UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended November 1, 2003
Commission File Number 0-15898
CASUAL MALE RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
(781) 828-9300
(Registrant’s telephone number, including area code)
Indicate by “X” whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by “X” whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of common stock outstanding as of December 1, 2003 was 35,059,339.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property and equipment, net of accumulated depreciation and amortization
Other assets:
Goodwill
Other intangible assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued expenses and other current liabilities
Accrued liabilities for severance and store closings
Total current liabilities
Long-term liabilities:
Notes payable
Long-term debt, net of current portion
Other long-term liabilities
Total long-term liabilities
Total liabilities
Minority interest
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none outstanding at November 1, 2003 and February 1, 2003
Common stock, $0.01 par value, 75,000,000 shares authorized, 39,219,248 and 38,867,000 shares issued at November 1, 2003 and February 1, 2003, respectively
Additional paid-in capital
Accumulated deficit
Treasury stock at cost, 3,171,930 and 3,119,236 shares at November 1, 2003 and February 1, 2003, respectively
Loan to executive
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Sales
Cost of goods sold, including occupancy
Gross profit
Expenses:
Selling, general and administrative
Provision for impairment of assets, store closings and severance
Depreciation and amortization
Total expenses
Operating income (loss)
Other expenses
Interest expense, net
Loss from continuing operations before minority interest and income taxes
Less:
Provision for income taxes
Loss from continuing operations
Income (loss) from discontinued operations
Net loss
Net income (loss) per share - basic and diluted
Weighted average number of common shares outstanding
- Basic and diluted
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands and unaudited)
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used for operating activities:
Loss from discontinued operations
Provision for store closings, impairment of assets and severance
Accretion of warrants
Issuance of common stock to related party
Issuance of common stock to Board of Directors
Gain on sale or disposal of fixed assets
Changes in operating assets and liabilities:
Reserve for severance and store closings
Net cash used for operating activities
Cash flows from investing activities:
Acquisition of Casual Male, net of cash acquired
Additions to property and equipment
Net cash used for investing activities
Cash flows from financing activities:
Net (repayments) borrowings under credit facility
Principal payments on long-term debt
Proceeds from issuance of long term debt, net of discount
Proceeds from issuance of warrants
Proceeds from issuance of Series B preferred stock
Proceeds from issuance of common stock
Payment of equity transaction costs
Repurchase of common stock
Issuance of common stock under option program
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents:
Beginning of the period
End of the period
CASUAL MALE RETAIL GROUP, INC,
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of Casual Male Retail Group, Inc., a Delaware corporation formerly known as Designs, Inc. (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended February 1, 2003 (included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on May 5, 2003).
The interim financial statements contain the results of operations of the Company’s Casual Male business, which consists of substantially all of the assets of Casual Male Corp. and certain of its subsidiaries (“Casual Male”), which assets were acquired by the Company on May 14, 2002.
The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Certain amounts for the three and nine months ended November 2, 2002 have been reclassified to conform to the presentation for the three and nine months ended November 1, 2003. These adjustments relate to the reclassification for discontinued operations in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). For further discussion regarding discontinued operations, see Note 6 below.
The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2004 is a 52-week period ending on January 31, 2004.
2. Casual Male Acquisition
On May 14, 2002, pursuant to an asset purchase agreement entered into as of May 2, 2002, the Company completed the acquisition of substantially all of the assets of Casual Male for a purchase price of approximately $170 million, plus the assumption of certain operating liabilities.
Below are the operating results from continuing operations, exclusive of discontinued operations, for the three and nine months ended November 1, 2003 compared to the actual results for the three months ended November 2, 2002 and the pro forma results for the nine months ended November 2, 2002, assuming that the Casual Male acquisition had occurred on February 3, 2002:
For the three months ended:
(unaudited, dollars in millions)
Actual
Casual Male
business
Combined
Company
Gross margin, net of occupancy
Gross margin rate
Selling, general and administrative expenses
Operating income
For the nine months ended:
Pro forma
The pro forma results have been prepared based on available information, using assumptions that the Company’s management believes are reasonable. Such pro forma results do not purport to represent the actual results of operations that would have occurred if the Casual Male acquisition had occurred on February 3, 2002. The above results are also not necessarily indicative of the results that may be achieved in the future.
3. Debt
Notes Payable-Credit Facility
The Company has a credit facility (as amended from time to time, the “Credit Facility”) with Fleet Retail Finance, Inc. (“Fleet”), which was most recently amended on November 3, 2003 in connection with the Company’s issuance of its 12% senior subordinated notes due 2010, which is discussed further below. Such amendment reduced the total commitment under the Credit Facility from $120.0 million to $90.0 million, with a $20.0 million carve-out for standby and documentary letters of credit. In addition, the amendment lowered the Company’s interest costs under the Credit Facility by approximately 50 basis points depending on its levels of excess availability and increased the Company’s advance rates for borrowings based on seasonality. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The term of the Credit Facility was extended by the amendment and will expire May 14, 2006. The Company is subject to prepayment penalties through May 14, 2005.
The Company’s obligations under the Credit Facility are secured by a lien on all of its assets. The Credit Facility includes certain covenants and events of default customary for credit facilities of this nature, including change of control provisions and limitations on payment of dividends by the Company. The Company is also subject to a financial covenant requiring minimum levels of EBITDA if certain minimum excess availability levels are not met. The Company was in compliance with all debt covenants under the Credit Facility at November 1, 2003.
At November 1, 2003, the Company had outstanding borrowings of approximately $49.5 million under the Credit Facility. Outstanding standby letters of credit were $775,000, and outstanding documentary letters of credit were approximately $80,598 at November 1, 2003. Average borrowings outstanding under the Credit Facility during the first nine months of fiscal 2004 were approximately $57.1 million, resulting in a corresponding average unused availability of approximately $16.3 million. At November 1, 2003, the unused availability was approximately $29.5 million. Availability under the Credit Facility increased to approximately $60 million as a result of the November 3, 2003 amendment and as a result of approximately $32.1 million in payments by the Company against borrowings outstanding under the Credit Facility.
Other Long-Term Debt
Components of other long-term debt at November 1, 2003 are as follows:
Term loan
12% senior subordinated notes due 2007
5% senior subordinated notes due 2007
12% senior subordinated notes due 2010
Mortgage note
Total long-term debt
Less: current portion of long-term debt
Long-term debt, less current portion
During the third quarter of fiscal 2004, the Company made prepayments of principal totaling approximately $10.0 million on its term loan with Back Bay Capital. In connection with these prepayments, the Company incurred early termination costs of approximately $225,000 and an additional $200,000 of costs related to the write-off of unamortized commitment fees. In accordance with SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64 Amendment of FASB Statement 13, and Technical Corrections, such costs have been reflected as part of other expenses in the consolidated results of operations for three and nine months ended November 1, 2003. The Company prepaid the remaining principal of $5.6 million on November 5, 2003, subsequent to the end of the third quarter of fiscal 2004.
Through the end of the third quarter of fiscal 2004, the Company issued through private placements approximately $29.6 million principal amount of 12% senior subordinated notes due 2010. A description of related party participation in these private placements is included in Note 10. Together with these notes, which in most cases were issued net of any commission for an aggregate purchase price equal to 98.4% of the aggregate principal amount, the Company also issued, through such private placements, detachable warrants to purchase approximately 1.18 million shares of Common Stock at exercise prices ranging from $4.76 to $7.32 per share. Such exercise prices represent the average of the closing prices of the Company’s Common Stock on the Nasdaq National Market for the period of 30 trading days ending prior to each of the respective issue dates. The assigned value of $4.8 million for such warrants has been reflected as a component of stockholders’ equity and is being amortized over the seven-year life of the notes as additional interest expense. Accordingly, at November 1, 2003 the carrying value of $24.9 million is net of the unamortized assigned value for such warrants of $4.7 million. The net proceeds from the issuance of the 12% senior subordinated notes due 2010 were used to reduce borrowings outstanding under the Credit Facility and to prepay approximately $10.0 million of the Company’s term loan with Back Bay Capital, as discussed above.
Subsequent to the end of the third quarter of fiscal 2004, the Company prepaid in full $24.5 million principal amount of its 12% senior subordinated notes due 2007 and prepaid or had commitments to prepay through the end of fiscal 2004 approximately $21.8 million of the approximately $29.6 million 12% senior subordinated notes due 2010.
4. Equity
Earnings Per Share
SFAS No. 128, Earnings per Share, requires the computation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the respective period. Diluted earnings per share is determined by giving effect to the exercise of stock options and certain warrants using the treasury stock method. The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
Basic weighted average common shares outstanding
Stock options, excluding the effect of anti-dilutive options and warrants totaling 1,786 shares and 1,095 shares for the three and nine months ended November 1, 2003 and 1,036 shares and 1,075 shares for the three and nine months ended November 2, 2002, respectively
Diluted weighted average common shares outstanding
The following potential common stock equivalents were excluded from the computation of diluted earnings per share, in each case, because the exercise price of such options and warrants was greater than the average market price per share of Common Stock for the periods reported:
Stock Options
Warrants
As more fully discussed in Note 11, on November 12, 2003, the Company repurchased 1,000,000 shares of Common Stock at a cost of $7.9 million.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”), an amendment of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. Accordingly, the Company adopted the interim disclosure provisions of SFAS 148 in the first quarter of fiscal 2004.
The Company has elected the disclosure-only alternative prescribed in SFAS 123 and, accordingly, no compensation cost has been recognized. The Company has disclosed the pro forma net income or loss and per share amounts using the fair value based method. Had compensation costs for the Company’s grants for stock-based compensation been determined consistent with SFAS 123, the Company’s net income (loss) and income (loss) per share would have been as indicated below:
Net loss - as reported
Net loss - pro forma
Loss per share - diluted as reported
Loss per share - diluted pro forma
The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income or loss for future years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions used for grants for the three and nine months ended November 1, 2003 and November 2, 2002:
Expected volatility
Risk-free interest rate
Expected life
Dividend rate
The weighted-average fair value of options granted in the first nine months of fiscal 2004 and fiscal 2003 was $4.84 and $3.93, respectively.
5. Restructuring, Store Closing and Impairment of Assets
During the second quarter of fiscal 2003, the Company recorded charges totaling $11.1 million related to the Company’s restructuring of its Levi’s®/Dockers® business and the integration of the Casual Male operations. Of the total $11.1 million in restructuring charges, $7.3 million relates to stores which are still open and therefore is reflected as part of the operating loss from continuing operations for the nine months ended November 2, 2002. The remaining $3.8 million relates to stores that the Company has closed and therefore is included in discontinued operations for the nine months ended November 2, 2002.
In the fourth quarter of fiscal 2003, the Company recorded an additional charge totaling $30.2 million related to its decision to further downsize its Levi’s®/Dockers® business and to transfer its Candies® outlet stores to Candies, Inc. Of the total $41.3 million in restructuring charges incurred in fiscal 2003: (i) $7.8 million related to the Company’s fiscal 2003 discontinued operations, which included the closing of 20 Levi’s®/Dockers® stores and the exiting of its Candies® outlet stores, both of which were completed in fiscal 2003; (ii) $21.9 million related to the future closing of the remaining Levi’s®/Dockers® stores; (iii) $3.6 million related to the integration plan to combine the operations of Casual Male with those of the Company; and (iv) $8.0 million related to the impairment of certain tax assets. Through the end of the third quarter of fiscal 2004, the Company had closed 22 Levi’s®/Dockers® stores and had transferred its Candies® outlet business to Candies, Inc.
At November 1, 2003, the remaining reserve for Levi’s®/Dockers® store closings was $10.3 million. The reserve consisted of inventory reserves of $5.3 million, which have been netted against “Inventories” on the Consolidated Balance Sheet, and accruals for landlord settlements and other costs of $5.0 million, which are shown as “Accrued liabilities for severance and store closings” on the Consolidated Balance Sheet. Below is a table showing the changes in the components of the reserves from February 1, 2003 to November 1, 2003:
(in millions)
Balance at
February 1, 2003
November 1, 2003
Inventory reserves
Total reserves
6. Discontinued Operations
In accordance with the provisions of SFAS 144, the Company’s discontinued operations reflect the operating results for stores which have been closed as part of the Company’s plan to exit its Levi’s®/Dockers® business and Candies® outlet business. The results for the first nine months of fiscal 2003 have been reclassified to show the results of operations for the Company’s 22 closed Levi’s®/Dockers® outlet stores and the Candies® outlet store business as discontinued operations. Included in the results of discontinued operations for the nine months ended November 2, 2002 is $3.8 million of the total $11.1 million in restructuring charges recorded in the second quarter of fiscal 2003. Of that $3.8 million, $3.1 million is reflected as inventory liquidation costs of the closed stores and is included in cost of goods sold in the table below. Also, due to the consolidated tax position of the Company, no tax benefit or provision was realized on discontinued operations for either fiscal 2004 or fiscal 2003.
Below is a summary of the results of operations for these closed stores for the three and nine months ended November 1, 2003 and November 2, 2002:
(in thousands)
Cost of goods sold
Gross profit, net of occupancy
Provision for impairment of assets, store Closings and severance
Income tax provision
7. Income Taxes
In the fourth quarter of fiscal 2003, as a result of the net loss incurred by the Company and the potential that the Company’s remaining net deferred tax assets may not be realizable, the Company recorded a non-cash charge of approximately $8.0 million, fully reserving the Company’s deferred tax assets at February 1, 2003.
At November 1, 2003, the Company had total gross deferred tax assets of approximately $35.8 million, which are fully reserved. These tax assets principally relate to federal net operating loss carryforwards that expire from 2017 through 2023. The ability to reduce the Company’s corresponding valuation allowance of $35.8 million in the future is dependent upon the Company’s ability to achieve sustained taxable income, which would allow for the utilization of the deferred tax assets.
Due to the circumstances described above, no tax benefit or provision has been recognized for the three and nine months ended November 1, 2003.
8. Minority Interest
Since March 2002, the Company has operated a joint venture with Ecko Complex, LLC (“Ecko”) under which the Company, a 50.5% partner, owns and manages retail outlet stores bearing the name Ecko Unltd.® and featuring Ecko® brand merchandise. Ecko, a 49.5% partner, contributes to the joint venture the use of its trademark and the merchandise requirements, at cost, of the retail outlet stores. The Company contributes all real estate and operating requirements of the retail outlet stores, including, but not limited to, the real estate leases, payroll needs and advertising. Each partner shares in the operating profits of the joint venture, after each partner has received reimbursements for its cost contributions. Under the terms of the agreement, the Company must maintain a prescribed store opening schedule and open 75 stores over a six-year period in order to maintain the joint venture’s exclusivity. At certain times during the term of the agreement, the Company may exercise a put option to sell its share of the retail joint venture, and Ecko has an option to acquire the Company’s share of the retail joint venture at a price based on the performance of the retail outlet stores. As of November 1, 2003, the Company had opened a total of 21 Ecko Unltd.® outlet stores pursuant to its joint venture arrangement.
For financial reporting purposes, the joint venture’s assets, liabilities, and results of operations are consolidated with those of the Company, and Ecko’s 49.5% ownership in the joint venture is included in the Company’s consolidated financial statements as a minority interest. For the three and nine months ended November 1, 2003, the joint venture had sales of approximately $6.7 million and $12.4 million, respectively. For the nine months ended November 1, 2003, Ecko contributed approximately $6.8 million of merchandise to the joint venture and had an equity investment at November 1, 2003 of approximately $3.4 million. The Company’s equity investment in the joint venture at November 1, 2003 was approximately $3.4 million.
9. Segment Information
Since the Casual Male acquisition in May 2002, the Company has operated its business under two reportable segments: (i) the Casual Male business and (ii) the Other Branded Apparel businesses.
Casual Male business: This segment includes the Company’s 415 Casual Male Big & Tall retail stores, its 65 Casual Male Big & Tall outlet stores, and its Casual Male catalog and e-commerce businesses.
Other Branded Apparel businesses: This segment includes the Company’s remaining 80 Levi’s®/Dockers® outlet stores, 23 of which are in liquidation and expected to close by the end of fiscal 2004, and its 21 Ecko Unltd.® outlet stores. As discussed in Note 5, the Company is in the process of exiting its Levi’s®/Dockers® outlet business.
The accounting policies of the reportable segments are consistent with the consolidated financial statements of the Company. The Company evaluates individual store profitability in terms of a store’s “Operating Income”, which is defined by the Company as gross margin less occupancy costs, direct selling costs and an allocation of indirect selling costs. Below are the results of operations on a segment basis for the three and nine months ended November 1, 2003 and November 2, 2002, respectively.
For the three months ended
November 2, 2002
Statement of Operations:
Gross margin
Reconciliation to net loss:
(Loss) income from discontinued operations
For the nine months ended
Provision for store closing, impairment of assets and severance
Reconciliation to net loss):
Balance Sheet:
Fixed assets
Goodwill and other intangible assets
Trade accounts payable
Capital expenditures
10. Related Party Transactions
Loan to Executive
In June 2000, the Company extended a loan to David A. Levin, its President and Chief Executive Officer, in the amount of $196,875 in order for Mr. Levin to acquire from the Company 150,000 newly issued shares of the Company’s Common Stock at the closing price of the Common Stock on the day of the loan. The Company and Mr. Levin entered into a secured promissory note, whereby Mr. Levin agreed to pay to the Company the principal sum of $196,875 plus interest due and payable on June 26, 2003. The promissory note provided for interest at a rate of 6.53% per annum and was secured by the 150,000 acquired shares of the Company’s Common Stock.
On April 30, 2003, Mr. Levin satisfied his obligations under the promissory note through the delivery to the Company of 52,694 shares of the Company’s Common Stock with a fair market value of $233,435, which represented the outstanding principal and interest through April 30, 2003. The Company accounted for the 52,694 shares received from Mr. Levin as treasury stock.
Extension of Jewelcor Management Inc. Consulting Agreement
As of April 28, 2003, the Board of Directors of the Company approved an extension to the Company’s consulting agreement with Jewelcor Management Inc. (“JMI”) for an additional three-year term commencing on April 29, 2003 and ending on April 28, 2006. The extension of the consulting agreement will automatically renew each year thereafter on its anniversary date for additional one-year terms, unless either party notifies the other at least ninety days prior to the end of the then-current term. Under the consulting agreement, the Company will compensate JMI, annually, through the issuance of non-forfeitable and fully vested shares of the Company’s Common Stock with a fair value equal to $276,000 on the date of grant. Accordingly, as payment for services to be rendered under this agreement through April 28, 2004, the Company issued to JMI 70,769 non-forfeitable and fully vested shares of Common Stock. The fair
value of those shares as of April 28, 2003 was $276,000 or $3.90 per share. Seymour Holtzman, the Chairman of the Company’s Board of Directors and the beneficial holder of approximately 12% of the Company’s outstanding Common Stock (principally held by JMI), is also the President and Chief Executive Officer, and indirectly, with his wife, the primary shareholder of JMI.
Effective May 1, 2003, the Compensation Committee increased the annual compensation to JMI by $50,000, from $276,000 to $326,000. The increase of $50,000 for fiscal 2004 was paid to JMI through the issuance of 12,820 non-forfeitable and fully vested shares of Common Stock. In addition, on July 1, 2003, the Board of Directors of the Company approved a $150,000 bonus to JMI, payable in cash.
Fiscal 2004 Private Placement Debt Issuances
During the second and third quarters of fiscal 2004, the Company issued through private placements approximately $29.6 million principal amount of 12% senior subordinated notes due 2010. Together with these notes, the Company also issued through such private placements detachable warrants to purchase approximately 1.18 million shares of the Company’s Common Stock. Certain of such issuances were to existing investors in the Company including:
In addition, certain principal officers of Ecko management and certain of their family members purchased approximately $2.5 million of such notes and received warrants to purchase 100,000 shares of Common Stock at exercise prices ranging from $5.10 to $6.83 per share.
The exercise prices of all warrants was based on the average of the closing prices of the Company’s Common Stock on the Nasdaq National Market for the period of 30 trading days ending prior to each of the respective issue dates.
11. Subsequent Events-Prepayment of Term Loan and Issuance of Convertible Subordinated Notes
On November 5, 2003, the Company prepaid the remaining $5.6 million of principal outstanding on its term loan with Back Bay Capital.
Also subsequent to the end of the third quarter of fiscal 2004, the Company completed the sale of $100 million principal amount of convertible senior subordinated notes due 2024 (the “Convertible Notes”). The Convertible Notes were sold in a private transaction, exempt from registration requirements of the Securities Act of 1933. The sale of $85.0 million of the Convertible Notes closed on November 17, 2003, and the remaining $15.0 million of notes, which were sold pursuant to an option exercised by the initial purchaser, closed on November 26, 2003. The Convertible Notes, which bear interest at a rate of 5% per year, are convertible into the Company’s Common Stock at a conversion price of $10.65 per share and constitute general unsecured obligations of the Company, subordinate to all existing and future designated senior indebtedness.
The Company anticipates that the net proceeds from the sale of the Convertible Notes will be approximately $95.8 million. In November 2003, subsequent to the end of the third quarter of fiscal 2004, the Company used approximately $24.5 million of the proceeds to prepay in full its 12% senior subordinated notes due 2007 and used $7.9 million of the proceeds to repurchase 1,000,000 shares of Common Stock. The Board of Directors has authorized the Company to use a portion of the remaining proceeds to repurchase an additional 1,000,000 shares of Common Stock in the open market or in negotiated transactions, from time to time, depending on market and other conditions.
Although the Company’s 12% senior subordinated notes due 2010 are not redeemable until July 3, 2004, the Company sought early redemption from the respective note holders. As a result, by the end of fiscal 2004, the Company expects to have repaid approximately $21.8 million of the total approximately $29.6 million outstanding. The Company also used approximately $32.1 million of the proceeds to reduce its borrowings under the Credit Facility.
In connection with the early prepayment of the senior subordinated notes due 2007 and 2010 and the prepayment of the remainder of the Back Bay term loan, the Company expects to incur charges during the fourth quarter of fiscal 2004 of approximately $13.2 million related to the prepayment charges and write offs of deferred costs. These costs will be reflected in the Company’s results of operations as other expenses for the three and twelve months ending January 31, 2004. Upon redemption of the remaining approximately $7.8 million of 12% senior subordinated notes, which are presently not redeemable until July 3, 2004, the Company expects to incur $1.7 million of additional expenses related to prepayment charges and the write off of remaining deferred costs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. The forward-looking statements in this Quarterly Report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Numerous factors could cause the Company’s actual results to differ materially from such forward-looking statements. The Company encourages readers to refer to the Company’s Current Report on Form 8-K, previously filed with the Securities and Exchange Commission on September 17, 2002, which identifies certain risks and uncertainties that may have an impact on future earnings and the direction of the Company.
All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on the Company’s behalf are expressly qualified in their entirety by the foregoing. These forward-looking statements speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.
BUSINESS SUMMARY
Casual Male Retail Group, Inc. (formerly known as Designs, Inc.) together with its subsidiaries (the “Company”) is the largest specialty apparel retailer of big and tall men’s apparel, with a presence throughout the United States and Puerto Rico. The business of the Company, which historically had been the operation of outlet stores selling Levi Strauss & Co. and other well-known branded apparel, changed dramatically during fiscal 2003. On May 14, 2002, the Company completed its acquisition of substantially all of the assets of Casual Male Corp. and certain of its subsidiaries (“Casual Male”) for a purchase price of approximately $170 million, plus the assumption of certain operating liabilities.
RESULTS OF OPERATIONS
The following discussion of the Company’s results of operations includes the results of the Casual Male business from May 14, 2002, the date of the Casual Male acquisition. Since the acquisition of Casual Male, the Company has defined its business as two reportable business segments: (i) the Casual Male business and (ii) the Other Branded Apparel businesses (“Other Apparel”). The Company’s Casual Male business includes its retail and outlet Casual Male Big & Tall stores, and its catalog and e-commerce businesses. Other Apparel includes the Company’s Levi’s®/Dockers® outlet stores and its Ecko Unltd.® outlet stores.
Because of the significance of the Casual Male business to the Company’s consolidated results of operations for the first nine months of fiscal 2004, the Company has included the following table, which highlights operating income/(loss) by business segment and includes pro forma results from operations for the nine months ended November 2, 2002. These pro forma results assume that the Company acquired Casual Male on February 3, 2002. Management believes that this information is necessary in order to provide a complete and balanced discussion of the results of operations for the three and nine months ended November 1, 2003 as compared to the prior year. The following pro forma financial tables were prepared based on available information, using assumptions that the Company’s management believes are reasonable. The pro forma results do not purport to represent the actual results of operations that would have occurred if the Casual Male acquisition had occurred on February 3, 2002, and they are not necessarily indicative of the results that may be achieved in the future.
Financial Highlights – Operating income (loss) by business segment (dollars in millions)
as a percent of total sales
gross margin rate
as a percentage of sales
Provision for impairment of assets store closing, and severance
For the third quarter of fiscal 2004, the Casual Male business had sales of $73.0 million compared to sales for the third quarter of fiscal 2003 of $74.7 million, or a decrease of 2.3%. For the nine months ended November 1, 2003, the Casual Male business had sales of $224.7 million, compared to sales for the nine months ended November 2, 2002, on a pro forma basis, of $234.4 million, or a decrease of 4.1%. Comparable store sales for the Casual Male business decreased 1.1% for the third quarter of fiscal 2004 and, on a pro forma basis, 2.8% for the nine months ended November 1, 2003. Comparable stores are those stores that have been open for at least 13 months. The Company’s
comparable store sales are gradually improving as a result of several of the Company’s merchandising initiatives which were directed toward improving sales, such as the expansion of its young men’s assortments, extended sizes toward the tall customer, and merchandising of key items.
Other Apparel, exclusive of stores closed as described below under “Discontinued Operations”, experienced a 10.7% decrease in sales for the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003. This decrease was due to the Company’s intent to exit its Levi’s®/Dockers® outlet stores, which has had a negative impact on sales. Partially offsetting this decrease were the operations of the Company’s 21 Ecko Unltd.® outlet stores, which had sales of approximately $6.7 million and $12.4 million for the three and nine months ended November 1, 2003. By comparison, the Company’s five Ecko Unltd.® outlet stores that were open at the end of the third quarter of fiscal 2003 had sales of $1.8 million for the nine months ended November 2, 2002.
Gross Profit Margin
For the third quarter of fiscal 2004, the gross margin rate for the Casual Male business, inclusive of occupancy costs, was 41.2%, which was a decrease of 0.6 percentage points as compared to a gross margin rate of 41.8% for the third quarter of fiscal 2003. This decrease was attributable to a 1.1 percentage point increase in occupancy costs as part of normal rent increases, offset by a 0.5 percentage point increase in merchandise margins. For the nine months ended November 1, 2003, the gross margin rate for the Casual Male business of 41.2% decreased 1.1 percentage points, on a pro forma basis, compared to a gross margin rate of 42.3% for the nine months ended November 2, 2002. This decrease was mainly attributable to increased occupancy costs and sales declines.
The gross margin rate for Other Apparel was 25.9% for the third quarter of fiscal 2004 as compared to 23.5% for the third quarter of the prior fiscal year. For the nine months ended November 1, 2003, the gross margin rate for Other Apparel was 23.5% as compared to 22.1% for the nine months ended November 2, 2002.
Selling, General and Administrative Expenses
On a consolidated basis, selling, general and administrative (“SG&A”) expenses as a percentage of sales for the third quarter of fiscal 2004 were 31.3% of sales as compared to 30.7% for the third quarter of fiscal 2003. For the nine months ended November 1, 2003, SG&A expenses were 31.6% of sales as compared to 29.6% for the nine months ended November 2, 2002.
For the nine months ended November 1, 2003, the Company reduced SG&A expenses by approximately $10.6 million to $103.0 million as compared to $113.6 million, on a pro forma basis, for the nine months ended November 2, 2002. SG&A expenses for the Casual Male business decreased by $8.9 million to $79.2 million for the nine months ended November 1, 2003 as compared to $88.1 million on a pro forma basis last year. Other Apparel also had a reduction in SG&A expenses of $1.7 million to $23.8 million for the nine months ended November 1, 2003 as compared to $25.5 million for the prior fiscal year.
Depreciation and Amortization
Depreciation and amortization expense for the third quarter of fiscal 2004 was $2.4 million as compared to $2.3 million for the third quarter of fiscal 2003. This increase was primarily the result of new store openings in fiscal 2004. For the nine months ended November 1, 2003, depreciation and amortization was $6.7 million as compared to $6.4 million for the corresponding nine-month period of the prior fiscal year. This increase was due to the addition of approximately $52.9 million in assets from the Casual Male acquisition in May 2002 and was partially offset by a reduction in assets from the Other Apparel segment as a result of store closings and write-down of assets in the second and fourth quarters of fiscal 2003.
Restructuring and Impairment of Assets–Fiscal 2003
During the second quarter of fiscal 2003, the Company recorded charges totaling $11.1 million related to the Company’s restructuring of its Levi’s®/Dockers® business and the integration of the Casual Male operations. Of the total $11.1 million in restructuring charges, $7.3 million was related to stores which are still open and therefore is reflected as part of the operating loss from continued operations for the nine months ended November 2, 2002. The remaining $3.8 million was related to stores which have closed and therefore is included in discontinued operations for the nine months ended November 2, 2002.
In the fourth quarter of fiscal 2003, the Company recorded additional charges of $30.2 million related to the Company’s decision to further downsize its Levi’s®/Dockers® business and transfer its Candies® outlet stores to Candies, Inc., resulting in total charges of approximately $41.3 million in fiscal 2003. For more information on these charges, see Note 5 to the Consolidated Financial Statements.
Other Expenses
Included in other expenses for the three and nine months ended November 1, 2003 was $425,000 of expenses related to the Company’s early prepayment of $10.0 million of principal of its term loan with Back Bay Capital.
Interest Expense, Net
Net interest expense was $3.1 million for the third quarter of fiscal 2004 as compared to $3.2 million for the third quarter of fiscal 2003. For the nine months ended November 1, 2003, net interest expense was $9.0 million as compared to $6.2 million for the nine months ended November 2, 2002. This increase was due to an increase of approximately $80.2 million in long-term debt and increased borrowings under the Company’s credit facility (as amended from time to time, the “Credit Facility”) with Fleet Retail Finance, Inc. (“Fleet”) in May 2002 to finance the Casual Male acquisition. The Company also assumed a $12.2 million mortgage as part of the acquisition. Included in net interest expense for the nine months ended November 1, 2003 was accretion on stock warrants of $1.4 million as compared to $895,000 for the nine months ended November 2, 2002. This increase in accretion was due to additional warrants, which were issued in connection with the Company’s 12% senior subordinated notes due 2010.
Discontinued Operations
In accordance with the provisions of SFAS 144, the Company’s discontinued operations reflect the operating results for stores which have been closed as part of the Company’s plan to exit its Levi’s®/Dockers® business and Candies® outlet business. The results for the first nine months of fiscal 2003 have been reclassified to show the results of operations for the Company’s 22 closed Levi’s®/Dockers® outlet stores and the Candies® outlet store business as discontinued operations. Included in the results of discontinued operations for the nine months ended November 2, 2002 is $3.8 million of the total $11.1 million in restructuring charges recorded in the second quarter of fiscal 2003. Of that $3.8 million, $3.1 million, which is included in gross profit, reflects inventory liquidation costs of the closed stores. Also, due to the consolidated tax position of the Company, no tax benefit or provision was realized on discontinued operations for either period. For more information on these charges, see Note 6 to the Consolidated Financial Statements.
Income Taxes
In fiscal 2003, as a result of the net loss incurred by the Company and the potential that its remaining net deferred tax assets may not be realizable, the Company recorded a non-cash charge of approximately $8.0 million, fully reserving the Company’s deferred tax assets at February 1, 2003.
At November 1, 2003 the Company had total gross deferred tax assets of approximately $35.8 million, which are fully reserved. These tax assets principally relate to federal net operating loss carryforwards that expire from 2017 through 2023. The ability to reduce the Company’s corresponding valuation allowance of $35.8 million in the future is dependent upon the Company’s ability to achieve sustained taxable income, which would allow for the utilization of the deferred tax assets.
Net Income (Loss)
For the third quarter of fiscal 2004 the Company reported a net loss of $1.2 million or $(0.03) per diluted share, as compared to a net loss of $0.3 million or $(0.01) per diluted share for the third quarter of fiscal 2003. For the nine months ended November 1, 2003, the Company reported a net loss of $3.3 million or $(0.09) per diluted share as compared to a net loss of $15.0 million or $(0.69) per diluted share for the nine months ended November 2, 2002. The results for the nine months ended November 2, 2002 include $11.1 million in charges related to the Company’s decision to downsize its Levi’s®/Dockers® business and also include certain integration costs.
Inventory
At November 1, 2003, total inventory equaled $119.9 million compared to $103.2 million at February 1, 2003 and $143.9 million at November 2, 2002. The Company continues to effectively manage its inventory levels despite its sales decreases during the first nine months of fiscal 2004. The Company continues to focus on reducing its inventory levels, and, compared with end of the third quarter last year, inventory levels are down approximately 17%. Inventory at November 1, 2003 is net of approximately $5.3 million in inventory reserves related to the Company’s exiting of its Levi’s®/Dockers® outlet stores.
SEASONALITY
Historically and consistent with the retail industry, the Company has experienced seasonal fluctuations in revenues and income, with increases traditionally occurring during the Company’s third and fourth quarters as a result of the “Fall” and “Holiday” seasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary cash needs are for working capital (essentially inventory requirements) and capital expenditures. Specifically, the Company’s capital expenditure program includes projects for new store openings, downsizing or combining existing stores, and improvements and integration of its systems infrastructure. The Company expects that cash flow from operations, external borrowings and trade credit will enable it to finance its current working capital and expansion requirements.
For the first nine months of fiscal 2004, cash used by operating activities was $1.5 million as compared to cash used for operating activities of $12.0 million for the corresponding period of the prior year. This $10.5 million improvement in cash from operations was primarily due to increased profitability from continuing operations in fiscal 2004.
In addition to cash flow from operations, the Company’s other primary source of working capital is the Credit Facility with Fleet. In connection with the Company’s issuance of its 12% senior subordinated notes due 2010, which is discussed below, the Credit Facility was amended on November 3, 2003. Such amendment reduced the total commitment under the Credit Facility from $120.0 million to $90.0 million, with a $20.0 million carve-out for standby and documentary letters of credit. In addition, the amendment lowered the Company’s interest costs under the Credit Facility depending on its levels of excess availability and increased the Company’s advance rates on borrowings based on seasonality. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The term of the Credit Facility was extended by the amendment and will expire May 14, 2006. The Company is subject to prepayment penalties through May 14, 2005.
At November 1, 2003, the Company had borrowings of approximately $49.5 million outstanding under the Credit Facility and excess availability of $29.5 million. Availability under the Credit Facility subsequent to November 1, 2003 increased to approximately $60 million as a result of the November 3, 2003 amendment and as a result of approximately $32.1 million in payments against borrowings outstanding under the Credit Facility.
During the second and third quarters of fiscal 2004, the Company issued through private placements approximately $29.6 million principal amount of 12% senior subordinated notes due 2010. A description of related party participation in these private placements is included in Note 10 to the Consolidated Financial Statements. Together with these notes, the Company also issued, through such private placements, detachable warrants to purchase approximately 1.18 million shares of Common Stock at exercise prices ranging from $4.76 to $7.32 per share. The net proceeds from the issuance of the notes were used to reduce borrowings outstanding under the Credit Facility and to prepay approximately $10.0 million against the Company’s term loan with Back Bay Capital. See Note 3 to the Consolidated Financial Statements for a full discussion of the notes and related warrants.
Subsequent Events-Prepayment of Term Loan and Issuance of $100 million Convertible Senior Subordinated Notes
On November 5, 2003, the Company prepaid the remaining $5.6 million outstanding on its term loan with Back Bay Capital.
Also subsequent to the end of the third quarter of fiscal 2004, the Company completed the sale of $100 million principal amount of convertible senior subordinated notes due 2024 (the “Convertible Notes”). The Convertible Notes, which were sold in a private transaction and were exempt from the registration requirements of the Securities Act of 1933, bear interest at a rate of 5% per year and are convertible into the Company’s Common Stock at a conversion price of $10.65 per share. The Company completed the sale of $85.0 million of the Convertible Notes on November 17, 2003, and the remaining $15.0 million of the Convertible Notes, which were sold pursuant to an option exercised by the initial purchaser, closed on November 26, 2003. The Convertible Notes constitute general unsecured obligations of the Company, subordinate to all existing and future designated senior indebtedness.
The Company anticipates that the net proceeds from the sale of the Convertible Notes will be approximately $95.8 million. Subsequent to the end of the third quarter of fiscal 2004, the Company used approximately $24.5 million of the proceeds to prepay in full its 12% senior subordinated notes due 2007 and used $7.9 million to repurchase 1,000,000 shares of Common Stock. The Board of Directors has authorized the Company to use a portion of the remaining proceeds to repurchase an additional 1,000,000 shares of Common Stock in the open market or in negotiated transactions, from time to time, depending on market and other conditions.
Although the Company’s 12% senior subordinated notes due 2010 are not redeemable until July 3, 2004, the Company sought early redemption. As a result, by the end of fiscal 2004, the Company has committed to repay approximately $21.8 million of the total approximately $29.6 million outstanding. The Company also used approximately $32.1 million of the proceeds to reduce its borrowings under the Credit Facility.
In connection with the early prepayment of the senior subordinated notes due 2007 and 2010 and the prepayment of the remainder of the Back Bay Capital term loan, the Company expects to incur charges during the fourth quarter of fiscal 2004 of approximately $13.2 million related to the prepayment charges and write offs of deferred costs. These costs will be reflected in the Company’s results of operations as other expenses for the three and twelve months ending January 31, 2004. Upon redemption of the remaining $7.8 million of 12% senior subordinated notes, which are presently not redeemable until July 3, 2004, the Company expects to incur $1.7 million of additional expenses related to prepayment charges and the write off of remaining deferred costs.
The issuance of the Convertible Notes improves the liquidity position of the Company by increasing availability under the Credit Facility for working capital needs. In addition, the prepayment of the Company’s existing 12% senior subordinated notes due 2007 and 2010 will reduce the Company’s interest costs. Upon completion of the prepayment of existing obligations, the Company anticipates that its interest costs, including debt issuance costs, will be reduced by approximately $5.0 million on an annualized basis.
In order to understand the impact of the issuance of the Convertible Notes on the capitalization of the Company, the following table below sets forth the pro forma effect of the issuance as if it had occurred on November 1, 2003. The adjustments reflect the (i) receipt of the net proceeds of approximately $95.8 million from the sale of the Convertible Notes, (ii) repurchase by the Company of 1,000,000 shares of the Company’s Common Stock at a price of $7.89 per share, (iii) redemption of the Company’s 12% senior subordinated notes due 2007, (iv) assumed redemption of all of the Company’s 12% senior subordinated notes due 2010, (v) repayment of the remaining $5.6 million of the Back Bay Capital term loan and (vi) repayment of a portion of the amount outstanding under the Credit Facility.
Long term liabilities:
Credit Facility
5% convertible senior subordinated notes
Term loan with Back Bay Capital
12% senior subordinated notes 2007
5% senior subordinated notes 2007
12% senior subordinated notes 2010
Stockholders’ equity
Common Stock
Treasury Stock (d)
The Company anticipates that cash flow from operations and availability under the Credit Facility will be sufficient to meet all debt service requirements and will be sufficient to enable the Company to execute its future growth plans.
Capital Expenditures
The following table sets forth the stores opened and related square footage at November 1, 2003 and November 2, 2002, respectively, and excludes the 23 Levi’s®/Dockers® stores which are in liquidation and are expected to close by the end of fiscal 2004:
Store Concept
(square footage in thousands)
Casual Male Big & Tall retail and outlet stores
Levi’s®/Dockers® outlet Stores
Ecko Unltd.® outlet stores
Total Stores
Total cash outlays for capital expenditures for the first nine months of fiscal 2004 were $8.9 million as compared to $6.9 million for the first nine months of fiscal 2003. Below is a summary of store openings and closings since February 1, 2003:
At February 1, 2003
New outlet stores
New retail stores
Closed stores
At November 1, 2003
The Company expects that its total capital expenditures for fiscal 2004 will be between $12.0 to $14.0 million, of which approximately $8.5 million will relate to store expansion. The remaining planned capital expenditures relate to the Company’s management information systems, which include new merchandising and distribution systems.
The Company’s expansion plans for the remainder of fiscal 2004 will focus on opening another Casual Male Big & Tall retail store, an additional Casual Male Big & Tall outlet store and the Company’s first Ecko Unltd.® retail store. The Company continues to focus on expanding its catalog and e-commerce businesses.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, the financial position and results of operations of the Company are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures.
The Company utilizes cash from operations and the Credit Facility to fund its working capital needs. The Credit Facility is not used for trading or speculative purposes. In addition, the Company has available letters of credit as sources of financing for its working capital requirements. Borrowings under the Credit Facility, which expires in May 2006, bear interest at variable rates based on FleetBoston, N.A.’s prime rate or the London Interbank Offering Rate (“LIBOR”). These interest rates at November 1, 2003 were 4.50% for prime based borrowings and included various LIBOR contracts with interest rates ranging from 3.88% to 3.89%. Based upon sensitivity analysis as of November 1, 2003, a 50 basis point increase in interest rates would result in a potential annual increase in interest expense of approximately $286,000.
Item 4. Controls and Procedures.
We maintain “disclosure controls and procedures,” as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this quarterly report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. There has been no change in our internal control over financial reporting that has occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On October 15, 2003, a class action lawsuit was filed against the Company in the Superior Court of California, County of Santa Clara, by Robin J. Tucker, a former employee. The complaint alleges, among other things, that the Company failed to pay overtime compensation and to provide meal and rest periods to our California store managers for the period from May 14, 2002 to the present. The Company believes that it has substantial legal defenses to these claims and intends to vigorously defend this action. However, there can be no assurance that such claims will not be successful in whole or in part.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Default Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on August 7, 2003. The matters submitted to a vote of the Company’s stockholders were (i) the election of eight directors, (ii) amendments to the Company’s 1992 Stock Incentive Plan, and (iii) the ratification of Ernst & Young LLP as independent auditors for the Company for the current fiscal year.
Directors
Seymour Holtzman
David A. Levin
Alan S. Bernikow
Jesse Choper
Stephen M. Duff
Frank J. Husic
Joseph Pennacchio
George T. Porter, Jr.
14,749,811
28,332,414
Item 5. Other Information.
On November 12, 2003, subsequent to the end of the third quarter of fiscal 2004, LP Innovations, Inc. (“LPI”), which is presently majority-owned by the Company, filed with the Securities and Exchange Commission filed an amendment on Form S-1/A with respect to an offering of rights to purchase approximately 7,500,000 shares of LPI common stock at a purchase price of $1.00 per share. The rights offering will be effected in connection with a plan to establish LPI as a separate public company that will be owned by the Company’s stockholders and by LPI’s other stockholders who subscribe for shares of LPI common stock in the offering. The holders of LPI shares other than the Company consist of LPI’s executive officers, certain other members of LPI’s management and an LPI director. The Company intends to distribute to its stockholders all of the approximately 6,000,000 rights that the Company receives from LPI, in the ratio of one right for every six shares of the Common Stock owned as of the record date for the rights offering. LPI’s other stockholders will receive one right for every 0.60 shares of LPI common stock owned by them as of the record date for the rights offering.
Item 6. Exhibits and Reports on Form 8-K.
A.
B.
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.
Date: December 8, 2003
By: /S/ DENNIS R. HERNREICH
Dennis R. Hernreich