10-Q/A 1 d010510qa-2.txt FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 2) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended January 29, 2005 Commission file number 0-11736 THE DRESS BARN, INC. (Exact name of registrant as specified in its charter) Connecticut 06-0812960 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Dunnigan Drive, Suffern, New York 10901 (Address of principal executive offices) (Zip Code) (845) 369-4500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock $.05 par value Indicate whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X] No [ ]. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. .05 par value 29,862,826 shares of voting common stock were outstanding on March 17, 2005 EXPLANATORY NOTE The Dress Barn, Inc. (together with its subsidiaries, the "Company") is filing this Amendment No. 2 on Form 10-Q/A (this "Amendment No. 2") to amend its Quarterly Report on Form 10-Q for the fiscal quarter ended January 29, 2005, as previously amended by Amendment No. 1 on Form 10-Q/A filed on March 23, 2005 (the "Second Quarter Form 10-Q"). Amendment No. 1 was filed to submit exhibit 10(ss), The Dress Barn, Inc. 2001 Stock Incentive Plan (amended and restated effective January 1, 2005) that was omitted from the original 10-Q. Subsequent to the issuance of the Second Quarter Form 10-Q, the Company's management determined that certain supplemental information presented in Note 12 was incorrect. Accordingly, the accompanying supplemental financial information for the Parent Company and Guarantor and Non-Guarantor subsidiaries presented in Note 12 has been 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. Except as otherwise expressly stated herein, the information in this Amendment No. 2 is as of March 23, 2005, the date on which the Second Quarter Form 10-Q was filed, and this Amendment No. 2 does not purport to provide an update or discussion of any developments subsequent to such date. THE DRESS BARN, INC. FORM 10-Q/A (Amendment No. 2) QUARTER ENDED JANUARY 29, 2005 TABLE OF CONTENTS Page Number Part I. FINANCIAL INFORMATION (Unaudited): Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets January 29, 2005 and July 31, 2004 (as restated) I-4 Condensed Consolidated Statements of Earnings for the Thirteen weeks ended January 29, 2005 and January 24, 2004 (as restated) I-6 Condensed Consolidated Statements of Earnings for the Twenty-six weeks ended January 29, 2005 and January 24, 2004 (as restated) I-7 Condensed Consolidated Statements of Cash Flows for the Twenty-six weeks ended January 29, 2005 and January 24, 2004 (as restated) I-8 Notes to Unaudited Condensed Consolidated Financial Statements I-10 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-38 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-40 Signatures I-41 * Not applicable in this filing Item 1 - FINANCIAL STATEMENTS The Dress Barn, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) Amounts in thousands, except share data
January 29, July 31, 2005 2004 ---------------------- ----------------- (restated, see Note 3) ASSETS Current Assets: Cash and cash equivalents $34,936 $15,141 Restricted cash and investments 39,461 38,661 Marketable securities and investments 5,726 122,700 Merchandise inventories 146,359 116,912 Deferred tax asset 13,691 14,845 Prepaid expenses and other 13,296 8,898 ---------------------- ----------------- Total Current Assets 253,469 317,157 ---------------------- ----------------- Property and Equipment: Land and buildings 58,261 45,391 Leasehold improvements 124,328 93,289 Fixtures and equipment 200,389 173,466 Computer software 33,321 23,302 ---------------------- ----------------- 416,299 335,448 Less accumulated depreciation and amortization 180,438 172,244 ---------------------- ----------------- 235,861 163,204 ---------------------- ----------------- Intangible assets, net (see note 2) 111,766 -- Goodwill (see note 2) 135,774 -- Other Assets 18,831 8,955 ---------------------- ----------------- TOTAL ASSETS $755,701 $489,316 ====================== =================
See notes to unaudited condensed consolidated financial statements The Dress Barn, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) Amounts in thousands, except share data
January 29, July 31, 2005 2004 -------------------------------------------- (restated, see Note 3) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $89,294 $66,776 Accrued salaries, wages and related expenses 32,535 21,349 Litigation accrual (see note 9) 37,736 36,128 Other accrued expenses 31,522 24,247 Customer credits 12,677 8,970 Income taxes payable - 5,548 Current portion of long-term debt 11,060 1,033 -------------------- ----------------- Total Current Liabilities 214,824 164,051 Long-Term Debt (see note 8) 236,451 31,988 Deferred Rent 41,401 40,319 -------------------- ----------------- Total Liabilities 492,676 236,358 -------------------- ----------------- Commitments and Contingencies Shareholders' Equity: Preferred stock, par value $.05 per share: Authorized- 100,000 shares Issued and outstanding- none -- -- Common stock, par value $.05 per share: Authorized- 50,000,000 shares Issued- 29,638,567 and 29,638,360 shares, respectively Outstanding- 29,638,567 and 29,618,660 shares, respectively 1,494 1,482 Additional paid-in capital 65,885 63,554 Retained earnings 195,646 188,757 Treasury stock, to be retired -- (313) Accumulated other comprehensive (loss) -- (522) -------------------- ----------------- 263,025 252,958 -------------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $755,701 $489,316 ==================== =================
See notes to unaudited condensed consolidated financial statements The Dress Barn, Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (unaudited) Amounts in thousands, except per share amounts
Thirteen Weeks Ended ------------------------------------------ January 29, January 24, 2005 2004 ------------------------------------------ (restated, see Note 3) Net sales $200,138 $171,053 Cost of sales, including occupancy and buying costs 125,536 106,121 ------------------------------------------ Gross profit 74,602 64,932 Selling, general and administrative expenses 62,568 50,753 Depreciation and amortization 7,745 6,435 ------------------------------------------ Operating income 4,289 7,744 Interest income 56 682 Interest expense (2,148) (1,219) Other income 382 382 ------------------------------------------ Earnings before provision for income taxes 2,579 7,589 Provision for income taxes 942 2,769 ------------------------------------------ Net earnings $1,637 $4,820 ========================================== Earnings per share: Basic $0.06 $0.16 ========================================== Diluted $0.05 $0.16 ========================================== Weighted average shares outstanding: Basic 29,699 29,308 ========================================== Diluted 30,491 30,050 ==========================================
See notes to unaudited condensed consolidated financial statements The Dress Barn, Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (unaudited) Amounts in thousands, except per share amounts
Twenty-Six Weeks Ended ------------------------------------------ January 29, January 24, 2005 2004 ------------------------------------------ (restated, see Note 3) Net sales $397,254 $363,597 Cost of sales, including occupancy and buying costs 249,948 228,880 ------------------------------------------ Gross profit 147,306 134,717 Selling, general and administrative expenses 117,701 103,210 Depreciation and amortization 13,901 12,712 ------------------------------------------ Operating income 15,704 18,795 Interest income 778 1,214 Interest expense (3,408) (2,571) Other income 763 763 ------------------------------------------ Earnings before provision for income taxes 13,837 18,201 Provision for income taxes 5,051 6,589 ------------------------------------------ Net earnings $8,786 $11,612 ========================================== Earnings per share: Basic $0.30 $0.40 ========================================== Diluted $0.29 $0.39 ========================================== Weighted average shares outstanding: Basic 29,639 29,253 ========================================== Diluted 30,420 29,915 ==========================================
See notes to unaudited condensed consolidated financial statements The Dress Barn, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) Dollars in thousands
Twenty-Six Weeks Ended --------------------------------- January 29, January 24, 2005 2004 --------------------------------- (restated, see Note 3) Operating Activities: Net earnings $8,786 $11,612 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 13,901 12,712 Provision for impairment and asset disposals 1,512 1,496 Deferred income tax expense 1,154 1,847 Increase in deferred rent expense 1,082 1,132 Other 1,706 96 Changes in assets and liabilities, net of acquisition: Increase in restricted cash and investments (800) -- Decrease in merchandise inventories 4,028 10,135 Decrease in prepaid expenses and other 3,390 1,684 Decrease (increase) in other assets 134 (146) Increase (decrease) in accounts payable - trade 4,461 (40) Increase in accrued salaries, wages and related expenses 5,478 1,610 Increase in litigation accrual 1,608 40 Increase (decrease) in other accrued expenses 1,299 (176) (Decrease) increase in customer credits (883) 2,739 Decrease in income taxes payable (5,548) (3,573) --------------------------------- Total adjustments 32,522 29,556 --------------------------------- Net cash provided by operating activities 41,308 41,168 ---------------------------------
The Dress Barn, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) Dollars in thousands
Twenty-Six Weeks Ended --------------------------------- January 29, January 24, 2005 2004 --------------------------------- (restated, see Note 3) Investing Activities: Acquisition of Maurices Inc., net of $982 cash acquired $(332,737) $ -- Purchases of property and equipment (12,046) (12,815) Sales and maturities of marketable securities and investments 515,863 33,040 Purchases of marketable securities and investments (399,600) (49,503) --------------------------------- Net cash (used in) investing activities (228,520) (29,278) --------------------------------- Financing Activities: Proceeds from long-term debt 215,000 -- Repayments of long-term debt (510) (483) Payment of debt issuance costs (7,580) -- Purchase of treasury stock (1,584) -- Proceeds from Employee Stock Purchase Plan 41 42 Proceeds from stock options exercised 1,640 1,808 --------------------------------- Net cash provided by financing activities 207,007 1,367 --------------------------------- Net increase in cash and cash equivalents 19,795 13,257 Cash and cash equivalents- beginning of period 15,141 37,551 --------------------------------- Cash and cash equivalents- end of period $34,936 $50,808 ================================= Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $6,164 $8,221 --------------------------------- Cash paid for interest $3,225 $901 ---------------------------------
See notes to unaudited condensed consolidated financial statements THE DRESS BARN, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The condensed consolidated financial statements are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the consolidated financial position of The Dress Barn Inc., and its wholly owned subsidiaries (the "Company") as of January 29, 2005 and July 31, 2004, the consolidated results of its operations for the thirteen weeks and twenty-six weeks ended January 29, 2005 and January 24, 2004, and cash flows for the twenty-six weeks ended January 29, 2005. The results of operations for a thirteen-week or a twenty-six week period may not be indicative of the results for the entire year. All intercompany amounts and transactions have been eliminated. The July 31, 2004 condensed consolidated balance sheet amounts have been derived from the previously audited Consolidated Balance Sheets of the Company filed on Form 10-K/A. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies and other disclosures necessary for complete financial statements in conformity with accounting principles generally accepted in the United States of America have been omitted as such items are reflected in the Company's audited financial statements and related notes thereto. Accordingly, these consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's July 31, 2004 Annual Report to Shareholders on Form 10-K/A. 2. Acquisition of Maurices Incorporated On January 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 $332.7 million, net of cash acquired, which included $4.1 million of transaction fees and is subject to post-closing adjustments. The Company's condensed consolidated financial statements include Maurices' results of operations from January 2, 2005. The Company accounted for the acquisition as a purchase using the accounting standards established in Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and, accordingly, the excess purchase price over the fair market value of the underlying net assets acquired, of $135.7 million, was allocated to goodwill. The allocation of the purchase price to assets acquired and liabilities assumed for the Maurices acquisition was based on preliminary estimates of fair value and may be revised as additional information concerning such assets and liabilities becomes available. The transaction was financed by $118.7 million in cash, the issuance of $115 million 2.5% Convertible Senior Notes due 2024, and $100 million of borrowings from a $250 million senior credit facility (consisting of a $100 million term loan, and a $150 million revolving credit line under which no funds were drawn). The estimated fair values of assets acquired and liabilities assumed at January 2, 2005 are as follows: Dollars in thousands Purchase Price $332,737 ----------------- Current assets 7,788 Inventory 33,475 Property, plant, and equipment, net 75,937 Intangibles 111,853 Other non-current assets 2,241 ----------------- Total assets acquired 231,294 ----------------- ----------------- Total liabilities assumed (34,331) ----------------- ----------------- Net assets acquired, net of cash 196,963 ----------------- ----------------- Goodwill $135,774 ================= In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," amortization of goodwill and indefinite life intangible assets is replaced with annual impairment tests. The Company will perform annual impairment tests to determine whether an impairment charge related to the carrying value of the Company's recorded goodwill is necessary. Other identifiable intangible assets consist of trade names, customer relationship and proprietary technology. Trade names have an indefinite life and therefore are not amortized. Customer relationship and proprietary technology constitute the Company's identifiable intangible assets subject to amortization which are amortized on a straight-line basis over their useful lives. Intangible assets were comprised of the following as of January 29, 2005:
Gross carrying Accumulated amount amortization Net Amount Expected Life --------------------------------------------------------------------------- Customer Relationship $2,200 $26 $2,174 7 years Proprietary Technology 3,653 61 3,592 5 years Trade Name 106,000 - 106,000 Indefinite --------------------------------------------------------------------------- $111,853 $87 $111,766 ---------------------------------------------------------------------------
The following unaudited pro forma information assumes the Maurices acquisition had occurred on July 26, 2003. The pro forma information, as presented below, is not indicative of the results that would have been obtained had the transaction occurred on July 26, 2003, nor is it indicative of the Company's future results. (Amounts in millions except per share data)
Thirteen Weeks Ended Twenty-Six Weeks Ended January 29, January 24, January 29, January 24, 2005 2004 2005 2004 ------------------------------------------- ----------------- -------------- --------------- ----------------- Pro forma net sales $277.1 $268.9 $563.7 $547.7 Pro forma net income (loss) (3.1) 4.0 3.9 10.3 Pro forma earnings per share: Basic ($0.10) $0.14 $0.13 $0.35 Diluted ($0.10) $0.13 $0.13 $0.34
3. Restatement of Financial Statements On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease-related accounting issues and their application under accounting principles generally accepted in the United States of America ("GAAP"). In light of this letter, the Company's management initiated a review of its lease accounting and determined that its then-current method of accounting for leasehold improvements funded by landlord incentives or allowances under operating leases (construction allowances) and its then-current method of calculating straight-line rent expense for its operating leases was not in accordance with GAAP. As a result, the Company restated its consolidated financial statements as of July 31, 2004 and for the thirteen and twenty-six weeks ended January 24, 2004, in this Quarterly Report. The Company had historically accounted for construction allowances as reductions to the related leasehold improvement asset on the consolidated balance sheets and presented construction allowances received as a reduction in capital expenditures in investing activities on the consolidated statements of cash flows. Management determined that Financial Accounting Standards Board ("FASB") Technical Bulletin No. 88-1, "Issues Relating to Accounting for Leases," requires these allowances to be recorded as a deferred rent liability on the consolidated balance sheets and allowances received as a component of operating activities on the consolidated statements of cash flows. Additionally, this adjustment results in a reclassification of the deferred rent amortization from "Depreciation and amortization expenses" to "Cost of sales including occupancy and buying costs" on the consolidated statements of earnings. The Company had historically recognized its straight-line rent expense for its operating leases over the lease term generally commencing with the opening date for the store, which generally coincided with the commencement of the lease payments per the lease. The store opening date also coincided with the commencement of business operations, which corresponds to the intended use of the property. Management re-evaluated FASB Technical Bulletin No. 85-3, "Accounting for Operating Leases with Scheduled Rent Increases," and determined that the lease term should commence on the date the Company takes possession of the leased space for construction purposes, which is generally two months prior to a store opening date. Furthermore, the Company determined that it should recognize rent expense on a straight-line basis for rent escalations over appropriate renewal periods, including option periods where failure to exercise such options would result in an economic penalty. Excluding tax impacts, the correction of this accounting requires the Company to record additional deferred rent in "Other accrued expenses" and "Deferred rent" and to adjust "Retained earnings" on the condensed consolidated balance sheets as well as to correct amortization in "Costs of sales including occupancy and buying costs" and "Depreciation and amortization" on the condensed consolidated statements of earnings for each of the thirteen and twenty-six weeks ended January 24, 2004. In addition, the Company corrected certain other balance sheet errors which resulted in an increase to "Property and equipment" and a corresponding increase to beginning "Retained earnings", which were included in the cumulative effect adjustments related to the reversal of an impairment reserve. In addition, the Company reclassified its provision for impairments and asset disposals from "Depreciation and Amortization" to "Selling, general and administrative". The Company also reclassified premiums paid upfront when entering into certain lease agreements that had been classified as "Property and equipment" to "Other assets" on July 31, 2004. For the thirteen and twenty-six weeks ended January 24, 2004, the cumulative effect is an increase in earnings of $0.3 million and $0.3 million, respectively. Following is a summary of the significant effects of these restatements on the Company's condensed consolidated balance sheet as of July 31, 2004, as well as on the Company's consolidated statements of earnings for thirteen and twenty-six weeks ended in January 24, 2004, and cash flows for the twenty-six weeks ended in January 24, 2004 (in thousands, except per share data):
Condensed Consolidated Statements of Earnings --------------------------------------------------------- As previously For thirteen weeks ended January 24, 2004 reported Adjustments As restated --------------------------------------------------------- --------------------------------------------------------- Cost of sales, including occupancy and buying costs $107,518 ($1,397) $106,121 Gross profit 63,535 1,397 64,932 Selling, general and administrative expenses 50,007 746 50,753 Depreciation & amortization 6,271 164 6,435 Operating income 7,257 487 7,744 Earnings before provision for income taxes 7,102 487 7,589 Provision for Income taxes 2,592 177 2,769 Net earnings 4,510 310 4,820 Earnings per share - basic $0.15 $0.01 $0.16 Earnings per share - diluted $0.15 $0.01 $0.16 =========================================================
As previously For twenty-six weeks ended January 24, 2004 Reported Adjustments As restated ---------------------------------------------------------- --------------- ---------------- ---------------- Cost of sales, including occupancy and buying costs $231,157 ($2,277) $228,880 Gross Profit 132,440 2,277 134,717 Selling, general and administrative expenses 101,714 1,496 103,210 Depreciation & amortization 12,452 260 12,712 Operating income 18,274 521 18,795 Earnings before provision for income taxes 17,680 521 18,201 Income taxes 6,400 189 6,589 Net earnings 11,280 332 11,612 Earnings per share - basic $0.39 $0.01 $0.40 Earnings per share - diluted $0.38 $0.01 $0.39 ========================================================
Condensed Consolidated Balance Sheets ------------------------------------------------------------- As previously July 31, 2004 Reported Adjustments As restated ---------------------------------------------------------- ------------------------------------------- ---------------- Deferred income tax asset $10,583 $4,262 $14,845 Leasehold improvements 60,978 32,311 93,289 Accumulated depreciation and amortization (162,346) (9,898) (172,244) Property and equipment, net 140,791 22,413 163,204 Other assets 8,149 806 8,955 Total assets 461,835 27,481 489,316 Other accrued expenses 27,089 (2,842) 24,247 Long-term deferred tax liability 1,315 (1,315) 0 Deferred rent 0 40,319 40,319 Total liabilities 200,196 36,162 236,358 Retained earnings 197,438 (8,681) 188,757 Total shareholders' equity 261,639 (8,681) 252,958 Total liabilities and shareholders' equity 461,835 27,481 489,316 =============================================================
Condensed Consolidated Statements of Cash Flows -------------------------------------------------- As previously For twenty-six weeks ended January 24, 2004 Reported Adjustments As restated ------------------------------------------------------------ -------------------------------------------------- Net cash provided by operating activities $37,713 $3,455 $41,168 Net cash used in investing activities (25,823) (3,455) (29,278) ==================================================
Subsequent to the issuance of the Second Quarter Form 10-Q, the Company's management determined that certain supplemental information presented in Note 12 was incorrect. Accordingly, the accompanying supplemental financial information for the Parent Company and Guarantor and Non-Guarantor subsidiaries presented in Note 12 has been 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. 4. Stock Repurchase Program On March 30, 2000, the Board of Directors authorized a $50 million stock repurchase program, which was increased to $75 million on April 5, 2001. As of the date of this filing, the Company had repurchased 2,442,700 shares at an aggregate purchase price of approximately $26.7 million. During the three months ended October 30, 2004, 100,000 shares were repurchased under this authorization. There were no shares repurchased in the second quarter ended January 29, 2005. Treasury (Reacquired) shares are retired and treated as authorized but unissued shares. 5. Earnings Per Share Basic EPS is based upon the weighted average number of common shares outstanding and diluted EPS is based upon the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents outstanding during the period. Antidilutive options are excluded from the earnings per share calculations when the option price exceeds the average market price of the common shares for the period. The following is a reconciliation of the denominators of the basic and diluted EPS computations shown on the face of the accompanying condensed consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended -------------------- ---------------------- January 29, January 24, January 29, January 24, Shares in thousands 2005 2004 2005 2004 --------------- -------------- -------------- --------------- Basic weighted average outstanding shares 29,699 29,308 29,639 29,253 Dilutive effect of options outstanding 792 742 781 662 --------------- -------------- -------------- --------------- Diluted weighted average shares outstanding 30,491 30,050 30,420 29,915 --------------- -------------- -------------- --------------- Anti-dilutive options excluded from calculations 125 150 125 337 --------------- -------------- -------------- ---------------
6. Comprehensive Income The Company's marketable securities and investments are classified as available for sale securities, and therefore, are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive income. Total comprehensive income is composed of net earnings and net unrealized gains or losses on available for sale securities. The following is a reconciliation of comprehensive income and net earnings as shown on the face of the accompanying condensed consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended -------------------- ---------------------- January 29, January 24, January 29, January 24, Dollars in thousands 2005 2004 2005 2004 --------------- -------------- -------------- --------------- (As restated) (As restated) Net earnings $1,637 $4,820 $8,786 $11,612 Unrealized gain on available for sale securities -- 22 291 107 --------------- -------------- -------------- --------------- Comprehensive income $1,637 $4,842 $9,077 $11,719 --------------- -------------- -------------- ---------------
The Company sold all of its marketable securities which had unrealized losses during the second quarter of fiscal 2005, incurring a realized loss of $1.2 million that is included in "Interest income" on the Condensed Consolidated Statements of Earnings. At January 29, 2005, the Company had no marketable securities with an unrealized loss position. 7. Stock Based Compensation At January 29, 2005, the Company has various stock option plans. The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, where compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price on the measurement date. No compensation expense is recognized for the Company's option grants that have an exercise price equal to the market price on the date of grant or for the Company's Employee Stock Purchase Plan. In accordance with SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123" ("SFAS 148"), the Company discloses the pro forma effects of recording stock-based employee compensation plans at fair value on net earnings and net earnings per common share--basic and diluted as if the compensation expense was recorded in the financial statements. As of January 29, 2005, the only plan under which the Company can issue stock options is the 2001 Stock Option Plan. The number of options available for grant under this Plan are 1,960,000 shares. The Board of Directors has approved an amended and restated 2001 Plan, effective January 1, 2005, subject to shareholder approval, authorizing an increase in the number of shares of common stock that may be awarded under the Plan by 2,500,000 shares, authorizes the award of restricted stock, and provides that any share of common stock that is subject to restricted stock shall be counted as three shares for every share awarded. At January 29, 2005, the Company has issued 95,400 shares of restricted stock. Restricted stock awards result in the recognition of deferred compensation. Deferred compensation is shown as a reduction of shareholders' equity and is amortized to operating expenses over the vesting period of the stock award. Had compensation cost for the Company's stock option plans been determined based on the fair value at the option grant dates for awards in accordance with the accounting provisions of SFAS No. 148 (which does not apply to awards issued prior to fiscal 1996), the Company's net earnings and earnings per share would have been reduced to the following pro forma amounts:
Thirteen Weeks Ended Twenty-six Weeks Ended (in thousands, except per share amounts) January 29, January 24, January 29, January 24, 2005 2004 2005 2004 -------------------------------------------------------------- (As restated) (As restated) Net earnings as reported $1,637 $4,820 $8,786 $11,612 Add: compensation expense included in net earnings 48 -- 155 -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects (399) (546) (1,021) (1,061) -------------------------------------------------------------- Pro forma net earnings $1,286 $4,274 $7,920 $10,551 ============================================================== Earnings per share Basic - as reported $0.06 $0.16 $0.30 $0.40 -------------------------------------------------------------- Basic - pro forma $0.04 $0.15 $0.27 $0.36 -------------------------------------------------------------- Diluted - as reported $0.05 $0.16 $0.29 $0.39 -------------------------------------------------------------- Diluted - pro forma $0.04 $0.14 $0.26 $0.35 --------------------------------------------------------------
The fair values of the options granted under the Company's fixed stock option plans were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------- ---------------------- January 29, January 24, January 29, January 24, 2005 2004 2005 2004 ------------------------------------------------------------ Weighted average risk-free interest rate 3.5% 3.3% 3.5% 3.3% Weighted average expected life (years) 5.0 5.0 5.0 5.0 Expected volatility of the market price of the Company's common stock 26.5% 39.1% 26.5% 39.8%
8. Long-Term Debt On December 15, 2004, the Company issued 2.50% Convertible Senior Notes due 2024 ("Convertible Senior Notes"). The Convertible Senior Notes have an aggregate principal amount of $115 million and interest is payable on June 15 and December 15 of each year, beginning on June 15, 2005. Beginning with the period commencing on December 22, 2011 and ending June 14, 2012, and for each of the six-month periods thereafter commencing on June 15, 2012, the Company is required to pay contingent interest during the applicable interest period if the average trading price of the notes on the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of the notes. The contingent interest payable per note within any applicable interest period will equal an annual rate of 0.25% of the average trading price of a note during the measuring period. The Company may redeem some or all of the Convertible Senior Notes for cash at any time on or after December 22, 2011 at a redemption price equal to 100% of the principal amount of the notes plus accrued interest. Holders may convert their notes into cash and shares of the Company's common stock, if any, at a conversion rate of 47.5715 shares per $1,000 principal amount of Convertible Senior Notes (equal to a conversion price of approximately $21.02 per share), during specified periods, if the price of the Company's common stock reaches, or the trading price of the convertible notes falls below, specified thresholds, or upon the event of certain Company transactions. The number of contingently issuable shares of the Company's common stock cannot exceed 1.6 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 January 29, 2005, the share price was below the conversion price. On December 14, 2004, the Company entered into a senior credit facility with a number of banks. The $250 million senior credit facility consists of a $150 million revolving credit facility and a $100 million term loan. The senior credit facility will mature five years after it is entered into, subject to customary rollover and exchange provisions, which may extend the maturity of the loans under the senior credit facility and the senior exchange note into which they are converted to up to seven years. In addition to customary financial and non-financial covenants, the senior credit facility will limit the Company's ability to use borrowings under that facility to pay any cash payable on a conversion of the notes and will prohibit the Company from making any cash payments on the conversion of the notes if a default or event of default has occurred under that facility without the consent of the lenders under the senior credit facility. As of the date of this filing, the Company has not borrowed any funds under the $150 million revolving credit facility. In connection with the issuance to the Convertible Senior Notes and the senior credit facility, the Company incurred approximately $3.5 and $4.0 million, respectively, in underwriting costs and professional fees. Such fees were deferred and included in "Other assets" on the accompanying condensed consolidated balance sheets at January 29, 2005 and are being amortized to interest expense over the life of the Notes and the Senior Credit facility, respectively. In connection with the purchase of the Suffern facility, Dunnigan Realty, LLC, ("Dunnigan") in July 2003, borrowed $34 million under a fixed rate mortgage loan. The Dunnigan Realty, LLC mortgage loan (the "mortgage") is collateralized by a mortgage lien on the Suffern facility, of which the major portion is the Company's corporate offices and distribution center. Payments of principal and interest on the mortgage, a 20-year fully amortizing loan with a fixed interest rate of 5.33%, are due monthly through July 2023. In connection with the mortgage, the Company paid approximately $1.7 million in debt issuance costs. These costs were deferred and included in "Other assets" on the condensed consolidated balance sheets and are being amortized to interest expense over the life of the mortgage.
Long term debt consists of the following: (in thousands) January 29, July 31, 2005 2004 ---------------------------------------------------------------------------------- Dunnigan Realty, LLC mortgage loan $32,511 $33,021 Convertible Senior Notes 115,000 -- Term loan 100,000 -- ---------------------------------------------------------------------------------- 247,511 33,021 Less: current portion (11,060) (1,033) ---------------------------------------------------------------------------------- Total long-term debt $236,451 $31,988 ----------------------------------------------------------------------------------
Scheduled principal maturities of the above debt for the second half of fiscal 2005 and in each of the next five fiscal years and beyond is as follows: $5,300, $13,600, $18,600, $23,700, $28,900 and $157,400. Interest expense relating to the above debt was approximately $0.5 million and $1.8 million for the thirteen and twenty-six period periods ended January 29, 2005, respectively. 9. Litigation The Company is involved in various legal proceedings incident to the ordinary course of business. On May 18, 2000, an action was filed against the Company seeking compensatory and punitive damages for alleged unfair trade practices and alleged breach of contract arising out of negotiations for an acquisition the Company never concluded. The case went to a jury trial in 2003, and a jury verdict of $30 million of compensatory damages was awarded against the Company. On July 7, 2003, the court entered a final judgment of approximately $32 million in compensatory damages and expenses, which is subject to post-judgment interest. The trial court ruled against the plaintiffs' motion for any punitive damages or pre-judgment interest. Based on this judgment, the Company recorded a litigation charge of $32 million in its fiscal 2003 fourth quarter results. The Company believes there is no merit in the jury verdict and is vigorously pursuing an appeal. Plaintiffs have cross-appealed seeking an increase in the amount of the judgment. If upon appeal the judgment is subsequently modified or reversed, the Company will adjust its litigation charge accordingly. Interest accrues on the unpaid judgment at the statutory rate of 10% annually which the Company has provided for at the rate of approximately $800,000 each quarter in its litigation accrual. In the fourth quarter of fiscal 2004, as required as part of the unpaid judgment, the Company deposited $38.6 million in an escrow account, utilizing its operating funds. Such amount was dictated by the court to include the $32 million judgment and accrued interest of $3.3 million, as well as six months of prefunded interest ($1.5 million) and an additional 5% of the amount due (including interest) at the time of the funding of such escrow (5% of $36.8 million or $1.8 million), totaling $38.6 million. In January 2005, the Company deposited additional $.5 million ($0.8 million less interest actually earned during the period) into the escrow accounts. The escrow account is an interest bearing account and is included in restricted cash and cash equivalents on the Company's balance sheet. The Company continues in settlement discussions regarding the class action law suit in California as discussed in the Company's Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004. Except for the above cases, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. 10. Recent Accounting Pronouncements In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 03-1, or EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for identifying impaired investments and new disclosure requirements for investments that are deemed to be temporarily impaired. On September 30, 2004, the FASB issued a final staff position EITF Issue 03-1 that delays the effective date for the measurement and recognition guidance included in paragraphs 10 through 20 of EITF 03-1. The Company does not believe the impact of adoption of this EITF consensus will be significant to the Company's overall results of operations or financial position. In September 2004, the Emerging Issues Task Force reached a final consensus on EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share" ("EITF 04-8"), to change the existing accounting for convertible debt within the dilutive earnings per share calculation. The EITF concluded the common stock underlying contingent convertible debt instruments should be included in diluted net income per share computations using the if-converted method regardless of whether the market price trigger or other contingent feature has been met. The EITF concluded that this new treatment should be applied retroactively, with the result that issuers of securities would be required to restate previously issued diluted earning per share. In October 2004, The FASB approved EITF 04-8 and established an implementation date of December 15, 2004. The Company does not believe the impact of adoption of this EITF consensus will be significant to the Company's overall results of operations or financial position. 11. Segments The Company has aggregated its Dress Barn and Maurices brands based on the aggregation criteria outlined in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", which states that two or more operating segments may be aggregated into a single operating segment if the segments have similar economic characteristics, similar product, similar production process, similar clients, and similar methods of distribution. Dress Barn and Maurices have similar economic characteristics and similar operating, financial and competitive risks. Dress Barn and Maurices are similar in nature of product, as they offer apparel and clothing accessories. The merchandise inventory for Dress Barn and Maurices is sourced from many of the same countries and some of the same vendors, using similar production processes. Neither Dress Barn nor Maurices performs its own manufacturing, but buys all its merchandise from third parties. Dress Barn and Maurices clients have similar characteristics; retail clothing customers, primarily women looking for apparel that reflects style and fashion made of good quality offered at competitive prices. In addition, Dress Barn and Maurices merchandise is distributed to stores in a similar manner and sold to customers through the Company's retail stores located primarily in strip shopping centers. 12. Subsidiary Guarantors (Restated) 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 active subsidiary of the Parent Company, except for Dunnigan Realty, LLC. Presented below are the restated 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. For additional information relating to the restatement refer to Note 3 of the Notes to the Unaudited Condensed Financial Statements. CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) as of January 29, 2005
(Amounts in thousands) ---------------------------------------------------------------------------------------- Parent Company Guarantor Non-guarantor Eliminations Consolidated Subsidiaries Subsidiary ---------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $27,584 $6,003 $1,349 $ - $34,936 Restricted cash and investments 39,461 - - - 39,461 Marketable securities and investments 578 5,146 2 - 5,726 Merchandise inventories 108,515 37,844 - - 146,359 Deferred tax asset 13,691 - - - 13,691 Prepaid expenses and other 8,129 4,589 578 - 13,296 ---------------------------------------------------------------------------------------- Total Current Assets 197,958 53,582 1,929 - 253,469 ---------------------------------------------------------------------------------------- Property and Equipment, net 116,064 77,886 41,911 - 235,861 Intangible assets, net - 111,766 - - 111,766 Goodwill - 135,774 - - 135,774 Other Assets 14,948 2,173 1,710 - 18,831 Investment in Subsidiaries 567,534 - - (567,534) - Due from Affiliate - 285,456 - (285,456) - ======================================================================================== TOTAL ASSETS $896,504 $666,637 $45,550 $ (852,990) $755,701 ========================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) as of January 29, 2005
(Amounts in thousands) ------------------------------------------------------------------------------ Parent Company Guarantor Non-guarantor Eliminations Consolidated Subsidiaries Subsidiary ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $62,614 $26,680 $ - $ - $89,294 Accrued salaries, wages and related expenses 22,068 10,467 - - 32,535 Litigation accrual 37,736 - - - 37,736 Other accrued expenses 24,481 6,539 502 - 31,522 Customer credits - 12,677 - - 12,677 Income taxes payable - - - - - Current portion of long-term debt 10,000 - 1,060 - 11,060 ------------------------------------------------------------------------------ Total Current Liabilities 156,899 56,363 1,562 - 214,824 ------------------------------------------------------------------------------ Long-Term Debt 205,000 - 31,451 - 236,451 ------------------------------------------------------------------------------ Deferred Rent 41,401 - - - 41,401 ------------------------------------------------------------------------------ Due to Affiliate 230,179 54,636 641 (285,456) - ------------------------------------------------------------------------------ Total Liabilities 633,479 110,999 33,654 (285,456) 492,676 ------------------------------------------------------------------------------ Shareholders' Equity 263,025 555,638 11,896 (567,534) 263,025 ------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $896,504 $666,637 $45,550 $ (852,990) $755,701 ==============================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) (UNAUDITED) for the Thirteen Weeks Ended January 29, 2005
(Amounts in thousands) ---------------------------------------------------------------------------------------- Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ---------------------------------------------------------------------------------------- Net sales $178,743 $21,395 $1,543 $ (1,543) $200,138 Cost of sales, including occupancy and buying costs 109,894 16,336 467 (1,161) 125,536 ---------------------------------------------------------------------------------------- Gross profit 68,849 5,059 1,076 (382) 74,602 Selling, general and administrative expenses 59,189 9,113 271 (6,005) 62,568 Depreciation and amortization 5,807 1,484 454 - 7,745 ---------------------------------------------------------------------------------------- Operating income (loss) 3,853 (5,538) 351 5,623 4,289 Interest income 592 (544) 8 - 56 Interest expense (1,677) - (471) - (2,148) Other income - 6,005 - (5,623) 382 Equity in earnings of subsidiaries (120) - - 120 - ---------------------------------------------------------------------------------------- Earnings (loss) before provision for income taxes 2,648 (77) (112) 120 2,579 Provision (benefit) for income taxes 1,011 (27) (42) - 942 ---------------------------------------------------------------------------------------- Net earnings (loss) $1,637 $ (50) $ (70) $ 120 $1,637 ========================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) (UNAUDITED) for the Twenty-six Weeks Ended January 29, 2005
(Amounts in thousands) ---------------------------------------------------------------------------------- Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ---------------------------------------------------------------------------------- Net sales $375,859 $21,395 $3,920 $ (3,920) $397,254 Cost of sales, including occupancy and buying costs 232,161 19,434 1,510 (3,157) 249,948 ---------------------------------------------------------------------------------- Gross profit 143,698 1,961 2,410 (763) 147,306 Selling, general and administrative expenses 118,388 10,857 374 (11,918) 117,701 Depreciation and amortization 11,450 1,543 908 - 13,901 ---------------------------------------------------------------------------------- Operating income (loss) 13,860 (10,439) 1,128 11,155 15,704 Interest income 807 (38) 9 - 778 Interest expense (2,476) - (932) - (3,408) Other income - 11,918 - (11,155) 763 Equity in earnings of subsidiaries 1,045 - - (1,045) - ---------------------------------------------------------------------------------- Earnings (loss) before provision for income taxes 13,236 1,441 205 (1,045) 13,837 Provision (benefit) for income taxes 4,450 527 74 - 5,051 ---------------------------------------------------------------------------------- Net earnings (loss) $8,786 $ 914 $131 $ (1,045) $8,786 ==================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) for the Twenty-six Weeks Ended January 29, 2005
(Dollars in thousands) ----------------------------------------------------------------------------- Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ----------------------------------------------------------------------------- Operating Activities: Net earnings (loss) $8,786 $ 914 $131 $ (1,045) $8,786 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in earnings of subsidiaries (1,045) - - 1,045 - Depreciation and amortization 11,450 1,543 908 - 13,901 Provision for impairment and asset disposals 1,512 - - - 1,512 Deferred income tax expense 1,154 - - - 1,154 Increase in deferred rent expense 1,082 - - - 1,082 Other 1,688 - 18 - 1,706 Changes in assets and liabilities: Increase in restricted cash (800) - - - (800) Decrease (increase) in merchandise inventories 8,396 (4,368) - - 4,028 Decrease (increase) in prepaid expenses and other 315 3,209 (134) - 3,390 (Increase) decrease in other assets (10) 70 74 - 134 (Increase) decrease in due from affiliate - (97,095) - 97,095 - Increase (decrease) in due to affiliate 95,449 1,572 74 (97,095) - (Decrease) increase in accounts payable- trade (4,162) 8,623 - - 4,461 Increase in accrued salaries, wages and related expenses 3,706 1,772 - - 5,478 Increase in litigation accrual 1,608 - - - 1,608 Increase (decrease) in other accrued expenses 2,766 (1,224) (243) - 1,299 (Decrease) increase in customer credits (2,024) 1,141 - - (883) Decrease in income taxes payable (5,548) - - - (5,548) ----------------------------------------------------------------------------- Total adjustments 115,537 (84,757) 697 1,045 32,522 ----------------------------------------------------------------------------- Net cash provided by operating activities $124,323 $ (83,843) $828 $ - $41,308 -----------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) for the Twenty-six Weeks Ended January 29, 2005
------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------ Investing Activities: Acquisition of Maurices Inc., net of cash acquired $(332,737) $ - $ - $- $ (332,737) Purchases of property and equipment (11,749) (297) - - (12,046) Sales and maturities of marketable securities and investments 410,730 105,133 - - 515,863 Purchases of marketable securities and investments (383,954) (15,644) (2) - (399,600) ----------------------------------------------------------------------------- Net cash (used in) provided by investing activities (317,710) 89,192 (2) - (228,520) ----------------------------------------------------------------------------- Financing Activities: Proceeds from long-term debt 215,000 - - - 215,000 Payment of debt issuance costs (7,580) - - - (7,580) Repayments of long-term debt (1) - (509) - (510) Purchase of treasury stock (1,584) - - - (1,584) Proceeds from Employee Stock Purchase Plan 41 - - - 41 Proceeds from stock options exercised 1,640 - - - 1,640 ----------------------------------------------------------------------------- Net cash provided by (used in) financing activities 207,516 - (509) - 207,007 ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 14,129 5,349 317 - 19,795 Cash and cash equivalents- beginning of period 13,455 654 1,032 - 15,141 ----------------------------------------------------------------------------- Cash and cash equivalents- end of period $27,584 $6,003 $1,349 $ - $34,936 -----------------------------------------------------------------------------
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 January 24, 2004
(Amounts in thousands) ---------------------------------------------------------------------------------------- Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ---------------------------------------------------------------------------------------- Net sales $171,053 $- $2,039 $ (2,039) $171,053 Cost of sales, including occupancy and buying costs 105,275 2,066 437 (1,657) 106,121 ---------------------------------------------------------------------------------------- Gross profit 65,778 (2,066) 1,602 (382) 64,932 Selling, general and administrative expenses 53,539 2,075 271 (5,132) 50,753 Depreciation and amortization 5,928 53 454 - 6,435 ---------------------------------------------------------------------------------------- Operating income (loss) 6,311 (4,194) 877 4,750 7,744 Interest income 322 360 - - 682 Interest expense (799) - (420) - (1,219) Other income - 5,132 - (4,750) 382 Equity in earnings of subsidiaries 1,121 - - (1,121) - ---------------------------------------------------------------------------------------- Earnings (loss) before provision for income taxes 6,955 1,298 457 (1,121) 7,589 Provision (benefit) for income taxes 2,135 468 166 - 2,769 ---------------------------------------------------------------------------------------- Net earnings (loss) $4,820 $ 830 $ 291 $ (1,121) $4,820 ========================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS) (UNAUDITED) for the Twenty-six Weeks Ended January 24, 2004
(Amounts in thousands) ---------------------------------------------------------------------------------- Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ---------------------------------------------------------------------------------- Net sales $363,597 $- $3,801 $ (3,801) $363,597 Cost of sales, including occupancy and buying costs 224,895 5,649 1,374 (3,038) 228,880 ---------------------------------------------------------------------------------- Gross profit 138,702 (5,649) 2,427 (763) 134,717 Selling, general and administrative expenses 109,792 3,920 406 (10,908) 103,210 Depreciation and amortization 11,698 106 908 - 12,712 ---------------------------------------------------------------------------------- Operating income (loss) 17,212 (9,675) 1,113 10,145 18,795 Interest income 479 735 - - 1,214 Interest expense (1,669) - (902) - (2,571) Other income - 10,908 - (10,145) 763 Equity in earnings of subsidiaries 1,391 - - (1,391) - ---------------------------------------------------------------------------------- Earnings (loss) before provision for income taxes 17,413 1,968 211 (1,391) 18,201 Provision (benefit) for income taxes 5,801 712 76 - 6,589 ---------------------------------------------------------------------------------- Net earnings (loss) $11,612 $1,256 $135 $ (1,391) $11,612 ==================================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) for the Twenty-six Weeks Ended January 24, 2004
(Dollars in thousands) ----------------------------------------------------------------------------- Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ----------------------------------------------------------------------------- Operating Activities: Net earnings (loss) $11,612 $ 1,256 $135 $ (1,391) $11,612 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in earnings of subsidiaries (1,391) - - 1,391 - Depreciation and amortization 11,698 106 908 - 12,712 Provision for impairment and asset disposals 1,496 - - - 1,496 Deferred income tax expense 1,847 - - - 1,847 Increase in deferred rent 1,132 - - - 1,132 Other 90 - 6 - 96 Changes in assets and liabilities: Decrease in merchandise inventories 10,135 - - - 10,135 Decrease in prepaid expenses and other 82 5 1,597 - 1,684 Decrease (increase) in other assets 1,675 (1) (1,820) - (146) Increase in due from affiliate - (6,625) - 6,625 - Increase (decrease) in due to affiliate 1,522 6,027 (924) (6,625) - (Decrease) increase in accounts payable- trade (40) - - - (40) Increase in accrued salaries, wages and related expenses 1,610 - - - 1,610 Increase in litigation accrual 40 - - - 40 Increase (decrease) in other accrued expenses 91 (29) (238) - (176) (Decrease) increase in customer credits 2,739 - - - 2,739 Decrease in income taxes payable (3,573) - - - (3,573) ----------------------------------------------------------------------------- Total adjustments 29,153 (517) (471) 1,391 29,556 ----------------------------------------------------------------------------- Net cash provided by operating activities $40,765 $739 $ (336) $ - $41,168 -----------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) for the Twenty-six Weeks Ended January 24, 2004
------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Guarantor Non-guarantor Parent Company Subsidiaries Subsidiary Eliminations Consolidated ------------------------------------------------------------------------------------------------------------------------------ Investing Activities: Purchases of property and equipment (12,814) - (1) - (12,815) Sales and maturities of marketable securities and investments 15,735 17,305 - - 33,040 Purchases of marketable securities and investments (31,402) (18,101) - - (49,503) ----------------------------------------------------------------------------- Net cash (used in) provided by investing activities (28,481) (796) (1) - (29,278) ----------------------------------------------------------------------------- Financing Activities: Repayments of long-term debt - - (483) - (483) Proceeds from Employee Stock Purchase Plan 42 - - - 42 Proceeds from stock options exercised 1,808 - - - 1,808 ----------------------------------------------------------------------------- Net cash provided by (used in) financing activities 1,850 - (483) - 1,367 ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 14,134 (57) (820) - 13,257 Cash and cash equivalents- beginning of period 35,188 300 2,063 - 37,551 ----------------------------------------------------------------------------- Cash and cash equivalents- end of period $49,322 $243 $1,243 $ - $50,808 -----------------------------------------------------------------------------
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 $332.7 million, net of cash acquired, including $4.1 million of transaction fees, and is subject to post-closing adjustments. The Company's condensed consolidated financial statements include Maurices' results of operations from January 2, 2005. The Company accounted for the acquisition as a purchase using the accounting standards established in Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and, accordingly, the excess purchase price over the fair market value of the underlying net assets acquired net of cash, of $135.7 million was allocated to goodwill. The accounting rules require that the goodwill arising from the purchase method not be amortized. However, 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 preliminary estimates of fair value (performed by an independent appraiser) and may be revised as additional information concerning such assets and liabilities becomes available and final purchase price information is available. The transaction was financed by $118.7 in cash, the issuance of $115 million 2.5% convertible senior notes due 2024, and $100 million from borrowings under a $250 million senior credit facility (consisting of a $100 million term loan, and a $150 million revolving credit line under which no funds were drawn). Please refer to note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of the Maurices acquisition. Maurices is a specialty apparel retailer whose stores are concentrated in small markets in the United States. Maurices offers moderately priced, up-to-date fashions to its target customers, female and male teens, college students and young adults. The Company believes that Maurices' target customers are an especially attractive group for specialty retailers, since the group is growing rapidly, has a substantial amount of discretionary cash and spends more on apparel than most other demographic groups. As of January 29, 2005, Maurices operated 473 stores in 39 states, primarily concentrated in small and metro fringe markets in the United States. Approximately 43% of Maurices stores are located in strip centers, 39% are located in small malls and the remaining 18% in regional malls. Historically, Maurices' sales of women's apparel accounted for approximately 73% of their net sales, while women's accessories (including jewelry, watches and shoes), and men's apparel accounted for 18% and 9%, respectively. Maurices was founded in 1931 as single store operation for women's fashion in Duluth, Minnesota. By the mid 1970's, Maurices had expanded to a chain of 175 stores. In 1978, Maurices was acquired by American Retail Group, which has expanded Maurices to its current size. Maurices' corporate offices are located in Duluth, Minnesota and its distribution center is located in Des Moines, Iowa. Restatement of Financial Statements On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease-related accounting issues and their application under accounting principles generally accepted in the United States of America ("GAAP"). In light of this letter, the Company's management initiated a review of its lease accounting and determined that its then-current method of accounting for leasehold improvements funded by landlord incentives or allowances under operating leases (construction allowances) and its then-current method of calculating straight-line rent expense for its operating leases was not in accordance with GAAP. As a result, the Company restated its consolidated financial statements as of July 31, 2004 and for the thirteen and twenty-six weeks ended January 24, 2004, in this Quarterly Report. The Company had historically accounted for construction allowances as reductions to the related leasehold improvement asset on the consolidated balance sheets and presented construction allowances received as a reduction in capital expenditures in investing activities on the consolidated statements of cash flows. Management determined that Financial Accounting Standards Board ("FASB") Technical Bulletin No. 88-1, "Issues Relating to Accounting for Leases," requires these allowances to be recorded as a deferred rent liability on the consolidated balance sheets and allowances received as a component of operating activities on the consolidated statements of cash flows. Additionally, this adjustment results in a reclassification of the deferred rent amortization from "Depreciation and amortization expenses" to "Cost of sales including occupancy and buying costs" on the consolidated statements of earnings. The Company had historically recognized its straight-line rent expense for its operating leases over the lease term generally commencing with the opening date for the store, which generally coincided with the commencement of the lease payments per the lease. The store opening date also coincided with the commencement of business operations, which corresponds to the intended use of the property. Management re-evaluated FASB Technical Bulletin No. 85-3, "Accounting for Operating Leases with Scheduled Rent Increases," and determined that the lease term should commence on the date the Company takes possession of the leased space for construction purposes, which is generally two months prior to a store opening date. Furthermore, the Company determined that it should recognize rent expense on a straight-line basis for rent escalations over appropriate renewal periods, including option periods where failure to exercise such options would result in an economic penalty. Excluding tax impacts, the correction of this accounting requires the Company to record additional deferred rent in "Other accrued expenses" and "Deferred rent" and to adjust "Retained earnings" on the condensed consolidated balance sheets as well as to correct amortization in "Costs of sales including occupancy and buying costs" and "Depreciation and amortization" on the condensed consolidated statements of earnings for each of the thirteen and twenty-six weeks ended January 24, 2004. In addition, the Company corrected certain other balance sheet errors which resulted in an increase to "Property and equipment" and a corresponding increase to beginning "Retained earnings", which were included in the cumulative effect adjustment, related to the reversal of an impairment reserve. In addition, the Company reclassified its provision for impairments and asset disposals from "Depreciation and Amortization" to "Selling, general and administrative". Also the Company reclassified premiums paid upfront when entering into certain lease agreements that had been classified as "Property and equipment" to "Other assets" in July 31, 2004. For the thirteen and twenty-six weeks ended January 24, 2004, the cumulative effect is an increase of earnings of $0.3 million and $0.3 million, respectively. See Note 3 to the unaudited condensed consolidated financial statements of this Report for a summary of the effects of these restatements on the Company's condensed consolidated balance sheet as of July 31, 2004, as well as on the Company's condensed consolidated statements of earnings for the thirteen and twenty-six weeks ended January 24, 2004, and on the cash flows for the twenty-six weeks ended January 24, 2004. This Management's Discussion and Analysis gives effect to these corrections. Management Overview This Management Overview section of Management's Discussion and Analysis of Financial Condition and Results of Operations provides a high level summary of the more detailed information elsewhere in this quarterly Report and an overview to put this information in context. This section is also an introduction to the discussion and analysis that follows. Accordingly, it necessarily omits details that appear elsewhere in this quarterly Report. It should not be relied upon separately from the balance of this quarterly Report. . The retail environment remains very competitive. With the acquisition of Maurices, the Company has diversified its core business and believes it has strengthened its foundation for future growth. The addition of Maurices will allow the Company to broaden its demographic reach and diversify its retail base. With this broader foundation, the Company expects to continue its strategy of opening new stores while closing under-performing locations. Store expansion will focus on both expanding in the Company's major trading markets and developing and expanding into new markets. The Company believes that the addition of Maurices will create more synergies that will increase profitability. The Company is currently in the process of implementing an integration plan that will result in implementing best practices across the entire Company. In connection with the acquisition of Maurices, the Board of Directors adopted, subject to shareholder approval, amendments to the Company's current stock option plan which: permits the Company to make awards of restricted stock; increases by 2,500,000 the number of shares of stock; limits the number of shares of common stock which may eventually be issued under the plan; and provides that every share of restricted stock awarded shall count as three shares against the number of common stock which may eventually be issued under the plan. Management uses a number of key indicators of financial condition and operating performance to evaluate the performance of the Company's business, including the following:
Thirteen Weeks Ended Twenty-Six Weeks Ended January 29, January 24, January 29, January 24, 2005 2004 2005 2004 ---- ----- ---- ---- ---- ---- ---- Net sales growth 17.0% 2.2% 9.3% 2.9% Same store sales growth 2.4% -0.9% 1.6% -0.3% Merchandise margins 55.0% 55.1% 54.9% 55.1% Average Square footage growth (1) 20.8% 3.2% 14.4% 3.5% Total store count (1) 1,248 774 1,248 774 Diluted earnings per share $0.05 $0.16 $0.29 $0.39 S,G &A as a percentage of sales 31.3% 29.7% 29.6% 28.4% Capital expenditures (in millions) $4.6 $5.0 $12.0 $12.8 (1) Increase in square footage growth and store count due to acquisition of Maurices on January 2, 2005
The Company's methodology for determining same store sales is calculated based on the sales of stores open throughout the full period and throughout the full prior period (including stores relocated within the same shopping center and stores with minor square footage additions). If a single-format store is converted into a combo store, the additional sales from the incremental format are not included in the calculation of same store sales. The determination of which stores are included in the same store sales calculation only changes at the beginning of each fiscal year except for stores that close during the fiscal year which are excluded from same store sales beginning with the fiscal month the store actually closes. The Company includes in its cost of sales line item all costs of merchandise (net of purchase discounts and vendor allowances), freight on inbound, outbound and internally transferred merchandise, merchandise acquisition costs, (primarily commissions and import fees), occupancy costs excluding depreciation and all costs associated with the buying and distribution functions. The Company's cost of sales and gross profit may not be comparable to those of other entities, since some entities include all costs related to their distribution network and all buying and occupancy costs in their cost of sales, while other entities such as the Company exclude a portion of these expenses from cost of sales and include them in selling, general and administrative expenses or depreciation. Results of Operations The following table sets forth the percentage change in dollars from last year's comparable periods for the thirteen and twenty-six week periods ended January 29, 2005, and the percentage of net sales for each component of the condensed Consolidated Statements of Earnings for each of the periods presented: (TY= this year, LY=last year)
Thirteen Weeks Twenty-Six Weeks --------------- ---------------- % Change % of Sales % Change % of Sales ---------- ---------- from L/Y T/Y L/Y from L/Y T/Y L/Y -------- --- --- -------- --- --- Net sales 17.0% 100.0% 100.0% 9.3% 100.0% 100.0% Cost of sales, including occupancy & buying 18.3% 62.7% 62.0% 9.2% 62.9% 62.9% Gross profit 14.9% 37.3% 38.0% 9.3% 37.1% 37.1% Selling, general and admin. expenses 23.3% 31.3% 29.7% 14.0% 29.6% 28.4% Depreciation and amortization 20.3% 3.9% 3.8% 9.4% 3.5% 3.5% Operating income -44.6% 2.1% 4.5% -16.4% 4.0% 5.2% Interest income -91.8% --% 0.4% -35.9% 0.2% 0.3% Interest expense 76.2% -1.1% -0.7% 32.6% -0.9% -0.7% Other income -- 0.2% 0.2% -- 0.2% 0.2% Earnings before income taxes -66.0% 1.3% 4.4% -24.0% 3.5% 5.0% Net earnings -66.0% 0.8% 2.8% -24.3% 2.2% 3.2%
Net sales for the thirteen weeks ended January 29, 2005 (the "second quarter") increased by 17.0% to $200.1 million from $ 171.1 million for the thirteen weeks ended January 24, 2004 (the "prior period"). Net sales for the twenty-six weeks ended January 29, 2005 (the "six months") increased by 9.3% to $397.3 million from $363.6 million in the twenty-six weeks ended January 24, 2004 ("last year"). The sales increase for both periods is primarily due a 2% increase in same store sales, sales from new and noncomp stores and the inclusion of sales of Maurices from its acquisition on January 2, 2005. The Company's positive same store sales momentum has continued into February and early March for both Dress Barn and Maurices with a strong early selling of the spring transitional merchandise. The Company believes that this trend is a result of offering merchandise that includes more fashion and color that is more appealing to its customers. As of January 29, 2005, the Company's total selling square footage was approximately 42% higher than January 24, 2004, primarily as a result of the acquisition of 477 Maurices stores. In addition, during the six months the Company opened 18 new stores, converted 1 single-format store to a combination Dress Barn/Dress Barn Woman ("DB/DBW combo store") and closed 23 stores. The majority of the Company's store openings have generally occurred in the first and third fiscal quarters, while the majority of store closings have generally occurred in the second and fourth fiscal quarters. Maurices store openings and closings follow the same general pattern. As of January 29, 2005, the Company had 1,248 stores in operation, (174 Dress Barn stores, 50 Dress Barn Woman stores, 551 DB/DBW combo stores, and 473 Maurices stores), versus 774 stores in operation as of January 24, 2004 (183 Dress Barn stores, 55 Dress Barn Woman stores and 536 DB/DBW combo stores). Gross profit ("GP", which represents net sales less cost of goods sold, including occupancy and buying costs) for the second quarter increased by 14.9% to $74.6 million, or 37.3% of net sales, from $64.9 million, or 38.0% of net sales, for the prior period. For the six months, gross profit increased 9.3%, to $147.3 million, or 37.1% of net sales, from $134.7 million, or 37.1 % of net sales, for the prior six-month period. The decrease in GP as a percentage of sales for the second quarter was a result of slightly higher markdowns for the period and the inclusion of Maurices' January GP for January. For the six month period, GP as a percentage of sales was unchanged at 37.1% of sales. Selling, general and administrative (SG&A) expenses increased by 23.3% to $62.6 million, or 31.3% of net sales, in the second quarter as compared to $50.7 million, or 29.7% of net sales, in the prior period. For the six months, SG&A expenses increased by 14.0% to $117.7 million, or 29.6% of net sales, versus $103.2 million, or 28.4% of net sales, in the comparable six-month period. The dollar increase in SG&A for both the second quarter and the six months was primarily due to the inclusion of Maurices' SG&A expenses for the month of January, higher store operating costs (primarily salaries, related payroll taxes, and benefits) along with increases in professional fees (primarily related to the compliance costs in connection with the internal control attestations mandated by the Sarbanes-Oxley Act of 2002). The Company currently anticipates that SG&A expenses in the second half of fiscal 2005 will continue trend higher as a percentage of sales primarily due to continued Sarbanes-Oxley compliance costs and other professional fees. As previously mentioned, the Company is in the process implementing an integration plan for Maurices that will result in implementing best practices across the entire Company. Depreciation increased to $7.7 million in the second quarter from $6.4 million in the prior period. For the six months, depreciation expense increased to $13.9 million from $12.7 million last year. The six month increase in depreciation expense is primarily due to the additional depreciation for Maurices for the month of January 2005. Depreciation will be impacted by the additional depreciation of Maurices' fixed assets. Interest income decreased 91.8% to $0.06 million in the second quarter and decreased 35.9% to $0.8 million in the six months versus last year's $0.7 million and $1.2 million, respectively. These decreases were primarily due to the reductions in investment funds that were used to partially fund the acquisition of Maurices in January 2005. This reduction in investment funds will negatively impact interest income for the remainder of the fiscal year. Interest expense increased 76.2% to $2.1 million in the second quarter and increased 32.6% to $3.4 million in the six months versus last year's $1.2 million and $2.6 million, respectively. The increase is primarily due to the additional interest expense incurred for the 2.5% Convertible Senior Notes issued in December 2004 and the $100 million term loan funded January 3, 2005, the proceeds of which were used to partially fund the acquisition of Maurices. Other income represents rental income that Dunnigan Realty, LLC, a wholly owned consolidated subsidiary of the Company, receives from the two unaffiliated tenants in the Suffern facility. That square footage is 100% leased through 2012. Intercompany rentals between the Company and Dunnigan Realty, LLC are eliminated in consolidation. During the second quarter of fiscal 2005 and 2004, the effective tax rate was 36.5%. Principally as a result of the above factors, net income for the second quarter was $1.6 million, or 0.8% of net sales, a decrease of 66.0% from $4.8 million, or 2.8% of net sales, in the prior period. Net income for the six months decreased 24.3% to $8.8 million, or 2.2% of net sales, versus $11.6 million, or 3.2% of net sales, for the prior six-month period. Critical Accounting Policies and Estimates Management has determined that the Company's most critical accounting policies are those related to revenue recognition, merchandise inventories, long-lived assets, insurance reserves, claims and contingencies, litigation, operating leases, income taxes, 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 $41.3 million for the six months compared with $41.2 million during last year's comparable period. Cash flows from operating activities for the period were primarily generated by income from operations, adjustments for depreciation and amortization and changes in working capital account balances, specifically the decrease in merchandise inventories (related to Dress Barn), increase in accrued expenses and accounts payable, decrease in prepaid assets, offset by increases in other assets and decrease in income taxes payable. During the six months, the Company invested $332.7 million in its acquisition of Maurices, net of cash acquired. This investment was funded from the issuance in of $115 million of Convertible Senior Notes, a $100 million term loan in connection with the Company's $250 million senior credit facility, and from the sale of marketable securities. Except for the financing of the purchase of the Company's Suffern facility with a 20-year fixed-rate mortgage, the Company's balance sheet had been debt free, with the Company funding all of its capital needs with internally generated funds. The acquisition of Maurices has required the Company to leverage its balance sheet by liquidating its marketable securities, issuing $115 million of its Convertible Senior Notes and establishing a $250 million senior credit facility with a group of banks. The senior credit facility allowed the Company to borrow $100 million under a term loan and provides a $150 million revolving line of credit which gives the Company ample capacity to fund any short term working capital needs that may arise in the operation of its expanded business. The Company believes that its cash, cash equivalents, short-term investments, together with cash flow from operations, along with the senior credit facility mentioned above, will be adequate to fund the Company's fiscal 2005 planned capital expenditures and all other operating requirements and other proposed or contemplated expenditures. As of March 2005 the Company has not utilized the revolving credit facility. Scheduled principal maturities of the above debt are as follows: $5.3 million, $13.6 million, $18.6 million, $23.7 million, $28.9 million and $157.4 million for the remainder of fiscal 2005 and for fiscal years 2006, 2007, 2008, 2009, and 2010 and thereafter, respectively. In addition to the Maurices acquisition, the Company invested $12.0 million in capital expenditures for the six months ended January 29, 2005 as compared to $12.9 million in the prior six month period. The Company plans to invest approximately $20 million in capital expenditures during the last six months of fiscal year 2005. The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of its business, the Company enters into operating leases for its store locations and utilizes letters of credit principally for the importation of merchandise. The Company does not have any undisclosed material transactions or commitments involving related persons or entities. Dunnigan Realty, LLC receives rental income and reimbursement for taxes and common area maintenance charges from the Company and two additional tenants that occupy the Suffern facility that are not affiliated with the Company. These unaffiliated rental payments are more than sufficient to cover the mortgage payments and planned capital and maintenance expenditures for the Suffern facility. Seasonality The Company has historically experienced substantially lower earnings in its second fiscal quarter ending in January than during its other three fiscal quarters, reflecting the intense promotional atmosphere that has characterized the Christmas shopping season in recent years. Management expects that its future second fiscal quarters will be positively impacted with the inclusion of Maurices, since Maurices has historically experienced a relatively more profitable Christmas shopping season. In addition, the Company's quarterly results of operations may fluctuate materially depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in timing of certain holidays, the timing of new store openings, the promotional activities of other retailers, net sales contributed by new stores and changes in the Company's merchandise mix. Forward-Looking Statements and Factors Affecting Future Performance This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect the Company's current views with respect to future events and financial performance. The Company's actual results of operations and future financial condition may differ materially from those expressed or implied in any such forward looking statements as a result of certain factors set forth in the Company's Annual Report on Form 10-K/A for its fiscal year ended July 31, 2004. Item 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's portfolio of investments consisting of cash, cash equivalents and marketable securities can be affected by changes in market interest rates. The escrow account referred to in Footnote 9 is invested in short term money market instruments. The remainder of the marketable securities in the portfolio consists primarily of municipal bonds that can readily be converted to cash. Financial instruments, which potentially subject the Company to concentrations of credit risk, are principally bank deposits and short-term money-market investments. Cash and cash equivalents are deposited with high credit quality financial institutions. Short-term investments principally consist of triple A or double A rated instruments. The carrying amounts of cash, cash equivalents, short-term investments and accounts payable approximate fair value because of the short-term nature and maturity of such instruments. Currently, the Company maintains virtually all of its cash and investments in financial instruments with original maturity dates of three months or less. These financial instruments are subject to interest rate risk and may decline in value if interest rates increase. The Company estimates that a change of 100 basis points in interest rates would have no impact in the fair value of its cash and investments. On December 15, 2004, the Company issued $115 million of Convertible Senior Notes. As the Convertible Senior Notes bear interest at a fixed rate, the Company's results of operations would not be affected by interest rate changes. The Company also secured a $250 million senior credit facility with a group of banks. Under that senior credit facility, the Company has borrowed $100 million under a variable rate term loan and has available a revolving credit facility with borrowings up to $150 million at a variable rate. At January 29, 2005, the Company had the $100 million outstanding term loan and had no borrowings under the revolving credit facility. An increase of 100 basis points in interest rates for the term loan would equal $1 million of interest expense on an annual basis. Accordingly, the Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. A discussion of the Company's accounting policies for financial instruments and further disclosures relating to financial instruments are included in the Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the Company's Form 10-K/A for the year ended July 31, 2004. Item 4 -- CONTROLS AND PROCEDURES During the first six months of fiscal 2005, there were no changes in the Company's internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting. However, on February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease-related accounting issues and their application under accounting principles generally accepted in the United States of America ("GAAP"). In light of this letter, the Company's management initiated a review of its lease accounting and determined that its then-current method of accounting for leasehold improvements funded by landlord incentives or allowances under operating leases (construction allowances) and its then-current method of calculating straight-line rent expense for its operating leases was not in accordance with GAAP, and that a review of all lease-related accounting practices was underway. In a meeting with the Company's management and its independent registered public accountants, management determined that the Company's accounting for construction allowances and rent escalations was incorrect. Management determined that the Company's audited consolidated financial statements for the years ended July 31, 2004, July 26, 2003, and July 27, 2002 should be restated. In addition, the Company reported on Form 8-K that such financial statements filed in its Annual Report on Form 10-K for the year ended July 31, 2004 and its quarterly report on Form 10-Q for the quarter ended October 30, 2004 should no longer be relied upon. Based on the definition of "material weakness" in the Public Company Accounting Oversight Board's Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, restatements in prior filings with the SEC is a strong indicator of the existence of a "material weakness" in the design or operation of internal control over financial reporting in the Company's store lease accounting practices. Based on that, management concluded that a material weakness existed in the Company's internal control over financial reporting due to its store lease accounting practices, and disclosed this to the Audit Committee and to the independent registered public accountants. The Company is in the process of remediating its internal control over financial reporting in it's store lease accounting practices by conducting a review of its internal controls related to operating leases and correcting its method of accounting for construction allowances. 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 accompanying supplemental financial information for the Parent Company and Guarantor and Non-Guarantor subsidiaries presented in Note 12 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 unaudited condensed consolidated financial statements filed as a part of its Form 10-Q for the quarter ended January 29, 2005. The Company is in the process of remediating this weakness. The Company also carried out an evaluation, under the supervision and with the participation of the Company's management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15 (e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, which included the matter discussed above, the Company's chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were not effective, due to in its store lease accounting practices, discussed above, as of the end of the period covered by this Report (March 21, 2005), in ensuring that material information relating to The Dress Barn, Inc., including its consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. At the end of fiscal 2005, Section 404 of the Sarbanes-Oxley Act will require the Company's management to provide an assessment of the effectiveness of the Company's internal control over financial reporting, and the Company's independent registered public accountants will be required to audit management's assessment. The Company is in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for its independent registered public accountants to provide their attestation report. The Company has not completed this process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated. The Company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers. The Code of Ethics for the Chief Executive Officer and Senior Financial Officers is posted on the company's website, www.dressbarn.com (under the "Governance" caption) and was included as Exhibit 14 to the Company's Annual Report on Form 10-K/A for its fiscal year ended July 31, 2004. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Chief Executive Officer and Senior Financial Officers by posting such information on its website. The Company undertakes to provide to any person a copy of this Code of Ethics upon request to the Secretary of the Company at the Company's principal executive offices. Part II - OTHER INFORMATION Item 1 - LEGAL PROCEEDINGS On May 18, 2000, Alan M. Glazer, GLZR Acquisition Corp. and Bedford Fair Industries, Ltd. commenced an action against the Company in the Superior Court of Connecticut, Stamford Judicial District, seeking compensatory and punitive damages in an unspecified amount for alleged unfair trade practices and alleged breach of contract arising out of negotiations before Bedford Fair Industries' Chapter 11 bankruptcy filing for the acquisition of the Bedford Fair business which the Company never concluded. On April 10, 2003, after a trial in the Superior Court of Connecticut, Waterbury District, a jury returned a verdict of $30 million of compensatory damages in the lawsuit described above. The court, on July 7, 2003, entered a judgment of approximately $32 million in compensatory damages and expenses, which is subject to post-judgment interest. The trial court ruled against the plaintiffs' motion for any punitive damages or pre-judgment interest. The Company vigorously pursued an appeal. Plaintiffs cross-appealed seeking an increase in the amount of the judgment. The parties are awaiting the decision of the Supreme Court of the State of Connecticut, which heard the appeal on November 23, 2004. The Company continues in settlement discussions regarding the class action law suit in California as discussed in the Company's Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004. Except for the above cases, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. Item 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Description 10.SS The Dress Barn, Inc. 2001 Stock Incentive Plan (amended and restated effective January 1, 2005 31.1 Certification of David R. Jaffe pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Armand Correia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of David R. Jaffe pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Armand Correia pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed six reports on Form 8-K during the quarter ended January 29, 2005.
Date Filed Description November 17, 2004 Release of First Quarter Results November 17, 2004 Entry into a Stock Purchase Agreement December 06, 2004 Press Release of Convertible Senior Notes due 2024 December 09, 2004 Entry into a Purchase Agreement with Banc of America Securities LLC and JP Morgan Securities Inc. December 16, 2004 Entry into a Resale Registration Rights Agreement with Banc of America Securities LLC and JP Morgan Securities Inc. January 06, 2005 Acquisition of all issued and outstanding capital stock of Maurices Incorporated.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BY: /s/ David R. Jaffe_______________________ ---------------------------------------------- David R. Jaffe President, Chief Executive Officer and Director (Principal Executive Officer) BY: __/s/ Armand Correia______________________ Armand Correia Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)