<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 April 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 June 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 19 Pages
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - April 27, 1996 and January 27, 1996.............. 3
Condensed Consolidated Statements of Operations - Thirteen
weeks ended April 27, 1996 and April 29, 1995 ........................................... 4
Condensed Consolidated Statements of Cash Flows- Thirteen weeks ended
April 27, 1996 and April 29, 1995....................................................... 5
Notes to Condensed Consolidated Financial Statements - April 27, 1996...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 16
Item 5. Other Information........................................................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................................ 18
SIGNATURES.......................................................................................... 19
</TABLE>
<PAGE> 3
THE CLOTHESTIME, INC.
PART I. -- FINANCIAL INFORMATION
ITEM 1. -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
April 27, January 27,
1996 1996
--------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 18,127,304 $ 34,477,823
Marketable securities available-for-sale, net of allowances 3,106,151 3,191,737
of $102,264 and $16,678
Merchandise inventories 24,140,758 8,551,207
Income taxes receivable 9,336,008 9,336,008
Prepaid expenses and other current assets 2,840,227 2,707,926
Deferred income taxes 471,000 471,000
------------ ------------
Total Current Assets 58,021,448 58,735,701
------------ ------------
Investments 1,174,497 1,174,497
------------ ------------
Property, plant and equipment - on the basis of cost 54,996,557 55,281,631
Less: accumulated depreciation & amortization (28,849,829) (27,384,443)
------------ ------------
26,146,728 27,897,188
Other assets 561,799 472,766
------------ ------------
Total Assets $ 85,904,472 $ 88,280,152
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 14,582,863 $ 11,074,076
Accrued sales tax 1,608,533 1,982,300
Accrued payroll and related taxes 4,078,771 4,629,524
Other accrued liabilities 8,811,166 8,378,305
------------ ------------
Total Current Liabilities 29,081,333 26,064,205
------------ ------------
Long-term Liabilities
Deferred income taxes 471,000 471,000
------------ ------------
Total Long-term Liabilities 471,000 471,000
------------ ------------
Liabilities subject to compromise 53,978,261 53,433,703
------------ ------------
Shareholders' Equity
Common Stock, $.001 par value, authorized 50,000,000 shares issued and
outstanding - 14,198,241 shares at April 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) (3,549,920) 2,301,860
Less: Treasury stock, 565,000 shares at cost at April 27, 1996
and January 27, 1996, respectively (4,850,215) (4,850,215)
Securities valuation allowance (102,264) (16,678)
------------ ------------
Total Shareholders' Equity 2,373,878 8,311,244
------------ ------------
Total Liabilities and Shareholders' Equity $ 85,904,472 $ 88,280,152
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 3 of 19
<PAGE> 4
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------
April 27, April 29,
1996 1995
----------- ----------
<S> <C> <C>
Revenues:
Net sales $43,666,981 $72,347,239
Interest and other income 80,770 372,466
----------- -----------
43,747,751 72,719,705
----------- -----------
Costs and Expenses:
Cost of sales, including buying and distribution
and occupancy costs 29,719,180 54,022,447
Selling, general and administrative expenses 18,411,485 25,083,404
Interest expense 77,630 374,900
Other losses - 393,331
---------- -----------
48,208,295 79,874,082
---------- -----------
Loss before reorganization costs and income taxes (4,460,544) (7,154,377)
Reorganization costs 1,391,236 -
----------- -----------
Loss before income taxes (5,851,780) (7,154,377)
Benefit for income taxes - (2,804,515)
---------- -----------
Net Loss $(5,851,780) $(4,349,862)
=========== ===========
Loss per share $ (0.41) $ (0.31)
=========== ===========
Weighted average number of common and common
equivalent shares used in the calculation 14,198,241 14,182,489
========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 4 of 19
<PAGE> 5
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended
------------------------------
April 27, April 29,
1996 1995
------------ ------------
<S> <C> <C>
Operating Activities:
Net loss $ (5,851,780) $ (4,349,862)
Adjustments to reconcile net loss
to net cash used in operating activities:
Non cash reorganization costs 131,476 -
Depreciation and amortization 1,664,439 2,552,593
Loss on sales of marketable securities - 393,331
Changes in operating assets and liabilities:
Increase in merchandise inventories (15,589,551) (14,104,498)
Increase in income taxes receivable - (2,407,860)
Increase in prepaid expenses, other assets and investments (221,334) (2,035,174)
Increase in accounts payable 4,428,442 9,047,396
Decrease in accrued payroll and related taxes (550,753) (438,859)
Decrease in accrued sales tax and other accrued liabilities (107,567) (486,906)
------------ -------------
Net cash used in operating activities (16,096,628) (11,829,839)
------------ ------------
Investing activities:
Investment in marketable securities - (11,534)
Proceeds from sales of marketable securities - 4,606,800
Purchases of property, plant, and equipment (45,455) (453,641)
------------ ------------
Net cash provided by (used in) investing activities (45,455) 4,141,625
------------ ------------
Financing Activities:
Net repayments under revolving credit facility (208,436) (31,319,336)
Proceeds from long-term debt - 1,400,000
Principal payments under long-term debt - (183,841)
Proceeds from the exercise of stock options - 7,340
------------ ------------
Net cash used in financing activities (208,436) (30,095,837)
------------ ------------
Decrease in cash and cash equivalents (16,350,519) (37,784,051)
Cash and cash equivalents at beginning of year 34,477,823 40,829,741
------------ ------------
Cash and cash equivalents at end of quarter $ 18,127,304 $ 3,045,690
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ - $ 8,420
Interest paid $ - $ 374,900
Income tax refunds received $ - $ 369,557
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 5 of 19
<PAGE> 6
THE CLOTHESTIME, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 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 April 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.
The principal business of the Company is the retail sale of junior size
women's clothing. As of April 27, 1996, the Company operated stores in 20 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 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
Page 6 of 19
<PAGE> 7
THE CLOTHESTIME, INC.
NOTE A - REORGANIZATION AND BASIS OF REPORTING (CONTINUED)
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 thirteen week period
ended April 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 April 27, 1996, the agreement provided for
revolving loans to be made up to the lesser of (a) $40 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. Up to $25 million of the revolving line of credit
may be in the form of letters of credit determined as provided under the
agreement. See Note G - Subsequent Events, herein.
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
April 27, 1996, the Company had not used the direct borrowing capacity on the
line and had outstanding letters of credit in the amount of $2.1 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. The Company was
in compliance with or had obtained waivers for all such covenants as of April
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.
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 April 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>
April 27, 1996 January 27, 1996
-------------- ----------------
<S> <C> <C>
Revolving credit facility debt............................ $15,398,825 $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................................... 1,001,637 1,001,637
Accounts payable, trade.................................... 21,690,895 20,771,240
Estimated lease rejection claims........................... 8,871,043 8,871,043
Other payables and accrued expenses........................ 4,483,364 4,650,024
----------- -----------
$53,978,261 $53,433,703
=========== ===========
</TABLE>
Page 7 of 19
<PAGE> 8
THE CLOTHESTIME, INC.
NOTE C - LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
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. The note payable to Wells Fargo Bank 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, 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. The capital lease obligation is secured by
certain equipment acquired in connection with the capital lease agreement. The
obligation matured through May 31, 1998, with the interest portion of the lease
payments at a yield of 30 day commercial paper rate plus 235 basis points (see
Note G - Subsequent Events, herein). The interest rates described above do not
consider interest rates which may be applicable in the event of default.
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 these prepetition liabilities.
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 which 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 $15,398,825 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
thirteen week period ended April 27, 1996 by approximately $363,555. See Note G
- - Subsequent Events, herein.
NOTE D - REORGANIZATION COSTS
Reorganization costs recorded in the first quarter of Fiscal 1996
consisted of:
<TABLE>
<S> <C>
Professional fees............................. $1,496,860
Interest income............................... (234,718)
Other......................................... 129,094
----------
$1,391,236
</TABLE> ==========
Page 8 of 19
<PAGE> 9
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 thirteen week period ended April 27, 1996:
<TABLE>
<CAPTION>
Shares
------
<S> <C>
Options Outstanding, January 27, 1996 2,815,788
Activity during the period:
Options Granted -
Options Exercised -
Options Canceled
(per share amounts: $1.50 to $12.75) (164,053)
Options outstanding, April 27, 1996 2,651,735
=========
</TABLE>
At April 27, 1996, options to purchase 1,937,984 shares of the
Company's common stock were exercisable on various dates through March 8, 2005,
at prices ranging from $1.50 to $12.75 per share. In addition, at April 27,
1996, there were options to purchase 1,204,262 shares of the Company's common
stock available for grant under the Company's stock option plans. The
computation of net income (loss) per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the period
plus, in periods in which they have a dilutive effect, the effect of common
shares contingently issuable, primarily from stock options and warrants.
NOTE F - MARKETABLE SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), was adopted by
the Company at the beginning of fiscal 1994. SFAS 115 requires that investments
be classified as "held-to-maturity", "available-for-sale" or "trading
securities". At April 27, 1996, the Company classified all of its investments in
securities which did not meet the definition of cash equivalents as marketable
securities available-for-sale. Investment securities available-for-sale are
those securities not held as trading securities nor as held-to-maturity
securities. These securities are reported at fair value, with unrealized gains
and losses, net of related income taxes reported as a separate component of
stockholders' equity.
The carrying values (cost) and estimated market values of investment
securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
As of April 27, 1996
-----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Holding
Cost Value Losses Gains
-----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. state and local government agency issues $ 3,208,415 $3,106,151 $102,264 $ -
</TABLE>
Page 9 of 19
<PAGE> 10
THE CLOTHESTIME, INC.
NOTE F - MARKETABLE SECURITIES (CONTINUED)
Maturities of investment securities available-for-sale are summarized as
follows:
<TABLE>
<CAPTION>
As of April 27, 1996
--------------------
<S> <C>
Within 1 year $ -
After 1 year through 5 years 1,003,835
After 5 years through 10 years 2,204,580
After 10 years -
----------
$3,208,415
<CAPTION>
For the period ended
April 27, 1996
--------------------
Proceeds from sales of investment
securities available-for-sale $ -
Gross realized gains on sales of
investment securities available-for-sale $ -
Gross realized losses on sales of
investment securities available-for-sale $ -
Net unrealized holding loss on available-for-sale securities included
as a component of stockholders' equity $ 102,264
</TABLE>
All realized gains and losses are computed on the specific identification basis.
Investment securities available-for-sale include securities having a fair value
of $2,120,000 held as collateral under the prepetition revolving credit
facility debt.
NOTE G - SUBSEQUENT EVENTS
By notice dated May 24, 1996 and effective June 1, 1996, the Company
reduced the maximum line of credit under the DIP Financing Agreement to $25.0
million. Because of the limits on borrowing established by the Company's
inventory levels (see Note B - Debtor in Possession Financing, herein), the
reduction will have no effect on availability of funds under the DIP Financing
Agreement.
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, which 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 - Liabilities Subject to Compromise, herein.
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. Subject to the approval of the Bankruptcy Court and final documentation,
the Company and MetLife have entered into an agreement (the "MetLife Agreement")
settling the matters that are 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
Page 10 of 19
<PAGE> 11
THE CLOTHESTIME, INC.
NOTE G - SUBSEQUENT EVENT (CONTINUED)
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
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.
In June 1996, the Company received a tax refund in the amount of
$9,450,136 relating to Fiscal 1995. Such amount has been deposited into a
segregated account. See Part II, Item 1. Legal Proceedings, herein.
On or about June 11, 1996, the Company filed a motion seeking authority
from the Bankruptcy Court to (i) close 33 underperforming retail stores (the
"Closed Stores"), (ii) conduct store closing sales at 18 of these stores
located in Hawaii, Oregon and Washington and to retain a liquidation consultant
and (iii) conduct store closing sales at the other 15 locations in other
markets. The Company also intends to retain a lease consultant to review the
leases of certain Closed Stores to determine whether such leases are marketable
and if so, to market those leases.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHAPTER 11 REORGANIZATION
On December 8, 1995, the Company 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 11 of 19
<PAGE> 12
THE CLOTHESTIME, INC.
The following table sets forth certain items in the consolidated
statements of operations as a percentage of total revenues for the thirteen week
period ended April 27, 1996 and April 29, 1995.
<TABLE>
<CAPTION>
Thirteen weeks ended
April 27, 1996 April 29, 1995
-------------- --------------
<S> <C> <C>
Total revenues 100.0% 100.0%
Cost of sales, including buying and distribution
and occupancy costs 67.9 74.3
Selling, general and administrative expenses 42.1 34.5
Interest expense 0.2 0.5
Other losses - 0.5
------ ------
Loss before reorganization costs and income taxes (10.2) (9.8)
Reorganization costs 3.2 -
------ ------
Loss before income taxes (13.4) (9.8)
Benefit for income taxes - (3.8)
------ ------
Net loss (13.4)% (6.0)%
====== ======
</TABLE>
NET SALES
Net sales decreased 40% in the first quarter of Fiscal 1996 to $43.7
million compared to $72.3 million in the first quarter of Fiscal 1995.
Comparable store sales (stores in operation for at least 15 months) decreased by
23% in the first quarter of Fiscal 1996 as compared with the first quarter of
Fiscal 1995. Management attributes this decline in sales to two principal
factors. First, the Company ended the first quarter of Fiscal 1996 with 178
fewer stores than at the end of the comparable period in Fiscal 1995. Second,
new merchandise shipments sharply declined following the filing of the Chapter
11 Petitions causing inventory levels to fall far below that which the Company
planned. Lack of new merchandise in the beginning of the first quarter, coupled
with an already low level of inventory in the stores as a result of aggressive
pricing decisions made in the fourth quarter, created an overall negative
perception with many of its customers, which also contributed to a decline in
sales.
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 quarter of fiscal 1996.
Page 12 of 19
<PAGE> 13
THE CLOTHESTIME, INC.
INTEREST AND OTHER INCOME; INTEREST EXPENSE; OTHER LOSSES
Interest and other income decreased to $81 thousand in the first
quarter of Fiscal 1996, compared to $372 thousand in the first quarter of Fiscal
1995 as a result of a lower invested cash balance.
Interest expense decreased to $78 thousand in the first quarter of
Fiscal 1996, compared to $375 thousand in the first quarter of Fiscal 1995. This
decrease is attributable to the Company not recording approximately $364
thousand in interest during the first quarter of Fiscal 1996, consistent with
certain accounting rules applicable to a company which has filed for chapter 11
protection. The interest expense recorded in the first quarter 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.
The $393 thousand in other losses incurred in the first quarter 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 67.9% in
the first quarter of Fiscal 1996 as compared with 74.3% in the first quarter of
Fiscal 1995, primarily as a result of the Company taking fewer markdowns. Fewer
markdowns were necessary in the first quarter of Fiscal 1996 as a result of the
aggressive markdowns taken in the fourth quarter of Fiscal 1995 which cleared
out Fall merchandise and the sharp decrease in new merchandise shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of total
revenues increased to 42.1% for the first quarter in Fiscal 1996 compared with
34.5% for the first quarter in Fiscal 1995. The overall increase in expenses as
a percentage of revenues in the current year was due to increases in (i)
advertising costs; (ii) store operations and supervisory payroll; (iii) store
maintenance and depreciation and (iv) other expenses attributable to store
operations and administration. Advertising expenses were higher as the Company
launched a major advertising campaign in the month of April 1996 in an attempt
to increase sales and increase public awareness. Store operations and
supervisory payroll were higher for the quarter primarily as a result of
staffing to support higher than realized sales levels. Increases in other
expenses as a percentage of revenues were incurred due to decreased leverage on
fixed operating expenses resulting from fewer stores and lower average sales.
REORGANIZATION COSTS
Reorganization costs includes all costs associated with the
reorganization under chapter 11. During the first quarter of Fiscal 1996, the
Company incurred reorganization costs of $1.4 million, relating primarily to
legal, accounting and other professional fees. The Company anticipates that it
will incur additional reorganization costs throughout its chapter 11
reorganization. See Note D to Condensed Consolidated Financial Statements.
BENEFIT FOR INCOME TAXES
No income tax benefit has been recorded for the first 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 39.2% for the first quarter of Fiscal 1995.
Page 13 of 19
<PAGE> 14
THE CLOTHESTIME, INC.
NET LOSS AND LOSS PER SHARE
Net loss and loss per share for the first quarter of Fiscal 1996 were
$5.9 million and $0.41, respectively. This compared with net loss and loss per
share of $4.3 million and $0.31, respectively, for the first quarter of Fiscal
1995. The increase in net loss for Fiscal 1996 as compared to Fiscal 1995 was
due principally to $1.4 million of reorganization charges incurred during the
first quarter of Fiscal 1996.
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. As a result, $54.0 million has been established as
liabilities subject to compromise. 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 enabled the Company to report $18.1 million in cash and
cash equivalents at April 27, 1996.
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. In June 1996, the Company decided to close 33 underperforming stores.
See Part II, Item 5. Other Information, herein.
The exclusive period for the filing of a plan of reorganization has
been extended to August 30, 1996 and to solicit acceptances of a plan of
reorganization to October 31, 1996. The Company anticipates seeking further
extensions of the exclusive period; however, there can be no assurance that the
Bankruptcy Court will grant further extensions. 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.
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 April 27, 1996, the DIP Facility provided for
revolving loans to be made up to the lesser of (a) $40 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. Up to $25
million of 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
Page 14 of 19
<PAGE> 15
THE CLOTHESTIME, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
of capital expenditures, and a prohibition regarding declaring or making any
cash dividends by the Company or its subsidiaries. For a discussion of
a reduction in the maximum line of credit under the DIP Facility, see Note G to
Condensed Consolidated Financial Statements.
The Company did not use the direct borrowing capacity on the line
during the first quarter of Fiscal 1996. There were $2.1 million of letters of
credit outstanding at April 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.
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 $16.1 million for the first
quarter of Fiscal 1996, compared to $11.8 million for the first quarter of
Fiscal 1995. The Company's cash used in operations was impacted by losses in the
first quarter of Fiscal 1996 and an increase in merchandise inventories,
partially offset by an increase in accounts payable related to merchandise
purchases. Merchandise inventories increased to $24.1 million at the end of the
first quarter of Fiscal 1996, from $8.6 million at the end of Fiscal 1995. The
increase in inventory for the first quarter of Fiscal 1996 can be attributed to
seasonal inventory fluctuations and inventory returning to planned levels
following 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.
Accounts payable increased to $14.6 million at the end of the first
quarter of Fiscal 1996, from $11.1 million at the end of Fiscal 1995. The
relative increase in accounts payable resulted primarily from an increase in
merchandise inventories, as explained above. Accrued sales tax decreased to $1.6
million at the end of the first 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 $4.1 million at the end of the first quarter of Fiscal 1996 primarily due to
decreasing group health and payroll-related tax payments. Other accrued
liabilities increased $0.4 million from the end of Fiscal 1995 to the end of the
first quarter of Fiscal 1996 due to an increase of $0.5 million in unearned
premium and insurance claims accruals recorded relating to captive insurance,
offset by a net decrease of $0.1 million in various other components.
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 1. Legal Proceedings, herein for a discussion of
the litigation 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 negative
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
Page 15 of 19
<PAGE> 16
THE CLOTHESTIME, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 and in the women's specialty market
segment, 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 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 June 10, 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.
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 June 10, 1996, the Company had
rejected 142 retail store leases. The Company anticipates filing a motion to
assume and assign or to reject additional leases in connection with the store
closings described below. See also Part II, Item 5. Other Information, herein.
Page 16 of 19
<PAGE> 17
THE CLOTHESTIME, INC.
LEGAL PROCEEDINGS (CONTINUED)
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 distribution under, any
plan or reorganization).
Described below are certain proceedings now pending in the Bankruptcy
Court.
As discussed in the Company's Annual Report, (i) on January 24, 1996,
Wells Fargo Bank, N.A., individually and as agent for itself and Union Bank
(collectively, "Wells"), 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 Wells'
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 Wells, Adversary Proceeding No.
96-01017, seeking a judicial determination and declaration that Wells does 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 Wells in such property can be avoided (the "Credit Card Litigation").
The parties are in settlement discussions on the Tax Litigation and the
Credit Card Litigation; however, no agreement has yet been reached. The
Company can not predict whether or when any settlement will be reached. Any
settlement would require approval of the Bankruptcy Court after notice and a
hearing. Pursuant to stipulations entered in the Tax Refund Litigation, the
Company has deposited the tax refund in a segregated account with Wells. See
Note G to Condensed Consolidated Financial Statements.
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. Subject to the approval of the Bankruptcy Court, the Company and MetLife
have entered into an agreement (i) settling the matters that are the subject of
the Motion and (ii) restructuring the Company's loan obligations to MetLife (the
"MetLife Agreement"). 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 or about June 11, 1996, the Company filed a motion seeking
authority from the Bankruptcy Court to (i) close 33 underperforming retail
stores (the "Closed Stores"), (ii) conduct store closing sales at 18 of these
stores located in Hawaii, Oregon and Washington and to retain a liquidation
consultant and (iii) conduct store closing sales at the other 15 locations in
Page 17 of 19
<PAGE> 18
THE CLOTHESTIME, INC.
LEGAL PROCEEDINGS (CONTINUED)
other markets. The Company also intends to retain a lease consultant to
review the leases of certain Closed Stores to determine whether such leases
are marketable and if so, to market those leases. The Company has requested
that the motion be heard in June, 1996. In July, the Company anticipates
filing a motion to assume and assign any leases for Closed Stores which are
successfully marketed and to reject the balance of the leases for the
Closed Stores.
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 which have arisen in the ordinary course of its business.
ITEM 5. OTHER INFORMATION
As a part of its continuing review of operations, Management determined
that a number of stores were underperforming and should be closed. On or about
June 11, 1996, the Company filed a motion seeking authority from the Bankruptcy
Court to (i) close 33 underperforming retail stores (the "Closed Stores"), (ii)
conduct store closing sales at 18 of these stores located in Hawaii, Oregon and
Washington and to retain a liquidation consultant and (iii) conduct store
closing sales at the other 15 locations in other markets. The Company also
intends to retain a lease consultant to review the leases of certain Closed
Stores to determine whether such leases are marketable and if so, to market
those leases. The Company has requested that the motion be heard in June, 1996.
The store closings will result in a withdrawal of the Company from the markets
in Hawaii, Oregon and Washington.
In July, the Company anticipates filing a motion to assume and assign
any leases for Closed Stores which are successfully marketed and to reject the
balance of the leases for the Closed Stores.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for
the quarterly period ended April 27, 1996.
Page 18 of 19
<PAGE> 19
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: June 11, 1996 By: /s/ John Ortega II
-----------------------------
John Ortega II
Chairman of the Board
and Chief Executive Officer
Date: June 11, 1996 By: /s/ David A. Sejpal
-----------------------------
David A. Sejpal
Vice President -
Chief Financial Officer
(Principal Financial Officer)
Page 19 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
consolidated balance sheets and the consolidated statements of operations and is
qualified in its entirety by reference to such (B) financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> APR-27-1996
<EXCHANGE-RATE> 1
<CASH> 18127
<SECURITIES> 3106
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 24141
<CURRENT-ASSETS> 58021
<PP&E> 54997
<DEPRECIATION> 28850
<TOTAL-ASSETS> 85904
<CURRENT-LIABILITIES> 29081
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 2359
<TOTAL-LIABILITY-AND-EQUITY> 85904
<SALES> 43667
<TOTAL-REVENUES> 43748
<CGS> 29719
<TOTAL-COSTS> 29719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> (5852)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5852)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
