UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 30, 1999
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 No. 0-20234
TODAY'S MAN, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-1743137
------------ ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
835 Lancer Drive
Moorestown, New Jersey 08057
---------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (609) 235-5656
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value 27,014,485
-------------------------- ----------
(Title of Class) (Number of Shares Outstanding as of May 24, 1999)
Common Stock Purchase Warrants 5,427,927
- ------------------------------ ---------
(Title of Class) (Number of Warrants Outstanding as of May 24, 1999)
Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ X ] No [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant is $23,574,839 (1).
Documents incorporated by reference are listed in the Exhibit Index.
- --------------------
(1) The aggregate dollar amount of the voting and non-voting common equity set
forth equals the number of shares of and warrants for the Company's Common
Stock outstanding, reduced by the amount of shares of and warrants for
Common Stock held by officers, directors and shareholders owning 10% or
more of the Company's Common Stock and Warrants for Common Stock,
multiplied by $1.44 and $0.25, the last reported sale price for the
Company's Common Stock and Warrants on May 24, 1999. The information
provided shall in no way be construed as an admission that any officer,
director or 10% shareholder in the Company may be deemed an affiliate of
the Company or that such person is the beneficial owner of the shares
reported as being held by such person, and any such inference is hereby
disclaimed. The information provided herein is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
<PAGE>
PURPOSE OF AMENDMENT
The registrant hereby amends the following items, financial statements exhibits
or other portions of its Annual Report on Form 10-K for the Annual Period ended
January 30, 1999, as set forth in the pages attached hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data (see page F-1)
1
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which the items in the Company's Statements of Operations bear to net sales.
<TABLE>
<CAPTION>
Fiscal Year
-----------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 65.9 64.5 63.6
----------- ----------- ----------
Gross profit 34.1 35.5 36.4
Selling, general and administrative expenses 32.3 30.7 31.3
----------- ----------- ----------
Income from operations 1.8 4.8 5.1
Reorganization items, net 4.3 3.2 -
Interest expense and other (income) expense, net .3 3.6 1.5
----------- ----------- ----------
Income (loss) before income taxes and extraordinary item (2.8) (2.0) 3.6
Income tax provision - - 1.3
----------- ----------- ----------
Income (loss) before extraordinary item (2.8)% (2.0)% 2.3
Extraordinary item, net of income tax benefit - - 0.3
----------- ----------- -----------
Net income (loss) (2.8)% (2.0)% 2.0%
=========== =========== ===========
</TABLE>
FISCAL YEARS 1998 AND 1997
Net Sales. Net sales were $213,608,600 in fiscal 1998, a decrease of
$539,400 or 0.3% from net sales of $214,148,000 in fiscal 1997. The sales
decrease was due in part to a $434,500 decrease in sales from licensed shoe
departments. Additionally, the Company has reduced its semi-annual clearance
event. In fiscal 1998 the Company shortened its fall clearance event by two
weeks as compared to fiscal 1997. The Company operated 25 superstores at January
31, 1998, and January 30, 1999, respectively.
Gross Profit. Gross profit as a percentage of net sales increased to 36.4%
in fiscal 1998 from 35.5% in fiscal 1997. The increase in gross profit was
attributable to a reduction in the promotional activities and markdowns from
those used in fiscal 1997 related to the marketing of the Today's Man
proprietary card. Additionally, the Company has moved a significant portion of
its inventory to a replenishment program which allows for more timely receipt of
merchandise and therefore fewer markdowns. In fiscal 1998, approximately 48% of
sales were made through replenishment programs as compared to 35% in fiscal
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 1.4% or $940,500 from $65,819,800 in fiscal
1997 to $66,760,300 in fiscal 1998. As a percentage of net sales, selling,
general and administrative expenses increased from 30.7% in fiscal 1997 to 31.3%
in fiscal 1998. The increase in expenses was primarily due to an additional
$1,100,000 in planned advertising costs associated with the relationship
marketing campaign. In addition to the relationship marketing, the cost of
administering the Today's Rewards Program increased by approximately $450,000
due to increased utilization of the card and a higher number of payouts under
the program. Offsetting these increases was a decrease in amortization expense
of approximately $500,000 related to the decrease in assets under capital leases
and bank issuance costs. Store payroll, occupancy, and advertising costs
increased by $847,100 in fiscal 1998 as compared to the same period in fiscal
1997, and represented 19.5% of net sales in fiscal 1998 as compared to 19.1% of
net sales in fiscal 1997.
Reorganization Items, Net. Reorganization items in fiscal 1997 consisted of
legal and accounting fees incurred in the administration of the Chapter 11
proceedings offset by interest income earned during the period. No
reorganization items were incurred in fiscal 1998.
Interest Expense, Interest Income and Other (Income) Expense, Net. Interest
expense, interest income and other (income) expense, net, decreased by
$4,505,700 in fiscal 1998 from fiscal 1997. This decrease is a result of the
charge taken in the third quarter of fiscal 1997 of $7,264,000 related to the
Company's Plan of Reorganization. In fiscal 1998, the Company recognized
$1,045,000 in charges for the early termination of its revolving credit facility
and term loan with Foothill Capital Corporation, which the Company recorded as
an extraordinary item.
Income Tax Expense. In fiscal 1998 the Company recorded a provision for
income taxes of $2,495,900. This provision is fully offset by the Company's net
operating loss carryforwards. The Company had a net loss in fiscal 1997 and
therefore recorded no tax provision.
2
<PAGE>
Extraordinary Item. In December 1998, the Company refinanced its revolving
credit facility and term loan from Foothill Capital with a new revolving credit
facility with Mellon Bank, N.A. As a result of this refinancing, the company
incurred a prepayment penalty of approximately $720,000 and wrote off
approximately $640,000 of unamortized debt issuance costs. These amounts were
offset by approximately $315,000 in accrued debt discount and related
liabilities and approximately $387,000 in income tax benefits related to this
extraordinary item.
FISCAL YEARS 1997 AND 1996
Net Sales. Net sales of $214,148,000 in fiscal 1997 represented an increase
of $10,105,600 or 5.0% over net sales of $204,042,400 in fiscal 1996. The sales
increase was due to the increase from license shoe department sales as well as
better merchandise assortments, more timely arrival of merchandise, and better
in-stock positions resulting from the Company's expanded utilization of its
merchandise replenishment program. Sales from licensed shoe departments
increased $3,853,600 to $12,642,600 for fiscal 1997 as compared to the prior
year period. The replenishment program serves to minimize stock outs and quickly
restock fast selling merchandise. These factors contributed to the Company's
comparable store sales increase of 7%. There were 25 superstores in operation at
January 31, 1998 and February 1, 1997 respectively.
Gross Profit. Gross profit increased by $6,554,700 to $76,072,900 and as a
percentage of net sales to 35.5% in fiscal 1997 from 34.1% in fiscal 1996. The
gross margin improvement was due to better buying, a decrease in markdowns
resulting from better merchandise transition between seasons and the increase in
merchandise productivity due to the Company's merchandise replenishment program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined $162,700 to $65,819,800 in fiscal 1997 from
$65,982,500 in the year ago period and declined as a percentage of net sales to
30.7% in fiscal 1997 as compared to 32.3% in fiscal 1996. Store payroll,
occupancy and advertising costs decreased $984,100 to 19.1% of net sales in
fiscal 1997 as compared to 20.5% of net sales in the prior fiscal year. This
decrease was partially offset by increases in the Company's credit card
processing costs due to an increase in usage of the Company's private label
credit card.
Reorganization Items, Net. Reorganization items consisted of $7,224,000 in
professional fees, $121,300 in retention bonus expenses and other employee
related costs to minimize employee turnover, and $519,700 related to lease
rejection settlement costs. These items were offset by $1,096,000 in interest
income earned on cash accumulated during the bankruptcy period while not paying
pre-petition obligations. These amounts compared to $3,567,600 in professional
fees, $4,780,600 in asset write-offs, $526,000 in retention bonus expense and
$283,800 in net lease rejection costs offset by $310,300 in interest income in
the prior fiscal year.
Interest Expense, Interest Income and Other (Income) Expense, Net. Interest
expense, interest income and other (income) expense, net increased by $7,286,600
in fiscal 1997. This was primarily due to the Company recording a charge of
$7,264,000 as a result of the Company's Plan of Reorganization representing the
premium demanded by the Official Committee of the Unsecured Creditors, the
holders of the secured pre-petition bank claims and other holders of unsecured
pre-petition obligations of the Company to support a Plan that provided a full
recovery for all allowed claims.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary historic source of working capital is cash flow from
operations. The recent bankruptcy proceedings have distorted the presentation of
the historic sources of working capital by allowing the Company to accumulate
cash without paying its pre-petition obligations. The Company had working
capital of $49,527,600, $26,291,900 and $31,927,200 at the end of fiscal 1996,
1997 and 1998, respectively. The fiscal 1997 decrease in working capital was a
result of the Company's emergence from Chapter 11 and the payment of
pre-petition obligations pursuant to the Reorganization Plan. See Item 1.
"Business." Historically, the Company's working capital is at its lowest level
in the first and third quarters and increases in the second and fourth quarters
during the peak selling seasons. The Company measures its inventory turnover by
dividing net sales by the retail value of the inventory averaged over 12 months.
Inventory turnover was 3.22 times, 3.05 times and 2.81 times in fiscal 1996,
1997 and 1998, respectively.
Net cash provided by (used in) operating activities amounted to
$24,362,100, ($45,080,000) and $11,330,300 in fiscal 1996, 1997 and 1998,
respectively. These amounts primarily represent net income plus depreciation,
amortization and other changes in operating assets and liabilities. The large
use of cash in fiscal 1997 was primarily due to the payment of approximately
$42,329,700 of liabilities subject to settlement in the Company's Chapter 11
proceedings. Without such payment, operating activities would have used net cash
of $2,750,300. In fiscal 1998 the Company used approximately $11,005,500 to fund
additional liabilities subject to settlement.
Net cash used in investing activities for existing stores and new systems
amounted to $1,424,200, $1,326,600 and $4,521,400 in fiscal 1996, 1997 and 1998,
respectively. The increase in fiscal 1998 from 1997 represents the capital
expenditures related to the Company's new merchandising system and general
ledger program.
3
<PAGE>
Net cash provided by (used in) financing activities amounted to
($1,397,300), $23,700,100 and ($5,847,300) in fiscal 1996, 1997 and 1998,
respectively. The increase in fiscal 1997 represents the proceeds from the
Company's equity offering and the proceeds from the term loan, two of the
funding sources used to fund the Plan of Reorganization.
On December 31, 1997, the Company entered into a Loan and Security
Agreement with Foothill Capital Corporation ("Foothill"), individually and as
agent. The Loan and Security Agreement provided for a $12.5 million term loan
and a $30.0 million revolving credit facility. The Company granted Foothill
Capital Corporation a lien on its tangible and intangible assets to secure this
term loan and revolving credit facility. Proceeds from these loans were used to
fund a portion of the Company's Plan of Reorganization. There were no
outstanding borrowings under the Foothill revolving credit facility at January
31, 1998. The Company had approximately $6,600,000 in outstanding letters of
credit at January 31, 1998.
On December 4, 1998, the Company entered into a Loan and Security Agreement
with Mellon Bank, N.A., ("Mellon") individually and as agent. The Loan and
Security Agreement provides for a $45.0 million revolving credit facility. The
Company has granted Mellon a lien on its tangible and intangible assets to
secure this revolving credit facility. Proceeds from this loan were used to
refinance the Company's previous revolving credit facility and term loan from
Foothill. In accordance with the early termination provisions of the Foothill
loan document, the Company paid an early termination fee of $720,000 to
Foothill.
The Mellon revolving credit facility bears interest at the option of the
Company at prime (7.75% at January 30, 1999) or LIBOR (5.03% at January 30,
1999) plus a margin ranging from 1.75% to 3.25% depending upon the Company's
EBITDA. This facility has a term of five years and includes a $20.0 million
sublimit for letter of credit advances. Availability under the revolver is based
on a formula of inventory and credit card receivables, less applicable reserves.
The Mellon Loan and Security Agreement contains financial covenants
including tangible net worth, indebtedness to tangible net worth and fixed
charge coverage ratios, and limitations on new store openings and capital
expenditures as well as restrictions on the payment of dividends. The Company
was in compliance with all covenants as of and for the year ended January 30,
1999. In April 1999 the Company and Mellon amended the Loan Agreement to allow
for the inclusion of participant lenders and to modify certain other provisions.
The Company believes that the sources of capital above and internally
generated funds will be adequate to meet the Company's anticipated needs through
fiscal 1999.
YEAR 2000 COMPLIANCE
The Company is conducting a comprehensive review of its information
technology and non information technological systems to determine which systems
will require modification to enable proper processing of transactions related to
the year 2000 and beyond. The primary information systems upon which the Company
relies for its daily operations are the point of sale register systems, its
merchandising system and its general ledger accounting system. The Company has
completed testing of its point of sale and existing general ledger system and
concluded that these systems are capable of processing transactions in the year
2000 and beyond. The Company's merchandising system will require remediation
that is estimated to cost less than $250,000. A further and complete analysis of
the Company's internal systems has indicated that despite the systems' ability
to properly process transactions related to the year 2000 and beyond the
Company's overall operations would be better served by replacing the existing
general ledger and merchandising systems. As of January 30, 1999, the Company
has completed the installation of its new general ledger system. The Company's
new merchandising system has been warranted to be Year 2000 compliant system by
the supplier and management believes that it will be fully installed, tested and
functioning by the end of the second quarter of Fiscal 1999. The Company
estimates that it will spend an additional $1.0 million and $2.0 million of
budgeted funds through the end of the fiscal year ending January 30, 2000
("Fiscal 1999") to replace its existing merchandise, and financial accounting
systems. Included in the capital expenditures for the fiscal year ended January
30, 1999 is approximately $3.5 million of new system costs. One of the primary
requirements imposed by the Company on its new systems vendors is certification
of year 2000 compliance and compatibility. The costs for new systems will be
capitalized and depreciated, to the extent permitted by Generally Accepted
Accounting Principles, in accordance with the Company's fixed asset policy.
In an effort to determine and ensure that there would be no material and
adverse impact on the results of the Company's operations caused by non
informational technological systems, an internal committee was developed using a
cross section of all disciplines within the Company. All of the Company's
vendors and suppliers were polled and asked to evaluate and confirm their
abilities to process transactions in the year 2000 and beyond. This committee,
which reports directly to the Company's Chief Financial Officer, is currently
evaluating responses from vendors and has preliminarily identified all mission
critical non information technological systems. These systems will be tested and
contingency plans will be developed for those systems deemed to be
non-compliant. It is the committee's intention to complete its testing and
contingency planning before September 30, 1999 as of April 23, 1999 no
contingency plans have been developed.. If the
4
<PAGE>
Company's present efforts to address year 2000 compliance issues are not
successful, or if the systems of its suppliers are not complaint, the Company
may be unable to engage in normal business activities for a period of time after
January 1, 2000. As a result the Company would be unable to recognize income.
The Company also may lose existing or potential clients and its reputation and
in the industry might be damaged.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in fiscal
2000. The Company expects to adopt the new Statement effective January 30, 2000.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
In March, 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1 "Accounting for the Costs of
Computers Software Developed or Obtained for Internal Use." The Company followed
the SOP in accounting for the costs of computer software obtained for internal
use during 1998. SOP 98-1 is consistent with the Company's prior accounting
policies in all material respects.
QUASI-REORGANIZATION
As of January 31, 1998, the Company effected a quasi-reorganization through
the application of $27,316,200 of its $74,115,700 Common Stock account to
eliminate its retained deficit. The Company's Board of Directors authorized a
quasi-reorganization given that the Company had completed its restructuring,
obtained long-term financing and successfully emerged from bankruptcy. The
Company's retained deficit was related to operations that resulted in the
restructuring of the Company and losses incurred during the Chapter 11
proceeding and was not, in management's view, reflective of the Company's
financial condition.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations during the past three years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
SEASONALITY AND QUARTERLY RESULTS
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits are
realized during the fourth fiscal quarter (which includes the Christmas selling
season) and, to a lesser extent, during the second fiscal quarter. In addition,
because the Company's cost of goods sold includes net alteration expense, the
Company's gross profit as a percentage of net sales has historically been lower
in the first and third fiscal quarters primarily as the result of a lower level
of net sales being spread over fixed (primarily payroll) expenses related to
tailoring operations. In addition, quarterly results can be affected by the
timing of the opening of new stores. Because of the seasonality of the Company's
business, results for any quarter are not necessarily indicative of the results
that may be achieved for a full fiscal year.
5
<PAGE>
The following table sets forth certain unaudited quarterly results of
operations for fiscal 1998 and 1997.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
--------------------
May 2, August 1, October 31, January 30,
FISCAL 1998: 1998 1998 1998(1) 1999
---- ---- ------- ----
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net sales $ 46,253 $ 51,580 $ 48,270 $ 67,505
Cost of goods sold 29,455 33,685 29,334 43,309
--------------- -------------- ---------------- ---------------
Gross profit 16,798 17,895 18,936 24,196
Selling, general and administrative expenses 15,340 16,016 16,293 19,111
--------------- -------------- ---------------- ---------------
Income from operations 1,458 1,879 2,642 5,085
Interest expense and other income, net 757 775 768 981
--------------- -------------- ---------------- ---------------
Income before income taxes and
extraordinary item 701 1,104 1,874 4,105
Income tax provision (benefit) 260 409 693 1,521
--------------- -------------- ---------------- ---------------
Income before extraordinary item 441 696 1,181 2,584
Extraordinary item, net of income tax benefit - - 658 -
--------------- -------------- ---------------- ---------------
Net income $ 441 $ 696 $ 523 $ 2,584
=============== ============== ================ ===============
Earnings per share:
Before extraordinary item $ 0.02 $ 0.03 $ 0.04 $ 0.10
Extraordinary item - - (0.02) -
--------------- -------------- ---------------- ---------------
Earnings per share $ 0.02 $ 0.03 $ 0.02 $ 0.10
=============== ============== ================ ===============
Weighted average shares outstanding 26,911 26,915 26,915 27,014
Earnings per share assuming dilution:
Before extraordinary item $ 0.02 $ 0.03 $ 0.04 $ 0.10
Extraordinary item - - (0.02) -
--------------- -------------- ---------------- ---------------
Earnings per share assuming dilution $ 0.02 $ 0.03 $ 0.02 $ 0.10
=============== ============== ================ ===============
Weighted average shares outstanding
assuming dilution 28,169 26,945 26,915 27,014
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended
--------------------
May 3, August 2, November 1, January 31,
FISCAL 1997: 1997 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net sales $ 43,929 $ 50,466 $ 48,457 $ 71,296
Cost of goods sold 27,998 32,466 30,618 46,993
--------------- -------------- ---------------- ---------------
Gross profit 15,931 18,000 17,839 24,303
Selling, general and administrative expenses 15,062 16,092 15,869 18,797
--------------- -------------- ---------------- ---------------
Income from operations 869 1,908 1,970 5,506
Reorganization items, net 654 1,268 973 3,874
Interest expense and other income, net 57 (30) 7,266 493
--------------- -------------- ---------------- ---------------
Income (loss) before income taxes 158 670 (6,269) 1,139
Provision for income taxes - - - -
--------------- -------------- ---------------- ---------------
Net income (loss) $ 158 $ 670 $ (6,269) $ 1,139
=============== ============== ================ ===============
Earnings (loss) per share $ 0.02 $ 0.06 $ (0.57) $ 0.10
=============== ============== ================ ===============
Earnings (loss) per share assuming
dilution $ 0.02 $ 0.06 $ (0.57) $ 0.09
=============== ============== ================ ===============
Weighted average shares outstanding 10,861 10,861 10,861 11,677
Weighted average shares outstanding
assuming dilution 10,861 10,861 10,861 12,502
</TABLE>
(1) Third quarter 1998 restated to reflect the reclassification of the
extraordinary item related to the early termination of the Company's revolving
credit facility.
There is no difference between earnings per share and earnings per share
assuming dilution in fiscal 1998 because the impact of common share equivalents
is anti-dilutive.
6
<PAGE>
SIGNATURES
The undersigned registrant hereby amends the following items, financial
statements exhibits or other portions of its Annual Report on Form 10-K for the
Annual Period ended January 30, 1999, as set forth in the pages attached hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data (see page F-1)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
TODAY'S MAN, INC.
By: /s/ DAVID FELD
------------------------------------
David Feld
Chairman of the Board, President and Chief
Executive Officer
7
<PAGE>
TODAY'S MAN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors....................................................................F-2
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999...........................F-3
Consolidated Statements of Operations for the fiscal years ended
February 1, 1997, January 31, 1998 and January 30, 1999......................................F-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended
February 1, 1997, January 31, 1998 and January 30, 1999......................................F-5
Consolidated Statements of Cash Flows for the fiscal years ended
February 1, 1997, January 31, 1998 and January 30, 1999......................................F-6
Notes to Consolidated Financial Statements........................................................F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Today's Man, Inc.
We have audited the Consolidated Balance Sheets of Today's Man, Inc. as of
January 30, 1999 and January 31, 1998, and the related Consolidated Statements
of Operations, Shareholders' Equity and Cash Flows for each of the three fiscal
years in the period ended January 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Today's Man, Inc.
at January 30, 1999 and January 31, 1998, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended January 30, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 17, 1999
F-2
<PAGE>
TODAY'S MAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 219,500 $ 1,181,100
Cash equivalents restricted for pre-petition settlements 11,005,500 -
Due from credit card companies and other receivables, net of allowance
for uncollectible accounts of $177,800 and $61,500 2,136,400 1,535,300
Inventory 34,652,100 34,636,600
Prepaid expenses and other current assets 2,753,600 3,903,800
Prepaid inventory purchases 2,611,400 3,038,600
------------------- ----------------
Total current assets 53,378,500 44,295,400
Property and equipment, less accumulated depreciation and amortization 31,574,100 32,664,900
Loans to shareholders 228,400 228,400
Rental deposits and other noncurrent assets 1,983,000 1,785,500
------------------- ----------------
$87,164,000 $78,974,200
=================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,670,800 $ 5,719,400
Accrued expenses and other current liabilities 4,784,900 5,827,200
Current maturities of capital lease obligations 1,226,600 821,600
Current portion of term loan 4,416,700 -
Liabilities subject to settlement 8,987,600 -
------------------- ----------------
Total current liabilities 27,086,600 12,368,200
Capital lease obligations, less current maturities 1,037,200 216,000
Deferred rent and other 4,489,000 4,750,000
Obligation under revolving credit facility - 8,945,700
Term loan, less current maturities 7,751,700 -
------------------- ----------------
40,364,500 26,279,900
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued - -
Common stock, no par value, 100,000,000 shares authorized, 27,274,588 and
27,014,485 shares issued and outstanding at January 31, 1998 and January
30, 1999 respectively, net of accumulated retained
earnings (deficit) of $27,316,200 as of January 31, 1998 46,799,500 48,451,200
Retained earnings - 4,243,100
------------------- ----------------
Total shareholders' equity 46,799,500 52,694,300
------------------- ----------------
$87,164,000 $78,974,200
=================== ================
</TABLE>
See accompanying notes.
F-3
<PAGE>
TODAY'S MAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------
February 1, January 31, January 30,
1997 1998 1999
---- ---- ----
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Net sales $ 204,042,400 $ 214,148,000 $ 213,608,600
Cost of goods sold 134,524,200 138,075,100 135,784,100
------------------- ------------------- -------------------
Gross profit 69,518,200 76,072,900 77,824,500
Selling, general and administrative expenses 65,982,500 65,819,800 66,760,300
------------------- ------------------- -------------------
Income from operations 3,535,700 10,253,100 11,064,200
Reorganization items:
Professional fees and other 4,341,100 7,865,000 -
Asset write-offs and additional lease
rejection claims, net 4,816,900 - -
Interest income (310,300) (1,096,000) -
------------------- ------------------- -------------------
Net reorganization items 8,847,700 6,769,000 -
Interest expense (excludes contractual interest
of $2,785,200 in fiscal 1996) 484,300 7,759,900 3,200,600
Other expense, net 15,000 26,000 79,600
------------------- ------------------- -------------------
Income/(loss) before income taxes and
extraordinary item (5,811,300) (4,301,800) 7,784,000
Provision for income taxes - - 2,882,500
------------------- ------------------- -------------------
Income (loss) before extraordinary item (5,811,300) (4,301,800) 4,901,500
Extraordinary item, net of income tax benefit
of $386,600 - - 658,400
------------------- ------------------- -------------------
Net income (loss) $ (5,811,300) $ (4,301,800) $ 4,243,100
=================== =================== ===================
Basic and diluted earnings per share before
extraordinary item $ (0.54) $ (0.39) $ 0.18
Basic and diluted earnings per share from
extraordinary item - - (0.02)
------------------- ------------------- -------------------
Basic and diluted earnings per share $ (0.54) $ (0.39) $ 0.16
=================== =================== ===================
Weighted average shares outstanding 10,861,005 11,063,275 27,013,125
</TABLE>
See accompanying notes.
F-4
<PAGE>
TODAY'S MAN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT)
--------- ------ ---------
<S> <C> <C> <C>
Balances at February 3, 1996 10,861,005 $38,269,100 $(17,203,100)
Net loss - - (5,811,300)
----------------- --------------- ----------------
Balances at February 1, 1997 10,861,005 38,269,100 (23,014,400)
Issuance of shares pursuant to rights offering 8,145,753 16,291,500 -
Issuance of shares in settlement of pre-petition 8,257,280 19,524,800 -
claims
Issuance of shares to employees 10,550 30,300 -
Net loss - - (4,301,800)
Quasi-reorganization as of January 31, 1998 - (27,316,200) 27,316,200
----------------- --------------- ----------------
Balances at January 31, 1998 27,274,588 46,799,500 -
Exercise of stock options 800 1,900 -
Issuance of shares to employees 820 2,400 -
Benefit of net operating loss carryforwards - 2,495,900 -
Exercise of stock purchase warrants 2,576 7,000 -
Adjustment of shares due to final settlement of
pre-petition claims (264,299) (855,500) -
Net income - - 4,243,100
----------------- --------------- ----------------
Balances at January 30, 1999 27,014,485 $48,451,200 $4,243,100
================= =============== ================
</TABLE>
See accompanying notes.
F-5
<PAGE>
TODAY'S MAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------
February 1, January 31, January 30,
1997 1998 1999
---- ---- ----
Operating activities:
<S> <C> <C> <C>
Net income (loss) $(5,811,300) $(4,301,800) $4,243,100
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation expense 2,389,900 2,215,000 2,548,800
Amortization expense 1,676,300 1,575,400 881,900
Provision for uncollectible accounts receivable 562,000 142,300 183,700
Accretion of debt discount - 36,500 -
Deferred rent and other 468,800 (91,300) (567,200)
Extraordinary item - - 1,045,000
Charge in lieu of income taxes - - 2,882,500
Changes in operating assets and liabilities:
Restricted cash - (11,005,500) 11,005,500
Decrease in receivables 5,000 20,700 417,400
Decrease (increase) in inventory 6,829,200 (6,015,500) 15,500
Decrease in refundable income taxes 6,016,000 - -
Decrease (increase) in prepaid expenses 1,142,300 230,400 (749,200)
(Decrease) increase in payables, accrued
expenses and liabilities subject to settlement 4,155,200 12,085,500 (909,100)
(Increase) decrease in other noncurrent assets 1,390,200 (310,000) (431,600)
Payment of liabilities subject to settlement - (42,329,700) (9,236,000)
Charges due to reorganization activities:
Reorganization costs 8,847,700 6,769,000 -
Payment of reorganization costs (3,309,200) (4,101,000) -
----------------- -------------- ---------------
Total adjustments 30,173,400 (40,778,200) 7,087,200
----------------- -------------- ---------------
Net cash provided by (used in) operating activities 24,362,100 (45,080,000) 11,330,300
Investing activities:
Capital expenditures (1,278,900) (1,306,100) (3,871,600)
Fixtures and equipment in process (145,300) (20,500) (649,800)
----------------- --------------- ---------------
Net cash used in investing activities (1,424,200) (1,326,600) (4,521,400)
Financing activities:
Repayment of capital leases (1,397,300) (1,396,700) (1,226,200)
Proceeds from exercise of stock options and common
stock purchase warrants - - 11,300
Proceeds from sale of common stock - 12,964,900 -
Proceeds from term loan - 12,500,000 -
Borrowings under revolving credit facility - 3,972,000 97,837,100
Repayment of term loan and revolving credit facility - (4,340,100) (102,469,500)
----------------- --------------- ---------------
Net cash provided by (used in) financing activities (1,397,300) 23,700,100 (5,847,300)
Net increase (decrease) in cash and cash equivalents 21,540,600 (22,706,500) 961,600
Cash and cash equivalents at beginning of year 1,385,400 22,926,000 219,500
----------------- --------------- ---------------
Cash and cash equivalents at end of year $22,926,000 $ 219,500 $1,181,100
================= =============== ===============
</TABLE>
See accompanying notes.
F-6
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BANKRUPTCY REORGANIZATION
Reorganization Proceedings. On December 12, 1997, the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") entered
an order dated December 12, 1997 confirming the Company's Second Amended Joint
Plan of Reorganization (the "Reorganization Plan") proposed by Today's Man, Inc.
("the Company") and certain of its subsidiaries. On December 31, 1997, the
Reorganization Plan became effective and the Company emerged from bankruptcy
reorganization proceedings. Those proceedings had begun on February 2, 1996 when
the Company and certain of its subsidiaries filed voluntary petitions in seeking
to reorganize under Chapter 11 of the U.S. Bankruptcy Code.
Pursuant to the Reorganization Plan, the Company paid an aggregate of $51.0
million and issued 9,656,269 shares of Common Stock to its creditors in
settlement of $73.3 million of outstanding indebtedness, including post-petition
interest. Under the Reorganization Plan, holders of the Company's Common Stock
received for each share of old Common Stock: (1) one share of new Common Stock
and (2) 0.5 of a Common Stock Purchase Warrant ("Warrant"). Each whole Warrant
entitles the holder to purchase one share of New Common Stock at an exercise
price of $2.70 per share at any time on or before December 31, 1999. At January
30, 1999 approximately $1,100,000 remained to be distributed; these amounts were
distributed in April 1999. A total of 5,430,503 Warrants were issued to the
Company's pre-reorganization shareholders.
2. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company operates menswear superstores specializing in tailored
clothing, furnishings and accessories and sportswear. The Company also offers
footwear through licensed shoe departments. The superstores are located in the
Greater Philadelphia, Washington, D.C. and New York Markets.
BASIS OF PRESENTATION
As of January 30, 1998, the Company effected a quasi-reorganization through
the application of $27,316,200 of its $74,115,700 Common Stock account to
eliminate its retained deficit. The Company's Board of Directors decided to
effect a quasi-reorganization given that the Company had completed its
restructuring, obtained long-term financing and successfully emerged from
bankruptcy. The Company's retained deficit was related to operations that
resulted in the restructuring of the Company and losses incurred during the
Chapter 11 proceeding and was not, in management's view, reflective of the
Company's financial condition.
FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS
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"), provides guidance for financial reporting by
entities that have filed petitions with the Bankruptcy Court and expect to
reorganize under Chapter 11 of the Bankruptcy Code.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that are
directly associated with the reorganization from those of the operations of the
ongoing business as it evolves. Accordingly, SOP 90-7 requires the following
financial reporting/accounting treatments with respect to each of the financial
statements.
Consolidated Balance Sheet
The balance sheet separately classifies pre-petition and post-petition
liabilities. A further distinction is made between pre-petition liabilities
subject to settlement (generally unsecured and undersecured claims) and those
not subject to settlement (fully secured claims). Pre-petition liabilities are
reported on the basis of the expected amount of such allowed claims, as opposed
to the amounts for which those allowed claims may be settled.
When a liability subject to settlement becomes an allowed claim and that
claim differs from the net carrying amount of the liability, the net carrying
amount is adjusted to the amount of the allowed claim. The resulting change is
classified as a reorganization item in the Consolidated Statement of Operations.
Consolidated Statement of Operations
Pursuant to SOP-90-7, revenues and expenses, realized gains and losses, and
provisions for losses resulting from the reorganization of the business are
reported in the Consolidated Statement of Operations separately as
reorganization items. Professional fees are expensed as incurred. Interest
expense of $7,264,000, incurred during
F-7
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the bankruptcy period, was recorded as part of the settlement negotiated with
the Official Committee of the Unsecured Creditors.
CONSOLIDATED STATEMENT OF CASH FLOWS
Reorganization items are reported separately within the operating,
investing and financing categories of the Consolidated Statement of Cash Flows.
CREDIT CARD RECEIVABLES
The Company sells through third-party credit cards and collects related
receivables, generally within four days.
INVENTORY
Inventory consisting of merchandise held for sale is valued at cost, using
the retail method, which is not in excess of market.
PREPAID INVENTORY PURCHASES
Prepaid inventory purchases includes costs associated with merchandise
acquired which has not been received as of the Consolidated Balance Sheet date.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method for financial reporting purposes and
accelerated methods for tax purposes over the estimated useful lives of the
assets, ranging from 3-22 years, or the terms of applicable leases, if shorter
and accelerated methods for tax purposes.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments purchased with an initial maturity of
three months or less to be cash equivalents. The Company held $11,005,500 of
such investments at January 31, 1998. These investments are stated at cost which
approximates market. The $11,005,500 at January 31, 1998 has been designated as
restricted cash, set aside for the settlement of pre-petition obligations. The
Company held no such investments as of January 30, 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions are eliminated. The Company operates on a
52-53 week with fiscal year end being the Saturday closest to January 31.
EARNINGS (LOSS) PER COMMON SHARE
Earnings per share is calculated following Financial Accounting Standards
Board issued Statement No. 128 Earnings per Share. Statement 128 requires
companies to present basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effect of outstanding stock options whereas diluted
earnings per share include the effect of such items. There is no difference
between basic and diluted earnings per share because the effect of the Company's
common share equivalents would be anti-dilutive.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform with the
current year presentation.
F-8
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ADVERTISING
The Company utilizes both broadcast and print advertising and expenses
related costs as incurred. Advertising expense was $11,066,000, $11,198,500 and
$12,246,000 for the fiscal years 1996, 1997 and 1998, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in fiscal
2000. The Company expects to adopt the new Statement effective January 30, 2000.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
In March, 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1 "Accounting for the Costs of
Computers Software Developed or Obtained for Internal Use." The Company followed
the SOP in accounting for the costs of computer software obtained for internal
use during 1998. SOP 98-1 is consistent with the Company's prior accounting
policies in all material aspects.
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
---- ----
<S> <C> <C>
Furniture, fixtures and signs $ 5,005,000 $ 5,083,400
Leasehold improvements 32,586,300 32,765,500
Data processing equipment 1,911,900 5,048,200
Fixtures and equipment under capital leases 7,122,700 5,963,600
Fixtures and equipment in process 20,500 649,800
---------------- ---------------
Gross property and equipment 46,646,400 49,510,500
Accumulated depreciation (11,405,600) (13,443,600)
Accumulated amortization of equipment under capital leases (3,666,700) (3,402,000)
---------------- ---------------
Net property and equipment $31,574,100 $32,664,900
================ ===============
</TABLE>
Property and equipment accounts and their associated accumulated
depreciation accounts are reduced to "0" when the asset's useful life has
expired. Depreciation and amortization expense related to property and equipment
was $3,329,700, $3,258,500 and $3,441,700 for fiscal years 1996, 1997 and 1998,
respectively. Fixtures and equipment in process includes items for new systems,
equipment, and stores which as of the respective financial statement date have
not been placed into service.
4. BARTER CREDITS
At February 3, 1996, rental deposits and other noncurrent assets included
$4,600,000 relating to trade credits received by the Company in exchange for
merchandise sold to a barter agency. These credits may be used by the Company
for the purchase of various merchandise and services through September 1999. The
Company has determined that the Chapter 11 proceedings and the inherent business
environment significantly limit its ability to use the credits. These
limitations included, but are not limited to, reluctance on the part of vendors
to accept such credits; the curtailment of the Company's previous growth
strategy and a significant reduction in advertising expenditures. The Company
wrote off the $4,600,000 in the fourth quarter of fiscal 1996. The charge was
included as a component of the reorganization items in the accompanying
Consolidated Statement of Operations for fiscal 1996.
F-9
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. RELATED PARTY TRANSACTIONS
Certain of the Company's superstores and its executive offices and
distribution center are leased from the Company's Chairman, President and Chief
Executive Officer (CEO). Rent expense on these locations was $2,053,500,
$1,702,400 and $1,789,400 for the fiscal years ended February 3, 1996, January
31, 1998 and January 30, 1999, respectively. Pursuant to the Company's Plan of
Reorganization, the Company's CEO was paid approximately $900,000 in settlement
of pre-petition obligations arising from leases with the Company. In addition,
the CEO received a $3.3 million credit to be used towards the purchase of stock
in the equity offering and 938,190 additional shares of common stock in
satisfaction of his $5.0 million subordinated loan and accrued interest.
Included in the schedule of operating lease commitments in Note 7 are
required payments on leases with the Company's CEO for its principal offices and
distribution center as well as certain stores, totaling $1,708,000 for each of
the next five years and $8,591,900 thereafter. Certain of the leases require
increasing payments based upon changes in the Consumer Price Index.
In May 1995, the Company's CEO acquired a manufacturing facility. Purchases
by the Company from this facility were approximately $3,642,300 for the fiscal
year ended February 1, 1997. The facility was sold in January 1997. See Notes 7
and 8 for discussions of additional related party transactions.
6. DEBT
As more completely described in Note 1, all amounts outstanding under the
Company's pre-petition debt facilities were satisfied pursuant to the Company's
Plan of Reorganization, including claims for post-petition interest. Upon
satisfaction of the obligations, any and all liens were removed by the
pre-petition debt holders.
On December 31, 1997, the Company entered into a Loan and Security
Agreement with Foothill Capital Corporation ("Foothill"), individually and as
agent. The Loan and Security Agreement provided for a $12.5 million term loan
and a $30.0 million revolving credit facility. The Company granted Foothill
Capital Corporation a lien on its tangible and intangible assets to secure this
term loan and revolving credit facility. Proceeds from these loans were used to
fund a portion of the Company's Plan of Reorganization. There were no
outstanding borrowings under the Foothill revolving credit facility at January
31, 1998. The Company had approximately $6,600,000 in outstanding letters of
credit at January 31, 1998.
On December 4, 1998, the Company entered into a Loan and Security Agreement
with Mellon Bank, N.A., ("Mellon") individually and as agent. The Loan and
Security Agreement provides for a $45.0 million revolving credit facility. The
Company has granted Mellon a lien on its tangible and intangible assets to
secure this revolving credit facility. Proceeds from this loan were used to
refinance the Company's previous revolving credit facility and term loan from
Foothill. As a result of this refinancing, the company incurred a prepayment
penalty of approximately $720,000 and wrote off approximately $640,000 of
unamortized debt issuance costs. These amounts were offset by approximately
$315,000 in accrued debt discount and related liabilities and approximately
$387,000 in income tax benefits related to this extraordinary item.
The Mellon revolving credit facility bears interest at the option of the
Company at prime (7.75% at January 30, 1999) or LIBOR (5.03% at January 30,
1999) plus a margin ranging from 1.75% to 3.25% depending upon the Company's
EBITDA, has a term of five years and includes a $20.0 million sublimit for
letter of credit advances. Availability under the revolver is determined by a
formula based on inventory and credit card receivables, less applicable
reserves.
The Mellon Loan and Security Agreement contains financial covenants
including tangible net worth, indebtedness to tangible net worth and fixed
charge coverage ratios, and limitations on new store openings and capital
expenditures as well as restrictions on the payment of dividends. The Company
was in compliance with all covenants as of and for the year ended January 30,
1999. In April 1999 the Company and Mellon amended the Loan Agreement to allow
for the inclusion of participant lenders and to modify certain other provisions.
F-10
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. COMMITMENTS AND CONTINGENCIES
The Company leases its stores and distribution center under non-cancelable
operating leases. Several stores and the Company's distribution center are
leased from the Company's principal shareholder. (See Note 5.) In addition,
certain equipment leases are classified as capital leases. The following is a
schedule by year of the future minimum lease payments for leases with initial
terms in excess of one year at January 30, 1999:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1999 $ 884,000 $12,567,300
2000 209,400 12,450,300
2001 - 11,722,600
2002 - 10,548,200
2003 - 9,517,000
Thereafter - 28,627,100
------------- ---------------
Total minimum lease payments 1,093,400 $85,432,500
===============
Less:
Amounts representing interest 55,800
-------------
Present value of net minimum lease payments $1,037,600
=============
</TABLE>
Total rent expense for the fiscal years ended February 1, 1997, January 31,
1998 and January 30, 1999 was, $12,593,900, $11,825,000 and $12,087,100
respectively.
The distribution center lease provides for payment of direct operating
costs including real estate taxes. Certain store leases provide for increases in
rentals when sales exceed specified levels. To date, no such payments have been
required.
Certain store leases provide for predetermined escalations in future
minimum annual rentals. The pro rata portion of future minimum rent escalations,
amounting to $3,050,400 and $3,135,400 at January 31, 1998 and January 30, 1999
respectively, has been included in Deferred rent and other in the accompanying
Consolidated Balance Sheet.
The Company is involved in routine legal proceedings incidental to the
conduct of its business. Management believes that none of these routine legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company. The Company maintains general liability
insurance coverage in amounts deemed adequate by management.
8. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code. The plan allows all eligible employees to defer up to 6% of their
income on a pretax basis through contributions to the plan. Under the provisions
of the plan, the Company matches 40% of the employees' contributions subject to
a maximum limit.
The charge to operations for Company contributions was $266,800, $279,000
and $287,600 for the years ended, February 1, 1997, January 31, 1998 and January
30, 1999, respectively.
On the termination of the Company's Executive Equity Plan in fiscal 1991,
the Company provided loans to the Plan's participants to fund any federal and
state income taxes relating to the issuance of the shares. The loans bear
interest at 1% above the prime lending rate as established by the Company's
principal lender. All principal and accrued interest was due on April 14, 1996.
Loans are collateralized by the participants' shares of Common Stock. At this
time, the Company has made no decision relative to the collection of these
loans.
F-11
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------
February 1, January 31, January 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest paid $ 452,400 $ 7,723,400 $3,367,600
Noncash investing and financing activities:
Settlement of pre-petition obligations through issuance
of shares of Common Stock and credit for stock rights $ - $22,845,900 $ -
</TABLE>
10. INCOME TAXES
In light of the net operating loss position in fiscal 1996 and 1997 the
Company did not record an income tax benefit. The fiscal 1998 tax provision
consists of a charge in lieu of federal income taxes of $2,322,300 and state
income taxes of $173,600 resulting from the benefit of NOL carryforwards
existing at the date of the quasi-reorganization.
A reconciliation of the effective tax rate with the statutory federal
income tax rate follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------
February 1, January 31, January 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income tax, net of federal income tax effects - - -
Effect of permanent differences (28.6) (18.3) 0.5
Federal income tax valuation allowance (6.7) (15.7) -
Other 1.3 - -
Quasi reorganization equity accounting - - 2.5
--------------- --------------- --------------
-% -% 37.0%
=============== =============== ==============
</TABLE>
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
---- ----
Deferred tax assets:
<S> <C> <C>
Accrued liabilities $ 3,112,700 $ 88,100
Inventory 429,200 434,500
Net operating loss carryforward 8,093,400 9,220,100
AMT credit carryforward 394,300 394,300
Leases 1,238,500 1,273,000
Bad debts 72,200 25,000
Other 49,000 49,700
----------------- ---------------
Total deferred tax assets 13,389,300 11,484,700
Less: deferred tax valuation allowance (11,522,500) (10,270,100)
----------------- ---------------
Net deferred tax assets 1,866,800 1,214,600
----------------- ---------------
Deferred tax liabilities:
Property and equipment, including capital leases 1,215,700 678,200
Other 1,051,100 936,400
----------------- ---------------
2,266,800 1,614,600
----------------- ---------------
Net deferred tax liability $ 400,000 $ 400,000
================= ===============
</TABLE>
The valuation allowance against deferred tax assets decreased by $1,252,400
in fiscal 1998 due to the decrease in net deferred tax assets.
F-12
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of the Company's quasi-reorganization (see Note 2), the Company
has recorded a charge in lieu of income taxes which represents the federal and
state taxes that are eliminated by the utilization of tax benefits existing at
the quasi-reorganization date, and result in an increase to contributed capital.
As of January 31, 1999, the Company has remaining $10,588,000 of tax attributes
that will be credited to additional paid in capital when realized.
At January 31, 1999, the Company had available for carryforward net
operating losses (for federal tax purposes) of $19,614,000 and a minimum tax
credit carryover of $394,000. The NOL carryforwards expire in 2011 through 2018;
the minimum tax credits can be carried forward indefinitely. Additionally, at
January 31, 1999, the Company had available carryforward losses for state tax
purposes in the states in which the Company does business. These deferred tax
assets are fully offset by the valuation allowance.
11. STOCK OPTION PLANS
Pursuant to the Plan of Reorganization: (i) the existing employee and
director stock option plan and all existing options thereunder were canceled and
(ii) the Management Stock Option Plan ("Management Plan") was adopted. At
January 30, 1999, the Company had outstanding options to purchase an aggregate
of 1,997,500 shares of Common Stock under the Management Stock Option Plan. The
following tables summarize activity in fiscal 1996, fiscal 1997 and fiscal 1998.
<TABLE>
<CAPTION>
Number of Shares Under Option Exercise Price Per Share
----------------------------- ------------------------
Employee Director
Stock Stock
Option Plan Option Plan Total
------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Outstanding at February 3, 1996 560,450 30,000 590,450 $ 7.50 - $ 18.75
Options issued - 30,000 30,000 $ 1.69
Options canceled (226,900) - (226,900) $ 7.50 - $ 18.75
Exercised - - -
------------ -------------- -------------- ----------------------
Outstanding at February 1, 1997 333,550 60,000 393,550 $ 1.69 - $ 15.75
Options canceled (333,550) (60,000) (393,550) $ 1.69 - $ 15.75
------------ -------------- --------------
Outstanding at January 31, 1998 - - -
============ ============== ==============
</TABLE>
F-13
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management Stock Option Plan (A)
Number of Exercise
Shares Under Price Per
Option Share
------------- --------------
Outstanding at February 1, 1997 - -
Options issued December 31, 1997 2,247,500 $2.38
Exercised - -
------------- --------------
Outstanding at January 31, 1998 2,247,500 $2.38
Options issued 44,000 $2.38
Options cancelled (293,200) $2.38
Exercised (800) $2.38
------------- --------------
Outstanding at January 30, 1999 1,997,500 $2.38
============= ==============
Exercisable at January 30, 1999 1,191,300 $2.38
============= ==============
(A) Options to purchase an aggregate of 2,450,000 shares of Common Stock may be
granted pursuant to this plan. Options are granted at the fair market value
at the date of grant. At January 30, 1999, 451,700 shares were available
for grant. The unexercisable options issued vest over three years. All
options issued expire ten years from the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the market price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro-forma information regarding net income and earnings per share is
required because, as discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options and has been determined as if the
Company had accounted for its employee stock options issued under the Management
Plan under the fair value method of that Statement. The fair value for these
options was estimated at the date of the grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
1997 1998
---- ----
Risk-free interest rate 6.0% 6.0%
Dividend yield 0% 0%
Volatility factor of the expected market price of the
Company's common stock 0.72 0.702
Weighted average expected life of the options 5 5
Fair Value of options issued was $1.52 and $1.36 as of January 31, 1998 and
January 30, 1999, respectively.
F-14
<PAGE>
TODAY'S MAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For purposes of pro-forma disclosure, the estimated fair value of the
options issued as part of the Management Plan is amortized to expense in
accordance with the options vesting period. The Company's pro-forma information
is as follows:
1997 1998
---- ----
Pro-Forma net income (loss) ($4,364,400) $3,672,600
Pro-Forma earnings per share:
Basic and diluted ($0.39) $0.14
======= =====
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-56515) pertaining to the Employees' Savings Plan of Today's Man,
Inc. and in the Registration Statement (Form S-3 No. 333-57179) of Today's Man,
Inc. and in the related Prospectus of our report dated March 17, 1999, with
respect to the consolidated financial statements of Today's Man, Inc. included
in its amended Annual report (Form 10-K/A) for the year ended January 30, 1999.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
June, 1, 1999
