UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended November 1, 2014

Commission File Number 01-34219

 

DESTINATION XL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

04-2623104

(State or other jurisdiction of

incorporation or organization)

 

(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)

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding as of October 31, 2014 was 50,682,322.

 

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

DESTINATION XL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

November 1, 2014

 

 

February 1, 2014

 

 

 

(Fiscal 2014)

 

 

(Fiscal 2013)

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,066

 

 

$

4,544

 

Accounts receivable

 

 

7,514

 

 

 

8,347

 

Inventories

 

 

126,403

 

 

 

105,556

 

Prepaid expenses and other current assets

 

 

9,523

 

 

 

7,994

 

Total current assets

 

 

149,506

 

 

 

126,441

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation and amortization

 

 

122,370

 

 

 

102,939

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Intangible assets

 

 

3,549

 

 

 

4,393

 

Other assets

 

 

4,527

 

 

 

3,608

 

Total assets

 

$

279,952

 

 

$

237,381

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,473

 

 

$

4,561

 

Current portion of deferred gain on sale-leaseback

 

 

1,465

 

 

 

1,465

 

Accounts payable

 

 

28,545

 

 

 

32,945

 

Accrued expenses and other current liabilities

 

 

34,732

 

 

 

28,227

 

Borrowings under credit facility

 

 

37,954

 

 

 

9,029

 

Total current liabilities

 

 

110,169

 

 

 

76,227

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

28,516

 

 

 

12,145

 

Deferred rent and lease incentives

 

 

28,424

 

 

 

22,835

 

Deferred gain on sale-leaseback, net of current portion

 

 

15,021

 

 

 

16,120

 

Deferred tax liability

 

 

65

 

 

 

 

Other long-term liabilities

 

 

3,763

 

 

 

5,083

 

Total long-term liabilities

 

 

75,789

 

 

 

56,183

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized,  61,559,761 and  61,473,083 shares issued at November 1, 2014 and February 1, 2014, respectively

 

 

616

 

 

 

615

 

Additional paid-in capital

 

 

298,985

 

 

 

296,501

 

Treasury stock at cost, 10,877,439 shares at November 1, 2014 and  February 1, 2014

 

 

(87,977

)

 

 

(87,977

)

Accumulated deficit

 

 

(113,457

)

 

 

(99,608

)

Accumulated other comprehensive loss

 

 

(4,173

)

 

 

(4,560

)

Total stockholders' equity

 

 

93,994

 

 

 

104,971

 

Total liabilities and stockholders' equity

 

$

279,952

 

 

$

237,381

 

 

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

 

 

 

2


 

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

November 1, 2014

 

 

November 2, 2013

 

 

November 1, 2014

 

 

November 2, 2013

 

 

 

(Fiscal 2014)

 

 

(Fiscal 2013)

 

 

(Fiscal 2014)

 

 

(Fiscal 2013)

 

 

 

 

 

Sales

 

$

93,640

 

 

$

88,682

 

 

$

294,114

 

 

$

280,685

 

Cost of goods sold including occupancy costs

 

 

53,126

 

 

 

49,515

 

 

 

162,249

 

 

 

151,931

 

Gross profit

 

 

40,514

 

 

 

39,167

 

 

 

131,865

 

 

 

128,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

40,185

 

 

 

40,988

 

 

 

127,004

 

 

 

122,252

 

Depreciation and amortization

 

 

6,041

 

 

 

4,867

 

 

 

17,169

 

 

 

13,550

 

Total expenses

 

 

46,226

 

 

 

45,855

 

 

 

144,173

 

 

 

135,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(5,712

)

 

 

(6,688

)

 

 

(12,308

)

 

 

(7,048

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(506

)

 

 

(280

)

 

 

(1,368

)

 

 

(699

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision (benefit)  for income taxes

 

 

(6,218

)

 

 

(6,968

)

 

 

(13,676

)

 

 

(7,747

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

 

63

 

 

 

(2,905

)

 

 

173

 

 

 

(3,108

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,281

)

 

$

(4,063

)

 

$

(13,849

)

 

$

(4,639

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.13

)

 

$

(0.08

)

 

$

(0.28

)

 

$

(0.10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,773

 

 

 

48,553

 

 

 

48,724

 

 

 

48,441

 

Diluted

 

 

48,773

 

 

 

48,553

 

 

 

48,724

 

 

 

48,441

 

 

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

 

 

 

3


 

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 1, 2014

 

 

November 2, 2013

 

 

November 1, 2014

 

 

November 2, 2013

 

 

 

(Fiscal 2014)

 

 

(Fiscal 2013)

 

 

(Fiscal 2014)

 

 

(Fiscal 2013)

 

Net loss

 

$

(6,281

)

 

$

(4,063

)

 

$

(13,849

)

 

$

(4,639

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(144

)

 

 

97

 

 

 

(37

)

 

 

(110

)

Pension plan

 

 

147

 

 

 

180

 

 

 

424

 

 

 

499

 

Other comprehensive income (loss) before taxes

 

 

3

 

 

 

277

 

 

 

387

 

 

 

389

 

Tax (provision) benefit related to items of other comprehensive income (loss)

 

 

 

 

 

(106

)

 

 

 

 

 

(197

)

Other comprehensive income (loss), net of tax

 

 

3

 

 

 

171

 

 

 

387

 

 

 

192

 

Comprehensive loss

 

$

(6,278

)

 

$

(3,892

)

 

$

(13,462

)

 

$

(4,447

)

 

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

 

 

 

4


 

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Paid-in

 

 

Treasury Stock

 

 

 

 

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at February 1, 2014

 

 

61,473

 

 

$

615

 

 

$

296,501

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(99,608

)

 

$

(4,560

)

 

$

104,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

2,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,203

 

Exercises under option program

 

 

26

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

123

 

Issuances of restricted stock, net of cancels

 

 

30

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Board of Directors compensation

 

 

31

 

 

 

 

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

159

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized loss associated with Pension Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

424

 

 

 

424

 

Foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

(37

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,849

)

 

 

 

 

 

 

(13,849

)

Balance at November 1, 2014

 

 

61,560

 

 

$

616

 

 

$

298,985

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(113,457

)

 

$

(4,173

)

 

$

93,994

 

 

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

 

 

 

5


 

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

November 1, 2014

 

 

November 2, 2013

 

 

 

(Fiscal 2014)

 

 

(Fiscal 2013)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,849

)

 

$

(4,639

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

 

 

 

Amortization of deferred gain on sale leaseback

 

 

(1,099

)

 

 

(1,099

)

Depreciation and amortization

 

 

17,169

 

 

 

13,550

 

Deferred taxes, net of valuation allowance

 

 

65

 

 

 

(3,133

)

Stock compensation expense

 

 

2,203

 

 

 

1,492

 

Issuance of common stock to Board of Directors

 

 

159

 

 

 

227

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities :

 

 

 

 

 

 

 

 

Accounts receivable

 

 

833

 

 

 

(2,953

)

Inventories

 

 

(20,847

)

 

 

(15,339

)

Prepaid expenses and other current assets

 

 

(1,529

)

 

 

(226

)

Other assets

 

 

(321

)

 

 

(742

)

Accounts payable

 

 

(4,400

)

 

 

5,504

 

Deferred rent and lease incentives

 

 

5,589

 

 

 

5,891

 

Accrued expenses and other liabilities

 

 

651

 

 

 

(4,031

)

Net cash used for operating activities

 

 

(15,376

)

 

 

(5,498

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property and equipment, net

 

 

(30,835

)

 

 

(38,179

)

Net cash used for investing activities

 

 

(30,835

)

 

 

(38,179

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

123

 

 

 

355

 

Proceeds from the issuance of long-term debt

 

 

23,923

 

 

 

13,878

 

Principal payments on long-term debt

 

 

(4,640

)

 

 

(33

)

Costs associated with amendment to credit facility and long-term debt issuances

 

 

(598

)

 

 

(454

)

Net borrowings under credit facility

 

 

28,925

 

 

 

27,001

 

Net cash provided by financing activities

 

 

47,733

 

 

 

40,747

 

Net increase (decrease) in cash and cash equivalents

 

 

1,522

 

 

 

(2,930

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

4,544

 

 

 

8,162

 

End of period

 

$

6,066

 

 

$

5,232

 

 

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

 

 

 

6


 

DESTINATION XL GROUP, INC.

Notes to Consolidated Financial Statements

 

 

1. Basis of Presentation

In the opinion of management of Destination XL Group, Inc., a Delaware corporation (formerly known as Casual Male Retail Group, Inc. and collectively with its subsidiaries is referred to as the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended February 1, 2014 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 17, 2014.

The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2014 and fiscal 2013 are 52-week periods ending January 31, 2015 and February 1, 2014, respectively.

Segment Information

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of two principal operating segments: its retail business and its direct businesses. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and have therefore aggregated them into a single reporting segment. The direct operating segment includes the operating results and assets for LivingXL® and ShoesXL®.

 

Reclassifications

Beginning in the first quarter of fiscal 2014, the Company is reporting revenue from its on-site tailoring and the related tailoring costs associated with such revenue as part of “Sales” and “Cost of Goods Sold Including Occupancy Costs,” respectively, on the Consolidated Statement of Operations. The Company has reclassified the revenue and related cost of goods sold for the third quarter and first nine months of fiscal 2013 from “Selling, General and Administrative Expenses,” where the amounts were previously netted, to “Sales” and “Cost of Goods Sold Including Occupancy Costs.”

 

Intangibles

At November 1, 2014, the “Casual Male” trademark had a carrying value of $1.7 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value of $1.7 million on an accelerated basis, consistent with projected cash flows through fiscal 2018, its estimated remaining useful life.

The Company’s “Rochester” trademark is considered an indefinite-lived intangible asset and has a carrying value of $1.5 million. During the first nine months of fiscal 2014, no event or circumstance occurred which would cause a reduction in the fair value of the Company’s reporting units, requiring interim testing of the Company’s “Rochester” trademark.

 

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.

7


 

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At November 1, 2014, the fair value approximates the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.

The fair value of indefinite-lived assets, which consists of the Company’s “Rochester” trademark, is measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of the trademark is determined using a projected discounted cash flow analysis based on unobservable inputs and are classified within Level 3 of the valuation hierarchy. See Intangibles above.

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.

 

Accumulated Other Comprehensive Income (Loss) - (“AOCI”)

Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income and reclassifications from AOCI for the three and nine months ended November 1, 2014 and November 2, 2013 are as follows:

 

 

 

November 1, 2014

 

 

November 2, 2013

 

For the three months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of the quarter

 

$

(4,270

)

 

$

94

 

 

$

(4,176

)

 

$

(5,635

)

 

$

95

 

 

$

(5,540

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

82

 

 

 

(144

)

 

 

(62

)

 

 

43

 

 

 

62

 

 

 

105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income (loss), net of taxes  (1)

 

 

65

 

 

 

 

 

 

65

 

 

 

66

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

147

 

 

 

(144

)

 

 

3

 

 

 

109

 

 

 

62

 

 

 

171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(4,123

)

 

$

(50

)

 

$

(4,173

)

 

$

(5,526

)

 

$

157

 

 

$

(5,369

)

 

8


 

 

 

 

November 1, 2014

 

 

November 2, 2013

 

For the nine months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of fiscal year

 

$

(4,547

)

 

$

(13

)

 

$

(4,560

)

 

$

(5,828

)

 

$

267

 

 

$

(5,561

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

246

 

 

 

(37

)

 

 

209

 

 

 

129

 

 

 

(110

)

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income (loss), net of taxes  (2)

 

 

178

 

 

 

 

 

 

178

 

 

 

173

 

 

 

 

 

 

173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

424

 

 

 

(37

)

 

 

387

 

 

 

302

 

 

 

(110

)

 

 

192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(4,123

)

 

$

(50

)

 

$

(4,173

)

 

$

(5,526

)

 

$

157

 

 

$

(5,369

)

 

(1)

Includes the amortization of the unrecognized (gain)/loss on pension plans which was charged to “Selling, General and Administrative” Expense on the Consolidated Statement of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $65,000 and $109,000 for the three months ended November 1, 2014 and November 2, 2013, respectively. The corresponding tax benefit was $43,000 for the three months ended November 2, 2013. There was no tax benefit for the three months ended November 1, 2014.

(2)

For the nine months ended November 1, 2014 and November 2, 2013, the amortization of the unrecognized loss, before tax, was $178,000 and $285,000, respectively. The corresponding tax benefit was $112,000 for the nine months ended November 2, 2013. There was no tax benefit for the nine months ended November 1, 2014.

 

Revenue Recognition

Revenue from the Company’s retail store operation is recorded upon purchase of merchandise by customers, net of an allowance for sales returns. Revenue from the Company’s catalog and e-commerce operations is recognized at the time a customer order is delivered, net of an allowance for sales returns. Revenue is recognized by the operating segment that fulfills a customer’s order.

 

Stock-based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statement of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

 

Recently Issued Accounting Pronouncements

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Top 205): Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity (“ASU 2014-08”). The objective of ASU No. 2014-08 is to clarify the criteria for determining which disposals can be presented as discontinued operations and also modifies related disclosure requirements. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted for new disposals beginning in the first quarter of 2014, provided financial statements have not been issued before the release of this standard. The Company is in the process of evaluating the impact of ASU 2014-08 on its Consolidated Financial Statements.

9


 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “Other Assets and Deferred Costs-Capitalized Advertising Costs.” The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is not permitted. The Company is in the process of evaluating the impact of ASU 2014-09 on its Consolidated Financial Statements, including the choice of retrospective application upon adoption.

 

 

2. Debt

Credit Agreement with Bank of America, N.A.

On October 30, 2014, the Company amended its credit facility with Bank of America, N.A, effective October 29, 2014, by executing the Second Amendment to the Sixth Amended and Restated Loan and Security Agreement (as amended, the “Credit Facility”).

The Credit Facility provides for an increase in the maximum committed borrowings from $100 million to $125 million. The Credit Facility continues to include, pursuant to an accordion feature, the ability to increase the Amended Credit Facility by an additional $50 million upon the request of the Company and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20 million for commercial and standby letter of credits and a sublimit of up to $15 million for swingline loans. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The maturity date of the Credit Facility was extended from June 26, 2018 to October 29, 2019. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets, excluding (i) a first priority lien held by the lenders of the Term Loan Facility on certain equipment of the Company and (ii) intellectual property.

At November 1, 2014, the Company had outstanding borrowings under the Credit Facility of $38.0 million. Outstanding standby letters of credit were $2.2 million and documentary letters of credit were $0.3 million. Unused excess availability at November 1, 2014 was $75.1 million. Average monthly borrowings outstanding under the Credit Facility during the first nine months of fiscal 2014 were $31.9 million, resulting in an average unused excess availability of approximately $62.7 million. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets, with increased advance rates based on seasonality. Pursuant to the terms of the Credit Facility, if the Company’s excess availability under the Credit Facility fails to be equal to or greater than the greater of 10% of the Loan Cap (the lesser of the Revolving Credit Commitments at such time or the Borrowing Base at such time) and $7.5 million, the Company will be required to maintain a minimum consolidated fixed charge coverage ratio of 1.0:1.0 in order to pursue certain transactions, including but not limited to, stock repurchases, payment of dividends and business acquisitions.

Borrowings made pursuant to the Credit Facility will bear interest at a rate equal to the base rate (determined as the highest of (a) Bank of America N.A.’s prime rate, (b) the Federal Funds rate plus 0.50% or (c) the annual ICE-LIBOR rate (“LIBOR”) for the respective interest period) plus a varying percentage, based on the Company’s borrowing base, of 0.50%-0.75% for prime-based borrowings and 1.50%-1.75% for LIBOR-based borrowings. The Company is also subject to an unused line fee of 0.25%. At November 1, 2014, the Company’s prime-based interest rate was 3.75%. At November 1, 2014, the Company had approximately $30.0 million of its outstanding borrowings in a LIBOR-based contract with an interest rate of 1.62%. The LIBOR-based contracts expired November 4, 2014 through November 6, 2014. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.

10


 

The fair value of the amount outstanding under the Credit Facility at November 1, 2014 approximated the carrying value.

Long-Term Debt

Components of long-term debt are as follows:

 

(in thousands)

 

November 1,

2014

 

 

February 1,

2014

 

Equipment financing notes

 

$

20,989

 

 

$

16,706

 

Term loan, due 2019

 

 

15,000

 

 

 

 

Total long-term debt

 

 

35,989

 

 

 

16,706

 

Less: current portion of long-term debt

 

 

7,473

 

 

 

4,561

 

Long-term debt, net of current portion

 

$

28,516

 

 

$

12,145

 

 

Equipment Financing Loans

Pursuant to a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC, dated July 20, 2007 and amended September 30, 2013 (the “Master Agreement”), the Company has entered into twelve equipment security notes (in aggregate, the “Notes”). The Company borrowed an aggregate of $26.4 million between September 2013 and June 2014, of which $8.9 million was borrowed during the first nine months of fiscal 2014. The Notes are for a term of 48 months and accrue interest at fixed rates ranging from 3.07% and 3.50%. Principal and interest are paid monthly, in arrears.

The Notes are secured by a security interest in all of the Company’s rights, title and interest in and to certain equipment. The Company is subject to a prepayment penalty equal to 1% of the prepaid principal of the Notes until the first anniversary, 0.5% of the prepaid principal from the first anniversary until the second anniversary and no prepayment penalty thereafter. The Master Agreement includes default provisions that are customary for financings of this type and are similar and no more restrictive than the Company’s existing Credit Facility.

Term Loan

 

On October 30, 2014, the Company entered into a term loan agreement with respect to a new $15 million senior secured term loan facility with Wells Fargo Bank, National Association as administrative and collateral agent (the “Term Loan Facility”). The effective date of the Term Loan Facility is October 29, 2014 (the “Effective Date”). The proceeds from the Term Loan Facility were used to repay borrowings under the Credit Facility.

 

The Term Loan Facility bears interest at a rate per annum equal to the greater of (a) 1.00% and (b) the one month LIBOR rate, plus 6.50%.  Interest payments are payable on the first business day of each calendar month, and increase by 2% following the occurrence and during the continuance of an “event of default,” as defined in the Term Loan Facility. The Term Loan Facility provides for quarterly principal payments on the first business day of each calendar quarter, commencing the first business day of January 2015, in an aggregate principal amount equal to $250,000, subject to adjustment, with the balance payable on the termination date.

 

The Term Loan Facility includes usual and customary mandatory prepayment provisions for transactions of this type that are triggered by the occurrence of certain events.  In addition, the amounts advanced under the Term Loan Facility can be optionally prepaid in whole or part. All prepayments are subject to an early termination fee in the amount of: (a) 4% of the amount prepaid if the prepayment is prior to the first anniversary of the Effective Date; (b) 2% of the amount prepaid if the prepayment is after the first anniversary, but prior to the second anniversary, of the Effective Date; and (c) 1% of the amount prepaid if the prepayment is after the second anniversary, but prior to the third anniversary, of the Effective Date. There is no prepayment penalty after the third anniversary of the Effective Date.  

 

The Term Loan Facility matures on October 29, 2019. It is secured by a first priority lien on certain equipment of the Company, and a second priority lien on substantially all of the remaining assets of the Company, excluding intellectual property.

 

 

11


 

3. Stock-Based Compensation

2013-2016 LTIP

During the second quarter of fiscal 2013, the 2013-2016 Destination XL Group, Inc. Long-Term Incentive Plan (the “2013-2016 LTIP”) was approved and implemented. Pursuant to the terms of the 2013-2016 LTIP, on the date of grant, each participant was granted an unearned and unvested award equal in value to four times his/her annual salary multiplied by the applicable long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 50% for other participants in the plan, which the Company refers to as the “Projected Benefit Amount.” Each participant was granted 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash. All shares were granted from the Company’s 2006 Incentive Compensation Plan.

Of the total Projected Benefit Amount, 50% is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award (half of the shares of restricted stock, options and cash) vests in three installments with 20% of the time-vested portion vesting at the end of fiscal 2014, 40% at the end of fiscal 2015 and the remaining 40% vesting at the end of fiscal 2016.

 

For the performance-based portion of the award to vest, the Company must achieve, during any rolling four fiscal quarter period that ends on or before the end of fiscal 2015, revenue of at least $550 million and an operating margin of not less than 8.0%. In the event that the Company achieves its target of $550 million in revenue with an operating margin of not less than 8.0% during any rolling fiscal four quarters prior to fiscal 2016, then the total Projected Benefit Amount vests in full.

 

If the targets for vesting of the performance-based portion of the award are not met by the end of fiscal 2015, then the performance-based target can still be met in fiscal 2016. In fiscal 2016, the Company must achieve revenue of at least $600 million and an operating margin of not less than 8.0% for participants to receive 100% vesting of the performance-based portion of the Projected Benefit Amount. If the Company does not meet the performance target at the end of fiscal 2016, but the Company is able to achieve revenue equal to or greater than $510 million at the end of fiscal 2016 and the operating margin is not less than 8.0%, then the participants will receive a pro-rata portion of the performance-based award based on minimum sales of $510 million (50% payout) and $600 million (100% payout).

 

Assuming the Company achieves the performance target and 100% of the Projected Benefit Amount vests, excluding estimated forfeitures, the total potential value of all awards over this four-year period, as of November 1, 2014, would be approximately $19.5 million. Approximately half of the compensation expense relates to the time-vested awards, which is being expensed over forty-four months, based on the respective vesting dates. As the performance targets were not deemed probable at November 1, 2014, no expense for the performance-based awards has been recognized through the first nine months of fiscal 2014. However, as a result of two terminations during the first nine months of fiscal 2014, the Company did recognize additional stock compensation expense of approximately $77,000 related to the partial pro-rata vesting of the performance awards that each former employee was entitled to pursuant to the terms of the 2013-2016 LTIP. In total, 10,200 shares of performance-related restricted stock vested and performance-related options to purchase 12,418 shares of common stock vested as a result of such terminations.

2016 Long-Term Incentive Wrap-Around Plan

On November 7, 2014, subsequent to the end of the third quarter of fiscal 2014, the Company’s Compensation Committee approved the 2016 Long-Term Incentive Wrap-Around Plan (the “Wrap-Around Plan”).  The Wrap-Around Plan is a supplemental performance-based incentive plan that is only effective if there is no vesting of the performance-based awards under the 2013-2016 LTIP and, as a result, all performance-based awards under that plan are forfeited. Under the Wrap-Around Plan, if the target level performance metrics for fiscal 2016 are met, participants will be eligible to receive a payout equal to 80% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  If the target level performance metrics for fiscal 2016 under the Wrap-Around Plan are exceeded, the greatest payout that participants will be eligible to receive is 100% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP.  Any award earned will be paid 50% in cash and 50% in shares of restricted stock.

The performance target under the Wrap-Around Plan consists of two metrics, Sales and EBITDA, with threshold (50%), target (80%) and maximum (100%) payout levels.  Each metric is weighted as 50% of the total performance target.  However, in order for there to be any payout under either metric, EBITDA for fiscal 2016 must be equal to or greater than the minimum threshold.    

12


 

The Wrap-Around Plan also provides for an opportunity to receive additional shares of restricted stock if the performance targets are achieved and the Company’s closing stock price is $6.75 or higher on the day earnings for fiscal 2016 are publicly released. If the Company’s stock price is $6.75, the 50% payout in restricted shares will be increased by 20% and if the stock price is $7.25 or higher, the 50% payout in restricted shares will be increased by 30%.  All awards granted pursuant to the Wrap-Around Plan will not vest until the last day of the second quarter of fiscal 2017.

2006 Plan—Stock Option and Restricted Share Award Activity

Pursuant to the Company’s 2006 Incentive Compensation Plan, as amended (the “2006 Plan”), the Company has 7,250,000 shares authorized for issuance, of which 4,250,000 shares may be subject to the granting of awards other than stock options and stock appreciation rights.

 

The following tables summarize the stock option activity and restricted share activity under th