10-Q 1 f10q073104.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 31, 2004. OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission File No. 0-31787 LOEHMANN'S HOLDINGS INC. (Exact Name of Registrant As Specified In Its Charter) DELAWARE 13-4129380 ---------------------------------------- -------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2500 Halsey Street, Bronx, New York 10461 ----------------------------------------- (Address of Principal Executive Offices, Including Zip Code) (718) 409-2000 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by a 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 as 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 registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X --- --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed under Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- Below are indicated the number of shares outstanding of each of the registrant's classes of common stock. Class Outstanding at September 9, 2004 ------ -------------------------------- Common Stock, $.01 par value per share 6,729,236 Loehmann's Holdings Inc. Contents

~~PART~~Part I--~~FINANCIAL~~Financial ~~INFORMATION~~Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets--~~August~~July 231, ~~2003~~2004, ~~February~~January 131, ~~2003~~2004 (Audited) and August 32, ~~2002~~2003.................................................................................... 2 Consolidated Statements of Operations--Quarters and six months ended ~~August~~July 231, ~~2003~~2004 and August 32, ~~2002~~2003.................................................................. 3 Consolidated Statements of Cash Flows--Six months ended ~~August~~July 231, ~~2003~~2004 and August 32, ~~2002~~2003................................................................................ 4 Notes to Consolidated Financial Statements........................................................... 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........................................................................... 67 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 1012 Item 4. Controls and Procedures...................................................................... 1012 ~~PART~~Part II--~~OTHER~~Other ~~INFORMATION~~Information Item 51. ~~Submission~~Legal ~~of Matters to a Vote of Security Holders~~Proceedings............................................................................ 1012 Item 6. Exhibits ~~and Reports on Form 8-K~~..................................................................................... 1113 Signature............................................................................................ 1214

1 Part 1. Financial Information Item 1. Financial Statements Loehmann's Holdings Inc. Consolidated Balance Sheets (In thousands)

~~August~~July 231, ~~February~~January 131, August 32, ~~2003~~2004 2004 2003 ~~2002~~ -------- -------- -------- (Unaudited) (Audited) (Unaudited) Assets Current assets: Cash and cash equivalents $ 18,~~081~~869 $ 118,~~217~~046 $ 171,~~158~~081 Accounts receivable and other assets 78,~~484~~016 57,~~798~~392 57,~~590~~484 Merchandise inventory 5868,~~611~~767 5159,~~506~~177 4858,~~164~~611 -------- -------- -------- Total current assets 6785,~~176~~652 6874,~~521~~615 7067,~~912~~176 Property, equipment and leaseholds, net 4443,~~681~~834 4543,~~087~~893 4144,~~613~~681 Deferred financing fees and other assets, net 1,~~445~~495 1,~~585~~305 1,~~573~~445 Deferred tax asset 28,~~968~~252 28,~~968~~252 2,~~357~~968 Reorganization value in excess of identifiable assets, net 1511,~~988~~322 11,243 15,988 ~~19,381~~ -------- -------- -------- Total assets $~~132~~150,~~258~~555 $~~134~~139,~~149~~308 $~~135~~132,~~836~~258 ======== ======== ======== Liabilities and ~~common~~ stockholders' equity Current liabilities: Accounts payable $ 2330,~~088~~989 $ 2328,~~603~~330 $ 1623,~~480~~088 Revolving credit facility ~~4,057~~ - - 4,057 Accrued expenses 1719,~~473~~060 1819,~~954~~041 1817,~~145~~635 ~~Accrued interest 162 354 767~~ Income taxes payable ~~162 1~~2,~~351~~729 ~~1,763~~- 162 -------- -------- -------- Total current liabilities 4452,~~942~~778 4447,~~262~~371 3744,~~155~~942 11% ~~Senior~~senior notes due December 2005 - - 5,703 11Deferred tax liability 3,~~407~~441 263,~~407~~441 - Other noncurrent liabilities 68,~~840~~958 67,~~195~~870 56,~~794~~840 ~~Common stockholders~~Stockholders' equity: Common stock, $0.01 par value, 20,000,000 shares authorized; 6,729,236, ~~6,659,236 and 6,658,964~~ shares issued and outstanding at ~~August~~July 231, ~~2003~~2004, ~~February~~January 131, ~~2003~~2004 and August 32, ~~2002,~~2003 ~~respectively~~67 67 6667 66 Additional paid-in capital 50,~~362~~361 4950,~~934~~361 4950,~~934~~362 Retained earnings 2434,~~344~~950 2230,~~285~~198 1624,~~480~~344 -------- -------- -------- Total ~~common~~ stockholders' equity 7485,~~773~~378 7280,~~285~~626 6674,~~480~~773 -------- -------- -------- Total liabilities and ~~common~~ stockholders' equity $~~132~~150,~~258~~555 $~~134~~139,~~149~~308 $~~135~~132,~~836~~258 ======== ======== ========

The accompanying notes are an integral part of these financial statements. 2 Loehmann's Holdings Inc. Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)

~~QUARTER~~Quarter ~~ENDED~~Ended ~~SIX~~Six ~~MONTHS~~Months ~~ENDED~~Ended ------------------------- ------------------------ ~~AUGUST~~July 231, August 3,2 ~~AUGUST~~July 231, August 32, 2004 2003 ~~2002~~2004 2003 ~~2002~~ -------- -------- -------- -------- Net sales $ 83,189 $ 79,279 $ 75190,~~284~~208 $169,707 ~~$168,681~~Other revenue 557 423 910 752 Cost of sales 51,232 51,416 47114,~~687~~291 105,417 ~~104,226~~ -------- -------- -------- -------- Gross profit 2732,~~863~~514 ~~27,597 64,290 64,455 Revenue from leased departments 423 346 752 627 -------- -------- -------- -------- Operating profit~~ 28,286 2776,~~943~~827 65,042 ~~65,082~~ Selling, general, and administrative expenses 29,121 26,745 2462,~~772~~116 55,991 52Merger related costs 1,~~032~~648 - 1,648 - Depreciation and amortization 2,~~439~~633 2,~~160~~439 45,~~784~~068 4,~~315~~784 ~~Gain on sale of building~~ - ~~3,934~~ - ~~3,934~~ -------- -------- -------- -------- Operating (loss) income (888) (898) 47,~~945~~995 4,267 ~~12,669~~ Interest expense, net 11 319 ~~668~~48 777 ~~1,454~~ -------- -------- -------- -------- (Loss) income before income taxes (899) (1,217) 47,~~277~~947 3,490 ~~11,215~~ (Benefit) provision for income taxes, net (361) (524) 13,~~683~~195 1,431 ~~4,423~~ -------- -------- -------- -------- Net (loss) income ~~applicable~~$ to(538) ~~common stock~~ $ (693) $ 24,~~594~~752 $ 2,059 ~~$ 6,792~~ ======== ======== ======== ======== ~~Earnings~~(Loss) earnings per share: Basic ~~Net~~ (~~loss~~Loss) ~~income~~earnings per share $ (0.1008) $ (0.3910) $ 0.3171 $ 10.0231 ======== ======== ======== ======== Weighted average shares outstanding 6,~~673~~729 6,~~659~~673 6,~~666~~729 6,~~659~~666 ======== ======== ======== ======== Diluted ~~Net~~ (~~loss~~Loss) ~~income~~earnings per share $ (0.1008) $ (0.3610) $ 0.2862 $ 0.9528 ======== ======== ======== ======== Weighted average shares outstanding 6,729 6,673 7,~~246~~712 7,460 ~~7,142~~ ======== ======== ======== ========

The accompanying notes are an integral part of these financial statements. 3 Loehmann's Holdings Inc. Consolidated Statements of Cash Flows (Unaudited) (In thousands)

Six Months Ended ----------------------- ~~August~~July 231, August 32, 2004 2003 ~~2002~~ -------- -------- Cash flows provided by (used in) ~~provided by~~ operating activities: Net income $ 24,~~059~~752 $ 62,~~792~~059 Adjustments to reconcile net income to net cash provided by (used in) ~~provided by~~ operating activities: Depreciation and amortization 4,~~784~~899 4,~~315~~784 ~~Gain~~Adjustments onto ~~sale~~reorganization ofvalue ~~building~~(79) - ~~(3,934)~~Loss ~~Asset~~on disposal ~~187~~of -assets 169 187 Changes in current assets and liabilities: Accounts receivable and other assets (624) (1,686) ~~(969)~~ Merchandise inventory (79,~~105~~590) (47,~~192~~105) Accounts payable 2,659 (515) ~~(2,947)~~ Accrued expenses 19 (1,~~481~~673) ~~1,908~~ Income taxes payable 2,729 (1,189) ~~876 Accrued interest (192) (73)~~ -------- -------- Net changes in current assets and liabilities (124,~~168~~807) (512,~~397~~168) Net change in other noncurrent assets and liabilities 793 642 ~~136~~ -------- -------- Total adjustments, net 975 (6,555) ~~(4,880)~~ -------- -------- Net cash provided by (used in) ~~provided by~~ operating activities 5,727 (4,496) ~~1,912~~ -------- -------- Cash flows from investing activities: Capital expenditures (4,~~422~~358) (34,~~498~~422) ~~Net proceeds from sale of building~~ - ~~5,012~~ -------- -------- Net cash (used in) ~~provided by~~ investing activities (4,~~422~~358) 1(4,~~514~~422) -------- -------- Cash flows from financing activities: Borrowings under the credit facility, net - 4,057 - Net issuance of common stock ~~429~~ - 429 Repayment of 11% ~~Senior~~senior notes - (5,704) - Other financing activities, net - (~~150~~546) - -------- -------- Net cash provided by (used in) financing activities (546) (1,218) ~~(150)~~ -------- -------- Net increase (decrease) ~~increase~~ in cash and cash equivalents 823 (10,136) ~~3,276~~ Cash and cash equivalents at beginning of period 8,046 11,217 ~~13,882~~ -------- -------- Cash and cash equivalents at end of period $ 18,~~081~~869 $ 171,~~158~~081 ======== ======== Supplemental disclosure of cash flow information: Cash interest paid during period $ ~~997~~47 $ ~~1,657~~997 ======== ======== Cash taxes paid during period $ ~~3,354~~538 $ 23,~~431~~354 ======== ========

The accompanying notes are an integral part of these financial statements. 4 Loehmann's Holdings Inc. Notes to Financial Statements Loehmann's Holdings Inc. ("Holdings" and collectively with its subsidiaries, "Loehmann's" or the "Company"), a Delaware corporation incorporated in 2000, is the parent company of Loehmann's, Inc. Loehmann's, founded in 1921 as the "Original Designer Outlet," is a leading national specialty retailer of well known designer and brand name women's fashion apparel, men's furnishings, accessories, and shoes offered at prices that are typically 30% to 65% below department store prices. The Company has a strong brand name, loyal customer base and long-standing relationships with leading designers and vendors of quality merchandise. The Company's target customers are relatively affluent women between the ages of 30 and 55 with household incomes greater than $100,000, who are attracted to designer and other name brand merchandise offered at exceptional values. As of July 31, 2004, the Company operated 48 stores in major metropolitan markets located in 17 states and the District of Columbia. 1. Basis of Presentation The balance sheet at July 31, 2004 and the statements of operations and cash flows for the six months ended July 31, 2004 include, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Certain information and footnote disclosure normally included in financial statements required by generally accepted accounting principles have been omitted. Operating results for the quarter ended July 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending January 29, 2005. It is suggested that these unaudited financial statements be read in conjunction with the financial statements and notes for the fiscal year ended January 31, 2004 included in the Company's Annual Report on Form 10-K for such year. 2. Proposed Merger On April 22, 2004, the Company, Designer Apparel Holding Company, a Delaware corporation ("Parent"), and DAH Merger Corporation, a Delaware corporation and wholly-owned subsidiary of Parent ("Sub"), entered into an Agreement and Plan of Merger, dated as of April 22, 2004 (the "Merger Agreement"). Pursuant to the Merger Agreement, following the satisfaction of certain conditions, including the approval of the Merger (as defined below) by stockholders of the Company representing a majority of the outstanding shares of common stock, par value $.01 per share, of the Company (collectively, the "Shares") entitled to vote, Sub will be merged with and into the Company with the Company being the surviving corporation (the "Merger"). In the Merger the stockholders of the Company will be entitled to receive, for each outstanding Share, $23.00 per Share without interest thereon. After consummation of the Merger, the Shares will no longer be traded on The NASDAQ National Market or any other securities exchange and the Company will become a privately-held company. On April 22, 2004, Parent entered into a Voting Agreement with Alpine Associates, A Limited Partnership, Alpine Partners, L.P., Alpine Associates Offshore Fund Ltd. and Palisades Partners, L.P. (collectively "Alpine"), collectively the beneficial owners of approximately 32.7% of the outstanding Shares, pursuant to which Alpine has agreed to vote its Shares in favor of the Merger. 5 On April 22, 2004, the Company entered into new Employment Agreements with each of Robert N. Friedman and Robert Glass which will be effective upon consummation of the Merger. On April 22, 2004, the Company entered into Agreements as to Surrender and Cancellation of Options with each of Robert N. Friedman and Robert Glass which will be effective upon consummation of the Merger. On April 27, 2004, a complaint was filed by Davidco Investments in the Court of Chancery of the State of Delaware in and for New Castle County against the Company and its directors. The complaint purports to be brought as a class action on behalf of the Company's stockholders. The complaint alleges, among other things, that the members of the board of directors of the Company breached their fiduciary duties to the Company's stockholders by approving the terms of the proposed sale of the Company for $23.00 per share. The complaint seeks, among other things, injunctive relief (including enjoining the proposed sale or rescission if the proposed sale is consummated) and compensatory and/or rescissory damages. On April 29, 2004, a complaint was filed by Bernard Shatz in the Court of Chancery of the State of Delaware in and for New Castle County. The second complaint is substantially similar to the first complaint but also names Crescent Capital Investments, Inc. ("Crescent") as a defendant. On June 10, 2004, plaintiffs in both cases filed a Proposed Order of Consolidation in the Delaware Court of Chancery. The Proposed Order of Consolidation was entered on July 29, 2004. The Order of Consolidation provides that (1) both actions shall be consolidated for all purposes; (2) plaintiffs will cause a consolidated amended complaint to be filed as soon as practicable; and (3) defendants need not respond to the complaints or discovery previously filed in the constituent actions. The defendants have not yet filed answers to the consolidated complaint. The Company, its directors and Crescent intend to vigorously defend the allegations set forth in the consolidated complaint. There will be a special meeting (the "Special Meeting") of the Company's stockholders on Wednesday, October 13, 2004, at 10:00 a.m. Eastern Standard Time, at Loehmann's headquarters, 2500 Halsey Street, Bronx, New York. At the Special Meeting the Company's stockholders as of the record date of August 26, 2004 will vote on the Merger Agreement. 3. Income Taxes Income taxes are provided for under the liability method using an effective tax rate of 40.2% for fiscal 2004 and 39.3% in fiscal 2003. 4. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States for interim financial information requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from the estimates. 5. Stock-Based Compensation In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has not adopted a method under SFAS 148 to expense stock options but rather continues to follow APB 25 and related interpretations in accounting for stock options and accordingly, has recognized no compensation expense with respect to options granted to key employees or options granted to non-employee directors. Had compensation cost been determined based upon the fair value at grant date for awards consistent with the methodology prescribed by SFAS 123, "Accounting for Stock-Based Compensation", the Company's net income and net income per share would have been the pro forma amounts indicated below: 6

~~QUARTER~~Quarter ~~ENDED~~Ended ~~SIX~~Six ~~MONTHS~~Months ~~ENDED~~Ended ~~AUGUST~~--------------------- 2-------------------- July 31, August 32, ~~AUGUST~~July 231, August 32, 2004 2003 ~~2002~~2004 2003 ~~2002~~ --------- --------- --------- --------- (In millions, except per share data) Net (loss) income - as reported $ (0.75) $ 2(0.67) $ 24.18 $ 62.81 Less total stock-based employee compensation expense under the fair value method, net of tax 0.32 0.23 0.43 0.84 --------- --------- --------- --------- Net (loss) income - pro forma $ (0.7) $ (1.0) $ 2.4.5 $ 1.7 ~~$ 6.0~~ ========= ========= ========= ========= Net (loss) income per share: Basic - as reported $ (0.1008) $ (0.3910) $ 0.3171 $ 10.0231 Basic - pro forma (0.1510) (0.3615) 0.2666 0.9026 Diluted - as reported (0.1008) (0.3610) 0.2862 0.9528 Diluted - pro forma (0.1510) (0.3315) 0.2358 0.8423

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Summary Loehmann's is a leading national specialty retailer of well known designer and brand name women's fashion apparel, men's furnishings, accessories, and shoes offered at prices that are typically 30% to 65% below department store prices. The Company currently operates 48 stores in 17 states and the District of Columbia with a concentration of stores in the New York Metro/Mid Atlantic area, California and Florida. The Company opened two new stores in 2004: Northbrook, IL and Pasadena, CA. In July 2004, the Company closed its store in Dallas, TX. The Company will continue to follow a conservative strategy by opening 3-5 new stores per year in existing markets. Comparable store sales increased for the quarter by 2.1% and increased 7.6% for the six months ended July 31, 2004. Net income per diluted share for the six months ended July 31, 2004 was $0.62, up from $0.28 in the prior year period. Loehmann's generated cash from operations of $5.7 million and used $4.4 million for capital expenditures. The discussion and analysis below further explains the Company's results of operations for the quarter and six months ended July 31, 2004. 7

Results of Operations - Comparison of the Quarters Ended July 31, 2004 and August 2, 2003 Net sales for the quarter ended July 31, 2004 were $83.2 million as compared to $79.3 million for the comparable period in the prior year. The increase of $3.9 million is primarily attributable to (i) the comparable store sales increase of $1.5 million and (ii) a net increase of $2.4 million in sales related to six new stores. Comparable store sales increased by 2.1% compared to the same period in fiscal 2003. The increase in comparable store sales in the second quarter was primarily attributable to increased sales volume in shoes. Included in the comparable store base are expanded stores in San Francisco, CA and East Brunswick, NJ. Gross profit for the quarter ended July 31, 2004 was $32.5 million as compared to $28.3 million for the same period in the prior year. Gross profit percentage increased to 39.1% from 35.7% in the prior year period. The increase in gross profit percentage is attributable to greater full price sell through and lower markdowns as a percent of net sales. Selling, general and administrative ("SG&A") expenses as a percentage of net sales for the quarter increased to 35.0% of net sales as compared to 33.7% of net sales in the prior period. SG&A expenses for the quarter ended July 31, 2004 increased by $2.4 million to $29.1 million from $26.7 million in the prior period. The increase of $2.4 million was primarily due to (i) a net increase of $0.8 million of expenses related to the six new stores opened within the past twelve months and (ii) an increase of $0.5 million in occupancy expenses primarily due to the two expanded stores mentioned previously. Depreciation and amortization expense for the quarter ended July 31, 2004 was $2.6 million as compared to $2.4 million for the same period in the prior year. The increase in depreciation expense is due primarily to the accelerated depreciation resulting from the closing of the Company's store in Dallas, TX. There was net interest expense of $11,000 for the quarter ended July 31, 2004 as compared to $319,000 for the same period in the prior year. The reduction in interest expense is due to (i) a reduction of $224,000 in interest expense due to the redemption in November 2003 of the remaining 11% senior notes due 8 December 2005 and (ii) reduced interest charges under the Company's Credit Facility due to the Company's favorable cash position. Merger related expense for the quarter ended July 31, 2004 was $1.6 million. The $1.6 million in expense consists of professional and legal fees incurred by the Company associated with the proposed Merger. As a result of the items explained above, net loss was $(0.5) million, or (0.6)% of net sales, for the quarter ended July 31, 2004 as compared to a net loss of $(0.7) million, or (0.9)% of net sales, for the quarter ended August 2, 2003. Results of Operations - Comparison of the Six Months Ended July 31, 2004 and August 2, 2003 Net sales for the six-month period ended July 31, 2004 were $190.2 million as compared to $169.7 million for the comparable period in the prior year. The increase of $20.5 million was primarily attributable to (i) an increase in comparable store sales of $12.2 million and (ii) an increase of $8.4 million in sales related to six new stores. Comparable store sales increased by 7.6 % for the six-month period ended July 31, 2004 compared to the same period in fiscal 2003. The increase in comparable store sales in the six-month period was largely attributable to increased sales volume in better sportswear and shoes. Gross profit for the six-month period ended July 31, 2004 was $76.8 million as compared to $65.0 million for the same period in the prior year. Gross profit percentage increased to 40.4% from 38.3% in the prior year period. The increase in gross profit percentage is attributed to (i) more full price sell through resulting in lower markdowns as a percent of net sales and (ii) the initial markup of merchandise resulting from a favorable change in the merchandise mix. SG&A expenses, as a percent to sales decreased to 32.7% from 33.0% in the prior six month period. SG&A expenses for the six months ended July 31, 2004, increased to $62.2 million from $56.0 million in the prior period. The increase of $6.2 million was primarily due to (i) an increase of $2.4 million of expenses related to the six new stores opened within the past twelve months, (ii) an increase of $1.3 million in variable sales related expenses resulting from the $12.2 million increase in comparable store sales for the period and (iii) an increase of $1.2 million in occupancy expenses incurred at stores open for at least a year, primarily related to the two expanded stores previously mentioned. Included in new store expenses were $0.2 million of pre-opening expenses. Depreciation and amortization expense for the six-month period ended July 31, 2004 was $5.1 million as compared to $4.8 million for the same period in the prior year. The increase in depreciation expense is due primarily to the accelerated depreciation resulting from the closing of the Company's store in Dallas, TX. Net interest expense for the six-month period ended July 31, 2004 was $48,000 as compared to $777,000 for the same period in the prior year. The reduction in interest expense is due to (i) a reduction of $540,000 in interest expense due to the redemption in November 2003 of the remaining 11% senior notes due December 2005 and (ii) reduced interest charges under the Company's Credit Facility due to the Company's favorable cash position. Merger related expense for the six months ended July 31, 2004 was $1.6 million. The $1.6 million in expense consists of professional and legal fees incurred by the Company associated with the proposed Merger. 9 As a result of the items explained above, net income was $4.8 million, or 2.5% of sales, for the six months ended July 31, 2004 as compared to net income of $2.1 million, or 1.2% of sales, for the six months ended August 2, 2003. Liquidity and Capital Resources The Company has a $50.0 million credit facility with The CIT Group/Business Credit, Inc. (the "Credit Facility"). The availability of the revolving line of credit under the Credit Facility is subject to certain inventory-related borrowing base requirements. Repayment of amounts borrowed under the Credit Facility is secured by a lien on substantially all the assets of the Company. The indebtedness under the Credit Facility bears interest at variable rates based on LIBOR plus 2.0% or the prime rate plus 0.5% on borrowings. There is an unused line fee of 0.25% per annum on the unused portion of the Credit Facility. The Credit Facility contains certain customary covenants, including capital expenditure limitations, limitations on indebtedness, liens, and restricted payments. There are no financial performance covenants under the Credit Facility. As of July 31, 2004, the Company had no borrowings and documentary letters of credit of $7.8 million outstanding with $42.2 million of unused availability under the Credit Facility. Net cash provided by operations for the six months ended July 31, 2004 was $5.7 million compared to $4.5 million used in operations in the prior year. Net cash provided by operations benefited from the increase in net income of $2.7 million over the prior period and the increase in income taxes payable of $3.9 million over the prior period resulting from decreased estimated tax payments related to the Company initiatives to accelerate depreciation expense taken for tax purposes. Inventory at the end of the second quarter increased by $10.2 million compared to the same period in the prior year primarily due to (i) an increase in inventory related to an earlier transition to the fall selling season than the prior year period , (ii) an increase in pack-away inventory and (iii) an increase in inventory related to new stores not open in the prior period. Accounts receivable and other current assets for the six months ended July 31, 2004 were $8.0 million compared to $7.4 million at January 31, 2004. The increase was due primarily to an increase in prepaid advertising expenses for upcoming fall season events. Accounts payable increased $2.7 million in the first six months of fiscal year 2004. The increase in accounts payable was primarily the result of an increase in favorable payment terms with the Company's vendors as compared to the same period in the prior year. Capital expenditures for the six months were $4.4 million. The opening of a shoe store in White Plains, NY, new stores in Northbrook, IL and Pasadena, CA, the purchase of new POS register equipment and additional storage capacity at our distribution center accounted for $3.7 million of the $4.4 million. Income taxes payable for the six months ended July 31, 2004 were $2.7 million compared to no amount payable at January 31, 2004. The increase is primarily due to an increase in the provision for income taxes to $3.2 million as a result of the increase in the earnings of the Company, less $0.5 million of cash taxes paid during the period for estimated prior year and estimated state and federal taxes. 10 The Company believes that cash generated from operations and funds available under the Credit Facility will be sufficient to satisfy its cash requirements through the remainder of the fiscal year. This Quarterly Report on Form 10-Q and, in particular, Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the Securities Exchange Act of 1934. The Company's actual results of operations and future financial condition may differ materially from those expressed or implied in any such forward-looking statements as a result of many factors, including factors that may be beyond the Company's control. Other factors that may cause actual results of operations and future financial condition to differ from those expressed or implied in any forward-looking statements contained herein include adverse changes in relationships with key vendors, changes in consumer preferences, competition from existing and potential competitors and general economic conditions. Investors are also directed to the discussion of risks and uncertainties associated with forward-looking statements contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements contained herein or that may be made from time to time by or on behalf of the Company. Critical Accounting Policies Inventory Merchandise inventory is valued at the lower of cost or market as determined by the retail inventory method, which the Company believes approximates fair value. However, certain warehoused inventory, referred to as pack-away inventory, that is not immediately available for sale is valued on a specific cost basis. The merchandise inventory valued on a specific cost basis at July 31, 2004 and August 2, 2003 was $24.0 million and $20.6 million, respectively. The Company takes permanent markdowns to reduce prices as goods age. The resulting gross profit reduction is recognized in the period the markdown is recorded. Shrinkage is estimated as a percentage of sales for the period from the last inventory date to the end of each reporting period. Such estimates are based on experience and recent physical inventory results. Physical inventories are taken twice annually and inventory records are adjusted accordingly. Revenue Recognition and Other Revenue The Company recognizes revenue when goods are sold, at retail, to customers in its stores. Sales from fragrances, a leased department, and internet sales through a partnership with Smart Bargains, a leading internet provider of off-price merchandise, are not reflected in the net sales reported on the Company's statements of operations. The gross profit from both fragrance and internet sales are shown as other revenue on the Company's statements of operations. Proposed Merger On April 22, 2004, the Company, Parent and Sub entered into the Merger Agreement. Pursuant to the Merger Agreement, following the satisfaction of certain conditions, including the approval of the Merger by stockholders of the Company representing a majority of the Shares entitled to vote, Sub will be merged with and into the Company with the Company being the surviving corporation. In the Merger the stockholders of the Company will be entitled to receive, for each outstanding Share, 11 $23.00 per Share without interest thereon. After consummation of the Merger, the Shares will no longer be traded on The NASDAQ National Market or any other securities exchange and the Company will become a privately-held company. On April 22, 2004, Parent entered into a Voting Agreement with Alpine, the beneficial owner of approximately 32.7% of the outstanding Shares, pursuant to which Alpine has agreed to vote its Shares in favor of the Merger. On April 22, 2004, the Company entered into new Employment Agreements with each of Robert N. Friedman and Robert Glass which will be effective upon consummation of the Merger. On April 22, 2004, the Company entered into Agreements as to Surrender and Cancellation of Options with each of Robert N. Friedman and Robert Glass which will be effective upon consummation of the Merger. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has assessed its vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash and cash equivalents. Due to the short-term nature of these investments the Company has determined that the risks associated with interest rate fluctuations related to these financial instruments do not pose a material risk to the Company. Item 4. Controls and Procedures The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information that is required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management in a timely manner. The Company's Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Part II. Other Information Item 1. Legal Proceedings The Company filed a report on Form 8-K under items 5 and 7 of Form 8-K, dated April 28, 2004, reporting that on April 27, 2004, a complaint was filed by Davidco Investments in the Court of Chancery of the State of Delaware in and for New Castle County against the Company and its directors. The complaint purports to be brought as a class action on behalf of the Company's stockholders. The complaint alleges, among other things, that the members of the board of directors of the Company breached their fiduciary duties to the Company's stockholders by approving the terms of the proposed sale of the Company for $23.00 per share. The complaint seeks, among other things, injunctive relief (including enjoining the proposed sale or rescission if the proposed sale is consummated) and compensatory and/or rescissory damages. On April 29, 2004, a complaint was filed by Bernard Shatz in the Court of Chancery of the State of Delaware in and for New Castle County. The second complaint is substantially similar to the first complaint but also names Crescent as a defendant. 12 On June 10, 2004, plaintiffs in both cases filed a Proposed Order of Consolidation in the Delaware Court of Chancery. The Proposed Order of Consolidation was entered on July 29, 2004. The Order of Consolidation provides that (1) both actions shall be consolidated for all purposes; (2) plaintiffs will cause a consolidated amended complaint to be filed as soon as practicable; and (3) defendants need not respond to the complaints or discovery previously filed in the constituent actions. The defendants have not yet filed answers to the consolidated complaint. The Company, its directors and Crescent intend to vigorously defend the allegations set forth in the consolidated complaint. Item 6. Exhibits Exhibits (a) Exhibits 31.1 Certificate of Chief Executive Officer required by Section 15d-14(a) of the Rules and Regulations under the Securities Exchange Act of 1934. 31.2 Certificate of Chief Financial Officer required by Section 15d-14(a) of the Rules and Regulations under the Securities Exchange Act of 1934. 32.1 Certificate of Chief Executive Officer required by 18 U.S.C. Section 1350. 32.2 Certificate of Chief Financial Officer required by 18 U.S.C. Section 1350. 13 Loehmann's Holdings Inc. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: September 9, 2004 Loehmann's Holdings Inc. By /s/ Robert Glass ----------------------------------------------------- Robert Glass Chief Operating Officer, Chief Financial Officer and Secretary 14

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