<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended July 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-12203
THE CLOTHESTIME, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0469138
- ----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5325 E. Hunter Avenue, Anaheim, California 92807
- ------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)779-5881
Not Applicable
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the issuer's classes of
common stock, as of the latest practicable date: As of September 6, 1996,
14,198,241 shares of the issuer's common stock, $.001 par value per share, were
outstanding.
This Form 10-Q consists of 25 Pages
Exhibit Index on Page 25
<PAGE> 2
THE CLOTHESTIME, INC.
INDEX TO FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - July 27, 1996 and January 27, 1996.................... 3
Condensed Consolidated Statements of Operations - Thirteen and
Twenty-six weeks ended July 27, 1996 and July 29, 1995 ..................................... 4
Condensed Consolidated Statements of Cash Flows- Twenty-six weeks
ended July 27, 1996 and July 29, 1995 ...................................................... 5
Notes to Condensed Consolidated Financial Statements - July 27, 1996.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders........................................... 21
Item 5. Other Information............................................................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................................................. 23
SIGNATURES.............................................................................................. 24
EXHIBIT INDEX........................................................................................... 25
</TABLE>
<PAGE> 3
THE CLOTHESTIME, INC.
PART I. -- FINANCIAL INFORMATION
ITEM 1. -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
July 27, 1996 January 27, 1996
------------- ----------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 29,493,558 $ 34,477,823
Marketable securities available-for-sale, net of allowances 3,099,314 3,191,737
of $109,101 and $16,678
Merchandise inventories 18,444,373 8,551,207
Income taxes receivable - 9,336,008
Prepaid expenses and other current assets 2,684,041 2,707,926
Deferred income taxes 471,000 471,000
------------ ------------
Total Current Assets 54,192,286 58,735,701
------------ ------------
Investments 1,174,497 1,174,497
------------ ------------
Property, plant and equipment - on the basis of cost 51,229,216 55,281,631
Less: accumulated depreciation & amortization (28,725,442) (27,384,443)
------------ ------------
22,503,774 27,897,188
Other assets 416,486 472,766
------------ ------------
Total Assets $ 78,287,043 $ 88,280,152
============ ============
Liabilities and Shareholders' Equity (Deficiency)
Current Liabilities
Accounts payable $ 9,935,138 $ 11,074,076
Accrued sales tax 1,359,707 1,982,300
Accrued payroll and related taxes 3,802,283 4,629,524
Other accrued liabilities 8,368,403 8,378,305
------------ ------------
Total Current Liabilities 23,465,531 26,064,205
------------ ------------
Long-term Liabilities
Deferred income taxes 471,000 471,000
Capital lease obligation 660,000 -
------------ ------------
Total long-term Liabilities 1,131,000 471,000
------------ ------------
Liabilities subject to compromise 55,512,973 53,433,703
------------ ------------
Shareholders' Equity (Deficiency)
Common Stock, $.001 par value, authorized 50,000,000 shares issued and
outstanding - 14,198,241 shares at July 27, 1996 and January 27, 1996,
respectively 14,763 14,763
Additional paid-in capital 10,861,514 10,861,514
Retained earnings (accumulated deficit) (7,739,422) 2,301,860
Less: Treasury stock, 565,000 shares at cost at July 27, 1996
and January 27, 1996, respectively (4,850,215) (4,850,215)
Securities valuation allowance (109,101) (16,678)
------------ ------------
Total Shareholders' Equity (Deficiency) (1,822,461) 8,311,244
------------ ------------
Total Liabilities and Shareholders' Equity (Deficiency) $ 78,287,043 $ 88,280,152
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 3 of 25
<PAGE> 4
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------------- ------------------------------
July 27, July 29, July 27, July 29,
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net Sales $59,492,362 $89,282,033 $103,159,343 $161,629,272
Interest and other income 62,688 68,349 143,458 440,815
----------- ----------- ------------ ------------
59,555,050 89,350,382 103,302,801 162,070,087
----------- ----------- ------------ ------------
Costs and Expenses:
Cost of sales, including buying and distribution
and occupancy costs 41,710,236 65,534,612 71,429,416 119,557,059
Selling, general and administrative expenses 17,748,219 24,085,325 36,159,704 49,168,729
Interest expense 14,765 181,283 92,395 556,183
Other losses - 11,625 - 404,956
----------- ----------- ------------ ------------
59,473,220 89,812,845 107,681,515 169,686,927
----------- ----------- ------------ ------------
Income (loss) before reorganization costs
and income taxes 81,830 (462,463) (4,378,714) (7,616,840)
Reorganization costs 4,271,332 - 5,662,568 -
----------- ----------- ------------ ------------
Loss before income taxes (4,189,502) (462,463) (10,041,282) (7,616,840)
Benefit for income taxes - (13,716) - (2,818,231)
----------- ----------- ------------ ------------
Net Loss $(4,189,502) $ (448,747) $(10,041,282) $ (4,798,609)
=========== =========== ============ ============
Loss per share $ (0.30) $ (0.03) $ (0.71) $ (0.34)
=========== =========== ============ ============
Weighted average number of shares outstanding
14,198,241 14,187,443 14,198,241 14,184,966
=========== =========== ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 4 of 25
<PAGE> 5
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six weeks ended
-------------------------------
July 27, July 29,
1996 1995
------------ ------------
<S> <C> <C>
Operating Activities:
Net loss $(10,041,282) $ (4,798,609)
Adjustments to reconcile net loss
to net cash used in operating activities:
Non cash reorganization costs 4,783,262 -
Depreciation and amortization 3,267,655 4,546,347
Loss on sales of marketable securities - 404,956
Changes in operating assets and liabilities:
Increase in merchandise inventories (9,893,166) (9,780,614)
Decrease in income taxes receivable 9,336,008 2,476,428
(Increase) decrease in prepaid expenses and other assets 80,165 (1,486,115)
Increase (decrease) in accounts payable (21,734) 6,623,137
Decrease in accrued payroll and related taxes (827,241) (475,146)
Decrease in accrued sales tax and other accrued liabilities (1,368,595) (1,597,337)
------------ ------------
Net cash used in operating activities (4,684,928) (4,086,953)
------------ ------------
Investing activities:
Investment in marketable securities - (11,534)
Proceeds from sales of marketable securities - 4,718,600
Purchases of property, plant, and equipment (46,433) (585,135)
------------ ------------
Net cash provided by (used in) investing activities (46,433) 4,121,931
------------ ------------
Financing Activities:
Net repayments under revolving credit facility (242,904) (35,153,000)
Proceeds from long-term debt - 1,400,000
Principal payments under long-term debt (10,000) (379,805)
Proceeds from the exercise of stock options - 15,591
------------ ------------
Net cash used in financing activities (252,904) (34,117,214)
------------ ------------
Decrease in cash and cash equivalents (4,984,265) (34,082,236)
Cash and cash equivalents at beginning of year 34,477,823 40,829,741
------------ ------------
Cash and cash equivalents at end of quarter $ 29,493,558 $ 6,747,505
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 3,000 $ 19,970
Interest paid $ - $ 556,183
Income tax refunds received $ 9,443,657 $ -
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 5 of 25
<PAGE> 6
THE CLOTHESTIME, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 27, 1996
NOTE A - REORGANIZATION AND BASIS OF REPORTING
On December 8, 1995, (the "Petition Date"), The Clothestime, Inc.
("Clothestime") and five of its subsidiaries, MRJ Industries, Inc. ("MRJ"),
Clothestime Stores, Inc. ("Stores"), Clothestime Investment, Inc.
("Investment"), Clothestime Acquisition Corporation ("Acquisition") and
Clothestime International, Inc. ("International") (collectively, the "Debtors")
commenced reorganization cases (the "Bankruptcy Cases") by filing voluntary
petitions for relief under chapter 11, Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Central
District of California, Santa Ana Division (the "Bankruptcy Court"). For
purposes of this report, unless otherwise referenced, the defined term "Company"
shall apply to Clothestime and its consolidated group of subsidiaries, except
that references to the Company in connection with any disclosure relating to the
Debtors' chapter 11 cases refer solely to the Debtors and excludes Clothestime
Insurance Company ("Insurance"), Clothestime's captive insurance company
subsidiary.
The Debtors decided to seek bankruptcy protection after an extensive
review of the retail environment and the Debtors' operations. Management of
each of the respective companies determined that filing the chapter 11
petitions would allow the Debtors the needed time and flexibility to
restructure their respective operations.
Since the Petition Date, the Debtors have continued in possession of
their properties and, as debtors in possession, are authorized to operate and
manage each of their respective businesses and enter into all transactions,
including obtaining services, supplies and inventories, that each could have
entered into in the ordinary course of business had there been no bankruptcy
filings. As debtors in possession, the Debtors may not engage in transactions
outside of the ordinary course of business without approval of the Bankruptcy
Court, after notice and hearing.
Liabilities subject to compromise in the accompanying consolidated
balance sheets represent the Company's estimate of liabilities as of July 27,
1996, subject to adjustment in the reorganization process. Under chapter 11,
actions to enforce certain claims against the Company are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date.
Other liabilities may arise or be subject to compromise as a result of
rejection of executory contracts and unexpired leases, or the Bankruptcy
Court's resolution of claims for contingencies and other disputed amounts. As
a general matter, the treatment of these liabilities will be determined as a
part of the formulation and confirmation of a plan of reorganization. See Note
C - Liabilities Subject to Compromise, herein.
The accompanying condensed consolidated financial statements have been
presented on the basis that the Company is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As a result of the chapter 11 filing and circumstances
relating to this event, realization of assets and satisfaction of liabilities
is subject to uncertainty. A plan of reorganization could materially change
the amounts reported in the accompanying consolidated financial statements,
which do not give effect to adjustments to the carrying values of assets and
liabilities which may be necessary as a consequence of a plan of
reorganization. The ability of the Company to continue as a going concern is
dependent on, among other things, confirmation of an acceptable plan of
reorganization, future profitable operations, compliance with the debtor in
possession financing agreement (see Note B - Debtor in Possession Financing,
herein), and the ability to generate sufficient cash from operations and obtain
financing sources to meet future obligations.
As of July 27,1996 cash and cash equivalents included $12.7 million being
held in segregated accounts pursuant to various agreements in the Company's
Bankruptcy Cases. Such amount has been reduced to $3.3 million as a result of
payments to creditors and release of funds to the Company pursuant to a
settlement agreement dated as of August 28, 1996. See Note F - Subsequent
Events, herein.
The principal business of the Company is the retail sale of junior size
women's clothing. As of July 27, 1996, the Company operated stores in 17
states and Puerto Rico, with a large concentration of stores in California,
Florida and Texas. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
Page 6 of 25
<PAGE> 7
THE CLOTHESTIME, INC.
NOTE A - REORGANIZATION AND BASIS OF REPORTING (CONTINUED)
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
condensed consolidated financial statements include the accounts of The
Clothestime, Inc. and its consolidated group of subsidiaries, MRJ, Stores,
Insurance, International, Investment and Acquisition. All material
intercompany balances and transactions have been eliminated in consolidation.
The operating results for the twenty-six week period ended July 27, 1996 are
not necessarily indicative of the results that may be expected for the year
ending January 25, 1997 ("Fiscal 1996"). For further information, refer to the
financial statements and related notes included in the Company's annual report
on Form 10-K for the year ended January 27, 1996 ("Fiscal 1995").
NOTE B - DEBTOR IN POSSESSION FINANCING
The Company, through Stores, has a financing agreement with The CIT
Group/Business Credit, Inc. (the "DIP Lender") for debtor in possession
financing (the "DIP Facility"). At July 27, 1996, the agreement provided for
revolving loans to be made up to the lesser of (a) $25 million or (b) the
lesser of (i) sixty percent (60%) of eligible inventory valued on a cost basis
and (ii) thirty-six and one half percent (36.5%) of eligible inventory valued
on a retail basis, subject to adjustment. The revolving line of credit may be
in the form of letters of credit determined as provided under the agreement.
Cash borrowings bear interest at a reference rate plus one half of one
percent (0.5%) per annum or, at the request of Stores, the London Interbank
Rate plus two and one half percent (2.5%). The agreement calls for a loan
facility fee of $250,000, a semi-annual inventory management fee of $30,000, an
unused line fee of 3/8% per annum and a letter of credit fee of 1% per annum.
As of July 27, 1996, the Company had not used the direct borrowing capacity on
the line and had outstanding letters of credit in the amount of $2.0 million.
The agreement contains various restrictive covenants requiring, among
other things, minimum levels of earnings before interest, income taxes,
depreciation and amortization, the establishment of maximum levels of capital
expenditures, and a prohibition regarding declaring or making any cash
dividends by the Company or its subsidiaries. In addition, the DIP Lender
required a negative pledge on Stores' merchandise inventory and proceeds.
Effective August 1, 1996, the DIP Facility was amended to revise certain
financial covenants and other provisions. (See Note F - Subsequent Events,
herein). The Company was in compliance with or had obtained waivers for all
such covenants as of July 27, 1996. The term of the DIP Facility is the
earlier of December 8, 1997 or the effective date of the Debtors' confirmed
plan of reorganization, subject to earlier termination.
Cash borrowings and letters of credit issued under the agreement have
been granted super priority status by the Bankruptcy Court over all obligations
except certain administrative expenses, as defined in the agreement.
Page 7 of 25
<PAGE> 8
THE CLOTHESTIME, INC.
NOTE C - LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include substantially all of the
current and noncurrent liabilities of the Company as of the Petition Date.
Certain prepetition liabilities have been approved by the Bankruptcy Court for
payment. At July 27, 1996 and January 27, 1996, such amounts to the extent not
paid, were included in accrued expenses and other payables for the periods set
forth below.
<TABLE>
<CAPTION>
July 27, 1996 January 27, 1996
------------- ----------------
<S> <C> <C>
Revolving credit facility debt........................... $15,364,357 $15,607,262
Secured note payable to Wells Fargo Bank................. 1,358,000 1,358,000
Secured notes payable to Union Bank...................... 1,174,497 1,174,497
Capital lease obligation................................. 345,222 1,001,637
Accounts payable, trade.................................. 21,888,444 20,771,240
Estimated lease rejection claims......................... 11,482,113 8,871,043
Other payables and accrued expenses...................... 3,900,340 4,650,024
----------- -----------
$55,512,973 $53,433,703
=========== ===========
</TABLE>
Prior to the Petition Date, the revolving credit facility debt bore
interest at the bank's prime rate plus 1% and was due February 1, 1997. The
banks assert a security interest in substantially all of the assets of the
Company and its subsidiaries, excluding merchandise inventories. The amount of
revolving credit facility debt will be higher, and accounts payable, trade will
be lower, by amounts paid under the credit facility pursuant to letters of
credit. See Note F - Subsequent Events, herein, for a discussion of a
settlement of certain claims relating to the revolving credit facility,
including fixing the amount of the prepetition claim relating to such facility.
The note payable to Wells Fargo Bank, N.A. ("Wells"), is secured by an
office/warehouse building and underlying real property that the Company uses to
house a portion of its administrative offices and warehouse facilities. The
note bears interest based on LIBOR plus 1.5% and was due March 1, 2005. The two
notes payable to Union Bank of California, N.A. ("Union"), which are secured by
limited partnership interests in low-income housing projects, bear interest at
6.1% and 6.2% and were due in September 1998 and January 1999. (See Note
F - Subsequent Events, herein for a description of the sale of these partnership
interests and payment to Union). The interest rates described above do not
consider interest rates that may be applicable in the event of default.
The capital lease obligation at January 27, 1996 was secured by certain
"point of sale" computer equipment and related software (collectively, the "POS
Equipment") acquired in connection with a capital lease with MetLife Capital
Corporation ("MetLife"). On May 13, 1996, MetLife filed a motion (the "Motion")
for relief from the automatic stay in the Company's chapter 11 case, pursuant to
section 362 of the Bankruptcy Code, to permit MetLife to foreclose upon its
liens on the POS Equipment or, alternatively, to require the Company to make
"adequate protection" payments to MetLife to protect against any diminution to
the value of the POS Equipment during the pendency of the Company's chapter 11
case. The Company and MetLife entered into an agreement (the "MetLife
Agreement"), which was approved by the Bankruptcy Court on July 22, 1996,
settling the matters that were the subject of the Motion and restructuring the
Company's loan obligations to MetLife. Under the terms of the MetLife Agreement,
MetLife will have an allowed secured claim (the "Secured Claim") in the
Company's chapter 11 case in the amount of $670,000 and the balance of MetLife's
claim will be an allowed unsecured claim (the "Unsecured Claim") in the
Company's chapter 11 case. In order to amortize the Secured Claim, the Company
will (i) make monthly payments of $5,000 to MetLife, commencing in June 1996,
which payments will be applied to reduce the principal amount of the Secured
Claim, until the effective date of a plan of reorganization in the Company's
chapter 11 case (the "Effective Date") and (ii) pay the remainder of the Secured
Claim by making monthly payments to MetLife from and after the Effective Date in
an amount equal to remaining principal plus interest at the Bank of America
prime rate plus 200 basis points (up to a maximum of 10.5% per annum) amortized
over a number of months equal to the difference between 60 and the number of
monthly payments made to MetLife prior to the Effective Date. The Secured Claim
is reflected on the balance sheet in long-term liabilities and not in
liabilities subject to compromise. The Unsecured Claim will be treated and paid
in accordance with the terms of any confirmed plan of reorganization in the
Company's chapter 11 case.
A plan of reorganization ultimately approved by the Company's impaired
prepetition creditors and shareholders and confirmed by the Bankruptcy Court
may materially change the amounts and terms of prepetition liabilities.
Page 8 of 25
<PAGE> 9
THE CLOTHESTIME, INC.
NOTE C - LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
The Company anticipates that it will negotiate with creditors to
reconcile claims filed with the Bankruptcy Court to the Company's financial
records. The additional liability arising from this reconciliation process, if
any, is not subject to reasonable estimation. As a result, no provision has
been recorded for these possible claims. The Company will recognize the
additional liability, if any, as the amounts become subject to reasonable
estimation.
Additional bankruptcy claims and prepetition liabilities may arise from
the rejection of executory contracts and unexpired leases, resolution of
contingent and unliquidated claims and the settlement of disputed claims.
Consequently, the amounts included in the condensed consolidated balance sheets
as liabilities subject to compromise may be subject to future adjustment.
In accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company is not
required to record interest during chapter 11 proceedings on unsecured or
undersecured prepetition debt. Interest expense on certain secured debt will
continue to be accrued but is subject to settlement. No determination has been
made regarding the value of the property interests that secure certain debt
and, consequently, whether interest thereon will be paid. The Company has
continued accruing interest on its secured prepetition debt obligations, except
for the revolving credit facility debt, which the Company believes is
undersecured. However, the Bankruptcy Court could determine that postpetition
interest should be paid on this obligation. Contractual interest (computed
without regard to default rates of interest) exceeds interest expense recorded
in the accompanying condensed consolidated statement of operations for the
twenty-six week period ended July 27, 1996 by approximately $723,454.
NOTE D - REORGANIZATION COSTS
Reorganization costs recorded in the second quarter of Fiscal 1996 and
the first six months of Fiscal 1996 consisted of:
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
July 27, 1996 July 27, 1996
-------------------- ----------------------
<S> <C> <C>
Write-off of leasehold improvements
and fixtures associated with store
closures net of proceeds $1,985,732 $1,908,772
Estimated store lease rejection claims
net of proceeds from lease sales 2,611,070 2,569,818
Other related store closure costs 38,788 161,513
Professional fees (297,979) 1,198,881
Interest income (175,758) (410,477)
Other 109,479 234,061
---------- ----------
$4,271,332 $5,662,568
========== ==========
</TABLE>
Page 9 of 25
<PAGE> 10
THE CLOTHESTIME, INC.
NOTE E - CAPITAL STOCK AND STOCK OPTION TRANSACTIONS
The following table summarizes the activity under the Company's Stock
Option Plans during the twenty-six week period ended July 27, 1996:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Options Outstanding, January 27, 1996 2,815,788
Activity during the period:
Options Granted
(per share amount: $1.00) 10,000
Options Exercised -
Options Canceled
(per share amounts: $1.50 to $12.75) (451,353)
---------
Options outstanding, July 27, 1996 2,374,435
=========
</TABLE>
At July 27, 1996, options to purchase 1,728,174 shares of the Company's
common stock were exercisable on various dates through June 19, 2005, at prices
ranging from $1.50 to $12.75 per share. In addition, at July 27, 1996, there
were options to purchase 1,476,002 shares of the Company's common stock
available for grant under the Company's stock option plans. The computation of
net loss per common and common equivalent share is based upon the weighted
average number of common shares outstanding during the period.
The Company's common stock was delisted from The Nasdaq Stock Market,
Inc., effective with the opening of business on July 26, 1996, because the
Company no longer complies with the criteria established by The Nasdaq Stock
Market, Inc. for continuation of listing. To the extent the market makers in
the Company's stock continue to enter bids, the Company's common stock will be
quoted in the OTC Bulletin Board, or, in the alternative, in the National
Quotation Bureau's Pink Sheets.
NOTE F - SUBSEQUENT EVENTS
On July 11, 1996, the Company received Bankruptcy Court approval to (i)
close 33 underperforming retail stores (the "Closed Stores"), (ii) retain a
liquidation consultant to conduct store closing sales at 18 of these stores
located in Hawaii, Oregon and Washington and (iii) conduct store closing sales
at the other 15 locations in other markets. On July 22, 1996, the Company
received Bankruptcy Court approval to reject certain of the leases for the
Closed Stores and to retain a marketing consultant to market certain of the
other leases. Effective July 31, the Company rejected the remaining leases for
the Closed Stores and, in August, assumed and assigned one lease that had been
marketed successfully. These store closings have resulted in a withdrawal of
the Company from the markets in Hawaii, Oregon and Washington.
Subject to Bankruptcy Court approval, the Company has agreed to a
restructuring of the lease for its headquarters building. The base rent will
be reduced, effective May 15, 1996, from 67.7 cents per square foot per month
to 40 cents per square foot per month, or an annual reduction of approximately
$400,000. The lease, as amended, will also provide for annualized adjustment
based on the consumer price index of not less than 103% and not more than 105%
of the base rent for the prior year. Any damages incurred by the lessor are
capped at the annualized amount of the base rent for the year, and the Debtors
will provide the lessors with a letter of credit for such amount. The term of
the lease will also be extended to May 15, 2006. A hearing to approve the
assumption of the lease, as amended, is scheduled for September 30, 1996.
On August 28, 1996, the Bankruptcy Court approved the sale of, and on
August 30, the Company sold, its interests in two limited partnerships for an
aggregate consideration of $1,550,000. $1,229,443.46 of the net proceeds of
the sale were paid to Union in full satisfaction of its secured loans. See
Note C to Condensed Consolidated Financial Statements, herein. The balance of
the net proceeds will be paid into a segregated account, will be subject to any
other liens
Page 10 of 25
<PAGE> 11
THE CLOTHESTIME, INC.
NOTE F - SUBSEQUENT EVENTS (CONTINUED)
against the partnership interests, including the lien (if any) of the Banks,
and will not be used by the Debtors without further order of the Bankruptcy
Court.
On August 28, 1996, the Bankruptcy Court approved the extension of the
Company's exclusive period to file a plan of reorganization until January 31,
1997, and its exclusive period to solicit acceptances of a plan until March 31,
1997. The Company cannot, at the present time, predict the contents of any
proposed plan of reorganization or when or whether it will be accepted by the
creditors or approved by the Bankruptcy Court. In addition, the Company may
seek further extensions of the exclusive period; however there can be no
assurance that the Bankruptcy Court will grant further extensions if requested.
Effective August 1, 1996, the DIP Facility was amended to revise the
covenant relating to the minimum required level of earnings before interest,
income taxes, depreciation and amortization for the third quarter of Fiscal
1996 and certain other provisions.
On August 28, 1996, the Bankruptcy Court approved a Settlement Agreement
dated as of August 28, 1996 (the "Settlement Agreement") between Wells, Union,
and Wells, as agent for itself and Union (in such capacity, the "Agent"), and
the Debtors. The Settlement Agreement provides for the resolution of all claims
and controversies relating to alleged security interests of Wells, the Agent and
Union (collectively, the "Banks") in the following property (the "Disputed
Collateral"): (i) refunds of federal, state and local income taxes in the amount
of $9,452,726.29, representing tax refunds from the Internal Revenue Service in
the amount of $9,450,146.00, from the State of Illinois in the amount of
$2,280.29 and from the City of New York in the amount of $300.00 (collectively,
the "Tax Refund"); (ii) certain funds held on deposit in segregated accounts
pursuant to the terms of the parties' Amended Stipulation for Order (1)
Clarifying Order Approving Centralized Cash Management Systems, etc., (2)
Providing Adequate Protection for Alleged Collateral of Wells Fargo Bank, as
Agent, to the Extent of Valid Liens and (3) Establishing Schedule for Resolution
of Disputes, dated December 27, 1995; (iii) the Company's prepetition credit
card accounts receivable; and (iv) fee and expense retainers paid by the Company
to professionals prior to the commencement of the Bankruptcy Cases. The
Settlement Agreement also fixes the allowed amount of the Banks' prepetition
claims under the credit facilities evidenced by the Credit Agreement, dated as
of February 28, 1995 between Stores, as borrower, the other Debtors, as
Guarantors, and the Banks (the "Bank Claims") at $26,306,481.05, subject to
increase for prepetition legal fees and expenses and certain contingent claims
on account of letters of credit. Such amount has been and will be reduced by
certain payments, including payments to be made pursuant to the Settlement
Agreement. On or about September 5, 1996, pursuant to the terms of the
Settlement Agreement and on account of the Banks' alleged security interests in
the Disputed Collateral other than the Tax Refunds, the Banks (i) applied $3.1
million of the funds on deposit in certain segregated accounts held by the
Company to reduce the Bank Claims (the "Initial Payment"), (ii) released the
remainder of all funds (approximately $6.5 million) on deposit in such accounts
to the Company and (iii) released the Banks' security interests in all Disputed
Collateral other than the Tax Refund. In addition, pursuant to the terms of the
Settlement Agreement and on account of the Banks' alleged security interests in
the Tax Refund, the Company will make an additional payment to the Banks in the
amount of $3,126,363.00 (plus interest accrued on such amount from August 29,
1996 through the date of payment and less certain letter of credit fees and
expenses) (the "Remaining Payment") on the earlier of (i) the effective date of
a plan of reorganization in any of the Bankruptcy Cases and (ii) May 30, 1997.
The Remaining Payment also will be applied to reduce the amount of the Bank
Claims.
On September 5, 1996, to secure its obligation to make the Remaining
Payment, the Company deposited the sum of $3,126,363.00 into a segregated
account (the "Segregated Account") on which, under the terms of the Settlement
Agreement, the Banks hold a first priority lien, subject and subordinate only
to a lien securing the Company's reimbursement obligations under the letter of
credit described below. As further security for its obligation to make the
Remaining Payment, the Company will deliver a letter of credit (the "Letter of
Credit") in favor of the Banks in the face amount of $3,241,095.24,
representing the anticipated amount of the Remaining Payment. As security for
the Company's reimbursement obligations under the Letter of Credit, the bank
issuing the Letter of Credit will be granted a first priority perfected
security interest in the Segregated Account.
Page 11 of 25
<PAGE> 12
THE CLOTHESTIME, INC.
NOTE F - SUBSEQUENT EVENTS (CONTINUED)
In consideration for the Remaining Payment and the related Segregated
Account and Letter of Credit arrangements described above, the Banks: (i) have
released the balance of the Tax Refund to the Company; and (ii) have released
their alleged security interests in the Tax Refund, subject to reinstatement if,
but only if, the Company or any other party in interest commences any judicial
or other proceeding seeking to enjoin or otherwise interfere with the Banks'
rights under the terms of the Settlement Agreement to apply funds on deposit in
the Segregated Account or to draw upon the Letter of Credit, in either case in
satisfaction of the Company's obligation to make the Remaining Payment. In
addition, under the terms of the Settlement Agreement, the Adversary Proceedings
will be dismissed.
The Company projects that the aggregate consideration to be paid to the
Banks under the terms of Settlement Agreement, consisting of the sum of the
Initial Payment and the Remaining Payment and assuming a final payment date of
May 30, 1997, will be $6,341,095.24.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHAPTER 11 REORGANIZATION
On December 8, 1995, Clothestime and five of its subsidiaries commenced
reorganization cases by filing voluntary petitions for relief under chapter 11,
title 11 of the United States Code in the United States Bankruptcy Court for
the Central District of California, Santa Ana Division (collectively, the
"Chapter 11 Petitions"). See "Liquidity and Capital Resources" below.
The Company decided to seek bankruptcy protection after an extensive
review of the current retail environment and the Company's operations.
Management determined that filing the Chapter 11 Petitions would allow the
Company the needed time and flexibility to restructure its operations.
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated financial statements have been presented on the basis
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
As a result of the chapter 11 filing and circumstances relating to this event,
realization of assets and satisfaction of liabilities is subject to
uncertainty. A plan of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements, which do not
give effect to all adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of the confirmation and implementation
of a plan of reorganization. The ability of the Company to continue as a going
concern is dependent on, among other things, confirmation of an acceptable plan
of reorganization, future profitable operations, compliance with the
debtor-in-possession financing agreement and the ability to generate sufficient
cash from operations and obtain financing sources to meet future obligations.
Page 12 of 25
<PAGE> 13
THE CLOTHESTIME, INC.
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth certain items in the consolidated
statements of operations as a percentage of total revenues for the thirteen
week and twenty six week periods ended July 27, 1996 and July 29, 1995.
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
------------------------------- ------------------------------
July 27, 1996 July 29, 1995 July 27, 1996 July 29, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying and distribution
and occupancy costs 70.0 73.3 69.1 73.8
Selling, general and administrative expenses 29.8 27.0 35.0 30.3
Interest expense - 0.2 0.1 0.3
Other losses - - - 0.3
----- ----- ----- -----
Income (loss) before reorganization costs and
income taxes 0.2 (0.5) (4.2) (4.7)
Reorganization costs 7.2 - 5.5 -
----- ----- ----- -----
Loss before income taxes (7.0) (0.5) 9.7 (4.7)
----- ----- ----- -----
Benefit for income taxes - - - (1.7)
----- ----- ----- -----
Net loss (7.0)% (0.5)% (9.7)% (3.0)%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales decreased 33.4% in the second quarter of Fiscal 1996 to $59.5
million compared to $89.3 million in the second quarter of Fiscal 1995.
Comparable store sales (stores in operation for at least 15 months) decreased
by 11.8% in the second quarter of Fiscal 1996 as compared with the second
quarter of Fiscal 1995. For the first six months of Fiscal 1996, net sales
decreased 36.2% to $103.2 million from $161.6 million in the same period of
Fiscal 1995. Comparable store sales decreased by 16.6% for the first six
months of Fiscal 1996 compared with comparable store sales for the first six
months of Fiscal 1995. Management attributes this decline in sales to two
principal factors. First, the Company ended the second quarter of Fiscal 1996
with 190 fewer stores than at the end of the comparable period in Fiscal 1995.
Second, a delay in advertising due to low inventory levels following the
Company's chapter 11 filing caused a significant decrease in customer traffic
in the first quarter of Fiscal 1996. This decrease in customer traffic
continued into the second quarter of Fiscal 1996, albeit at a lesser rate than
in the first quarter. Although Management believes these factors have now
begun to stabilize, customer traffic has not yet reached planned levels.
The Company's primary target market is women in the 18 to 34 age group.
While customer demographics revealed that this age represents a significant
portion of our customers, the Company still maintains a lesser customer base in
the 14 to 17 and 35 and over age groups. The Company's business is comprised
of two principal selling seasons: Spring (the first and second quarters) which
includes the period during which spring and summer styles are introduced; and,
Fall (the third and fourth quarters) which includes the back-to-school, winter
and Christmas selling seasons. Consistent with the majority of clothing
retailers, the Company normally posts its strongest sales during the fourth
quarter as a result of a stronger Christmas selling period compared to its
summer and early Fall selling periods. First quarter sales are generally lower
than sales in the other quarters primarily as a result of the higher sales
activity during the fourth quarter. However, during the past two Fiscal years,
the Company has realized higher sales levels during the Spring seasons rather
than the Fall seasons. Management believes that this was primarily due to the
highly competitive promotional environment surrounding the holiday seasons as
well as the lack of consumer acceptance of merchandise offered. As is the case
for most clothing retailers, abnormal seasonal weather also may affect sales
because the seasonal merchandise then in the stores may not correspond to the
merchandise consistent with the abnormal weather. In addition, since most of
the Company's stores are located in non-enclosed retail locations as opposed to
enclosed malls, the Company's sales can be adversely affected by abnormal rain
or other inclement weather. There was no evidence of adverse weather affecting
sales during the first six months of Fiscal 1996.
Page 13 of 25
<PAGE> 14
THE CLOTHESTIME, INC.
INTEREST AND OTHER INCOME; INTEREST EXPENSE; OTHER LOSSES
Interest and other income decreased to $63 thousand in the second quarter
of Fiscal 1996, compared to $68 thousand in the second quarter of Fiscal 1995.
For the first six months of Fiscal 1996, interest and other income decreased to
$143 thousand from $441 thousand in the same period of Fiscal 1995. The
decrease in the second quarter of Fiscal 1996 and for the first six months of
Fiscal 1996 as compared to the respective periods of Fiscal 1995 was
attributable to the fact that the Company maintained a lower invested cash
balance during each of the respective periods after excluding invested cash
balances attributable to the bankruptcy proceeding.
Interest expense decreased to $15 thousand in the second quarter of
Fiscal 1996, compared to $181 thousand in the second quarter of Fiscal 1995.
Interest expense decreased to $92 thousand for the first six months of Fiscal
1996, from $556 thousand in the same period of Fiscal 1995. This decrease is
attributable to the Company not recording approximately $360 thousand and $723
thousand in interest during the second quarter and first six months of Fiscal
1996, respectively, consistent with certain accounting rules applicable to a
company which has filed for chapter 11 protection. The interest expense
recorded in the second quarter and first six months of Fiscal 1995 resulted
from borrowings of $1.4 million made during the first quarter of Fiscal 1995,
bank loans of $1.9 million taken out in the fourth quarter of Fiscal 1993, a
capital lease obligation of $1.9 million entered into during Fiscal 1993, and
outstanding borrowings under the revolving credit facility in Fiscal 1995. See
Note C to Condensed Consolidated Financial Statements, herein.
The $12 thousand and $405 thousand in other losses incurred in the second
quarter of Fiscal 1995 and the first six months of Fiscal 1995 was attributable
to losses from sales of marketable securities.
COST OF SALES
Cost of sales as a percentage of total revenues decreased to 70.0% in the
second quarter of Fiscal 1996 as compared with 73.3% in the second quarter of
Fiscal 1995. For the first six months of Fiscal 1996, cost of sales as a
percentage of total revenues decreased to 69.1% from 73.8% for the same period
of Fiscal 1995. The decrease for the second quarter of Fiscal 1996 and the
first six months of Fiscal 1996 as compared to the same periods of Fiscal 1995
was primarily the result of the Company taking fewer markdowns on new
merchandise received in the stores following the sharp decline in merchandise
shipments in the first quarter of Fiscal 1996 and tighter inventory controls
stemming from negative sales trends.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of total
revenues increased to 29.8% for the second quarter in Fiscal 1996 compared with
27.0% for the second quarter in Fiscal 1995. The overall increase in expenses
as a percentage of total revenues in the second quarter of Fiscal 1996 compared
to the same period of Fiscal 1995 was due to increases in advertising costs and
corporate administration expenses. Advertising costs as a percentage of total
revenues were higher as the Company continued its major advertising campaign
launched late in the first quarter of Fiscal 1996 in an attempt to raise sales
and increase public awareness and customer traffic. Administrative expenses as
a percentage of total revenues were higher primarily due to a reversal of a
legal accrual in the second quarter of Fiscal 1995 relating to a favorable
settlement of a legal proceeding.
For the first six months of Fiscal 1996 and Fiscal 1995, selling, general
and administrative expenses as a percentage of total revenues were 35.0% and
30.3%, respectively. The overall increase in expenses as a percentage of
revenues in the first six months of Fiscal 1996 compared to the first six
months of Fiscal 1995 was due to increases in (i) advertising costs; (ii) store
operations and supervisory payroll; (iii) corporate administration expenses and
(iv) other fixed operating expenses. Advertising costs as a percentage of
total revenues were higher due to the major advertising campaign launched
during Fiscal 1996. Store operations and supervisory payroll as a percentage of
total revenues were higher as a result of staffing to support higher than
realized sales levels. Corporate administrative expenses as a percentage of
total revenues were higher primarily due to a reversal of a legal accrual in
the second quarter of Fiscal 1995 relating to a favorable settlement of a legal
proceeding. Increases in other fixed operating expenses as a percentage of
total revenues were incurred due to decreased leverage on fixed operating
expenses resulting from fewer stores and lower average sales.
Page 14 of 25
<PAGE> 15
THE CLOTHESTIME, INC.
REORGANIZATION COSTS
Reorganization costs includes all costs associated with the
reorganization under chapter 11. During the second quarter of Fiscal 1996, the
Company incurred reorganization costs of $4.3 million, primarily for costs and
expenses associated with the closing of 33 unprofitable stores (including
estimated lease rejection claims). Reorganization costs in the first six
months of Fiscal 1996 were $5.7 million, relating primarily to the write-off of
leasehold improvements and fixtures associated with closed stores, estimated
lease rejection claims, professional fees and certain other expenses. See Note
D to Condensed Consolidated Financial Statements, herein.
BENEFIT FOR INCOME TAXES
No income tax benefit has been recorded for the second quarter of Fiscal
1996 because the Company has exhausted its available net operating loss
carrybacks permitted under the Federal and state tax codes. The benefit of net
operating loss carryforwards will be reflected in future periods when it
becomes more likely than not that the benefit will be realized. The Company's
effective benefit rate was 37.0% for the first six months of Fiscal 1995.
NET LOSS AND LOSS PER SHARE
Net loss and loss per share for the second quarter of Fiscal 1996 were
$4.2 million and $0.30, respectively. This compared with net loss and loss per
share of $449 thousand and $0.03, respectively, for the second quarter of
Fiscal 1995. Net loss and loss per share for the first six months of Fiscal
1996 were $10.0 million and $0.71, respectively. This compared with net loss
and loss per share of $4.8 million and $0.34, respectively, for the same period
of Fiscal 1995. The increase in net loss for the second quarter and first six
months of Fiscal 1996 as compared to the same periods of Fiscal 1995 was due
principally to reorganization charges incurred during the second quarter of
Fiscal 1996 and during the first six months of Fiscal 1996 of $4.3 million and
$5.7 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Chapter 11 Filing
As discussed previously, the Company and five of its subsidiaries filed
voluntary petitions for relief under chapter 11 of title 11 of the United
States Code on December 8, 1995. Under chapter 11, actions to enforce certain
claims against the Company are stayed if the claims arose, or are based on,
events that occurred on or before the Petition Date. The ultimate terms of
settlement of these claims will be determined in accordance with a plan of
reorganization which requires the approval of the impaired prepetition
creditors and shareholders and confirmation by the Bankruptcy Court.
Until a plan of reorganization is confirmed by the Bankruptcy Court, only
such payments on prepetition obligations that are approved or required by the
Bankruptcy Court will be made. Except as approved by the Bankruptcy Court,
principal and interest payments on prepetition debt have not been made since
the Petition Date and will not be made without the Bankruptcy Court's approval
or until a plan of reorganization, defining the repayment terms, has been
confirmed by the Bankruptcy Court. At July 27, 1996 liabilities subject to
compromise are estimated at $55.5 million. Other liabilities may arise or be
subject to compromise as a result of rejection of executory contracts and
unexpired leases or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts.
The prohibition on payments of prepetition liabilities as a result of the
chapter 11 filing and income tax refunds received in the second quarter of
Fiscal 1996 enabled the Company to report $29.5 million in cash and cash
equivalents at July 27, 1996. Included in cash and cash equivalents at July
27, 1996 is $12.7 million being held in segregated accounts pursuant to various
agreements in the Company's Bankruptcy Cases. Such amount has been reduced to
$3.3 million as a result of payments to creditors and release of funds to the
Company pursuant to a settlement agreement dated as of August 28, 1996. See
Note F to Condensed Consolidated Financial Statements, herein, and Part II,
Item I. Legal Proceedings, herein for a discussion of the settlement involving
the tax refund.
Page 15 of 25
<PAGE> 16
THE CLOTHESTIME, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to prepetition creditors may be substantially altered and, as to some
classes, eliminated. At this time, it is not possible to predict the outcome
of the chapter 11 filing, in general, or its effects on the business of the
Company or on the interests of creditors or shareholders.
The Company is in the process of developing a long term business plan
around which the framework of a plan of reorganization will be developed. As a
part of this process, the Company will be assessing the effects of new
merchandising and marketing strategies on operating results and assessing the
desirability of further store closings. Further store closings and rejections
of leases and other executory contracts will result in increased reorganization
costs. During the months of June 1996 and July 1996, the Company closed a total
of 33 underperforming stores. In July, the Company rejected the leases for the
Closed Stores and, in August, assumed and assigned one lease that had been
marketed successfully. These store closings have resulted in a withdrawal of
the Company from the markets in Hawaii, Oregon and Washington.
The exclusive period for the filing of a plan of reorganization has been
extended to January 31, 1997 and to solicit acceptances of a plan of
reorganization to March 31, 1997. The Company cannot, at the present time,
predict the contents of any proposed plan of reorganization or when or whether
it will be accepted by the creditors or approved by the Bankruptcy Court. In
addition, the Company may seek further extensions of the exclusive period;
however, there can be no assurance that the Bankruptcy Court will grant further
extensions if requested.
Subsequent to the chapter 11 filing, the Company reached an agreement
with The CIT Group/Business Credit, Inc. to provide debtor in possession
financing (the "DIP Facility"). The DIP Facility was approved by the
Bankruptcy Court on January 9, 1996. At July 27, 1996, the DIP Facility
provided for revolving loans to be made up to the lesser of (a) $25 million or
(b) the lesser of (i) 60% of eligible inventory valued on a cost basis and (ii)
36.5% of eligible inventory valued on a retail basis, subject to adjustment.
The revolving line of credit may be in the form of letters of credit determined
as provided under the agreement. Cash borrowings bear interest at either a
reference rate plus 0.5% or LIBOR plus 2.5%, at the option of the Company. The
agreement contains various restrictive covenants requiring, among other things,
minimum levels of earnings before interest, income taxes, depreciation and
amortization the establishment of maximum levels of capital expenditures, and a
prohibition regarding declaring or making any cash dividends by the Company or
its subsidiaries. Effective August 1, 1996, the DIP Facility was amended to
revise certain financial covenants and other provisions. (See Note F to
Condensed Consolidated Financial Statements, herein).
The Company did not use the direct borrowing capacity on the line during
the second quarter of Fiscal 1996. There were $2.0 million of letters of credit
outstanding at July 27, 1996. The DIP Facility will terminate on the earlier
of December 8, 1997 or the date of consummation of a plan of reorganization,
subject to earlier termination. Cash borrowings and letters of credit issued
under the agreement have been granted superpriority status by the Bankruptcy
Court over all obligations except certain administrative expenses, as defined
in the agreement. The DIP Facility is more fully described in Note B to
Condensed Consolidated Financial Statements, herein.
General
The Company's principal needs for liquidity are to finance the purchase
of merchandise inventories, fund its operations and pay professional and
administrative fees in connection with its reorganization.
Net cash used in operating activities was $4.7 million for the second
quarter of Fiscal 1996, compared to $4.1 million for the second quarter of
Fiscal 1995. The Company's cash used in operations of $4.7 million for the
second quarter of Fiscal 1996 resulted primarily from losses incurred during
the first six months of Fiscal 1996 and an increase in merchandise inventories,
partially offset by the add back of non- cash charges representing non-cash
reorganization costs and income tax refunds received. Merchandise inventories
increased to $18.4 million at the end of the second quarter of Fiscal 1996,
from $8.6 million at the end of Fiscal 1995. The increase in inventory for the
second quarter of Fiscal 1996 can be attributed to seasonal inventory
fluctuations and inventory returning to planned levels following
Page 16 of 25
<PAGE> 17
THE CLOTHESTIME, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
aggressive markdowns taken in the fourth quarter of Fiscal 1995 and the delay
in receiving merchandise due to the initial uncertainty in the vendor and
factor community caused by the chapter 11 filing until the DIP Facility was
approved.
The Company has an indirect relationship with the factoring community,
which assists vendors of merchandise inventories in securing up front payment
(as opposed to payment terms from the Company directly) for goods shipped to
the Company. Subsequent to the approval of the DIP Facility, factors have been
willing to extend credit for goods shipped to the Company. To the extent that
(i) cash provided from operating activities is inadequate to meet the Company's
liquidity requirements, (ii) the factors require greater credit support and/or
(iii) manufacturers are less willing to deliver merchandise pursuant to payment
terms, short or long-term liquidity will be adversely impacted.
Income taxes receivable decreased to $0 by the end of the second quarter
of Fiscal 1996, compared to $9.3 million at the end of Fiscal 1995, due to the
Company receiving tax refunds of $9.4 million in the second quarter of Fiscal
1996. See Part II, Item I. Legal Proceedings, herein for a discussion of the
settlement involving the tax refund.
Accounts payable decreased to $9.9 million at the end of the second
quarter of Fiscal 1996, from $11.1 million at the end of Fiscal 1995. The
decrease in accounts payable resulted primarily from professional fees relating
to the Company's chapter 11 filing, which were accrued as part of the accounts
payable balance at the end of Fiscal 1995 and paid primarily in the second
quarter of Fiscal 1996. Accrued sales tax decreased to $1.4 million at the end
of the second quarter of Fiscal 1996 from $2.0 million at the end of Fiscal
1995 primarily due to tax payment timing differences. Accrued payroll and
related taxes decreased from $4.6 million at the end of Fiscal 1995 to $3.8
million at the end of the second quarter of Fiscal 1996 primarily due to
decreasing group health and payroll-related tax payments.
Long-term liabilities consisting of a capital lease obligation increased
to $660 thousand from $0 at the end of Fiscal 1995 due to the Company
reclassifying a portion of the capital lease obligation from liabilities
subject to compromise to long-term liabilities as a result of the settlement
involving the MetLife capital lease obligation. The capital lease obligation
settlement and the amounts outstanding thereunder are more fully described in
Note C to the Notes to Condensed Consolidated Financial Statements, herein.
During Fiscal 1996, the Company has a capital spending limit of $2.0
million under the DIP Facility. Management believes this amount is more than
adequate to meet the capital requirements of the Company. Although the Company
plans no new store openings during Fiscal 1996, capital expenditures for store
maintenance, system enhancements and various other corporate expenditures are
anticipated. The DIP Facility, cash on hand, revenues generated from
operations, credit terms extended by the vendor and factor community, tax
refunds and anticipated expense reduction measures will be the principal
sources of liquidity. See Part II, Item I. Legal Proceedings, herein for a
discussion of the settlement involving the tax refund. Although the Company
believes that these sources will be sufficient to meet the Company's operating
and capital requirements, the Company is unable to predict the extent to which
the retail apparel environment will continue at its current or at an
accelerated rate and the extent to which the public will accept the Company's
merchandise during the bankruptcy period. To the extent that results of
operations continue to decline, short and long term liquidity will be adversely
affected, particularly if the availability of funds under the DIP Facility are
significantly decreased or are no longer made available.
Forward-Looking Statements
Included in this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Report are
certain forward-looking statements reflecting management's current
expectations. Although the Company believes that its expectations are based
upon reasonable assumptions, there can be no assurance that the Company's
financial goals will be realized. Numerous factors may affect the Company's
actual results and may cause results to differ materially from those expressed
in forward-looking statements made by or on behalf of the Company. Some of
these factors include the competition in the retail industry, the general
economic factors affecting consumer spending particularly in the geographic
markets in which the Company competes, customer acceptance of the merchandise
offered by the Company, pricing and other competitive factors. The Company
cannot predict how these
Page 17 of 25
<PAGE> 18
THE CLOTHESTIME, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
factors will be additionally impacted by the Company's chapter 11 filing. In
addition, there are uncertainties inherent in the process of reconciling
claims, rejecting and assuming executory contracts and unexpired leases,
formulating and confirming a plan of reorganization and other events in the
context of the Company's chapter 11 filing.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following discussion provides general background information
regarding developments in the Company's chapter 11 cases since January 27, 1996
through approximately August 31, 1996, but is not intended to be an exhaustive
summary. For additional information regarding the Company's chapter 11 cases
reference should be made to the Company's Annual Report on Form 10-K for the
Fiscal year ended January 27, 1996 (the "Annual Report"), Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation herein, the Notes to Consolidated Financial Statements herein and
Part II, Item 5. Other Information, herein. The Company files routine monthly
reports with the Office of the United States Trustee for the Central District
of California and files various pleadings with the Bankruptcy Court. Copies of
these documents may be obtained, upon request, from CPT Group, Inc. ("CPT"),
1151 Dove Street, Suite 170, Newport Beach, California 92660, (714) 852-8240;
however, the requesting party will be charged a fee by CPT.
Since the Petition Date, the Company has continued in possession of its
properties and, as a debtor in possession, is authorized to operate and manage
its business and to enter into all transactions (including obtaining services,
supplies and inventories) that it could have entered into in the ordinary
course of business had there been no bankruptcy. The Company may not engage in
transactions outside the ordinary course of business without first complying
with the notice and hearing provisions of the Bankruptcy Code and obtaining
Bankruptcy Court approval where necessary.
The Company has the right, subject to the approval of the Bankruptcy
Court, under relevant provisions of the Bankruptcy Code, to assume or reject
executory contracts and unexpired leases, including real property leases.
Certain parties to such executory contracts and unexpired leases with the
Company, including parties to such real property leases, may file motions with
the Bankruptcy Court seeking to require the Company to assume or reject those
contracts or leases.
In this context, "assumption" requires that the Company cure, or provide
adequate assurance that it will cure, all existing defaults under the contract
or lease and provide adequate assurance of future performance under relevant
provisions of the Bankruptcy Code; and "rejection" means that the Company is
relieved from its obligations to perform further under the contract or lease.
Rejection of an executory contract or lease may constitute a breach of that
contract and may afford the non-debtor party the right to assert a claim
against the bankruptcy estate for damages arising out of the breach, which
claim shall be allowed or disallowed as if such claim had arisen before the
date of the filing of the petition. By order of the Bankruptcy Court, effective
February 5, 1996, the Company obtained an extension of time within which to
assume or reject its non-residential real property leases through and including
the confirmation date of its plan of reorganization, except for certain leases
of non-residential real property and certain objecting landlords for which the
time within which such leases must be assumed or rejected was extended to
September 30, 1996. Since the Petition Date and as of August 31, 1996, the
Company had rejected 167 retail store leases.
By order entered May 6, 1996, the Bankruptcy Court fixed July 15, 1996 as
the date by which all creditors (with certain limited exceptions) must file
proofs of claim against the Company with respect to prepetition claims (or be
forever barred from (i) asserting claims that such person or entity possesses
against the Company and (ii) voting upon, or receiving any distribution under,
any plan or reorganization).
Described below are certain proceedings now pending in the Bankruptcy
Court.
Page 18 of 25
<PAGE> 19
THE CLOTHESTIME, INC.
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
As discussed in the Company's Annual Report, (i) on January 24, 1996,
Wells, individually and as agent for itself and Union, commenced an adversary
proceeding in the Bankruptcy Court, Adversary Proceeding No. 96-1100, against
the Debtors claiming that a tax refund, then estimated to be approximately $9.3
million is subject to the Banks' prepetition lien on certain of the Company's
assets (the "Tax Refund Litigation"); and (ii) on January 5, 1996, the Company
commenced an adversary proceeding in the Bankruptcy Court against the Banks,
Adversary Proceeding No. 96-01017, seeking a judicial determination and
declaration that the Banks do not hold a valid and perfected security interest
in certain credit card receivables or a deposit account or, alternatively, that
the security interest, if any, held by the Banks in such property can be avoided
(the "Credit Card Litigation").
On August 28, 1996, the Bankruptcy Court approved the compromise and
settlement of the Tax Refund Litigation and the Credit Card Litigation
(collectively, the "Adversary Proceedings") and certain related disputes between
the Company and the Banks, pursuant to a Settlement Agreement. The Settlement
Agreement provides for the resolution of all claims and controversies relating
to the Banks' alleged security interests in the following Disputed Collateral:
(i) refunds of federal, state and local income taxes in the amount of
$9,452,726.29, representing tax refunds from the Internal Revenue Service in the
amount of $9,450,146.00, from the State of Illinois in the amount of $2,280.29
and from the City of New York in the amount of $300.00 (collectively, the "Tax
Refund"); (ii) certain funds held on deposit in segregated accounts pursuant to
the terms of the parties' Amended Stipulation for Order (1) Clarifying Order
Approving Centralized Cash Management Systems, etc., (2) Providing Adequate
Protection for Alleged Collateral of Wells Fargo Bank, as Agent, to the Extent
of Valid Liens and (3) Establishing Schedule for Resolution of Disputes, dated
December 27, 1995; (iii) the Company's prepetition credit card accounts
receivable; and (iv) fee and expense retainers paid by the Company to
professionals prior to the commencement of the Bankruptcy Cases. The Settlement
Agreement also fixes the allowed amount of the Banks' prepetition claims under
the credit facilities evidenced by the Credit Agreement, dated as of February
28, 1995 between Stores, as borrower, the other Debtors, as Guarantors, and the
Banks (the "Bank Claims") at $26,306,481.05, subject to increase for prepetition
legal fees and expenses and certain contingent claims on account of letters of
credit. Such amount has been and will be reduced by certain payments, including
payments to be made pursuant to the Settlement Agreement. On or about September
5, 1996, pursuant to the terms of the Settlement Agreement and on account of the
Banks' alleged security interests in the Disputed Collateral other than the Tax
Refunds, the Banks (i) applied $3.1 million of the funds on deposit in certain
segregated accounts held by the Company to reduce the Bank Claims (the "Initial
Payment"), (ii) released the remainder of all funds (approximately $6.5 million)
on deposit in such accounts to the Company and (iii) released the Banks'
security interests in all Disputed Collateral other than the Tax Refund. In
addition, pursuant to the terms of the Settlement Agreement and on account of
the Banks' alleged security interests in the Tax Refund, the Company will make
an additional payment to the Banks in the amount of $3,126,363.00 (plus interest
accrued on such amount from August 29, 1996 through the date of payment and less
certain letter of credit fees and expenses) (the "Remaining Payment") on the
earlier of (i) the effective date of a plan of reorganization in any of the
Bankruptcy Cases and (ii) May 30, 1997. The Remaining Payment also will be
applied to reduce the amount of the Bank Claims.
On September 5, 1996, to secure its obligation to make the Remaining
Payment, the Company deposited the sum of $3,126,363.00 into a segregated
account (the "Segregated Account") on which, under the terms of the Settlement
Agreement, the Banks hold a first priority lien, subject and subordinate only
to a lien securing the Company's reimbursement obligations under the letter of
credit described below. As further security for its obligation to make the
Remaining Payment, the Company will deliver a letter of credit (the "Letter of
Credit") in favor of the Banks in the face amount of $3,241,095.24,
representing the anticipated amount of the Remaining Payment. As security for
the Company's reimbursement obligations under the Letter of Credit, the bank
issuing the Letter of Credit will be granted a first priority perfected
security interest in the Segregated Account.
In consideration for the Remaining Payment and the related Segregated
Account and Letter of Credit arrangements described above, the Banks: (i) have
released the balance of the Tax Refund to the Company; and (ii) have released
their alleged security interests in the Tax Refund, subject to reinstatement if,
but only if, the Company or any other party in interest commences any judicial
or other proceeding seeking to enjoin or otherwise interfere with the Banks'
rights under the
Page 19 of 25
<PAGE> 20
THE CLOTHESTIME, INC.
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
terms of the Settlement Agreement to apply funds on deposit in the Segregated
Account or to draw upon the Letter of Credit, in either case in satisfaction of
the Company's obligation to make the Remaining Payment. In addition, under the
terms of the Settlement Agreement, the Adversary Proceedings will be dismissed.
The Company projects that the aggregate consideration to be paid to the
Banks under the terms of Settlement Agreement, consisting of the sum of the
Initial Payment and the Remaining Payment and assuming a final payment date of
May 30, 1997, will be $6,341,095.24.
In May 1993, the Company purchased various "point of sale" computer
equipment and related software (collectively, the "POS Equipment") used in
certain of the Company's retail stores to record data regarding sales
transactions. Such data is simultaneously transferred to the Company's central
computer system and used to track, among other things, inventory levels and
sales performance. The Company financed the POS Equipment through a capital
lease with MetLife Capital Corporation ("MetLife"). The lease obligation was
in the aggregate original principal amount of $1,909,725 and was secured by the
POS Equipment. See Note C to Condensed Consolidated Financial Statements.
As of the Petition Date, the aggregate unpaid amount of the Company's
indebtedness to MetLife, including unpaid principal and accrued interest, was
$1,035,335. On or about May 13, 1996, MetLife filed a motion (the "Motion")
for relief from the automatic stay in the Company's chapter 11 case, pursuant
to section 362 of the Bankruptcy Code, to permit MetLife to foreclose upon its
liens on the POS Equipment or, alternatively, to require the Company to make
"adequate protection" payments to MetLife to protect against any diminution to
the value of the POS Equipment during the pendency of the Company's chapter 11
case. The Company and MetLife entered into an agreement (the "MetLife
Agreement"), which was approved by the Bankruptcy Court on July 22, 1996,
settling the matters that were the subject of the Motion and restructuring the
Company's loan obligations to MetLife. Under the terms of the MetLife
agreement, MetLife will have an allowed secured claim (the "Secured Claim") in
the Company's chapter 11 case in the amount of $670,000 and the balance of
MetLife's claim will be an allowed unsecured claim (the "Unsecured Claim") in
the Company's chapter 11 case. To amortize the Secured Claim, the Company (i)
will make monthly payments to MetLife in the amount of $5,000, commencing in
June 1996, which payments will be applied to reduce the principal amount of the
Secured Claim, until the effective date of a plan of reorganization in the
Company's chapter 11 case (the "Effective Date") and (ii) will pay the
remainder of the Secured Claim by making monthly payments to MetLife from and
after the Effective Date in an amount equal to remaining principal plus
interest at the Bank of America prime rate plus 200 basis points (up to a
maximum of 10.5% per annum) amortized over a number of months equal to the
difference between 60 and the number of monthly payments made to MetLife prior
to the Effective Date. The Unsecured Claim will be treated and paid in
accordance with the terms of any confirmed plan of reorganization in the
Company's chapter 11 case.
On July 11, 1996, the Company received Bankruptcy Court approval to (i)
close 33 underperforming retail stores (the "Closed Stores"), (ii) retain a
liquidation consultant to conduct store closing sales at 18 of these stores
located in Hawaii, Oregon and Washington and (iii) to conduct store closing
sales at the other 15 locations in other markets. On July 22, 1996, the
Company received Bankruptcy Court approval to reject certain of the leases for
the Closed Stores and to retain a marketing consultant to market certain of the
other leases. Effective July 31, the Company rejected the remaining leases for
the Closed Stores and, in August, assumed and assigned one lease that had been
marketed successfully. These store closings have resulted in a withdrawal of
the Company from the markets in Hawaii, Oregon and Washington.
Subject to Bankruptcy Court approval, the Company has agreed to a
restructuring of the lease for its headquarters space. The base rent for the
space will be reduced, effective May 15, 1996, from 67.7 cents per square foot
per month to 40 cents per square foot per month, or an annual reduction of
approximately $400,000. The lease as amended will also provide for annualized
adjustment based on the consumer price index of not less than 103% and not more
than 105% of the base rent for the prior year. Any damages incurred by the
lessor are capped at the annualized amount of the base rent for the year, and
the Debtors will provide the lessors with a letter of credit for such amount.
The term of the lease will also be extended to May 15, 2006. A hearing to
approve the assumption of the lease, as amended, is scheduled for September 30,
1996.
Page 20 of 25
<PAGE> 21
THE CLOTHESTIME, INC.
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
On August 28, 1996, the Bankruptcy Court approved the sale of, and on
August 30, the Company sold, its interests in two limited partnerships for an
aggregate consideration of $1,550,000. $1,229,443.46 of the net proceeds of
the sale were paid to Union in full satisfaction of its secured loans. See
Note C to Condensed Consolidated Financial Statements. The balance of the net
proceeds will be paid into a segregated account, will be subject to any other
liens against the partnership interests, including the lien (if any) of the
Banks, and will not be used by the Debtors without further order of the
Bankruptcy Court.
On August 28, 1996, the Bankruptcy Court approved the extension of the
Company's exclusive period to file a plan of reorganization until January 31,
1997, and its exclusive period to solicit acceptances of a plan until March 31,
1997. The Company cannot, at the present time, predict the contents of any
proposed plan of reorganization or when or whether it will be accepted by the
creditors or approved by the Bankruptcy Court. In addition, the Company may
seek further extensions of the exclusive period; however, there can be no
assurance that the Bankruptcy Court will grant further extensions if requested.
On June 28, 1996, the official committee of unsecured creditors in the
Bankruptcy Cases (the "Committee") filed a motion (the "Compensation Motion")
seeking an order requiring the Company to reduce by 25 percent the annual base
compensation of John Ortega II, the Company's Chairman of the Board and Chief
Executive Officer, and Norman Abramson, the Company's President and Chief
Operating Officer. Thereafter, the Company, the Committee, Messrs. Ortega and
Abramson and David Sejpal, the Company's Vice President and Chief Financial
Officer, entered into negotiations regarding, and, with the approval of the
Compensation Committee of the Board of Directors, entered into a compromise and
settlement of, the subject matter of the Compensation Motion.
Under the terms of this compromise and settlement, effective as of August
1, 1996, the annual base compensation paid to Messrs. Ortega and Abramson was
reduced by 12.5 percent, such reduction to remain effective during the
remaining pendency of the Bankruptcy Cases. In addition, Messrs. Ortega,
Abramson and Sejpal will be eligible to receive certain incentive payments
based on the Company's financial performance for the second half of Fiscal
1996. Finally, if Mr. Sejpal is terminated other than for cause subsequent to
the date of the Bankruptcy Court's approval of the settlement, any and all
payments to which he may be entitled under the terms of his severance agreement
with the Company will be treated as allowed administrative expense claims in
Clothestime's chapter 11 bankruptcy case.
The compromise and settlement of the Compensation Motion, including the
compensation arrangements described above, has been submitted to the Bankruptcy
Court but has not yet been approved.
To the best of management's knowledge, there are no other material
pending legal proceedings. The Company is, however, subject to other legal
proceedings and claims that have arisen in the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 1996, the Company held its Annual Meeting of Stockholders.
At such Meeting, the following matters were approved or, in the case of the
selection of the independent accountants, ratified, by the stockholders:
(a) Norman Abramson and Herman D. Epstein were each elected to serve as
Class II Directors of the Corporation for a three year term
expiring at the 1999 Annual Meeting of Stockholders. George Foos
continued in office as a Class I Director; and John Ortega II and
David A. Sejpal continued in office as Class III Directors of the
Corporation.
Page 21 of 25
<PAGE> 22
THE CLOTHESTIME, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The tabulation of the votes cast for the election of the Class II
Directors was as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Norman Abramson 13,099,301 333,542
Herman D. Epstein 13,099,301 333,542
</TABLE>
(b) The selection of the accounting firm of KPMG Peat Marwick LLP as
the Corporation's independent auditors for the Fiscal year ending
January 25, 1997 was ratified.
<TABLE>
<S> <C> <C> <C>
Votes For - 13,335,335 Abstentions - 1,400
Votes Against 50,756 Broker non-votes -0-
</TABLE>
ITEM 5. OTHER INFORMATION
On August 28, 1996, the Bankruptcy Court approved the compromise and
settlement of the Adversary Proceedings and certain related disputes between the
Company and the Banks, pursuant to a Settlement Agreement. The Settlement
Agreement provides for the resolution of all claims and controversies relating
to the Banks' alleged security interests in the following Disputed Collateral:
(i) refunds of federal, state and local income taxes in the amount of
$9,452,726.29, representing tax refunds from the Internal Revenue Service in the
amount of $9,450,146.00, from the State of Illinois in the amount of $2,280.29
and from the City of New York in the amount of $300.00 (collectively, the "Tax
Refund"); (ii) certain funds held on deposit in segregated accounts pursuant to
the terms of the parties' Amended Stipulation for Order (1) Clarifying Order
Approving Centralized Cash Management Systems, etc., (2) Providing Adequate
Protection for Alleged Collateral of Wells Fargo Bank, as Agent, to the Extent
of Valid Liens and (3) Establishing Schedule for Resolution of Disputes, dated
December 27, 1995; (iii) the Company's prepetition credit card accounts
receivable; and (iv) fee and expense retainers paid by the Company to
professionals prior to the commencement of the Bankruptcy Cases. The Settlement
Agreement also fixes the allowed amount of the Banks' prepetition claims under
the credit facilities evidenced by the Credit Agreement, dated as of February
28, 1995 between Stores, as borrower, the other Debtors, as Guarantors, and the
Banks (the "Bank Claims") at $26,306,481.05, subject to increase for prepetition
legal fees and expenses and certain contingent claims on account of letters of
credit. Such amount has been and will be reduced by certain payments, including
payments to be made pursuant to the Settlement Agreement. On or about September
5, 1996, pursuant to the terms of the Settlement Agreement and on account of the
Banks' alleged security interests in the Disputed Collateral other than the Tax
Refunds, the Banks (i) applied $3.1 million of the funds on deposit in certain
segregated accounts held by the Company to reduce the Bank Claims (the "Initial
Payment"), (ii) released the remainder of all funds (approximately $6.5 million)
on deposit in such accounts to the Company and (iii) released the Banks'
security interests in all Disputed Collateral other than the Tax Refund. In
addition, pursuant to the terms of the Settlement Agreement and on account of
the Banks' alleged security interests in the Tax Refund, the Company will make
an additional payment to the Banks in the amount of $3,126,363.00 (plus interest
accrued on such amount from August 29, 1996 through the date of payment and less
certain letter of credit fees and expenses) (the "Remaining Payment") on the
earlier of (i) the effective date of a plan of reorganization in any of the
Bankruptcy Cases and (ii) May 30, 1997. The Remaining Payment also will be
applied to reduce the amount of the Bank Claims.
On September 5, 1996, to secure its obligation to make the Remaining
Payment, the Company deposited the sum of $3,126,363.00 into a segregated
account (the "Segregated Account") on which, under the terms of the Settlement
Agreement, the Banks hold a first priority lien, subject and subordinate only
to a lien securing the Company's reimbursement obligations under the letter of
credit described below. As further security for its obligation to make the
Remaining Payment, the Company will deliver a letter of credit (the "Letter of
Credit") in favor of the Banks in the face amount of $3,241,095.24,
representing the anticipated amount of the Remaining Payment. As security for
the Company's reimbursement obligations under the Letter of Credit, the bank
issuing the Letter of Credit will be granted a first priority perfected
security interest in the Segregated Account.
Page 22 of 25
<PAGE> 23
THE CLOTHESTIME, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
In consideration for the Remaining Payment and the related Segregated
Account and Letter of Credit arrangements described above, the Banks: (i) have
released the balance of the Tax Refund to the Company; and (ii) have released
their alleged security interests in the Tax Refund, subject to reinstatement if,
but only if, the Company or any other party in interest commences any judicial
or other proceeding seeking to enjoin or otherwise interfere with the Banks'
rights under the terms of the Settlement Agreement to apply funds on deposit in
the Segregated Account or to draw upon the Letter of Credit, in either case in
satisfaction of the Company's obligation to make the Remaining Payment. In
addition, under the terms of the Settlement Agreement, the Adversary Proceedings
will be dismissed.
The Company projects that the aggregate consideration to be paid to the
Banks under the terms of Settlement Agreement, consisting of the sum of the
Initial Payment and the Remaining Payment and assuming a final payment date of
May 30, 1997, will be $6,341,095.24.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Settlement Agreement, dated as of August 28, 1996 by and
among the Debtors and Wells Fargo Bank, N.A. ("Wells"),
Union Bank of California, N.A. ("Union") and Wells as
agent for itself and Union.
27. Financial Data Schedule.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the quarterly period ended July 27, 1996.
Page 23 of 25
<PAGE> 24
THE CLOTHESTIME, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CLOTHESTIME, INC.
Date: September 10, 1996 By: /s/ JOHN ORTEGA II
------------------ ---------------------------------
John Ortega II
Chairman of the Board
and Chief Executive Officer
Date: September 10, 1996 By: /s/ DAVID A. SEJPAL
------------------ ---------------------------------
David A. Sejpal
Vice President - Chief
Financial Officer
(Principal Financial Officer)
Page 24 of 25
<PAGE> 25
THE CLOTHESTIME, INC.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Settlement Agreement, dated as of August 28, 1996 by and
among the Debtors and Wells Fargo Bank, N.A. ("Wells"),
Union Bank of California, N.A. ("Union") and Wells as
agent for itself and Union.
27. Financial Data Schedule.
Page 25 of 25
<PAGE> 1
EXECUTION VERSION
SETTLEMENT AGREEMENT
This Settlement Agreement (this "Agreement") is entered into as of
August 28, 1996, by and among The Clothestime, Inc., Clothestime Stores, Inc.
(for itself and as successor in interest to Clothestime Realty, Inc., "Stores"),
MRJ Industries, Inc., Clothestime International, Inc., Clothestime Acquisition
Corporation, Clothestime Investment, Inc. (collectively, the "Debtors"), and
Wells Fargo Bank, N.A. ("Wells"), Union Bank of California, N.A., successor in
interest to Union Bank (Union Bank of California and Union Bank collectively,
and each as the context may require, "Union"), and Wells as agent for itself and
Union (Wells, in such capacity, the "Agent").
Recitals
A. The Debtors are the debtors and debtors in possession in Chapter 11
Case Nos. SA 95-22533 JW through SA 95-22538 JW jointly administered under
chapter 11 of the Bankruptcy Code. The Debtors filed their respective petitions
on December 8, 1995 with the United States Bankruptcy Court for the Central
District of California (the "Bankruptcy Court").
B. The Agent, Wells and Union (together, the "Banks") established two
credit facilities for Stores under one agreement entitled "Credit Agreement",
dated as of February 28, 1995 (the "Credit Agreement") among Stores, the Banks,
and the Agent. The larger of the two credit facilities is in a principal amount
not exceeding $38,000,000 ("Facility A"). As of December 8, 1995, the date of
the Debtors' bankruptcy filings, the Agent and the Banks assert that Stores was
indebted to the Banks under Facility A various amounts, including $14,477,000.00
in the unpaid principal balance of loans, $17,125.36 in unpaid interest,
$288,972.95 in unpaid fees, and $12,977,690.94 in contingent reimbursement
obligations under outstanding letters of credit. The Agent and the Banks
further assert that the other credit facility ("Facility B") is in an amount
equal to $2,000,000, in the unpaid principal balance of loans, and $3,791.68 in
unpaid interest. The Agent and the Banks further assert that the obligations of
Stores to the Banks and to the Agent are guaranteed by the other Debtors.
C. The Agent and the Banks further assert that the obligations of the
Debtors to the Banks and to the Agent, pursuant to security agreements and other
documents, are secured by first perfected security interests in, among other
things, (i) the Debtors' refunds of federal, state and local income taxes in the
amount of $9,452,726.29, representing tax refunds from the IRS in the amount of
$9,450,146.00, from the State of Illinois in the amount of $2,280.29 and from
the City of New York in the
<PAGE> 2
amount of $300.00 (collectively, the "Tax Refund"), (ii) the Additional Deposit
Account Balances (defined herein to have the meaning given in the Amended
Stipulation for Order (1) Clarifying Order Approving Centralized Cash Management
Systems, etc., (2) Providing Adequate Protection for Alleged Collateral of Wells
Fargo Bank, as Agent, to the Extent of Valid Liens and (3) Establishing Schedule
for Resolution of Disputes, dated December 27, 1995 (the "Stipulation")), (iii)
the Debtors' prepetition credit card accounts receivable (the "Credit Card
Receivables") and (iv) fee and expense retainers (the "Retainers") paid by the
Debtors to professionals prior to the commencement of the Debtors'
reorganization cases under chapter 11 of the Bankruptcy Code, 11 U.S.C. Sections
101-1330 (the "Bankruptcy Cases") (the collateral described in clauses (i),
(ii), (iii) and (iv) above are referred to herein as the "Subject Collateral").
D. The Debtors, the Agent and the Banks are parties to those certain
actions entitled The Clothestime, Inc., et al. v. Wells Fargo Bank, N.A., et al.
(Adversary Proceeding No. 96-01017) and Wells Fargo Bank, N.A., et al. v. The
Clothestime, Inc., et al. (Adversary Proceeding No. 96-01100) (collectively,
the "Adversary Proceedings") pending in the Bankruptcy Court.
E. The parties hereto have now agreed to compromise and settle the
following claims, causes of actions and assertions on the terms and subject to
the conditions hereinafter set forth: (1) all claims and causes of action
asserted in the Adversary Proceedings and (2) the Agent and the Banks' assertion
of first priority perfected security interests in the Subject Collateral. The
matters described in clauses (1) and (2) of the preceding sentence are referred
to herein collectively as the "Subject Claims."
AGREEMENT
NOW, THEREFORE, for and good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. Allowed Amount of Prepetition Claims. The Debtors, the Agent and
the Banks hereby agree that the amount of the Banks' prepetition claims in the
Bankruptcy Cases, exclusive of the Banks' Individual Claims (as defined in
paragraph 5 below), is $26,306,481.05; provided, however, that such amount shall
be increased by (a) the amount, ultimately stipulated or otherwise determined to
be allowed, of prepetition legal fees and expenses incurred by the Agent and the
Banks, and (b) the amount of any claims or causes of action the Banks may have
that are now contingent or unliquidated, including, without limitation, any
amount the Agent or the Banks are required to pay on account of a letter of
credit, issued prepetition, in the face amount of $1,027,436, identified as
Irrevocable Documentary Credit No.
2
<PAGE> 3
SMI199122, which Wells did not honor, at the request of the Debtor, on the
grounds that the beneficiary did not make a conforming draw under the letter of
credit, plus the amount of all fees and expenses, including legal fees and
expenses, incurred by the Agent or the Banks in defending against any action or
claim brought or asserted against any of them on account of such dishonor (to
the extent such legal fees and expenses may be allowed pursuant to 11 U.S.C.
Section 502 or 506); and provided, further, that the Banks shall apply, to the
allowed amount of their claims, postpetition payments from the Debtors,
including, without limitation, $859,888.36, applied pursuant to the
Stipulation, and certain proceeds of the sale of fixtures or equipment
(totalling, as of July 27, 1996, $252,754.24), paid over to the Banks pursuant
to the Stipulation. Subject to paragraph 5 below, the Agent and Banks hereby
represent and warrant to the Debtors that, except with respect to the Subject
Claims, they are not currently aware, without undertaking any investigation
with respect thereto, of any contingent or unliquidated claims or causes of
action that would cause the allowed amount of the Banks' claims to be greater
than $26,306,481.05 plus the allowed amount of prepetition legal fees and
expenses incurred by the Agent and the Banks, other than the potential claims
and causes of action relating to Irrevocable Documentary Credit NO. SMI199122
or to another letter of credit in the face amount of $145.35; provided,
however, that such representation and warranty shall not constitute a waiver of
claims or causes of action of which the Banks are not currently aware. The
Debtors hereby represent and warrant to the Banks that, except with respect to
the Subject Claims, they are not currently aware, without undertaking any
investigation with respect thereto, of any claims or causes of action any of
the Debtors or their bankruptcy estates may have against the Agent or the
Banks; provided, however, that such representation and warranty shall not
constitute a waiver by the Debtors of any claims or causes of action of which
the Debtors are not currently aware; and provided, further, that, except with
respect to the Subject Claims, such representation and warranty shall not
affect the rights of third parties, including the Official Creditors' Committee
appointed in the Bankruptcy Cases. The parties hereto acknowledge and agree
that nothing contained in this Agreement shall determine the portion of such
allowed claims which are secured for purposes of the Bankruptcy Cases;
provided, however, that, notwithstanding the Banks' release set forth in
paragraph 7 below, the parties do hereby acknowledge and agree that in no event
shall the allowed amount of the Banks' secured claims be less than the amount
of the Secured Claim (as defined in paragraph 2 below).
2. Allowance of Secured Claim. Without affecting any secured claim
the Banks may assert on account of property other than the Subject Collateral,
the Debtors agree that the Banks shall have an allowed secured claim in the
Bankruptcy Cases solely on account of their asserted interests in the Subject
3
<PAGE> 4
Collateral in the aggregate amount of (x) $6,226,363.00 less (y) if the Letter
of Credit (as defined in subparagraph e of paragraph 3 below) is timely
received by the Agent as provided in subparagraph e of this paragraph 3, the
L/C Fee Reduction Amount (as defined in subparagraph e of paragraph 3 below),
plus (z) the amount of any and all interest accruing on sums on deposit in the
Segregated Account (as defined in subparagraph c of paragraph 3 below) (the
"Secured Claim"). Notwithstanding any other provision of this Agreement, the
parties acknowledge that they have not attempted to determine the exact amount
of all claims that shall be deemed secured for purposes of the Bankruptcy
Cases.
3. Treatment and Satisfaction of Secured Claim. The Secured Claim
shall be treated and satisfied as follows:
a. Initial Payment. Upon entry of an order of the Bankruptcy
Court approving this Agreement, which order shall be reasonably
satisfactory to the Debtors, the Agent and the Banks (the "Order"),
provided no stay of the Order is in effect, the Banks shall apply funds
on deposit with Wells in deposit accounts established pursuant to the
Stipulation with respect the Subject Claims and the Subject Collateral
(the "Subject Collateral Accounts") to pay to the Banks the sum of $3.1
million (the "Initial Payment"). Upon receipt, the Banks shall apply
the Initial Payment to reduce the principal amount of the Secured
Claim. Upon such application of the deposited funds, the Banks,
subject to their rights to reassert an interest in such funds in the
circumstances described in subparagraph e of paragraph 3 and paragraph
7 below, will release to the Debtors all amounts in excess of $3.1
million in the Subject Collateral Accounts.
b. Payment of Remainder of Secured Claim. The Debtors shall
pay to the Banks the amount of (x) $3,126,363.00, less (y) if the
Letter of Credit (as defined in subparagraph e of this paragraph 3) is
timely received by the Banks as provided in subparagraph e of this
paragraph 3, the L/C Fee Reduction Amount (as defined in subparagraph e
of this paragraph 3), plus (z) the amount of any and all interest
accruing on sums on deposit in the Segregated Account (as defined in
subparagraph c of this paragraph 3) (the "Remaining Payment") on the
date (the "Remaining Payment Date") that is the earlier of (i) May 30,
1997 and (ii) the effective date of a plan or plans of reorganization
in any of the Bankruptcy Cases. Upon receipt, the Banks shall apply
the Remaining Payment to reduce and fully satisfy the remaining amount
of the Secured Claim.
c. Establishment of Segregated Account as Security for
Remainder of Secured Claim. As security for the Debtors' obligation to
make the Remaining Payment, no later than one business day after the
Order is entered, from
4
<PAGE> 5
the Tax Refund already received the Debtors shall transfer to the Agent
for deposit into a separate interest bearing account at the Agent (the
"Segregated Account") the amount of $3,126,363.00 (the "Additional
Deposit Amount"). Any subsequent application or transfer of such funds
to the Banks pursuant to the terms of this Agreement shall be applied
to the Debtors' obligation, as set forth in subparagraph b of this
paragraph 3, to make the Remaining Payment. The amount of the Tax
Refund exceeding the Additional Deposit Amount, together with the
amount of interest earned, through the date of funding of the
Segregated Account, on the Tax Refund deposit account maintained with
the Agent (together, the "Remaining Tax Refund Amount") shall be
released to the Debtors free and clear of the liens, claims,
encumbrances and other interests in favor of the Agent and the Banks on
the terms set forth in paragraph 7 below, but subject to reinstatement
of such liens, claims, encumbrances and other interests on the terms
set forth in subparagraph e of this paragraph 3 and in said paragraph
7.
d. Security for Debtors' Payment Obligations. To further
assure payment of the Remaining Payment to the Banks: (i) the Debtors
hereby grant to the Agent and the Banks, and the Order shall expressly
confirm that the Agent and the Banks shall have, a perfected security
interest in the Segregated Account with priority over any and all other
liens, claims or security interests, other than the interests of the
L/C Bank (as defined in subparagraph e of this paragraph 3); and (ii)
the Agent shall be the beneficiary of the Letter of Credit (as defined
in subparagraph e of this paragraph 3).
e. Letter of Credit. No later than fifteen calendar days
after the date on which the Order is entered, provided no stay of the
Order is in effect on such date or, if a stay of the Order is entered
on such date, promptly after the lifting of such stay, the Debtors
shall cause to be issued and delivered to the Agent a direct-pay letter
of credit (the "Letter of Credit") naming the Agent as the beneficiary
thereof, having an expiry of June 30, 1997 and having a face amount of
$3,241,095.24, representing (x) $3,126,363.00, less (y) if the Letter
of Credit is timely received by the Banks as provided in this
subparagraph e, the L/C Fee Reduction Amount (as defined below in this
subparagraph e)(which for the purpose of this calculation only shall be
assumed to be $16,000), plus (z) an amount for interest which is
expected to accrue on sums on deposit in the Segregated Account (which
amount for interest for the purpose of this calculation only shall be
assumed to be an interest rate of 5% per annum). The Letter of Credit
shall be payable by the delivery of a draft by the Agent to the L/C
Bank (as hereinafter defined) in the amount of the Remaining Payment on
the Remaining Payment Date. To secure
5
<PAGE> 6
the Debtors' reimbursement obligations to the issuer of the Letter of
Credit (the "L/C Bank"), the Debtors may grant to the L/C Bank a
perfected security interest in the Segregated Account with priority
over any and all other liens, claims or security interests, including,
without limitation, any security interest granted to the Agent and the
Banks. The Debtor shall pay all fees, costs and other expenses payable
to the L/C Bank on account of the issuance of the Letter of Credit,
provided that, upon timely receipt of the Letter of Credit, the Banks
agree that the amount of the Secured Claim shall then be reduced by an
amount (the "L/C Fee Reduction Amount") equal to 50% of the amount
actually paid by the Debtors to the L/C Bank for the issuance of the
Letter of Credit (but not exceeding 50% of an amount equal to 1% per
annum times the face amount of the Letter of Credit for the term of
such Letter of Credit), and an amount equal to the L/C Fee Reduction
Amount shall be released at the Debtors' request from the Segregated
Account. In the event that the Debtors do not deliver the Letter of
Credit to the Agent within fifteen calendar days after the date on
which the Order is entered or, if a stay of the Order is entered on
such date, fifteen calendar days after the lifting of such stay, the
Banks may apply all funds on deposit in the Segregated Account,
including interest thereon, to their claims against the Debtors;
provided, however, that, if the Debtors, any trustee in bankruptcy or
the Official Creditors' Committee appointed in the Bankruptcy Cases at
any time seeks to enjoin or otherwise impair the Agent or the Banks'
rights to hold, receive or apply such funds or the Agent's right or
ability to draw under the Letter of Credit, or in the event that any
entity actually obtains an injunction or other court order so impairing
the Agent or the Banks' rights or ability, then the Agent and the Banks
may reinstate litigation concerning the Banks' alleged security
interest in the Tax Refunds to recover amounts in excess of the Secured
Claim; provided, further, however, in no event shall the Banks have an
allowed secured claim in the Bankruptcy Cases on account of any
interest in the Subject Collateral in an amount less than the amount of
the Secured Claim or be required to disgorge any payments or other
amounts previously applied by them pursuant to this Agreement.
4. Exclusivity. The Agent and the Banks agree not to oppose an
extension until January 31, 1997 of the Debtors' exclusive right to propose a
plan in the Bankruptcy Cases, and, if such exclusive right is so extended, not
to oppose a concurrent extension until March 31, 1997 of the Debtors' exclusive
right to obtain acceptances of a plan; provided, however, that, as members or ex
officio members of the Creditors' Committee, the Banks may abstain from any vote
on exclusivity.
6
<PAGE> 7
5. Banks' Individual Claims. Nothing in this Agreement shall affect
the Banks' Individual Claims, as hereinafter defined, or the collateral
therefor. "Banks' Individual Claims" shall mean:
(a) The claim of Union which is secured by a first priority
security interest in the Debtors' interests in certain limited
partnerships holding interests in separate limited partnerships owning
various low income housing projects; and
(b) The claim of Wells secured by a first priority mortgage
on that certain office building located at 5395 East Hunter Avenue in
Anaheim, California.
6. Dismissal of Adversary Proceedings. Concurrently with or as soon
as practicable after the delivery to the Agent of the Letter of Credit, the
Debtors, the Agent and the Banks shall take any and all actions necessary or
appropriate to result in the dismissal, with prejudice, of the Adversary
Proceeding No. 96-01017, and the dismissal, without prejudice to the
reinstitution thereof, but solely in the circumstances described in subparagraph
e of paragraph 3 above, of Adversary Proceeding No. 96-01100. Concurrently with
or as soon as practicable after the Banks' receipt of the Remaining Payment, the
Agent and the Banks shall take any and all reasonable actions necessary or
appropriate to amend their prior dismissal of Adversary Proceeding No. 96-01100
to a dismissal with prejudice. Notwithstanding the foregoing or the provisions
of paragraph 7 below, in the event that the Order is reversed by a final order
or decree of an appellate court that is not subject to further judicial appeal
or review, the Debtors may reinstitute or otherwise reassert the claims for
relief set forth in Adversary Proceeding No. 96-01017 and the Agent and the
Banks may reinstitute or otherwise reassert the claims for relief set forth in
Adversary Proceeding No. 96-01100, without, in either case, regard to the effect
of any statute of limitation, and the releases set forth in paragraph 7, below,
shall be of no further force and effect with respect to such claims for relief.
7. Release.
(a) Except for the lien on the Segregated Account described
in subparagraph d of Paragraph 3 above, and upon payment of the Initial
Payment and establishment of the Segregated Account, the Agent and the
Banks hereby release any and all actual or alleged liens, claims,
encumbrances and other interests in and to the Subject Collateral and
the Subject Collateral Accounts and the Remaining Tax Refund Amount;
provided, however, that, if the Debtors, any trustee in bankruptcy or
the Official Creditors' Committee appointed in the Bankruptcy Cases at
any time seeks to enjoin or otherwise impair the Agent's or the Banks'
rights to hold, receive or apply all
7
<PAGE> 8
funds on deposit in the Segregated Account or the Agent's ability to
draw under the Letter of Credit, including interest thereon, to their
claims against the Debtors or in the event that any entity actually
obtains an injunction or other court order so impairing the Agent's or
the Banks' rights or ability, then the Agent's and the Banks' actual or
alleged liens, claims, encumbrances and other interests in and to the
Remaining Tax Refund Amount, automatically and without the need for any
action, shall be automatically reinstated to the same extent and with
the same effect as the same had immediately prior to such release. The
foregoing release shall not extend to any lien, claim, encumbrance or
other interest in property of the Debtors not constituting the Subject
Collateral, the Subject Collateral Accounts or the Remaining Tax Refund
Amount.
(b) No lien that the Agent or the Banks may assert with
respect to the Remaining Tax Refund Amount shall be asserted against
any funds paid to and applied to the obligations of the Debtors to The
CIT Group/Business Credit, Inc. ("CIT").
8. Relief from Stay; No Further Injunctions. The Debtors hereby
agree, and the Order shall expressly provide, that the Banks shall have relief
from the automatic stay of 11 U.S.C. Section 362(a) to the extent necessary to
effectuate the terms of this Agreement and that the Debtors relinquish any right
to seek and the Bankruptcy Court will not grant any injunctive relief, pursuant
to 11 U.S.C. Section 105 or otherwise, that would restrain the Banks or any
other entity from effectuating the terms of this Agreement.
9. Conditions Precedent. Except with respect to the agreements, terms
and provisions contained in paragraph 10 below, which shall be effective on the
date this Agreement is executed, the agreements, terms, provisions and
compromises contained in this Agreement shall not be effective unless (a) CIT
has provided the Debtors with (i) its written consent to the Settlement
Agreement and (ii) related waivers of certain covenants in the agreements
governing the Debtors' postpetition financing facility with CIT, which consent
and waivers shall have been obtained no later than August 27, 1996, and (b) the
Bankruptcy Court has entered the Order no later than August 30, 1996.
10. Miscellaneous Agreements. The Debtors hereby agree to use their
best efforts to obtain the consents and waivers referred to in paragraph 9 above
and to have the Order entered no later than August 30, 1996.
11. Further Assurances. Each of the parties hereto agrees to
execute, acknowledge (where appropriate) and deliver or cause to be delivered
such other documents, instruments or
8
<PAGE> 9
certificates as may reasonably be required from time to time to carry out the
intentions and purposes of this Agreement.
12. Captions. The captions and headings in this Agreement are to be
used solely for convenience of reference, and are not to be construed as
modifying in any way the substantive terms of this Agreement.
13. Entire Agreement. This Agreement contains the entire agreement
of the parties hereto relating to the compromise and settlement of the Subject
Claims; provided, however, that the parties hereto have agreed that in no event
shall the allowed amount of the Banks' secured claims be less than the amount of
the Secured Claim. This Agreement supersedes all prior and contemporaneous
agreements, understandings, representations, warranties and statements with
respect to such subject matter, whether express or implied, oral or written,
including, but not limited to, that certain Settlement Agreement Term Sheet
dated as of August 7, 1996.
14. Amendment. This Agreement may not be modified, changed,
supplemented, or terminated, nor may any obligations under this Agreement be
waived, except by a written instrument signed by all of the parties hereto.
15. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of California
applicable to contracts made and performed in such State.
16. Successors and Assigns. This Agreement shall bind and benefit
the parties hereto (including the reorganized debtors) and their respective
successors and assigns including any trustee or examiner with expanded powers
appointed in the Bankruptcy Cases.
17. Counterparts. This Agreement may be executed by the parties in
any number of counterparts, and when each party has signed at least one such
counterpart, each counterpart shall be deemed an original and, taken together,
shall constitute one and the same agreement that shall be binding and effective
as to all parties.
18. Third-Party Beneficiaries. Other than the parties hereto and
their respective successors and assigns and, with respect solely to paragraph
7(b), CIT, there are no other beneficiaries, third-party or otherwise, to this
Agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be executed by their duly authorized representatives as of the date
first set forth above.
THE CLOTHESTIME, INC.
By: /s/ DAVID A. SEJPAL
------------------------------
Title: Vice President and
Chief Financial Officer
CLOTHESTIME STORES, INC.
(FOR ITSELF AND AS SUCCESSOR
IN INTEREST TO CLOTHESTIME REALTY, INC.)
By: /s/ DOUGLAS L. PEREIRA
------------------------------
Title: Chief Financial Officer
and Treasurer
MRJ INDUSTRIES, INC.
By: /s/ DAVID A. SEJPAL
------------------------------
Title: Vice President and
Chief Financial Officer
CLOTHESTIME INTERNATIONAL, INC.
By: /s/ DOUGLAS L. PEREIRA
------------------------------
Title: Chief Financial Officer
and Treasurer
CLOTHESTIME ACQUISITION CORPORATION
By: /s/ DAVID A. SEJPAL
------------------------------
Title: Vice President and
Chief Financial Officer
CLOTHESTIME INVESTMENT, INC.
By: /s/ DAVID A. SEJPAL
------------------------------
Title: President and Secretary
WELLS FARGO BANK, N.A., as Agent
and in its individual capacity
/s/ GREG RICHARDSON
- ---------------------------------
By: Greg Richardson
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.,
successor in interest to Union Bank
/s/ JAMES E. HUNT
- ---------------------------------
By: James E. Hunt
Title: Vice President
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-END> JUL-27-1996
<EXCHANGE-RATE> 1
<CASH> 29,494
<SECURITIES> 3,099
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 18,444
<CURRENT-ASSETS> 54,192
<PP&E> 51,229
<DEPRECIATION> 28,725
<TOTAL-ASSETS> 78,287
<CURRENT-LIABILITIES> 23,466
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> (1,837)
<TOTAL-LIABILITY-AND-EQUITY> 78,287
<SALES> 103,159
<TOTAL-REVENUES> 103,303
<CGS> 71,429
<TOTAL-COSTS> 71,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> (10,041)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,041)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
