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EX-32.1 - EX-32.1 - DESTINATION XL GROUP, INC.dxlg-ex321_2015050211.htm

 

 

UNITED STATES

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 Quarterly Period Ended May 2, 2015

Commission File Number 01-34219

 

DESTINATION XL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

04-2623104

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

555 Turnpike Street, Canton, MA

 

02021

(Address of principal executive offices)

 

(Zip Code)

(781) 828-9300

(Registrant’s telephone

number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding as of May 20, 2015 was 50,746,448.

 

 

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

DESTINATION XL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

May 2, 2015

 

 

January 31, 2015

 

 

 

(Fiscal 2015)

 

 

(Fiscal 2014)

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,553

 

 

$

4,586

 

Accounts receivable

 

 

5,659

 

 

 

3,619

 

Inventories

 

 

123,772

 

 

 

115,220

 

Prepaid expenses and other current assets

 

 

10,515

 

 

 

8,913

 

Total current assets

 

 

146,499

 

 

 

132,338

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation and amortization

 

 

123,888

 

 

 

120,328

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Intangible assets

 

 

3,139

 

 

 

3,308

 

Other assets

 

 

3,848

 

 

 

3,907

 

Total assets

 

$

277,374

 

 

$

259,881

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,385

 

 

$

7,335

 

Current portion of deferred gain on sale-leaseback

 

 

1,465

 

 

 

1,465

 

Accounts payable

 

 

34,844

 

 

 

29,979

 

Accrued expenses and other current liabilities

 

 

25,029

 

 

 

31,972

 

Borrowings under credit facility

 

 

40,143

 

 

 

18,817

 

Total current liabilities

 

 

108,866

 

 

 

89,568

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

24,290

 

 

 

26,171

 

Deferred rent and lease incentives

 

 

29,613

 

 

 

28,850

 

Deferred gain on sale-leaseback, net of current portion

 

 

14,288

 

 

 

14,654

 

Deferred tax liability

 

 

118

 

 

 

91

 

Other long-term liabilities

 

 

7,335

 

 

 

8,157

 

Total long-term liabilities

 

 

75,644

 

 

 

77,923

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 1,000,000 shares  authorized, none issued

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 61,593,147 and  61,560,544 shares issued at May 2, 2015 and January 31, 2015, respectively

 

 

616

 

 

 

616

 

Additional paid-in capital

 

 

300,681

 

 

 

299,892

 

Treasury stock at cost, 10,877,439 shares at May 2, 2015 and January 31, 2015

 

 

(87,977

)

 

 

(87,977

)

Accumulated deficit

 

 

(112,477

)

 

 

(111,903

)

Accumulated other comprehensive loss

 

 

(7,979

)

 

 

(8,238

)

Total stockholders' equity

 

 

92,864

 

 

 

92,390

 

Total liabilities and stockholders' equity

 

$

277,374

 

 

$

259,881

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

2


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

 

May 2, 2015

 

 

May 3, 2014

 

 

 

(Fiscal 2015)

 

 

(Fiscal 2014)

 

 

 

 

 

Sales

 

$

104,405

 

 

$

96,659

 

Cost of goods sold including occupancy costs

 

 

56,166

 

 

 

52,721

 

Gross profit

 

 

48,239

 

 

 

43,938

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

41,469

 

 

 

41,447

 

Depreciation and amortization

 

 

6,522

 

 

 

5,430

 

Total expenses

 

 

47,991

 

 

 

46,877

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

248

 

 

 

(2,939

)

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(761

)

 

 

(411

)

 

 

 

 

 

 

 

 

 

Loss from continuing operations before provision for income taxes

 

 

(513

)

 

 

(3,350

)

Provision for income taxes

 

 

61

 

 

 

47

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

(574

)

 

 

(3,397

)

Loss from discontinued operations, net of taxes

 

 

 

 

 

(139

)

 

 

 

 

 

 

 

 

 

Net loss

 

$

(574

)

 

$

(3,536

)

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted:

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.01

)

 

$

(0.07

)

Loss from discontinued operations

 

$

-

 

 

$

-

 

Net loss per share - basic and diluted

 

$

(0.01

)

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

49,019

 

 

 

48,656

 

Diluted

 

 

49,019

 

 

 

48,656

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

3


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

For the three months ended

 

 

 

 

May 2, 2015

 

 

May 3, 2014

 

 

 

 

(Fiscal 2015)

 

 

(Fiscal 2014)

 

 

Net loss

 

$

(574

)

 

$

(3,536

)

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

23

 

 

 

92

 

 

Pension plan

 

 

236

 

 

 

139

 

 

Other comprehensive income (loss) before taxes

 

 

259

 

 

 

231

 

 

Tax (provision) benefit related to items of other comprehensive income (loss)

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

259

 

 

 

231

 

 

Comprehensive loss

 

$

(315

)

 

$

(3,305

)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

4


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Paid-in

 

 

Treasury Stock

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at January 31, 2015

 

 

61,561

 

 

$

616

 

 

$

299,892

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(111,903

)

 

$

(8,238

)

 

$

92,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

598

 

Exercises under option program

 

 

12

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61

 

Board of Directors compensation

 

 

20

 

 

 

 

 

 

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gain associated with Pension Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

236

 

 

 

236

 

Foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

23

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(574

)

 

 

 

 

 

 

(574

)

Balance at May 2, 2015

 

 

61,593

 

 

$

616

 

 

$

300,681

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(112,477

)

 

$

(7,979

)

 

$

92,864

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

5


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the three months ended

 

 

 

May 2, 2015

 

 

May 3, 2014

 

 

 

(Fiscal 2015)

 

 

(Fiscal 2014)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(574

)

 

$

(3,536

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

 

 

 

Amortization of deferred gain on sale leaseback

 

 

(366

)

 

 

(367

)

Amortization of deferred debt issuance costs

 

 

70

 

 

 

38

 

Depreciation and amortization

 

 

6,522

 

 

 

5,430

 

Deferred taxes, net of valuation allowance

 

 

27

 

 

 

13

 

Stock compensation expense

 

 

598

 

 

 

747

 

Issuance of common stock to Board of Directors

 

 

130

 

 

 

51

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities :

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,040

)

 

 

951

 

Inventories

 

 

(8,552

)

 

 

(8,598

)

Prepaid expenses and other current assets

 

 

(1,602

)

 

 

(1,590

)

Other assets

 

 

59

 

 

 

267

 

Accounts payable

 

 

4,865

 

 

 

(4,604

)

Deferred rent and lease incentives

 

 

763

 

 

 

571

 

Accrued expenses and other liabilities

 

 

(7,851

)

 

 

(3,271

)

Net cash used for operating activities

 

 

(7,951

)

 

 

(13,898

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property and equipment, net

 

 

(9,568

)

 

 

(11,086

)

Net cash used for investing activities

 

 

(9,568

)

 

 

(11,086

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

61

 

 

 

 

Proceeds from the issuance of long-term debt

 

 

 

 

 

7,303

 

Principal payments on long-term debt

 

 

(1,862

)

 

 

(1,387

)

Costs associated with debt issuances

 

 

(8

)

 

 

(27

)

Net borrowings under credit facility

 

 

21,295

 

 

 

20,191

 

Net cash provided by financing activities

 

 

19,486

 

 

 

26,080

 

Net increase in cash and cash equivalents

 

 

1,967

 

 

 

1,096

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

4,586

 

 

 

4,544

 

End of period

 

$

6,553

 

 

$

5,640

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

6


DESTINATION XL GROUP, INC.

Notes to Consolidated Financial Statements

 

 

1. Basis of Presentation

In the opinion of management of Destination XL Group, Inc., a Delaware corporation (formerly known as Casual Male Retail Group, Inc. and, collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended January 31, 2015 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 25, 2015.

The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make 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. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2015 and fiscal 2014 are 52-week periods ending January 30, 2016 and January 31, 2015, respectively.

Segment Information

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of two principal operating segments: its retail business and its direct business. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment, consistent with its omni-channel business approach. The direct operating segment includes the operating results and assets for LivingXL® and ShoesXL®.

 

Change in Accounting Principle

The Company historically presented deferred debt issuance costs, or fees related to directly issuing debt, as assets on the consolidated balance sheets. During the first quarter of fiscal 2015, the Company elected early adoption of ASU 2015−03, “Interest − Imputation of Interest (Subtopic 835−30), Simplifying the Presentation of Debt Issuance Costs”. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense over the term of the corresponding debt issuance. The Company applied the new guidance retrospectively to all prior periods presented in the financial statements.

The reclassification did not impact net income (loss) previously reported or any prior amounts reported on the Consolidated Statements of Operations. The following table presents the effect of the retrospective application of this change in accounting

principle on the Company’s Consolidated Balance Sheets as of January 31, 2015:

 

7


 

 

As Reported

 

 

Effect of Change in

 

 

After Change in

 

Consolidated Balance Sheets (in thousands)

 

January 31, 2015

 

 

Accounting Principle

 

 

Accounting Principle

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

9,190

 

 

$

(277

)

 

$

8,913

 

Total current assets

 

 

132,615

 

 

 

(277

)

 

 

132,338

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

4,849

 

 

 

(942

)

 

 

3,907

 

Total assets

 

 

261,100

 

 

 

(1,219

)

 

 

259,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,489

 

 

$

(154

)

 

$

7,335

 

Borrowings under credit facility

 

 

19,402

 

 

 

(585

)

 

 

18,817

 

Total current liabilities

 

 

90,307

 

 

 

(739

)

 

 

89,568

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

26,651

 

 

 

(480

)

 

 

26,171

 

Total long-term liabilities

 

 

78,403

 

 

 

(480

)

 

 

77,923

 

Total liabilities and stockholders' equity

 

 

261,100

 

 

 

(1,219

)

 

 

259,881

 

 

Reclassification

As a result of the Company adopting ASU 2015-03, for the first three months ended May 3, 2014, the Company has reclassed $38,000 from “Change in Other Assets” to “Amortization of Deferred Debt Issuance Costs” in the Consolidated Statement of Cash Flows.

Intangibles

At May 2, 2015, the “Casual Male” trademark had a carrying value of $1.3 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value on an accelerated basis, consistent with projected cash flows through fiscal 2018, its estimated remaining useful life.

The Company’s “Rochester” trademark is considered an indefinite-lived intangible asset and has a carrying value of $1.5 million. During the first three months ended May 2, 2015, no event or circumstance occurred which would cause a reduction in the fair value of the Company’s reporting units, requiring interim testing of the Company’s “Rochester” trademark.

 

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At May 2, 2015, the fair value approximates the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.

The fair value of indefinite-lived assets, which consists of the Company’s “Rochester” trademark, is measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of the trademark is determined using a projected discounted cash flow analysis based on unobservable inputs and are classified within Level 3 of the valuation hierarchy. See Intangibles above.

8


The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.

 

Accumulated Other Comprehensive Income (Loss) - (“AOCI”)

Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income and reclassifications from AOCI for the three months ended May 2, 2015 and May 3, 2014 are as follows:

 

 

 

May 2, 2015

 

 

May 3, 2014

 

For the three months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of the year

 

$

(7,795

)

 

$

(443

)

 

$

(8,238

)

 

$

(4,547

)

 

$

(13

)

 

$

(4,560

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

97

 

 

 

23

 

 

 

120

 

 

 

82

 

 

 

92

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income (loss), net of taxes  (1)

 

 

139

 

 

 

 

 

 

139

 

 

 

57

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

236

 

 

 

23

 

 

 

259

 

 

 

139

 

 

 

92

 

 

 

231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(7,559

)

 

$

(420

)

 

$

(7,979

)

 

$

(4,408

)

 

$

79

 

 

$

(4,329

)

 

 

(1)

Includes the amortization of the unrecognized (gain)/loss on pension plans which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $139,000 and $57,000 for the three months ended May 2, 2015 and May 3, 2014, respectively. There was no tax benefit for either period.

 

Revenue Recognition

Revenue from the Company’s retail store operation is recorded upon purchase of merchandise by customers, net of an allowance for sales returns. Revenue from the Company’s e-commerce operations is recognized at the time a customer order is delivered, net of an allowance for sales returns. Revenue is recognized by the operating segment that fulfills a customer’s order.

 

Stock-based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statement of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

 

9


Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “Other Assets and Deferred Costs - Capitalized Advertising Costs”. The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is permitted after December 15, 2016 (the original effective date). The Company does not believe that there will be any material impact of ASU 2014-09 on its Consolidated Financial Statements upon adoption.

In June 2014, FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period”. ASU 2014-12 affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with earlier adoption permitted. The Company does not believe that there will be any material impact of ASU 2014-12 on its Consolidated Financial Statements upon adoption.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)”. ASU 2015-01 eliminates the concept of extraordinary items from GAAP, which requires an entity to separately classify, present, and disclose extraordinary events and transactions. ASU 2015-01 is effective for annual reporting periods beginning after December 15, 2015, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of ASU 2015-01 is not expected to have an impact on the Company’s financial position or results of operations.

In May 2015, the FASB issued ASU 2015-05, “Intangibles- Goodwill and Other - Internal -Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. ASU 2015-05 provides accounting guidance on how customers should treat cloud computing arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s financial position or results of operations.

No other new accounting pronouncements, issued or effective during the first quarter of fiscal 2015, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.

 

 

2. Debt

Credit Agreement with Bank of America, N.A.

On October 30, 2014, the Company amended its credit facility with Bank of America, N.A, effective October 29, 2014, by executing the Second Amendment to the Sixth Amended and Restated Loan and Security Agreement (as amended, the “Credit Facility”).

The Credit Facility provides for maximum committed borrowings of $125 million. The Credit Facility includes, pursuant to an accordion feature, the ability to increase the Credit Facility by an additional $50 million upon the request of the Company and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20 million for commercial and standby letter of credits and a sublimit of up to $15 million for swingline loans. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The maturity date of the Credit Facility is October 29, 2019. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets, excluding (i) a first priority lien held by the lenders of the Term Loan Facility on certain equipment of the Company and (ii) intellectual property.

At May 2, 2015, the Company had outstanding borrowings under the Credit Facility of $40.7 million, before unamortized debt issuance costs of $0.6 million. Outstanding standby letters of credit were $2.2 million and documentary letters of credit were $0.4 million. Unused excess availability at May 2, 2015 was $68.3 million. Average monthly borrowings outstanding under the Credit

10


Facility during the first three months of fiscal 2015 were $37.4 million, resulting in an average unused excess availability of approximately $71.1 million. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.  Pursuant to the terms of the Credit Facility, if the Company’s excess availability under the Credit Facility fails to be equal to or greater than the greater of (i) 10% of the Loan Cap (defined in the Credit Facility as the lesser of the revolving credit commitments at such time or the borrowing base at the relevant measurement time) and (ii) $7.5 million, the Company will be required to maintain a minimum consolidated fixed charge coverage ratio of 1.0:1.0 in order to pursue certain transactions, including but not limited to, stock repurchases, payment of dividends and business acquisitions.

Borrowings made pursuant to the Credit Facility will bear interest at a rate equal to the base rate (determined as the highest of (a) Bank of America N.A.’s prime rate, (b) the Federal Funds rate plus 0.50% or (c) the annual ICE-LIBOR rate (“LIBOR”) for the respective interest period) plus a varying percentage, based on the Company’s borrowing base, of 0.50%-0.75% for prime-based borrowings and 1.50%-1.75% for LIBOR-based borrowings. The Company is also subject to an unused line fee of 0.25%. At May 2, 2015, the Company’s prime-based interest rate was 3.75%. At May 2, 2015, the Company had approximately $36.0 million of its outstanding borrowings in a LIBOR-based contract with an interest rate of 1.64%. The LIBOR-based contract expired on May 4, 2015. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.

The fair value of the amount outstanding under the Credit Facility at May 2, 2015 approximated the carrying value.

Long-Term Debt

Components of long-term debt are as follows:

 

(in thousands)

 

May 2, 2015

 

 

January 31, 2015

 

Equipment financing notes

 

$

17,778

 

 

$

19,390

 

Term loan, due 2019

 

 

14,500

 

 

 

14,750

 

Less: unamortized debt issuance costs (1)

 

 

(603

)

 

 

(634

)

Total long-term debt

 

 

31,675

 

 

 

33,506

 

Less: current portion of long-term debt

 

 

7,385

 

 

 

7,335

 

Long-term debt, net of current portion

 

$

24,290

 

 

$

26,171

 

(1)

Includes the reclassification of debt issuance costs of $0.1 million from Prepaid and other current assets and $0.5 million from “Other assets” at January 31, 2015 as a result of the Company adopting ASU 2015-03, see Note 1.

Equipment Financing Loans

Pursuant to a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC, dated July 20, 2007 and amended on September 30, 2013 (the “Master Agreement”), the Company has entered into twelve equipment security notes (in aggregate, the “Notes”), whereby the Company borrowed an aggregate of $26.4 million. The Notes are for a term of 48 months and accrue interest at fixed rates ranging from 3.07% and 3.50%. Principal and interest are paid monthly, in arrears.

The Notes are secured by a security interest in all of the Company’s rights, title and interest in and to certain equipment. The Company is subject to a prepayment penalty equal to 1% of the prepaid principal of the Notes until the first anniversary, 0.5% of the prepaid principal from the first anniversary until the second anniversary and no prepayment penalty thereafter. The Master Agreement includes default provisions that are customary for financings of this type and are similar and no more restrictive than the Company’s existing Credit Facility.

Term Loan

 

On October 30, 2014, the Company entered into a term loan agreement with respect to a new $15 million senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”). The effective date of the Term Loan Facility is October 29, 2014 (the “Effective Date”). The proceeds from the Term Loan Facility were used to repay borrowings under the Credit Facility.

 

The Term Loan Facility bears interest at a rate per annum equal to the greater of (a) 1.00% and (b) the one month LIBOR rate, plus 6.50%.  Interest payments are payable on the first business day of each calendar month, and increase by 2% following the occurrence and during the continuance of an “event of default,” as defined in the Term Loan Facility. The Term Loan Facility provides for quarterly principal payments on the first business day of each calendar quarter, commencing the first business day of January 2015, in an aggregate principal amount equal to $250,000, subject to adjustment, with the balance payable on the termination date.

 

11


The Term Loan Facility includes usual and customary mandatory prepayment provisions for transactions of this type that are triggered by the occurrence of certain events.  In addition, the amounts advanced under the Term Loan Facility can be optionally prepaid in whole or part. All prepayments are subject to an early termination fee in the amount of: (a) 4% of the amount prepaid if the prepayment is prior to the first anniversary of the Effective Date; (b) 2% of the amount prepaid if the prepayment is after the first anniversary, but prior to the second anniversary, of the Effective Date; and (c) 1% of the amount prepaid if the prepayment is after the second anniversary, but prior to the third anniversary, of the Effective Date. There is no prepayment penalty after the third anniversary of the Effective Date.  

 

The Term Loan Facility matures on October 29, 2019. It is secured by a first priority lien on certain equipment of the Company, and a second priority lien on substantially all of the remaining assets of the Company, excluding intellectual property.

 

 

3. Stock-Based Compensation

2013-2016 LTIP

The Company’s 2013-2016 Destination XL Group, Inc. Long-Term Incentive Plan (the “2013-2016 LTIP”) was approved in the second quarter of fiscal 2013.  Pursuant to the terms of the 2013-2016 LTIP, on the date of grant, each participant was granted an unearned and unvested award equal in value to four times his/her annual salary multiplied by the applicable long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 50% for other participants in the plan, which the Company refers to as the “Projected Benefit Amount.” Each participant was granted 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash. All shares were granted from the Company’s 2006 Incentive Compensation Plan.

Of the total Projected Benefit Amount, 50% is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award (half of the shares of restricted stock, options and cash) vests in three installments with 20% of the time-vested portion vesting at the end of fiscal 2014, 40% will vest at the end of fiscal 2015 and the remaining 40% will vest at the end of fiscal 2016.

 

For the performance-based portion of the award to vest, the Company must achieve, during any rolling four fiscal quarter period that ends on or before the end of fiscal 2015, revenue of at least $550 million and an operating margin of not less than 8.0%. In the event that the Company achieves its target of $550 million in revenue with an operating margin of not less than 8.0% during any rolling fiscal four quarters prior to fiscal 2016, then the total Projected Benefit Amount vests in full.

 

If the targets for vesting of the performance-based portion of the award are not met by the end of fiscal 2015, then the performance-based target can still be met in fiscal 2016. In fiscal 2016, the Company must achieve revenue of at least $600 million and an operating margin of not less than 8.0% for participants to receive 100% vesting of the performance-based portion of the Projected Benefit Amount. If the Company does not meet the performance target at the end of fiscal 2016, but the Company is able to achieve revenue equal to or greater than $510 million at the end of fiscal 2016 and the operating margin is not less than 8.0%, then the participants will receive a pro-rata portion of the performance-based award based on minimum sales of $510 million (50% payout) and $600 million (100% payout).

 

Assuming the Company achieves the performance target and 100% of the Projected Benefit Amount vests, excluding estimated forfeitures, the total potential value of all awards over this four-year period, as of May 2, 2015, would be approximately $19.4 million. Approximately half of the compensation expense relates to the time-vested awards, which is being expensed over forty-four months, based on the respective vesting dates. As the performance targets were not deemed probable at May 2, 2015, no expense for the performance-based awards has been recognized through the end of the first quarter of fiscal 2015.

2016 Long-Term Incentive Wrap-Around Plan

In the fourth quarter of fiscal 2014, the Company’s Compensation Committee approved the 2016 Long-Term Incentive Wrap-Around Plan (the “Wrap-Around Plan”).  The Wrap-Around Plan is a supplemental performance-based incentive plan that is only effective if there is no vesting of the performance-based awards under the 2013-2016 LTIP and, as a result, all performance-based awards under that plan are forfeited. Under the Wrap-Around Plan, if the target level performance metrics for fiscal 2016 are met, participants will be eligible to receive a payout equal to 80% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  If the target level performance metrics for fiscal 2016 under the Wrap-Around Plan are exceeded, the greatest payout that participants will be eligible to receive is 100% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  Any award earned will be paid 50% in cash and 50% in shares of restricted stock.

12


The performance target under the Wrap-Around Plan consists of two metrics, Sales and EBITDA, with threshold (50%), target (80%) and maximum (100%) payout levels.  Each metric is weighted as 50% of the total performance target.  However, in order for there to be any payout under either metric, EBITDA for fiscal 2016 must be equal to or greater than the minimum threshold.    

The Wrap-Around Plan also provides for an opportunity to receive additional shares of restricted stock if the performance targets are achieved and the Company’s closing stock price is $6.75 or higher on the day earnings for fiscal 2016 are publicly released. If the Company’s stock price is $6.75, the 50% payout in restricted shares will be increased by 20% and if the stock price is $7.25 or higher, the 50% payout in restricted shares will be increased by 30%.  In any event, the most that can be achieved is the 100% payout level. All awards granted pursuant to the Wrap-Around Plan will not vest until the last day of the second quarter of fiscal 2017.

Assuming that the Company achieves the performance target at target levels under the Wrap-Around Plan, and further assuming that the Company’s stock price is greater than $7.25, at the time the Company’s earnings are publicly released, the compensation expense associated with this Wrap-Around Plan is estimated to be approximately $8.7 million.  However, because the performance targets under the Wrap-Around Plan were not deemed probable at May 2, 2015, no compensation expense for the performance-based awards has been recognized through the end of first quarter of fiscal 2015.

2006 Plan—Stock Option and Restricted Share Award Activity

Pursuant to the Company’s 2006 Incentive Compensation Plan, as amended (the “2006 Plan”), the Company has 7,250,000 shares authorized for issuance, of which 4,250,000 shares may be subject to the granting of awards other than stock options and stock appreciation rights.

 

The following tables summarize the stock option activity and restricted share activity under the 2006 Plan for the first three months of fiscal 2015:

 

 

 

Number of

Shares

 

 

Weighted-average

exercise price

per option

 

 

Weighted-average

remaining

contractual term

 

Aggregate

intrinsic value

 

Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding options at beginning of year

 

 

2,747,802

 

 

$

4.97

 

 

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

 

 

 

 

 

Options canceled

 

 

(13,791

)

 

$

5.04

 

 

 

 

 

 

 

Options exercised (1)

 

 

(12,136

)

 

$

5.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding options at end of quarter

 

 

2,721,875

 

 

$

4.97

 

 

7.7 years

 

$

321,182

 

Options exercisable at end of quarter

 

 

582,060

 

 

$

4.76

 

 

6.1 years

 

$

260,516

 

 

(1)

The intrinsic value of options exercised was immaterial.

 

 

 

 

 

 

 

 

Number of

Shares

 

 

Weighted-average

grant-date

fair value (1)

 

Restricted Shares

 

 

 

 

 

 

 

 

 

 

 

 

Restricted shares outstanding at beginning of year

 

 

 

 

 

 

1,696,528

 

 

$

5.09

 

Shares granted (2)

 

 

 

 

 

 

14,886

 

 

$

5.15

 

Deferred shares granted (3)

 

 

 

 

 

 

4,962

 

 

$

5.15

 

Restricted shares vested and shares issued

 

 

 

 

 

 

(16,553

)

 

$

5.22

 

Restricted shares canceled

 

 

 

 

 

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted and deferred shares outstanding at end of quarter

 

 

 

 

 

 

1,699,823

 

 

$

5.09

 

 

(1)

The fair value of both a restricted share and a deferred share is equal to the Company’s closing stock price on the date of grant.

 

(2)

During the first three months of fiscal 2015, the Company granted 14,886 shares of stock, with a fair value of approximately $76,663 to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. Beginning in fiscal 2015, directors are required to elect 50% of their quarterly retainer in equity.  All shares paid to directors to satisfy this election are issued from the Company’s 2006 Stock Incentive Plan.  Any shares in excess of the minimum required election will be issued from the Company’s Non-Employee Director Stock Purchase Plan.

13


(3)

During the first three months of fiscal 2015, the Company granted 4,962 shares of deferred stock, with a fair value of approximately $25,554 to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. The shares of deferred stock will vest three years from the date of grant or at separation of service, based on the irrevocable election of each director.

1992 Stock Incentive Plan (the “1992 Plan”)—Stock Option Activity

The following table summarizes stock option activity under the 1992 Plan for the first three months of fiscal 2015:

 

 

 

Number of

Shares

 

 

Weighted-average

exercise price

per option

 

 

Weighted-average

remaining

contractual term

 

Aggregate