As filed with the Securities and Exchange Commission on October 1, 1996
Registration No. 333-5855
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
STAGE STORES, INC.
(Exact Name Of Registrant As Specified In Its Charter)
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<S> <C> <C>
Delaware 76-0407711 5311
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
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10201 Main Street, Houston, Texas 77025 Telephone: 713-667-5601
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
MR. CARL TOOKER
Stage Stores, Inc.
10201 Main Street
Houston, Texas 77025
Telephone: 713-667-5601
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
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LANCE C. BALK, ESQ. MARK A. STEGEMOELLER, ESQ.
Kirkland & Ellis Latham & Watkins
Citicorp Center, 39th Floor Sears Tower, Suite 5800
153 East 53rd Street 233 South Wacker Drive
New York, New York 10022 Chicago, Illinois 60606
Telephone: 212-446-4800 Telephone: 312-876-7700
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 1, 1996
10,000,000 Shares
[LOGO Of STAGE STORES INC.]
Common Stock
($.01 par value)
---------------
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Stage Stores, Inc. ("Stage Stores" or the
"Company"). Prior to the Offering, there has been no public market for
the Common Stock. It is anticipated that the initial public
offering price will be between $14.00 and $16.00 per share. For
information relating to the factors considered in determining
the initial offering price to the public, see "Underwriting."
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "STGE", subject to notice of issuance.
---------------
For a discussion of certain factors that should be considered in connection
with an investment in the Common Stock, see "Risk Factors" beginning on page
12 herein.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
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Per Share $ $ $
Total(2) $ $ $
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(1)Before deduction of expenses payable by the Company estimated at
$1,300,000.
(2)The Company and certain of the Company's stockholders named herein under
"Over-Allotment Option" have granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up
to 1,500,000 additional shares (up to 750,000 additional shares from the
Company and up to 750,000 outstanding shares from the selling
stockholders) to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $_________,
Underwriting Discounts and Commissions will be $____________, Proceeds to
Company will be $___________ and Proceeds to Selling Stockholders will be
$______.
================================================================================
The shares are offered by the several Underwriters when, as and if issued
by the Company, delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the
shares will be ready for delivery on or about , 1996, against
payment in immediately available funds.
CS First Boston
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
PaineWebber Incorporated
The date of this Prospectus is , 1996.
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(blank page)
2
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(blank page)
3
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[Pictures to come]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
DURING THE OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10b-6, 10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
4
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. References in this
Prospectus to the Company shall, as the context requires, refer to Stage
Stores, Inc. ("Stage Stores"), which was previously known as Apparel
Retailers, Inc., together with its wholly-owned subsidiaries, including
Specialty Retailers, Inc. ("SRI"). References to a particular year are to the
Company's fiscal year which is the 52 or 53 week period ending on the
Saturday closest to January 31 of the following calendar year (e.g., a
reference to "1995" is a reference to the fiscal year ended February 3,
1996). The term pro forma refers to the basis described under "Unaudited Pro
Forma Combined Financial Data." In addition, unless otherwise indicated, (i)
the information in this Prospectus reflects a .94727 for 1 reverse stock
split of the common stock to be consummated prior to the Offering and (ii)
the information contained herein assumes that the Underwriters'
over-allotment option is not exercised. See "Underwriting."
The Company
The Company operates the store of choice for well known, national brand
name family apparel in over 200 small towns and communities across the
central United States. The Company has recognized the high level of brand
awareness and demand for fashionable, quality apparel by consumers in small
markets and has identified these markets as a profitable and underserved
niche. The Company has developed a unique franchise focused on small markets,
differentiating itself from the competition by offering a broad range of
merchandise with a high level of customer service in convenient locations.
The Company currently operates 314 stores through its "Stage", "Bealls"
and "Palais Royal" trade names in 20 states throughout the central United
States. Approximately 77% of these stores are located in small markets and
communities with as few as 4,000 people. The Company's store format
(averaging approximately 18,000 total selling square feet) and merchandising
capabilities enable the Company to operate profitably in small markets. The
remainder of the Company's stores operate in metropolitan areas, primarily in
suburban Houston. For the twelve months ended February 3, 1996, the Company
would have had pro forma sales and income before extraordinary item of $742.4
million and $20.7 million, respectively.
Stage Stores' merchandise offerings include a carefully edited but broad
selection of branded, moderately priced, fashion apparel, accessories,
fragrances and cosmetics and footwear for women, men and children. Over 85%
of 1995 sales consisted of branded merchandise, including nationally
recognized brands such as Levi Strauss, Liz Claiborne, Chaps/Ralph Lauren,
Calvin Klein, Guess, Hanes, Nike, Reebok and Haggar Apparel.
In recent years, the Company has undertaken several initiatives to realize
the full potential of its unique franchise in small markets, including (i)
recruiting a new senior management team, (ii) embarking on a store expansion
program to capitalize on available opportunities in new markets through new
store openings and strategic acquisitions, (iii) continuing to refine the
Company's retailing concept and (iv) closing unprofitable stores. As a result
of these initiatives, the lower operating costs of small market stores, the
benefits of economies of scale, and its highly automated facilities and
sophisticated information systems, the Company has among the highest
operating income margins in the apparel retailing industry.
Competitively Well Positioned
As a result of its small market focus, Stage Stores generally faces less
competition for brand name apparel because consumers in small markets
generally have only been able to shop for branded merchandise in distant
regional malls. In those small markets where the Company does compete for
brand name apparel sales, such competition generally comes from local
retailers, small regional chains and, to a lesser extent, national department
stores. The Company believes it has a competitive advantage over local
retailers and smaller regional chains due to its (i) economies of scale, (ii)
strong vendor relationships, (iii) proprietary credit card program and (iv)
sophisticated operating systems. The Company believes it has a competitive
advantage in small markets over national department stores due to its (i)
experience with smaller markets, (ii) ability to effectively manage
merchandise assortments in a small store format and (iii) established
operating systems designed for efficient management within small markets. In
addition, due to minimal merchandise overlap, Stage Stores generally does not
directly compete for branded apparel sales with national discounters such as
Wal-Mart.
5
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Key Strengths
The following factors serve as the Company's key strengths and
distinguishing characteristics:
Ability to Operate Profitably in Smaller Markets. In targeting small
markets, the Company has developed a store format, generally ranging in size
from 12,000 to 30,000 square feet, which is smaller than typical department
stores yet large enough to offer a well edited, but broad selection of
merchandise. This format, together with economies of scale in buying and
merchandising, information systems, distribution and advertising, has enabled
the Company to operate profitably in small markets. In 1995, the Company's
small market stores open for at least one year generated a store contribution
(operating profit before allocation of corporate overhead) as a percentage of
sales of 18%, as compared to 12% for its larger market stores.
Benefits of Strong Vendor Relationships. The Company's large store base
offers major vendors a unique vehicle for accessing multiple small markets in
a cost effective manner. The proliferation of media combined with the
significant marketing efforts of these vendors has created significant demand
for branded merchandise. However, the financial and other limitations of many
local retailers have left vendors of large national brands with limited
access to such markets. Further, these vendors, in order to preserve brand
image, generally do not sell to national discounters. As a result, the
Company is able to carry branded merchandise frequently not carried by local
competitors. Additionally, the Company continuously seeks to expand its
vendor base and has recently added nationally recognized brand names such as
Polo, Dockers for Women, and Oshkosh, and fragrances by Elizabeth Arden, Liz
Claiborne and Perry Ellis. In addition, the Company has successfully
increased the participation by key vendors in joint marketing programs to a
level that the Company believes exceeds the standard programs provided to its
smaller, regional competitors.
Effective Merchandising Strategy. The Company's merchandising strategy is
based on an in-depth understanding of its customers and is designed to
accommodate the particular demographic profile of each store. Store layouts
and visual merchandising displays are designed to create a friendly, modern,
department store environment, which is frequently not found in small markets.
The Company's strategy focuses on moderately priced merchandise categories of
women's, men's and children's apparel, accessories, fragrances, cosmetics and
footwear, which have traditionally experienced attractive margins. The
Company utilizes a sophisticated merchandise allocation and transfer system
which is designed to maximize in-stock positions, increase sales and reduce
markdowns. The Company believes that the combination of the size and
experience of its buyer group, strong vendor relationships, effective
merchandising systems and participation in the Associated Merchandising
Corporation ("AMC") cooperative buying service enable it to compete
effectively on both price and selection in its markets.
Focused Marketing Strategy. The Company's primary target customers are
women between the ages of 20 and 55 with household incomes over $25,000 who
are the primary decision makers for family clothing purchases. The Company
uses a multi-media advertising approach to position its stores as the local
destination for fashionable, brand name merchandise. In addition, the Company
heavily promotes its proprietary credit card in order to create customer
loyalty and to effectively identify its core customers. The Company believes
it has a high level of customer awareness due to the small size of its
markets, its aggressive advertising strategy and well developed corporate
programs designed to encourage a high level of customer interaction and
employee participation in local community activities.
Benefits of Proprietary Credit Card Program. The Company aggressively
promotes its proprietary credit card and, as a result, the Company believes
it experiences a higher percentage of proprietary credit card sales (55.6% of
net sales in 1995) than most retailers. The Company considers its credit card
program to be a critical component of its retailing concept because it (i)
enhances customer loyalty by providing a service that few local and regional
competitors or discounters offer, (ii) allows the Company to identify and
regularly contact its best customers and (iii) creates a comprehensive
database that enables the Company to implement detailed, segmented marketing
and merchandising strategies for each store.
Emphasis on Customer Service. A primary corporate objective is to provide
excellent customer service through stores staffed with highly trained and
motivated sales associates. Each sales associate is evaluated based upon the
attainment of specific customer service standards such as offering prompt
assistance, suggesting complementary items, sending thank-you notes to charge
customers and establishing consistent contact with customers in order to
create the associate's own customer base. The Company continuously monitors
the quality
6
<PAGE>
of its service by making over 3,000 calls each month to credit card customers
who have recently made a purchase. The results of these surveys are used to
determine a portion of each store manager's bonus. The Company further
extends its service philosophy to the design of the store, including
installing call buttons in its fitting rooms and, in its small market stores,
locating the store manager on the selling floor to increase accessibility to
customers.
Sophisticated Operating and Information Systems. The Company supports its
retail concept with highly automated and integrated systems in areas such as
merchandising, distribution, sales promotions, credit, personnel management,
store design and accounting. These systems have enabled the Company to
effectively manage its inventory, improve sales productivity and reduce
costs, and have contributed to its relatively high operating income margins.
Growth Strategy
In order to fully realize the potential of its unique market position and
proven ability to operate profitably in small markets, the Company has
initiated an aggressive growth strategy to capitalize on available
opportunities in new markets through new store openings and strategic
acquisitions. The Company opened 23 new stores and 45 acquired stores in
1995, has opened 25 new stores and acquired 34 stores to date in 1996, and
expects to open approximately 10 additional new stores during the remainder
of 1996. The Company's goal is to open at least 55 new stores in 1997.
The following are the primary elements of the Company's strategy for
profitable growth:
New Store Openings in Smaller Markets. As part of its ongoing expansion
program, the Company has identified over 600 additional markets in the
central United States and contiguous states which meet its demographic and
competitive criteria. All of these target markets are smaller communities,
where the Company has historically experienced its highest profit margins.
Strategic Acquisitions. The Company believes that it can benefit from
strategic acquisitions by (i) applying its buying and merchandising
capabilities, sales promotion techniques and customer service methods, (ii)
introducing its proven management systems, and (iii) consolidating overhead
functions. This strategy has been successfully demonstrated by the Company's
acquisition of 45 stores from Beall-Ladymon, Inc. ("Beall-Ladymon") in 1994
and the subsequent reopening of the stores in the first quarter of 1995 under
the Stage name. In 1993, the year prior to their acquisition, the
Beall-Ladymon stores generated sales of approximately $53.4 million, whereas
the newly opened Stage stores in the same locations generated sales for the
twelve months ended August 3, 1996 of $95.0 million, an increase of 78%. Over
the same periods, store contribution more than doubled.
In June 1996, the Company acquired Uhlmans Inc. ("Uhlmans"), a privately
held retailer with 34 locations in Ohio, Indiana and Michigan, where the
Company previously had no stores (the "Uhlmans Acquisition"). These stores
are of similar size and merchandise content to the Company's existing stores
and are compatible with the Company's retailing concept and growth strategy.
For 1995, Uhlmans had net sales of $59.7 million and operating income of $2.2
million. The Company believes significant opportunities are available to
improve Uhlmans' financial results through the expansion of certain
merchandise categories, the Company's lower merchandising costs, increased
proprietary credit card-based sales, the implementation of the Company's
operating systems and the elimination of duplicative central and
administrative overhead.
Expansion to Micromarkets. The Company recently began targeting its small
market retailing concept towards communities with populations from 4,000 to
12,000 ("micromarkets"). These efforts are designed to capitalize on the
Company's favorable operating experience in markets of this size. Stage
Stores believes that micromarkets may offer a significant avenue for
potential growth, because the Company is able to apply its existing
successful store model in those micromarkets due to its ability to scale its
store concept to the appropriate size (less than 12,000 gross square feet),
the generally lower levels of competition and low labor and occupancy costs.
The Company has identified approximately 1,200 potential micromarkets in the
central United States and contiguous states which meet these criteria.
7
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The Offering
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Common Stock to be sold in the Offering 10,000,000 shares
Common Stock to be outstanding after the
Offering (1) 22,520,892 shares
Use of proceeds The net proceeds to be received by the Company from the
Offering are estimated to be approximately $139.7 million and
will be used (i) to purchase for cash up to all of the
Company's outstanding 12-3/4% Senior Discount Debentures due
2005 (the "Senior Discount Debentures") in a tender offer
(the "Tender Offer") and to pay a consent fee for elimination
or amendment of certain covenants in the Senior Discount
Debentures for an aggregate amount of approximately $135.0
million, (ii) to pay consent fees for amendments to certain
covenants in the indebtedness of SRI and (iii) to pay a $2.0
million fee to terminate the Professional Services Agreement
(as defined). See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
Proposed Nasdaq National Market symbol "STGE"
</TABLE>
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(1) Includes 1,351,967 shares issuable upon the conversion of non-voting
Class B Common Stock, $0.01 par value per share (the "Class B Common
Stock"), which are convertible into Common Stock on a share-for-share
basis, subject to certain restrictions. See "Description of Capital
Stock." Excludes 1,511,523 shares that may be issued upon the exercise of
options granted pursuant to the 1993 Stock Option Plan (as defined). See
"Management--1993 Stock Option Plan."
Prospective purchasers of the Common Stock offered hereby should carefully
consider the "Risk Factors" immediately following this Prospectus Summary.
The executive offices of the Company are located at 10201 Main Street,
Houston, Texas 77025. The Company's telephone number is (713) 667-5601.
8
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Summary Consolidated Historical and
Pro Forma Combined Financial and Operating Data
The following table sets forth summary consolidated historical and pro
forma combined financial and operating data of the Company for the periods
indicated. The Company's summary consolidated historical financial data were
derived from the Company's Consolidated Financial Statements. The summary pro
forma combined financial data were derived from the Unaudited Pro Forma
Combined Financial Data of the Company and give effect to the Uhlmans
Acquisition, including the issuance of the SRPC Notes (as defined), and the
Offering (including a .94727 for 1 reverse stock split of the common stock to
be consummated prior to the Offering). The information in the table should be
read in conjunction with "Selected Consolidated Historical Financial and
Operating Data", "Management's Discussion and Analysis of Financial Condition
and Results of Operations", "Unaudited Pro Forma Combined Financial Data",
the Company's Consolidated Financial Statements and the Financial Statements
of Uhlmans, included elsewhere in this Prospectus.
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Fiscal Year
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Pro Forma
1991 1992 1993(1) 1994 1995(2) 1995(2)
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(dollars in thousands, except per share and store data)
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Statement of operations data:
Net sales $447,142 $504,401 $557,422 $581,463 $682,624 $742,373
Gross profit 135,569 154,265 172,579 182,804 214,277 229,498
Selling, general and administrative
expenses 116,403 129,193 135,011 134,715 159,625 168,936
Service charge income(3) 22,840 29,670 20,003 8,515 10,523 11,374
Store opening and closure costs 255 120 199 5,647 3,689 3,689
Operating income(4) 41,751 54,622 57,372 50,957 61,486 68,247
Net interest expense 33,407 31,771 36,377 40,010 43,989 34,713
Income before extraordinary item 3,961 12,235 13,426 6,630 10,730 20,673
Pro forma earnings per common share(5) -- -- -- -- -- 0.91
Margin and other data:
Gross profit margin 30.3% 30.6% 31.0% 31.4% 31.4% 30.9%
Selling, general and administrative
expense rate 26.0% 25.6% 24.2% 23.2% 23.4% 22.8%
Operating income margin(4) 9.3% 10.8% 10.3% 8.8% 9.0% 9.2%
Adjusted operating income margin(6) 8.1% 8.7% 8.4% 9.2% 9.4% 9.4%
Adjusted operating income(6) $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996 $70,036
Depreciation and amortization 10,049 9,065 9,259 9,997 12,816 13,712
Capital expenditures 4,768 7,631 8,503 19,706 28,638 --
Store data:(7)
Comparable store sales growth:
Bealls/Stage(8) 4.1% 5.1% 7.2% 4.8% 3.3% --
Palais Royal (2.8)% (9.8)% 0.8% 1.7% 1.4% --
Total Company(9) 2.9% 1.8% 6.3% 4.1% 0.8%(10) --
Net sales per selling square foot:
Bealls/Stage(8) $ 113 $ 118 $ 129 $ 138 $ 142 --
Palais Royal 228 191 200 205 203 --
Total Company(9) 138 138 149 157 157 --
Total selling square footage(11) 3,354 3,418 3,472 3,516 4,581 --
Number of stores open at end of
period(12) 159 175 180 188 256 290
</TABLE>
(RESTUBBED TABLE)
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Six Months Ended
-------------------------------------------------
August 3, Pro Forma
July 29, 1995 1996 August 3, 1996
-------------- ------------- --------------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C>
Statement of operations data:
Net sales $296,931 $345,927 $362,443
Gross profit 92,838 108,704 112,697
Selling, general and administrative
expenses 70,877 84,335 86,425
Service charge income(3) 5,124 5,902 6,171
Store opening and closure costs 1,176 301 301
Operating income(4) 25,909 29,970 32,142
Net interest expense 21,365 24,054 18,091
Income before extraordinary item 2,659 3,520 8,563
Pro forma earnings per common share(5) -- -- 0.37
Margin and other data:
Gross profit margin 31.3% 31.4% 31.1%
Selling, general and administrative
expense rate 23.9% 24.4% 23.8%
Operating income margin(4) 8.7% 8.7% 8.9%
Adjusted operating income margin(6) 8.5% 7.8% 8.0%
Adjusted operating income(6) $ 25,134 $ 27,128 $ 29,031
Depreciation and amortization 5,721 6,844 7,148
Capital expenditures 16,786 15,183 --
Store data:(7)
Comparable store sales growth:
Bealls/Stage(8) 3.8% 7.7% --
Palais Royal 0.9% 6.2% --
Total Company(9) 0.5% 7.3% --
Net sales per selling square foot:
Bealls/Stage(8) -- -- --
Palais Royal -- -- --
Total Company(9) -- -- --
Total selling square footage(11) 4,365 5,361 5,361
Number of stores open at end of
period(12) 242 308 308
Balance sheet data (at end of period):
Working capital $181,118 $204,808
Total assets 463,240 473,534
Total long-term debt 425,353 308,354
Stockholders' (deficit) equity (68,428) 56,451(13)
</TABLE>
(END OF RESTUBBED TABLE)
9
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Notes to Summary Consolidated Historical and
Pro Forma Combined Financial and Operating Data
(1) During 1993, Stage Stores was formed and concurrently became the direct
parent of SRI when the existing stockholders of SRI exchanged all of
their common stock for common stock of Stage Stores. Concurrent with the
formation of Stage Stores, the Company completed the refinancing of its
existing debt and preferred stock (the "Refinancing"). As a result of the
Refinancing, the Company recorded an after-tax extraordinary charge of
$16.2 million.
(2) 1995 includes 53 weeks.
(3) Service charge income for 1993, 1994 and 1995 decreased as compared to
levels achieved during 1991 and 1992 due to the sale of accounts
receivable to the SRI Receivables Master Trust (the "Trust") established
as part of the Refinancing in which the Company adopted an accounts
receivable securitization program (the "Accounts Receivable Program").
Without giving effect to the Accounts Receivable Program, service charge
income for 1993, 1994 and 1995 would have been $32.5 million, $35.2
million and $41.3 million, respectively. For a complete summary of the
impact of the Company's proprietary credit card program and the Accounts
Receivable Program, see Note 2 to the Company's Consolidated Financial
Statements, Note 6 below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounts
Receivable Program."
(4) Operating income and operating income margin decreased during 1994
compared to 1993 due primarily to the impact of the adoption of the
Accounts Receivable Program (See Note 2 to the Company's Consolidated
Financial Statements and Note 6 below) combined with a $5.2 million
provision associated with the closure of a majority of the stores
operated under the Fashion Bar name (the "Store Closure Plan")
(substantially all of which were underperforming). See Note 4 to the
Company's Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(5) Pro forma earnings per common share reflects the impact of a .94727 for 1
reverse stock split of the common stock to be consummated prior to the
Offering.
(6) Adjusted operating income represents operating income adjusted to
eliminate store opening and closure costs, and the positive impact on
operating income of the Company's proprietary credit card program
(including the Accounts Receivable Program).
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------------------------------
Pro Forma
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating income $41,751 $54,622 $57,372 $50,957 $61,486 $68,247
Plus: Store opening and closure costs 255 120 199 5,647 3,689 3,689
Less: Positive impact of proprietary
credit card program
on operating income 5,942 11,062 10,743 2,927 1,179 1,900
------- ------- ------- ------- ------- -------
Adjusted operating income $36,064 $43,680 $46,828 $53,677 $63,996 $70,036
======= ======= ======= ======= ======= =======
</TABLE>
(RESTUBBED TABLE)
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<CAPTION>
Six Months Ended
------------------------------------------------
July 29, August 3, Pro Forma
1995 1996 August 3, 1996
------------- ------------- --------------
(in thousands)
<S> <C> <C> <C>
Operating income $25,909 $29,970 $32,142
Plus: Store opening and closure costs 1,176 301 301
Less: Positive impact of proprietary
credit card program
on operating income 1,951 3,143 3,412
------- ------- -------
Adjusted operating income $25,134 $27,128 $29,031
======= ======= =======
</TABLE>
(END OF RESTUBBED TABLE)
The impact of the Company's proprietary credit card program (including
the Accounts Receivable Program) on operating income is calculated as:
(i) the reported service charge income less (ii) the servicing and bad
debt costs reflected in the Company's selling, general and administrative
expenses less (iii) the gain (or plus the loss) associated with the sale
of receivables to the Trust. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounts
Receivable Program" and Note 7 to Selected Consolidated Historical
Financial and Operating Data.
Although adjusted operating income and adjusted operating income margin
do not represent operating income or any other measure of financial
performance under generally accepted accounting principles, the Company
believes they are helpful in understanding the profitability of the
Company's retailing operations prior to the impact of its credit card
program, the Accounts Receivable Program and store opening and closure
costs.
10
<PAGE>
(7) Store data exclude Bealls stores scheduled to be closed under the Bealls
1988 store closure program, except as otherwise noted in Note 12 below,
and also exclude the Fashion Bar stores included in the Store Closure
Plan. Comparable store sales growth and net sales per selling square
foot for 1995 have been determined based on a comparable fifty-two week
period. Sales are considered comparable after a store has been in
operation fourteen months. Net sales per selling square foot are
calculated for stores open the entire year.
(8) Excludes for all the periods presented the six Bealls stores located on
the border of Mexico which were adversely affected by the peso
devaluation in 1994. Comparable stores sales growth and net sales per
selling square foot for Bealls/Stage including these stores were:
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year ---------------------
------------------------------------------ July 29, August 3,
Bealls/Stage 1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth 5.4% 6.7% 7.7% 4.6% 0.2% 0.3% 7.7%
Net sales per selling square foot $119 $125 $137 $146 $145 -- --
</TABLE>
(9) Total Company comparable store sales growth and net sales per selling
square foot including the stores which were part of the Store Closure
Plan were as follows:
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year ---------------------
------------------------------------------ July 29, August 3,
Total Company 1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth 2.9% 1.8% 5.4% 3.2% 0.5% 0.4% 6.8%
Net sales per selling square foot $138 $138 $143 $151 $150 -- --
</TABLE>
(10) Excluding the six Bealls stores located on the border of Mexico which
were adversely affected by the peso devaluation in 1994, total Company
comparable store sales growth for 1995 would have been 3.0%.
(11) Excludes data related to the stores which were included in the Store
Closure Plan. Data is in thousands and is as of the end of the period.
(12) Number of stores open at the end of each period presented also exclude
stores in the Store Closure Plan. Stores open at the end of 1992 and
1993 included one and six stores, respectively, which were previously
excluded under the Bealls 1988 store closure program. Such stores are
only included in the Company's results of operations subsequent to their
removal from the Bealls 1988 store closure program. Both the Store
Closure Plan and the Bealls 1988 store closure program were
substantially completed before the end of 1995.
(13) Reflects non-recurring charges, net of tax, totalling approximately
$14.8 million in connection with the early retirement of the Senior
Discount Debentures and the write-off of related debt issue costs, the
payment of consent fees for amendments to certain covenants in the
indebtedness of SRI and the termination of the Professional Services
Agreement (as defined).
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the Common Stock offered hereby.
Leverage and Restrictive Covenants
Although the Company will use the proceeds from the Offering to reduce
certain high-cost debt, the Company will remain significantly leveraged
following the Offering. As of August 3, 1996, on a pro forma basis to give
effect to the Offering, the Company's total consolidated indebtedness would
have been $308.4 million and total stockholders' equity would have been $56.5
million. See "Capitalization."
Due to the level of the Company's remaining indebtedness after giving
effect to the Offering, any material adverse development affecting the
business of the Company could significantly limit its ability to withstand
competitive pressures and adverse economic conditions, to take advantage of
expansion opportunities or other significant business opportunities that may
arise, or to meet its obligations as they become due. The Company's debt that
remains outstanding following the Offering will continue to impose operating
and financial restrictions on the Company and certain of its subsidiaries.
Such restrictions limit, among other matters, the Company's ability to incur
additional indebtedness, to make dividend payments and to make capital
expenditures. See Note 5 to the Company's Consolidated Financial Statements
and "Description of Certain Indebtedness." The Company will begin to incur
significant scheduled principal repayment obligations on its indebtedness
beginning in 1999, and expects that it will be necessary to refinance this
indebtedness upon the respective maturity of such debt through additional
debt issuances or through additional equity financing. No assurance can be
given that the Company will be able to obtain such financing, or that such
financing will be available on favorable terms. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Future Growth and Recent Acquisitions; Liquidity
Key components of the Company's growth strategy are to (i) continue to
identify and acquire new store locations where the Company believes it can
operate profitably and (ii) identify and consummate strategic acquisitions.
Such expansions and acquisitions could be material in size and cost. The
Company's ability to achieve its expansion plans is dependent upon many
factors, including the availability and permissibility under restrictive
covenants of financing, general and market specific economic conditions, the
identification of suitable markets, the availability and leasing of suitable
sites on acceptable terms, the hiring, training and retention of qualified
management and other store personnel and the integration of new stores into
the Company's information systems and operations. As a result, there can be
no assurance that the Company will be able to achieve its targets for opening
new stores (including acquisitions) or that such new stores will operate
profitably when opened or acquired. The Company recently completed the
acquisition of Uhlmans; however, there can be no assurance that the Company
will be able to successfully integrate the stores acquired or that they will
operate profitably or as profitably as previously acquired stores. If the
Company is unable to successfully locate or integrate new and acquired stores
or operate them profitably, the Company's business and financial condition
could be materially adversely affected.
The Company's growth strategy may significantly expand the Company's
capital expenditure and working capital requirements, and the Company's
ability to meet such requirements may be adversely affected by the Company's
level of indebtedness and the restrictive covenants contained therein,
especially in periods of economic downturn.
Economic and Market Conditions; Seasonality
Substantially all of the Company's operations are located in the central
United States. In addition, many of the Company's stores are situated in
small towns and rural environments that are substantially dependent upon the
local economy. The retail apparel business is dependent upon the level of
consumer spending, which may be adversely affected by an economic downturn or
a decline in consumer confidence. An economic downturn, particularly in the
central United States and any state (such as Texas) from which the Company
derives a significant portion of its net sales, could have a material adverse
effect on the Company's business and financial condition. The Company
currently has seven stores located near the Texas-Mexico border and has plans
to open several additional stores in that region. Economic conditions in
Mexico, and particularly a significant devaluation of the Mexican peso, have
adversely affected, and in the future may adversely affect, the Company's
business and financial condition.
12
<PAGE>
The Company's success depends in part upon its ability to anticipate and
respond to changing consumer preferences and fashion trends in a timely
manner. Although the Company attempts to stay abreast of emerging lifestyle
and consumer preferences affecting its merchandise, any sustained failure by
the Company to identify and respond to such trends could have a material
adverse effect on the Company's business and financial condition.
The Company's business is seasonal and its quarterly sales and profits
traditionally have been lower during the first three fiscal quarters of the
year and higher during the fourth fiscal quarter (November through January).
In addition, working capital requirements fluctuate throughout the year,
increasing substantially in October and November in anticipation of the
holiday season due to requirements for significantly higher inventory levels.
Any substantial decrease in sales for the last three months of the year could
have a material adverse effect on the Company's business and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Competition
The retail apparel business is highly competitive. Although competition
varies widely from market to market, the Company faces substantial
competition, particularly in its Houston area markets, from national,
regional and local department and specialty stores. Some of the Company's
competitors are considerably larger than the Company and have substantially
greater financial and other resources. Although the Company currently offers
branded merchandise not available at certain other retailers (including large
national discounters) in its small market stores, there can be no assurance
that existing or new competitors will not begin to carry similar branded
merchandise, which could have a material adverse effect on the Company's
business and financial condition.
Dependence on Key Personnel
The success of the Company depends to a large extent on its executive
management team, including the Company's President and Chief Executive
Officer, Carl Tooker. Although the Company expects to enter into employment
agreements with each of the Company's executive officers prior to the
completion of the Offering, it is possible that members of executive
management may leave the Company, and such departures could have a material
adverse effect on the Company's business and financial condition. The Company
does not maintain key- man life insurance on any of its executive officers.
See "Management."
Consumer Credit Risks
Private Label Credit Card Portfolio. Sales under the Company's private
label credit card program represent a significant portion of the Company's
business, accounting for approximately 55.6% of the Company's net sales for
1995. In recent years (and continuing in the first six months of 1996), there
have been substantial increases in the rate of charge-offs on the Company's
accounts receivable. To date, aggregate increases in finance charges and late
fee collections have more than offset the increases in charge-offs. However,
further deterioration in the quality of the Company's accounts receivable
portfolio or any adverse changes in laws regulating the granting or servicing
of credit (including late fees and the finance charge applied to outstanding
balances) could have a material adverse effect on the Company's business and
financial condition. There can be no assurance that the rate of charge- offs
on the Company's accounts receivable portfolio will not increase further or
that increases in finance charges and late fee collections will continue to
offset any such increases in charge-offs.
Accounts Receivable Program. The Company currently securitizes
substantially all of the receivables derived from its proprietary credit card
accounts. Under the Accounts Receivable Program, the Company causes such
receivables to be transferred to the Trust, which from time to time issues
certificates to investors backed by such receivables. The Accounts Receivable
Program has provided the Company with substantially more liquidity (through
the issuance and sale of such certificates) than it would have had without
this program. There can be no assurance that the Company will be able to
continue to securitize its receivables in this manner. There can be no
assurance that receivables will continue to be generated by credit card
holders, or that new credit card accounts will continue to be established, at
the rate historically experienced by the Company. Any decline in the
generation of receivables or in the rate or pattern of cardholder payments on
accounts could have a material adverse effect on the Company's business and
financial condition. In addition, significant increases in the floating rates
paid on investor certificates and/or significant deterioration in the
performance of the Company's receivables portfolio could trigger an early
repayment requirement, which could materially adversely affect liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounts Receivable Program."
13
<PAGE>
Interest Rate Risk. Although the Company is protected to a certain extent
by interest rate caps, investors in the receivables-backed certificates of
the Trust receive interest payments on such certificates based on a floating
rate. If the interest rate on these certificates increases, the profitability
of the Company's Accounts Receivable Program and the Company's operating
income could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Accounts
Receivable Program."
Control by Existing Stockholders
Upon consummation of the Offering, Bain Capital ("Bain") and certain of
its affiliates will beneficially own 22.1%, Acadia Partners, L.P. ("Acadia")
and certain of its affiliates will beneficially own 14.7%, Court Square
Capital Limited ("Court Square"), a subsidiary of Citicorp Banking
Corporation ("Citicorp"), will beneficially own 7.2% (assuming conversion of
all shares of Class B Common Stock to shares of Common Stock) and Bernard
Fuchs, the Company's Chairman, will beneficially own 4.7% of the Company's
outstanding Common Stock. To the knowledge of the Company, upon consummation
of the Offering, there will be no agreements among the Company's principal
stockholders relating to the voting of Common Stock or otherwise relating to
corporate governance issues. Upon consummation of the Offering, if such
parties were to vote their shares together, such parties would possess 48.7%
of the combined voting power of the Company's Common Stock and would be in a
position to significantly influence the affairs of the Company and the
outcome of all matters requiring a stockholder vote, including the election
of the Board of Directors. See "Principal Stockholders" and "Management."
Dilution
Based upon an assumed public offering price of $15.00 per share, the
Offering will result in immediate and substantial dilution of $14.56 per
share of the Common Stock to investors purchasing shares of Common Stock. See
"Dilution."
Absence of Public Market and Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for trading on the Nasdaq
National Market, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained. The initial public offering
price of the Common Stock offered hereby will be determined by negotiations
among the Company and the representatives of the Underwriters and may not be
indicative of the market price for the Common Stock after the Offering. The
market price for shares of the Common Stock may be volatile and may fluctuate
based upon a number of factors, including, without limitation, business
performance of the Company and the retail sector, news announcements or
changes in general market and economic conditions. See "Underwriting."
Shares Eligible for Future Sale
Upon completion of the Offering, the Company will have 22,520,892 shares
of common stock outstanding. The shares of Common Stock sold in the Offering
will be freely tradeable without restriction or further registration under
the Securities Act of 1933 (the "Securities Act") unless held by an
"affiliate" of the Company, as that term is defined under Rule 144 of the
Securities Act, which shares will be subject to the resale limitations of
Rule 144. In addition, certain existing stockholders, including holders of
restricted Common Stock, have registration rights with respect to Common
Stock held by them. Beginning 90 days following the Offering, 12,125,792
shares of Common Stock will be eligible for sale subject to certain volume
and other limitations of Rule 144 under the Securities Act applicable to
"affiliates" of the Company. In connection with the Offering, stockholders
holding in the aggregate 11,394,782 shares (or 50.6% of the total outstanding
common stock after the Offering) have agreed not to sell or otherwise dispose
of any shares for a period of 180 days from the date of this Prospectus, and
the Company has agreed not to sell any shares (other than shares sold by the
Company in the Offering or issuances by the Company of certain employee stock
options and shares covered thereby) for a period of 180 days from the date of
this Prospectus, without the prior written consent of CS First Boston
Corporation. No prediction can be made as to the effect that market sales of
shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price of the Common Stock from time to time. The sale
of a substantial number of shares held by the existing stockholders, whether
pursuant to a subsequent public offering or otherwise, or the perception that
such sales could occur, could adversely affect the market price of the Common
Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities. See "Shares Eligible for
Future Sale" and "Underwriting."
14
<PAGE>
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the sale of the 1,894,540 shares of Common Stock
reserved for issuance under the 1993 Stock Option Plan (as defined) and the
Incentive Plan (as defined). As a result, any shares issued upon exercise of
stock options granted under such plans will be available, subject to
limitations on sales by affiliates under Rule 144, for resale in the public
market after the effective date of such registration statement, subject to
applicable lock-up arrangements. See "Management--1993 Stock Option Plan" and
"Management--1996 Equity Incentive Plan."
Restriction on Payment of Dividends on Common Stock
Since its inception, the Company has not customarily declared or paid any
regular cash or other dividends on the Common Stock other than in connection
with the Distribution (as defined) and does not expect to pay cash dividends
for the foreseeable future. The indentures governing SRI's indebtedness
generally restrict the ability of SRI to make payments to the Company, which
effectively limits the ability of the Company to pay dividends. The Company's
credit agreements also contain restrictive covenants that restrain the
Company from paying dividends. See "Dividend Policy" and "--Leverage and
Restrictive Covenants."
Anti-Takeover Provisions
Certain provisions of the Company's certificate of incorporation and
by-laws may inhibit changes in control of the Company not approved by the
Company's board of directors (the "Board of Directors" or the "Board") and
could limit the circumstances in which a premium may be paid for the Common
Stock in proposed transactions or a proxy contest for control of the Board.
These provisions include (i) a prohibition on stockholder action through
written consents, (ii) advance notice requirements for stockholder proposals
and nominations, (iii) limitations on the ability of stockholders to amend,
alter or repeal certain provisions of the Company's certificate of
incorporation and by-laws, (iv) the authority of the Board to issue, without
stockholder approval, preferred stock (of which 2,500 shares are authorized)
with such terms as the Board may determine and (v) a "fair price" provision
pursuant to which certain transactions involving an interested stockholder
and the Company require super-majority shareholder approval. The Company will
also be afforded the protections of Section 203 of the Delaware General
Corporation Law, which could have similar effects. See "Description of
Capital Stock."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the 10,000,000 shares of
Common Stock by the Company in the Offering (after deducting the underwriting
discounts and estimated expenses of the Offering) are estimated to be
approximately $139.7 million, based on an assumed initial public offering
price of $15.00 per share. The Company intends to use such net proceeds (i)
to purchase, through the Tender Offer, up to all of the Senior Discount
Debentures, and pay a consent fee for elimination and amendment of certain
covenants in the Senior Discount Debentures for an aggregate amount of
approximately $135.0 million, (ii) to pay consent fees for amendments to
certain covenants in the indebtedness of SRI and (iii) to pay a $2.0 million
fee to terminate the Professional Services Agreement (as defined). The
Company will receive no proceeds from the sale of shares by the selling
stockholders if the Underwriters' overallotment option is exercised. See
"Description of Certain Indebtedness--Long-Term Indebtedness--Senior Discount
Debentures" and "Certain Relationships and Related Transactions."
DIVIDEND POLICY
Since its inception, the Company has not declared or paid any regular cash
or other dividends on its Common Stock other than in connection with the
Distribution, and does not expect to pay cash dividends for the foreseeable
future. The Company anticipates that for the foreseeable future, earnings
will be reinvested in the business and used to service indebtedness. The
Company's existing indebtedness limits its ability to pay dividends. The
declaration and payment of dividends by the Company are subject to the
discretion of the Board. Any future determination to pay dividends will
depend on the Company's results of operations, financial condition, capital
requirements, contractual restrictions under its current indebtedness and
other factors deemed relevant by the Board. See "Risk Factors--Leverage and
Restrictive Covenants" and "--Restriction on Payment of Dividends on Common
Stock."
16
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company at August 3, 1996 and adjusted to give pro forma effect to the
Offering. This presentation should be read in conjunction with the Company's
Consolidated Financial Statements, the Unaudited Pro Forma Combined Financial
Data of the Company, the Selected Consolidated Historical Financial and
Operating Data and other information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
August 3, 1996
---------------------------
Historical Pro Forma
---------- ---------
(in thousands)
<S> <C> <C>
Long-term debt, including current portion:
Revolving credit agreement(1) $ 7,500 $ 7,500
Senior Discount Debentures, net(2) 116,999 --
Senior Notes 130,000 130,000
Senior Subordinated Notes, net(2) 116,606 116,606
SRPC Notes 30,000 30,000
Other long-term debt 24,248 24,248
-------- --------
Total long-term debt 425,353 308,354
Stockholders' equity (deficit)(3) (68,428) 56,451(4)
-------- --------
Total capitalization $356,925 $364,805
======== ========
</TABLE>
- ---------------
(1) The Company currently has a revolving credit agreement under which it may
draw up to $25.0 million with an additional seasonal availability of
$10.0 million from August 15 through January 15 of each year. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operation--Liquidity and Capital Resources."
(2) The Senior Discount Debentures and the Senior Subordinated Notes have
unamortized original issue discounts of $32.1 million and $1.6 million,
respectively.
(3) Following the consummation of the Offering, the authorized capitalization
of the Company will consist of (i) 75,000,000 shares of Common Stock, of
which 21,168,925 shares will be outstanding, (ii) 3,000,000 shares of
non-voting Class B Common Stock, of which 1,351,967shares will be issued
and outstanding and (iii) 2,500 shares of Preferred Stock, par value
$1.00 per share, of which no shares will be outstanding. Options to
purchase 1,511,523 shares of Common Stock will be outstanding immediately
following consummation of the Offering. See "Description of Capital
Stock."
(4) Reflects non-recurring charges, net of tax, totalling approximately $14.8
million in connection with the early retirement of the Senior Discount
Debentures and the write-off of related debt issue costs, the payment of
consent fees for amendments to certain covenants in the indebtedness of
SRI and the termination of the Professional Services Agreement.
17
<PAGE>
DILUTION
The net tangible book value of the Company as of August 3, 1996, without
giving effect to the Offering, but giving effect to a .94727 for 1 reverse
stock split of the common stock to be consummated prior to the Offering, was
approximately $(115.0) million, or $(9.19) per share of common stock. Net
tangible book value per share represents the amount of the Company's total
tangible assets less its total liabilities, divided by the number of shares
of common stock outstanding. After giving effect to the receipt of $139.7
million of estimated net proceeds from the sale by the Company of shares of
common stock in the Offering and the use of such net proceeds as described
under "Use of Proceeds", the pro forma net tangible book value of the Company
at August 3, 1996 would have been approximately $9.9 million, or $0.44 per
share of common stock. This represents an immediate increase in net tangible
book value of $9.63 per share to the existing stockholders and an immediate
net tangible book value dilution of $14.56 per share to new investors
purchasing shares in the Offering.
The following table illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share $15.00
Net tangible book value per share,
without giving effect to the Offering $(9.19)
Increase in pro forma net tangible book value per share attributable to new
investors 9.63
------
Pro forma net tangible book value per share after the Offering 0.44
------
Dilution per share to new investors $14.56
======
</TABLE>
The foregoing computations assume no exercise of stock options. As of
September 20, 1996, there were 1,255,761 options with exercise prices below
the initial public offering price to purchase shares of Common Stock at a
weighted average exercise price of approximately $3.57 per share. If all of
such options had been exercised at August 3, 1996, the net tangible book
value per share of common stock, without giving effect to the Offering but
giving effect to the reverse stock split at such date, would have been
$(8.02) and the pro forma net tangible book value per share after giving
effect to the Offering and the reverse stock split would have been $0.60,
representing an immediate dilution to new investors of $14.40 per share and
an immediate increase in net tangible book value of $8.62 per share
attributable to the Offering.
18
<PAGE>
SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated historical financial
and operating data of the Company for the periods indicated. The Company's
selected consolidated historical financial data were derived from the
Company's Consolidated Financial Statements. The data for the unaudited
six-month periods ended July 29, 1995 and August 3, 1996, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of the interim
periods. The Company's business is seasonal and the results of operations for
these six-month periods are not necessarily indicative of the results
expected for a complete fiscal year or any other interim period. The
information in the table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
the Company's Consolidated Financial Statements and the Financial Statements
of Uhlmans, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Month Ended
Fiscal Year ---------------------
---------------------------------------------------- July 29, August 3,
1991 1992 1993(1) 1994 1995(2) 1995 1996
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $447,142 $504,401 $557,422 $581,463 $682,624 $296,931 $345,927
Cost of sales and related buying, occupancy and
distribution expenses 311,573 350,136 384,843 398,659 468,347 204,093 237,223
Gross profit 135,569 154,265 172,579 182,804 214,277 92,838 108,704
Selling, general and administrative expenses 116,403 129,193 135,011 134,715 159,625 70,877 84,335
Service charge income(3) 22,840 29,670 20,003 8,515 10,523 5,124 5,902
Store opening and closure costs 255 120 199 5,647 3,689 1,176 301
-------- -------- -------- -------- -------- -------- --------
Operating income(4) 41,751 54,622 57,372 50,957 61,486 25,909 29,970
Other non-operating income (expense) 359 (2,276) -- -- -- -- --
Net interest expense(5) 33,407 31,771 36,377 40,010 43,989 21,365 24,054
-------- -------- -------- -------- -------- -------- --------
Income before income tax and extraordinary item 8,703 20,575 20,995 10,947 17,497 4,544 5,916
Income tax expense 3,993 8,340 7,569 4,317 6,767 1,885 2,396
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item 4,710 12,235 13,426 6,630 10,730 2,659 3,520
Minority interest expense (749) -- -- -- -- -- --
Extraordinary item -- -- (16,208) (308) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 3,961 $ 12,235 $ (2,782) $ 6,322 $ 10,730 $ 2,659 $ 3,520
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per common share(6) $ 0.10 $ 0.77 $ (0.39) $ 0.48 $ 0.80 $ 0.20 $ 0.26
======== ======== ======== ======== ======== ======== ========
Margin and other data:
Gross profit margin 30.3% 30.6% 31.0% 31.4% 31.4% 31.3% 31.4%
Selling general and administrative expense rate 26.0% 25.6% 24.2% 23.2% 23.4% 23.9% 24.4%
Operating income margin(4) 9.3% 10.8% 10.3% 8.8% 9.0% 8.7% 8.7%
Adjusted operating income margin(7) 8.1% 8.7% 8.4% 9.2% 9.4% 8.5% 7.8%
Adjusted operating income(7) $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996 $ 25,134 $27,128
Depreciation and amortization 10,049 9,065 9,259 9,997 12,816 5,721 6,844
Capital expenditures 4,768 7,631 8,503 19,706 28,638 16,786 15,183
Store data:(8)
Comparable store sales growth:
Bealls/Stage(9) 4.1% 5.1% 7.2% 4.8% 3.3% 3.8% 7.7%
Palais Royal (2.8)% (9.8)% 0.8% 1.7% 1.4% 0.9% 6.2%
Total Company(10) 2.9% 1.8% 6.3% 4.1% 0.8%(11) 0.5% 7.3%
Net sales per selling square foot:
Bealls/Stage(9) $ 113 $ 118 $ 129 $ 138 $ 142 -- --
Palais Royal 228 191 200 205 203 -- --
Total Company(10) 138 138 149 157 157 -- --
Total selling square footage(12) 3,354 3,418 3,472 3,516 4,581 4,365 5,361
Number of stores open at end of period(13) 159 175 180 188 256 242 308
Balance sheet data (at end of period):
Working capital $200,050 $214,430 $156,782 $148,229 $170,108 $161,658 $181,118
Total assets 365,381 403,824 347,055 369,730 412,333 394,945 463,240
Long-term debt 298,266 296,587 347,468 349,775 380,039 372,972 425,353
Redeemable preferred stock 15,200 17,500 -- -- -- -- --
Stockholders' (deficit)(14) (19,500) (9,605) (87,727) (81,193) (72,314) (78,297) (68,428)
</TABLE>
19
<PAGE>
NOTES TO SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA
(1) During 1993, Stage Stores was formed and concurrently became the direct
parent of SRI when the existing stockholders of SRI exchanged all of
their common stock for common stock of Stage Stores. Concurrent with the
formation of Stage Stores, the Company completed the Refinancing. As a
result of the Refinancing the Company recorded an after-tax extraordinary
charge of $16.2 million.
(2) 1995 includes 53 weeks.
(3) Service charge income for 1993, 1994 and 1995 decreased as compared to
levels achieved during 1991 and 1992 due to the sale of accounts
receivable to the Trust as part of the Accounts Receivable Program.
Without giving effect to the Accounts Receivable Program, service charge
income for 1993, 1994 and 1995 would have been $32.5 million, $35.2
million and $41.3 million, respectively. For a complete summary of the
impact of the Company's proprietary credit card program and the Accounts
Receivable Program, see Note 2 to the Company's Consolidated Financial
Statements, Note 7 below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounts
Receivable Program."
(4) Operating income and operating income margin decreased during 1994
compared to 1993 due primarily to the impact of the adoption of the
Accounts Receivable Program (See Note 2 to the Company's Consolidated
Financial Statements and Note 7 below) combined with a $5.2 million
provision associated with the Store Closure Plan. See Note 4 to the
Company's Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Store
Closure Plan."
(5) Net interest expense includes $6.8 million, $5.2 million and $2.4 million
for 1991, 1992 and 1993, respectively, that represented the interest
expense associated with the Company's accounts receivable facility
outstanding prior to the adoption of the Accounts Receivable Program.
(6) Earnings (loss) per common share for 1993 includes the impact of the
extraordinary item associated with the Refinancing which reduced earnings
per common share by $1.24. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletins and Staff policy, common stock options issued
during the twelve months prior to the Offering have been included in the
calculation of earnings (loss) per common share as if such options were
outstanding during 1993, 1994, 1995 and the six months ended August 3,
1996. Historical earnings (loss) per common share does not reflect the
impact of a .94727 for 1 reverse stock split of the common stock to be
consummated prior to the Offering.
(7) Adjusted operating income represents operating income adjusted to
eliminate store opening and closure costs and the positive impact on
operating income of the Company's proprietary credit card program
(including the Accounts Receivable Program) as follows.
<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
---------------------------------------------- ------------------------
July 29, August 3,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Operating income $41,751 $54,622 $57,372 $50,957 $61,486 $25,909 $29,970
Plus: Store opening and closure cost 255 120 199 5,647 3,689 1,176 301
Less: Positive impact of proprietary credit
card program on operating income 5,942 11,062 10,743 2,927 1,179 1,951 3,143
------- ------- ------- ------- ------- ------- -------
Adjusted operating income $36,064 $43,680 $46,828 $53,677 $63,996 $25,134 $27,128
======= ======= ======= ======= ======= ======= =======
</TABLE>
The impact of the Company's proprietary credit card program (including
the Accounts Receivable Program) on operating income is calculated as:
(i) the reported service charge income less (ii) the servicing and bad
debt costs reflected in the Company's selling, general and administrative
expenses less (iii) the gain (or plus the loss) associated with the sale
of receivables to the Trust. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounts
Receivable Program."
20
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year ----------------------
------------------------------------------------------ July 29, August 3,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Service charge income:
Consolidated $ 22,840 $ 29,670 $ 32,547 $ 35,183 $ 41,321 $ 19,228 $ 23,968
Certificateholders' portion -- -- 12,544 26,668 30,798 14,104 18,066
-------- -------- -------- -------- -------- -------- --------
Reported service charge income (i) 22,840 29,670 20,003 8,515 10,523 5,124 5,902
-------- -------- -------- -------- -------- -------- --------
Servicing and bad debt costs:
Consolidated 16,898 18,608 21,374 22,504 28,551 11,158 15,215
Certificateholders' portion -- -- 8,814 15,956 19,400 7,290 10,766
-------- -------- -------- -------- -------- -------- --------
Reported in selling, general and
administrative expenses (ii) 16,898 18,608 12,560 6,548 9,151 3,868 4,449
Loss (gain) on sale of receivables:
Certificateholders' portion of service
charge income -- -- 12,544 26,668 30,798 14,104 18,066
Certificateholders' portion of servicing
and bad debt costs -- -- 8,814 15,956 19,400 7,290 10,766
Return to Certificateholders -- -- 3,219 8,200 11,529 5,547 5,629
Other -- -- (2,789) 1,552 62 572 (19)
-------- -------- -------- -------- -------- -------- --------
Total (gain) loss on sale of receivables (iii) -- -- (3,300) (960) 193 (695) (1,690)
-------- -------- -------- -------- -------- -------- --------
Total positive impact of proprietary credit
card program on operating income [(i)-(ii)
-(iii)] $ 5,942 $ 11,062 $ 10,743 $ 2,927 $ 1,179 $ 1,951 $ 3,143
======== ======== ======== ======== ======== ======== ========
</TABLE>
Although adjusted operating income and adjusted operating income margin
do not represent operating income or any other measure of financial
performance under generally accepted accounting principles, the Company
believes they are helpful in understanding the profitability of the
Company's retailing operations prior to the impact of its credit card
program, the Accounts Receivable Program and store opening and closure
costs.
(8) Store data exclude Bealls stores scheduled to be closed under the Bealls
1988 store closure program, except as otherwise noted in Note 12 below
and also exclude the Fashion Bar stores included in the Store Closure
Plan. Comparable store sales growth and net sales per selling square
foot for 1995 have been determined based on a comparable fifty-two week
period. Sales are considered comparable after a store has been in
operation fourteen months. Net sales per selling square foot are
calculated for stores open the entire year.
(9) Excludes for all the periods presented the six Bealls stores located on
the border of Mexico which were adversely affected by the peso
devaluation in 1994. Comparable stores sales growth and net sales per
selling square foot for Bealls/Stage including these stores were:
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year ---------------------
------------------------------------------ July 29, August 3,
Bealls/Stage 1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth 5.4% 6.7% 7.7% 4.6% 0.2% 0.3% 7.7%
Net sales per selling square foot $119 $125 $137 $146 $145 -- --
</TABLE>
(10) Total Company comparable store sales growth and net sales per selling
square foot including the stores which were part of the Store Closure
Plan were as follows:
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year ---------------------
------------------------------------------ July 29, August 3,
Total Company 1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth 2.9% 1.8% 5.4% 3.2% 0.5% 0.4% 6.8%
Net sales per selling square foot $138 $138 $143 $151 $150 -- --
</TABLE>
(11) Excluding the six Bealls stores located on the border of Mexico which
were adversely affected by the peso devaluation in 1994, total Company
comparable store sales growth for 1995 would have increased to 3.0%.
(12) Excludes data related to the stores which were in the Store Closure
Plan. Data is in thousands and is as of the end of the period.
(13) Number of stores open at the end of each period presented also exclude
stores in the Store Closure Plan. Stores open at the end of 1992 and
1993 included one and six stores, respectively, which were previously
excluded under the Bealls 1988 store closure program. Such stores are
only included in the Company's results
21
<PAGE>
of operations subsequent to their removal from the store closure
program. Both the Store Closure Plan and the Bealls 1988 store closure
program were substantially completed before the end of 1995.
(14) Beginning in 1993, Stockholders' deficit includes the impact of the
extraordinary charge associated with the Refinancing ($16.2 million) and
the dividend associated with a cash distribution (the "Distribution") to
the Company's stockholders ($74.8 million).
22
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data give effect to
the Uhlmans Acquisition, the issuance of the SRPC Notes, the application of
the net proceeds of the Offering and a .94727 for 1 reverse stock split of
the common stock to be consummated prior to the Offering. The unaudited pro
forma financial data are based on the historical consolidated financial
statements for the Company, the historical financial statements of Uhlmans
and the assumptions and adjustments described in the accompanying notes. The
unaudited pro forma combined statements of operations were prepared as if the
transactions described above had occurred at the beginning of the earliest
period presented and do not (i) purport to represent what the Company's
results of operations actually would have been if the Uhlmans Acquisition and
the Offering had occurred as of the dates indicated or will be for any future
periods or (ii) give effect to certain non-recurring charges expected to
result from the application of the net proceeds of the Offering. The
unaudited pro forma financial data are based upon assumptions deemed
appropriate by the management of the Company. The unaudited pro forma
combined financial data should be read in conjunction with the Company's
Consolidated Financial Statements and the Financial Statements of Uhlmans
included elsewhere in this Prospectus.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 3, 1996
<TABLE>
<CAPTION>
Historical
---------------------
Acquisition Offering Pro Forma
Company Uhlmans Adjustments(1) Adjustments(2) Combined
-------- ------- -------------- -------------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $682,624 $59,749 $ -- $ -- $742,373
Cost of sales and related buying,
occupancy and distribution expenses 468,347 46,129 (1,601)(a) -- 512,875
-------- ------- ------- -------- --------
Gross profit 214,277 13,620 1,601 -- 229,498
Selling, general and administrative
expenses 159,625 12,232 (2,408)(b) (513)(i) 168,936
Service charge income 10,523 851 -- -- 11,374
Store opening and closure costs 3,689 -- -- -- 3,689
-------- ------- ------- -------- --------
Operating income 61,486 2,239 4,009 513 68,247
Interest expense, net 43,989 1,637 2,595(c) (13,508)(j) 34,713
Income before income tax and
extraordinary item 17,497 602 1,414 14,021 33,534
Income tax expense(3) 6,767 -- 766(d) 5,328(k) 12,861
-------- ------- ------- -------- --------
Income before extraordinary
item(4) $ 10,730 $ 602 $ 648 $ 8,693 $ 20,673
======== ======= ======= ======== ========
Earnings per common share data:
Earnings per common share before
extraordinary item $ 0.80 $ 0.91
======== ========
Weighted average common shares
outstanding 13,434(5) 22,726
======== ========
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 3, 1996
<TABLE>
<CAPTION>
Historical
---------------------
Acquisition Offering Pro Forma
Company Uhlmans(6) Adjustments(1) Adjustments(2) Combined
-------- ------- -------------- -------------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $345,927 $16,516 $ -- $ -- $362,443
Cost of sales and related buying,
occupancy and distribution expenses 237,223 13,030 (507)(e) -- 249,746
-------- ------- -------- ------- --------
Gross profit 108,704 3,486 507 -- 112,697
Selling, general and administrative
expenses 84,335 3,751 (1,411)(f) (250)(l) 86,425
Service charge income 5,902 269 -- -- 6,171
Store opening and closure costs 301 -- -- -- 301
-------- ------- -------- ------- --------
Operating income (loss) 29,970 4 1,918 250 32,142
Interest expense, net 24,054 554 885(g) (7,402)(m) 18,091
Income (loss) before income tax and
extraordinary item 5,916 (550) 1,033 7,652 14,051
Income tax expense (benefit)(3) 2,396 -- 184(h) 2,908(n) 5,488
-------- ------- -------- ------- --------
Income (loss) before extraordinary
item(4) $ 3,520 $ (550) $ 849 $ 4,744 $ 8,563
======== ======= ======== ======= ========
Earnings per common share data:
Earnings per common share
before extraordinary item $ 0.26 $ 0.37
======== ========
Weighted average common shares
outstanding 13,678(5) 22,957
======== ========
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Note 1--Acquisition Adjustments
Uhlmans Consolidation Program
The Company has substantially completed a consolidation program to absorb
the Uhlmans general office functions, including accounting, data processing,
merchandising, personnel, credit and distribution into similar functions
provided by the Company (the "Uhlmans Consolidation Program"). As a part of
the acquisition agreement with the former stockholders of Uhlmans, the
Company has paid severance to each individual whose employment has been
terminated as a result of the Uhlmans Consolidation Program. Additionally,
all leases associated with Uhlmans' corporate offices and distribution center
have been terminated.
Although the consolidation of the Uhlmans general office functions took
place over a period of two months, the pro forma combined statements of
operations reflect the elimination of the separate Uhlmans general office
expenses assuming the consolidation had been fully implemented at the
beginning of the respective periods.
The accompanying pro forma combined statements of operations do not
reflect certain cost savings or improvements in sales volume or gross margin
related to the acquisition of Uhlmans which the Company believes can be
realized. For instance, the Company believes it should be able to receive
better pricing and vendor participation programs on the merchandise it
purchases for the acquired stores given the Company's historical ability to
negotiate better pricing structures with its vendors as compared to those
historically obtained by Uhlmans. Additionally, the Company intends to expand
certain merchandise categories in the acquired stores such as footwear, which
Uhlmans has historically offered on a limited basis in only certain stores.
Finally, the Company believes it should be able to increase the penetration
of the Company's proprietary credit card as compared to historical levels,
since Uhlmans had not aggressively promoted its proprietary credit card.
Purchase Accounting
The application of purchase accounting to the Uhlmans Acquisition results
in an excess of the purchase price over the estimated fair value of the
assets acquired and liabilities assumed. This excess is treated as goodwill.
Based upon the strategic positioning of the Uhlmans stores in relation to the
Company's growth strategy, the stores purchased by the Company and the long
operating history and historical profitability of these stores, management
believes a forty-year amortization period for this goodwill is appropriate.
Such acquisition will be accounted for as an asset purchase for tax purposes,
and accordingly, the annual goodwill amortization will be tax deductible.
Acquisition Financing
The Company financed the Uhlmans Acquisition through the issuance of $30.0
million in aggregate principal amount of SRPC Notes. The pro forma combined
statements of operations reflect additional interest expense relating to
these notes. See "Description of Certain Indebtedness--Long-term
Indebtedness--SRPC Notes."
The pro forma combined statements of operations reflect the impact of the
aforementioned items as follows (in thousands):
Year ended February 3, 1996:
(a) Elimination of Uhlmans' historical personnel costs associated with the
buying and distribution functions which the Company has absorbed into
its existing central office of $(1,908) offset by incremental freight
due to the use of the Company's distribution center of $307.
(b) Elimination of Uhlmans' historical personnel costs associated with the
accounting, advertising, data processing and credit functions and
occupancy costs associated with leases the Company is terminating in
connection with the Uhlmans Consolidation Program aggregating $(2,676)
offset by amortization of goodwill resulting from the acquisition of
$268.
(c) Elimination of Uhlmans' historical interest expense of $(1,637) offset
by interest on the SRPC Notes of $3,750 and amortization of debt issue
costs of $482.
(d) Additional income tax expense associated with the Uhlmans' historical
income of $229 and the remaining acquisition adjustments of $537.
25
<PAGE>
Six months ended August 3, 1996:
(e) Elimination of Uhlmans' historical personnel costs associated with the
buying and distribution functions which the Company has absorbed into
its existing central office of $(606) offset by incremental freight
due to the use of the Company's distribution center of $99.
(f) Elimination of Uhlmans' historical personnel costs associated with the
accounting, advertising, data processing and credit functions and
occupancy costs associated with leases the Company is terminating in
connection with the Uhlmans Consolidation Program aggregating $(1,547)
offset by amortization of goodwill resulting from the acquisition of
$136.
(g) Elimination of Uhlmans' historical interest expense of $(554) offset
by interest on the SRPC Notes of $1,250 and amortization of debt issue
costs of $189.
(h) Income tax benefit of Uhlmans' historical loss of $(209) and remaining
acquisition adjustments of $393.
Note 2--Offering Adjustments
The unaudited pro forma combined statements of operations should be read
in conjunction with the discussion of the Offering included under "Use of
Proceeds." The completion of the Offering at the beginning of the pro forma
periods presented would have resulted in the following adjustments (in
thousands):
Year ended February 3, 1996:
(i) Elimination of the expense associated with the termination of the
Professional Services Agreement (as defined) of $(513). See "Certain
Relationships and Related Transactions--Professional Services
Agreement."
(j) Elimination of historical interest expense and amortization of debt
issue costs associated with the Senior Discount Debentures of
$(13,070) and $(438), respectively.
(k) Income tax expense associated with the Offering adjustments of $5,328.
Six months ended August 3, 1996:
(l) Elimination of the expense associated with the termination of the
Professional Services Agreement (as defined) of $(250).
(m) Elimination of historical interest expense and amortization of debt
issue costs associated with the Senior Discount Debentures of $(7,183)
and $(219), respectively.
(n) Income tax expense associated with the Offering adjustments of $2,908.
Note 3--Income Taxes
Pro forma adjustments to record the provision or benefit for income taxes
have been made assuming a tax rate of 38%, based upon the statutory federal
and state income tax rates. These adjustments result in a pro forma combined
effective tax rate of 38% and 39% for the year ended February 3, 1996, and
the six months ended August 3, 1996, respectively.
Note 4--Non-Recurring Charges
In the fiscal quarter in which the Offering is consummated (currently
expected to be the third quarter of 1996), the Company expects to incur
non-recurring charges, net of tax, totaling approximately $15.0 million in
connection with the early retirement of the Senior Discount Debentures and
the write-off of related debt issue costs, the payment of consent fees for
amendments to certain covenants in the indebtedness of SRI and the
termination of the Professional Services Agreement (as defined).
Note 5--Reverse Stock Split
The historical weighted average common shares outstanding does not give
effect to a .94727 for 1 reverse stock split of the common stock to be
consummated prior to the Offering.
Note 6--Uhlmans Historical Statement of Operations
Statement of operations data for Uhlmans includes results only for the
period from February 4, 1996 through June 3, 1996, the date when Uhlmans was
acquired and from which it is included in the Company's historical results of
operation.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Overview. The Company operates the store of choice for well known national
brand name family apparel in over 200 small towns and communities across the
central United States. The Company has recognized the high level of brand
awareness and demand for fashionable, quality apparel by consumers in small
markets and has identified these markets as a profitable and underserved
niche. The Company has developed a unique franchise focused on small markets,
differentiating itself from the competition by offering a broad range of
merchandise with a high level of customer service in convenient locations.
In recent years, the Company has undertaken several initiatives to realize
the full potential of its unique franchise in small markets, including (i)
recruiting a new senior management team, (ii) embarking on a store expansion
program to capitalize on available opportunities in new markets through new
store openings and strategic acquisitions, (iii) continuing to refine the
Company's retailing concept and (iv) closing unprofitable stores. As a result
of these initiatives, the lower operating costs of small market stores, the
benefits of economies of scale and its highly automated facilities and
sophisticated information systems, the Company has among the highest
operating income margins in the apparel retailing industry.
Recent Acquisitions. The Company acquired 45 stores from Beall-Ladymon in
1994 and subsequently reopened the stores in the first quarter of 1995 under
the Stage name. In 1993, the year prior to their acquisition, the
Beall-Ladymon stores generated sales of approximately $53.4 million, whereas
the newly opened Stage stores in the same locations generated sales for the
twelve months ended August 3, 1996 of $95.0 million, an increase of 78%. Over
the same periods, store contribution more than doubled. The Company believes
that the following key strengths have contributed to its successful expansion
and acquisition plan: (i) ability to operate profitably in smaller markets,
(ii) benefits of strong vendor relationships, (iii) effective merchandising
strategy, (iv) focused marketing strategy, (v) benefits of proprietary credit
card program, (vi) emphasis on customer service, and (vii) sophisticated
operating and information systems.
On June 3, 1996 the Company consummated the Uhlmans Acquisition for $27.3
million, including acquisition expenses and net of cash acquired. In 1995,
Uhlmans had net sales of $59.7 million and operating income of $2.2 million.
The Company has substantially completed a consolidation program to absorb the
Uhlmans general office functions, including accounting, data processing,
merchandising, personnel, credit and distribution into similar functions
provided by the Company. As a result of the Uhlmans Consolidation Plan the
Company has eliminated approximately $4.0 million of annualized Uhlmans
historical overhead costs. In addition to any improvements in operating
results that may be achieved through the opportunity to expand the business
above its historical levels, the Company believes it should be able to
receive better pricing and vendor participation programs on the merchandise
it purchases for the acquired stores given the Company's historical ability
to negotiate better pricing structures with its vendors as compared to those
historically obtained by Uhlmans. Additionally, the Company has introduced
certain expanded merchandise categories in the acquired stores such as
footwear, which Uhlmans has historically offered in only certain stores.
Finally, the Company believes it should be able to increase the penetration
of proprietary credit card usage as compared to historical levels since
Uhlmans had not aggressively promoted its own proprietary credit card.
Store Closure Plan. During the fourth quarter of 1994, the Company
approved the Store Closure Plan which provided for the closure of 40
underperforming Fashion Bar stores. These stores were primarily located in
major regional malls within the Denver area. Management determined that the
merchandising strategy and market positions of such stores were not
compatible with the Company's overall strategy. Accordingly, the Company
accrued $5.2 million for the expected costs associated with the Store Closure
Plan during 1994. The Store Closure Plan was substantially completed in 1995.
Accounts Receivable Program. Pursuant to the Accounts Receivable Program,
the Company sells, on a daily basis, substantially all of the accounts
receivable generated from purchases by the holders of the Company's
proprietary credit card to SRPC. SRPC is a separate limited-purpose
subsidiary that is operated in a manner intended to ensure that its assets
and liabilities are distinct from those of the Company and its other
affiliates so that SRPC's creditors have a claim on its assets prior to such
assets becoming available to any creditor of the Company. SRPC sells, on a
daily basis, the accounts receivable purchased from the Company to the Trust
in exchange for cash or
27
<PAGE>
a certificate representing an undivided interest in the Trust (together with
SRPC's interest in receivables previously sold to the Trust, the "Retained
Interest"). The Company's Retained Interest at August 3, 1996 was $55.8
million, which represented 25.2% of total receivables outstanding in the
Trust. The remaining interest in the Trust is held by third-party investors.
The Retained Interest is effectively subordinated to the interests of such
third-party investors, and is pledged to secure the SRPC Notes.
Prior to the implementation of the Accounts Receivable Program in 1993,
operating income included all service charge income and servicing costs
attributable to the Company's accounts receivable and credit card operations.
The cost of financing the Company's accounts receivable was included in
interest expense. Subsequent to the implementation of the Accounts Receivable
Program, service charge income only includes the amount of service charge
income attributable to the Company's Retained Interest. Additionally, the
Company's selling, general and administrative expenses are decreased or
increased by a gain or loss, respectively, on the sale of receivables to the
Trust. This gain or loss is calculated based upon the projected cash receipts
from the receivables sold to the Trust (primarily service charge income) and
reduced by the projected payments of returns to the holders of the Trust
Certificates, and projected credit expenses. Selling, general and
administrative expenses are also affected by adjustments to previously
recorded gains and losses. Bad debt expenses on the Company's entire
portfolio were reflected in selling, general and administrative expenses
prior to the adoption of the Accounts Receivable Program. Under the Accounts
Receivable Program, bad debt expenses remain effectively included in selling,
general and administrative expenses because they directly affect the
profitability of the Accounts Receivable Program.
The financial information, discussion and analysis that follow should be
read in conjunction with the Company's Consolidated Financial Statements
included elsewhere herein.
Results of Operations
The following sets forth certain components of operations as a percentage
of sales for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year -------------------------
--------------------------------------------------------- July 29, August 3,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and related buying,
occupancy and distribution expenses (69.7) (69.4) (69.0) (68.6) (68.6) (68.7) (68.6)
----- ----- ----- ----- ----- ----- -----
Gross profit 30.3 30.6 31.0 31.4 31.4 31.3 31.4
Selling, general and administrative
expenses (26.0) (25.6) (24.2) (23.2) (23.4) (23.9) (24.4)
Service charge income 5.1 5.9 3.6 1.5 1.5 1.7 1.7
Store opening and closure costs (0.1) -- -- (1.0) (0.5) (0.4) --
----- ----- ----- ----- ----- ----- -----
Operating income 9.3 10.8 10.3 8.8 9.0 8.7 8.7
Net interest expense (7.5) (6.3) (6.5) (6.9) (6.4) (7.2) (7.0)
Income before income tax, minority
interest and extraordinary item 1.9% 4.1% 3.8% 1.9% 2.6% 1.5% 1.7%
----- ----- ----- ----- ----- ----- -----
Income before extraordinary item 0.9% 2.4% 2.4% 1.1% 1.6% 0.9% 1.0%
===== ===== ===== ===== ===== ===== =====
Other data:
Adjusted operating income(1) 8.1% 8.7% 8.4% 9.2% 9.4% 8.5% 7.8%
</TABLE>
- ---------------
(1) Adjusted operating income represents operating income adjusted to
eliminate the income and expense associated with the Company's
proprietary credit card program (including the Accounts Receivable
Program) and store opening and closure costs. See Note 7 to the Selected
Consolidated Historical Financial and Operating Data.
Because of the 53-week year in 1995, the Company's quarterly accounting
periods for 1996 occur one week later than their 1995 counterparts. This
calendar shift, combined with the timing of the Company's promotional events
and holidays, has had the effect of increasing year-to-year comparable store
performance during the first half of 1996 and will likely have the effect of
decreasing comparable store performance during the second half of 1996.
28
<PAGE>
Six Months Ended August 3, 1996 Compared to Six Months Ended July 29, 1995
Sales for the first six months of 1996 increased 16.5% to $345.9 million
from $296.9 million in the comparable period in 1995. The increase in sales
for the six month period was primarily due to an 11.1% increase in sales from
stores opened during 1996 and 1995 combined with a 6.8% increase in
comparable store sales. The significant increase in comparable store sales
was primarily attributable to the strong performance of the Company's Bealls
stores combined with a one-week shift in the comparable calendar period due
to the 53-week year in 1995. Adjusting for this shift in the fiscal calendar,
the increase in comparable store sales for the first six months of 1996 would
have been 4.2%. As mentioned above, the effect of this calendar shift will
likely negatively affect comparable store sales comparisons for the third and
the fourth quarters of 1996.
Gross profit for the first six months of 1996 increased 17.1% to $108.7
million from $92.8 million in the comparable period in 1995 as a result of
the opening/acquisition of 67 stores during the twelve month period ended
August 3, 1996. Gross profit margin increased to 31.4% for the first six
months of 1996 from 31.3% in the comparable period in 1995. The increase in
gross profit margin was derived from the application of fixed buying,
occupancy and distribution expenses over a larger sales base, partially
offset by the favorable impact of vendor discount programs related to the
purchase of new inventory for the opening of 68 new stores during the first
six months of 1995 (as compared to 19 new stores receiving such discounts in
the first six months of 1996).
Selling, general and administrative expenses as a percent of sales for the
first six months of 1996 increased to 24.4% from 23.9% in the comparable
period in 1995 due to an increase in bad debt expense associated with the
Company's proprietary credit card program as well as certain non-recurring
costs associated with the Company's expansion program. Bad debt expense as a
percent of sales increased to 2.3% for the first six months of 1996 from 1.5%
for the comparable period in 1995. The increase in bad debt was the result of
a general rise in the level of personal bankruptcies in the Company's
accounts receivable portfolio. As a result of the acquisition of Uhlmans, the
Company incurred $0.4 million (0.1% of sales) of duplicative costs during the
first six months of 1996 related to the Uhlmans central office which has been
eliminated as of August 31, 1996. Advertising expenses as a percentage of
sales remained unchanged at approximately 3.8% for the first six months of
1996 and 1995.
Service charge income for the first six months of 1996 increased 15.7% to
$5.9 million from $5.1 million for the comparable period in 1995. Service
charge income increased due to an increase in the average level of accounts
receivable balances combined with an increased yield on the accounts
receivable portfolio. The increased yield resulted primarily from an increase
in late fees applied to delinquent accounts.
Operating income increased 15.7% for the first six months of 1996 as
compared to comparable period in 1995 due to the factors described above.
Interest expense for the first six months of 1996 increased 12.5% to $24.3
million from $21.6 million for the comparable period in 1995. Interest
expense increased due to (i) the issuance of $30.0 million in aggregate
principal amount of SRPC Notes during May 1996, (ii) the issuance of $18.3
million in aggregate principal amount of Senior Subordinated Notes during
August 1995 and (iii) the increase in the accretion of discount on the Senior
Discount Debentures.
As a result of the foregoing, the Company's net income for the first six
months of 1996 increased by 29.6% to $3.5 million from $2.7 million for the
comparable period in 1995.
1995 Compared to 1994
1995 was highlighted by the positive initial results of management's
growth strategy to expand into small markets. Sales increased 17.4% to $682.6
million in 1995 from $581.5 million in 1994. This increase was due to (i) a
$112.5 million increase in sales from stores opened during 1994 and 1995,
(ii) a 0.8% increase in comparable store sales in 1995 and (iii) $10.0
million in sales due to the inclusion of one extra week in 1995 as a result
of 1995 being a 53-week year. Such increases were partially offset by the
effects of the Store Closure Plan which was substantially completed in 1995.
During 1995, the devaluation of the Mexican peso, which resulted in extremely
weak economic conditions throughout Mexico, negatively impacted sales at the
Company's six stores located on the Texas/Mexico border. Excluding these
stores, comparable store sales growth for 1995 would have been 3.0%.
Gross profit increased 17.2% to $214.3 million in 1995 from $182.8 million
in 1994. Gross profit as a percent of sales was 31.4% for both 1995 and 1994.
Gross profit for 1995 was favorably impacted by (i) the opening of
29
<PAGE>
new stores, which traditionally experience lower markdown activity during
their first six months of operations, (ii) vendor discount programs granted
to the Company to support new store openings, (iii) the application of
buying, occupancy and distribution costs over a larger sales base, and (iv)
LIFO credits. These items were offset by an increase in markdowns resulting
from additional promotional events during the Christmas season intended to
increase sales and reduce inventories and an increase in the level of
shrinkage. Management believes that the increased shrinkage was primarily due
to the Company's focus on improving ticketing compliance on merchandise in
1995 as well as the rapid expansion of stores during the same year. In
response, management has put several new programs in place, including
shortage awareness programs, which are intended to return the level of
shrinkage to historical levels.
Selling, general and administrative expenses as a percent of sales were
23.4% for 1995 and 23.2% for 1994. The increase resulted from incremental
costs associated with opening stores in new markets, increased costs
associated with the certificates issued by the Trust to third party investors
under the Accounts Receivable Program and an increase in the charge-off ratio
associated with the Company's credit card program (including charge-offs
resulting from sales of the Mexican border stores) from 6.0% of average
balances in 1994 to 7.9% in 1995. These increases were partially offset by
the application of fixed costs to a greater volume of sales and the reversal
of a $0.8 million litigation reserve as a result of a favorable court ruling.
Selling, general and administrative expenses for 1995 increased 18.5% to
$159.6 million from $134.7 million in 1994. Advertising expenses as a percent
of sales for 1995 and 1994 were 3.9% and 3.8%, respectively; the increase was
primarily a result of the Company's expansion into new markets.
Service charge income for 1995 increased 23.5% to $10.5 million from $8.5
million in 1994. Such increase was due to an increase in average accounts
receivable balances resulting from the 17.4% increase in sales discussed
above, an increase in the late fee rate charged on delinquent accounts as
well as the fifty-third week of 1995.
The 1995 store opening and closure costs of $3.7 million were comprised of
store opening costs related to 68 new stores. The 1994 store opening and
closure costs were comprised of a $5.2 million provision for the Store
Closure Plan and $0.4 million for store opening costs related to 10 new
stores.
Operating income for 1995 increased 20.6% to $61.5 million from $51.0
million for 1994 due to the factors discussed above. Operating income as a
percent of sales was 9.0% in 1995 as compared to 8.8% for 1994.
Interest expense for 1995 increased 10.0% to $44.0 million from $40.0
million for 1994. The increase in interest expense was due primarily to an
increase in the accretion on the Senior Discount Debentures combined with
interest related to the Series D Senior Subordinated Notes issued in August
1995.
As a result of the factors described above, the Company's net income for
1995 increased 69.8% to $10.7 million from $6.3 million for 1994.
1994 Compared to 1993
Sales for 1994 increased 4.3% to $581.5 million from $557.4 million for
1993. The overall increase in sales was a result of a 3.2% increase in
comparable store sales combined with an increase in sales from new stores
opened during 1994.
Gross profit for 1994 increased 5.9% to $182.8 million from $172.6 million
in 1993. Gross profit as a percent of sales for 1994 increased to 31.4% from
31.0% for 1993. The increase in the gross profit percentage was due primarily
to a reduced level of markdowns as a result of better inventory management.
Selling, general and administrative expenses as a percent of sales
declined to 23.2% in 1994 from 24.2% in 1993. Selling, general and
administrative expenses for 1994 decreased to $134.7 million from $135.0
million in 1993. These decreases were primarily due to the sale of accounts
receivable pursuant to the Accounts Receivable Program that began during
August 1993, offset in part by an increase in the level of bad debt expense
associated with the Company's credit card program. Excluding the effect of
the Accounts Receivable Program, selling, general and administrative expenses
as a percent of sales for 1994 would have been 26.1% as compared to 26.4% in
1993. Such decrease was due to the Company's ability to effectively manage
variable selling, general and administrative expenses. Advertising expenses
as a percent of sales for 1994 and 1993 were 3.8% and 4.0%, respectively, a
decrease of 0.2%.
Service charge income decreased to $8.5 million for 1994 from $20.0
million for 1993 due to the implementation of the Accounts Receivable
Program. Without giving effect to the Accounts Receivable Program,
30
<PAGE>
1994 service charge income would have increased 8.1% from 1993 as a result of
an increase in average accounts receivable balances due to the increase in
sales and the purchase of certain accounts receivable from Beall-Ladymon.
Store opening and closure costs for 1994 comprised the $5.2 million
accrual related to the Store Closure Plan and $0.4 million related primarily
to the 10 stores opened during 1994.
Operating income for 1994 decreased 11.1% to $51.0 million from $57.4
million for 1993. Operating income as a percent of sales for 1994 decreased
to 8.8% from 10.3% for 1993 as a result of the items discussed above. Such
decreases were due to the $5.2 million provision associated with the Store
Closure Plan combined with the impact of the implementation of the Accounts
Receivable Program in 1993 (see Note 2 to the Company's Consolidated
Financial Statements). Adjusted operating income, which excludes the above
two factors and store opening costs, increased 14.7% to $53.7 million (or
9.2% of sales) from $46.8 million (or 8.4% of sales).
Net interest expense in 1994 increased 9.9% to $40.0 million from $36.4
million in 1993. The increase in net interest expense is due to a full year
of discount accretion in 1994 related to the Senior Discount Debentures
versus six months of accretion in 1993. Such increase was partially offset by
a decrease in interest expense due to the purchase and retirement of $20.0
million of Senior Notes, and by a reduction in interest expense and the
impact on interest expense of the Accounts Receivable Program adopted in
1993.
As a result of the factors described above, the Company's net income in
1994 increased to $6.3 million from a net loss of $2.8 million in 1993 which
included a $16.2 million extraordinary charge associated with the
Refinancing.
Seasonality and Inflation
The Company's business is seasonal and its quarterly sales and profits
traditionally are lower during the first three quarters and higher during the
fourth quarter (November through January). In addition, working capital
requirements fluctuate throughout the year, increasing substantially in
October and November in anticipation of the holiday season due to
requirements for significantly higher inventory levels.
<TABLE>
<CAPTION>
1994 1995
----------------------------------------- ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $128,073 $132,060 $134,939 $186,391 $142,353 $154,578 $159,161 $226,532
Gross profit(1) 39,856 39,163 41,110 62,675 46,283 46,555 48,659 72,780
Operating income 11,943 10,576 10,029 18,409 14,835 11,074 9,724 25,853
Quarters' operating
income as a percent
of annual income 23% 21% 20% 36% 24% 18% 16% 42%
Income before
extraordinary item $ 1,197 $ 463 $ 52 $ 4,918 $ 2,438 $ 221 $ (899) $ 8,970
Net income 871 463 90 4,898 2,438 221 (899) 8,970
Adjusted operating income(2) 9,868 9,081 9,387 25,341 13,797 11,337 10,364 28,498
</TABLE>
- ---------------
(1) The Company states its inventories at the lower of cost or market, cost
being determined on the last-in first-out method. See Note 1 to the
Company's Consolidated Financial Statements.
(2) Adjusted operating income represents operating income adjusted to
eliminate the income and expense associated with the Company's
proprietary credit card program (including the Accounts Receivable
Program) and store opening and closure costs.
The Company does not believe that inflation had a material effect on its
results of operations during the past two years. However, there can be no
assurance that the Company's business will not be affected by inflation in
the future.
31
<PAGE>
Liquidity and Capital Resources
At August 3, 1996, the Company's consolidated long-term debt included
$130.0 million of Senior Notes, $116.6 million of Senior Subordinated Notes,
Senior Discount Debentures with an accreted value of $117.0 million, $30.0
million of SRPC Notes and $24.2 million of certain other debt.
On June 3, 1996, the Company purchased Uhlmans for approximately $27.3
million, including acquisition costs and net of cash acquired. The Company,
through SRPC, issued $30.0 million in aggregate principal amount of SRPC
Notes during May 1996, the proceeds of which were used to fund the Uhlmans'
acquisition. The SRPC Notes are secured by the Company's Retained Interest.
Interest on the SRPC Notes is payable semi-annually on June 15 and December
15 of each year, commencing December 15, 1996. Amounts received by SRPC from
its Retained Interest are expected to provide a source of cash flows to pay
the interest on the SRPC Notes. The scheduled amortization of principal will
commence in December 1999 and is subject to the collection experience of the
receivables underlying the Trust Certificates at that time. The issuance of
the SRPC Notes does not impact the ability of the Company to issue additional
certificates under the Accounts Receivable Program to third-party investors.
Total working capital increased $11.0 million to $181.1 million at August
3, 1996 from $170.1 million at February 3, 1996, due primarily to the
issuance of the SRPC Notes and the acquisition of Uhlmans.
Working capital at February 3, 1996 increased 14.8% to $170.1 million from
$148.2 million at January 28, 1995. The increase in working capital during
1995 was primarily the result of an increase in inventories required to
support the Company's larger store base.
The Company's primary capital requirements are for working capital, debt
service and capital expenditures. Based upon the current capital structure,
management anticipates cash interest payments during 1996 and 1997 to be
approximately $5.5 million higher than the 1995 level due to the issuance of
the Series D Senior Subordinated Notes and the SRPC Notes. Capital
expenditures are generally for new store openings, remodeling of existing
stores and facilities and customary store maintenance. Capital expenditures
for the first six months of 1996 were $15.2 million as compared to $16.8
million for the comparable period of 1995 as a result of fewer stores opened
or acquired. Management expects capital expenditures to be approximately
$12.8 million for the last six months of 1996 consisting primarily of the
opening of approximately 16 new stores, the conversion of most of the Uhlmans
stores to Stage stores, routine store maintenance, store remodels and
renovations at the corporate headquarters. Required principal payments on
debt during 1996 and 1997 aggregate $2.4 million.
The Company's short-term liquidity needs are provided by (i) existing cash
balances, (ii) operating cash flows, (iii) the Accounts Receivable Program
and (iv) the Revolving Credit Agreements (as defined below). The Company
expects to fund its long-term liquidity needs from its operating cash flows,
the issuance of debt and/or equity securities, the securitization of its
accounts receivable and bank borrowings.
The Company has a revolving credit agreement with a bank (the "Revolving
Credit Agreement") under which it may draw up to $25.0 million. Of this
amount, $15.0 million may be used to support letters of credit. As of August
3, 1996, $14.5 million of the capacity under the Revolving Credit Agreement
was utilized of which $7.0 million of this amount was used to collateralize
letters of credit. The Company also has a separate agreement with the bank
under which it may borrow an additional $10.0 million for seasonal working
capital needs (the "Seasonal Credit Agreement" and together with the
Revolving Credit Agreement, the "Revolving Credit Agreements"). Funds are
available under the Seasonal Credit Agreement from August 15 through January
15 of each calendar year (the "Seasonal Period"). The Revolving Credit
Agreements are available through February 3, 1998.
SRI is soliciting consents to certain amendments to the indentures
governing its Senior Notes, its Series B Senior Subordinated Notes and its
Series D Senior Subordinated Notes to, among other things, increase the
maximum amount of revolving senior secured borrowing capacity to $50.0
million (subject to a reduction to $25.0 million for a 45-day period
annually) and relax the limitations on the incurrence of additional
indebtedness.
These amendments are intended to provide the Company with additional
financial flexibility in meeting its expansion plans and the working capital
requirements of its growing store base, and are conditioned on the
consummation of the Offering.
Since its inception, the Trust has issued $165.0 million of term
certificates and a $40.0 million revolving certificate (collectively, the
"Trust Certificates") to third parties representing undivided interests in
the Trust. The holder of the revolving certificate agreed to purchase
interests in the Trust equal to the amount of accounts receivable
32
<PAGE>
in the Trust above the level required to support the term certificates
(aggregating $200.1 million at August 3, 1996), up to a maximum of $40.0
million. As of August 3, 1996, the outstanding balance under the revolving
certificate was $1.1 million. The Company's Retained Interest at August 3,
1996 was $55.8 million, which represented 25.2% of total receivables
outstanding in the Trust. The remaining interest in the Trust is held by
third-party investors. The Retained Interest is effectively subordinated to
the interests of such third-party investors, and is pledged to secure the
SRPC Notes. If receivable balances in the Trust fall below the level required
to support the term certificates and revolving certificates, certain
principal collections may be retained in the Trust until such time as the
accounts receivable balances exceed the amount of accounts receivable
required to support the Trust Certificates and any required transferor's
interest. SRPC receives distributions from the Trust of cash in excess of
amounts required to satisfy the Trust's obligations to third-party investors
on the Trust Certificates. Cash so received by SRPC may be used to purchase
additional accounts receivable from, or make distributions to, the Company
after SRPC has satisfied its obligations on the SRPC Notes. The Trust may
issue additional series of certificates from time to time on various terms.
Terms of any future series will be determined at the time of issuance.
33
<PAGE>
BUSINESS
General
The Company operates the store of choice for well known national brand
name family apparel in over 200 small towns and communities across the
central United States. The Company has recognized the high level of brand
awareness and demand for fashionable, quality apparel by consumers in small
markets and has identified these markets as a profitable and underserved
niche. The Company has developed a unique franchise focused on small markets,
differentiating itself from the competition by offering a carefully edited,
but broad range of merchandise with a high level of customer service in
convenient locations. Stage Stores' product offerings include fashion
apparel, accessories, fragrances and cosmetics and footwear for women, men
and children. Over 85% of 1995 sales consisted of branded merchandise,
including nationally recognized names such as Levi Strauss, Liz Claiborne,
Chaps/Ralph Lauren, Calvin Klein, Guess, Hanes, Nike, Reebok and Haggar
Apparel.
The Company currently operates 314 stores through its "Stage", "Bealls"
and "Palais Royal" trade names in 20 states throughout the central United
States. Approximately 77% of these stores are located in small markets and
communities with as few as 4,000 people. The Company's store format
(averaging approximately 18,000 total selling square feet) and merchandising
capabilities enable the Company to operate profitably in small markets. The
remainder of the Company's stores operate in metropolitan areas, primarily in
suburban Houston. For the twelve months ended February 3, 1996, the Company
would have had pro forma sales and income before extraordinary item of $742.4
million and $20.7 million, respectively.
In order to fully realize the potential of its unique market position and
proven ability to operate profitably in small markets, the Company began
recruiting a new senior management team commencing in 1993. This new
management team has (i) initiated an aggressive growth strategy to capitalize
on available opportunities through new store openings and strategic
acquisitions in new markets, (ii) refined the Company's retailing concept,
(iii) implemented new merchandising and operating programs, and (iv) closed
unprofitable stores. The Company has made substantial progress in
implementing its growth strategy by opening or acquiring 68 stores in 1995
and 59 stores to date in 1996, and expects to open approximately 10
additional stores during the remainder of 1996. In addition, the Company's
goal is to open at least 55 new stores in 1997.
Competitively Well Positioned
As a result of its small market focus, Stage Stores generally faces less
competition for brand name apparel, because consumers in small markets
generally have only been able to shop for branded merchandise in distant
regional malls. In those small markets where the Company does compete for
brand name apparel sales, such competition generally comes from local
retailers, small regional chains and, to a lesser extent, national department
stores. The Company believes it has a competitive advantage over local
retailers and smaller regional chains due to (i) the economies of scale of
its large store base, (ii) strong vendor relationships which provide it with
a broad selection of branded merchandise at a lower cost, (iii) a proprietary
credit card program, which enables it to provide an independent source of
credit and which generates a significant customer database that supports the
Company's promotion and marketing efforts, and (iv) sophisticated operating
systems for efficient management. The Company believes it has a competitive
advantage in small markets over national department stores due to its (i)
experience with smaller markets, (ii) ability to effectively manage
merchandise assortments in a small store format, and (iii) operating systems
designed for efficient management within small markets. In addition, due to
minimal merchandise overlap, Stage Stores generally does not directly compete
for branded apparel sales with national discounters such as Wal-Mart.
Key Strengths
The following factors serve as the Company's key strengths and
distinguishing characteristics.
Ability to Operate Profitably in Smaller Markets. The Company has
recognized that customers in small markets are generally as aware of current
fashion trends and as sophisticated as consumers in larger urban centers due
to the proliferation of electronic, computer and print media. However, these
consumers have not traditionally had convenient access to broad assortments
of quality, brand name merchandise. The Company operates in small markets
with populations ranging from 4,000 to 100,000, and has developed a store
format, generally ranging in size from 12,000 to 30,000 square feet, which is
smaller than typical department stores yet large enough to offer a well
edited, but broad selection of merchandise. This format has enabled the
Company to operate profitably in
34
<PAGE>
small markets. Historically, the Company has achieved higher profit margins
in its small market stores. For 1995, store contribution (operating profit
before allocation of corporate overhead) as a percentage of sales for small
market stores open for at least one year was 18%, as compared to 12% for
larger market stores. In addition, by operating more than 300 stores, the
Company benefits from economies of scale in buying and merchandising,
information systems, distribution and advertising which, combined with the
lower cost structure of the smaller market stores, has resulted in operating
margins which are among the highest in the retailing industry.
Benefits of Strong Vendor Relationships. The Company's large store base
offers major vendors a unique vehicle for accessing multiple small markets in
a cost effective manner. The proliferation of media combined with the
significant national marketing efforts of these vendors has created
significant demand for branded merchandise in small markets. However, the
financial and other limitations of many local retailers has left large
national brands with limited access to such markets. Furthermore, these large
vendors generally do not sell through national discounters in order to
preserve their brand image. The Company's new management team recognized this
significant opportunity and continuously seeks to expand its vendor base and
has recently added nationally recognized name brands such as Polo, Dockers
for Women and Oshkosh, as well as fragrances by Elizabeth Arden, Liz
Claiborne and Perry Ellis during 1996. In addition, the Company has also
increased the participation by key vendors in joint marketing programs to a
level that the Company believes exceeds the standard vendor programs provided
to its smaller competitors. For example, the Company is among the largest
customers of Levi Strauss, Liz Claiborne and Haggar Apparel and enjoys
significant support from such vendors in sales promotions, advertising and
store fixture programs.
Effective Merchandising Strategy. The Company's merchandising strategy is
based on an in-depth understanding of its customers and is designed to
accommodate the particular demographic profile of each store. This
understanding is attributable to over 70 years of experience operating in its
markets coupled with 43 buyers who average approximately 11 years of service
with the Company. Store layouts and visual merchandising displays are
designed to create a friendly, modern and convenient department store
atmosphere which is frequently not found in small markets. The Company's
strategy focuses on moderately priced merchandise categories which have
traditionally yielded attractive margins. The Company offers an edited
assortment of quality, moderately priced merchandise that is divided into
distinct departments including misses, women's, men's, boy's, footwear,
intimate apparel, junior's, children's, accessories, cosmetics, fragrances
and gifts.
To augment its branded merchandise offerings, the Company also offers a
quality assortment of higher margin, private label merchandise which
comprises less than 15% of total sales. The Company's private label
merchandise includes its highly successful Graphite(R) label for apparel,
accessories and footwear as well as its new Whispers(R) line of bath and body
products and intimate apparel. The Company procures the majority of its
private label merchandise through AMC, a cooperative buying service whose
participants include nationally recognized retailers, such as Federated
Department Stores.
The Company also utilizes a sophisticated merchandise allocation and
transfer system which is designed to maximize in-stock positions, increase
sales and reduce markdowns. The Company believes that the combination of the
size and experience of its buyer group, its vendor relationships, its strong
merchandising systems and its participation in AMC allow the Company to
compete effectively on both price and selection in its markets.
Focused Marketing Strategy. The Company's primary target customers are
women between the ages of 20 and 55 with household incomes over $25,000 who
are the primary decision makers for family clothing purchases. The Company
uses a multi-media advertising approach, including newspaper, radio, direct
mail and television, to position its store as the local destination for
fashionable, brand name merchandise. In addition, the Company heavily
promotes its proprietary credit card in order to create customer loyalty and
to effectively identify its core customers. The Company believes it is better
able to maintain personal contact with its customers due to the small size of
its markets, aggressive advertising strategy and well-developed corporate
customer service programs designed to encourage a high level of customer
interaction. Stage Stores seeks to enhance its image in the communities it
serves by encouraging its store managers and employees to be involved in
local activities such as youth groups, civic activities and athletic events.
Benefits of Proprietary Credit Card Program. The Company aggressively
promotes its proprietary credit card and, as a result, experiences a higher
percentage of proprietary credit card sales (55.6% of net sales in 1995) than
most retailers. The Company considers its credit card program to be a
critical component of its retailing concept because it (i) enhances customer
loyalty by providing customers with a service that few of its local and
regional
35
<PAGE>
competitors or discounters offer, (ii) allows the Company to identify and
regularly contact its best customers, and (iii) helps create a comprehensive
database that allows the Company to implement detailed, segmented marketing
and merchandising strategies for each store. In addition, the Company has
established a VIP program which offers special services and benefits to
customers with credit card purchases over $750 annually. VIP customers are
rewarded with certain extra services such as free gift-wrapping, emergency
check cashing, free credit card registration, discounts on alterations, and
other benefits. While these customers only represent approximately 9.5% of
total active cardholders, credit sales to these customers during 1995
comprised 36.6% of total cardholder sales. Sales associates are encouraged to
focus their selling efforts on these customers to increase the productivity
of the Company's marketing efforts.
Emphasis on Customer Service. A primary corporate objective is to provide
excellent customer service through stores staffed with highly trained and
motivated sales associates. All sales associates are evaluated based upon the
attainment of specific customer service standards such as offering prompt
assistance, suggesting complementary items, sending thank-you notes to charge
customers and establishing consistent contact with customers in order to
create a customer base for each associate. The Company continuously monitors
the quality of its service by making over 3,000 calls each month to its
credit card customers who have recently made a purchase. The results of these
surveys are used to determine a portion of each store manager's bonus. In
addition, the Company has extended this service philosophy to the design of
the store; for example, in nearly all stores it has installed call buttons in
the fitting rooms and in smaller market stores, has adopted a "Team One"
concept which locates the store manager on the selling floor. The Team One
concept is also designed to help the store manager ensure that sales
associates focus on selling and customer service.
Sophisticated Operating and Information Systems. The Company supports its
retail concept with highly automated and integrated systems in areas such as
merchandising, distribution, sales promotions, credit, personnel management,
store design and accounting. The Company's merchandising systems assist
merchandise planners in allocating merchandise assortments for each store
based on specific characteristics and recent sales trends. The Company's
point of sale systems include bar code scanning and electronic credit and
check authorization, all of which allow the Company to capture customer
specific sales data for use in its merchandising system. Other systems allow
the Company to identify and mark down slow moving merchandise or efficiently
transfer it to stores selling such items more rapidly, and to maintain high
levels of in-stock positions in basic items including jeans and hosiery. The
Company is focused on expanding its use of electronic data interchange (EDI)
and has made significant progress in doing so over the last two years. These
systems have enabled the Company to efficiently manage its inventory, improve
sales productivity and reduce costs, which have contributed to the Company's
relatively high operating income margins. The Company has developed and
utilizes an automated store personnel scheduling system that analyzes
historical hourly and projected sales trends to efficiently schedule sales
personnel. This system is designed to minimize labor costs while producing a
higher level of customer service.
Growth Strategy
In order to fully realize the potential of its unique market position and
proven ability to operate profitably in small markets, the Company, through
its new management team, has (i) initiated an aggressive growth strategy to
capitalize on available opportunities through new store openings and
acquisitions and (ii) refined its retailing concept to successfully operate
in very small markets with populations of less than 12,000.
New Store Openings in Smaller Markets. The Company opened 23 new stores
and 45 acquired stores in 1995, has opened 25 new stores and acquired 34
stores to date in 1996, and expects to open approximately 10 additional new
stores during the remainder of 1996. In addition, the Company's goal is to
open at least 55 new stores in 1997. Since 1994, store additions have allowed
the Company to begin operating in 14 additional states. As part of new
management's ongoing expansion strategy, the Company has identified over 600
additional markets in the central United States and contiguous states which
meet the Company's demographic and competitive criteria. All of these target
markets are smaller communities, where the Company has historically
experienced its highest profit margins. In addition, the Company believes it
has a competitive advantage over local retailers in these markets which are
typically underserved by department stores. Based on the Company's historical
operating experience, small market stores typically experience lower
incremental opening costs and lower occupancy and operating expenses than
larger markets. When combined with the Company's operating systems in
merchandising, credit, distribution and store personnel scheduling, the
smaller market stores have typically generated higher margins than
36
<PAGE>
metropolitan market stores. For 1995, store contribution as a percentage of
sales for small market stores open for at least one year was 18% as compared
to 12% for larger market stores.
The Company utilizes a proprietary model which is designed to allow
management to identify suitable markets for new stores. The Company targets
communities for new store openings with populations generally ranging from
12,000 to 30,000, an average household income of $25,000 or more, and which
are located at least 30 miles from the nearest regional mall. Such locations
generally face limited competition from national retailers. In addition to
satisfying the above criteria, only those markets that management believes
have the potential to exceed certain minimum sales and profitability
standards and have available, suitable, low cost real estate are selected for
new store openings.
In opening a new store, the Company's investment consists primarily of
inventory, net of vendor payables, and furniture, fixtures, equipment and
leasehold improvements. For the Company's stores opened in 1995, inventory
investment per store was approximately $450,000, with average vendor payables
equal to approximately $110,000 for a net investment per store of
approximately $340,000 and investment in furniture, fixtures, equipment and
leasehold improvement was approximately $313,000 per store. In addition,
pre-opening expenses (which are deferred and expensed in the fiscal year the
store opens) for the new stores opened in 1995 averaged approximately $60,000
per new store.
Strategic Acquisitions. The Company believes that it can benefit from
strategic acquisitions by (i) applying its buying and merchandising
capabilities, sales promotion techniques and customer service methods, (ii)
introducing its proven management systems and (iii) consolidating overhead
functions. The Company believes that such actions have allowed it to improve
the overall profitability of acquired retailers.
The Company believes that numerous acquisition opportunities are available
in its target markets on favorable terms due in part to (i) financially
weakened local retailers and regional chains which, due to their lack of
merchandise differentiation, have been adversely impacted by national
discounters, (ii) the limited exit strategies available to owners of regional
chains who wish to sell, (iii) the relatively limited availability of
favorable credit terms from vendors/factors and (iv) competitive pressures
created by cost effective retailers such as Stage Stores.
This strategy has been successfully demonstrated by the Company's
acquisition of 45 stores from Beall- Ladymon in 1994 and the subsequent
reopening of the stores in the first quarter of 1995 under the Stage name. In
1993, the year prior to their acquisition, the Beall-Ladymon stores generated
sales of $53.4 million, whereas the newly opened Stage stores in the same
locations generated sales for the twelve months ended August 3, 1996 of $95.0
million, an increase of 78%. Over the same periods, store contribution more
than doubled.
In June 1996, the Company acquired Uhlmans, a privately held apparel
retailer with 34 locations in Ohio, Indiana and Michigan, where the Company
previously had no stores. These stores are of similar size and merchandise
content to the Company's existing stores and are compatible with the
Company's retailing concept and growth strategy. Uhlmans generated 1995 sales
of $59.7 million. The Company believes significant opportunities are
available to improve Uhlmans' financial results through the expansion of
certain merchandise categories, the Company's lower merchandising costs,
increased proprietary credit card-based sales, the implementation of the
Company's operating systems and the elimination of overlapping administrative
costs. See "Risk Factors--Future Growth and Recent Acquisitions; Liquidity."
Expansion to Micromarkets. The Company recently began targeting its small
market retailing concept toward communities with populations ranging from
4,000 to 12,000 with stores of less than 12,000 gross square feet. These
efforts are designed to build on the Company's favorable operating experience
in markets of this size. Stage Stores believes that micromarkets may offer a
significant additional avenue for potential growth, because it can
successfully apply its existing store model in those micromarkets due to its
ability to scale its store concept to the appropriate size, the generally
lower levels of competition and low labor and occupancy costs. The Company
has identified 1,200 such potential sites in and around the central United
States and contiguous states.
37
<PAGE>
Company Operations
Merchandise Purchasing and Allocation. The Company offers a select
assortment of quality, moderately priced soft goods, which are divided into
departments including misses, women's, men's, boys, juniors, children's,
intimate, petites, accessories, cosmetics, fragrances, gifts and footwear
departments. Merchandise mix may vary significantly from store to store to
accommodate differing demographic factors. The Company modifies its
assortments to focus on merchandise its buyers expect will have the broadest
appeal to its targeted customers based upon sales analyses and individual
store attributes.
The Company purchases merchandise from a vendor base of over 2,000
suppliers. The Company's leading vendors for 1995 were Levi Strauss, Liz
Claiborne, Haggar Apparel, Guess, Hanes, Nike, Chorus Line, Parson Place and
Reebok. The Company was one of Levi Strauss's top ten customers in 1995. No
one supplier accounted for more than 9% of the Company's 1995 purchases. The
Company is also a member of the cooperative buying service AMC, and as such
is entitled to make purchases of imported merchandise for its private label
program. The membership provides the Company with group purchasing
opportunities. Private label products result in better gross margins for the
Company and excellent value for the customer as a result of the lower cost of
such apparel as compared to branded items in the same categories. Private
label purchases were approximately 8%, 10% and 11% of total purchases in
1993, 1994 and 1995, respectively. The Company currently intends to keep
private label merchandise sales below 15% of total sales in order to focus on
sales of branded merchandise.
Set forth below is certain information regarding the percentage of net
sales by major merchandise departments for the Company for 1994 and 1995.
<TABLE>
<CAPTION>
Department 1994 1995
- ---------- ---- ----
<S> <C> <C>
Mens and Young Men 20% 22%
Misses Sportswear 15 15
Juniors 15 13
Accessories and Gifts 10 9
Children 9 9
Footwear 8 8
Intimate 6 6
Special Sizes 5 5
Cosmetics 4 5
Misses Dresses 4 4
Boys 3 3
Furs and Coats 1 1
--- ---
Total 100% 100%
=== ===
</TABLE>
The Company's integrated merchandising systems are designed to provide its
buyers with the information and analytical support needed to maximize
efficiency, increase sales, reduce markdowns and increase inventory turnover
through better inventory management. These systems include, among others: (i)
an automated merchandise, financial planning and allocation system which
recognizes the attributes and current merchandise needs of each store; (ii) a
staple stock replenishment system to ensure the Company is in stock on basic
items such as hosiery, foundation garments, dress shirts and jeans; (iii)
markdown and merchandise transfer analysis; and (iv) an assortment planning
system which enables the Company to closely tailor the merchandise assortment
in each store based on local demographics and historical trends and
automatically allocate merchandise accordingly. In addition, electronic
point-of-sale ("POS") terminals at each store record and transmit to the
Company's corporate headquarters a real time, full accounting of each day's
sales by transaction and item. The Company utilizes its information systems
to monitor slow and fast moving merchandise for the purpose of enabling the
Company to transfer slower moving merchandise from one store to another store
where such merchandise is selling more rapidly. The Company believes that its
inventory transfer system improves in-stock positions, increases sales and
reduces markdowns, thereby increasing profit margins.
Credit Services. The Company offers its own private label credit card
program, which enhances the Company's relationship with core customers by
tailoring credit availability to individual customers and facilitating
frequent communication of promotional offering. The number of private label
credit accounts and dollar volume of charges reflects an important element in
the Company's marketing strategy. The Company believes that private label
credit card holders shop more regularly and purchase more merchandise than
customers who pay cash or use bankcards. In addition, the Company maintains a
database of all proprietary charge purchases of these customers.
38
<PAGE>
Management believes that this data base is a significant competitive
advantage over competitors who lack such programs, allowing the Company to
target promotional material, via direct mail, to its regular customers. At
August 31, 1996, there were more than 1.6 million active accounts. Private
label credit card purchases generated approximately 55.6% of net sales in
1995. The Company seeks to expand the volume of such credit card purchases
through a marketing strategy emphasizing (i) direct mail of promotional
materials to existing cardholders to communicate new merchandise offerings,
(ii) promotion of customer incentive programs and (iii) the issuance of new
credit through the opening of new accounts and extension of credit on
existing accounts. It is the Company's policy to expand the number and use of
private label credit card accounts on a controlled basis by utilizing
computerized systems such as point-scoring for approving new accounts and
behavioral scoring for monitoring account performance and approving
additional purchases.
The Company administers its private label credit card program through a
dedicated in-house facility and staff located in Jacksonville, Texas. The
Company's internally developed, fully computerized and highly automated
credit systems analyze customer payment histories, automatically approve or
reject new sales at point of sale and enable account representatives to
efficiently manage delinquent account collections.
Management Information Systems. In addition to its merchandising systems
described above, the Company relies on proprietary management information
systems to maximize productivity and minimize costs in the other
labor-intensive areas of its business, including distribution, personnel
management, credit and accounting. In each store, the Company's POS system
uses bar code scanning and includes electronic credit and check
authorization. The Company has made substantial investments in its systems
and utilizes a central mainframe computer to coordinate store level
information and to support almost every aspect of the business. By linking
the corporate headquarters with each store, the Company's systems allow the
merchandising department to track sales of all items at all stores at any
time and enable immediate POS credit approval for the use of private label
credit cards. These systems have enabled the Company to better manage and
plan its inventory while reducing costs and have contributed to the Company's
relatively high operating margins.
Distribution. The Company's 450,000 square foot automated and centralized
distribution center in Jacksonville, Texas enables it to distribute most
merchandise within 48 hours of receipt and has the current capacity (with
minimal incremental investment) to support in excess of 800 stores. The
Company's centralized distribution system results in more efficient
distribution costs per unit, lower freight costs and reduced accounts payable
processing costs than certain of the Company's competitors. In 1995, the
Company entered into an arrangement with a major freight forwarder for the
delivery of merchandise from the distribution center to all of the Company's
stores on a daily basis. This arrangement is a more cost-efficient method of
distribution than the Company's previous method of multiple common carriers.
Distribution expenses, net of handling fees charged to vendors, were less
than 0.5% of net sales in each of 1994 and 1995, which the Company believes
is below industry averages.
Competition
The retail apparel business is highly competitive. Retailers generally
compete on the basis of convenience of location, merchandise selection,
service and price. Although competition varies widely from market to market,
the Company faces substantial competition, particularly in metropolitan
markets, from national, regional and local department and specialty stores.
Some of the Company's competitors are considerably larger than the Company
and have substantially greater financial and other resources. The Company
believes that its distinctive retail concept, combined with its emphasis on
operating systems and technology, distinguishes it from department store and
specialty store competitors, especially in small markets. The Company
believes that its knowledge of small markets has enabled it to establish a
strong franchise in those markets.
Employees
During 1995, the Company employed an average of 9,946 employees, of which
1,069 were salaried and 8,877 were hourly. The central offices (which
includes corporate, credit and distribution center offices) averaged 296
salaried and 684 hourly employees during 1995. In its stores, the Company
employed an average of 773 salaried and 8,193 hourly employees during 1995.
Such averages will vary during the year as the Company traditionally hires
additional employees and increases the hours of part-time employees during
peak seasonal selling periods. At September 19, 1996, the Company employed
11,570 employees, including 1,143 central office employees. There are no
collective bargaining agreements in effect with respect to any of the
Company's employees. The Company believes that it has a good relationship
with its employees.
39
<PAGE>
The Company has implemented performance monitoring systems designed to
assure achievement of selling and service standards at the store level. Most
of the Company's sales associates participate in incentive-based compensation
programs with objectives that are defined at the individual department and
store level. During 1995, 95% of all Company personnel participated in
incentive and recognition programs based on individual performance.
Properties
The Company's corporate headquarters is located in a 130,000 gross square
foot building in Houston, Texas. The Company leases the land and building at
its Houston facility. See "Certain Relationships and Related
Transactions--Transactions with Management." The Company owns its
distribution center and its credit department facility, both located in
Jacksonville, Texas.
The Company currently operates stores located in the following states:
<TABLE>
<CAPTION>
Number of Stores(1)
-----------------------------------
Year End September 20,
Location 1994 1995 1996
- -------- ---- ---- -------------
<S> <C> <C> <C>
Alabama 3 3 3
Arizona -- -- 2
Arkansas -- 12 13
Colorado 11 12 11
Illinois -- 5 11
Indiana(2) -- -- 3
Iowa -- 3 6
Kansas -- 2 3
Louisiana -- 26 27
Michigan(2) -- -- 6
Minnesota -- -- 1
Mississippi -- 6 7
Missouri 1 4 5
Nebraska -- -- 1
New Mexico 8 8 9
Ohio (2) -- -- 25
Oklahoma 11 13 13
South Dakota -- -- 2
Texas 153 161 165
Wyoming 1 1 1
--- --- ---
Total 188 256 314
=== === ===
</TABLE>
- ---------------
(1) Excluding the stores included in the Store Closure Plan.
(2) Represents stores acquired in connection with the Uhlmans Acquisition.
Stores range in size from 4,000 to 46,000 selling square feet with the
majority between 12,000 and 30,000 selling square feet. In general, Bealls
stores are located in small markets primarily in Texas, Oklahoma and New
Mexico, Stage stores are located in small markets in states other than Texas,
Oklahoma and New Mexico and Palais Royal stores are located in metropolitan
Houston and suburban areas. These stores are primarily located in strip
shopping centers. All store locations are leased except for three Bealls
stores and two Stage stores that are owned. Most leases provide for a base
rent amount plus contingent rentals, generally based upon a percentage of
gross sales.
Litigation
From time to time the Company and its subsidiaries are involved in various
litigation matters arising in the ordinary course of its business. Management
believes that none of the matters in which the Company or its subsidiaries
are currently involved, either individually or in the aggregate, is material
to the financial position, results of operations or cash flows of the Company
or its subsidiaries.
40
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company and their respective
ages and positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- ----------------------------------------------------
<S> <C> <C>
Bernard Fuchs(1) 70 Chairman and Director
Carl Tooker 49 Chief Executive Officer, President and Director
Mark Shulman 47 Executive Vice President/Chief Merchandising Officer
James Marcum 37 Executive Vice President/Chief Financial Officer
Stephen Lovell 40 Executive Vice President/Director of Stores
Ron Lucas 49 Senior Vice President/Human Resources
Jerry Ivie 63 Senior Vice President, Secretary and Treasurer
Joshua Bekenstein(1) 38 Director
Adam Kirsch(2) 34 Director
Peter Mulvihill(2) 37 Director
Lasker Meyer 70 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
The Company expects to expand the size of the Board to add three
directorships by the end of 1997, at least two of which will be filled with
independent, outside directors.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee oversees actions taken by the
Company's independent auditors, recommends the engagement of auditors and
reviews the Company's internal accounting policies and practices. The
Compensation Committee approves the compensation of executives of the
Company, makes recommendations to the Board of Directors with respect to
standards for setting compensation levels and administers the Company's
incentive plans.
Mr. Fuchs has been involved in retailing since 1944. He began his career
with Grayson Shops of California and subsequently served as Executive Vice
President and Chief Operating Officer of S. Klein in New York from 1960
through 1967. He came to Palais as Executive Vice President and Chief
Operating Officer in 1967 and became President and Chief Executive Officer in
1979. Mr. Fuchs was Chairman and Chief Executive Officer of the Company and
SRI from December 1988 until July 1994 when Mr. Tooker was appointed Chief
Executive Officer. Mr. Fuchs continues to serve as Chairman.
Mr. Tooker joined the Company as a Director, President and Chief Operating
Officer on July 1, 1993. On July 1, 1994, Mr. Tooker was appointed Chief
Executive Officer. Mr. Tooker has 24 years of experience in the retail
industry, 18 of which were spent in the May Co. where he served as Chairman
and Chief Operating Officer of Filene's of Boston from 1988 to 1990. In 1990,
Mr. Tooker joined Rich's, a division of Federated Department Stores, Inc., as
President and Chief Operating Officer, and in 1991 Mr. Tooker was promoted to
Chief Executive Officer of Rich's where he served until joining the Company
in 1993.
Mr. Shulman joined the Company in January 1994 as Executive Vice President
and Chief Merchandising Officer with 24 years of retailing experience. Prior
to joining the Company, Mr. Shulman held varying positions with
Bloomingdales, Rikes and I. Magnin, all of which are divisions of Federated
Department Stores, Inc. Mr. Shulman served as President and Chief Executive
Officer of Ann Taylor from 1985 to 1987, President and Chief Executive
Officer of Henri Bendel (a division of the Limited) from 1987 to 1990,
President and Chief Operating Officer of Bonjour, Inc. from 1990 to 1992, and
president of Leslie Fay Dress Division from 1992 to 1994.
41
<PAGE>
Mr. Marcum joined the Company in June 1995 as Executive Vice President and
Chief Financial Officer. Prior to joining the Company, Mr. Marcum held
various positions at the Melville Corporation where he was employed since
1983 and where he served as Treasurer from 1986 to 1989, Vice President and
Controller of Marshalls, Inc., a division of the Melville Corporation, from
1989 to 1990 and from 1990 to 1995 as Senior Vice President and Chief
Financial Officer of Marshalls, Inc. From 1980 to 1983, Mr. Marcum was
employed at Coopers and Lybrand L.L.P.
Mr. Lovell joined the Company in June 1995 as Executive Vice President and
Director of Stores. Before joining the Company, Mr. Lovell served in various
positions at Hit or Miss, a division of TJX Companies, where he was employed
since 1980 and where he served since January 1987 as Senior Vice President
and Director of Stores.
Mr. Lucas joined the Company in July 1995 as Senior Vice President, Human
Resources. Between 1987 and 1995, Mr. Lucas served as Vice President, Human
Resources at two different divisions of Limited, Inc., the Limited Stores
Division and Lane Bryant. Previously, he spent seventeen years at the Venture
Stores Division of May Co. where from 1985 to 1987 he was Vice President,
Organization Development.
Mr. Ivie has served as Senior Vice President, Secretary and Treasurer of
the Company since December 1988. Between 1976 and 1990, he served in various
capacities with Palais. From 1959 to 1976, Mr. Ivie was employed in the
finance department of Burdine's, a division of Federated Department Stores,
Inc.
Mr. Bekenstein has been a director since December 1988 and was Vice
Chairman of the Board of Directors and Chief Financial Officer of the Company
from May 1992 until June 1995 when Mr. Marcum was appointed Chief Financial
Officer. In March 1996, Mr. Bekenstein resigned as Vice Chairman. Mr.
Bekenstein continues to serve as a director. Mr. Bekenstein has been a
Managing Director of Bain Capital, Inc. since May 1993 and a General Partner
of Bain Venture Capital since its inception in 1987. Mr. Bekenstein also
currently serves on the Board of Directors of Waters Corporation.
Mr. Kirsch has been a director since June 1992 and has been a Managing
Director of Bain Capital, Inc. since May 1993 and a General Partner of Bain
Venture Capital since 1990 and was an associate and principal of Bain from
1987 to 1990. Mr. Kirsch also currently serves as a director of Brookstone,
Inc., Duane Reade Holding Corp., Diagnostics Holdings Inc. and the
Wesley-Jessen Corporation.
Mr. Mulvihill has been a director since December 1988. Mr. Mulvihill has
served as a Managing Director of Oak Hill Partners, Inc. (the management
company for Acadia) since 1993. From June 1987 to 1993, Mr. Mulvihill worked
for and was associated with Rosecliff, Inc. (the predecessor of Oak Hill).
Prior to joining Rosecliff, Mr. Mulvihill was an investment banker with
Drexel Burnham Lambert Incorporated in the corporate finance department from
1985 to 1987. Mr. Mulvihill also serves as a director of Harvest Foods, Inc.,
an Arkansas-based grocery chain.
Mr. Meyer served as Vice-Chairman and Chief Merchandising Officer of SRI
from May 1989 until he retired in December 1993. Mr. Meyer has been a
director since 1988. Mr. Meyer was at Foley's from 1959 until 1987, when he
retired from his position as Chairman and Chief Executive Officer.
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or
removal. Currently, certain members of the Board of Directors are elected
pursuant to a stockholders agreement, which will be terminated upon
completion of the Offering. There are no family relationships between any of
the Directors or executive officers of the Company. Following the
consummation of the Offering each director shall serve until the following
annual meeting when a successor is duly elected and qualified or until his or
her earlier death, resignation or removal.
42
<PAGE>
Executive Compensation
Summary Compensation Table
The following summarizes the principal components of compensation of the
Company's Chief Executive Officer and the four highest compensated executive
officers. The compensation set forth below fully reflects compensation for
work performed on behalf of the Company.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------- --------------
Other
Annual Securities All Other
Fiscal Salary Bonus Compensation Underlying Comp.
Name and Principal Position Year ($) ($) ($) Options/SARs(#) ($)(1)
- --------------------------- ------ ------- ------ ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bernard Fuchs, 1995 437,500 28,870 189,375(2) -- 252
Chairman and 1994 450,000 65,265 35,625(3) -- 1,260
Director 1993 450,000 59,200 3,713,000(4) 186,612 1,260
Carl Tooker,
President, 1995 538,416 43,305 67,600(5) -- 87
Chief Executive Officer and 1994 468,750 56,128 67,600(5) 47,363 174
Director 1993 247,916 75,000 132,116(6) 189,454 --
Mark Shulman, 1995 302,082 75,000 9,600(7) 14,208 783
Executive Vice President and 1994 276,614 41,250 393,984(8) 94,727 160
Chief Merchandising Officer 1993 -- -- -- -- --
James Marcum, 1995 183,333 55,000 184,722(9) 94,727 173
Executive Vice President and 1994 -- -- -- -- --
Chief Financial Officer 1993 -- -- -- -- --
Stephen Lovell, 1995 183,333 55,000 173,535(10) 71,045 268
Executive Vice President, 1994 -- -- -- -- --
Director of Stores 1993 -- -- -- -- --
</TABLE>
- ---------------
(1) Amounts shown for 1995 reflect premiums paid for life insurance coverage.
(2) Amount shown reflects a distribution related to options vested of $35,625
and the value realized upon the exercise of options for Common Stock of
$153,750. Value realized is based upon the Fair Market Value (as defined)
of the stock at the exercise date minus the exercise price.
(3) Amount shown reflects a distribution related to options vested.
(4) Amount shown reflects the value realized upon the exercise of options for
Common Stock. Value realized is based upon the Fair Market Value of the
stock at the exercise date minus the exercise price.
(5) Amount shown reflects a distribution related to options vested of $38,000
and housing and automobile allowances of $29,600 paid to Mr. Tooker
during 1994 and 1995.
(6) Amount shown reflects moving expenses of $114,861 and housing and
automobile allowances of $17,255 paid to Mr. Tooker during 1993.
(7) Amount shown reflects housing and automobile allowances paid to Mr.
Shulman during 1995.
(8) Amount shown reflects moving expenses of $385,184 and housing and
automobile allowances of $8,800 paid to Mr. Shulman during 1994.
(9) Amount shown reflects moving expenses paid to Mr. Marcum during 1995.
(10) Amount shown reflects moving expenses of $167,935 and housing and
automobile allowances of $5,600 paid to Mr. Lovell during 1995.
43
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following discloses options granted during 1995 for the executives
named in the compensation table above.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------------------------------- Value at Assumed Annual
Number of % of Total Rates of Stock Price Appreciation
Securities Options/SARs for Option Term
Underlying Granted to --------------------------------------
Options/SARs Employees in Exercise of Expiration 5% Annual 10% Annual
Name Granted(#)(1) Fiscal Year (%) Base Price ($) Date Growth Rate ($) Growth Rate ($)
- ------------------ -------------- ---------------- --------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark Shulman 14,209 3.5 3.04 6/10/05 27,000 68,850
James Marcum 94,727 23.2 3.04 6/01/05 180,000 459,000
Stephen Lovell 71,045 17.4 3.04 6/01/05 135,000 344,250
</TABLE>
- ---------------
(1) All of such options were granted under the 1993 Option Plan (as defined).
The options granted under such plan are subject to vesting and repurchase
provisions upon termination of employment.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
The following summarizes exercises of stock options (granted in prior
years) during 1995 by the executives named in the compensation table above in
the past year, as well as the number and value of all unexercised options
held by the named officers at the end of 1995.
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)(2)
----------------- -----------------------
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)(1) Unexercisable Unexercisable
------------------ --------------- ------------ ----------------- -----------------------
<S> <C> <C> <C> <C>
Bernard Fuchs 79,949 153,750 44,426/62,235 210,540/264,120
Carl Tooker -- -- 85,254/151,563 420,000/702,000
Mark Shulman -- -- 37,890/71,045 114,000/202,800
James Marcum -- -- -/94,727 -/212,000
Stephen Lovell -- -- -/71,045 -/159,000
</TABLE>
- ---------------
(1) Value is based upon the fair market value of the stock at the applicable
date minus the exercise price (the "Fair Market Value"). Fair Market
Value has been determined in good faith by the Board of Directors based
upon historical and projected financial performance.
(2) Value is based upon the Fair Market Value of the stock as of February 3,
1996 minus the exercise price.
Compensation of Directors
During 1995, Mr. Meyer received cash compensation of $25,000 for services
rendered as a director. The Company expects that its independent outside
directors will be paid in a manner and at a level consistent with industry
practice.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Mr. Fuchs and Mr.
Bekenstein, who served in such capacities during the last fiscal year. Mr.
Fuchs abstains from voting on matters relating directly to his compensation
as an executive officer. See "Certain Relationships and Related Transactions"
for a description of certain transactions between Mr. Fuchs and the Company
and Bain and the Company.
44
<PAGE>
Management And Employment Agreements
Fuchs Management Agreement
The Company, Bain and certain of its affiliates, Citicorp and Bernard
Fuchs entered into a management agreement (the "Fuchs Management Agreement"),
dated as of May 26, 1989 and amended effective February 1, 1993, pursuant to
which (i) the Company employed Mr. Fuchs as an executive officer and (ii) Mr.
Fuchs purchased from Bain and certain of its affiliates, and an affiliate of
Citicorp, in the aggregate, 278,259 shares of the Company's common stock for
$0.09 per share and 250 shares of the Company's senior preferred stock for
$1,000 per share (subsequently redeemed in connection with the Refinancing).
The Fuchs Management Agreement provides that transfers of common stock by Mr.
Fuchs are subject to certain rights to first offer and refusal of the Company
and the other parties to the Fuchs Management Agreement.
Pursuant to the Fuchs Management Agreement, Mr. Fuchs served as Chairman
of the Board and Chief Executive Officer until July 1, 1994 when Mr. Tooker
was appointed Chief Executive Officer. Mr. Fuchs continues to serve as
Chairman. The Fuchs Management Agreement, as amended, provides for a base
salary plus an annual incentive bonus based on an increase in the Company's
pretax income (excluding any increase or decrease in pretax income
attributable to any financial restructuring) as compared to the fiscal year
in which the Company recorded its highest pretax income prior to the fiscal
year for which the bonus is being paid. The incentive bonus is applicable to
fiscal years 1993 through 1998. Mr. Fuchs may also be awarded discretionary
bonuses by the Company's Compensation Committee elected by the Board of
Directors. The Fuchs Management Agreement generally restricts Mr. Fuchs from
competing with the Company or its subsidiaries for a period of 24 months
after his termination, except for termination without cause. Pursuant to the
Fuchs Management Agreement, Mr. Fuchs' base salary for 1996, 1997 and 1998
shall be $300,000, $200,000 and $100,000, respectively. The Fuchs Management
Agreement terminates at the end of 1998.
In connection with the February 1993 amendment to the Fuchs Management
Agreement, the Company also entered into a stock option agreement with Mr.
Fuchs providing the grant of options to acquire up to 142,090 shares of SRI's
common stock at an original purchase price of $5.28 per share. Such options
are subject to vesting and repurchase restrictions. In connection with the
formation of the Company, such options were converted into options to acquire
shares of Common Stock at a price of $0.11 per share and the right to receive
payments equaling $1.00 per option share ratably over the vesting schedule.
Tooker Employment Agreement
The Company and Carl Tooker expect to enter into an employment agreement
(the "Tooker Employment Agreement") prior to the completion of the Offering
which will provide for Mr. Tooker's employment as President and Chief
Executive Officer. The Tooker Employment Agreement will provide for an
initial base salary of $600,000 plus an annual incentive bonus as agreed to
with the Compensation Committee. The Tooker Employment Agreement also will
provide for annual performance and salary reviews, and for participation in
all other bonus and benefit plans available to executive officers of the
Company.
If the Company terminates Mr. Tooker other than for good cause, (as
defined in the Tooker Employment Agreement) or if Mr. Tooker voluntarily
terminates his employment for good reason, Mr. Tooker would be entitled to 18
months' base salary, any accrued or unpaid bonus, salary and deferred
compensation, any expense allowances and any earned but unpaid benefits under
the Company's benefit plans. The Tooker Employment Agreement also will
provide that, following a change in control (as defined in the Tooker
Employment Agreement) if Mr. Tooker is terminated other than for good cause
or Mr. Tooker resigns other than for good reason, Mr. Tooker would be
entitled to three years' base salary (as opposed to eighteen months) plus the
amounts referred to above. In the event of a change of control of the Company
in which the Company does not survive, all unvested options for the purchase
of Common Stock held by Mr. Tooker would vest immediately. The Tooker
Employment Agreement will contain certain non-compete and confidentiality
provisions. The Tooker Employment Agreement will renew annually in accordance
with its terms unless terminated by either party.
Other Employment Agreements
The Company expects to enter into employment agreements with Messrs.
Shulman, Marcum, Lovell and Lucas prior to the completion of the Offering
which will provide for their initial base salaries as well as annual
incentive bonuses as agreed to with the Compensation Committee. The
employment agreements also will provide for annual
45
<PAGE>
performance reviews, salary increases at the discretion of the Compensation
Committee, and participation in all other bonus and benefit plans available
to executive officers of the Company. The initial base salaries, which will
be provided for in the individual employment agreements, are as follows:
<TABLE>
<CAPTION>
Initial Base
Executive Position Salary
- ----------------- --------------------------------------- ----------------
<S> <C> <C>
Mark Shulman Executive Vice President and $350,000
Chief Merchandising Officer
James Marcum Executive Vice President and $300,000
Chief Financial Officer
Stephen Lovell Executive Vice President and $300,000
Director of Stores
Ron Lucas Senior Vice President, Human $190,000
Resources
</TABLE>
If the Company terminates any of the aforementioned individuals, other
than for good cause (as defined in the respective employment agreements),
then the terminated individual would be entitled to one year's base salary,
any accrued or unpaid bonus, salary and deferred compensation, any expense
allowances, and any earned but unpaid benefits under the Company's benefit
plans. The employment agreements also will provide that, following a change
of control (as defined in the respective employment agreements), the
respective individual would be entitled to two years' base salary (as opposed
to one) plus the amounts referred to above. In the event of a change of
control of the Company in which the Company does not survive, all unvested
options for the purchase of Common Stock held by the aforementioned
individuals would vest immediately. The employment agreements will contain
certain non-compete and confidentiality provisions. Each of the employment
agreements will renew annually in accordance with its terms unless terminated
by either party.
1993 Stock Option Plan
In 1993, the Company adopted the Third Amended and Restated Stock Option
Plan, a successor plan to prior SRI plans (the "1993 Stock Option Plan"),
designed to provide incentives to present and future executive, managerial,
marketing, technical, other key employees, and consultants and advisors of
the Company and its subsidiaries as selected in the sole discretion of the
Board of Directors. The 1993 Stock Option Plan provided for aggregate option
grants of up to 1,894,540 shares. As of September 20, 1996, options to
purchase an aggregate of 1,511,523 shares of Common Stock at prices from
$0.11 to $21.11 are currently outstanding under the 1993 Stock Option Plan.
In connection with the Offering, the Compensation Committee has granted
options to purchase 255,762 shares of Common Stock under this plan to members
of executive management at an exercise price of $21.11 per share with a
five-year cliff vesting requirement. No additional grants shall be made under
the 1993 Stock Option Plan after the consummation of the Offering.
1996 Equity Incentive Plan
In connection with the Offering, the Company has adopted the 1996 Equity
Incentive Plan (the "Incentive Plan") designed to update and replace the 1993
Stock Option Plan.
The Incentive Plan provides for the granting to employees and other key
individuals who perform services for the Company and its subsidiaries
("Participants") of the following types of incentive awards: stock options,
stock appreciation rights ("SARs"), restricted stock, performance units,
performance grants and other types of awards that the Board of Directors or
the Compensation Committee (the "Plan Administrator") deems to be consistent
with the purposes of the Incentive Plan. An aggregate of 1,500,000 shares of
Common Stock have been reserved for issuance under the Incentive Plan;
however, no Participant shall be entitled to receive grants of Common Stock,
stock options or SARs with respect to Common Stock, in any calendar year in
excess of 400,000 shares in the aggregate. The Incentive Plan affords the
Company latitude in tailoring incentive compensation for the retention of key
personnel, to support corporate and business objectives, and to anticipate
and respond to a changing business environment and competitive compensation
practices.
The Plan Administrator will have exclusive discretion to select the
Participants and to determine the type, size and terms of each award, to
modify the terms of awards, to determine when awards will be granted and
paid, and to make all other determinations which it deems necessary or
desirable in the interpretation and administration of the Incentive Plan. The
Incentive Plan is scheduled to terminate ten years from the date that the
Incentive Plan was initially approved and adopted by the stockholders of the
Company, unless extended for up to an additional
46
<PAGE>
five years by action of the Board of Directors. With limited exceptions,
including termination of employment as a result of death, disability or
retirement, or except as otherwise determined by the Plan Administrator,
rights to these forms of contingent compensation are forfeited if a
recipient's employment or performance of services terminates within a
specified period following the award. Generally, a Participant's rights and
interest under the Incentive Plan will not be transferable except by will or
by the laws of descent and distribution.
Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock
at a price fixed by the Plan Administrator. The option price may be less
than, equal to or greater than the fair market value of the underlying shares
of Common Stock, but in no event less than the fair market value on the date
of grant. Options generally will expire not later than ten years after the
date on which they are granted. Options will become exercisable at such times
and in such installments as the Plan Administrator shall determine. Payment
of the option price must be made in full at the time of exercise in such form
(including, but not limited to, cash or Common Stock of the Company) as the
Plan Administrator may determine.
An SAR may be granted alone, or in tandem with another option or award, or
a holder of an option or other award may be granted a related SAR, either at
the time of grant or by amendment thereafter. In the event that an SAR is
granted in tandem with another award, the holder of the SAR must surrender
the SAR and surrender, unexercised, any related option or other award, and
the holder will receive in exchange, at the election of the Plan
Administrator, cash or Common Stock or other consideration, or any
combination thereof, equal in value to the difference between the exercise
price or option price per share and the fair market value per share on the
last business day preceding the date of exercise, times the number of shares
subject to the SAR or option or other award, or portion thereof, which is
exercised.
A restricted stock award is an award of a given number of shares of Common
Stock which are subject to a restriction against transfer and to a risk of
forfeiture during a period set by the Plan Administrator. During the
restriction period, the Participant generally has the right to vote and
receive dividends on the shares. Dividends received while under restriction
are treated as compensation.
Performance grants are awards whose final value, if any, is determined by
the degree to which specified performance objectives have been achieved
during an award period set by the Plan Administrator, subject to such
adjustments as the Plan Administrator may approve based on relevant factors.
Performance objectives are based on such measures of performance, including,
without limitation, measures of industry, Company, unit or Participant
performance, or any combination of the foregoing, as the Plan Administrator
may determine. The Committee may make such adjustments in the computation of
any performance measure as it deems appropriate. A target value of an award
is established (and may be amended thereafter) by the Plan Administrator and
may be a fixed dollar amount, an amount that varies from time to time based
on the value of a share of Common Stock, or an amount that is determinable
from other criteria specified by the Plan Administrator. Payment of the final
value of an award is made as promptly as practicable after the end of the
award period or at such other time or times as the Plan Administrator may
determine.
Upon the liquidation or dissolution of the Company all outstanding awards
under the Incentive Plan shall terminate immediately prior to the
consummation of such liquidation or dissolution, unless otherwise provided by
the Plan Administrator. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, all restrictions on any outstanding awards
may lapse and Participants may be entitled to the full benefit of such
awards, as determined by the Plan Administrator, immediately prior to the
closing date of such sale or merger.
Certain Federal Tax Consequences under the Incentive Plan
The following discussion addresses certain federal income tax consequences
under current law to recipients of awards made under the Incentive Plan. The
following discussion is intended only as a general summary of the federal
income tax consequences arising under the Incentive Plan based upon the
Internal Revenue Code of 1986, as amended (the "Code") as currently in
effect. Because federal income tax consequences will vary as a result of
individual circumstances, each Participant should consult his tax advisor
with respect to the tax consequences of such participation. Moreover, the
following summary relates only to a Participants' federal income tax
treatment, and the state, local and foreign tax consequences may be
substantially different.
47
<PAGE>
A Participant to whom a nonqualified stock option is granted will not
recognize any income at the time of the grant. When a Participant exercises a
nonqualified stock option, he generally will recognize ordinary compensation
income equal to the difference, if any, between the fair market value of the
Common Stock he receives at such time and the option's exercise price. The
Participant's tax basis in such shares will be equal to the exercise price paid
plus the amount includable in his gross income as compensation, and his holding
period for such shares will begin on the day on which he recognizes taxable
income in respect of such shares.
A Participant to whom an incentive stock option is granted will not
recognize any ordinary income at the time of grant or at the time of
exercise. However, upon the exercise of an incentive stock option, the
Participant generally will be required to include the excess of fair market
value of the Common Stock over the option's exercise price in his alternative
minimum taxable income and, as a result, he may be subject to an alternative
minimum tax ("AMT"). In order to obtain incentive stock option treatment for
federal income tax purposes, a Participant (i) must be an employee of the
Company or a subsidiary continuously from the date of grant until any
termination of employment and (ii) in the event of such a termination, must
exercise an incentive stock option within three months after such
termination, except if disabled, in which case exercise may occur within one
year from the date of termination of employment. If a Participant holds
Common Stock received upon the exercise of an incentive stock option for more
than one year after exercise and more than two years after the option was
granted (the "Statutory Holding Periods"), then upon a sale of such Common
Stock he will recognize long-term capital gain or loss equal to the
difference, if any, between the sale price of such shares and the option's
exercise price. If the Participant has not held such shares for the Statutory
Holding Periods, when he sells such share (a "disqualifying disposition") he
will recognize ordinary compensation income equal to the lesser of (i) the
excess, if any, of the fair market value of such shares on the date of
exercise over the exercise price or (ii) the excess, if any, of the sale
price over the exercise price. Any additional gain or any loss on such sale
will constitute capital gain or loss, short- or long-term depending upon
whether the Participant has held the Common Stock for more than one year
after the exercise date. The tax basis of such shares to the Participant, for
purposes of computing such other gain or loss, will be equal to the exercise
price paid plus the amount includable in his gross income as compensation, if
any.
A participant will not recognize any taxable income as a result of the
inclusion of SARs in a nonqualified stock option or an incentive stock
option. At the time of exercise, a Participant generally will recognize
ordinary compensation income in an amount equal to the cash and the fair
market value of the Common Stock he receives to satisfy his SARs. The
Participant's tax basis in any such shares received pursuant to a SAR will be
equal to the amount includable in his gross income as compensation in respect
of such shares, and the Participant's holding period therefor will begin on
the day on which he recognizes taxable income in respect of such shares.
With respect to restricted stock awards, unless he files a timely election
with the Internal Revenue Service under Section 83(b) of the Code (a "Section
83(b) election"), a Participant who receives Common Stock pursuant to a
restricted stock award will not recognize any taxable income upon the receipt
of such award, but will recognize taxable compensation income at the time his
interest in such shares is no longer subject to the repurchase option imposed
by the Plan in an amount equal to the fair market value of such shares at
such time. Alternatively, by filing a Section 83(b) election within 30 days
after the shares are granted, the Participant may elect to recognize ordinary
income equal to the fair market value of the shares on the grant date. In
either event, the Participant's tax basis in such shares will be equal to the
amount includable in his gross income as compensation, and his holding period
for such shares will begin on the date his compensation income is determined.
If a Participant does not make a Section 83(b) election, dividends paid on
restricted stock awards will be includable in his income as compensation when
received.
A Participant to whom a performance grant award is made will not recognize
taxable income at the time such award is made. Such Participant generally
will recognize taxable income, however, at the time cash, Common Stock or
other Company securities or property are paid to him pursuant to such award
in an amount equal to the amount of such cash and the fair market value at
such time of such shares, securities or property. The tax basis of any such
shares, securities or property received by a Participant pursuant to a
performance grant award will be equal to the amount includable in his gross
income as compensation in respect of such shares, securities or property, and
the holding period therefor will begin on the day on which he recognizes
taxable income in respect of such shares, securities or property. Any income
equivalents paid to a Participant with respect to his performance grant award
should generally be regarded as compensation.
If a Participant who receives Common Stock under the Incentive Plan
(whether pursuant to the exercise of an option, as a restricted stock award,
or as a performance grant award) is subject to Section 16(b) of the
Securities
48
<PAGE>
Exchange Act of 1934, as amended (the "Exchange Act") (such recipient, an
"Insider"), the tax consequences may be different from those described above.
Generally, an Insider will not recognize income (or, in the case of the
exercise of an incentive stock option, alternative minimum taxable income) on
receipt of Common Stock until he is no longer subject to liability with
respect to the disposition of such Common Stock. However, by filing a Section
83(b) election with the Internal Revenue Service no later than 30 days after
the date of transfer of property (e.g., after exercise of a nonqualified
stock option that was granted within six months of such exercise to the
extent a six month holding period is required), an Insider may elect to be
taxed based upon the fair market value of the Common Stock at the time of
such transfer.
Subject to certain limitations described in the next paragraph, the
company for which a Participant is performing services generally will be
allowed to deduct amounts that are includable in the Participant's income as
ordinary compensation income at the time such amounts are so includable,
provided that such amounts qualify as reasonable compensation for personal
services actually rendered.
With limited exceptions, the Company may not deduct certain compensation
paid to its chief executive officer or any of its four other highest paid
executives to the extent such compensation exceeds $1 million in any taxable
year. Depending on the circumstances, some or all of the compensation paid to
such an executive under the Incentive Plan may be nondeductible.
Company Retirement Plans
Retirement Plan. The Specialty Retailers, Inc. Restated Retirement Plan
(the "Retirement Plan") is a qualified defined benefit plan. Benefits under
the Retirement Plan are administered through a trust arrangement providing
benefits in the form of monthly payments or a single lump sum payment. The
Retirement Plan covers substantially all employees who have completed one
year of service with 1,000 hours of service. The Retirement Plan is
administered by the retirement plan committee (the "Retirement Committee"),
and its three to five members are appointed by the Company. All
determinations of the Retirement Committee are made in accordance with the
provisions of the Retirement Plan in a uniform and nondiscriminatory manner.
Generally, a participant is eligible for a benefit on his/her normal
retirement date, which is the later of age 65 or the fifth anniversary of the
date of hire. A participant may elect an early retirement benefit if he/she
is at least 55 years old, has 10 Years of Service (as defined below) and
retires from active employment with the Company. Early retirement benefits
are reduced according to a formula established in the Retirement Plan based
upon each full month that the participant's age is less than 65 on the date
the payments commence. If a participant who is vested terminates employment,
he/she is entitled to a deferred benefit payable at his/her normal retirement
date or an earlier date, if requested, but not before age 55.
The amount of a participant's retirement benefit is based on each Year of
Credited Service (as defined below) and on his/her earnings for that year.
The individual yearly benefits are then totaled to determine the annual
benefit at age 65. A participant's accrued benefits in the superseded plan
are determined in accordance with the terms of those plans except as modified
by the terms of the Retirement Plan. The annual amount of the participant's
normal retirement benefit is derived, subject to certain limitations, by
adding (i) 1% of earnings up to $30,600 plus 1-1/2% of the excess of such
earnings over $30,600 for each Year of Credited Service earned on or after
July 1, 1989 through December 31, 1991, (ii) 1% of earnings up to $31,800
plus 1-1/2% of the excess of such earnings over $31,800 for each Year of
Credited Service earned after December 31, 1991, (iii) 1% of earnings up to
$42,500 plus 1-1/2% of the excess of such earnings over $42,500 for each Year
of Credited Service earned after December 31, 1994 and (iv) accrued benefits
determined in accordance with the terms of the Retirement Plan under any
superseded plan. The normal retirement benefit formula produces an annual
benefit which is paid to the participant in equal monthly installments. The
standard form of payment for a single participant is a monthly benefit
payable for the participant's life only. The standard form of payment for a
married participant is a 50% joint and survivor benefit, which provides a
reduced monthly benefit to the participant during his/her lifetime, and 50%
of that benefit to the participant's spouse for his/her lifetime in the event
of the participant's death. Other forms of the payment are also provided
including lump sum payouts, but they require participant election. In
addition, the Retirement Committee may elect to pay the benefit equivalent of
a benefit payable at normal retirement date in the form of a lump sum
payment, if the lump sum payment does not exceed $3,500.
Any participant who is credited with 1,000 or more hours of service in a
calendar year receives a "Year of Service", while any participant who is
credited with 1,284 or more hours of service in a calendar year receives
49
<PAGE>
a "Year of Credited Service". Years of Service determine a participant's
eligibility for benefits under the Retirement Plan, and the percentage vested
in those benefits. After five Years of Service, a participant is 100% vested.
Participants in any superseded plan earn Years of Service and Years of
Credited Service pursuant to sightly different criteria for plan years
beginning prior to January 1, 1990.
The Retirement Plan is funded entirely by Company contributions which are
held by a trustee for the exclusive benefit of the participants. The Company
voluntarily agreed to contribute the amounts necessary to provide the assets
required to meet the future benefits payable to Retirement Plan participants.
Under the Retirement Plan, contributions are not specifically allocated to
individual participants. Although the Company intends to continue the
Retirement Plan indefinitely, it can terminate the plan at any time, upon
which all participants will become 100% vested in any benefit accrued to the
extent funds are available in trust. In this event, assets will be allocated
to benefit categories in the order specified in the Retirement Plan.
The Benefit Equalization Plan. The Specialty Retailers, Inc. Benefit
Equalization Plan (the "Equalization Plan") is a nonqualified defined benefit
plan which is intended to replace the benefits that cannot be provided under
the terms of the Retirement Plan on account of certain limitations imposed
under the Internal Revenue Code (for example, the Retirement Plan cannot
consider compensation for a participant which is in excess of $150,000 when
determining the participant's benefit). The Equalization Plan is unfunded.
However, upon a change of control as defined in the Equalization Plan, the
Company is required to deposit into a rabbi trust sufficient funds to cover
all obligations then accrued under the Equalization Plan.
Supplemental Employee Retirement Plan. In 1996, the Company adopted the
Specialty Retailers, Inc. Supplemental Employee Retirement Plan (the "SERP").
The SERP provides for certain retirement benefits for the Company's senior
management upon retirement at or after age 65 with at least 15 years of
credited service with the Company. The SERP provides for annual retirement
compensation of 50% of the retiree's average annual base salary for the three
years preceding retirement, less amounts received under the Company's defined
benefit retirement plans. Participants in the SERP may elect to receive early
retirement benefits at or after age 55 with at least 15 years of credited
service. Early retirement benefits are reduced by 4% for each year an
executive retires before age 65. SERP Benefits are vested after 15 years of
service. Upon a change of control as defined in the SERP, the Company is
required to deposit into a rabbi trust sufficient funds to cover all
obligations then accrued under the SERP. If a participant's employment is
terminated after a change in control by the Company without cause or by the
participant for good reason, the participant will be fully vested in the
benefit that would have been payable at age 55. This amount will be paid to
the participant in a lump sum upon termination of employment.
The estimated annual benefits payable upon retirement under the Retirement
Plan, Equalization Plan and SERP at normal retirement age, subject to certain
adjustments permitted by applicable federal law, for the individuals named in
the cash compensation table above would be as follows (assuming no increase
in compensation): Mr. Fuchs--$0; Mr. Tooker--$300,000; Mr. Shulman--$175,000;
Mr. Marcum--$150,000; and Mr. Lovell-- $150,000. No amounts were paid or
distributed during 1995 or to date in 1996 pursuant to any of the above plans
to any of the individuals named or included in the group in the cash
compensation table above.
Company Deferred Compensation Plan
On February 26, 1996 and effective April 1, 1996, the Company adopted the
Specialty Retailers, Inc. Deferred Compensation Plan (the "Deferred
Compensation Plan") that provides officers of the Company with the
opportunity to participate in an unfunded, deferred compensation program that
is not qualified under the Code. Generally, the Code and the Employee
Retirement Income Security Act of 1974, as amended, restrict contributions to
a 401(k) plan by highly compensated employees. The Deferred Compensation Plan
is intended to allow officers to defer income at the same rates as those
employees not restricted by such regulations. Under the Deferred Compensation
Plan, participants may defer up to 15% of their salary and bonus (not
otherwise covered by the Company's 401(k) plan) and earn a rate of return
based on select indices chosen by each participant. The Company may, but is
not obligated to, establish a grantor trust for the purposes of holding
assets to provide benefits to the participants. The Company will match 25% of
the first 6% of each participant's contributions to the Deferred Compensation
Plan not otherwise covered by the Company's 401(k) plan. Company
contributions vest over five years of service.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management
The Company's corporate headquarters in Houston and the land and buildings
upon which six Palais stores are located are leased from PR Investments, a
partnership in which Mr. Fuchs, his wife and certain former owners of Palais
are general partners. The lease relating to the Company's corporate
headquarters is for a term of 50 years expiring in 2032 and includes an
established minimum annual rent adjusted periodically for changes in the
Consumer Price Index ("CPI"). Three of the Palais store leases with PR
Investments are for terms of 20 years expiring in the years 1999, 1999 and
2000, respectively. The remaining three Palais store leases with PR
Investments are for 25-year terms expiring in the years 2005, 2010 and 2010,
respectively. All of the Palais store leases with PR Investments provide
Palais with the option to extend the term of the lease for two consecutive
five-year terms. One of the Palais leases with PR Investments provides Palais
with the option to extend the term of the lease for an additional 20 years.
In addition to an established minimum annual rent adjusted annually for
changes in the CPI, the above described store leases include additional rent
calculated at 4% of gross sales exceeding established levels per store.
During 1993, 1994 and 1995, the Company paid PR Investments an aggregate of
$1.9 million, $2.0 million and $2.1 million, respectively, under the leases
described above.
The Company has made loans, in an aggregate principal amount of $774,700,
to certain executive officers of the Company. These loans are full recourse
loans and are secured by a pledge of the shares of Common Stock owned by such
executive officers. The following executive officers' loans bear interest at
5.7% interest and have a maturity date of April 15, 1997: Carl Tooker,
$343,200, Mark Shulman, $230,300, James Marcum, $115,000, Stephen Lovell,
$86,200. In addition, the following executive officers have the following
full recourse loans outstanding which bear market rates of interest: Carl
Tooker, $380,000, James Marcum, $75,000, Stephen Lovell, $150,000.
Professional Services Agreement
Pursuant to a professional service agreement (the "Professional Services
Agreement"), Bain received fees from the Company for professional services
rendered and expense reimbursements in the aggregate amount of $1.5 million
in 1993, $0.6 million in 1994, $0.8 million in 1995 and $0.5 million in 1996
prior to the Offering. Upon consummation of the Offering, Bain will receive a
fee of $2.0 million to terminate this agreement.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The Company's authorized equity consists of Common Stock and Class B
Common Stock. Except as otherwise described herein, all shares of Common
Stock and Class B Common Stock are identical and entitle the holders thereof
to the same rights and privileges (except with respect to voting privileges).
Holders of Class B Common Stock may elect at any time to convert any or all
of such shares into Common Stock, on a share-for-share basis, to the extent
the holder thereof is not prohibited from owning additional voting securities
by virtue of regulatory restrictions. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Except as required by law, holders of Class B Common Stock do
not have the right to vote on any matters to be voted upon by the
stockholders. As of September 20, 1996, 1,351,967 shares of Class B Common
Stock were outstanding, 1,250,584 of which were owned by Court Square. Except
for the column relating to voting power, the numbers and percentages of
shares of Common Stock held by holders of the Class B Common Stock are
calculated assuming all Class B Common Stock is converted.
The table below sets forth certain information regarding ownership of
Common Stock as of September 20, 1996 assuming exercise of options
exercisable within sixty days of such date by (i) each person or entity who
owns of record or beneficially 5% or more of the Common Stock, (ii) each
director and named executive officer and (iii) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
Number of Percentage of Percentage of Percentage of
Shares of Voting Power Total Shares Total Shares
Common Prior to Owned Prior Owned After
Name Stock Owned the Offering to the Offering the Offering(1)
- ------------------------------------- -------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Bain Capital Funds(2) 5,012,868 44.4% 39.7% 22.1%
Acadia (3) 3,330,095 29.5 26.4 14.7
Court Square (4) 1,620,651 3.1 12.8 7.2
Bernard Fuchs (5) 1,067,526 9.5 8.4 4.7
Joshua Bekenstein (6) 5,080,343 45.0 40.2 22.4
Adam Kirsch (6) 5,059,032 44.8 40.0 22.4
Carl Tooker 141,901 1.3 1.1 *
Mark Shulman 40,733 * * *
Jerry Ivie (7) 32,323 * * *
Lasker Meyer (8) 12,800 * * *
Stephen Lovell 14,209 * * *
James Marcum 18,945 * * *
Peter Mulvihill (9) 0 * * *
All executive officers and directors
as a group (10 Persons) (10) 6,454,944 57.2% 51.1% 28.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Percentages are calculated without giving effect to the Underwriters'
over-allotment option. See "Over-Allotment Option."
(2) Includes 3,951,122 shares of Common Stock held by Tyler Capital Fund,
L.P.; 809,567 shares of Common Stock held by Tyler Massachusetts, L.P.;
236,814 shares of Common Stock held by Tyler International; 15,067 shares
of Common Stock held by BCIP Associates ("BCIP Associates"); and 295
shares of Common Stock held by BCIP Trust Associates, L.P. ("BCIP Trust"
and, collectively with BCIP Associates and the Tyler entities, the "Bain
Capital Funds"). The address of the Bain Capital Funds is c/o Bain
Venture Capital, Two Copley Place, Boston, Massachusetts 02116.
(3) Amounts shown represent shares held by the nominee of Acadia and shares
held by FWHY-Coinvestment I Partner L.P. ("FCP") and Oak Hill, both
affiliates of Acadia. The address of Acadia and FCP is 201 Main Street,
Fort Worth, Texas 76102. The address of Oak Hill is 65 East 55th Street,
New York, New York 10022.
52
<PAGE>
(4) Court Square is a subsidiary of Citicorp, a Delaware corporation. Amount
and percentage shown as owned include 1,250,584 shares of non-voting
Class B Common Stock owned by Court Square. Each share of non- voting
Class B Common Stock is convertible, subject to certain restrictions,
into one share of Common Stock. The address of Court Square is 399 Park
Avenue, 6th Floor, New York, New York 10043.
(5) Amount shown for Mr. Fuchs includes (i) 445,216 shares held by The Fuchs
Family Limited Partnership for which Mr. Fuchs may be deemed to possess
beneficial ownership and (ii) 8,904 options which are exercisable within
60 days.
(6) Amounts shown include shares beneficially owned by the Bain Capital
Funds. Mr. Bekenstein and Mr. Kirsch may be deemed to share voting and
dispositive power as to all shares owned by the Bain Capital Funds.
(7) Includes 334 shares of Common Stock that may be acquired through options
exercisable within 60 days.
(8) Includes 1,670 shares of Common Stock that may be acquired through
options exercisable within 60 days.
(9) Mr. Mulvihill is a director and a managing director of the investment
adviser to Acadia. In addition, Mr. Mulvihill holds indirectly a limited
interest in Acadia and holds directly a limited interest in Oak Hill.
However, he does not hold or share voting or dispositive power as to
shares beneficially owned by Acadia or Oak Hill.
(10) Amount shown includes 10,908 shares of Common Stock that such persons or
group could acquire upon the exercise of options exercisable within 60
days.
OVER-ALLOTMENT OPTION
The Company, along with the Bain Capital Funds and Acadia (the "Selling
Stockholders") have granted the Underwriters a 30-day option (the "Option")
to purchase up to an additional 1,500,000 shares of Common Stock to cover
over-allotments of shares in connection with the Offering. Of such amount,
the Company will sell up to 750,000 additional shares, and the Selling
Stockholders will sell up to 750,000 outstanding shares. The following table
sets forth information as of September 20, 1996, with respect to the
beneficial ownership of Common Stock held by each of the Selling Stockholders
before and after the exercise of the Option (assuming the Option is exercised
in full).
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Exercise After Exercise
------------------------- Number of --------------------------
Number of Shares Being Number of
Selling Stockholders Shares Percent Offered Shares Percent
- ----------------------- ------------ ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Bain Capital Funds 5,012,868 22.1% 450,635 4,562,233 19.6%
Acadia 3,330,095 14.7 299,365 3,030,730 13.0
</TABLE>
53
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
Revolving Credit Agreements
The Company may draw up to $25.0 million under the Revolving Credit
Agreements. Of this amount, up to $15.0 million may be used to support
letters of credit. As of February 3, 1996, $8.4 million of the total
commitment was used to collateralize letters of credit resulting in available
funds of $16.6 million. In addition, $10.0 million are available under the
Seasonal Credit Agreement during the Seasonal Period for working capital
needs. The Revolving Credit Agreements are available through February 3, 1998
and provide for a commitment fee of 1/2 of 1% of the average daily unused
portion of the commitment amount paid on a quarterly basis. Interest is
charged on outstanding loans at a base rate plus a specified margin. The
Revolving Credit Agreements contain covenants which, among other things,
restrict (i) incurrence of additional debt, (ii) purchase of certain
investments, (iii) payment of dividends, (iv) formation of certain business
combinations, (v) disposition of certain assets, (vi) acquisition of
subordinated debt, (vii) use of proceeds received and (viii) certain
transactions with related parties. The Revolving Credit Agreements also
require that SRI maintain a debt service ratio above predetermined levels.
The Revolving Credit Agreements are secured by the distribution center
located in Jacksonville, Texas, including equipment located therein, and a
pledge of SRPC's stock.
Long-term Indebtedness
Senior Discount Debentures. During 1993, the Company issued the Senior
Discount Debentures. The Senior Discount Debentures were issued at a discount
for aggregate net proceeds of approximately $75.6 million. Substantially all
of the net proceeds from the Senior Discount Debentures were used to make
cash payments to the holders of Common Stock equal to $6.17 per share. Cash
interest begins to accrue in August 1998 and is payable semi-annually on
February 15 and August 15 commencing February 15, 1999. The discount is being
charged to interest expense over the term to maturity using the effective
interest method which, together with the coupon interest, results in a 12.7%
effective interest rate. The Senior Discount Debentures contain restrictions
which, among other things, limit (i) the payment of dividends, (ii) the
repurchase of stock and subordinated debt, (iii) the acquisition of
additional debt or the creation of certain liens, (iv) disposition of certain
assets and (v) certain related party intercompany transactions. The Senior
Discount Debentures are secured by all of the issued and outstanding common
stock of SRI and are structurally subordinated to all of SRI's debt.
The Company has commenced the Tender Offer to purchase up to 100% of the
outstanding Senior Discount Debentures with the proceeds of the Offering. In
connection with the Tender Offer, the Company is seeking consents from the
holders of the Senior Discount Debentures to modify or remove certain of the
covenants governing such debentures to provide the Company with greater
operational flexibility.
Senior Notes. During 1993, SRI issued the Senior Notes. The Senior Notes
were issued in an aggregate principal amount of $150.0 million and bear
interest at 10% payable semi-annually on February 15 and August 15. SRI is
required to make a mandatory sinking fund payment on August 15, 1999 equal to
twenty-five percent of the original principal amount. The Company has
purchased $20.0 million of the Senior Notes which satisfied a portion of the
August 15, 1999 sinking fund requirement. The Senior Notes are general
unsecured obligations and rank senior to all subordinated debt including the
Series B Senior Subordinated Notes.
Series B Senior Subordinated Notes. During 1993, SRI issued the Series B
Senior Subordinated Notes. The Series B Senior Subordinated Notes were
originally issued in an aggregate principal amount of $100.0 million and bear
interest at 11% payable semi-annually on February 15 and August 15. The
Company is required to make a mandatory sinking fund payment on August 15,
2002 equal to forty percent of the original principal amount. The Series B
Senior Subordinated Notes are subordinated to the obligations under the
Senior Notes.
Series D Senior Subordinated Notes. During 1995, SRI issued $18.3 million
in an aggregate principal amount of Series D Senior Subordinated Notes. The
Series D Senior Subordinated Notes were issued at a discount of $1.8 million
and bear interest at 11% payable semi-annually on February 15 and August 15
of each year. The original issue discount is being charged to interest
expense over the term to maturity using the effective interest method. The
combination of coupon interest payments and original issue discount results
in an effective interest rate of 13.0%. The Company is required to make a
mandatory sinking fund payment on September 15, 2002 equal to forty percent
of the original aggregate principal amount of the Series D Senior
Subordinated Notes. The Series D Senior Subordinated Notes rank pari passu
with the existing Series B Senior Subordinated Notes (collectively, the
"Senior Subordinated Notes").
54
<PAGE>
The Senior Notes and the Senior Subordinated Notes contain restrictive
covenants which, among other things, (i) limit SRI's ability to sell certain
assets, pay dividends, retire its common stock or retire certain debt, (ii)
limit its ability to incur additional debt or issue stock and (iii) limit
certain related party transactions.
SRI is soliciting consents to certain amendments to the indentures
governing its Senior Notes, its Series B Senior Subordinated Notes and its
Series D Senior Subordinated Notes to, among other things increase the
maximum amount of revolving senior secured borrowing capacity to $50.0
million (subject to a reduction to $25.0 million for a 45-day period
annually) and relax the limitations on the incurrence of additional
indebtedness.
These amendments are intended to provide the Company with additional
financial flexibility in meeting its expansion plans and the working capital
requirements of its growing store base, and are conditioned on the
consummation of the Offering.
SRPC Notes. On May 30, 1996, SRPC issued $30.0 million in aggregate
principal amount of SRPC Notes in order to finance the Uhlmans Acquisition.
The SRPC Notes have an expected maturity date of December 15, 2000 ("Expected
Maturity Date"). Principal is expected to be paid on the SRPC Notes in one
payment on the Expected Maturity Date. If principal is not paid in full on
the Expected Maturity Date it will be paid monthly thereafter on each Monthly
Payment Date (as defined therein), to the extent of available funds. Interest
on the Notes accrues at the rate per annum of 12.5% and is payable
semi-annually on June 15 and December 15 of each year.
Principal, interest and premium, if any, on the SRPC Notes is secured by,
and paid solely from distributions on, certificates issued to SRPC by the
Trust representing the Retained Interest. For a description of the Accounts
Receivable Program, see Note 2 to the Company's Consolidated Financial
Statements.
Bealls Subordinated Debentures. The increasing rate 3 Bealls Holding, Inc.
("Bealls Holding") subordinated debentures due 2002 (the "Bealls Holding
Subordinated Debentures") in aggregate principal amount of approximately
$15.0 million bore interest at 10% through 1994 and 11% in 1995 and currently
bear interest of 12% until maturity. Interest is payable semi-annually on
June 30 and December 31. Original issue discount of $7.3 million is being
charged to interest expense over the term to maturity using the effective
interest method. The combination of coupon interest payments and original
issue discount results in an effective interest rate of 20.9%. The Bealls
Holding Subordinated Debentures may be prepaid, at the Company's option, at
their face value. The Company is required to redeem the Bealls Holding
Subordinated Debentures beginning no later than December 31, 1997, in no more
than six equal annual installments. The Bealls Holding Subordinated
Debentures are subordinated to all debt except the Senior Discount
Debentures. SRI is the primary obligor under these debentures.
Bealls Junior Subordinated Debentures. In connection with the acquisition
of Bealls, Bealls Holding issued the 7% Bealls Holding Junior Subordinated
Debentures Due 2003 ("Bealls Holding Junior Subordinated Debentures") at a
face value of approximately $12.5 million, net of discount of approximately
$8.4 million. Such discount is being charged to interest expense over the
term to maturity using the effective interest method. The Bealls Holding
Junior Subordinated Debentures are limited to an aggregate principal amount
of approximately $18.3 million. Interest is payable semi-annually on June 30
and December 31. The combination of coupon interest payments and original
issue discount results in an effective interest rate of 39.4%. The principal
amount of Bealls Holding Junior Subordinated Debentures are subordinated to
all debt except the Senior Discount Debentures. SRI is the primary obligor
under these debentures.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
The total amount of authorized capital stock of the Company consists of
75,000,000 shares of Common Stock, par value $0.01 per share, 3,000,000
shares of Class B Common Stock, par value $0.01 per share, and 2,500 shares
of preferred stock, par value $1.00 per share (the "Preferred Stock"). Upon
completion of the Offering, 22,520,892 shares of Common Stock will be issued
and outstanding, 1,351,967 shares of Class B Common Stock will be issued and
outstanding, and no shares of Preferred Stock will be outstanding. The
discussion herein describes the Company's capital stock, the Certificate of
Incorporation and Bylaws as will be in effect upon consummation of the
Offering. The following summary of certain provisions of the Company's
capital stock describes all material provisions of, but does not purport to
be complete and is subject to, and qualified in its entirety by, the
Certificate of Incorporation and the Bylaws of the Company that are included
as exhibits to the Registration Statement of which this Prospectus forms a
part and by the provisions of applicable law.
Common Stock
As of September 20, 1996, there were 11,168,925 shares of Common Stock
outstanding held by 110 holders of record. The issued and outstanding shares
of Common Stock are, and the shares of Common Stock being offered will be
upon payment therefor, validly issued, fully paid and nonassessable. Subject
to the prior rights of the holders of any Preferred Stock and restrictions
contained in the Company's indebtedness, the holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the Board may from
time to time determine. See "Dividend Policy."
Following consummation of the Offering, the shares of Common Stock will
not be redeemable or convertible, and the holders thereof will have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata, along with the holders of
Common Stock, the assets of the Company which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "STGE", subject to notice of issuance.
Class B Common Stock
Unless otherwise required by law, holders of the Class B Common Stock are
not entitled to vote on matters submitted to a vote of stockholders,
including the election of directors. Holders of Class B Common Stock may
elect at any time to convert any or all of such shares into Common Stock, on
a share for share basis, to the extent such holder is not prohibited from
owning additional voting securities by virtue of regulatory restrictions.
As of September 20, 1996, there were 1,351,967 shares of Class B Common
Stock outstanding held by 11 holders of record. The issued and outstanding
shares of Class B Common Stock are validly issued, fully paid and
nonassessable. Subject to the prior rights of the holders of any Preferred
Stock and restrictions contained in the Company's indebtedness, the holders
of outstanding shares of Class B Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board may from time to time determine. See "Dividend Policy."
Following consummation of the Offering, the shares of Class B Common Stock
will not be redeemable or convertible other than into shares of Common Stock,
and the holders thereof will have no preemptive or subscription rights to
purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, the holders of Class B Common Stock are entitled
to receive pro rata, along with the holders of Common Stock, the assets of
the Company which are legally available for distribution, after payment of
all debts and other liabilities and subject to the prior rights of any
holders of Preferred Stock then outstanding.
Preferred Stock
The Board may, without further action by the Company's stockholders, from
time to time, direct the issuance of additional shares of Preferred Stock in
series and may, at the time of issuance, determine the rights, preferences
and limitations of each series. Satisfaction of any dividend preferences of
outstanding shares of Preferred Stock
56
<PAGE>
would reduce the amount of funds available for the payment of dividends on
shares of Common Stock. Holders of shares of Preferred Stock may be entitled
to receive a preference payment in the event of any liquidation, dissolution
or winding-up of the Company before any payment is made to the holders of
shares of Common Stock. Under certain circumstances, the issuance of shares
of Preferred Stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a
large block of the Company's securities or the removal of incumbent
management. The Board, without stockholder approval, may issue shares of
Preferred Stock with voting and conversion rights which could adversely
affect the holders of shares of Common Stock. Upon consummation of the
Offering, there will be no shares of Preferred Stock outstanding, and the
Company currently has no present intention to issue any shares of Preferred
Stock.
Certain Provisions of the Restated Certificate of Incorporation and By-laws
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot
be taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the By-laws provides that, except as otherwise required by
law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors or by the chief
executive officer of the Company. Stockholders will not be permitted to call
a special meeting or to require the Board to call a special meeting.
The Restated Certificate of Incorporation contains a "fair price"
provision pursuant to which any Business Combination (as defined therein)
involving an interested stockholder and the Company or any subsidiary would
require approval by the affirmative vote of the holders of at least 66-2/3%
of the shares of voting stock of the Company. The fair price provision of the
Restated Certificate of Incorporation provides that 66-2/3% stockholder vote
is not required if the Business Combination is approved by 70% of the
continuing directors or if certain procedures and price requirements are
satisfied. Instead, the vote, if any, required by applicable Delaware law or
by any other provision of the Restated Certificate of Incorporation would be
necessary.
The By-laws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders of the
Company, including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
Section 203 of Delaware Law
Following the consummation of the Offering, the Company will be subject to
the "business combination" provisions of the Delaware General Corporation
Law. In general, such provisions prohibit a publicly-held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of
the transaction in which the person became an "interested stockholder,"
unless (i) the transaction is approved by the Board of Directors prior to the
date the interested stockholder obtained such status, (ii) upon consummation
of the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66-2/3% of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
In general, an "interested stockholder" is a person who, together with
affiliates and
57
<PAGE>
associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
Limitations on Liability and Indemnification of Officers and Directors
The Certificate of Incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In
addition, the Amended and Restated Certificate of Incorporation provides that
the Company shall indemnify directors and officers of the Company to the
fullest extent permitted by such law.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Common Stock.
Upon the closing of the Offering there will be 22,520,892 shares of common
stock outstanding. The 10,000,000 shares of Common Stock sold in the Offering
will be freely tradeable without restriction or further registration under
the Securities Act, unless held by an "affiliate" of the Company as that term
is defined in Rule 144, which shares will be subject to the resale
limitations of Rule 144. Of the outstanding shares, 12,520,892 have not been
registered under the Securities Act and may not be sold unless they are
registered or unless an exemption from registration, such as the exemption
provided by Rule 144, is available.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities
acquired from the Company or an affiliate of the Company in a non-public
transaction) for at least two years, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the outstanding Common Stock or the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144
are also subject to certain provisions regarding the manner of sale, notice
requirements and the availability of current public information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is
not an affiliate of the Company for at least 90 days prior to a proposed
transaction and who has beneficially owned "restricted securities" for at
least three years is entitled to sell such shares under Rule 144 without
regard to the limitations described above. Beginning 90 days following the
Offering, 12,125,792 shares of common stock will be eligible for sale under
this rule. Rule 144 is proposed to be amended, and the two and three year
holding periods specified above may be reduced to one and two years,
respectively.
Certain of the Company's existing stockholders, including the officers and
directors of the Company, have agreed that they will not, without the prior
written consent of CS First Boston Corporation on behalf of the Underwriters,
sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the date hereof. 11,394,782 outstanding shares (or 50.6% of the
total outstanding Common Stock after the Offering) are subject to such
agreement.
Registration Rights
The Company is party to a Registration Agreement (the "Registration
Agreement") with the Bain Capital Funds, Acadia and Court Square pursuant to
which such stockholders have the right to cause the Company to register
shares of Common Stock (the "registrable securities") under the Securities
Act. Upon the consummation of the Offering, 9,963,611 outstanding shares of
Common Stock will constitute registrable securities and therefore will be
eligible for registration pursuant to the Registration Agreement. Under the
terms of the Registration Agreement, (i) the holders of at least a majority
of the registrable securities can require the Company, subject to certain
limitations, to file up to three "long-form" registration statements under
the Securities Act covering all or part of the registrable securities, and,
subject to certain limitations, to file an unlimited number of "short-form"
registration statements under the Securities Act covering all or part of the
registrable securities and (ii) Acadia can require the Company, subject to
certain limitations, to file a "long-form" registration statement on Form S-1
covering all or part of the registrable securities held by Acadia (each, a
"demand registration"). The Company is obligated to pay all registration
expenses (other than underwriting discounts and commissions and subject to
certain limitations) incurred in connection with the demand registrations. In
addition, the Registration Statement provides the Bain Capital Funds, Acadia
and Court Square with "piggyback" registration rights, subject to certain
limitations, whenever the Company files a registration statement on a
registration form that can be used to register registrable securities.
58
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1996 (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), for whom CS First Boston Corporation, Bear,
Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and PaineWebber Incorporated are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from
the Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ---------
<S> <C>
CS First Boston Corporation
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
PaineWebber Incorporated
-------
Total
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides
that, in the event of a default by an Underwriter, in certain circumstances
the purchase commitments of the non-defaulting Underwriters may be increased
or the Underwriting Agreement may be terminated.
The Company and the Selling Stockholders have granted to the Underwriters
an option, expiring at the close of business on the 30th day after the date
of this Prospectus, to purchase up to 1,500,000 additional shares (up to
750,000 additional shares from the Company and up to 750,000 outstanding
shares from the Selling Stockholders) at the initial public offering price
less the underwriting discounts and commissions, all as set forth on the
cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer shares of Common Stock
to the public initially at the public offering price set forth on the cover
page of this Prospectus and, through the Representatives, to certain dealers
at such price less a concession of $ per share, and the Underwriters and
such dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
The Company and certain stockholders (holding in aggregate 11,394,782
shares) have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities Exchange Commission a registration
statement under the Securities Act relating to any of its Common Stock or
securities convertible or exchangeable into or exercisable for any shares of
Common Stock without the prior written consent of CS First Boston Corporation
for a period of 180 days from the date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
The shares of Common Stock have been approved for listing on the Nasdaq
National Market subject to official notice of issuance under the symbol
"STGE".
59
<PAGE>
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. The initial price to the public for the shares of Common Stock will be
negotiated among the Company and the Representatives. Such initial price will
be based on, among other things in addition to prevailing market conditions,
the Company's financial and operating history and condition, its prospects
and the prospects for its industry in general, the management of the Company
and the market prices for securities of companies in businesses similar to
that of the Company.
DLJ will act as dealer manager in connection with the Tender Offer and the
solicitation of consents to certain amendments to the indentures governing
SRI's indebtedness, and expects to receive customary fees in connection
therewith. DLJ makes a market in the Senior Discount Debentures and, in such
capacity, has a position in such Senior Discount Debentures from time to
time. To the extent DLJ owns Senior Discount Debentures upon expiration of
the Tender Offer, it is expected that DLJ would tender such Senior Discount
Debentures into the Tender Offer.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Common Stock are effected. Accordingly, any resale
of the Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek
legal advice prior to any resale of the Common Stock.
Representations of Purchasers
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities
laws to purchase such Common Stock without the benefit of a prospectus
qualified under such securities laws, (ii) where required by law, that such
purchaser is purchasing as principal and not as agent and (iii) such
purchaser has reviewed the text above under "Resale Restrictions."
Right of Action and Enforcement
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the Company or such persons. All or a substantial portion of the assets
of the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Company or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against the Company of such persons outside of Canada.
Notice to British Columbia Residents
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company.
Only one such report must be filed in respect of Common Stock acquired on the
same date and under the same prospectus exemption.
60
<PAGE>
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is
a person or entity that, for U.S. federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership,
or a non-resident fiduciary of a foreign estate or trust.
This discussion is based on the Code and administrative interpretations as
of the date hereof, all of which are subject to change, including changes
with retroactive effect. This discussion does not address all aspects of U.S.
federal income and estate taxation that may be relevant to Non-U.S. Holders
in light of their particular circumstances and does not address any tax
consequences arising under the laws of any state, local or foreign
jurisdiction. Prospective holders should consult their tax advisors with
respect to the particular tax consequences to them of owning and disposing of
Common Stock, including the consequences under the laws of any state, local
or foreign jurisdiction.
Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United
States taxation of dividends paid to a Non-U.S. Holder on Common Stock. The
Proposed Regulations are generally proposed to be effective with respect to
dividends paid after December 31, 1997, subject to certain transition rules.
The discussion below is not intended to be a complete discussion of the
provisions of the Proposed Regulations, and prospective investors are urged
to consult their tax advisors with respect to the effect the Proposed
Regulations would have if adopted.
Dividends
Subject to the discussion below, dividends, if any, paid to a Non-U.S.
Holder of Common Stock generally will be subject to withholding tax at a rate
of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified
by an income tax treaty, in accordance with existing United States Treasury
Regulations, the Company ordinarily will presume that dividends paid to an
address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted.
Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-United States Holder would generally be required to
provide an Internal Revenue Service Form W-3 certifying such Non-United
States Holder's entitlement to benefits under a treaty. The Proposed
Regulations would also provide special rules to determine whether, for
purposes of determining the applicability of a tax treaty, dividends paid to
a Non-United States Holder that is an entity should be treated as paid to the
entity or to those holding an interest in that entity.
There will be no withholding tax on dividends paid to a Non-U.S. Holder if
such dividends are effectively connected with the Non-U.S. Holder's conduct
of a trade or business within the United States and if a Form 4224 stating
that the dividends are so connected is filed with the Company or its paying
agent. Instead, the effectively connected dividends will be subject to
regular U.S. net income tax at graduated rates, in the same manner as if the
Non-U.S. Holder were a U.S. resident. In addition to the graduated tax
described above, a non-U.S. corporation receiving effectively connected
dividends may be subject to a "branch profits tax" which is imposed, under
certain circumstances, at a rate of 30% (or such lower rate as may be
specified by an applicable treaty) of the non-U.S. corporation's effectively
connected earnings and profits, subject to certain adjustments.
Generally, the Company must report to the U.S. Internal Revenue Service
the amount of dividends paid, the name and address of the recipient, and the
amount, if any of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or certain other agreements, the U.S. Internal
Revenue Service may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the Non-U.S.
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information to the
Company or its paying agent.
61
<PAGE>
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a
sale or other disposition of Common Stock unless (i) the gain is effectively
connected with a trade or business of such holder in the United States, (ii)
in the case of certain Non-U.S. Holders who are non-resident alien
individuals and hold the Common Stock as a capital asset, such individuals
are present in the United States for 183 or more days in the taxable year of
the disposition, (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code regarding the taxation of U.S. expatriates, or (iv)
the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes and the Non-U.S. Holder owned directly or
pursuant to certain attribution rules more than 5% of the Company's Common
Stock (assuming the Common Stock is regularly traded on an established
securities market) at any time within the shorter of the five-year period
preceding such disposition or such holder's holding period.
Information Reporting Requirements and Backup Withholding on Disposition of
Common Stock
Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of
a disposition of Common Stock paid to or through a U.S. office of a broker
unless the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-U.S. office of a
non-U.S. broker. However, U.S. information reporting requirements (but not
backup withholding) will apply to a payment of disposition proceeds outside
the United States if the payment is made through an office outside the United
States of a broker that is (i) a U.S. Person, (ii) a foreign person which
derives 50% or more of its gross income for certain periods from the conduct
of a trade or business in the United States or (iii) a "controlled foreign
corporation" for U.S. federal income tax purposes, unless the broker
maintains documentary evidence that the holder is a Non-U.S. Holder and that
certain conditions are met, or that the holder otherwise is entitled to an
exemption.
The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-United States Holder would be subject
to backup withholding and information reporting unless the Company receives
certification from the holder of its non-U.S. status.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
Federal Estate Tax
An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. federal
estate tax purposes, and may be subject to U.S. federal estate tax unless an
applicable estate tax treaty provides otherwise.
LEGAL MATTERS
The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Kirkland & Ellis (a partnership which includes professional corporations),
New York, New York. Mr. Karl E. Lutz, whose professional corporation is a
partner of Kirkland & Ellis, as of the date hereof holds 27,823 shares of
Common Stock and 7,688 shares of Class B Common Stock. Certain legal matters
will be passed upon for the Underwriters by Latham & Watkins, New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of January 28,
1995 and February 3, 1996 and for each of the three years in the period ended
February 3, 1996 included in this Prospectus and the Registration Statement
of which it is a part, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting. The financial statements of
Uhlmans as of January 31, 1995 and February 3, 1996 and for each of the three
years in the period ended February 3, 1996 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP,
62
<PAGE>
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed the Registration Statement on Form S-1 with respect
to the Common Stock being offered hereby with the Securities and Exchange
Commission (the "Commission") under the Securities Act. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
the information set forth in the Registration Statement, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus concerning the provisions
of documents filed with the Registration Statement as exhibits are
necessarily summaries of such documents, and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed as
an exhibit to the Registration Statement. The Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and at its New York Regional Office, 75 Park Place, 14th Floor,
New York, New York 10007. Copies of such material can be obtained from the
public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be
accessed electronically at the Commission's site on the World Wide Web
located at http://www.sec.gov. For further information pertaining to the
Company and the Common Stock being offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
STAGE STORES, INC. Number
---------
<S> <C>
Unaudited Financial Statements
Consolidated Condensed Balance Sheet at February 3, 1996 and August 3, 1996 F-2
Consolidated Condensed Statement of Income for the three and six months ended July 29, 1995 and
August 3, 1996 F-3
Consolidated Condensed Statement of Cash Flows for the six months ended July 29, 1995 and
August 3, 1996 F-4
Consolidated Condensed Statement of Stockholders' Deficit for the six months ended August 3, 1996 F-6
Notes to Unaudited Consolidated Condensed Financial Statements F-7
Audited Financial Statements
Report of Independent Accountants F-8
Consolidated Balance Sheet at January 28, 1995 and February 3, 1996 F-9
Consolidated Statement of Operations for the fiscal years 1993, 1994 and 1995 F-10
Consolidated Statement of Cash Flows for the fiscal years 1993, 1994 and 1995 F-11
Consolidated Statement of Stockholders' Deficit for the fiscal years 1993, 1994 and 1995 F-13
Notes to Consolidated Financial Statements F-14
UHLMANS INC.
Report of Independent Auditors F-26
Balance Sheets at January 31, 1995 and February 3, 1996 F-27
Statements of Income for the years ended January 31, 1994 and 1995 and for the period from
February 1, 1995 through February 3, 1996 F-28
Statements of Stockholders' Equity for the years ended January 31, 1994 and 1995 and for the
period from February 1, 1995 through February 3, 1996 F-29
Statements of Cash Flows for the years ended January 31, 1994 and 1995 and for the period from
February 1, 1995 through February 3, 1996 F-30
Notes to Financial Statements F-31
</TABLE>
F-1
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Balance Sheet
(in thousands, except par value and number of shares)
<TABLE>
<CAPTION>
February 3, 1996 August 3, 1996
---------------- --------------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 20,273 $ 18,940
Accounts receivable 65,740 64,684
Merchandise inventories 150,032 167,769
Prepaid expenses and other current assets 24,457 29,826
-------- --------
Total current assets 260,502 281,219
Property, equipment and leasehold improvements, net 93,118 106,464
Goodwill, net 30,876 46,577
Other assets 27,837 28,980
-------- --------
$412,333 $463,240
======== ========
Liabilities and Stockholders' Deficit
Accounts payable $ 41,494 $ 44,336
Accrued interest 12,327 13,009
Accrued expenses and other current liabilities 33,197 37,067
Accrued taxes, other than income taxes 3,376 5,689
Total current liabilities 90,394 100,101
Long-term debt 335,839 373,362
Related party debt 44,200 44,200
Other long-term liabilities 14,214 14,005
-------- --------
Total liabilities 484,647 531,668
-------- --------
Preferred stock, par value $1.00, non-voting, 2,500
shares authorized, no shares issued or outstanding -- --
Common stock, par value $0.01, 15,000,000 shares
authorized, 11,470,902 and 11,748,686 shares issued
and outstanding, respectively 115 117
Class B common stock, par value $0.01, non-voting,
1,500,000 shares authorized, 1,468,750 shares issued
and outstanding 15 15
Additional paid-in capital 3,793 4,157
Accumulated deficit (76,237) (72,717)
-------- --------
Stockholders' deficit (72,314) (68,428)
-------- --------
Commitments and contingencies -- --
-------- --------
$412,333 $463,240
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Income
(in thousands, except earnings per share)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
July 29, 1995 August 3, 1996 July 29, 1995 August 3, 1996
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $154,578 $182,750 $296,931 $345,927
Cost of sales and related buying,
occupancy and distribution expenses 108,023 126,127 204,093 237,223
-------- -------- -------- --------
Gross profit 46,555 56,623 92,838 108,704
Selling, general and administrative
expenses 37,061 45,457 70,877 84,335
Service charge income 2,441 2,989 5,124 5,902
Store opening and closure costs 861 230 1,176 301
-------- -------- -------- --------
Operating income 11,074 13,925 25,909 29,970
-------- -------- -------- --------
Interest income 111 116 271 242
-------- -------- -------- --------
Interest expense: Related party 1,117 1,118 2,154 2,235
Other 9,315 10,902 18,550 21,030
Amortization of debt issue costs 480 562 932 1,031
-------- -------- -------- --------
10,912 12,582 21,636 24,296
-------- -------- -------- --------
Income before income tax 273 1,459 4,544 5,916
Income tax expense 52 591 1,885 2,396
-------- -------- -------- --------
Net income $ 221 $ 868 $ 2,659 $ 3,520
======== ======== ======== ========
Earnings per common share data:
Earnings per common share $ 0.02 $ 0.06 $ 0.20 $ 0.26
======== ======== ======== ========
Weighted average common shares
outstanding 13,404 13,740 13,390 13,678
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
July 29, 1995 August 3, 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,659 $ 3,520
-------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,721 6,844
Deferred income taxes (490) (833)
Accretion of discount 6,722 7,663
Amortization of debt issue costs 932 1,031
Issuance of long-term debt in lieu of interest payment 147 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 10,809 5,299
Increase in merchandise inventories (28,696) (8,205)
Increase in other assets (8,169) (5,366)
Increase in accounts receivable sold 1,200 1,100
Decrease in accounts payable and accrued liabilities (1,349) (4,946)
-------- --------
Total adjustments (13,173) 2,587
-------- --------
Net cash provided by (used in) operating activities (10,514) 6,107
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (27,276)
Additions to property, equipment and
leasehold improvements (16,786) (15,183)
-------- --------
Net cash used in investing activities (16,786) (42,459)
-------- --------
Cash flows from financing activities:
Proceeds from:
Revolving credit agreement -- 7,500
Long-term debt 16,458 30,000
Common stock 64 292
Payments on:
Long-term debt (115) (125)
Redemption of common stock -- (16)
Additions to debt issue costs (734) (2,632)
-------- --------
Net cash provided by financing activities 15,673 35,019
-------- --------
Net decrease in cash and cash equivalents (11,627) (1,333)
Cash and cash equivalents:
Beginning of period 28,593 20,273
-------- --------
End of period $ 16,966 $ 18,940
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
July 29, 1995 August 3, 1996
------------- --------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $13,894 $ 14,885
======= ========
Income taxes paid $ 5,862 $ 8,617
======= ========
Supplemental schedule of noncash investing and financing activities:
The Company purchased Uhlmans, Inc. for $27,276 in cash, including acquisition
expenses and net of cash acquired, on June 3, 1996. In conjunction with this
acquisition, liabilities were assumed as follows:
Six Months Ended
August 3, 1996
--------------
Fair value allocated to assets acquired $ 34,295
Cash paid for assets acquired, including acquisition expenses (27,276)
--------
Liabilities assumed $ 7,019
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Stockholders' Deficit
(in thousands, except numbers of shares)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------
Class B
--------------------
Additional
Shares Shares Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
----------- ------ ----------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 3, 1996 11,470,902 $115 1,468,750 $15 $3,793 $(76,237) $(72,314)
Net income -- -- -- -- -- 3,520 3,520
Vested compensatory stock
options -- -- -- -- 90 -- 90
Issuance of stock 280,994 2 -- -- 290 -- 292
Retirement of stock (3,210) -- -- -- (16) -- (16)
---------- ---- --------- --- ------ -------- --------
Balance, August 3, 1996 11,748,686 $117 1,468,750 $15 $4,157 $(72,717) $(68,428)
========== ==== ========= === ====== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Unaudited Consolidated Condensed Financial Statements
1. The accompanying unaudited consolidated condensed financial statements of
Stage Stores, Inc. (formerly Apparel Retailers, Inc.) ("Stage Stores"), have
been prepared in accordance with Rule 10-01 of Regulation S-X and do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. Those adjustments, which include
only normal recurring adjustments, that are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods have
been made. The results of operations for such interim periods are not
necessarily indicative of results of operations for a full year. The unaudited
consolidated condensed financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the year
ended February 3, 1996. Certain reclassifications have been made to prior year
amounts to conform with the current year presentation. The fiscal years
discussed herein end on the Saturday nearest to January 31, in the following
calendar year. For example, references to "1996" mean the fiscal year ended
February 1, 1997.
Stage Stores conducts its business exclusively through its wholly owned
subsidiary Specialty Retailers, Inc. ("SRI"), which operated 308 family apparel
stores in the central United States as of August 3, 1996. Stage Stores has no
operations of its own and its primary asset is the common stock of SRI. Stage
Stores and SRI are collectively referred to herein as the "Company".
2. Pursuant to the accounts receivable securitization program implemented in
1993 (the "Accounts Receivable Program"), an indirect wholly owned subsidiary of
the Company, SRI Receivables Purchase Co., Inc. ("SRPC") purchases the accounts
receivable generated by the Company's private label credit card program. Such
accounts receivable are transferred to a master trust (the "Trust") which has
issued certain certificates to third parties representing undivided interests in
the Trust. SRPC owns an undivided interest in the accounts receivable not
supporting the certificates issued to third parties by the Trust (the "Retained
Interest"). SRPC is a separate corporate entity from the Company and SRPC's
creditors have a claim on its assets prior to those assets becoming available to
any creditor of the Company.
3. On June 3, 1996, the Company completed its acquisition of Uhlmans Inc.
("Uhlmans") for $27.3 million, including acquisition expenses and net of cash
acquired. Uhlmans, which operated 34 family apparel stores located in Ohio,
Michigan and Indiana, had sales of $59.7 million and net income of $0.6 million
for the year ended February 3, 1996.
The Company financed the acquisition of Uhlmans through the issuance of $30.0
million in aggregate principal amount of 12.5% Trust Certificate-Backed Notes
Due 2000 (the "SRPC Notes"). Interest on the SRPC Notes is payable semi-annually
on June 15 and December 15 of each year, commencing December 15, 1996 from
amounts otherwise received by SRPC from its Retained Interest. Principal
repayments are scheduled to begin on December 1, 1999.
4. Pursuant to Securities and Exchange Commission Staff Bulletins and Staff
policy, common stock options issued during the twelve months prior to the
proposed initial public offering have been included in the calculations of
earnings per common share as if such options were outstanding for all periods
presented.
5. During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and
Statement of Financial Accounting Standard No. 123, Accounting for Stock Based
Compensation ("SFAS 123"). Neither the adoption of SFAS 121 or SFAS 123 had a
material effect on the Company's financial position or its results of
operations. With the adoption of SFAS 123, the Company continues to measure
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees, and will provide pro forma
disclosures of net income and earnings per share as if the market value based
method prescribed by SFAS 123 had been applied in measuring compensation expense
in its annual financial statements.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Stage Stores, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Stage Stores, Inc. (formerly Apparel Retailers, Inc.) and its
subsidiaries at January 28, 1995 and February 3, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
February 3, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
March 15, 1996
F-8
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Balance Sheet
(in thousands, except par value and number of shares)
<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
----------------- -------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 28,593 $ 20,273
Accounts receivable 70,356 65,740
Merchandise inventories 118,039 150,032
Restricted investments 338 438
Prepaid expenses and other current assets 17,824 24,019
-------- --------
Total current assets 235,150 260,502
Property, equipment and leasehold improvements, net 75,602 93,118
Goodwill, net 31,865 30,876
Other assets 27,113 27,837
-------- --------
$369,730 $412,333
======== ========
Liabilities and Stockholders' Deficit
Accounts payable $ 38,332 $ 41,494
Accrued interest 11,372 12,327
Accrued employee compensation costs 8,907 7,892
Accrued expenses and other current liabilities 25,668 25,305
Accrued taxes, other than income taxes 2,642 3,376
-------- --------
Total current liabilities 86,921 90,394
Long-term debt 310,575 335,839
Related party debt 39,200 44,200
Deferred income taxes 562 --
Other long-term liabilities 13,665 14,214
-------- --------
Total liabilities 450,923 484,647
-------- --------
Preferred stock, par value $1.00, non-voting, 2,500
shares authorized, no shares issued or outstanding -- --
Common stock, par value $0.01, 15,000,000 shares
authorized, 11,381,141 and 11,470,902 shares
issued and outstanding, respectively 113 115
Class B common stock, par value $0.01, non-voting,
1,500,000 shares authorized, 1,468,750 shares
issued and outstanding 15 15
Additional paid-in capital 3,565 3,793
Accumulated deficit (84,886) (76,237)
-------- --------
Stockholders' deficit (81,193) (72,314)
-------- --------
Commitments and contingencies -- --
-------- --------
$369,730 $412,333
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Operations
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales $557,422 $581,463 $682,624
Cost of sales and related buying, occupancy and
distribution expenses 384,843 398,659 468,347
-------- -------- --------
Gross profit 172,579 182,804 214,277
Selling, general and
administrative expenses 135,011 134,715 159,625
Service charge income 20,003 8,515 10,523
Store opening and closure costs 199 5,647 3,689
-------- -------- --------
Operating income 57,372 50,957 61,486
-------- -------- --------
Interest income 1,230 1,684 781
-------- -------- --------
Interest expense:
Related party 6,038 2,902 4,355
Other 29,985 37,118 38,555
Amortization of debt issue costs 1,584 1,674 1,860
-------- -------- --------
37,607 41,694 44,770
-------- -------- --------
Income before income tax and
extraordinary item 20,995 10,947 17,497
Income tax expense 7,569 4,317 6,767
-------- -------- --------
Income before extraordinary item 13,426 6,630 10,730
Extraordinary item--early
extinguishment of debt (16,208) (308) --
-------- -------- --------
Net income (loss) $ (2,782) $ 6,322 $ 10,730
======== ======== ========
Earnings (loss) per common share data:
Income before extraordinary item $ 13,426 $ 6,630 $ 10,730
Dividends and accretion on mandatorily
redeemable preferred stock (2,297) -- --
-------- -------- --------
Earnings before extraordinary item
applicable to common stock $ 11,129 $ 6,630 $ 10,730
======== ======== ========
Earnings per common share before
extraordinary item $ 0.85 $ 0.50 $ 0.80
Extraordinary item--early
extinguishment of debt (1.24) (0.02) --
-------- -------- --------
Earnings (loss) per common share after
extraordinary item $ (0.39) $ 0.48 $ 0.80
======== ======== ========
Weighted average common shares
outstanding 13,029 13,083 13,434
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-10
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (2,782) $ 6,322 $ 10,730
--------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,259 9,997 12,816
Deferred income taxes (2,783) (3,608) (4,065)
Accretion of discount 5,796 12,286 13,940
Amortization of debt issue costs 1,584 1,674 1,860
Issuance of long-term debt in lieu of interest payment 1,214 282 147
Loss on early extinguishment of debt 25,032 474 --
Changes in operating assets and liabilities:
Increase in accounts receivable (18,822) (5,378) (20,206)
Increase in merchandise inventories (10,862) (14,077) (31,650)
Increase in other assets (5,907) (2,599) (4,112)
Increase (decrease) in accounts receivable sold 147,100 (7,100) 25,000
Increase in accounts payable and accrued liabilities 6,388 11,532 1,794
--------- -------- --------
Total adjustments 157,999 3,483 (4,476)
--------- -------- --------
Net cash provided by operating activities 155,217 9,805 6,254
--------- -------- --------
Cash Flows from Investing Activities:
Decrease (increase) in restricted investments (2,150) 10,812 (100)
Acquisitions, net of cash acquired -- (20,840) (1,167)
Payments to former Bealls and Palais Royal shareholders (252) -- --
Additions to property, equipment and leasehold
improvements (8,503) (19,706) (28,638)
--------- -------- --------
Net cash used in investing activities (10,905) (29,734) (29,905)
--------- -------- --------
Cash Flows from Financing Activities:
Proceeds from:
Short-term debt 19,135 -- --
Long-term debt 352,041 -- 16,458
Common stock 325 97 68
Payments on:
Working capital facility (1,000) -- --
Short-term debt (24,992) -- --
Long-term debt (337,254) (10,442) (266)
Redemption of redeemable preferred stock (19,797) -- --
Redemption of common stock (33) -- (122)
Additions to debt issue costs (14,035) (448) (807)
Dividends paid (74,804) -- --
--------- -------- --------
Net cash provided by (used in) financing activities (100,414) (10,793) 15,331
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 43,898 (30,722) (8,320)
Cash and cash equivalents:
Beginning of year 15,417 59,315 28,593
--------- -------- --------
End of year $ 59,315 $ 28,593 $ 20,273
========= ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Cash Flows (Continued)
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------
1993 1994 1995
------- -------- -------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $30,142 $ 28,814 $27,845
======= ======== =======
Income taxes paid $ 3,857 $ 5,198 $ 5,939
======= ======== =======
Supplemental schedule of noncash investing and financing activities:
The Company purchased a significant portion of the assets of Beall-
Ladymon, Inc. for $20,840 in cash during 1994. In addition, the Company
purchased Mammouth, Inc. and Szolds, Inc. ("Szolds") for $1,067 and $493,
respectively, during 1995. Pursuant to the Szolds purchase agreement, $393
was paid at closing to Szolds during February 1996. In conjunction with
these acquisitions, liabilities were assumed as follows:
Fair value allocated to assets acquired $ -- $ 24,043 $ 1,702
Cash paid for assets acquired, including acquisition expenses -- (20,840) (1,167)
Purchase price payable at closing -- -- (393)
------- -------- -------
Liabilities assumed $ -- $ 3,203 $ 142
======= ======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Stockholders' Deficit
(in thousands, except numbers of shares)
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------
Class B
------------------
Additional
Shares Shares Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
----------- ------ ----------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 30, 1993 10,559,167 $106 1,468,750 $15 $ 899 $(10,625) $ (9,605)
Net loss -- -- -- -- -- (2,782) (2,782)
Dividends on preferred
stock -- -- -- -- -- (1,596) (1,596)
Dividends on common stock -- -- -- -- -- (74,804) (74,804)
Accretion on preferred
stock -- -- -- -- -- (701) (701)
Tax benefits from stock
option activity -- -- -- -- 2,037 -- 2,037
Adjustment for minimum
pension liability -- -- -- -- -- (568) (568)
Issuance of stock 783,998 7 -- -- 318 -- 325
Retirement of stock (10,024) -- -- -- (33) -- (33)
---------- ---- --------- --- ------ -------- --------
Balance, January 29, 1994 11,333,141 113 1,468,750 15 3,221 (91,076) (87,727)
Net income -- -- -- -- -- 6,322 6,322
Vested compensatory stock
options -- -- -- -- 247 -- 247
Adjustment for minimum
pension liability -- -- -- -- -- (132) (132)
Issuance of stock 48,000 -- -- -- 97 -- 97
---------- ---- --------- --- ------ -------- --------
Balance, January 28, 1995 11,381,141 113 1,468,750 15 3,565 (84,886) (81,193)
Net income -- -- -- -- -- 10,730 10,730
Vested compensatory stock
options -- -- -- -- 284 -- 284
Adjustment for minimum
pension liability -- -- -- -- -- (2,081) (2,081)
Issuance of stock 121,621 2 -- -- 66 -- 68
Retirement of stock (31,860) -- -- -- (122) -- (122)
---------- ---- --------- --- ------ -------- --------
Balance, February 3, 1996 11,470,902 $115 1,468,750 $15 $3,793 $(76,237) $(72,314)
========== ==== ========= === ====== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-13
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Stage Stores, Inc. (formerly Apparel Retailers,
Inc.) was incorporated under the laws of Delaware on June 17, 1993 at the
direction of the stockholders of Specialty Retailers, Inc. as a part of an
overall refinancing and distribution plan (see Note 5). As a part of this
plan, the stockholders of Specialty Retailers, Inc. exchanged all of their
common stock for Stage Stores, Inc. common stock with identical terms and
conditions. Stage Stores, Inc., Specialty Retailers, Inc. and their
subsidiaries are collectively referred to as the "Company". When the
distinction is necessary, "Stage Stores" refers to Stage Stores, Inc. and
"SRI" refers to Specialty Retailers, Inc. SRI operates family apparel
stores primarily under the names "Bealls", "Palais Royal" and "Stage"
offering branded fashion apparel and accessories for women, men and
children. The Company currently operates 268 stores in thirteen states
located throughout the central United States.
Principles of Consolidation: The consolidated financial statements include the
accounts of Stage Stores and its wholly-owned subsidiaries subsequent to
June 17, 1993. Prior to June 17, 1993, the consolidated financial
statements include the accounts of SRI and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated in
consolidation.
On October 31, 1994, Palais Royal, Inc., a wholly-owned subsidiary of the
Company, purchased a significant portion of the assets of the Beall-Ladymon
Corporation ("Beall-Ladymon") for $20.8 million in cash. The assets
acquired consisted primarily of customer accounts receivable and fixed
assets. In addition, the Company assumed leases for forty-five store
locations which the Company opened as Stage stores during the first
quarter of 1995. Beall-Ladymon was a regional apparel retailer which
operated stores primarily in Louisiana, Arkansas and Mississippi.
The following unaudited pro forma information gives effect to the
Beall-Ladymon acquisition as if it had occurred at the beginning of the
periods presented and includes operating activity of Beall-Ladymon prior
to the beginning of the closure period (in thousands, except per common
share data):
Fiscal Year
------------------------
1993 1994
--------- ---------
(unaudited)
Net sales $609,857 $613,994
======== =========
Income before extraordinary item $ 13,359 $ 4,353
======== =========
Net income (loss) $ (2,849) $ 4,045
======== =========
Earnings (loss) per common share $ (0.40) $ 0.31
======== =========
The above amounts are based on certain estimates and assumptions which the
Company believes are reasonable. The pro forma results do not purport to be
indicative of the results which would have occurred if the acquisition had
actually taken place at the beginning of the periods presented, nor are
they necessarily indicative of the results of any future periods.
The Beall-Ladymon acquisition was accounted for under the purchase method
of accounting. Accordingly, the total acquisition cost was allocated to
the assets acquired and liabilities assumed based upon their estimated
fair values. The excess of the purchase price over the estimated fair
value of such assets and liabilities was recognized as goodwill and is
being amortized on a straight-line basis over fifteen years.
Fiscal Year: The fiscal years discussed herein end on the Saturday nearest to
January 31 in the following calendar year. For example, references to
"1995" mean the fiscal year ended February 3, 1996. All fiscal years
consist of fifty-two weeks except for 1995 which consists of fifty-three
weeks.
F-14
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Merchandise Inventories: The Company states its merchandise inventories at the
lower of cost or market, cost being determined using the retail last-in,
first-out ("LIFO") method. Market is estimated on a pool-by-pool basis.
The Company believes that the LIFO method, which charges the most recent
merchandise costs to the results of current operations, provides a better
matching of current costs with current revenues in the determination of
operating results. Some companies use the retail first-in, first-out
("FIFO") method in valuing their inventories. If the retail FIFO method
had been used, inventories at January 28, 1995 and February 3, 1996 would
have been higher by $0.4 million and lower by $3.5 million, respectively.
Property, Equipment and Leasehold Improvements: Property, equipment and
leasehold improvements are stated at cost and depreciated over their
estimated useful lives using the straight line method. The estimated
useful lives of leasehold improvements do not exceed the term, including
renewal options, of the related lease. The estimated useful lives in years
are as follows:
Buildings 20-25
Store and office fixtures and equipment 7-12
Warehouse equipment 5-15
Favorable leases and leasehold improvements 15-50
Income Taxes: The provision for income taxes is computed based on the pretax
income included in the consolidated statement of operations. The asset and
liability approach is used to recognize deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
Earnings (Loss) Per Common Share: Earnings or loss per common share is computed
based upon net income or loss adjusted for dividends and accretion on
preferred stock. Common stock options outstanding are treated as common
stock equivalents in the computation of earnings or loss per common share
using the treasury stock method. The fair value of the Company's common
stock is determined in good faith by the Board of Directors based upon the
historical and projected financial performance of the Company. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletins and Staff
policy, common stock options issued during the twelve months prior to the
proposed initial public offering have been included in the calculation of
earnings (loss) per common share as if such options were outstanding for
all periods presented.
Debt Issue Costs: Debt issue costs are accounted for as a deferred charge and
amortized on a straight-line basis over the term of the related issue.
Goodwill and Other Intangibles: The Company amortizes goodwill and intangible
assets on a straight-line basis over the estimated future periods
benefited, not to exceed forty years. Amortization periods for goodwill
and other intangibles associated with acquisitions are currently five to
forty years. Each year, the Company evaluates the remaining useful life
associated with goodwill based upon, among other things, historical and
expected long-term results of operations. Accumulated amortization of
goodwill was $3.7 million and $4.7 million at January 28, 1995 and
February 3, 1996, respectively.
Store Pre-Opening Expenses: Pre-opening expenses of new stores are deferred
and charged to operations in the year the store opens.
F-15
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
Advertising Expenses: Advertising costs are charged to operations when the
related advertising first takes place. Advertising costs were $22.3
million, $22.3 million, and $25.9 million for 1993, 1994 and 1995,
respectively. Prepaid advertising costs were $0.6 million and $0.5 million
at January 28, 1995 and February 3, 1996, respectively.
Statement of Cash Flows: The Company considers highly liquid investments with
initial maturities of less than three months to be cash equivalents in its
statement of cash flows.
Financial Instruments: The Company records all financial instruments at cost.
The fair values of accounts receivable and accounts payable approximate
cost.
Impairment of Assets: The Company has not elected early adoption of Statement of
Financial Accounting Standard No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 121 becomes effective beginning with the Company's first quarter
of 1996. The Company does not believe that the adoption of SFAS 121 will
have a material effect on the Company's financial position or results of
operations.
Stock Based Compensation: The Company has not elected early adoption of
Statement of Financial Accounting Standard No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." SFAS 123 becomes effective
beginning with the Company's first quarter of 1996 and will not have a
material effect on the Company's financial position or results of
operations. Upon adoption of SFAS 123, the Company will continue to
measure compensation plans using the intrinsic value method prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will
provide pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by SFAS 123 had been applied
in measuring compensation expense.
Reclassifications: The accompanying consolidated financial statements include
reclassifications from financial statements issued in previous years.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable balances were as follows (in thousands):
January 28, 1995 February 3, 1996
---------------- ----------------
Gross customer accounts receivable $ 210,941 $ 228,354
Accounts receivable sold (140,000) (165,000)
Other receivables 2,647 5,146
--------- ---------
73,588 68,500
Less--allowance for doubtful accounts (3,232) (2,760)
--------- ---------
$ 70,356 $ 65,740
========= =========
During 1993, the Company implemented an accounts receivable securitization
program (the "Accounts Receivable Program") which provides a source of funds
from the sale of accounts receivable to a master trust (the "Trust"). Pursuant
to the Accounts Receivable Program, the Company sells all of the accounts
receivable generated by the holders of the Company's private label credit card
accounts to its wholly-owned subsidiary, SRI Receivables Purchase Co., Inc.
("SRPC"), on a daily basis. SRPC is a separate limited-purpose subsidiary that
is operated in a fashion intended to ensure that its assets and liabilities are
distinct from those of the Company and its other affiliates as SRPC's creditors
have a claim on its assets prior to becoming available to any creditor of the
Company. SRPC sells, on a daily basis, the accounts receivable purchased from
the Company to the Trust in exchange for cash or a certificate representing an
undivided interest in the Trust. The Trust currently has $165.0 million of term
certificates and a $40.0 million revolving certificate outstanding which
represent undivided interests in the Trust. The holder of the revolving
certificate has agreed to purchase interests in the Trust equal to the amount of
accounts receivable
F-16
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
in the Trust above the level required to support the term certificates and the
transferor's retained interest (currently $204.1 million), up to a maximum of
$40.0 million. If receivable balances in the Trust fall below the level required
to support the term certificates and revolving certificates, certain principal
collections may be retained in the Trust until such time as the receivable
balances exceed the certificates then outstanding and the required transferor's
interest. The Company owns an undivided interest in the accounts receivable in
the Trust not represented by the term or revolving certificates and continues to
service all of the accounts receivable in the Trust. The Trust may issue
additional series of certificates from time to time. Terms of any future series
will be determined at the time of issuance. The outstanding balances of the term
certificates totaled $140.0 million and $165.0 at January 28, 1995 and February
3, 1996, respectively. There was no portion of the revolving certificate
outstanding at January 28, 1995 and February 3, 1996.
Total accounts receivable sold to the Trust during 1993, 1994 and 1995 were
$285.1 million, $278.6 million and $306.8 million, respectively. The cash flows
generated from the accounts receivable in the Trust are dedicated to (i) the
purchase of new accounts receivable generated by the Company, (ii) payment of a
return on the certificates and (iii) the payment of a servicing fee to SRI. Any
remaining cash flows are remitted to the Company. The term certificates entitle
the holders to receive a return, based upon the London Interbank Offered Rate
("LIBOR"), plus a specified margin paid on a quarterly basis. Principal payments
commence in December 31, 1999 but can be accelerated upon occurrence of certain
events. The revolving certificate entitles the holder to receive a return based
upon a floating LIBOR rate, plus a specified margin, or prime rate, at the
option of the Company paid on a monthly basis. The Company is currently
protected against increases above 12% under an agreement entered into with a
bank. The Company is exposed to loss in the event of non-performance by the
bank. However, the Company does not anticipate non-performance by the bank. At
February 3, 1996, the average rate of return on the term certificates was 6.8%.
The purchase commitment for the Revolving certificate is five years, subject to
renewal at the option of the parties. The revolving certificate holders are
entitled to repayment in the event the accounts receivable decrease below that
required to support such certificates.
Subsequent to the implementation of the Accounts Receivable Program in 1993,
the Company's financial statements do not reflect accounts receivable, finance
charge income, bad debt expense or servicing costs attributable to the Trust
accounts receivable supporting the outstanding term or revolving certificates.
The Company recognized an initial gain of $2.7 million on the sale of accounts
receivable during 1993 which was reflected as a reduction of selling, general
and administrative expenses. Subsequent gains on the sale of accounts receivable
were not material.
The provision for doubtful accounts was $6.6 million, $2.6 million and $3.8
million for 1993, 1994 and 1995, respectively. The provision for doubtful
accounts does not reflect the Company's recourse obligations under the Accounts
Receivable Program which have been included in the calculation of the gain on
the sale of accounts receivable.
NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements were as follows (in
thousands):
January 28, 1995 February 3, 1996
---------------- ----------------
Land $ 3,074 $ 3,074
Buildings 16,313 16,313
Fixtures and equipment 72,624 88,794
Leasehold improvements 37,542 49,290
-------- --------
129,553 157,471
Less--accumulated depreciation (53,951) (64,353)
-------- --------
$ 75,602 $ 93,118
======== ========
Depreciation expense was $8.3 million, $8.5 million and $10.8 million for
1993, 1994 and 1995, respectively.
F-17
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
NOTE 4 - STORE CLOSURES
During 1994, the Company approved a store closure plan (the "Store
Closure Plan") which provided for the closure of forty Fashion Bar stores. These
stores were primarily located in major regional malls within the Denver area.
Management determined that the merchandising strategy and market positions of
such stores were not compatible with the Company's overall merchandising
philosophies or growth strategy. The Company accrued $5.2 million for the
expected costs associated with the Store Closure Plan which include: occupancy
($4.2 million); severance ($0.4 million); write-off of fixed assets and other
intangibles ($0.9 million); other expenses ($0.8 million) and the write-off of
negative goodwill ($1.1 million) allocated to the stores to be closed. The
Company substantially completed the Store Closure Plan during 1995. At January
28, 1995 and February 3, 1996, the balance of the Store Closure Plan accrual was
$4.8 million and $1.0 million, respectively, primarily reflecting the lease
costs associated with closed stores. During 1995, the Company charged $3.8
million to the accrual.
Net sales and operating income attributable to the stores closed were
as follows (in thousands):
Fiscal Year
--------------------------
1993 1994 1995
------- ------- -----
Net sales $25,442 $23,174 $605
======= ======= ====
Operating income (loss) $ (213) $ 618 $ 32
======= ======= ====
At the date of the acquisition of Bealls, the Company undertook a
centralization and consolidation program which included the expected closure of
twenty-six store locations (the "Store Closure Program") and certain operating
facilities, as well as the consolidation of certain duplicate administrative and
distribution functions. At January 30, 1993, twenty-one stores remained in the
Store Closure Program, sixteen of which had been closed. During 1993, based on
the Company's ongoing assessment of scheduled store closures, the remaining five
open stores were removed from the Store Closure Program. As a result of the
removal of these five stores from the Store Closure Program, the Company reduced
its consolidation and centralization accrual by $2.3 million. Of this amount,
$1.1 million, before applicable taxes, was credited to goodwill and the
remaining $1.2 million credited to long-term liabilities to reflect the ongoing
adverse lease commitments associated with the removed stores. At January 28,
1995 and February 3, 1996, the balance of the consolidation and centralization
accrual was $4.7 million and $4.1 million, respectively, primarily reflecting
the lease costs associated with closed stores. During 1993, 1994 and 1995, the
Company charged $0.8 million, $0.7 million and $0.6 million, respectively, to
the accrual.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
---------------- ----------------
<S> <C> <C>
Held by third parties:
SRI Senior Notes $ 90,800 $ 85,800
SRI Senior Subordinated Notes, net of discount 100,000 116,530
Revolving Credit Agreement -- --
Bealls Holding Subordinated Notes, net of discount 10,686 11,319
FB Holdings Subordinated Notes, net of discount 3,939 4,125
Bealls Holding Junior Subordinated Debentures, net of
discount 6,095 6,221
Port Arthur IDRB 2,117 2,002
Stage Stores Senior Discount Debentures, net of discount 96,748 109,817
Other long term debt 451 301
-------- --------
310,836 336,115
Less--current maturities (261) (276)
-------- --------
$310,575 $335,839
======== ========
Held by related party:
SRI Senior Notes $ 39,200 $ 44,200
======== ========
</TABLE>
F-18
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
During 1993, the Company completed its refinancing (the "Refinancing") which
included (i) the replacement of SRI's existing accounts receivable facility with
the Accounts Receivable Program and (ii) the issuance of SRI 10% Senior Notes
Due 2000 (the "SRI Senior Notes") and SRI 11% Series B Senior Subordinated Notes
Due 2003 (the "SRI Series B Senior Subordinated Notes"). The proceeds from the
Refinancing were used primarily to replace certain previously outstanding debt.
As a result of the Refinancing, the Company recorded an extraordinary charge of
$16.2 million net of applicable income taxes of $8.8 million during 1993.
Concurrent with the Refinancing, the Company completed its distribution plan
which included the issuance of $149.1 million principal amount of 12 3/4% Senior
Discount Debentures Due 2005 (the "Stage Stores Senior Discount Debentures");
the proceeds of which were used primarily to make a distribution to the
shareholders of Stage Stores.
The SRI Senior Notes were originally issued with a principal amount of $150.0
million and bear interest at 10% payable semi-annually on February 15 and August
15. The Company is required to make a mandatory sinking fund payment on August
15, 1999 equal to twenty five percent of the original principal amount. The
Company has purchased $20.0 million of the SRI Senior Notes which satisfied a
portion of the August 15, 1999 sinking fund requirement. The SRI Senior Notes
are general unsecured obligations and rank senior to all subordinated debt of
the Company including the SRI Senior Subordinated Notes.
The SRI Series B Senior Subordinated Notes were originally issued with a
principal amount of $100.0 million and bear interest at 11% payable
semi-annually on February 15 and August 15. SRI is required to make a mandatory
sinking fund payment on August 15, 2002 equal to forty percent of the original
principal amount. The SRI Series B Senior Subordinated Notes are subordinated to
the obligations under the SRI Senior Notes.
During 1995, SRI issued $18.3 million in aggregate principal amount of SRI
11% Series D Senior Subordinated Notes Due 2003 (the "SRI Series D Senior
Subordinated Notes"). The SRI Series D Senior Subordinated Notes were issued at
a discount of $1.8 million and bear interest at 11% payable semi-annually on
February 15 and August 15 of each year. The original issue discount is being
charged to interest expense over the term to maturity using the effective
interest method. The combination of coupon interest payments and original issue
discount results in an effective interest rate of 13.0%. SRI is required to make
a mandatory sinking fund payment on September 15, 2002 equal to forty percent of
the original aggregate principal amount of the SRI Series D Senior Subordinated
Notes. The SRI Series D Senior Subordinated Notes rank pari passu with the
existing SRI Series B Senior Subordinated Notes (collectively, the "SRI Senior
Subordinated Notes").
The SRI Senior Notes and SRI Senior Subordinated Notes contain restrictive
covenants which, among other things (i) limit SRI's ability to sell certain
assets, pay dividends, retire its common stock or retire certain debt, (ii)
limit its ability to incur additional debt or issue stock and (iii) limit
certain related party transactions.
SRI has a revolving credit agreement with a bank (the "Credit Agreement")
under which it may draw up to $25.0 million. Of this amount, up to $15.0 million
may be used to support letters of credit. As of February 3, 1996, $8.4 million
of the total commitment was used to collateralize letters of credit resulting in
available funds of $16.6 million. The Company also has a separate agreement with
the bank under which it may borrow an additional $10.0 million for seasonal
working capital needs (the "Seasonal Credit Agreement" and together with the
Credit Agreement, the "Revolving Credit Agreement"). Funds are available under
the Seasonal Credit Agreement from August 15 through January 15 of each calendar
year (the "Seasonal Period"). The Revolving Credit Agreement is available
through February 3, 1998 and provides for a commitment fee of 1/2 of 1% of the
average daily unused portion of the commitment amount paid on a quarterly basis.
Interest is charged on outstanding loans at a base rate plus a specified margin.
The base rate is the higher of the bank's prime rate or 1/2 of 1% above the
Federal Funds Effective Rate. The specified margin range is 1.25% to 2.75% based
on calculated debt service ratios as defined in the agreement. During 1995, the
availability under the Credit Agreement was never less than $4.5 million. During
the Seasonal Period, the availability under the Revolving Credit Agreement was
never less than $11.5 million. The Revolving Credit Agreement contains covenants
which, among other things, restricts the (i) incurrence of additional
F-19
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
debt, (ii) purchase of certain investments, (iii) payment of dividends, (iv)
formation of certain business combinations, (v) disposition of certain assets,
(vi) acquisition of subordinated debt, (vii) use of proceeds received under the
agreement, (viii) aggregate amount of capital expenditures (including any
expenditures made in connection with any permitted acquisitions) to $31.0
million during 1995 and (iv) certain transactions with related parties. The
Revolving Credit Agreement also requires that SRI maintain a debt service ratio
above a predetermined level. The Revolving Credit Agreement is secured by SRI's
distribution center located in Jacksonville, Texas, including equipment located
therein, a pledge of SRPC stock and a pledge of the Company's trademarks. The
net book value of the distribution center was approximately $10.7 million at
February 3, 1996.
The increasing rate Bealls Holding, Inc. ("Bealls Holding") Subordinated
Debentures Due 2002 (the "Bealls Holding Subordinated Debentures") in aggregate
principal amount of approximately $15.0 million bear interest at 10% through
1994, 11% in 1995 and 12% thereafter until maturity. Interest is payable
semi-annually on June 30 and December 31. Original issue discount of $7.3
million is being charged to interest expense over the term to maturity using the
effective interest method. The combination of coupon interest payments and
original issue discount results in an effective interest rate of 20.9%. The
Bealls Holding Subordinated Debentures may be prepaid, at the Company's option,
at their face value. The Company is required to redeem the Bealls Holding
Subordinated Debentures beginning no later than December 31, 1997, in no more
than six equal annual installments. The Bealls Holding Subordinated Debentures
are subordinated to all debt except the Stage Stores Senior Discount Debentures.
SRI is the primary obligor under these debentures.
In connection with the acquisition of Fashion Bar, FB Holdings, Inc. ("FB
Holdings") issued approximately $3.6 million aggregate principal amount of 7% FB
Holdings Subordinated Notes Due 2000 ("FB Holdings Subordinated Notes") to
former stockholders of Fashion Bar. The FB Holdings Subordinated Notes were
recorded at their estimated fair value at issuance date of $3.1 million. The
difference between the estimated fair value and principal amount of $0.5 million
is being charged to interest expense over the term to maturity using the
effective interest method. The FB Holdings Subordinated Notes are due in two
equal installments on June 30, 1999 and 2000. The FB Holdings Subordinated Notes
may be prepaid at any time in whole or in part at SRI's option. The FB Holdings
Subordinated Notes bear interest at 7% per annum, payable quarterly. The
combination of coupon interest payments and original issue discount results in
an effective interest rate of 9.0%. Prior to and including June 1995, SRI paid
interest in the form of additional FB Holdings Subordinated Notes; thereafter,
interest is being paid in cash. The principal amount of FB Holdings Subordinated
Notes at February 3, 1996 was $4.4 million. The FB Holdings Subordinated Notes
are subordinated to all debt except the Stage Stores Senior Discount Debentures.
SRI is the primary obligor under these debentures.
In connection with the acquisition of Bealls, Bealls Holding issued the 7%
Bealls Holding Junior Subordinated Debentures Due 2003 ("Bealls Holding Junior
Subordinated Debentures") at a face value of approximately $12.5 million, net of
discount of approximately $8.4 million. Such discount is being charged to
interest expense over the term to maturity using the effective interest method.
The Bealls Holding Junior Subordinated Debentures are limited to an aggregate
principal amount of approximately $18.3 million. Interest is payable
semi-annually on June 30 and December 31. The combination of coupon interest
payments and original issue discount results in an effective interest rate of
39.4%. The principal amount of Bealls Holding Junior Subordinated Debentures
outstanding at February 3, 1996 was $14.3 million. The Bealls Holding Junior
Subordinated Debentures are subordinated to all debt except the Stage Stores
Senior Discount Debentures. SRI is the primary obligor under these debentures.
The Port Arthur Industrial Development Revenue Bond (the "Port Arthur IDRB")
bears interest at 75% of the prime rate payable monthly. The interest rate
applicable to the Port Arthur IDRB at February 3, 1996 was 6.6%. The Port Arthur
IDRB is collateralized by a building with a net book value of approximately $1.7
million. Under a separate agreement, SRI is required to make scheduled annual
sinking fund payments ranging from $0.1 million to $0.2 million.
The Stage Stores Senior Discount Debentures were issued with a principal
amount of approximately $149.1 million. The debentures were sold at a discount
of approximately $69.1 million. Substantially all of the net proceeds
F-20
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
from the Stage Stores Senior Discount Debentures were used to make cash payments
to the holders of Stage Stores common stock equal to $5.85 per share. Interest
begins to accrue in August 1998 and is payable semi-annually on February 15 and
August 15 commencing February 15, 1999. The discount is being charged to
interest expense over the term to maturity using the effective interest method
which, together with the coupon interest, results in a 12.74% effective interest
rate. The Stage Stores Senior Discount Debentures contain restrictions which,
among other things, limits (i) the payment of dividends, (ii) the repurchase of
stock and subordinated debt, (iii) the acquisition of additional debt or the
creation of certain liens, (iv) disposition of certain assets and (v) certain
related party and intercompany transactions. The Stage Stores Senior Discount
Debentures are secured by all of the issued and outstanding common stock of SRI
and is subordinated to all debt.
Aggregate maturities of long-term debt for the next five years are:
1996--$0.3 million; 1997--$2.1 million; 1998--$2.1 million; 1999--$21.7 million
and 2000--$116.6 million.
Management estimates the fair value of its long-term debt to be $325.7
million and $352.3 million at January 28, 1995 and February 3, 1996,
respectively. In developing its estimates, management considered quoted market
prices for each instrument, if available, current market interest rates in
relation to the coupon interest rates of each instrument, the relative
subordination of each instrument and the relative liquidity of the instrument as
indicated by the presence or lack of an active market.
NOTE 6 - MANDATORILY REDEEMABLE PREFERRED STOCK
In connection with the Refinancing in 1993 (see Note 5), the Company
redeemed all of the outstanding shares of its 15% cumulative senior redeemable
preferred stock and 14% cumulative junior redeemable preferred stock (8,080 and
2,000 shares, respectively) at the aggregate of their liquidation value plus
accrued and unpaid dividends amounting to $16.0 million and $3.8 million,
respectively.
NOTE 7 - STOCK OPTION PLAN
During 1993, the Company adopted the Third Amended and Restated Stock
Option Plan (the "Stock Option Plan") which was designed to provide incentives
to present and future key employees and advisors to the Company (the
"Participants") as selected by the compensation committee of the Board of
Directors (the "Board"). Options to purchase shares of the Company's common
stock may be granted to any Participant at any time, at such price and on such
terms as established by the Board. Options granted under the Stock Option Plan
may be either non-qualified or incentive stock options ("ISOs") within the
meaning of Section 422A of the Internal Revenue Code or in a form consistent
with the Stock Option Plan as the Board may determine. All outstanding options
are non-qualified.
The number of shares of common stock which may be granted under the Stock
Option Plan shall not exceed 2,000,000 shares. All Options issued as ISOs under
the Stock Option Plan are required to (i) have an exercise price not less than
100% of the fair value of the common stock at the date of grant, (ii) not be
exercisable more than 10 years after grant date, (iii) be nontransferable and
(iv) be exercisable only during the holder's employment by the Company or a
period not exceeding three months following termination thereof. Options which
are not ISOs may provide that the holder receive cash equal to the excess of the
fair market value per share of common stock at the exercise date over the
exercise price per share, in lieu of issuance of common stock upon exercise of
the option. Upon termination of the Participant's employment with the Company,
the Company may, at its option, repurchase any vested common stock obtained
under the Stock Option Plan at the fair market value of the common stock. Any
unvested common stock obtained under the Stock Option Plan may be repurchased at
the Company's option, at the original issuance cost of the common stock. The
Stock Option Plan also provides that the Company may sell to any Participant
shares of common stock or preferred stock consistent with the Plan and at the
discretion of the Board.
During 1993, all of SRI's options with an exercise price of $0.10 were
exercised. Additionally, the Board granted active Participants who exercised
such options one Stage Stores option with an exercise price of $2.15
F-21
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
for every ten SRI options exercised. All of SRI's options with an exercise price
of $5.00 remained outstanding and were exchanged for Stage Stores options with
an exercise price of $0.10 and the right to receive a distribution of $0.95 per
option which will be paid as the options vest. This distribution is being
recognized as compensation expense over the vesting period.
The range of prices for options exercised during 1995 was $0.10 to $2.15 per
share. The range of prices for options outstanding at the end of 1995 was $0.10
to $5.00 per share.
A summary of the activity in the Stock Option Plan follows:
Fiscal Year
--------------------------------
1993 1994 1995
-------- ------- ----------
Options outstanding at beginning of year 863,625 571,082 743,012
Granted 457,227 197,050 431,880
Surrendered (13,045) (22,240) (7,849)
Exercised (736,725) (2,880) (105,551)
-------- ------- ---------
Options outstanding at end of year 571,082 743,012 1,061,492
======== ======= =========
Options vested at end of year -- 130,570 254,790
======== ======= =========
Options exercisable at end of year -- 130,570 254,790
======== ======= =========
NOTE 8 - EMPLOYEE BENEFIT PLANS
Pension benefits for employees are provided under the SRI Retirement Plan
(the "Plan"), a qualified benefit plan. Benefits are administered through a
Trust arrangement which provides monthly payments or lump sum distributions. The
Plan covers substantially all employees who have completed one year of service
with one thousand hours of service. Benefits under the plan are based upon a
percentage of the participant's earnings during each year of credited service.
The following sets forth the funded status of the Plan and the amounts
recognized in the consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
---------------- ----------------
<S> <C> <C>
Actuarial present value of benefits:
Vested benefit obligations $(18,590) $(24,680)
======== ========
Accumulated benefit obligations $(19,630) $(25,790)
======== ========
Projected benefit obligations $(24,530) $(32,240)
Market value of Plan assets, primarily fixed income and equity
securities 16,320 20,000
-------- --------
Pension obligations in excess of assets (8,210) (12,240)
Unrecognized prior service income (34) (28)
Unrecognized net loss 6,078 10,948
Adjustment required to recognize minimum liability (1,144) (4,470)
-------- --------
Accrued pension cost $ (3,310) $ (5,790)
======== ========
Assumptions utilized in determining projected obligations and
funding amounts:
Discount rate 8.75% 7.00%
Rate of increase in compensation levels 4.00% 4.00%
Expected long-term rate of return on Plan assets 9.00% 9.00%
</TABLE>
The Company's funding policy for the Plan is to contribute the minimum amount
required by applicable regulations. During 1993, 1994 and 1995, in accordance
with Statement of Financial Accounting Standards No.
F-22
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
87, the Company recorded adjustments of $1.1 million, $0.2 million and $3.2
million to recognize the excess of the accumulated benefit obligation over the
market value of the Plan assets, respectively. Accordingly, the Company recorded
a charge to retained earnings of $0.6 million, $0.1 million and $2.1 million,
net of applicable tax and unrecognized prior service cost, for 1993, 1994 and
1995, respectively.
The components of pension cost for the Plan were as follows (in thousands):
Fiscal Year
----------------------------
1993 1994 1995
------- ------- -------
Service cost $ 743 $ 887 $ 771
Interest cost 1,861 1,995 2,139
Actual loss (return) on Plan assets (1,955) 940 (3,377)
Net amortization and deferral 409 (2,174) 2,292
------- ------- -------
$ 1,058 $ 1,648 $ 1,825
======= ======= =======
Prior to its acquisition, Beall Brothers, Inc. sponsored an unfunded,
nonqualified Benefit Restoration Plan which provided certain key executives
defined pension benefits in excess of limits imposed by federal tax law. In
February 1989, this plan was terminated. The recorded liability for this plan
was $1.3 million at February 3, 1996.
NOTE 9 - OPERATING LEASES
The Company leases stores, service center facilities, the corporate
headquarters and equipment under operating leases. A number of store leases
provide for escalating minimum rent. Rental expense is recognized on a
straight-line basis over the life of such leases. The majority of the Company's
store leases provide for contingent rentals, generally based upon a percentage
of gross sales. The Company has renewal options for most of its store leases;
such leases generally require that the Company pay for utilities, taxes and
maintenance expense. A summary of rental expense associated with operating
leases follows (in thousands):
Fiscal Year
----------------------------
1993 1994 1995
------- ------- -------
Minimum rentals $22,319 $22,979 $26,943
Contingent rentals 2,818 2,874 2,618
Equipment rentals 1,273 784 593
------- ------- -------
$26,410 $26,637 $30,154
======= ======= =======
Minimum rental commitments on long-term operating leases at February 3, 1996,
net of sub-leases, are as follows (in thousands):
Fiscal Year:
1996 $ 28,307
1997 27,028
1998 25,146
1999 23,527
2000 20,233
Thereafter 84,999
--------
$209,240
========
The Company's corporate headquarters and six Palais Royal stores are leased
from a partnership in which a Company director is a general partner. The lease
relating to the corporate headquarters is for a term of fifty years expiring in
2032 and includes an established minimum annual rate adjusted every three years
for changes in the Consumer Price Index. Three of the Palais Royal store leases
are for terms of twenty years expiring between 1999 and 2000. The remaining
three store leases are for terms of twenty-five years expiring between 2005 and
2010.
F-23
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
All of the store leases provide options to extend the term of the lease and for
contingent rentals based on a percentage of gross sales. The Company recognized
rental expense of $1.9 million, $2.0 million and $2.1 during 1993, 1994 and
1995, respectively, for all such leases. Future minimum lease payments total
$44.7 million, $9.6 million of which is payable over the next five fiscal years
for all such leases. The Company believes that the terms of all such leases are
comparable to leases with unaffiliated third parties covering similar
properties.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company's corporate headquarters and six Palais Royal stores are leased
from a partnership in which a Company officer is a general partner (see Note 9).
An affiliate of a principal shareholder of the Company received fees for
professional services rendered and expense reimbursements in the amounts of $1.5
million, $0.6 million and $0.8 million for 1993, 1994 and 1995, respectively.
During 1993, the Company entered into an employment agreement with the
President and Chief Executive Officer of the Company. As part of this agreement,
the Company agreed to purchase his former residence for subsequent resale for
$1.2 million and loaned $0.3 million to him. Such loan is due October 2, 1996,
subject to extension, and bears a market rate of interest.
NOTE 11 - INCOME TAXES
All Company operations are domestic. Income tax expense charged to continuing
operations consisted of the following (in thousands):
Fiscal Year
----------------------------
1993 1994 1995
------- ------- -------
Federal income tax expense (benefit):
Current $ 9,989 $ 7,154 $ 9,772
Deferred (2,362) (3,794) (3,630)
------- ------- -------
7,627 3,360 6,142
------- ------- -------
State income tax expense (benefit):
Current 1,250 771 1,060
Deferred (1,308) 186 (435)
------- ------- -------
(58) 957 625
------- ------- -------
$ 7,569 $ 4,317 $ 6,767
======= ======= =======
A reconciliation between the federal income tax expense charged to continuing
operations computed at statutory tax rates and the actual income tax expense
recorded follows (in thousands):
Fiscal Year
-------------------------
1993 1994 1995
------ ------ ------
Federal income tax expense at the statutory rate $7,348 $3,831 $6,124
State income taxes, net 125 797 406
Permanent differences, net 58 (311) 290
Other, net 38 -- (53)
------ ------ ------
$7,569 $4,317 $6,767
====== ====== ======
The 1993 income tax benefit relating to the extraordinary item of $8.8
million (see Note 5) is comprised of current federal tax benefit ($7.4 million),
deferred federal tax benefit ($1.3 million) and state tax benefit ($0.1
million). The 1994 income tax benefit relating to the extraordinary item
associated with the retirement of the SRI Senior Notes (see Note 5) is comprised
of $0.2 million current federal tax benefit.
F-24
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)
Deferred tax liabilities (assets) consist of the following (in thousands):
<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
---------------- ----------------
<S> <C> <C>
Gross deferred tax liabilities:
Depreciation and amortization $ 8,303 $ 7,485
Inventory reserves 3,175 1,406
Gain on sale of accounts receivable 822 800
Other 1,310 1,435
-------- --------
13,610 11,126
-------- --------
Gross deferred tax assets:
Allowance for doubtful accounts (3,174) (3,302)
Accrued consolidation costs (1,968) (1,478)
Net operating loss carryforwards -- (82)
Original issue discount (5,640) (10,042)
Accrued expenses (1,518) (990)
Prepaid expenses -- --
Pensions (1,404) (2,686)
Escalating leases (962) (962)
Charitable contribution carryforward (620) (113)
Accrued payroll costs (1,196) (884)
Accrued store closure costs (2,085) (558)
Other (975) (780)
-------- --------
(19,542) (21,877)
-------- --------
Deferred tax assets valuation allowance -- --
-------- --------
$ (5,932) $(10,751)
======== ========
</TABLE>
The utilization of any carryforwards which originated prior to the Company's
acquisition of Bealls or Fashion Bar are recorded as an adjustment to goodwill
or other intangibles associated with the respective acquisition.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Litigation: The Company is subject to claims and litigation arising in the
normal course of its business. The Company does not believe that any of
these proceedings will have a material adverse effect on its financial
position, its results of operations or its cash flows.
Letters of Credit: The Company issues letters of credit to support certain
merchandise purchases which are required to be collateralized. The Company
had outstanding letters of credit totaling $8.4 million at February 3,
1996, all of which were collateralized by the Revolving Credit Agreement
(see Note 5). These letters of credit expire within twelve months of
issuance.
Concentration of Credit Risk: Financial instruments which potentially subject
the Company to concentrations of credit risk are primarily cash, short-term
investments and accounts receivable. The Company's cash management and
investment policies restrict investments to low risk, highly-liquid securities
and the Company performs periodic evaluations of the relative credit standing of
the financial institutions with which it deals. The credit risk associated with
the Company's accounts receivable is limited by the large number of customers in
the Company's customer base. Substantially all of the Company's customers reside
in the central United States.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Uhlmans Inc.
We have audited the accompanying balance sheets of Uhlmans Inc. as of February
3, 1996 and January 31, 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended February 3, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Uhlmans Inc. at February 3,
1996 and January 31, 1995, and the results of its operations and its cash flows
for each of the three years in the period ended February 3, 1996 in conformity
with generally accepted accounting principles.
In fiscal 1996, as described in Note 6 to the financial statements, the
Company adopted the provisions of FASB Statement No. 106, "Employer's
Accounting for Retirement Benefits Other Than Pensions."
Ernst & Young LLP
Toledo, Ohio
March 22, 1996
F-26
<PAGE>
UHLMANS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, February 3,
1995 1996
----------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash $ 924,550 $ 847,823
Trade accounts receivable, less $100,000 allowance for
doubtful accounts 6,617,576 6,115,928
Merchandise inventories 10,921,994 11,295,466
Prepaid expenses 138,978 171,978
----------- -----------
Total current assets 18,603,098 18,431,195
Other assets 227,697 217,252
Leasehold improvements and equipment:
Leasehold improvements 7,299,310 6,969,300
Furniture and fixtures 4,229,136 4,333,724
Transportation equipment 53,431 68,148
----------- -----------
11,581,877 11,371,172
Less allowances for depreciation and amortization 7,190,789 7,216,929
----------- -----------
4,391,088 4,154,243
----------- -----------
$23,221,883 $22,802,690
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 3,288,528 $ 2,939,965
Accrued expenses 421,904 453,496
Compensation and payroll taxes 658,316 654,994
State and local taxes 309,630 321,406
Interest 51,149 70,177
Current maturities of long-term liabilities 876,292 924,595
----------- -----------
Total current liabilities 5,605,819 5,364,633
Long-term liabilities, less current maturities:
Notes payable including notes payable to stockholders and
former stockholders (Note 2) 13,877,904 13,768,910
Obligations under deferred compensation arrangements 234,748 186,636
Pension 110,089 147,875
----------- -----------
14,222,741 14,103,421
Deferred credit 5,133 --
Commitments and Contingencies -- --
Stockholders' equity (Note 3):
Common stock, no par value:
Authorized--150,000 shares
Outstanding--8,271 shares after deducting 86,069 treasury
shares, at stated value 82,710 82,710
Retained earnings 3,305,480 3,305,443
Reduction for minimum pension liability -- (53,517)
----------- -----------
3,388,190 3,334,636
----------- -----------
$23,221,883 $22,802,690
=========== ===========
</TABLE>
See accompanying notes.
F-27
<PAGE>
UHLMANS INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
February 1,
1995 through
Year ended January 31, February 3,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C>
Net merchandise sales $ 57,101,769 $ 60,212,662 $ 59,749,342
Cost of sales and related buying, occupancy, and distribution
expenses (43,545,216) (46,559,601) (46,129,222)
------------ ------------ ------------
Gross profit 13,556,553 13,653,061 13,620,120
Selling, general and administrative expenses (12,096,093) (11,883,614) (12,231,712)
Service charge income 801,584 874,029 850,852
------------ ------------ ------------
Operating income 2,262,044 2,643,476 2,239,260
Interest expense (1,168,260) (1,431,055) (1,636,673)
------------ ------------ ------------
Net income $ 1,093,784 $ 1,212,421 $ 602,587
============ ============ ============
</TABLE>
See accompanying notes.
F-28
<PAGE>
UHLMANS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Reduction
---------------------- for Minimum
Stated Retained Pension
Shares Value Earnings Liability Total
------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at February 1, 1993 27,016 $ 270,160 $ 5,599,966 $ 5,870,126
Net income 1,093,784 1,093,784
Cash distributions to
stockholders (360,394) (360,394)
Purchase of common stock for
treasury (Note 3) (18,745) (187,450) (3,726,256) (3,913,706)
------- --------- ----------- -------- -----------
Balances at February 1, 1994 8,271 82,710 2,607,100 2,689,810
Net income 1,212,421 1,212,421
Cash distributions to
stockholders (514,041) (514,041)
------- --------- ----------- -------- -----------
Balances at January 31, 1995 8,271 82,710 3,305,480 3,388,190
Net income 602,587 602,587
Cash distributions to
stockholders (602,624) (602,624)
Reduction for minimum
pension liability (Note 5) $(53,517) (53,517)
------- --------- ----------- -------- -----------
Balances at February 3, 1996 8,271 $ 82,710 $ 3,305,443 $(53,517) $ 3,334,636
======= ========= =========== ======== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
UHLMANS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 1,
1995 through
Year ended January 31, February 3,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,093,784 $ 1,212,421 $ 602,587
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation 876,037 844,625 896,177
Provision for bad debts 143,996 135,647 131,678
Amortization of deferred credit (13,000) (13,000) (5,133)
Changes in operating assets and liabilities:
Trade accounts receivable (462,008) 75,559 369,722
Merchandise inventories (503,840) (717,111) (373,768)
Prepaid expenses and other assets (30,822) 43,116 51,881
Trade accounts payable and accrued expenses 529,784 669,810 (258,588)
Pension obligations (51,320) 34,602 (108,138)
Obligations under deferred compensation
arrangements 4,629 (30,659) (48,112)
Cash value of life insurance 65,413 (10,557) (12,386)
----------- ----------- ----------
Net cash provided by operating activities 1,652,653 2,244,453 1,245,920
Net cash used in investing activities--purchase of
leasehold improvements and equipment (762,617) (860,912) (659,332)
Financing activities
Borrowings on notes payable 2,750,000 -- --
Payments on notes payable (617,158) (860,692) (960,691)
Distributions to stockholders (360,394) (514,041) (602,624)
Purchase of common stock (2,500,000) -- --
Net borrowings on revolving line of credit -- -- 900,000
----------- ----------- ----------
Net cash used in financing activities (727,552) (1,374,733) (663,315)
----------- ----------- ----------
Increase (decrease) in cash 162,484 8,808 (76,727)
Cash at beginning of year 753,258 915,742 924,550
----------- ----------- ----------
Cash at end of year $ 915,742 $ 924,550 $ 847,823
=========== =========== ==========
</TABLE>
See accompanying notes.
F-30
<PAGE>
UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS
February 3, 1996
(1) SIGNIFICANT ACCOUNT POLICIES
Basis of Presentation
In fiscal 1996, the Company changed its fiscal year-end to a fifty-two/
fifty-three week year which ends on the Saturday closest to January 31.
Description of Business
Uhlmans Inc. (the Company--formerly Fred W. Uhlman and Co.) operates 34
family apparel stores in Ohio, Michigan and Indiana.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
Actual results could differ from those estimates.
Trade Accounts Receivable
Retail customer accounts receivable are charged-off in full if no payment has
been applied against the unpaid balance of the customer's account during the
last seven months of the fiscal year and no action has been taken by the
customer to repay the account. The allowance for doubtful accounts is based on
historical bad debt experience and an evaluation of the past-due status of the
accounts. The credit risk associated with the Company's accounts receivable is
limited by the large number of customers in the Company's customer base.
Substantially all of the Company's customers reside in Ohio, Indiana and
Michigan.
Advertising
The Company expenses the production costs of advertising as incurred.
Advertising expense for fiscal 1994, 1995 and 1996 was approximately $1,695,000,
$1,650,000 and $1,700,000, respectively. No advertising costs have been
capitalized by the Company.
Merchandise Inventories
Merchandise inventories are valued by use of the retail method and are stated
at the lower of cost or market using the first-in, first-out method.
Leasehold Improvements and Equipment
Leasehold improvements and equipment (including significant renewals and
betterments) are capitalized at cost. The Company provides for depreciation and
amortization by the straight-line method for financial-reporting purposes and by
accelerated methods for income-tax purposes. Leasehold improvements are
amortized over 10 years which approximates the lease terms. Equipment is
depreciated over its useful life (generally 5 to 10 years).
Income Taxes
Under an election privilege afforded by provisions of the Internal Revenue
Code, the Company has elected Subchapter S status for federal income tax
reporting. Accordingly, no provision has been made for federal income taxes as
the income of the Company is included in the stockholders' personal income tax
returns.
Financial Instruments
The Company records all financial instruments at cost. The fair value of all
financial instruments approximates cost.
F-31
<PAGE>
UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNT POLICIES (Continued)
Impairment of Assets
The Company has not elected early adoption of Statement of Financial
Accounting Standard No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 becomes
effective beginning with the Company's first quarter of fiscal 1997. The Company
does not believe that the adoption of SFAS 121 will have a material effect on
the Company's financial position or results of operations.
(2) NOTES PAYABLE
The Company's lending agreement with banks (the agreement) provides for an
unsecured term note of $5,000,000 and an unsecured $12,000,000 revolving line of
credit (the revolver) (increasing to $14,500,000 during the period from
September 15 to December 15), and expires June 1, 1997.
Interest on the term note is at a base rate (8-1/4% at February 3, 1996)
fluctuating with prime plus 1/4%--2-1/2% dependent on the Company's financial
position. Interest on the revolver is at a base rate (6-3/4% at February 3,
1996) fluctuating with LIBOR plus 1-1/2%--3% dependent on the Company's
financial position. A commitment fee of 1/2% per annum is due on the unused
portion of the revolver.
The agreement requires the Company to maintain certain financial ratios and
net worth requirements. The agreement also limits annual stockholder
distributions to $40,000 plus an amount equivalent to income taxes that would
otherwise be payable. Provisions of the agreement were complied with during
fiscal 1994, 1995 and 1996.
Details of notes payable are as follows:
<TABLE>
<CAPTION>
January 31, February 3,
1995 1996
----------- -----------
<S> <C> <C>
Revolving line of credit with banks $ 9,500,000 $10,400,000
Term note payable to banks, due in semiannual installments of
$350,000 plus interest through January 1, 1999 3,950,000 3,150,000
Subordinated notes payable to stockholders ($677,014 in 1995
and $597,366 in 1996) and to former stockholders, unsecured,
due in semiannual installments of $70,685 plus interest at
12% through May 31, 1998 1,201,650 1,060,280
Other unsecured notes payable 86,946 67,625
----------- -----------
14,738,596 14,677,905
Less current maturities 860,692 908,995
----------- -----------
Totals $13,877,904 $13,768,910
=========== ===========
</TABLE>
The future maturities of long-term notes payable for fiscal years 1998
through 2000 are $11,241,371, $1,477,539 and $1,050,000, respectively.
Interest paid in fiscal 1994, 1995 and 1996 amounted to $1,253,904,
$1,463,607 and $1,617,645, respectively.
(3) COMMON STOCK
On November 25, 1986, the Company entered into a Stock Redemption and Share
Transfer Restriction Agreement (the Agreement) with certain stockholders of the
Company and redeemed 34,100 shares of common stock for $2,584,098. On July 19,
1993, the Company redeemed 18,745 shares of common stock not owned by management
for $3,913,706. The 1993 redemption was financed by an increase in the term note
with the banks of $2,500,000 and unsecured subordinated notes payable in the
amount of $1,413,706.
The Company has the option in the event of termination of employment to
purchase shares of the Company's common stock owned by the management group. The
price per share is the book value per share. The Company also has the obligation
to purchase the shares of the Company owned by the president of the Company in
the event
F-32
<PAGE>
UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(3) COMMON STOCK (Continued)
of his death at 133% of book value per share at the end of the preceding fiscal
year. The Company carries life insurance on the life of the president of the
Company to fund the obligation.
(4) RENTAL EXPENSE
The Company leases all facilities and certain equipment under noncancellable
operating leases. Total rental expense amounted to $3,906,282, $3,747,293 and
$3,667,703 (including contingent rental expense of $213,390 $261,696 and
$230,738) for fiscal years 1994, 1995 and 1996, respectively, including
$767,899, $775,999 and $746,979 applicable to leases with related parties for
the same periods.
Future minimum rental commitments under noncancellable operating leases with
initial terms of more than one year are as follows:
Fiscal years:
1997 $ 2,883,776
1998 2,475,548
1999 1,820,334
2000 1,474,366
2001 809,138
2002 and thereafter 2,218,049
Total $11,681,211
Certain leases have provisions for additional contingent rentals based on
percentages of sales and contain options to renew for additional terms ranging
from one to twenty years.
(5) EMPLOYEE BENEFIT PLANS
The Company has a defined-benefit pension plan (the "Plan") covering the
majority of its employees. The benefits are primarily based on the employee's
compensation. The Company's funding policy is to contribute amounts to the Plan
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus additional amounts as the Company
may determine to be appropriate. Effective December 31, 1994, the Company
curtailed all future benefit accruals of participants in the Plan that resulted
in a gain of $39,244 which is included in the results of operations for the year
ended January 31, 1995.
The Company has recorded an additional minimum liability of $110,089 and
$147,875 as of January 31, 1995 and February 3, 1996, respectively, which
represent the amounts required to bring the Company's recorded pension asset
equal to the excess of the accumulated benefit obligation over plan assets.
Intangible assets (included in other assets) of $110,089 and $94,358 as of
January 31, 1995 and February 3, 1996, respectively, were recorded to the extent
of the unrecognized prior service costs and net transition obligation. The
difference between the additional minimum liability and intangible asset as of
February 3, 1996 was included as a reduction of shareholders' equity.
F-33
<PAGE>
UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(5) EMPLOYEE BENEFIT PLANS (Continued)
The following table sets forth the funded status and amounts recognized in
the Company's balance sheets for the Plan:
<TABLE>
<CAPTION>
January 31, 1995 February 3, 1996
---------------- ----------------
<S> <C> <C>
Projected benefit obligation (substantially all vested) $1,547,517 $1,745,457
Plan assets at fair value, primarily invested in common trust funds
and U. S. Treasury and agency securities 1,407,071 1,675,363
---------- ----------
Projected benefit obligation in excess of plan assets (140,446) (70,094)
Unrecognized prior service cost 110,089 94,358
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions 17,205 68,265
Unrecognized net asset (17,205) (14,748)
Minimum liability (110,089) (147,875)
---------- ----------
Net pension liability $ (140,446) $ (70,094)
The net pension liability is included in:
Prepaid (accrued) expenses $ (30,357) $ 77,781
Long-term liabilities (110,089) (147,875)
---------- ----------
$ (140,446) $ (70,094)
========== ==========
</TABLE>
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
Period from
February 1,
1995 through
Year ended January 31, February 3,
1994 1995 1996
--------- --------- ------------
<S> <C> <C> <C>
Interest cost on projected benefit obligation $116,299 $ 125,095 $ 112,641
Service cost--benefits earned during the period 88,483 92,630 --
Return on plan assets (gain) loss (24,522) 43,777 (241,959)
Net amortization and deferral (80,331) (141,640) 144,117
-------- --------- ---------
Net periodic pension cost $ 99,929 $ 119,862 $ 14,799
======== ========= =========
</TABLE>
Assumptions used in the actuarial determinations for the Plan are:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ------
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.5% 6.5%
Expected long-term rate of return on plan assets 7.5% 7.5% 6.5%
Rate of increase in future compensation levels 4.0% -- --
</TABLE>
In fiscal 1996, the Company established a 401(k) profit sharing plan for the
benefit of all qualifying employees. Employer matching contributions are made
monthly based upon a percentage of qualified employees' contributions, and
amounted to $52,000 in fiscal year 1996. No additional profit sharing
contributions were made by the Company in fiscal year 1996.
F-34
<PAGE>
UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(6) OTHER POSTRETIREMENT BENEFIT PLAN
The Company sponsors a defined benefit health care plan that provides
postretirement medical benefits to a group of 17 retired employees. No
additional employees are being added to the Plan. The Plan is contributory, with
retiree contributions adjusted annually to cover any increased costs, and
contains other cost-slimming features such as deductibles and coinsurance. The
accounting for the Plan anticipates future cost-sharing changes. The Company's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management.
In 1996, the Company adopted FASB Statement No. 106, "Employer's Accounting
for Postretirement Benefits Other than Pensions" and elected to use the
prospective recognition method for transition. The effect of adopting the new
rules increased 1996 net periodic postretirement benefit cost by $2,400 and
decreased 1996 net income by $2,400. Postretirement benefit cost for 1994 and
1995, which was recorded on a cash basis, has not been restated.
The following table presents the Plan's funded status reconciled with amounts
recognized in the Company's balance sheet at February 3, 1996:
Accumulated postretirement benefit obligation for retirees $100,000
Plan assets at fair value --
--------
Accumulated postretirement benefit obligation in excess of
plan assets 100,000
Transition obligation (94,600)
Unrecognized net gain (3,000)
--------
(97,600)
--------
Accrued post retirement benefit liability $ 2,400
========
Net periodic postretirement benefit cost includes the
following components:
Interest cost $ 7,700
Amortization of transition obligation over 11 years 9,500
--------
Net periodic postretirement benefit cost $ 17,200
========
Medical trend rates are not applicable since the subsidy is not related to
trend rates. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% for 1996.
F-35
<PAGE>
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change
in the affairs of the Company since such date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 5
Risk Factors 12
Use of Proceeds 16
Dividend Policy 16
Capitalization 17
Dilution 18
Selected Consolidated Historical Financial and
Operating Data 19
Unaudited Pro Forma Combined Financial Data 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Business 34
Management 41
Certain Relationships and Related Transactions 51
Principal Stockholders 52
Over-Allotment Option 53
Description of Certain Indebtedness 54
Description of Capital Stock 56
Shares Eligible for Future Sale 58
Underwriting 59
Notice to Canadian Residents 60
Certain U.S. Federal Tax Considerations for Non-U.S.
Holders of Common Stock 61
Legal Matters 62
Experts 62
Additional Information 63
Index to Financial Statements F-1
</TABLE>
Until , 1996 (25 days after the commencement of the Offering), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
STAGE STORES INC. LOGO
10,000,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CS First Boston
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
PaineWebber Incorporated
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee $ 66,207
NASD filing fee 19,700
Nasdaq National Market original listing fee 25,000
Blue sky fees and expenses (including attorneys' fees
and expenses) 20,000
Printing and engraving expenses 200,000
Transfer agent's fees and expenses 10,000
Accounting fees and expenses 175,000
Legal fees and expenses 500,000
Miscellaneous expenses 284,093
-----------
Total $1,300,000
===========
</TABLE>
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
Item 14. Indemnification of Directors and Officers.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is,
or is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any person who is, or is threatened to be made, a
party to any threatened, pending or completed action or suit by or in the
right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the
indemnification of directors and officers of the Company to the fullest
extent permitted by Section 145.
In that regard, the Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the corporation) by reason of the fact that he
is or was a director or officer of such corporation, or is or was serving at
the request of such corporation as a director, officer or member of another
corporation, partnership, joint venture,
II-1
<PAGE>
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of such corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Indemnification in connection with an action or suit by or in
the right of such corporation to procure a judgment in its favor is limited
to payment of settlement of such an action or suit except that no such
indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the indemnifying corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine that, despite
the adjudication of liability but in consideration of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper.
Item 15. Recent Sales of Unregistered Securities.
<TABLE>
<CAPTION>
DATE OF AGGREGATE OFFERING
NAME SALE TITLE SHARES PRICE
- --------------------- --------- ------------- ---------- -------------------
<S> <C> <C> <C> <C>
Mark White 09/30/93 Common Stock 8,547 $ 19,401,60
Sandra Bornstein 01/28/94 Common Stock 5,730 $ 13,007.50
Eddy Osborne 02/22/94 Common Stock 8,547 $ 19,401.60
Pat Bowman 10/31/94 Common Stock 8,547 $ 19,401.60
Peter Realmuto 11/08/94 Common Stock 1,781 $ 188.00
Tom Buttaccio 12/05/94 Common Stock 8,547 $ 19,401.60
Mark Hess 01/15/95 Common Stock 379 $ 40.00
Kathy Bodin 02/20/95 Common Stock 379 $ 40.00
Dan Singer 01/15/95 Common Stock 568 $ 60.00
Harry Gray 02/20/95 Common Stock 283 $ 30.00
Bob Mitchell 02/20/95 Common Stock 283 $ 30.00
Jerry Forrest 01/26/95 Common Stock 8,547 $ 19,401.60
David Slaughter 01/28/95 Common Stock 8,547 $ 19,401.60
Joshua Bekenstein 04/07/95 Common Stock 9,472 $ 1,000.00
Jim Hanks 04/07/95 Common Stock 222 $ 505.25
Bernard Fuchs 04/07/95 Common Stock 71,045 $ 7,500.00
Bernard Fuchs 04/07/95 Common Stock 8,904 $ 20,210.00
Elizabeth Winkler 04/10/95 Common Stock 8,525 $ 19,350.00
Joanne Swartz 04/15/95 Common Stock 4,849 $ 11,008.00
June Betz 05/17/95 Common Stock 1,657 $ 5,040.00
Doug Scarth 08/16/95 Common Stock 2,670 $ 282.00
Tom Hill 11/06/95 Common Stock 189 $ 20.00
Josh Bekenstein 12/27/95 Common Stock 4,735 $ 500.00
Dan Singer 01/22/96 Common Stock 283 $ 30.00
Bob Mitchell 01/23/96 Common Stock 142 $ 15.00
Bob Hart 02/29/96 Common Stock 568 $ 60.00
Bernard Fuchs 03/15/96 Common Stock 35,522 $ 3,750.00
Ron Sells 03/28/96 Common Stock 1,420 $ 150.00
Dan Singer 04/17/96 Common Stock 189 $ 430.00
Carl Tooker 05/01/96 Common Stock 75,781 $ 8,000.00
Carl Tooker 05/01/96 Common Stock 9,472 $ 21,500.00
Bernard Fuchs 06/05/96 Common Stock 8,904 $ 20,210.00
Joanne Turano 06/05/96 Common Stock 426 $ 45.00
Dan Singer 6/6/96 Common Stock 189 $ 430.00
Elizabeth Winkler 6/9/96 Common Stock 890 $ 2,021.00
Al Cocek 6/10/96 Common Stock 426 $ 45.00
Jerry Ivie 6/11/96 Common Stock 1,046 $ 2,375.75
Joanne Turano 6/20/96 Common Stock 94 $ 215.00
Al Cocek 6/28/96 Common Stock 189 $ 430.00
II-2
<PAGE>
Carolann Moore 6/28/96 Common Stock 947 $ 920.00
Joanne Turano 6/29/96 Common Stock 94 $ 215.00
Eugene Good 7/1/96 Common Stock 729 $ 1,655.50
Carl Tooker 7/5/96 Common Stock 47,363 $25,500.00
Mark Shulman 7/8/96 Common Stock 40,732 $94,640.00
Steve Lovell 7/9/96 Common Stock 14,209 $43,200.00
James Marcum 7/9/96 Common Stock 18,945 $57,600.00
Patsy McLeod 7/9/96 Common Stock 189 $ 430.00
Mark Hess 7/9/96 Common Stock 568 $ 880.00
William McLaughlin 7/10/96 Common Stock 367 $ 834.20
Robert Bowers 7/11/96 Common Stock 189 $ 430.00
Deborah Repace 7/11/96 Common Stock 284 $ 30.00
Burke Randolph 7/11/96 Common Stock 473 $ 255.00
Harry Gray 7/11/96 Common Stock 378 $ 552.50
Kathy Bodin 7/15/96 Common Stock 663 $ 1,095.00
Trina Gladwell 7/15/96 Common Stock 473 $ 225.00
Jack Chipperfield 7/24/96 Common Stock 356 $ 808.40
Rebecca Ross 7/30/96 Common Stock 952 $ 2,160.75
William Ehlert 8/7/96 Common Stock 94 $ 215.00
Eugene Good 8/19/96 Common Stock 222 $ 505.25
William Bloomfield 9/5/96 Common Stock 189 $ 430.00
James Murphy 9/11/96 Common Stock 94 $ 215.00
Patti Bodkins 9/12/96 Common Stock 568 $ 60.00
</TABLE>
The Company relied upon Section 4(2) of the Securities Act of 1933 in
connection with the foregoing sales of unregistered securities.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
***1.1 Form of Underwriting Agreement.
**3.1 Certificate of Incorporation of Apparel Retailers, Inc. (Incorporated by Reference to Exhibit 3.1 of
Registration No. 33-68258 on Form S-4).
**3.2 By-Laws of Apparel Retailers, Inc. (Incorporated by Reference to Exhibit 3.2 of Registration No. 33-68258
on Form S-4).
**4.1 Form of Indenture between Apparel Retailers, Inc. and The First National Bank of Boston, as Trustee,
relating to the 12 3/4% Senior Discount Debentures due 2005 of Apparel Retailers, Inc. (Incorporated
by Reference to Exhibit 4.1 of Registration No. 33-68258 on Form S-4).
**4.2 Form of Indenture among Specialty Retailers, Inc., The First National Bank of Boston, as Trustee, and
Palais Royal, Inc., as Guarantor, relating to the 10% Senior Notes due 2000 of Specialty Retailers,
Inc. (including form of note) (Incorporated by Reference to Exhibit 4.2 of Registration No. 33-68258
on Form S-4).
**4.3 Form of Indenture among Specialty Retailers, Inc., The First National Bank of Boston, as Trustee, and
Palais Royal, Inc., as Guarantor, relating to the 11% Senior Subordinated Notes due 2003 of Specialty
Retailers, Inc. (including form of note) (Incorporated by Reference to Exhibit 4.3 on Registration
No. 33-68258 on Form S-4).
**4.4 Form of Indenture between 3 Bealls Holding Corporation and Bankers Trust Company, as Trustee, relating
to 3 Bealls Holding Corporation's 9% Subordinated Debentures due 2002 (Incorporated by Reference to
Exhibit 4.2 of Registration No. 33-24571 on Form S-4) and First Supplemental Indenture dated August
2, 1993 (Incorporated by Reference to Exhibit 4.4 of Registration No. 33-68258 on Form S-4).
**4.5 Form of Indenture between 3 Bealls Holding Corporation and IBJ Schroder Bank and Trust Company, as Trustee,
relating to 3 Bealls Holding Corporation's 7% Junior Subordinated Debentures due 2002 (Incorporated
by Reference to Exhibit 4.3 of Registration No. 33-24571 on Form S-4) and First Supplemental Indenture
dated August 2, 1993 (Incorporated by Reference to Exhibit 4.5 of Registration No. 33-68258 on Form
S-4).
**4.6 Indenture by and between Specialty Retailers, Inc. and The First National Bank of Boston, as Trustee,
relating to the 11% Series C and Series D Senior Subordinated Notes due 2003 of Specialty Retailers,
Inc. dated July 27, 1995 (including form of note), (Incorporated by Reference to Exhibit 4.1 on Form
10-Q of Apparel Retailers, Inc., dated October 28, 1995).
**4.7 Form of Indenture among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., as Administrative
Agent, and Bankers Trust Company, as Trustee and Collateral Agent, relating to the 12.5% Trust
Certificate-Backed Notes of SRI Receivables Purchase Co., Inc. (including form of note). (Incorporated
by Reference to Exhibit 4.1 on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
**4.8 Amended and Restated Pooling and Servicing Agreement by and among SRI Receivables Purchase Co., Inc.,
Specialty Retailers, Inc. and Bankers Trust (Delaware) dated as of August 11, 1995 (Incorporated by
Reference to Exhibit 4.6 on Form 10-Q of Apparel Retailers, Inc., dated October 28, 1995).
**4.9 First Amendment to Amended and Restated Pooling and Servicing Agreement by and among SRI Receivables
Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust (Delaware), dated as of May 30, 1996
(Incorporated by Reference to Exhibit 4.2 on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
**4.10 Amended and Restated Series 1993-1 Supplement among SRI Receivables Purchase Co., Inc., Specialty Retailers,
Inc. and Bankers Trust (Delaware) dated as of May 30, 1996 (Incorporated by Reference to Exhibit 4.3
on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
**4.11 Amended and Restated Series 1993-2 Supplement among SRI Receivables Purchase Co., Inc., Specialty Retailers,
Inc. and Bankers Trust (Delaware) dated as of May 30, 1996 (Incorporated by Reference to Exhibit 4.4
on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
**4.12 First Amendment to the Series 1993-2 Supplement and Revolving Certificate Purchase Agreement by and among
Specialty Retailers, Inc., SRI Receivables Purchase Co., Inc., Bankers Trust (Delaware) as Trustee
for the SRI Receivables Master Trust, the financial institutions parties thereto and National Westminster
Bank Plc, New York branch dated as of August 11, 1995 (Incorporated by Reference to Exhibit 4.5 on
Form 10-Q of Apparel Retailers, Inc., dated as of May 4, 1996).
**4.13 Amended and Restated Series 1995-1 Supplement by and among SRI Receivables Purchase Co., Inc., Specialty
Retailers, Inc. and Bankers Trust (Delaware) on behalf of the Series 1995- 1 Certificateholders dated
as of May 30, 1996 (Incorporated by Reference to Exhibit 4.6 on Form 10-Q of Apparel Retailers, Inc.,
dated May 4, 1996).
**4.14 Amended and Restated Receivables Purchase Agreement among SRI Receivables Purchase Co., Inc. and Originators
dated as of May 30, 1996 (Incorporated by Reference to Exhibit 4.7 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996).
**4.15 Certificate Purchase Agreements between SRI Receivables Purchase Co., Inc. and the Purchasers of the
Series 1993-1 Offered Certificates (Incorporated by Reference to Exhibit 4.10 of Registration No. 33-68258
on Form S-4).
**4.16 Revolving Certificate Purchase Agreement between SRI Receivables Purchase Co., Inc., the Facility Agent
and the Revolving Purchasers with respect to the Class A-R Certificates (Incorporated by Reference
to Exhibit 4.11 of Registration No. 33-68258 on Form S-4).
**4.17 Revolving Credit Agreement by and among Specialty Retailers, Inc., Palais Royal, Inc. and the First National
Bank of Boston, as agent for itself and other financial institutions dated January 29, 1994 (Incorporated
by Reference to Exhibit A of Current Report on Form 8-K of Apparel Retailers, Inc. dated February 9,
1994).
**4.18 First Amendment dated July 14, 1994 to Revolving Credit Agreement by and among Specialty Retailers, Inc.,
Palais Royal, Inc. and the First National Bank of Boston, as agent for itself and other financial institutions
dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.13 on Form 10-K of Apparel Retailers,
Inc. dated January 28, 1995).
**4.19 Second Amendment dated October 31, 1994 to Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and the First National Bank of Boston, as agent for itself and other financial
institutions dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.14 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.20 Third Amendment dated January 5, 1995 to Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and the First National Bank of Boston, as agent for itself and other financial
institutions dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.15 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.21 Fourth Amendment dated March 31, 1995 to Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and the First National Bank of Boston, as agent for itself and other financial
institutions dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.16 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.22 Fifth Amendment dated July 7, 1995 to Revolving Credit Agreement by and among Specialty Retailers, Inc.,
Palais Royal, Inc., and the First National Bank of Boston, as agent for itself and other financial
institutions dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.2 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**4.23 Sixth Amendment dated July 27, 1995 to Revolving Credit Agreement by and among Specialty Retailers, Inc.,
Palais Royal, Inc. and the First National Bank of Boston, as agent for itself and other financial institutions
dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.3 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995).
**4.24 Seventh Amendment dated February 1, 1996 to Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc., and the First National Bank of Boston, as agent for itself and other financial
institutions dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.8 on Form 10-Q of
Apparel Retailers, Inc., dated as of May 4, 1996).
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
**4.25 Eighth Amendment dated as of May 30, 1996 to Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and The First National Bank of Boston, as agent for itself and other financial
institutions dated as of January 28, 1994 (Incorporated by Reference to Exhibit 4.9 on Form 10-Q of
Apparel Retailers, Inc., dated May 4, 1996).
**4.26 Seasonal Revolving Credit Agreement by and among Specialty Retailers, Inc., Palais Royal, Inc. and the
First National Bank of Boston, as agent for itself and other financial institutions dated March 31,
1995 (Incorporated by Reference to Exhibit 4.17 on Form 10-K of Apparel Retailers, Inc. dated January
28, 1995).
**4.27 First Amendment dated July 7, 1995 to the seasonal Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc., and the First National Bank of Boston, as agent for itself and
other financial institutions dated March 31, 1995 (Incorporated by Reference to Exhibit 4.4 on Form
10-Q of Apparel Retailers, Inc., dated October 28, 1995).
**4.28 Second Amendment dated July 27, 1995 to the seasonal Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc., and the First National Bank of Boston, as agent for itself and
other financial institutions dated March 31, 1995 (Incorporated by Reference to Exhibit 4.5 on Form
10-Q of Apparel Retailers, Inc., dated October 28, 1995).
**4.29 Third Amendment dated February 1, 1996 to the seasonal Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc., and the First National Bank of Boston, as agent for itself and
other financial institutions dated March 31, 1995 (Incorporated by Reference to Exhibit 4.10 on Form
10-Q of Apparel Retailers, Inc., dated as of May 4, 1996).
**4.30 Fourth Amendment dated as of May 30, 1996 to the seasonal Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc. and The First National Bank of Boston, as agent for itself and
other financial institutions dated as of March 31, 1995 (Incorporated by Reference to Exhibit 4.11
on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
**4.31 Certificate Purchase Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
the Certificate Purchaser dated as of August 11, 1995 (Incorporated by Reference to Exhibit 4.9 on
Form 10-Q of Apparel Retailers, Inc., dated October 28, 1995).
**5.1 Opinion of Kirkland and Ellis.
**10.1 Purchase Agreement dated July 22, 1993 by and among Apparel Retailers, Inc., Specialty Retailers, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co. Inc. relating to the sale
of Apparel Retailers, Inc. 12 3/4% Senior Discount Debentures due 2005 (Incorporated by Reference to
Exhibit 10.1 of Registration No. 33-68258 on Form S-4).
**10.2 Registration Rights Agreement dated August 2, 1993 by and among Apparel Retailers, Inc., Donaldson, Lufkin
& Jenrette Securities Corporation and Bear, Stearns & Co. Inc. relating to the sale of Apparel Retailers,
Inc. 12 3/4% Senior Discount Debentures due 2005 (Incorporated by Reference to Exhibit 10.2 of Registration
No. 33-68258 on Form S-4).
**10.3 Senior Management Agreement and Stock Option Agreement between Specialty Retailers, Inc., Bain Venture
Capital, Citicorp Venture Capital, Ltd., and Bernard Fuchs, dated as of May 26, 1989 (Incorporated
by Reference to Exhibit 10.8 of Registration No. 33-27714 on Form S-1) and Amendment to Senior Management
Agreement and Stock Option Agreement dated February 1, 1993 (Incorporated by Reference to Exhibit 10.3
of Registration No. 33-68258 on Form S-4).
**10.4 Equity Stock Purchase Agreement by and among Specialty Retailers, Inc., Tyler Capital Fund, L.P. Tyler
Massachusetts, L.P., Tyler International, L.P.-I, Tyler International, L.P.-II, Bain Venture Capital,
Citicorp Capital Investors, Ltd., Acadia Partners, L.P., Drexel Burnham Lambert Incorporated, and certain
other Purchasers, dated as of December 28, 1988 (Incorporated by Reference to Exhibit 10.9 of Registration
No. 33-27714 on Form S-1) and Amendments to Equity Stock Purchase Agreement dated September 21, 1992
and August 2, 1993 (Incorporated by Reference to Exhibit 10.4 of Registration No. 33-68258 on Form
S-4).
II-6
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
**10.5 Registration Agreement by and among Specialty Retailers, Inc., Tyler Capital Fund, L.P. Tyler Massachusetts,
L.P., Tyler International, L.P.-I, Tyler International, L.P.-II, Bain Venture Capital, Citicorp Capital
Investors, Ltd., Acadia Partners, L.P., Drexel Burnham Lambert Incorporated, and certain other Purchasers,
dated as of December 29, 1988 (Incorporated by Reference to Exhibit 10.10 of Registration No. 33-27714
on Form S-1) and Amendment to Registration Agreement dated August 2, 1993 (Incorporated by Reference
to Exhibit 10.5 of Registration No. 33-68258 on Form S-4).
**10.6 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of August 2, 1982 (Incorporated
by Reference to Exhibit 10.11 of Registration No. 33-27714 on Form S-1).
**10.7 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of March 15, 1979, as amended
(Incorporated by Reference to Exhibit 10.12 of Registration No. 33-27714 on Form S-1).
**10.8 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of November 7, 1978, as amended
(Incorporated by Reference to Exhibit 10.13 of Registration No. 33-27714 on Form S-1).
**10.9 Lease Agreement between PR Investments and Palais Royal, Inc., dated October 4, 1983, as amended (Incorporated
by Reference to Exhibit 10.14 of Registration No. 33-27714 on Form S-1).
**10.10 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of December 21, 1983, as amended
(Incorporated by Reference to Exhibit 10.15 of Registration No. 33-27714 on Form S-1).
**10.11 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of March 21, 1985, as amended
(Incorporated by Reference to Exhibit 10.16 of Registration No. 33-27714 on Form S-1).
**10.12 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of November 22, 1985, as amended
(Incorporated by Reference to Exhibit 10.17 of Registration No. 33-27714 on Form S-1).
**10.13 Apparel Retailers, Inc. Stock Option Plan (Incorporated by Reference to Exhibit 10.13 to Registration
No. 33-68258 on Form S-4).
**10.14 Form of Stock Option Agreement between Apparel Retailers, Inc. and Executive to be named therein (Incorporated
by Reference to Exhibit 10.14 to Registration No. 33-68258 on Form S-4).
**10.15 Form of Management Agreement by an among Specialty Retailers, Inc., the Bain Entities, Citicorp Venture
Capital, Ltd. and Executive to be named therein (Incorporated by Reference to Exhibit 10.22 of Registration
No. 33-32045 on Form S-1) and Form of First Amendment (Incorporated by Reference to Exhibit 10.15 to
Registration No. 33-68258 on Form S-4).
**10.16 Professional Services Agreement between Specialty Retailers, Inc. and Bain Capital Partners (Incorporated
by Reference to Exhibit 10.21 of Registration No. 33-54504 on Form S-1).
**10.17 Employment Agreement between Specialty Retailers, Inc. and Carl E. Tooker dated June 9, 1993 (Incorporated
by Reference to Exhibit 10.17 to Registration No. 33-68258 on Form S-4).
**10.18 Stock Option Agreement between Specialty Retailers, Inc. and Carl E. Tooker dated June 9, 1993 (Incorporated
by Reference to Exhibit 10.18 to Registration No. 33-68258 on Form S-4).
**10.19 Purchase agreement dated September 2, 1994 by and among Palais Royal, Inc. and Beall-Ladymon Corporation
relating to the sale of certain assets of Beall-Ladymon Corporation (Incorporated by Reference to Exhibit
10.1 on Form 10-Q of Apparel Retailers, Inc., dated July 30, 1994).
**10.20 Purchase Agreement dated July 20, 1995 by and among Specialty Retailers, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, relating to the sale of the Company's 11% Series C Senior Subordinated Notes
due 2003 (Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Apparel Retailers, Inc., dated October 28, 1995).
II-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
**10.21 Registration Rights Agreement dated July 27, 1995 by and between Specialty Retailers, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, relating to the sale of the Company's 11% Series C Senior
Subordinated Notes due 2003 (Incorporated by Reference to Exhibit 10.2 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995).
**10.22 Employment Agreement between Mark Shulman and Specialty Retailers, Inc., dated as of January 8, 1994
(Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Apparel Retailers, Inc., dated April 29,
1995).
**10.23 Stock Option Agreement between Mark Shulman and Apparel Retailers, Inc., dated as of January 31, 1994
(Incorporated by Reference to Exhibit 10.2 on Form 10-Q of Apparel Retailers, Inc., dated April 29,
1995).
**10.24 Employment Agreement between James Marcum and Specialty Retailers, Inc., dated as of May 15, 1995 (Incorporated
by Reference to Exhibit 10.3 on Form 10-Q of Apparel Retailers, Inc., dated April 29, 1995).
**10.25 Employment Agreement between Stephen Lovell and Specialty Retailers, Inc., dated as of May 19, 1995
(Incorporated by Reference to Exhibit 10.4 on Form 10-Q of Apparel Retailers, Inc., dated April 29,
1995).
**10.26 Agency Agreement between Specialty Retailers, Inc. and Palais Royal, Inc. dated January 29, 1995 (Incorporated
by Reference to Exhibit 10.26 on Form 10-K of Apparel Retailers, Inc., dated February 3, 1996)
**10.27 Securities Purchase Agreement among Palais Royal, Inc. and certain selling stockholders of Uhlmans, Inc.
dated May 9, 1996 (Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Stage Stores, Inc., dated
June 12, 1996.
***12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
**21.1 List of Registrant's Subsidiaries (Incorporated by Reference to Exhibit 21.1 to Registration No. 33-68258
on Form S-4).
***23.1 Consent of Price Waterhouse LLP.
***23.2 Consent of Ernst & Young LLP.
**23.3 Consent of Kirkland & Ellis (included in opinion filed as Exhibit 5.1).
***24.1 Powers of attorney (included in signature page included in this Part II).
</TABLE>
- ---------------
** Previously filed.
*** Filed herewith.
(b) Financial Statement Schedules:
Schedule III - Condensed Financial Information
Schedule VIII - Consolidated Valuation Accounts
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in this registration statement;
provided, however, that the undertakings set forth in paragraph (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed
II-8
<PAGE>
by the registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post- effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the Offering.
In addition, the undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of
Texas on September 30, 1996.
STAGE STORES, INC.
By: /s/ Carl Tooker
----------------------------------------------------
Name: Carl Tooker
Title: President, Chief Executive Officer and Director
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed on September 30, 1996, by the following persons in the
capacities indicated with respect to Stage Stores, Inc.:
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Director and Chairman
- -----------------------------
Bernard Fuchs
/s/ Carl Tooker President, Chief Executive Officer and Director (Principal
- ----------------------------- Executive Officer)
Carl Tooker
* Executive Vice President and Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
James Marcum
* Director
- -----------------------------
Joshua Bekenstein
* Director
- -----------------------------
Adam Kirsch
* Director
- -----------------------------
Peter Mulvihill
* Director
- -----------------------------
Lasker Meyer
* By /s/ Carl Tooker
------------------------
Carl Tooker
Attorney-in-Fact
</TABLE>
II-10
<PAGE>
Schedule III
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Condensed Balance Sheet
(in thousands, except par value and numbers of shares)
<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
------------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 796 $ 9
Intercompany advances 6,997 7,240
Debt issue costs, net of amortization 4,588 4,163
Investment in subsidiary 17,750 35,340
Deferred income taxes 5,640 10,042
-------- --------
$ 35,771 $ 56,794
======== ========
Liabilities and Stockholders' Deficit
Accrued expenses $ 7,294 $ 6,369
Intercompany advances -- --
Long-term debt 96,748 109,817
-------- --------
Total liabilities 104,042 116,186
-------- --------
Preferred stock, par value $1.00, non-voting, 2,500 shares
authorized, zero shares issued and outstanding -- --
Common Stock, par value $0.01, 15,000,000 shares authorized,
11,381,141 and 11,470,902 shares issued and outstanding,
respectively 113 115
Class B common stock, non-voting, par value $0.01, 1,500,000 shares
authorized, 1,468,750 shares issued and outstanding 15 15
Additional paid-in capital 3,565 3,793
Accumulated deficit (71,964) (63,315)
-------- --------
Stockholders' deficit (68,271) (59,392)
-------- --------
$ 35,771 $ 56,794
======== ========
</TABLE>
The accompanying notes are an integral part of this condensed financial
information.
<PAGE>
Schedule III
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Condensed Statement of Operations and Accumulated Deficit
(in thousands)
<TABLE>
<CAPTION>
For the Period from Fiscal Year
August 2, 1993 to ----------------------------
January 29, 1994 1994 1995
--------------------- ------------ --------
<S> <C> <C> <C>
Interest income $ 18 $ 30 $ 18
Interest expense (5,471) (11,954) (13,511)
-------- -------- --------
Loss before income tax and equity in earnings of
subsidiary (5,453) (11,924) (13,493)
Income tax benefit 1,761 4,022 4,550
-------- -------- --------
Loss before equity in earnings of subsidiary (3,692) (7,902) (8,943)
Equity in earnings of subsidiary 910 14,224 19,673
-------- -------- --------
Net income (loss) (2,782) 6,322 10,730
Accumulated deficit:
Beginning of period -- (78,154) (71,964)
Dividends on common stock (74,804) -- --
Adjustment for minimum pension liability (568) (132) (2,081)
-------- -------- --------
End of period $(78,154) $(71,964) $(63,315)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this condensed financial
information.
<PAGE>
Schedule III
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Condensed Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Period from Fiscal Year
August 2, 1993 to ----------------------------
January 29, 1994 1994 1995
----------------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (2,782) $ 6,322 $ 10,730
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Accretion of discount 5,233 11,515 13,070
Amortization of debt issue costs 207 437 438
Deferred federal income tax (1,761) (3,879) (4,402)
Equity in earnings of subsidiary (910) (14,224) (19,673)
Changes in operating assets and liabilities:
Increase (decrease) in accrued liabilities 31 7,116 (641)
Intercompany advances -- (7,382) (243)
-------- -------- --------
Total adjustments 2,800 (6,417) (11,451)
-------- -------- --------
Net cash provided by (used in) operating
activities 18 (95) (721)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from:
Long-term debt 80,000 -- --
Common stock 33 97 68
Redemption of Common stock -- -- (122)
Additions to debt issue cost (4,453) -- (12)
Dividends paid (74,804) -- --
-------- -------- --------
Net cash provided by (used in) financing activities 776 97 (66)
-------- -------- --------
Net increase (decrease) in cash 794 2 (787)
Cash and cash equivalents:
Beginning of period -- 794 796
-------- -------- --------
End of period $ 794 $ 796 $ 9
======== ======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Debt issue costs accrued for by the Company or paid
by subsidiary $ 779 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this condensed financial
information.
<PAGE>
Stage Stores, Inc.
(formerly Apparel Retailer, Inc.)
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE 1--BASIS OF PRESENTATION:
The accompanying condensed financial statements present the financial
position and results of operations of Stage Stores, Inc. (the "Company") on a
separate company basis. The condensed financial statements of the Company
have been prepared in accordance with Rule 10-01 of Regulation S-X and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The Company's
investment in its wholly-owned subsidiary is accounted for using the equity
method.
The Company's fiscal year ends on the Saturday nearest to January 31 in
the following calendar year. For example, references to "1995" mean the
fiscal year ended February 3, 1996.
NOTE 2--HOLDING COMPANY FORMATION:
The Company was incorporated under the laws of Delaware on June 17, 1993
at the direction of the shareholders of Specialty Retailers, Inc. ("SRI"). On
August 2, 1993, the Company acquired all of the common stock of SRI and the
existing stockholders of SRI acquired all of the common stock of the Company.
The Company has no operations of its own and its primary asset is the common
stock of the SRI.
NOTE 3--INCOME TAXES:
The Company files a consolidated federal income tax return with its
subsidiaries. The Company's recorded tax benefit represents the impact of its
tax assets and liabilities on the consolidated group.
<PAGE>
Schedule VIII
Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Valuation Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
------------------------------------
Balance at
beginning of Charged to costs Charged to other Balance at end
year and expenses accounts Deductions of year
-------------- ---------------- ---------------- ------------- ------------------
Description
------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:(1)
Fiscal Year:
1993 $7,855 $6,590 $ -- $12,501(2) $1,944
====== ====== ==== ======= ======
1994 $1,944 $3,176 $486(3) $ 2,374 $3,232
====== ====== ==== ======= ======
1995 $3,232 $4,905 $ -- $ 5,377 $2,760
====== ====== ==== ======= ======
Reserve for Shrinkage:
Fiscal Year:
1993 $ 160 $4,042 $ -- $ 4,004 $ 198
====== ====== ==== ======= ======
1994 $ 198 $4,459 -- $ 4,459 $ 198
====== ====== ==== ======= ======
1995 $ 198 $8,967 $ -- $ 8,808 $ 357
====== ====== ==== ======= ======
</TABLE>
(1) Includes reserve for uncollectible service charge and late fee income.
(2) Includes $6.1 million which has been reclassified to accrued liabilities
as a result of the implementation of the Accounts Receivable Program.
(3) This represents the initial allowance for doubtful accounts associated
with the accounts receivable purchased in an acquisition.
<PAGE>
EXHIBIT INDEX
The following documents are the exhibits to this Registration Statement on
Form S-1. For convenient reference, each exhibit is listed according to the
Exhibit Table of Regulation S-K.
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ---------- ------- ------------
<S> <C> <C>
***1.1 Form of Underwriting Agreement. --
**3.1 Certificate of Incorporation of Apparel Retailers, Inc. (Incorporated by Reference
to Exhibit 3.1 of Registration No. 33-68258 on Form S-4). --
**3.2 By-Laws of Apparel Retailers, Inc. (Incorporated by Reference to Exhibit 3.2 of
Registration No. 33-68258 on Form S-4). --
**4.1 Form of Indenture between Apparel Retailers, Inc. and The First National Bank of
Boston, as Trustee, relating to the 12 3/4% Senior Discount Debentures due 2005
of Apparel Retailers, Inc. (Incorporated by Reference to Exhibit 4.1 of Registration
No. 33-68258 on Form S-4). --
**4.2 Form of Indenture among Specialty Retailers, Inc., The First National Bank of Boston,
as Trustee, and Palais Royal, Inc., as Guarantor, relating to the 10% Senior Notes
due 2000 of Specialty Retailers, Inc. (including form of note) (Incorporated by
Reference to Exhibit 4.2 of Registration No. 33-68258 on Form S-4). --
**4.3 Form of Indenture among Specialty Retailers, Inc., The First National Bank of Boston,
as Trustee, and Palais Royal, Inc., as Guarantor, relating to the 11% Senior Subordinated
Notes due 2003 of Specialty Retailers, Inc. (including form of note) (Incorporated
by Reference to Exhibit 4.3 on Registration No. 33-68258 on Form S-4). --
**4.4 Form of Indenture between 3 Bealls Holding Corporation and Bankers Trust Company,
as Trustee, relating to 3 Bealls Holding Corporation's 9% Subordinated Debentures
due 2002 (Incorporated by Reference to Exhibit 4.2 of Registration No. 33-24571
on Form S-4) and First Supplemental Indenture dated August 2, 1993 (Incorporated
by Reference to Exhibit 4.4 of Registration No. 33-68258 on Form S-4). --
**4.5 Form of Indenture between 3 Bealls Holding Corporation and IBJ Schroder Bank and
Trust Company, as Trustee, relating to 3 Bealls Holding Corporation's 7% Junior
Subordinated Debentures due 2002 (Incorporated by Reference to Exhibit 4.3 of
Registration No. 33-24571 on Form S-4) and First Supplemental Indenture dated August
2, 1993 (Incorporated by Reference to Exhibit 4.5 of Registration No. 33-68258
on Form S-4). --
**4.6 Indenture by and between Specialty Retailers, Inc. and The First National Bank of
Boston, as Trustee, relating to the 11% Series C and Series D Senior Subordinated
Notes due 2003 of Specialty Retailers, Inc. dated July 27, 1995 (including form
of note), (Incorporated by Reference to Exhibit 4.1 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995). --
**4.7 Form of Indenture among SRI Receivables Purchase Co., Inc., Specialty Retailers,
Inc., as Administrative Agent, and Bankers Trust Company, as Trustee and Collateral
Agent, relating to the 12.5% Trust Certificate-Backed Notes of SRI Receivables
Purchase Co., Inc. (including form of note). (Incorporated by Reference to Exhibit
4.1 on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996). --
**4.8 Amended and Restated Pooling and Servicing Agreement by and among SRI Receivables
Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust (Delaware) dated
as of August 11, 1995 (Incorporated by Reference to Exhibit 4.6 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995). --
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ---------- ------- ------------
**4.9 First Amendment to Amended and Restated Pooling and Servicing Agreement by and among
SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust
(Delaware), dated as of May 30, 1996 (Incorporated by Reference to Exhibit 4.2
on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996). --
**4.10 Amended and Restated Series 1993-1 Supplement among SRI Receivables Purchase Co.,
Inc., Specialty Retailers, Inc. and Bankers Trust (Delaware) dated as of May 30,
1996 (Incorporated by Reference to Exhibit 4.3 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996). --
**4.11 Amended and Restated Series 1993-2 Supplement among SRI Receivables Purchase Co.,
Inc., Specialty Retailers, Inc. and Bankers Trust (Delaware) dated as of May 30,
1996 (Incorporated by Reference to Exhibit 4.4 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996). --
**4.12 First Amendment to the Series 1993-2 Supplement and Revolving Certificate Purchase
Agreement by and among Specialty Retailers, Inc., SRI Receivables Purchase Co.,
Inc., Bankers Trust (Delaware) as Trustee for the SRI Receivables Master Trust,
the financial institutions parties thereto and National Westminster Bank Plc, New
York branch dated as of August 11, 1995 (Incorporated by Reference to Exhibit 4.5
on Form 10-Q of Apparel Retailers, Inc., dated as of May 4, 1996). --
**4.13 Amended and Restated Series 1995-1 Supplement by and among SRI Receivables Purchase
Co., Inc., Specialty Retailers, Inc. and Bankers Trust (Delaware) on behalf of
the Series 1995- 1 Certificateholders dated as of May 30, 1996 (Incorporated by
Reference to Exhibit 4.6 on Form 10-Q of Apparel Retailers, Inc., dated May 4,
1996). --
**4.14 Amended and Restated Receivables Purchase Agreement among SRI Receivables Purchase
Co., Inc. and Originators dated as of May 30, 1996 (Incorporated by Reference to
Exhibit 4.7 on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996). --
**4.15 Certificate Purchase Agreements between SRI Receivables Purchase Co., Inc. and the
Purchasers of the Series 1993-1 Offered Certificates (Incorporated by Reference
to Exhibit 4.10 of Registration No. 33-68258 on Form S-4). --
**4.16 Revolving Certificate Purchase Agreement between SRI Receivables Purchase Co., Inc.,
the Facility Agent and the Revolving Purchasers with respect to the Class A-R
Certificates (Incorporated by Reference to Exhibit 4.11 of Registration No. 33-68258
on Form S-4). --
**4.17 Revolving Credit Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself and other financial
institutions dated January 29, 1994 (Incorporated by Reference to Exhibit A of
Current Report on Form 8-K of Apparel Retailers, Inc. dated February 9, 1994). --
**4.18 First Amendment dated July 14, 1994 to Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc. and the First National Bank of Boston, as agent
for itself and other financial institutions dated as of January 28, 1994 (Incorporated
by Reference to Exhibit 4.13 on Form 10-K of Apparel Retailers, Inc. dated January
28, 1995). --
**4.19 Second Amendment dated October 31, 1994 to Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc. and the First National Bank of Boston,
as agent for itself and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.14 on Form 10-K of Apparel Retailers, Inc.
dated January 28, 1995). --
<PAGE>
0
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ---------- ------- ------------
**4.20 Third Amendment dated January 5, 1995 to Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc. and the First National Bank of Boston,
as agent for itself and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.15 on Form 10-K of Apparel Retailers, Inc.
dated January 28, 1995). --
**4.21 Fourth Amendment dated March 31, 1995 to Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc. and the First National Bank of Boston,
as agent for itself and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.16 on Form 10-K of Apparel Retailers, Inc.
dated January 28, 1995). --
**4.22 Fifth Amendment dated July 7, 1995 to Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc., and the First National Bank of Boston, as
agent for itself and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.2 on Form 10-Q of Apparel Retailers, Inc.,
dated October 28, 1995). --
**4.23 Sixth Amendment dated July 27, 1995 to Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc. and the First National Bank of Boston, as agent
for itself and other financial institutions dated as of January 28, 1994 (Incorporated
by Reference to Exhibit 4.3 on Form 10-Q of Apparel Retailers, Inc., dated October
28, 1995). --
**4.24 Seventh Amendment dated February 1, 1996 to Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc., and the First National Bank of Boston,
as agent for itself and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.8 on Form 10-Q of Apparel Retailers, Inc.,
dated as of May 4, 1996). --
**4.25 Eighth Amendment dated as of May 30, 1996 to Revolving Credit Agreement by and among
Specialty Retailers, Inc., Palais Royal, Inc. and The First National Bank of Boston,
as agent for itself and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.9 on Form 10-Q of Apparel Retailers, Inc.,
dated May 4, 1996). --
**4.26 Seasonal Revolving Credit Agreement by and among Specialty Retailers, Inc., Palais
Royal, Inc. and the First National Bank of Boston, as agent for itself and other
financial institutions dated March 31, 1995 (Incorporated by Reference to Exhibit
4.17 on Form 10-K of Apparel Retailers, Inc. dated January 28, 1995). --
**4.27 First Amendment dated July 7, 1995 to the seasonal Revolving Credit Agreement by
and among Specialty Retailers, Inc., Palais Royal, Inc., and the First National
Bank of Boston, as agent for itself and other financial institutions dated March
31, 1995 (Incorporated by Reference to Exhibit 4.4 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995). --
**4.28 Second Amendment dated July 27, 1995 to the seasonal Revolving Credit Agreement by
and among Specialty Retailers, Inc., Palais Royal, Inc., and the First National
Bank of Boston, as agent for itself and other financial institutions dated March
31, 1995 (Incorporated by Reference to Exhibit 4.5 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995). --
**4.29 Third Amendment dated February 1, 1996 to the seasonal Revolving Credit Agreement
by and among Specialty Retailers, Inc., Palais Royal, Inc., and the First National
Bank of Boston, as agent for itself and other financial institutions dated March
31, 1995 (Incorporated by Reference to Exhibit 4.10 on Form 10-Q of Apparel Retailers,
Inc., dated as of May 4, 1996). --
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ---------- ------- ------------
**4.30 Fourth Amendment dated as of May 30, 1996 to the seasonal Revolving Credit Agreement
by and among Specialty Retailers, Inc., Palais Royal, Inc. and The First National
Bank of Boston, as agent for itself and other financial institutions dated as of
March 31, 1995 (Incorporated by Reference to Exhibit 4.11 on Form 10-Q of Apparel
Retailers, Inc., dated May 4, 1996). --
**4.31 Certificate Purchase Agreement among SRI Receivables Purchase Co., Inc., Specialty
Retailers, Inc. and the Certificate Purchaser dated as of August 11, 1995 (Incorporated
by Reference to Exhibit 4.9 on Form 10-Q of Apparel Retailers, Inc., dated October
28, 1995). --
**5.1 Opinion of Kirkland and Ellis. --
**10.1 Purchase Agreement dated July 22, 1993 by and among Apparel Retailers, Inc., Specialty
Retailers, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Bear,
Stearns & Co. Inc. relating to the sale of Apparel Retailers, Inc. 12 3/4% Senior
Discount Debentures due 2005 (Incorporated by Reference to Exhibit 10.1 of Registration
No. 33-68258 on Form S-4). --
**10.2 Registration Rights Agreement dated August 2, 1993 by and among Apparel Retailers,
Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co.
Inc. relating to the sale of Apparel Retailers, Inc. 12 3/4% Senior Discount Debentures
due 2005 (Incorporated by Reference to Exhibit 10.2 of Registration No. 33-68258
on Form S-4). --
**10.3 Senior Management Agreement and Stock Option Agreement between Specialty Retailers,
Inc., Bain Venture Capital, Citicorp Venture Capital, Ltd., and Bernard Fuchs,
dated as of May 26, 1989 (Incorporated by Reference to Exhibit 10.8 of Registration
No. 33-27714 on Form S-1) and Amendment to Senior Management Agreement and Stock
Option Agreement dated February 1, 1993 (Incorporated by Reference to Exhibit 10.3
of Registration No. 33-68258 on Form S-4). --
**10.4 Equity Stock Purchase Agreement by and among Specialty Retailers, Inc., Tyler Capital
Fund, L.P. Tyler Massachusetts, L.P., Tyler International, L.P.-I, Tyler
International, L.P.-II, Bain Venture Capital, Citicorp Capital Investors, Ltd.,
Acadia Partners, L.P., Drexel Burnham Lambert Incorporated, and certain other
Purchasers, dated as of December 28, 1988 (Incorporated by Reference to Exhibit
10.9 of Registration No. 33-27714 on Form S-1) and Amendments to Equity Stock Purchase
Agreement dated September 21, 1992 and August 2, 1993 (Incorporated by Reference
to Exhibit 10.4 of Registration No. 33-68258 on Form S-4). --
**10.5 Registration Agreement by and among Specialty Retailers, Inc., Tyler Capital Fund,
L.P. Tyler Massachusetts, L.P., Tyler International, L.P.-I, Tyler International,
L.P.-II, Bain Venture Capital, Citicorp Capital Investors, Ltd., Acadia Partners,
L.P., Drexel Burnham Lambert Incorporated, and certain other Purchasers, dated
as of December 29, 1988 (Incorporated by Reference to Exhibit 10.10 of Registration
No. 33-27714 on Form S-1) and Amendment to Registration Agreement dated August
2, 1993 (Incorporated by Reference to Exhibit 10.5 of Registration No. 33-68258
on Form S-4). --
**10.6 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of August
2, 1982 (Incorporated by Reference to Exhibit 10.11 of Registration No. 33-27714
on Form S-1). --
**10.7 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of March
15, 1979, as amended (Incorporated by Reference to Exhibit 10.12 of Registration
No. 33-27714 on Form S-1). --
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ---------- ------- ------------
**10.8 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of November
7, 1978, as amended (Incorporated by Reference to Exhibit 10.13 of Registration
No. 33-27714 on Form S-1). --
**10.9 Lease Agreement between PR Investments and Palais Royal, Inc., dated October 4, 1983,
as amended (Incorporated by Reference to Exhibit 10.14 of Registration No. 33-27714
on Form S-1). --
**10.10 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of December
21, 1983, as amended (Incorporated by Reference to Exhibit 10.15 of Registration
No. 33-27714 on Form S-1). --
**10.11 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of March
21, 1985, as amended (Incorporated by Reference to Exhibit 10.16 of Registration
No. 33-27714 on Form S-1). --
**10.12 Lease Agreement between PR Investments and Palais Royal, Inc., dated as of November
22, 1985, as amended (Incorporated by Reference to Exhibit 10.17 of Registration
No. 33-27714 on Form S-1). --
**10.13 Apparel Retailers, Inc. Stock Option Plan (Incorporated by Reference to Exhibit 10.13
to Registration No. 33-68258 on Form S-4). --
**10.14 Form of Stock Option Agreement between Apparel Retailers, Inc. and Executive to be
named therein (Incorporated by Reference to Exhibit 10.14 to Registration No. 33-68258
on Form S-4). --
**10.15 Form of Management Agreement by an among Specialty Retailers, Inc., the Bain Entities,
Citicorp Venture Capital, Ltd. and Executive to be named therein (Incorporated
by Reference to Exhibit 10.22 of Registration No. 33-32045 on Form S-1) and Form
of First Amendment (Incorporated by Reference to Exhibit 10.15 to Registration
No. 33-68258 on Form S-4). --
**10.16 Professional Services Agreement between Specialty Retailers, Inc. and Bain Capital
Partners (Incorporated by Reference to Exhibit 10.21 of Registration No. 33-54504
on Form S-1). --
**10.17 Employment Agreement between Specialty Retailers, Inc. and Carl E. Tooker dated June
9, 1993 (Incorporated by Reference to Exhibit 10.17 to Registration No. 33-68258
on Form S-4). --
**10.18 Stock Option Agreement between Specialty Retailers, Inc. and Carl E. Tooker dated
June 9, 1993 (Incorporated by Reference to Exhibit 10.18 to Registration No. 33-68258
on Form S-4). --
**10.19 Purchase agreement dated September 2, 1994 by and among Palais Royal, Inc. and
Beall-Ladymon Corporation relating to the sale of certain assets of Beall-Ladymon
Corporation (Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Apparel
Retailers, Inc., dated July 30, 1994). --
**10.20 Purchase Agreement dated July 20, 1995 by and among Specialty Retailers, Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, relating to the sale of the Company's
11% Series C Senior Subordinated Notes due 2003 (Incorporated by Reference to Exhibit
10.1 on Form 10-Q of Apparel Retailers, Inc., dated October 28, 1995). --
**10.21 Registration Rights Agreement dated July 27, 1995 by and between Specialty Retailers,
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, relating to the sale
of the Company's 11% Series C Senior Subordinated Notes due 2003 (Incorporated
by Reference to Exhibit 10.2 on Form 10-Q of Apparel Retailers, Inc., dated October
28, 1995). --
**10.22 Employment Agreement between Mark Shulman and Specialty Retailers, Inc., dated as
of January 8, 1994 (Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Apparel
Retailers, Inc., dated April 29, 1995). --
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ---------- ------- ------------
**10.23 Stock Option Agreement between Mark Shulman and Apparel Retailers, Inc., dated as
of January 31, 1994 (Incorporated by Reference to Exhibit 10.2 on Form 10-Q of
Apparel Retailers, Inc., dated April 29, 1995). --
**10.24 Employment Agreement between James Marcum and Specialty Retailers, Inc., dated as
of May 15, 1995 (Incorporated by Reference to Exhibit 10.3 on Form 10-Q of Apparel
Retailers, Inc., dated April 29, 1995). --
**10.25 Employment Agreement between Stephen Lovell and Specialty Retailers, Inc., dated
as of May 19, 1995 (Incorporated by Reference to Exhibit 10.4 on Form 10-Q of Apparel
Retailers, Inc., dated April 29, 1995). --
**10.26 Agency Agreement between Specialty Retailers, Inc. and Palais Royal, Inc. dated January
29, 1995 (Incorporated by Reference to Exhibit 10.26 on Form 10-K of Apparel Retailers,
Inc., dated February 3, 1996).
**10.27 Securities Purchase Agreement among Palais Royal, Inc. and certain selling stockholders
of Uhlmans, Inc. dated May 9, 1996 (Incorporated by Reference to Exhibit 10.1 on
Form 10-Q of Stage Stores, Inc., dated June 12, 1996. --
***12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. --
**21.1 List of Registrant's Subsidiaries (Incorporated by Reference to Exhibit 21.1 to
Registration No. 33-68258 on Form S-4). --
***23.1 Consent of Price Waterhouse LLP. --
***23.2 Consent of Ernst & Young LLP. --
**23.3 Consent of Kirkland & Ellis (included in opinion filed as Exhibit 5.1). --
***24.1 Powers of attorney (included in signature page included in this Part II).
</TABLE>
- ---------------
** Previously filed.
*** Filed herewith.
<PAGE>
EXHIBIT 12.1
STAGE STORES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
------------------------------------------------------------- -------------------------
July 29, August 3,
1991 1992 1993 1994 1995 1995 1996
-------- ---- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary income $3,961 $12,235 $13,426 $6,630 $10,730 $2,659 $3,520
Minority interest in Bealls Holding 749 -- -- -- -- -- --
Income tax expense 3,993 8,340 7,569 4,317 6,767 1,885 2,396
-------- ---- -------- -------- -------- -------- ------
Income before income tax, minority
interest and extraordinary item 8,703 20,575 20,995 10,947 17,497 4,544 5,916
======== ==== ======== ======== ======== ======== ======
Fixed charges charged to expense:
Rental expense (1) 7,275 7,575 8,803 8,879 10,051 4,726 5,315
Interest expense 33,928 32,384 37,607 41,694 44,770 21,636 24,296
Dividend and accretion on redeemable
preferred stock of subsidiary 749 -- -- -- -- -- --
-------- ---- -------- -------- -------- -------- -------
Total fixed charges charged to
expense 41,952 39,959 46,410 50,573 54,821 26,362 29,611
-------- ---- -------- -------- -------- -------- -------
Income before income tax, minority
interest, extraordinary item and
fixed charges charged to expense $50,655 $60,534 $67,405 $61,520 $72,318 $30,906 $35,527
======== ==== ======== ======== ======== ======== =======
Fixed charges charged to accruals:
Rental expense (1) $898 $803 $298 $446 $1,516 $1,283
$243
Interest expense 667 381 -- -- -- -- --
-------- ---- -------- -------- -------- -------- -------
Total fixed charges charged to
accruals 1,565 1,184 298 446 1,516 1,283 243
-------- ---- -------- -------- -------- -------- -------
Total fixed charges $43,517 $41,143 $46,708 $51,019 $56,337 $27,645
$29,854
======== ==== ======== ======== ======== ======== =======
Ratio of earnings to fixed charges 1.16 1.47 1.44 1.21 1.28 1.12 1.19
======== ==== ======== ======== ======== ======== =======
</TABLE>
- ---------------
(1) Rental expense comprises one-third of all rental expenses incurred during
the period.
This is deemed by management to be representative of the interest factor
of rental payments.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of Amendment
No. 3 to this Registration Statement on Form S-1 of our report dated March
15, 1996, relating to the financial statements of Stage Stores, Inc. which
appears in such Prospectus. We also consent to the application of such report
to the Financial Statement Schedules for the period and two years ended
February 3, 1996 listed under Item 16(b) of this Registration Statement when
such schedules are read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included these
schedules. We also consent to the references to us under the headings
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Houston, Texas September 27, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 22, 1996, with respect to the financial
statements of Uhlmans Inc. included in the Registration Statement (Form S-1
No. 333-5855) and related prospectus of Stage Stores, Inc. for the
registration of 10,000,000 shares of its common stock.
Ernst & Young LLP
Toledo, Ohio September 27, 1996
10,000,000 Shares
Stage Stores, Inc.
Common Stock
UNDERWRITING AGREEMENT
_________, 1996
CS FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
As representatives of the
several underwriters
named in Schedule I hereto
c/o CS First Boston Corporation
55 East 52nd Street
New York, New York 10055
Ladies and Gentlemen:
Stage Stores, Inc., a Delaware corporation (the "Company")
proposes to sell an aggregate of 10,000,000 shares of the common stock, par
value $.01 per share of the Company (the "Firm Shares"), to the several
underwriters named in Schedule I hereto (the "Underwriters"). The Company and
the Stockholders identified on Schedule II hereto (collectively the "Selling
Stockholders") also propose to sell to the several Underwriters an aggregate of
up to 1,500,000 additional shares of common stock, par value $.01 per share of
the Company (the "Additional Shares") if requested by the Underwriters as
provided in Section 2 hereof. The Company will sell up to 750,000 shares and the
Selling Stockholders will sell up to 750,000 shares of such Additional Shares.
The Firm Shares and the Additional Shares are herein collectively called the
Shares. The shares of common stock of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the
Common Stock. The Company and the Selling Stockholders are hereinafter
collectively called the Sellers.
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively called the "Act"), a registration statement on Form S-1 including
a prospectus relating to the Shares, which may be amended. The registration
statement as amended at the time when it becomes effective, including a
registration statement
<PAGE>
(if any) filed pursuant to Rule 462(b) under the Act increasing the size of the
offering registered under the Act and information (if any) deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule 430A or
Rule 434 under the Act, is hereinafter referred to as the Registration
Statement; and the prospectus including any prospectus subject to completion
taken together with any term sheet meeting the requirements of Rule 434(a) or
Rule 434(b) under the Act in the form first used to confirm sales of Shares is
hereinafter referred to as the Prospectus.
2. Agreements to Sell and Purchase. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell, and each Underwriter
agrees, severally and not jointly, to purchase from the Company at a price per
share of $_____ (the "Purchase Price") the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, (i)(A) the Company
agrees to sell up to 750,000 Additional Shares and (B) the Underwriters shall
have the right to purchase, severally and not jointly, up to an aggregate of
750,000 Additional Shares from the Company at the Purchase Price and (ii)(A) the
Selling Stockholders agree to sell up to 750,000 Additional Shares and (B) the
Underwriters shall have the right to purchase, severally and not jointly, up to
an aggregate of 750,000 Additional Shares from the Selling Stockholders at the
Purchase Price. Additional Shares may be purchased solely for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part from time to time by giving written notice thereof to the
Company and the Selling Stockholders within 30 days after the date of this
Agreement. You shall give any such notice on behalf of the Underwriters and such
notice shall specify the aggregate number of Additional Shares to be purchased
pursuant to such exercise and the date for payment and delivery thereof. The
date specified in any such notice shall be a business day (i) no earlier than
the Closing Date (as hereinafter defined), (ii) no later than ten business days
after such notice has been given and (iii) no earlier than two business days
after such notice has been given. If any Additional Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase from the Company
and the Selling Stockholders the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which bears the
same proportion to the total number of Additional Shares to be purchased from
the Company and the Selling Stockholders as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
The Sellers hereby agree, severally and not jointly, and the
Company shall, concurrently with the execution of this Agreement, deliver an
agreement executed by (i) each of the directors and officers of the Company who
is not a Selling Stockholder, and (ii) each stockholder listed on Annex I
hereto, pursuant to which each such person agrees not to offer, sell, contract
to sell, grant any option to purchase, or otherwise dispose of any common stock
of the Company or any securities convertible into or exercisable or exchangeable
for such common stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any such common stock,
except to the Underwriters pursuant to this Agreement, for a period of 180 days
after the date of the Prospectus without the prior written consent of CS First
Boston Corporation. Notwithstanding the foregoing, during such
2
<PAGE>
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plans and (ii) the Company may issue shares of its common
stock upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof.
3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on
the third or fourth business day unless otherwise permitted by the Commission
pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (the "Closing Date") following the date of the initial public
offering, at such place outside the State of New York as you shall designate.
The Closing Date and the location of delivery of and the form of payment for the
Firm Shares may be varied by agreement between you and the Sellers.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at such place as you
shall designate at 10:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "Option
Closing Date"). Any such Option Closing Date and the location of delivery of and
the form of payment for such Additional Shares may be varied by agreement
between you and the Company.
Certificates for the Shares shall be registered in such names
and issued in such denominations as you shall request in writing not later than
two full business days prior to the Closing Date or an Option Closing Date, as
the case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next preceding
the Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment of the Purchase Price therefor by wire
transfer or certified or official bank checks payable in Federal funds to the
order of the applicable Sellers.
5. Agreements of the Company. The Company agrees with you:
(a) To use its best efforts to cause the Registration
Statement to become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to
confirm such advice in writing, (i) when the Registration Statement
has become effective and when any post-effective amendment to it
becomes effective, (ii) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements
to the Prospectus or for additional information, (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of
the Shares for offering or sale in any jurisdiction, or the initiation
of any proceeding for such purposes, and (iv) of the
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happening of any event during the period referred to in paragraph (e)
below which makes any statement of a material fact made in the
Registration Statement or the Prospectus untrue or which requires the
making of any additions to or changes in the Registration Statement or
the Prospectus in order to make the statements therein not misleading.
If at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make
every reasonable effort to obtain the withdrawal or lifting of such
order at the earliest possible time.
(c) To furnish to you, without charge, four (4) signed copies
of the Registration Statement as first filed with the Commission and of
each amendment to it, including all exhibits, and to furnish to you and
each Underwriter designated by you such number of conformed copies of
the Registration Statement as so filed and of each amendment to it,
without exhibits, as you may reasonably request.
(d) Not to file any amendment or supplement to the
Registration Statement, whether before or after the time when it
becomes effective, or to make any amendment or supplement to the
Prospectus (including the issuance or filings of any term sheet within
the meaning of Rule 434) of which you shall not previously have been
advised or to which you shall reasonably object; and to prepare and
file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or supplement to the Prospectus
(including the issuance or filings of any term sheet within the meaning
of Rule 434) which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause
the same to become promptly effective.
(e) Promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period as in the
opinion of counsel for the Underwriters a prospectus is required by law
to be delivered in connection with sales by an Underwriter or a dealer,
to furnish to each Underwriter and dealer as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as
such Underwriter or dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event
shall occur as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the Prospectus
to comply with any law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so
that the statements in the Prospectus, as so amended or supplemented,
will not in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with law, and to
furnish to each Underwriter and to such dealers as you shall specify,
such number of copies thereof as such Underwriter or dealers may
reasonably request.
(g) Prior to any public offering of the Shares, to cooperate
with you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the
several Underwriters and by dealers under the state securities or Blue
Sky laws of such jurisdictions as you may request, to continue such
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qualification in effect so long as required for distribution of the
Shares and to file such consents to service of process or other
documents as may be necessary in order to effect such registration or
qualification.
(h) To mail and make generally available to its stockholders
as soon as reasonably practicable an earnings statement covering a
period of at least twelve months after the effective date of the
Registration Statement (but in no event commencing later than 90 days
after such date) which shall satisfy the provisions of Section 11(a) of
the Act, and to advise you in writing when such statement has been so
made available.
(i) During the period of five years after the date of this
Agreement, (i) to mail as soon as reasonably practicable after the end
of each fiscal year to the record holders of its Common Stock a
financial report of the Company and its subsidiaries on a consolidated
basis (and a similar financial report of all unconsolidated
subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year,
together with comparable information as of the end of and for the
preceding year, certified by independent certified public accountants,
and (ii) to mail and make generally available as soon as practicable
after the end of each quarterly period (except for the last quarterly
period of each fiscal year) to such holders, a consolidated balance
sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such
period, and for the period from the beginning of such year to the close
of such quarterly period, together with comparable information for the
corresponding periods of the preceding year.
(j) During the period referred to in paragraph (i), to furnish
to you as soon as available a copy of each report or other publicly
available information of the Company mailed to the holders of Common
Stock or filed with the Commission and such other publicly available
information concerning the Company and its subsidiaries as you may
reasonably request.
(k) To pay all costs, expenses, fees and taxes incident to (i)
the preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits),
each preliminary prospectus and all amendments and supplements to any
of them prior to or during the period specified in paragraph (e), (ii)
the printing and delivery of the Prospectus and all amendments or
supplements to it during the period specified in paragraph (e), (iii)
the printing and delivery of this Agreement, the Preliminary and
Supplemental Blue Sky Memoranda and all other agreements, memoranda,
correspondence and other documents printed and delivered in connection
with the offering of the Shares (including in each case any
disbursements of counsel for the Underwriters relating to such printing
and delivery), (iv) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several
states (including in each case the fees and disbursements of counsel
for the Underwriters relating to such registration or qualification and
memoranda relating thereto), (v) filings and clearance with the
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National Association of Securities Dealers, Inc. in connection with the
offering, (vi) the listing of the Shares on the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") National
Market, (vii) furnishing such copies of the Registration Statement, the
Prospectus and all amendments and supplements thereto as may be
requested for use in connection with the offering or sale of the Shares
by the Underwriters or by dealers to whom Shares may be sold and (viii)
the performance by the Sellers of their other obligations under this
Agreement.
(l) To use its best efforts to maintain the inclusion of the
Common Stock in the NASDAQ National Market (or on a national securities
exchange) for a period of five years after the effective date of the
Registration Statement.
(m) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by
the Company prior to the Closing Date and to satisfy all conditions
precedent to the delivery of the Shares.
6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such
part became effective, did not contain and each such part, as amended
or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Act and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph (b)
do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, and each
Registration Statement filed pursuant to Rule 462(b) under the Act, if
any, complied when so filed in all material respects with the Act; and
did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) The Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of
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incorporation and has the corporate power and authority to carry on its
business as it is currently being conducted and to own, lease and
operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(e) All of the issued and outstanding shares of capital stock
of, or other ownership interests in, each of the Company's subsidiaries
have been duly and validly authorized and issued and are fully paid and
nonassessable, and are owned, directly or through other subsidiaries of
the Company, by the Company, free and clear of any lien, except for the
lien of the holders of the Company's 12 3/4 Senior Discount Debentures
due 2003 on the common stock of Specialty Retailers, Inc.;
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights; and the Shares to
be issued and sold by the Company hereunder have been duly authorized
and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus.
(h) Neither the Company nor any of its subsidiaries is (i) in
violation of its respective charter or by-laws or (ii) in default in
the performance of any obligation, agreement or condition contained in
any bond, debenture, note or any other evidence of indebtedness or in
any other agreement, indenture or instrument material to the conduct of
the business of the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which it
or any of its subsidiaries or their respective property is bound which
default in this clause (iii) would have a material adverse effect on
the business and results of operations of the Company and its
subsidiaries taken as a whole.
(i) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require
any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body
(except as such may be required under the Act, the NASD rules and
regulations, the rules and regulations of the NASDAQ National Market or
the securities or Blue Sky laws of the various states) and will not
conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the charter or by-laws of the Company or any of
its subsidiaries or any agreement, indenture or other instrument to
which it or any of its subsidiaries is a party or by
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<PAGE>
which it or any of its subsidiaries or their respective property is
bound, or violate or conflict with any laws, administrative regulations
or rulings or court decrees applicable to the Company, any of its
subsidiaries or their respective property. Which breach or violation
would have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(j) Except as otherwise set forth in the Prospectus, there are
no material legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any of their
respective property is the subject, and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated. No
contract or document of a character required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement is not so described or filed as required.
(k) Neither the Company nor any of its subsidiaries has
violated any foreign, federal, state or local law or regulation
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions of
the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which in each case might result in
any material adverse change in the business, prospects, financial
condition or results of operation of the Company and its subsidiaries,
taken as a whole.
(l) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease and
operate its respective properties and to conduct its business; the
Company and each of its subsidiaries has fulfilled and performed all of
its material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit; and, except
as described in the Prospectus, such permits contain no restrictions
that are materially burdensome to the Company or any of its
subsidiaries.
(m) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license
or approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of such review,
the Company has reasonably concluded that such associated costs and
liabilities would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
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(n) Except as otherwise set forth in the Prospectus or such as
are not material to the business, prospects, financial condition or
results of operation of the Company and its subsidiaries, taken as a
whole, the Company and each of its subsidiaries has good and marketable
title, free and clear of all liens, claims, encumbrances and
restrictions except liens for taxes not yet due and payable, to all
property and assets described in the Registration Statement as being
owned by it. All leases to which the Company or any of its subsidiaries
is a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse
change in the business, prospects, financial condition or results of
operation of the Company and its subsidiaries taken as a whole, and the
Company and its subsidiaries enjoy peaceful and undisturbed possession
under all such leases to which any of them is a party as lessee with
such exceptions as do not materially interfere with the use made by the
Company or such subsidiary.
(o) The Company and each of its subsidiaries maintains
reasonably adequate insurance.
(p) Price Waterhouse LLP are independent public accountants
with respect to the Company as required by the Act and the Exchange
Act. Ernst & Young LLP are independent public accountants with respect
to Uhlmans Inc. as required by the Act and the Exchange Act.
(q) The financial statements, together with related schedules
and notes forming part of the Registration Statement and the Prospectus
(and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis
stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial
and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto)
is, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and
records of the Company.
(r) Neither the Company nor any of its subsidiaries is an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended;
(s) To such counsel's knowledge, after due inquiry, no holder
of any security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company that have
not been waived;
(t) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire
any shares of the capital stock of, or other ownership interest in, the
Company or any subsidiary thereof except as otherwise disclosed in the
Registration Statement.
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(u) Except as disclosed in the Prospectus, there are no
business relationships or related party transactions required to be
disclosed therein by Item 404 of Regulation S-K of the Commission.
(v) There is (i) no significant unfair labor practice
complaint pending against the Company or any of its subsidiaries or, to
the knowledge of the Company, threatened against any of them, before
the National Labor Relations Board or any state or local labor
relations board, and no significant grievance or more significant
arbitration proceeding arising out of or under any collective
bargaining agreement is so pending against the Company or any of its
subsidiaries or, to the knowledge of the Company, threatened against
any of them, and (ii) no significant strike, labor dispute, slowdown or
stoppage pending against the Company or any of its subsidiaries or, to
the knowledge of the Company, threatened against it or any of its
subsidiaries except for such actions specified in clause (i) or (ii)
above, which, singly or in the aggregate could not reasonably be
expected to have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(w) The Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(x) All material tax returns required to be filed by the
Company and each of its subsidiaries in any jurisdiction have been
filed, other than those filings being contested in good faith, and all
material taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due pursuant to such returns or
pursuant to any assessment received by the Company or any of its
subsidiaries have been paid, other than those being contested in good
faith and for which adequate reserves have been provided.
(y) The Company has filed an application to list the Shares on
the NASDAQ National Market, and has received notification that the
listing has been approved, subject to notice of issuance of the Shares.
(z) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
7. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder severally represents and warrants to each
Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement and
has, and on the Option
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Closing Date will have, good and clear title to such Shares, free of
all restrictions on transfer, liens, encumbrances, security interests
and claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to
this Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever.
(c) Such Selling Stockholder has, and on the Option Closing
Date will have, full legal right, power and authority to enter into
this Agreement and the Custody Agreement between the Selling
Stockholders and ____________________________________, as Custodian
(the "Custody Agreement") and to sell, assign, transfer and deliver
such Shares in the manner provided herein and therein, and this
Agreement and the Custody Agreement have been duly authorized, executed
and delivered by such Selling Stockholder and each of this Agreement
and the Custody Agreement is a valid and binding agreement of such
Selling Stockholder enforceable in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by
applicable law.
(d) The power of attorney signed by such Selling Stockholder
appointing Joshua Bekenstein and Peter Mulvihill or either one of them,
as such Selling Stockholder's attorney-in-fact to the extent set forth
therein with regard to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding instrument of such Selling
Stockholder enforceable in accordance with its terms, and, pursuant to
such power of attorney, such Selling Stockholder has authorized Joshua
Bekenstein and Peter Mulvihill, or either one of them, to execute and
deliver on such Selling Stockholder's behalf this Agreement and any
other document necessary or desirable in connection with transactions
contemplated hereby and to deliver the Shares to be sold by such
Selling Stockholder pursuant to this Agreement.
(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares pursuant to the distribution
contemplated by this Agreement, and other than as permitted by the Act,
the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering
and sale of the Shares.
(f) The execution, delivery and performance of this Agreement
by such Selling Stockholder, compliance by such Selling Stockholder
with all the provisions hereof and the consummation of the transactions
contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body (except as such may be
required under the Act, the NASD rules and regulations, the rules and
regulations of the NASDAQ National Market or the state securities laws
or Blue Sky laws) and will not conflict with or constitute a breach of
any of the terms or provisions of, or a default
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under, organizational documents of such Selling Stockholder, if not an
itndividual, or any agreement, indenture or other instrument to which
such Selling Stockholder is a party or by which such Selling
Stockholder or property of such Selling Stockholder is bound, or
violate or conflict with any law, administrative regulation or ruling
or court decree applicable to such Selling Stockholder or property of
such Selling Stockholder.
(g) Such parts of the Registration Statement under the caption
"Principal Stockholders" which specifically relate to such Selling
Stockholder do not, and will not on the Option Closing Date, contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of circumstances under which they were made, not
misleading.
(h) At any time during the period described in paragraph 5(e)
hereof, if there is any change in the information referred to in
paragraph 7(g) above, such Selling Stockholder will immediately notify
you of such change.
8. Indemnification. (a) The Company and each Selling
Stockholder, severally and not jointly, agree to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriters furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages and liabilities and judgments purchased Shares, or
any person controlling such Underwriter, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended and supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or judgment. Notwithstanding the
foregoing, the aggregate liability of any Selling Stockholder pursuant to the
provisions of this paragraph shall be limited to an amount equal to the
aggregate purchase price received by such Selling Stockholder from the sale of
such Selling Stockholder's Shares hereunder, and the Selling Stockholders will
be liable in any case only to the extent that any such loss, claim, damage,
liability or judgment arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission, made in the
Registration Statement or Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), in reliance upon
and in conformity with information furnished to the
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Company in writing by or through the Selling Stockholders specifically for use
in the preparation thereof.
(b) In case any action shall be brought against any
Underwriter or any person controlling such Underwriter, based upon any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement thereto and with respect to which indemnity may be
sought against the Company and/or the Selling Stockholders, such Underwriter
shall promptly notify the Company and the Selling Stockholders in writing and
the Company and the Selling Stockholders shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such indemnified
party (it being asked that Kirkland & Ellis will be considered satisfactory) and
payment of all fees and expenses. Any Underwriter or any such controlling person
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the employment of such counsel has been specifically authorized in writing
by the Company, (ii) the Company and the Selling Stockholders shall have failed
to assume the defense and employ counsel or (iii) the named parties to any such
action (including any impleaded parties) include both such Underwriter or such
controlling person and the Company or the Selling Stockholders, as the case may
be, and such Underwriter or such controlling person shall have been advised by
such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the Company or the
Selling Stockholders, as the case may be, (in which case the Company and the
Selling Stockholders shall not have the right to assume the defense of such
action on behalf of such Underwriter or such controlling person, it being
understood, however, that the Company and the Selling Stockholders shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all such
Underwriters and controlling persons, which firm shall be designated in writing
by CS First Boston Corporation and that all such fees and expenses shall be
reimbursed as they are incurred). A Seller shall not be liable for any
settlement of any such action effected without the written consent of such
Seller but if settled with the written consent of such Seller, such Seller
agrees to indemnify and hold harmless any Underwriter and any such controlling
person from and against any loss or liability by reason of such settlement.
Notwithstanding the immediately preceding sentence, if in any case where the
fees and expenses of counsel are at the expense of the indemnifying party and an
indemnified party shall have requested the indemnifying party to reimburse the
indemnified party for such fees and expenses of counsel as incurred, such
indemnifying party agrees that it shall be liable for any settlement of any
action effected without its written consent if (i) such settlement is entered
into more than ten business days after the receipt by such indemnifying party of
the aforesaid request and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
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<PAGE>
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, controlling such Selling Stockholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Sellers to each Underwriter but
only with reference to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In case
any action shall be brought against the Company, any of its directors, any such
officer or any person controlling the Company or any Selling Stockholder or any
person controlling such Selling Stockholder based on the Registration Statement,
the Prospectus or any preliminary prospectus and in respect of which indemnity
may be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Sellers (except that if any Seller shall have assumed the
defense thereof, such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and the
Company, its directors, any such officers and any person controlling the Company
and the Selling Stockholders and any person controlling such Selling
Stockholders shall have the rights and duties given to the Underwriter, by
Section 8(b) hereof.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Sellers on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Sellers and
the Underwriters in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the Sellers
and the Underwriters shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by the
Sellers, and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Shares, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the Company, the Selling Stockholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(d) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a
14
<PAGE>
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) Each Seller hereby designates the address for notices
specified in Section 12 as the address at which process may be served in any
action, suit or proceeding which may be instituted in any state or federal court
in the State of New York by any Underwriter or person controlling an Underwriter
asserting a claim for indemnification or contribution under or pursuant to this
Section 8, and each Seller will accept the jurisdiction of such court in such
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue.
(f) The Company hereby confirms that at its request CS First
Boston has without compensation acted as "qualified independent underwriter" (in
such capacity, the "QIU") within the meaning of Schedule E to the By-Laws of the
National Association of Securities Dealers, Inc: in connection with the offering
of the Offered Securities. The Company will indemnify and hold harmless the QIU
against any losses, claims, damages or liabilities, joint or several, to which
the QIU may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon the QIU's acting (or alleged failing to act) as such "qualified
independent underwriter" and will reimburse the QIU for any legal or other
expenses reasonably incurred by the QIU in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred.
9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing
Date with the same force and effect as if made on and as of the Closing
Date.
(b) The Registration Statement shall have become effective not
later than 5:00 p.m. (and in the case of a Registration Statement filed
under Rule 462(b) of the Act, not later than 10:00 p.m.), New York City
time, on the date of this Agreement or at such later date and time as
you may approve in writing, and at the Closing Date no stop order
suspending the effectiveness of the Registration Statement shall have
been
15
<PAGE>
issued and no proceedings for that purpose shall have been commenced or
shall be pending before or contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a
prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, affairs or business prospects, whether
or not arising in the ordinary course of business, of the Company, (ii)
since the date of the latest balance sheet included in the Registration
Statement and the Prospectus there shall not have been any change, or
any development involving a prospective material adverse change, in the
capital stock or in the long-term debt of the Company from that set
forth in the Registration Statement and Prospectus, (iii) the Company
and its subsidiaries shall have no liability or obligation, direct or
contingent, which is material to the Company and its subsidiaries,
taken as a whole, other than those reflected in the Registration
Statement and the Prospectus and (iv) on the Closing Date you shall
have received a certificate dated the Closing Date, signed by Carl
Tooker and James Marcum in their capacities as the Chief Executive
Officer and President and Executive Vice President/Chief Financial
Officer of the Company, confirming the matters set forth in paragraphs
(a), (b), and (c) of this Section 9.
(d) All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on
the Option Closing Date with the same force and effect as if made on
and as of the Option Closing Date and you shall have received a
certificate to such effect, dated the Option Closing Date, from each
Selling Stockholder executed by Power-of-attorney.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the
Closing Date, of Kirkland & Ellis, counsel for the Company and the
Selling Stockholders, to the effect that:
(i) the Company and each of its subsidiaries has been
duly incorporated, is validly existing as a corporation in good
standing under the laws of their respective jurisdiction of
incorporation and each has the corporate power and authority
required to carry on its business as it is currently being
conducted and to own, lease and operate its properties;
(ii) the Company and each of its subsidiaries is duly
qualified and is in good standing as a foreign corporation
authorized to do business in each jurisdiction listed on
Schedule III hereto;
(iii) all of the issued and outstanding shares of
capital stock of, or other ownership interests in, each of the
Company's subsidiaries have been duly and validly authorized
and issued and are fully paid and nonassessable, and are owned,
directly or through other subsidiaries of the Company, by the
Company, free and clear of any lien, except for the lien of the
holders of the Company's 12 3/4 Senior Discount Debentures due
2003 on the common stock of Specialty Retailers, Inc.;
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<PAGE>
(iv) all of the outstanding shares of Common Stock
(including the Shares to be sold by the Selling Stockholders)
have been duly authorized and validly issued and are fully
paid, nonassessable and, to the knowledge of such counsel, not
subject to any preemptive or similar rights;
(v) the certificates evidencing the Shares are in due
and proper form under Delaware law;
(vi) the Shares to be issued and sold by the Company
hereunder have been duly authorized, and when issued and
delivered to the Underwriters against payment therefor as
provided by this Agreement, will have been validly issued and
will be fully paid and nonassessable, and, to the knowledge of
such counsel, the issuance of such Shares is not subject to any
preemptive or similar rights;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company and each of the Selling
Stockholders and is a valid and binding agreement of the
Company and each Selling Stockholder enforceable in accordance
with its terms, except as such enforceability may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium, or
similar laws now or hereafter in effect relating to creditors'
rights and remedies generally and (ii) general equitable
principles, whether asserted in an action in law or in equity,
and that such enforceability may be subject to the discretion
of the court before which any proceedings therefor may be
brought;
(viii) the authorized capital stock of the Company,
including the Common Stock, conforms as to legal matters to the
description thereof contained in the Prospectus;
(ix) the Registration Statement has become effective
under the Act, no stop order suspending its effectiveness has
been issued and no proceedings for that purpose are, to the
knowledge of such counsel, pending before or contemplated by
the Commission;
(x) the statements under the caption "Description of
Capital Stock" in the Prospectus and Items 14 and 15 of Part II
of the Registration Statement insofar as such statements
constitute a summary of legal matters documents or proceedings
referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings;
(xi) to such counsel's knowledge, neither the Company
nor any of its subsidiaries is in violation of its respective
charter or by-laws;
(xii) to such counsel's knowledge, no authorization,
approval, consent or order of, or filing with, any court or
governmental body or agency is required for the consummation by
the Company of the transactions contemplated by this Agreement
except such as have been obtained or made (or, in the case of
the Registration Rights Agreements, will be obtained or
17
<PAGE>
made) under the Act, state securities or Blue Sky laws or
regulations or such as may be required by the NASD;
(xiii) the execution, delivery and performance of
this Agreement, compliance by the Company with all of the
provisions hereof, and the consummation of the transactions
contemplated hereby will not (i) conflict with or result in a
breach or violation of the charter or bylaws of the Company or
any of its subsidiaries, (ii) to such counsel's knowledge,
conflict with or result in a breach or violation of the terms
or provisions of, or constitute a default or cause an
acceleration of any obligation under or result in the
imposition or creation of (or the obligation to create or
impose) a lien with respect to, any material bond, note,
debenture or other evidence of indebtedness or any material
indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of its subsidiaries is
a party or by which it or any of them is bound, or to which
any properties of the Company or any of its subsidiaries is or
may be subject and listed as an exhibit to the Registration
Statement, (iii) to such counsel's knowledge, contravene any
order of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or
any of their properties, or (iv) violate or conflict with any
stature, rule or regulation or administrative or court decree
applicable to the Company or any of its subsidiaries, or any
of their respective properties, in the case of clauses (ii),
(iii) and (iv), which conflict, breach, violate, default or
contravention, singly or in the aggregate with each other such
conflict, breach, violation, default or contravention, would
have a material adverse effect or would materially and
adversely affect the consummation of this Agreement or the
transactions contemplated hereby;
(xiv) to such counsel's knowledge, there is no
action, suit, proceeding or investigation before or by any
court or governmental agency or body, domestic or foreign,
pending against or affecting the Company or any of its
subsidiaries which, would, singly or in the aggregate, have a
material adverse effect or materially and adversely affect the
consummation of this Agreement or the transactions
contemplated hereby;
(xv) after due inquiry, such counsel does not know of
any legal or governmental proceeding pending or threatened to
which the Company or any of its subsidiaries is a party or to
which any of their respective property is subject which is
required to be described in the Registration Statement or the
Prospectus and is not so described, or of any contract or
other document which is required to be described in the
Registration Statement or the Prospectus or is required to be
filed as an exhibit to the Registration Statement which is not
described or filed as required;
(xvi) neither the Company nor any of its subsidiaries
is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment
Company Act of 1940, as amended;
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<PAGE>
(xvii) to such counsel's knowledge, after due
inquiry, no holder of any security of the Company has any
right to require registration of shares of Common Stock or any
other security of the Company that have not been waived;
(xviii) to such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the
issuance of, and no commitments, plans or arrangements to
issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of
the Company except as described in the Prospectus;
(xix) no transfer taxes are required to be paid in
connection with the sale and delivery of the Shares to the
Underwriters hereunder;
(xx) the Custody Agreement has been duly authorized,
executed and delivered by each Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder
enforceable in accordance with its terms;
(xxi) each Selling Stockholder has full legal right,
power and authority, and any approval required by law (other
than any approval imposed by the applicable state securities
and Blue Sky laws) to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder in the manner
provided in this Agreement and the Custody Agreement;
(xxii) each Selling Stockholder has good and clear
title to the certificates for the Shares to be sold by it and
upon delivery thereof, pursuant hereto and payment therefor,
good and clear title will pass to the Underwriters, severally,
free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever;
(xxiii) the power of attorney signed by each Selling
Stockholder appointing Joshua Bekenstein and Peter Mulvihill,
or either of them, as such Selling Stockholder's
attorney-in-fact to the extent set forth therein with regard
to the transactions contemplated hereby and by the
Registration Statement has been duly authorized, executed and
delivered by or on behalf of each Selling Stockholder and are
valid and binding instruments of such Selling Stockholder
enforceable in accordance with its terms, and pursuant to such
power of attorney, each of the Selling Stockholders has
authorized Joshua Bekenstein and Peter Mulvihill, or either of
them, to execute and deliver on their behalf this Agreement
and any other document necessary or desirable in connection
with transactions contemplated hereby and to deliver the
Shares to be sold by them pursuant to this Agreement; and
(xxiv) the Registration Statement (including any
Registration Statement filed under 462(b) of the Act, if any)
and the Prospectus and any supplement or amendment thereto
(except for financial statements, the schedules included
therein and other financial or statistical data as to which no
19
<PAGE>
opinion need be expressed) comply as to form in all material
respects with the
Act.
Kirkland & Ellis shall also include a statement to the effect
that nothing has come to such counsel's attention to cause it to believe that
(except for financial statements, the schedules included therein and other
financial or statistical data, as aforesaid) the Registration Statement and the
prospectus included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as amended or
supplemented, if applicable (except for financial statements, the schedules
included therein and other financial or statistical data, as aforesaid)
contained, as of its date or as of the Closing Date, any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In giving such opinion with respect to the matters covered by
clause (xxiv) and making the statement set forth in the immediately preceding
paragraph such counsel may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified.
The opinion of Kirkland & Ellis described in paragraph (e)
above shall be rendered to you at the request of the Company or one or more of
the Selling Stockholders, as the case may be, and shall so state therein.
(f) You shall have received on the Closing Date an opinion,
dated the Closing Date, of Latham & Watkins, counsel for the
Underwriters, as to the matters referred to in clauses (vi), (vii) (but
only with respect to the Company and with respect to due authorization,
execution and delivery), (viii), (xxiii) and the statement set forth in
the final paragraph of the foregoing paragraph (e). In giving such
opinion with respect to the matters covered by clause (xxiii) and the
statement set forth in the final paragraph of the foregoing paragraph
(e) such counsel may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check
or verification except as specified.
(g) You shall have received letters on and as of the Closing
Date, in form and substance satisfactory to you, from Price Waterhouse
LLP and Ernst & Young LLP, each independent public accountants, with
respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus and
substantially in the form and substance of the letters delivered to you
by Price Waterhouse LLP and Ernst & Young LLP on the date of this
Agreement.
(h) The Company shall have delivered to you the agreements
specified in Section 2 hereof.
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<PAGE>
(i) The Company and the Selling Stockholders shall not have
failed at or prior to the Closing Date to perform or comply with any of
the agreements herein contained and required to be performed or
complied with by the Company at or prior to the Closing Date.
(j) You shall have received on the Option Closing Date, a
certificate of each Selling Stockholder who is not a U.S. Person to the
effect that such Selling Stockholder is not a U.S. Person (as defined
under applicable U.S. federal tax legislation), which certificate may
be in the form of a properly completed and executed United States
Treasury Department Form W-8 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
(k) The Company shall have accepted for payment, in accordance
with the terms of the Company's tender offer for all of its outstanding
12-3/4% Senior Discount Debentures due 2005 (the "Senior Discount
Debentures"), at least a majority in aggregate principal amount of its
Senior Discount Debentures.
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such other documents as you may reasonably request with respect to such
other matters related to the issuance of such Additional Shares.
10. Effective Date of Agreement and Termination. This
Agreement shall become effective upon the later of (i) execution of this
Agreement and (ii) when notification of the effectiveness of the Registration
Statement has been released by the Commission.
This Agreement may be terminated at any time prior to the
Closing Date by you by written notice to the Sellers if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in the condition,
financial or otherwise, of the Company and its subsidiaries, taken as a whole,
or the earnings, affairs, or business prospects of the Company and its
subsidiaries, taken as a whole, whether or not arising in the ordinary course of
business, which would, in your judgment, make it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) any
outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic conditions or in the financial markets
of the United States or elsewhere that, in your judgment, is material and
adverse and would, in your judgment, make it impracticable to market the Shares
on the terms and in the manner contemplated in the Prospectus, (iii) the
suspension or material limitation of trading in securities on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market or
limitation on prices for securities on any such exchange or National Market
System, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects,
or will materially and adversely affect, the business or operations of the
Company or any subsidiary, (v) the declaration of a banking moratorium by either
federal or New York State authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of
21
<PAGE>
its monetary or fiscal affairs which in your opinion has a material adverse
effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Firm Shares
or Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date or on an Option Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or
Additional Shares, as the case may be, and the aggregate number of Firm Shares
or Additional Shares, as the case may be, with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date by all Underwriters and arrangements satisfactory to you and the
applicable Sellers for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the applicable Sellers. In any such case
which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of any such Underwriter under this
Agreement.
11. Agreements of the Selling Stockholders. Each Selling Stockholder
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with respect to
the Shares to be sold by such Selling Stockholder; and
(b) To take all reasonable actions in cooperation with the Company and
the Underwriters to cause the Registration Statement to become effective at
the earliest possible time, to do and perform all things to be done and
performed under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares pursuant to this
Agreement.
12. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to Stage Stores,
Inc., 10201
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Main Street, Houston, Texas 77025, Attention: Carl Tooker, (b) if to the Selling
Stockholders, to their respective addresses set forth on Schedule II, and (c) if
to any Underwriter or to you, to you c/o CS First Boston Corporation, 55 East
52nd Street, New York, New York 10055, Attention: Syndicate Department, or in
any case to such other address as the person to be notified may have requested
in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of the Selling Stockholders,
the Company, its officers and directors and of the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter or by or on behalf of the Sellers, the
officers or directors of the Company or any controlling person of the Sellers
(ii) acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
If this Agreement shall be terminated by the Underwriters
because of any failure or refusal on the part of the Sellers to comply with the
terms or to fulfill any of the conditions of this Agreement, the Sellers agree
to reimburse the several Underwriters for all out-of-pocket expenses (including
the fees and disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is
made solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance
with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
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<PAGE>
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the several Underwriters.
Very truly yours,
STAGE STORES, INC.
By____________________________
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE II HERETO
By____________________________
Name:
Title: Attorney-in-fact
CS FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By CS FIRST BOSTON CORPORATION
By__________________________
Name:
Title:
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SCHEDULE I
----------
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------------
CS First Boston Corporation
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
PaineWebber Incorporated --------
Total: 10,000,000
==========
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<PAGE>
SCHEDULE II
-----------
Selling Stockholders
Number of Additional
Name Shares Being Sold
---- --------------------
Bain Capital Funds
Tyler Capital Fund, L.P.
Tyler Massachusetts, L.P.
Tyler International, L.P.-II
BCIP Associates
BCIP Trust Associates, L.P.
c/o Bain Venture Capital
Two Copley Place
Boston, Massachusetts 02116
Acadia Partners, L.P.
201 Main Street
Fort Worth, Texas 76102
--------------------
Total: 750,000
26
<PAGE>
SCHEDULE III
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[To Be Provided By Kirkland & Ellis]
27
<PAGE>
ANNEX I
Required Stockholder Lock-ups
Bain Capital Funds
Tyler Capital Fund, L.P.
Tyler Massachusetts, L.P.
Tyler International, L.P.-II
BCIP Associates
BCIP Trust Associates, L.P.
Acadia Partners, L.P.
FWHY-Coinvestment I Partner L.P.
Oak Hill
Court Square
Bernard Fuchs
Joshua Bekenstein
Adam Kirsch
Carl Tooker
Mark Shulman
Jerry Ivie
Lasker Meyer
Stephen Lovell
James Marcum
Peter Mulvihill
28
