Item 1. Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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, 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 January 28, 2017 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 20, 2017.
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 2017 is a 53-week period ending on February 3, 2018 and fiscal 2016 was a 52-week period ending on January 28, 2017.
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 business. 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, consistent with its omni-channel business approach. The direct operating segment includes the operating results and assets for LivingXL
®
and ShoesXL
®
.
Intangibles
At April 29, 2017, the “Casual Male” trademark had a carrying value of $0.5 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value 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 three months ended April 29, 2017, 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.
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 assets 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.
7
The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At April 29,
2017, 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 months ended April 29, 2017 and April 30, 2016, respectively, were as follows:
|
|
April 29, 2017
|
|
|
April 30, 2016
|
|
For the three months ended:
|
|
(in thousands)
|
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
Balance at beginning of the quarter
|
|
$
|
(5,237
|
)
|
|
$
|
(781
|
)
|
|
$
|
(6,018
|
)
|
|
$
|
(6,113
|
)
|
|
$
|
(539
|
)
|
|
$
|
(6,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications, net of taxes
|
|
|
60
|
|
|
|
39
|
|
|
|
99
|
|
|
|
61
|
|
|
|
45
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other
comprehensive income, net of taxes
(1)
|
|
|
155
|
|
|
|
—
|
|
|
|
155
|
|
|
|
152
|
|
|
|
—
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period
|
|
|
215
|
|
|
|
39
|
|
|
|
254
|
|
|
|
213
|
|
|
|
45
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of quarter
|
|
$
|
(5,022
|
)
|
|
$
|
(742
|
)
|
|
$
|
(5,764
|
)
|
|
$
|
(5,900
|
)
|
|
$
|
(494
|
)
|
|
$
|
(6,394
|
)
|
|
(1)
|
Includes the amortization of the unrecognized loss on pension plans which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $155,000 and $152,000 for the three months ended April 29, 2017 and April 30, 2016, respectively. There was no tax benefit for either period.
|
Revenue Recognition
Revenue from the Company’s retail business is recorded upon purchase of merchandise by customers, net of an allowance for sales returns. Revenue from the Company’s direct business 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 Statements 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.
8
Recently Adopted Accounting P
ronouncements
In July 2015, the FASB issued ASU 2015-11, "
Inventory (Topic 330): Simplifying the Measurement of Inventory,
" which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company
adopted this pronouncement as of January 29, 2017. The adoption of this standard did not have a material impact on the Company’s
Consolidated Financial Statements
.
In March 2016, the FASB issued ASU 2016-09, “
Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting
,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard during the first quarter of fiscal 2017. The adoption of this standard did not have a material impact on the Company’s provision for income taxes or diluted earnings per share. The Company has elected to adopt the guidance related to the presentation of excess tax benefits in its Consolidated Statements of Cash Flows on a prospective transition method.
Since there were
no excess tax benefits
for the three months ended April 29, 2017 or April 30, 2016, this election did not result in a change in presentation on the Consolidated Statement of Cash Flows.
In addition, the Company has elected to continue to estimate forfeitures at each grant.
Recently Issued Accounting Pronouncements
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 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, 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 permitted after December 15, 2016.
The Company expects to adopt ASU 2014-09 in the first quarter of fiscal 2018 and will not adopt early. The Company has not yet selected a transition method or completed its assessment of the effect that ASU 2014-09 will have on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “
Leases (Topic 842)
,” which will require an entity to recognize lease assets and lease liabilities on its balance sheet and will increase disclosure requirements on its leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted.
In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. While the Company is still
evaluating the impact this pronouncement will have on its
Consolidated Financial Statements, the
Company expects a
gross
-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets. The extent of such gross-up is under evaluation.
In
March 2016, the FASB issued
ASU
2016
-
04
, “
Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,
” which amends exempting gift cards and other prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue guidance in Topic 606. However, the exemption only applies to breakage liabilities that are not subject to unclaimed property laws or that are attached to segregated bank accounts (e.g., consumer debit cards). The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this pronouncement to have a material impact on its
Consolidated Financial Statements
.
In August 2016, the FASB issued ASU 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
,”
which reduces the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230
. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company does not expect the adoption of this pronouncement to have a material impact on its
Consolidated Financial Statements
.
9
In October 2016, the FASB issued ASU 2016-16, “
Income Taxes (Topic 740): In
tra-Entity Transfer of Assets Other Than Inventory
,” which
reduces the existing diversity in practice in how income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized. The amendments in
ASU 2016
-
16
require an
entity to recognize such income tax consequences when the intra-entity transfer occurs rather than waiting until such time as the asset has been sold to an outside party
. The ASU is effective for fiscal years beginning after December 15, 2017, and interi
m periods within those fiscal years.
The Company does not expect the adoption of this pronouncement to have a material impact on its
Consolidated Financial Statements
.
No other new accounting pronouncements, issued or effective during the first three months of fiscal 2017, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
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 maximum committed borrowings of $125 million. The Credit Facility includes, pursuant to an accordion feature, the ability to increase the 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 letters of credit 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 is 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 described below and (ii) intellectual property.
At April 29, 2017, the Company had outstanding borrowings under the Credit Facility of $62.4 million, before unamortized debt issuance costs of $0.3 million. Outstanding standby letters of credit were $3.3 million and outstanding documentary letters of credit were $0.1 million. Unused excess availability at April 29, 2017 was $45.7 million. Average monthly borrowings outstanding under the Credit Facility during the first three months of fiscal 2017 were $56.9 million, resulting in an average unused excess availability of approximately $49.8 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 (i) 10% of the Loan Cap (defined in the Credit Facility as the lesser of the revolving credit commitments at such time or the borrowing base at the relevant measurement time) and (ii) $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 April 29, 2017, the Company’s prime-based interest rate was 4.5%. At April 29, 2017, the Company had approximately $55.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 2.45%. The LIBOR-based contracts expired on May 2, 2017. 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.
The fair value of the amount outstanding under the Credit Facility at April 29, 2017 approximated the carrying value.
Long-Term Debt
Components of long-term debt are as follows:
(in thousands)
|
|
April 29, 2017
|
|
|
January 28, 2017
|
|
Equipment financing notes
|
|
$
|
4,452
|
|
|
$
|
6,589
|
|
Term loan, due 2019
|
|
|
12,500
|
|
|
|
12,750
|
|
Less: unamortized debt issuance costs
|
|
|
(297
|
)
|
|
|
(337
|
)
|
Total long-term debt
|
|
|
16,655
|
|
|
|
19,002
|
|
Less: current portion of long-term debt
|
|
|
5,246
|
|
|
|
6,941
|
|
Long-term debt, net of current portion
|
|
$
|
11,409
|
|
|
$
|
12,061
|
|
10
Equipment Financing Loans
Pursuant to a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC, dated July 20, 2007 and amended on September 30, 2013 (the “Master Agreement”), the Company entered into twelve equipment security notes between September 2013 and June 2014 (in aggregate, the “Notes”), whereby the Company borrowed an aggregate of $26.4 million. The Notes are for a term of 48 months and accrue interest at fixed rates ranging from 3.07% to 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 was subject to prepayment penalties through the second anniversary of each note. The Company is no longer subject to any prepayment penalties. 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, which commenced 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 1% of the amount prepaid through October 29, 2017.
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.
3. Long-Term Incentive Plans
The following is a summary of the Company’s long-term incentive plans. Beginning on August 4, 2016, all equity awards granted under long-term incentive plans are issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan. All prior awards were issued from the Company’s 2006 Incentive Compensation Plan, which expired on July 31, 2016. See Note 4, Stock-Based Compensation.
2016 Long-Term Incentive Wrap-Around Plan
The 2016 Long-Term Incentive Wrap-Around Plan (the “Wrap-Around Plan”), which was approved in the fourth quarter of fiscal 2014, was a supplemental performance-based incentive plan that was only effective if there was 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. The performance targets under the 2013-2016 LTIP were not achieved at the end of fiscal 2016 and accordingly, the Wrap-Around Plan became effective.
The performance target under the Wrap-Around Plan consisted of two metrics, Sales and EBITDA, with threshold (50%), target (80%) and maximum (100%) payout levels. Each metric was weighted as 50% of the total performance target. However, in order for there to be any payout under either metric, EBITDA for fiscal 2016 had to be equal to or greater than the minimum threshold.
The Wrap-Around Plan also provided for an opportunity to receive additional shares of restricted stock if the performance targets were achieved and the Company’s closing stock price was $6.75 or higher on the day earnings for fiscal 2016 were publicly released, which was March 20, 2017. The stock did not achieve a minimum of $6.75, therefore, no additional award was earned.
Based on the operating results for fiscal 2016, the Company achieved 50.6% of its EBITDA target. The minimum threshold for the Sales target was not achieved. Accordingly, subsequent to year-end, in the first quarter of fiscal 2017, the Compensation Committee of the Board of Directors approved awards totaling $2.3 million, with a grant date of March 20, 2017. On that date, the Company
11
granted shares of restricted stock, with a fair value
of approximately $1.0 million and cash awards totaling approximately $1.3 million. All awards will vest on the last day of the second quarter of fiscal 2017. On March 20, 2017, in conjunction with the grant of restricted stock awards, the Company reclass
ified $0.9 million of the liability accrual from “
Accrued Expenses and Other Current Liabilities
” to “
Additional Paid-In Capital.
” See the Consolidated Stat
ement of Changes in Stockholder
s
’
Equity.
New Long-Term Incentive Plan
With the 2013-2016 LTIP and Wrap-Around Plan expiring at the end of fiscal 2016, on March 15, 2016, the Compensation Committee approved the Destination XL Group, Inc. Long-Term Incentive Plan, as amended February 1, 2017 (the “new LTIP”).
Under the terms of the new LTIP, each year the Compensation Committee will establish performance targets which will cover a two-year performance period (each a “Performance Period”), thereby creating overlapping Performance Periods. Each participant in the plan will be entitled to receive an award based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 25% for other participants in the plan. Because of the overlapping two-year Performance Periods, the Target Cash Value for any award is based on one year of annual salary, as opposed to two years, to avoid doubling an award payout in any given fiscal year.
For each participant, 50% of the Target Cash Value is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award will vest in two installments with 50% of the time-vested portion vesting on April 1 following the fiscal year end which marks the end of the applicable Performance Period and 50% vesting on April 1 the succeeding year. The performance-based vesting is subject to the achievement of the performance target(s) for the applicable Performance Period. Any performance award granted will vest on August 31 following the end of the applicable Performance Period.
For the 2016-2017 Performance Period, the Compensation Committee established two performance targets under the LTIP (the “2016-2017 LTIP”), each weighted 50%. The first target is EBITDA for fiscal 2017, defined as earnings before interest, taxes, depreciation and amortization, and the second target is “DXL Comparable Store Marginal Cash-Over-Cash Return”, defined as the aggregate of each comparable DXL store’s four-wall cash flow for fiscal 2017 divided by the aggregate capital investment, net of any tenant allowance, for each comparable DXL store.
For the 2017-2018 Performance Period, the Compensation Committee established two performance targets under the LTIP (the “2017-2018 LTIP”), each weighted 50%. The first target is Total Company Comparable Sales and will be measured based on a two-year stack, which is the sum of the Total Company Comparable Sales for fiscal 2017 and fiscal 2018. The second target is a Modified ROIC, which is defined as Operating Income divided by Invested Capital (Total Debt plus Stockholders’ Equity).
All awards granted under both the 2016-2017 LTIP and 2017-2018 LTIP were in restricted stock units (RSUs). Assuming that the Company achieves the performance target at target levels and all time-vested awards vest, the compensation expense associated with the 2016-2017 LTIP and 2017-2018 LTIP is estimated to be approximately $3.8 million and $4.1 million, respectively. Approximately half of the compensation expense for each plan relates to the time-vested RSUs, which are being expensed over thirty-six months, based on the respective vesting dates. With respect to the performance-based component, RSUs will be granted at the end of the performance period if the performance targets are achieved. Through the end of the first quarter of fiscal 2017, the Company had accrued approximately $0.3 million and $0.1 million in compensation expense related to the potential payout of performance awards under the 2016-2017 LTIP and 2017-2018 LTIP, respectively.
4. Stock-Based Compensation
Through the end of the second quarter of fiscal 2016, the Company’s 2006 Incentive Compensation Plan (as amended and restated effective as of August 1, 2013, the “2006 Plan”) was the only stockholder-approved plan. The 2006 Plan expired on July 31, 2016. In the third quarter of fiscal 2016, at the Company’s 2016 Annual Meeting of Stockholders held August 4, 2016, the Company’s stockholders approved the adoption of the 2016 Incentive Compensation Plan (the “2016 Plan”).
2016 Plan
The share reserve under the 2016 Plan is 5,200,000 shares of our common stock. A grant of a stock option award or stock appreciation right will reduce the outstanding reserve on a one-for-one basis, meaning one share for every share granted. A grant of a full-value award, including, but not limited to, restricted stock, restricted stock units and deferred stock, will reduce the outstanding reserve by a fixed ratio of 1.9 shares for every share granted.
In addition to the initial share reserve of 5,200,000 shares, the 525,538 shares that remained available under our 2006 Plan were added and became available for issuance under the 2016 Plan on August 4, 2016. In accordance with the terms of the 2016 Plan, any shares outstanding under the 2006 Plan at August 4, 2016 that subsequently terminate, expire or are canceled for any reason without having been exercised or paid are added back and become available for issuance under the 2016 Plan, with options and stock appreciation
12
rights being added back on a one-for-one basis and full-value awards being added back
on a 1 to
1.9 basis. At April 29, 2017, the Company had 6,645,815 shares available under the 2016 Plan.
The 2016 Plan is administered by the Compensation Committee. The Compensation Committee is authorized to make all determinations with respect to amounts and conditions covering awards. Options are not granted at a price less than fair value on the date of the grant. Except with respect to 5% of the shares available for awards under the 2016 Plan, no award will become exercisable or otherwise forfeitable unless such award has been outstanding for a minimum period of one year from its date of grant.
The following tables summarize the stock option activity and share activity for the Company’s 2006 Plan and 2016 Plan, on a combined basis, for the first three months of fiscal 2017:
|
|
Restricted shares
|
|
|
Restricted Stock Units
(1)
|
|
|
Deferred shares
(2)
|
|
|
Fully-vested
shares
(3)
|
|
|
Total number of shares
|
|
|
Weighted-average
grant-date
fair value
(4)
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding non-vested shares at beginning of year
|
|
|
856,332
|
|
|
|
369,828
|
|
|
|
64,876
|
|
|
|
—
|
|
|
|
1,291,036
|
|
|
$
|
5.09
|
|
Shares granted
|
|
|
484,558
|
|
|
|
734,268
|
|
|
|
19,143
|
|
|
|
19,660
|
|
|
|
1,257,629
|
|
|
$
|
2.72
|
|
Shares vested/issued
|
|
|
(1,667
|
)
|
|
|
—
|
|
|
|
(2,571
|
)
|
|
|
(19,660
|
)
|
|
|
(23,898
|
)
|
|
$
|
3.65
|
|
Shares canceled
|
|
|
(857,221
|
)
|
|
|
(17,733
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(874,954
|
)
|
|
$
|
4.99
|
|
Outstanding non-vested shares at end of quarter
|
|
|
482,002
|
|
|
|
1,086,363
|
|
|
|
81,448
|
|
|
|
—
|
|
|
|
1,649,813
|
|
|
$
|
3.33
|
|
|
(1)
|
Restricted Stock Units (“RSUs”) were granted in connection with the 2017-2018 LTIP. The RSUs will vest in two tranches with the first 50% vesting on April 1, 2019 and the second 50% vesting on April 1, 2020.
|
|
(2)
|
The 19,143 shares of deferred stock, with a fair value of $61,115, represent compensation to certain directors in lieu of cash, in accordance with their irrevocable elections. The shares of deferred stock will vest three years from the date of grant or at separation of service, based on the irrevocable election of each director.
|
|
(3)
|
During the first three months of fiscal 2017, the Company granted 19,660 shares of stock, with a fair value of approximately $63,895 to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. Directors are required to elect 50% of their quarterly retainer in equity. Any shares in excess of the minimum required election are issued from the Company’s Third Amendment to the Second Amended and Restated Non-Employee Director Compensation Plan (“Non-Employee Director Compensation Plan”).
|
|
(4)
|
The fair value of a restricted share, deferred share and fully-vested share is equal to the Company’s closing stock price on the day immediately preceding the date of grant.
|
|
|
Number of
shares
|
|
|
Weighted-average
exercise price
per option
|
|
|
Weighted-average
remaining
contractual term
|
|
Aggregate
intrinsic value
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at beginning of year
|
|
|
2,524,546
|
|
|
$
|
4.98
|
|
|
|
|
$
|
11,286
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(1,147,398
|
)
|
|
$
|
4.96
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding options at end of quarter
|
|
|
1,377,148
|
|
|
$
|
4.97
|
|
|
5.3 years
|
|
$
|
-
|
|
Options exercisable at end of quarter
|
|
|
1,377,148
|
|
|
$
|
4.97
|
|
|
5.3 years
|
|
|
|
|
Valuation Assumptions
For the first three months of fiscal 2017, the Company granted 484,558 shares of restricted stock, 734,268 RSUs and 19,143 shares of deferred stock. For the first three months of fiscal 2016, the Company granted 8,434 shares of deferred stock and 423,230 RSUs. There were no grants of stock options during the first three months of fiscal 2017 and fiscal 2016.
Unless otherwise specified by the Compensation Committee, RSUs, restricted stock and deferred stock are valued using the closing price of the Company’s common stock on the day immediately preceding the date of grant.
Non-Employee Director Compensation Plan
The Company granted 7,898 shares of common stock, with a fair value of approximately $24,525, to certain of its non-employee directors as compensation in lieu of cash in the first three months of fiscal 2017.
13
Stock Compensation Expense
The Company recognized total stock-based compensation expense of $0.3 million for both the first quarter of fiscal 2017 and fiscal 2016. The total compensation cost related to time-vested stock options, restricted stock and RSU awards not yet recognized as of April 29, 2017 was approximately $3.3 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 26 months.
5. Earnings per Share
The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
|
|
For the three months ended
|
|
|
|
|
April 29, 2017
|
|
|
April 30, 2016
|
|
|
(in thousands
)
|
|
|
|
|
|
|
|
|
|
Common Stock Outstanding:
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
49,735
|
|
|
|
49,513
|
|
|
Common stock equivalents – stock options and restricted stock
(1)
|
|
|
—
|
|
|
|
367
|
|
|
Diluted weighted average common shares outstanding
|
|
|
49,735
|
|
|
|
49,880
|
|
|
|
(1)
|
Common stock equivalents of 73 shares for the three months ended April 29, 2017 were excluded due to the net loss.
|
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period because the exercise price of such options was greater than the average market price per share of common stock for the respective periods or because of the unearned compensation associated with either stock options, restricted stock units, restricted or deferred stock had an anti-dilutive effect.
|
|
For the three months ended
|
|
|
|
|
April 29, 2017
|
|
|
April 30, 2016
|
|
|
(in thousands, except exercise prices)
|
|
|
|
|
|
|
|
|
|
Stock Options (time-vested)
|
|
|
1,377
|
|
|
|
1,244
|
|
|
Restricted Stock Units (time-vested)
|
|
|
1,086
|
|
|
|
423
|
|
|
Restricted and Deferred Stock
|
|
|
477
|
|
|
|
—
|
|
|
Range of exercise prices of such options
|
|
$3.20
-
$7.52
|
|
|
$4.91
-
$7.52
|
|
|
The above options, which were outstanding at April 29, 2017, expire from October 22, 2017 to January 18, 2027.
There were no performance-based awards outstanding at April 29, 2017. For the first quarter of fiscal 2016, 941,082 shares of unvested performance-based restricted stock and 1,181,168 performance-based stock options were excluded from the Company’s computation of basic and diluted earnings per share. All outstanding performance-based awards expired unvested in March 2017 as a result of the Company not achieving performance targets in fiscal 2016.
Shares of unvested time-based restricted stock of 482,002 for the first three months of fiscal 2017 and 377,395 shares for the first three months of fiscal 2016 were excluded from the computation of basic earnings per share and will continue to be excluded until such shares vest. See Note 3, Long-Term Incentive Plans, for a discussion of the Company’s LTIP plans and equity awards.
All 482,002 shares of restricted stock outstanding at April 29, 2017 are considered issued and outstanding. Each share of restricted stock has all of the rights of a holder of the Company’s common stock, including, but not limited to, the right to vote and the right to receive dividends, which rights are forfeited if the restricted stock is forfeited.
6. Stock Repurchase Plan
On March 17, 2017, the Company’s Board of Directors approved a stock repurchase plan. Under the stock repurchase plan, the Company may purchase up to $12.0 million of its common stock through open market and privately negotiated transactions during fiscal 2017. The timing and the amount of any repurchases of common stock will be determined based on the Company’s evaluation of market conditions and other factors. The stock repurchase program commenced in the first quarter of fiscal 2017 and will expire on February 3, 2018, but may be suspended, terminated or modified at any time for any reason. The Company expects to finance the repurchases from operating funds and/or periodic borrowings on its Credit Facility. Any repurchased common stock will be held as treasury stock and will be recorded on a trade-date basis.
Through April 29, 2017, the Company purchased 669,347 shares of common stock at an average price of $2.73 per share. Approximately $10.2 million remains available under the stock repurchase plan.
14
7. Income Taxes
At April 29, 2017, the Company had total deferred tax assets of approximately $83.5 million, total deferred tax liabilities of $14.4 million and a corresponding valuation allowance of $69.3 million.
In the fourth quarter of fiscal 2013, the Company entered into a three-year cumulative loss position and based on forecasts at that time, the Company expected the cumulative three-year loss to increase as of the end of fiscal 2014. Management determined that this represented significant negative evidence at February 1, 2014. While the Company has projected it will return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, based on a consideration of all positive and negative evidence as of February 1, 2014, the Company established a full allowance against its net deferred tax assets. Based on the Company’s forecast for fiscal 2017, the Company believes that a full allowance remains appropriate at this time.
As of April 29, 2017, the Company had net operating loss carryforwards of $146.9 million for federal income tax purposes and $87.6 million for state income tax purposes that are available to offset future taxable income through fiscal year 2037. Additionally, the Company has alternative minimum tax credit carryforwards of $2.3 million, which are available to further reduce income taxes over an indefinite period. Additionally, the Company has $2.4 million of net operating loss for tax purposes related to the Company’s operations in Canada, which is expected to expire largely unutilized.
The utilization of net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon having taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carryforwards and tax credit carryforwards which may be used in future years.
The Company’s tax provision for the first three months of fiscal 2017 and fiscal 2016 primarily represents current state margin tax and foreign income tax.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. The charge is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Pursuant to Topic 740, “
Income Taxes
”, the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. The unrecognized tax benefit at April 29, 2017 was $3.0 million. This amount is directly associated with a prior year tax position related to exiting the Company’s direct business in Europe. The amount of unrecognized tax benefit has been presented as a reduction in the reported amounts of its federal and state net operating loss carryforwards. It is the Company’s policy to record interest and penalties on unrecognized tax benefits as income taxes; however, no penalties or interest have been accrued on this liability because the carryforwards have not yet been utilized.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for years through fiscal 2001, with remaining fiscal years subject to income tax examination by federal tax authorities.
15