Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 1, 2009
OR
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o |
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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 1-14987
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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31-1333930
(I.R.S. Employer Identification No.) |
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8323 Walton Parkway, New Albany, OH
(Address of principal executive offices)
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43054
(Zip Code) |
(614) 775-3500
(Registrants telephone number, including area code)
N/A
(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 þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller
reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Common Stock
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Outstanding at September 4, 2009 |
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$.01 Par Value
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24,862,954 Shares |
TWEEN BRANDS, INC.
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements. |
TWEEN BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
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Thirteen Weeks Ended |
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Twenty-Six Weeks Ended |
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August 1, |
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August 2, |
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August 1, |
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August 2, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net sales |
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$ |
205,124 |
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$ |
223,102 |
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$ |
410,349 |
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$ |
474,840 |
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Cost of goods sold, including buying
and occupancy costs |
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150,784 |
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161,316 |
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291,018 |
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326,713 |
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Gross income |
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54,340 |
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61,786 |
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119,331 |
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148,127 |
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Store operating, general and
administrative expenses |
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64,575 |
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71,101 |
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127,523 |
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148,993 |
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Operating loss |
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(10,235 |
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(9,315 |
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(8,192 |
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(866 |
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Interest (income) |
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(70 |
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(337 |
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(184 |
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(898 |
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Interest expense |
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3,290 |
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2,207 |
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7,280 |
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4,549 |
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Loss before income taxes |
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(13,455 |
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(11,185 |
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(15,288 |
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(4,517 |
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Benefit from income taxes |
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(10,653 |
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(4,506 |
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(11,050 |
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(2,119 |
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Net loss |
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$ |
(2,802 |
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$ |
(6,679 |
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$ |
(4,238 |
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$ |
(2,398 |
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Loss per share: |
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Basic |
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$ |
(0.11 |
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$ |
(0.27 |
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$ |
(0.17 |
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$ |
(0.10 |
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Diluted |
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$ |
(0.11 |
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$ |
(0.27 |
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$ |
(0.17 |
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$ |
(0.10 |
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Weighted average common shares: |
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Basic |
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24,824 |
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24,763 |
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24,817 |
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24,749 |
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Diluted |
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24,824 |
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24,763 |
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24,817 |
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24,749 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
3
TWEEN BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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August 1, |
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January 31, |
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2009 |
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2009 |
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(unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
71,545 |
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$ |
72,154 |
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Investments |
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8,000 |
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Restricted assets |
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1,802 |
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2,592 |
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Accounts receivable, net |
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37,358 |
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35,607 |
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Inventories, net |
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103,960 |
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88,523 |
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Store supplies |
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17,186 |
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18,053 |
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Prepaid expenses |
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15,940 |
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17,734 |
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Total current assets |
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247,791 |
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242,663 |
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Property and equipment, net |
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282,088 |
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301,085 |
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Other assets |
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3,497 |
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1,710 |
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Total assets |
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$ |
533,376 |
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$ |
545,458 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
30,108 |
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$ |
29,782 |
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Accrued expenses |
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45,264 |
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44,418 |
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Deferred revenue |
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14,871 |
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15,808 |
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Current portion long-term debt |
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14,250 |
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8,750 |
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Income taxes payable and unrecognized tax benefits |
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3,328 |
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2,748 |
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Total current liabilities |
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107,821 |
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101,506 |
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Long-term debt |
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149,000 |
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157,500 |
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Deferred tenant allowances from landlords |
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63,303 |
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68,439 |
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Accrued straight-line rent, unrecognized tax benefits and other |
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39,877 |
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42,240 |
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Commitments and contingencies |
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Shareholders Equity: |
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Preferred stock, $.01 par value, 50 million shares authorized |
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Common stock, $.01 par value, 100 million shares authorized,
37.1 million shares issued, 24.9 and 24.8 million shares
outstanding at August 1, 2009 and January 31, 2009 |
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371 |
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371 |
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Treasury stock, at cost, 12.3 million shares
at August 1, 2009 and January 31, 2009 |
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(362,459 |
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(362,459 |
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Paid in capital |
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193,796 |
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192,367 |
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Retained earnings |
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346,725 |
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350,963 |
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Accumulated other comprehensive loss |
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(5,058 |
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(5,469 |
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Total shareholders equity |
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173,375 |
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175,773 |
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Total liabilities and shareholders equity |
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$ |
533,376 |
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$ |
545,458 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
4
TWEEN BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Twenty-Six Weeks Ended |
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August 1, |
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August 2, |
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2009 |
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2008 |
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Operating activities: |
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Net loss |
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$ |
(4,238 |
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$ |
(2,398 |
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Impact of other operating activities on cash flows: |
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Depreciation expense |
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21,831 |
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21,374 |
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Amortization of tenant allowances |
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(5,930 |
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(5,575 |
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Net loss on disposal of fixed assets |
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983 |
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567 |
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Tax benefit from stock option exercises |
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(56 |
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Stock-based compensation expense |
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2,318 |
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3,146 |
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Impairment of long-lived assets |
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3,513 |
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Changes in assets and liabilities: |
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Inventories |
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(15,437 |
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(18,446 |
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Accounts payable and accrued expenses |
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26 |
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(4,545 |
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Income taxes payable |
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580 |
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(9,689 |
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Accounts receivable |
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(2,290 |
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820 |
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Other assets |
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4,070 |
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(2,867 |
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Tenant allowances received |
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1,333 |
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11,544 |
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Other long-term liabilities |
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(1,710 |
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827 |
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Net cash provided by (used for) operating activities |
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5,049 |
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(5,298 |
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Investing activities: |
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Capital expenditures |
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(6,637 |
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(40,762 |
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Purchase of investments |
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(670 |
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Sale / maturation of investments |
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8,000 |
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65,200 |
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Proceeds from sale of fixed assets |
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1,657 |
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Change in restricted assets |
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790 |
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(1,670 |
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Net cash provided by investing activities |
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2,153 |
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23,755 |
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Financing activities: |
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Payments to acquire treasury stock |
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(5,914 |
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Repayment of long-term debt |
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(3,000 |
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Amended Credit Facility fees |
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(3,437 |
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Excess tax benefit from stock option exercises |
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56 |
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Change in cash overdraft |
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(485 |
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281 |
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Stock options and other equity changes |
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(889 |
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(625 |
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Net cash used for financing activities |
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(7,811 |
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(6,202 |
) |
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Net (decrease) increase in cash and cash equivalents |
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(609 |
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12,255 |
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Cash and cash equivalents, beginning of year |
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72,154 |
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46,009 |
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Cash and cash equivalents, end of period |
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$ |
71,545 |
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$ |
58,264 |
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
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$ |
1,478 |
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$ |
9,836 |
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Cash received for income tax refunds |
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$ |
6,712 |
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$ |
201 |
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Cash paid for interest |
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$ |
5,327 |
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$ |
4,599 |
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Fixed asset additions in accounts payable and accrued expenses |
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$ |
1,259 |
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$ |
274 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
5
TWEEN BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Company
Tween Brands, Inc. (referred to herein as Tween Brands, the Company, we, our or us;
formerly Too, Inc.) is the largest premier tween specialty retailer in the world. Through our
powerhouse brand, Justice, Tween Brands provides the hottest fashion merchandise and accessories
for tween (age 7-14) girls. We were established in 1987 and, prior to our August 1999 spin-off,
were a wholly-owned subsidiary of The Limited, Inc. (The Limited or Limited Brands). Since the
spin-off, we have operated as an independent, separately traded, public company, currently traded
on the New York Stock Exchange (NYSE) under the symbol TWB. Known as the destination for
fashion-aware tweens, Justice stores proudly feature outgoing sales associates who assist girls in
expressing their individuality and self-confidence through fashion. Visually-driven catazines (a
combination of a catalog and a magazine) and direct mail pieces reach millions of tween girls
annually, further positioning Tween Brands as a preeminent retailer in the tween marketplace. We
manage our business on the basis of one segment, specialty retailing. Our fiscal year is comprised
of two principal selling seasons: spring (the first and second quarters) and fall (the third and
fourth quarters).
In August 2008, Tween Brands announced plans to transition to a single store brand taking the best
of Limited Too and the best of Justice to create a fresh, new Justice. With a focus on providing
tween girls the absolute best experience possible, Tween Brands looks toward the future with a
single store brand, a single focus, and a single mission: to celebrate tween girls through an
extraordinary experience of fashion and fun in an everything-for-her destination. Over 900 Justice
stores are located throughout the United States and internationally.
On June 24, 2009, Tween Brands entered into an Agreement and Plan of Merger (the Merger
Agreement) with The Dress Barn, Inc., a Connecticut corporation (Dress Barn) and Thailand
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Dress Barn (Merger Sub),
which provides for the acquisition of Tween Brands by Dress Barn by means of a merger of Merger Sub
with and into Tween Brands, with Tween Brands surviving as a wholly owned subsidiary of Dress Barn
(the Merger). The Merger Agreement is subject to the approval of Tween Brands stockholders and
to the terms and closing conditions set forth in the Merger Agreement.
If the proposed Merger is consummated, each share of Tween Brands common stock, issued and
outstanding immediately prior to the effective time of the Merger, will be converted into the right
to receive 0.47 shares of Dress Barn common stock the Exchange Ratio). Tween Brands stockholders
will not receive any fractional shares of Dress Barn common stock in the Merger. Instead, any
Tween Brands stockholder who would otherwise be entitled to a fractional share of Dress Barn common
stock will be entitled to receive an amount in cash (rounded down to the nearest whole cent),
without interest, equal to the product of such fraction multiplied by the measurement price. Dress
Barn common stock is listed on the Nasdaq Global Select Market under the symbol DBRN.
The accompanying consolidated financial statements include the accounts of Tween Brands and all
subsidiaries more than 50% owned and reflect our financial position, results of operations and cash
flows. These statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). All intercompany balances and transactions have
been eliminated in consolidation.
In our opinion, the accompanying consolidated financial statements reflect all adjustments (which
are of a normal recurring nature) necessary to present fairly the financial position, results of
operations and cash flows for the interim periods, but are not necessarily indicative of the
results of operations to be anticipated for the fiscal year ending January 30, 2010 (the 2009
fiscal year). A more complete discussion of our significant accounting policies can be found in
Note 1 to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended January
31, 2009 (the 2008 fiscal year).
6
2. Debt
In September 2007, we entered into an unsecured $275.0 million credit agreement with Bank of
America, N.A. (Bank of America) and various other lenders (the credit facility). The credit
facility provided for a $100.0 million revolving line of credit, which could be increased to $150.0
million at our option under certain circumstances and subject to the approval of our lenders. The
credit facility was available for direct borrowing, issuance of letters of credit, stock
repurchases, and general corporate purposes, and was guaranteed on an unsecured basis by all
current and future domestic subsidiaries of Tween Brands. A portion of the credit facility in an
aggregate amount not to exceed $20.0 million was available for swingline loans. The credit
facility also contained a delayed draw term loan in an aggregate principal amount not to exceed
$175.0 million (the Term Loan) for financing repurchases of common stock. As of August 1, 2009,
the total outstanding borrowings of the Term Loan have been used for share repurchases. Due to its
contractual nature, the carrying amount of borrowings under the term loan is considered to
approximate its fair value. The credit facility is scheduled to mature on September 12, 2012.
On February 23, 2009, we amended the terms and conditions of our credit facility to provide for an
easing of the original leverage and coverage ratio financial covenants. The amended facility (the
Amended Credit Facility) is secured by our assets and reduces the undrawn revolving credit
facility from $100.0 million to a maximum of $50.0 million. The option to increase the facility by
an additional $50.0 million was eliminated; however, swingline loans continue to be available up to
$20.0 million under the line of credit.
Our Amended Credit Facility contains financial covenants, which require us to maintain certain
coverage and leverage ratios, and it also restricts our ability to incur additional debt. The
leverage financial covenant limits the ratio of consolidated senior debt to earnings before
interest, taxes, depreciation, amortization and rent expense (EBITDAR) on a trailing four-quarter
basis to an initial maximum of 7.65 measured quarterly beginning at the end of the fourth quarter
of fiscal year 2009, with the maximum limit declining over time. The coverage financial covenant
limits the ratio of EBITDAR to rent and interest expense on a trailing four quarter basis to a
minimum of 0.80 measured quarterly beginning at the end of the second quarter of fiscal year 2009,
with the minimum required ratio gradually increasing over time. Our annual capital investment
levels, net of cash tenant allowances received, which are also governed by the amendment, consist
of a maximum of $10.0 million in 2009 and increase in future years. The Amended Credit Facility
also restricts our ability to declare or pay dividends and to repurchase our common stock.
As of August 1, 2009, we are in compliance with all material terms of the Amended Credit Facility.
Our failure to comply with these covenants could result in an event of default. An event of
default, if not cured or waived, would permit acceleration of any outstanding indebtedness under
the Amended Credit Facility and impair our ability to obtain working capital advances and letters
of credit, which could have a material adverse effect on our financial condition, results of
operations or cash flows. The alternatives available to us if in default of our covenants would
include renegotiating certain terms of the credit agreement, obtaining waivers from the lenders,
obtaining a new credit agreement with another bank or group of lenders, which may contain different
terms, or seeking additional equity financing.
While the maturity date of the Amended Credit Facility remains at September 12, 2012, the Company
is required to make monthly principal payments on the outstanding term loan in the amount of
$500,000 payable on the last business day of February through December of each year beginning
February 27, 2009. Consistent with the original term loan repayment schedule, the Company is
required to make an $8.8 million principal payment at the end of each fiscal year commencing on or
about January 29, 2010. On the expiration date in 2012, a final payment in an amount equal to the
entire outstanding principal balance of the Term Loan, together with accrued and unpaid interest
thereon and other amounts payable under this agreement will be required. Interest on the
outstanding unpaid principal amount of the Term Loan is required to be paid based on our choosing
of either a Prime rate or LIBOR quoted for one, two, three or six months, plus an applicable
spread. Pricing of the facility has been adjusted to reflect current market rates, resulting in an
increase to LIBOR plus margin of 350 basis points from the previous margin of 80 basis points.
7
The table below details our future Term Loan principal payment obligations (in thousands):
|
|
|
|
|
Payment Description |
|
Annual Amount |
|
Amount Outstanding as of February 23, 2009 |
|
$ |
166,250 |
|
|
|
|
|
|
Fiscal 2009 Monthly Payments |
|
|
5,500 |
|
Fiscal 2009 Annual Principal Payment |
|
|
8,750 |
|
|
|
|
|
|
Fiscal 2010 Monthly Payments |
|
|
5,500 |
|
Fiscal 2010 Annual Principal Payment |
|
|
8,750 |
|
|
|
|
|
|
Fiscal 2011 Monthly Payments |
|
|
5,500 |
|
Fiscal 2011 Annual Principal Payment |
|
|
8,750 |
|
|
|
|
|
|
Fiscal 2012 Monthly Payments |
|
|
3,500 |
|
Fiscal 2012 Final Payment |
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
Total Remaining after September 12, 2012 |
|
$ |
|
|
|
|
|
|
Except for the use of the Term Loan to fund the repurchase of shares as described in Note 8 to
our Consolidated Financial Statements, as of August 1, 2009, we currently have no direct borrowings
outstanding under the Amended Credit Facility and have not historically used this facility.
3. Share-Based Compensation
In 1999, we adopted the 1999 Stock Option and Performance Incentive Plan and the 1999 Stock Plan
for Non-Associate Directors. In 2005, our shareholders approved the adoption of the 2005 Stock
Option and Performance Incentive Plan and the 2005 Stock Plan for Non-Associate Directors
(collectively, the Plans).
Under the Plans, as amended, up to 7.5 million shares are reserved and may be granted to our
associates and certain non-associates. The Plans allow for the grant of incentive stock options,
non-qualified stock options and restricted stock to officers, directors and selected associates.
Stock options are granted at the fair market value of our common shares on the date of grant and
generally have 10-year terms. Option grants generally vest ratably over the first four
anniversaries from the grant date. We currently issue new shares to satisfy option exercises. Of
the restricted shares granted, approximately 40% vest ratably over the first four anniversaries
from the grant date and have performance criteria associated with vesting only for certain
associates. The remaining 60% vest at the end of a two-year cliff period and have performance
criteria associated with vesting for all associates.
The weighted average fair value per share of options granted is estimated using the Black-Scholes
option-pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (in years) |
|
|
4.1 |
|
|
|
4.4 |
|
|
|
4.1 |
|
|
|
4.4 |
|
Dividend rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price volatility |
|
|
86 |
% |
|
|
40 |
% |
|
|
78 |
% |
|
|
40 |
% |
Risk-free interest rate |
|
|
2.1 |
% |
|
|
3.4 |
% |
|
|
2.0 |
% |
|
|
2.9 |
% |
The expected life estimate represents the expected period of time we believe the stock options
will be outstanding, and is based on historical employee behavior, including exercises,
cancellations, vesting and forfeiture information. The expected future stock price volatility
estimate is based on the historical volatility of our common stock equal to
the expected term of the option. The historic volatility is calculated as the annualized standard
deviation of the differences in the natural logarithms of the daily stock closing price.
8
The weighted average fair value per share of options granted during the thirteen weeks ended August
1, 2009 and August 2, 2008 was $3.83 and $6.71, respectively. The initial forfeiture rate used in
determining the expense related to option awards was 12% and 14% for the thirteen weeks ended
August 1, 2009 and August 2, 2008, respectively. The weighted average fair value per share of
options granted during the twenty-six weeks ended August 1, 2009 and August 2, 2008 was $1.31 and
$10.15, respectively. The initial forfeiture rate used in determining the expense related to
option awards was 11% and 14% for the twenty-six weeks ended August 1, 2009 and August 2, 2008,
respectively. Our initial forfeiture rate is adjusted periodically to reflect actual cancellations
throughout the quarter.
A summary of changes in our outstanding stock options for the thirteen and twenty-six week periods
ended August 1, 2009 and August 2, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of
Shares |
|
|
Average
Exercise Price |
|
|
Number of
Shares |
|
|
Average
Exercise Price |
|
Outstanding, beginning of quarter |
|
|
1,947,527 |
|
|
$ |
22.20 |
|
|
|
1,827,206 |
|
|
$ |
27.92 |
|
Granted |
|
|
10,000 |
|
|
|
6.04 |
|
|
|
45,917 |
|
|
|
17.66 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
(1,875 |
) |
|
|
16.26 |
|
Cancelled/Expired |
|
|
(65,787 |
) |
|
|
23.04 |
|
|
|
(212,247 |
) |
|
|
31.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of quarter |
|
|
1,891,740 |
|
|
$ |
22.08 |
|
|
|
1,659,001 |
|
|
$ |
27.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of quarter |
|
|
1,112,645 |
|
|
$ |
25.91 |
|
|
|
1,086,604 |
|
|
$ |
25.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of Shares |
|
|
Average
Exercise Price |
|
|
Number of
Shares |
|
|
Average
Exercise Price |
|
Outstanding, beginning of year |
|
|
1,967,871 |
|
|
$ |
22.66 |
|
|
|
1,612,375 |
|
|
$ |
27.65 |
|
Granted |
|
|
60,000 |
|
|
|
2.23 |
|
|
|
286,614 |
|
|
|
27.60 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
(12,762 |
) |
|
|
17.22 |
|
Cancelled/Expired |
|
|
(136,131 |
) |
|
|
18.09 |
|
|
|
(227,226 |
) |
|
|
31.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of quarter |
|
|
1,891,740 |
|
|
$ |
22.08 |
|
|
|
1,659,001 |
|
|
$ |
27.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of quarter |
|
|
1,112,645 |
|
|
$ |
25.91 |
|
|
|
1,086,604 |
|
|
$ |
25.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
A summary of changes in our restricted stock granted
as compensation to employees for the thirteen and twenty-six week periods ended August 1, 2009 and August 2, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average Grant Date |
|
|
Number of |
|
|
Average Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Outstanding, beginning of
quarter |
|
|
362,056 |
|
|
$ |
27.68 |
|
|
|
598,875 |
|
|
$ |
30.99 |
|
Granted |
|
|
8,500 |
|
|
|
6.04 |
|
|
|
22,797 |
|
|
|
17.90 |
|
Vested |
|
|
(5,887 |
) |
|
|
21.41 |
|
|
|
(1,125 |
) |
|
|
38.23 |
|
Cancelled |
|
|
(2,408 |
) |
|
|
29.55 |
|
|
|
(76,392 |
) |
|
|
34.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of quarter |
|
|
362,261 |
|
|
$ |
27.26 |
|
|
|
544,155 |
|
|
$ |
29.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average Grant Date |
|
|
Number of |
|
|
Average Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Outstanding, beginning of year |
|
|
485,237 |
|
|
$ |
28.95 |
|
|
|
511,638 |
|
|
$ |
29.52 |
|
Granted |
|
|
13,500 |
|
|
|
4.41 |
|
|
|
235,992 |
|
|
|
25.78 |
|
Vested |
|
|
(73,988 |
) |
|
|
28.93 |
|
|
|
(119,400 |
) |
|
|
29.52 |
|
Cancelled |
|
|
(62,488 |
) |
|
|
33.57 |
|
|
|
(84,075 |
) |
|
|
34.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of quarter |
|
|
362,261 |
|
|
$ |
27.26 |
|
|
|
544,155 |
|
|
$ |
29.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 1, 2009, total unrecognized share-based compensation expense related to
non-vested stock options and restricted stock was $7.1 million, which is expected to be recognized
over a weighted average period of 1.3 years. As of August 2, 2008, total unrecognized share-based
compensation expense related to non-vested stock options and restricted stock was approximately
$13.2 million, which is expected to be recognized over a weighted average period of approximately
2.3 years.
4. Investments
At August 1, 2009 and January 31, 2009, we held no investments in securities classified as
held-to-maturity based on our intent and ability to hold the securities to maturity. We determine
the appropriate classification at the time of purchase. All such securities historically held by
us were municipal debt securities issued by states of the United States or political subdivisions
of the states. During the twenty-six weeks ended August 1, 2009, no cash was used to purchase, or
generated by the maturation of, held-to-maturity securities.
At August 1, 2009 we held no investments in securities classified as available-for-sale securities.
Investments at January 31, 2009 include variable rate municipal demand notes classified as
available-for-sale securities. Our investments in these securities are recorded at cost, which
approximates fair value due to their variable interest rates, which typically reset every 1 to 35
days. Despite the long-term nature of their stated contractual maturities, we have the ability to
quickly liquidate these securities to support current operations. As a result, we have no
accumulated unrealized gains or losses in other comprehensive income from these current
investments. All income generated from these current investments is recognized as interest income.
10
The table below details the marketable securities classified as available-for-sale owned by us
at August 1, 2009 and January 31, 2009, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, 2009 |
|
|
January 31, 2009 |
|
|
|
Maturity of |
|
|
Maturity of |
|
|
|
Less than 1 Year |
|
|
Less than 1 Year |
|
Aggregate fair value |
|
$ |
|
|
|
$ |
8,000 |
|
Net gains in accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Net losses in accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
|
|
|
$ |
8,000 |
|
|
|
|
|
|
|
|
During the twenty-six weeks ended August 1, 2009, no cash was used to purchase
available-for-sale securities while $8.0 million of cash was generated by the sale of
available-for-sale securities.
5. Property and Equipment
Property and equipment, at cost, consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, |
|
|
January 31, |
|
|
|
2009 |
|
|
2009 |
|
Land and land improvements |
|
$ |
16,424 |
|
|
$ |
16,424 |
|
Buildings |
|
|
56,329 |
|
|
|
56,253 |
|
Furniture, fixtures and equipment |
|
|
250,317 |
|
|
|
250,205 |
|
Leasehold improvements |
|
|
188,164 |
|
|
|
188,024 |
|
Construction-in-progress |
|
|
2,468 |
|
|
|
5,185 |
|
|
|
|
|
|
|
|
Total |
|
|
513,702 |
|
|
|
516,091 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
(231,614 |
) |
|
|
(215,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
282,088 |
|
|
$ |
301,085 |
|
|
|
|
|
|
|
|
6. Earnings per Share
Basic earnings per share are computed by dividing net income or loss by the weighted average number
of common shares outstanding for the period. Earnings per diluted share reflect the potential
dilution that could occur if stock options or restricted stock were converted into common stock
using the treasury stock method in accordance with SFAS No. 128, Earnings per Share. Earnings
per diluted share is not applicable in periods when a loss from continuing operations exists. In
these periods, the diluted computation must be the same as the basic computation.
The following table shows the amounts used in the computation of loss per basic share and loss per
diluted share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen |
|
|
Twenty-Six |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(2,802 |
) |
|
$ |
(6,679 |
) |
|
$ |
(4,238 |
) |
|
$ |
(2,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic |
|
|
24,824 |
|
|
|
24,763 |
|
|
|
24,817 |
|
|
|
24,749 |
|
Dilutive effect of stock options and
restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted |
|
|
24,824 |
|
|
|
24,763 |
|
|
|
24,817 |
|
|
|
24,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
If net income had been achieved in the second fiscal quarter and year-to-date of 2009, certain
options would have been excluded from the calculation of earnings per diluted share as their strike
price exceeded the average market price of the common shares for the reporting periods. Due to the
options strike prices exceeding the average market price of the common shares for the thirteen and
twenty-six weeks ended August 1, 2009, options to purchase 1,855,142 and 1,891,896, respectively,
would have been excluded from the computation of weighted average common shares diluted. Due to
the options strike prices exceeding the average market price of the common shares for the thirteen
and twenty-six weeks ended August 2, 2008, options to purchase 1,423,900 and 1,376,000 common
shares, respectively, were not included in the computation of weighted average common shares
diluted. Also excluded from the computation at August 2, 2008 were 60,000 restricted shares with
associated performance criteria expected not to be met.
7. Derivative Instruments
During fiscal year 2007, we entered into a derivative financial instrument to reduce our exposure
to market risk resulting from fluctuations in interest rates associated with our variable rate
debt. This was accomplished through the use of an interest rate swap which qualifies as a cash
flow hedge under Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting
for Derivative Instruments and Hedging Activities. We are required to designate at inception
whether the derivative contract is considered hedging or non-hedging for SFAS No. 133 accounting
purposes. All derivative instruments are recognized in the balance sheet as either assets or
liabilities depending on the rights or obligations under the contract. The derivative instruments
are to be measured at fair value based on expected future cash flows. Under cash flow hedge
accounting, the effective portion of the change in fair value of the interest rate swap designated
and qualifying as a cash flow hedging instrument shall be reported as a component of other
comprehensive income and reclassified into earnings in the same period during which the hedged
forecasted transaction affects earnings. The remaining change in fair value on the derivative
instrument, if any, shall be recognized currently in earnings. For SFAS No. 133 hedges, we
formally document at inception the relationship between the hedging instrument and the hedged item,
as well as our risk management objectives and strategies for undertaking the accounting hedge.
In December 2007, we entered into an interest rate swap under the policy described above, having an
initial notional amount of $157.5 million to hedge the variable interest rate risk associated with
a portion of our $175.0 million of debt currently outstanding under the term loan component of our
credit facility, as described in Note 2 to our Consolidated Financial Statements. The initial
notional amount of the interest rate swap is scheduled to decline over the life of the scheduled
reduction in the hedged item in the Term Loan component of the credit facility. Under the terms of
the interest rate swap agreement, we will receive a floating rate of interest based on 3-month
LIBOR and pay a fixed interest rate of 4.212%, through maturity of the interest rate swap in
September 2012. Net payments will be made or received quarterly. The interest rate swap is
accounted for as a hedge and, accordingly, any difference between amounts paid and received was
recorded as interest expense. The impact on net interest expense as a result of this agreement is
an increase of $1.1 million for the quarter ended August 1, 2009 and an increase of $2.0 million
for the year-to-date period ended August 1, 2009. Notwithstanding the terms of the interest rate
swap agreement, we are obligated for all amounts due and payable under the credit facility.
In accordance with SFAS No. 133, we have recorded the interest rate swap at fair value at
August 1, 2009 and January 31, 2009 resulting in a liability of $8.0 million and $8.7 million,
respectively. This liability amount is reported in Accrued straight-line rent, unrecognized tax
benefits and other on our Consolidated Balance Sheet. This fair value adjustment resulted in a
decrease of $0.6 million in accumulated other comprehensive income for the quarter ended August 1,
2009 and a decrease of $0.7 million for the year-to-date period ended August 1, 2009. The fair
value of the interest rate swap agreement was determined based on the present value of the
estimated future net
cash flows using implied rates in the applicable yield curve as of the valuation date.
Additionally, we have reviewed the effectiveness of the interest rate swap at quarter-end and
have determined there to be no ineffectiveness for the quarter and year-to-date periods ended
August 1, 2009.
12
The fair values of the Companys derivative instruments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2009 |
|
|
January 31, 2009 |
|
|
|
Balance |
|
|
|
|
|
Balance |
|
|
|
Derivatives designated as hedging |
|
Sheet |
|
Fair |
|
|
Sheet |
|
Fair |
|
instruments under SFAS 133 |
|
Location |
|
Value |
|
|
Location |
|
Value |
|
Interest rate swap agreement |
|
Accrued straight-line rent, unrecognized tax benefits and other |
|
$ |
8,013 |
|
|
Accrued straight-line rent, unrecognized tax benefits and other |
|
$ |
8,664 |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging
instruments under SFAS 133 |
|
|
|
$ |
8,013 |
|
|
|
|
$ |
8,664 |
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments on accumulated other comprehensive income/(loss) on the
Consolidated Statements of Operations for the thirteen and twenty-six week periods ended August 1,
2009 and August 2, 2008 was as follows (in thousands, net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
Derivatives in SFAS 133 cash flow |
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
hedging relationships |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest rate swap agreement |
|
$ |
425 |
|
|
$ |
719 |
|
|
$ |
411 |
|
|
$ |
1,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
425 |
|
|
$ |
719 |
|
|
$ |
411 |
|
|
$ |
1,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From time to time, we may enter into additional derivative financial instruments to manage our
exposure to market risk resulting from fluctuations in interest rates.
8. Share Repurchase Program
As of August 1, 2009, $142.3 million was remaining under the May 2007 Board authorized Share
Repurchase Program (May 2007 Share Repurchase Program). No purchases or payments have been made
related to treasury stock subsequent to January 31, 2009. The Amended Credit Facility, as
described in Note 2, prohibits the repurchase our common stock.
9. Fair Value Measurements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements; however, SFAS 157 does not require any new fair value measurements. SFAS No.
157, as issued, was effective for fiscal years beginning after November 15, 2007. FASB Staff
Position (FSP) FAS No. 157-2 was issued in February 2008 and deferred the effective date of SFAS
No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. However, as of February 3, 2008, we adopted SFAS No. 157 for financial assets and
liabilities only. As of August 1, 2009, the financial assets and liabilities subject to SFAS No.
157 consisted of investments, restricted cash related to our deferred compensation plan and an
interest rate swap derivative liability, totaling $0.0 million, $0.5 million and
$8.0 million, respectively. As of January 31, 2009, the
financial assets and liabilities subject to SFAS No. 157 consisted of investments, restricted cash
related to our deferred compensation plan and an interest rate swap derivative liability, totaling
$8.0 million, $1.2 million and $8.7 million, respectively. As discussed in Note 4 of our
Consolidated Financial Statements, we typically hold investments in securities classified as
held-to-maturity as well as variable rate municipal demand notes classified as available-for-sale
securities. Our investments in these securities are recorded at cost, which approximates fair
value due to their variable interest rates, which typically reset every 1 to 35 days. Some of
these investments, along with our restricted cash have Level
13
1 inputs, as the fair value is based
on unadjusted, quoted prices for identical assets or liabilities in active markets at the end of
the second fiscal quarter. The interest rate swap derivative liability at August 1, 2009 and
January 31, 2009, and $6.0 million of the $8.0 million of our investments at January 31, 2009 have
Level 2 inputs, as the fair value is based on inputs other than quoted prices, but is observable
through corroboration with market data at the end of the period. The adoption of SFAS No. 157 for
financial assets and financial liabilities did not have a significant impact on the Companys
results of operations, financial condition or liquidity. Determining the fair value of our
long-lived assets is judgmental in nature and involves the use of significant estimates and
assumptions. These estimates and assumptions include revenue growth rates and operating margins
used to calculate projected future cash flows, risk-adjusted discount rates, and future economic
and market conditions. We based our fair value estimates on assumptions we believe to be reasonable
but that are inherently uncertain, thus they have Level 3 inputs. The fair value for the impaired
long-lived assets at August 1, 2009 was $2.0 million. The adoption of SFAS No. 157 in 2009 for
nonfinancial assets and nonfinancial liabilities did not have a significant impact on the Companys
results of operations, financial condition or liquidity.
10. Recently Issued Accounting Standards
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 (SFAS No. 161), which requires additional
disclosures about the objectives of using derivative instruments, the method by which the
derivative instruments and related hedged items are accounted for under FASB Statement No.133 and
its related interpretations, and the effect of derivative instruments and related hedged items on
financial position, financial performance and cash flows. SFAS No. 161 also requires disclosure of
the fair values of derivative instruments and their gains and losses in a tabular format. SFAS No.
161 was effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early adoption encouraged. The Company has adopted SFAS No. 161 for
the fiscal quarter ended May 2, 2009. Refer to Note 7.
In April 2009, the FASB issued three FSPs intended to provide additional accounting guidance and
enhanced disclosures regarding fair value measurements and impairments of securities. FSP FAS
107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair values of certain financial instruments in interim and annual financial
statements. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments, provides guidance for measurement and recognition of other-than-temporary impairment
charges on investments in debt securities and provides for additional disclosure requirements. FSP
FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidance
for determining fair values when the markets become inactive and quoted prices may reflect
distressed transactions. These FSPs become effective for interim and annual periods ending after
June 15, 2009 with early application permitted for periods ending after March 15, 2009. The
Company has adopted the FSPs for the fiscal quarter ended August 1, 2009 and there was no material
impact on our financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). This standard is
intended to establish general standards of accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued. We have adopted SFAS 165
for the fiscal quarter ended August 1, 2009, and there was no material impact on our financial
position, results of operations or cash flows. Refer to Note 14.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles (SFAS
168). This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles, and establishes two levels of GAAP, authoritative and non-authoritative. The FASB
Accounting Standards Codification (the Codification) will become the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange
Commission (SEC), which are sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. This standard is effective for financial statements for interim or annual
reporting periods ending after September 15, 2009. Adoption of SFAS 168 will have no impact on our
financial position, results of operations or cash flows.
14
We have reviewed and continue to monitor the actions of the various financial and regulatory
reporting agencies and are currently not aware of any other pronouncement that could have a
material impact on our consolidated financial position, results of operations or cash flows.
11. Restructuring
In August 2008, we announced our plan to convert all Limited Too stores to our more value-oriented
Justice store brand in order to drive profitability.
The amount accrued as a liability as of the end of the second quarter totaled $0.8 million as shown
in the table below (in thousands). This decrease of $2.8 million is primarily due to the payment
of severance. This liability amount is reported in Accrued expenses on our Consolidated Balance
Sheets.
|
|
|
|
|
|
|
|
|
|
|
August 1, 2009 |
|
|
January 31, 2009 |
|
Accrued restructuring charges, beginning of year |
|
$ |
3,573 |
|
|
$ |
|
|
Costs incurred and charged to expense |
|
|
|
|
|
|
18,992 |
|
Costs paid or settled |
|
|
(2,789 |
) |
|
|
(15,419 |
) |
|
|
|
|
|
|
|
Accrued restructuring charges, end of period |
|
$ |
784 |
|
|
$ |
3,573 |
|
|
|
|
|
|
|
|
12. Impairment
Long-lived assets are reviewed for impairment quarterly or when circumstances indicate the carrying
values of such assets may not be recoverable. Assets are grouped and evaluated for impairment at
the lowest level of which there are identifiable cash flows, which is generally at a store level.
Store assets are reviewed using factors including, but not limited to, our future operating plans
and projected cash flows. The determination of whether impairment has occurred is based on an
estimate of undiscounted future cash flows directly related to that store, compared to the carrying
value of the assets. If the sum of the undiscounted future cash flows of a store does not exceed
the carrying value of the assets, full or partial impairment exists. If impairment has occurred,
the amount of impairment recognized is determined by comparing the discounted expected future cash
flows of a store against that stores net book value of assets. If the net book value, including
tenant allowances, is greater than the sum of its discounted future cash flows, full or partial
impairment may exist. During the second quarter of 2009, the Company recorded an out-of-period
adjustment related to the impairment of the long-lived assets not taken in previous periods. The
effect of recording this adjustment in the second quarter was a decrease in long-lived assets and
an increase in cost of sales in the amount of $3.5 million. Of the $3.5 million recorded for the
thirteen weeks ended August 1, 2009, $1.1 million was attributable to the fourth quarter of 2008
and $0.2 million was attributable to the first quarter of 2009. Based on the evaluation of all
relevant factors, management believed the adjustments would not have been material to the Companys
quarterly results for 2009 or to the quarterly trend of earnings and, therefore, recorded the full
impact of the adjustment in the second quarter of 2009. Accordingly, the Company determined that
restatement of previously issued financial statements or information was not necessary.
13. Legal Proceedings
Since August 24, 2007, three purported class action complaints were filed by purported purchasers of the Companys
common stock against the Company and certain of its current and former officers, asserting claims under the federal
securities laws. All of these actions were filed in the United States District Court for the Southern District of
Ohio, where, on October 23, 2007, they were consolidated into a single proceeding (the Tween Brands federal securities
litigation). On December 21, 2007, the Court appointed the Electrical Works Pension Fund, Local 103, I.B.E.W. as lead
plaintiff and, on March 20, 2008, the lead plaintiff filed a consolidated complaint naming the Company and certain
current and former officers as defendants.
15
The Tween Brands federal securities litigation purports to be brought on behalf of all purchasers of the Companys
common stock between February 21, 2007 and August 21, 2007 (the class period). The consolidated complaint alleges,
among other things, that the defendants violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act by making false and misleading statements concerning the Companys
business and prospects during the class period. These actions also allege that the Companys CEO sold stock while in
possession of adverse non-public information. On May 5, 2008, a Motion to Dismiss the consolidated complaint was filed
on behalf of all defendants. On June 17, 2008, a Motion for Leave to File a Second Amendment Consolidated Complaint
was filed by the lead plaintiff. On September 4, 2008, the Court granted the lead plaintiffs Motion for Leave to File
a Second Amended Consolidated Complaint and on October 3, 2008, the lead plaintiff filed an Amended Consolidated
Complaint. On November 17, 2008, a Motion to Dismiss the Amended Consolidated Complaint was filed on behalf of all
defendants. On January 30, 2009, lead plaintiff filed an Opposition to Defendants Motion to Dismiss. On March 2,
2009, defendants filed a Reply in Support of the Motion to Dismiss. On June 2, 2009, the Court granted Defendants
Motion to Dismiss with prejudice. On June 16, 2009, the lead plaintiff filed a Motion for Reconsideration, which was
denied by the Court on August 4, 2009. The 30 day time period for appeal has expired.
The Company, the members of the Companys board of directors and, in certain lawsuits, Dress Barn,
Dress Barns chief executive officer and/or Merger Sub have been named as defendants in several
purported class action lawsuits that have been filed in either the Common Pleas Court of Franklin
County, Ohio or the Delaware Court of Chancery. The complaints allege, among other things, that
the Company and its directors, aided and abetted by the Dress Barn defendants (as to those
complaints naming Dress Barn), breached their fiduciary duties by failing to obtain adequate
consideration in the proposed Merger and failing to make adequate disclosures related to the
proposed Merger in the Registration Statement on Form S-4 filed by Dress Barn with the Securities
and Exchange Commission on August 11, 2009. On September 3, 2009, the three cases pending in the
Common Pleas Court of Franklin County, Ohio, were dismissed without prejudice by their respective
plaintiffs in favor of the suit they jointly filed in the Delaware Court of Chancery. A motion to
consolidate has been filed for the cases pending in the Delaware Court of Chancery. At this stage,
it is not possible to predict the outcome of these proceedings or their impact on the Company.
The Company believes the allegations made in these complaints are without merit and intends to
vigorously defend these actions. The Company believes that, if necessary, insurance coverage will
be available under the Companys insurance policies, subject to self-insured retentions and policy
limits, and we do not believe the litigation will have a material adverse effect on our results of
operations, cash flows or financial position.
From time-to-time we become involved in various litigation and regulatory matters incidental to
operations of our business. It is our opinion the ultimate resolution of these matters will not
have a material adverse effect on our results of operations, cash flows or financial position.
14. Subsequent Events
The Company evaluated all events or transactions that occurred after August 1, 2009 up through
September 9, 2009, the date the Company issued these financial statements. During this period, the
Company did not have any material recognizable or nonrecognizable subsequent events.
16
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Managements discussion and analysis of our financial condition and results of operations should be
read in conjunction with our Consolidated Financial Statements and the related notes to those
Consolidated Financial Statements. Also refer to the Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995 on page 27. For the purposes of the following discussion,
unless the context otherwise requires, Tween Brands, we, our, the Company and us refer to
Tween Brands, Inc. and our wholly-owned subsidiaries.
Company Overview
Tween Brands, Inc. is the largest premier specialty tween (age 7 to 14) girl retailer in the world.
Through our powerhouse brand, Justice, we provide the hottest fashion merchandise and accessories
for tween girls. Known as the destination for fashion aware tweens, Justice stores proudly
feature outgoing sales associates who assist girls in expressing their individuality and
self-confidence through fashion. Visually-driven catazines (a combination of a catalog and a
magazine) and direct mail pieces reach millions of tween girls annually, further positioning us as
a preeminent retailer in the tween marketplace. As of the end of the second quarter, we had over
900 stores located throughout the United States and internationally. Additionally, we maintain a
website, www.shopjustice.com, to offer our girls another alternative to in-store shopping. A
product assortment similar to the one carried at our stores, with the addition of web-only styles,
can be purchased through this website.
Beginning February 1, 2009, Justice became our primary specialty retail store brand offering
fashionable sportswear, key accessories and lifestyle items for tween girls. Justice celebrates
tween girls at a more value-conscious price point and contains a large proportion of basic items,
as well as the latest fashions for our girl.
Justice merchandise includes:
|
|
|
apparel, such as jeans and other pants, skirts, shorts, knit tops, graphic tee
shirts, dresses and outerwear; |
|
|
|
accessories, such as bags, belts, hats, coin purses, backpacks, jewelry, hair
ornaments, and legwear; |
|
|
|
footwear, such as casual shoes, boots, flip flops and slippers; |
|
|
|
lifestyle products, such as bedroom furnishings, music, stationery, candy,
party favors, electronics and web based toys; and |
|
|
|
swimwear, underwear, bras and sleepwear. |
Pending Merger with Dress Barn
On June 24, 2009, Tween Brands entered into an Agreement and Plan of Merger (the Merger
Agreement) with The Dress Barn, Inc., a Connecticut corporation (Dress Barn) and Thailand
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Dress Barn (Merger Sub)
which provide for the acquisition of Tween Brands by Dress Barn by means of a merger of Merger Sub
with and into Tween Brands, with Tween Brands surviving as a wholly owned subsidiary of Dress Barn.
The Merger Agreement is subject to the approval of Tween Brands stockholders and to the terms and
conditions set forth in the Merger Agreement.
If the proposed Merger is consummated, each share of Tween Brands common stock issued and
outstanding immediately prior to the effective time of the Merger, will be converted into the right
to receive 0.47 shares of Dress Barn common stock (the Exchange Ratio). Tween Brands
stockholders will not receive any fractional shares of Dress Barn common stock in the Merger.
Instead, any Tween Brands stockholder who would otherwise be entitled to a fractional share of
Dress Barn common stock will be entitled to receive an amount in cash (rounded down to the nearest
whole cent), without interest, equal to the product of such fraction multiplied by the measurement
price. Dress Barn common stock is listed on the Nasdaq Global Select Market under the symbol
DBRN.
In connection with the proposed Merger, on July 28, 2009, Dress Barn and Tween Brands submitted
notification and report forms under the Hart Scott Rodino Act (HSR) with the Federal Trade
Commission and the Antitrust Division of the U.S. Department of Justice. The HSR waiting period
expired on August 27, 2009. In addition, on August 11, 2009, Dress Barn filed a registration
statement on Form S-4 with the Securities and Exchange
Commission. The Form S-4 contains the Companys proxy statement. Once the Form S-4 is declared
effective, Tween Brands intends to distribute a definitive proxy statement to our stockholders in
connection with the stockholder meeting to vote on a proposal to adopt the Merger Agreement.
17
Executive Overview
While the second fiscal quarter of 2009 was certainly not one of our best, our performance exceeded
our internal forecast due to sales levels and cost savings exceeding expectations. We had expected
sales during the quarter to be soft for the obvious macroeconomic reasons and comparisons to a more
successful second quarter of last year, primarily driven by WebkinzTM sales which
significantly decreased in the second quarter of 2009 when compared to the second quarter of 2008.
The trends in the composition of our sales (units per transaction, average unit retail, and average
dollar sale) are falling in line with our expectations as well. We saw significant decreases in
expenses due to payroll, occupancy and marketing expense savings and experienced higher interest
expense due to our recent credit facility amendment.
Although marketing efforts were intentionally reduced during the second quarter of 2009 as compared
to the same period in 2008, we increased the number of contacts with our customers and we extended
our direct mail efforts deeper into our database. Given that customers do not appear willing to
shop without a deal in-hand, we adjusted our promotional cadence and, consequently, increased the
number of days we were promotional versus last year. We also sweetened our offers at various
times such as more 40% off events as compared to the 30% off opportunities. Throughout the second
quarter, we in fact, engaged in all of these activities and saw improved performance for the
period, particularly late in the quarter with the excellent response to our back-to-school
merchandise assortments. While we expect to increase the marketing frequency through the remainder
of the year as compared to spring season, we still expect to realize an overall cost savings in
marketing efforts due to reduction in page count, increased density per page and the use of
postcards in place of catazines and minis.
Our conversion to our single Justice store brand has been smooth and is nearly complete with all
stores offering a wide array of exciting back-to-school Justice merchandise to customers. During
the second quarter of 2009, we continue to make progress on the signage changes. We are targeting
to have all stores converted to the Justice brand by the end of fiscal 2009. The brand transition
appears to be gaining traction with consumers as evidenced by recent market research data
indicating that Tween Brands market share in the tween girl 7-12 year old market increased 114
basis points for the 12-month period ended June 2009. During the same period, the Tween Girl
apparel market contracted almost 6% and several other retailers lost market share.
Results of Operations
Financial Summary
Net sales for the fiscal quarter ended August 1, 2009 were $205.1 million, $18.0 million or 8%
worse than the $223.1 million in the second fiscal quarter of 2008. Gross income in the second
fiscal quarter of 2009 was $54.3 million, $7.4 million or 12% worse than the $61.8 million in the
second fiscal quarter of 2008. Operating loss in the second fiscal quarter of 2009 was $10.2
million, $0.9 million or 10% worse than the operating loss of $9.3 million in the second fiscal
quarter of 2008. Net loss in the second fiscal quarter of 2009 was $2.8 million, $3.9 million or
58% better than the net loss of $6.7 million in the second fiscal quarter of 2008. Loss per
diluted share in the second fiscal quarter of 2009 was $0.11, which was $0.16 better than the loss
per diluted share of $0.27 in the second fiscal quarter of 2008.
Net sales for the year-to-date period ended August 1, 2009 were $410.3 million, $64.5 million or
14% worse than the $474.8 million in the same period of 2008. Gross income in the year-to-date
period ended August 1, 2009 was $119.3 million, $28.8 million or 19% worse than the $148.1 million
in the same period of 2008. Operating loss in the year-to-date period ended August 1, 2009 was
$8.2 million, $7.3 million or 846% worse than the operating loss of $0.9 million in the same period
of 2008. Net loss in the year-to-date period ended August 1, 2009 was $4.2 million, $1.8 million
or 77% worse than the net loss of $2.4 million in the same period of 2008. Loss per diluted share
in the year-to-date
period ended August 1, 2009 was $0.17, which was $0.07 worse than the loss per diluted share of
$0.10 in the same period of 2008.
18
Summarized operational data for the thirteen and twenty-six week periods ended August 1, 2009 and
August 2, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
% |
|
|
August 1, |
|
|
August 2, |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (millions) (1) |
|
$ |
205.1 |
|
|
$ |
223.1 |
|
|
|
-8 |
% |
|
$ |
410.3 |
|
|
$ |
474.8 |
|
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales (2) |
|
|
-12 |
% |
|
|
-8 |
% |
|
|
|
|
|
|
-18 |
% |
|
|
-4 |
% |
|
|
|
|
Net store sales per average gross square foot (3) |
|
$ |
51.3 |
|
|
$ |
58.4 |
|
|
|
-12 |
% |
|
$ |
103.1 |
|
|
$ |
126.1 |
|
|
|
-18 |
% |
Net store sales per average store (thousands) (4) |
|
$ |
214.6 |
|
|
$ |
243.5 |
|
|
|
-12 |
% |
|
$ |
431.4 |
|
|
$ |
527.4 |
|
|
|
-18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average store size at period end (gross square feet) |
|
|
4,189 |
|
|
|
4,174 |
|
|
|
0 |
% |
|
|
4,189 |
|
|
|
4,174 |
|
|
|
0 |
% |
Total gross square feet at period end (thousands) |
|
|
3,783 |
|
|
|
3,736 |
|
|
|
1 |
% |
|
|
3,783 |
|
|
|
3,736 |
|
|
|
1 |
% |
Store inventory per gross square foot at period end (5) |
|
$ |
24.3 |
|
|
$ |
30.0 |
|
|
|
-19 |
% |
|
$ |
24.3 |
|
|
$ |
30.0 |
|
|
|
-19 |
% |
Store inventory per store at period end (thousands) (5) |
|
$ |
101.9 |
|
|
$ |
125.4 |
|
|
|
-19 |
% |
|
$ |
101.9 |
|
|
$ |
125.4 |
|
|
|
-19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
910 |
|
|
|
867 |
|
|
|
|
|
|
|
914 |
|
|
|
842 |
|
|
|
|
|
Opened |
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
Closed |
|
|
(7 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
903 |
|
|
|
895 |
|
|
|
|
|
|
|
903 |
|
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total net sales includes: store sales, net of associate discounts; direct sales; shipping
revenue; deferred revenue; international revenue and partner advertising revenue. |
|
(2) |
|
A store is included in our comparable store sales calculation once it has completed 52 weeks
of operation. Further, stores that have changed more than 20% in gross square feet are
treated as new stores for purposes of this calculation. The conversion of a Limited Too store
to a Justice store does not affect its inclusion in the comparable store base. |
|
(3) |
|
Net store sales per average gross square foot is the result of dividing net store sales for
the fiscal period by the monthly average gross square feet, which reflects the impact of
opening and closing stores throughout the period. |
|
(4) |
|
Net store sales per average store is the result of dividing net store sales for the fiscal
period by average store count, which reflects the impact of opening and closing stores
throughout the period. |
|
(5) |
|
Inventory value includes store and distribution center inventory net of estimated shrink. |
19
The following table compares components of the Consolidated Statements of Operations as a
percentage of net sales at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks |
|
|
Twenty-Six Weeks |
|
|
|
Ended |
|
|
Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
August 1, |
|
|
August 2, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold, including buying
and occupancy costs |
|
|
73.5 |
|
|
|
72.3 |
|
|
|
70.9 |
|
|
|
68.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross income |
|
|
26.5 |
|
|
|
27.7 |
|
|
|
29.1 |
|
|
|
31.2 |
|
Store operating, general and
administrative expenses |
|
|
31.5 |
|
|
|
31.9 |
|
|
|
31.1 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(5.0 |
) |
|
|
(4.2 |
) |
|
|
(2.0 |
) |
|
|
(0.2 |
) |
Interest (income) |
|
|
0.0 |
|
|
|
(0.2 |
) |
|
|
0.0 |
|
|
|
(0.2 |
) |
Interest expense |
|
|
1.6 |
|
|
|
1.0 |
|
|
|
1.7 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(6.6 |
) |
|
|
(5.0 |
) |
|
|
(3.7 |
) |
|
|
(1.0 |
) |
Benefit from income taxes |
|
|
(5.2 |
) |
|
|
(2.0 |
) |
|
|
(2.7 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(1.4 |
)% |
|
|
(3.0 |
)% |
|
|
(1.0 |
)% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales of $205.1 million for the second fiscal quarter of 2009 decreased 8% from $223.1 million
for the second fiscal quarter of 2008. This was primarily driven by a 12% decrease in comparable
store sales, partially offset by the additional sales from the 8 net new stores added since the
second fiscal quarter of 2008. Net sales of $410.3 million for the year-to-date period ended
August 1, 2009 decreased 14% from $474.8 million for the year-to-date period ended August 2, 2008.
This was primarily driven by an 18% decrease in comparable store sales, partially offset by the
additional sales from the 8 net new stores added since the second fiscal quarter of 2008.
The following summarized comparable store sales data compares the thirteen and twenty-six week
periods ended August 1, 2009 and August 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
August 1, |
|
|
August 2, |
|
|
% |
|
|
August 1, |
|
|
August 2, |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Average dollar value of unit sold at retail (AUR) (1) |
|
$ |
9.51 |
|
|
$ |
10.81 |
|
|
|
-12 |
% |
|
$ |
9.73 |
|
|
$ |
10.96 |
|
|
|
-11 |
% |
Average number of units per transaction (UPT) (2) |
|
|
4.69 |
|
|
|
4.35 |
|
|
|
8 |
% |
|
|
4.67 |
|
|
|
4.37 |
|
|
|
7 |
% |
Average dollar sales value per transaction (ADS) (3) |
|
$ |
44.60 |
|
|
$ |
47.06 |
|
|
|
-5 |
% |
|
$ |
45.45 |
|
|
$ |
47.85 |
|
|
|
-5 |
% |
Number of comparable store transactions (4) |
|
|
4,124 |
|
|
|
4,458 |
|
|
|
-8 |
% |
|
|
7,949 |
|
|
|
9,209 |
|
|
|
-14 |
% |
|
|
|
(1) |
|
Average dollar value of unit sold at retail is the result of dividing comparable store sales
dollars, store sales before associate discounts, for the period by the number of units sold
during the period at comparable stores. |
|
(2) |
|
Average number of units per transaction is the result of dividing the number of units sold in
the period at comparable stores by the number of comparable store transactions. |
|
(3) |
|
Average dollar sales value per transaction is the result of dividing comparable gross store
sales dollars for the period by the number of comparable store transactions. |
|
(4) |
|
Number of comparable store transactions is the total number of comparable store transactions
for the fiscal period in thousands. |
For the thirteen weeks ended August 1, 2009, the decline in comparable store sales of 12% was
driven by an 8% drop in transactions and a 5% reduction in ADS. Although UPT increased 8%, AUR
decreased 12%, primarily driven by the conversion to Justice, which caused an overall decrease in
ADS. For the twenty-six weeks ended
August 1, 2009, the decline in comparable store sales of 18% was driven by a 14% drop in
transactions and a 5% reduction in ADS. Although UPT increased 7%, AUR decreased 11%, primarily
driven by the conversion to Justice, which caused an overall decrease in ADS.
20
Merchandise Review
Nearly all merchandise category sales decreased from second quarter 2008 to second quarter 2009.
Significant decreases in Lifestyles were largely driven by trailing WebkinzTM sales in
fiscal 2009. WebkinzTM sales, which accounted for 7% of our sales for the second
quarter of 2008, fell to 3% of our sales for the second quarter of 2009, resulting in a 4 point
comparable store sales decline. Decreases in ready to wear apparel, casual tops and bottoms, and
intimates were also seen from the second quarter of 2008. Active tops and bottoms and accessories
have experienced increased sales since the second quarter of 2008.
Similar to the second quarter, on a year-to-date basis nearly all merchandise categories
experienced decreased sales from the year-to-date period ended August 2, 2008 as compared to the
year-to-date period ended August 1, 2009. Significant decreases in Lifestyles were largely driven
by trailing WebkinzTM sales in fiscal 2009. WebkinzTM, which accounted for
10% of our sales for the year-to-date period ended August 2, 2008, fell to 4% of our sales for the
year-to-date period ended August 1, 2009, and was a large component of the overall decrease.
Decreases in ready to wear apparel, casual tops and bottoms, and intimates were also seen for the
year-to-date period ended August 1, 2009 as compared to the same period in 2008. Active tops and
bottoms and accessories have experienced increased sales for the year-to-date period ended August
1, 2009 as compared to the same period in 2008.
Gross Income
Gross income is comprised of internal gross margin (net sales less cost of sales) less buying and
occupancy costs. Internal gross margin is composed of our more variable cost components of gross
income, while our buying and occupancy costs are predominantly fixed in nature. Gross income for
the second fiscal quarter of 2009 was $54.3 million, $7.4 million and 120 basis points as a
percentage of net sales (bps), less than the second fiscal quarter of 2008 as shown in the table
below (in thousands, except basis point amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2009 vs. Q2 2008 |
|
|
Q2 2009 vs. Q2 2008 |
|
|
|
|
|
|
|
|
|
|
|
Dollar change |
|
|
Change in bps |
|
|
|
Q2 2009 |
|
|
Q2 2008 |
|
|
favorable/(unfavorable) |
|
|
favorable/(unfavorable) |
|
Net Sales |
|
$ |
205,124 |
|
|
$ |
223,102 |
|
|
$ |
(17,978 |
) |
|
|
|
|
Cost of Sales |
|
|
89,869 |
|
|
|
98,106 |
|
|
|
8,237 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Gross Margin |
|
$ |
115,255 |
|
|
$ |
124,996 |
|
|
$ |
(9,741 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buying & Occupancy Costs |
|
|
60,915 |
|
|
|
63,210 |
|
|
|
2,295 |
|
|
|
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Income |
|
$ |
54,340 |
|
|
$ |
61,786 |
|
|
$ |
(7,446 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $9.7 million decrease in internal gross margin from the second quarter 2008 was primarily
attributable to a top-line sales miss of $18.0 million, an expected decrease in initial mark-up
(IMU) rate offset by favorability in other margin items, primarily due to increased sourcing
penetration, and favorability in freight and shrink. Buying and occupancy costs decreased $2.3
million from second quarter 2008 driven by buying payroll savings of $2.5 million related to our
recent restructuring, a $1.3 million decrease in catalog production costs due to decreased
marketing efforts, and a $1.7 million decrease in store occupancy costs offset by a $3.5 million
store impairment charge on 31 stores, of which $1.3 million relates to prior periods.
The year-over-year decline in gross income of 120 bps was primarily attributable to the inability
to leverage the $2.3 million reduction in buying and occupancy expense, primarily because of the
inclusion of the $3.5 million store impairment charge, against the drop in sales. The increase in
our sourcing income and other margin favorability mitigated the impact on internal gross margin
that the expected IMU decline associated with the transition to the Justice brand would have
otherwise had.
21
Gross income for the year-to-date period ended August 1, 2009 was $119.3 million, $28.8 million and
210 basis points as a percentage of net sales (bps), less than the year-to-date period ended
August 2, 2008 as shown in the table below (in thousands, except basis point amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD 2009 vs. YTD 2008 |
|
|
YTD 2009 vs. YTD 2008 |
|
|
|
|
|
|
|
|
|
|
|
Dollar change |
|
|
Change in bps |
|
|
|
YTD 2009 |
|
|
YTD 2008 |
|
|
favorable/(unfavorable) |
|
|
favorable/(unfavorable) |
|
Net Sales |
|
$ |
410,349 |
|
|
$ |
474,840 |
|
|
$ |
(64,491 |
) |
|
|
|
|
Cost of Sales |
|
|
172,264 |
|
|
|
201,556 |
|
|
|
29,292 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Gross Margin |
|
$ |
238,085 |
|
|
$ |
273,284 |
|
|
$ |
(35,199 |
) |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buying & Occupancy Costs |
|
|
118,754 |
|
|
|
125,157 |
|
|
|
6,403 |
|
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Income |
|
$ |
119,331 |
|
|
$ |
148,127 |
|
|
$ |
(28,796 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $35.2 million decrease in internal gross margin from the year-to-date period August 2,
2008 was primarily attributable to a top-line sales miss of $64.5 million, an expected decrease in
IMU rate partially offset by reduced markdowns due to tighter inventory levels, and favorability in
other margin items, primarily due to increased sourcing penetration, and favorability in freight
and shrink. The decrease in buying and occupancy costs of $6.4 million from the year-to-date
period August 2, 2008 was driven by buying payroll savings of $5.6 million related to our recent
restructuring and a $3.9 million decrease in catalog production costs due to decreased marketing
efforts, offset by a $3.5 million store impairment charge on 31 stores, of which $1.3 million
relates to prior periods.
The year-over-year decline in gross income of 210 bps was primarily attributable to the inability
to leverage the $6.4 million reduction in buying and occupancy expense, primarily because of the
inclusion of the $3.5 million store impairment charge, against the decline in sales. The decrease
in markdowns and the increase in our sourcing income and other margin mitigated the impact on
internal gross margin that the expected IMU decline associated with the transition to the Justice
brand would have otherwise had. Our gross income may not be comparable to that of other retailers
since all significant costs related to our distribution network, with the exception of freight
costs, are included in store operating, general and administrative expenses (see Store Operating,
General and Administrative Expenses).
Store Operating, General and Administrative Expenses
Store operating, general and administrative expenses improved $6.5 million and 40 bps as a
percentage of net sales from the second fiscal quarter of 2008. The change is outlined in the
table below (in thousands, except basis point amounts):
|
|
|
|
|
|
|
|
|
|
|
Q2 2009 vs. Q2 2008 |
|
|
|
favorable/(unfavorable) |
|
Changes in: |
|
in dollars |
|
|
in bps |
|
Store payroll and operating expenses |
|
$ |
5,635 |
|
|
|
90 |
|
Home office |
|
|
1,263 |
|
|
|
|
|
Marketing |
|
|
1,771 |
|
|
|
60 |
|
Distribution center |
|
|
(359 |
) |
|
|
(20 |
) |
Other |
|
|
(1,784 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
Total change |
|
$ |
6,526 |
|
|
|
40 |
|
|
|
|
|
|
|
|
The $6.5 million decrease in store operating, general and administrative expenses from second
quarter 2008 was primarily attributable to our ability to control store payroll and operating
expenses evidenced by a 12% reduction, manage our home office expenses through our recent restructuring and cost savings initiatives, and
decrease marketing efforts in the quarter.
The year-over-year decrease in store operating, general and administrative expenses of 40 bps was
primarily attributable to cost savings initiatives and lower marketing expenses offset by proposed
merger costs of $1.9 million.
22
On a year-to-date basis, store operating, general and administrative expenses improved $21.5
million and 30 bps as a percentage of net sales from the year-to-date period ended August 2, 2008.
The change is outlined in the table below (in thousands, except basis point amounts):
|
|
|
|
|
|
|
|
|
|
|
YTD 2009 vs. YTD 2008 |
|
|
|
favorable/(unfavorable) |
|
Changes in: |
|
in dollars |
|
|
in bps |
|
Store payroll and operating expenses |
|
$ |
11,762 |
|
|
|
(30 |
) |
Home office |
|
|
4,917 |
|
|
|
|
|
Marketing |
|
|
5,034 |
|
|
|
80 |
|
Distribution center |
|
|
(201 |
) |
|
|
(20 |
) |
Other |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
$ |
21,470 |
|
|
|
30 |
|
|
|
|
|
|
|
|
The $21.5 million decrease in the year-to-date store operating, general and administrative
expenses from the year-to-date period ended August 2, 2008 was primarily attributable to our
ability to control store payroll and operating expenses evidenced by a 12% reduction, manage our
home office expenses through our recent restructuring and cost savings initiatives, and decrease
marketing efforts in the season.
The year-over-year decrease in the year-to-date store operating, general and administrative
expenses of 30 bps was primarily attributable to cost savings initiatives and lower marketing
expenses offset by our inability to leverage the 12% decline in store payroll and operating
expenses against a 14% sales decline and our proposed merger costs of $1.9 million.
Interest Expense/Income
Interest expense was driven mainly by the interest payments on our long-term debt. Interest income
was earned on investments in money market securities, variable rate demand notes and short-term,
highly liquid, tax free municipal bonds. For the second fiscal quarter of 2009, net interest
expense amounted to $3.2 million versus net interest expense of $1.9 million for the second fiscal
quarter of 2008. The increase in net interest expense of $1.3 million in 2009 was primarily
attributable to the increased interest rate on our long-term debt for the Amended Credit Facility
as noted in Note 2.
For the year-to-date period ended August 1, 2009, net interest expense amounted to $7.1 million
versus net interest expense of $3.7 million for the same period of 2008. The increase in net
interest expense of $3.4 million in 2009 was primarily attributable to the increased interest rate
on our long-term debt for the Amended Credit Facility as noted in Note 2.
Income Taxes
The effective tax rate for the second fiscal quarter of 2009 was 79.2%. This was an increase from
the second fiscal quarter of 2008 effective tax rate of 40.3%. This increase was primarily
attributable to the impact of the permanent book-tax difference expected in the fiscal year. Most
notably, during the quarter we incurred expenses related to the proposed merger which were non-deductible. Additionally, the effective tax rate was impacted
by the distribution of income and losses across legal entities and among the state taxing
jurisdictions in which we operate.
The effective tax rate for the year-to-date period ended August 1, 2009 was 72.3%. This was an
increase from the same period of 2008 effective tax rate of 46.9%. This increase was primarily
attributable to the impact of the permanent book-tax difference expected in the fiscal year. Most
notably, during the quarter we incurred expenses related to the proposed merger which were
non-deductible. Additionally, the effective tax rate was impacted by the distribution of income
and losses across legal entities and among the state taxing jurisdictions in which we operate.
23
Financial Condition
In assessing the financial condition of the business, we consider factors such as cash flow from
operations, capital expenditures and operating margins to be key metrics in determining financial
health. We were able to finance all capital needs with existing working capital and cash generated
from operations, while ending the quarter with $71.5 million in cash and cash equivalents.
Liquidity and Capital Resources
We are committed to a cash management strategy that maintains sufficient liquidity to support the
operations of our business and withstand unanticipated business volatility. We believe cash
generated from operations will be substantially sufficient to maintain ongoing operations, support
seasonal working capital requirements and fund our planned capital expenditures. This cash may be
supplemented with current levels of cash equivalents, short-term investments and credit
availability, if necessary. However, our liquidity position is subject to economic conditions and
their impact on a variety of factors, including consumer spending. If consumer spending does not
increase, we may continue to experience declines in comparable store sales or experience other
events that negatively affect our operating results, financial condition or liquidity. If our
comparable store sales drop significantly for an extended period, or if we falter in the execution
of our business strategy, we may fall short of our financial performance goals, which could further
impact our results of operations and operating cash flow. This could also cause a decrease in or
elimination of excess availability under our revolving credit facility, which could force us to
seek alternatives to address cash constraints, including seeking additional debt and/or equity
financing.
At the end of the second fiscal quarter of 2009, our working capital (defined as current assets
less restricted assets and current liabilities) was $138.2 million, slightly down from $138.6
million on January 31, 2009. The decrease was primarily due to an increase in the current portion
of long term debt from the amendment of the credit facility and partially offset by the increase in
inventory.
The table below summarizes our working capital position and capitalization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 1, |
|
|
January 31, |
|
|
|
2009 |
|
|
2009 |
|
Working Capital (as defined above) |
|
$ |
138,168 |
|
|
$ |
138,564 |
|
|
|
|
|
|
|
|
Capitalization: |
|
|
|
|
|
|
|
|
Long-term debt (including current portion) |
|
|
163,250 |
|
|
|
166,250 |
|
Shareholders equity |
|
|
173,375 |
|
|
|
175,772 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
336,625 |
|
|
$ |
342,022 |
|
|
|
|
|
|
|
|
Amounts available under the credit facility |
|
$ |
50,000 |
|
|
$ |
100,000 |
|
Letters of credit outstanding under the credit facility |
|
$ |
|
|
|
$ |
|
|
Restricted assets |
|
$ |
1,802 |
|
|
$ |
2,592 |
|
Our working capital decreased from year-end, but our overall liquidity was in-line with the
apparel industry average as shown below. Additionally, our current ratio and debt-to-equity ratio
are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tween Brands, Inc. |
|
|
Apparel |
|
|
|
|
|
|
August 1, 2009 |
|
|
January 31, 2009 |
|
|
Industry * |
|
|
S&P 500 |
|
Current Ratio |
|
|
2.3 |
|
|
|
2.4 |
|
|
|
2.5 |
|
|
|
1.5 |
|
Debt/Equity Ratio |
|
|
0.9 |
|
|
|
0.9 |
|
|
|
0.4 |
|
|
|
1.4 |
|
|
|
|
* |
|
Information reflects the latest apparel stores industry financial ratios found on
MSN©
Money. |
24
Our liquidity is enhanced by the February 2009 Amendment to our September 2007 credit facility (the
Amended Credit Facility). The Amended Credit Facility provides for a $50.0 million revolving
line of credit, as well as the Term Loan discussed in Note 2 to our Consolidated Financial
Statements. Our Amended Credit Facility is secured and contains certain financial covenants.
Additionally, the Amended Credit Facility prohibits the declaration or payment of dividends, any
additional repurchases of our common shares and also limits our future capital expenditures. As of
August 1, 2009 we are in compliance with all of our financial covenants. Our failure to comply
with these covenants could result in an event of default. An event of default, if not cured or
waived, would permit acceleration of any outstanding indebtedness under the credit facility and
impair our ability to obtain working capital advances and letters of credit, which could have a
material adverse effect on our financial condition, results of operations or cash flows. The
alternatives available to us if in default of our covenants would include renegotiating certain
terms of the credit agreement, obtaining waivers from the lenders, obtaining a new credit agreement
with another bank or group of lenders, which may contain different terms or seeking additional
equity financing.
While we expect to maintain significant overall liquidity, we recognize the specialty retail
industry can be highly volatile and fashion missteps can quickly impact the ability to generate
operating cash flow. We continually evaluate and strive to optimize our capital structure. We
may, from time to time, make changes to our capital structure without prior notice, unless
specifically required by applicable regulations.
As discussed in Note 2 to our Consolidated Financial Statements, our interest payments are
calculated on a short-term variable LIBOR or base rate of our choosing under the terms of the loan.
We have typically elected to use the 3-month LIBOR. In December 2007, we entered into a swap
contract in order to fix the interest rate payment on a portion of the long-term debt. Our cash
flows are better matched to a fixed interest rate debt structure rather than a variable rate
structure.
Net Change in Cash and Cash Equivalents
The table below summarizes our net increase in cash and cash equivalents for the twenty-six weeks
ended August 1, 2009 and August 2, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
|
|
|
August 1, 2009 |
|
|
August 2, 2008 |
|
Net cash provided by (used for) operating activities |
|
$ |
5,049 |
|
|
$ |
(5,298 |
) |
Net cash provided by investing activities |
|
|
2,153 |
|
|
|
23,755 |
|
Net cash used for financing activities |
|
|
(7,811 |
) |
|
|
(6,202 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(609 |
) |
|
$ |
12,255 |
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities amounted to $5.0 million for the year-to-date period
ended August 1, 2009, an increase of $10.3 million when compared to net cash used for operating
activities of $5.3 million for the same period of 2008. The table below outlines the changes in
cash flows from operating activities during the twenty-six week period (in thousands):
|
|
|
|
|
|
|
YTD 2009 vs. YTD 2008 |
|
Changes in cash flows from: |
|
increase/(decrease) |
|
Net income, net of non-cash expenses |
|
$ |
2,191 |
|
Accounts payable and accrued expenses |
|
|
4,571 |
|
Accounts receivable |
|
|
(3,110 |
) |
Income taxes |
|
|
10,325 |
|
Inventory |
|
|
3,009 |
|
Tenant allowances received |
|
|
(10,211 |
) |
Other long-term assets and liabilities |
|
|
3,572 |
|
|
|
|
|
Total change in cash flows from operating activities |
|
$ |
10,347 |
|
|
|
|
|
Net income, net of non-cash expenses, increased 13% resulting in a continued net loss. Cash
used to liquidate accounts payable and accrued expenses decreased as compared with the year-to-date
period ended August 2, 2008. The decrease related to accounts receivable is primarily attributable
to federal and state income tax refunds to be received and the tax benefit related to the
year-to-date net loss. The decreased use of cash for income taxes for the year-to-date period
ended August 1, 2009 relative to the same period in 2008 was due primarily to our lower net income
as compared to the same period in 2008. Cash used to purchase inventory was less in the
year-to-date period ended August 1, 2009 versus the same period of 2008 mainly due to our continued
efforts to achieve a cleaner and better-managed inventory position. Cash provided by the tenant
allowances received decreased due to the decrease in store openings.
25
Investing Activities
Net cash provided by investing activities amounted to $2.2 million for the year-to-date period
ended August 1, 2009, a decrease of $21.6 million from the $23.8 million provided during the same
period of 2008. The table below outlines the changes in cash flows from investing activities
during the twenty-six week period (in thousands):
|
|
|
|
|
|
|
YTD 2009 vs. YTD 2008 |
|
Changes in cash flows from: |
|
increase/(decrease) |
|
Investments |
|
$ |
(56,530 |
) |
Capital expenditures |
|
|
34,125 |
|
Other |
|
|
803 |
|
|
|
|
|
Total change in cash flows from investing activities |
|
$ |
(21,602 |
) |
|
|
|
|
We generated $8.0 million of cash in the year-to-date period ended August 1, 2009, by
liquidating our marketable securities, a decrease of $56.5 million when compared to the net $64.5
million generated in the same period of 2008. Our capital expenditures decreased over the
year-to-date period ended August 1, 2009 as compared to the same period in 2008, due primarily to
the decrease in store openings.
Financing Activities
Net cash used for financing activities amounted to $7.8 million for the year-to-date period ended
August 1, 2009, an increase in the use of cash of $1.6 million from the $6.2 million used during
the same period of 2008. The table below outlines the changes in cash flows from financing
activities during the twenty-six week period (in thousands):
|
|
|
|
|
|
|
YTD 2009 vs. YTD 2008 |
|
Changes in cash flows from: |
|
increase/(decrease) |
|
Purchases of treasury stock |
|
|
5,914 |
|
Repayment of long-term debt |
|
|
(3,000 |
) |
Amended Credit Facility fees |
|
|
(3,437 |
) |
Change in cash overdraft position |
|
|
(766 |
) |
Stock options and other equity changes |
|
|
(320 |
) |
|
|
|
|
Total change in cash flows used for financing activities |
|
$ |
(1,609 |
) |
|
|
|
|
As stipulated in our Amended Credit Facility, we are restricted from repurchasing any common
stock. As such, no purchases of treasury stock were made during the year-to-date period ended
August 1, 2009 as compared with the $5.9 million ASR settlement payment made in the same period in
2008. Additionally, due to the amendment of our credit facility, we had cash outflow of $3.4
million in related fees and $3.0 million of accelerated debt payments. These debt payments will
continue to be accelerated until the maturity date. Due to the timing of payments made, the change
in our cash overdraft position resulted in a cash decrease for the year-to-date period.
Capital Expenditures
We continually evaluate the best use of our resources as they relate to investments in capital
projects. In the current economic environment, our main focus is renegotiating and realigning our
store fleet in the most cost effective manner possible. In addition, our Amended Credit Facility
places restrictions on our future capital expenditures. To that end, we are drastically reducing
capital spending in 2009. We anticipate spending approximately $10.0 million, net of cash tenant
allowances received, in fiscal 2009 for capital expenditures. This will be primarily for new store
construction and the store signage changes related to our conversion to Justice. This planned
spending is a fraction of the $64.2 million, $46.7 net of cash tenant allowances received, spent in
fiscal 2008 and is indicative of our commitment to discipline during these tough economic times.
We expect cash on hand, the routine liquidation of short-term investments and cash generated from
operating activities to fund substantially all capital expenditures for 2009.
26
For a more complete discussion of our future capital expenditures, refer to our Annual Report on
Form 10-K for the year ended January 31, 2009, as filed with the Securities and Exchange Commission
on March 31, 2009 (the Fiscal 2008 Form 10-K).
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates can be found in the Managements Discussion and
Analysis of Financial Condition and Results of Operation section of our Fiscal 2008 Form 10-K.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We desire to take advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the PSLRA). This Quarterly Report on Form 10-Q contains various
forward-looking statements within the meaning of the PSLRA and other applicable securities laws.
Such statements can be identified by the use of the forward-looking words anticipate, estimate,
project, target, predict, believe, intend, plan, expect, hope, risk, could,
pro forma, potential, prospect, forecast, outlook or similar words. These statements
discuss future expectations, contain projections regarding future developments, operations or
financial conditions, or state other forward-looking information. These forward-looking statements
involve various important risks, uncertainties and other factors that could cause our actual
results for 2009 and beyond to differ materially from those expressed. The following factors,
among others, could affect our future financial performance and cause actual future results to
differ materially from those expressed or implied in any forward-looking statements included in
this Form 10-Q:
|
|
|
The failure of Tween Brands stockholders to adopt the merger agreement with Dress Barn; |
|
|
|
Failure to consummate or delay in consummating the merger for other reasons; |
|
|
|
Legal proceedings in connection with the merger could delay or prevent the completion of the merger; |
|
|
|
Effectiveness of converting Limited Too stores to Justice stores; |
|
|
|
Ability to convert Limited Too customers to the Justice brand; |
|
|
|
Risk that the benefits expected from the brand conversion program will not be achieved or may take
longer to achieve than expected; |
|
|
|
Ability to grow or maintain comparable store sales; |
|
|
|
Decline in the demand for our merchandise; |
|
|
|
Ability to develop new merchandise; |
|
|
|
The impact of competition and pricing; |
|
|
|
Level of mall and power center traffic; |
|
|
|
Effectiveness of expansion into new or existing markets; |
|
|
|
Effectiveness of store remodels; |
|
|
|
Availability of suitable store locations at appropriate terms; |
|
|
|
Effectiveness of our brand awareness and marketing programs; |
27
|
|
|
Ability to enforce our licenses and trademarks; |
|
|
|
Ability to hire, retain, and train associates; |
|
|
|
Ability to successfully launch a new brand; |
|
|
|
A significant change in the regulatory environment applicable to our business; |
|
|
|
Risks associated with our sourcing and logistics functions; |
|
|
|
Changes in existing or potential trade restrictions, duties, tariffs or quotas; |
|
|
|
Currency and exchange risks; |
|
|
|
Changes in consumer spending patterns, consumer preferences and overall economic conditions; |
|
|
|
The security of our computer networks; |
|
|
|
Outcome of various legal proceedings; |
|
|
|
Impact of product recalls; |
|
|
|
Ability to comply with restrictions and covenants in our credit facilities; |
|
|
|
Ability to service our debt; |
|
|
|
The potential impact of health concerns relating to severe infectious diseases, particularly on
manufacturing operations of our vendors in Asia and elsewhere; |
|
|
|
Potential impairment of long-lived assets; |
|
|
|
Ability to satisfy NYSE continued listing standards; |
|
|
|
Acts of terrorism in the U.S. or worldwide; and |
|
|
|
Other risks as described in other reports and filings we make with the Securities and Exchange
Commission. |
Future economic and industry trends that could potentially impact revenue and profitability
are difficult to predict. Therefore, there can be no assurance the forward-looking statements
included herein will prove to be accurate. The inclusion of forward-looking statements should not
be regarded as a representation by us, or any other person, that our objectives will be achieved.
The forward-looking statements made herein are based on information presently available to us as
the management of Tween Brands. We assume no obligation to publicly update or revise our
forward-looking statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to interest rate risk primarily due to our debt. At August 1, 2009, $163.3 million
was outstanding under the credit facility and appears on our balance sheet as long-term debt and
current portion of long-term debt. As such, we are currently exposed to market risk related to
changes in interest rates. Refer to Note 2 to our Consolidated Financial Statements for additional
information regarding the credit facility. Additionally, we purchase investments with original
maturities of 90 days or less. These financial instruments bear interest at fixed rates and are
subject to potential interest rate risk should interest rates fluctuate. We do not enter into financial
instruments for trading purposes.
As discussed in Note 2 to our Consolidated Financial Statements, our interest payments are
calculated on a short-term variable rate of our choosing under the terms of the loan. As part of
our risk management policy, we aim to minimize our exposure to interest rate variability and
therefore entered into an interest rate swap contract in December 2007 in order to fix the interest
rate payment on a significant portion of our variable rate long-term debt. Our cash flows are
better matched to a fixed interest rate debt structure rather than a variable rate structure. We
chose variable rate debt with a swap contract, versus traditional fixed rate debt, because of the
increased flexibility surrounding the terms available under this type of financing. Refer to Note
7 to our Consolidated Financial Statements for further information regarding the swap agreement.
28
|
|
|
Item 4. |
|
Controls and Procedures. |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act)) designed to provide reasonable
assurance the information required to be reported in our Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified and pursuant to Securities and
Exchange Commission rules and forms, including controls and procedures designed to ensure that this
information is accumulated and communicated to our management, including our Principal Executive
Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
As of the end of the period covered by this report, our management, with the participation of our
Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Principal
Executive Officer and our Principal Financial Officer concluded our disclosure controls and
procedures were effective and designed to (1) ensure material information relating to our Company
is accumulated and communicated to our management, including our Principal Executive Officer and
Principal Financial Officer, in a timely manner, particularly during the period in which this
report was being prepared and (2) provide reasonable assurance that information we are required to
disclose in the reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our Principal Executive Officer and Principal Financial
Officer, also conducted an evaluation of our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) to determine whether any changes occurred
during the period covered by this report have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. During the second quarter of
fiscal 2009, certain changes in responsibility for performing internal control procedures occurred
as a result of the realignment of resources within the Finance Department. Management, with the
participation of the Principal Executive Officer and Principal Financial Officer, has evaluated
these changes in our internal control over financial reporting and believes we have taken the
necessary steps to establish and maintain effective internal controls over financial reporting.
Inherent Limitations
It should be noted that our management, including the Principal Executive Officer and the Principal
Financial Officer, does not expect our disclosure controls and procedures or internal controls will
prevent all error and all fraud. A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management override of the controls.
The design of any system of controls is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance any design will succeed in achieving its stated
goals under all potential future conditions; over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
29
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings. |
Since August 24, 2007, three purported class action complaints were filed by purported purchasers of the Companys
common stock against the Company and certain of its current and former officers, asserting claims under the federal
securities laws. All of these actions were filed in the United States District Court for the Southern District of
Ohio, where, on October 23, 2007, they were consolidated into a single proceeding (the Tween Brands federal securities
litigation). On December 21, 2007, the Court appointed the Electrical Works Pension Fund, Local 103, I.B.E.W. as lead
plaintiff and, on March 20, 2008, the lead plaintiff filed a consolidated complaint naming the Company and certain
current and former officers as defendants.
The Tween Brands federal securities litigation purports to be brought on behalf of all purchasers of the Companys
common stock between February 21, 2007 and August 21, 2007 (the class period). The consolidated complaint alleges,
among other things, that the defendants violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act by making false and misleading statements concerning the Companys
business and prospects during the class period. These actions also allege that the Companys CEO sold stock while in
possession of adverse non-public information. On May 5, 2008, a Motion to Dismiss the consolidated complaint was filed
on behalf of all defendants. On June 17, 2008, a Motion for Leave to File a Second Amendment Consolidated Complaint
was filed by the lead plaintiff. On September 4, 2008, the Court granted the lead plaintiffs Motion for Leave to File
a Second Amended Consolidated Complaint and on October 3, 2008, the lead plaintiff filed an Amended Consolidated
Complaint. On November 17, 2008, a Motion to Dismiss the Amended Consolidated Complaint was filed on behalf of all
defendants. On January 30, 2009, lead plaintiff filed an Opposition to Defendants Motion to Dismiss. On March 2,
2009, defendants filed a Reply in Support of the Motion to Dismiss. On June 2, 2009, the Court granted Defendants
Motion to Dismiss with prejudice. On June 16, 2009, the lead plaintiff filed a Motion for Reconsideration, which was
denied by the Court on August 4, 2009. The 30 day time period for appeal has expired.
The Company, the members of the Companys board of directors and, in certain lawsuits, Dress Barn,
Dress Barns chief executive officer and/or Merger Sub have been named as defendants in several
purported class action lawsuits that have been filed in either the Common Pleas Court of Franklin
County, Ohio or the Delaware Court of Chancery. The complaints allege, among other things, that
the Company and its directors, aided and abetted by the Dress Barn defendants (as to those
complaints naming Dress Barn), breached their fiduciary duties by failing to obtain adequate
consideration in the proposed Merger and failing to make adequate disclosures related to the
proposed Merger in the Registration Statement on Form S-4 filed by Dress Barn with the Securities
and Exchange Commission on August 11, 2009. On September 3, 2009, the three cases pending in the
Common Pleas Court of Franklin County, Ohio, were dismissed without prejudice by their respective
plaintiffs in favor of the suit they jointly filed in the Delaware Court of Chancery. A motion to
consolidate has been filed for the cases pending in the Delaware Court of Chancery. At this stage,
it is not possible to predict the outcome of these proceedings or their impact on the Company.
The Company believes the allegations made in these complaints are without merit and intends to
vigorously defend these actions. The Company believes that, if necessary, insurance coverage will
be available under the Companys insurance policies, subject to self-insured retentions and policy
limits, and we do not believe the litigation will have a material adverse effect on our results of
operations, cash flows or financial position.
From time-to-time we become involved in various litigation and regulatory matters incidental to
operations of our business. It is our opinion the ultimate resolution of these matters will not
have a material adverse effect on our results of operations, cash flows or financial position.
30
Set forth below are two additional risk factors to those risk factors discussed in Part I, Item 1A
of our Annual Report on Form 10-K for the year ended January 31, 2009. Except for the addition of
the two risk factors set forth below, there are no other material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended January 31, 2009.
Failure to consummate or delay in consummating the merger for any reason
If the merger is not consummated for any reason, including the failure of Tween Brands stockholders
to adopt the merger agreement with Dress Barn, or there is a delay in the consummation of the
merger, Tween Brands will be subject to a number of material risks, including:
|
|
|
Tween Brands could be required to pay to Dress Barn a termination fee of
$5,150,000 and certain out-of-pocket expenses (up to a maximum of $1,000,000) incurred
by Dress Barn in connection with the merger agreement and the merger under certain
circumstances as set forth in the merger agreement; |
|
|
|
the market price of Tween Brands common stock may decline to the extent that
the current market price of such common stock reflects a market assumption that the
merger will be consummated; |
|
|
|
the possibility exists that certain key employees may terminate their
employment with Tween Brands as a result of the proposed merger with Dress Barn even if
the proposed merger is not ultimately consummated; |
|
|
|
benefits that Tween Brands expects to realize from the merger, such as the
potentially enhanced strategic position of the combined company, would not be realized;
and |
|
|
|
the diversion of managements attention away from the day-to-day business of
Tween Brands, compliance with the limits on capital spending and acquisitions, and
other restrictive covenants contained in the merger agreement that may impact the
manner in which the management of Tween Brands is able to conduct the business of the
company during the period prior to the consummation of the merger and the unavoidable
disruption to employees and Tween Brands relationships with customers and suppliers
during the period prior to the consummation of the merger, may make it difficult for
Tween Brands to regain its financial and market position if the merger does not occur. |
In addition, if the merger agreement is terminated and the board of directors of Tween Brands
determines to seek another business combination, there can be no assurance that Tween Brands will
be able to find a partner willing to provide equivalent or more attractive consideration than the
consideration to be provided in the merger.
Legal proceedings in connection with the merger could delay or prevent the completion of the merger
Purported class action lawsuits have been filed by third parties challenging the proposed merger
and seeking, among other things, to enjoin the consummation of the merger. One of the conditions to
the closing of the merger is that no governmental entity of competent jurisdiction has permanently
enjoined the consummation of the merger or the transactions contemplated by the merger agreement.
If a plaintiff is successful in obtaining an injunction prohibiting consummation of the merger,
then the injunction may delay the merger or prevent the merger from being completed.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
There have been no share repurchases in the second fiscal quarter of 2009.
31
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders. |
(a) On May 21, 2009, we held our Annual Meeting of Stockholders.
(b) See paragraph (c) below.
(c) At the Annual Meeting, our stockholders elected two Class C Directors to the Board of
Directors, each to serve a three-year term expiring at the 2012 Annual Meeting of stockholders, by
the following vote:
|
|
|
|
|
|
|
|
|
Director Nominees |
|
Shares Voted For |
|
|
Shares Withheld |
|
Elizabeth M. Eveillard |
|
|
12,677,436 |
|
|
|
8,621,702 |
|
Fredric M. Roberts |
|
|
12,669,389 |
|
|
|
8,629,749 |
|
The term of office of our other Directors, Michael W. Rayden, David A. Krinsky, Phillip E.
Mallott and Kenneth J. Strottman continued after the Annual Meeting.
At the Annual Meeting, our stockholders were also asked to ratify the selection of Deloitte &
Touche LLP as our independent registered public accounting firm for the 2009 fiscal year. Of the
21,299,138 shares present in person or represented by proxy at the meeting, 21,224,618 shares were
voted for the ratification of Deloitte & Touche LLP, 55,168 shares were voted against the
ratification, and 19,352 shares were abstained from voting with respect to the ratification of
Deloitte & Touche LLP. At the Annual Meeting, our stockholders were also asked to re-approve the
material terms of the Incentive Compensation Performance Plan. Of the 21,299,138 shares present in
person or represented by proxy at the meeting, 20,401,100 shares were voted for the re-approval of
the Incentive Compensation Performance Plan, 656,687 shares were voted against the plan, and
241,351 shares were abstained from voting with respect to the re-approval of the Incentive
Compensation Performance Plan.
32
Exhibits
|
|
|
|
|
|
2.1 |
|
|
Agreement and Plan of Merger dated June 24, 2009, by and
among The Dress Barn, Inc., Thailand Acquisition Corp. and
Tween Brands, Inc. (incorporated by reference to Exhibit 2.1
to the Current Report on Form 8-K filed June 25, 2009). |
|
|
|
|
|
|
4.1 |
|
|
Amendment No. 2 to Rights Agreement dated June 24, 2009, by
and between Tween Brands, Inc. and American Stock Transfer &
Trust Company (incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K filed June 25, 2009). |
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10.1 |
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Retention Agreement between Tween Brands, Inc. and Rolando
de Aguiar (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed June 25, 2009). |
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10.2 |
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Retention Agreement between Tween Brands, Inc. and Gregory
J. Henchel (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed June 25, 2009). |
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10.3 |
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Letter Agreement between Tween Brands, Inc., The Dress Barn,
Inc. and Michael Rayden (incorporated by reference to
Exhibit 10.3 to the Current Report on Form 8-K filed June
25, 2009). |
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31.1 |
* |
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Certification of Periodic Report by the Principal Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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31.2 |
* |
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Certification of Periodic Report by the Principal Financial
and Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1 |
+ |
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Certification of Periodic Report by the Principal Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2 |
+ |
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Certification of Periodic Report by the Principal Financial
and Accounting Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Filed with this Report. |
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+ |
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Furnished with this Report. |
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.
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TWEEN BRANDS, INC.
(Registrant)
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Date: September 9, 2009 |
By: |
/s/ Rolando de Aguiar
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Rolando de Aguiar |
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Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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33