SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 29, 2005 Commission file number 0-11736
THE DRESS BARN, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-0812960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Dunnigan Drive, Suffern, New York 10901
(Address of principal executive offices) (Zip Code)
(845) 369-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock $.05 par value
Indicate 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 [ ] No [ x].
Indicate whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act) Yes [ x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
..05 par value 29,862,826 shares on March 21, 2005
THE DRESS BARN, INC.
FORM 10-Q
QUARTER ENDED JANUARY 29, 2005
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
January 29, 2005
and July 31, 2004 (as restated) I-3
Condensed Consolidated Statements of Earnings
for the Thirteen weeks ended January 29, 2005
and January 24, 2004 (as restated) I-5
Condensed Consolidated Statements of Earnings
for the Twenty-six weeks ended January 29, 2005
and January 24, 2004 (as restated) I-6
Condensed Consolidated Statements of Cash Flows
for the Twenty-six weeks ended January 29, 2005
and January 24, 2004 (as restated) I-7
Notes to Unaudited Condensed Consolidated
Financial Statements I-9 through I-24
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations I-24 through I-30
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-31
Item 4 Controls and Procedures I-31
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings I-33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds *
None
Item 3. Submission of Matters to a Vote of Security Holders *
None
Item 6. Exhibits and Reports on Form 8-K I-33
Signatures I-34
* Not applicable in this filing
Item 1 - FINANCIAL STATEMENTS
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Amounts in thousands, except share data January 29, July 31,
2005 2004
---------------------- -----------------
(restated, see
Note 3)
ASSETS
Current Assets:
Cash and cash equivalents $34,936 $15,141
Restricted cash and investments 39,461 38,661
Marketable securities and investments 5,726 122,700
Merchandise inventories 146,359 116,912
Deferred tax asset 13,691 14,845
Prepaid expenses and other 13,296 8,898
---------------------- -----------------
Total Current Assets 253,469 317,157
---------------------- -----------------
Property and Equipment:
Land and buildings 58,261 45,391
Leasehold improvements 124,328 93,289
Fixtures and equipment 200,389 173,466
Computer software 33,321 23,302
---------------------- -----------------
416,299 335,448
Less accumulated depreciation
and amortization 180,438 172,244
---------------------- -----------------
235,861 163,204
---------------------- -----------------
Intangible assets, net (see note 2) 111,766 --
Goodwill (see note 2) 135,774 --
Other Assets 18,831 8,955
---------------------- -----------------
TOTAL ASSETS $755,701 $489,316
====================== =================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Amounts in thousands, except share data January 29, July 31,
2005 2004
--------------------------------------------
(restated, see
Note 3)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $89,294 $66,776
Accrued salaries, wages and related expenses 32,535 21,349
Litigation accrual (see note 9) 37,736 36,128
Other accrued expenses 31,522 24,247
Customer credits 12,677 8,970
Income taxes payable - 5,548
Current portion of long-term debt 11,060 1,033
-------------------- -----------------
Total Current Liabilities 214,824 164,051
Long-Term Debt (see note 8) 236,451 31,988
Deferred Rent 41,401 40,319
-------------------- -----------------
Total Liabilities 492,676 236,358
-------------------- -----------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, par value $.05 per share:
Authorized- 100,000 shares
Issued and outstanding- none -- --
Common stock, par value $.05 per share:
Authorized- 50,000,000 shares
Issued- 29,638,567 and 29,638,360 shares, respectively
Outstanding- 29,638,567 and 29,618,660 shares, respectively 1,494 1,482
Additional paid-in capital 65,885 63,554
Retained earnings 195,646 188,757
Treasury stock, to be retired -- (313)
Accumulated other comprehensive (loss) -- (522)
-------------------- -----------------
263,025 252,958
-------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $755,701 $489,316
==================== =================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
Amounts in thousands, except per share amounts
Thirteen Weeks Ended
------------------------------------------
January 29, January 24,
2005 2004
------------------------------------------
(Restated, see
Note 3)
Net sales $200,138 $171,053
Cost of sales, including
occupancy and buying costs 125,536 106,121
------------------------------------------
Gross profit 74,602 64,932
Selling, general and
administrative expenses 62,568 50,753
Depreciation and amortization 7,745 6,435
------------------------------------------
Operating income 4,289 7,744
Interest income 56 682
Interest expense (2,148) (1,219)
Other income 382 382
------------------------------------------
Earnings before provision for
income taxes 2,579 7,589
Provision for income taxes 942 2,769
------------------------------------------
Net earnings $1,637 $4,820
==========================================
Earnings per share:
Basic $0.06 $0.16
==========================================
Diluted $0.05 $0.16
==========================================
Weighted average shares outstanding:
Basic 29,699 29,308
==========================================
Diluted 30,491 30,050
==========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
Amounts in thousands, except per share amounts
Twenty-Six Weeks Ended
------------------------------------------
January 29, January 24,
2005 2004
------------------------------------------
(Restated, see
Note 3)
Net sales $397,254 $363,597
Cost of sales, including
occupancy and buying costs 249,948 228,880
------------------------------------------
Gross profit 147,306 134,717
Selling, general and
administrative expenses 117,701 103,210
Depreciation and amortization 13,901 12,712
------------------------------------------
Operating income 15,704 18,795
Interest income 778 1,214
Interest expense (3,408) (2,571)
Other income 763 763
------------------------------------------
Earnings before provision for
income taxes 13,837 18,201
Provision for income taxes 5,051 6,589
------------------------------------------
Net earnings $8,786 $11,612
==========================================
Earnings per share:
Basic $0.30 $0.40
==========================================
Diluted $0.29 $0.39
==========================================
Weighted average shares outstanding:
Basic 29,639 29,253
==========================================
Diluted 30,420 29,915
==========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Twenty-Six Weeks Ended
---------------------------------
January 29, January 24,
2005 2004
---------------------------------
(restated, see
Note 3)
Operating Activities:
Net earnings $8,786 $11,612
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 13,901 12,712
Provision for impairment and asset disposals 1,512 1,496
Deferred income tax expense 1,154 1,847
Increase in deferred rent expense 1,082 1,132
Other 1,706 96
Changes in assets and liabilities, net of acquisition:
Increase in restricted cash and investments (800) --
Decrease in merchandise inventories 4,028 10,135
Decrease in prepaid expenses and other 3,390 1,684
Decrease (increase) in other assets 134 (146)
Increase (decrease) in accounts payable - trade 4,461 (40)
Increase in accrued salaries, wages and related expenses 5,478 1,610
Increase in litigation accrual 1,608 40
Increase (decrease) in other accrued expenses 1,299 (176)
(Decrease) increase in customer credits (883) 2,739
Decrease in income taxes payable (5,548) (3,573)
---------------------------------
Total adjustments 32,522 29,556
---------------------------------
Net cash provided by operating activities 41,308 41,168
---------------------------------
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Twenty-Six Weeks Ended
---------------------------------
January 29, January 24,
2005 2004
---------------------------------
(restated, see
Note 3)
Investing Activities:
Acquisition of Maurices Inc., net of $982 cash acquired $(332,737) $ --
Purchases of property and equipment (12,046) (12,815)
Sales and maturities of marketable securities and investments 515,863 33,040
Purchases of marketable securities and investments (399,600) (49,503)
---------------------------------
Net cash (used in) investing activities (228,520) (29,278)
---------------------------------
Financing Activities:
Proceeds from long-term debt 215,000 --
Repayments of long-term debt (510) (483)
Payment of debt issuance costs (7,580) --
Purchase of treasury stock (1,584) --
Proceeds from Employee Stock Purchase Plan 41 42
Proceeds from stock options exercised 1,640 1,808
---------------------------------
Net cash provided by financing activities 207,007 1,367
---------------------------------
Net increase in cash and cash equivalents 19,795 13,257
Cash and cash equivalents- beginning of period 15,141 37,551
---------------------------------
Cash and cash equivalents- end of period $34,936 $50,808
=================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $6,164 $8,221
---------------------------------
Cash paid for interest $3,225 $901
---------------------------------
See notes to unaudited condensed consolidated financial statements
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements are unaudited but, in the
opinion of management, contain all adjustments (which are of a normal recurring
nature) necessary to present fairly the consolidated financial position of The
Dress Barn Inc., and its wholly owned subsidiaries (the "Company") as of January
29, 2005 and July 31, 2004, the consolidated results of its operations for the
thirteen weeks and twenty-six weeks ended January 29, 2005 and January 24, 2004,
and cash flows for the twenty-six weeks ended January 29, 2005. The results of
operations for a thirteen-week or a twenty-six week period may not be indicative
of the results for the entire year. All intercompany amounts and transactions
have been eliminated.
The July 31, 2004 condensed consolidated balance sheet amounts have been
derived from the previously audited Consolidated Balance Sheets of the Company
filed on Form 10-K/A.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant accounting policies and other disclosures necessary for
complete financial statements in conformity with accounting principles generally
accepted in the United States of America have been omitted as such items are
reflected in the Company's audited financial statements and related notes
thereto. Accordingly, these consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's July 31, 2004 Annual Report to Shareholders on Form 10-K/A.
2. Acquisition of Maurices Incorporated
On January 2, 2005, the Company acquired 100% of the outstanding stock of
Maurices Incorporated, a specialty apparel retailer, for a total purchase price
of $332.7 million, net of cash acquired, which included $4.1 million of
transaction fees and is subject to post-closing adjustments. The Company's
condensed consolidated financial statements include Maurices' results of
operations from January 2, 2005. The Company accounted for the acquisition as a
purchase using the accounting standards established in Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations, and, accordingly,
the excess purchase price over the fair market value of the underlying net
assets acquired, of $135.7 million, was allocated to goodwill. The allocation of
the purchase price to assets acquired and liabilities assumed for the Maurices
acquisition was based on preliminary estimates of fair value and may be revised
as additional information concerning such assets and liabilities becomes
available.
The transaction was financed by $118.7 million in cash, the issuance of
$115 million 2.5% Convertible Senior Notes due 2024, and $100 million of
borrowings from a $250 million.
The estimated fair values of assets acquired and liabilities assumed at
January 2, 2005 are as follows:
Dollars in thousands
Purchase Price $332,737
Current assets 7,788
Inventory 33,475
Property, plant, and equipment, net 75,937
Intangibles 111,853
Other non-current assets 2,241
-----------------
Total assets acquired 231,294
-----------------
Total liabilities assumed (34,331)
-----------------
Net assets acquired, net of cash 196,963
-----------------
-----------------
Goodwill $135,774
=================
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," amortization of goodwill and
indefinite life intangible assets is replaced with annual impairment tests. The
Company will perform annual impairment tests to determine whether an impairment
charge related to the carrying value of the Company's recorded goodwill is
necessary.
Other identifiable intangible assets consist of trade names, customer
relationship and proprietary technology. Trade names have an indefinite life and
therefore are not amortized. Customer relationship and proprietary technology
constitute the Company's identifiable intangible assets subject to amortization
which are amortized on a straight-line basis over their useful lives.
Intangible assets were comprised of the following as of January 29, 2005:
Gross carrying Accumulated
amount amortization Net Amount Expected Life
---------------------------------------------------------------------------
Customer Relationship $2,200 $26 $2,174 7 years
Proprietary Technology 3,653 61 3,592 5 years
Trade Name 106,000 - 106,000 Indefinite
----------------- ----------------------------------------
$111,853 $87 $111,766
-------------------------------------------------------------
The following unaudited pro forma information assumes the Maurices
acquisition had occurred on July 26, 2003. The pro forma information, as
presented below, is not indicative of the results that would have been obtained
had the transaction occurred on July 26, 2003, nor is it indicative of the
Company's future results.
(Amounts in millions except per share data)
Thirteen Weeks Ended Twenty-Six Weeks Ended
January 29, January 24, January 29, January 24,
2005 2004 2005 2004
- ------------------------------------------- ----------------- -------------- --------------- -----------------
Pro forma net sales $277.1 $268.9 $563.7 $547.7
Pro forma net income (loss) (3.1) 4.0 3.9 10.3
Pro forma earnings per share:
Basic ($0.10) $0.14 $0.13 $0.35
Diluted ($0.10) $0.13 $0.13 $0.34
3. Restatement of Financial Statements
On February 7, 2005, the Office of the Chief Accountant of the Securities
and Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing its views regarding certain operating
lease-related accounting issues and their application under accounting
principles generally accepted in the United States of America ("GAAP"). In light
of this letter, the Company's management initiated a review of its lease
accounting and determined that its then-current method of accounting for
leasehold improvements funded by landlord incentives or allowances under
operating leases (construction allowances) and its then-current method of
calculating straight-line rent expense for its operating leases was not in
accordance with GAAP. As a result, the Company restated its consolidated
financial statements as of July 31, 2004 and for the thirteen and twenty-six
weeks ended January 24, 2004, in this Quarterly Report.
The Company had historically accounted for construction allowances as
reductions to the related leasehold improvement asset on the consolidated
balance sheets and presented construction allowances received as a reduction in
capital expenditures in investing activities on the consolidated statements of
cash flows. Management determined that Financial Accounting Standards Board
("FASB") Technical Bulletin No. 88-1, "Issues Relating to Accounting for
Leases," requires these allowances to be recorded as a deferred rent liability
on the consolidated balance sheets and allowances received as a component of
operating activities on the consolidated statements of cash flows. Additionally,
this adjustment results in a reclassification of the deferred rent amortization
from "Depreciation and amortization expenses" to "Cost of sales including
occupancy and buying costs" on the consolidated statements of earnings.
The Company had historically recognized its straight-line rent expense for
its operating leases over the lease term generally commencing with the opening
date for the store, which generally coincided with the commencement of the lease
payments per the lease. The store opening date also coincided with the
commencement of business operations, which corresponds to the intended use of
the property. Management re-evaluated FASB Technical Bulletin No. 85-3,
"Accounting for Operating Leases with Scheduled Rent Increases," and determined
that the lease term should commence on the date the Company takes possession of
the leased space for construction purposes, which is generally two months prior
to a store opening date. Furthermore, the Company determined that it should
recognize rent expense on a straight-line basis for rent escalations over
appropriate renewal periods, including option periods where failure to exercise
such options would result in an economic penalty. Excluding tax impacts, the
correction of this accounting requires the Company to record additional deferred
rent in "Other accrued expenses" and "Deferred rent" and to adjust "Retained
earnings" on the condensed consolidated balance sheets as well as to correct
amortization in "Costs of sales including occupancy and buying costs" and
"Depreciation and amortization" on the condensed consolidated statements of
earnings for each of the thirteen and twenty-six weeks ended January 24, 2004.
In addition, the Company corrected certain other balance sheet errors which
resulted in an increase to "Property and equipment" and a corresponding increase
to beginning "Retained earnings", which were included in the cumulative effect
adjustments related to the reversal of an impairment reserve. In addition, the
Company reclassified its provision for impairments and asset disposals from
"Depreciation and Amortization" to "Selling, general and administrative". The
Company also reclassified premiums paid upfront when entering into certain lease
agreements that had been classified as "Property and equipment" to "Other
assets" on July 31, 2004. For the thirteen and twenty-six weeks ended January
24, 2004, the cumulative effect is an increase in earnings of $0.3 million and
$0.3 million, respectively.
Following is a summary of the significant effects of these restatements on
the Company's condensed consolidated balance sheet as of July 31, 2004, as well
as on the Company's consolidated statements of earnings for thirteen and
twenty-six weeks ended in January 24, 2004, and cash flows for the twenty-six
weeks ended in January 24, 2004 (in thousands, except per share data):
Condensed Consolidated Statements of Earnings
---------------------------------------------------------
As previously
For thirteen weeks ended January 24, 2004 reported Adjustments As restated
- --------------------------------------------------------- ---------------------------------------------------------
Cost of sales, including occupancy and buying costs $107,518 ($1,397) $106,121
Gross profit 63,535 1,397 64,932
Selling, general and administrative expenses 50,007 746 50,753
Depreciation & amortization 6,271 164 6,435
Operating income 7,257 487 7,744
Earnings before provision for income taxes 7,102 487 7,589
Provision for Income taxes 2,592 177 2,769
Net earnings 4,510 310 4,820
Earnings per share - basic $0.15 $0.01 $0.16
Earnings per share - diluted $0.15 $0.01 $0.16
=========================================================
As previously
For twenty-six weeks ended January 24, 2004 Reported Adjustments As restated
- ---------------------------------------------------------- --------------- ---------------- ----------------
Cost of sales, including occupancy and buying costs $231,157 ($2,277) $228,880
Gross Profit 132,440 2,277 134,717
Selling, general and administrative expenses 101,714 1,496 103,210
Depreciation & amortization 12,452 260 12,712
Operating income 18,274 521 18,795
Earnings before provision for income taxes 17,680 521 18,201
Income taxes 6,400 189 6,589
Net earnings 11,280 332 11,612
Earnings per share - basic $0.39 $0.01 $0.40
Earnings per share - diluted $0.38 $0.01 $0.39
========================================================
Condensed Consolidated Balance Sheets
-------------------------------------------------------------
As previously
July 31, 2004 Reported Adjustments As restated
- ---------------------------------------------------------- ------------------------------------------- ----------------
Deferred income tax asset $10,583 $4,262 $14,845
Leasehold improvements 60,978 32,311 93,289
Accumulated depreciation and amortization (162,346) (9,898) (172,244)
Property and equipment, net 140,791 22,413 163,204
Other assets 8,149 806 8,955
Total assets 461,835 27,481 489,316
Other accrued expenses 27,089 (2,842) 24,247
Long-term deferred tax liability 1,315 (1,315) 0
Deferred rent 0 40,319 40,319
Total liabilities 200,196 36,162 236,358
Retained earnings 197,438 (8,681) 188,757
Total shareholders' equity 261,639 (8,681) 252,958
Total liabilities and shareholders' equity 461,835 27,481 489,316
=============================================================
Condensed Consolidated Statements of Cash Flows
--------------------------------------------------
As previously
For twenty-six weeks ended January 24, 2004 Reported Adjustments As restated
- ----------------------------------------------------------- --------------------------------------------------
Net cash provided by operating activities $37,713 $3,455 $41,168
Net cash used in investing activities (25,823) (3,455) (29,278)
==================================================
4. Stock Repurchase Program
On March 30, 2000, the Board of Directors authorized a $50 million stock
repurchase program, which was increased to $75 million on April 5, 2001. As of
the date of this filing, the Company had repurchased 2,442,700 shares at an
aggregate purchase price of approximately $26.7 million. During the three months
ended October 30, 2004, 100,000 shares were repurchased under this
authorization. There were no shares repurchased in the second quarter ended
January 29, 2005.
Treasury (Reacquired) shares are retired and treated as authorized but
unissued shares.
5. Earnings Per Share
Basic EPS is based upon the weighted average number of common shares
outstanding and diluted EPS is based upon the weighted average number of common
shares outstanding plus the dilutive effect of common stock equivalents
outstanding during the period. Antidilutive options are excluded from the
earnings per share calculations when the option price exceeds the average market
price of the common shares for the period. The following is a reconciliation of
the denominators of the basic and diluted EPS computations shown on the face of
the accompanying condensed consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
January 29, January 24, January 29, January 24,
Shares in thousands 2005 2004 2005 2004
--------------- -------------- -------------- ---------------
Basic weighted average outstanding shares 29,699 29,308 29,639 29,253
Dilutive effect of options outstanding 792 742 781 662
--------------- -------------- -------------- ---------------
Diluted weighted average shares outstanding 30,491 30,050 30,420 29,915
--------------- -------------- -------------- ---------------
Anti-dilutive options excluded from calculations 125 150 125 337
--------------- -------------- -------------- ---------------
6. Comprehensive Income
The Company's marketable securities and investments are classified as
available for sale securities, and therefore, are carried at fair value, with
unrealized gains and losses reported as a component of other comprehensive
income. Total comprehensive income is composed of net earnings and net
unrealized gains or losses on available for sale securities. The following is a
reconciliation of comprehensive income and net earnings as shown on the face of
the accompanying condensed consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
January 29, January 24, January 29, January 24,
Dollars in thousands 2005 2004 2005 2004
--------------- -------------- -------------- ---------------
(As restated) (As restated)
Net earnings $1,637 $4,820 $8,786 $11,612
Unrealized gain on available for sale securities -- 22 291 107
--------------- -------------- -------------- ---------------
Comprehensive income $1,637 $4,842 $9,077 $11,719
--------------- -------------- -------------- ---------------
The Company sold all of its marketable securities which had unrealized
losses during the second quarter of fiscal 2005, incurring a realized loss of
$1.2 million that is included in "Interest income" on the Condensed Consolidated
Statements of Earnings. At January 29, 2005, the Company had no marketable
securities with an unrealized loss position.
7. Stock Based Compensation
At January 29, 2005, the Company has various stock option plans. The
Company uses the intrinsic value method to account for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, where
compensation expense, if any, is measured as the excess of the market price of
the stock over the exercise price on the measurement date. No compensation
expense is recognized for the Company's option grants that have an exercise
price equal to the market price on the date of grant or for the Company's
Employee Stock Purchase Plan. In accordance with SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123"
("SFAS 148"), the Company discloses the pro forma effects of recording
stock-based employee compensation plans at fair value on net earnings and net
earnings per common share--basic and diluted as if the compensation expense was
recorded in the financial statements.
As of January 29, 2005, the only plan under which the Company can issue
stock options is the 2001 Stock Option Plan. The number of options available for
grant under this Plan are 1,960,000 shares. The Board of Directors has approved
an amended and restated 2001 Plan, effective January 1, 2005, subject to
shareholder approval, authorizing an increase in the number of shares of common
stock that may be awarded under the Plan by 2,500,000 shares, authorizes the
award of restricted stock, and provides that any share of common stock that is
subject to restricted stock shall be counted as three shares for every share
awarded. At January 29, 2005, the Company has issued 95,400 shares of restricted
stock. Restricted stock awards result in the recognition of deferred
compensation. Deferred compensation is shown as a reduction of shareholders'
equity and is amortized to operating expenses over the vesting period of the
stock award.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the option grant dates for awards in
accordance with the accounting provisions of SFAS No. 148 (which does not apply
to awards issued prior to fiscal 1996), the Company's net earnings and earnings
per share would have been reduced to the following pro forma amounts:
Thirteen Weeks Ended Twenty-six Weeks Ended
(in thousands, except per share amounts) January 29, January 24, January 29, January 24,
2005 2004 2005 2004
--------------------------------------------------------------
(As restated) (As restated)
Net earnings as reported $1,637 $4,820 $8,786 $11,612
Add: compensation expense included in net earnings 48 -- 155 --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards net of related tax effects (399) (546) (1,021) (1,061)
--------------------------------------------------------------
Pro forma net earnings $1,286 $4,274 $7,920 $10,551
==============================================================
Earnings per share
Basic - as reported $0.06 $0.16 $0.30 $0.40
--------------------------------------------------------------
Basic - pro forma $0.04 $0.15 $0.27 $0.36
--------------------------------------------------------------
Diluted - as reported $0.05 $0.16 $0.29 $0.39
--------------------------------------------------------------
Diluted - pro forma $0.04 $0.14 $0.26 $0.35
--------------------------------------------------------------
The fair values of the options granted under the Company's fixed stock
option plans were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
January 29, January 24, January 29, January 24,
2005 2004 2005 2004
------------------------------------------------------------
Weighted average risk-free interest rate 3.5% 3.3% 3.5% 3.3%
Weighted average expected life (years) 5.0 5.0 5.0 5.0
Expected volatility of the market price of
the Company's common stock 26.5% 39.1% 26.5% 39.8%
8. Long-Term Debt
On December 15, 2004, the Company issued 2.50% Convertible Senior Notes due
2024 ("Convertible Senior Notes"). The Convertible Senior Notes have a aggregate
principal amount of $115 million and interest is payable on June 15 and December
15 of each year, beginning on June 15, 2005. Beginning with the period
commencing on December 22, 2011 and ending June 14, 2012, and for each of the
six-month periods thereafter commencing on June 15, 2012, the Company is
required to pay contingent interest during the applicable interest period if the
average trading price of the notes on the five trading days ending on the third
day immediately preceding the first day of the applicable interest period equals
or exceeds 120% of the principal amount of the notes. The contingent interest
payable per note within any applicable interest period will equal an annual rate
of 0.25% of the average trading price of a note during the measuring period. The
Company may redeem some or all of the Convertible Senior Notes for cash at any
time on or after December 22, 2011 at a redemption price equal to 100% of the
principal amount of the notes plus accrued interest. Holders may convert their
notes into cash and shares of the Company's common stock, if any, at a
conversion rate of 47.5715 shares per $1,000 principal amount of Convertible
Senior Notes (equal to a conversion price of approximately $21.02 per share),
during specified periods, if the price of the Company's common stock reaches, or
the trading price of the convertible notes falls below, specified thresholds, or
upon the event of certain Company transactions. The number of contingently
issuable shares of the Company's common stock cannot exceed 1.8 million shares.
If the market price of common stock exceeds the conversion price, the Company is
required to use the treasury stock method in calculating diluted earnings per
share for the number of shares to be issued for the excess value. If the market
price of the Company's common stock is less than the conversion price, the notes
will not be included in the calculation of the Company's diluted EPS. At January
29, 2005, the share price was below the conversion price.
On December 14, 2004, the Company entered into a senior credit facility
with a number of banks. The $250 million senior credit facility consists of a
$150 million revolving credit facility and a $100 million term loan. The senior
credit facility will mature five years after it is entered into, subject to
customary rollover and exchange provisions, which may extend the maturity of the
loans under the senior credit facility and the senior exchange note into which
they are converted to up to seven years. In addition to customary financial and
non-financial covenants, the senior credit facility will limit the Company's
ability to use borrowings under that facility to pay any cash payable on a
conversion of the notes and will prohibit the Company from making any cash
payments on the conversion of the notes if a default or event of default has
occurred under that facility without the consent of the lenders under the senior
credit facility. As of the date of this filing, the Company has not borrowed any
funds under the $150 million revolving credit facility.
In connection with the issuance to the Convertible Senior Notes and the
senior credit facility, the Company incurred approximately $3.5 and $4.0
million, respectively, in underwriting costs and professional fees. Such fees
were deferred and included in "Other assets" on the accompanying condensed
consolidated balance sheets at January 29, 2005 and are being amortized to
interest expense over the life of the Notes and the Senior Credit facility,
respectively.
In connection with the purchase of the Suffern facility, Dunnigan Realty,
LLC, ("Dunnigan") in July 2003, borrowed $34 million under a fixed rate mortgage
loan. The Dunnigan Realty, LLC mortgage loan (the "mortgage") is collateralized
by a mortgage lien on the Suffern facility, of which the major portion is the
Company's corporate offices and distribution center. Payments of principal and
interest on the mortgage, a 20-year fully amortizing loan with a fixed interest
rate of 5.33%, are due monthly through July 2023. In connection with the
mortgage, the Company paid approximately $1.7 million in debt issuance costs.
These costs were deferred and included in "Other assets" on the condensed
consolidated balance sheets and are being amortized to interest expense over the
life of the mortgage.
Long term debt consists of the following:
(in thousands)
January 29, July 31,
2005 2004
----------------------------------------------------------------------------------
Dunnigan Realty, LLC mortgage loan $32,511 $33,021
Convertible Senior Notes 115,000 --
Term loan 100,000 --
----------------------------------------------------------------------------------
247,511 33,021
Less: current portion (11,060) (1,033)
----------------------------------------------------------------------------------
Total long-term debt $236,451 $31,988
----------------------------------------------------------------------------------
Scheduled principal maturities of the above debt for the second half of
fiscal 2005 and in each of the next five fiscal years and beyond is as follows:
$5,300, $13,600, $18,600, $23,700, $28,900 and $157,400.
Interest expense relating to the above debt was approximately $0.5 million
and $1.8 million for the thirteen and twenty-six period periods ended January
29, 2005, respectively.
9. Litigation
The Company is involved in various legal proceedings incident to the
ordinary course of business. On May 18, 2000, an action was filed against the
Company seeking compensatory and punitive damages for alleged unfair trade
practices and alleged breach of contract arising out of negotiations for an
acquisition the Company never concluded. The case went to a jury trial in 2003,
and a jury verdict of $30 million of compensatory damages was awarded against
the Company. On July 7, 2003, the court entered a final judgment of
approximately $32 million in compensatory damages and expenses, which is subject
to post-judgment interest. The trial court ruled against the plaintiffs' motion
for any punitive damages or pre-judgment interest.
Based on this judgment, the Company recorded a litigation charge of $32
million in its fiscal 2003 fourth quarter results. The Company believes there is
no merit in the jury verdict and is vigorously pursuing an appeal. Plaintiffs
have cross-appealed seeking an increase in the amount of the judgment. If upon
appeal the judgment is subsequently modified or reversed, the Company will
adjust its litigation charge accordingly. Interest accrues on the unpaid
judgment at the statutory rate of 10% annually which the Company has provided
for at the rate of approximately $800,000 each quarter in its litigation
accrual. In the fourth quarter of fiscal 2004, as required as part of the unpaid
judgment, the Company deposited $38.6 million in an escrow account, utilizing
its operating funds. Such amount was dictated by the court to include the $32
million judgment and accrued interest of $3.3 million, as well as six months of
prefunded interest ($1.5 million) and an additional 5% of the amount due
(including interest) at the time of the funding of such escrow (5% of $36.8
million or $1.8 million), totaling $38.6 million. In January 2005, the Company
deposited additional $.5 million ($0.8 million less interest actually earned
during the period) into the escrow accounts. The escrow account is an interest
bearing account and is included in restricted cash and cash equivalents on the
Company's balance sheet.
The Company continues in settlement discussions regarding the class action
law suit in California as discussed in the Company's Annual Report on Form
10-K/A for the fiscal year ended July 31, 2004.
Except for the above cases, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business,
to which the Company or any of its subsidiaries is a party or of which any of
their property is the subject.
10. Recent Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force Issue No. 03-1, or EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 provides guidance for identifying impaired investments and new disclosure
requirements for investments that are deemed to be temporarily impaired. On
September 30, 2004, the FASB issued a final staff position EITF Issue 03-1-1
that delays the effective date for the measurement and recognition guidance
included in paragraphs 10 through 20 of EITF 03-1. Quantitative and qualitative
disclosures required by EITF 03-1 remain effective for the Company's fiscal year
ending 2005. The Company does not believe the impact of adoption of this EITF
consensus will be significant to the Company's overall results of operations or
financial position.
In September 2004, the Emerging Issues Task Force reached a final consensus
on EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share" ("EITF 04-8"), to change the existing accounting for
convertible debt within the dilutive earnings per share calculation. The EITF
concluded the common stock underlying contingent convertible debt instruments
should be included in diluted net income per share computations using the
if-converted method regardless of whether the market price trigger or other
contingent feature has been met. The EITF concluded that this new treatment
should be applied retroactively, with the result that issuers of securities
would be required to restate previously issued diluted earning per share. In
October 2004, The FASB approved EITF 04-8 and established an implementation date
of December 15, 2004. The Company does not believe the impact of adoption of
this EITF consensus will be significant to the Company's overall results of
operations or financial position.
11. Segments
The Company has aggregated its Dress Barn and Maurices brands based on the
aggregation criteria outlined in SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", which states that two or more operating
segments may be aggregated into a single operating segment if the segments have
similar economic characteristics, similar product, similar production process,
similar clients, and similar methods of distribution.
Dress Barn and Maurices have similar economic characteristics and similar
operating, financial and competitive risks. Dress Barn and Maurices are similar
in nature of product, as they offer apparel and clothing accessories. The
merchandise inventory for Dress Barn and Maurices is sourced from many of the
same countries and some of the same vendors, using similar production processes.
Neither Dress Barn nor Maurices performs its own manufacturing, but buys all its
merchandise from third parties. Dress Barn and Maurices clients have similar
characteristics; retail clothing customers, primarily women looking for apparel
that reflects style and fashion made of good quality offered at competitive
prices. In addition, Dress Barn and Maurices merchandise is distributed to
stores in a similar manner and sold to customers through the Company's retail
stores located primarily in strip shopping centers.
12. Subsidiary Guarantor
The Dress Barn, Inc.'s (The "Parent Company") $250 million senior credit
facility, which consists of a $100 million term loan and a $150 million
revolving credit facility, and the Convertible Senior Notes contain provisions
that all obligations under the Credit Agreement are unconditionally guaranteed
by each existing and subsequently acquired or organized subsidiary of The Dress
Barn, Inc., except for Dunnigan Realty LLC.
The following supplemental financial information sets forth, on a
consolidating basis, the condensed consolidating balance sheet, the condensed
consolidating statements of earnings (loss) and cash flows for the Parent
Company, for the other Guarantor Subsidiaries and for the Company's
non-guarantor subsidiaries (the "Non-guarantor Subsidiaries") for the financial
statements presented in our interim condensed financial statements for the
periods subsequent to the issuance of the $250 million senior credit facility
and the Convertible Senior Notes. The intercompany investment for each
subsidiary is recorded by its parent in Other Assets on the condensed
consolidated balance sheets.
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
as of January 29, 2005
(Amounts in thousands)
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $27,018 $6,569 $1,349 $ - $34,936
Restricted cash and investments 39,461 - - - 39,461
Marketable securities and investments 603 5,121 2 - 5,726
Merchandise inventories 108,515 37,844 - - 146,359
Deferred tax asset 13,691 - - - 13,691
Prepaid expenses and other 8,129 8,967 578 (4,378) 13,296
----------------------------------------------------------------------------------------
Total Current Assets 197,417 58,501 1,929 (4,378) 253,469
----------------------------------------------------------------------------------------
Property and Equipment, net 119,147 74,803 41,911 - 235,861
Intangible assets, net - 111,766 - - 111,766
Goodwill - 135,774 - - 135,774
Other Assets 353,800 4,520 (9,057) (330,432) 18,831
----------------------------------------------------------------------------------------
TOTAL ASSETS $670,364 $385,364 $34,783 ($334,810) $755,701
========================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
as of January 29, 2005
(Amounts in thousands)
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $62,614 $26,680 $ - $ - $89,294
Accrued salaries, wages and related
expenses 22,068 10,467 - - -
Litigation accrual 37,736 - - - -
Other accrued expenses 29,079 1,941 502 - -
Customer credits 12,677 - - 12,677
Income taxes payable - - - - -
Current portion of long-term debt 10,000 - 1,060 - 11,060
------------------------------------------------------------------------------
Total Current Liabilities 161,497 51,765 1,562 - -
-------------------------------------------------------------------------------
Long-Term Debt 205,000 - - - -
-------------------------------------------------------------------------------
Deferred rent 41,401 - - - -
-------------------------------------------------------------------------------
Long-Term Deferred Tax Liability - - - - -
------------------------------------------------------------------------------
Commitments and Contingencies -
------------------------------------------------------------------------------
Total Liabilities 407,898 51,765 33,013 - -
------------------------------------------------------------------------------
Shareholders' Equity 262,466 333,599 1,770 (334,810) 263,025
------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $670,364 $385,364 $34,783 ($334,810) $755,701
==============================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
for the Thirteen Weeks Ended January 29, 2005
(Amounts in thousands)
-----------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
-----------------------------------------------------------------------------------------
Net sales $178,743 $21,395 $1,543 $ (1,543) $200,138
Cost of sales, including
Occupancy and buying costs 111,114 14,422 466 (466) 125,536
-----------------------------------------------------------------------------------------
Gross profit 67,629 6,973 1,077 (1,077) 74,602
Selling, general and
administrative expenses 55,511 6,786 271 - 62,568
Depreciation and amortization 5,867 1,424 454 - 7,745
-----------------------------------------------------------------------------------------
Operating income (loss) 6,251 (1,237) 352 (1,077) 4,289
Interest income 6 45 5 - 56
Interest expense (1,674) (2) (472) - (2,148)
Other income (695) - - 1,077 382
-----------------------------------------------------------------------------------------
Earnings (loss) before provision
for income taxes 3,888 (1,194) (115) - 2,579
Provision (benefit) for
income taxes 1,520 (575) (3) - 942
-----------------------------------------------------------------------------------------
Net earnings (loss) $2,368 $ (619) $ (112) $ - $1,637
=========================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
for the Twenty-six Weeks Ended January 29, 2005
(Amounts in thousands)
----------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------
Net sales $375,859 $21,395 $3,920 $ (3,920) $397,254
Cost of sales, including
Occupancy and buying costs 235,526 14,422 1,510 (1,510) 249,948
----------------------------------------------------------------------------------
Gross profit 140,333 6,973 2,410 (2,410) 147,306
Selling, general and
administrative expenses 110,711 6,616 374 - 117,701
Depreciation and amortization 11,569 1,424 908 - 13,901
----------------------------------------------------------------------------------
Operating income (loss) 18,053 (1,067) 1,128 (2,410) 15,704
Interest income 705 68 5 - 778
Interest expense (2,476) - (932) - (3,408)
Other income (1,647) - - 2,410 763
----------------------------------------------------------------------------------
Earnings (loss) before provision for
income taxes 14,635 (999) 201 - 13,837
Provision (benefit) for income taxes 5,630 (575) (4) - 5,051
----------------------------------------------------------------------------------
Net earnings (loss) $9,005 $ (424) $205 $ - $8,786
==================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
for the Twenty-six Weeks Ended January 29, 2005
(Dollars in thousands)
-----------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
-----------------------------------------------------------------------------
Operating Activities:
Net earnings (loss) $9,005 $ (424) $205 $ - $8,786
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 11,569 1,424 908 - 13,901
Provision for impairment and asset disposals 1,512 - - - 1,512
Deferred income tax expense 1,154 - - - 1,154
Increase in deferred rent 1,082 - - - 1,082
Other 1,706 - - - 1,706
Changes in assets and liabilities:
Decrease in restricted cash (800) - - (800)
(Increase) decrease in merchandise inventories 8,396 (4,368) - - 4,028
Decrease (increase) in prepaid expenses and other 581 2,943 (134) - 3,390
(Increase) decrease in other assets 6,817 (2,399) 93 (4,377) 134
Increase (Decrease) in accounts payable- trade (4,161) 8,622 - - 4,461
Increase in accrued salaries, wages
and related expenses 5,478 - - - 5,478
Increase in litigation accrual 1,608 - - - 1,608
(Decrease) increase in other accrued expenses 1,630 (88) (243) - 1,299
(Decrease) Increase in customer credits (3,528) 2,645 - - (883)
(Decrease) in income taxes payable (4,973) (575) - - (5,548)
-----------------------------------------------------------------------------
Total adjustments 28,071 8,204 624 (4,377) 32,522
-----------------------------------------------------------------------------
Net cash provided by operating activities $37,076 $7,780 $829 $ (4,377) $41,308
-----------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
for the Twenty-six Weeks Ended January 29, 2005
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisition of Maurices Inc., net of
cash acquired $ (333,719) $ - $ - $982 $ (332,737)
Purchases of property and equipment (11,915) (131) - - (12,046)
Sales and maturities of marketable
securities and investments 514,120 1,743 - - 515,863
Purchases of marketable securities
and investments (399,598) - (2) - (399,600)
-----------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (231,112) 1,612 (2) 982 (228,520)
-----------------------------------------------------------------------------
Financing Activities:
Proceeds from long-term debt 215,000 - - - 215,000
Payment of debt issuance costs (7,580) - - - (7,580)
Repayments of long-term debt (1) - (509) - (510)
Intercompany receivable from parent - (4,377) - 4,377 -
Purchase of treasury stock (1,584) - - - (1,584)
Proceeds from Employee Stock Purchase Plan 41 - - - 41
Proceeds from stock options exercised 1,640 - - - 1,640
-----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 207,516 (4,377) (509) 4,377 207,007
-----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 13,480 5,015 318 982 19,795
Cash and cash equivalents- beginning of period 13,538 1,554 1,031 (982) 15,141
-----------------------------------------------------------------------------
Cash and cash equivalents- end of period $27,018 $6,569 $1,349 $ - $34,936
-----------------------------------------------------------------------------
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations are based upon the Company's Unaudited Condensed Consolidated
Financial Statements and should be read in conjunction with those statements,
the notes thereto and our Annual Report on Form 10-K/A for the fiscal year ended
July 31, 2004.
On January 2, 2005, the Company acquired 100% of the outstanding stock of
Maurices Incorporated, a specialty apparel retailer, for $332.7 million, net of
cash acquired, including $4.1 million of transaction fees, and is subject to
post-closing adjustments. The Company's condensed consolidated financial
statements include Maurices' results of operations from January 2, 2005. The
Company accounted for the acquisition as a purchase using the accounting
standards established in Statement of Financial Accounting Standards ("SFAS")
No. 141, Business Combinations, and, accordingly, the excess purchase price over
the fair market value of the underlying net assets acquired net of cash, of
$135.7 million was allocated to goodwill. The accounting rules require that the
goodwill arising from the purchase method not be amortized. However, it must be
tested for impairment at least annually. The allocation of the purchase price to
assets acquired and liabilities assumed for the Maurices acquisition was based
on preliminary estimates of fair value (performed by an independent appraiser)
and may be revised as additional information concerning such assets and
liabilities becomes available and final purchase price information is available.
The transaction was financed by $118.7 in cash, the issuance of $115
million 2.5% convertible senior notes due 2024, and $100 million from borrowings
under a $250 million senior credit facility (consisting of a $100 million term
loan, and a $150 million revolving credit line under which no funds were drawn).
Please refer to note 2 of Notes to Condensed Consolidated Financial Statements
for a discussion of the Maurices acquisition.
Maurices is a specialty apparel retailer whose stores are concentrated in
small markets in the United States. Maurices offers moderately priced,
up-to-date fashions to its target customers, female and male teens, college
students and young adults. The Company believes that Maurices' target customers
are an especially attractive group for specialty retailers, since the group is
growing rapidly, has a substantial amount of discretionary cash and spends more
on apparel than most other demographic groups. As of January 29, 2005, Maurices
operated 473 stores in 39 states, primarily concentrated in small and metro
fringe markets in the United States. Approximately 43% of Maurices stores are
located in strip centers, 39% are located in small malls and the remaining 18%
in regional malls. Historically, Maurices' sales of women's apparel accounted
for approximately 73% of their net sales, while women's accessories (including
jewelry, watches and shoes), and men's apparel accounted for 18% and 9%,
respectively.
Maurices was founded in 1931 as single store operation for women's fashion
in Duluth, Minnesota. By the mid 1970's, Maurices had expanded to a chain of 175
stores. In 1978, Maurices was acquired by American Retail Group, which has
expanded Maurices to its current size. Maurices' corporate offices are located
in Duluth, Minnesota and its distribution center is located in Des Moines, Iowa.
Restatement of Financial Statements
On February 7, 2005, the Office of the Chief Accountant of the Securities
and Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing its views regarding certain operating
lease-related accounting issues and their application under accounting
principles generally accepted in the United States of America ("GAAP"). In light
of this letter, the Company's management initiated a review of its lease
accounting and determined that its then-current method of accounting for
leasehold improvements funded by landlord incentives or allowances under
operating leases (construction allowances) and its then-current method of
calculating straight-line rent expense for its operating leases was not in
accordance with GAAP. As a result, the Company restated its consolidated
financial statements as of July 31, 2004 and for the thirteen and twenty-six
weeks ended January 24, 2004, in this Quarterly Report.
The Company had historically accounted for construction allowances as
reductions to the related leasehold improvement asset on the consolidated
balance sheets and presented construction allowances received as a reduction in
capital expenditures in investing activities on the consolidated statements of
cash flows. Management determined that Financial Accounting Standards Board
("FASB") Technical Bulletin No. 88-1, "Issues Relating to Accounting for
Leases," requires these allowances to be recorded as a deferred rent liability
on the consolidated balance sheets and allowances received as a component of
operating activities on the consolidated statements of cash flows. Additionally,
this adjustment results in a reclassification of the deferred rent amortization
from "Depreciation and amortization expenses" to "Cost of sales including
occupancy and buying costs" on the consolidated statements of earnings.
The Company had historically recognized its straight-line rent expense for
its operating leases over the lease term generally commencing with the opening
date for the store, which generally coincided with the commencement of the lease
payments per the lease. The store opening date also coincided with the
commencement of business operations, which corresponds to the intended use of
the property. Management re-evaluated FASB Technical Bulletin No. 85-3,
"Accounting for Operating Leases with Scheduled Rent Increases," and determined
that the lease term should commence on the date the Company takes possession of
the leased space for construction purposes, which is generally two months prior
to a store opening date. Furthermore, the Company determined that it should
recognize rent expense on a straight-line basis for rent escalations over
appropriate renewal periods, including option periods where failure to exercise
such options would result in an economic penalty. Excluding tax impacts, the
correction of this accounting requires the Company to record additional deferred
rent in "Other accrued expenses" and "Deferred rent" and to adjust "Retained
earnings" on the condensed consolidated balance sheets as well as to correct
amortization in "Costs of sales including occupancy and buying costs" and
"Depreciation and amortization" on the condensed consolidated statements of
earnings for each of the thirteen and twenty-six weeks ended January 24, 2004.
In addition, the Company corrected certain other balance sheet errors which
resulted in an increase to "Property and equipment" and a corresponding increase
to beginning "Retained earnings", which were included in the cumulative effect
adjustment, related to the reversal of an impairment reserve. In addition, the
Company reclassified its provision for impairments and asset disposals from
"Depreciation and Amortization" to "Selling, general and administrative". Also
the Company reclassified premiums paid upfront when entering into certain lease
agreements that had been classified as "Property and equipment" to "Other
assets" in July 31, 2004. For the thirteen and twenty-six weeks ended January
24, 2004, the cumulative effect is an increase of earnings of $0.3 million and
$0.3 million, respectively.
See Note 3 to the unaudited condensed consolidated financial statements of
this Report for a summary of the effects of these restatements on the Company's
condensed consolidated balance sheet as of July 31, 2004, as well as on the
Company's condensed consolidated statements of earnings for the thirteen and
twenty-six weeks ended January 24, 2004, and on the cash flows for the
twenty-six weeks ended January 24, 2004. This Management's Discussion and
Analysis gives effect to these corrections.
Management Overview
This Management Overview section of Management's Discussion and Analysis of
Financial Condition and Results of Operations provides a high level summary of
the more detailed information elsewhere in this quarterly Report and an overview
to put this information in context. This section is also an introduction to the
discussion and analysis that follows. Accordingly, it necessarily omits details
that appear elsewhere in this quarterly Report. It should not be relied upon
separately from the balance of this quarterly Report . The retail environment
remains very competitive. With the acquisition of Maurices, the Company has
diversified its core business and believes it has strengthened its foundation
for future growth. The addition of Maurices will allow the Company to broaden
its demographic reach and diversify its retail base. With this broader
foundation, the Company expects to continue its strategy of opening new stores
while closing under-performing locations. Store expansion will focus on both
expanding in the Company's major trading markets and developing and expanding
into new markets. The Company believes that the addition of Maurices will create
more synergies that will increase profitability. The Company is currently in the
process of implementing an integration plan that will result in implementing
best practices across the entire Company.
In connection with the acquisition of Maurices, the Board of Directors
adopted, subject to shareholder approval, amendments to the Company's current
stock option plan which: permits the Company to make awards of restricted stock;
increases by 2,500,000 the number of shares of stock; limits the number of
shares of common stock which may eventually be issued under the plan; and
provides that every share of restricted stock awarded shall count as three
shares against the number of common stock which may eventually be issued under
the plan.
Management uses a number of key indicators of financial condition and
operating performance to evaluate the performance of the Company's business,
including the following:
Thirteen Weeks Ended Twenty-Six Weeks Ended
January 29, January 24, January 29, January 24,
2005 2004 2005 2004
---- ----- ---- ---- ---- ---- ----
Net sales growth 17.0% 2.2% 9.3% 2.9%
Same store sales growth 2.4% -0.9% 1.6% -0.3%
Merchandise margins 55.0% 55.1% 54.9% 55.1%
Average Square footage growth (1) 20.8% 3.2% 14.4% 3.5%
Total store count (1) 1,248 774 1,248 774
Diluted earnings per share $0.05 $0.16 $0.29 $0.39
S,G &A as a percentage of sales 31.3% 29.7% 29.6% 28.4%
Capital expenditures (in millions) $4.6 $5.0 $12.0 $12.8
(1) Increase in square footage growth and store count due to acquisition of
Maurices on January 2, 2005
The Company's methodology for determining same store sales is calculated
based on the sales of stores open throughout the full period and throughout the
full prior period (including stores relocated within the same shopping center
and stores with minor square footage additions). If a single-format store is
converted into a combo store, the additional sales from the incremental format
are not included in the calculation of same store sales. The determination of
which stores are included in the same store sales calculation only changes at
the beginning of each fiscal year except for stores that close during the fiscal
year which are excluded from same store sales beginning with the fiscal month
the store actually closes.
The Company includes in its cost of sales line item all costs of
merchandise (net of purchase discounts and vendor allowances), freight on
inbound, outbound and internally transferred merchandise, merchandise
acquisition costs, (primarily commissions and import fees), occupancy costs
excluding depreciation and all costs associated with the buying and distribution
functions. The Company's cost of sales and gross profit may not be comparable to
those of other entities, since some entities include all costs related to their
distribution network and all buying and occupancy costs in their cost of sales,
while other entities such as the Company exclude a portion of these expenses
from cost of sales and include them in selling, general and administrative
expenses or depreciation.
Results of Operations
The following table sets forth the percentage change in dollars from last
year's comparable periods for the thirteen and twenty-six week periods ended
January 29, 2005, and the percentage of net sales for each component of the
condensed Consolidated Statements of Earnings for each of the periods presented:
(TY= this year, LY=last year)
Thirteen Weeks Twenty-Six Weeks
--------------- ----------------
% Change % of Sales % Change % of Sales
---------- ----------
from L/Y T/Y L/Y from L/Y T/Y L/Y
-------- --- --- -------- --- ---
Net sales 17.0% 9.3%
Cost of sales, including
occupancy & buying 18.3% 62.7% 62.0% 9.2% 62.9% 62.9%
Gross profit 14.9% 37.3% 38.0% 9.3% 37.1% 37.1%
Selling, general and
admin. expenses 23.3% 31.3% 29.7% 14.0% 29.6% 28.4%
Depreciation and amortization 20.3% 3.9% 3.8% 9.4% 3.5% 3.5%
Operating income -44.6% 2.1% 4.5% -16.4% 4.0% 5.2%
Interest income -91.8% --% 0.4% -35.9% 0.2% 0.3%
Interest expense 76.2% -1.1% -0.7% 32.6% -0.9% -0.7%
Other income -- 0.2% 0.2% -- 0.2% 0.2%
Earnings before income taxes -66.0% 1.3% 4.4% -24.0% 3.5% 5.0%
Net earnings -66.0% 0.8% 2.8% -24.3% 2.2% 3.2%
Net sales for the thirteen weeks ended January 29, 2005 (the "second
quarter") increased by 17.0% to $200.1 million from $ 171.1 million for the
thirteen weeks ended January 24, 2004 (the "prior period"). Net sales for the
twenty-six weeks ended January 29, 2005 (the "six months") increased by 9.3% to
$397.3 million from $363.6 million in the twenty-six weeks ended January 24,
2004 ("last year"). The sales increase for both periods is primarily due a 2%
increase in same store sales, sales from new and noncomp stores and the
inclusion of sales of Maurices from its acquisition on January 2, 2005.
The Company's positive same store sales momentum has continued into
February and early March for both Dress Barn and Maurices with a strong early
selling of the spring transitional merchandise. The Company believes that this
trend is a result of offering merchandise that includes more fashion and color
that is more appealing to its customers.
As of January 29, 2005, the Company's total selling square footage was
approximately 42% higher than January 24, 2004, primarily as a result of the
acquisition of 477 Maurices stores, on January 2, 2005. In addition, during the
six months the Company opened 18 new stores, converted 1 single-format store to
a combination Dress Barn/Dress Barn Woman ("DB/DBW combo store") and closed 23
stores. The majority of the Company's store openings have generally occurred in
the first and third fiscal quarters, while the majority of store closings have
generally occurred in the second and fourth fiscal quarters. Maurices store
openings and closings follow the same general pattern. As of January 29, 2005,
the Company had 1,248 stores in operation, (174 Dress Barn stores, 50 Dress Barn
Woman stores, 551 DB/DBW combo stores, and 473 Maurices stores), versus 774
stores in operation as of January 24, 2004 (183 Dress Barn stores, 55 Dress Barn
Woman stores and 536 DB/DBW combo stores).
Gross profit ("GP", which represents net sales less cost of goods sold,
including occupancy and buying costs) for the second quarter increased by 14.9%
to $74.6 million, or 37.3% of net sales, from $64.9 million, or 38.0% of net
sales, for the prior period. For the six months, gross profit increased 9.3%, to
$147.3 million, or 37.1% of net sales, from $134.7 million, or 37.1 % of net
sales, for the prior six-month period. The decrease in GP as a percentage of
sales for the second quarter was a result of slightly higher markdowns for the
period and the inclusion of Maurices' January GP for January. For the six month
period, GP as a percentage of sales was unchanged at 37.1% of sales.
Selling, general and administrative (SG&A) expenses increased by 23.3% to
$62.6 million, or 31.3% of net sales, in the second quarter as compared to $50.7
million, or 29.7% of net sales, in the prior period. For the six months, SG&A
expenses increased by 14.0% to $117.7 million, or 29.6% of net sales, versus
$103.2 million, or 28.4% of net sales, in the comparable six-month period. The
dollar increase in SG&A for both the second quarter and the six months was
primarily due to the inclusion of Maurices' SG&A expenses for the month of
January, higher store operating costs (primarily salaries, related payroll
taxes, and benefits) along with increases in professional fees (primarily
related to the compliance costs in connection with the internal control
attestations mandated by the Sarbanes-Oxley Act of 2002). The Company currently
anticipates that SG&A expenses in the second half of fiscal 2005 will continue
trend higher as a percentage of sales primarily due to continued Sarbanes-Oxley
compliance costs and other professional fees. As previously mentioned, the
Company is in the process implementing an integration plan for Maurices that
will result in implementing best practices across the entire Company.
Depreciation increased to $7.7 million in the second quarter from $6.4
million in the prior period. For the six months, depreciation expense increased
to $13.9 million from $12.7 million last year. The six month increase in
depreciation expense is primarily due to the additional depreciation for
Maurices for the month of January 2005. Depreciation will be impacted by the
additional depreciation of Maurices' fixed assets.
Interest income decreased 91.8% to $0.06 million in the second quarter and
decreased 35.9% to $0.8 million in the six months versus last year's $0.7
million and $1.2 million, respectively. These decreases were primarily due to
the reductions in investment funds that were used to partially fund the
acquisition of Maurices in January 2005. This reduction in investment funds will
negatively impact interest income for the remainder of the fiscal year.
Interest expense increased 76.2% to $2.1 million in the second quarter and
increased 32.6% to $3.4 million in the six months versus last year's $1.2
million and $2.6 million, respectively. The increase is primarily due to the
additional interest expense incurred for the 2.5% Convertible Senior Notes
issued in December 2004 and the $100 million term loan funded January 3, 2005,
the proceeds of which were used to partially fund the acquisition of Maurices.
Other income represents rental income that Dunnigan Realty, LLC, a wholly
owned consolidated subsidiary of the Company, receives from the two unaffiliated
tenants in the Suffern facility. That square footage is 100% leased through
2012. Intercompany rentals between the Company and Dunnigan Realty, LLC are
eliminated in consolidation.
During the second quarter of fiscal 2005 and 2004, the effective tax rate
was 36.5%. The Company anticipates the 36.5% rate will remain in effect for the
remainder of fiscal 2005.
Principally as a result of the above factors, net income for the second
quarter was $1.6 million, or 0.8% of net sales, a decrease of 66.0% from $4.8
million, or 2.8% of net sales, in the prior period. Net income for the six
months decreased 24.3% to $8.8 million, or 2.2% of net sales, versus $11.6
million, or 3.2% of net sales, for the prior six-month period.
Critical Accounting Policies and Estimates
Management has determined that the Company's most critical accounting
policies are those related to revenue recognition, merchandise inventories,
long-lived assets, insurance reserves, claims and contingencies, litigation,
operating leases, income taxes, sales returns and stock-based employee
compensation. The Company continues to monitor its accounting policies to ensure
proper application. There have been no changes to these policies as discussed in
the Company's Annual Report on Form 10-K/A for the fiscal year ended July 31,
2004. With the acquisition of Maurices in the second fiscal quarter 2005,
management has determined that its accounting policy relating to goodwill and
intangible assets is also a critical accounting policy. The Company's accounting
policy is in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," whereby amortization
of goodwill and indefinite life intangible assets is replaced with annual
impairment tests. The Company will perform annual impairment tests to determine
whether an impairment charge related to the carrying value of the Company's
recorded goodwill and intangible assets is necessary.
Liquidity and Capital Resources
Net cash provided by operations was $41.3 million for the six months
compared with $41.2 million during last year's comparable period. Cash flows
from operating activities for the period were primarily generated by income from
operations, adjustments for depreciation and amortization and changes in working
capital account balances, specifically the decrease in merchandise inventories
(related to Dress Barn), increase in accrued expenses and accounts payable,
decrease in prepaid assets, offset by increases in other assets and decrease in
income taxes payable.
During the six months, the Company invested $332.7 million in its
acquisition of Maurices. This investment was funded from the issuance in of $115
million of Convertible Senior Notes, a $100 million term loan in connection with
the Company's $250 million senior credit facility, and from the sale of
marketable securities.
Except for the financing of the purchase of the Company's Suffern facility
with a 20-year fixed-rate mortgage, the Company's balance sheet had been debt
free, with the Company funding all of its capital needs with internally
generated funds. The acquisition of Maurices has required the Company to
leverage its balance sheet by liquidating its marketable securities, issuing
$115 million of its Convertible Senior Notes and establishing a $250 million
senior credit facility with a group of banks. The senior credit facility allowed
the Company to borrow $100 million under a term loan and provides a $150 million
revolving line of credit which gives the Company ample capacity to fund any
short term working capital needs that may arise in the operation of its expanded
business. The Company believes that its cash, cash equivalents, short-term
investments, together with cash flow from operations, along with the senior
credit facility mentioned above, will be adequate to fund the Company's fiscal
2005 planned capital expenditures and all other operating requirements and other
proposed or contemplated expenditures. As of March 2005 the Company has not
utilized the revolving credit facility. Scheduled principal maturities of the
above debt are as follows: $5.3 million, $13.6 million, $18.6 million, $23.7
million, $28.9 million and $157.4 million for the remainder of fiscal 2005 and
for fiscal years 2006, 2007, 2008, 2009, and 2010 and thereafter, respectively.
In addition to the Maurices acquisition, the Company invested $12.0 million
in capital expenditures for the six months ended January 29, 2005 as compared to
$12.9 million in the prior six month period. The Company plans to invest
approximately $20 million in capital expenditures during the last six months of
fiscal year 2005.
The Company does not have any off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities. In the normal course
of its business, the Company enters into operating leases for its store
locations and utilizes letters of credit principally for the importation of
merchandise. The Company does not have any undisclosed material transactions or
commitments involving related persons or entities.
Dunnigan Realty, LLC receives rental income and reimbursement for taxes and
common area maintenance charges from the Company and two additional tenants that
occupy the Suffern facility that are not affiliated with the Company. These
unaffiliated rental payments are more than sufficient to cover the mortgage
payments and planned capital and maintenance expenditures for the Suffern
facility.
Seasonality
The Company has historically experienced substantially lower earnings in
its second fiscal quarter ending in January than during its other three fiscal
quarters, reflecting the intense promotional atmosphere that has characterized
the Christmas shopping season in recent years. Management expects that its
future second fiscal quarters will be positively impacted with the inclusion of
Maurices, since Maurices has historically experienced a relatively more
profitable Christmas shopping season. In addition, the Company's quarterly
results of operations may fluctuate materially depending on, among other things,
increases or decreases in comparable store sales, adverse weather conditions,
shifts in timing of certain holidays, the timing of new store openings, the
promotional activities of other retailers, net sales contributed by new stores
and changes in the Company's merchandise mix.
Forward-Looking Statements and Factors Affecting Future Performance
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
reflect the Company's current views with respect to future events and financial
performance. The Company's actual results of operations and future financial
condition may differ materially from those expressed or implied in any such
forward looking statements as a result of certain factors set forth in the
Company's Annual Report on Form 10-K/A for its fiscal year ended July 31, 2004.
Item 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's portfolio of investments consisting of cash, cash equivalents
and marketable securities can be affected by changes in market interest rates.
The escrow account referred to in Footnote 9 is invested in short term money
market instruments. The remainder of the marketable securities in the portfolio
consists primarily of municipal bonds that can readily be converted to cash.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, are principally bank deposits and short-term money-market
investments. Cash and cash equivalents are deposited with high credit quality
financial institutions. Short-term investments principally consist of triple A
or double A rated instruments. The carrying amounts of cash, cash equivalents,
short-term investments and accounts payable approximate fair value because of
the short-term nature and maturity of such instruments.
Currently, the Company maintains virtually all of its cash and investments
in financial instruments with original maturity dates of three months or less.
These financial instruments are subject to interest rate risk and may decline in
value if interest rates increase. The Company estimates that a change of 100
basis points in interest rates would have no impact in the fair value of its
cash and investments.
On December 15, 2004, the Company issued $115 million of Convertible Senior
Notes. As the Convertible Senior Notes bear interest at a fixed rate, the
Company's results of operations would not be affected by interest rate changes.
The Company also secured a $250 million senior credit facility with a group of
banks. Under that senior credit facility, the Company has borrowed $100 million
under a variable rate term loan and has available a revolving credit facility
with borrowings up to $150 million at a variable rate. At January 29, 2005, the
Company had the $100 million outstanding term loan and had no borrowings under
the revolving credit facility. An increase of 100 basis points in interest rates
for the term loan would equal $1 million of interest expense on an annual basis.
Accordingly, the Company does not believe that there is any material market
risk exposure with respect to derivative or other financial instruments that
would require disclosure under this item.
A discussion of the Company's accounting policies for financial instruments
and further disclosures relating to financial instruments are included in the
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements in the Company's Form 10-K/A for the year ended July 31,
2004.
Item 4 -- CONTROLS AND PROCEDURES
During the first six months of fiscal 2005, there were no changes in the
Company's internal control over financial reporting that materially affected or
are reasonably likely to materially affect internal control over financial
reporting.
However, on February 7, 2005, the Office of the Chief Accountant of the
Securities and Exchange Commission ("SEC") issued a letter to the American
Institute of Certified Public Accountants expressing its views regarding certain
operating lease-related accounting issues and their application under accounting
principles generally accepted in the United States of America ("GAAP"). In light
of this letter, the Company's management initiated a review of its lease
accounting and determined that its then-current method of accounting for
leasehold improvements funded by landlord incentives or allowances under
operating leases (construction allowances) and its then-current method of
calculating straight-line rent expense for its operating leases was not in
accordance with GAAP, and that a review of all lease-related accounting
practices was underway.
In a meeting with the Company's management and its independent registered
public accountants, management determined that the Company's accounting for
construction allowances and rent escalations was incorrect. Management
determined that the Company's audited consolidated financial statements for the
years ended July 31, 2004, July 26, 2003, and July 27, 2002 should be restated.
In addition, the Company reported on Form 8-K that such financial statements
filed in its Annual Report on Form 10-K for the year ended July 31, 2004 and its
quarterly report on Form 10-Q for the quarter ended October 30, 2004 should no
longer be relied upon.
Based on the definition of "material weakness" in the Public Company
Accounting Oversight Board's Auditing Standard No. 2, An Audit of Internal
Control Over Financial Reporting Performed in Conjunction With an Audit of
Financial Statements, restatements in prior filings with the SEC is a strong
indicator of the existence of a "material weakness" in the design or operation
of internal control over financial reporting in the Company's store lease
accounting practices. Based on that, management concluded that a material
weakness existed in the Company's internal control over financial reporting due
to its store lease accounting practices, and disclosed this to the Audit
Committee and to the independent registered public accountants. The Company is
in the process of remediating its internal control over financial reporting in
it's store lease accounting practices by conducting a review of its internal
controls related to operating leases and correcting its method of accounting for
construction allowances.
The Company also carried out an evaluation, under the supervision and with
the participation of the Company's management, including the chief executive
officer and the chief financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15 (e) under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). Based upon that evaluation, which included the
matter discussed above, the Company's chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were not effective, due to in its store lease accounting practices,
discussed above, as of the end of the period covered by this Report (March 21,
2005), in ensuring that material information relating to The Dress Barn, Inc.,
including its consolidated subsidiaries, required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
At the end of fiscal 2005, Section 404 of the Sarbanes-Oxley Act will
require the Company's management to provide an assessment of the effectiveness
of the Company's internal control over financial reporting, and the Company's
independent registered public accountants will be required to audit management's
assessment. The Company is in the process of performing the system and process
documentation, evaluation and testing required for management to make this
assessment and for its independent registered public accountants to provide
their attestation report. The Company has not completed this process or its
assessment, and this process will require significant amounts of management time
and resources. In the course of evaluation and testing, management may identify
deficiencies that will need to be addressed and remediated.
The Company has adopted a Code of Ethics for the Chief Executive Officer
and Senior Financial Officers. The Code of Ethics for the Chief Executive
Officer and Senior Financial Officers is posted on the company's website,
www.dressbarn.com (under the "Governance" caption) and was included as Exhibit
14 to the Company's Annual Report on Form 10-K/A for its fiscal year ended July
31, 2004. The Company intends to satisfy the disclosure requirement regarding
any amendment to, or a waiver of, a provision of the Code of Ethics for the
Chief Executive Officer and Senior Financial Officers by posting such
information on its website. The Company undertakes to provide to any person a
copy of this Code of Ethics upon request to the Secretary of the Company at the
Company's principal executive offices.
Part II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
On May 18, 2000, Alan M. Glazer, GLZR Acquisition Corp. and Bedford Fair
Industries, Ltd. commenced an action against the Company in the Superior Court
of Connecticut, Stamford Judicial District, seeking compensatory and punitive
damages in an unspecified amount for alleged unfair trade practices and alleged
breach of contract arising out of negotiations before Bedford Fair Industries'
Chapter 11 bankruptcy filing for the acquisition of the Bedford Fair business
which the Company never concluded.
On April 10, 2003, after a trial in the Superior Court of Connecticut,
Waterbury District, a jury returned a verdict of $30 million of compensatory
damages in the lawsuit described above. The court, on July 7, 2003, entered a
judgment of approximately $32 million in compensatory damages and expenses,
which is subject to post-judgment interest. The trial court ruled against the
plaintiffs' motion for any punitive damages or pre-judgment interest. The
Company vigorously pursued an appeal. Plaintiffs cross-appealed seeking an
increase in the amount of the judgment. The parties are awaiting the decision of
the Supreme Court of the State of Connecticut, which heard the appeal on
November 23, 2004.
The Company continues in settlement discussions regarding the class action
law suit in California as discussed in the Company's Annual Report on Form
10-K/A for the fiscal year ended July 31, 2004.
Except for the above cases, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business,
to which the Company or any of its subsidiaries is a party or of which any of
their property is the subject.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
10.SS The Dress Barn, Inc. 2001 Stock Incentive Plan (amended and restated effective January 1,
2005
31.1 Certification of David R. Jaffe pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Armand Correia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of David R. Jaffe pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Armand Correia pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed six reports on Form 8-K during the quarter ended
January 29, 2005.
Date Filed Description
November 17, 2004 Release of First Quarter Results
November 17, 2004 Entry into a Stock Purchase Agreement
December 06, 2004 Press Release of Convertible Senior Notes due 2024
December 09, 2004 Entry into a Purchase Agreement with Banc of America Securities LLC and JP Morgan
Securities Inc.
December 16, 2004 Entry into a Resale Registration Rights Agreement with Banc of America Securities LLC and
JP Morgan Securities Inc.
January 06, 2005 Acquisition of all issued and outstanding capital stock of Maurices Incorporated.
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.
BY:/S/ DAVID R. JAFFE
David R. Jaffe
President, Chief Executive Officer and Director
(Principal Executive Officer)
BY: /S/ ARMAND CORREIA
Armand Correia
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)