................................... 3,975
Decrease in inventories............................................ 7,421
Decrease in prepaid expenses....................................... 282
Decrease in accounts payable and accrued liabilities............... (3,164)
---------------------
Net cash provided by operating activities............................. 6,692
---------------------
INVESTING ACTIVITIES
Purchase of fixed assets........................................... (4)
---------------------
Net cash used in investing activities................................. (4)
---------------------
FINANCING ACTIVITIES
Notes payable...................................................... (3,000)
Decrease in Due from Parent........................................ 448
Repayment of capital lease obligation.............................. (221)
---------------------
Net cash used in financing activities................................. (2,773)
Increase in cash...................................................... 3,915
Cash and cash equivalents at beginning of year........................ 1,707
---------------------
Cash and cash equivalents at end of year.............................. $ 5,622
=====================
</TABLE>
See notes to financial statements.
26
<PAGE>
ANNE KLEIN COMPANY LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JULY 3, 1999
NOTE 1. GENERAL
The Condensed Financial Statements included herein have been prepared
without audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted from this report; however the
disclosures are adequate to make the information presented not misleading.
NOTE 2. KASPER TRANSACTION
On March 15, 1999 the Company entered into a license agreement with
Kasper A.S.L., Ltd. ("Kasper") under which Kasper will commence operation of an
Anne Klein apparel division which will design, manufacture, advertise, promote
and sell Anne Klein and A Line Anne Klein bridge apparel beginning with the
Resort 1999 season. In addition Kasper agreed to purchase all the trademarks and
other similar intellectual property of the Company for an aggregate amount of
$60,000,000, and operate the licensing business currently operated by the
Company (the "Kasper Transaction"). The Kasper Transaction closed on July 9,
1999. In connection with the transaction, the Company received two (2) advance
payments from Kasper each in the amount of $1,500,000, in March and May,
respectively.
27
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed consolidated
financial statements give effect to the purchase of certain trademarks and
related license agreements (the "Trademark Purchase") of Anne Klein Company LLC
("Anne Klein") and the assumption of certain leases by Kasper A.S.L., Ltd. (the
"Company") under the purchase method of accounting. The Trademark Purchase was
consummated pursuant to an Asset Purchase Agreement dated as of March 15, 1999,
by and among the Company and Anne Klein.
The Trademark Purchase price, net of a $3,000,000 fee (the "Purchase
Price Prepayment") paid upon the completion of the Asset Purchase Agreement, was
funded by cash provided by operations and by the Revolving Credit Facility
between the Company and The Chase Manhattan Bank ("Chase") as Agent, dated July
9, 1999.
The pro forma combined condensed consolidated balance sheet as of
July 3, 1999 assumes the Trademark Purchase took place on that date and is based
on the unaudited historical condensed consolidated balance sheet, reported on
the Company's Form 10-Q, filed with the SEC and the unaudited condensed balance
sheet of Anne Klein. The pro forma adjustments record the purchase price of
$67,897,000, which includes professional fees, financing fees and other costs,
and allocate the pro forma purchase price to the trademarks acquired. The pro
forma adjustments relating to the Trademark Purchase and integration of Anne
Klein represent the Company's preliminary determinations of these adjustments
and preliminary allocation to the trademarks acquired. A final determination of
the required purchase accounting adjustments has not been made. Accordingly, the
purchase accounting adjustments made in connection with the preparation of the
unaudited pro forma financial information reflect the Company's best estimate
based upon currently available information. Final amounts could differ from
those set forth herein.
The pro forma combined condensed consolidated statements of
operations for the twenty six weeks ended July 3, 1999 and for the fiscal year
ended January 2, 1999 ("Fiscal 1998") assume that the transaction was
consummated at the beginning of Fiscal 1998, and are based on the historical
consolidated statements of operations, reported on the Company's Form 10-Q and
Form 10-K and the historical statements of operations of Anne Klein.
The unaudited pro forma financial information and related notes are
provided for informational purposes only and are not necessarily indicative of
what the Company's actual financial position or results of operations would have
been had the foregoing transaction been consummated on such dates, nor does it
give effect to the synergies, cost savings and other charges expected to result
from the Trademark Purchase. Accordingly, the pro forma financial information
does not purport to be indicative of the Company's financial position or results
from operations as of the date hereof or for any period ended on the date hereof
or as of or for any other future dates or periods.
The pro forma combined condensed consolidated balance sheet and
statements of operations should be read in conjunction with the accompanying
notes to financial statements included herein.
28
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES AND ANNE KLEIN COMPANY LLC
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JULY 3, 1999
(In thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- ------------------------------------
ASSETS ANNE KLEIN
KASPER (a) ADJUSTMENTS* COMBINED
-------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............................. $10,886 $ 5,622 $ (10,519) (b) $ 5,989
Accounts receivable.................................... 31,651 2,617 (2,617) (a) 31,651
Inventories............................................ 84,467 3,541 (3,541) (a) 84,467
Prepaid expenses and other current assets.............. 6,453 311 (211) (c) 6,553
-------------- -------------- ------------------- --------------
Total Current Assets................................... 133,457 12,091 (16,888) 128,660
-------------- -------------- ------------------- --------------
Due from parent............................................ -- 8,714 (8,714) (a) --
Property, plant and equipment, net......................... 16,281 444 (444) (a) 16,281
Reorganization value in excess of identifiable assets, net. 58,391 -- -- 58,391
Trademarks, net............................................ 47,964 -- 63,233 (d) 111,197
Other assets, net.......................................... 5,824 148 (265) (e) 5,707
-------------- -------------- ------------------- --------------
Total Assets............................................ $261,917 $ 21,397 $ 36,922 $320,236
============== ============= ================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $13,189 $ 5,998 $ (5,998) (a) $13,189
Accrued expenses and other current liabilities.......... 6,180 677 1,382 (f) 8,239
Note Payable............................................ -- 4,000 (4,000) (a) --
Interest Payable........................................ 3,557 -- -- 3,557
Income taxes payable.................................... 1,239 -- -- 1,239
-------------- ------------- ------------------ --------------
Total Current Liabilities............................... 24,165 10,675 (8,616) 26,224
Long-Term Liabilities:
Deferred Taxes.......................................... 1,630 -- -- 1,630
Long-Term Debt.......................................... 110,000 -- -- 110,000
Bank Revolver........................................... -- -- 57,000 (g) 57,000
Other liabilities....................................... -- 2,577 (2,577) (a) --
Minority Interest....................................... 426 -- -- 426
-------------- ------------- ------------------ --------------
Total Liabilities....................................... 136,221 13,252 45,807 195,280
Commitments and Contingencies
Shareholders' Equity:
Common Stock............................................ 68 -- -- 68
Capital in excess of par value.......................... 119,932 -- -- 119,932
Retained Earnings....................................... 5,881 -- (740) (h) 5,141
Members' Equity......................................... -- 8,145 (8,145) (a) --
Cumulative Other Comprehensive Income................... (185) -- -- (185)
-------------- ------------- ------------------ --------------
Total Shareholders' Equity.............................. 125,696 8,145 (8,885) 124,956
-------------- ------------- ------------------ --------------
Total Liabilities and Shareholders' Equity.............. $261,917 $21,397 $36,922 $320,236
============== ============= ================== ==============
</TABLE>
* All letter references correspond to Note 1.
29
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES AND ANNE KLEIN COMPANY LLC
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JULY 3, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------ ----------------------------------
KASPER ANNE KLEIN ADJUSTMENTS* COMBINED
------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales .................................................. $154,046 $34,300 $ -- $188,346
Royalty Income, net......................................... -- 4,479 474 (a) 4,953
------------ -------------- ---------------- --------------
Total Revenue............................................... 154,046 38,779 474 193,299
Cost of Sales............................................... 105,660 26,577 -- 132,237
------------ -------------- ---------------- --------------
Gross Profit................................................ 48,386 12,202 474 61,062
Operating Expenses:
Selling, general and administrative expenses................ 32,713 12,048 596 (b) 45,357
Depreciation and Amortization............................... 4,431 -- 963 (c) 5,394
Management fee--parent company.............................. -- 1,800 -- 1,800 (f)
------------ -------------- ---------------- --------------
Total operating expenses.................................... 37,144 13,848 1,559 52,551
------------ -------------- ---------------- --------------
Operating income (loss)..................................... 11,242 (1,646) (1,085) 8,511
Interest and Financing Costs, net........................... 8,245 468 2,216 (d) 10,929
------------ -------------- ---------------- --------------
Income (Loss) before provision for income taxes............. 2,997 (2,114) (3,301) (2,418)
Provision for Income Taxes.................................. 1,258 -- (1,258) (e) --
------------ -------------- ---------------- --------------
Net Income (Loss)........................................... $ 1,739 (2,114) (f) (2,043) (2,418)
============ ============== ================ ===============
Basic earnings per common share............................. .26 (.36)
============ ===============
Diluted earnings per common share........................... .26 (.36)
============ ===============
Weighted average number of shares used in computing Basic
earnings per share 6,800 6,800
Weighted average number of shares used in computing Diluted
earnings per share 6,800 6,800
</TABLE>
* All letter references correspond to Note 2.
30
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES AND ANNE KLEIN COMPANY LLC
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------ ------------------------------------
KASPER ANNE KLEIN ADJUSTMENTS* COMBINED
------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales .................................................. $ 312,089 $ 84,574 $ -- $396,663
Royalty Income, net......................................... -- 9,937 852 (a) 10,789
------------ --------------- ------------ ------------
Total Revenue............................................... 312,089 94,511 852 407,452
Cost of Sales............................................... 219,060 58,888 -- 277,948
------------ --------------- ------------ -----------
Gross Profit................................................ 93,029 35,623 852 129,504
Operating Expenses:
Selling, general and administrative expenses................ 61,984 39,198 (5,107) (b) 96,075
Depreciation and Amortization............................... 8,602 -- 2,530 (c) 11,132
Write off of receivables from affiliated companies.......... -- 8,120 -- 8,120 (g)
Impairment of long-lived assets............................. -- 3,141 -- 3,141 (g)
Management fee--parent company.............................. -- 3,600 -- 3,600 (g)
------------ --------------- ------------ ------------
Total operating expenses.................................... 70,586 54,059 (2,577) 122,068
------------ --------------- ------------ ------------
Operating income (loss)..................................... 22,443 (18,436) 3,429 7,436
Interest and Financing Costs, net........................... 16,981 17 5,187 (d) 22,185
Other income................................................ -- 19 -- 19
------------ --------------- ------------ ------------
Income (loss) before provision for income taxes............. 5,462 (18,434) (1,758) (14,730)
Equity in loss of affiliate................................. -- (735) 735 (e) --
Provision for Income Taxes.................................. 2,292 -- (2,292) (f) --
------------ --------------- ------------ ------------
Net Income (loss)........................................... $ 3,170 $ (19,169) (g) 1,269 (14,730)
============ =============== ============ ============
Basic earnings per common share............................. .47 (2.17)
============ ===========
Diluted earnings per common share........................... .47 (2.17)
============ ===========
Weighted average number of shares used in computing Basic
earnings per share 6,800 6,800
Weighted average number of shares used in computing Diluted
earnings per share 6,800 6,800
</TABLE>
* All letter references correspond to Note 3.
31
<PAGE>
KASPER A.S.L., LTD. AND SUBSIDIARIES AND ANNE KLEIN COMPANY LLC
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
NOTE 1 - PRO FORMA ADJUSTMENTS AS OF JULY 3, 1999 - BALANCE SHEET
The pro forma adjustments to the unaudited pro forma combined condensed
consolidated balance sheet reflect the Trademark Purchase and the preliminary
allocation of the purchase price to the trademarks acquired.
PURCHASE PRICE DETERMINATION:
Revolving Credit Facility $57,000
Cash Paid 4,897
Purchase Price Prepayment 3,000
Accrued Acquisition Costs 2,059
Prepaid Acquisition Costs 941
-------
Net Purchase Price $67,897
=======
PURCHASE PRICE ALLOCATION:
Trademarks $63,233
Other Assets 4,564
Prepaids 100
-------
Net Purchase Price $67,897
=======
(a) As the Trademark Purchase consisted solely of the purchase of Anne Klein's
trademarks, all Anne Klein Balance Sheet items have been eliminated through
pro forma adjustments.
(b) Cash paid for purchase $ (4,897)
Elimination of Anne Klein Cash (5,622)
---------
$(10,519)
(c) Prepaid Agent Fees $ 100
Elimination of Anne Klein prepaids (311)
---------
(211)
(d) Allocation of Purchase Price to Trademarks acquired.
(e) Reclass of Purchase Price Prepayment to Trademarks $ (3,000)
Reclass of Other Assets to Trademarks (941)
Write-off of Unamortized Old Deferred Financing Fees (740)
Consent Fee paid to Bondholders 2,200
New Deferred Financing Fees 2,364
Elimination of Anne Klein other assets (148)
-------------
$ (265)
(f) Accrued acquisition costs $ 2,059
Elimination of Anne Klein accrued expenses
and other liabilities (677)
-------------
$ 1,382
(g) Borrowing under Revolving Credit Facility for Purchase.
(h) Write-off of Unamortized Old Deferred Financing Fees.
32
<PAGE>
NOTE 2 - PRO FORMA ADJUSTMENTS FOR THE TWENTY-SIX WEEKS ENDED JULY 3, 1999 -
STATEMENT OF OPERATIONS
The adjustments to the unaudited pro forma combined condensed consolidated
statement of operations reflect the Trademark Purchase and the conforming of
Anne Klein financial statement presentation to that of the Company.
(a) The Company has historically included royalty income as a reduction of
selling, general and administrative expenses. As a result of the purchase
transaction, the Company will now be required to disclose royalty income as
a separate income statement line item. This adjustment reflects the
reclassification of royalty income out of selling, general and
administrative expense.
(b) Anne Klein has historically included depreciation in selling, general and
administrative expenses. In order to conform to the Company's presentation,
Anne Klein's depreciation expense has been reclassified to depreciation and
amortization. The Company has made a pro forma adjustment to eliminate the
salaries and related benefits of Anne Klein employees who have not
continued with the Company. In addition, during the twenty-six weeks ended
July 3, 1999, Anne Klein incurred costs on behalf of Kasper, which were not
included in Anne Klein's historical statement of operations, but were
instead offset against the Purchase Price Prepayment included in Anne
Klein's Balance Sheet. The Company has accordingly adjusted the pro forma
statement of operations to include these costs.
<TABLE>
<CAPTION>
<S> <C>
Elimination of personnel costs that will not be incurred by the Company $ (2,618)
Costs incurred by Anne Klein on behalf of Kasper not expensed 2,800
Reclassification of Kasper royalty income 474
Reclassification of Anne Klein Depreciation (60)
------------
$ 596
In addition to the above, the Company believes additional cost savings will
be realized through the combination of the two companies.
(c) Trademark Amortization (35 years - expected useful life) $ 903
Reclassification of Anne Klein Depreciation 60
------------
$ 963
(d) Elimination of Anne Klein Interest Expense (599)
Bondholder Consent Fee Amortization (43/4years - remaining life) 232
New Deferred Financing Fees Amortization (41/2years - remaining life) 263
Elimination of amortization -Old Deferred Financing Fees (404)
Interest relating to Revolving Credit Facility 2,724
------------
$ 2,216
</TABLE>
(e) The Company has offset its taxable income by the losses of Anne Klein
thereby eliminating the Company's income tax provision. No tax benefit was
recorded for the losses of Anne Klein in excess of the current income of
the Company.
(f) During the first half of 1999, Anne Klein made a $1,800 payment to its
parent company in the form of a management fee. The Company considers this
transaction to be non-recurring and not indicative of what the Company's
results of operations would have been had the Trademark Purchase been
consummated at the beginning of 1999. However, the Company has not excluded
this transaction from the pro forma statement of operations.
Loss Reported by Anne Klein $ (2,114)
Management fee - parent company 1,800
-----------
Adjusted Anne Klein Loss $ (314)
===========
33
<PAGE>
NOTE 3 - PRO FORMA ADJUSTMENTS FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 -
STATEMENT OF OPERATIONS
The adjustments to the unaudited pro forma combined condensed consolidated
statement of operations reflect the Trademark Purchase of Anne Klein and the
conforming of Anne Klein financial statement presentation to that of the
Company.
(a) The Company has historically included royalty income as a reduction of
selling, general and administrative expenses. As a result of the purchase
transaction, the Company will now be required to disclose royalty income as
a separate income statement line item. This adjustment reflects the
reclassification of royalty income out of selling, general and
administrative expense.
(b) Anne Klein has historically included depreciation in selling, general and
administrative expenses. In order to conform to the Company's presentation,
Anne Klein's depreciation expense has been reclassified to depreciation and
amortization. The Company has made a pro forma adjustment to eliminate the
salaries and related benefits of Anne Klein employees who have not
continued with the Company.
<TABLE>
<CAPTION>
<S> <C>
Elimination of personnel costs that will not be incurred by Company $ (5,236)
Reclassification of Kasper royalty income 852
Reclassification of Anne Klein Depreciation (723)
------------
$ 5,107
In addition to the above, the Company believes additional cost savings will
be realized through the combination of the two companies.
(c) Trademark Amortization (35 years - expected useful life) $ 1,807
Reclassification of Anne Klein Depreciation 723
------------
$ 2,530
(d) Elimination of Anne Klein Interest Expense $ (206)
New Deferred Financing Fees Amortization (41/2years - remaining life) 525
Bondholder Consent Fee Amortization (43/4years - remaining life) 463
Elimination of amortization -Old Deferred Financing Fees (807)
Interest relating to Revolving Credit Facility 5,212
------------
$ 5,187
</TABLE>
(e) This amount relates to Anne Klein's percentage share of the loss of its
affiliate, which is accounted for under the equity method. As the affiliate
is not part of the Trademark Purchase, the loss has been eliminated.
(f) The Company has offset its taxable income by the losses of Anne Klein
thereby eliminating the Company's income tax provision. No tax benefit was
recorded for the losses of Anne Klein in excess of the current income of
the Company.
(g) During 1998, Anne Klein wrote off amounts due from affiliates ($8,120) that
were deemed to be uncollectible; recorded an impairment loss ($3,141) based
on expected estimated future cash flows; and made a payment ($3,600) to its
parent company in the form of a management fee. The Company considers these
transactions to be non-recurring and not indicative of what the Company's
results of operations would have been had the Trademark Purchase been
consummated at the beginning of 1998. However, the Company has not excluded
these transactions from the pro forma statement of operations.
Loss Reported by Anne Klein $ (19,169)
Write off of receivables from affiliated companies 8,120
Impairment of long-lived assets 3,141
Management fee - parent company 3,600
-------------
Adjusted Anne Klein Loss $ (4,308)
=============
34
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KASPER A.S.L., LTD.
(Registrant)
Dated: September 22, 1999
By: /s/ Mary Ann Domuracki
--------------------------------------
Mary Ann Domuracki
Executive Vice President -
Finance and Administration
35
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.3 Letter Agreement, dated as of September 13, 1999, between
Kasper A.S.L, Ltd. and Whippoorwill Associates, Inc.,
as agent for various discretionary accounts.
36
Exhibit 10.3
[KASPER A.S.L., LTD. LETTERHEAD]
September 13, 1999
Whippoorwill Associates, Inc., as agent
for various discretionary accounts
11 Martine Avenue
White Plains, New York 10606
Gentlemen:
This letter will confirm our agreement that Kasper A.S.L.,
Ltd., a Delaware company (the "Company"), will adjourn its Annual Meeting of
Stockholders to be held on September 14, 1999 in respect of proposals 1 and 2
(or schedule a new meeting to consider such proposals); such adjourned portion
of the Annual Meeting or new meeting is referred to herein as the "Adjourned
Meeting". The Adjourned Meeting will be held not less than 45 days (but no more
than 90 days) after September 14, 1999 in order to permit discussions among
stockholders regarding the composition of the Company's Board of Directors and
the impact of the 1999 Share Incentive Plan. Such Adjourned Meeting shall
qualify as an "annual meeting" for the purposes of Section 3.2 of the By-laws.
The Board of Directors has unanimously determined that in
the event any stockholder desires to nominate a slate of proposed directors for
consideration by stockholders at the Adjourned Meeting, the Board of Directors
will amend the bylaws so that the provisions of Section 2.7(A)(2) and (3) will
be inapplicable to such vote (and will not impose any other restrictions on the
ability of stockholders to bring director nominations to such meeting other
than, if desired, a deadline of no less than 30 days after public announcement
of the date and location of the Adjourned Meeting for any stockholder to provide
the notice described in said Section 2.7).
The Company agrees that if any stockholder desires to
nominate a slate of director nominees at the Adjourned Meeting, the Company will
cooperate and not interfere with, including the prompt supply of a stockholder
list as of the applicable Record Date, and provide sufficient time to, such
stockholder to enable such stockholder to prepare, file and distribute its own
proxy materials and solicit proxies from other stockholders, and to enable the
Company's stockholders to vote on such stockholder's slate at the Adjourned
Meeting.
The Board of Directors has unanimously approved the
Company's execution and delivery of this letter agreement. The Board and the
Company understand that Whippoorwill Associates, Inc., as agent for various
discretionary accounts, will be relying on the Company's compliance with its
obligations set forth herein and the Board's actions described herein. The
Company acknowledges and agrees that irreparable damage would occur in the event
that any
<PAGE>
of the provisions of this letter agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
Whippoorwill Associates, Inc., as agent for various discretionary accounts,
shall be entitled to an injunction or injunctions to prevent or cure breaches of
the provisions hereof and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which it may be entitled
by law or equity.
Very truly yours,
KASPER A.S.L. LTD.
/s/ Arthur S. Levine
----------------------------------
By: Arthur S. Levine
Chairman of the Board and
Chief Executive Officer
ACCEPTED AND AGREED:
WHIPPOORWILL ASSOCIATES, INC., as agent
for various discretionary accounts
By: /s/ Shelley Greenhaus
------------------------------------
Name: Shelley Greenhaus
Title: Managing Director
2
