0000892569-95-000486.txt : 19950914 0000892569-95-000486.hdr.sgml : 19950914 ACCESSION NUMBER: 0000892569-95-000486 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950729 FILED AS OF DATE: 19950911 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: 95572550 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 July 29, 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 (IRS Employer Identification No.) incorporation or organization) 5325 E. Hunter Avenue, Anaheim, California 92807 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714) 779-5881 ----------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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. Common Stock, $.001 Par Value 14,190,241 shares at September 8, 1995 ----------------------------------------------------------------------------- This Form 10-Q consists of 17 Pages 2 THE CLOTHESTIME, INC. INDEX TO FORM 10-Q INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Condensed balance sheets - July 29, 1995 and January 28, 1995.............................. 3 Condensed statements of operations - thirteen weeks and twenty-six weeks ended July 29, 1995 and July 30, 1994......................................................... 4 Condensed statements of cash flow - twenty-six weeks ended July 29, 1995 and July 30, 1994....................................................................... 5 Notes to condensed consolidated financial statements - July 29, 1995....................... 6-9 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.................................................................. 9-14 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................................... 15 Item 4. Submission of Matters to a Vote of Security Holders ....................................... 16 Item 6. Exhibits and Reports on Form 8-K........................................................... 16 SIGNATURES.......................................................................................... 17
Page 2 of 17 3 THE CLOTHESTIME, INC. PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements BALANCE SHEETS (Unaudited)
July 29, January 28, 1995 1995 ------------ ------------ Assets Current Assets Cash and cash equivalents $ 6,747,505 $ 40,829,741 Marketable securities available-for-sale, net of allowances of $85,200 and $631,328 3,116,380 7,682,273 Merchandise inventories 34,592,879 24,812,265 Income taxes receivable 2,873,856 5,350,284 Prepaid expenses and other current assets 3,442,878 2,650,227 Deferred income taxes 5,344,720 5,560,677 ------------ ------------ Total Current Assets 56,118,218 86,885,467 ------------ ------------ Investments 1,880,238 1,880,238 ------------ ------------ Property, Plant and Equipment - On the basis of cost 73,670,032 75,671,921 Less: Accumulated depreciation & amortization (28,789,404) (25,686,104) ------------ ------------ 44,880,628 49,985,817 Other Assets 2,344,070 1,650,606 ------------ ------------ Total Assets $105,223,154 $140,402,128 ============ ============ Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 25,784,947 $ 19,161,810 Accrued sales tax 2,520,552 2,918,754 Accrued payroll and related taxes 3,555,022 4,030,168 Other accrued liabilities 17,908,270 20,177,354 ------------ ------------ Total Current Liabilities 49,768,791 46,288,086 ------------ ------------ Long-Term Liabilities Long-term debt 3,027,189 37,234,019 Deferred income taxes 5,966,332 5,966,332 ------------ ------------ Total Long-Term Liabilities 8,993,521 43,200,351 ------------ ------------ Shareholders Equity Common Stock, $.001 par value: Authorized - 50,000,000 shares; issued and outstanding - 14,190,129 shares and 14,181,346 shares at July 29, 1995 and January 28, 1995, respectively 14,755 14,746 Additional paid-in capital 10,844,355 10,828,773 Retained earnings 40,505,623 45,304,232 Less: Treasury stock, 565,000 shares at cost at July 29, 1995 and January 28, 1995, respectively (4,850,215) (4,850,215) Net unrealized holding loss on marketable securities (53,676) (383,845) ------------ ------------ Total Shareholders' Equity 46,460,842 50,913,691 ------------ ------------ Total Liabilities and Shareholders' Equity $105,223,154 $140,402,128 ============ ============
See Notes to Condensed Consolidated Financial Statements Page 3 of 17 4 THE CLOTHESTIME, INC. STATEMENT OF OPERATIONS (Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------ ------------------------------ July 29, July 30, July 29, July 30, 1995 1994 1995 1994 ------------ ----------- ------------ ------------ Revenues: Net Sales $89,282,033 $93,449,607 $161,629,272 $176,965,368 Interest and other income 68,349 407,376 440,815 746,619 ----------- ----------- ------------ ------------ 89,350,382 93,856,983 162,070,087 177,711,987 ----------- ----------- ------------ ------------ Costs and Expenses: Cost of sales, including buying and distribution and occupancy costs 65,534,612 69,653,867 119,557,059 126,205,934 Selling, general and administrative expenses 24,085,325 28,753,865 49,168,729 54,402,670 Loss on disposal of property, plant and equipment - 437,501 - 935,389 Interest expense 181,283 124,841 556,183 189,668 Other losses 11,625 349,618 404,956 377,643 ----------- ----------- ------------ ------------ 89,812,845 99,319,692 169,686,927 182,111,304 ----------- ----------- ------------ ------------ Loss Before Income Taxes (462,463) (5,462,709) (7,616,840) (4,399,317) Benefit For Income Taxes (13,716) (1,911,948) (2,818,231) (1,518,493) ----------- ----------- ------------ ------------ Net Loss $ (448,747) $(3,550,761) $ (4,798,609) $ (2,880,824) =========== =========== ============ ============ Loss Per Common Share $ (0.03) $ (0.25) $ (0.34) $ (0.20) =========== =========== ============ ============ Weighted average number of common shares used in the calculation 14,187,443 14,154,812 14,184,966 14,153,630 =========== =========== ============ ============
See Notes to Condensed Consolidated Financial Statements Page 4 of 17 5 THE CLOTHESTIME, INC. STATEMENTS OF CASH FLOW (Unaudited)
Twenty six weeks ended --------------------------------- July 29, July 30, 1995 1994 ------------- ----------- Operating Activities: Net loss $ (4,798,609) $(2,880,824) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 4,546,347 4,255,212 Loss on disposal of property, plant and equipment - 935,389 Loss on sales of marketable securities 404,956 377,643 Changes in operating assets and liabilities: Increase in merchandise inventories (9,780,614) (3,738,016) Decrease in income taxes receivable 2,476,428 - Increase in prepaid expenses and other assets (1,486,115) (1,177,866) Increase in accounts payable 6,623,137 5,719,950 Increase (decrease) in accrued payroll and related taxes (475,146) 31,935 Increase (decrease) in accrued sales tax and other accrued liabilities (1,597,337) 1,417,876 Decrease in income taxes payable - (2,519,678) ------------ ----------- Net cash provided by (used in) operating activities (4,086,953) 2,421,621 ------------ ----------- Investing activities: Investment in marketable securities (11,534) (3,177,185) Proceeds from sales of marketable securities 4,718,600 14,863,254 Purchases of property, plant, and equipment (585,135) (7,780,145) ------------ ----------- Net cash provided by investing activities 4,121,931 3,905,924 ------------ ----------- Financing Activities: Net borrowings (repayments) under revolving credit facility (35,153,000) 8,000,000 Proceeds from long-term debt 1,400,000 - Principal payments under long-term debt (379,805) (355,897) Proceeds from the exercise of stock options 15,591 8,649 ------------ ----------- Net cash provided by (used in) financing activities (34,117,214) 7,652,752 ------------ ----------- Increase (decrease) in cash and cash equivalents (34,082,236) 13,980,297 Cash and cash equivalents at beginning of year 40,829,741 2,705,688 ------------ ----------- Cash and cash equivalents at end of quarter $ 6,747,505 $16,685,985 ============ =========== Supplemental disclosure of cash flow information: Income taxes paid $ 19,970 $ 1,002,035 Interest paid $ 556,183 $ 189,668
See Notes to Condensed Consolidated Financial Statements Page 5 of 17 6 THE CLOTHESTIME, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 29, 1995 Note A - Significant Accounting Policies Basis of Presentation: The accompanying unaudited condensed consolidated 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 the Company and its consolidated group of subsidiaries, MRJ Industries, Inc., Clothestime Stores, Inc., Clothestime Insurance Company, Clothestime International, Inc., Clothestime Investment, Inc., Clothestime Acquisition Corporation, and Clothestime Realty, Inc. All material intercompany balances and transactions have been eliminated in consolidation. The operating results for the twenty-six week period ended July 29, 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"). Note B - Credit Agreements At July 29, 1995, the Company, through its subsidiary Clothestime Stores, Inc., had a senior secured revolving credit facility with a bank serving as agent for a lending group comprised of two banks which allows for total credit of $40 million. The agreement expires February 1, 1997, and is secured by substantially all of the assets of the Company and its subsidiaries, excluding merchandise inventories. As of July 29, 1995, the Company had outstanding letters of credit in the amount of $19.5 million and no outstanding borrowings. Any 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 six 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 contains 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. The Company was in compliance with or had obtained waivers for all such covenants as of July 29, 1995. Page 6 of 17 7 THE CLOTHESTIME, INC. Note C - Capital Stock And Stock Option Transactions The following table summarizes the activity under the Company's Stock Option Plans during the twenty-six week period ended July 29, 1995:
Shares --------- Options Outstanding, January 28, 1995 2,708,665 Activity during the period: Options Granted (per share amounts: $2.75 to $2.88) 205,500 Options Exercised (per share amounts: $1.50 to $1.88) (8,783) Options Canceled (per share amounts: $1.50 to $12.50) (119,266) --------- Options outstanding, July 29, 1995 2,786,116 =========
At July 29, 1995, there were exercisable options covering 1,759,765 shares of the Company's common stock. Due to the loss in the second quarter and first six months of fiscal 1995, and in the same periods of fiscal 1994, common equivalent shares of 67,224, 67,641, 213,663, and 312,755, respectively, were excluded from the loss per share calculation as a result of the antidilutive effect. Note D - Long Term Debt Long-term debt and capital lease obligations were:
July 29, 1995 January 28, 1995 ------------- ---------------- Notes payable to bank at various rates based on prime plus 1% at July 29, 1995, and LIBOR at January 28, 1995. $ - $35,153,000 Secured note payable to bank based on LIBOR plus 1.5% fully amortized over 25 years, balance due in 10 years. 1,381,333 - Notes payable to bank at 6.1% and 6.2%, fully amortized over five years. 1,298,090 1,478,927 Capital lease obligation 1,154,768 1,335,069 ---------- ----------- Total debt 3,834,191 37,966,996 Less: Current maturities (807,002) (732,977) ---------- ----------- Total $3,027,189 $37,234,019 ========== ===========
Page 7 of 17 8 THE CLOTHESTIME, INC. Note D - Long-Term Debt (Continued) The Company borrowed $1,400,000 during the first quarter of fiscal 1995, evidenced by a note payable to the bank collaterized by an office/warehouse building and underlying 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 E - 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 July 29, 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 July 29, 1995 ------------------------------------------------ Gross Gross Unrealized Unrealized Fair Holding Holding Cost Value Losses Gains ---------- ---------- ---------- ---------- U.S. state and local government agency issues $3,201,580 $3,116,380 $85,200 $ -
Maturities of investment securities available-for-sale are summarized as follows:
As ofJuly 29, 1995 ------------------ Within 1 year $ - After 1 year through 5 years 997,000 After 5 years through 10 years 2,204,580 After 10 years - ---------- $3,201,580 ==========
Page 8 of 17 9 THE CLOTHESTIME, INC. Note E - Marketable Securities - (Continued)
Thirteen weeks ended Twenty-six weeks ended July 29, 1995 July 29, 1995 -------------------- ---------------------- Proceeds from sales of investment securities available-for-sale $111,800 $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 $(11,625) $ (410,446) Net unrealized holding (loss) on available-for-sale securities included as a component of stockholders' equity, net of tax $(53,676) $ (53,676)
All realized gains and losses are computed on the specific identification basis. Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 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 twenty-six week periods ended July 29, 1995 and July 30, 1994.
Thirteen weeks ended Twenty-six weeks ended --------------------------------- --------------------------------- July 29, 1995 July 30, 1994 July 29, 1995 July 30, 1994 ------------- -------------- -------------- ------------- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of sales, including buying and distribution and occupancy costs 73.3 74.2 73.8 71.0 Selling, general and administrative expenses 27.0 30.6 30.3 30.6 Loss on disposal of property, plant and equipment - 0.5 - 0.5 Interest expense 0.2 0.1 0.3 0.1 Other loss - 0.4 0.3 0.2 ----- ----- ----- ----- Loss before income taxes (0.5) (5.8) (4.7) (2.4) Benefit for income taxes - (2.0) (1.7) (0.8) ----- ----- ----- ----- Net loss (0.5)% (3.8)% (3.0)% (1.6)% ===== ===== ===== =====
Net Sales Net sales for The Clothestime, Inc. (the "Company") decreased 4.5% in the second quarter of fiscal 1995 to $89.3 million compared to $93.4 million in the second quarter of fiscal 1994. Comparable store sales (stores in operation for at least 15 months) decreased by 5.2% in the second quarter of fiscal 1995 as compared with the second quarter of fiscal 1994. For the first six months of fiscal 1995, net sales decreased 8.7% to $161.6 million from $177.0 million in the same period of fiscal 1994. Comparable store sales decreased by 11.0% for the first six months of fiscal Page 9 of 17 10 THE CLOTHESTIME, INC. Net Sales (Continued) 1995 compared with comparable store sales for the first six 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 the lack of fashion direction in this segment of the retail apparel industry, resulted in the reduction in sales in the second quarter and first six 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 our 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 may also 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 second quarter of fiscal 1995. Interest and Other Income; Interest Expense; Other Losses Interest and other income decreased to $68 thousand in the second quarter of fiscal 1995, compared to $407 thousand in the second quarter of fiscal 1994. For the first six months of fiscal 1995, interest and other income decreased to $441 thousand, from $747 thousand in the same period in fiscal 1994. This decrease in the second quarter of fiscal 1995 and for the first six 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 increased to $181 thousand in the second quarter of fiscal 1995, compared to $125 thousand in the second quarter of fiscal 1994. Interest expense increased to $556 thousand for the first six months of fiscal 1995 compared to $190 thousand in the same period of fiscal 1994. The increase in interest expense stemmed from outstanding borrowings under the Company's credit agreement (which the Company paid down during the first two quarters of fiscal 1995); additional borrowing of $1.4 million made during the first quarter of fiscal 1995, the proceeds of which were used to purchase 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 taken out in 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 store equipment financing. See Notes B and D to the Notes to Condensed Consolidated Financial Statements. Other losses of $12 thousand and $405 thousand were recorded for the second quarter and first six months of fiscal 1995, compared with $350 thousand and $378 thousand for the same periods of fiscal 1994. The losses were primarily due to losses from sales of marketable securities. See Note E to the Notes to Condensed Consolidated Financial Statements. Page 10 of 17 11 THE CLOTHESTIME, INC. Cost of Sales Cost of sales as a percentage of total revenues decreased to 73.3% in the second quarter of fiscal 1995 as compared with 74.2% in the same period of fiscal 1994. During the second quarter of fiscal 1995, the decrease of cost of sales as a percentage of total revenues was due to reduced markdowns through improved inventory management. For the first six months of fiscal 1995, cost of sales as a percentage of total revenues increased to 73.8% from 71.0% for the same period of fiscal 1994. The increase in cost of sales as a percentage of total revenues for the first six months of fiscal 1995 was principally due to increases in markdowns required to sell merchandise in the highly promotional retail environment primarily occurring in the first quarter of the current year. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of total revenues decreased to 27.0% for the second quarter of fiscal 1995 compared with 30.6% for the second quarter of fiscal 1994. For the first six months of fiscal 1995 and fiscal 1994, selling, general and administrative expenses as a percentage of total revenues were 30.3% and 30.6%, respectively. The overall change in expenses as a percentage of total revenues for the second quarter and first six months of the current year was due to: (i) the reversal of a legal accrual due to a favorable settlement of the Company's Class Action and Derivative Action, hereinafter defined (see Part II, Item 1. Legal Proceedings, herein), (ii) a decrease in corporate compensation as a result of cost cutting measures, (iii) management's decision to reallocate it's advertising costs from the second quarter to the second half of the current fiscal year, (iv) changes in other expenses attributable to store operations and administration and (v) an increase in store operations and supervisory payroll to support sales levels which were not realized. 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 Twenty-six weeks ended -------------------- ---------------------- July 29, July 30, July 29, July 30, 1995 1994 1995 1994 -------- -------- --------- -------- % Amount % Amount (In 000's) (In 000's) Decrease due to reversal of a legal accrual (1.6)% $(1,451) (0.9)% $(1,449) Decrease in corporate compensation (1.1) (1,254) (1.1) (2,571) Increase (decrease) in advertising costs (0.8) (890) 0.3 (175) Increase (decrease) in other expenses attributable to store operations and administration (0.8) (1,211) 0.2 (1,061) Increase in store operating and supervisory payroll 0.7 137 1.2 22 ---- ------- ---- ------- (3.6)% $(4,669) (0.3)% $(5,234) ==== ======= ==== =======
Page 11 of 17 12 THE CLOTHESTIME, INC. Loss on Disposal of Plant, Property and Equipment During the second quarter of fiscal 1995 and fiscal 1994, the Company expensed $0 and $438 thousand, respectively. For the first six months of fiscal 1995 and fiscal 1994, $0 and $935 thousand, respectively, was expensed. The aforementioned expenses were primarily for store-related asset write-offs (e.g. obsolete fixtures, equipment, etc.). During the second quarter and the first six months of fiscal 1995, the Company utilized $857 thousand and $1,144 thousand, respectively against the accrual for store closures it had recorded at the end of fiscal 1994. As the Company's stores mature, the Company will continue to remodel and/or relocate stores, resulting in asset write-offs. Benefit for Income Taxes The Company's effective tax rate benefit was 37.0% and 34.5% for the first six months of fiscal 1995 and fiscal 1994, respectively. 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 second quarter of fiscal 1995 were $449 thousand and $0.03, respectively. This compared with net loss and loss per share of $3.6 million and $0.25, respectively, for the same period of fiscal 1994. The decrease in net loss for the second quarter of fiscal 1995 as compared to the same period of fiscal 1994 was due to the decreases in cost of sales and selling, general and administrative expenses, referenced above. Net loss and loss per share for the first six months of fiscal 1995 were $4.8 million and $0.34, respectively. This compared with net loss and loss per share of $2.9 million and $0.20, respectively, for the same period of fiscal 1994. Management believes the increase in net loss for the first six 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 the lack of fashion direction in this segment of the retail apparel industry. The significant decrease in net sales in the first quarter of fiscal 1995 disproportionately affected the increase in net loss for the first six months of fiscal 1995. Liquidity and Capital Resources Cash provided from operating activities, the Company's capital structure and resources available from its committed long-term credit agreement provides the financial stability to support both current operations, capital requirements and future growth. As of the end of the second quarter in fiscal 1995, the Company, through its subsidiary Clothestime Stores, Inc., had a senior secured revolving credit facility with a bank serving as agent for a lending group comprised of two banks which allows for total credit of $40 million. This agreement expires February 1, 1997, and is secured by substantially all of the assets of the Company and its subsidiaries, excluding merchandise inventories. The agreement contains 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. These restrictive covenants have not affected, and management does not expect that such covenants will affect, the ability of the Company and its subsidiaries to meet their respective cash obligations. The Company was in compliance with or had obtained waivers for all such covenants as of July 29, 1995. At the end of the first six months, the Company had outstanding letters of credit in the amount of $19.5 million and no outstanding borrowings. The banking agreement and the amounts outstanding thereunder are more fully described in Notes B and D to the Notes to Condensed Consolidated Financial Statements. Page 12 of 17 13 THE CLOTHESTIME, INC. Liquidity and Capital Resources (Continued) Cash and cash equivalents and marketable securities decreased to $9.9 million by the end of the second 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 $35.2 million and cash used in operating activities of $4.1 million. Merchandise inventories increased to $34.6 million at the end of the second quarter of fiscal 1995, from $24.8 million at the end of fiscal 1994. The increase in inventory for the first six 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 $25.8 million at the end of the second quarter of fiscal 1995, from $19.2 million at the end of fiscal 1994. The relative increase in accounts payable resulted primarily from seasonal inventory purchasing. Income taxes receivable decreased to $2.9 million by the end of the second quarter of fiscal 1995, compared to $5.4 million at that end of fiscal 1994, primarily due to the Company receiving tax refunds of $4.9 million relating to the fiscal 1994 loss, offset partially by the Company recognizing a tax benefit for the first six 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 second 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 $0.4 million in prepaid bank-related fees and a net decrease of $0.2 million in various other components. Other assets increased $0.7 million from the end of fiscal 1994 to the end of the second quarter of fiscal 1995 due to an increase of deferred corporate-owned life insurance costs. Accrued sales tax decreased to $2.5 million at the end of the second quarter of fiscal 1995 from $2.9 million at the end of fiscal 1994 mainly due to tax payment timing differences. Accrued payroll and related taxes decreased from $4.0 million at the end of fiscal 1994 to $3.6 million at the end of the second quarter of fiscal 1995 primarily due to group health and payroll-related tax payments, which decreased the accruals by $0.4 million. Other accrued liabilities decreased $2.3 million from the end of fiscal 1994 to the end of the second quarter of fiscal 1995 due to decreases in accruals for store closures and legal-related accruals of $1.1 million and $1.6 million, respectively, offset by a net increase of $0.4 million in various other accruals. Total cash used in operating activities during the first six months of fiscal 1995 was $4.1 million, compared to $2.4 million provided by operating activities during the same period of fiscal 1994. The Company's cash used in operations was impacted by losses in the first six months of fiscal 1995 and an increase in merchandise inventories, partially offset by more leverage on accounts payable. Although future performance will affect cash provided by operations, the aforementioned factors are not expected to have short or long-term implications on the Company's liquidity, as merchandise is purchased and liabilities are paid in the normal course of business. Page 13 of 17 14 THE CLOTHESTIME, INC. Liquidity and Capital Resources (Continued) Consistent with many retailers, the Company has an indirect relationship with the factoring community which assists suppliers of merchandise in ensuring payments or obtaining advances (as opposed to payment terms from the retailer directly) for goods shipped to retailers like the Company. The Company believes that internally generated funds, along with its current financial position and the availability of lines of credit under its current credit agreement will be sufficient to meet both operating and capital requirements. However, to the extent cash provided from operating activities is adversely affected, the factors require greater credit support and/or manufacturers are less willing to deliver merchandise pursuant to payment terms, short or long-term liquidity may be adversely impacted. During fiscal 1995, capital expenditures of approximately $2.0 million are anticipated. The Company plans to spend approximately $1.5 million to open approximately 8 new stores and provide capital support for its existing store base. In addition, the Company plans to spend approximately $0.5 million for system enhancements and various other corporate expenditures. Capital expenditures for expansion are planned at lower levels during fiscal 1995 in order to conserve cash and focus on the Company's existing store network. Management anticipates that these capital requirements will be funded principally by cash generated from operating activities, along with resources available under the long-term credit agreement. In the first six months of fiscal 1995, the Company opened five new stores and closed twenty-eight stores. As a result, property, plant and equipment decreased $2.0 million (net of write-offs), from $75.7 million at the end of fiscal 1994 to $73.7 million at July 29, 1995. Page 14 of 17 15 THE CLOTHESTIME, INC. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On February 16, 1990, two stockholders of the Company filed a class action lawsuit in the United States District Court for the Central District of California against the Company and certain of its present and former directors and executive officers, namely, August DeAngelo, Michael P. DeAngelo, Raymond A. DeAngelo, John Ortega II, Norman Abramson and John M. Shanklin (the "Class Action"). The amended complaint purported to state claims for violations of certain federal securities laws and certain common law claims and sought damages in an unspecified amount based on allegations which included that between April 17, 1989, and February 1, 1990, the defendants caused to be issued materially false or misleading information and failed to disclose material information about the Company's finances and business in an effort to artificially inflate the market price of the Company's common stock. All defendants answered the amended complaint denying all material allegations thereof. On November 21, 1990, two different stockholders of the Company filed a purported class action and stockholder derivative lawsuit in the United States District Court for the Central District of California against the Company, as a nominal defendant, and certain of its present and former directors and executive officers, namely, August DeAngelo, Michael P. DeAngelo, Raymond A. DeAngelo, John Ortega II, Norman Abramson, John M. Shanklin, Harvey A. Bookstein, George Foos, Peter B. Cumming and Jeffrey R. Dake (the "Derivative Action"). The amended complaint purported to state only derivative claims for breach of fiduciary duty and waste of corporate assets and sought, among other things, damages in an unspecified amount based on allegations which included that between approximately April 17, 1989, and February 1, 1990 the defendants caused to be issued materially false or misleading information and failed to disclose material information about the Company's finances and business in an effort to artificially inflate the market price of the Company's common stock and engaged in a course of self-dealing and other conduct for the defendants' personal profit. All defendants answered the amended complaint denying the material allegations thereof. Because the Class Action and the Derivative Action involved several common questions of law and fact, they were consolidated for pre-trial purposes by order of the court. On or about February 24, 1995, the parties to the Class Action and the Derivative Action executed a Stipulation of Settlement (the "Settlement") pursuant to which, among other things, the Class Action and the Derivative Action would be dismissed with prejudice, subject to court approval, in return for payment of $3,660,000 in cash. Of such amount $3,350,000 will be paid by the insurance company which issued the Directors and Officers Liability Insurance Policy and $310,000 will be paid by the Company. The defendants to the Class Action and the Derivative Action in executing the Settlement did so without admitting any wrongdoing or liability and continue to deny each and all of the claims and contentions alleged in the Class Action and the Derivative Action. On June 5, 1995, the Federal District Court Judge handing the Class Action and the Derivative Action entered Orders which approved the Settlement and dismissed in their entirety, with prejudice, both the Class Action and the Derivative Action. Page 15 of 17 16 THE CLOTHESTIME, INC. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 19, 1995, the Company held its Annual Meeting of Stockholders. At such Meeting, the following matters were approved or, in the case of the selection of the independent accountants, ratified, by the stockholders: a) George Foos was elected to serve as a Class I Director of the Corporation for a three year term expiring at the 1998 Annual Meeting of Stockholders. Norman Abramson and Herman D. Epstein continued in office as Class II Directors; and John Ortega II and David A. Sejpal continued in office as Class III Directors of the Corporation. The tabulation of the votes cast for the election of the Class I Director was as follows:
Nominee Votes For Votes Withheld ----------- ---------- -------------- George Foos 12,412,921 242,332
b) The selection of the accounting firm of KPMG Peat Marwick LLP as the Corporation's independent auditors for the fiscal year ending January 27, 1996 was ratified. Votes For - 12,500,509 Abstentions - 29,462 Votes Against 125,282 Broker non-votes -0-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule. (b) Reports on Form 8-K - There were no reports on Form 8-K filed for the quarterly period ended July 29, 1995. Page 16 of 17 17 THE CLOTHESTIME, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CLOTHESTIME, INC. Date: September 11, 1995 By: /s/ John Ortega II ----------------------------- John Ortega II Chairman of the Board and Chief Executive Officer Date: September 11, 1995 By: /s/ David A. Sejpal ----------------------------- David A. Sejpal Vice President - Chief Financial Officer (Principal Financial Officer) Page 17 of 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS JAN-27-1996 JAN-29-1995 JUL-29-1995 1 6,748 3,116 0 0 34,593 56,118 73,670 28,789 105,223 49,769 3,027 15 0 0 46,446 105,223 161,629 162,070 119,557 119,557 0 0 556 (7,617) (2,818) (4,799) 0 0 0 (4,799) (0.34) (0.34)