SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: May 14, 2002 Commission File Number 0-15898
DESIGNS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2623104
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of principal executive offices)
555 Turnpike Street, Canton, MA 02021
(Address of principal executive offices) (Zip Code)
(781) 828-9300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of each Class)
-----------------
This report on Form 8-K/A amends and supplements the report on Form 8-K filed by
Designs, Inc. (the "Company") on May 23, 2002 in connection with the Company's
acquisition on May 14, 2002 of substantially all the assets of Casual Male Corp.
and certain of its subsidiaries ("Casual Male"), to include the financial
information required by Item 7(a) and Item 7(b).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
The following historical audited consolidated financial statements of Casual
Male Corp. and notes thereto are included herein:
Independent Auditors' Report
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001
Consolidated Statements of Operations for the years ended February 2,
2002, February 3, 2001 and January 29, 2000
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended February 2, 2002, February 3, 2001 and January 29, 2000
Consolidated Statements of Cash Flows for the years ended February 2,
2002, February 3, 2001 and January 29, 2000
Notes to Consolidated Financial Statements
2
Independent Auditors' Report
The Board of Directors and Stockholders
Casual Male Corp., Debtor-in-Possession:
We have audited the accompanying consolidated balance sheets of Casual Male
Corp. and subsidiaries, Debtor-in-Possession, as of February 2, 2002 and
February 3, 2001, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the 52 week period ended
February 2, 2002, the 53 week period ended February 3, 2001, and the 52 week
period ended January 29, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the Company's 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Casual Male Corp.
and subsidiaries as of February 2, 2002 and February 3, 2001, and the results of
their operations and their cash flows for the 52 week period ended February 2,
2002, the 53 week period ended February 3, 2001, and the 52 week period ended
January 29, 2000, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on May 18, 2001. As
of May 15, 2002, most of the assets of the Company have been sold. The Company
will continue operations primarily to liquidate any remaining assets and settle
the Company's remaining liabilities, including liabilities subject to
compromise, to the extent possible. After the settlements have occurred, it is
expected that the Company will cease operations. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Boston, Massachusetts /s/ KPMG LLP
May 18, 2002
3
CASUAL MALE CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
Consolidated Balance Sheets
February 2, 2002 and February 3, 2001
Assets 2002 2001
------------- ------------
Current assets:
Cash and cash equivalents $ 5,056,039 5,619,983
Accounts receivable:
Trade, net 1,330,020 2,453,460
Other 4,126,700 3,112,402
------------- -------------
5,456,720 5,565,862
Merchandise inventories -- 136,200,960
Prepaid expenses 655,104 3,902,692
Net assets held for sale (notes 1(q) and 4) 113,902,849 --
Current assets of discontinued operations (note 2) -- 13,462,139
------------- -------------
Total current assets 125,070,712 164,751,636
------------- -------------
Property, plant, and equipment, at cost:
Land and buildings -- 20,041,636
Furniture, fixtures, and equipment -- 56,464,492
Leasehold improvements -- 36,664,206
------------- -------------
-- 113,170,334
Less accumulated depreciation and amortization -- 47,778,229
------------- -------------
Net property, plant, and equipment -- 65,392,105
------------- -------------
Other assets, at cost, less accumulated amortization 20,557 14,939,857
------------- -------------
$ 125,091,269 245,083,598
============= =============
Liabilities and Stockholders' Deficit
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt (note 4) $ 65,640,543 12,328,921
Accounts payable 653,531 64,459,990
Accrued expenses 7,432,138 15,216,423
------------- -------------
Total current liabilities 73,726,212 92,005,334
------------- -------------
Other liabilities -- 1,926,660
Long-term debt, net of current portion (note 4) -- 93,788,679
Convertible subordinated debt (note 4) -- 70,300,000
Liabilities subject to compromise (note 1(r)): 148,243,643 --
------------- -------------
Total liabilities 221,969,855 258,020,673
------------- -------------
Stockholders' deficit:
Common stock, par value $0.50 per share. Authorized 40,000,000 shares;
issued and outstanding 14,208,260 shares in 2002 and 14,069,185 in 2001 7,104,131 7,034,593
Additional paid-in capital 121,533,712 120,902,446
Accumulated deficit (225,516,429) (140,874,114)
------------- -------------
Total stockholders' deficit (96,878,586) (12,937,075)
------------- -------------
$ 125,091,269 245,083,598
============= =============
See accompanying notes to consolidated financial statements.
4
CASUAL MALE CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
Consolidated Statements of Operations
Years ended February 2, 2002, February 3, 2001, and January 29, 2000
2002 2001 2000
------------- ------------- -------------
(53 Weeks)
Net sales $ 430,807,393 473,333,156 411,706,993
Cost of sales 246,468,480 247,199,104 212,866,012
------------- ------------- -------------
Gross profit 184,338,913 226,134,052 198,840,981
Selling, administrative, and general expenses 190,585,217 188,017,371 164,488,528
Reorganization costs (note 1(a)) 37,973,531 -- --
Impairment of Work 'n Gear assets (note 1(a)) 12,292,462 -- --
Depreciation and amortization 12,632,574 11,973,599 12,012,716
------------- ------------- -------------
Operating income (loss) (69,144,871) 26,143,082 22,339,737
Interest expense, net 13,671,562 11,971,995 10,075,227
------------- ------------- -------------
Earnings (loss) from continuing operations
before income taxes (82,816,433) 14,171,087 12,264,510
Income tax expense (note 5) 303,500 57,216,000 4,047,000
------------- ------------- -------------
Earnings (loss) from continuing operations (83,119,933) (43,044,913) 8,217,510
Discontinued operations (note 2):
Earnings (loss) from discontinued operations, net of
income tax expense of $0, $574,000, and $322,000
in fiscal 2002, 2001 and 2000, respectively -- 1,594,940 655,100
Loss on disposal of discontinued operations (1,309,264) (60,405,902) --
------------- ------------- -------------
Earnings (loss) from discontinued operations (1,309,264) (58,810,962) 655,100
------------- ------------- -------------
Net earnings (loss) $ (84,429,197) (101,855,875) 8,872,610
============= ============= =============
Earnings (loss) per common share:
Basic:
Continuing operations $ (5.85) (3.06) 0.58
Discontinued operations (0.09) (4.18) 0.05
------------- ------------- -------------
Net earnings (loss) per common share, basic $ (5.94) (7.24) 0.63
============= ============= =============
Diluted:
Continuing operations $ (5.85) (3.06) 0.57
Discontinued operations (0.09) (4.18) 0.05
------------- ------------- -------------
Net earnings (loss) per common share, diluted $ (5.94) (7.24) 0.62
============= ============= =============
Number of shares used to compute earnings
(loss) per common share:
Basic 14,205,976 14,067,998 14,065,734
Diluted 14,205,976 14,067,998 14,373,272
See accompanying notes to consolidated financial statements.
5
CASUAL MALE CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
Consolidated Statements of
Stockholders' Equity (Deficit) Years ended
February 2, 2002, February 3, 2001, and January 29, 2000
Common stock Additional Total
---------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------- ------------- ------------- ------------- -----------------
Balance, January 30, 1999 14,064,526 $ 7,032,263 117,353,846 (46,202,794) 78,183,315
Net earnings -- -- -- 8,872,610 8,872,610
Warrants issued on subordinated debt -- -- 3,300,000 -- 3,300,000
Exercise of stock options 3,000 1,500 212,814 -- 214,314
Dividends paid ($0.06 per share) -- -- -- (843,949) (843,949)
------------ ------------ ------------ ------------ ------------
Balance, January 29, 2000 14,067,526 7,033,763 120,866,660 (38,174,133) 89,726,290
Net loss -- -- -- (101,855,875) (101,855,875)
Exercise of stock options 1,659 830 35,786 -- 36,616
Dividends paid ($0.06 per share) -- -- -- (844,106) (844,106)
------------ ------------ ------------ ------------ ------------
Balance, February 3, 2001 14,069,185 7,034,593 120,902,446 (140,874,114) (12,937,075)
Net loss -- -- -- (84,429,197) (84,429,197)
Exercise of stock options 139,075 69,538 631,266 -- 700,804
Dividends paid ($0.015 per share) -- -- -- (213,118) (213,118)
------------ ------------ ------------ ------------ ------------
Balance, February 2, 2002 14,208,260 $ 7,104,131 121,533,712 (225,516,429) (96,878,586)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
6
CASUAL MALE CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
Consolidated Statements of
Cash Flows Years ended February 2, 2002,
February 3, 2001, and January 29, 2000
2002 2001 2000
------------ ------------- -----------
Cash flows from operating activities:
Earnings (loss) from continuing operations $(83,119,933) (43,044,913) 8,217,510
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization:
Fixed assets 11,389,975 9,973,289 9,921,179
Deferred charges, intangible assets, warrants and deferred
financing costs 2,578,599 3,164,310 2,891,537
Reorganization items 37,973,531 -- --
Impairment of Work 'n Gear assets 12,292,462 -- --
Deferred income taxes, net -- 56,347,000 3,592,641
Change in:
Accounts receivable (1,509,297) 270,384 (1,717,710)
Merchandise inventories 35,023,883 (16,878,762) (14,824,425)
Prepaid expenses (814,340) 84,462 (208,071)
Other assets 1,053,790 (3,009,735) (2,534,280)
Accounts payable 15,248,424 1,194,531 29,831,089
Accrued expenses (3,970,933) 3,163,817 3,280,458
Income taxes payable/receivable -- 416,698 (1,459,399)
Other liabilities (968,173) (428,216) (147,387)
------------ ------------ ------------
Net cash provided by operating activities before
reorganization items 25,177,988 11,252,865 36,843,142
------------ ------------ ------------
Operating cash flows from reorganization items:
Professional fees paid (12,278,948) -- --
------------ ------------ ------------
Net cash used by reorganization items (12,278,948) -- --
------------ ------------ ------------
Net cash provided by operating activities 12,899,040 11,252,865 36,843,142
------------ ------------ ------------
Cash flows from investing activities: Capital expenditures for:
Property, plant, and equipment (6,495,606) (15,424,938) (10,747,218)
Net cash paid in acquisition of Repp Ltd.
Big & Tall businesses -- -- (27,021,980)
Proceeds received from sale of footwear business 6,000,000 53,007,456 --
------------ ------------ ------------
Net cash provided by (used in) investing activities (495,606) 37,582,518 (37,769,198)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of senior debt -- -- (1,500,000)
Proceeds from revolving credit facilities -- -- 94,957,430
Repayment of revolving credit facilities (30,993,655) (1,497,749) (122,114,352)
Proceeds from (repayment of) senior
subordinated debt -- (53,000) 10,000,000
Proceeds from term loans 15,000,000 -- 34,000,000
Repayment of chattel loans (2,675,526) (9,292,630) (994,470)
Repayment of mortgage payable (733,348) (670,456) (612,954)
(Payment) reduction of mortgage escrow, net 4,190 71,145 (28,966)
Proceeds from exercise of stock options 700,804 36,616 214,314
Payment of dividends (213,118) (844,106) (843,949)
------------ ------------ ------------
Net cash provided by (used in) financing activities (18,910,653) (12,250,180) 13,077,053
------------ ------------ ------------
Net cash provided by (used in) discontinued operations 6,152,875 (36,295,685) (10,333,501)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (354,344) 289,518 1,817,496
Cash and cash equivalents at beginning of year 5,619,983 5,330,465 3,512,969
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,265,639 5,619,983 5,330,465
============ ============ ============
less: Cash included in Assets held for sale (209,600)
-----------
Cash and cash equivalents available at end of year $ 5,056,039
===========
See accompanying notes to consolidated financial statements.
7
CASUAL MALE CORP. AND SUBSIDIARIES
(Debtor-in-Possession)
Notes to Consolidated Financial Statements
February 2, 2002, February 3, 2001, and January 29, 2000
(1) Nature of Operations and Summary of Significant Accounting Policies
(a) Nature of Operations
Casual Male Corp. and subsidiaries (the Company), formerly J. Baker,
Inc., are primarily engaged in the retail sale of apparel. As of
February 2, 2002, the Company's Casual Male Big & Tall, Repp Big & Tall
and Work `n Gear businesses operated a total of 529 stores throughout
the United States. The Company operated the 431 store chain of Casual
Male Big & Tall stores (including 63 outlet stores) and the 42 store
chain of Repp Big & Tall stores, selling fashion, casual and dress
clothing, and footwear to the big and tall man. In the first quarter of
fiscal 2003, all of the Repp Big & Tall stores were converted to Casual
Male Big & Tall stores. The Company also operated the Work `n Gear
chain, comprised of 56 stores that sell utility workwear, healthcare
apparel, and custom uniforms for industry and service businesses. As
discussed below, the Company decided to close 49 stores during the
fourth quarter of 2002, and at February 2, 2002, a liquidator was
conducting closing sales at these 49 additional stores. The Company
also operated catalog, e-commerce and other direct selling and
marketing businesses, as well as security businesses under the names of
LPI and Securex. Through February 3, 2001, the Company also operated
self-service licensed footwear departments in discount department
stores (see note 2).
Chapter 11 Bankruptcy Filing
On May 18, 2001 (the Filing Date), Casual Male Corp. and 15 of its
direct and indirect subsidiaries (collectively, the Debtors) filed
voluntary petitions to reorganize their businesses under Chapter 11 of
the United States Bankruptcy Code (Chapter 11) in the United States
Bankruptcy Court for the Southern District of New York (the Bankruptcy
Court). JBAK Holding and JBAK Realty, a direct and indirect subsidiary
of Casual Male Corp., respectively, did not file petitions to
reorganize under Chapter 11 (the Chapter 11 Case). The Debtors continue
to operate their businesses and manage their properties as
debtors-in-possession pursuant to sections 1107(a) and 1108 of the
Bankruptcy Code, subject to the jurisdiction of the Bankruptcy Court.
On May 24, 2001, the United States Trustee for the Southern District of
New York appointed an Official Committee of Unsecured Creditors (the
Creditors' Committee) pursuant to Section 1102 of the Bankruptcy Code.
As of the Filing Date, actions to collect pre-petition indebtedness are
stayed, and other pre-petition contractual obligations may not be
enforced against the Company. In addition, the Company may reject
executory contracts and lease obligations, and parties affected by
these rejections may file claims with the Bankruptcy Court in
accordance with the reorganization process. The Company's liabilities
at the Filing Date are subject to allowance in the Chapter 11 case and
the creditors shall receive the distribution, if any, provided for
under one or more plans of reorganization. All unsecured claims are
reflected in the accompanying consolidated balance sheet as
"Liabilities subject to compromise". The Debtors received approval as
of the Filing Date to pay or otherwise honor certain of their
pre-petition obligations, including employee wages and related taxes,
employee benefits, travel expenses, insurance premiums, utilities and
certain customer programs.
The Company filed schedules of assets and liabilities on or about
August 1, 2001, which were amended in October 2001. Pursuant to an
order of the Bankruptcy Court, the last date for filing claims against
the Company as of the Filing Date was established as December 17, 2001.
Under Section 1121(b) of the Bankruptcy Code, a debtor has the
exclusive right to file a plan of reorganization during the initial 120
days after the date of the commencement of a Chapter 11 case. On
October 10, 2001, the Bankruptcy Court granted an extension of
approximately six months. On March 7, 2002, the Bankruptcy Court
entered an order extending the Debtors' exclusive time to file a plan
of reorganization through August 26, 2002.
During fiscal 2002, the Company made key modifications to its business
to enhance profitability. On July 11, 2001, the Company, after
consulting with the Creditors' Committee, filed a motion with the
Bankruptcy Court requesting authorization to close certain of its
locations which no longer contributed to the Company's overall business
objectives. The Company requested approval to commence store closing
sales at 80 of its locations, consisting of 21 Casual Male Big & Tall
stores, 43 Repp Big & Tall stores and 16 outlet stores. On August 22,
2001, the Bankruptcy Court authorized the Company's store closings.
Store closing sales commenced at the end of August and all 80 stores
were closed as of December 26, 2001.
8
The Company decided to close an additional 49 stores during the fourth
quarter of its fiscal year ended February 2, 2002. Commencing on
January 17, 2002, the Company engaged a liquidator to conduct store
closing sales at 12 Casual Male Big & Tall stores, 23 Repp Big & Tall
stores, and 14 Work `n Gear stores. The store closing sales ended on or
before April 14, 2002. Other stores were closed without the use of a
liquidator and all remaining stores operating under the Repp Big & Tall
format were converted to stores operating in the Casual Male Big & Tall
format during the first quarter of fiscal 2003. As a result of this
decision, it was determined that the goodwill associated with the Repp
acquisition no longer had value, and the unamortized balance of $6.0
million was entirely written off as of February 2, 2002. See further
discussion in note 3.
Additionally, the Company consolidated the catalog and e-commerce
operations previously located in its facility in Alpharetta, Georgia
into its facility in Canton, Massachusetts. This consolidation allowed
the Company to utilize space in the Canton facility made available as a
result of the disposal of the footwear business (see note 2). It also
eliminated occupancy and related expenses associated with the
Alpharetta facility. In order to ensure an efficient transition of the
Company's catalog and e-commerce business from Alpharetta to Canton,
the Company received authorization from the Bankruptcy Court to
establish a retention program that provided economic incentives to its
former Alpharetta-based employees to remain with the Company through
the transition period. Consolidation activities were concluded by the
end of February 2002. The expenses associated with this consolidation,
including retention and severance expenses, moving costs and capital
costs for improvements to the Canton facility, were $2.4 million, of
which $1.2 million was accrued at February 2, 2002.
Reorganization costs during fiscal 2002 are as follows:
Balance at
Utilized - Utilized - February 2,
Cost Cash cash 2002
--------------------------------------------------------
Professional fees $ 5,375,737 (3,954,679) -- 1,421,058
Bank fees 6,523,436 (6,510,188) -- 13,248
Asset write offs for closed stores 9,399,724 -- (9,399,724) --
Write off of Repp goodwill (note 3) 6,006,072 -- (6,006,072) --
Lease rejection claims 8,277,285 -- -- 8,277,285
Other 2,391,277 (1,814,081) -- 577,196
----------- ----------- ----------- -----------
Total reorganization costs $37,973,531 (12,278,948) (15,405,796) 10,288,787
=========== =========== =========== ===========
At February 2, 2002, the Company has accrued $10,288,787 related to
reorganization costs. Of that balance, $8,277,285 is lease rejection
claims, included in "Liabilities subject to compromise" on the
consolidated balance sheet. The remaining $2,011,502 is included in
accrued expenses.
Sale of Work `n Gear Assets
As of March 11, 2002, the Company agreed to sell substantially all of
the assets of the Work `n Gear business to Sandy Point, LLC (Sandy
Point). The assets sold include property and equipment at stores;
rights to real estate and equipment leases; inventory; and licenses,
permits and intellectual property. Sandy Point assumed accounts payable
on in-transit inventory, but no other accounts payable arising prior to
the closing. The adjusted Purchase Price was $9,750,000. The sale was
approved by order of the Bankruptcy Court on April 17, 2002, and closed
on May 4, 2002.
The carrying value of the assets being sold was greater than the net
proceeds received. Therefore, the Company wrote down the assets to
their fair value less costs to sell as of February 2, 2002, recording
an impairment charge of $12,292,462. The assets sold are classified
under "Net assets held for sale" on the accompanying consolidated
balance sheet. See also note 1(q).
9
Sale of Big & Tall and Security Business Assets
As of May 2, 2002, the Company agreed to sell substantially all of the
operating assets of the big and tall and security businesses to
Designs, Inc. (Designs). The assets sold include the Company's office
and warehouse facility in Canton, Massachusetts; property and equipment
both at the office and warehouse facility and at stores; rights to real
estate and equipment leases; inventory; licenses, permits and
intellectual property; and the Company's loss prevention businesses.
Designs did not acquire certain accounts receivable. Designs assumed
post-petition accounts payable relating to the businesses acquired,
certain employee costs, the mortgage on the Canton facility, and
liabilities relating to prepayment penalties under Tranche A and
Tranche B of the DIP facility. Designs did not assume the liabilities
subject to compromise, or certain other post-petition reorganization
related obligations, such as professional fees. See further discussion
of the DIP facility in note 4. The Purchase Price was $170,000,000. The
sale was approved by order of the Bankruptcy Court on May 7, 2002, and
closed effective May 14, 2002.
The carrying value of the assets being sold was less than the net
proceeds received. The net assets sold are classified under "Net assets
held for sale" on the accompanying consolidated balance sheet. See also
note 1(q).
(b) Basis of Presentation and Principles of Consolidation
The consolidated financial statements have been prepared in accordance
with the American Institute of Certified Public Accountants Statement
of Position 90-7 (SOP 90-7), Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, and accounting principles
generally accepted in the United States of America applicable to a
going concern, which principles assume that assets will be realized and
liabilities will be discharged in the normal course of business. As of
May 15, 2002, most of the assets of the Company have been sold. The
Company will continue operations primarily to liquidate any remaining
assets and settle the Company's remaining liabilities, including
liabilities subject to compromise, to the extent possible. After the
settlements have occurred, it is expected that the Company will cease
operations.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
(d) Fiscal Year
The Company's fiscal year ends the Saturday closest to January 31.
Fiscal years 2002, 2001, and 2000 ended on February 2, 2002, February
3, 2001, and January 29, 2000, respectively. Fiscal 2002 included 52
weeks, fiscal 2001 included 53 weeks, and fiscal 2000 included 52
weeks. References to years in these financial statements and notes
relate to fiscal years rather than calendar years.
(e) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS No. 107),
Disclosures About Fair Value of Financial Instruments, requires
disclosure of the fair value of certain financial instruments. The
estimated fair values of the Company's financial instruments as of
February 2, 2002 are summarized below.
Carrying
amount Fair value
----------- -----------
DIP revolving credit facility (Tranche A) $ 29,603,169 29,603,169
DIP term loan (Tranche B) 20,000,000 20,000,000
DIP term loan (Tranche C) 15,000,000 15,000,000
Chattel loan 1,037,374 1,037,374
Mortgage note 12,410,527 13,164,835
10
The carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable (post-petition), accrued expenses, and
short-term borrowings approximate fair value because of the short
maturity of these instruments. Discounted cash flows are used to
determine the fair value of the mortgage. The fair value of the
Company's liabilities subject to compromise are not presently
determinable as a result of the Chapter 11 proceedings. At February 2,
2002, the Company has no investments in derivative financial
instruments.
(f) Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities
of three months or less and are stated at cost, which approximates
market.
(g) Merchandise Inventories
Except for the direct marketing business, which accounts for its
inventory by the average cost method, merchandise inventories, which
consist entirely of finished goods, are valued at the lower of cost or
market, principally by the retail inventory method.
(h) Depreciation and Amortization of Property, Plant and Equipment and
Other Assets
Depreciation and amortization of the Company's property, plant and
equipment, and other assets are provided on the straight-line method
over the following periods:
Furniture and fixtures 7 years
Machinery and equipment 7 years
Leasehold improvements 10 years
Building, building improvements, and land
improvements 40 years
Systems development costs, goodwill, and other 3 to 15 years
intangible assets
Maintenance and repairs are charged to expense as incurred. Major
renewals or replacements are capitalized. When properties are retired
or otherwise disposed of, the asset and related reserve account are
relieved and the resulting gain or loss, if any, is credited or charged
to operations.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
(j) Goodwill
Goodwill, which represents the excess of the purchase price over the
fair value of net assets acquired, is amortized on a straight-line
basis over a period of 15 years. The Company evaluates goodwill for
impairment whenever events or circumstances indicate that the carrying
amount may not be recoverable. If the carrying amount of the goodwill
exceeds the expected undiscounted future cash flows, the Company
records an impairment loss.
As discussed in note 3, the Company's goodwill relating to Repp was
written off as an impairment loss during fiscal 2002. At February 2,
2002, the remaining balance of goodwill is $100,000, which relates to
an acquisition of a security business in December 2000.
11
(k) Earnings Per Common Share
Basic Earnings Per Share (EPS) is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed by dividing
income available to common shareholders by the weighted average number
of common shares, after giving effect to all potentially dilutive
common shares outstanding during the period. All potentially dilutive
securities were excluded from the calculations for fiscal 2002 and 2001
because their effect would be anti-dilutive. The number of total shares
excluded from the calculation was 1,899,941 for both fiscal 2002 and
fiscal 2001. The common stock issuable under the 7% convertible
subordinated notes due 2002 and the convertible debentures were not
included in the calculation for fiscal 2000 because their effects would
be antidilutive.
Earnings (loss) from continuing operations and shares used to compute
earnings (loss) per share, basic and diluted, are reconciled below:
2002 2001 2000
------------ ------------ ------------
Earnings (loss) from continuing
operations, basic and diluted $(83,119,933) (43,044,913) 8,217,510
============ ============ ============
Weighted average common shares:
Basic 14,025,976 14,067,998 14,065,734
Effect of dilutive securities:
Stock options, warrants, and
performance share awards -- -- 307,538
------------ ------------ ------------
Diluted 14,205,976 14,067,998 14,373,272
============ ============ ============
(l) Revenue Recognition
The Company recognizes revenue in its retail stores at the time of sale
and in its catalog and e-commerce business at the time orders are
shipped.
(m) Store Opening and Closing Costs
Store opening costs are expensed as incurred. All costs related to
store closings are expensed at the time the decision is reached to
close the store.
(n) Advertising Costs
The Company expenses in-store advertising costs as incurred. Direct
response advertising costs, which consist of catalog production and
postage costs, are deferred and amortized over the period of expected
direct marketing revenue, which is less than one year. The amount of
deferred direct expense advertising cost was $1,045,132 and $868,820 at
February 2, 2002 and February 3, 2001, respectively. Advertising
expense was approximately $20.5 million, $18.7 million, and $14.1
million for the years ended February 2, 2002, February 3, 2001, and
January 29, 2000, respectively.
(o) Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation permits entities
to recognize as expense over the vesting period the fair value on the
date of grant of all stock-based awards. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees and provide pro forma
net income and pro forma earnings per share disclosures for employee
stock option grants made in fiscal 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company continues to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
12
(p) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(q) Net Assets Held for Sale
Net assets held for sale are stated at the lower of net book value or
estimated net realizable value. Net assets held for sale, including
Work `n Gear and the big and tall and security businesses, consist of
the following at February 2, 2002:
Cash $ 209,600
Inventory 92,603,042
Accounts receivable and deposits 1,408,439
Prepaid expenses 3,693,359
Property, plant and equipment 47,958,154
Other assets 6,612,649
less: Accounts payable and accrued
expenses assumed (26,171,866)
less: Mortgage note assumed (12,410,528)
-------------
Net assets held for sale $ 113,902,849
=============
(r) Liabilities Subject to Compromise
In accordance with SOP 90-7, liabilities subject to compromise are
claims reported at amounts based on the Company's books and records,
even though such liabilities may not be paid in full. Liabilities
subject to compromise consist of the following at February 2, 2002:
Accounts payable $ 56,561,210
Senior subordinated debt (note 4) 10,000,000
7% convertible subordinated notes (note 4) 70,000,000
Convertible debentures (note 4) 300,000
Accrued interest 2,712,840
Lease rejection claims 8,277,285
Other 392,308
------------
Liabilities subject to
compromise $148,243,643
============
Additional claims (liabilities subject to compromise) may subsequently
arise resulting from rejection of additional executory contracts and
non-residential leases, and from the determination by the Bankruptcy
Court (or by agreement between the parties involved) of allowed claims
for contingencies and other disputed amounts.
(s) Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of prior years to conform to the fiscal 2002 presentation.
13
(t) New Accounting Pronouncements
In accordance with EITF 00-10, Accounting for Shipping and Handling
Fees and Costs, the Company classifies shipping and handling fees
billed to customers as revenue, and shipping and handling costs in cost
of sales.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations. SFAS No. 141
specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with SFAS No. 121 and subsequently, SFAS
No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and of SFAS No. 142 on February 3, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS No.
142 is adopted in full, are not amortized. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001
continued to be amortized and tested for impairment prior to the full
adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in
order to conform with the new classification criteria in SFAS No. 141
for recognition separate from goodwill. If an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period.
Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first
interim period.
As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $100,000 and unamortized
identifiable intangible assets in the amount of $103,251, all of which
will be subject to the transition provisions of SFAS No. 142. Based on
the sale of substantially all of the Company's assets in May 2002, the
impact of adopting the Statements on the Company's financial statements
is not expected to be material.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No.
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. The Company adopted SFAS No. 144 on February 3, 2002.
(2) Discontinued Operations
Sale of Footwear Operations to Footstar
In November 2000, the Company announced that it had entered into an
agreement with an affiliate of Footstar, Inc. (Footstar) to sell
substantially all of the assets of its JBI, Inc. and Morse Shoe, Inc.
subsidiaries, which are the entities that comprised its footwear segment.
Pursuant to the terms of the Asset Purchase Agreement between the Company
and Footstar, the Company retained the obligation to operate certain
footwear departments in the following stores scheduled to close: (i) all
105 stores operated by Bradlees Stores, Inc., a debtor-in-possession under
Chapter 11, which stores closed during February 2001, (ii) 32 stores
operated by Ames Department Stores, Inc., which stores closed during March
2001 and (iii) six stores operated by Ann & Hope, Inc., which stores closed
during the spring of
14
2001. On February 3, 2001, the sale of the footwear segment to Footstar
was finalized. The sale resulted in a loss from discontinued operations
of $1.3 million and $58.8 million for fiscal years 2002 and 2001,
respectively. The net loss from the disposal of the footwear segment in
2001 included the book loss on the transaction, the operating loss of
the business in fiscal 2001 and other costs directly associated in the
decision to divest. Proceeds of the sale to Footstar were $59 million,
including $6 million placed in escrow at February 3, 2001. All of the
proceeds held in escrow were received in full in the first quarter of
fiscal 2002.
The footwear segment is accounted for as a discontinued operation.
Accordingly, its net assets have been segregated from continuing operations
in the accompanying consolidated balance sheets, and its operating results
are segregated and reported as discontinued operations in the accompanying
consolidated statements of operations and cash flows, and related notes.
For the periods ended February 2, 2002, February 3, 2001, and January 29,
2000, the results of discontinued operations were as follows:
2002 2001 2000
--------- --------- --------
(Amounts in thousands)
Net sales $ -- 303,622 254,350
Earnings before income taxes -- 2,169 977
Loss on disposal of discontinued
operations (1,309) (60,406) --
Income tax expense -- (574) (322)
-------- -------- --------
Earnings (loss) from
discontinued operations $ (1,309) (58,811) 655
======== ======== ========
The Company allocated interest expense to discontinued operations based on
debt that was attributed to the footwear segment. The loss on disposal of
discontinued operations in fiscal 2001 included interest costs of $6.3
million. Results from discontinued operations in fiscal 2002, 2001, and
2000 included interest costs of $0, $3.8 million, and $6.8 million,
respectively.
The assets identified as part of the disposition of the footwear segment
are recorded as current and noncurrent assets of discontinued operations;
the cash flow of the business is reported as net cash provided by (used in)
discontinued operations; and the results of operations of the segment are
reported as earnings (loss) from discontinued operations.
There were no remaining assets of discontinued operations as of February 2,
2002. Current assets of discontinued operations as of February 3, 2001
consist of the following:
(Amounts in thousands)
Current assets:
Accounts receivable $ 7,371
Amounts held in escrow 6,000
Other 91
----------
Current assets of discontinued
operations $ 13,462
==========
Shoe Corporation of America
On February 11, 2000, the Company entered into an agreement to purchase the
ongoing assets of Shoe Corporation of America (SCOA) and, on February 29,
2000, the transaction was consummated. The purchase price paid by the
Company to acquire the ongoing assets of SCOA was approximately $14
million. As part of this acquisition, the Company acquired the rights to
operate 204 licensed footwear departments for moderate department and
specialty store chains nationwide. All assets and rights of this division
were included in the sale to Footstar.
15
(3) Acquisition of Repp Ltd. And Repp Ltd. By Mail
On May 23, 1999, the Company acquired substantially all of the assets of
the Repp Ltd. Big & Tall and Repp Ltd. By Mail divisions of Edison Brothers
Stores, Inc. The Company paid cash, as described below, for the acquisition
of 175 United States and Canadian Repp Ltd. Big & Tall retail locations and
the Repp Ltd. By Mail catalog business. The Company immediately sold Repp's
Canadian operation, 16 stores, to Grafton-Fraser, Inc., a Canadian men's
retailer, and commenced the closing of 31 stores in the United States. The
Company operated the remaining retail stores in the United States and the
Repp Ltd. By Mail catalogs through a new subsidiary, JBI Apparel, Inc.,
until the business was sold to Designs (see note 1(a)). The transaction was
financed primarily through (a) a new $20 million credit facility and a $5
million term loan provided to JBI Apparel, Inc. by BankBoston Retail
Finance Inc. and Back Bay Capital Funding LLC, respectively, (both of which
were amended on August 30, 1999 through a refinancing), (b) the issuance by
JBI Apparel, Inc. of $10 million of senior subordinated notes to a group of
investors, which included investment funds affiliated with Donaldson,
Lufkin & Jenrette, Inc. (the Investor Group) (see note 4), and (c) the sale
of the Canadian operations and the liquidation of the inventories in the 31
closing stores. The net purchase price for the acquired assets, which
primarily consisted of inventory and fixed assets for the 128 retail stores
in the United States and the Repp Ltd. By Mail catalogs, was $27.0 million.
In connection with the $10 million financing provided by the Investor
Group, the Company issued 5-year warrants enabling holders to purchase
1,200,000 shares of the Company's common stock at $5.00 per share. See note
4.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations of Repp Big & Tall are included
in the consolidated statements of operations since the date of acquisition.
The net purchase price of $27.0 million was allocated as follows:
Property, plant, and equipment $ 3,000,000
Prepaid expenses 892,775
Merchandise inventories 16,901,370
Goodwill 6,227,835
-------------
$ 27,021,980
=============
During fiscal 2001, an additional $0.5 million of goodwill was booked. At
February 3, 2001, the unamortized goodwill of $6.7 million was included in
other assets and was being amortized on a straight line basis over fifteen
years. Accumulated amortization was $718,000 as of February 3, 2001.
At the end of fiscal 2002, the Company decided to either close the
remaining Repp stores or convert them to the Casual Male concept in the
spring of fiscal 2003. As a result of this decision, it was determined that
the goodwill no longer had value, and it was entirely written off as of
February 2, 2002. The Company also recorded a $3,865,000 write down of the
inventory in the converted Repp stores to reflect a valuation consistent
with that of the Casual Male stores. The write off of Repp goodwill has
been classified as Reorganization costs, and the write down of Repp
inventory has been classified as cost of sales in the accompanying
consolidated statements of operations for fiscal 2002.
16
(4) Debt
Long-term debt, including liabilities subject to compromise, at February 2,
2002 and February 3, 2001 was comprised of:
2002 2001
------------ ------------
Revolving credit facility $ -- 60,596,824
Term loan (Tranche B) -- 20,000,000
DIP revolving credit facility (Tranche A) 29,603,169 --
DIP term loan (Tranche B) 20,000,000 --
DIP term loan (Tranche C) 15,000,000 --
Chattel loan 1,037,374 3,712,900
Mortgage note (interest rate of 9.0%) 12,410,528 13,143,876
13% senior subordinated debt 10,000,000 8,664,000
7% convertible subordinated notes 70,000,000 70,000,000
Convertible debentures 300,000 300,000
------------ ------------
$158,351,071 176,417,600
============ ============
The 13% senior subordinated debt, 7% convertible subordinated notes, and
convertible debentures are all classified as "Liabilities subject to
compromise" on the consolidated balance sheet at February 2, 2002. The
mortgage note is classified as a liability to be assumed by Designs under
"Net assets held for sale" on the consolidated balance sheet at February 2,
2002.
The balance of long-term debt at February 2, 2002, other than liabilities
subject to compromise and net assets held for sale, is $65,640,543. This
balance is classified as current portion of long-term debt on the
accompanying consolidated balance sheet, and was fully repaid in May 2002
in conjunction with the sale to Designs.
Revolver, Term Loan and Chattel Loan
Effective February 3, 2001, the Company established a total of $130 million
in bank financing arrangements, comprised of a $110 million revolving
credit facility and a $20 million term loan. These two facilities, each of
which would have matured in January 2004, amended and restated the $185
million previously existing bank credit facility which would have otherwise
expired in May 2002.
The $110 million revolving line of credit (the Revolver) was provided by a
group of lenders led by Fleet Retail Finance, Inc. The $20 million term
loan (the Term Loan) was provided by Back Bay Capital Funding LLC.
Borrowings under the Term Loan bore interest at 17% per year until December
15, 2002 and 16.5% thereafter.
Upon commencement of the Chapter 11 Case, the Debtors filed a motion
seeking the authority of the Bankruptcy Court to enter into a
debtor-in-possession revolving credit arrangement (Tranche A) with a group
of lenders led by Fleet Retail Finance Inc., and Tranche B and C term loans
with a group of lenders led by Back Bay Capital Funding LLC (collectively,
the DIP Facility). On May 18, 2001, the Bankruptcy Court approved the DIP
Facility on an interim basis pursuant to Section 364(c) of the Bankruptcy
Code, and on July 18, 2001, approved the DIP Facility on a final basis. The
DIP Facility superseded and replaced the Company's $130 million in bank
financing arrangements comprised of the Revolver and the Term Loan.
The DIP Facility provides the Debtors with a $100 million revolving credit
facility (the DIP Revolver), which facility contains a $15.0 million
sub-limit for issuances of letters of credit, for the Debtors' general
working capital needs and for certain capital expenditures. Aggregate
borrowings under the DIP Revolver are limited to an amount determined by a
formula based on various percentages of eligible inventory and accounts
receivable. Borrowings under the DIP Revolver bear interest at variable
rates, and bore a weighted average interest rate of 5.93% in fiscal 2002.
As of February 2, 2002, the Company had aggregate borrowings outstanding
under the DIP Revolver totaling $30.4 million, including $0.8 million of
the letters of credit.
The Tranche B term loan provides $20 million to be applied solely towards
the retirement of the Revolver and the Term Loan. The unpaid balance of the
Tranche B term loan bears interest at a fixed rate of 17.5% per annum (of
17
which 15.5% is payable monthly in arrears and the remaining 2% may be paid
monthly or paid-in-kind, at the option of the Debtors).
The Tranche C term loan provides $15 million to the Debtors, the proceeds
of which must be applied solely towards the retirement of the Revolver and
the Term Loan and for the Debtors' working capital needs. The unpaid
balance of the Tranche C term loan bears interest at a fixed rate of 22%
per annum (of which 19% is payable monthly in arrears and the remaining 3%
may be paid monthly or paid-in-kind, at the option of the Debtors).
The DIP Facility is secured by a first priority lien on, and security
interest in, substantially all of the Debtors' assets except equipment as
to which Fleet Leasing Inc.'s lien has priority and property subject to
other permitted liens (as defined in the DIP Facility), in which case the
lenders have a perfected junior lien. The DIP Facility has debt covenants.
At February 2, 2002, the Debtors were in violation of certain of these
covenants. As noted above, the DIP facility was fully paid in May 2002 in
conjunction with the transaction with Designs.
At February 2, 2002 the Company had $1.0 million remaining of its $9
million chattel loan which was provided by Fleet Leasing Inc. (the Chattel
Loan). The Chattel Loan was payable in equal monthly installments of
principal and interest, bore interest at 10.35%, and was paid off upon its
maturity in May 2002.
Mortgage Note
On December 30, 1996, JBAK Canton Realty, Inc. (JBAK Realty), a wholly
owned subsidiary of JBAK Holding, Inc. (JBAK Holding) and an indirect,
wholly owned subsidiary of the Company, obtained a $15.5 million mortgage
loan from The Chase Manhattan Bank (the Mortgage Loan) secured by the real
estate, buildings, and other improvements located at 555 Turnpike Street,
Canton, Massachusetts (the Canton Property) owned by JBAK Realty. JBAK
Realty leases the Canton Property to JBI, Inc. (JBI), a wholly owned
subsidiary of the Company. Neither JBAK Holding nor JBAK Realty have agreed
to pay or make their assets available to pay creditors of the Company or of
JBI. Neither the Company nor JBI have agreed to make their assets available
to pay creditors of JBAK Holding or of JBAK Realty. This loan is being
repaid in equal monthly payments of principal and interest over 15 years,
and bears interest at 9.0%. As of February 2, 2002, the balance due was
$12.4 million. When the Company sold certain assets to Designs in May 2002,
the Canton Property was sold to Designs and Designs assumed obligations
under the mortgage, subject to the consent of the lenders.
Senior Subordinated Debt
In May 1999, to facilitate the purchase of the Repp Ltd. and Repp Ltd. By
Mail businesses (see note 3), a group of investors, which included
investment funds affiliated with Donaldson, Lufkin and Jenrette, Inc.
provided $10 million to the Company through the issuance of 13% Senior
Subordinated Notes by JBI Apparel, Inc. Detachable warrants were issued in
connection with the 13% Senior Subordinated Notes, which enable the holders
to purchase 1,200,000 shares of Casual Male Corp. common stock at $5.00 per
share. The value of the detachable warrants was recorded as additional
paid-in capital in stockholders' equity (deficit), and was amortized using
the effective interest method. The amount of the 13% Senior Subordinated
Notes at February 3, 2001 had been reduced by $1.3 million, the unamortized
balance of the $3.3 million value assigned to the detachable warrants. As
of February 2, 2002, the balance assigned to the warrants had been fully
amortized. The 13% Senior Subordinated Notes matured on December 31, 2001,
and the warrants expire on May 21, 2004. The debt has not been paid, and
the balance of $10,000,000 is included in "Liabilities subject to
compromise" on the consolidated balance sheet.
Convertible Subordinated Debt
In June 1992, Casual Male Corp. issued $70 million of 7% convertible
subordinated notes due June 2002. The notes are convertible into common
stock at a conversion price of $16.125 per share, subject to adjustment in
certain events.
The convertible debentures began accruing interest on January 15, 1997 at a
rate of 8% and no principal was payable until January 15, 2002. The debt is
subject, under certain circumstances, to mandatory conversion.
Approximately 6,500 shares of Casual Male common stock are reserved for any
future conversions of the convertible debentures.
Neither the 7% convertible subordinated notes nor the convertible
debentures have been paid, and the balances of $70,000,000 on the notes and
$300,000 on the debentures are included in "Liabilities subject to
compromise" on the consolidated balance sheet.
18
(5) Taxes on Earnings
Income tax expense attributable to earnings (loss) from continuing
operations consists of:
Current Deferred Total
------------ ------------ -----------
Year ended February 2, 2002:
Federal $ -- -- --
State and city 303,500 -- 303,500
----------- ----------- -----------
$ 303,500 -- 303,500
=========== =========== ===========
Year ended February 3, 2001:
Federal $ 354,135 55,992,407 56,346,542
State and city 869,458 -- 869,458
----------- ----------- -----------
$ 1,223,593 55,992,407 57,216,000
=========== =========== ===========
Year ended January 29, 2000:
Federal $ 315,965 3,510,035 3,826,000
State and city 221,000 -- 221,000
----------- ----------- -----------
$ 536,965 3,510,035 4,047,000
=========== =========== ===========
Income tax expense (benefit) attributable to earnings (loss) from
continuing operations differed from the amounts computed by applying the
U.S. federal income tax rate of 35% to pretax earnings (loss) from
continuing operations as a result of the following:
2002 2001 2000
------------- ------------ -------------
Computed "expected" tax expense
(benefit) $(28,986,000) 4,960,000 4,293,000
State income taxes, net of
federal income tax benefit 197,500 565,000 143,000
Adjustment to valuation
allowance for deferred tax
assets 29,111,000 51,697,000 (390,000)
Other (19,000) (6,000) 1,000
------------ ------------ ------------
$ 303,500 57,216,000 4,047,000
============ ============ ============
19
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at February 2,
2002 and February 3, 2001 are presented below:
2002 2001
------------- --------------
Deferred tax assets:
Accounts receivable $ 280,000 88,000
Inventory 284,000 556,000
Intangible assets 3,647,000 4,018,000
Other liabilities 4,917,000 --
Nondeductible accruals and reserves 11,185,000 1,016,000
Operating loss and credit carryforwards 114,114,000 96,428,000
------------- -------------
Total gross deferred tax assets 134,427,000 102,106,000
Less valuation allowance (134,005,000) (100,070,000)
------------- -------------
Net deferred tax asset 422,000 2,036,000
------------- -------------
Deferred tax liabilities:
Property, plant, and equipment (27,000) (1,682,000)
Intangible assets (395,000) (354,000)
------------- -------------
Total gross deferred tax liabilities (422,000) (2,036,000)
------------- -------------
Net deferred tax asset $ -- --
============= =============
At February 2, 2002, the Company has net operating loss carryforwards and
general business credit carryforwards for federal income tax purposes of
approximately $273.0 million and $1.3 million, respectively, which expire
in years ending February 2003 through February 2022. The Company also has
minimum tax credit carryforwards of approximately $4.2 million available to
reduce future regular income taxes, if any, over an indefinite period. Such
carryforwards are defined herein as "NOLs."
SFAS No. 109, Accounting for Income Taxes, requires that the tax benefit of
such NOLs be recorded for financial reporting purposes as an asset to the
extent that the Company assesses the utilization of such NOLs to be "more
likely than not". At February 3, 2001, the Company increased its valuation
allowance to fully reserve its net deferred tax asset. At February 2, 2002,
the Company increased its valuation allowance by $33,935,000 in order to
continue to fully reserve against its net deferred tax asset. As of
February 2, 2002, the Company has established a valuation allowance against
its deferred tax assets of $134,005,000, which has been charged against
income tax expense.
The Company considers its changing financial circumstances, and the related
risks, in assessing whether it is more likely than not that some portion or
all of the NOLs will be realized. In considering the likelihood of
realizing the value of the NOLs, the Company is required to consider the
likelihood of the generation of future taxable income during the periods in
which the NOLs may be utilized. In addition, the Company considers Section
382 of the Internal Revenue Code, which serves to limit a taxpayer's
ability to utilize NOLs as a result of changes in stock ownership of the
Company over a three year period. In the year ended February 3, 2001, the
Company disposed of its footwear business, and in May 2001 the Company
filed a petition to reorganize its business under Chapter 11. As of
February 3, 2001, the possible limitations under Section 382 caused
management to conclude that none of the Company's deferred tax assets were
more likely than not to be realized.
As of May 2002, substantially all of the assets of the Company have been
sold. The Company's financial circumstances, including the fact that the
sale of the Company's assets results in the NOLs remaining with the
Company, have caused management to conclude that none of the Company's
deferred tax assets are more likely than not to be realized. The Company
therefore increased the valuation allowance to fully reserve against its
net deferred tax asset as of February 2, 2002.
20
(6) Pension and Profit Sharing Plans
The Company has a noncontributory pension plan (the Pension Plan), which
covers substantially all employees and is administered by Trustees who are
officers of the Company. In March 1997, the board of directors of the
Company approved an amendment to the Pension Plan, which resulted in
freezing all future benefits under the plan as of May 3, 1997. The
following table sets forth the Pension Plan's funded status at February 2,
2002 and February 3, 2001:
2002 2001
------------- -------------
Change in benefit obligation:
Balance at beginning of year $ 15,881,000 14,629,000
Benefits and expenses paid (710,000) (933,000)
Service and interest costs 1,134,000 1,108,000
Actuarial loss 111,000 1,077,000
------------ ------------
Balance at end of year 16,416,000 15,881,000
------------ ------------
Change in fair value of plan assets:
Balance at beginning of year 24,026,000 23,050,000
Actual return on plan assets (1,813,000) 1,909,000
Benefits and expenses paid (710,000) (933,000)
------------ ------------
Balance at end of year 21,503,000 24,026,000
------------ ------------
Plan assets in excess of benefit obligations 5,087,000 8,145,000
Unrecognized net loss (gain) 27,000 (3,902,000)
------------ ------------
Prepaid pension cost $ 5,114,000 4,243,000
============ ============
Assumptions used to develop the Plans' funded status were a discount rate
of 7.25% and an increase in compensation level of 4.0%. Plan assets of the
Pension Plan consist primarily equity securities, U.S. government
obligations, mutual funds, and insurance contracts.
Net pension benefit for the years ended February 2, 2002, February 3, 2001,
and January 29, 2000 include the following components:
2002 2001 2000
------------ ------------ ------------
Service cost earned during the year $ -- -- 27,000
Interest cost on projected
benefit obligation 1,134,000 1,107,000 1,098,000
Expected return on plan assets (1,999,000) (1,802,000) (1,599,000)
Net gain recognition (6,000) (14,000) --
----------- ----------- -----------
Net pension benefit $ (871,000) (709,000) (474,000)
=========== =========== ===========
Assumptions used to develop the net periodic pension cost were a discount
rate of 7.75%, expected long-term return on assets of 9% and an increase in
compensation levels of 4.0%.
In December 1993, the board of directors of the Company established a
Supplemental Retirement plan (the Supplemental Plan) to provide benefits
attributable to compensation in excess of $160,000 but less than $267,326.
In December 1998, the board of directors of the Company approved an
amendment to the Supplemental Plan, which resulted in the freezing of all
future benefits under the Plan as of December 31, 1998. The following table
sets forth the Supplemental Plan's funded status at February 2, 2002 and
February 3, 2001:
21
2002 2001
---------- ----------
Change in benefit obligation:
Balance at beginning of year $ 333,000 286,000
Benefits and expenses paid (2,000) (2,000)
Service and interest costs 24,000 22,000
Actuarial loss 4,000 27,000
--------- ---------
Balance at end of year 359,000 333,000
--------- ---------
Change in fair value of plan assets:
Balance at beginning of year -- --
Employer contributions 2,000 2,000
Benefits and expenses paid (2,000) (2,000)
--------- ---------
Balance at end of year -- --
--------- ---------
2002 2001
--------- ---------
Benefit obligation in excess of plan assets (359,000) (333,000)
Unrecognized net gain (136,000) (148,000)
--------- ---------
Accrued pension cost $(495,000) (481,000)
========= =========
In January 1992, the Company implemented a qualified 401(k) profit sharing
plan available to eligible full-time employees. Under the 401(k) plan, the
Company matches 50% of the qualified employee's contribution up to 6% of
the employee's salary. The total cost of the matching contribution was
$861,000, $1,149,000, and $989,000 for the years ended February 2, 2002,
February 3, 2001, and January 29, 2000, respectively.
The Company has established incentive bonus plans for certain executives
and employees. The bonus calculations are generally based on achievement of
certain profit levels, as defined in the plans. For the years ended
February 2, 2002 and February 3, 2001, there was no bonus provided under
the plans. For the year ended January 29, 2000, $1.1 million was provided
under the bonus plans.
The Company does not provide post-retirement benefits, other than pensions
as defined under SFAS No. 106.
(7) Stock Options, Performance Share Awards, and Restricted Stock Awards
The Company has options outstanding under the Amended and Restated 1985
Stock Option Plan, the 1992 Directors' Stock Option Plan and the 1994
Equity Incentive Plan (the Stock Option Plans). In addition, the Company
has granted options which are not part of any Stock Option Plan.
The Amended and Restated 1985 Stock Option Plan provided for the issuance
of incentive and nonqualified stock options to officers and employees at an
option price of not less than 100% of the fair market value of a share on
the date of grant. Under this plan, no shares of common stock are available
for grant at February 3, 2001, as no options could be granted thereunder
after June 1995.
In fiscal 1995, the Company established the 1994 Equity Incentive Plan,
which provides for the issuance of one million shares of common stock to
officers and employees in the form of stock options (both incentive options
and nonqualified options), grants of restricted stock, grants of
performance shares and unrestricted grants of stock.
22
Options granted under the Amended and Restated 1985 Stock Option Plan and
the 1994 Equity Incentive Plan generally become exercisable either ratably
over four years or as otherwise determined by the board of directors, and
generally expire seven to ten years from date of grant.
The 1992 Directors' Stock Option Plan provides for the automatic grant of
2,500 shares of the Company's common stock upon a director's initial
election to the board of directors and at the close of business on the
fifth business day following the Company's annual meeting of stockholders.
Options under the Directors' Plan are granted at a price equal to the
closing price of the Company's common stock on the date of grant. Options
granted under the 1992 Directors' Plan are exercisable in full upon grant
and expire ten years from date of grant.
The Company applied APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, $7,813, $29,232, and
$199,219 of compensation cost has been recognized for stock options in the
Company's results of operations in fiscal 2002, fiscal 2001, and fiscal
2000, respectively. Had the Company recorded a charge for the fair value of
options granted consistent with SFAS No. 123, net earnings and earnings per
common share would have decreased by $1,112,000 and $0.08 in fiscal 2002,
$1,630,000 and $0.11 in fiscal 2001, and $1,827,000 and $0.13 in fiscal
2000, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model, with the following weighted
average assumptions used for grants in fiscal 2001 and 2000. No options
were granted in fiscal 2002.
2001 2000
-------------- -------------
Risk-free interest rate 4.7% 6.9%
Expected option lives 7.7 years 7.7 years
Expected volatility 69.2% 70.0%
Expected dividend yield 1.1% 1.0%
The effect of applying SFAS No. 123 is not representative of the pro forma
effect on net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior
to fiscal 1996.
23
Data with respect to stock options for fiscal 2002, 2001, and 2000 is as
follows:
2002 2001 2000
-------------------------- ----------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- ----------- ---------- ----------- ---------- ----------
Outstanding at
beginning of year 1,899,94 $ 7.24 1,565,497 $ 7.58 1,249,840 $ 8.23
Granted -- -- 476,400 6.18 381,456 5.33
Exercised (139,075) 4.98 (850) 4.17 (3,000) 5.03
Canceled (390,630) 6.64 (141,106) 7.42 (62,799) 10.24
---------- ---------- ----------
Options outstanding at
end of year 1,370,236 $ 7.28 1,899,941 $ 7.24 1,565,497 $ 7.58
========== ========== ==========
Options exercisable
at end of year 944,901 1,024,900 769,472
Weighted average
fair value of
options granted
during the year $ -- $ 6.18 $ 5.33
The following table sets forth a summary of the stock options outstanding
at February 2, 2002:
Options outstanding Options exercisable
--------------------------- -------------------------
Weighted
average
remaining Weighted Weighted
Range of years of average average
exercise Number contractual exercise Number exercise
price outstanding life price exercisable price
----------- ----------- ----------- ---------- ----------- -----------
1.00 -3.98 159,250 6.5 $ 2.68 110,825 $ 2.22
4.00 -9.75 1,108,736 6.1 7.31 741,326 7.85
11.31 -21.75 102,250 4.4 14.10 92,750 14.33
--------- --------
1.00 -21.75 1,370,236 6.0 $ 7.28 944,901 $ 7.43
========= =======
During fiscal 1997 and fiscal 1998, the Company granted Performance Share
Awards, which entitled certain officers to shares of the Company's common
stock in fiscal 1999 if the price of the common stock attained a "Target
Price" (the average closing price of the Company's common stock for certain
defined periods) between $10.00 and $15.00. In fiscal 1999, the Company
granted 21,750 shares of the Company's common stock to eligible officers.
During fiscal 1999, the Company granted certain officers stock price
performance based restricted stock awards, pursuant to which the officers
purchased, in the aggregate, 100,000 shares of the Company's common stock
at a purchase price of $10.18 per share. Each of such officers executed a
promissory note with the Company as consideration for the aggregate
purchase price. The remaining principal and interest obligations under each
note were to be forgiven in their entirety on July 8, 2003 provided the
respective officer remains employed by the Company at such time. During
fiscal 2002, the Board approved an amendment to the notes that would cause
them to be forgiven under certain circumstances, including upon a change in
control. At February 2, 2002, the notes are included in assets held for
sale, and they were sold to Designs.
24
(8) Commitments and Contingent Liabilities
Leases
The Company leases its retail stores, computers, vehicles, and certain of
its office facilities.
The Company remains liable under certain leases and lease guaranties for
premises previously leased by the Company for the operation of Parade of
Shoes and Fayva footwear stores (the Excess Property Leases). The total
liability under the Excess Property Leases is approximately $10.1 million
as of February 2, 2002. The Company has reduced its estimated liability to
zero by assigning or subleasing substantially all of the Excess Property
Leases to unaffiliated third parties.
At February 2, 2002, minimum rental commitments under operating leases are
as follows:
Net minimum Minimum
rentals sub-rentals
------------- -------------
(In thousands)
Fiscal year ending January:
2003 $ 26,210 69
2004 19,651 61
2005 13,148 61
2006 8,716 46
2007 4,624 --
Thereafter 5,160 --
------------- -------------
$ 77,509 237
============= =============
Rent expense for the years ended February 2, 2002, February 3, 2001, and
January 29, 2000 was as follows:
2002 2001 2000
------------- ------------- -------------
(In thousands)
Minimum rentals $ 40,415 43,671 38,403
Contingent rentals 225 196 142
----------- ------------ ------------
40,640 43,867 38,545
Less sublease rentals 388 901 921
----------- ------------ ------------
Net rentals $ 40,252 42,966 37,624
=========== ============ ============
Other Commitments and Contingencies
On August 22, 2001, the Bankruptcy Court approved severance agreements and
a retention program for certain key employees. The severance agreements
superseded and replaced all employment, severance and change of control
severance agreements in place prior to August 22, 2001 for such executives.
Under the severance agreements, 12 of the Company's officers are entitled
to payments in the event of termination without cause, change of control,
or liquidation of the Company. At February 2, 2002, the maximum aggregate
commitment amount payable under these severance agreements, should all of
the covered employees be terminated in a manner triggering severance
payment, is $4.3 million. Severance agreements for 10 of the Company's
officers were assumed by Designs.
Under the retention program, certain employees are entitled to receive
retention payments if they remain employed and in good standing on three
milestone dates: (i) three months after the filing of the Chapter 11
petition (i.e. August 18, 2001), (ii) nine months after the filing of the
Chapter 11 petition (i.e. February 18, 2002) or upon "emergence" from the
Chapter 11 Case, as defined in the retention program, if earlier and (iii)
upon "emergence"
25
from the Chapter 11 Case. The Company made aggregate retention payments
under the plan of $1.0 million on both August 18, 2001 and February 18,
2002, and, based on the sale to Designs, $2.1 million on May 15, 2002.
At February 2, 2002 and February 3, 2001, the Company was contingently
liable under letters of credit totaling $0.8 million and $1.9 million,
respectively. These letters of credit, which have terms ranging from one
month to one year, are used primarily to collateralize obligations to third
parties for the purchase of the Company's inventory. The fair value of
these letters of credit is estimated to be the same as the contract values
based on the nature of fee arrangements with the issuing banks. No material
loss is anticipated due to nonperformance by counterparties to these
arrangements.
(9) Stockholders' Equity
The board of directors of the Company is authorized by vote or votes, from
time to time adopted, to provide for the issuance of Preferred Stock in one
or more series and to fix and state the voting powers, designations,
preferences and relative participating, optional, or other special rights
of the shares of each series and the qualifications, limitations, and
restrictions thereof.
On December 15, 1994, the Company's board of directors adopted a
Shareholder Rights Agreement (the Rights Agreement) designed to enhance the
Company's ability to protect shareholder interests and to ensure
shareholders receive fair treatment in the event any future coercive
takeover attempt of the Company is made. Pursuant to the Rights Agreement,
the board of directors declared a dividend distribution of one preferred
stock purchase right (the Right) for each outstanding share of the
Company's common stock to shareholders of record as of the close of
business on January 6, 1995. Each right entitles the holder to purchase
from the Company a unit consisting of one ten thousandth (1/10,000) of a
share of Series A Junior Participating Cumulative Preferred Stock, par
value $1.00 per share, at a cash exercise price of $70 per unit, subject to
adjustment, upon the occurrence of certain events as set forth in the
Rights Agreement. These events include the earliest to occur of: (i) the
acquisition of 15% or more of the Company's outstanding common stock by any
person or group; (ii) the commencement of a tender or exchange offer that
would result upon its consummation in a person or a group becoming the
beneficial owner of 15% or more of the Company's outstanding common stock;
or (iii) the determination by the board of directors that any person is an
"Adverse Person", as defined in the Rights Agreement. The Rights are not
exercisable until or following the occurrence of one of the above events
and will expire on December 14, 2004 unless previously redeemed or
exchanged by the Company, as provided in the Rights Agreement.
(10) Supplemental Schedules
Supplemental schedule to consolidated statement of cash flows:
2002 2001 2000
------------ ----------- -----------
Cash paid for:
Interest $11,764,208 21,612,192 16,141,233
Income taxes 371,187 1,373,971 2,235,758
Schedule of noncash financing
activity:
Warrants issued with senior
subordinated debt -- -- 3,300,000
26
Supplemental schedule for the allowance for doubtful accounts:
2002 2001 2000
---------- ----------- -----------
Balance beginning of year $ 220,000 200,000 185,000
Additions charged to expense 700,000 80,000 107,000
Write-offs, net of recoveries (20,000) (60,000) (92,000)
--------- --------- ---------
Balance end of year $ 900,000 220,000 200,000
========= ========= =========
27
(b) Pro Forma Financial Information
The following pro forma financial information is subject to revision, which
could have a significant impact on total assets, total liabilities and
stockholders' equity (deficit), depreciation and amortization, interest expense
and income taxes:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of May 4,
2002
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the three months ended May 4, 2002
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended February 2, 2002
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
The unaudited pro forma financial information included herein gives effect to
the Company's acquisition of Casual Male and to the financing transactions
completed by the Company as of May 14, 2002. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the three months ended May 4, 2002 and
the year ended February 2, 2002 are based on historical data as reported by the
separate companies, and reflect adjustments prepared as if the acquisition had
occurred on February 3, 2002 and February 4, 2001, respectively. The Unaudited
Pro Forma Condensed Consolidated Balance Sheet is based on historical data as
reported by the separate companies, and reflects adjustments prepared as if the
acquisition had occurred on May 4, 2002.
The acquisition of Casual Male has been accounted for using the purchase method
of accounting. Accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair values, with appropriate recognition given
to the Company's borrowing rates, accounting policies, and income taxes. The
Company's management does not expect that the final allocation of the purchase
price for the acquisition of Casual Male will differ materially from the
allocations used to prepare the unaudited pro forma financial information
presented herein.
The Unaudited Pro Forma Condensed Consolidated Financial Statements contained
herein (the "Statements") have been prepared based on available information,
using assumptions that the Company's management believes are reasonable. The
Statements do not purport to represent the actual financial position or results
of operations that would have occurred if the acquisition had occurred on the
dates specified. The Statements are not necessarily indicative of the results
that may be achieved in the future. The Statements do not reflect any
adjustments for the effect of certain operating synergies or expected cost
reductions that the Company may realize as a result of the acquisition. No
assurances can be given as to the amount of financial benefits, if any, that may
actually be realized as the result of the acquisition.
The assumptions used and adjustments made in preparing the Statements are
described in the Notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements contained herein (the "Notes"), which should be read in
conjunction with the Statements contained herein. The Statements and related
Notes contained herein should be read in conjunction with the consolidated
financial statements and related notes of the Company included in its Annual
Report on Form 10-K for the year ended February 2, 2002, and the consolidated
financial statements and related notes of Casual Male included above.
28
DESIGNS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------------------
May 4, 2002
Historical
------------------------------
Casual Pro Forma Pro Forma
(In thousands) Designs, Inc. Male Corp. Adjustments Note 3 Combined
-------------- ------------- ------------ -------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 4,974 $ (4,784) a,b $ 190
Accounts receivable 278 4,500 (2,630) b 2,148
Inventories 69,273 -- 98,032 b 167,305
Deferred income taxes 1,082 -- -- 1,082
Prepaid expenses 3,012 778 5,109 b 8,899
Assets held for sale -- 124,996 (124,996) b --
--------- --------- --------- ---------
Total current assets 73,645 135,248 (29,269) 179,624
Property and equipment, net of
accumulated depreciation and amortization 20,052 -- 65,474 b 85,526
Deferred income taxes 7,326 -- 8,000 c 15,326
Other assets 1,072 11 39,992 b 41,075
--------- --------- --------- ---------
Total assets $ 102,095 $ 135,259 $ 84,197 $ 321,551
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 35,263 $ (34,443) b $ 820
Accounts payable 15,367 1,155 24,642 b 41,164
Accrued expenses and other current liabilities 12,420 4,132 8,107 b 24,659
Borrowings under revolver 33,641 45,268 (15,113) a,b 63,796
--------- --------- --------- ---------
Total current liabilities 61,428 85,818 (16,807) 130,439
Long-term debt, net of current portion (Note 5) -- -- 54,607 a,b 54,607
Liabilities subject to compromise -- 148,244 (148,244) b --
--------- --------- --------- ---------
Total liabilities 61,428 234,062 (110,444) 185,046
--------- --------- --------- ---------
Stockholders' equity:
Series B convertible preferred stock -- -- 180 a 180
Common stock 176 7,104 (7,090) a,b 190
Additional paid-in capital 56,237 121,534 (33,890) a,b 143,881
(Accumulated deficit) retained earnings (7,099) (227,441) 235,441 b,c 901
Treasury stock (8,450) -- -- (8,450)
Note receivable from officer (197) -- -- (197)
--------- --------- --------- ---------
Total stockholders' equity 40,667 (98,803) 194,641 136,505
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 102,095 $ 135,259 $ 84,197 $ 321,551
========= ========= ========= =========
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
29
DESIGNS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
For the three months ended May 4, 2002
Historical
---------------------------
Casual Pro Forma Pro Forma
(In thousands, except share data) Designs, Inc. Male Corp. Adjustments Note 4 Combined
------------- ------------- -------------- ---------- -----------
Sales $ 36,441 $ 78,371 $ -- $ 114,812
Cost of goods sold including occupancy 28,448 35,494 9,715 a 73,657
--------- --------- --------- ---------
Gross profit 7,993 42,877 (9,715) 41,155
--------- --------- --------- ---------
Expenses:
Selling, general and administrative 9,077 37,904 (10,912) a 36,069
Reorganization costs -- 2,098 (2,098) b --
Depreciation and amortization 1,411 2,254 (554) c 3,111
--------- --------- --------- ---------
Total expenses 10,488 42,256 (13,564) 39,180
--------- --------- --------- ---------
Operating income (loss) (2,495) 621 3,849 1,975
Interest expense, net 353 2,546 43 d 2,942
--------- --------- --------- ---------
Income (loss) before income taxes (2,848) (1,925) 3,806 (967)
Provision (benefit) for income taxes (1,053) -- 696 e (357)
--------- --------- --------- ---------
Net (loss) income $ (1,795) $ (1,925) $ 3,110 $ (610)
========= ========= ========= =========
Net loss per share - basic ($0.12) ($0.14) ($0.02)
Net loss per share - diluted ($0.12) ($0.14) ($0.02)
Weighted average number of common and
preferred shares outstanding:
Basic 14,576 14,206 36,187
Diluted 14,576 14,206 36,187
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
30
DESIGNS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended February 2, 2002
Historical
---------------------------
Casual Pro Forma
(In thousands, except share data) Designs, Inc. Male Corp. Adjustments Note 4 Combined
------------- ------------- -------------- --------- -----------
Sales $ 195,119 $ 430,807 $ (98,275) a $ 527,651
Cost of goods sold including occupancy 147,898 246,468 (48,693) a 345,673
--------- --------- --------- ---------
Gross profit 47,221 184,339 (49,582) 181,978
--------- --------- --------- ---------
Expenses:
Selling, general and administrative 39,743 190,585 (88,505) a 141,823
Reorganization costs -- 37,974 (37,974) b --
Provision for impairment of assets -- 12,292 (12,292) b --
Depreciation and amortization 5,398 12,633 (5,832) c 12,199
--------- --------- --------- ---------
Total expenses 45,141 253,484 (144,603) 154,022
--------- --------- --------- ---------
Operating income (loss) 2,080 (69,145) 95,021 27,956
Interest expense, net 1,905 13,671 (3,313) d 12,263
--------- --------- --------- ---------
Income (loss) before income taxes 175 (82,816) 98,334 15,693
Provision (benefit) for income taxes 8,056 304 (2,562) e 5,798
--------- --------- --------- ---------
Net (loss) income $ (7,881) $ (83,120) $ 100,896 $ 9,895
========= ========= ========= =========
Net (loss) income per share - basic ($0.54) ($5.85) $0.27
Net (loss) income per share - diluted ($0.54) ($5.85) $0.27
Weighted average number of common and preferred
shares outstanding:
Basic 14,486 14,206 36,096
Diluted 14,486 14,206 36,674
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
31
DESIGNS, INC.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
1. Basis of Presentation
The unaudited pro forma financial information included herein gives effect to
the acquisition by Designs, Inc. (the "Company") of substantially all the assets
of Casual Male Corp. and certain of its subsidiaries ("Casual Male"). The
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
three months ended May 4, 2002 and the year ended February 2, 2002 are based on
historical data as reported by the separate companies, and reflect adjustments
prepared as if the acquisition had occurred on February 3, 2002 and February 4,
2001, respectively. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
is based on historical data as reported by the separate companies, and reflects
adjustments prepared as if the acquisition had occurred on May 4, 2002.
The acquisition of Casual Male has been accounted for using the purchase method
of accounting. Accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair values, with appropriate recognition given
to the Company's borrowing rates, accounting policies, and income taxes. The
Company's management does not expect that the final allocation of the purchase
price for the acquisition of Casual Male will differ materially from the
allocations used to prepare the unaudited pro forma financial information
presented herein.
2. Description of Acquisition
On May 14, 2002, the Company completed the acquisition of substantially all of
the operating assets of Casual Male, including the retail stores and the catalog
and e-commerce business, for a purchase price of approximately $170 million plus
the assumption of certain operating liabilities. The acquisition was pursuant to
an Asset Purchase Agreement entered into as of May 2, 2002 (the "Asset Purchase
Agreement") by and among Designs, Inc. and Casual Male. The Company was selected
as the highest and best bidder for the Casual Male assets at a bankruptcy court
ordered auction commencing May 1, 2002 and concluded on May 2, 2002. The U.S.
Bankruptcy Court for the Southern District of New York subsequently granted its
approval for the acquisition of Casual Male by the Company on May 7, 2002.
The Casual Male acquisition, along with the payment of certain related fees and
expenses, was completed with funds provided by: (i) approximately $30.2 million
in additional borrowings from the Company's amended three-year $120.0 million
senior secured credit facility with the Company's bank, Fleet Retail Finance,
Inc. ("FRFI"), (ii) $15.0 million in a three-year term loan with a subsidiary of
FRFI, (iii) proceeds from the private placement of $24.5 million principal
amount of 12% senior subordinated notes due 2007 together with detachable
warrants to acquire 1,715,000 shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), at an exercise price of $.01 per share, and
additional detachable warrants to acquire 1,176,471 shares of Common Stock at an
exercise price of $8.50 per share, (iv) proceeds from the private placement of
$11.0 million principal amount of 5% senior subordinated notes due 2007, (v)
approximately $82.5 million of proceeds from the private placement of
approximately 1.4 million shares of Common Stock and 180,162 shares of newly
designated Series B Convertible Preferred Stock, par value $0.01 per share
("Series B Preferred Stock") (equivalent to approximately 18.0 million shares of
Common Stock, conditioned upon shareholder approval for conversion), and (vi)
the assumption of a mortgage note in the principal amount of approximately $12.2
million.
The convertibility of the Series B Preferred Stock and the exercisability of
certain such warrants are subject to approval by the stockholders of the
Company. The newly issued Common Stock and the Common Stock issuable upon
conversion of the Series B Preferred Stock and the exercise of warrants are
subject to certain rights to require registration under the Securities Act of
1933, as amended.
32
3. Pro Forma Adjustments as of May 4, 2002
The pro forma adjustments to the unaudited pro forma condensed consolidated
balance sheet reflect the purchase of Casual Male and the allocation of the pro
forma purchase price to the acquired assets and the assumed liabilities based on
the preliminary estimate of their fair market value at the date of acquisition.
a) The adjustment reflects the funds raised in connection with the Casual Male
acquisition, as follows:
i) $30.2 million in borrowings under a senior secured credit facility
with FRFI.
ii) $15.0 million term loan with a subsidiary of FRFI, Back Bay Capital.
iii) $11.0 million principal amount of 5% senior subordinated notes.
iv) $24.5 million principal amount of 12% senior subordinated notes, and
the issuance of warrants to purchase 1,715,000 shares of Common Stock
at an exercise price of $.01 per share. In addition, $10.0 million of
the $24.5 million senior subordinated notes were issued together with
additional detachable warrants to acquire 1,176,471 shares at an
exercise price of $8.50 per share.
v) $82.5 million of gross proceeds from the private placement of
approximately 1.4 million shares of Common Stock and 180,162 shares of
Series B Preferred Stock, less offering costs of approximately $2
million (in addition to warrants to purchase 500,000 shares of Common
Stock at an exercise price of $4.25 per share issued to a financial
advisor).
b) The adjustment reflects the consummation of the acquisition, including
payment to the Casual Male Corp. for certain assets held for sale, payment of
certain related fees and expenses, accrual for estimated transaction costs,
and the elimination of the net assets of Casual Male Corp. The adjustment
also reflects the allocation of the purchase price, as follows:
(In thousands)
Cash paid to Casual Male Corp. (1) $ 159,004
Estimated transaction and severance costs 8,750
----------
Cost of the acquisition of Casual Male $ 167,754
----------
Debit (Credit)
Cash and cash equivalents $ 190
Accounts receivable 1,870
Merchandise inventory 98,032
Prepaid expenses 5,887
Property and equipment 65,474
Other assets 6,659
Casual Male trademark 29,544
Customer lists 1,600
Accounts payable (25,797)
Accrued expenses and other current
liabilities (3,489)
Mortgage note (12,216)
----------
Estimated fair value of net assets acquired $ 167,754
----------
(1)Amount is net of offering costs of $2.0 million and financing fees of
$2.2 million. The offering costs are reflected as a reduction of equity
and the financing fees are reflected in other assets on the pro forma
condensed consolidated balance sheet.
c) The $8.0 million charge against the Company's deferred tax assets in the year
ended February 2, 2002 was eliminated as a non-recurring cost due to the
availability of pro forma taxable income.
33
4. Pro Forma Adjustments for the Three Months Ended May 4, 2002 and the Fiscal
Year Ended February 2, 2002
The pro forma adjustments to the unaudited pro forma condensed consolidated
income statement reflect the purchase of Casual Male and the conforming of
Casual Male's financial statement presentation to that of the Company.
a) The adjustment is intended to reflect the pro forma results of the Statement
of Operations on a continuing basis and include adjustments for the
following:
i) elimination of the operations of the Casual Male Corp. Work n' Gear
business sold to Sandy Point LLC effective May 4, 2002;
ii) non-continuing sales, cost of goods sold and selling, general and
administrative costs associated with closing 134 stores;
iii) reduction in the corporate overhead of Casual Male Corp. due to
downsizing as a result of closing 134 stores;
iv) elimination of certain overhead costs relating to the relocation of
the Casual Male Corp. catalog business, Think Big Direct, from
Alpharetta, Georgia to Canton, Massachusetts;
v) elimination of non-recurring write-offs and reserves relating to the
discontinuance of Casual Male Corp.;
vi) reduction for costs associated with terminated corporate employees of
Casual Male Corp.; and
vii) consolidation of the Company's corporate headquarters and distribution
facilities.
Cost of
Three Months Ended May 4, 2002 Sales Sales SG&A
--------- --------- ---------
Costs relating to terminated
corporate employees $ - - (884)
Facility consolidation - - (313)
--------- --------- ---------
Subtotal - - (1,197)
--------- --------- ---------
Reclassification of occupancy - 9,715 (9,715)
expense (1)
--------- --------- ---------
Total adjustment $ - 9,715 (10,912)
========= ========= =========
Cost of
Year Ended February 2, 2002 Sales Sales SG&A
--------- --------- ---------
Work n' Gear operations $(53,970) (33,842) (24,650)
Store closures (44,305) (40,425) (21,887)
Think Big Direct -- -- (3,738)
Corporate overhead -- -- (4,292)
Write-offs and reserves -- -- (3,135)
Costs relating to terminated
corporate employees -- -- (3,895)
Facility consolidation -- -- (1,334)
-------- ------- -------
Subtotal (98,275) (74,267) (62,931)
-------- ------- -------
Reclassification of occupancy
expense (1) -- 38,120 (38,120)
-------- ------- -------
Reclassification of cost of
sales (1) -- (12,546) 12,546
-------- ------- -------
Total adjustment $(98,275) (48,693) (88,505)
======== ======= =======
(1) Historical occupancy expenses for Casual Male are reclassified from
selling, general and administrative expenses to cost of goods sold to
conform to the Company's presentation. In addition, certain overhead costs
included in the historical cost of goods sold of Casual Male are
reclassified to selling, general and administrative expenses to conform to
the Company's presentation.
34
b) The adjustment reflects the elimination of reorganization costs and provision
for impairment of assets.
c) Depreciation and amortization expense was adjusted to reflect the fair market
revaluation of Casual Male property and equipment, as well as the
amortization of the deferred financing costs over a 3-year period. In
addition, depreciation expense was adjusted for the Casual Male Corp. stores
closed during the year ended February 2, 2002. The corporate headquarters
building located in Canton, Massachusetts is depreciated over a 30-year
remaining useful life and the average remaining useful life of stores
purchased in the acquisition is 7 years.
d) Interest expense was adjusted to reflect debt levels and varied rates of
interest used to acquire the assets of Casual Male.
e) Income taxes were adjusted to record the tax effect of the pro forma
adjustments at an effective tax rate of 37%. In addition, the $8.0 million
charge against the Company's deferred tax assets in the year ended February
2, 2002 was eliminated as a non-recurring cost due to the availability of pro
forma taxable income.
5. Pro Forma Long-term Debt
Pro forma long-term debt as of May 4, 2002 was comprised of the following:
(In thousands)
12% senior subordinated notes due 2007 (a) $ 17,211
Term loan (b) 15,000
5% senior subordinated notes due 2007 11,000
Mortgage note (c) 12,216
--------
Total long-term debt 55,427
Less: current portion of mortgage note (820)
--------
Long-term debt, less current portion $ 54,607
========
a) The principal amount of the 12% senior subordinated notes of $24.5 million is
net of warrants to purchase 1,715,000 shares of Common Stock at an exercise
price of $.01 per warrant, and additional detachable warrants to acquire
1,176,471 shares of Common Stock at an exercise price of $8.50 per share. The
total estimated value of the warrants of $7,289,000 will be amortized over
the five-year life of the notes as interest expense.
b) The three-year term loan includes a 12% coupon, 3% paid-in-kind interest, and
3% annual commitment fee, for a total annual yield of 18%.
c) The mortgage note is payable in equal monthly installments of principal and
interest over its remaining term of 10 years and bears interest at 9.0%.
6. Pro Forma Net Income (Loss) Per Share
Pro forma basic earnings per share for the three months ended May 4, 2002 and
the year ended February 2, 2002 assumes that the Series B Preferred Stock was
converted to 18,016,200 shares of Common Stock and certain warrants were fully
exercised for 2,215,000 shares of Common Stock on February 3, 2002 and February
4, 2001, respectively. Pro forma diluted earnings per share is determined by
giving effect to the exercise of stock options and warrants using the treasury
stock method.
35
Three
Months Ended Year Ended
(In thousands) May 4, 2002 February 2, 2002
------------- ----------------
Basic weighted-average common shares 36,187 36,096
outstanding
Stock options, excluding anti-dilutive
options of 764 shares for the
three months ended May 4, 2002 - 578
------------ -------------
Diluted weighted-average shares 36,187 36,674
outstanding ============ =============
Options to purchase shares of Common Stock of 178,350 and 933,900 for the
three months ended May 4, 2002 and the year ended February 2, 2002,
respectively, and warrants to purchase 1,176,471 shares of Common Stock at an
exercise price of $8.50 per share, were assumed outstanding during the
respective periods but were not included in the computation of diluted
earnings per share because the exercise prices of the options and warrants
were greater than the average market price of the Common Stock for the period
reported.
36
(c) Exhibits
23.1 Consent of KPMG LLP.
37
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DESIGNS, INC.
Date: June 14, 2002
By: /s/ DENNIS R. HERNREICH
--------------------------------
Name: Dennis R. Hernreich
Title: Senior Vice President
and Chief Financial Officer
38