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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2005
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-19526
Goody’s Family Clothing, Inc.
(Exact name of registrant as specified in its charter)
| Tennessee | 62-0793974 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
| 400 Goody’s Lane, | ||
| Knoxville, Tennessee | 37922 | |
| (Address of principal executive offices) | (Zip Code) |
(865) 966-2000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value,33,170,286 shares outstanding as of November 16, 2005.
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GOODY’S FAMILY CLOTHING, INC.
Index to Form 10-Q
October 29, 2005
Index to Form 10-Q
October 29, 2005
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PART 1 — FINANCIAL INFORMATION
Item 1. — Condensed Consolidated Financial Statements
Goody’s Family Clothing, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
| Thirteen | Thirty-nine | |||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||
| October 30, | October 30, | |||||||||||||||
| 2004 | 2004 | |||||||||||||||
| October 29, | (As restated, | October 29, | (As restated, | |||||||||||||
| 2005 | see note 2) | 2005 | see note 2) | |||||||||||||
| Sales | $ | 295,210 | $ | 284,794 | $ | 879,583 | $ | 882,304 | ||||||||
| Cost of sales and occupancy expenses | 213,490 | 200,476 | 633,064 | 616,125 | ||||||||||||
| Gross profit | 81,720 | 84,318 | 246,519 | 266,179 | ||||||||||||
| Selling, general and administrative expenses | 90,846 | 85,908 | 268,683 | 253,129 | ||||||||||||
| Transaction expenses | 15,526 | — | 15,526 | — | ||||||||||||
| (Loss) earnings from operations | (24,652 | ) | (1,590 | ) | (37,690 | ) | 13,050 | |||||||||
| Investment income | 384 | 291 | 1,225 | 682 | ||||||||||||
| Interest expense | (40 | ) | (2 | ) | (51 | ) | (133 | ) | ||||||||
| (Loss) earnings before income taxes | (24,308 | ) | (1,301 | ) | (36,516 | ) | 13,599 | |||||||||
| (Benefit) provision for income taxes | (833 | ) | (485 | ) | (5,839 | ) | 5,066 | |||||||||
| Net (loss) earnings | $ | (23,475 | ) | $ | (816 | ) | $ | (30,677 | ) | $ | 8,533 | |||||
| (Loss) earnings per common share: | ||||||||||||||||
| Basic | $ | (0.71 | ) | $ | (0.02 | ) | $ | (0.93 | ) | $ | 0.26 | |||||
| Diluted | $ | (0.71 | ) | $ | (0.02 | ) | $ | (0.93 | ) | $ | 0.25 | |||||
| Cash dividends declared per common share | $ | — | $ | 0.03 | $ | 0.06 | $ | 0.08 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 33,122 | 32,915 | 33,026 | 32,923 | ||||||||||||
| Diluted | 33,122 | 32,915 | 33,026 | 33,812 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm.
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Goody’s Family Clothing, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share amounts)
| October 30, | ||||||||||||
| 2004 | ||||||||||||
| October 29, | January 29, | (As restated, | ||||||||||
| 2005 | 2005 | see Note 2) | ||||||||||
ASSETS | ||||||||||||
| Current Assets | ||||||||||||
| Cash and cash equivalents | $ | 52,961 | $ | 121,614 | $ | 67,016 | ||||||
| Inventories | 294,010 | 230,637 | 300,542 | |||||||||
| Accounts receivable and other current assets | 27,955 | 19,932 | 22,703 | |||||||||
| Total current assets | 374,926 | 372,183 | 390,261 | |||||||||
| Property and equipment, net | 140,453 | 126,229 | 124,008 | |||||||||
| Other assets | 5,021 | 4,988 | 5,130 | |||||||||
| Total assets | $ | 520,400 | $ | 503,400 | $ | 519,399 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities | ||||||||||||
| Accounts payable — trade | $ | 180,079 | $ | 136,116 | $ | 170,661 | ||||||
| Accounts payable — other | 17,396 | 17,716 | 14,265 | |||||||||
| Accrued expenses | 49,451 | 46,413 | 45,153 | |||||||||
| Current deferred income taxes | 25,730 | 27,847 | 24,754 | |||||||||
| Total current liabilities | 272,656 | 228,092 | 254,833 | |||||||||
| Long-term liabilities | 34,164 | 26,032 | 19,413 | |||||||||
| Deferred income taxes | 5,408 | 10,375 | 12,736 | |||||||||
| Total liabilities | 312,228 | 264,499 | 286,982 | |||||||||
| Commitments and Contingencies (Note 5) | ||||||||||||
| Shareholders’ Equity | ||||||||||||
| Preferred stock, par value $1.00 per share; | ||||||||||||
| Authorized - 2,000,000 shares; issued and outstanding — none | ||||||||||||
| Class B Common stock, no par value; | ||||||||||||
| Authorized - 50,000,000 shares; issued and outstanding — none | ||||||||||||
| Common stock, no par value; | ||||||||||||
| Authorized - 50,000,000 shares; | ||||||||||||
| Issued and outstanding — 33,136,497; 32,842,019; and 32,788,969 shares, respectively | 36,552 | 34,619 | 34,269 | |||||||||
| Retained earnings | 171,620 | 204,282 | 198,148 | |||||||||
| Total shareholders’ equity | 208,172 | 238,901 | 232,417 | |||||||||
| Total liabilities and shareholders’ equity | $ | 520,400 | $ | 503,400 | $ | 519,399 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm.
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Goody’s Family Clothing, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| Thirty-nine Weeks Ended | ||||||||
| October 30, | ||||||||
| 2004 | ||||||||
| October 29, | (As restated, | |||||||
| 2005 | see note 2) | |||||||
Cash Flows from Operating Activities | ||||||||
| Net (loss) earnings | $ | (30,677 | ) | $ | 8,533 | |||
| Adjustments to reconcile net (loss) earnings to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 19,595 | 18,442 | ||||||
| Net loss on asset sales, disposals and write-downs | 2,216 | 774 | ||||||
| Changes in assets and liabilities: | ||||||||
| Inventories | (63,373 | ) | (101,816 | ) | ||||
| Accounts payable — trade | 43,963 | 51,250 | ||||||
| Accounts payable — other | (163 | ) | 2,266 | |||||
| Other assets, liabilities and income tax accounts | (3,856 | ) | (4,130 | ) | ||||
| Net cash used in operating activities | (32,295 | ) | (24,681 | ) | ||||
Cash Flows from Investing Activities | ||||||||
| Acquisitions of property and equipment | (37,954 | ) | (28,142 | ) | ||||
| Proceeds from sale of property and equipment | 3,150 | 24 | ||||||
| Net cash used in investing activities | (34,804 | ) | (28,118 | ) | ||||
Cash Flows from Financing Activities | ||||||||
| Dividends paid to shareholders | (2,969 | ) | (2,305 | ) | ||||
| Proceeds from exercise of stock options | 1,415 | 934 | ||||||
| Shares repurchased and retired | — | (1,847 | ) | |||||
| Net cash used in financing activities | (1,554 | ) | (3,218 | ) | ||||
| Net decrease in cash and cash equivalents | (68,653 | ) | (56,017 | ) | ||||
| Cash and cash equivalents, beginning of period | 121,614 | 123,033 | ||||||
| Cash and cash equivalents, end of period | $ | 52,961 | $ | 67,016 | ||||
| Supplemental Disclosures: | ||||||||
| Net income tax (refunds) payments | $ | (35 | ) | $ | 7,209 | |||
| Interest payments | 18 | 1 | ||||||
| Sale/leaseback of property and equipment | 2,297 | 4,080 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm.
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Goody’s Family Clothing, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of presentation
The accompanying condensed consolidated financial statements of Goody’s Family Clothing, Inc. and subsidiaries (the “Company”) are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting primarily of normal and recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. Due to the seasonal nature of the Company’s business, the results of operations for the interim periods are not necessarily indicative of the results that may be achieved for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended January 29, 2005. Certain reclassifications have been made to the condensed consolidated financial statements of prior periods to conform to the current period presentation.
Sale of the Company.On October 27, 2005, the Company entered into an Acquisition Agreement and Agreement and Plan of Merger (the “Merger Agreement”) with GF Acquisition Corp. (“Acquisition Corp.”) and GF Goods Inc. (“Parent”).
Pursuant to the terms of the Merger Agreement, Acquisition Corp., an affiliate of Prentice Capital Management, LP and GMM Capital LLC (collectively “Prentice/GMM”), commenced a cash tender offer (the “Tender Offer”) on November 10, 2005, to acquire all of the issued and outstanding shares of the Company’s common stock at a price of $9.60 per share in cash. The Merger Agreement provides that, subject to the conditions set forth therein, including the consummation of the Tender Offer in accordance with its terms, Acquisition Corp. will be merged (the “Merger”) with the Company and, in connection therewith, shares not tendered in the Tender Offer would be converted into the right to receive $9.60 per share in cash. Acquisition Corp. is required to keep the Tender Offer open for a minimum of 20 business days and may extend the offer for an additional 10 business days at its sole discretion. The Company may also extend the Tender Offer for an additional 10 business days if the conditions to the Tender Offer have not been met at the time that the Tender Offer it may be extended) would otherwise expire. Consummation of the Tender Offer is subject to certain conditions, including the tender of such number of shares which, together with the shares beneficially owned by Parent or Acquisition Corp., equal at least 51% of the Company’s fully diluted shares, that there be no event or occurrence which would have a material adverse effect on the Company, that there be no law, order or injunction that would affect the ability of the parties to consummate the Tender Offer, that there be no action by a governmental authority challenging the transactions, that the Company comply with its covenants and not have breached its representations and warranties (subject to applicable materiality qualifiers) and other customary conditions. Closing of the merger is conditioned upon consummation of the Tender Offer and there being no law, order or injunction that is then in effect that would prevent or prohibit consummation of the merger or would otherwise impose material limitations on the ability of Acquisition Corp. and Parent effectively to acquire or hold the business of the Company.
The Company had previously entered into an Acquisition Agreement and Agreement and Plan of Merger with certain affiliates of Sun Capital Partners, Inc. (the “Sun Capital Affiliates”) on October 7, 2005, pursuant to which the Sun Capital affiliates were to have purchased the Company at a cash price of $8.00 per share (the “Sun Merger Agreement”). Following the receipt of an all-cash offer from Prentice/GMM through Parent and Acquisition Corp., which the Board of Directors of the Company determined was a Superior Proposal (as defined in the Sun Merger Agreement), the Sun Merger Agreement was terminated pursuant to its terms. In connection with such termination, the Company was required to pay a termination fee plus expenses to the Sun Capital Affiliates aggregating approximately $13,085,000 (collectively, the “Sun Capital Termination Fee”). The Sun Capital Termination Fee, along with other transaction related expenses, together aggregating approximately $15,526,000, may not be considered deductible for income tax purposes and are recorded as transaction expenses on the Company’s Statements of Operations for the 13-week and 39-week periods ended October 29, 2005.
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(2) Restatement
As more fully discussed in the fiscal 2004 Annual Report on Form 10-K filed on April 15, 2005, the Company restated its balance sheets and statements of operations and cash flows for certain periods including as of, and for the 13 and 39 weeks ended October 30, 2004, to correct its lease accounting for rent holidays, normal tenant improvements, construction costs, and sale-leaseback transactions in accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” Emerging Issues Task Force Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction,” and Statement of Financial Accounting Standards No. 98, “Accounting for Leases.”
The following is a summary of the effects of the restatement on the Company’s condensed consolidated financial statements as of, and for the 13 and 39 weeks ended, October 30, 2004 (in thousands):
| Condensed Consolidated | ||||||||||||
| Statement of Operations | ||||||||||||
| As Previously | As | |||||||||||
| Reported | Adjustments | Restated | ||||||||||
| For the 13 weeks ended October 30, 2004 | ||||||||||||
| Cost of sales and occupancy expenses | $ | 200,975 | $ | (499 | ) | $ | 200,476 | |||||
| Gross profit | 83,819 | 499 | 84,318 | |||||||||
| Selling, general and administrative expenses | 85,390 | 518 | 85,908 | |||||||||
| Loss from operations | (1,571 | ) | (19 | ) | (1,590 | ) | ||||||
| Loss before income taxes | (1,282 | ) | (19 | ) | (1,301 | ) | ||||||
| Benefit for income taxes | (478 | ) | (7 | ) | (485 | ) | ||||||
| Net loss | (804 | ) | (12 | ) | (816 | ) | ||||||
| Condensed Consolidated | ||||||||||||
| Statement of Operations | ||||||||||||
| As Previously | As | |||||||||||
| Reported | Adjustments | Restated | ||||||||||
| For the 39 weeks ended October 30, 2004 | ||||||||||||
| Cost of sales and occupancy expenses | $ | 617,567 | $ | (1,442 | ) | $ | 616,125 | |||||
| Gross profit | 264,737 | 1,442 | 266,179 | |||||||||
| Selling, general and administrative expenses | 251,717 | 1,412 | 253,129 | |||||||||
| Earnings from operations | 13,020 | 30 | 13,050 | |||||||||
| Earnings before income taxes | 13,569 | 30 | 13,599 | |||||||||
| Provision for income taxes | 5,054 | 12 | 5,066 | |||||||||
| Net earnings | 8,515 | 18 | 8,533 | |||||||||
| Condensed Consolidated Balance Sheet | ||||||||||||
| As Previously | As | |||||||||||
| Reported | Adjustments | Restated | ||||||||||
| As of October 30, 2004 | ||||||||||||
| Property and equipment, net | $ | 114,692 | $ | 9,316 | $ | 124,008 | ||||||
| Total assets | 510,083 | 9,316 | 519,399 | |||||||||
| Accrued expenses | 44,887 | 266 | 45,153 | |||||||||
| Current deferred income taxes | 24,770 | (16 | ) | 24,754 | ||||||||
| Total current liabilities | 254,583 | 250 | 254,833 | |||||||||
| Long-term liabilities | 7,405 | 12,008 | 19,413 | |||||||||
| Deferred income taxes | 13,871 | (1,135 | ) | 12,736 | ||||||||
| Total liabilities | 275,859 | 11,123 | 286,982 | |||||||||
| Retained earnings | 199,955 | (1,807 | ) | 198,148 | ||||||||
| Total shareholders’ equity | 234,224 | (1,807 | ) | 232,417 | ||||||||
| Total liabilities and shareholders’ equity | 510,083 | 9,316 | 519,399 | |||||||||
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(3) Stock-Based Compensation
The Company has options outstanding under five stock option plans: the Goody’s Family Clothing, Inc. Amended and Restated 1991 Stock Incentive Plan (the “1991 Plan”), the Goody’s Family Clothing, Inc. Amended and Restated 1993 Stock Option Plan (the “1993 Plan”), the Goody’s Family Clothing, Inc. Amended and Restated 1997 Stock Option Plan (the “1997 Plan”), the Goody’s Family Clothing, Inc. 2005 Stock Incentive Plan (the “2005 Plan”), and the Amended and Restated Discounted Stock Option Plan for Directors (the “Directors’ Plan”).
The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net (loss) earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. However, expense is recorded in connection with stock options issued under the Directors’ Plan to non-employee directors and this expense has been immaterial. Interim pro forma information regarding net (loss) income and (loss) earnings per share is required by Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123,” which requires that the information be determined as if the Company had accounted for its employee stock options granted under the fair value method of that statement. The following table illustrates the effect on net (loss) earnings and (loss) earnings per common share if the Company had applied the fair value recognition provisions of SFAS 148 to stock-based employee compensation (in thousands, except per share amounts):
| Thirteen | Thirty-nine | |||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||
| October 29, | October 30, | October 29, | October 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Net (loss) earnings, as reported | $ | (23,475 | ) | $ | (816 | ) | $ | (30,677 | ) | $ | 8,533 | |||||
| Deduct: Total stock-based employee compensation expense determined under fair value based-method for all awards, net of related tax effects | (91 | ) | (346 | ) | (5,317 | ) | (459 | ) | ||||||||
| Pro forma net (loss) earnings | $ | (23,566 | ) | $ | (1,162 | ) | $ | (35,994 | ) | $ | 8,074 | |||||
| (Loss) earnings per common share | ||||||||||||||||
| Basic — as reported | $ | (0.71 | ) | $ | (0.02 | ) | $ | (0.93 | ) | $ | 0.26 | |||||
| Basic — pro forma | (0.71 | ) | (0.03 | ) | (1.09 | ) | 0.24 | |||||||||
| Diluted — as reported | $ | (0.71 | ) | $ | (0.02 | ) | $ | (0.93 | ) | $ | 0.25 | |||||
| Diluted — pro forma | (0.71 | ) | (0.03 | ) | (1.09 | ) | 0.24 | |||||||||
The weighted-average fair value of each stock option included in the preceding pro forma amounts was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options.
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(4) Credit arrangements
In May 2001, the Company entered into a five-year, $130,000,000 syndicated revolving loan and security agreement that provides for cash borrowings for general corporate purposes, including a $95,000,000 sub-facility for the issuance of letters of credit. Borrowings under this credit facility are limited by collateral formulas, based principally upon the Company’s eligible inventories. The credit facility is secured primarily by the Company’s inventories, receivables and cash and cash equivalents. The available collateral for the borrowing base was $200,171,000 at October 29, 2005, which excludes cash and most of cash equivalents and only gives credit for specified percentages of inventory and receivables. The amount available to draw under the credit facility at October 29, 2005, was approximately $116,965,000. If availability (as calculated pursuant to the credit facility) falls below $25,000,000, the Company would be required, for a period of time, to comply with a financial covenant requiring it to maintain minimum levels of tangible net worth based on formulas. The Company’s availability did not fall below $25,000,000 during the 13 weeks ended October 29, 2005, or October 30, 2004, and therefore the Company was not required to comply with this financial covenant. The credit facility also contains certain discretionary provisions that enable the lender to reduce availability. The credit facility bears interest at LIBOR plus an applicable margin or the prime rate. In June 2003, the credit facility was amended to permit cash dividends in any fiscal year on the common stock in an amount not to exceed (i) $3,500,000 (but not to exceed $10,000,000 in the aggregate during the remaining term of the credit facility) plus (ii) 50% of the Company’s consolidated net income for the immediately preceding fiscal year. At October 29, 2005, the Company had no borrowings outstanding and had letters of credit outstanding of $12,987,000. Of these letters outstanding, $2,371,000 represented merchandise that had not yet been shipped to the Company and therefore had not yet been reflected in accounts payable. These letters of credit generally have terms of less than one year and are primarily used to facilitate the purchase of import merchandise.
(5) Contingencies
Class Action Proceeding
In February 1999, a lawsuit was filed in the United States District Court for the Middle District of Georgia and was served on the Company and Robert M. Goodfriend, its Chairman of the Board and Chief Executive Officer, by 20 named plaintiffs, generally alleging that the Company discriminated against a class of African-American employees at its retail stores through the use of discriminatory selection and compensation procedures and by maintaining unequal terms and conditions of employment. The plaintiffs further alleged that the Company maintained a racially hostile working environment.
On February 28, 2003, a proposed Consent Decree was filed with the District Court for its preliminary approval. The proposed Consent Decree sets forth the proposed settlement of the class action race discrimination lawsuit. Ultimately, class action certification was sought in the lawsuit only with respect to alleged discrimination in promotion to management positions and the proposed Consent Decree is limited to such claims. Generally, the proposed settlement provides for a payment by the Company in the aggregate amount of $3.2 million to the class members (including the named plaintiffs) and their counsel, as well as the Company’s implementation of certain policies, practices and procedures regarding, among other things, training of employees. The Company’s employer liability insurance underwriter has funded $3.1 million of such payment to a third-party administrator.
The proposed Consent Decree explicitly provides that it is not an admission of liability by the Company and the Company continues to deny all of the allegations. On July 30, 2003, the District Court granted preliminary approval of the proposed Consent Decree, and a hearing was held on June 30, 2003, regarding the adequacy and fairness of the proposed settlement. On March 3, 2004, the United States District Court for the Middle District of Georgia issued an Order granting final approval of the Consent Decree. On or about February 23, 2004, a purported class member filed an appeal with the U.S. Court of Appeals for the Eleventh Circuit (the “Eleventh Circuit”), alleging, among other things, misconduct on the part of the District Court and the plaintiff’s/appellant’s counsel; the Eleventh Circuit dismissed this appeal on March 5, 2004. On or about March 12, 2004, a Motion to set aside the dismissal was filed with the Eleventh Circuit. On May 28, 2004, the Eleventh Circuit dismissed all appeals regarding this matter. In August 2004, a purported class member filed a Petition for a Writ of Certiorari with the United States Supreme Court regarding the Eleventh Circuit’s dismissal of all appeals on this matter; on January 20, 2005, the United States Supreme Court denied the Petition for a Writ of Certiorari. Pursuant to the terms of the March 3, 2004,
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Order, the District Court will maintain jurisdiction of this matter until July 2006 to monitor the parities’ compliance with the Consent Decree.
Shareholder Actions Brought in Connection With the Sun Merger Agreement and Related Transactions
On October 11, 2005, a complaint was filed in connection with the Sun Merger Agreement and the transactions contemplated thereby (see Note 1 for additional information about the Sun Merger Agreement). The complaint, which names the Company, its directors and certain executive officers as defendants, was brought in the Chancery Court for Knox County, Tennessee (the “Chancery Court”) and is seeking, among other things, certification as a class action, injunctive relief and unspecified damages. The complaint generally alleges that the defendants breached their fiduciary duties by accepting an inadequate offer, by failing to address other acquisition proposals, by taking steps to discourage other acquisition proposals, including an excessive termination fee, and by generally failing to maximize shareholder value. The complaint also alleges that the sale is motivated by the self-interest of the Company’s Chairman and Chief Executive Officer, Robert M. Goodfriend.
On October 12, 2005, two additional complaints were filed in connection with the Sun Merger Agreement and the transactions contemplated thereby. The complaints, which name both the Company and its directors as defendants, were also brought in the Chancery Court, and are seeking, among other things, certification as a class action, a determination that fiduciary duties were breached, injunctive relief against the proposed transaction (and in one case in the alternative to injunctive relief, rescission of the proposed transaction if it has been consummated and unspecified damages). Together, the complaints allege that the defendants breached their fiduciary duties by accepting an inadequate offer, by failing to address other acquisition proposals, by taking steps to discourage other acquisition proposals, including an excessive termination fee (in one case), and by generally failing to maximize shareholder value.
At a proceeding in the Chancery Court on October 14, 2005, the plaintiff in one of the cases filed on October 12, 2005, sought a temporary restraining order against the consummation of the transactions contemplated by the Sun Merger Agreement. The Chancery Court granted the Company’s motion for continuance of the initial hearing on this matter until October 26, 2005, relying upon representations from counsel to the Company at the hearing that the proposed transaction would not be consummated before that date. On October 23, 2005, the Company received another offer (the “October 23 Offer”). At the resumed hearing in Chancery Court on October 26, 2005, all three of the plaintiffs sought temporary injunctive relief concerning the October 23 Offer, which had been the subject of the Company’s October 24, 2005 press release. The Court heard argument on the motions for injunctive relief and reserved decision until October 27, 2005. At the commencement of the resumed hearing at 9:30 a.m. on October 27, 2005, the Chancery Court was informed by the Company’s counsel of the events that had taken place following adjournment of the October 26, 2005 hearing at approximately 3:45 p.m., and specifically that at approximately 2:30 a.m. on October 27, 2005, the Company had executed the Merger Agreement and a Stock Option Agreement with the affiliates of Prentice/GMM providing for an all-cash purchase price of $9.60 per share. The Chancery Court declined to issue a temporary injunction. The Chancery Court also directed that the three matters be consolidated and appointed lead plaintiffs’ counsel.
On November 10, 2005, the plaintiffs filed a new complaint (the “Fee Complaint”) in the consolidated action naming the Company, its directors, GMM Capital LLC, Prentice Capital Management, LP and Acquisition Corp. as defendants. The Fee Complaint alleges that the increase in tender offer price from the price of $8.00 per share in the Sun Merger Agreement to the $9.60 per share in the Merger Agreement with affiliates of Prentice/GMM was caused by the plaintiffs complaints and related actions, and that counsel for the putative class are entitled to an award of attorneys fees as a percentage of the total increase in value of the transaction. The complaint seeks, among other things, a declaration that the matter is properly maintainable as a class action, and an injunction prohibiting consummation of the merger until “an appropriate amount of the merger proceeds” is set aside for a future award of attorneys’ fees. Plaintiffs’ counsel has also sought by motion a temporary restraining order (“TRO”) to enjoin the distribution of $10,595,200 of the proceeds of the tender offer so that funds remain available and be used to pay their attorneys fees. A hearing on the TRO is set for November 30, 2005, in the Chancery Court.
The Company believes the complaints are without merit and has filed a motion to dismiss the three consolidated cases. The motion to dismiss has not yet been fully briefed nor has it been argued to the Chancery Court. The Company also believes that the application for the TRO is without merit.
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Other Matters
In addition, the Company is a party to various other legal proceedings arising in the ordinary course of its business. The Company has various insurance policies in place in the event of unfavorable outcomes from such proceedings. The insurance companies’ level of, and willingness to, support their coverage could vary depending upon the circumstances of each particular case. As such, there can be no assurance as to the level of support available from insurance policies. The Company does not currently believe that the ultimate outcome of all such pending legal proceedings, individually or in the aggregate, would have a material adverse effect on the Company’s financial position, results of operations or cash flows.
(6) Intangible Assets
The Company purchased the Duck Head trademarks and four related licenses from TSI Brands Inc., and its parent corporation, Tropical Sportswear Int’l Corporation during fiscal 2003 and total acquisition costs were $4,103,000. In accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets,” the Company performed a valuation of the trademarks during fiscal 2004 and determined that the asset has an indefinite life and no impairment charge was necessary. Intangible assets are included within other assets in the accompanying condensed consolidated balance sheets.
(7) Non-Qualified Deferred Compensation Plan and Agreement
The Company entered into the Robert M. Goodfriend Non-Qualified Deferred Compensation Plan and Agreement (the “Supplemental Retirement Plan”) for Robert M. Goodfriend, its Chairman and Chief Executive Officer during the second quarter of fiscal 2005. The Supplemental Retirement Plan is a defined contribution plan, pursuant to which the Company contributed $250,000 to a rabbi trust in August 2005 and has agreed to make an annual contribution of $250,000 to the Supplemental Retirement Plan on behalf of Mr. Goodfriend for each year beginning in January 2006 through the Company’s 2014 fiscal year for an aggregate of $2,750,000.
(8) Asset Held for Sale
The Company made a decision to sell an aircraft during the second quarter of fiscal 2005 and entered into an agreement with a broker/agent to place the aircraft on the open market. The Company evaluated the net realizable value of the aircraft at the end of the third quarter of fiscal 2005 and, as a result, the Company recorded a writedown of $500,000 and $1,914,000 during the 13 weeks and 39 weeks ended October 29, 2005, respectively. This writedown of the aircraft to its net realizable value was recorded in selling, general and administrative expenses. The aircraft held for sale is currently valued at $1,000,000 and is reflected in the caption, accounts receivables and other current assets. The Company expects the aircraft to be sold within the next three fiscal quarters.
(9) New Accounting Pronouncements
On April 14, 2005, the Securities and Exchange Commission announced that the required effective date for adopting SFAS 123(R), has been deferred to fiscal years beginning after June 15, 2005, instead of an effective date of interim periods beginning after June 15, 2005. The Company will be required to adopt this statement on January 29, 2006, the first day of fiscal 2006.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Goody’s Family Clothing, Inc.
Knoxville, Tennessee:
Goody’s Family Clothing, Inc.
Knoxville, Tennessee:
We have reviewed the accompanying condensed consolidated balance sheets of Goody’s Family Clothing, Inc. and Subsidiaries (the “Company”) as of October 29, 2005 and October 30, 2004, and the related condensed consolidated statements of operations for the 13 and 39 week periods ended October 29, 2005 and October 30, 2004 and the related consolidated statements of cash flows for the 39 week periods ended October 29, 2005 and October 30, 2004. These interim condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of January 29, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 15, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
As discussed in Note 2, the accompanying condensed consolidated balance sheet as of October 30, 2004 and the related condensed consolidated statements of operations for the 13 and 39 week periods ended October 30, 2004 and the related consolidated statement of cash flows for the 39 week period ended October 30, 2004 have been restated.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
November 22, 2005
Atlanta, Georgia
November 22, 2005
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Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement discussed in Note 2 in the Notes to Condensed Consolidated Financial Statements.
Forward-looking Statements
This quarterly report contains certain forward-looking statements which are based upon current expectations relating to the expected timing and scope of the Merger Agreement, and these statements involve material risks and uncertainties including, but not limited to:
| (i) | that such number of shares are tendered, which, together with the shares beneficially owned by GMM and Prentice, equal at least 51% of the Company’s fully diluted shares; | |
| (ii) | that there be no event or occurrence which would have a material adverse effect on the Company that would allow Parent or Acquisition Corp. to terminate the Merger Agreement; | |
| (iii) | that there be no law, order or injunction that would affect the ability of the parties to consummate the tender offer; | |
| (iv) | that there be no action by a governmental authority challenging the transactions contemplated by the Merger Agreement; | |
| (v) | that the Company comply with its covenants and not have breached its representations and warranties (subject to applicable materiality qualifiers); and | |
| (vi) | certain other conditions to be met by the Company. |
This Quarterly Report also contains certain forward-looking statements related to the on-going business operations, which are based upon business plans and estimates and involve material risks and uncertainties including, but not limited to:
| (i) | customer demand and trends in the apparel and retail industry and to the acceptance of the Company’s merchandise offerings, including the Company’s private-label and exclusive lines; | |
| (ii) | the ability to reverse the negative trend in comparable-store sales; | |
| (iii) | weather conditions; | |
| (iv) | the effectiveness of advertising and promotional events; | |
| (v) | the ability to avoid excess promotional pricing; | |
| (vi) | the effectiveness of merchandising, advertising, pricing, and operational strategies; | |
| (vii) | the ability to predict fashion trends; | |
| (viii) | the ability to achieve business plan targets; | |
| (ix) | the timely availability of branded and private-label merchandise in sufficient quantities to satisfy customer demand; | |
| (x) | the ability to achieve business plans for the Duck Head line, which call for continued growth; | |
| (xi) | the impact of competitors’ pricing and store expansion; | |
| (xii) | individual store performance, including new stores; | |
| (xiii) | the ability to negotiate acceptable lease terms for new store locations and existing store locations to be remodeled or relocated; | |
| (xiv) | the timing, magnitude and costs of opening new stores; | |
| (xv) | growth of the Company’s store base; | |
| (xvi) | relations with vendors, factors and employees; | |
| (xvii) | the general economic conditions within the Company’s markets, including gasoline and energy prices, and an improvement in the overall retail environment; | |
| (xviii) | global political unrest, including terrorism and war; | |
| (xix) | the continued availability of adequate credit support from vendors and factors; | |
| (xx) | the Company’s compliance with loan covenants and the availability of sufficient eligible collateral for borrowing; | |
| (xxi) | the unanticipated needs for additional capital expenditures; | |
| (xxii) | trends affecting the Company’s financial condition, results of operations or cash flows; | |
| (xxiii) | the success of the Company’s information technology systems; and | |
| (xxiv) | the success of the Company’s e-commerce initiative. |
Any “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, which generally can be identified by the use
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of forward-looking terminology such as “may,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “target,” “plan,” “project,” or “continue” or the negatives thereof or other variations thereon or similar terminology, are made on the basis of management’s plans and current analysis of the Company, its business and the industry as a whole. Readers are cautioned that any such forward-looking statement is not a guarantee of future performance and involves risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statement as a result of various factors. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Additional information on risk factors that could potentially affect the Company’s financial results may be found in the Company’s 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Certain of such filings may be accessed through the Company’s web site,www.goodysonline.com, then choose “SEC Filings.”
Overview
General.Goody’s is a retailer of moderately priced family apparel, with its stores located in small to midsized markets in the Southeast, Midwest and Southwest regions of the United States that have demographic characteristics consistent with its targeted customer. The Company’s objective is to be a leading retailer of apparel for the entire family in each of the markets it serves. In keeping with this objective, Goody’s offers a broad selection of current-season, nationally recognized brands for brand-conscious shoppers, as well as exclusive brands for those shoppers who seek quality apparel at value prices. All of Goody’s stores are leased, average approximately 27,600 gross square feet, and are generally located in strip shopping centers. The Company manages its core functions, such as purchasing, pricing, marketing and advertising, distribution, planning and allocation, real estate, finance, and information systems, from its centrally located corporate office in Knoxville, Tennessee. The Company has two distribution centers, one each in Knoxville, Tennessee and Russellville, Arkansas.
Sale of the Company.On October 27, 2005, the Company entered into the Merger Agreement with Acquisition Corp. and Parent.
Pursuant to the terms of the Merger Agreement, Acquisition Corp. commenced a cash tender offer (the “Tender Offer”) on November 10, 2005, to acquire all of the issued and outstanding shares of the Company’s common stock at a price of $9.60 per share in cash. The Merger Agreement provides that, subject to the conditions set forth therein, including the consummation of the Tender Offer in accordance with its terms, Acquisition Corp. will be merged (the “Merger”) with the Company and, in connection therewith, shares not tendered in the offer would be converted into the right to receive $9.60 per share in cash. Acquisition Corp. is required to keep the Tender Offer open for a minimum of 20 business days and may extend the offer for an additional 10 business days in its sole discretion. The Company may also extend the offer for an additional 10 business days if the conditions to the Tender Offer have not been met at the time that the offer (as it may be extended) would otherwise expire. Consummation of the Tender Offer is subject to certain conditions, including the tender of such number of shares which, together with the shares beneficially owned by Parent or Acquisition Corp., equal at least 51% of the Company’s fully diluted shares, that there be no event or occurrence which would have a material adverse effect on the Company, that there be no law, order or injunction that would affect the ability of the parties to consummate the Tender Offer, that there be no action by a governmental authority challenging the transactions, that the Company comply with its covenants and not have breached its representations and warranties (subject to applicable materiality qualifiers) and other customary conditions. Closing of the merger is conditioned upon consummation of the Tender Offer and there being no law, order or injunction that is then in effect that would prevent or prohibit consummation of the merger or would otherwise impose material limitations on the ability of Acquisition Corp. and Parent effectively to acquire or hold the business of the Company.
The Company had previously entered into the Sun Merger Agreement at a cash price of $8.00 per share. Following the receipt of an all-cash offer from Prentice/GMM through Parent and Acquisition Corp, which the Board of Directors of the Company determined was a Superior Proposal (as defined in the Sun Merger Agreement), the Sun Merger Agreement was terminated pursuant to its terms. In connection with such termination, the Company was required to pay a termination fee plus expenses to the Sun Capital Affiliates aggregating approximately $13,085,000. The Sun Capital Termination Fee, along with other transaction related expenses, together aggregating approximately $15,526,000, are not considered deductible for income tax
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purposes and are recorded as transaction expenses on the Company’s Statements of Operations for the 13 week and 39 week periods ended October 29, 2005.
For a more complete description of the Merger Agreement and related matters, please refer to the Company’s filings with the Securities and Exchange Commission which can be accessed through the Company’s web site,www.goodysonline.com, then choose “SEC Filings.”
Outlook
The consummation of the Tender Offer, which is anticipated to occur in December 2005, will result in a change in control of the Company. The consummation of the subsequent Merger will result in the Company being wholly owned by affiliates of Prentice/GMM. In connection with the change in control, the Company anticipates incurring additional expenses during the fourth quarter of approximately $8.0 million. These additional expenses consist primarily of change in control benefits payable to certain executive officers, investment banking fees and legal expenses.
The Company will not achieve its previously announced business plan for fiscal 2005, which included guidance for comparable store sales, gross profit rate including occupancy expenses, and selling, general and administrative expenses. As a result of the pending sale of the Company, the Company has ceased providing such financial guidance regarding its expected results. As previously disclosed, the Merger Agreement also prohibits the declaration of future dividends.
During the fourth quarter of fiscal 2005, the Company opened seven new stores, re-opened four of the five stores temporarily closed by the hurricanes in September 2005 and plans to close one of its stores at the end of November 2005. The fifth store closed by the hurricanes is scheduled to open in the spring of 2006.
The Company’s primary needs for capital resources are for the purchase of store inventories, capital expenditures and for normal operating purposes. Management believes that its existing working capital, together with anticipated cash flows from operations, including credit terms from vendors and factors, and the borrowings available under the credit facility will be sufficient to meet the Company’s operating and capital expenditure requirements until the consummation of the Merger.
Critical Accounting Policies
The Company’s accompanying interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets, and liabilities reported. The critical accounting matters that are very important to the portrayal of the Company’s financial condition and results of operations and require some of management’s most difficult, subjective and complex judgments are described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005. The accounting for these matters involves forming estimates based on current facts, circumstances and assumptions which, in management’s judgment, could change in a manner that would materially affect management’s future estimates with respect to such matters and, accordingly, could cause future reported financial condition and results of operations to differ materially from financial results reported based on management’s current estimates. There have been no material changes in the critical accounting policies during the 13 weeks ended October 29, 2005.
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Results of Operations
The following table sets forth unaudited results of operations, as a percent of sales, for the periods indicated:
| Thirteen | Thirty-nine | |||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||
| October 29, | October 30, | October 29, | October 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of sales and occupancy expenses | 72.3 | 70.4 | 72.0 | 69.8 | ||||||||||||
| Gross profit | 27.7 | 29.6 | 28.0 | 30.2 | ||||||||||||
| Selling, general and administrative expenses | 30.7 | 30.2 | 30.5 | 28.7 | ||||||||||||
| Transaction expenses | 5.3 | — | 1.8 | — | ||||||||||||
| (Loss) earnings from operations | (8.3 | ) | (0.6 | ) | (4.3 | ) | 1.5 | |||||||||
| Investment income | 0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
| Interest expense | — | — | — | — | ||||||||||||
| (Loss) earnings before income taxes | (8.2 | ) | (0.5 | ) | (4.2 | ) | 1.6 | |||||||||
| (Benefit) provision for income taxes | (0.2 | ) | (0.2 | ) | (0.7 | ) | 0.6 | |||||||||
| Net (loss) earnings | (8.0 | )% | (0.3 | )% | (3.5 | )% | 1.0 | % | ||||||||
Thirteen Weeks Ended October 29, 2005 Compared with Thirteen Weeks Ended October 30, 2004
Overview. During the third quarter of fiscal 2005, the Company opened nine new stores, relocated three stores, remodeled one store, permanently closed one store, and temporarily closed five stores due to hurricane-related damage, bringing the total number of stores in operation at October 29, 2005, to 371, compared with 352 at October 30, 2004. During the third quarter of fiscal 2004, the Company opened seven new stores, relocated one store and remodeled one store. The Company incurred a net loss for the third quarter of fiscal 2005 of $23,475,000, or 8.0% of sales, compared with a net loss for the third quarter of fiscal 2004 of $816,000, or 0.3% of sales. The net loss included the Sun Capital Termination Fee and other related transaction expenses aggregating $15,526,000, or 5.3% of sales.
Sales.Sales for the third quarter of fiscal 2005 were $295,210,000, a 3.7% increase from the $284,794,000 in sales for the third quarter of fiscal 2004. The increase of $10,416,000 consisted primarily of a $12,663,000 increase in net sales from new stores, transition stores and sales from stores that were subsequently closed offset by a $2,247,000 decrease in comparable store sales. Comparable store sales for the third quarter of fiscal 2005 decreased 0.9% compared with the third quarter of fiscal 2004. Sales for the third quarter of fiscal 2005 were negatively impacted by the effects of hurricanes in September as well as unseasonably warm weather in September and most of October. Sales of private-label and exclusive brand merchandise increased to approximately 32% of total merchandise sales for the third quarter of fiscal 2005 from 31% of total merchandise sales for the same period in the prior year.
Gross profit.Gross profit for the third quarter of fiscal 2005 was $81,720,000 or 27.7% of sales, a $2,598,000 decrease from the $84,318,000 in gross profit, or 29.6% of sales, for the third quarter of fiscal 2004. Merchandise margins in the third quarter of fiscal 2005 decreased 1.9% as a percent of sales from the third quarter of fiscal 2004. The components of the gross profit rate decrease were primarily (i) a 1.8% decrease related to reduced selling prices and increased promotional activity in an effort to stimulate sales and reduce seasonal inventory levels, and (ii) a 0.1% increase in occupancy costs due to the decrease in comparable store sales and the resulting lack of leverage as a percentage of sales.
Selling, general and administrative (“SG&A”) expenses.SG&A expenses for the third quarter of fiscal 2005 were $90,846,000, or 30.7% of sales, an increase of $4,938,000 from $85,908,000, or 30.2% of sales, for the third quarter of fiscal 2004. SG&A expenses increased by 0.5%, as a percent of sales, for the third quarter of fiscal 2005 compared with the third quarter of fiscal 2004. The SG&A expense rate increase, as a percentage of sales, was due largely to the decrease in comparable store sales and the resulting lack of leverage. The components of the SG&A expense rate increase were primarily: (i) a 0.5% increase in payroll expense, (ii) a 0.5% increase in trucking and utilities expenses, and (iii) 0.2% increase related to a writedown on an aircraft which is held for sale, offset by (iv) a
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0.5% decrease in group health insurance, and (v) a 0.2% decrease in all other SG&A expenses.
Transaction Expenses.During the third quarter of fiscal 2005, the Company incurred $15,526,000 in transaction expenses, which are expected to be non-deductible for income tax purposes. The transaction expenses principally consist of the Sun Capital Termination Fee and legal fees related to the transaction. In connection with the change in control, the Company anticipates incurring additional expenses during the fourth quarter of fiscal 2005 of approximately $8.0 million, which are also expected to be non-deductible for income tax purposes. These additional expenses consist primarily of change in control benefits payable to certain officers and associates, investment banking fees and legal expenses.
Income taxes.The benefit for income taxes for the third quarter of fiscal 2005 was $833,000, for an effective tax rate of 3.4% of loss before income taxes, compared with a benefit for income taxes of $485,000, for an effective tax rate of 37.3% of earnings before income taxes, for the third quarter of fiscal 2004. The effective tax rate for fiscal 2005 was negatively affected by the non-deductible transaction expenses noted above and other non-deductible costs of the Company.
Thirty-nine Weeks Ended October 29, 2005 Compared with Thirty-nine Weeks Ended October 30, 2004
Overview. During the 39 weeks ended October 29, 2005, the Company opened 24 new stores, relocated 6 stores, remodeled 2 stores, permanently closed 5 stores, and temporarily closed 5 stores due to hurricane-related damage, bringing the total number of stores in operation at October 29, 2005 to 371, compared with 352 at October 30, 2004. During the 39 weeks ended October 30, 2004, the Company opened 17 new stores relocated 2 stores and remodeled 8 stores. The Company incurred a net loss for the 39 weeks ended October 29, 2005 of $30,677,000, or 3.5% of sales, compared with net earnings for the 39 weeks ended October 30, 2004 of $8,533,000, or 1.0% of sales. The net loss included the Sun Capital Termination Fee and other related transaction expenses aggregating $15,526,000, or 1.8% of sales.
Sales.Sales for the 39 weeks ended October 29, 2005 were $879,583,000, a 0.3% decrease from the $882,304,000 in sales for the 39 weeks ended October 30, 2004. The decrease of $2,721,000 consisted primarily of a $44,747,000 decrease in comparable store sales, offset by a $42,026,000 increase in additional net sales from new stores, transition stores and sales from stores that were subsequently closed. Comparable store sales for the 39 weeks ended October 29, 2005 decreased 5.3% compared with the 39 weeks ended October 30, 2004. Sales for the 39 weeks ended October 29, 2005 were negatively affected by the following factors: (i) negative sales trends in the Missy and Special Size divisions, which in turn negatively affected customer traffic and sales throughout the store, (ii) inadequate inventory levels in certain departments of the Company’s stores, primarily in the children’s merchandise area, (iii) a planned shift of advertising dollars from television to radio that was ultimately not successful, and (iv) the effects of hurricanes in September as well as unseasonably warm weather in September and most of October. Sales of private-label and exclusive brand merchandise increased to approximately 35% of total merchandise sales for the 39 weeks ended October 29, 2005 from 33% of total merchandise sales for the same period in the prior year.
Gross profit.Gross profit for the 39 weeks ended October 29, 2005 was $246,519,000 or 28.0% of sales, a $19,660,000 decrease from the $266,179,000 in gross profit, or 30.2% of sales, for the 39 weeks ended October 30, 2004. Merchandise margins for the 39 weeks ended October 29, 2005 decreased 2.2% as a percent of sales from the 39 weeks ended October 30, 2004. The components of the gross profit rate decrease were primarily (i) a 1.8% decrease related to reduced selling prices and increased promotional activity in an effort to stimulate sales and reduce seasonal inventory levels, and (ii) a 0.4% increase in occupancy costs due to the decrease in comparable store sales and the resulting lack of leverage as a percentage of sales.
Selling, general and administrative (“SG&A”) expenses.SG&A expenses for the 39 weeks ended October 29, 2005, were $268,683,000, or 30.5% of sales, an increase of $15,554,000 from $253,129,000, or 28.7% of sales, for the third quarter of fiscal 2004. SG&A expenses increased by 1.8%, as a percent of sales, for the third quarter of fiscal 2005 compared with the third quarter of fiscal 2004. The SG&A expense rate increase, as a percentage of sales, was due largely to the decrease in comparable store sales and the resulting lack of leverage. The components of the SG&A expense rate increase were primarily (i) a 1.0% increase in payroll expense, (ii) a 0.4% increase in trucking and utilities expenses (iii) a 0.3% increase in advertising expense, (iv) 0.2% increase related to a writedown on an aircraft which is held for sale, (v) a 0.2% increase in retirement benefits relating to a contractual retirement benefit
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for the CEO to be funded by annual cash payments of $250,000 through the year 2014, (vi) a 0.1% increase in depreciation, offset by (vii) a 0.4% decrease in group health insurance.
Transaction Expenses.During the 39 weeks ended October 29, 2005, the Company incurred $15,526,000 in transaction expenses, which are expected to be non-deductible for income tax purposes. The transaction expenses principally consist of the Sun Capital Termination Fee and legal fees related to the transaction. In connection with the change in control, the Company anticipates incurring additional expenses during the fourth quarter of fiscal 2005 of approximately $8.0 million, which are also expected to be non-deductible for income tax purposes. These additional expenses consist primarily of change in control benefits payable to certain officers and associates, investment banking fees and legal expenses.
Income taxes.The benefit for income taxes for the 39 weeks ended October 29, 2005 was $5,839,000, for an effective tax rate of 16.0% of loss before income taxes, compared with a provision for income taxes of $5,066,000, for an effective tax rate of 37.25% of earnings before income taxes, for the 39 weeks ended October 29, 2004. The effective tax rate for fiscal 2005 was negatively affected by the non-deductible transaction expenses noted above and other non-deductible costs of the Company.
Liquidity and Capital Resources
Financial Position.The Company’s primary sources of liquidity are cash flows from operations, including credit terms from vendors and factors, and borrowings under its credit facility discussed below. At October 29, 2005, January 29, 2005, and October 30, 2004, the Company’s working capital was $102,270,000, $144,091,000 and $135,428,000, respectively. In the third quarter of fiscal 2005, the Company paid the Sun Capital Termination Fee and certain other expenses aggregating $12,287,000.
The $33,158,000 decrease in working capital from October 30, 2004 to October 29, 2005, consisted primarily of: (i) a net loss of $23,558,000 (which includes the transaction expenses noted above), (ii) a $16,445,000 net increase in property and equipment, (iii) a $7,328,000 decrease in long-term deferred income taxes, (iii) dividends declared of $2,989,000, (iv) offset by (vi) increases in long-term liabilities of $14,751,000, and (vii) $1,649,000 from the issuance of common stock through the exercise of stock options.
The $41,821,000 decrease in working capital from January 29, 2005 to October 29, 2005, consisted primarily of: (i) a net loss of $30,677,000 (which includes the transaction expenses noted above), (ii) a $14,224,000 net increase in property and equipment, (iii) a $4,967,000 decrease in long-term deferred income taxes, (iv) dividends declared of $1,985,000, offset by (v) increases in long-term liabilities of $8,132,000, and (vi) $1,415,000 from the issuance of common stock through the exercise of stock options.
In May 2001, the Company entered into a five-year, $130,000,000 syndicated revolving loan and security agreement that provides for cash borrowings for general corporate purposes, including a $95,000,000 sub-facility for the issuance of letters of credit. Borrowings under this credit facility are limited by collateral formulas, based principally upon the Company’s eligible inventories. The credit facility is secured primarily by the Company’s inventories, receivables and cash and cash equivalents. The available collateral for the borrowing base was $200,171,000 at October 29, 2005, which excludes cash and most of cash equivalents and only gives credit for specified percentages of inventory and receivables. The amount available to draw under the credit facility at October 29, 2005, was approximately $116,965,000. If availability (as calculated pursuant to the credit facility) falls below $25,000,000, the Company would be required, for a period of time, to comply with a financial covenant requiring it to maintain minimum levels of tangible net worth based on formulas. The credit facility also contains certain discretionary provisions that enable the lender to reduce availability. The credit facility bears interest at LIBOR plus an applicable margin or the prime rate. In June 2003, the credit facility was amended to permit cash dividends in any fiscal year on the common stock in an amount not to exceed (i) $3,500,000 (but not to exceed $10,000,000 in the aggregate during the remaining term of the credit facility) plus (ii) 50% of the Company’s consolidated net income for the immediately preceding fiscal year.
There were no cash borrowings during the 39 weeks ended October 29, 2005 or October 30, 2004, or during fiscal 2004. Letters of credit outstanding averaged $14,255,000 during the 39 weeks ended October 29, 2005, compared with $37,750,000 during the 39 weeks ended October 30, 2004. The highest balance of letters of credit outstanding
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during the 39 weeks ended October 29, 2005, was $39,735,000 in February 2005 compared with $44,632,000 in August 2004 during the 39 weeks ended October 30, 2004. The Company had letters of credit outstanding of $12,988,000, $39,735,000 and $34,860,000 at October 29, 2005, January 29, 2005 and October 30, 2004, respectively. Of these letters outstanding, $2,371,000, $23,122,000 and $20,699,000, at October 29, 2005, January 29, 2005 and October 30, 2004, respectively, represented merchandise that had not yet been shipped to the Company and therefore had not yet been reflected in accounts payable. The Company renegotiated its business arrangement with its primary import agent in the fourth quarter of fiscal 2004, and therein eliminated the need for letters of credit with such agent. As a result, the Company expects its need for letters of credit in fiscal 2005 to be substantially less than historical amounts.
Cash Flows.Cash flows from operating activities reflected a net use of cash of $32,295,000 and $24,681,000 for the 39 weeks ended October 29, 2005 and October 30, 2004, respectively. Cash used for increases in inventory during the 39 weeks ended October 29, 2005 and October 30, 2004, was $63,373,000 and $101,816,000, respectively. Inventories on a per square foot basis were $28.74 and $30.80 at October 29, 2005 and October 30, 2004, respectively, which represents a 6.7% decrease on a per square foot basis.An increase in accounts payable — trade provided cash of $43,963,000 and $51,250,000 for the 39 weeks ended October 29, 2005 and October 30, 2004, respectively. Accounts payable — trade as a ratio to inventories were 61.2% versus 56.8% at October 29, 2005 and October 30, 2004, respectively. The increase in inventory and payables reflects normal seasonal build-ups for the upcoming holiday season.
Cash flows from investing activities reflected a net use of cash of $34,804,000 and $28,118,000 for the 39 weeks ended October 29, 2005 and October 30, 2004, respectively. The Company used cash to fund capital expenditures for new, relocated and remodeled stores, upgrading information technology and for general corporate purposes for the 39 weeks ended October 29, 2005 and October 30, 2004. Additionally, the Company used cash to purchase used aircraft for the 39 weeks ended October 29, 2005.
Cash flows from financing activities used cash of $1,554,000 and $3,218,000 for the 39 weeks ended October 29, 2005 and October 30, 2004, respectively. The Company paid cash dividends of $2,969,000 and $2,305,000 in each of the 39 weeks ended October 29, 2005 and October 30, 2004, respectively. Proceeds from the issuance of common stock resulting from the exercise of stock options for the 39 weeks ended October 29, 2005 and October 30, 2004, were $1,415,000 and $934,000, respectively. The Company also purchased and retired $1,847,000 of its common stock during the 39 weeks ended October 30, 2004.
New Accounting Pronouncement
On April 14, 2005, the Securities and Exchange Commission announced that the required effective date for adopting Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payment,” has been deferred to fiscal years beginning after June 15, 2005, instead of an effective date of interim periods beginning after June 15, 2005. The Company will be required to adopt this statement on January 29, 2006, the first day of fiscal 2006.
Contractual Obligations
For a discussion of the Company’s contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its Annual Report on Form 10-K for the fiscal year ended January 29, 2005. There have been no significant developments with respect to the Company’s contractual obligations since January 29, 2005, other than the execution of the Robert M. Goodfriend Non-Qualified Deferred Compensation Plan and Agreement (the “Supplemental Retirement Plan”) during the second quarter of fiscal 2005. The Supplemental Retirement Plan is a defined contribution plan, pursuant to which the Company has agreed to make future annual contributions of $250,000 in January of each year through the Company’s 2014 fiscal year for an aggregate of $2,750,000.
Item 3. — Quantitative and Qualitative Disclosures about Market Risk
The Company has no material investments or risks in market risk sensitive instruments.
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Item 4. — Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Company’s Chairman and Chief Executive Officer, and the Company’s Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Each fiscal quarter, under the supervision and with the participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer, the Company’s Chief Financial Officer and Chief Accounting Officer, the Company carries out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Company’s Chairman and Chief Executive Officer, along with the Company’s Chief Financial Officer and Chief Accounting Officer, concluded that, as of October 29, 2005, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act reports.
(b) Changes in internal control over financial reporting.
During the fiscal quarter ended October 29, 2005, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. — Legal Proceedings
On October 11, 2005, a complaint was filed in connection with Sun Merger Agreement and the transactions contemplated thereby (see Note 1 for additional information about the Sun Merger Agreement). The complaint, which names the Company, its directors and certain executive officers as defendants, was brought in the Chancery Court for Knox County, Tennessee (the “Chancery Court”) and is seeking, among other things, certification as a class action, injunctive relief and unspecified damages. The complaint generally alleges that the defendants breached their fiduciary duties by accepting an inadequate offer, by failing to address other acquisition proposals, by taking steps to discourage other acquisition proposals, including an excessive termination fee, and by generally failing to maximize shareholder value. The complaint also alleges that the sale is motivated by the self-interest of the Company’s Chairman and Chief Executive Officer, Robert M. Goodfriend.
On October 12, 2005, two additional complaints were filed in connection with the Sun Merger Agreement and the transactions contemplated thereby. The complaints, which name both the Company and its directors as defendants, were also brought in the Chancery Court, and are seeking, among other things, certification as a class action, a determination that fiduciary duties were breached, injunctive relief against the proposed transaction (and in one case in the alternative to injunctive relief, rescission of the proposed transaction if it has been consummated and unspecified damages). Together, the complaints allege that the defendants breached their fiduciary duties by accepting an inadequate offer, by failing to address other acquisition proposals, by taking steps to discourage other acquisition proposals, including an excessive termination fee (in one case), and by generally failing to maximize shareholder value.
At a proceeding in the Chancery Court on October 14, 2005, the plaintiff in one of the cases filed on October 12, 2005 sought a temporary restraining order against the consummation of the transactions contemplated by the Sun Merger Agreement. The Chancery Court granted the Company’s motion for continuance of the initial hearing on this matter until October 26, 2005, relying upon representations from counsel to the Company at the hearing that the proposed transaction would not be consummated before that date. On October 23, 2005, the Company received another offer (the “October 23 Offer”). At the resumed hearing in Chancery Court on October 26, 2005, all three of the plaintiffs sought temporary injunctive relief concerning the October 23 Offer, which had been the subject of the Company’s October 24, 2005 press release. The Court heard argument on the motions for injunctive relief and reserved decision until October 27, 2005. At the commencement of the resumed hearing at 9:30 a.m. on October 27, 2005, the Chancery Court was informed by the Company’s counsel of the events that had taken place following adjournment of the October 26, 2005 hearing at approximately 3:45 p.m., and specifically that at approximately 2:30 a.m. on October 27, 2005, the Company had executed the Merger Agreement and a Stock Option Agreement with the affiliates of Prentice/GMM providing for an all-cash purchase price of $9.60 per share. The Chancery Court declined to issue a temporary injunction. The Chancery Court also directed that the three matters be consolidated and appointed lead plaintiffs’ counsel.
On November 10, 2005, the plaintiffs filed a new complaint (the “Fee Complaint”) in the consolidated action naming the Company, its directors, GMM Capital LLC, Prentice Capital Management, LP and Acquisition Corp. as defendants. The Fee Complaint alleges that the increase in tender offer price from the price of $8.00 per share in the Sun Merger Agreement to the $9.60 per share in the Merger Agreement with affiliates of Prentice/GMM was caused by the plaintiffs complaints and related actions, and that counsel for the putative class are entitled to an award of attorneys fees as a percentage of the total increase in value of the transaction. The complaint seeks, among other things, a declaration that the matter is properly maintainable as a class action, and an injunction prohibiting consummation of the merger until “an appropriate amount of the merger proceeds” is set aside for a future award of attorneys’ fees. Plaintiffs’ counsel has also sought by motion a temporary restraining order (“TRO”) to enjoin the distribution of $10,595,200 of the proceeds of the tender offer so that funds remain available and be used to pay their attorneys fees. A hearing on the TRO is set for November 30, 2005 in the Chancery Court.
The Company believes the complaints are without merit and has filed a motion to dismiss the three consolidated cases. The motion to dismiss has not yet been fully briefed nor has it been argued to the Chancery Court. The Company also believes that the application for the TRO is without merit.
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Item 6. — Exhibits and Reports on Form 8-K
a) Exhibits
| 2.1 | Acquisition Agreement and Agreement and Plan of Merger, among the Company, GFC Enterprises, Inc., and GFC Holding Corp., dated October 7, 2005.(a) | |
| 2.2 | Acquisition Agreement and Agreement and Plan of Merger among the Company, GF Acquisition Corp., and GF Goods, Inc., dated October 27, 2005.(b) | |
| 10.108 | Stock Option Agreement, among the Company, GFC Enterprises, Inc., and GFC Holding Corp., dated October 7, 2005.(a) | |
| 10.109 | Support Agreement, among the Company, GFC Enterprises, Inc., and GFC holding Corp. and certain shareholders of the Company, dated October 7, 2005.(a) | |
| 10.110 | Commitment Letter, between Sun Capital Partners IV, LP and GFC Holding Corp., dated October 7, 2005.(a) | |
| 10.111 | Stock Option Agreement among the Company, GF Acquisition Corp., and GF Goods, Inc., dated October 27, 2005.(b) | |
| 10.112 | Support Agreement among the Company, GF Acquisition Corp., and GF Goods, Inc., and certain shareholders of the Company dated October 27, 2005.(b) | |
| 10.113 | Commitment Letter between Prentice Capital Management, LP, GMM Capital LLC and GF Goods, Inc. dated October 27, 2005.(b) | |
| 10.114 | Second Amendment to the employment agreement between the Registrant and Edward R. Carlin dated September 20, 2005. | |
| 15 | Letter from Deloitte & Touche LLP regarding unaudited interim financial information. | |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.3 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.3 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| (a) | Incorporated herein by reference to exhibit of the same number in Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2005. | |
| (b) | Incorporated herein by reference to exhibit of the same number in Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 28, 2005. |
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GOODY’S FAMILY CLOTHING, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GOODY’S FAMILY CLOTHING, INC. | ||||
| (Registrant) | ||||
| Date: November 22, 2005 | /s/ Robert M. Goodfriend | |||
| Chairman of the Board and | ||||
| Chief Executive Officer | ||||
| Date: November 22, 2005 | /s/ Edward R. Carlin | |||
| Executive Vice President, | ||||
| Chief Financial Officer and | ||||
| Secretary | ||||
| (Principal Financial Officer) | ||||
| Date: November 22, 2005 | /s/ David G. Peek | |||
| Senior Vice President and | ||||
| Chief Accounting Officer | ||||
| (Principal Accounting | ||||
| Officer) |
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