<PAGE> 1
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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 26, 1997
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)
<TABLE>
<S> <C>
DELAWARE 33-0469138
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 each of the issuer's classes
of common stock, as of the latest practicable date: As of September 5, 1997,
14,198,241 shares of the issuer's only class of common stock, $.001 par value
per share, were outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- July 26, 1997 and January 25,
1997......................................................................... 3
Condensed Consolidated Statements of Operations -- Thirteen and Twenty-Six
weeks ended July 26, 1997 and July 27, 1996.................................. 4
Condensed Consolidated Statements of Cash Flows -- Twenty-Six weeks ended
July 26, 1997 and July 27, 1996.............................................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited) -- July 26,
1997......................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 10
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
EXHIBIT INDEX
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 26, 1997 JANUARY 25, 1997
------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash, including restricted cash of $2,737,500 at July 26, 1997... $ 16,942,175 $ 20,695,409
Marketable securities available-for-sale, net of allowances of
$20,276 and $80,734............................................ 998,545 3,142,667
Merchandise inventories.......................................... 9,990,530 9,292,338
Prepaid expenses and other current assets........................ 2,136,120 2,044,527
Deferred income taxes............................................ 16,106 16,106
------------- ------------
Total Current Assets........................................ 30,083,476 35,191,047
Property, plant and equipment -- on the basis of cost............ 38,710,789 48,479,461
Less: accumulated depreciation and amortization................ (27,583,060) (32,643,684)
------------- ------------
Net property, plant and equipment................................ 11,127,729 15,835,777
Other assets..................................................... 306,262 287,648
------------- ------------
Total Assets........................................... $ 41,517,467 $ 51,314,472
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable................................................. $ 2,672,084 $ 4,203,060
Accrued sales taxes.............................................. 1,493,126 1,657,311
Accrued payroll and related taxes................................ 2,602,187 3,551,300
Other accrued liabilities........................................ 10,204,966 9,911,517
Income taxes payable............................................. 1,716,245 1,716,043
------------- ------------
Total Current Liabilities................................... 18,688,608 21,039,231
LONG-TERM LIABILITIES
Long-term debt................................................... 750,059 630,000
Deferred income taxes............................................ 16,106 16,106
------------- ------------
Total Long-term Liabilities................................. 766,165 646,106
Liabilities Subject To Compromise................................ 48,639,381 53,025,675
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.001 par value, authorized 50,000,000 shares,
issued and outstanding 14,198,241 shares....................... 14,763 14,763
Additional paid-in capital....................................... 10,861,514 10,861,514
Retained earnings (accumulated deficit).......................... (32,582,473) (29,341,868)
Less: Treasury stock, 565,000 shares at cost..................... (4,850,215) (4,850,215)
Securities valuation allowance................................... (20,276) (80,734)
------------- ------------
Total Shareholders' Equity (Deficiency)..................... (26,576,687) (23,396,540)
------------- ------------
Total Liabilities and Shareholders' Equity
(Deficiency)......................................... $ 41,517,467 $ 51,314,472
============= ============
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
3
<PAGE> 4
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- --------------------------
JULY 26, JULY 27, JULY 26, JULY 27,
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales................................ $46,345,232 $59,492,362 $88,826,840 $103,159,343
Interest and other income................ 792,550 62,688 852,528 143,458
----------- ----------- ----------- ------------
Total Revenues........................ 47,137,782 59,555,050 89,679,368 103,302,801
----------- ----------- ----------- ------------
Costs and Expenses:
Cost of sales, including buying and
distribution and occupancy costs...... 31,822,489 41,710,236 62,129,656 71,429,416
Selling, general and administrative
expenses.............................. 13,249,505 17,748,219 27,116,982 36,159,704
Loss on disposal of property, plant and
equipment............................. 3,810 -- 181,006 --
Interest expense......................... 28,468 14,765 52,731 92,395
Other losses............................. 136,220 -- 136,220 --
----------- ----------- ----------- ------------
Total Costs and Expenses.............. 45,240,492 59,473,220 89,616,595 107,681,515
----------- ----------- ----------- ------------
Income (Loss) Before Reorganization Costs
and Income Taxes......................... 1,897,290 81,830 62,773 (4,378,714)
Reorganization costs..................... 1,757,457 4,271,332 3,303,378 5,662,568
----------- ----------- ----------- ------------
Income (Loss) Before Income Taxes.......... 139,833 (4,189,502) (3,240,605) (10,041,282)
Benefit for income taxes................. -- -- -- --
----------- ----------- ----------- ------------
Net Income (Loss).......................... $ 139,833 $(4,189,502) $(3,240,605) $(10,041,282)
=========== =========== =========== ============
Income (Loss) Per Share.................... $ 0.01 $ (0.30) $ (0.23) $ (0.71)
=========== =========== =========== ============
Weighted average number of common shares
outstanding.............................. 14,198,241 14,198,241 14,198,241 14,198,241
=========== =========== =========== ============
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
4
<PAGE> 5
THE CLOTHESTIME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------------
JULY 26, JULY 27,
1997 1996
----------- ------------
<S> <C> <C>
Operating Activities:
Net loss....................................................... $(3,240,605) $(10,041,282)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash reorganization costs.................................. 233,793 4,783,262
Depreciation and amortization.................................. 2,535,018 3,267,655
Loss on sales of marketable securities......................... 136,220 --
Gain on sale of land and building.............................. (750,671) --
Loss on disposal of property, plant, and equipment............. 181,006 --
Changes in operating assets and liabilities:
Increase in merchandise inventories............................ (698,192) (9,893,166)
Decrease in income taxes receivable............................ -- 9,336,008
(Increase) decrease in prepaid expenses and other assets....... (110,207) 80,165
Decrease in accounts payable................................... (878,317) (21,734)
Decrease in accrued payroll and related taxes.................. (948,911) (827,241)
Decrease in accrued sales tax and other accrued liabilities.... (72,836) (1,368,595)
----------- ------------
Net cash used in operating activities.......................... (3,613,702) (4,684,928)
----------- ------------
Investing activities:
Proceeds from sale of marketable securities.................... 2,068,360 --
Proceeds from sale of property, plant, and equipment........... 2,862,962 --
Purchases of property, plant and equipment..................... (22,050) (46,433)
----------- ------------
Net cash provided by (used in) investing activities............ 4,909,272 (46,433)
----------- ------------
Financing Activities:
Net repayments under revolving credit facility................. (3,660,804) (242,904)
Principal payments under long-term debt........................ (1,388,000) (10,000)
----------- ------------
Net cash used in financing activities.......................... (5,048,804) (252,904)
----------- ------------
Decrease in cash................................................. (3,753,234) (4,984,265)
Cash at beginning of year...................................... 20,695,409 34,477,823
----------- ------------
Cash at end of quarter......................................... $16,942,175 $ 29,493,558
=========== ============
Supplemental disclosure of cash flow information:
Income taxes paid.............................................. $ -- $ 3,000
Interest paid.................................................. $ 163,159 $ --
Income tax refunds received.................................... $ -- $ 9,443,657
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
5
<PAGE> 6
THE CLOTHESTIME, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 26, 1997
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., Clothestime
Acquisition Corporation and Clothestime International, Inc. (collectively, the
"Debtors") commenced reorganization cases (the "Bankruptcy Cases" or the
"Reorganization 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"). 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 exclude
Clothestime Insurance Company (Clothestime's captive insurance company
subsidiary).
The Debtors decided to seek bankruptcy protection after an extensive review
of the then current 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 a hearing.
Liabilities subject to compromise in the accompanying consolidated balance
sheets represent the Company's estimate of liabilities as of July 26, 1997 and
January 25, 1997, subject to adjustment in the reorganization process (see Note
C). 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.
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), and the ability to generate sufficient cash from operations and obtain
financing sources to meet future obligations.
On March 21, 1997, the Debtors filed their joint plan of reorganization and
related disclosure statement (as subsequently amended from time to time, the
"Plan" and the "Disclosure Statement"). On July 11, 1997, the Debtors filed
their second amended Plan and Disclosure Statement, which was supported by the
Creditors' Committee and represented the results of negotiations with the Banks
(hereinafter defined). At a hearing on July 24, 1997, the Bankruptcy Court
approved the Debtors' Disclosure Statement. On July 29, 1997, in
6
<PAGE> 7
THE CLOTHESTIME, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 26, 1997
accordance with the court's order approving the Disclosure Statement, the
Debtors mailed voting and solicitation packages to creditors. The deadline for
creditors to vote on the Plan was August 29, 1997, and on September 4, 1997, the
Debtors filed a report with the Bankruptcy Court on the tabulation of ballots on
the Plan. All classes of creditors entitled to vote on the Plan have voted to
accept the Plan. The hearing on the confirmation of the Plan is scheduled for
September 10, 1997. The confirmation and effectiveness of the Plan will be
subject to a number of conditions precedent. See Part II, Item 1. Legal
Proceedings, herein. There can be no assurance whether the Plan will be
confirmed by the Bankruptcy Court or when or whether the Plan will become
effective. Under the Plan, existing stockholders would receive no distributions,
and their stock would be canceled.
The principal business of the Company is the retail sale of junior size
women's clothing. As of July 26, 1997, the Company operated stores in 15 states,
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 include the
accounts of The Clothestime, Inc. and its consolidated group of subsidiaries,
MRJ, Stores, Clothestime Insurance Company, Clothestime International, Inc.,
Clothestime Investment, Inc. and Clothestime Acquisition Corporation. All
material intercompany balances and transactions have been eliminated in
consolidation. The operating results for the twenty-six week period ended July
26, 1997 are not necessarily indicative of the results that may be expected for
the year ending January 31, 1998 ("Fiscal 1997"). 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 25, 1997 ("Fiscal 1996").
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" which,
when adopted, will replace the current methodology for calculating and
presenting earnings per share. Under SFAS No. 128, primary earnings per share
will be replaced with a presentation of basic earnings per share, and fully
diluted earnings per share will be replaced with diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
fully diluted earnings per share. The statement will be effective beginning in
the Company's fourth quarter ended January 31, 1998, and accordingly, the
financial statements for such quarter will include a restatement of historical
earnings per share to conform to the requirements of SFAS No. 128. Management
does not expect that the presentation required by SFAS No. 128 to differ
materially from the current presentation of earnings per share.
NOTE B -- DEBTOR IN POSSESSION FINANCING
The Company, through Stores, has a financing agreement with The CIT
Group/Business Credit, Inc. (the "DIP Lender" or "CIT")) for debtor in
possession financing (the "DIP Facility"). At July 26, 1997, 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.
7
<PAGE> 8
THE CLOTHESTIME, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 26, 1997
Cash borrowings bear interest at a reference rate plus one-half 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 26,
1997, the Company had not used the direct borrowing capacity on the line and had
outstanding letters of credit in the amount of $4.9 million.
The agreement contains various restrictive covenants requiring, among other
things, minimum levels of earnings before interest, income taxes, depreciation
and amortization ("EBITDA"), 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 inventories and proceeds. The Company was
in compliance with or had obtained waivers for all such covenants as of July 26,
1997. Pursuant to a provision of the DIP Facility, in March 1997, the Company
provided $2.7 million in cash collateral to CIT representing 75% of the maximum
potential liability under certain outstanding letters of credit. The $2.7
million in cash collateral is classified as restricted cash in the accompanying
condensed consolidated balance sheets as of July 26, 1997. 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. These
liabilities were transferred from their respective prepetition balance sheet
accounts to liabilities subject to compromise and have been treated as noncash
items in the accompanying condensed consolidated statements of cash flows as of
July 26, 1997 and July 27, 1996. Certain prepetition liabilities have been
approved by the Bankruptcy Court for payment and to the extent not paid, were
included in accrued expenses and other payables. Liabilities subject to
compromise are summarized as follows:
<TABLE>
<CAPTION>
JULY 26, 1997 JANUARY 25, 1997
------------- ----------------
<S> <C> <C>
Revolving credit facility debt............................ $ 15,240,601 $ 18,901,405
Secured note payable to Wells Fargo Bank.................. -- 1,358,000
Capital lease obligation.................................. 340,636 345,222
Accounts payable, trade................................... 12,678,598 12,175,998
Estimated lease rejection claims.......................... 16,705,545 16,368,949
Other payables and accrued expenses....................... 3,674,001 3,876,101
------------ ------------
$ 48,639,381 $ 53,025,675
============ ============
</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 note
payable to Wells Fargo Bank, N.A. ("Wells") was secured by an office/warehouse
building and underlying real property that the Company used to house a portion
of its administrative offices and warehouse facilities. The office/warehouse
building and underlying real property was also security for the revolving credit
facility debt. On July 25, 1997, Stores sold the office/warehouse building and
underlying real property to an unaffiliated third party for $2,719,000. On July
25, 1997, Stores paid $1,521,158 of the net proceeds to Wells in full payment of
its secured note, plus
8
<PAGE> 9
THE CLOTHESTIME, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 26, 1997
accrued interest from the Petition Date, and the remaining $1,030,331 of the net
proceeds to the Banks (hereinafter defined) to reduce the revolving credit
facility debt.
On April 2, 1997, the Bankruptcy Court granted the motion of Wells,
individually and as agent for itself and Union Bank of California, N.A.
("Union"), seeking relief from the automatic stay established under section 362
of the Bankruptcy Code and authorized Wells and Union (collectively, the
"Banks") to execute upon their security interests in (a) a New York State
Dormitory Authority Revenue Bond in the face amount of $2.0 million and interest
thereon and (b) restricted cash in the amount of $253,916 (plus accrued
interest) (the "Restricted Cash"), consisting of the excess net proceeds of the
Debtors' sale of certain limited partnership interests. In May, 1997 Wells, as
agent, sold the bond and applied the proceeds and related interest ($2.3
million) and the Restricted Cash to reduce the Company's obligations to the
Banks under the revolving credit facility.
The Company will continue to 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. A plan of
reorganization ultimately approved by the Company's impaired prepetition
creditors and confirmed by the Bankruptcy Court may materially change the
amounts and terms of prepetition liabilities. Consequently, the amounts included
in the condensed consolidated balance sheets as liabilities subject to
compromise will 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," the Company is not required to record interest
during chapter 11 proceedings on unsecured or undersecured prepetition debt.
Contractual interest (computed without regard to default rates of interest)
exceeds interest expense recorded in the accompanying condensed consolidated
statements of operations for the twenty-six week period ended July 26, 1997 and
July 27, 1996 by approximately $854,000 and $723,000, respectively.
NOTE D -- REORGANIZATION COSTS
Reorganization costs recorded in the thirteen week and twenty-six week
periods ended July 26, 1997 and July 27, 1996 consisted of:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- -------------------------
JULY 26, JULY 27, JULY 26, JULY 27,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Write-off of leasehold
improvements and fixtures
associated with store closures
net of proceeds............... $ (119,796) $1,985,732 $ (5,545) $1,908,772
Estimated store lease rejection
claims net of proceeds from
lease sales................... -- 2,611,070 198,979 2,569,818
Other related store closure
costs......................... 948,769 38,788 952,691 161,513
Professional fees............... 875,129 (297,979) 2,055,260 1,198,881
Interest income................. (155,944) (175,758) (311,186) (410,477)
Other........................... 209,299 109,479 413,179 234,061
---------- ---------- ---------- ----------
$1,757,457 $4,271,332 $3,303,378 $5,662,568
========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHAPTER 11 REORGANIZATION
On December 8, 1995, The Clothestime, Inc. ("Clothestime") and five of its
subsidiaries (collectively, the "Debtors") 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 (the "Bankruptcy Court"). 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. 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 refers
solely to the Debtors and excludes Clothestime Insurance Company, Clothestime's
captive insurance company subsidiary.
For further information regarding the Company's chapter 11 cases and the
Debtor's plan of reorganization, see Part II, Item 1. Legal Proceedings, herein.
CONSOLIDATED RESULTS OF OPERATIONS
The 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 condensed 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.
The following table sets forth certain items in the condensed consolidated
financial statements of operations as a percentage of total revenues for the
thirteen week and twenty-six week periods ended July 26, 1997 and July 27, 1996.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------- -----------------------
JULY 26, JULY 27, JULY 26, JULY 27,
1997 1996 1997 1996
-------- -------- -------- --------
<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........ 67.5 70.0 69.3 69.1
Selling, general and administrative
expenses................................ 28.1 29.8 30.2 35.0
Loss on disposal of property, plant, and
equipment............................... -- -- 0.2 --
Interest expense.......................... 0.1 -- 0.1 0.1
Other losses.............................. 0.3 -- 0.1 --
------ ------ ------ ------
Income (loss) before reorganization costs
and income taxes........................ 4.0 0.2 0.1 (4.2)
Reorganization costs...................... 3.7 7.2 3.7 5.5
------ ------ ------ ------
Income (loss) before income taxes......... 0.3 (7.0) (3.6) (9.7)
Benefit for income taxes.................. -- -- -- --
------ ------ ------ ------
Net income (loss)......................... 0.3% (7.0%) (3.6%) (9.7%)
====== ====== ====== ======
</TABLE>
10
<PAGE> 11
Net Sales
Net sales decreased 22% in the second quarter of Fiscal 1997 to $46.3
million compared to $59.5 million in the second quarter of Fiscal 1996.
Comparable store sales (stores in operation for at least 15 months) decreased by
6% in the second quarter of Fiscal 1997 as compared with the second quarter of
Fiscal 1996. Management attributes this decrease in comparable store sales to
lower average retail prices on merchandise sold. For the first six months of
Fiscal 1997, net sales decreased 14% to $88.8 million from $103.2 million in the
same period of Fiscal 1996. Comparable store sales increased by 2% for the first
six months of Fiscal 1997 compared with comparable store sales for the first six
months of Fiscal 1996. Management attributes this increase in comparable store
sales to more timely receipt of merchandise shipments and better inventory
management offset partially by lower average retail prices on merchandise sold
in the second quarter of Fiscal 1997. The decrease in total net sales is
primarily due to the Company ending the second quarter of Fiscal 1997 with 100
fewer stores than at the end of the comparable period in Fiscal 1996.
The Company's primary target market is women in the 18 to 34 age group.
While customer demographics revealed that this age range 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. The Company normally posts its strongest sales during the second and
third quarters. Second quarter sales have traditionally been strong due to the
customer's acceptance of the Company's summer merchandise and the concentration
of stores in warm weather climates. Third quarter sales have been primarily
driven by back-to-school sales. Typically, clothing retailers post their
strongest sales during the fourth quarter as a result of a strong Christmas
selling period. While the Company has sought to increase its fourth quarter
sales consistent with most clothing retailers, during the last several years, a
highly competitive promotional environment surrounding the holiday season as
well as the lack of acceptance of merchandise offered contributed to weak
Company sales in the fourth quarter. First quarter sales are generally lower
than sales in the other quarters primarily as a result of the high general level
of retail sales activity during the fourth quarter.
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 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 1997.
Interest and Other Income; Interest Expense; Other Losses
Interest and other income increased to $793 thousand in the second quarter
of Fiscal 1997, compared to $63 thousand in the second quarter of Fiscal 1996.
For the first six months of Fiscal 1997, interest and other income increased to
$853 thousand from $143 thousand in the same period of Fiscal 1996. The increase
in the second quarter of Fiscal 1997 and for the first six months of Fiscal 1997
as compared to the respective periods of Fiscal 1996 is attributable to a gain
of $751 thousand from the sale of the Company's office/warehouse building and
underlying real property. For a discussion of the sale of the office/warehouse
building and underlying real property, see Note C to the Condensed Consolidated
Financial Statements.
Interest expense increased to $28 thousand in the second quarter of Fiscal
1997, compared to $15 thousand in the second quarter of Fiscal 1996. This
increase is attributable to payments made by the Company in the second quarter
of Fiscal 1997 on certain secured indebtedness pursuant to orders of the
Bankruptcy Court. Interest expense decreased to $53 thousand for the first six
months of Fiscal 1997 from $92 thousand in the same period of Fiscal 1996. This
decrease is attributable to payments made by the Company in Fiscal 1996 on
certain secured indebtedness pursuant to orders of the Bankruptcy Court. In the
second quarter and first six months of Fiscal 1997 and in the second quarter and
first six months of Fiscal 1996, approximately $409 thousand, $854 thousand,
$360 thousand and $723 thousand, respectively, of
11
<PAGE> 12
contractual interest expense was not recorded as a result of the chapter 11
filing. See Note C to the Condensed Consolidated Financial Statements.
The $136 thousand in other losses incurred in the second quarter of Fiscal
1997 and the first six months of Fiscal 1997 was attributable to losses from
sales of marketable securities.
Cost of Sales
Cost of sales as a percentage of total revenues decreased to 67.5% in the
second quarter of Fiscal 1997 as compared with 70.0% in the second quarter of
Fiscal 1996. During the second quarter of Fiscal 1997, the decrease of cost of
sales as percentage of total revenues was due to reduced markdowns through
improved inventory management. For the first six months of Fiscal 1997, cost of
sales as a percentage of total revenues increased to 69.3% from 69.1% for the
same period of Fiscal 1996, primarily as a result of the Company taking more
markdowns. The Company took proportionately more markdowns in the first quarter
of Fiscal 1997 as compared to the first quarter of Fiscal 1996. 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 in the first
quarter of Fiscal 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of total
revenues decreased to 28.1% for the second quarter of Fiscal 1997 compared to
29.8% for the second quarter in Fiscal 1996. For the first six months in Fiscal
1997 and Fiscal 1996, selling, general and administrative expenses as a
percentage of total revenues were 30.2% and 35.0% respectively. The overall
decrease in expenses as a percentage of revenues in the second quarter and the
first six months in Fiscal 1997 as compared to the same periods in Fiscal 1996
was due to decreases in (i) advertising costs; (ii) management information
systems and operating expenses; (iii) store maintenance and depreciation and
(iv) senior executive compensation. Advertising expenses were lower due to the
elimination of television advertising. Management information systems and
operating expenses declined due to less systems development and fewer stores.
The Company ended the second quarter of Fiscal 1997 with 100 fewer stores than
at the end of the comparable period in Fiscal 1996, resulting in the decline in
store maintenance and depreciation expenses. The decrease in selling, general
and administrative expenses as a percentage of total revenues in the second
quarter of Fiscal 1997 and the first six months of Fiscal 1997 was also
attributable to the decrease in salary and related costs due to the resignation
of two senior executive officers.
Reorganization Costs
Reorganization costs includes all costs associated with the reorganization
under chapter 11. During the second quarter of Fiscal 1997 and the second
quarter of Fiscal 1996, the Company incurred reorganization costs of $1.8
million and $4.3 million, respectively, relating primarily to professional fees,
estimated lease rejection claims, write-off of leasehold improvements, fixtures
and other store costs associated with store closures, and certain other
expenses. Reorganization costs in the first six months of Fiscal 1997 and the
first six months of Fiscal 1996 were $3.3 million and $5.7 million,
respectively, relating primarily to professional fees, estimated lease rejection
claims, write-off of leasehold improvements, fixtures and other store costs
associated with store closures, and certain other expenses. The Company
anticipates that it will incur additional reorganization costs throughout its
chapter 11 reorganization. See Note D to the Condensed Consolidated Financial
Statements.
Benefit for Income Taxes
No income tax benefit has been recorded for the second quarter and the
first six months of Fiscal 1997 and for the second quarter and first six months
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.
12
<PAGE> 13
Net Income (Loss) and Income (Loss) Per Share
Net income and income per share for the second quarter of Fiscal 1997 were
$140 thousand and $0.01, respectively. This compared with net loss and loss per
share of $4.2 million and $0.30, respectively, for the second quarter of Fiscal
1996. The increase in net income for the second quarter of Fiscal 1997 as
compared to the second quarter of Fiscal 1996 was due principally to a decrease
in reorganization costs incurred during the second quarter of Fiscal 1997 and a
reduction in costs and expenses due to the closing of unprofitable stores. Net
loss and loss per share for the first six months of Fiscal 1997 were $3.2
million and $0.23, respectively. This compared with net loss and loss per share
of $10.0 million and $0.71, respectively, for the same period of Fiscal 1996.
The decrease in net loss for the first six months of Fiscal 1997 as compared to
the same period of Fiscal 1996 was due primarily to a decrease in selling,
general and administrative expenses as a percentage of total revenues,
referenced above, as well as lower reorganization costs.
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 (the "Petition Date"). 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 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, $48.6 million has been established as
liabilities subject to compromise as of July 26, 1997. 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. See Note C to the Condensed
Consolidated Financial Statements and Part II, Item 1. Legal Proceedings,
herein.
The prohibition on payments of prepetition liabilities as a result of the
chapter 11 filing and the receipt of income tax refunds in the second quarter of
Fiscal 1996, partially offset by cash used in operating activities, enabled the
Company to report $16.9 million in cash at July 26, 1997. Included in cash at
July 26, 1997 is restricted cash of approximately $2.7 million which the Company
provided to The CIT Group/Business Credit, Inc. (the "DIP Lender" or "CIT"). See
Note B to the Condensed Consolidated Financial Statements.
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. See Part II, Item 1. Legal Proceedings, herein.
Subsequent to the chapter 11 filing, the Company reached an agreement with
CIT to provide debtor in possession financing (the "DIP Facility"). On December
28, 1995, the Debtors obtained preliminary Bankruptcy Court approval of, and on
January 9, 1996, the Debtors obtained final Bankruptcy Court approval of, the
DIP Facility. As amended, the DIP Facility provides 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. At July 26, 1997, the maximum
availability under the DIP Facility as determined under the borrowing base was
$7.4 million. The revolving line of credit may be in the form of letters of
credit determined as provided under the amended DIP Facility. Cash borrowings
bear interest at either a reference rate plus 0.5% or LIBOR plus 2.5%, at the
option of the Company. The DIP Facility, as amended, contains various
restrictive covenants requiring, among other things,
13
<PAGE> 14
minimum levels of earnings before interest, income taxes, depreciation and
amortization ("EBITDA"), the establishment of maximum levels of capital
expenditures, and a prohibition regarding declaring or making any cash dividends
by the Company or its subsidiaries. Pursuant to a provision of the DIP Facility,
in March 1997, the Company provided $2.7 million in cash collateral to CIT
representing 75% of the maximum potential liability under certain outstanding
letters of credit.
During the second quarter Fiscal 1997, the Company had not used the direct
borrowing capacity on the line. There were $4.9 million of letters of credit
outstanding at July 26, 1997. 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. Pursuant to the amended DIP Facility and a
related order issued by the Bankruptcy Court, cash borrowings and letters of
credit issued under the DIP Facility have been granted superpriority status over
all obligations except certain administrative expenses, as defined in such
agreement. The DIP Facility agreement is more fully described in Note B to the
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 $3.6 million for the second
quarter of Fiscal 1997 compared to $4.7 million for the second quarter of Fiscal
1996. The Company's cash used in operations was impacted by losses in the first
six months of Fiscal 1997 and an increase in merchandise inventories.
Merchandise inventories increased to $10.0 million at the end of the second
quarter of Fiscal 1997 from $9.3 million at the end of Fiscal 1996. The increase
in inventory for the second quarter of Fiscal 1997 can be attributed to seasonal
inventory fluctuations, partially offset by the Company's reduction in its store
base.
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, most 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 and long-term liquidity will be adversely impacted.
Marketable securities available-for-sale decreased $2.2 million from the
end of Fiscal 1996 to the end of the second quarter of Fiscal 1997 due to the
sale of the Company's New York State Dormitory Authority Revenue Bond. See Note
C to the Condensed Consolidated Financial Statements and Part II, Item 1. Legal
Proceedings, herein.
Net property, plant and equipment decreased to $11.1 million at the end of
the second quarter of Fiscal 1997, compared with $15.8 million at the end of
Fiscal 1996. The decrease primarily resulted from six months of depreciation of
property, plant and equipment and the sale of the Company's office/warehouse
building and underlying real property. For a discussion of the sale of the
office/warehouse building and underlying real property, see Note C to the
Condensed Consolidated Financial Statements.
Accounts payable decreased to $2.7 million at the end of the second quarter
of Fiscal 1997 from $4.2 million at the end of Fiscal 1996. The decrease in
accounts payable resulted primarily from prepayments for purchase of merchandise
inventories due to tighter credit terms experienced from the Company's
merchandise vendor community. Management believes that tighter credit terms are
a result of vendor uncertainty over the Company's continuing chapter 11 status.
Accrued sales tax decreased to $1.5 million at the end of the second quarter of
Fiscal 1997 from $1.7 million at the end of Fiscal 1996 primarily due to tax
payment timing differences. Accrued payroll and related taxes decreased from
$3.6 million at the end of Fiscal 1996 to $2.6 million at the end of the second
quarter of Fiscal 1997 primarily due to decreasing group health and
payroll-related tax payments as a result of the Company's reduction in its store
base and related personnel. Other accrued liabilities increased to $10.2 million
at the end of the second quarter of Fiscal 1997 from
14
<PAGE> 15
$9.9 million at the end of Fiscal 1996. The increase resulted primarily from
accrued professional fees relating to the Company's chapter 11 cases.
The DIP Facility, cash on hand, revenues generated from operations and
credit terms extended by the vendor and factor community are the principal
sources of liquidity. The Company believes that these sources will be sufficient
to meet the Company's operating and capital requirements. However, 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. The
Company has had discussions with prospective lenders regarding financing upon
their emergence from chapter 11 and believes that it will be able to secure
financing for operations on and after the effective date of a plan of
reorganization.
FORWARD-LOOKING STATEMENTS
Included in this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Part II -- Other Information, Item 1. Legal
Proceedings and Item 5. Other Information; 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 a plan of reorganization will be
confirmed and that the Company's financial goals will be realized prior or
subsequent to such confirmation. In addition to uncertainties relating to
confirmation of such plan of reorganization discussed in Part II -- Other
Information, Item 1. Legal Proceedings, herein, numerous factors may affect the
Company's actual financial 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.
15
<PAGE> 16
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 25, 1997 through
approximately September 5, 1997. 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 25, 1997, Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein and the Notes to the Condensed Consolidated Financial
Statements herein. In addition, copies of documents filed with the Bankruptcy
Court and the U.S. Trustee 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. The
discussion presented in this Report regarding developments in the Company's
chapter 11 proceedings are not intended to be exhaustive summaries and are
qualified in their entirety by references to the actual documents filed with the
Bankruptcy Court and the U.S. Trustee.
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 the 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 claims 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 as of
February 5, 1996, the Debtors obtained an extension of the period within which
to assume or reject nonresidential real property leases through and including
the confirmation date of a plan or plans of reorganization except for leases of
certain objecting landlords (the "Objection Leases"). With respect to the
Objection Leases, the Bankruptcy Court has extended through and including July
31, 1997, the period within which the Debtors may elect to assume or reject 15
of the Objection Leases, and through August 31, 1997, the period within which
the Debtors may elect to assume or reject the remaining nine Objection Leases.
Since the Petition Date and as of September 5, 1997, the Company had rejected
248 retail store leases.
On June 5, 1997, the Company filed a motion seeking authority from the
Bankruptcy Court to close 58 underperforming retail stores (the "Closed Stores")
and to retain a liquidation consultant to conduct store closing sales at these
locations. The motion was approved by the Bankruptcy Court on June 26, 1997, and
on July 31, 1997 the Company rejected the leases for the Closed Stores.
On January 17, 1997, the Creditors' Committee entered into letter
agreements with each of John Ortega and Norman Abramson (the "Letter
Agreements"), whereby the parties agreed, in the interests of resolving the
Reorganization Cases, that: (a) Messrs. Ortega and Abramson would resign
immediately from their respective positions as officers, directors and employees
of the Company and certain of its affiliates; and (b) in connection with and as
consideration for such resignations, all claims by and against Messrs. Ortega
and Abramson would be compromised and settled pursuant to the terms and subject
to the conditions set forth in
16
<PAGE> 17
such Letter Agreements; including the severance compensation to Messrs. Ortega
and Abramson payable on the respective dates when final non-appealable orders
are entered by the Bankruptcy Court approving the terms of the compromise and
settlement of the claims.
By order entered April 28, 1997, the Bankruptcy Court approved the
compromise and settlement of the claims by and against Mr. Abramson described in
the immediately preceding paragraph, and the severance payment of $378,007 was
made in May 1997. By orders dated August 21, 1997, the Bankruptcy Court approved
the compromise and settlement of the claims by and against Mr. Ortega and a
settlement of certain litigation against the Company and Mr. Ortega. Under the
terms of the settlement with Mr. Ortega, Mr. Ortega will be entitled to receive
a net payment of $152,813 after the order with respect to Mr. Ortega's
settlement and the settlement of the lawsuit have become final and
nonappealable.
Under the Bankruptcy Code, a debtor has the exclusive right to (a) file a
plan of reorganization during the first 120 days of its chapter 11 case and (b)
solicit acceptances of such a plan during the first 180 days of the case. The
Debtors had obtained extensions of these periods; and by order of the Bankruptcy
Court entered on February 5, 1997: (i) effective as of January 31, 1997 and
through and including March 31, 1997, the Debtors and the Official Committee of
Unsecured Creditors in the Bankruptcy Cases (the "Creditors' Committee"),
jointly or severally, had the exclusive right to file a plan or plans of
reorganization; and (ii) effective as of January 31, 1997 and through and
including May 30, 1997, the Debtors and the Creditors' Committee, jointly and
severally, had the exclusive right to solicit acceptances of such a plan or
plans. On March 21, 1997, the Debtors filed a plan of reorganization, which was
supported by the Creditors' Committee, and on March 31, 1997, the Debtors and
the Creditors' Committee filed a joint motion seeking a further extension of the
dates set forth in the preceding sentence. In response to that motion, John
Ortega, a former executive of the Company, filed a motion to terminate
exclusivity, which motion was granted by the Bankruptcy Court at a hearing on
May 7, 1997. On May 23, 1997, Mr. Ortega filed a plan of reorganization, and
other parties have the right to file a plan or plans of reorganization.
On March 21, 1997, the Debtors filed their joint plan of reorganization and
related disclosure statement (as subsequently amended from time to time, the
"Plan" and the "Disclosure Statement"). On July 11, 1997 the Debtors filed their
second amended Plan and Disclosure Statement, which was supported by the
Creditors' Committee and represented the results of negotiations with the Banks.
At a hearing on July 24, 1997, the Bankruptcy Court approved the Debtors'
Disclosure Statement and denied approval to the disclosure statement filed by
Mr. Ortega. On July 29, 1997, in accordance with the court's order approving the
Disclosure Statement, the Debtors mailed voting and solicitation packages to
creditors. The deadline for creditors to vote on the Plan was August 29, 1997,
and on September 4, 1997, the Debtors filed a report with the Bankruptcy Court
on the tabulation of ballots on the Plan. All classes of creditors entitled to
vote on the Plan have voted to accept the Plan. The hearing on the confirmation
of the Plan is scheduled for September 10, 1997.
The confirmation and effectiveness of the Plan will be subject to a number
of conditions precedent. There can be no assurance whether the Plan will be
confirmed by the Bankruptcy Court or when or whether the Plan will become
effective.
Described below are certain of the more significant claims and adversary
proceedings in the Bankruptcy Cases.
Claims Arising from Tax Audit. In early 1996, the Internal Revenue Service
(the "IRS") commenced an audit of the Company's Federal income tax returns for
the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994.
In July 1996, the IRS reported to the Debtors that it had made only limited
progress in its audit and thus could not, in advance of the claims bar date,
estimate accurately the amounts of outstanding tax liabilities for the periods
being audited. As a result, the IRS reported on its proofs of claim high
estimates of the outstanding tax liabilities for the periods being audited. The
Debtors believe that their actual outstanding tax liabilities for such periods
are far lower than those set forth in the proofs of claim filed by the IRS.
Wells and Union Claims. On April 2, 1997, the Bankruptcy Court granted the
motion of Wells Fargo Bank, N.A. ("Wells"), individually and as agent for itself
and Union Bank of California, N.A. ("Union"),
17
<PAGE> 18
seeking relief from the automatic stay established under section 362 of the
Bankruptcy Code and authorized Wells and Union (collectively the "Banks") to
execute upon their security interests in (i) a New York State Dormitory
Authority Revenue Bond in the face amount of $2.0 million and interest thereon
and (ii) restricted cash in the amount of $253,916 (plus accrued interest) (the
"Restricted Cash"), consisting of the excess net proceeds of the Debtors' sale
of certain limited partnership interests. In May 1997, Wells, as agent, sold the
bond and applied the proceeds and related interest and the Restricted Cash to
reduce the Company's obligations to the Banks under the revolving credit
facility.
On July 25, 1997, Clothestime Stores, Inc. sold an office/warehouse
building and underlying real property to an unaffiliated third party for
$2,719,000. On July 25, 1997, Clothestime Stores, Inc. paid $1,521,158 of the
net proceeds to Wells in full payment of its secured note, plus accrued interest
from the Petition Date, and the remaining $1,030,331 of the net proceeds to the
Banks to reduce the revolving credit facility debt.
Resolution of Certain Secured Claims. In August 1997, in connection with
the Plan, the Company resolved the claims of three equipment lessors and the
holder of mechanics' lien claims. The settlements with the equipment lessors
provided for the return of excess equipment and determined the lessors claims
against the Company. All of such claims will be treated as provided in the
settlements and the Plan.
Other Litigation. The Company is also subject to other legal proceedings
and claims. Although occasional adverse decisions (or settlements) may occur,
the Company believes that the final disposition of such matters will not have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
ITEM 5. OTHER INFORMATION
The information set forth in Part II, Item 1. Legal Proceedings in this
Report is hereby incorporated by reference in its entirety into this Item 5.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The Exhibit listed below is hereby filed with the U.S.
Securities and Exchange Commission as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
quarterly period ended July 26, 1997.
18
<PAGE> 19
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.,
a Delaware corporation
Date: September 8, 1997 By /s/ DAVID A. SEJPAL
------------------------------------
David A. Sejpal
Chairman of the Board and
Chief Executive Officer and
President and Chief Operating Officer
Date: September 8, 1997 By /s/ DOUGLAS L. PEREIRA
------------------------------------
Douglas L. Pereira
Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------------------------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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