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 April 30, 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 [ 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 29,912,432 shares on June 06, 2005
THE DRESS BARN, INC.
FORM 10-Q
QUARTER ENDED APRIL 30, 2005
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
April 30, 2005
and July 31, 2004 (as restated) I-3
Condensed Consolidated Statements of Earnings
for the Thirteen weeks ended April 30, 2005
and April 24, 2004 (as restated) I-5
Condensed Consolidated Statements of Earnings
for the Thirty-nine weeks ended April 30, 2005
and April 24, 2004 (as restated) I-6
Condensed Consolidated Statements of Cash Flows
for the Thirty-nine weeks ended April 30, 2005
and April 24, 2004 (as restated) I-7
Notes to Unaudited Condensed Consolidated
Financial Statements I-9 through I-31
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations I-32 through I-38
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-38
Item 4 Controls and Procedures I-39
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings I-40
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-41
Signatures I-42
* 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 April 30, July 31,
2005 2004
---------------------- -----------------
(restated, see
Note 3)
ASSETS
Current Assets:
Cash and cash equivalents $50,026 $15,141
Restricted cash and investments 40,286 38,661
Marketable securities and investments 793 122,700
Merchandise inventories 150,788 116,912
Deferred tax asset 11,251 14,845
Prepaid expenses and other 13,194 8,898
---------------------- -----------------
Total Current Assets 266,338 317,157
---------------------- -----------------
Property and Equipment:
Land and buildings 58,389 45,391
Leasehold improvements 123,389 93,289
Fixtures and equipment 207,517 173,466
Computer software 34,408 23,302
---------------------- -----------------
423,703 335,448
Less accumulated depreciation
and amortization 189,870 172,244
---------------------- -----------------
233,833 163,204
---------------------- -----------------
Intangible Assets, net (see note 2) 111,505 --
Goodwill (see note 2) 132,566 --
Other Assets 19,388 8,955
---------------------- -----------------
TOTAL ASSETS $763,630 $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 April 30, July 31,
2005 2004
--------------------------------------------
(restated, see
Note 3)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $86,891 $66,776
Accrued salaries, wages and related expenses 31,873 21,349
Litigation accrual (see note 9) 38,583 36,128
Other accrued expenses 36,644 24,247
Customer credits 13,316 8,970
Income taxes payable 1,867 5,548
Current portion of long-term debt 4,825 1,033
-------------------- -----------------
Total Current Liabilities 213,999 164,051
Long-Term Debt (see note 8) 232,427 31,988
Deferred Rent 41,620 40,319
-------------------- -----------------
Total Liabilities 488,046 236,358
-------------------- -----------------
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- 29,877,382 and 29,638,360 shares, respectively
Outstanding- 29,877,382 and 29,618,660 shares, respectively 1,497 1,482
Additional paid-in capital 68,248 63,554
Retained earnings 205,839 188,757
Treasury stock, to be retired -- (313)
Accumulated other comprehensive (loss) -- (522)
-------------------- -----------------
275,584 252,958
-------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $763,630 $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
------------------------------------------
April 30, April 24,
2005 2004
------------------------------------------
(restated, see
Note 3)
Net sales $295,958 $183,331
Cost of sales, including
occupancy and buying costs 183,986 118,137
------------------------------------------
Gross profit 111,972 65,194
Selling, general and
administrative expenses 82,636 51,720
Depreciation and amortization 10,007 4,378
------------------------------------------
Operating income 19,329 9,096
Interest income 377 553
Interest expense (3,697) (1,347)
Other income 381 381
------------------------------------------
Earnings before provision for
income taxes 16,390 8,683
Provision for income taxes 6,197 3,169
------------------------------------------
Net earnings $10,193 $5,514
==========================================
Earnings per share:
Basic $0.34 $0.19
==========================================
Diluted $0.33 $0.18
==========================================
Weighted average shares outstanding:
Basic 29,836 29,522
==========================================
Diluted 30,698 30,370
==========================================
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
Thirty-nine weeks ended
------------------------------------------
April 30, April 24,
2005 2004
------------------------------------------
(restated, see
Note 3)
Net sales $693,212 $546,928
Cost of sales, including
occupancy and buying costs 433,934 347,017
------------------------------------------
Gross profit 259,278 199,911
Selling, general and
administrative expenses 200,337 154,930
Depreciation and amortization 23,908 17,090
------------------------------------------
Operating income 35,033 27,891
Interest income 1,150 1,767
Interest expense (7,100) (3,918)
Other income 1,144 1,144
------------------------------------------
Earnings before provision for
income taxes 30,227 26,884
Provision for income taxes 11,248 9,758
------------------------------------------
Net earnings $18,979 $17,126
==========================================
Earnings per share:
Basic $0.64 $0.58
==========================================
Diluted $0.62 $0.57
==========================================
Weighted average shares outstanding:
Basic 29,704 29,343
==========================================
Diluted 30,484 30,031
==========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Thirty-nine weeks ended
---------------------------------
April 30, April 24,
2005 2004
---------------------------------
(restated, see
Note 3)
Operating Activities:
Net earnings $18,979 $17,126
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 23,908 17,090
Provision for impairment and asset disposals 3,373 2,828
Deferred income tax expense 3,594 2,895
Increase in deferred rent expense 1,301 2,617
Other 2,627 (737)
Changes in assets and liabilities, net of acquisition:
Increase in restricted cash and investments (1,625) --
Increase in merchandise inventories (401) (2,288)
Decrease in prepaid expenses and other 3,492 797
Decrease in other assets 453 187
Increase in accounts payable - trade 2,063 18,661
Increase in accrued salaries, wages and related expenses 4,242 1,540
Increase in litigation accrual 2,455 319
Increase in other accrued expenses 6,536 3,672
(Decrease) increase in customer credits (471) 1,508
Decrease in income taxes payable (3,681) (2,891)
---------------------------------
Total adjustments 47,866 46,198
---------------------------------
Net cash provided by operating activities 66,845 63,324
---------------------------------
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Thirty-nine weeks ended
---------------------------------
April 30, April 24,
2005 2004
---------------------------------
(restated, see
Note 3)
Investing Activities:
Acquisition of Maurices Inc., net of $982 cash acquired $(328,305) $ -
Purchases of property and equipment (22,168) (23,679)
Sales and maturities of marketable securities and investments 576,139 165,786
Purchases of marketable securities and investments (454,890) (179,493)
---------------------------------
Net cash (used in) investing activities (229,224) (37,386)
---------------------------------
Financing Activities:
Proceeds from long-term debt 215,000 -
Repayments of long-term debt (10,769) (729)
Payment of debt issuance costs (7,962) -
Purchase of treasury stock (1,584) -
Proceeds from Employee Stock Purchase Plan 62 62
Proceeds from stock options exercised 2,517 3,426
---------------------------------
Net cash provided by financing activities 197,264 2,759
---------------------------------
Net increase in cash and cash equivalents 34,885 28,697
Cash and cash equivalents- beginning of period 15,141 37,551
---------------------------------
Cash and cash equivalents- end of period $50,026 $66,248
=================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $11,513 $9,858
---------------------------------
Cash paid for interest $4,162 $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 April
30, 2005 and July 31, 2004, the consolidated results of its operations for the
thirteen weeks and thirty-nine weeks ended April 30, 2005 and April 24, 2004,
and cash flows for the thirty-nine weeks ended April 30, 2005 and April 24,
2004. The results of operations for a thirteen-week or a thirty-nine 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. Certain reclassifications have been made to prior year
amounts to conform with the current year presentation.
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 3, 2005, as of the close of business on January 1, 2005, the
Company acquired 100% of the outstanding stock of Maurices Incorporated, a
specialty apparel retailer, for a total purchase price of $328.3 million, net of
cash acquired, which included $4.4 million of transaction fees. The transaction
was financed by $114.3 in cash (derived from the sale of investments), 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). 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 $132.6 million,
was allocated to goodwill after considering the post-closing adjustments
described below.
The following table summarizes the allocation of the purchase price to the
estimated fair value of the assets acquired and liabilities assumed as of the
acquisition date, January 1, 2005, in accordance with SFAS No. 141. The
allocation of the purchase price to the estimated fair value of the assets
acquired and liabilities assumed as of the acquisition date was performed in
accordance with SFAS No. 141. The Company's initial allocation was based on a
preliminary evaluation of the appropriate fair values and represented
management's best estimate based on the data then available. During the third
quarter the initial allocation was revised as the evaluation process was
substantially completed, resulting in a $3.2 million reduction in goodwill. This
reduction reflected a post closing working capital adjustment of $4.7 million
received from the seller and various other adjustments.
The estimated fair values of assets acquired and liabilities assumed, as of
the close of business on January 1, 2005 are as follows:
Dollars in thousands
Purchase Price $328,305
Current assets 7,788
Inventory 33,475
Property, plant, and equipment, net 75,394
Intangibles 111,853
Other non-current assets 2,241
-----------------
Total assets acquired 230,751
-----------------
Total liabilities assumed (35,012)
-----------------
Net assets acquired, net of cash 195,739
-----------------
Goodwill $132,566
=================
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 April 30, 2005:
- ------------------------------------------------------------------------------------------------------------
Gross carrying Accumulated
amount amortization Net Amount Expected Life
---------------------------------------------------------------------------
Customer Relationship $2,200 $104 $2,096 7 years
Proprietary Technology 3,653 244 3,409 5 years
Trade Name 106,000 - 106,000 Indefinite
- ------------------------------------------------------------------------------------------------------------
$111,853 $348 $111,505
- ------------------------------------------------------------------------------------------------------------
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 Thirty-Nine Weeks Ended
April 30, April 24, April 30, April 24,
2005(1) 2004 2005 2004
- ------------------------------------------- ----------------- -------------- --------------- -----------------
Pro forma net sales $296.0 $277.3 $859.6 $825.0
Pro forma net income 10.2 8.2 16.7 21.4
Pro forma earnings per share:
Basic $0.34 $0.28 $0.56 $0.73
Diluted $0.33 $0.27 $0.55 $0.71
(1) Represents actual amounts for the period.
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 were 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 thirty-nine
weeks ended April 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 reevaluated 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 thirty-nine weeks ended April 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. The Company also corrected the amounts of purchases,
sales and redemptions of marketable securities in the cash flow statement to
properly record these amounts on a gross basis. For the thirteen and thirty-nine
weeks ended April 24, 2004, the cumulative effect is an increase in earnings of
$0.1 million and $0.5 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
thirty-nine weeks ended in April 24, 2004, and cash flows for the thirty-nine
weeks ended in April 24, 2004 (in thousands, except per share data):
Condensed Consolidated Statements of Earnings
--------------------------------------------------------
As previously
For thirteen weeks ended April 24, 2004 reported Adjustments As restated
- --------------------------------------------------------- --------------------------------------------------------
Cost of sales, including occupancy and buying costs $119,080 $ (943) $118,137
Gross profit 64,251 943 65,194
Selling, general and administrative expenses 50,388 1,332 51,720
Depreciation & amortization 4,963 (585) 4,378
Operating income 8,900 196 9,096
Earnings before provision for income taxes 8,487 196 8,683
Provision for Income taxes 3,098 71 3,169
Net earnings 5,389 125 5,514
Earnings per share - basic $0.18 $0.01 $0.19
Earnings per share - diluted $0.18 $- $0.18
========================================================
As previously
For thirty-nine weeks ended April 24, 2004 Reported Adjustments As restated
- ---------------------------------------------------------- --------------- ---------------- ----------------
Cost of sales, including occupancy and buying costs $350,237 $ (3,220) $347,017
Gross Profit 196,691 3,220 199,911
Selling, general and administrative expenses 152,102 2,828 154,930
Depreciation & amortization 17,415 (325) 17,090
Operating income 27,174 717 27,891
Earnings before provision for income taxes 26,167 717 26,884
Income taxes 9,498 260 9,758
Net earnings 16,669 457 17,126
Earnings per share - basic $0.57 $0.01 $0.58
Earnings per share - diluted $0.56 $0.01 $0.57
========================================================
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 thirty-nine weeks ended April 24, 2004 Reported Adjustments As restated
- ----------------------------------------------------------- ------------------------------------------- ---------------
Net cash provided by operating activities $57,713 $5,611 $63,324
Net cash used in investing activities (31,775) (5,611) (37,386)
============================================================
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.
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 Thirty-Nine Weeks Ended
-------------------- -----------------------
April 30, April 24, April 30, April 24,
Shares in thousands 2005 2004 2005 2004
--------------- -------------- -------------- ---------------
Basic weighted average outstanding shares 29,836 29,522 29,704 29,343
Dilutive effect of options outstanding 862 848 780 688
--------------- -------------- -------------- ---------------
Diluted weighted average shares outstanding 30,698 30,370 30,484 30,031
--------------- -------------- -------------- ---------------
Anti-dilutive options excluded from calculations - - 137 152
--------------- -------------- -------------- ---------------
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 Thirty-Nine Weeks Ended
-------------------- -----------------------
April 30, April 24, April 30, April 24,
Shares in thousands 2005 2004 2005 2004
--------------- -------------- -------------- ---------------
Net earnings $10,193 $5,514 $18,979 $17,126
Unrealized gain (loss) on available for sale
securities -- (608) 522 (501)
--------------- -------------- -------------- ---------------
Comprehensive income $10,193 $4,906 $19,501 $16,625
--------------- -------------- -------------- ---------------
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 deducted from "Interest income" on the Condensed
Consolidated Statements of Earnings. At April 30, 2005, the Company had no
marketable securities with an unrealized loss position.
7. Stock Based Compensation
At April 30, 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 April 30, 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 April 30, 2005, the Company has awarded 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 and restricted
stock awards 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 Thirty-nine Weeks Ended
-------------------- -----------------------
April 30, April 24, April 30, April 24,
2005 2004 2005 2004
------------------------------------------------------------
(in thousands, except per share amounts)
Net earnings as reported $10,193 $5,514 $18,979 $17,126
Add: compensation expense included in net earnings 166 -- 290 --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards net of related tax effects (435) (557) (1,301) (1,618)
--------------------------------------------------------------
Pro forma net earnings $9,924 $4,957 $17,968 $15,508
==============================================================
Earnings per share
Basic - as reported $0.34 $0.19 $0.64 $0.58
--------------------------------------------------------------
Basic - pro forma $0.33 $0.17 $0.60 $0.53
--------------------------------------------------------------
Diluted - as reported $0.33 $0.18 $0.62 $0.57
--------------------------------------------------------------
Diluted - pro forma $0.32 $0.16 $0.59 $0.52
--------------------------------------------------------------
The fair values of the options granted under the Company's fixed stock
option plans and restricted stock awards were estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
April 30, April 24, April 30, April 24,
2005 2004 2005 2004
------------------------------------------------------------
Weighted average risk-free interest rate 4.1% 2.7% 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 17.0% 38.3% 26.3% 39.1%
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, except that from March 15, 2005 to
May 2, 2005, the notes bore interest at the rate of 2.75% per year. 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 1.6 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 April 30, 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 of the Convertible Senior Notes and the
senior credit facility, the Company incurred approximately $3.9 and $4.1
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 April 30, 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)
April 30, July 31,
2005 2004
----------------------------------------------------------------------------------
Dunnigan Realty, LLC mortgage loan $32,252 $33,021
Convertible Senior Notes 115,000 --
Term loan 90,000 --
----------------------------------------------------------------------------------
237,252 33,021
Less: current portion (4,825) (1,033)
----------------------------------------------------------------------------------
Total long-term debt $232,427 $31,988
----------------------------------------------------------------------------------
Interest expense relating to the above debt was approximately $2.0 million
and $4.1 million for the thirteen and thirty-nine period periods ended April 30,
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 judgment of approximately $32
million in compensatory damages and expenses, which was subject to post-judgment
interest. The Company appealed the judgment. Based on this judgment, the Company
recorded a litigation charge of $32 million in its fiscal 2003 fourth quarter
results. 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. The Company deposited an additional $.5 million in January 2005 and $.6
million in April 2005 ($1.6 million less interest actually earned during the
thirty-nine weeks) into the escrow accounts, resulting in a balance of $40.3
million at April 30, 2005. The escrow account is an interest bearing account and
is included in restricted cash and cash equivalents on the Company's balance
sheet.
On May 31, 2005 the Supreme Court of Connecticut unanimously reversed the
$32 million judgment against the Company and remanded the case with direction to
render judgment in favor of the Company. The plaintiffs have an opportunity to
file a motion for reconsideration or reconsideration en banc, with the Court's
decision stayed pending such motion. If the motion is filed and the Supreme
Court does not reject the motion it could be several months before any further
decisions are made. Given the significant uncertainties that still exist
regarding the eventual outcome of this case the Company does not believe the
current legal accrual for the case should be reduced or reversed as of April 30,
2005.
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 December 2004, the FASB issued Statement No. 123R (revised 2004),
"Share-Based Payment" ("SFAS No. 123R"), which is a revision of SFAS No. 123.
SFAS No. 123R supersedes APB No. 25 and amends Statement No. 95, "Statement of
Cash Flows." Under SFAS No. 123, companies must calculate and record in the
income statement, not in pro forma disclosures, the cost of equity instruments,
such as stock options, awarded to employees for services received. The cost of
the equity instruments will be measured based on fair value of the instruments
on the date they are granted (with certain exceptions) and will be required to
be recognized over the period during which the employees are required to provide
services in exchange for the equity instruments. The statement is effective in
the first fiscal year beginning after June 15, 2005, therefore, the Company is
required to adopt SFAS No. 123R effective the beginning of its fiscal year
ending in July 2006.
The Company is evaluating the requirements of SFAS No. 123R and expects
that the adoption of SFAS No. 123R will have a material effect on its results of
operations and earnings per share. The Company must determine the appropriate
fair value method to be used for valuing share-based payments, the amortization
method of compensation cost and the transition method to be used at the date of
adoption. The future impact of adopting SFAS No. 123R cannot be accurately
estimated at this time because it will depend on levels of share-based awards
granted in the future. However, had we adopted SFAS No. 123R in prior periods,
the impact of that standard would have approximated the impact of SFAS No. 123
as described in the disclosure of pro forma net income and earnings per share in
Note 7 to our unaudited condensed consolidated financial statements. SFAS No.
123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow. This change will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. The amount of this change cannot be estimated at this time.
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 impact of the adoption of this EITF consensus was not
significant to the Company's overall results of operations or financial
position.
In November 2004, the FASB issued SFAS No. 151 ("SFAS No. 151"), Inventory
Costs, which amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. SFAS No. 151 also requires the allocation of fixed
production overheads to inventory be based on normal production capacity. SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and, accordingly, the Company will adopt the standard in
the first quarter of fiscal 2006. Adoption of SFAS No. 151 is not expected to
have a material impact on the Company's operating results or financial
condition.
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 (as used in this footnote, the "Parent Company")
$250 million senior credit facility, which consists of a $100 million term loan
and a $150 million revolving credit facility, and its Convertible Senior Notes
contain provisions that all obligations under the senior credit facility are
unconditionally guaranteed by each existing and subsequently acquired or
organized subsidiary of the Parent Company, except for Dunnigan Realty LLC.
Presented below are the unaudited condensed consolidating balance sheets,
unaudited statements of earnings and unaudited statements of cash flows for the
Parent Company, for the Parent Company's guarantor subsidiaries and for the
Parent Company's non-guarantor subsidiary for the periods presented herein as
required by Rule 3-10 under Regulation S-X. Such information reflects the
effects of the restatement discussed in footnote 3.
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
as of April 30, 2005
(Amounts in thousands)
-----------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $43,043 $4,893 $2,090 $ - $50,026
Restricted cash and investments 40,286 - - - 40,286
Marketable securities and investments 770 23 - - 793
Merchandise inventories 113,736 37,052 - - 150,788
Deferred tax asset 11,251 - - - 11,251
Prepaid expenses and other 8,291 4,439 464 - 13,194
----------------------------------------------------------------------------------------
Total Current Assets 217,377 46,407 2,554 - 266,338
----------------------------------------------------------------------------------------
Property and Equipment, net 117,478 74,823 41,532 - 233,833
Intangible Assets, net - 111,505 - - 111,505
Goodwill - 132,566 - - 132,566
Other Assets 15,723 1,969 1,696 - 19,388
Investment in Subsidiaries 565,767 - - (565,767) -
Due from Affiliate - 302,251 - (302,251) -
========================================================================================
TOTAL ASSETS $916,345 $669,521 $45,782 $ (868,018) $763,630
========================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
as of April 30, 2005
(Amounts in thousands)
-----------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $59,856 $27,035 $ - $ - $86,891
Accrued salaries, wages and related
expenses 24,191 7,682 - - 31,873
Litigation accrual 38,583 - - - 38,583
Other accrued expenses 26,166 9,343 1,135 - 36,644
Customer credits 1,688 11,628 - - 13,316
Income taxes payable - 1,867 - - 1,867
Current portion of
long-term debt 3,750 - 1,075 - 4,825
------------------------------------------------------------------------------
Total Current Liabilities 154,234 57,555 2,210 - 213,999
------------------------------------------------------------------------------
Long-Term Debt 201,250 - 31,177 - 232,427
Deferred rent 41,305 315 - - 41,620
Due to Affiliate 243,972 58,018 261 (302,251) -
Commitments and Contingencies - - - - -
------------------------------------------------------------------------------
Total Liabilities 640,761 115,888 33,648 (302,251) 488,046
------------------------------------------------------------------------------
Shareholders' Equity 275,584 553,633 12,134 (565,767) 275,584
------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $916,345 $669,521 $45,782 $(868,018) $763,630
==============================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
for the Thirteen weeks ended April 30, 2005
(Amounts in thousands)
-----------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
-----------------------------------------------------------------------------------------
Net sales $203,433 $92,525 $1,595 $ (1,595) $295,958
Cost of sales, including
occupancy and buying costs 125,085 60,035 80 (1,214) 183,986
-----------------------------------------------------------------------------------------
Gross profit 78,348 32,490 1,515 (381) 111,972
Selling, general and
administrative expenses 56,048 26,294 294 - 82,636
Depreciation and amortization 5,633 3,995 379 - 10,007
-----------------------------------------------------------------------------------------
Operating income 16,667 2,201 842 (381) 19,329
Interest income 300 72 5 - 377
Interest expense (3,224) - (473) - (3,697)
Other income - - - 381 381
Equity in earnings of subsidiaries 1,680 - - (1,680) -
-----------------------------------------------------------------------------------------
Earnings before provision
for income taxes 15,423 2,273 374 (1,680) 16,390
Provision for income taxes 5,230 830 137 - 6,197
-----------------------------------------------------------------------------------------
Net earnings $10,193 $ 1,443 $ 237 $ (1,680) $10,193
=========================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
for the Thirty-nine weeks ended April 30, 2005
(Amounts in thousands)
----------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------
Net sales $579,292 $113,920 $5,515 $ (5,515) $693,212
Cost of sales, including
occupancy and buying costs 357,246 79,469 1,590 (4,371) 433,934
----------------------------------------------------------------------------------
Gross profit
222,046 34,451 3,925 (1,144) 259,278
Selling, general and
administrative expenses 174,436 37,151 668 (11,918) 200,337
Depreciation and amortization 17,083 5,538 1,287 - 23,908
----------------------------------------------------------------------------------
Operating income (loss) 30,527 (8,238) 1,970 10,774 35,033
Interest income 1,102 34 14 - 1,150
Interest expense (5,695) - (1,405) - (7,100)
Other income - 11,918 - (10,774) 1,144
Equity in earnings of subsidiaries 2,725 - - (2,725) -
----------------------------------------------------------------------------------
Earnings before provision for
income taxes 28,659 3,714 579 (2,725) 30,227
Provision for income taxes 9,680 1,357 211 - 11,248
----------------------------------------------------------------------------------
Net earnings $18,979 $ 2,357 $368 $ (2,725) $18,979
==================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
for the Thirty-nine weeks ended April 30, 2005
(Dollars in thousands)
-----------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
-----------------------------------------------------------------------------
Operating Activities:
Net earnings $18,979 $ 2,357 $368 $ (2,725) $18,979
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries (2,725) - - 2,725 -
Depreciation and amortization 17,083 5,538 1,287 - 23,908
Provision for impairment and asset disposals 2,876 497 - - 3,373
Deferred income tax expense 3,594 - - - 3,594
Increase in deferred rent 986 315 - - 1,301
Other 2,606 - 21 - 2,627
Changes in assets and liabilities:
Increase in restricted cash (1,625) - - - (1,625)
Decrease (increase) in merchandise inventories 3,176 (3,577) - - (401)
Decrease (increase) in prepaid expenses and other 154 3,359 (21) - 3,492
(Increase) decrease in other assets (891) 1,256 88 - 453
Decrease (increase) in due from affiliate - (118,268) - 118,268 -
Increase (decrease) in due to affiliate 109,243 9,331 (306) (118,268) -
(Decrease) increase in accounts payable- trade (6,920) 8,983 - - 2,063
Increase in accrued salaries, wages and
related expenses 2,842 1,400 - - 4,242
Increase in litigation accrual 2,455 - - - 2,455
Increase (decrease) in other accrued expenses 7,553 (1,407) 390 - 6,536
Decrease in customer credits (455) (16) - - (471)
(Decrease) increase in income taxes payable (5,548) 1,867 - - (3,681)
-----------------------------------------------------------------------------
Total adjustments 134,404 (90,722) 1,459 2,725 47,866
-----------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $153,383 $ (88,365) $1,827 $ - $66,845
-----------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
for the Thirty-nine weeks ended April 30, 2005
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
- -------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisition of Maurices Inc., net of
cash acquired $ (328,305) $ - $ - $ - $ (328,305)
Purchases of property and equipment (20,159) (2,009) - - (22,168)
Sales and maturities of marketable
securities and investments 465,881 110,258 - - 576,139
Purchases of marketable securities
and investments (439,245) (15,645) - - (454,890)
------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (321,828) 92,604 - - (229,224)
------------------------------------------------------------------------------
Financing Activities:
Proceeds from long-term debt 215,000 - - - 215,000
Repayments of long-term debt (10,000) - (769) - (10,769)
Payment of debt issuance costs (7,962) - - - (7,962)
Purchase of treasury stock (1,584) - - - (1,584)
Proceeds from Employee Stock Purchase Plan 62 - - - 62
Proceeds from stock options exercised 2,517 - - - 2,517
------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 198,033 - (769) - 197,264
------------------------------------------------------------------------------
Net increase in cash and cash equivalents 29,588 4,239 1,058 - 34,885
Cash and cash equivalents- beginning of period 13,455 654 1,032 - 15,141
------------------------------------------------------------------------------
Cash and cash equivalents- end of period $43,043 $4,893 $2,090 $ - $50,026
------------------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
as of July 31, 2004
(Amounts in thousands)
----------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $13,455 $654 $1,032 $ - $15,141
Restricted cash and investments 38,661 - - - 38,661
Marketable securities and investments 28,639 94,061 - - 122,700
Merchandise inventories 116,912 - - - 116,912
Deferred tax asset 14,845 - - - 14,845
Prepaid expenses and other 8,445 10 443 - 8,898
----------------------------------------------------------------------------------------
Total Current Assets 220,957 94,725 1,475 - 317,157
----------------------------------------------------------------------------------------
Property and Equipment, net 117,278 3,107 42,819 - 163,204
Other Assets 7,169 2 1,784 - 8,955
Investment in Subsidiaries 233,159 - - (233,159) -
Due from Affiliate - 183,983 - (183,983) -
========================================================================================
TOTAL ASSETS $578,563 $281,817 $46,078 $ (417,142) $489,316
========================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET
as of July 31, 2004
(Amounts in thousands)
------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $66,776 $ - $ - $ - $66,776
Accrued salaries, wages and related
expenses 21,349 - - - 21,349
Litigation accrual 36,128 - - - 36,128
Other accrued expenses 18,613 4,889 745 - 24,247
Customer credits 2,143 6,827 - - 8,970
Income taxes payable 5,548 - - - 5,548
Current portion of long-term debt - - 1,033 - 1,033
------------------------------------------------------------------------------
Total Current Liabilities 150,557 11,716 1,778 - 164,051
------------------------------------------------------------------------------
Long-Term Debt - - 31,988 - 31,988
------------------------------------------------------------------------------
Deferred Rent 40,319 - - - 40,319
------------------------------------------------------------------------------
Due to Affiliate 134,729 48,687 567 (183,983) -
------------------------------------------------------------------------------
Total Liabilities 325,605 60,403 34,333 (183,983) 236,358
------------------------------------------------------------------------------
Shareholders' Equity 252,958 221,414 11,745 (233,159) 252,958
------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $578,563 $281,817 $46,078 $ (417,142) $489,316
==============================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
for the Thirteen weeks ended April 24, 2004
(Amounts in thousands)
-----------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
-----------------------------------------------------------------------------------------
Net sales $183,331 $- $1,433 $ (1,433) $183,331
Cost of sales, including
occupancy and buying costs 115,909 3,280 - (1,052) 118,137
-----------------------------------------------------------------------------------------
Gross profit 67,422 (3,280) 1,433 (381) 65,194
Selling, general and
administrative expenses 54,401 2,034 256 (4,971) 51,720
Depreciation and amortization 3,871 53 454 - 4,378
-----------------------------------------------------------------------------------------
Operating income (loss) 9,150 (5,367) 723 4,590 9,096
Interest income 193 360 - - 553
Interest expense (799) - (548) - (1,347)
Other income - 4,971 - (4,590) 381
Equity in earnings of subsidiaries 81 - - (81) -
-----------------------------------------------------------------------------------------
Earnings (loss) before provision
for income taxes 8,625 (36) 175 (81) 8,683
Provision (benefit) for
income taxes 3,111 (7) 65 - 3,169
-----------------------------------------------------------------------------------------
Net earnings (loss) $5,514 $ (29) $ 110 $(81) $5,514
=========================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
for the Thirty-nine weeks ended April 24, 2004
(Amounts in thousands)
----------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
----------------------------------------------------------------------------------
Net sales $546,928 $- $5,234 $ (5,234) $546,928
Cost of sales, including
occupancy and buying costs 340,804 8,929 1,374 (4,090) 347,017
----------------------------------------------------------------------------------
Gross profit
206,124 (8,929) 3,860 (1,144) 199,911
Selling, general and
administrative expenses 164,193 5,954 662 (15,879) 154,930
Depreciation and amortization 15,569 159 1,362 - 17,090
----------------------------------------------------------------------------------
Operating income (loss)
26,362 (15,042) 1,836 14,735 27,891
Interest income 672 1,095 - - 1,767
Interest expense (2,468) - (1,450) - (3,918)
Other income - 15,879 - (14,735) 1,144
Equity in earnings of subsidiaries 1,472 - - (1,472) -
----------------------------------------------------------------------------------
Earnings before provision for
income taxes 26,038 1,932 386 (1,472) 26,884
Provision for income taxes 8,912 705 141 - 9,758
----------------------------------------------------------------------------------
Net earnings $17,126 $ 1,227 $245 $ (1,472) $17,126
==================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
for the Thirty-nine weeks ended April 24, 2004
(Dollars in thousands)
-----------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
-----------------------------------------------------------------------------
Operating Activities:
Net earnings $17,126 $ 1,227 $245 $ (1,472) $17,126
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in earnings of subsidiaries (1,472) - - 1,472 -
Depreciation and amortization 15,569 159 1,362 - 17,090
Provision for impairment and asset disposals 2,828 - - - 2,828
Deferred income tax expense 2,895 - - - 2,895
Increase in deferred rent 2,617 - - - 2,617
Other (833) 67 29 - (737)
Changes in assets and liabilities:
Increase in merchandise inventories (2,288) - - - (2,288)
Decrease (increase) in prepaid expenses
and other 788 (10) 19 - 797
Decrease (increase) in other assets 211 - (24) - 187
(Increase) decrease in due from affiliate - (9,620) - 9,620 -
Increase (decrease) in due to affiliate 699 9,780 (859) (9,620) -
Increase in accounts payable- trade 18,661 - - - 18,661
Increase in accrued salaries, wages and
related expenses 1,540 - - - 1,540
Increase in litigation accrual 319 - - - 319
Increase (decrease) in other accrued expenses 3,888 96 (312) - 3,672
(Decrease) increase in customer credits (5,376) 6,884 - - 1,508
Decrease in income taxes payable (2,891) - - - (2,891)
-----------------------------------------------------------------------------
Total adjustments 37,155 7,356 215 1,472 46,198
-----------------------------------------------------------------------------
Net cash provided by operating activities $54,281 $8,583 $460 $- $63,324
-----------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
for the Thirty-nine weeks ended April 24, 2004
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Parent Company Guarantor Non-guarantor Eliminations Consolidated
Subsidiaries Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment $ (23,641) $ (37) $ (1) $- $ (23,679)
Sales and maturities of marketable
securities and investments 139,188 26,598 - - 165,786
Purchases of marketable securities
and investments (151,788) (27,705) - - (179,493)
-----------------------------------------------------------------------------
Net cash used in investing activities (36,241) (1,144) (1) - (37,386)
-----------------------------------------------------------------------------
Financing Activities:
Repayments of long-term debt - - (729) - (729)
Proceeds from Employee Stock Purchase Plan 62 - - - 62
Proceeds from stock options exercised 3,426 - - - 3,426
-----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 3,488 - (729) - 2,759
-----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 21,528 7,439 (270) - 28,697
Cash and cash equivalents- beginning of period 35,188 300 2,063 - 37,551
-----------------------------------------------------------------------------
Cash and cash equivalents- end of period $56,716 $7,739 $1,793 $ - $66,248
-----------------------------------------------------------------------------
13. Subsequent Event
On May 31, 2005 the Supreme Court of Connecticut unanimously reversed the
$32 million judgment against the Company and remanded the case with direction to
render judgment in favor of the Company. The plaintiffs have an opportunity to
file a motion for reconsideration or reconsideration en banc, with the Court's
decision stayed pending such motion. If the motion is filed and the Supreme
Court does not reject the motion it could be several months before any further
decisions are made. Given the significant uncertainties that still exist
regarding the eventual outcome of this case the Company does not believe the
current legal accrual for the case should be reduced or reversed as of April 30,
2005.
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 3, 2005, as of the close of business January 1, 2005, the
Company acquired 100% of the outstanding stock of Maurices Incorporated, a
specialty apparel retailer, for $328.3 million, net of cash acquired, including
$4.4 million of transaction fees. 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
$132.6 million was allocated to goodwill after considering the post-closing
adjustments described below. The accounting rules require that the goodwill
arising from the purchase method not be amortized. However, goodwill 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 estimates of their fair value. During the third quarter, goodwill was reduced
by $3.2 million, reflecting a post closing working capital adjustment of $4.7
million from the seller and various other adjustments to the opening balance
sheet.
The allocation of the purchase price to the estimated fair value of the
assets acquired and liabilities assumed as of the acquisition date was performed
in accordance with SFAS No. 141. The Company's initial allocation was based on a
preliminary evaluation of the appropriate fair values and represented
management's best estimate based on the data then available. During the third
quarter the initial allocation was revised as the evaluation process was
substantially completed, resulting in a $3.2 million reduction in goodwill. This
reduction reflected a post closing working capital adjustment of $4.7 million
received from the seller and various other adjustments.
The transaction was financed by $114.3 in cash (derived from the sale of
investments), 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 April 30, 2005, Maurices
operated 476 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 had
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 thirty-nine
weeks ended April 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
to increase "Depreciation and amortization expenses" and a corresponding
decrease 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 reevaluated 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 thirty-nine weeks ended April 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. The Company also corrected the amounts of purchases,
sales and redemptions of marketable securities in the cash flow statement to
properly record these amounts on a gross basis. For the thirteen and thirty-nine
weeks ended April 24, 2004, the cumulative effect is an increase of earnings of
$0.1 million and $0.5 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
thirty-nine weeks ended April 24, 2004, and on the cash flows for the
thirty-nine weeks ended April 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. The Company
expects to continue its expansion program focusing on both expanding in its
major trading markets and developing and expanding into new markets. The Company
is currently in the process of finalizing and implementing an integration plan
that the Company believes will result in best practices across the entire
Company. As of April 30, 2005, the Company has identified a number of synergies
but it remains a work in progress.
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 Thirty-Nine Weeks Ended
April 30, April 24, April 30, April 24,
2005 2004 2005 2004
-------- -------- -------- --------
Net sales growth (1) 61.4% 10.6% 26.7% 5.4%
Same store sales growth 7.3% 7.1% 4.2% 2.1%
Merchandise margins 54.9% 55.2% 54.9% 55.1%
Average Square footage growth (1) 41.3% 0.1% 20.6% 0.3%
Total store count (1) 1,264 793 1,264 793
Diluted earnings per share $0.33 $0.18 $0.62 $0.57
SG &A as a percentage of sales 27.9% 28.2% 28.9% 28.3%
Capital expenditures (in millions) $10.2 $10.9 $22.2 $23.7
(1) Increase in net sales, square footage growth and store count primarily due
to acquisition of Maurices in January 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.
On May 31, 2005 the Supreme Court of Connecticut unanimously reversed the
$32 million judgment against the Company and remanded the case with direction to
render judgment in favor of the Company. The plaintiffs have an opportunity to
file a motion for reconsideration or reconsideration en banc, with the Court's
decision stayed pending such motion. If the motion is filed and the Supreme
Court grants the motion it would be several months before any further decisions
are made. Given the significant uncertainties that still exist regarding the
eventual outcome of this case the Company does not believe the current legal
accrual for the case should be reduced or reversed as of April 30, 2005.
Results of Operations
The following table sets forth the percentage change in dollars from last
year's comparable periods for the thirteen and thirty-nine week periods ended
April 30, 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 Thirty-Nine Weeks
--------------- -----------------
% Change % of Sales % Change % of Sales
---------- ----------
from L/Y T/Y L/Y from L/Y T/Y L/Y
-------- --- --- -------- --- ---
Net sales 61.4% 26.7%
Cost of sales, including
occupancy & buying 55.7% 62.2% 64.4% 25.0% 62.6% 63.4%
Gross profit 71.8% 37.8% 35.6% 29.7% 37.4% 36.6%
Selling, general and
admin. expenses 59.8% 27.9% 28.2% 29.3% 28.9% 28.3%
Depreciation and amortization 128.6% 3.4% 2.4% 39.9% 3.4% 3.1%
Operating income 112.5% 6.5% 5.0% 25.6% 5.1% 5.1%
Interest income (31.8)% 0.1% 0.3% (34.9)% 0.2% 0.3%
Interest expense 174.5% (1.2)% (0.7)% 81.2% (1.0)% (0.7)%
Other income 0.0% 0.1% 0.2% -- 0.2% 0.2%
Earnings before income taxes 88.8% 5.5% 4.7% 12.4 % 4.4% 4.9%
Net earnings 84.9% 3.4% 3.0% 10.8% 2.7% 3.1%
Net sales for the thirteen weeks ended April 30, 2005 (the "third quarter")
increased by 61.4% to $296.0 million from $183.3 million for the thirteen weeks
ended April 24, 2004 (the "prior period"). The sales increase for the third
quarter was driven by the acquisition of Maurices as well as by a same store
sales increase of 7.1%. Net sales for Dress Barn, Dress Barn Woman, and Dress
Barn/Dress Woman Combo stores (collectively "dressbarn" stores) increased $20.1
million or 11.0% to $203.4 million and net sales from Maurices' stores
("maurices" stores) were $92.5 million. dressbarn and maurices same store sales
increased 10.3% and 1.3%, respectively. The same store sales increase for both
dressbarn and maurices was driven by an increase in units per transaction as
well as total sales transactions, reflecting an increase in customer traffic. In
addition, dressbarn benefited from increased sales of jewelry, accessories and
sportswear.
Net sales for the thirty-nine weeks ended April 30, 2005 (the "nine
months") increased by 26.7% to $693.2 million from $546.9 million in the
thirty-nine weeks ended April 24, 2004 ("last year"). Net sales for dressbarn
increased $32.4 million or 5.9% to $579.3 million and maurices net sales were
$113.9 million. The sales increase for the nine months was a result of a same
store sales increase of 4.2% as well as by the inclusion of maurices net sales
for four months. Same store sales for dressbarn and maurices increased 4.7% and
0.6%, respectively.
For the nine months ended April 30, 2005, the Company's average selling
square footage was approximately 20.6% higher than in the comparable prior
period, primarily as a result of the acquisition of 473 maurices stores in
January 2005. The Company has opened 41 (5 maurices and 36 dressbarn) new stores
and closed 26 (2 maurices and 24 dressbarn) stores during the nine months ended
April 30, 2005. 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
April 30, 2005, the Company had 1,264 stores in operation; 788 dressbarn stores
(187 Dress Barn, 49 Dress Barn Woman, 552 DB/DBW combo stores) and 476 maurices
stores, versus 793 stores in operation as of April 24, 2004 (186 Dress Barn
stores, 54 Dress Barn Woman stores and 553 DB/DBW combo stores). During the
quarter, the Company opened 23 stores (5 maurices and 18 dressbarn) and closed 7
stores (2 maurices and 5 dressbarn). The Company anticipates opening
approximately 20 stores by the end of fiscal 2005, mostly maurices stores.
Gross profit ("GP", which represents net sales less cost of goods sold,
including occupancy and buying costs) for the third quarter increased by 71.8 %
to $112.0 million, or 37.8% of net sales, from $65.2 million, or 35.6% of net
sales, for the prior period. dressbarn GP increased 16.9 % to $76.2 million, or
37.5% of net sales, and maurices GP was $35.8 million or 38.7% of net sales for
the quarter. As a percent of net sales, dressbarn GP improvement of 190 basis
points was primarily due to favorable leverage on buying and occupancy costs
gained from the increase in same stores sales.
For the nine months, GP increased 29.7%, to $259.3 million, or 37.4% of net
sales, from $199.9 million, or 36.6 % of net sales, for the prior nine-month
period. GP for dressbarn increased 8.3 % to $216.5 million, or 37.4% of net
sales, and maurices GP was $42.7 million or 37.5% of net sales for the quarter.
As a percent of net sales, the dressbarn GP improvement of 80 basis points was
primarily due to favorable leverage on buying and occupancy costs gained from
the increase in same stores sales.
Selling, general and administrative (SG&A) expenses increased by 59.8% to
$82.6 million, or 27.9% of net sales, in the third quarter as compared to $51.7
million, or 28.2% of net sales, in the prior period. As a percent of net sales,
consolidated SG&A decreased 30 basis points for the quarter as a result of the
operating leverage gained with the inclusion of maurices as well as the
favorable leverage gained from increased same store sales. SGA for dressbarn
increased 13.7% to $58.8 million, or 28.9% of net sales. maurices SG&A was $23.8
million for the quarter. As a percent of net sales, dressbarn SG&A increased 70
basis points in the quarter, primarily due to increases in benefit costs, audit
fees and other professional fees (primarily related to the compliance costs in
connection with the internal control attestations mandated by the Sarbanes-Oxley
Act of 2002).
For the nine months, SG&A expenses increased by 29.3% to $200.3 million, or
28.9% of net sales, versus $154.9 million, or 28.3% of net sales, in the
comparable nine-month period. SG&A for dressbarn increased 9.3 % to $169.3
million, or 29.2% of net sales, and maurices SG&A was $31.0 million for the
nine-month period. As a percent of net sales, dressbarn SG&A increased 90 basis
points for the nine months, primarily due to increases in benefit costs and
professional fees discussed above. The Company currently anticipates that SG&A
expenses in the fourth quarter of fiscal 2005 will continue to be pressured by
certain cost categories such as Sarbanes-Oxley compliance costs and other
professional fees. However, the Company continues its integration plan for
maurices that will result in best practices and create incremental efficiencies
and cost savings.
Depreciation increased 128.6% to $10.0 million in the third quarter from
$4.4 million in the prior period. Depreciation for dressbarn increased 38% to
$6.1 million and maurices depreciation was $4.0 million for the quarter. The
dressbarn increase was due primarily to the roll out of its new POS system in
the first quarter of fiscal 2005.
For the nine months, depreciation expense increased 39.9% to $23.9 million
from $17.1 million last year. dressbarn depreciation increased 8.4% to $18.5
million and maurices depreciation was $5.4 million for the quarter. The
dressbarn increase was due primarily to the roll out of its new POS system in
the first quarter of fiscal 2005.
Interest income decreased 31.8% to $0.4 million in the third quarter and
decreased 34.9% to $1.2 million in the nine months versus last year's $0.6
million and $1.8 million, respectively. For the quarter, the decrease was
primarily due to the reduction 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. For the nine month period, the decrease was due to the reduction in
investment funds as well as a realized loss on the sale of marketable securities
of $1.2 million recorded as a reduction to interest income in the second quarter
of fiscal 2005.
Interest expense increased 174.5% to $3.7 million in the third quarter and
increased 81.2% to $7.1 million in the nine months versus last year's $1.3
million and $3.9 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, combined with the sale of investments, were used to 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.
In the third quarter, the Company increased its effective tax rate to
37.8% from 36.5% in fiscal 2004. The increase resulted from a reevaluation of
the Company's effective tax rate for fiscal 2005 giving effect to the Maurices
acquisition and the resulting changes in the Company's funds available for
investment and estimated tax-free income. As a result, the Company has increased
its effective tax rate for fiscal 2005 to 37.2%.
Principally as a result of the above factors, net income for the third
quarter was $10.2 million, or 3.4% of net sales, an increase of 84.9% from $5.5
million, or 3.0% of net sales, in the prior period. Net income for the nine
months increased 10.8% to $19.0 million, or 2.7% of net sales, versus $17.1
million, or 3.1% of net sales, for the prior nine-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, goodwill impairment, 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 $66.8 million for the nine months
compared with $63.3 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 prepaid expenses and
other and other assets, increases in accounts payable trade, accrued salaries,
wages and related expenses, other accrued expenses and litigation accrual,
offset by increases in restricted cash, merchandise inventories, customer
credits and income taxes.
During the nine months, the Company invested $328.3 million in its
acquisition of Maurices. This investment was funded from the issuance 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. In addition, the Company received a $4.7 million post
closing working capital adjustment from the seller of Maurices in the third
quarter of fiscal 2005.
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 the date of this filing, the
Company has not utilized the revolving credit facility. As of April 30, 2005 the
Company has repaid $10 million of the term loan, which included a voluntary
principal prepayment of $7.5 million, leaving a balance of $90 million. As of
April 30, 2005, scheduled principal maturities of the above debt are as follows:
$.3 million, $8.6 million, $18.6 million, $23.7 million, $28.8 million and
$157.3 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 $22.2 million
in capital expenditures for the nine months ended April 30, 2005 as compared to
$23.7 million in the prior nine-month period. The Company plans to invest
approximately $10 million in capital expenditures during the last three 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 on 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 April 30, 2005, the
Company had the $90 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 $0.9 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
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 has
conducted a review of its internal controls related to store lease accounting
and construction allowances. As a result of such review, the Company has put
additional policies and procedures in place such as improving the quality of its
accounting staff through training and education and insuring that all accounting
personnel understand the accounting regulations and standards to insure its
financial reporting regarding store lease accounting and construction allowances
are complete, accurate, consistent, comparable across accounting periods, and
fairly presented in accordance with generally accepted accounting principles and
applicable regulatory guidelines. The Company is in the process of testing the
effectiveness of these new policies and procedures.
In addition, subsequent to the issuance of the Form 10-Q for the quarter
ended January 29, 2005, the Company's management determined that certain
supplemental information presented in Note 12 was incorrect. Accordingly, the
supplemental financial information for the Parent Company and Guarantor and
Non-Guarantor subsidiaries presented in Note 12 of the Company's financial
statements originally included in Form 10Q for the quarter ended January 29,
2005 had to be restated. There were no changes to the Company's Unaudited
Condensed Balance Sheets as of January 29, 2005 and July 31, 2004, and the
Statements of Earnings and Statements of Cash Flows for the thirteen and
twenty-six weeks ended January 29, 2005 and January 24, 2004. The Company
believes this restatement was an indication of a material weakness in the
preparation of the footnotes to the financial statements filed as part of its
Form 10-Q for the quarter ended January 29, 2005. The Company has conducted a
review of its internal controls related to the preparation and review of
footnotes in its financial statements. As a result of such review, the Company
has put additional policies and procedures in place such as adding new trained
accounting personnel to its staff and supplementing existing staff with
additional training, instituting quality control standards over its footnote
preparation such as documented tie-out procedures with multiple signoffs and
additional reviews to insure that the supplemental information presented in its
financial statements are complete, accurate, consistent, comparable across
accounting periods, and fairly presented in accordance with generally accepted
accounting principles and applicable regulatory guidelines. The Company is in
the process of testing the effectiveness of these new policies and procedures.
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
matters discussed above, the Company's chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were not effective in respect to the two matters addressed above as
of the end of the period covered by this Report, 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 has completed the process of documenting its systems and
processes (except Maurices), and is in the process of evaluating and testing key
internal controls 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 Section 404 assessment will be required to
be completed for Maurices by the end of fiscal 2006.
Except to the extent discussed above, there were no changes in the
Company's internal control over financial reporting during the first nine months
of fiscal 2005 that materially affected or are reasonably likely to materially
affect internal control over financial reporting.
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. On May 31, 2005 the Supreme Court of
Connecticut unanimously reversed the $32 million judgment against the Company
and remanded the case with direction to render judgment in favor of the Company.
The plaintiffs have an opportunity to file a motion for reconsideration or
reconsideration en banc, with the Court's decision stayed pending such motion.
If the motion is filed and the Supreme Court does not reject the motion it could
be several months before any further decisions are made.
The Company continues in settlement discussions regarding the class action
lawsuit 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
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 five reports on Form 8-K during the quarter ended April
30, 2005.
Date Filed Description
February 25, 2005 Restatement of historical financial statements as a result of correcting an error in the
application of GAAP applicable to certain leases and leasehold improvements.
March 09, 2005 Compensation Committee approval of certain changes to the Management Incentive (Bonus)
Plan, the Company's 401 (k) Plan, and the Nonqualified Deferred Compensation Plan.
March 10, 2005 Amendment to the Compensation Committee approval of certain changes to the Management
Incentive (Bonus) Plan, the Company's 401 (k) Plan, and the Nonqualified Deferred
Compensation Plan.
March 21, 2005 Filing of financial statements and exhibits related to the acquisition of Maurices and to
file the required pro forma financial information.
March 23, 2005 Release of Second Quarter Results
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)