FORM 10-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 

¨ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended January 31, 2004 (Fiscal 2003)

 

Commission File Number 0-15898

 


 

CASUAL MALE RETAIL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   04-2623104
(State or other jurisdiction of incorporation
of principal executive offices)
  (IRS Employer
Identification No.)
     
555 Turnpike Street, Canton, MA   02021
(Address of principal executive offices)   (Zip Code)

 

(781) 828-9300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.01 par value

(Title of each Class)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

 

As of August 2, 2003, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $184.9 million, based on the last reported sale price on that date. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded on the basis that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily determinative for other purposes.

 

The registrant had 35,099,382 shares of Common Stock, $0.01 par value, outstanding as of March 31, 2004.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 



Table of Contents

CASUAL MALE RETAIL GROUP, INC.

 


 

Index to Annual Report on Form 10-K

Year Ended January 31, 2004

 

         Page

PART I         
Item 1.  

Business

   3
Item 2.  

Properties

   13
Item 3.  

Legal Proceedings

   16
Item 4.  

Submission of Matters to a Vote of Security Holders

   16
PART II         
Item 5.  

Market for Registrant’s Common Equity and Related Stockholder Matters

   17
Item 6.  

Selected Financial Data

   19
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   21
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

   34
Item 8.  

Financial Statements and Supplementary Data

   35
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   65
Item 9A.  

Controls and Procedures

   65
PART III         
Item 10.  

Directors and Executive Officers of the Registrant

   66
Item 11.  

Executive Compensation

   69
Item 12.  

Security Ownership of Certain Beneficial Owners and Management

   76
Item 13.  

Certain Relationships and Related Transactions

   81
Item 14.  

Principal Accounting Fees and Services

   83
PART IV         
Item 15.  

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   84
             Signatures    92

 

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PART I.

 

Certain statements contained in this Annual Report on Form 10-K 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 Annual Report are generally located in the material set forth under the headings “Business” and “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 Annual 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 April 14, 2004, 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.

 

Item 1. Business

 

Casual Male Retail Group, Inc. together with its subsidiaries (the “Company”) is the largest specialty retailer of big and tall men’s apparel in the United States. The Company operates 481 Casual Male Big & Tall stores, the Casual Male catalog business and two e-commerce websites, 58 Levi’s®/Dockers® Outlet by Designs and 21 Ecko Unltd.® outlet stores, all of which are located throughout the United States and Puerto Rico. Unless the context indicates otherwise, all references to “we,” “our,” “ours,” “us” and “the Company” refer to Casual Male Retail Group, Inc. and its consolidated subsidiaries. The Company refers to its fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002 as “fiscal 2003”, “fiscal 2002” and “fiscal 2001”, respectively.

 

HISTORY

 

The Company was incorporated in the State of Delaware in 1976 under the name Designs, Inc. Until fiscal 1995, the Company operated exclusively Levi Strauss & Co. branded apparel mall and outlet stores. In fiscal 1995, the Company began seeing limited growth opportunities with Levi Strauss & Co. and started to embark on several private label diversification strategies. These strategies ultimately were abandoned by the Company due to a variety of reasons, including lack of brand recognition of its private label brands by its customers. As a result of these failed strategies, the Company incurred approximately $85.6 million in operating losses during fiscal years 1997, 1998 and 1999.

 

In October 1999, the stockholders of the Company elected a new Board of Directors, which subsequently appointed a new Chairman of the Board of Directors of the Company and management team. Under this new management, the Company saw significant cost reductions in both its store and overhead operations, resulting in a return to profitability in fiscal 2000. With this new effective low-cost structure in place, the Company renewed its strategy to become the premier operator in the outlet channel for other well-known branded manufacturers, including Candie’s Inc., a leading designer and marketer of young women’s footwear, apparel and accessories. In April 2002, the Company entered into a joint venture arrangement with Ecko.Complex, LLC (“Ecko”), a leading design-driven lifestyle brand targeting young men and women with worldwide annual sales exceeding $200 million. Under this joint venture arrangement, the Company plans to exclusively open and operate 75 Ecko Unltd.® branded outlet stores throughout the United States over a six-year period.

 

While implementing these initiatives, but with limited opportunity to expand its mature Levi’s®/Dockers® business, in May 2002 the Company acquired the Casual Male business from Casual Male Corp. at a bankruptcy court-ordered auction.

 

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At the time of the acquisition, Casual Male was the largest retailer of men’s clothing in the big and tall market in the United States. The Company acquired substantially all of the assets of Casual Male and certain of its subsidiaries for a purchase price of approximately $170 million, plus assumption of certain operating liabilities. In view of the significance of this acquisition to the growth and future identity of the Company, on August 8, 2002, the Company’s stockholders voted to change the Company’s name to “Casual Male Retail Group, Inc.”

 

Following the Casual Male acquisition, the Company re-evaluated its strategic initiatives. In light of the significant opportunity to grow the Casual Male business and the continued significant deterioration in its Levi’s®/Dockers® business, in fiscal 2002 the Company announced that it would downsize and eventually exit the Levi’s®/Dockers® business. The Company also announced that it would exit its Candies® outlet business, which it did by the end of fiscal 2002. These decisions enabled management to focus its resources on growing its more profitable Casual Male business and, to a lesser extent, expanding the operations of its Ecko joint venture. See “Other Branded Apparel Businesses-Levi’s®/Dockers® and Candies® outlet businesses” for a description of the Company’s exit strategy.

 

In June 2003, the Company announced an exclusive marketing agreement with George Foreman to promote the Casual Male brand. In March 2004, the Company launched its national marketing campaign introducing its exclusive line of clothing bearing the George Foreman name. The clothing, which will be marketed under three product lines, “Comfort Zone By George Foreman,” “Signature Collection By George Foreman” and “GF Sport By George Foreman,” will include a complete array of casual wear, dresswear and accessories and will include the comfort zone technology that the Company previously sold under its private label brand.

 

Since the Casual Male acquisition, the Company has operated in two segments, its “Casual Male business” and its “Other Branded Apparel businesses.”

 

CASUAL MALE BUSINESS

 

The Casual Male business, which represents over 74% of the Company’s total revenues for fiscal 2003, is a multi-channel retailer offering what the Company believes to be high quality casual wear for the big and tall customer. The Company offers its merchandise to customers through diverse selling and marketing channels, including over 481 retail and outlet stores, which operate under the names “Casual Male Big & Tall®” and “Casual Male Big & Tall Outlet” stores, its Casual Male Big & Tall catalog and two e-commerce sites.

 

Industry

 

The NPD Group, a leading marketing information provider, estimates that the men’s big and tall apparel market, which includes pants with a waist size 44” and greater, as well as tops sized 1X and greater, generated approximately $5.3 billion in sales in 2002. This highly fragmented market represents approximately 13% of the overall men’s apparel business. In 2002, sales of men’s big and tall apparel increased 1.4%, while overall men’s apparel sales declined 0.7%. Growth in this segment has been driven by rapidly changing market demographics. Currently, 64% of U.S. adults are overweight or obese, up from 56% six years ago. Additionally, in 2001, 49 states classified 15% or more of their total adult population as obese, versus four states in 1991. Moreover, 29 states classified 20% or more of their total adult population as obese. According to the Center for Disease Control, the rate of obesity for the under-30 age group is growing faster than any other segment of the population. These statistics suggest that there is a significant gap between the market share of the big and tall apparel market and the overall percentage of the population classified as obese.

 

The men’s big and tall apparel market is currently served by a variety of retailers, including department stores, mass merchandisers and specialty stores. These stores typically offer a limited assortment of sizes and styles. By offering the widest selection of sizes and styles, the specialty channel has gained significant market share over the past five years, accounting for 26.2% of men’s big and tall apparel sales in 2002 versus 22.7% in 1998. Casual Male’s overall market share of the men’s big and tall apparel market approximates 7%.

 

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Multi-Channel Strategy

 

The Company tries to appeal to all of its customers by providing multiple ways to shop. The Casual Male customer is often a destination shopper when it comes to purchasing apparel for himself. For customers that are somewhat uncomfortable in a traditional shopping environment, the Company offers them the opportunity to shop through its catalog as well as through the Company’s e-commerce sites. The Company has recently begun to coordinate its merchandising and marketing across its stores, catalog and websites.

 

Retail stores. At January 31, 2004, the Company operated 415 Casual Male Big & Tall full-price retail stores, located primarily in strip centers, power centers or stand-alone locations. These stores target the middle-income customer seeking good quality at moderate prices. These stores offer a broad selection of basic sportswear and other casual apparel, as well as dress wear and accessories. The average Casual Male store is approximately 3,400 square feet and has approximately $178 in sales per square foot annually. The Company believes that it has a significant opportunity to grow its retail stores base, and has identified more than 250 potential additional locations.

 

Outlet stores. At January 31, 2004, the Company operated 66 Casual Male Big & Tall outlet stores designed to offer a wide range of casual clothing for the big and tall customer at prices that are generally 20-25% lower than those offered at it retail stores. Most of the merchandise in the Company’s outlet stores is offered with the purchasing interests of the value-oriented customer in mind. Approximately 20% of the merchandise in the outlet stores originates from the retail stores and serves as a distribution channel for clearance and other slow moving inventory. The average Casual Male outlet store is approximately 3,100 square feet and has approximately $172 in sales per square foot annually. The Company believes that there are an additional 50 potential locations suitable for a Casual Male outlet store.

 

For fiscal 2004, the Company intends to open 15 new stores, which will be a combination of retail and outlet stores. In addition, the Company expects to remodel between 300 to 350 of its existing retail and outlet stores over a two year period beginning in fiscal 2004. Many of these stores are aging and have not been updated since they opened. The remodel program will include replacing carpeting, repainting the store and otherwise repairing parts of the store, where needed. In addition, certain stores require updating fixtures and signage where necessary to maintain consistent presentation standards. In total, the average cost of the remodel program will approximate between $35,000 to $40,000 for each store location and will require approximately two years to complete such program.

 

Catalog. The Company’s “Casual Male Big & Tall” catalog offers an assortment of casual merchandise similar to what is available in the stores, but also offers a broader selection of dress apparel, such as sportcoats, suit separates and other tailored clothing. The Company issued 17 editions of its catalog in fiscal 2003 and circulated a total of 7.5 million catalogs. In fiscal 2004, the Company intends to enhance the productivity of its catalog by reducing circulation by approximately 10% and focusing its mailings on a more targeted group, based on historical buying patterns.

 

In the second half of fiscal 2003, the Company started to transition its REPP Big & Tall catalog customers to its Casual Male Big & Tall catalog. The REPP Big & Tall catalog was an extension of the REPP Ltd. Big & Tall stores, which were previously owned and subsequently closed by Casual Male Corp., prior to the Company’s acquisition.

 

In-bound calls and order fulfillment for the Company’s catalog are currently handled at its distribution center. See “Distribution” below.

 

E-Commerce. The Company currently has two e-commerce web sites: www.casualmale.com and www.reppbigandtall.com. These sites offer substantially the same merchandise as is offered in its catalog. The Company currently processes and fulfills orders from its web sites through its distribution center. Although its e-commerce web sites have generated relatively small sales volume, the Company sees the internet as a significant growth opportunity. For example, in addition to its traditional on-line business, the Company recently launched Casual Male Big & Tall apparel shops on Amazon.com. The Company expects its relationship with Amazon.com will provide further growth and brand identity for its Casual Male business. During fiscal 2003, the Company’s e-commerce business sales increased by 49%.

 

Similar to the REPP Big & Tall catalog, during fiscal 2004, the Company will begin to phase out its Repp Big and Tall web site and combine it with its existing www.casualmale.com web site.

 

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Merchandise

 

The Casual Male business offers an extensive selection of quality sportswear, dress clothing and footwear for the big and tall male customer at moderate prices. Over 50% of the Casual Male merchandise is basic or fashion-neutral items, such as jeans, casual slacks, tee-shirts polo shirts and dress shirts. The Casual Male customer is primarily interested in comfort and fit, more so than price. As such, Casual Male’s clothing has features specifically designed for our customer, such as waist-relaxer pants, stretch belts, zipper ties, wide band socks, neck-relaxer shirts and clothing with comfort-stretch technology and reinforced stress points. Independent tests have shown that the Company’s merchandise is among the highest in quality of all major brands. In fiscal 2003, approximately 75% of the merchandise offered was private label, manufactured primarily under its Harbor Bay and Menswear brand names. The Company expects the percentage of these private labels to decrease in fiscal 2004.

 

During Spring, 2004, the Company launched its new line of men’s big and tall apparel featuring Comfort Zone by George Foreman, Signature Collection by George Foreman and GF Sport by George Foreman in its stores, catalog and on its Casual Male e-commerce site.

 

  Comfort, fit and technology are the driving force behind the creation of the Comfort Zone by George Foreman apparel line. Offering exclusive features that provide comfort and performance combined with uncompromising style, now big and tall men can find casualwear, dresswear and loungewear that fits their lifestyle. Comfort Zone by George Foreman apparel features Casual Male comfort technologies with our patent-pending Neck-Relaxer shirt, Waist-Relaxer pants, Jacket-Relaxer suit separates and Dry-Action wicking polo.

 

  The Signature Collection unites George Foreman’s impeccable flair for style and fashion with the comfort and fit that Casual Male is known for—creating a new collection of contemporary menswear that appeals to discriminating, style-conscious big and tall men. For Spring 2004, the George Foreman Signature Collection includes tuxedo separates, dress pants, sportcoats, silk shirts and sweaters, mercerized cotton tees, satin boxer’s robe and shorts. The Signature Collection is being tested in approximately 60 stores in Spring 2004 and will expand to 140 stores in Fall 2004.

 

  An extension of Comfort Zone by George Foreman, GF Sport by George Foreman offers big and tall men apparel for their active lifestyle—utilizing the comfort technology of Dry Action. Dry-Action fabric removes perspiration, dries two times faster than cotton, is pill resistant and keeps active big and tall men fresh and dry. For Spring 2004 the GF Sport offering includes Dry-Action crewneck tees, Dry-Action trek jacket, pants, windbreakers and cargo shorts.

 

George Foreman branded apparel is expected to approximate 15% of the Casual Male merchandise assortment in Spring 2004 and approximately 30% of the Fall 2004 assortment. The Company intends to continue exploring other assortment additions to the George Foreman apparel line depending on performance and adaptation of existing assortments to include comfort zone features.

 

In addition, the Company has successfully negotiated with manufacturers of several well-known brands and expects that this branded merchandise, which is expected to have merchandise margins similar to Harbor Bay, could represent up to 60% of the Company’s merchandise mix in fiscal 2004. The Company already carries a wide range of well-known brand name merchandise including, Ecko Unltd.®, Polo Jeans Co.®, Perry Ellis Portfolio®, Geoffrey Beene®, Sean John®, Sketchers®, Levi’s®, Dockers® and others. In addition, Casual Male will launch an exclusive Reebok® big and tall collection for Fall 2004. Accordingly, it is anticipated that Casual Male’s private label Harbor Bay and Menswear merchandise assortments will be displaced significantly by the George Foreman lines of apparel, or other branded merchandise assortments.

 

The Company recently completed a roll-out of its new lifestyle format in all of its Casual Male Big and Tall stores. Stores are now merchandised to showcase entire outfits by lifestyle, including traditional, functional active, young men’s, dresswear and contemporary. This format allows the Company to merchandise key items and seasonal goods in prominent displays, makes coordinating outfits easier for the customer and encourages multi-item purchases. This lifestyle layout also allows the Company to better manage store space in each market to target local demographics. Stores are clustered to meet

 

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the demographic needs of customers by climate and ethnicity. The key item strategy is also fully integrated by lifestyle, allowing the Company to focus on merchandise presentation and offer its customers a compelling value proposition. By taking advantage of volume purchasing discounts, the Company is able to promote these key items across the entire chain without sacrificing gross margins.

 

The Company’s initiative to add extended sizing in tall sizes in core programs for Spring 2004 has resulted in doubling the penetration of these sizes to the total. Casual Male intends to offer additional extended sizes in core programs for Fall 2004.

 

To improve upon the Company’s capabilities to plan and replenish its merchandise assortments according to the age and demographic characteristics of each market, Casual Male adopted the Arthur product planning methodologies in 2004, as well as installed and implemented the E3 replenishment application. Both of these applications are part of the JDA Enterprise Portfolio. These new applications will not only improve upon Casual Male’s merchandise planning capabilities, but will also enable it to better manage size requirements for each store. Subsequent to implementing the JDA Enterprise Portfolio, intended to be live by mid-2004, Casual Male plans to pursue more advanced assortment planning tools to further enhance its abilities to provide merchandise assortments tailored to the individual characteristics of each market.

 

Marketing and Advertising

 

The Company’s marketing department creates and implements a wide variety of national, regional and local advertising, direct marketing and sales promotion programs. These television, radio, direct mail and e-mail programs are designed to increase sales and customer awareness of the Casual Male brand name. Approximately 70% of all sales are captured in the Company’s customer database. This allows continuous communication with the Company’s customers both for promotional events as well as relationship programs such as the birthday club and new customer programs. Local store marketing activities occur on a regular basis and include store opening events and in-store promotion programs. For 2004, the Company has redesigned its marketing strategy with the objective of branding Casual Male and acquiring new customers.

 

Advertising and marketing costs for the Casual Male businesses represented approximately 5.8% of the revenue from the Casual Male business in fiscal 2003. This includes creating and distributing 7.5 million catalogs, over 22 million retail direct mail pieces and all in-store signage for its 481 stores, as well as supporting e-commerce efforts. Historically through the end of fiscal 2003, approximately 66% of the Company’s total marketing budget was spent on direct marketing, utilizing its customer database which contains more than 2.5 million names, together with their respective Casual Male purchase histories. In 2004, the direct mail marketing programs percentage of total budget will be decreased to approximately 30% and includes 17 million contacts in support of 19 promotional events.

 

In fiscal 2004, as part of its new strategy the Company plans to redirect a portion of its direct marketing dollars in addition to increasing the total advertising budget to include for the first time outreach marketing initiatives, such as television. The Company believes that this type of marketing is necessary in order to attract new customers and introduce them to the Casual Male brands, including its George Foreman brand product lines. Over the past several years, the direct marketing program was geared toward existing customers. Although effective with the current customer base, a direct marketing program does not support the goal of increasing market share. The Company expects that its overall advertising budget will be approximately 7.5% of sales in fiscal 2004, an increase from approximately 5.8% in fiscal 2003, of which approximately 50% of the marketing budget will represent outreach marketing programs, mainly television. This will include the launch of a broad-range advertising campaign which commenced in March 2004 in connection with the Company’s roll out of the new George Foreman line of merchandise. Both national network and cable television will run throughout the year with the specific goals of branding Casual Male and customer acquisition in all three channels of distribution: retail stores, catalog and e-commerce.

 

With the celebrity status of George Foreman associated with Casual Male, a key component of marketing both the brand Casual Male and the new exclusive George Foreman line of apparel is public relations. Internal and external resources have been allocated to support this effort. This program started in the fall of 2003 and will continue through 2004 with media tours and press releases of new product during key selling periods.

 

 

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In Fall 2004, coupled with store systems upgrades, the development of a new customer relationship management system will be put in place. This will allow the Company to expand its level of communication outside of direct mail, and pertinent customer information will be available at the store level, with the goal of servicing the customer better. This program is expected to be rolled out in early 2005 and will include a loyalty program.

 

Competition

 

The Casual Male business faces competition from a variety of sources, including department stores, specialty stores, discount and off-price retailers, as well as other retailers that sell big and tall merchandise. While the Company has successfully competed on the basis of merchandise selection, favorable pricing, customer service and desirable store locations, there can be no assurances that other retailers will not adopt purchasing and marketing concepts similar to those of the Company. In addition, discount retailers with significant buying power, such as Wal-Mart, J.C. Penny and Target, represent a source of competition for the Company.

 

The United States men’s big and tall apparel market is highly competitive with many national and regional department stores, specialty apparel retailers, single market operators and discount stores offering a broad range of apparel products similar to those of the Company. Besides retail competitors, the Company considers any casual apparel manufacturer operating in outlet malls throughout the United States to be a competitor in the casual apparel market. The Company believes that it is the only national operator of apparel stores focused on the men’s big and tall market, the next largest specialty retailer being Rochester Big and Tall, which operates 22 stores.

 

The catalog business has several competitors, including the King Size Catalog (which is owned by Brylane) and J.C. Penny’s Big and Tall Collection catalog.

 

DISTRIBUTION

 

The Company acquired its property in Canton, Massachusetts, which represents its corporate offices and distribution center, as part of the Company’s acquisition of the Casual Male business. At the end of fiscal 2002, the Company terminated the leases of its two other distribution centers, which were located in Orlando, Florida, and centralized all of its distribution operations in Canton.

 

The Company believes that having one centralized distribution facility minimizes the delivered cost of merchandise and maximizes the in-stock position of its stores. The Company believes that the centralized distribution system enables its stores to maximize selling space by reducing necessary levels of back-room stock carried in each store. In addition, the distribution center provides order fulfillment services for the Company’s e-commerce and catalog businesses.

 

In fiscal 2003, the Company partnered with United Parcel Services (“UPS”) to improve upon its distribution methods and reduce shipping costs as a result of not having to use third party trucking companies. By utilizing UPS, the Company is able to track all deliveries from the warehouse to the individual stores, as well as the status of in-transit shipments.

 

In fiscal 2004, the Company expects to implement Manhattan Associates’ PKMS warehousing application for its distribution center systems, which is expected to significantly streamline its distribution processes, enhance in-transit times, and significantly reduce distribution costs. In addition, Casual Male has slightly altered its distribution strategy as it relates to seasonal merchandise to allow for replenishment of styles at the color and size level which is intended to optimize sales opportunities and minimize end of season clearance markdowns. This seasonal merchandise distribution strategy requires significantly higher volume of individual piece processing, a more costly distribution method in contrast to carton handling. However, in conjunction with the installation of a more efficient PKMS warehousing application, the Company is also updating its processes in order to optimize the new system capabilities in areas such as receiving, cross-dock handling, put-away, and picking which will include the use of scanning equipment. Accordingly, in spite of the shift in distribution strategy to include the more costly piece replenishment, Casual Male’s distribution costs are expected to decrease with the installation of new systems and the adoption of updated process flows.

 

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MANAGEMENT INFORMATION SYSTEMS

 

Since the Company’s acquisition of the Casual Male business, one of the Company’s primary goals has been to integrate the systems of the acquired business with those of the Company and to upgrade and enhance current systems where necessary. The Company has identified significant cost savings and synergies that can only be realized upon the completion of this integration and upgrade of the system infrastructure.

 

At the time of the acquisition, the Casual Male business operated primarily on an IBM mainframe platform. The mainframe based system included an internally supported enterprise retail system and a human resource/payroll application. The Company’s then-existing e-commerce/catalog fulfillment infrastructure operated on a Hewlett-Packard environment on software from Ecometry, and the remainder of is business operated on an IBM 400 platform. The Company’s financial systems were supported by a client server environment.

 

Presently, the Company’s management information systems consist of a full range of retail merchandising and financial systems which include merchandise planning and reporting, distribution center processing, inventory allocation, sales reporting, and financial processing and reporting. Until integration is complete, the Company’s Casual Male business will continue to operate primarily on a mainframe platform, with the e-commerce/catalog business on the HP environment, and the remainder of the business on the IBM AS/400 platform.

 

In February 2003, the Company completed the conversion of the Casual Male business to its Lawson Financial System. Management now has several tools from which to manage the business on a consolidated level in a more efficient and effective manner. During fiscal 2003, the Company implemented the JDA E3 Advanced Replenishment system for the Casual Male business. This system was integrated with the existing Casual Male business mainframe platform in an effort to improve sales opportunities and better manage inventories of basic merchandise.

 

During fiscal 2004, the Company plans to complete the systems integration work to upgrade its merchandising systems to the JDA Portfolio Solutions, specifically the MMS Merchandise Management System, E3 Advanced Replenishment, Retail Ideas Data Warehouse, and Arthur Merchandise Planning and Advanced Allocation systems. In addition, the Company also plans to convert its distribution system to Manhattan Associates’ PKMS distribution system.

 

To implement these initiatives, the Company spent approximately $4.1 million in fiscal 2002 and $4.0 million in fiscal 2003 and expects to spend approximately $6.0 million in fiscal 2004, primarily on system enhancement, implementation and maintenance. Once the systems are fully implemented, the Company expects to be able to improve sales, better manage inventory levels and streamline operations by:

 

Sharing information with vendors through EDI (electronic data interchange);

 

Reducing merchandise in-transit times;

 

Creating more advanced methods to replenish inventory;

 

Improving information databases;

 

Planning store merchandise assortments; and

 

Reducing MIS related corporate overhead.

 

Currently, all of the Company’s stores have point-of-sale terminals supplied by IBM, Fujitsu, and NCR. The Casual Male business is supported by a point-of-sale business application provided by Triversity, and the remainder of the Company’s business is supported by a point-of-sale (“POS”) business application by CRS. The POS applications capture daily transaction information by item, color and size. The Company utilizes barcode technology in tracking sales, inventory and pricing information. Communication between the corporate headquarters and all stores is facilitated on a daily basis through the use of an electronic mail system.

 

In fiscal 2005, the Company anticipates upgrading to a POS and register systems in its store locations. This new system will include a multitude of features including Customer Relationship Management tools that will enable the Company to track customer buying habits and provide it with the ability to target customers with specific offers and promotions. The Company expects that this will also enable the Company to develop an effective loyalty program for its customers. In March 2004, the Company announced that it signed a license agreement with NSB Group for its Connected Retailer® Store and Customer Relationship Management Solutions. The Company expects the roll-out of this project to its stores will begin in Spring 2005. The Company believes that these efforts can lead to new customers as well as a more loyal

 

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customer base. The cost of this project is anticipated to approximate $6.0 million, including a five-year maintenance arrangement on its store registers.

 

The merchandising management systems are updated daily with all store transactions and provide daily sales, inventory, pricing and merchandise information and management reports to assist the Company in operating its retail business. The Company’s merchandising system applications also facilitate the placement and tracking of purchase orders and utilize EDI technology. The Company evaluates this information, together with weekly reports on merchandise statistics, prior to making decisions regarding reorders of fast-selling items and the allocation of merchandise.

 

The Company utilizes a Microsoft NT / Windows 2000 environment running on a local area network to communicate and work-share within its corporate headquarters. The Company also utilizes the services of ADP, an outside payroll processing provider, to prepare, distribute and report its weekly payroll. All of the Company’s payroll processing was consolidated onto the ADP processing system effective January 1, 2003.

 

OTHER BRANDED APPAREL BUSINESSES

 

The Ecko Unltd.® Business

 

The Company entered into a joint venture arrangement with Ecko, under which the Company owns and manages retail outlet stores bearing the name Ecko Unltd.® and featuring Ecko® branded merchandise. The Company believes that the Ecko Unltd.® outlet stores represent an opportunity in the outlet marketplace for the underdeveloped young men’s and junior market because Ecko® is believed to be a cross-over youth brand appealing to both urban and suburban youth with a core customer between the ages of 14 to 24. Accordingly, these stores provide a broad selection of merchandise ranging from hip-hop to extreme sports, and street-wear to fraternity wear, with a core menswear line consisting of fleece, twill and denim bottoms, wovens, printed tee shirts, knits and sweaters. The average Ecko Unltd.® outlet store is approximately 3,800 sq. ft. and generates an average of $311 sales per square foot annually. At January 31, 2004 the Company operated 20 Ecko Unltd.® outlet stores. The Company intends to open 10 new Ecko stores in fiscal 2004 and will be increasing the size of these stores to 4,000 square feet. In November 2003, the Company opened its first mall-based, full-priced Ecko Unltd.® retail store.

 

Management believes that its Ecko Unltd.® outlet stores compete with other outlet apparel retailers on the basis of selection of quality, service and price. The Company stresses product training of sales staff and, with the assistance of merchandise materials from Ecko, provides the sales personnel with substantial product knowledge and training across all product lines.

 

The Company owns 50.5% of this joint venture and Ecko owns the remaining 49.5% of the joint venture. Under the terms of the joint venture arrangement, the Company manages the Ecko Unltd.® retail outlet stores and Ecko contributes to the joint venture their trademark and merchandise requirements at cost. Further, the Company contributes all real estate and operating requirements for 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 reimbursement for its cost contributions. Pursuant to its arrangement, 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 an option to sell its share of the joint venture to Ecko, and Ecko has an option to acquire the Company’s share of the joint venture at a price based on the performance of the Ecko retail outlet stores.

 

Levi’s®/Dockers® and Candies® outlet businesses

 

The Company announced in fiscal 2002 that it would be exiting its Levi’s®/Dockers® outlet business. At January 31, 2004, the Company operated 58 Levi’s®/Dockers® outlet stores, which it still intends to close over the next two years. The Company expects that these remaining 58 stores will either be closed at the end of their respective lease terms or through negotiations with respective landlords. Until such closings, these remaining stores will continue to offer an exclusive selection of Levi Strauss & Co. brands of merchandise, which include Levi’s® and Dockers® brands, at outlet prices. As such, the Company will continue to work with Levi Strauss & Co. on obtaining competitive costs for its products and, based on availability, will stock these remaining stores with a higher level of close-out merchandise, which will enable the

 

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Company to maintain its margin levels. The Company expects that these remaining stores will operate at or above break-even levels.

 

LP INNOVATIONS, INC.

 

LP Innovations, Inc. (“LPI”), an 80% owned subsidiary of the Company, which was acquired by the Company in May 2002 as part of its Casual Male acquisition, is a national provider of loss prevention solutions to companies in the retail industry. LPI’s loss prevention services include in-store audits, employee investigations, employee training and awareness, and specially designed software. Through LPI’s subsidiary, Securex LLC, LPI also sells and installs security equipment and alarm and security central monitoring, allowing LPI to provide a comprehensive loss prevention solution to its clients.

 

LPI’s clients have historically included small, mid-sized and large retail chains in the specialty, grocery, apparel, office supplies, sporting goods and numerous other segments of the retail industry. LPI currently has approximately 50 loss prevention retail clients representing over 5,000 retail locations. Approximately 64.8% of these retail clients have contracted for LPI’s full outsource loss prevention services, while the balance of the retail clients have contracted for a portion of LPI’s services, such as in-store audits or in-store employee investigation. For fiscal year 2003, loss prevention services generated revenues of approximately $6.2 million, which accounted for approximately 64.5% of LPI’s total revenues of approximately $9.5 million and approximately $698,000, or 22.6%, of the total loss of $3.1 million. Included in the total loss prevention revenues of $9.5 million are revenues of $1.7 million generated by services provided to the Company by LPI, or 18.0% of total loss prevention revenues.

 

From a background perspective, LPI was started in May 1988 to provide loss prevention services to its then parent, Casual Male Corp. In 1999, LPI began to experiment with an outsourcing model by providing loss prevention services to other retail companies. In January 2001, LPI expanded beyond loss prevention services to include providing security system sales and installation and security central monitoring services by acquiring Securex LLC. During July of fiscal year 2002, LPI made the strategic decision to realign its Securex-related business as more of a support function of its core loss prevention services that would then be able to generate revenues organically through LPI’s existing customer base. With the main focus on its outsourced loss prevention services and continued client and revenue growth, LPI intends to more efficiently utilize the nationwide loss prevention service infrastructure it has created. Although LPI has made and continues to make changes to its business to facilitate the realization of its business plan, there can be no assurance that LPI will be successful in expanding its retail client base and capitalizing upon its established infrastructure.

 

On February 23, 2004, subsequent to the end of fiscal 2003, LP Innovations, Inc. (“LPI”) filed a Form 10 registration statement with the Securities and Exchange Commission in connection with a proposed pro rata distribution of the Company’s 80% ownership interest in LPI to the Company’s existing stockholders. Under the proposed plan of distribution, each holder of the Company’s Common Stock will receive one share of LPI common stock for every 100 shares of the Company’s Common Stock owned at the date of distribution. Immediately after the distribution, which is expected to occur in the second quarter of fiscal 2004, LPI will be a separate and independent public company. After the distribution is complete, LPI’s board of directors is considering, among other financing alternatives, offering its stockholders the right to purchase additional shares of LPI common stock through a rights offering to raise additional funds for working capital and to repay amounts owed to the Company, which approximated $5.0 million at January 31, 2004. For the fiscal year ended January 31, 2004, the Company wrote off approximately $355,000 of costs incurred in connection with LPI becoming a stand alone entity. The proposed distribution of LPI common stock is currently being reviewed by the SEC as part of the normal registration process. The timing and terms of the proposed distribution may be affected by this process.

 

SEASONALITY

 

Consistent with the retail industry, the Company’s business is seasonal. The Casual Male business traditionally generates the largest volume of its sales during the Father’s Day selling season in June and the Christmas selling season in December. The Company’s outlet businesses, which include its Levi’s®/Dockers® and Ecko Unltd.® outlet stores, traditionally generate the largest volume volumes during the back-to-school selling season in August and the Christmas selling season in December. The majority of the Company’s operating income is generated in the fourth quarter as a result of the impact of the Christmas selling season.

 

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Table of Contents

TRADEMARKS/TRADEMARK LICENSE AGREEMENTS

 

The Company owns several servicemarks and trademarks relating to its Casual Male business, including Casual Male® and “Casual Male Big & Tall®”, “Harbor Bay®”, “GF Sport By George Foreman”, “Comfort Zone by George Foreman”, “George Foreman Signature Collection” and “Signature Collection By George Foreman” The Company also has a U.S. patent pending for an extendable collar system, which is marketed as “Neck Relaxer.”

 

The Company operates its Levi’s®/Dockers® business pursuant to a trademark license agreement with Levi Strauss & Co., which agreement was most recently amended in October 1998 (as amended, the “Levi Outlet License Agreement”). The Levi Outlet License Agreement authorizes the Company to use certain Levi Strauss & Co. trademarks in connection with the operation of the Company’s Levi’s®/Dockers® Outlet by Designs in 25 states in the eastern portion of the United States and in Puerto Rico.

 

The Company operates its Ecko Unltd.® outlet stores pursuant to a joint venture arrangement with Ecko.Complex, LLC which authorizes the Company to utilize the Ecko® trademark in connection with the operations of its Ecko Unltd.® outlet stores.

 

EMPLOYEES

 

As of January 31, 2004, the Company employed approximately 3,916 associates, of whom 2,553 were full-time personnel. The Company hires additional temporary employees during the peak Fall and Holiday seasons. None of the Company’s employees is represented by any collective bargaining agreement.

 

AVAILABLE INFORMATION

 

The Company’s corporate web site is www.cmrginc.com. The Company makes available, free of charge, through its web site its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company has electronically filed such material with, or furnished such materials to, the Securities and Exchange Commission.

 

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Item 2. Properties

 

The Company’s corporate offices and distribution center are located at 555 Turnpike Street in Canton, Massachusetts. The facility is located on 37 acres of land and is owned by Designs Canton Property Corp., a wholly owned subsidiary of Designs Canton Holdings, Inc., which is an indirect wholly owned consolidated subsidiary of the Company. The property, which was acquired by the Company as part of its Casual Male acquisition in May 2002, is subject to an outstanding mortgage of $10.7 million at January 31, 2004. The mortgage is secured by the real estate and the buildings. The building contains about 750,000 square feet, which includes approximately 150,000 square feet of office space.

 

The Company remains liable on its lease, which expires in January 2006, for its previous corporate offices located at 66 B Street, Needham, Massachusetts. In January 2003, the Company entered into a sublease agreement with its loss prevention subsidiary, LP Innovations, Inc. (“LPI”), pursuant to which LPI leases approximately 19,000 square feet of the total 80,000 square feet of this facility. The sublease agreement is for three years and will expire on December 31, 2005.

 

As of January 31, 2004, the Company operated 415 Casual Male Big and Tall retail stores, 66 Casual Male Big and Tall outlet stores, 58 Levi’s®/Dockers® Outlet stores and 21 Ecko Unltd.® outlet and retail stores. All of these stores are leased by the Company directly from shopping center owners. The store leases are generally five years in length and contain renewal options extending their terms to between 5 and 10 years. Following this discussion is a listing by state of all the Casual Male Big and Tall retail and outlet store locations open at January 31, 2004.

 

Sites for store expansion are selected on the basis of several factors intended to maximize the exposure of each store to the Company’s target customers. These factors include the demographic profile of the area in which the site is located, the types of stores and other retailers in the area, the location of the store within the center and the attractiveness of the store layout. The Company also utilizes financial models to project the profitability of each location using assumptions such as the center’s sales per square foot averages, estimated occupancy costs and return on investment requirements. The Company believes that its selection of locations enables the Company’s stores to attract customers from the general shopping traffic and to generate its own customers from surrounding areas.

 

See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Expenditures.”

 

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Table of Contents

Store locations by State for the Casual Male Big and Tall Retail and Outlet stores at January 31, 2004

 

Alabama

  California, cont.   Florida, cont.   Indiana   Massachusetts

Birmingham

  Santa Ana   Pembroke Pines   Edinburgh   Burlington

Foley

  Santa Clara   Pensacola   Evansville   Dedham

Huntsville

  Santa Rosa   Pompano Beach   Fort Wayne   Framingham

Montgomery

  Stockton   Ocala   Greenwood   Hanover

Tuscaloosa

  Tracy   Orange Park   Indianapolis (3)   Medford
    Tulare   Orlando (3)   Lafayette   No Attleboro

Arkansas

  Upland   Sarasota   Merrillville   North Dartmouth

Ft. Smith

  Vacaville   St. Augustine   Mishawaka   Saugus

Jonesboro

  Valencia   Stuart   Muncie   Seekonk

Little Rock

  Victorville   Tampa (2)       Shrewsbury
    West Covina   Vero Beach   Iowa   Tyngsboro

Arizona

  Woodland Hills   West Palm Beach   Davenport   West Springfield

Chandler

          Des Moines   Wrentham

Mesa

  Colorado   Georgia   Marion    

Phoenix (3)

  Castle Rock   Alpharetta   Williamsburg   Michigan

Tempe

  Colorado Springs   Augusta       Ann Arbor

Tucson (2)

  Denver   Calhoun       Battle Creek
    Glendale   Commerce   Kansas   Birch Run

California

  Lone Tree   Duluth   Olathe   Dearborn

Bakersfield

  Loveland   Kennesaw   Overland Park   Flint

Camarillo

  Westminster   Lake Park   Topeka   Grand Rapids

Culver City

      Macon   Wichita   Howell

Daly City

  Connecticut   Morrow       Kalamazoo

Dublin

  Danbury   Savannah   Kentucky   Lansing

El Cajon

  East Haven   Smyrna   Bowling Green   Lathrup Village

Emeryville

  Fairfield   Stone Mountain   Florence   Madison Heights

Escondido

  Groton   Tucker   Lexington   Monroe

Folsom

  Hamden       Louisville (2)   Novi (Detroit)

Fremont

  Manchester   Illinois       Pontiac

Fresno

  Milford   Bloomingdale   Louisiana   Port Huron

Fullerton

  Waterbury   Bloomington   Baton Rouge   Redford Township

Glendale

  West Hartford   Champaign   Bossier City   Roseville

Laguna Hills

  Westbrook   Chicago (3)   Gonzales   Saginaw

Lake Elsinore

  Wethersfield   Evergreen Park   Lafayette   Southfield

Lakewood

      Fairview Heights   Metairie   Southgate

Lawndale

  Delaware   Gurnee       Utica

Long Beach

  Dover   Hodgkins   Maine   Warren

Los Altos

  Reboboth Beach   Hometown   Bangor   Westland

Los Angeles

  Wilmington   Joliet   Kittery    

Modesto

      Lansing   South Portland   Minnesota

Northridge

  Florida   Matteson       Albertville

Ontario

  Altamonte Springs   Melrose Park   Maryland   Blaine

Orange

  Boca Raton   Naperville   Annapolis   Burnsville

Oxnard

  Boynton Beach   Niles   Baltimore (2)   Duluth

Palm Desert

  Brandon   Norridge   Columbia   Maplewood

Pasadena

  Daytona Beach   North Riverside   District Heights   Richfield

Pleasant Hill

  Fort Lauderdale   Oakbrook Terrace   Frederick   Roseville

Riverside

  Ft. Myers   Orland Park   Glen Burnie   West St. Paul

Roseville

  Gainesville   Peoria   Greenbelt   Woodbury

Sacramento (2)

  Hialeah   Rockford   Hagerstown    

Salinas

  Jacksonville   Schaumburg   Rockville   Montana

San Bernardino

  Lakeland   Skokie   Towson   Branson

San Diego

  Largo   Springfield   Waldorf   Columbia

San Jose

  Lauderdale Lakes   St. Charles       Independence

San Leandro

  Miami   Tuscola       Richmond Heights
    No. Miami Beach   Vernon Hills        

 

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Table of Contents

Store locations by State for the Casual Male Big and Tall Retail and Outlet stores at January 31, 2004

 

Montana, cont.

  New York, cont.   Ohio, cont.   Tennessee   Vermont

Springfield

  Carle Place   Miamisburg (2)   Antioch   S. Burlington

St. Ann

  Centereach   Niles   Chattanooga    

St. Louis

  Cheektowaga   North Olmsted   Jackson   Washington

St. Peters

  East Northport   North Randall   Knoxville   Auburn

Osage Beach

  Elmhurst   Springdale   Lakeland   Bellevue

Warrenton

  Fresh Meadows   Toledo   Memphis (2)   Seattle
    Greece   Trotwood   Nashville   Spokane

Mississippi

  Greenburgh       No. Memphis   Tacoma

Jackson

  Henrietta   Oklahoma   Pigeon Forge    

Gulfport

  Irondequoit   Oklahoma City (2)       Wisconsin
    Johnson City   Tulsa   Texas   Brookfield

Nebraska

  Lake George       Amarillo   Brown Deer

Lincoln

  Massapequa   Oregon   Arlington   Grand Chute

Omaha (3)

  Nanuet   Beaverton   Austin (2)   Green Bay
    New York   Lincoln City   Beaumont   Greenfield

New Hampshire

  Niagara Falls   Portland   College Station   Johnson Creek

Salem

  Patchogue   Salem   Conroe   Kenosha

Tilton

  Poughkeepsie       Corpus Christi   Madison
    Riverhead   Pennsylvania   Dallas (2)   Mosinee

New Jersey

  Staten Island   Altoona   El Paso    

Bloomfield

  Tonawanda   Bridgeville   Fort Worth   West Virginia

Cherry Hill

  Valley Stream   Erie   Hillsboro   Barboursville

Deptford

  Victor   Franklin Mills   Houston (6)   South Charleston

E. Brunswick

  Waterloo   Gettysburg   Hurst    

East Hanover

  Yonkers   Grove City   Irving    

Eatontown

      Harrisburg   Laredo    

Lawrence Township

  North Carolina   King Of Prussia   Lewisville    

Ledgewood

  Asheville   Lancaster   Lubbock    

Linden

  Burlington   Langhorne   Mesquite    

May’s Landing

  Charlotte   Monroeville (2)   Midland    

Menlo Park

  Fayetteville   Philadelphia (3)   Pasadena    

Paramus

  Greensboro   Pittsburgh (2)   Plano    

Riverton

  Greenville   Scranton   San Antonio (4)    

Secaucus

  Pineville   Springfield Township   San Marcos    

Somerville

  Raleigh (2)   Tannersville   Shenandoah    

Toms River

  Smithfield   West Mifflin   Tyler    

Totowa (2)

  Wilmington   Whitehall   Webster    

Union

  Winston-Salem   Wilkes Barre   West Houston    

West Berlin

      Willow Grove   West Oaks (Houston)    
    North Dakota   Wyomissing        

New Mexico

  Fargo   York   Virginia    

Albuquerque

          Alexandria    
    Ohio   Rhode Island   Charlottesville    

Nevada

  Akron   Warwick   Fairfax    

Henderson

  Aurora       Fredericksburg    

Las Vegas (2)

  Boardman   South Carolina   Hampton    

Reno

  Burbank   Charleston   Lightfoot    
    Canton   Columbia (2)   Manassas    

New York

  Cincinnati   Florence   Norfolk    

Albany (Wolf Rd.)

  Columbus (5)   Gaffney   Richmond (2)    

Bayshore L.I.

  Fairlawn   Greenville   Roanoke    

Bronx (2)

  Jeffersonville   Myrtle Beach   Sterling    

Brooklyn (3)

  Lyndhurst       Virginia Beach    

Camillus

  Mansfield   South Dakota   Woodbridge    
    Mentor   Sioux Falls        

 

 

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Item 3. Legal Proceedings

 

On October 15, 2003, a class action lawsuit was filed against the Company in the Supreme 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 the Company’s 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 assurances that such claims will not be successful in whole or in part.

 

On April 2, 2004 a former officer of the Company filed a discrimination charge with the Massachusetts Commission Against Discrimination and the Equal Employment Opportunity Commission. The Company will engage an outside independent fact-finder to conduct a thorough investigation into the allegations. The claim has been submitted to the Company’s insurance carrier for indemnity and defense. The Company does not expect this matter to have a material impact on its financial position or results of operation.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of fiscal 2003.

 

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PART II.

 

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

 

The Company’s Common Stock is listed for trading on the Nasdaq National Market under the symbol “CMRG.”

 

The following table sets forth, for the periods indicated, the high and low per share closing sales prices for the Common Stock, as reported on the Nasdaq consolidated reporting system.

 

Fiscal Year Ended February 1, 2003


   High

   Low

First Quarter

   $ 5.82    $ 3.90

Second Quarter

     8.05      4.75

Third Quarter

     5.03      3.10

Fourth Quarter

     4.60      2.98

Fiscal Year Ended January 31, 2004


   High

   Low

First Quarter

   $ 4.43    $ 2.28

Second Quarter

     6.20      4.12

Third Quarter

     8.99      5.86

Fourth Quarter

     9.42      6.38

 

As of April 10, 2004, based upon data provided by independent shareholder communication services and the transfer agent for the Common Stock, there were approximately 306 holders of record of Common Stock.

 

The Company has not paid and does not anticipate paying cash dividends on its Common Stock. In addition, financial covenants in the Company’s loan agreement may restrict dividend payments. For a description of these financial covenants see Note C to the Notes to the Consolidated Financial Statements.

 

On November 17, 2003, the Company issued $85.0 million principal amount of convertible senior subordinated notes due 2024 (the “Convertible Notes”). On November 26, 2003, the Company issued an additional $15.0 million of Convertible Notes, which were sold pursuant to an option exercised by the initial purchaser. The aggregate $100 million principal amount of Convertible Notes 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. These Convertible Notes were issued in reliance upon the exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), set forth under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering.

 

In connection with the Company’s private placement of $29.6 million of senior subordinated notes due 2010 which were issued during the second and third quarters of fiscal 2003, the Company issued detachable warrants to purchase 1,182,400 shares of the Company’s Common Stock at exercise prices ranging from $4.76 to $7.32 per share. The Company assigned a fair value to these warrants of $5.6 million. These warrants were issued in reliance upon the exemptions from the registration requirements of the Securities Act of 1933, set forth under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering.

 

See Note C to the Notes to the Consolidated Financial Statements for a complete description of these private placements.

 

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Table of Contents

Stock Repurchases

 

The following table includes repurchases by the Company of its Common Stock during the fourth quarter of fiscal 2003:

 

Period


   Total Number of
Shares Purchased


   Average Price Paid
per Share


   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs


    Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs


 

11/2/03-11/29/03

   1,000,000    $ 7.89    1,000,000 (1)   1,000,000 (1)

11/30/03-1/03/04

   —        —      —       —    

1/04/04-1/31/04

   —        —      —       —    

 

(1) In connection with the Company’s sale of its $100 million of convertible notes due 2024, the Board of Directors authorized the Company to use a portion of the proceeds to repurchase up to 2,000,000 shares of the Company’s Common Stock in the open market or in negotiated transactions, from time to time, depending on market and other conditions. The repurchase plan was first announced on November 11, 2003. On November 19, 2003, the Company repurchased 1,000,000 shares of its Common Stock. Accordingly, at January 31, 2004, 1,000,000 shares were still authorized for repurchase by the Company.

 

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Table of Contents
Item 6. Selected Financial Data

 

Selected Financial Data-Historical Results

 

     Fiscal Years Ended (1)

 
     January 31,
2004
(Fiscal 2003)


    February 1,
2003
(Fiscal 2002) (2)


    February 2,
2002
(Fiscal 2001)


    February 3,
2001
(Fiscal 2000)


    January 29,
2000
(Fiscal 1999)


 
     (In millions, except per share, weighted average shares and operating data)  

INCOME STATEMENT DATA:

                                        

Sales

   $ 429.5     $ 356.6     $ 133.3     $ 135.2     $ 135.3  

Gross profit, net of occupancy costs

     161.2       122.0 (5)     31.3       37.6       32.1 (7)

Selling, general and administrative

     136.8       106.5       29.6       32.6       34.4  

Provision (reversal) for store closings, impairment of assets and severance

     (0.6 )(4)     10.7 (5)     —         0.1       6.6 (7)

Depreciation and amortization

     9.1       9.5       4.2       4.3       5.5  
    


 


 


 


 


Operating (loss) income

     15.9       (4.7 )     (2.5 )     0.6       (14.4 )

Other expenses, principally debt redemption costs

     14.1 (4)     —                            

Interest expense, net

     11.2       9.1       1.9       1.8       1.2  
    


 


 


 


 


(Loss) income from continuing operations before minority interest and taxes

     (9.4 )     (13.8 )     (4.4 )     (1.2 )     (15.6 )
    


 


 


 


 


Minority interest

     0.3       0.2       —         —         —    

Provision for income taxes

     —         8.0 (5)     8.1 (6)     (0.5 )     0.4  
    


 


 


 


 


Loss from continuing operations

   $ (9.7 )   $ (22.0 )(5)   $ (12.5 )(6)   $ (0.7 )   $ (16.0 )(7)

(Loss) income from discontinued operations (3)

     (2.4 )     (16.8 )     4.6       3.9       3.5  
    


 


 


 


 


Net (loss) income

   $ (12.1 )(4)   $ (38.8 )   $ (7.9 )   $ 3.2     $ (12.5 )
    


 


 


 


 


(Loss) earnings per share from continuing operations—basic and diluted

   $ (0.27 )   $ (0.87 )   $ (0.86 )   $ (0.04 )   $ (0.99 )

Net (loss) income per share—basic and Diluted

   $ (0.34 )   $ (1.54 )   $ (0.54 )   $ 0.20     $ (0.78 )

Weighted average shares outstanding:

                                        

for net (loss) income per share-basic

     35,702       25,117       14,486       16,015       16,088  

for net (loss) income per share-diluted

     35,702       25,117       14,486       16,292       16,088  

EFFECT OF RESTRUCTURING AND CHARGES ON PREPAYMENT OF DEBT ON PRE—TAX INCOME (LOSS) FROM CONTINUING OPERATIONS

                                        

Net (loss) income from continuing operations

   $ (9.7 )   $ (22.0 )(5)   $ (12.5 )(6)   $ (0.7 )   $ (16.0 )(7)

Other expenses, principally debt redemption costs

     14.1 (4)     —         —         —         —    

Provision for income taxes

     —         8.0 (5)     8.1 (6)     —         —    

Restructuring charges (reversal) including amounts charged to gross profit

     (0.6 )(4)     18.0 (5)     —         0.1       14.5 (7)
    


 


 


 


 


Pre-tax income (loss) from continuing operations before effect of restructuring charges and debt redemption costs

   $ 3.8     $ 4.0     $ (4.4 )   $ (0.6 )   $ (1.5 )

BALANCE SHEET DATA:

                                        

Working capital

   $ 48.4     $ (4.0 )   $ 13.3     $ 16.3     $ 19.6  

Inventories

     98.7       103.2       57.7       57.7       57.0  

Property and equipment, net

     68.3       64.1       20.9       18.6       16.7  

Total assets

     272.7       266.9       90.9       95.1       95.1  

Long term debt

     122.4       51.0       —         —         —    

Stockholders’ equity

     80.8       91.1       42.4       49.8       52.3  

OPERATING DATA:

                                        

Net sales per square foot

   $ 179     $ 183     $ 195     $ 192     $ 190  

Number of stores open at fiscal year end

     560       556       102       102       103  

 

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(1) The Company’s fiscal year is a 52 or 53 week period ending on the Saturday closest to January 31. The fiscal year ended February 3, 2001 included 53 weeks.
(2) The results for fiscal 2002 include the effect, since May 14, 2002, of the acquisition of substantially all of the assets of Casual Male Corporation and certain of its subsidiaries.
(3) In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company has shown stores closed during fiscal 2003 and 2002 as discontinued operations. Accordingly, certain prior-year amounts on the Income Statement Data have been reclassified to discontinued operations to conform to the current-year presentation.
(4) The results for fiscal 2003 include a charge of approximately $14.1 million, primarily related to the write off of costs and prepayment penalties incurred in connection with the Company’s prepayment of its long-term debt. Results also include the reversal of $646,000 of restructuring reserves related to excess reserves established for landlord settlements.
(5) The results for fiscal 2002 include $41.3 million in charges taken in the second and fourth quarters of fiscal 2002 related to the downsizing of the Levi’s® and Dockers® business, the integration of Casual Male and the exiting of the Candies® outlet store business. Of the total $41.3 million recorded during fiscal 2002, approximately $7.2 million is reflected in gross margin from continuing operations and reflects a write down of inventory for stores that have not yet closed. Approximately $15.3 million of the charge, which related to stores that closed during fiscal 2003 and fiscal 2002, is included as part of discontinued operations. As a result of the restructuring and its impact on the operating profitability of the Company, the total $41.3 million in charges also includes a non-cash charge of $8.0 million to further reduce the carrying value of certain deferred tax assets.
(6) In the fourth quarter of fiscal 2001, the Company recorded a special non-cash charge of $8.1 million to reduce the carrying value of certain deferred tax assets. Due to the general weakness of the economy during fiscal 2001, which resulted in reduced earnings as compared to the prior year, the full realizability of certain tax assets could not be assured. Accordingly the Company established additional reserves against those assets.
(7) Pre-tax loss for fiscal 1999 includes the $15.2 million charge taken in the fourth quarter related to inventory markdowns, the abandonment of the Company’s Boston Traders® trademark, severance, and the closure of the Company’s five remaining Designs/BTC stores and its five Buffalo® Jeans Factory stores. Of the $15.2 million charge, $7.8 million, or 4.1% of sales, is reflected in gross margin. The pre-tax loss for fiscal 1999 also includes $717,000 of non-recurring income related to excess reserves from the fiscal 1998 restructuring program.

 

Selected 5 Year Financial Data of Casual Male

 

The following table provides historical financial information of the Casual Male business for the past five fiscal years, of which all information prior to May 14, 2002 is according to the financial records of Casual Male Corp., the predecessor company

 

     Fiscal Years Ended

     January 31,
2004
(Fiscal 2003)


  

February 1,

2003

(Fiscal 2002) (1)


  

February 2,

2002

(Fiscal 2001) (1)


  

February 3,

2001

(Fiscal 2000)


  

January 29,

2000

(Fiscal 1999) (2)


(in millions, except store count)                         

OPERATING INCOME:

                                  

Sales

   $ 319.2    $ 329.2    $ 332.4    $ 408.0    $ 353.6

Gross profit, net of occupancy costs

     132.5      140.1      142.3      162.4      141.3

Selling, general and administrative

     109.3      116.0      123.3      126.8      108.0

Depreciation and amortization

     6.7      8.5      7.4      10.1      10.5
    

  

  

  

  

Operating income

   $ 16.5    $ 15.6    $ 11.6    $ 25.5    $ 22.8

Store count

     481      467      473      598      580

 

(1) In August 2001, Casual Male Corp. initiated a store-closing plan in conjunction with its bankruptcy proceedings. The Company has excluded the operating results, if any, of these store closings for Fiscal 2002 and Fiscal 2001.
(2) Included in the results for fiscal 1999 is the acquisition by Casual Male Corp. of the Repp Ltd. Big & Tall and Repp Ltd. By Mail divisions which occurred in May 1999. In connection with the acquisition, Casual Male Corp. acquired 175 Repp Ltd. Big & Tall stores and its catalog businesses.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD LOOKING STATEMENTS

 

As noted above, this Annual Report on Form 10-K, including, without limitation, this Item 7, contains “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. Actual results or developments could differ materially from those projected in such statements as a result of numerous factors, including, without limitation those risks and uncertainties set forth in the Company’s Current Report on Form 8-K, previously filed with the SEC on April 14, 2004, which you are encouraged to read. The following discussion and analysis of our financial condition and results of operations should be read in light of those risks and uncertainties and in conjunction with our accompanying Consolidated Financial Statements and Notes thereto.

 

EXECUTIVE OVERVIEW

 

Since acquiring the Casual Male business from Casual Male Corp. in May 2002, the Company has been working on a three-year turnaround plan aimed toward:

 

  Reducing high corporate overhead of the acquired Casual Male business,

 

  Upgrading its antiquated and inefficient infrastructure,

 

  Developing an effective merchandising strategy,

 

  Improving upon the effectiveness of its marketing programs in maintaining or increasing customer traffic into its stores, catalog and e-commerce website,

 

  Enhancing balance sheet liquidity and flexibility, and

 

  Cost effectively remodeling the existing chain of aging Casual Male stores.

 

Over the past twenty-three months many of these objectives have either been accomplished or are in the latter stages of completion, positioning the Company to benefit from these changes over the coming quarters. Since acquiring the Casual Male business, the Company has successfully reduced its selling, general and administrative by approximately 15% on an average store basis and formulated and commenced implementation of an enterprise wide systems strategy. One of the most significant changes has been an updating of Casual Male’s merchandising strategy. During fiscal 2003, the Company implemented numerous merchandising initiatives to more broadly appeal to its varied customer base such as the introduction of its young men’s line of apparel, the re-introduction of suit separates, the inclusion of more branded merchandise in its assortments, including Comfort Zone by George Foreman, Signature Collection by George Foreman and GF Sport by George Foreman, the proliferation of its key item merchandising program, and the extension of greater range of sizes available in assortments. These merchandising initiatives, which started to be implemented in the second quarter of fiscal 2003, have resulted in a marked improvement in quarter to quarter comparable store sales. In the first quarter of fiscal 2003 comparable store sales were a negative 5% as compared to the corresponding period of the prior year, improving each quarter to a positive 2.4% in the fourth quarter. Although it is still early in the Company’s first quarter of fiscal 2004, this trend of improvement appears to be continuing into next year.

 

In addition to its merchandising strategy, the Company is also focused on improving the customer traffic to its stores. One significant statistic the Company uses to understand its sales performance is its conversion rate, which is the percentage of total customers who enter our stores that purchase merchandise. The Company’s conversion rates in fiscal 2003 have improved by approximately 10% over fiscal 2002. However, customer traffic to its stores continues to be down over 10% as compared to the prior year. The Company believes that an improved marketing strategy can reverse the negative traffic trend. In the past, much of the marketing strategy has been geared toward its existing customer. Toward the end of fiscal 2003, the Company revamped its marketing program and started to redirect its objective to re-introducing the Casual Male brand and its multi-channel businesses. The Company plans to accomplish this primarily through increased media, television and radio. Some of this increased marketing spend contributed to the slight increase in selling, general and administrative expenses incurred in fiscal 2003.

 

To help further promote the Casual Male concept, in June 2003, the Company signed George Foreman as the Company’s spokesperson and also developed three lines of product bearing the George Foreman name. Although the Company’s

 

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national marketing launch will not occur until Spring 2004, the sales performance of the George Foreman product lines for the fourth quarter of fiscal 2003 were positive.

 

From a financial position perspective, the Company completed the sale of $100 million in 5% convertible notes during the fourth quarter of fiscal 2003. This offering enabled the Company to substantially prepay all of its high rate debt, much of which was acquired in conjunction with the Casual Male acquisition, and pay off amounts outstanding under its credit facility. In addition to saving the Company approximately $4.0 million in annual interest costs, this offering also increased the Company’s liquidity for working capital needs. In connection with the Company’s prepayment of its debt, the Company incurred approximately $13.8 million in costs, primarily associated with the write-off of deferred costs. See the full discussion of the repayments of debt and related charges below under “Liquidity and Capital Resources.” The Company sees this offering as a significant step toward a stronger and more liquid balance sheet while at the same time supporting the Company’s future growth strategies.

 

SEGMENT REPORTING

 

Since the Casual Male acquisition, the Company has redefined its business into two reportable business segments: (i) the Casual Male business and (ii) Other Branded Apparel businesses. See Note M of the Notes to Consolidated Financial Statements for a complete disclosure of the financial results of each segment. The Company’s “Other Branded Apparel businesses” segment includes the operations of the Company’s Levi’s®/Dockers® outlet stores and its Ecko Unltd.® outlet and retail stores.

 

STORE CLOSINGS/DISCONTINUED OPERATIONS

 

In accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), results of operations for stores closed in fiscal 2003 and fiscal 2002 have been presented as discontinued operations. The discontinued operations of these stores include related write-downs for the impairment of assets and costs to liquidate inventory. Accordingly, the Company has reclassified all prior year results for such closed stores to conform with the current period presentation of discontinued operations.

 

RESULTS OF OPERATIONS

 

Because of the materiality of the Casual Male business to the Company’s consolidated operations, the following discussion of results of operations will first review the segment results of the Casual Male business and will conclude with a consolidated review of the Company’s results. The discussion of the Company’s consolidated results of operations begins on page 25 of this Form 10-K. Because the actual results for the Casual Male business include only operations from May 14, 2002, the date of acquisition, the following discussion will also include pro forma results from operations for fiscal 2002 and fiscal 2001, assuming that the acquisition of Casual Male occurred on February 4, 2001. Management believes that this additional information is necessary in order to provide a complete and balanced discussion of the results of operations for this segment for fiscal 2003 as compared to fiscal 2002 and 2001. Management also believes that the inclusion of this information helps investors gain a better understanding of the Company’s core operating results and future prospects, consistent with how management measures and forecasts the Company’s performance, especially when comparing such results to previous periods or forecasts. 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 4, 2001, and are not necessarily indicative of the results that may be achieved in the future.

 

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CASUAL MALE BUSINESS – SEGMENT OVERVIEW

 

(in millions)   

Actual

Fiscal 2003


    Actual
Fiscal 2002


   

Pro Forma

Fiscal 2002


    Pro Forma
Fiscal 2001


 

Sales

   $ 319.2     $ 242.7     $ 329.2     $ 332.4  

Gross margin

     132.5       102.7       140.1       142.3  

Gross margin rate

     41.5 %     42.3 %     42.6 %     42.8 %

Selling, general and administrative

     109.3       79.1       116.0       123.3  

Depreciation and amortization

     6.7       6.0       8.5       7.4  
    


 


 


 


Operating income

   $ 16.5     $ 17.6     $ 15.6     $ 11.6  
    


 


 


 


 

Sales. Sales for fiscal 2003 for the Casual Male business, which includes sales from its e-commerce and catalog businesses, were $319.2 million as compared to sales of $242.7 million in fiscal 2002. This increase in sales of $76.5 million was due to the fact that fiscal 2003 represented a full year of revenue as compared to fiscal 2002, which reflected revenue only from May 14, 2002, the date of the Casual Male acquisition. Compared to pro forma sales for fiscal 2002 of $329.2 million, total sales for fiscal 2003 decreased 3.0% and comparable store sales decreased 1.3%. In addition, Casual Male discontinued its Repp catalog title during fiscal 2003, which resulted in an approximate 2% loss of sales as compared to fiscal 2002. On a pro-forma basis, fiscal 2002 comparable store sales decreased by 1% as compared to fiscal 2001. Comparable store sales include retail stores that have been open for at least one full fiscal year, together with e-commerce and catalog sales.

 

When the Company purchased the Casual Male business in May 2002, it believed that Casual Male had a strong and stable sales base, with significant potential to grow market share from its current 7% of the overall men’s big and tall apparel market. However, during the first quarter of fiscal 2003, the Company identified several merchandising issues, which the Company believes were negatively impacting sales. As discussed above under “Executive Summary,” the Company implemented several key merchandising and marketing initiatives geared towards improving sales trends and gaining market share. As a result of these initiatives, the Company was able to improve quarter over quarter comparable store sales in fiscal 2003.

 

Gross Margin. The Casual Male business gross margin rate for fiscal 2003 was 41.5% compared to 42.3% for fiscal 2002. This decrease of 0.8 percentage points was due to the deleveraging of occupancy costs of 1.0 percentage points offset slightly by improved merchandise margins of 0.2 percentage points. In spite of the decreases in sales that the Casual Male business experienced in the first half of fiscal 2003, the Company was able to maintain strong merchandise margins throughout fiscal 2003 as a result of stable initial margins and strong inventory management. Since fiscal 2001, Casual Male’s gross margin has dropped by approximately $10.0 million as a result of the decline in sales, which was primarily the result of decreases in comparable stores sales and the discontinuance of the Repp catalog. Casual Male’s recently developed and executed merchandising and marketing strategies were designed to broaden Casual Male’s appeal to its big and tall customer base, improve customer traffic into its stores, catalog and web site, and enhance gross margins.

 

The Company expects similar if not higher merchandise margin performance in fiscal 2004 as the Company continues to implement its merchandising initiatives, which appear to be having a positive impact on sales.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) as a percentage of sales were 34.2%, or $109.3 million, in fiscal 2003 and 32.6%, or $79.1 million, in fiscal 2002. On a pro forma basis, SG&A expenses as a percentage of sales in fiscal 2002 and fiscal 2001 were 35.2% and 37.1%, respectively. Since the completion of the Casual Male acquisition in May 2002, the Company has implemented several cost reduction and synergy initiatives, which have resulted in approximately $20.0 million in savings on an annualized basis. On a pro forma basis, since fiscal 2001, SG&A costs for the Casual Male business have declined by approximately 12%, on an average store basis.

 

The increase in SG&A costs as a percentage of sales of 1.6 percentage points for fiscal 2003 (34.2% of sales) from fiscal 2002 (32.6% of sales) is primarily due to the weighted impact of a full year’s of expenses which includes the first quarter,

 

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which historically runs at a higher percentage of sales then the remainder of the year. In addition, in the fourth quarter of fiscal 2003, the Company also started to increase its marketing spend in connection with its new merchandising initiatives and its George Foreman product lines.

 

For fiscal 2004, the Company plans to increase its marketing spend by approximately $7.0 million in anticipation of its launch of its George Foreman line of clothing. The majority of the incremental marketing expenditures is expected to be incurred in the first half of the year during its initial George Foreman marketing launch. Aside from this increase in marketing for fiscal 2004, the Company expects to see continued cost savings in other areas in fiscal 2004 as a result of its infrastructure initiatives, which were discussed more fully under “Business- Management Information Systems.”

 

Operating Income. The Casual Male business had operating income of $16.5 million in fiscal 2003 as compared to $17.6 million in fiscal 2002. On a pro forma basis, operating income for fiscal 2002 was $15.6 million, which includes an operating loss for the first quarter of fiscal 2002. The improvement in the Casual Male business’ operating income in fiscal 2003 as compared to fiscal 2002 and fiscal 2001, on a pro forma basis, was the result of significant cost reductions and strong merchandise margins. On an average store basis, the Casual Male business’ operating income has increased over 40% since fiscal 2001, in spite of a 7% decline in gross margins over the same period.

 

OTHER BRANDED APPAREL BUSINESS – SEGMENT OVERVIEW

 

Other Branded Apparel business includes the results of operations, on a continuing basis, for the Company’s Levi’®/Dockers® outlet stores and it Ecko Unltd.® outlet and retail stores. In fiscal 2002, the Company announced that it would be winding down its Levi’s®/Dockers® business with the intention to eventually exit the business completely. During fiscal 2003, the Company closed an additional 25 Levi’s®/Dockers® Outlet stores. Accordingly, the operating results of these stores for fiscal 2003, 2002 and 2001 have been reclassified to discontinued operations and are discussed in more detail under “Consolidated Results of Operations- Discontinued Operations.”

 

At January 31, 2004, 58 Levi’s®/Dockers® outlet stores and 21 Ecko Unltd.® stores were open and are included in the below table of operating results for the Other Branded Apparel business. The Company intends to close another approximate 25-30 Levi’s®/Dockers® stores during fiscal 2004, many of which will be closed during the fourth quarter.

 

     Fiscal 2003

    Fiscal 2002

    Fiscal 2001

 

Sales

                        

Levi’®/Dockers® sales

   $ 90.2     $ 109.0     $ 133.3  

Ecko Untld.®

     20.1       4.9       —    
    


 


 


Total sales

   $ 110.3     $ 113.9     $ 133.3  

Gross margin

     28.7       19.3       31.3  

gross margin rate

     26.0 %     16.9 %     23.5 %

Selling, general and administrative

     27.5       27.4       29.6  

Provision for impairment of assets store closing and severance

     (0.6 )     10.7       —    

Depreciation and amortization

     2.4       3.5       4.2  
    


 


 


Operating loss

   $ (0.6 )   $ (22.3 )   $ (2.5 )
    


 


 


 

Over the past few years, the Company’s Levi’s®/Dockers® outlet business has been experiencing significant sales decline due to the erosion of the Levi Strauss & Co. brands and product availability issues, resulting in comparable store decreases of 16.2% and 14.0% for fiscal 2003 and fiscal 2002, respectively. In fiscal 2003, the gross margin rate was 26.0% as compared to 16.9% in fiscal 2002, primarily due to the write-down of inventory of $7.2 million in fiscal 2002 associated with the Company’s decision to exit the business. Fiscal 2002 also includes a charge of $10.7 million primarily related to the write-down of fixed assets for these remaining outlet stores and integration costs associated with the combination of the Casual Male and Designs businesses. See “Consolidated Results of Operations – Restructuring Charges” for a complete discussion of these charges.

 

Notwithstanding such comparable store decreases, the Company has started to see some improvements during the first quarter of fiscal 2004 and believes that these stores will be able to, at a minimum, achieve break-even operating results

 

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Table of Contents

through the end of their respective lease terms or until the Company is able to achieve a negotiated settlement with the respective landlords.

 

Sales from the Company’s Ecko business were approximately $20.1 million in fiscal 2003 as compared to $4.9 million in fiscal 2002. There were no sales from Ecko in fiscal 2001. During fiscal 2003, the Company increased its store count from 6 Ecko stores in fiscal 2002 to 21 stores at January 31, 2004 and expects to open 10 additional stores in fiscal 2004. For fiscal 2003, the Ecko business generated an operating profit of approximately $0.6 million compared to $0.7 million last year. This slight decrease was due mainly to the increased infrastructure added in fiscal 2003 to support its continued growth.

 

The selling, general and administrative expenses of Ecko Unltd.® and Levi’s®/Dockers® business approximated $9.0 million and $18.5 million, respectively, during fiscal 2003. The SG&A expense base of the Levi’s®/Dockers® business declined by almost 40% since fiscal 2001, much of these savings resulting from the combination of corporate functions and the elimination of redundancies. Over the same time period, Levi’s®/Dockers® gross margins declined by approximately 40% as a result of a declining sales base. Operating income is expected to be positive during fiscal 2004 on the basis of a stabilized Levi’s®/Dockers® sales base, as well as a growing Ecko Unltd.® outlet business.

 

CONSOLIDATED RESULTS OF OPERATIONS

 

     Fiscal 2003

    Fiscal 2002

    Fiscal 2001

    Pro Forma
Fiscal 2002


    Pro Forma
Fiscal 2001


 

Sales

   $ 429.5     $ 356.6     $ 133.3     $ 443.1     $ 465.7  

Gross margin

     161.2       122.0       31.3       159.3       173.6  

gross margin rate

     37.5 %     34.2 %     23.5 %     35.9 %     37.3 %

Selling, general and administrative

     136.8       106.5       29.6       143.4       152.9  

Provision (income) for impairment of assets store closing and severance

     (0.6 )     10.7       —         10.7       —    

Depreciation and amortization

     9.1       9.5       4.2       12.0       11.6  
    


 


 


 


 


Operating income (loss)

   $ 15.9     $ (4.7 )   $ (2.5 )   $ (6.8 )   $ 9.1  
    


 


 


 


 


 

SALES

 

Fiscal 2003 to Fiscal 2002

Sales for fiscal 2003 increased $72.9 million, or 20.4%, as compared to fiscal 2003. This increase was due to a full year of revenue from the Casual Male business as compared to fiscal 2002, which only had revenue from Casual Male since May 14, 2002. On a pro forma basis, as compared to fiscal 2002 sales of $443.1 million, sales for fiscal 2003 decreased $13.6 million principally due to decreases in comparable stores sales for fiscal 2003 of 1.3% for the Casual Male business and 16.2% for the Other Branded Apparel business. See segment discussion above for more discussion regarding the specific sales trends in each segment.

 

Fiscal 2002 to Fiscal 2001

Sales for fiscal 2002 of $356.6 million increased $223.3 million as compared to sales of $133.3 million in fiscal 2002. The increase was solely the result of the Company acquisition of the Casual Male business in May 2002. On a pro forma basis, total sales for fiscal 2002 would have been $443.1 million, or a decrease of 4.9%, as compared to pro forma sales of $465.7 million in fiscal 2001.

 

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Table of Contents

GROSS MARGIN

 

Gross margin rates for fiscal 2003, 2002 and 2001 were 37.5%, 34.2% and 23.5%, respectively. The gross margin rates for fiscal 2003 and 2002 reflect the significant benefit of the higher margin Casual Male business. The Casual Male business has a substantial portion of private label merchandise, which by its nature produces higher gross margins. Gross margin for fiscal 2002 also includes a charge for the write-down of inventory for its Levi’s®/Dockers® business of approximately $7.2 million, which was part of the total charge of $41.3 million recorded by the Company in fiscal 2002 as part of its plan to exit its Levi’s®/Dockers® business.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

SG&A expenses as a percentage of sales were 31.9%, 29.9% and 22.2% for fiscal 2003, 2002 and 2001, respectively. The increase in SG&A expenses in fiscal 2003 and fiscal 2002 was principally due to the addition of the Casual Male cost structure to the Company’s existing low cost base. The 2.0 percentage point increase in SG&A during fiscal 2003 was related to the impact of the Casual Male cost structure for a full fiscal year, increased cost structure to support the additional 15 Ecko stores opened during the year and increased promotional advertising in the Company’s Casual Male business. On a pro forma basis, SG&A as a percentage of sales for fiscal 2003 of 31.9% decreased as compared to 32.4% for fiscal 2002 and 32.8% for fiscal 2001. This improvement, on a pro forma basis, is the result of the Company’s cost reduction and synergy initiatives which to date approximate $20.0 million on an annual basis.

 

RESTRUCTURING CHARGES

 

In the second and fourth quarters of fiscal 2002, the Company recorded a total of $41.3 million in restructuring charges. The components of the $41.3 million of charges as reported in the Company’s Annual Report on Form 10-K for the year ended February 1, 2003 have been reclassified for presentation purposes to allocate the restructuring reserves recorded in fiscal 2002 for stores closed in fiscal 2003 as discontinued operations. For a table summarizing the components of these charges see Note J to the Notes to the Consolidated Financial Statements

 

Of the total restructuring charges of $41.3 million: i) $15.3 million relates to the 45 Levi’s®/Dockers® stores closed during fiscal 2003 and 2002, and pursuant to SFAS No. 144, are included in loss from discontinued operations; ii) $18.0 million relates to the future closing of the balance of the Levi’s®/Dockers® stores and integration costs associated with combining the Casual Male business with the Company and, pursuant to SFAS No. 144, are included in loss from continuing operations; and iii) $8.0 million relates to the impairment of certain tax assets, which is shown under “Provision for income taxes” in the Consolidated Statement of Operations for fiscal 2002. The impairment of the Company’s tax assets does not affect its ability to utilize the $93.9 million federal net operating loss carryforwards to offset future taxable income, subject to certain annual limitations.

 

IMPAIRMENT OF ASSETS

 

The Company periodically assesses long-lived assets for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.

 

In fiscal 2002, the Company recorded an impairment charge of $14.4 million, which was included as part of the $41.3 million in restructuring charges recorded in fiscal 2002. See “Restructuring Charges” above. Of the $14.4 million, approximately $5.9 million related to the 45 Levi’s®/Dockers® outlet stores closed in fiscal 2003 and 2002 and the Candies® outlet stores and accordingly is included as a component of discontinued operations for fiscal 2002. The remaining $8.5 million relates to the balance of the Levi’s®/Dockers® outlet stores which will be closed in the future and is reflected in “Provision for impairment of assets, store closings, and severance” on the Consolidated Statement of Operations for fiscal 2002. In fiscal 2003, the Company recorded an impairment of approximately $116,000, which is

 

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included as part of selling, general and administrative expenses in the Consolidated Statement of Operations for the year ended January 31, 2004. No such charge was necessary for fiscal 2001.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense was $9.1 million for fiscal 2003, $9.5 million for fiscal 2002 and $4.2 million for fiscal 2001. The decrease in depreciation and amortization in fiscal 2003 of $0.4 million as compared to fiscal 2002 is due to lower depreciation of approximately $1.1 million among the Company’s Levi’s®/Dockers® stores as a result of the $14.4 million impairment charge recorded in fiscal 2002. This decrease was partially offset by an increase of $0.7 million in fiscal 2003 related to annualization of depreciation for the Company’s Casual Male business. The increase in depreciation and amortization in fiscal 2002 as compared to fiscal 2001 was due to the addition of approximately $52.9 million in assets acquired in connection with the Casual Male acquisition, offset partially by the $14.4 million in impaired assets which the Company wrote off in connection with the restructuring and store closing charges recorded in fiscal 2002.

 

DISCONTINUED OPERATIONS

 

Discontinued operations for 2003 resulted in a loss of $2.4 million compared to net loss of $16.8 million in fiscal 2002 and net income of $4.6 million in fiscal 2001. Due to the consolidated loss for the Company in fiscal 2003, 2002 and 2001, no tax benefit or provision was realized on discontinued operations. Included in discontinued operations are the results of operations for fiscal 2003, 2002 and 2001 of the Company’s Candies® outlet stores and its 45 Levi’s®/Dockers® outlet stores closed during fiscal 2003 and 2002 pursuant to the Company’s exit strategy. There were no results of operations for the Candies® Outlet business in fiscal 2001.

 

Below is a summary of the results of operations for these discontinued operations for the past three fiscal years:

 

(in millions)    Fiscal 2003

    Fiscal 2002

    Fiscal 2001

Sales

   $ 32.2     $ 64.3     $ 61.8

Gross margin (1)

     3.3       2.5       15.9

Selling, general and administrative expenses

     5.6       11.9       10.1

Provision for impairment of assets and store closings

     —         6.2       —  

Depreciation and amortization

     0.1       1.2       1.2
    


 


 

(Loss) income from discontinued operations

   $ (2.4 )   $ (16.8 )   $ 4.6
    


 


 

 

(1) Gross margin for fiscal 2002 includes a non-recurring charge of $9.1 million related to inventory liquidation that was included as part of the Company’s $41.3 million in charges as discussed above. See “Restructuring Charges.”

 

OTHER EXPENSES

 

During the second half of fiscal 2003, the Company incurred approximately $13.8 million of expenses related to its early prepayment of its senior subordinated notes due 2007 and 2010 and its term loan with Back Bay Capital. Of the total expenses of $13.8 million, approximately $13.3 million was recorded in the fourth quarter of fiscal 2003. The majority of these expenses related to prepayment charges of approximately $1.6 million and write-off of deferred costs of $11.7 million, primarily related to the acceleration of deferred expense for the value of warrants issued in connection with the above debt.

 

In the fourth quarter of fiscal 2003, the Company also recognized $355,000 of expenses related to costs incurred by the Company to separate its majority owned subsidiary, LP Innovations, Inc., into a separate, publicly owned company. See “Business- LP Innovations, Inc.”

 

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INTEREST EXPENSE, NET

 

Net interest expense was $11.2 million in fiscal 2003 as compared to $9.1 million in fiscal 2002 and $1.9 million in fiscal 2001. The increase in fiscal 2003 as compared to fiscal 2002 was due to the annualization of interest cost associated with the issuance of approximately $80.2 million of debt incurred to finance the Company’s Casual Male acquisition in May 2002. Included in net interest expense for fiscal 2003 was accretion on stock warrants of $1.4 million as compared to $1.1 million for fiscal 2002.

 

Interest expense for fiscal 2001 of $1.9 million related solely to interest costs incurred on borrowings under the Company’s credit facility with Fleet Retail Finance, Inc.

 

As discussed below under “Liquidity and Capital Resources,” interest charges in fiscal 2004 are expected to decrease by up to $4.0 million from fiscal 2003 levels. This expected decrease is the result of the Company’s prepayment of its high-interest rate long-term debt, the majority of which was incurred as part of the financing for the Casual Male acquisition.

 

INCOME TAXES

 

Pursuant to accounting rules, realization of the Company’s deferred tax assets, which relate principally to federal net operating loss carryforwards which expire from 2017 through 2023, is dependent on generating sufficient taxable income in the near term. The Company had not generated historical earnings in previous years and, accordingly, in fiscal 2001, the Company recorded a charge of $8.1 million against its deferred tax assets. In the fourth quarter of fiscal 2002 the Company recorded an additional charge of $8.0 million, thereby establishing a full valuation allowance against its deferred tax assets. The impairment of the Company’s tax assets does not affect its ability to utilize its net operating loss carryforwards to offset any future taxable income, subject to certain annual limitations.

 

As of January 31, 2004, the Company has net operating loss carryforwards of $93.9 million for federal income tax purposes and $88.6 million for state income tax purposes that are available to offset future taxable income, subject to certain annual usage limitations, through fiscal year 2023. Additionally, the Company has alternative minimum tax credit carryforwards of $1.2 million, which are available to further reduce income taxes over an indefinite period. As a result of the Casual Male acquisition and the issuance of $82.5 million of additional equity, the utilization of approximately $41.6 million of the total $93.9 million of the net operating loss is limited to approximately $4.8 million each fiscal year.

 

NET LOSS

 

(in millions)    Fiscal 2003 (1)

    Fiscal 2002 (2)

    Fiscal 2001

 

Operating income (loss):

                        

Casual Male business

   $ 16.5     $ 17.6     $  —    

Other Branded Apparel businesses

     (1.2 )     (4.3 )     (2.5 )

Restructuring charges

     0.6       (18.0 )     —    
    


 


 


Total operating income (loss)

     15.9       (4.7 )     (2.5 )

Other expenses, principally related to debt redemption costs

     14.1       —         —    

Interest expense

     11.2       9.1       1.9  

Minority interest

     0.3       0.2       —    

Provision for income taxes

     —         8.0       8.1  

(Loss) income from discontinued operations

     (2.4 )     (16.8 )     4.6  
    


 


 


Net loss

   $ (12.1 )   $ (38.8 )   $ (7.9 )
    


 


 


 

(1) Results for fiscal 2003 include $14.1 million in other expenses related to the Company’s prepayment of long-term debt and $646,000 of restructuring income related to the reversal of excess landlord reserves.

 

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(2) Results for fiscal 2002 include $41.3 million in charges related to the Company’s decision to exit its Levi’s®/Dockers® and Candies® businesses. Of the total restructuring charge, $15.3 million is included in loss from discontinued operations for fiscal 2002.

 

SEASONALITY

 

A comparison of sales in each quarter of the past three fiscal years is presented below. The amounts shown are not necessarily indicative of actual trends, because such amounts also reflect the addition of new stores and the remodeling and closing of others during these periods. Consistent with the retail apparel industry, the Company’s business is seasonal. The Casual Male business traditionally generates the largest volume of its sales during the Father’s Day selling season in June and the Christmas selling season in December. The Company’s outlet business, which included its Levi’s®/Dockers® and Ecko Unltd.® outlet stores, traditionally generates its largest volume during the back-to-school selling season in August and the Christmas selling season in December. The majority of the Company’s operating income is generated in the fourth quarter as a result of the impact of the Christmas selling season. A comparison of quarterly sales, gross profit, net income (loss) per share for the past two fiscal years is presented in Note N of the Notes to Consolidated Financial Statements.

 

(in millions,

except percentages)


   FISCAL 2003

     FISCAL 2002 (1)

    FISCAL 2001

 

First quarter

   $ 93.4    21.7 %    $ 24.2    6.8 %   $ 26.9    20.2 %

Second quarter

     104.9    24.4 %      100.2    28.1 %     32.4    24.3 %

Third quarter

     104.3    24.3 %      108.2    30.3 %     37.6    28.2 %

Fourth quarter

     126.9    29.6 %      124.0    34.8 %     36.4    27.3 %
    

  

  

  

 

  

     $ 429.5    100.0 %    $ 356.6    100.0 %   $ 133.3    100.0 %

 

(1) Fiscal 2002 sales results include, since May 14, 2002, the sales of the Casual Male business.

 

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, remodeling, 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. The Company has financed its working capital requirements, store expansion program, stock repurchase programs and acquisitions with cash flow from operations, external borrowings, and proceeds from equity offerings. The Company’s objective is to maintain a positive cash flow after capital expenditures such that it can support its growth activities with operational cash flows and without the use of incurring any additional debt.

 

The following table sets forth financial data regarding the Company’s liquidity position at the end of the past three fiscal years:

 

     FISCAL YEARS

     2003

   2002

    2001

( in millions, except ratios)          

Cash provided by operations

   $ 12.0    $ 20.6     $ 0.6

Working capital

     48.4      (4.0 )     13.3

Current ratio

     1.7:1      1.0:1       1.3:1

 

Cash flow provided by operations in fiscal 2003 decreased approximately $8.6 million from fiscal 2002, primarily due to cash payments associated with landlord settlements and the timing of other working capital payments. This positive cash flow in fiscal 2003 was primarily used to finance the Company’s capital expenditures and reduce its borrowings under the Credit Facility (as defined below).

 

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Credit Facility

In addition to cash flow from operations, the Company’s other primary source of working capital is its credit facility (as amended from time to time, the “Credit Facility”) with Fleet Retail Finance, Inc., which was most recently 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 to May 14, 2006. The Company is subject to prepayment penalties through May 14, 2005.

 

At January 31, 2004, the Company had borrowings of approximately $3.6 million under the Credit Facility, with an unused availability of $51.5 million. In the fourth quarter of fiscal 2003, the Company used approximately $40.3 million from the proceeds of its convertible debt offering, which is described below, to reduce amounts outstanding under the Credit Facility and increase its available liquidity.

 

Issuance of $100 Million in Convertible Notes

During the fourth quarter of fiscal 2003, 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 to qualified institutional buyers (as such term is defined in Rule 144A under the Securities Act of 1933, as amended). The sales 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 purchasers, closed on November 24, 2003. The Convertible Notes, which bear interest at a rate of 5% per year, payable semi-annually, 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 net proceeds of $95.8 million from the sale of the Convertible Notes were used to prepay $24.5 million of the Company’s 12% senior subordinated notes due 2007, and $21.8 million of its 12% senior subordinated notes due 2010, which were issued during fiscal 2003. For a complete discussion of the 12% senior subordinated notes due 2010 and related party participation in the offering, see Notes C and H to the Notes to the Consolidated Financial Statements. The Company also used a portion of the proceeds to reduce borrowings under its Credit Facility and repurchase 1,000,000 shares of its Common Stock at a cost of $7.9 million.

 

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. The Company anticipates that interest costs, including debt issuance costs, will be reduced by approximately $4.0 million annually.

 

In connection with the early prepayment of the senior subordinated notes due 2007 and 2010 and the prepayment of its term loan, the Company incurred charges during the third and fourth quarters of fiscal 2003 totaling approximately $13.8 million. These charges consisted of cash costs for prepayment penalties of $1.6 million and non-cash costs of $12.2 million for the write-off of deferred costs, primarily related to the accelerated amortization of the related warrants. The $13.8 million is reflected in “Other Expenses” in the Consolidated Statement of Operations for the fiscal year ended January 31, 2004.

 

Upon redemption of the remaining $7.8 million of the 12% senior subordinated notes due 2010, which will not be redeemable until July 3, 2004, the Company expects to incur $2.0 million of additional expense related to prepayment charges and the write-off of remaining deferred costs.

 

In addition, in connection with the Convertible Note offering, the Board of Directors 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. Through January 31, 2004, the Company had not purchased any additional shares above the original 1,000,000.

 

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INVENTORY

 

At January 31, 2004, total inventories of the Company were $98.7 million as compared to $103.2 million at February 1, 2003. Total inventory at January 31, 2004 is net of approximately $0.9 million in remaining inventory reserves related to the exiting of its Levi’s®/Dockers® Outlet stores. The following table provides segment information of inventory at January 31, 2004 and February 1, 2003:

 

(in millions)    January 31, 2004

   February 1, 2003

Casual Male business

   $ 67.5    $ 62.3

Other Branded Apparel business

     31.2      40.9
    

  

Total Inventory

   $ 98.7    $ 103.2
    

  

 

The decrease in total inventory at January 31, 2004 of $4.5 million as compared to the prior year, is due to a reduction of $9.7 million in inventory of its Other Branded Apparel business. This decrease is related to the closing of 25 additional Levi’s®/Dockers® stores during fiscal 2003.

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our contractual obligations at January 31, 2004, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods:

 

     Payments due by period

Contractual Obligations

(in millions)


   Total

   Less than 1
year


  

1-3

years


  

3-5

years


   More than 5
years


Long-Term Debt Obligations                                        (1)

   $ 127.5    $ 3.7    $ 7.7    $ 3.3    $ 112.8

Operating Lease

     114.7      32.5      45.3      25.3      11.6

Lease Obligations—Levi’s®/Dockers® Business         (2)

     33.0      10.8      11.1      5.8      5.3

Non-merchandise Purchase Obligations                      (3)

     3.3      1.3      2.0      —        —  

Merchandise Purchase Obligations                              (4)

     138.1      25.0      53.8      59.3      —  
    

  

  

  

  

Total Commitments

   $ 416.6    $ 73.3    $ 119.9    $ 93.7    $ 129.7
    

  

  

  

  

 

(1) For a complete description of the Company’s long-term debt obligations, see Note C to the Notes to the Consolidated Financial Statements.
(2) Represents current obligations at January 31, 2004 for leases commitments for the Company’s remaining 58 Levi’s®/Dockers® outlet stores. At January 31, 2004, the Company had reserves of $2.9 million accrued for the settlement and termination of some of these store leases. See Note J—”Restructuring Charges” to the Notes to the Consolidated Financial Statements for a full description of the Company’s exit strategy.
(3) Non-merchandise Purchase Obligations include commitments pursuant to certain agreements for services. Included in the table are the minimum obligations of the Company under its License Agreement and Endorsement Agreement with George Foreman. Pursuant to these agreements, the Company is obligated to pay a remaining aggregate minimum of approximately $3.0 million through December 31, 2006. See Note E—”Commitments and Contingencies” to the Notes to the Consolidated Financial Statements for a full description of these agreements. Also included is $326,000, which the Company is obligated to pay pursuant to a consulting agreement with Jewelcor Management, Inc. See Note H—”Related Parties” to the Notes to the Consolidated Financial Statements for a full description of this agreement.
(4) Merchandise Purchase Obligations include a sourcing agreement with Kellwood Company for which the Company is committed to meet certain minimum purchases. These commitments are contingent on Kellwood Company meeting its obligations under the sourcing agreement. Excluded from Merchandise Purchase Obligations in the table above, are the Company’s outstanding obligations pursuant to open purchase orders. At January 31, 2004, the Company had

 

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approximately $94.7 million in open purchase orders. The Company estimates that approximately 85% of these purchase orders may be considered non-cancellable.

 

CAPITAL EXPENDITURES

 

Below is a summary of store openings, closings and remodels from February 1, 2003 to January 31, 2004 and related square footage:

 

Number of Stores:


   Casual Male

    Levi’s®/Dockers®
outlet stores


   

Ecko® Unltd.

stores


   Total stores

 

At February 1, 2003

   467     83     6    556  

New outlet stores

   8           14    22  

New retail stores

   11           1    12  

Remodels in 2003

   13     —       —      13  

Closed stores

   (5 )   (25 )   —      (30 )
    

 

 
  

At January 31, 2004

   481     58     21    560  

Square footage (in thousands)


                       

at February 1, 2003

   1,608     977     10    2,595  

at January 31, 2004

   1,621     714     65    2,400  

 

During fiscal 2003, the Company incurred approximately $12.3 million in capital expenditures, of which approximately $4.5 million was related to systems integration and infrastructure upgrades and the remaining $7.8 million was used towards store capital and miscellaneous equipment at the corporate level.

 

Capital expenditures for fiscal 2004 are expected to be between $18.0 million and $20.0 million, of which $13.5 million relates to the store expansion. Included in store expansion of $13.5 million are funds to remodel up to 175 of the Company’s existing Casual Male Big & Tall retail stores at an estimated $35,000 to $45,000 for each location. The Company currently plans to open a combination of 15 new Casual Male Big & Tall retail and outlet stores and 10 Ecko Unltd.® stores. Another $6.0 million of the 2004 budget is expected to be used for on-going MIS projects related to upgrading the Company’s infrastructure, including its merchandising systems and point of sale system. The remaining planned capital expenditures for fiscal 2004 are primarily related to new merchandising and distribution systems, as well as maintenance level requirements.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s financial statements are based on the application of significant accounting policies, many of which require management to make significant estimates and assumptions (see Note A to the Notes to Consolidated Financial Statements). The Company believes that the following items involve some of the more critical judgments in the application of its accounting policies that currently affect its financial condition and results of operations.

 

Inventory. The Company records inventory at the lower of cost or market on a first in, first out, or FIFO, basis under the retail inventory method. The Company reserves for obsolescence based on the difference between the weighted average cost of the inventory and the estimated market value of the inventory based on assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional reserves may be required.

 

Impairment of Long-Lived Assets. The Company reviews its long-lived assets for impairment when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets is less than the assets’ carrying amount. The Company evaluates its long-lived assets for impairment at a store level for all its retail locations. If actual market conditions are less favorable than management’s projections, future write-offs may be necessary.

 

Goodwill and Intangibles: In connection with the Casual Male acquisition, the Company recorded goodwill and intangibles of approximately $81.4 million. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,

 

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Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company will, at least annually, evaluate these assets for impairment by analyzing the estimated fair value based on present value of discounted cash flows and will write off the amount of any goodwill or intangible in excess of its fair value.

 

Deferred Taxes. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. At January 31, 2004, the Company’s deferred tax assets are fully reserved.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“Interpretation 46”). In December 2003, the FASB issued a revision to Interpretation 46 to make certain technical corrections and address certain implementation issues that had arisen. Interpretation 46, as revised, provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. Interpretation 46 was effective immediately for VIEs created after January 31, 2003. The provisions of Interpretation 46, as revised, were adopted as of January 31, 2004. The adoption of this Interpretation had no impact on our overall financial position and results of operations.

 

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The provisions of this Statement are effective for financial instruments entered into or modified after May 31, 2003. The adoption of this Statement in fiscal 2003 had no impact on the Company’s overall financial position and results of operations.

 

In July 2003, the Emerging Issues Task Force discussed Issue No. 03-10, Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers (“Issue 03-10”). Issue 03-10 addresses the accounting for consideration received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales incentives offered directly to consumers (e.g., coupons). The Task Force reached a consensus in November 2003 that all vendor consideration received in the form of sales incentives should be recorded as a reduction of cost of goods sold when recognized in the reseller’s financial statements, rather than an offset to expenses, if certain restrictive conditions are not met. For fiscal 2003, 2002 and 2001, the Company has accounted for vendor considerations, which are not material to the Company, as a component of cost of goods sold, and therefore this accounting pronouncement had no impact on the Company’s results of operations.

 

EFFECTS OF INFLATION

 

Although the Company’s operations are influenced by general economic trends, the Company does not believe that inflation has had a material effect on the results of its operations in the last three fiscal years.

 

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Item 7A. 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 its Credit Facility to fund its working capital needs. The Company’s 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”). At January 31, 2004, the Company had no outstanding LIBOR contracts and the interest rate on its prime based borrowings was 4.25%. Based upon a sensitivity analysis as of January 31, 2004, assuming average outstanding borrowing during fiscal 2003 of $46.6 million, a 50 basis point increase in interest rates would have resulted in a potential increase in interest expense of approximately $233,000.

 

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Item  8. Financial Statements and Supplementary Data

 

CASUAL MALE RETAIL GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Management’s Responsibility for Financial Reporting

   36

Report of Independent Auditors

   37

Consolidated Financial Statements:

    

Consolidated Balance Sheets at January 31, 2004 and February 1, 2003

   38

Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004, February 1, 2003 and February 2, 2002

   39

Consolidated Statements of Operations for the Fiscal Years Ended Equity for the Fiscal Years Ended January 31, 2004, February 1, 2003 and February 2, 2002

   40

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004 February 1, 2003 and February 2, 2002

   41

Notes to Consolidated Financial Statements

   42

 

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

 

The integrity and objectivity of the financial statements and the related financial information in this report are the responsibility of the management of the Company. The financial statements have been prepared in conformity with generally accepted accounting principles and include, where necessary, the best estimates and judgments of management.

 

The Company maintains a system of internal accounting control designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded, transactions are executed in accordance with management’s authorization and the accounting records provide a reliable basis for the preparation of the financial statements. The system of internal accounting control is regularly reviewed by management and improved and modified as necessary in response to changing business conditions.

 

The Audit Committee of the Board of Directors, consisting solely of directors that satisfy the independence standards of the Nasdaq National Market, meets periodically with management and the Company’s independent auditors to review matters relating to the Company’s financial reporting, the adequacy of internal accounting control and the scope and results of audit work. The independent auditors have free access to the Audit Committee.

 

Ernst & Young LLP, independent auditors, have been engaged to examine the financial statements of the Company for the fiscal year ended January 31, 2004. The Report of Ernst & Young, Independent Auditors expresses an opinion as to the fair presentation of the financial statements in accordance with generally accepted accounting principles and is based on an audit conducted in accordance with auditing standards generally accepted in the United States.

 

/s/    DAVID A. LEVIN       /s/    DENNIS R. HERNREICH

     

David A. Levin

President and Chief Executive Officer

     

Dennis R. Hernreich

Executive Vice President, Chief Operating Officer,

Chief Financial Officer & Treasurer

 

 

 

 

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REPORT OF INDEPENDENT AUDITORS

 

To the Board of Directors and Stockholders of Casual Male Retail Group, Inc.:

 

We have audited the accompanying consolidated balance sheets of Casual Male Retail Group, Inc. as of January 31, 2004 and February 1, 2003 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Casual Male Retail Group, Inc. at January 31, 2004 and February 1, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2004 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

/s/ ERNST & YOUNG LLP

 

Boston, Massachusetts

March 24, 2004

 

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CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED BALANCE SHEETS


January 31, 2004 and February 1, 2003

 

    

January 31, 2004

(Fiscal 2003)


   

February 1, 2003

(Fiscal 2002)


 
      
ASSETS    (In thousands, except share data)  

Current assets:

                

Cash and cash equivalents

   $ 4,179     $ 4,692  

Accounts receivable

     5,556       6,989  

Inventories

     98,673       103,222  

Prepaid expenses and other current assets

     5,275       3,983  
    


 


Total current assets

     113,683       118,886  

Property and equipment, net of accumulated depreciation and amortization

     68,345       64,062  

Other assets:

                

Goodwill

     50,677       50,698  

Other intangible assets

     30,629       30,729  

Other assets

     9,408       2,570  
    


 


Total assets

   $ 272,742     $ 266,945  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities:

                

Current portion of long-term debt

   $ 3,710     $ 2,940  

Accounts payable

     32,125       33,902  

Accrued expenses and other current liabilities

     22,884       24,338  

Accrued liabilities for severance and store closings

     2,945       6,172  

Notes payable

     3,623       55,579  
    


 


Total current liabilities

     65,287       122,931  
    


 


Long-term liabilities:

                

Long-term debt, net of current portion

     122,374       50,996  

Other long-term liabilities

     436       933  
    


 


Total long-term liabilities

     122,810       51,929  
    


 


Minority interest

     3,804       1,018  

Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued

     —         —    

Common stock, $0.01 par value, 75,000,000 shares authorized, 39,246,364 and 38,867,000 shares issued at

                

January 31, 2004 and February 1, 2003, respectively

     392       389  

Additional paid-in capital

     153,650       146,892  

Accumulated deficit

     (56,165 )     (44,104 )

Treasury stock at cost, 4,171,930 and 3,119,000 shares at

                

January 31, 2004 and February 1, 2003, respectively

     (17,036 )     (8,913 )

Note receivable from officer

     —         (197 )

Accumulated other comprehensive loss

     —         (3,000 )
    


 


Total stockholders’ equity

     80,841       91,067  
    


 


Total liabilities and stockholders’ equity

   $ 272,742     $ 266,945  
    


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

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CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


For the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002

 

     January 31,
2004
(fiscal 2003)


    February 1,
2003
(fiscal 2002)


    February 2,
2002
(fiscal 2001)


 
     (In thousands, except share data)  

Sales

   $ 429,524     $ 356,566     $ 133,274  

Cost of goods sold including occupancy costs

     268,332       234,539       101,931  
    


 


 


Gross profit

     161,192       122,027       31,343  

Expenses:

                        

Selling, general and administrative

     136,846       106,470       29,623  

Provision (reversal) for impairment of assets, store closings and severance

     (646 )     10,747       —    

Depreciation and amortization

     9,070       9,498       4,191  
    


 


 


Total expenses

     145,270       126,715       33,814  
    


 


 


Operating income (loss)

     15,922       (4,688 )     (2,471 )

Other expenses, principally debt redemption costs

     14,113       —         —    

Interest expense, net

     11,189       9,081       1,905  
    


 


 


Loss from continuing operations before minority interest and income taxes

     (9,380 )     (13,769 )     (4,376 )

Minority interest

     280       207       —    

Provision for income taxes

     —         7,978       8,056  
    


 


 


Loss from continuing operations

     (9,660 )     (21,954 )     (12,432 )
    


 


 


(Loss) income from discontinued operations

     (2,401 )     (16,846 )     4,551  
    


 


 


Net loss

   $ (12,061 )   $ (38,800 )   $ (7,881 )
    


 


 


Net loss per share—basic and diluted

                        

Loss from continuing operations

   ($ 0.27 )   ($ 0.87 )   ($ 0.86 )

(Loss) income from discontinued operations

   ($ 0.07 )   ($ 0.67 )   $ 0.31  
    


 


 


Net loss

   ($ 0.34 )   ($ 1.54 )   ($ 0.54 )

Weighted-average number of common shares outstanding:

                        

Basic

     35,702       25,117       14,486  

Diluted

     35,702       25,117       14,486  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002

(IN THOUSANDS)

 

                                    Additional     Note    

Accumulated

other

   

(Accumulated

Deficit)

       
    Common Stock   Preferred Stock     Treasury Stock     Paid-in     Receivable     comprehensive     Retained        
    Shares

  Amounts

  Shares

    Amounts

    Shares

    Amounts

    Capital

    from Officer

    loss

    Earnings

    Total

 

Balance at February 3, 2001

  17,488   $ 175   —       $ —         (3,035 )   $ (8,427 )   $ 55,697     $ (197 )   $ —       $ 2,577     $ 49,825  
   
 

 

 


 


 


 


 


 


 


 


Exercises under option program

  19                                         28                               28  

Board of Directors stock compensation

  35                                         99                               99  

Issuance of shares to related party for professional services

  66     1                                   316                               317  

Issuance of options for professional services rendered

                                            33                               33  

Repurchase of common stock

                            (5 )     (23 )                                     (23 )

Income tax benefit from stock option exercised

                                            16                               16  

Net loss

                                                                    (7,881 )     (7,881 )
   
 

 

 


 


 


 


 


 


 


 


Balance at February 2, 2002

  17,608   $ 176   —       $ —         (3,040 )   $ (8,450 )   $ 56,189     $ (197 )   $ —       $ (5,304 )   $ 42,414  
   
 

 

 


 


 


 


 


 


 


 


Issuance of common stock through private placement

  1,379     14                                   5,986                               6,000  

Issuance of preferred stock through private placements

            180       2                       76,447                               76,449  

Issuance of warrants through private placements

                                            9,589                               9,589  

Costs of raising capital

                                            (2,448 )                             (2,448 )

Conversion of preferred stock to common stock

  18,016     180   (180 )     (2 )                     (178 )                             —    

Exercises under option program

  190     2                                   475                               477  

Exercise of options by related party

  400     4                   (79 )     (463 )     459                               —    

Exercises of warrants by related parties

  1,190     12                                                                   12  

Board of Directors stock compensation

  23     0                                   98                               98  

Issuance of shares to related party for professional services

  61     1                                   275                               276  

Accumulated other comprehensive loss-pension

                                                            (3,000 )             (3,000 )

Net loss

                                                                    (38,800 )     (38,800 )
                                                                           


Total comprehensive loss

                                                                            (41.800 )
   
 

 

 


 


 


 


 


 


 


 


Balance at February 1, 2003

  38,867   $ 389   —       $ —         (3,119 )   $ (8,913 )     $146,892       $(197)       (3,000 )   $ (44,104 )   $ 91,067  
   
 

 

 


 


 


 


 


 


 


 


Issuance of warrants through private placements

                                            5,570                               5,570  

Repurchase of common stock

                            (1,000 )     (7,890 )                                     (7,890 )

Exercises under option program

  275     3                                   699                               702  

Board of Directors compensation

  20     0                                   119                               119  

Issuance of shares to related party for professional services

  84     1                                   339                               340  

Issuance of options to related party for professional services

                                            31                               31  

Repayment of loan by executive

                            (53 )     (233 )             197                       (36 )

Accumulated other comprehensive income—  pension

                                                            3,000               3,000  

Net loss

                                                                    (12,061 )     (12,061 )
                                                                           


Total comprehensive loss

                                                                            (9,061 )
   
 

 

 


 


 


 


 


 


 


 


Balance at January 31, 2004

  39,246   $ 392   —       $ —       $ (4,172 )   $ (17,036 )   $ 153,650     $ —       $ —       $ (56,165 )   $ 80,841  
   
 

 

 


 


 


 


 


 


 


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

CASUAL MALE RETAIL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


For the fiscal years ended January 31, 2004, February 1, 2003 and February 3, 2001

 

    

Fiscal

2003


   

Fiscal

2002


   

Fiscal

2001


 
     (In thousands)  

Cash flows from operating activities:

                        

Net loss

   $ (12,061 )   $ (38,800 )   $ (7,881 )

Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:

                        

Loss (income) from discontinued operations

     2,401       16,846       (4,551 )

Provision (reversal) for impairment of assets, store closings and severance

     (646 )     10,747       —    

Provision for inventory markdowns

     —         7,235       —    

Depreciation and amortization

     9,070       9,498       4,191  

Accretion of warrants

     1,388       1,087       —    

Other expenses, principally related to debt redemption costs

     14,113       —         —    

Minority interest

     280       207       —    

Deferred income taxes

     —         7,978       7,134  

Loss from disposal of property and equipment

     —         150       42  

Issuance of common stock to Board of Directors

     119       98       99  

Issuance of common stock to related party

     371       288       317  

Issuance of common stock for professional services

     —         —         33  

Changes in operating assets and liabilities:

                        

Accounts receivable

     1,433       (5,101 )     (473 )

Inventories

     6,369       8,843       5,699  

Prepaid expenses and other current assets

     (1,572 )     2,094       206  

Other assets

     (1,661 )     (649 )     (399 )

Payment to Internal Revenue Service on settlement of audit

     —         —         (1,500 )

Accounts payable

     (1,777 )     3,619       794  

Accrued liabilities for severance, store closings and impairment charges

     (2,581 )     3,882       (852 )

Accrued expenses and other liabilities

     (3,282 )     (7,458 )     (2,296 )
    


 


 


Net cash provided by operating activities

     11,964       20,564       563  
    


 


 


Cash flows from investing activities:

                        

Additions to property and equipment, net

     (12,320 )     (12,472 )     (4,012 )

Additions to property and equipment of discontinued operations

     —         (1,996 )     —    

Proceeds from disposal of property and equipment

     —         1       21  

Acquisition of Casual Male, less cash acquired

     —         (160,808 )     —    
    


 


 


Net cash used for investing activities

     (12,320 )     (175,275 )     (3,991 )
    


 


 


Cash flows from financing activities:

                        

Net (repayments) borrowings under credit facility

     (51,956 )     27,827       3,407  

Proceeds from the issuance of long-term debt, net of commissions and offering costs

     119,607       41,241       —    

Principal payments on long-term debt

     (18,270 )     (543 )     —    

Prepayment of long-term debt

     (46,250 )                

Proceeds from the issuance of warrants

     5,570       9,589       —    

Proceeds from the issuance of Series B preferred stock

     —         76,449       —    

Proceeds from the issuance of common stock

     —         6,000       —    

Payment of equity transaction costs

     —         (2,448 )     —    

Payment of premiums associated with prepayment of long-term debt

     (1,634 )     —         —    

Proceeds from minority equityholder of joint venture

     —         811       —    

Repurchase of common stock

     (7,926 )     —         (23 )

Issuance of common stock under option program

     702       477       44  
    


 


 


Net cash (used for) provided by financing activities

     (157 )     159,403       3,428  
    


 


 


Net (decrease) increase in cash and cash equivalents

     (513 )     4,692       —    

Cash and cash equivalents:

                        

Beginning of the year

     4,692       —         —    
    


 


 


End of the year

   $ 4,179     $ 4,692     $ —    
    


 


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

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CASUAL MALE RETAIL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 2004

 

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Casual Male Retail Group, Inc. (formerly known as Designs, Inc. and collectively referred to as the “Company”) is the largest specialty retailer of big and tall men’s apparel, with over 480 locations throughout the United States, along with e-commerce and catalog operations. The Company also operates approximately 58 Levi’s® and Dockers® outlet stores located in the eastern part of the United States and Puerto Rico. In addition, through a joint venture agreement with Ecko Complex LLC, the Company operates 21 Ecko Unltd.® outlet and retail stores.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts, transactions and profits are eliminated. As discussed more fully in Note K, the results for fiscal 2002 include the effect, since May 14, 2002, of the Company’s acquisition of substantially all of the assets and certain liabilities of Casual Male Corp. and certain of its subsidiaries (“Casual Male”).

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from estimates.

 

Certain amounts from prior years have been reclassified to conform to the current year presentation.

 

Fiscal Year

 

The Company’s fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal years 2003, 2002 and 2001 ended on January 31, 2004, February 1, 2003 and February 2, 2002, respectively. Fiscal years 2003, 2002 and 2001 were 52-week periods.

 

Cash and Cash Equivalents

 

Short-term investments, which have a maturity of ninety days or less when acquired, are considered cash equivalents.

 

Fair Value of Financial Instruments

 

Statement of Financial Accounting Standards (“FASB”) No. 107, Disclosure About Fair Value of Financial Instruments, requires disclosure of the fair value of certain financial instruments. The carrying amounts for the Company’s recently issued long-term debt and mortgage obligation approximate fair value as the interest rates and terms are substantially similar to those that could be obtained currently for similar instruments. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.

 

Inventories

 

Merchandise inventories for the Company’s catalog and e-commerce businesses, of approximately $4.8 million, are accounted for using the average cost method. All other merchandise inventories were valued at the lower of cost or market using first-in, first-out (“FIFO”) under the retail inventory method.

 

Property and Equipment

 

Property and equipment are stated at cost. Major additions and improvements are capitalized while repairs and maintenance are charged to expense as incurred. Upon retirement or other disposition, the cost and related depreciation of the assets are removed from

 

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Table of Contents

the accounts and the resulting gain or loss, if any, is reflected in income. Depreciation is computed on the straight-line method over the assets’ estimated useful lives as follows:

 

Building and land improvements         Forty years
Furniture and Fixtures         Five to ten years
Equipment         Five to eight years
Leasehold improvements         Lesser of useful lives or related lease term
Hardware and software         Three to five years

 

Goodwill and Intangibles

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations, and in January 2002 issued SFAS No. 142, Goodwill and Other Intangible Assets, which supersede Accounting Principles Board (“APB”) Opinion No. 17, Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two criteria set forth in the statement. This statement applies to all business combinations initiated after June 30, 2001. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested at least annually for impairment. Separable intangible assets with defined lives will continue to be amortized over their useful lives. The provisions of SFAS No. 142 apply to goodwill and intangible assets acquired before and after the statement’s effective date.

 

The carrying value of the Company’s goodwill and intangible assets were as follows at January 31, 2004 and February 1, 2003:

 

(in thousands)    January 31, 2004

   February 1, 2003

Goodwill

   $ 50,677    $ 50,698

Trademarks

     29,200      29,200

Customer lists

     1,429      1,529

 

At least annually, the Company performs an impairment analysis and records an impairment charge for any intangible assets with a carrying value in excess of its fair value. Customer lists, which is the only intangible asset with a defined life of 16 years, is net of accumulated amortization, using the straight-line method, of $170,834 at January 31, 2004 and $70,834 at February 1, 2003.

 

Pre-opening Costs

 

In accordance with Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities,” the Company expenses all pre-opening costs for its stores as incurred.

 

Advertising Costs

 

The Company expenses in-store advertising costs as incurred. Direct response advertising costs, which consist of catalog production and postage costs, are deferred and amortized over the period of expected direct marketing revenues, which is less than one year. Direct response costs which were deferred at January 31, 2004 and February 1, 2003 were $846,411 and $648,500, respectively. Advertising expense, which is included in selling, general and administrative expenses, was $19.2 million, $14.2 million and $1.0 million for fiscal 2003, 2002 and 2001, respectively.

 

Revenue Recognition

 

Revenue from the Company’s retail store operation is recorded upon purchase of merchandise by customers. Revenue from the Company’s catalog and e-commerce operations is recognized at the time a customer order is shipped. In connection with gift cards, a deferred revenue amount is established upon purchase of the gift card by the customer and revenue is recognized upon redemption and purchase of merchandise.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of sales.

 

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Table of Contents

Net Income (Loss) 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 year. Diluted earnings per share is determined by giving effect to the exercise of stock options using the treasury stock method.

 

     January 31, 2004

  

Fiscal Years Ended

February 1, 2003


   February 2, 2002

          (in thousands)     

Basic weighted-average common shares outstanding

   35,702    25,117    14,486

Stock options, excluding anti-dilutive options and warrants of 1,262, 1,234 and 578 shares for January 31, 2004, February 1, 2003 and February 2, 2002, respectively

   —      —      —  
    
  
  

Diluted weighted-average shares outstanding

   35,702    25,117    14,486
    
  
  

 

The following potential Common Stock equivalents were excluded from the computation of diluted earnings per share in each year because the exercise price of such options, warrants and convertible notes was greater than the average market price per share of Common Stock for the respective periods:

 

(in thousands)    January 31, 2004

   February 1, 2003

   February 2, 2002

Options

   353    253    934

Warrants

   1,898    1,176    —  

Convertible notes at $10.65/share

   9,390    —      —  

 

These options, warrants and convertible notes, which expire between July 1, 2004 and January 1, 2024, have exercise prices ranging from $6.01 to $10.65 in fiscal 2003, $4.77 to $17.75 in fiscal 2002 and $3.48 to $17.75 in fiscal 2001.

 

Stock-based Compensation

 

The Company accounts for stock option plans in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans. See Note G for more information regarding Stock-based compensation.

 

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the Statement also amends the disclosure requirements of SFAS No. 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. The Company adopted the interim disclosure provisions of SFAS No. 148 in the first quarter of fiscal 2003.

 

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The Company has elected the disclosure-only alternative prescribed in SFAS No. 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 No. 123, the Company’s net income (loss) and income (loss) per share would have been as indicated below:

 

     FISCAL YEARS ENDED

 

(In thousands, except per share amounts)


   January 31, 2004

    February 1, 2003

    February 2, 2002

 

Net loss—as reported

   $ (12,061 )   $ (38,800 )   $ (7,881 )

Net loss—pro forma

   $ (13,073 )   $ (39,468 )   $ (8,158 )

Loss per share—basic and diluted as Reported

   $ (0.34 )   $ (1.54 )   $ (0.54 )

Loss per share—basic and diluted pro–Forma

   $ (0.37 )   $ (1.57 )   $ (0.56 )

 

The effects of applying SFAS No. 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income 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 in fiscal 2003, 2002 and 2001:

 

     FISCAL YEARS ENDED

 
     January 31, 2004

    February 1, 2003

    February 2, 2002

 

Expected volatility

     65.0  %     89.6  %     91.8  %

Risk-free interest rate

     2.54%-3.26  %     2.7  %     5.0  %

Expected life

     4.5       4.5       4.5  

Dividend rate

     —         —         —    

Weighted average fair value of options granted

   $ 2.64     $ 2.87     $ 2.78  

 

Impairment of Long-Lived Assets

 

In fiscal 2002, the Company adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provided new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of. The statement also broadened the definition of what constitutes a discontinued operation and how the results of a discontinued operation were to be measured and presented. The adoption of the standard did not have a material impact on the Company’s impairment policy or on the Company’s net income (loss); however, it did result in classifying the operations of certain stores as discontinued operations in the accompanying Consolidated Statements of Operations.

 

The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds. In fiscal 2003, the Company recorded an impairment of approximately $116,000, which is included as part of selling, general and administrative expenses in the Consolidated Statement of Operations for the year ended January 31, 2004. In fiscal 2002, the Company recorded an impairment charge of $14.4 million, which was included as part of the $41.3 million in restructuring charges recorded in the second and fourth quarters of fiscal 2003. Approximately $5.9 million of the $14.4 million impairment charge related to closed stores and therefore has been reflected in discontinued operations in the Consolidated Statement of Operations for the year ended February 1, 2003. These charges are more fully discussed in Note J. No such charge was necessary for fiscal 2001.

 

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LP Innovations, Inc.

 

Since fiscal 2002, the Company has been in the process of divesting its majority owned loss prevention subsidiary, LP Innovations, Inc. (“LPI”), so that LPI will become a separate public company. In the fourth quarter of fiscal 2003, the Company recorded a charge of approximately $355,000 related to the write-off of certain offering costs. This charge is included in Other Expenses on the Consolidated Statement of Operations for the fiscal year ended January 31, 2004.

 

B. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at the dates indicated:

 

     January 31, 2004

   February 1, 2003

(in thousands)          

Furniture and fixtures

   $ 33,174    $ 35,369

Equipment

     4,052      4,063

Leasehold improvements

     13,214      11,495

Building, land and building improvements

     29,435      29,422

Hardware and software

     10,665      6,421

Construction in progress

     316      635
    

  

     $ 90,856    $ 87,405

Less accumulated depreciation

     22,511      23,343
    

  

Total property and equipment

   $ 68,345    $ 64,062
    

  

 

Depreciation expense for fiscal 2003, 2002 and 2001 was $8.2 million, $9.6 million and $5.3 million, respectively. Such amounts include depreciation expense recorded in discontinued operations of $135,000, $1.3 million and $1.2 million for fiscal 2003, 2002 and 2001, respectively.

 

C. DEBT OBLIGATIONS

 

Credit Agreement with Fleet Retail Finance, Inc.

 

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 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. Pursuant to the Credit Facility, which will expire on 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 January 31, 2004.

 

At January 31, 2004, the Company had borrowings outstanding under the Credit Facility of $3.6 million, with an unused availability of $51.5 million. Outstanding standby letters of credit were $850,000 and outstanding documentary letters of credit were less than $1,000 at January 31, 2004. Average borrowings outstanding under this facility during fiscal 2003 were approximately $46.6 million, resulting in an average unused excess availability of approximately $26.0 million during fiscal 2003. In the fourth quarter of fiscal 2003, the Company used approximately $40.3 million from proceeds from its convertible note offering, which is described below under other long-term debt, to reduce amounts outstanding under its credit facility.

 

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The fair value of amounts outstanding under the Credit Facility approximate the carrying value at January 31, 2004 and February 1, 2003. At the Company’s option, any portion of the outstanding borrowings can be converted to LIBOR based contracts; the remainder bears interest based on prime. At January 31, 2004, the prime based borrowings interest rate was 4.25% and the Company had no outstanding LIBOR contracts.

 

Other Long-Term Debt

 

Components of other long-term debt are as follows (in thousands):

 

     January 31, 2004

    February 1, 2003

 

5% convertible senior subordinated notes due 2024

   $ 100,000     $ —    

12% senior subordinated notes due 2010

     6,415       —    

12% senior subordinated notes due 2007

     —         15,998  

5% senior subordinated notes due 2007

     8,938       11,000  

Term Loan

     —         15,330  

Mortgage note

     10,731       11,608  
    


 


Total other long-term debt

     126,084       53,936  

Less: current portion of long-term debt

     (3,710 )     (2,940 )
    


 


Other long-term debt, less current portion

   $ 122,374     $ 50,996  
    


 


 

5% convertible senior subordinated notes due 2024

 

During the fourth quarter of fiscal 2003, 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 to qualified institutional buyers (as such term is defined in Rule 144A under the Securities Act of 1933, as amended). The sales 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 purchasers, closed on November 24, 2003. The Convertible Notes, which bear interest at a rate of 5% per year, payable semi-annually, 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 net proceeds of $95.8 million from the sale of the Convertible Notes were used to prepay some of the Company’s higher interest rate debt, reduce borrowings under its Credit Facility and repurchase 1,000,000 shares of its Common Stock. The Board of Directors 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. Through January 31, 2004, the Company had not purchased any additional shares above the original 1,000,000.

 

12% senior subordinated notes due 2010

 

During the second and third quarters of fiscal 2003, the Company issued through private placements approximately $29.6 million principal amount of 12% senior subordinated notes due 2010. Interest on such notes is paid semi-annually. A description of related party participation in these private placements is included in Note H. Together with these notes, the Company also issued, through such private placements, detachable warrants to purchase 1,182,400 million shares of Common Stock at exercise prices ranging from $4.76 to $7.32 per share. See Note F for more complete description of such warrants. The assigned value of $5.6 million for these warrants was reflected as a component of stockholder’s equity to be amortized over the seven-year life of the notes as additional interest expense. Although the Company’s 12% senior subordinated notes due 2010 were not redeemable until July 3, 2004, the Company sought early redemption from the respective note holders in the fourth quarter of fiscal 2003. As a result, by January 31, 2004, the Company used proceeds from the Convertible Note offering to prepay approximately $21.8 million of the notes. Accordingly, at January 31, 2004, the carrying value of the remaining notes, which were not redeemed, was $6.4 million, and is net of the remaining unamortized assigned value of the related warrants of $1.4 million.

 

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12% senior subordinated notes due 2007

 

In May 2002, the Company had issued $24.5 million principal amount of 12% senior subordinated notes due 2007 together with warrants to acquire 1,715,000 shares of Common Stock at $0.01 per share and additional detachable warrants to acquire 1,176,471 shares of Common Stock at an exercise price of $8.50 per share. See Note F, for a complete discussion of the warrants. In the fourth quarter of fiscal 2003, the Company used proceeds from the Convertible Note offering to prepay in full the $24.5 million principal amount of the 12% senior subordinated notes due 2007. A description of related party participation in these redemptions is included in Note H.

 

5% senior subordinated notes due 2007

 

At January 31, 2004, the Company has $8.9 million principal amount of its 5% senior subordinated notes due 2007 outstanding. These notes were issued in May 2002 through a private placement with the Kellwood Company, with whom the Company also has a product sourcing agreement. Beginning at the end of the second quarter of fiscal 2003, the Company started to make quarterly principal payments in the amount of $687,500 which will continue through the remaining term of the notes. Accrued interest is payable quarterly.

 

Term loan

 

During the third and fourth quarters of fiscal 2003, the Company prepaid in full the $15.6 million under its three-year term loan with Back Bay Capital, a subsidiary of Fleet Retail Finance, Inc.

 

Mortgage

 

The Company has an outstanding mortgage note for real estate and buildings located in Canton, Massachusetts. The mortgage note, which bears interest at 9%, has an outstanding principal balance of $10.7 million at January 31, 2004.

 

Prepayment costs

 

In connection with the early prepayment of the senior subordinated notes due 2007 and 2010 and the prepayment of the term loan, the Company incurred charges during the third and fourth quarters of fiscal 2003 totaling approximately $13.8 million. These charges consisted of prepayment charges of $1.6 million and the write off of deferred costs, primarily related to the accelerated amortization of the related warrants, of $12.2 million. The $13.8 million is reflected in the Company’s results of operations for fiscal 2003 as Other Expenses.

 

Upon redemption of the remaining $7.8 million of the 12% senior subordinated notes due 2010, which will not be redeemable until July 3, 2004, the Company expects to incur $2.0 million of additional expense related to prepayment charges and the write-off of remaining deferred costs.

 

Annual maturities of long-term debt, including the mortgage note, for the next five fiscal years are as follows:

 

     (in thousands)

Fiscal 2004

   $ 3,710

Fiscal 2005

     3,800

Fiscal 2006

     3,898

Fiscal 2007

     1,943

Fiscal 2008

     1,374

 

The Company paid interest and fees on all the above described debt obligations totaling $9.9 million, $7.4 million and $1.9 million for fiscal 2003, 2002 and 2001, respectively.

 

D. INCOME TAXES

 

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. SFAS No. 109 requires current recognition of net deferred tax assets to the extent that it is more likely than not that such net assets will be realized. To the extent that the Company believes that its net deferred tax assets will not be realized, a valuation allowance must be recorded against those assets.

 

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As of January 31, 2004, the Company has net operating loss carryforwards of $93.9 million for federal income tax purposes and $88.6 million for state income tax purposes that are available to offset future taxable income, subject to certain annual usage limitations, through fiscal year 2023. As a result of the Casual Male acquisition and the issuance of additional equity in fiscal 2003, the utilization of approximately $41.6 million of the $93.9 million in federal net operating losses are subject to an annual limitation of approximately $4.8 million per year. Additionally, the Company has alternative minimum tax credit carryforwards of $1.2 million, which are available to further reduce income taxes over an indefinite period.

 

The components of the net deferred tax assets as of January 31, 2004 and February 1, 2003 are as follows:

 

    

January 31,

2004


   

February 1,

2003


 

Deferred tax assets—current:

                

Inventory reserves

   $ 1,707     $ 3,444  

Restructuring reserve

     1,123       4,425  

Accrued expenses

     1,424       1  
    


 


Net deferred tax assets—current

     4,254       7,870  
    


 


Deferred tax assets—noncurrent:

                

Excess of book over tax depreciation/amortization

     7,356       7,617  

Restructuring reserve

     —         —    

Net operating loss carryforward

     37,292       20,734  

Alternative minimum tax credit carryforward

     1,166       1,166  
    


 


Net deferred tax assets—non current

     45,814       29,517  

Deferred tax liabilities—noncurrent

                

Tax-deductible goodwill

     (6,141 )     (2,884 )
    


 


Net deferred tax liabilities—noncurrent

     (6,141 )     (2,884 )

Deferred tax asset before valuation allowance

     43,927       34,503  

Valuation allowance

     (43,927 )     (34,503 )
    


 


Total deferred tax assets, net

   $ 0     $ 0  
    


 


 

In the fourth quarter of fiscal 2002, as a result of the net loss incurred by the Company for the fiscal year and the potential that the remaining deferred tax assets, net of existing valuation allowances, may not be realizable, the Company recorded an additional charge of $8.0 million against the deferred tax assets. At January 31, 2004, the total deferred tax assets of the Company are fully reserved.

 

Realization of the Company’s deferred tax assets, which relate principally to federal net operating loss carryforwards which expire from 2017 through 2023, is dependent on generating sufficient taxable income in the near term. Accordingly, the valuation allowance at January 31, 2004 is primarily attributable to the potential that certain deferred federal and state tax assets will not be realizable within this period. In the event the Company’s future performance results in overall profitability, the Company’s valuation allowance for its deferred tax assets may be reduced.

 

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The provision for income taxes consists of the following:

 

     FISCAL YEARS ENDED

 
     January 31,
2004


   February 1,
2003


   February 2,
2002


 

Current:

     (in thousands)  

Federal

   $ —      $ —      $ (627 )

State

     —        —        1,549  
    

  

  


       —        —        922  
    

  

  


Deferred:

                      

Federal

     —        6,981      5,107  

State

     —        997      2,027  
    

  

  


       —        7,978      7,134  
    

  

  


Total provision

   $ —      $ 7,978    $ 8,056  

 

The following is a reconciliation between the statutory and effective income tax rates in dollars:

 

     FISCAL YEARS ENDED

 
(in thousands)    January 31,
2004


    February 1,
2003


    February 2,
2002


 

Federal income tax at the statutory rate

   $ (4,221 )   $ (13,666 )   $ 60  

State income and other taxes, net of federal tax benefit

     —         —         5  

Permanent items

     —         —         38  

Change in valuation allowance

     9,424       21,644       8,000  

Other, net

     —         —         (47 )

Change in net operating loss carryforwards

     (5,203 )     —         —    
    


 


 


Provision for income tax

   $ —       $ 7,978     $ 8,056  

 

During the first quarter of fiscal year 1998, the Internal Revenue Service (“IRS”) completed an examination of the Company’s federal income tax returns for fiscal years 1991 through 1995. Taxes on the adjustments proposed by the IRS, excluding interest, amounted to approximately $4.9 million. The IRS challenged the fiscal tax years in which various income and expense deductions were recognized, resulting in potential timing differences of previously paid federal income taxes. The Company appealed these proposed adjustments through the IRS appeals process and on August 25, 2001 reached a settlement on the audit. In accordance with the settlement, the Company paid to the IRS a total of $1.5 million in fiscal 2001, including interest. The settlement of $1.5 million had no material impact on the Company’s results of operations in fiscal 2001 due to adequate provisions previously established by the Company.

 

In fiscal 2003, the Company made tax payments of $218,000. In fiscal 2002, the Company received income tax refunds of $93,000 and paid income taxes of $56,000. In fiscal 2001, the Company made tax payments, excluding its settlement with the IRS, of $231,000.

 

E. COMMITMENTS AND CONTINGENCIES

 

At January 31, 2004, the Company was obligated under operating leases covering store and office space, automobiles and certain equipment for future minimum rentals as follows:

 

     TOTAL

FISCAL    (in thousands)

2004

   $ 32,452

2005

     25,380

2006

     19,966

2007

     15,592

2008

     9,697

Thereafter

     11,645
    

     $ 114,732
    

 

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Excluded from the above commitment schedule are the lease obligations for the Company’s Levi’s®/Dockers® business. As discussed in Note J, the Company is exiting this business and is in the process of lease termination negotiations with several landlords. Assuming that these stores were not to close, the lease obligations for these stores would be $10.8 million in fiscal 2004; $7.0 million in fiscal 2005; $4.2 million in fiscal 2006; $3.0 million in fiscal 2007; $2.8 million in fiscal 2008; and $5.3 million thereafter.

 

In addition to future minimum rental payments, many of the store leases include provisions for common area maintenance, mall charges, escalation clauses and additional rents based on a percentage of store sales above designated levels.

 

The Company has an outstanding ten-year lease, which ends in January 2006, for its previous corporate headquarters in Needham, Massachusetts. The lease provides for the Company to pay all related costs associated with the land and headquarters building. The Company occupied these premises until the second quarter of fiscal 2002, at which time the majority of the Company relocated to Canton, Massachusetts as part of its Casual Male integration plan. At January 31, 2004, approximately 19,000 square feet of the total 80,000 square feet of the building was sub-leased through December 31, 2005 by the Company to its loss prevention service division, LP Innovations, Inc. At January 31, 2004, the Company had no other sub-tenants occupying the remaining vacant space.

 

Amounts charged to operations for all occupancy costs, automobile and leased equipment expense were $54.8 million, $46.2 million and $23.0 million for fiscal 2003, 2002 and 2001, respectively.

 

Licensing and Endorsement Agreement with George Foreman

 

In June 2003, the Company entered into a License Agreement and Endorsement Agreement (the “Foreman Agreements”) with George Foreman Productions, Inc. pursuant to which George Foreman would act as the Company’s spokesperson. Further, the Company would have the right to use Mr. Foreman’s name, image and likeness in connection with its Big and Tall merchandise. The initial term of the Foreman Agreements extends through December 31, 2006, at which time the Company has the option to extend pursuant to certain terms and conditions of the License Agreement. As compensation for Mr. Foreman’s services and the exclusive rights to his name, image and likeness for apparel clothing and certain accessories, Mr. Foreman will receive $1.5 million over the initial term of the Endorsement Agreement and will receive a royalty payment on all merchandise manufactured under the George Foreman product lines, subject to a guaranteed minimum payment of $2.0 million over the initial term. In fiscal 2003, Mr. Foreman received $500,000 as an advance under the terms of the License Agreement and on June 26, 2003 he received an option to purchase 100,000 fully vested and non-forfeitable shares of the Company’s Common Stock at an exercise price of $5.50 per share. On December 12, 2003, Mr. Foreman received an option to purchase an additional 100,000 fully vested and non-forfeitable shares of the Company’s Common Stock at an exercise price of $7.15 per share. The fair value of both options, as calculated using the Black Scholes model, was in aggregate approximately $604,000, which is being expensed by the Company over the initial term of the Foreman Agreements.

 

The Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. Management believes that the resolution of these matters will not have an adverse impact on the results of operations or the financial position of the Company.

 

The Company is also contractually obligated pursuant to agreements with certain related parties, which is discussed in Note H.

 

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F. EQUITY

 

Issuance of Warrants

 

Below is a summary of warrant activity for fiscal 2003 and fiscal 2002. There were no warrants issued or outstanding in fiscal 2001:

 

     FISCAL YEAR

     2003

   2002

Warrants outstanding at beginning of year

     2,201,471      —  

Warrants issued

     1,182,400      3,391,471

Warrants canceled

     —        —  

Warrants exercised

     —        1,190,000
    

  

Warrants outstanding at end of year

     3,383,871      2,201,471
    

  

Warrants exercisable at end of year

     3,383,871      2,201,471

Weighted-average exercise price per warrant:

             

Outstanding at beginning of year

   $ 5.51      —  

Issued during the year

   $ 6.16    $ 3.58

Canceled during the year

     —        —  

Exercised during the year

     —      $ 0.01

Outstanding at end of year

   $ 5.74    $ 5.51

 

 

Warrants Outstanding and Exercisable at January 31, 2004


Range of Exercise Prices

  

Number

Outstanding


  

Remaining

Contractual Life


  

Weighted Average

Exercise Price


  

Number

Exercisable


$0.01 to $2.15    525,000    8.3 years    $ 0.01    525,000
  2.16 to   4.30    500,000    8.3 years      4.25    500,000
  4.31 to   6.45    490,400    6.4 years      4.96    490,400
  6.46 to   8.50    1,868,471    4.4 years      7.95    1,868,471

  
       

  
$0.01 to $8.50    3,383,871         $ 5.74    3,383,871
    
       

  

 

In fiscal 2002, as part of the private placement of the Company’s 12% senior subordinated notes due 2007, the Company issued warrants to purchase 1,715,000 shares of Common Stock at an exercise price of $0.01 per share and additional warrants to purchase 1,176,471 shares of Common Stock at an exercise price of $8.50 per share. The Company assigned a value, based on the Black Scholes model, of $9.6 million for these warrants. The value of the warrants was reflected as a component of stockholders’ equity as a discount on the notes that was to be amortized over the term of the corresponding debt, which was five years. In November 2003, the Company prepaid in full the principal amount due on the 12% senior subordinated notes and accordingly the unamortized value of these warrants of $7.3 million was written off and is included in Other Expenses on the Consolidated Statement of Operations for fiscal 2003.

 

As part of the Company’s equity financing for its acquisition of Casual Male in May 2002, the Company issued to its investment advisor warrants to purchase 500,000 shares of Common Stock at an exercise price of $4.25 per share. The total assigned value of these warrants of $1.3 million was reflected as a cost of raising equity in fiscal 2002.

 

In the second and third quarters of fiscal 2003, as part of the private placement of the Company’s 12% senior subordinated notes due 2010, the Company issued warrants to purchase 1,182,400 shares of Common Stock at exercise prices ranging from $4.76 per share to $7.32 per share. Such exercise prices represent the average of the closing prices on 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 Black Scholes value of $5.6 million for such warrants was reflected as a component of stockholders’ equity to be amortized over the seven-year life of the notes as additional interest expense. In the fourth quarter of fiscal 2003, as discussed more fully in Note C above, the Company prepaid approximately $21.8 million of these notes, which

 

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resulted in the acceleration and partial write-off of the related unamortized value of the warrants of approximately $4.1 million, which is included in Other Expenses on the Consolidated Statement of Operations for fiscal 2003. The remaining unamortized value of $1.5 million at January 31, 2004 will be recognized as interest expense over the term of the remaining $7.8 million principal amount of 12% senior subordinated notes, due 2010.

 

Stock Repurchase Programs

 

In the fourth quarter of fiscal 2003, the Company repurchased 1,000,000 shares of Common Stock at an aggregate cost of $7.9 million. In connection with the Company’s sales of its Convertible Notes, the Board of Directors 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. As of January 31, 2004, the Company had not repurchased any additional shares.

 

At January 31, 2004, the Company has a total of 4.2 million shares of repurchased stock at an aggregate cost of $17.0 million which is reported by the Company as treasury stock and is reflected as a reduction in stockholders’ equity.

 

G. STOCK OPTIONS

 

On April 3, 1992, the Board of Directors adopted the 1992 Stock Incentive Plan (the “1992 Plan”), which became effective on June 9, 1992 when it was approved by the stockholders of the Company. Under the terms of the 1992 Plan, as amended most recently on August 7, 2003, up to 6,930,000 shares of Common Stock can be issued pursuant to “incentive stock options” (as defined in Section 422 of the Internal Revenue Code of 1986, as amended), options which are not “incentive stock options,” conditioned stock awards, unrestricted stock awards and performance share awards. The 1992 Plan is administered by the Compensation Committee, all of the members of which are non-employee directors who qualify as independent under the listing standards of the Nasdaq National Market. The Compensation Committee makes all determinations with respect to amounts and conditions covering awards under the 1992 Plan. Options have never been granted at a price less than fair value on the date of the grant. Options granted to employees and executives typically vest over three years and options granted to directors vest over two years. Options granted under the 1992 Plan expire ten years from the date of grant. The 1992 Plan, as amended, terminates on the earlier of (i) the date when all shares issuable thereunder have been issued and (ii) April 2, 2007.

 

A summary of shares subject to the 1992 Plan for the fiscal years indicated:

 

     FISCAL YEAR

     2003

   2002

   2001

Outstanding at beginning of year

     1,899,990      1,241,814      851,850

Options granted

     827,594      988,350      523,769

Options canceled

     212,063      149,661      74,413

Options exercised

     295,652      180,513      59,392
    

  

  

Outstanding at end of year

     2,219,869      1,899,990      1,241,814
    

  

  

Options exercisable at end of year

     1,097,364      707,632      470,551

Common shares reserved for future grants at end of year

     3,673,813      1,789,344      2,628,033

Weighted-average exercise price per option:

                    

Outstanding at beginning of year

   $ 3.94    $ 3.31    $ 2.87

Granted during the year

     5.29      4.60      3.69

Canceled during the year

     6.30      4.98      1.88

Exercised during the year

     3.11      2.38      2.49

Outstanding at end of year

   $ 4.33    $ 3.94    $ 3.31

 

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The following table summarizes information about stock options outstanding under the 1992 Plan at January 31, 2004:

 

 

Options Outstanding

   Options Exercisable

Range of
Exercise Prices


  

Number

Outstanding


   Remaining
Contractual Life


  

Weighted Average

Exercise Price


  

Number

Exercisable


   Weighted Average
Exercise Price


$0.81 to $2.15    342,140    6.1 years    $ 1.39    342,140    $ 1.39
  2.16 to   4.30    356,570    7.7 years      3.51    195,856      3.63
  4.31 to   6.45    1,341,409    8.7 years      4.89    418,284      4.77
  6.46 to   8.60    167,250    8.8 years      7.17    133,584      7.21
  8.61 to   9.00    12,500    4.1 years      9.00    7,500      9.00

  
  
  

  
  

$0.81 to $9.00    2,219,869    8.1 years    $ 4.33    1,097,364    $ 3.84
    
  
  

  
  

 

Options granted outside of the Company’s 1992 Plan

 

Below is a summary of options granted outside of the Company’s 1992 Plan. This activity represents options which have been granted to consultants of the Company prior to August 2003 and options granted to its executives in excess of the 1992 Plan’s annual maximum grant which was 500,000 as of August 7, 2003. With the exception of the 430,000 shares underlying options issued between November 2002 and January 2004, all shares underlying options granted outside of the Company’s 1992 Plan were registered for resale in September 2002 as part of the Company’s Form S-3 Registration Statement:

 

     FISCAL YEAR

     2003

   2002

   2001

Outstanding at beginning of year

     1,050,000      1,140,000      715,000

Options granted

     100,000      340,000      425,000

Options canceled

     10,000      —        —  

Options exercised

     —        430,000      —  
    

  

  

Outstanding at end of year

     1,140,000      1,050,000      1,140,000
    

  

  

Options exercisable at end of year

     850,000      391,668      608,334

Weighted-average exercise price per option:

                    

Outstanding at beginning of year

   $ 3.02    $ 2.27    $ 1.24

Granted during the year

     7.49      3.19      4.01

Canceled during the year

     6.81      —        —  

Exercised during the year

     —        3.19      —  

Outstanding at end of year

   $ 3.40    $ 3.02    $ 2.27