-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tm82ja/w8i+THT+/BIM8lKWzy4MSKg8fwZFDeImrLQ2FCdoJeIvgk1WyXIsBx+js CTn7WMsV7tWdB67eEbhLJg== 0000892569-95-000736.txt : 19951219 0000892569-95-000736.hdr.sgml : 19951219 ACCESSION NUMBER: 0000892569-95-000736 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951028 FILED AS OF DATE: 19951218 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLOTHESTIME INC CENTRAL INDEX KEY: 0000727739 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 330469138 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12203 FILM NUMBER: 95602452 BUSINESS ADDRESS: STREET 1: 5325 E HUNTER AVE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7147795881 MAIL ADDRESS: STREET 1: 5325 E HUNTER AVE CITY: ANAHEIM STATE: CA ZIP: 92807 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For quarterly period ended October 28, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 0-12203 THE CLOTHESTIME, INC. (Exact name of registrant as specified in its charter) Delaware 33-0469138 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5325 E. Hunter Avenue, Anaheim, California 92807 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 779-5881 Not Applicable -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date. As of December 15, 1995, 14,198,241 shares of the issuer's common stock, $.001 par value per share, were outstanding. ================================================================================ Total Number of Sequentially Numbered Pages 29 Exhibit Index on Page 21 2 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - October 28, 1995 and January 28, 1995 . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations - Thirteen weeks and thirty-nine weeks ended October 28, 1995 and October 29, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows - Thirty-nine weeks ended October 28, 1995 and October 29, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements - October 28, 1995 . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 PART II. OTHER INFORMATION Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Page 2 3 PART I. -- FINANCIAL INFORMATION ITEM 1. -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 28, January 28, 1995 1995 ----------- ----------- Assets Current Assets Cash and cash equivalents $ 2,804,144 $ 40,829,741 Marketable securities available-for-sale, net of allowances of $43,572 and $631,328 3,164,843 7,682,273 Merchandise inventories 36,755,573 24,812,265 Income taxes receivable 4,176,108 5,350,284 Prepaid expenses and other current assets 3,418,795 2,650,227 Deferred income taxes 5,329,318 5,560,677 ------------ ------------ Total Current Assets 55,648,781 86,885,467 ------------ ------------ Investments 1,872,238 1,880,238 ------------ ------------ Property, Plant and Equipment - On the basis of cost 72,190,556 75,671,921 Less: Accumulated depreciation & amortization (30,327,234) (25,686,104) ------------ ------------ 41,863,322 49,985,817 Other Assets 2,694,628 1,650,606 ------------ ------------ Total Assets $102,078,969 $140,402,128 ------------ ------------ Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 20,545,056 $ 19,161,810 Accrued sales tax 2,513,180 2,918,754 Accrued payroll and related taxes 3,123,905 4,030,168 Other accrued liabilities 17,805,540 20,177,354 ------------ ------------ Total Current Liabilities 43,987,681 46,288,086 ------------ ------------ Long-Term Liabilities Long-term debt 7,919,719 37,234,019 Deferred income taxes 5,966,332 5,966,332 ------------ ------------ Total Long-Term Liabilities 13,886,051 43,200,351 ------------ ------------ Shareholders' Equity Common Stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding 14,198,241 shares and 14,181,346 shares at October 28, 1995 and January 28, 1995, respectively 14,763 14,746 Additional paid-in capital 10,861,514 10,828,773 Retained earnings 38,206,625 45,304,232 Less: Treasury stock, 565,000 shares at cost at October 28, 1995 and January 28, 1995, respectively (4,850,215) (4,850,215) Net unrealized holding loss on marketable securities (27,450) (383,845) ------------ ------------ Total Shareholders' Equity 44,205,237 50,913,691 ------------ ------------ Total Liabilities and Shareholders' Equity $102,078,969 $140,402,128 ------------ ------------
See Notes to Condensed Consolidated Financial Statements Page 3 4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended Thirty-Nine Weeks Ended ------------------------------ ---------------------------------- October 28, October 29, October 28, October 29, 1995 1994 1995 1994 ----------- ----------- ------------ ------------ Revenues: Net sales $78,738,231 $80,400,606 $240,367,503 $257,365,974 Interest and other income 67,618 273,304 508,433 1,019,923 ----------- ----------- ------------ ------------ 78,805,849 80,673,910 240,875,936 258,385,897 ----------- ----------- ------------ ------------ Costs and Expenses: Cost of sales, including buying and distribution and occupancy costs 56,797,076 55,484,459 176,354,135 181,690,393 Selling, general and administrative expenses 25,565,500 24,378,294 74,734,229 78,780,964 Loss on disposal of property, plant and equipment -- 406,250 -- 1,341,639 Interest expense 92,475 181,696 648,658 371,364 Other losses -- -- 404,956 377,643 ----------- ----------- ------------ ------------ 82,455,051 80,450,699 252,141,978 262,562,003 ----------- ----------- ------------ ------------ Income (loss) before income taxes (3,649,202) 223,211 (11,266,042) (4,176,106) Provision (benefit) for income (1,350,204) 78,124 (4,168,435) (1,440,369) taxes ----------- ----------- ------------ ------------ Net income (loss) $(2,298,998) $ 145,087 $ (7,097,607) $ (2,735,737) ----------- ----------- ------------ ------------ Net Income (loss) per common and common equivalent shares $ (0.16) $ 0.01 $ (0.50) $ (0.19) ----------- ----------- ------------ ------------ Weighted average number of common and common equivalent shares 14,193,753 14,303,175 14,187,895 14,155,407 ----------- ----------- ------------ ------------
See Notes to Condensed Consolidated Financial Statements Page 4 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirty-nine weeks ended ---------------------------- October 28, October 29, 1995 1994 ------------ ------------ Operating Activities: Net loss $ (7,097,607) $ (2,735,737) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 6,790,652 6,277,820 Loss on disposal of property, plant and equipment -- 1,341,639 Loss on sales of marketable securities 404,956 377,643 Changes in operating assets and liabilities: Increase in merchandise inventories (11,943,308) (8,669,008) Decrease in income taxes receivable 1,174,176 -- Increase in prepaid expenses and other assets (1,804,590) (1,361,039) Increase in accounts payable 1,383,246 4,975,609 Decrease in accrued payroll and related taxes (906,263) (46,533) Increase (decrease) in accrued sales tax (1,018,198) 1,363,298 and other accrued liabilities Decrease in income taxes payable -- (2,617,362) ------------ ------------ Net cash used in operating activities (13,016,936) (1,093,670) ------------ ------------ Investing activities: Investment in marketable securities (18,370) (3,177,185) Proceeds from sales of marketable securities 4,718,600 14,863,254 Purchases of property, plant, and equipment (627,225) (9,387,609) Proceeds from sale of property, plant and equipment 112,000 -- ------------ ------------ Net cash provided by investing activities 4,185,005 2,298,460 ------------ ------------ Financing Activities: Net borrowings (repayments) under revolving credit facility (30,050,000) 13,840,000 Proceeds from long-term debt 1,400,000 -- Principal payments under long-term debt (576,424) (529,216) Proceeds from the exercise of stock options 32,758 38,480 ------------ ------------ Net cash provided by (used in) financing activities (29,193,666) 13,349,264 ------------ ------------ Increase (decrease) in cash and cash equivalents (38,025,597) 14,554,054 Cash and cash equivalents at beginning of year 40,829,741 2,705,688 ------------ ------------ Cash and cash equivalents at end of quarter $ 2,804,144 $ 17,259,742 ------------ ------------ Supplemental disclosure of cash flow information: Income tax refunds received $ 5,366,580 $ -- Income taxes paid $ 23,970 $ 1,189,448 Interest paid $ 648,658 $ 371,364
See Notes to Condensed Consolidated Financial Statements Page 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OCTOBER 28, 1995 NOTE A - SUBSEQUENT EVENTS On December 8, 1995 (the "Petition Date"), The Clothestime, Inc. ("Clothestime") and five of its subsidiaries (MRJ Industries, Inc. ("MRJ"), Clothestime Stores, Inc. ("CT Stores"), Clothestime Investment, Inc. ("CT Investment"), Clothestime Acquisition Corporation ("CT Acquisition") and Clothestime International, Inc. ("CT International")) (collectively, the "Debtors") commenced reorganization cases (the "Bankruptcy Cases") by filing voluntary petitions for relief under chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the "Bankruptcy Court"). For purposes of this Report, unless otherwise referenced, the defined term "Company" shall apply to Clothestime and its consolidated group of subsidiaries. The Debtors decided to seek bankruptcy protection after an extensive review of the current retail environment and the Debtors' operations. Management of each of the respective companies determined that filing the chapter 11 petitions would allow the Debtors the needed time and flexibility to restructure their respective operations. Since the Petition Date, the Debtors have continued in possession of their properties and, as debtors in possession, are authorized to operate and manage each of their respective businesses and enter into all transactions (including obtaining services, supplies and inventories) that each could have entered into in the ordinary course of business had there been no bankruptcy filings. Prior to filing the Bankruptcy Cases, the Company received, through CT Stores, a commitment (the "Commitment Letter") from The CIT Group/Business Credit, Inc. (the "DIP Lender") for up to $40 million in debtor-in-possession financing (the "DIP Facility"). Pursuant to the Commitment Letter, the DIP Lender has agreed to make revolving loans up to the lesser of (a) $40 million and (b) the lesser of (i) sixty percent (60%) of eligible inventory valued on a cost basis and (ii) forty percent (40%) of eligible inventory valued on a retail basis, subject to adjustment. Up to $25 million of the revolving line of credit may be in the form of letters of credit determined as provided under the DIP Facility. Outstanding amounts under the DIP Facility will bear interest at a reference rate plus one half of one percent (0.5%) per annum or, at the request of CT Stores, the London Interbank Rate plus two and one half percent (2.5%). The term of the DIP Facility is the earlier of 24 months after the Petition Date or the effective date of the Debtors' confirmed plan of reorganization, subject to earlier termination. The DIP Facility contains certain financial covenants and will include other customary covenants and conditions consistent with similar financings. Amounts outstanding under the DIP Facility will constitute a superpriority administrative expense and will have priority over all other administrative expenses, except for professionals' fees and U.S. Trustee fees up to an amount to be mutually agreed upon by the DIP Lender and CT Stores. In connection with the DIP Facility, CT Stores will give to the DIP Lender a negative pledge on CT Stores' merchandise inventory and proceeds. The Commitment Letter will terminate unless a final order of the Bankruptcy Court has been entered prior to January 31, 1996 approving the DIP Facility or, on an interim basis, loans thereunder in a lesser amount. The Commitment Letter is an outline of the material terms and conditions of the DIP Facility. The final terms of the DIP Facility will be contained in appropriate legal documents which will be subject to Bankruptcy Court approval. The Debtors filed a motion with the Bankruptcy Court seeking interim approval of the DIP Facility in an amount not to exceed $15 million. A hearing on the interim request is scheduled to be heard on December 21, 1995, and a final hearing is scheduled for January 8, 1996. Page 6 7 The commencement of a chapter 11 bankruptcy case results in the imposition of an automatic stay against the commencement or continuation of any judicial, administrative or other proceeding against the Debtors, against any act to obtain possession of property of or from the Debtors and against any act to create, perfect or enforce any lien against property of the Debtors, subject to certain exceptions. Creditors, therefore, are prohibited from attempting to collect prepetition debts without the consent of the Bankruptcy Court. Any creditor may seek relief from the automatic stay and, if applicable, enforce a lien against its collateral, if authorized by the Bankruptcy Court. There are various other provisions of the Bankruptcy Code which may impose limitations or constraints on the Debtors' operations. Pursuant to provisions of the Bankruptcy Code, claims arising prior to the filing of the Bankruptcy Cases may not be paid without prior approval of the Bankruptcy Court. The Debtors have received Bankruptcy Court approval to pay certain prepetition claims, including wages, salaries and employee benefits up to a stated maximum per person and to honor certain prepetition obligations to customers. The Debtors also have received Bankruptcy Court approval to close 137 stores by January 31, 1996. In connection therewith, the Debtors have engaged an experienced liquidation consultant to assist it in liquidating the inventory in those stores. No provision has been made for the possible effects which may result from such action. As a result of the reorganization proceedings, the Debtors may sell or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the financial statements. Further, a plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of these matters. The Debtors have until the confirmation of a plan of reorganization to assume or reject executory contracts and unexpired leases of personal property, unless the Bankruptcy Court orders otherwise. The Bankruptcy Code requires a Debtor to file motions to assume or reject commercial real property leases where it is a lessee within sixty days of the Petition Date or such longer period provided by the Bankruptcy Court within such sixty-day period. Assumption of an executory contract or unexpired lease requires the Debtors, among other things, to cure all prepetition and postpetition defaults under such contract or lease. Rejection of an executory contract or unexpired lease constitutes a breach of such contract or lease immediately before the Petition Date. The other party to the contract or lease is given the right to assert a general unsecured claim against the Debtor for damages arising out of the breach. The Company has not yet made a decision with respect to the assumption or rejection of its executory contracts and leases; however, it is anticipated that a number of real property leases will be rejected in connection with the store closings described above. Page 7 8 NOTE B - SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements include the accounts of Clothestime and its consolidated group of subsidiaries, MRJ, CT Stores, CT Insurance, CT International, CT Investment, CT Acquisition, and Clothestime Realty, Inc. On December 8, 1995, Clothestime Realty, Inc. was merged with and into its wholly-owned parent, CT Stores. All material intercompany balances and transactions have been eliminated in consolidation. The operating results for the thirty-nine week period ended October 28, 1995 are not necessarily indicative of the results that may be expected for the year ending January 27, 1996 ("fiscal 1995"). For further information, refer to the financial statements and related notes included in the Company's annual report on Form 10-K for the year ended January 28, 1995 ("fiscal 1994"). The financial statements have been prepared on a going concern basis of accounting which assumes continuity of operations and the realization of assets and liquidation of liabilities in the ordinary course of business. Such financial statements, consequently, do not reflect any adjustments that have or may result from the Debtors' chapter 11 proceeding or any adjustment that might result should the Company be unable to continue as a going concern. The appropriateness of using the going concern basis is dependent upon, among other things, the ability to comply with debtor in possession financing agreements, confirmation of a plan of reorganization under the Bankruptcy Code, the ability to achieve profitable operations after such confirmation and the ability to generate sufficient cash from operations to meet its obligations. As a result of the reorganization proceedings, the Company may sell or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the financial statements. Further, a plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of these matters. Page 8 9 NOTE C - CREDIT AGREEMENTS See Note A herein relating to a description of the DIP Facility. Also see Part II, Item 3 of this Report relating to the credit facility described in this Note C below. At October 28, 1995, the Company, through its subsidiary CT Stores, had a senior secured revolving credit facility with a bank serving as agent for a lending group comprised of two banks which allowed for total credit of $40 million. The agreement was scheduled to expire on February 1, 1997, and was secured by substantially all of the assets of the Company and its subsidiaries, excluding merchandise inventories. As of October 28, 1995, the Company had outstanding borrowings and outstanding letters of credit in the amount of $5.1 million and $15.3 million, respectively. Amounts outstanding under the agreement bear interest at various rates approximating prime plus 1%. The interest rate was 9-3/4% per annum at the end of the first nine months of fiscal 1995. The commitment and agency fee required on this agreement amounts to $55,000 on a quarterly basis. The Company is also required to pay certain fees with respect to each letter of credit issued under the agreement. The agreement contained various restrictive covenants requiring, among other things, the maintenance of certain financial ratios, including debt to net worth and current ratio, the establishment of maximum levels of cumulative net loss, the establishment of maximum levels of capital expenditures, the establishment of certain limitations regarding investments made within the Company's affiliated group, a limitation on the incurrence of future indebtedness, and a prohibition regarding declaring or making any cash dividends to the Company's stockholders by the Company or its subsidiaries. At October 28, 1995, the Company was in compliance with or had obtained waivers for such covenants. Page 9 10 NOTE D - CAPITAL STOCK AND STOCK OPTION TRANSACTIONS The following table summarizes the activity under the Company's Stock Option Plans during the thirty-nine week period ended October 28, 1995:
Shares ------ Options Outstanding, January 28, 1995 2,708,665 Activity during the period: Options Granted (per share amounts: $2.75 to $3.19) 622,500 Options Exercised (per share amounts: $1.50 to $2.13) (16,895) Options Canceled (per share amounts: $1.50 to $12.50) (188,862) --------- Options outstanding, October 28, 1995 3,125,408 ---------
At October 28, 1995, there were outstanding options exercisable into 1,732,117 shares of the Company's common stock. The computation of net income (loss) per common and common equivalent share is based upon the weighted average number of common shares outstanding during the period plus (in periods in which they have a dilutive effect) the effect of common shares contingently issuable, primarily from stock options and warrants. NOTE E - LONG TERM DEBT Long-term debt and capital lease obligations were:
October 28, 1995 January 28, 1995 - ----------------------------------------------------------------------------------------------------------- Notes payable to bank at various rates based on prime plus 1% at October 28, 1995, and LIBOR at January 28, 1995. $5,103,000 $35,153,000 Secured note payable to bank based on LIBOR plus 1.5% fully amortized over 25 years, balance due in 10 years. 1,367,333 -- Notes payable to bank at 6.1% and 6.2%, fully amortized over five years. 1,206,708 1,478,927 Capital lease obligation. 1,063,531 1,335,069 - ----------------------------------------------------------------------------------------------------------- Total debt 8,740,572 37,966,996 Less: Current maturities (820,853) (732,977) - ----------------------------------------------------------------------------------------------------------- Total $7,919,719 $37,234,019 - -----------------------------------------------------------------------------------------------------------
The Company borrowed $1,400,000 during the first quarter of fiscal 1995, evidenced by a note payable to the bank collateralized by an office/warehouse building and underlying Page 10 11 real property that the Company uses to house a portion of its administrative offices and warehousing facilities. During the fourth quarter of fiscal 1993, the Company borrowed $1,890,000, and used the proceeds to invest in certain tax advantaged investments. In addition, during fiscal 1993, the Company capitalized certain equipment acquired in connection with a capital lease agreement. The current portion of the aforementioned obligations is included in other accrued liabilities. No commitment or other fees were required under the aforementioned notes. NOTE F - MARKETABLE SECURITIES Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), was adopted by the Company at the beginning of fiscal 1994. SFAS 115 requires that investments be classified as "held-to-maturity," "available for sale" or "trading securities." At October 28, 1995, the Company classified all of its investments in securities which did not meet the definition of cash equivalents as marketable securities available-for-sale. Investment securities available-for-sale are those securities not held as trading securities nor as held-to-maturity securities. These securities are reported at fair value, with unrealized gains and losses, net of related income taxes, reported as a separate component of stockholders' equity. The carrying values (cost) and estimated market values of investment securities available-for-sale are summarized as follows:
As of October 28, 1995 ------------------------------------------------------- Gross Gross Unrealized Unrealized Fair Holding Holding Cost Value Losses Gains ------------------------------------------------------- U.S. state and local government agency issues $3,208,415 $3,164,843 $ 43,572 $ --
Maturities of investment securities available-for-sale are summarized as follows:
As of October 28, 1995 ------------------------------------------------------- Within 1 year $ -- After 1 year through 5 years 1,003,835 After 5 years through 10 years 2,204,580 After 10 years -- ----------- $ 3,208,415 -----------
Page 11 12
Thirteen weeks ended Thirty-nine weeks ended October 28, 1995 October 28, 1995 ---------------- ---------------- Proceeds from sales of investment securities available-for-sale $ -- $ 4,718,600 Gross realized gains on sales of investment securities available-for-sale $ -- $ 5,490 Gross realized (losses) on sales of investment securities available-for-sale $ -- $ (410,446) Net unrealized holding (loss) on available-for- sale securities included as a component of stockholders' equity, net of tax $ (27,450) $ (27,450)
All realized gains and losses are computed on the specific identification basis. Page 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Subsequent Events On December 8, 1995, Clothestime and five of its subsidiaries filed the Bankruptcy Cases. The Debtors decided to seek bankruptcy protection after an extensive review of the current retail environment and the Debtors' operations. Management of each of the respective companies determined that filing the chapter 11 petitions would allow the Debtors the needed time and flexibility to restructure their respective operations. Since the Petition Date, the Debtors have continued in possession of their properties and, as debtors in possession, are authorized to operate and manage their respective businesses and enter into all transactions (including obtaining services, supplies and inventories) that each could have entered into in the ordinary course of business had there been no bankruptcy filing. See Note A to Notes to the Condensed Consolidated Financial Statements. As a result of the Bankruptcy Cases, results will be affected unfavorably by the administrative and reorganization expenses resulting from the commencement of the Bankruptcy Cases. Additionally, future results may be adversely affected by other claims and factors resulting from the Bankruptcy Cases. The Bankruptcy Court has granted the Debtors permission to close 137 stores by January 31, 1996. Inventory and assets in these stores will be liquidated and the leasehold interests will be evaluated. Accordingly, additional losses can be expected as a result of this closure and liquidation process. No provision has been made for the possible effects which may result from such action. As a result of the filing of the Bankruptcy Cases, the Company allegedly is, or will be, in default on a significant amount of its prepetition indebtedness and obligations, including the indebtedness relating to its secured revolving $40 million credit facility which is described under the caption "Liquidity and Capital Resources" below. Prior to filing the Bankruptcy Cases, the Company received, through CT Stores, a commitment (the "Commitment Letter") from The CIT Group/Business Credit, Inc. (the "DIP Lender") for up to $40 million in debtor-in-possession financing (the "DIP Facility"). Pursuant to the Commitment Letter, the DIP Lender has agreed to make revolving loans up to the lesser of (a) $40 million and (b) the lesser of (i) sixty percent (60%) of eligible inventory valued on a cost basis and (ii) forty percent (40%) of eligible inventory valued on a retail basis, subject to adjustment. Up to $25 million of the revolving line of credit may be in the form of letters of credit determined as provided under the DIP Facility. Outstanding amounts under the DIP Facility will bear interest at a reference rate plus one half of one percent (0.5%) per annum or, at the request of CT Stores, the London Interbank Rate plus two and one half percent (2.5%). The term of the DIP Facility is the earlier of 24 months after the Petition Date or the effective date of the Debtor's confirmed plan of reorganization, subject to earlier termination. The DIP Facility contains certain financial covenants and will include other customary covenants and conditions consistent with similar financings. Amounts outstanding under the DIP Facility will constitute a superpriority administrative expense and will have priority over all other administrative and other expenses, except for professionals' fees and U.S. Trustee fees up to an amount to be mutually agreed upon by the DIP Lender and CT Stores. In connection with the DIP Facility, CT Stores will give to the DIP Lender a negative pledge on CT Stores' merchandise inventory and proceeds. The Commitment Letter will terminate unless a final order of the Bankruptcy Court has been entered prior to January 31, 1996 approving the DIP Facility or, on an interim basis, loans thereunder in a lesser amount. The Commitment Letter is an outline of the material terms and conditions of the DIP Facility. The final terms of the DIP Facility will be contained in appropriate legal documents which will be subject to Bankruptcy Court approval. The Debtors filed a motion with the Bankruptcy Court seeking interim approval of the DIP Facility in an amount not to exceed $15 million. A hearing on the interim request is scheduled to be heard on December 21, 1995, and a final hearing is scheduled for January 8, 1996. Page 13 14 The DIP Facility, cash on hand, revenues generated from operations, anticipated tax refunds and anticipated expense reduction measures, will be the principal sources of liquidity. Although the Company believes that these sources will be sufficient to meet the Company's operating and capital requirements, the Company is unable to predict the extent to which the negative retail apparel environment will continue at its current or at an accelerated rate and the extent to which the public will accept the Company's merchandise during the pendency of bankruptcy. To the extent that results of operations continue to decline, short and long term liquidity will be adversely affected, particularly if the availability of funds under the DIP Facility are significantly decreased or are no longer made available. Third Quarter Results Consolidated Results of Operations The following table sets forth certain items in the consolidated statements of operations as a percentage of total revenues for the thirteen week and thirty-nine week periods ended October 28, 1995 and October 29, 1994.
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------------- --------------------------- October 28, October 29, October 28, October 29, 1995 1994 1995 1994 ----------- ----------- ----------- ----------- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of sales, including buying and distribution and occupancy costs . . . . . . . . . . . . . 72.1 68.8 73.2 70.3 Selling, general and administrative expenses . . . . 32.4 30.2 31.0 30.5 Loss on disposal of property, plant and equipment . . . . . . -- 0.5 -- 0.5 Interest expense . . . . . . . . 0.1 0.2 0.3 0.1 Other losses . . . . . . . . . . -- -- 0.2 0.2 ----- ----- ----- ----- Income (loss) before income taxes (4.6) 0.3 (4.7) (1.6) Provision (benefit) for income taxes (1.7) 0.1 (1.7) (0.6) ----- ----- ----- ----- Net income (loss) (2.9)% 0.2% (3.0)% (1.0)% ----- ----- ----- -----
Net Sales Net sales for the Company decreased 2.1% in the third quarter of fiscal 1995 to $78.7 million compared to $80.4 million in the third quarter of fiscal 1994. Comparable store sales (stores in operation for at least 15 months) increased by 2.0% in the third quarter of fiscal 1995 as compared with the third quarter of fiscal 1994. The increase in comparable store sales in the third quarter of fiscal 1995 as compared with the same period Page 14 15 in fiscal 1994 was primarily due to the closing of a number of the Company's under-performing stores. For the first nine months of fiscal 1995, net sales decreased 6.6% to $240.4 million from $257.4 million in the same period of fiscal 1994. Comparable store sales decreased by 7.0% for the first nine months of fiscal 1995 compared with comparable store sales for the first nine months of fiscal 1994. Management believes that the continued weakness in the women's apparel specialty retail segments in general, and the soft California markets in particular, combined with customer resistance to product and pricing, resulted in the reduction in sales in the third quarter and first nine months of fiscal 1995, compared with the same periods of fiscal 1994. The Company's primary target market is women in the 18 to 35 age group. While customer demographics revealed that this age represents a significant portion of the Company's customers, the Company still maintains a lesser customer base in the 14 to 17 and 36 and over age groups. The Company's business is comprised of two principal selling seasons: Spring (the first and second quarters) which includes the period during which spring and summer styles are introduced; and, Fall (the third and fourth quarters) which includes the back-to-school, winter and Christmas selling seasons. Consistent with the majority of clothing retailers, first quarter sales are generally lower than sales in the other quarters primarily as a result of the higher sales activity during the summer, back-to-school, and Christmas selling seasons. As is the case for most clothing retailers, abnormal seasonal weather also may affect sales because the seasonal merchandise then in the stores may not correspond to the merchandise consistent with the abnormal weather. In addition, since most of the Company's stores are located in non-enclosed retail locations as opposed to enclosed malls, the Company's sales can be adversely affected by abnormal rain or other inclement weather. There was no evidence of adverse weather during the third quarter of fiscal 1995. Interest and Other Income; Interest Expense; Other Losses Interest and other income decreased to $68 thousand in the third quarter of fiscal 1995, compared to $273 thousand in the third quarter of fiscal 1994. For the first nine months of fiscal 1995, interest and other income decreased to $508 thousand, from $1.0 million in the same period in fiscal 1994. This decrease in the third quarter of fiscal 1995 and for the first nine months of fiscal 1995 as compared to the respective periods in fiscal 1994 was attributable to the fact that the Company maintained a lower average invested cash balance during each of the respective periods. Interest expense decreased to $92 thousand in the third quarter of fiscal 1995, compared to $182 thousand in the third quarter of fiscal 1994. Interest expense increased to $649 thousand for the first nine months of fiscal 1995 compared to $371 thousand in the same period of fiscal 1994. The decrease in interest expense in the third quarter of fiscal 1995 was primarily due to a reduction in outstanding borrowings under the Company's credit agreement during the third quarter of fiscal 1995, as compared to the same period of fiscal 1994. The increase in interest expense for the first nine months of fiscal 1995 was due to an increase in outstanding borrowings under the Company's credit agreement and an increase in the effective borrowing rate in the first nine months of fiscal 1995, as compared to the first nine months of fiscal 1994. The interest expense stemmed from outstanding borrowings under the Company's credit agreement; additional borrowing of $1.4 million made during the first quarter of fiscal 1995, the proceeds of which were used to purchase Page 15 16 an office/warehouse building and underlying real property that the Company uses to house a portion of its administrative offices and warehousing facilities; a bank loan of $1.9 million entered into during the fourth quarter of fiscal 1993, the proceeds of which were used to purchase certain tax advantaged investments; and a capital lease obligation of $1.9 million entered into during fiscal 1993 relating to the store equipment financing. See Notes C and E to the Notes to Condensed Consolidated Financial Statements. Other losses of $405 thousand were recorded for the first nine months of fiscal 1995, compared with $378 thousand for the same period of fiscal 1994. The losses were primarily due to losses from sales of marketable securities. See Note F to the Notes to Condensed Consolidated Financial Statements. Cost of Sales Cost of sales as a percentage of total revenues increased to 72.1% in the third quarter of fiscal 1995 as compared with 68.8% during the same period of fiscal 1994. For the first nine months of fiscal 1995, cost of sales as a percentage of total revenues increased to 73.2% from 70.3% for the same period of fiscal 1994. The increase in cost of sales as a percentage of total revenues for the third quarter and first nine months of fiscal 1995 was principally due to increases in markdowns required to sell merchandise in the highly promotional retail environment and less consumer acceptance of merchandise offered. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of total revenues increased to 32.4% for the third quarter in fiscal 1995 compared with 30.2% for the third quarter of fiscal 1994. For the first nine months of fiscal 1995 and fiscal 1994, selling, general and administrative expenses as a percentage of total revenues were 31.0% and 30.5%, respectively. The overall change in expenses as a percentage of total revenues for the third quarter and first nine months of the current year was due to: (i) an increase in advertising expenditures which management believed was necessary to entice potential customers in this highly competitive environment, (ii) an increase in expenses related to the implementation and operation of new management information systems, (iii) a reduction of capitalized real estate administration costs resulting in an increase in the expensed portion due to the construction of fewer new stores to allocate these expenses to, (iv) a decrease in store maintenance costs attributable to the installation of energy efficient lighting and (v) changes in other expenses attributable to store operations and administration. The following table sets forth the amount of percentage point variance as a percentage of total revenues, and the difference in dollar expense relating to the changes in selling, general and administrative expenses attributable to the factors discussed above, for the periods indicated:
Comparison of Thirteen weeks ended Thirty-nine weeks ended --------------------------- ------------------------------- October 28, October 29, October 28, October 29, 1995 1994 1995 1994 -------------------------- ------------------------------- % Amount % Amount (In 000's) (In 000's) Increase in advertising expenditures 1.3% $986 0.6% $811 Increase in management information systems and operations expenses 0.3 175 0.1 (140) Increase in real estate expenses net of capitalized costs 0.2 176 0.2 513 Decrease in store maintenance (0.2) (237) (0.2) (952) Increase (decrease) in other expenses attributable to store operations 0.6 87 (0.2) (4,279) ---- ------ ---- ------- 2.2% $1,187 0.50% $(4,047) ===== ===== ====== ======
Page 16 17 Loss on Disposal of Plant, Property and Equipment During the third quarter of fiscal 1995 and fiscal 1994, the Company expensed $0 and $406 thousand, respectively. For the first nine months of fiscal 1995 and fiscal 1994, $0 and $1.3 million, respectively, were expensed. The aforementioned expenses were primarily for store-related asset write-offs (e.g. obsolete fixtures, equipment, etc., but not losses related to real estate leases). During the third quarter and the first nine months of fiscal 1995, the Company utilized $703 thousand and $1.8 million, respectively against the accrual for store closures it had recorded at the end of fiscal 1994. Provision (Benefit) for Income Taxes The Company's effective tax (benefit) rate was (37.0%) and 35.0% for the third quarter of fiscal 1995 and fiscal 1994, respectively. For the first nine months of fiscal 1995 and fiscal 1994, the Company's effective tax rate benefit was 37.0% and 34.5% respectively. Based on the level of tax advantaged investments, the Company in the third quarter and first nine months of fiscal 1995 anticipates a higher net benefit rate than was anticipated for the respective periods of fiscal 1994. The Company's year-to-date benefit rate of 37.0% is less than the full year benefit rate of 39.2% that the Company experienced in fiscal 1994 due to reductions in it's tax free investment portfolio. Net Loss and Loss Per Share Net loss and loss per share for the third quarter of fiscal 1995 were $2.3 million and $0.16, respectively. This compared with net income and income per share of $145 thousand and $0.01, respectively, for the same period of fiscal 1994. The net loss for the third quarter of fiscal 1995 as compared to the same period of fiscal 1994 was due to the increases in cost of sales and selling, general and administrative expenses, referenced above. Net loss and loss per share for the first nine months of fiscal 1995 were $7.1 million and $0.50, respectively. This compared with net loss and loss per share of $2.7 million and $0.19, respectively, for the same period of fiscal 1994. Management believes the increase in net loss for the first nine months of fiscal 1995 as compared to the same period of fiscal 1994 was due to the continued weakness in the women's apparel specialty retail segments in general, and the soft California markets in particular, combined with customer resistance to product and pricing. Liquidity and Capital Resources As of the end of the third quarter in fiscal 1995, the Company, through its subsidiary CT Stores, had a senior secured revolving credit facility with a bank serving as agent for a lending group comprised of two banks which allowed for total credit of $40 million (the "Bank Credit Facility"). This agreement was scheduled to expire on February 1, 1997, and was secured by substantially all of the assets of the Company and its subsidiaries, excluding merchandise inventories. At October 28, 1995, the Company had outstanding borrowings and outstanding letters of credit in the amount of $5.1 million and $15.3 million respectively. The Bank Credit Facility contained various restrictive covenants requiring, among other things, the maintenance of certain financial ratios, including debt to net worth and current ratio, the establishment of maximum levels of cumulative net loss, the establishment of maximum levels of capital expenditures, the establishment of certain limitations regarding investments made with the Company's affiliated group, a limitation on the incurrence of future indebtedness, and a prohibition regarding declaring or making any cash dividends to the Company's stockholders by the Company or its subsidiaries. At October 28, 1995, the Company was in compliance with or had obtained waivers for such covenants. This banking agreement and the amounts outstanding thereunder are more fully described in Notes C and E to the Notes to Condensed Consolidated Financial Statements. Also see the disclosures set forth in this Item 2 under the caption "Subsequent Events" and in Part II, Item 3 of this Report. Cash and cash equivalents and marketable securities decreased to $6.0 million by the end of the third quarter of fiscal 1995, compared to $48.5 million at the end of fiscal 1994, primarily due to net repayments under the line of credit of $30.1 million and cash used in operating activities of $13.0 million. Merchandise inventories increased to $36.8 million at the end of the Page 17 18 third quarter of fiscal 1995, from $24.8 million at the end of fiscal 1994. The increase in inventory for the first nine months of fiscal 1995 is attributable to seasonal inventory fluctuations and inventory returning to normal levels following aggressive promotional activity at the end of fiscal 1994. In the normal course of the purchasing cycle during the year, cash and cash equivalents also will periodically decrease as the Company purchases inventory to meet projected sales demands. Accounts payable increased to $20.5 million at the end of the third quarter of fiscal 1995, from $19.2 million at the end of fiscal 1994. The relative increase in accounts payable resulted from seasonal inventory purchasing, partially offset by conservative leveraging on inventory purchases. Income taxes receivable decreased to $4.2 million by the end of the third quarter of fiscal 1995, compared to $5.4 million at the end of fiscal 1994, due to the Company receiving tax refunds of $5.4 million primarily relating to the fiscal 1994 loss, offset partially by the Company recognizing a tax benefit for the first nine months of fiscal 1995 (realizable as a result of taxes paid in fiscal 1993 and fiscal 1992). Prepaid expenses and other current assets increased $0.8 million from the end of fiscal 1994 to the end of the third quarter of fiscal 1995 due to an increase of $0.6 million in receivables due from insurers relating to the Company's captive insurance, an increase of $0.3 million in prepaid bank-related fees and a net decrease of $0.1 million in various other components. Other assets increased $1.0 million from the end of fiscal 1994 to the end of the third quarter of fiscal 1995 due to an increase of $1.1 million of corporate-owned life insurance and a decrease of $0.1 million in various other components. Accrued sales tax decreased to $2.5 million at the end of the third quarter of fiscal 1995 from $2.9 million at the end of fiscal 1994 mainly due to a portion of unpaid holiday related sales taxes remaining outstanding at fiscal 1994 year end. Accrued payroll and related taxes decreased from $4.0 million at the end of fiscal 1994 to $3.1 million at the end of the third quarter of fiscal 1995 primarily due to group health and payroll-related tax payments, which decreased the accruals by $0.9 million. Other accrued liabilities decreased $2.4 million from the end of fiscal 1994 to the end of the third quarter of fiscal 1995 due to decreases in accruals for store closures and legal-related accruals of $1.8 million and $1.6 million, respectively, offset by a net increase of $1.0 million in various other accruals (e.g., accrued interest, store property-related accruals). Total cash used in operating activities during the first nine months of fiscal 1995 was $13.0 million, compared to $1.1 million used in operating activities during the same period of fiscal 1994. The Company's cash used in operations was impacted by losses in the first nine months of fiscal 1995, an increase in merchandise inventories and less leverage on accounts payable. In the first nine months of fiscal 1995, the Company opened six new stores and closed forty-five stores. As a result, property, plant and equipment decreased $3.5 million, from $75.7 million at the end of fiscal 1994 to $72.2 million at October 28, 1995. Page 18 19 PART II -- OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES. As a result of the filing of the Bankruptcy Cases, the Company allegedly is in default on the Bank Credit Facility. See Notes A and C to the Notes of the Condensed Consolidated Financial Statements herein. As of the Petition Date, the two banks claim that the Company was indebted to them under the Bank Credit Facility in an amount of $16,477,000 in unpaid principal, $12,744,934 in contingent reimbursement obligations (of which the Company believes approximately $8,700,000 is the actual contingent obligation) under outstanding letters of credit and $20,917 in unpaid interest. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10. Commitment Letter for Debtor-in-Possession Financing with The CIT Group/Business Credit, Inc. 27. Financial Data Schedule. (b) Reports on Form 8-K - There were no reports on Form 8-K filed during the quarterly period ended October 28, 1995. Page 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. THE CLOTHESTIME, INC., a Delaware corporation Dated: December 18, 1995 By: /s/ John Ortega II ------------------------------------ John Ortega II Chairman of the Board and Chief Executive Officer Dated: December 18, 1995 By: /s/ David A. Sejpal ------------------------------------ David A. Sejpal Vice President - Chief Financial Officer (Principal Financial Officer) Page 20 21 EXHIBIT INDEX
Sequentially Exhibit Numbered Number Description Pages ------- ---------------------------------------- ------------ 10 Commitment Letter for Debtor-In- 22 Possession Financing with The CIT Group/ Business Credit, Inc. 27 Financial Data Schedule 29
Page 21 EX-10 2 CIT GROUP LETTER DATED DEC. 8, 1995 1 EXHIBIT 10 December 8, 1995 [THE CIT GROUP LOGO] Mr. Douglas Pereira Chief Financial Officer Clothestime Stores, Inc. 5325 E. Hunter Ave. Anaheim, CA 92807 Dear Mr. Pereira: Your financial advisor has advised The CIT Group/Business Credit, Inc. (the "Lender") that Clothestime Stores, Inc. (the "Company" or "Borrower") and its affiliates (except the Vermont Insurance Company) intends to file a petition (the "Petition") under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") and the Company will require debtor in possession financing in the amount of up to $40,000,000 for working capital purposes. We have reviewed the information you have submitted to us and are pleased to inform you that we have approved a debtor in possession revolving line of credit (the "DIP Line of Credit") consisting of, and subject to, the terms described in this letter (the "Commitment Letter"). Revolving Line of Credit - ------------------------ 1. A revolving Line of Credit (the "DIP Revolving Line of Credit") evidenced by a Financing Agreement ("DIP Agreement") providing for revolving advances ("DIP Revolving Loans") up to the lesser of (a) $40,000,000, (b) the lesser of (i) sixty percent (60%) of eligible inventory valued on a cost basis, and (ii) forty percent (40%) of eligible inventory valued on a retail basis, or (c) the amount of debtor in possession financing that the Company is authorized to borrow by the Bankruptcy Court for the District in which the Company's case is pending (the "Court") pursuant to the Bankruptcy Court Order (defined below), provided however, such rates of advance against the inventory shall be subject to reduction by the Lender based on the Lender's completed analysis of the Borrower's inventory systems and value of said inventory as determined by the appraisal provided for in 13 (c). After giving effect to all DIP Revolving Loans to be extended at closing, the Borrower's excess revolving loan availability, at the closing only, shall be at least $2,500,000. 1 2 Letter of Credit Subline - ------------------------ 2. Within the DIP Revolving Line of Credit and borrowing base availability the Lender will assist the Borrower in obtaining up to $25,000,000 at any time of documentary letters of credit for the purchase of inventory and standby letters of credit for business purposes approved by the Lender. Forty percent (40%) of the outstanding documentary letters of credit will be reserved from availability. One hundred percent (100%) of standby letters of credit will be reserved from availability. Term - ---- 3. Borrowings are to be repaid and the Agreement terminated on the earliest of (i) 24 months after the date on which the Company files its Petition, (ii) the effective date of the Company's confirmed plan of reorganization, (iii) the Final Bankruptcy Court Order is not entered prior to January 31, 1996, (iv) reversal or modification (if not consented to by Lender) of the Bankruptcy Court Order, or (v) at the option of Lender, occurrence and continuation of any Event of Default under the DIP Agreement. Interest Rate and Fees - ---------------------- 4. Interest on all outstanding DIP Revolving Loans under the DIP Agreement at a rate equivalent to a) the Chemical Bank Rate plus one half of one percent (0.50%) per annum, or b) at the election of the Company, the LIBO Rate plus two and one half percent (2.50%) per annum, provided that the Company i) gives the Lender three (3) business days prior written notice of any LIBO Rate election, ii) pays the Lender a $500 LIBO Rate election fee for each LIBO Rate election, and iii) cannot make a LIBO Rate election if an Event of Default under the DIP Agreement remains un-waived or uncured. Upon the Company's election of a LIBO Rate option, the Company will specify a one, two, three or six month LIBO Rate period. All cash receipts from the sale of inventory shall be deposited to blocked accounts and applied, first, to repay amounts outstanding under the DIP Agreement. Collections will be credited to the Borrower's account upon the Lender's receipt of good funds at its bank account in New York, New York. The Lender's receipt of funds previously evidenced by checks and like instruments which have cleared constitute good funds. Interest on all obligations due to the Lender will be payable monthly. 2 3 5. A DIP unused Line of Credit Fee, payable at the end of each month, of three eighths of one percent (.375%) per annum on the unused DIP Line of Credit, computed by multiplying .375% by the positive difference between the $40,000,000 maximum amount of the DIP Line of Credit and the sum of x) the average daily DIP Revolving Loan balance due Lender, and y) the average daily outstanding Letters of Credit. 6. In addition to passing along all charges from the Letter of Credit issuing bank, Lender will charge a service fee in connection with each Letter of Credit equal to one percent (1.00%) per annum, payable monthly, on the face amount of each Letter of Credit. 7. A Collateral Management Fee of $30,000 per each six month period the Agreement is in effect. Such fee shall be payable upon Closing, and in advance of each six (6) month period and shall be fully earned when paid and non-refundable. 8. A $250,000 Loan Facility Fee, payable on the date (the "Closing") that the Court first enters an order (whether interim or final) authorizing borrowing under the DIP Line of Credit. Priority - -------- 9. The DIP Line of Credit and the Borrower's obligations to us will constitute a superpriority administrative expense claim under Section 364(c)(1) of the Bankruptcy Code and shall be senior to all other administrative expense claims, except for professional fees and U.S. Trustee fees up to an amount to be mutually agreed upon by the Borrower and Lender. Additionally, Lender will require a negative pledge on the Company's merchandise inventory and proceeds and the Company's representation and warranty, confirmed in the Bankruptcy Court Order, that such inventory is and shall remain unencumbered. Payment of all obligations outstanding to the Lender under the DIP Agreement shall be guaranteed by each of the Borrower's affiliates (except the Vermont Insurance Company). 10. The definitive documentation shall provide that any rights of reserve and/or set-off that the Lender may have now or in the future in connection with the DIP Line of Credit may not be exercised or applied 3 4 to any other debtor-creditor relationships that the Lender's affiliates may now or hereafter have with the Borrower or its affiliates. Covenants and Provisions - ------------------------ 11. (a) The DIP Agreement will contain such warranties, representations, covenants, events of default and indemnity and expense reimbursement provisions as are customary or deemed appropriate by the Lender for financing transactions of this type, which will include certain financial covenants, including, but not limited to: Limitation on Capital Expenditures EBITDA Maximum Net Loss Provision (b) The Company will provide to the Lender, among other things, monthly interim and year-end financial statements. The year-end statements must be certified by an independent public accountant mutually acceptable to each of us. (c) The DIP Agreement will provide such remedies as are customary or deemed appropriate by the Lender for financing transactions of this type, and shall provide that the automatic stay of Section 362 of the Bankruptcy Code shall be modified for the limited purpose of permitting the Lender to exercise its remedies under the DIP Agreement and under law. Out of Pocket Expenses - ---------------------- 12. (a) The Borrower shall reimburse the Lender on demand (whether or not this transaction is consummated) for out-of-pocket costs and expenses (including reasonable fees and expenses of outside legal counsel) incurred in connection with the Agreement, including, but not limited to, those incurred by the Lender in connection with the preparation, execution and closing of this financing transaction and costs, fees and expenses relating to lien searches and filings. (b) By executing a copy of this letter, you agree to indemnify and hold Lender and its affiliates, and our and their directors, officers, employees, attorneys and other professionals harmless from and against all claims, liabilities, costs and expenses (including reasonable legal fees and disbursements) which may be incurred by or asserted against us or them (other than as a result of the gross negligence or willful misconduct of 4 5 such indemnified person or entity) in connection with or arising out of any actual or threatened proceeding (whether or not we or they are named as a party thereto) related to this Commitment Letter and/or the transactions contemplated hereby or any other matter arising as a result of the delivery of this letter. Conditions of Closing - --------------------- 13. The foregoing is furnished as a means of affording the Borrower a guide to, and an outline of, the material terms and conditions of this commitment. Moreover, the foregoing is subject to: (a) successful completion of all the above items; (b) the execution and delivery of appropriate legal documentation which must be satisfactory in form and substance to Borrower and Lender and their respective counsels; (c) Lender's satisfaction with a report from Gordon Bros. Partners, Inc. indicating a fair market value of the Company's inventory sufficient, in Lender's commercially reasonable judgement, to support the proposed advance rate against inventory. The appraiser shall be retained by the Lender but paid for by the Borrower; (d) Lender's satisfaction that prior to the entry of the final Bankruptcy Court Order, no material adverse change in the financial condition, business, prospects, profitability, assets or operations of the Borrower (other than the filing of a voluntary petition under Chapter 11 of the Bankruptcy Code) has occurred. It is understood and agreed that any adverse change in the terms, conditions, assumptions or projections supplied by the Borrower and on which the Lender based its decision to issue this letter may, in the Lender's reasonable business discretion, be construed by the Lender as a material adverse change; (e) This letter will terminate unless a final order of the Court on terms satisfactory to the Lender and its counsel (including any interim order, the "Bankruptcy Court Order") has been entered prior to January 31, 1996 approving as a superpriority administrative expense claim the DIP Line of Credit or, on an interim basis, loans thereunder in a lesser amount. Advances will be made on the date the Bankruptcy Court Order is entered on an interim basis, except that if an appeal from the Bankruptcy Court Order is filed and a stay pending appeal is obtained, the commitment shall be effective commencing on the first business day 5 6 following the day on which implementation of the Bankruptcy Court Order is not stayed pending resolution of such appeal. Confidentiality - --------------- 14. This letter and the financing arrangements described herein are delivered to you with the understanding that neither this letter nor the substance of said proposed financing arrangements shall be disclosed by Borrower to anybody outside your organization, except to those professional advisors who are in a confidential relationship with Borrower and require knowledge thereof to perform their duties (such as your legal counsel, accountants and financial advisers), or where disclosure is required by law, provided, however, that once the Commitment Letter is accepted by the Borrower and an executed original copy is returned to the Lender, i) the terms of the Commitment Letter may be disclosed, and ii) the Borrower will consult with the Lender as to any filings or document distribution in which reference is made to the Lender or the DIP Line of Credit. Commitment Fee - -------------- 15. To induce the Lender to proceed with its consideration of the Borrower's requested financing facility and to confirm that the request is made in good faith, the Lender requests a $100,000 commitment fee (the "Commitment Fee"). If a financing agreement is consummated, the Lender will credit all $100,000 of such Commitment Fee against the Loan Facility Fee due at closing. In any other event, $50,000 of the Commitment Fee will be retained by the Lender, in addition to all expense reimbursements and other amounts due to the Lender. WE EACH HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, ACTION OR CAUSE OF ACTION ARISING UNDER THIS LETTER. ANY TRANSACTION RELATED HERETO, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. This letter (a) embodies the entire agreement and understanding between the parties hereto with respect to the subject matter of this letter and supersedes all prior agreements, commitments, arrangements, negotiations or understandings, whether oral or written, of the parties with respect thereto, and (b) can be changed only by a writing signed by each of the parties hereto and shall bind and benefit each of such parties and their respective successors and assigns. 6 7 If the foregoing is acceptable to you, please so indicate by signing and returning to us the enclosed copy of this letter not later than the close of business on December 8, 1995. Upon our receipt from you of an executed copy of this letter we will consider the $100,000 previously received from you as the Commitment Fee and will sign below to confirm our acceptance and return a fully executed copy to you. We welcome the opportunity to work with you on this transaction and we hope to hear from you soon. Should you have any questions or comments, please feel free to contact us at anytime. Very truly yours, THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------ Title: Vice President Read and Agreed to: Clothestime Stores, Inc. By: -------------------------- Title: CFO Commitment Letter Accepted: THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------- Title: Vice President 7 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS JAN-27-1996 JAN-29-1995 OCT-28-1995 1 2,804 3,165 0 0 36,756 55,649 72,191 30,327 102,079 43,988 7,920 15 0 0 44,190 102,079 240,368 240,876 176,354 176,354 0 0 649 (11,266) (4,168) (7,098) 0 0 0 (7,098) (0.50) (0.50)
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