3
Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____
Commission file number 001-14035
Stage Stores, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0407711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identifications No.)
10201 Main Street, Houston, 77025
Texas (Zip Code)
(Address of principal executive
offices)
(713) 667-5601
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No _
The number of shares of common stock of Stage Stores, Inc.
outstanding as of October 13, 2000 was 26,850,223 shares of
Common Stock and 1,250,584 shares of Class B Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Stage Stores, Inc.
(Debtor-in-Possession)
Consolidated Condensed Balance Sheet
(in thousands, except par values)
July 29, January
2000 29, 2000
ASSETS (unaudited)
Cash and cash equivalents $ 22,083 $ 20,179
Undivided interest in accounts
receivable trust -- 41,600
Accounts receivable, net 295,616 --
Merchandise inventories, net 235,123 261,104
Prepaid expenses and other current
assets 17,447 23,866
Total current assets 570,269 346,749
Property, equipment and leasehold
improvements, net 158,152 181,834
Other assets 16,380 26,104
Total assets $744,801 $554,687
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 71,331 $40,955
Accrued expenses and other current
liabilities 52,848 72,177
Debtor-in-possession credit facility 245,028 --
Current portion of long-term debt -- 9,830
Long-term debt classified as current -- 492,393
Total current liabilities 369,207 615,355
Liabilities subject to compromise under
reorganization proceedings 565,216 --
Other long-term liabilities 6,914 14,299
Total liabilities 941,337 629,654
Preferred stock, par value $1.00, non-
voting,
3 shares authorized, no shares
issued or outstanding -- --
Common stock, par value $0.01, 75,000
shares authorized, 26,850 and 26,834
shares issued and outstanding,
respectively 268 268
Class B common stock, par value $0.01,
non-voting, 3,000 shares authorized,
1,250 shares issued and outstanding 13 13
Additional paid-in capital 267,059 266,590
Accumulated deficit (459,538) (337,500)
Accumulated other comprehensive income (4,338) (4,338)
Stockholders' deficit (196,536) (74,967)
Commitments and contingencies -- --
Total liabilities and
stockholders' deficit $ 744,801 $554,687
The accompanying notes are an integral part of this statement.
Stage Stores, Inc.
(Debtor-in-Possession)
Consolidated Condensed Statement of Operations
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended Twenty-six Weeks
Ended
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
Net sales $215,455 $269,848 $445,807 $532,439
Cost of sales and related
buying, occupancy and
distribution expenses 176,251 195,827 348,285 388,059
Gross profit 39,204 74,021 97,522 144,380
Selling, general and
administrative expenses 65,552 66,888 119,573 128,107
Store opening and closure
program costs -- 15,465 -- 16,214
Operating income (loss) (26,348) (8,332) (22,051) 59
Interest, net 10,529 12,646 23,957 24,757
Loss before reorganization
items, income tax, and
cumulative effect of a
change in accounting
principle (36,877) (20,978) (46,008) (24,698)
Reorganization items (60,935) -- (75,980) --
Loss before income tax and
cumulative effect of a
change in accounting
principle (97,812) (20,978) (121,988) (24,698)
Income tax expense
(benefit) 25 (5,887) 50 (7,338)
Loss before cumulative
effect of a change in
accounting principle (97,837) (15,091) (122,038) (17,360)
Cumulative effect of a
change in accounting
principle, net of tax -
reporting costs of
start-up activities -- -- -- (2,402)
Net loss $(97,837) $(15,091) $(122,038) $(19,762)
Basic loss per common share
data:
Basic loss per common share
before cumulative effect of
a change in accounting
principle $ (3.48) $ (0.54) $ (4.34) $ (0.62)
Cumulative effect of a
change in accounting
principle, net of tax -
reporting costs of
start-up activities -- -- -- (0.09)
Basic loss per common share
$ (3.48) $ (0.54) $ (4.34) $ (0.71)
Basic weighted average
common
shares outstanding 28,100 28,022 28,093 27,990
Diluted loss per common
share data:
Diluted loss per common
share before cumulative
effect of a change in
accounting principle $ (3.48) $ (0.54) $ (4.34) $ (0.62)
Cumulative effect of a
change in accounting
principle, net of tax -
reporting costs of
start-up activities -- -- -- (0.09)
Diluted loss per common
share $ (3.48) $ (0.54) $ (4.34) $ (0.71)
Diluted weighted average
common
shares outstanding 28,100 28,022 28,093 27,990
The accompanying notes are an integral part of this statement.
Stage Stores, Inc.
(Debtor-in-Possession)
Consolidated Condensed Statement of Cash Flows
(in thousands)
(unaudited)
Twenty-six Weeks Ended
July 29, July 29,
2000 1999
Cash flows from operating activities:
Net loss $ (122,038) $ (19,762)
Adjustments to reconcile net loss to net
cash used in operating
activities:
Depreciation and amortization 25,781 27,578
Deferred income taxes -- (2,120)
Accretion of discount 7,780 591
Amortization of debt issue costs 14,610 1,517
Cumulative effect of a change in
accounting principle -- 2,402
Change in working capital (143,161) (24,218)
Total adjustments (94,990) 5,750
Net cash used in operating activities (217,028) (14,012)
Cash flows from investing activities:
Additions to property, equipment and
leasehold improvements (2,350) (11,045)
Net cash used in investing activities (2,350) (11,045)
Cash flows from financing activities:
Proceeds from debtor-in-possession credit
facility 245,028 --
Proceeds from (payments on) pre-petition
working capital facility (13,000) 23,300
Proceeds from issuance of common stock -- 252
Payments on long-term debt (204) (2,357)
Additions to debt issue costs (10,542) --
Net cash provided by financing
activities 221,282 21,195
Net increase (decrease) in cash and cash
equivalents 1,904 (3,862)
Cash and cash equivalents:
Beginning of period 20,179 12,832
End of period $ 22,083 $ 8,970
Supplemental disclosure of cash flow
information:
Interest paid $ 10,983 $ 22,311
Income taxes paid (refunded) $ (14) $ 162
The accompanying notes are an integral part of this statement.
Stage Stores, Inc.
(Debtor-in-Possession)
Consolidated Statement of Stockholders' Deficit
For the Twenty-six Weeks Ended July 29, 2000
(in thousands)
Shares Outstanding
Shares of common stock
issued:
Beginning balance 26,834
Issuance of stock 16
Ending balance 26,850
Shares of Class B stock
issued:
Beginning balance 1,250
Ending balance 1,250
Stockholders' Deficit
Common stock issued:
Beginning balance $ 268
Issuance of stock --
Ending balance 268
Class B stock issued:
Beginning balance 13
Ending balance 13
Additional Paid-in Capital:
Beginning balance 266,590
Issuance of stock 469
Ending balance 267,059
Accumulated deficit and
accumulated other
comprehensive income:
Beginning balance (341,838)
Comprehensive loss:
Net loss (122,038)
Other comprehensive
loss --
Total comprehensive loss (122,038)
Ending balance (463,876)
Total Stockholders' Deficit $(196,536)
Accumulated other
comprehensive loss:
Beginning balance $ (4,338)
Ending balance $ (4,338)
The accompanying notes are an integral part of this statement.
Stage Stores, Inc.
(Debtor-in-Possession)
Notes to Unaudited Consolidated Condensed Financial Statements
1. The accompanying Unaudited Consolidated Condensed
Financial Statements of Stage Stores, 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 the 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 January 29, 2000 filed with Stage Stores' Annual
Report on Form 10-K. The fiscal years discussed herein end on the
Saturday nearest to January 31 in the following calendar year.
For example, references to "2000" mean the fiscal year ending
February 3, 2001. Certain reclassifications have been made to
prior year balances to conform with the reclassifications of such
amounts in the current period.
2. Stage Stores conducts its business primarily through its
wholly-owned subsidiary Specialty Retailers, Inc. ("SRI") which,
as of July 29, 2000, operated 506 family apparel stores in 22
states located primarily in the south central and midwestern
United States. Stage Stores and SRI are collectively referred to
herein as the "Company".
3. On June 1, 2000 (the "Petition Date"), Stage Stores, SRI
and Specialty Retailer, Inc. (NV) filed for protection under
Chapter 11 of Title 11 of the United States Bankruptcy Code
("Chapter 11") in the United States Bankruptcy Court for the
Southern District of Texas (the "Court"). Under Chapter 11, the
Company is operating its business as debtor-in-possession (see
Note 2 to the Company's Consolidated Financial Statements filed
with Stage Stores' Annual Report on Form 10-K for the year ended
January 29, 2000).
The accompanying Unaudited Consolidated Condensed Financial
Statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filing, such realization
of assets and liquidation of liabilities is subject to
uncertainty. Further, a plan of reorganization could materially
change the amounts reported in the consolidated financial
statements, which do not give effect to any adjustments to the
carrying value of assets or amounts of liabilities that might be
necessary as a consequence of a plan of reorganization. The
ability of the Company to continue as a going concern is
dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, the ability to
comply with debtor-in-possession financing agreements and the
ability to generate sufficient cash from operations and financing
sources to meet the Company's obligations. Additionally, the
accompanying Unaudited Consolidated Condensed Financial
Statements do not include any adjustments that would be required
if the Company were in liquidation. Substantially all of the
Company's pre-petition liabilities are subject to compromise
under reorganization proceedings. Those petition date
liabilities that are expected to be paid or comprised under a
plan of reorganization are separately classified in the
accompanying Unaudited Consolidated Condensed Balance Sheet and,
as of July 29, 2000, include the following items (in thousands):
Long-term debt $ 512,575
Accounts payable 20,090
Accrued expenses and other
liabilities 32,551
$ 565,216
The Company ceased accruing interest on pre-petition long-
term June 1, 2000. Reported interest differs from stated
contractual interest by $4.6 million for the thirteen and twenty-
six weeks ended July 29, 2000.
On June 2, 2000, the Company entered into a three year,
$450.0 million debtor-in-possession financing agreement (the "DIP
Financing Agreement") with a lender to finance, among other
things, the Company's working capital requirements during Chapter
11 reorganization proceedings. The Court has entered a final
order approving the terms of the DIP Financing Agreement.
Borrowings under the DIP Financing Agreement are limited to the
availability under a borrowing base which includes eligible
inventory and accounts receivable and certain leasehold
interests. Borrowings under the DIP Financing Agreement are
payable upon maturity and the daily interest rates are based upon
a Base rate or Eurodollar rate plus an applicable margin based on
availability as set forth in the DIP Financing Agreement.
Initial borrowings under the DIP Financing Agreement were
used to terminate the Company's existing Accounts Receivable
Program, retire the Senior Revolving Credit Facility and for
certain closing costs associated with the DIP Financing
Agreement. As a result of the termination of the Company's
existing Accounts Receivable Program, accounts receivable
generated under the Company's private label credit card program
will no longer be transferred to a special purpose trust (the
"Trust") but, rather, will be owned by SRI. Such receivables,
along with substantially all of the Company's other assets, serve
as collateral for the DIP Financing Agreement.
The DIP Financing Agreement contains covenants which, among
other things, restrict the (i) incurrence of additional debt,
(ii) incurrence of capital lease obligations, (iii) aggregate
amount of capital expenditures and (iv) transactions with related
parties. In addition, the DIP Financing Agreement requires the
Company to maintain compliance with a certain specified level of
earnings before depreciation, interest, taxes and special
charges.
On June 7, 2000, the Company paid the Trust $288.1 million
in cash and surrendered its retained interest in the Trust in
exchange for all accounts receivable balances held by the Trust
on that date. The Trust used the cash proceeds to retire all
remaining certificates and pay other costs associated with the
termination of the Trust. The accounts receivable balances
repurchased by the Company have been recorded at $312.3 million,
the aggregate of the cash paid and the estimated fair value of
the retained interest surrendered. The Company accretes the
yield resulting from the estimated net future cash flows
associated with these balances using the interest method. The
yield is recorded in selling, general and administrative expenses
in the accompanying financial statements. Service charge income,
late fees and estimated bad debt expense related to credit sales
made after June 7, 2000 are also included in selling, general and
administrative expense in the accompanying financial statements.
During July 2000, the Court approved the Company's plan to
close 120 stores as part of its restructuring process (the "2000
Store Closing Plan"). The Company has engaged third parties to
manage the inventory liquidation process in these stores. The
Company estimates the 2000 Store Closing Plan will be completed
within the current fiscal year.
The net expense resulting from the Company's Chapter 11
filing and subsequent reorganization efforts (which include the
2000 Store Closing Plan) has been separated from ordinary
operations and is classified as reorganization items in the
accompanying Consolidated Condensed Statement of Operations.
Components of reorganization items for the thirteen and twenty-
six weeks ended July 29, 2000 are as follows (in thousands):
Thirteen Twenty-
Weeks six
Ended Weeks
July 29, Ended
2000 July 29,
2000
Costs associated with the 2000 Store
Closing Plan (including loss on
Inventory, lease damages and severance) $ 28,731 $ 28,731
Professional fees associated with the
bankruptcy 4,917 4,917
Write-off of pre-petition debt issue
costs and original issue discount 17,987 17,987
Write-off of assets associated with the
2000 Store Closing Plan and other
miscellaneous assets 3,145 18,190
Write-down of undivided interest in
accounts receivable trust 6,155 6,155
Total $ 60,935 $ 75,980
Net cash used in operating activities for reorganization
items was approximately $3.7 million, related primarily to
professional fees and retainers during the twenty-six weeks ended
July 29, 2000.
4. Prior to the Petition Date, the Company charged $0.5
million against the store closure accrual it established in 1999
relating to the store closure program announced during February
2000. The accrued balance relating to this store closure program
was $7.3 million as of July 29, 2000 and has been included in
liabilities subject to compromise under reorganization
proceedings.
5. The Company has provided a full valuation allowance
against the net deferred tax assets generated during the twenty-
six weeks ended July 29, 2000. See Note 11 to the Audited
Consolidated Financial Statements for the year ended January 29,
2000, included in Stage Stores Annual Report on Form 10-K.
6. From time to time the Company and its subsidiaries are
involved in various litigation matters arising in the ordinary
course of its business.
Due to the bankruptcy filing mentioned previously, certain
of the cases mentioned below have been stayed pursuant to the
automatic stay of the Court. These cases require Court approval
or must be specifically exempt for litigation proceedings to
continue.
On March 30, 1999, a class action lawsuit was filed against
the Company and certain of its officers, directors and
stockholders in the United States District Court for the Southern
District of Texas by John C. Weld, Jr., a stockholder who
purchased 125 shares of the Company's common stock on August 3,
1998, alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder (the "Weld Suit"). The Company believed that the
allegations of the Weld Suit are without merit, and on July 23,
1999, the Company filed a motion to dismiss. United States
District Judge Kenneth Hoyt entered an order on December 8, 1999
dismissing the Weld Suit. The order has been appealed by Mr.
Weld.
On March 28, 2000, the Company filed a lawsuit against Carl
Tooker, the Company's former Chairman, Chief Executive Officer
and President in the District Court of Harris County, Texas. The
lawsuit is an action for damages arising from transactions
Mr. Tooker engaged in or directed while serving as President,
Chief Executive Officer and Chairman of the Board of Directors of
the Company which transactions benefited him personally or were
otherwise contrary to his duties as an officer and director. (See
Form 8-K dated March 9, 2000). The suit also seeks recovery of
debt owed by Mr. Tooker to the Company pursuant to loans and
promissory notes Mr. Tooker caused the Company to make to him
while serving in those capacities, and for conversion of stock
collateral pledged to the Company to secure his indebtedness.
The Company also seeks a mandatory injunction requiring
Mr. Tooker to deposit into the registry of the Court all
remaining stock collateral in his possession, and for a
declaratory judgment that Mr. Tooker was properly terminated "for
cause" under the terms of his employment agreement. The Company
seeks to recover not less than an aggregate of $2,755,672,
accrued interest, punitive damages, costs and reasonable
attorneys' fees.
On or about April 27, 2000 Mr. Tooker filed an Answer and
Counterclaim against the Company and a Third Party Petition
against the Company's Interim President, Chief Executive Officer
and Chairman of the Board, John J. Wiesner, Martin Stringer,
counsel to the Special Committee, and the law firm of McKinney &
Stringer, P.C. The answer generally denies all allegations made
by the Company. Mr. Tooker seeks damages from the Company of
approximately $3.9 million, plus attorney's fees, interest, and
costs for breach of his employment contract, and a like amount,
including punitive damages, from the third-party defendants for
alleged tortious interference with his employment contract. Mr.
Tooker also seeks to impose a constructive trust on the $300,000
in the Company's possession for certain contractual benefits he
claims to be due under his employment agreement. The remaining
claims seek damages against the Company and in part against the
third-party defendants, totaling $18 million, plus punitive
damages, fees, interest and costs, on theories of defamation,
civil conspiracy, breach of fiduciary duty and breach of duty of
good faith and fair dealing. The case is in its initial
development, prior to any discovery. The Company and the third-
party defendants dispute his allegations and intend to vigorously
defend all of Mr. Tooker's claims.
In March 2000, eleven former employees of SRI d/b/a Palais
Royal, filed two separate suits in the United States District
Court for the Southern District of Texas against the Company, SRI
and Mary Elizabeth Pena, arising out of alleged conduct occurring
over an unspecified time while the plaintiffs were working at one
or more Palais Royal stores in the Houston, Texas area. The
plaintiffs allege that on separate occasions they were falsely
accused of stealing merchandise and other company property and
giving discounts for purchases against company policy. The suits
accuse the defendants of defamation, false imprisonment,
intentional infliction of mental distress, assault and violation
of the Racketeer Influenced and Corrupt Organizations (RICO) Act.
The claims seek unspecified damages for mental anguish, lost
earnings, exemplary damages, treble damages, interest, attorneys'
fees and costs. The Company denies the allegations and intends
to vigorously defend the claims.
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.
7. In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which
requires that all derivative financial instruments be recorded in
the financial statements. SFAS No. 133 is effective for the
Company in the first quarter of 2001, and the Company is in the
process of ascertaining the impact this new standard will have on
its financial statements.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 is
effective for the Company in the fourth quarter of 2000, and the
Company is ascertaining the impact this pronouncement will have
on its financial statements.
8. The following Unaudited Consolidating Condensed Financial
Statements for Stage Stores and its wholly-owned subsidiaries is
presented to satisfy disclosure requirements pursuant to Sections
13 and 15(d) of the Securities Exchange Act of 1934 with respect
to wholly-owned subsidiaries of Stage Stores. Stage Stores does
not prepare separate financial statements and related disclosures
for its wholly-owned subsidiaries SRI and Specialty Retailers,
Inc. (NV), a wholly-owned subsidiary of Stage Stores which was
incorporated during June 1997, because management has determined
that such information is not material to investors. SRI is the
primary obligor under the 8.5% Senior Notes due 2005 and the 9%
Senior Subordinated Notes due 2007 (see Note 6 to the Company's
Consolidated Financial Statements filed with Stage Stores' Annual
Report on Form 10-K for the year ended January 29, 2000). Stage
Stores and Specialty Retailers, Inc. (NV) are guarantors of such
indebtedness.
The Consolidating Condensed Financial Statements for Stage
Stores and its wholly-owned subsidiaries, including all
significant intercompany transactions eliminated in
consolidation, are presented below. The results of operations of
SRPC as reported are not indicative of the total operating
performance of the Company's Accounts Receivable Program.
Consolidating
Condensed Balance
Sheet
July 29, 2000
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivables Eliminations Consolidated
Inc. Purchase Co.
ASSETS
Cash and cash $ 19,898 $ -- $ -- $ 19,898
equivalents
Accounts 295,616 -- -- 295,616
receivable, net
Merchandise 235,123 -- -- 235,123
inventories,
net
Prepaid expenses 17,447 -- -- 17,447
and other
current assets
Total current 568,084 -- -- 568,084
assets
Property, 158,152 -- -- 158,152
equipment and
leasehold
improvements,
net
Other assets 16,320 -- 16,320
Investment in 37,035 -- (37,035) --
subsidiaries
Total assets $ 779,591 $ -- $ (37,035) $ 742,556
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Accounts payable $ 71,331 $ -- $ -- $ 71,331
Accrued expenses 52,586 -- -- 52,586
and other
current
liabilities
Debtor-in-posses 245,028 -- -- 245,028
sion credit
Facility
Total current
liabilities 368,945 -- -- 368,945
Intercompany 231,915 (37,035) -- 194,880
notes/advances
Liabilities 565,216 -- -- 565,216
subject to
compromise
under
reorganization
proceedings
Other long-term 6,914 -- -- 6,914
liabilities
Investment in -- -- -- --
subsidiaries
Total
liabilities 1,172,990 (37,035) -- 1,135,955
Preferred stock -- -- -- --
Common stock -- -- -- --
Class B common -- -- -- --
stock
Additional paid-
in capital 3,317 34,253 (34,253) 3,317
Accumulated
earnings (392,378) 2,782 (2,782) (392,378)
(deficit)
Accumulated (4,338) -- -- (4,338)
other
comprehensive
income
Stockholders'
equity (393,399) 37,035 (37,035) (393,399)
Total $ 779,591 $ -- $ (37,035) $ 742,556
liabilities and
stockholders'
equity
Consolidating
Condensed Balance
Sheet
July 29, 2000
(in thousands,
unaudited)
Stage Specialty Eliminations Stage Stores
Stores, Inc. Retailers, Consolidated
Inc. (NV)
ASSETS
Cash and cash $ 2 $2,183 $ -- $ 22,083
equivalents
Accounts -- -- --
receivable, net 295,616
Merchandise -- -- --
inventories, 235,123
net
Prepaid expenses -- -- --
and other 17,447
current assets
Total current 2 2,183 -- 570,269
assets
Property, -- -- -- 158,152
equipment and
leasehold
improvements,
net
Other assets -- 60 -- 16,380
Investment in -- -- -- --
subsidiaries
Total assets $ 2 $ 2,243 $ -- $ 744,801
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Accounts payable $ -- $ -- $ -- $ 71,331
Accrued expenses -- 262 -- 52,848
and other
current
liabilities
Debtor-in-posses -- -- --
sion credit 245,028
Facility
Total current --
liabilities -- 262 369,207
Intercompany (194,351) -- --
notes/advances (529)
Liabilities 565,216
subject to
compromise
under
reorganization
proceedings
Other long-term -- -- -- 6,914
liabilities
Investment in -- --
subsidiaries 196,067 (197,067)
Total (194,089)
liabilities 196,538 (197,067) 941,337
Preferred stock -- -- -- --
Common stock -- --
268 268
Class B common -- --
stock 13 13
Additional paid-
in capital 267,059 160,915 (164,232) 267,059
Accumulated
earnings (459,538) 35,417 356,961 (459,538)
(deficit)
Accumulated --
other (4,338) 4,338 (4,338)
comprehensive
income
Stockholders'
equity (196,536) 196,332 197,067 (196,536)
Total
liabilities and
stockholders'
equity
$ 2 $ 2,243 $ -- $ 744,801
Consolidating Condensed
Balance Sheet
January 29, 2000
(in thousands)
Specialty SRI SRI SRI
Retailers, Receivables Eliminations Consolidated
Inc. Purchase Co.
ASSETS
Cash and cash $ 18,077 $ -- $ -- $ 18,077
equivalents
Undivided -- 41,600
interest in (13,101) 54,701
accounts
receivable trust
Merchandise -- -- 261,104
inventories, net 261,104
Prepaid expenses 220 -- 7,945
7,725
Other current 8,491 -- 15,921
assets 7,430
Total current 63,412 -- 344,647
assets 281,235
Property, -- -- 180,761
equipment and 180,761
leasehold
improvements,
net
Other assets 2,608 -- 26,044
23,436
Investment in -- (36,690) --
subsidiaries 36,690
Total assets $ $ 66,020 $ $ 551,452
522,122 (36,690)
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable $ 40,955 $ -- $ -- $ 40,955
Accrued expenses
and other
current
liabilities 69,385 2,770 -- 72,155
Current portion -- -- 9,830
of long-term 9,830
debt
Long-term debt -- -- 492,393
classified as 492,393
current
Total current 2,770 -- 615,333
liabilities 612,563
Long-term debt -- -- -- --
Other long-term -- -- 14,299
liabilities 14,299
Intercompany 26,560 -- 187,279
notes/advances 160,719
Investment in -- -- -- --
subsidiaries
Total 29,330 -- 816,911
liabilities 787,581
Preferred stock -- -- -- --
Common stock -- -- -- --
Class B common -- -- -- --
stock
Additional paid-
in capital 3,317 33,908 (33,908) 3,317
Accumulated (2,782) (264,438)
earnings (264,438) 2,782
(deficit)
Accumulated other -- -- (4,338)
comprehensive (4,338)
income
Stockholders' 36,690 (265,459)
equity (deficit) (265,459) (36,690)
Total $ 522,122 $ 66,020 $ $ 551,452
liabilities and (36,690)
stockholders'
equity (deficit)
Consolidating Condensed
Balance Sheet
January 29, 2000
(in thousands)
Stage Specialty Stage Stores
Stores, Inc. Retailers, Eliminations Consolidated
Inc. (NV)
ASSETS
Cash and cash $ 102 $ $ -- $ 20,179
equivalents 2,000
Undivided -- -- --
interest in 41,600
accounts
receivable trust
Merchandise -- -- --
inventories, net 261,104
Prepaid expenses -- -- -- 7,945
Other current -- -- --
assets 15,921
Total current 102 2,000 --
assets 346,749
Property, -- 1,073 --
equipment and 181,834
leasehold
improvements,
net
Other assets -- --
60 26,104
Investment in -- -- -- --
subsidiaries
Total assets $ 102 $ $ -- $
3,133 554,687
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable $ -- $ -- $ -- $ 40,955
Accrued expenses 22 -- -- 72,177
and other
current
liabilities
Current portion -- -- -- 9,830
of long-term
debt
Long-term debt -- -- --
classified as 492,393
current
Total current -- --
liabilities 22 615,355
Long-term debt -- -- -- --
Other long-term -- -- --
liabilities 14,299
Intercompany 18 -- --
notes/advances (187,297)
Investment in -- (75,029) --
subsidiaries 75,029
Total (75,029)
liabilities 75,069 (187,297) 629,654
Preferred stock -- -- -- --
Common stock -- --
268 268
Class B common -- --
stock 13 13
Additional paid-
in capital 266,590 160,915 (164,232) 266,590
Accumulated 234,923
earnings (337,500) 29,515 (337,500)
(deficit)
Accumulated other -- 4,338
comprehensive (4,338) (4,338)
income
Stockholders' 75,029
equity (deficit) (74,967) 190,430 (74,967)
Total $ 102 $ $ -- $ 554,687
liabilities and 3,133
stockholders'
equity (deficit)
Consolidating Condensed
Statement of Operations
Twenty-six Weeks Ended
July 29, 2000
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivables Eliminations Consolidated
Inc. Purchase Co.
Net sales $ 445,807 $ -- $ -- $ 445,807
Cost of sales 348,285 348,285
and related -- --
buying,
occupancy and
distribution
expenses
Gross profit 97,522 97,522
-- --
Selling, general (2,063)
and 122,102 -- 120,039
administrative
expenses
Operating income
(loss) (24,580) 2,063 -- (22,517)
Interest
expense, net 29,884 (229) -- 29,655
Income (loss) (54,464) (52,172)
before 2,292 --
reorganization
items and
income taxes
Reorganization (73,688) (75,980)
items (2,292) --
Income (loss)
before income (128,152) -- -- (128,152)
taxes
Income tax (212) (212)
expense -- --
(benefit)
Income (loss) (127,940) (127,940)
before equity -- --
in net earnings
of subsidiaries
Equity in net
earnings of -- -- -- --
subsidiaries
Net income $ (127,940) $ -- $ -- $ (127,940)
(loss)
Consolidating Condensed
Statement of Operations
Twenty-six Weeks Ended
July 29, 2000
(in thousands,
unaudited)
Stage Specialty Eliminations Stage Stores
Stores, Inc. Retailers, Consolidated
Inc. (NV)
Net sales $ -- $ -- $ -- $ 445,807
Cost of sales -- 348,285
and related -- --
buying,
occupancy and
distribution
expenses
Gross profit -- 97,522
-- --
Selling, general (466) 119,573
and -- --
administrative
expenses
Operating income -- (22,051)
(loss) 466 --
Interest -- (5,698) 23,957
expense, net --
Income (loss) -- (46,008)
before 6,164 --
reorganization
items and
income taxes
Reorganization --
items -- -- (75,980)
Income (loss) (121,988)
before income -- 6,164 --
taxes
Income tax -- 50
expense 262 --
(benefit)
Income (loss) -- (122,038)
before equity 5,902 --
in net earnings
of subsidiaries
Equity in net (131,882)
earnings of -- 131,882 --
subsidiaries
Net income $ (131,882) $ 5,902 $ 131,882 $ (122,038)
(loss)
Consolidating Condensed
Statement of Operations
Twenty-six Weeks
Ended July 31, 1999
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivables Eliminations Consolidated
Inc. Purchase Co.
Net sales $ $ -- $ -- $ 532,439
532,439
Cost of sales 388,059 -- -- 388,059
and related
buying,
occupancy and
distribution
expenses
Gross profit 144,380 -- -- 144,380
Selling, general 131,504 (3,298) -- 128,206
and
administrative
expenses
Store opening 16,214 -- -- 16,214
and closure
program costs
Operating income (3,338) 3,298 -- (40)
(loss)
Interest 30,813 2,095 -- 32,908
expense, net
Income (loss) (34,151) 1,203 -- (32,948)
before income
taxes
Income tax (10,694) 445 -- (10,249)
expense
(benefit)
Income (loss) (23,457) 758 -- (22,699)
before equity
in net earnings
of subsidiaries
and cumulative
effect of a
change in
accounting
principle
Equity in net
earnings of
subsidiaries (448) -- 448 --
Income (loss) (23,905) 758 448 (22,699)
before
cumulative
effect of a
change in
accounting
principle
Cumulative (1,196) (1,206) -- (2,402)
effect of a
change in
accounting
principle, net
of tax -
reporting costs
of start-up
activities
Net income $ (25,101) $ (448) $ 448 $ (25,101)
(loss)
Consolidating Condensed
Statement of Operations
Twenty-six Weeks
Ended July 31, 1999
(in thousands,
unaudited)
Stage Specialty Eliminations Stage Stores
Stores, Inc. Retailers, Consolidated
Inc. (NV)
Net sales $ -- $ -- $ -- $532,439
Cost of sales -- -- -- 388,059
and related
buying,
occupancy and
distribution
expenses
Gross profit -- -- -- 144,380
Selling, general 69 (168) -- 128,107
and
administrative
expenses
Store opening
and closure
program costs -- -- -- 16,214
Operating income (69) 168 -- 59
(loss)
Interest -- (8,151) -- 24,757
expense, net
Income (loss) (69) 8,319 -- (24,698)
before income
taxes
Income tax -- 2,911 -- (7,338)
expense
(benefit)
Income (loss) (69) 5,408 -- (17,360)
before equity
in net earnings
of subsidiaries
and cumulative
effect of a
change in
accounting
principle
Equity in net (19,693) -- 19,693 --
earnings of
subsidiaries
Income (loss) (19,762) 5,408 19,693 (17,360)
before
cumulative
effect of a
change in
accounting
principle
Cumulative -- -- -- (2,402)
effect of a
change in
accounting
principle, net
of tax -
reporting costs
of start-up
activities
Net income $ (19,762) $ 5,408 $ 19,693 $ (19,762)
(loss)
Consolidating Condensed
Statement of Cash Flows
Twenty-six Weeks Ended
July 29, 2000
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivables Eliminations Consolidated
Inc. Purchase Co.
Cash flows from
operating activities:
Net cash used
in operating $ (6,140) $ -- $(217,111)
activities $(210,971)
Cash flows from
investing activities:
Investment in
subsidiary -- -- -- --
Additions to (2,350) (2,350)
property, -- --
equipment and
leasehold
improvements
Proceeds from
the sales of (6,140) 6,140 -- --
accounts
receivable, net
Net cash (8,490) (2,350)
provided by 6,140 --
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from
debtor-in- 245,028 -- -- 245,028
possession
credit facility
Proceeds from
working capital (13,000) -- -- (13,000)
facility
Proceeds from
issuance of -- -- --
common stock --
Payments on long- (204) -- -- (204)
term debt
(10,542)
Additions to -- -- (10,542)
debt issue
costs
Net cash
provided by 221,282 -- -- 221,282
(used in)
Financing
activities
Net increase
(decrease) in 1,821 -- -- 1,821
cash and cash
equivalents
Cash and cash
equivalents:
Beginning of
period 18,077 -- -- 18,077
End of period $ 19,898 $ 19,898
-- --
Consolidating Condensed
Statement of Cash Flows
Twenty-six Weeks Ended
July 29, 2000
(in thousands,
unaudited)
Stage Specialty Stage Stores
Stores, Inc. Retailers, Eliminations Consolidated
Inc. (NV)
Cash flows from
operating activities:
Net cash used $ (100)
in operating $ 183 $ -- $(217,028)
activities
Cash flows from
investing activities:
Investment in
subsidiary -- -- -- --
Additions to
property,
equipment and
leasehold -- -- --
improvements (2,350)
Proceeds from
the sales of -- -- -- --
accounts
receivable, net
Net cash (2,350)
provided by -- -- --
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from
debtor-in- -- -- -- 245,028
possession
credit facility
Proceeds from
working capital -- -- -- (13,000)
facility
Proceeds from
issuance of -- -- -- --
common stock
Payments on long- -- -- -- (204)
term debt
Additions to -- -- -- (10,542)
debt issue
costs
Net cash
provided by -- -- -- 221,282
(used in)
Financing
activities
Net increase
(decrease) in (100) 183 -- 1,904
cash and cash
equivalents
Cash and cash
equivalents:
Beginning of 102
period 2,000 -- 20,179
End of period $ 2 $ 2,183 -- $ 22,083
Consolidating Condensed
Statement of Cash Flows
Twenty-six Weeks Ended
July 31, 1999
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivables Eliminations Consolidated
Inc. Purchase Co.
Cash flows from
operating activities:
Net cash $2,965 $ (16,723) $ -- $ (13,758)
provided by
(used in)
operating
activities
Cash flows from
investing activities:
Investment in -- -- -- --
subsidiary
Additions to (11,045) -- -- (11,045)
property,
equipment and
leasehold
improvements
Proceeds from 16,723
the sales of (16,723)
accounts -- --
receivable, net
Net cash (27,768) 16,723 -- (11,045)
provided by
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from 23,300 -- -- 23,300
working capital
facility
Proceeds from
issuance of
common stock -- -- -- --
Proceeds from -- -- -- --
capital
contribution
Payments on long- (2,357) -- -- (2,357)
term debt
Net cash 20,943 -- -- 20,943
provided by
(used in)
financing
activities
Net (decrease) (3,860) -- -- (3,860)
in cash and
cash
equivalents
Cash and cash
equivalents:
Beginning of 10,882 -- -- 10,882
period
End of period $ 7,022 $ -- $ -- $ 7,022
Consolidating Condensed
Statement of Cash Flows
Twenty-six Weeks Ended
July 31, 1999
(in thousands,
unaudited)
Stage Specialty Stage Stores
Stores, Inc. Retailers, Eliminations Consolidated
Inc. (NV)
Cash flows from
operating activities:
Net cash $ -- $(254) $ -- $(14,012)
provided by
(used in)
operating
activities
Cash flows from
investing activities:
Investment in (252) -- 252 --
subsidiary
Additions to
property,
equipment and
leasehold
improvements -- -- -- (11,045)
Proceeds from
the sales of
accounts -- -- -- --
receivable, net
Net cash (252) -- 252 (11,045)
provided by
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from -- -- -- 23,300
working capital
facility
Proceeds from 252 -- 252
issuance of
common stock
Proceeds from -- 252 (252) --
capital
contribution
Payments on long- -- -- -- (2,357)
term debt
Net cash 252 252 (252) 21,195
provided by
(used in)
financing
activities
Net (decrease) -- (2) -- (3,862)
in cash and
cash
equivalents
Cash and cash
equivalents:
Beginning of 2 1,948 -- 12,832
period
End of period $ 2 $1,946 $ -- $ 8,970
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
Certain items discussed or incorporated by reference herein
contain forward-looking statements that involve risks and
uncertainties including, but not limited to, the ability to
obtain financing on terms reasonably satisfactory to the Company,
the ability of the Company to obtain normal trade terms from its
vendors, the ability of the Company to comply with the various
covenant requirements contained in the Company's DIP Financing
Agreement and the demand for apparel. The demand for apparel can
be affected by weather patterns, levels of competition,
competitors' marketing strategies, changes in fashion trends,
availability of product on normal payment terms and the failure
to achieve the expected results of the Company's merchandising
and marketing plans as well as its store opening and closing
plans. The occurrence of the above has had and can continue to
have a material and adverse impact on the Company's operating
results. See "Risk Factors" below. Certain information herein
contains estimates which represent management's best judgment as
of the date hereof based on information currently available;
however, the Company does not intend to update this information
to reflect developments or information obtained after the date
hereof and disclaims any legal obligation to the contrary.
General
Overview. The Company operates family apparel stores
offering moderately priced, nationally recognized brand name
apparel, accessories, cosmetics and footwear, the majority of
which are located in small towns and communities primarily in the
south central and midwestern 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 strategically important and
under served niche. The Company has developed a franchise focused
on small markets offering a broad range of brand name merchandise
with a high level of customer service in convenient locations.
Significant Events. On June 1, 2000, Stage Stores, SRI and
Specialty Retailers, Inc. (NV) filed for protection under Chapter
11 of Title 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of Texas.
Under Chapter 11, the Company will operate its business as debtor-
in-possession. Additionally, a creditor committee has been formed
and will have the right to review and object to any non-ordinary
course of business transactions and participate in the
formulation of any plan or plans of reorganization.
As of the Petition Date, actions to collect pre-petition
indebtedness are stayed and other contractual obligations may not
be enforced against the Company. In addition, the Company may
reject executory contracts and lease obligations, and parties
affected by these rejections may file claims with the Court in
accordance with the reorganization process. Substantially all
liabilities as of the Petition Date are subject to settlement
under a plan of reorganization to be voted upon by all impaired
classes of creditors and equity security holders and approved by
the Court.
On June 2, 2000, the Company entered into a three year,
$450.0 million DIP Financing Agreement with a lender to finance,
among other things, the Company's working capital requirements
during Chapter 11 reorganization proceedings. The Court has
entered a final order approving the terms of the DIP Financing
Agreement. Borrowings under the DIP Financing Agreement are
limited to the availability under a borrowing base which includes
eligible inventory and accounts receivable and certain leasehold
interests. Borrowings under the DIP Financing Agreement are
payable upon maturity and the daily interest rates are based upon
a Base rate or Eurodollar rate plus an applicable margin based on
availability as set forth in the DIP Financing Agreement.
Initial borrowings under the DIP Financing Agreement were
used to terminate the Company's existing Accounts Receivable
Program, retire the Senior Revolving Credit Facility and for
certain closing costs associated with the DIP Financing
Agreement. As a result of the termination of the Company's
existing Accounts Receivable Program, accounts receivable
generated under the Company's private label credit card program
will no longer be transferred to the Trust but, rather, will be
owned by SRI. Such receivables, along with substantially all of
the Company's other assets, serve as collateral for the DIP
Financing Agreement.
On June 7, 2000, the Company paid the Trust $288.1 million
in cash and surrendered its retained interest in the Trust in
exchange for all accounts receivable balances held by the Trust
on that date. The Trust used the cash proceeds to retire all
remaining certificates and pay other costs associated with the
termination of the Trust. The accounts receivable balances
repurchased by the Company have been recorded at $312.3 million,
the aggregate of the cash paid and the estimated fair value of
the retained interest surrendered. The Company accretes the
yield resulting from the estimated net future cash flows
associated with these balances using the interest method. The
yield is recorded in selling, general and administrative expenses
in the accompanying financial statements. Service charge income,
late fees and estimated bad debt expense related to credit sales
made after June 7, 2000 are also included in selling, general and
administrative expense in the accompanying financial statements.
During July 2000, the Court approved the Company's 2000
Store Closing Plan which consisted of the closure of 120 stores
as part of its reorganization process. The Company has engaged
third parties to manage the liquidation process in these stores.
In conjunction with the 2000 Store Closing Plan, the Company
recorded charges aggregating $43.7 million for the 26 weeks ended
July 29, 2000, comprised of a $14.4 million loss on inventory,
$13.2 million of estimated lease damages to be settled in the
bankruptcy process, $1.0 million of severance and a $15.1 million
write-off of the fixed assets and prepaid supplies associated
with the 120 stores to be closed. This charge is reflected in
reorganization items in the accompanying Consolidated Condensed
Statement of Operations.
On August 8, 2000, the Company announced the employment of
James Scarborough as its new President and Chief Executive
Officer, subject to the necessary Court approval. Jack Wiesner,
who was serving as Chairman of the Board and Interim President
and Chief Executive Officer of the Company will continue as
Chairman of the Board and will oversee the Company's Chapter 11
proceedings and reorganization process.
The financial information, discussion and analysis that
follow should be read in conjunction with the Company's
Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended January 29, 2000.
Results of Operations
Thirteen Weeks Ended July 29, 2000 Compared to Thirteen Weeks
Ended July 31, 1999
Sales for the thirteen weeks ended July 29, 2000 ("current
year second quarter") decreased 20.1% to $215.5 million from
$269.8 million for the thirteen weeks ended July 31, 1999 ("prior
year second quarter"). The decrease in sales for the current
year second quarter reflects, among other things, (i) the net
reduction of 177 stores since the end of the prior year second
quarter and (ii) an 18.0% decline in comparable store sales
during the period. Management believes comparable store sales
were negatively impacted by lower inventory levels throughout the
spring season as a result of a contraction in trade support prior
to the Company's Chapter 11 filing from the Company's vendors and
factors. The contraction in trade support caused a significant
disruption in the Company's spring and summer merchandise receipt
flows.
Gross profit decreased 47.0% to $39.2 million for the
current year second quarter from $74.0 million for the prior year
second quarter. Gross profit, as a percent of sales, decreased
to 18.2% for the current year second quarter from 27.4% for the
prior year second quarter. The lower gross profit percentage for
the current year second quarter reflects, among other things, (i)
additional markdowns taken to implement the Company's new
markdown program, (ii) the impact of the liquidation sales during
the period from the stores in the 2000 store closure program
which do not generate any gross margin dollars, (iii) the
negative sales leverage associated with the Company's fixed
buying, occupancy and distribution expenses which are included in
cost of goods sold and (iv) lower vendor discounts as a result of
reduced inventory purchases.
Selling, general and administrative ("SG&A") expenses for
the current year second quarter decreased 2.0% to $65.6 million
from $66.9 million in the prior year second quarter and, as a
percent of sales, increased to 30.4% from 24.8% in the comparable
period last year. SG&A expenses for the current year second
quarter includes certain charges recorded during the period
totaling $14.2 million. These charges were comprised primarily
of (i) $2.6 million of operating costs at the stores which are in
the process of being closed, (ii) a $9.7 million reduction in
income from the Company's private label credit card program
associated with the accounting for receivables repurchased from
the previously existing Trust and (iii) $1.3 million of employee
severance expense.
Store opening and closure program costs of $15.5 million for
the prior year second quarter reflect the costs associated with
the store closure program which was implemented during the period
which resulted in the closure of approximately 35 under
performing stores. There were no store opening and closure
program costs recorded during the current year second quarter.
As a result of the factors discussed above, the operating
loss for the current year second quarter was $26.3 million as
compared to a loss of $8.3 million for the prior year second
quarter.
Net interest expense for the current year second quarter
decreased 16.7% to $10.5 million from $12.6 million for the prior
year second quarter due to a lower level of average borrowings
outstanding subsequent to the Petition Date as compared to the
amount of borrowings outstanding on the Petition Date, offset
somewhat by a higher interest rate on the post-Petition Date
borrowings. As a result of the Chapter 11 filing, the interest
accrual on the borrowings outstanding on the Petition Date was
suspended.
During the current year second quarter, the Company recorded
non-recurring costs related to its Chapter 11 filing and
reorganization process totaling $60.9 million. This charge
consisted of, among other things, (i) charges aggregating $28.7
million related to the 2000 store closing plan, (ii) $4.9 million
of professional fees associated with the bankruptcy, (iii) an
$18.0 million charge related to the write-off of pre-petition
debt issue costs and original issue discount, (iv) a charge of
$3.1 million for the impairment of intangible assets and (v) a
charge of $6.2 million related to the write-down of the undivided
interest in accounts receivable trust.
As a result of the foregoing, the Company's net loss for the
current year second quarter was $97.8 million as compared to a
net loss for the prior year second quarter of $15.1 million.
Twenty-six Weeks Ended July 29, 2000 Compared to Twenty-six Weeks
Ended July 31, 1999
Sales for the twenty-six weeks ended July 29, 2000 ("current
year ") decreased 16.2% to $445.8 million from $532.4 million for
the twenty-six weeks ended July 31, 1999 ("prior year"). The
decrease in sales for the current year reflects, among other
things, (i) the impact of fewer stores in operation during the
first two quarters of the current year as compared to the number
of stores in operation during the first two quarters of the prior
year and (ii) a 14.3% decline in comparable store sales during
the period. Management believes comparable store sales were
negatively impacted by lower inventory levels throughout the
spring season as a result of a contraction in trade support prior
to the Company's Chapter 11 filing from the Company's vendors and
factors. The contraction in trade support caused a significant
disruption in the Company's spring and summer merchandise receipt
flows.
Gross profit decreased 32.4% to $97.5 million for the
current year from $144.4 million for the prior year. Gross
profit, as a percent of sales, decreased to 21.8% for the current
year from 27.1% for the prior year second quarter. The lower
gross profit percentage for the current year reflects, among
other things, (i) the impact of the increased level of
promotional and liquidation activity utilized during the current
year first quarter, (ii) additional mark downs taken during the
current year second quarter to implement the Company's new
markdown program, (ii) the impact of the liquidation sales during
the current year from the stores in the 2000 store closure
program which do not generate any gross margin dollars, (iii) the
negative sales leverage associated with the Company's fixed
buying, occupancy and distribution expenses which are included in
cost of goods sold and (iv) lower vendor discounts as a result of
reduced inventory purchases.
Selling, general and administrative ("SG&A") expenses for
the current year decreased 6.7% to $119.6 million from $128.1
million in the prior year and, as a percent of sales, increased
to 26.8% from 24.0% in the comparable period last year. SG&A
expenses for the current year includes certain charges recorded
during the period totaling $16.3 million. These charges were
comprised primarily of (i) $4.6 million of operating costs at the
stores which are in the process of being closed, (ii) a $9.7
million reduction in income from the Company's private label
credit card program associated with the accounting for
receivables repurchased from the previously existing Trust and
(iii) $1.3 million of employee severance expense.
Store opening and closure program costs of $16.2 million for
the prior year reflect the costs associated with the opening of
10 new stores during the prior year first quarter ($0.7 million)
as well as the costs associated with the store closure program
which was implemented during the prior year second quarter ($15.5
million) which resulted in the closure of approximately 35 under
performing stores.
As a result of the factors discussed above, the operating
loss for the current year was $22.1 million as compared to
operating income of $0.1 million for the prior year.
Net interest expense for the current year decreased 3.2% to
$24.0 million from $24.8 million for the prior year. The current
year benefited from a lower level of average borrowings
outstanding subsequent to the Petition Date as compared to the
amount of borrowings outstanding on the Petition Date, offset
somewhat by a higher interest rate on the post-Petition Date
borrowings. As a result of the Chapter 11 filing, the interest
accrual on the borrowings outstanding on the Petition Date was
suspended.
During the current year, the Company recorded non-recurring
costs related to its Chapter 11 filing and reorganization process
totaling $76.0 million. This charge, which is classified as
reorganization items in the Consolidated Condensed Statement of
Operations, consisted of, among other things, (i) charges
aggregating $43.7 million related to the 2000 store closing plan,
(ii) $4.9 million of professional fees associated with the
bankruptcy, (iii) an $18 million charge related to the write-off
of pre-petition debt issue costs and original issue discount,
(iv) a charge of $3.1 million for the impairment of intangible
assets and (v) a charge of $6.2 million related to the write-down
of the undivided interest in accounts receivable trust..
As a result of the foregoing, the Company's net loss for the
current year was $122.0 million as compared to a net loss for the
prior year of $17.4 million before the cumulative effect of a
change in accounting principal.
In connection with the adoption of SOP 98-5, the Company
recorded the cumulative effect of change in accounting principle,
net of tax, of $2.4 million during the prior year first quarter.
The charge reflects the write-off of the unamortized
organizational costs associated with the Company's accounts
receivable trust and credit card bank.
Seasonality and Inflation
The Company's business is seasonal and annual results of
operations are highly dependent upon the fourth quarter as
quarterly sales and profits are traditionally lower during the
first three quarters (February through October) and higher during
the fourth quarter (November through January). In addition,
working capital requirements fluctuate throughout the year,
increasing substantially in October and November due to
requirements for significantly higher inventory levels in
anticipation of the holiday season.
The following table shows certain unaudited financial
information for the Company by quarter (dollars in thousands):
2000 1999
Q1 Q2 Q1 Q2 Q3 Q4
Net sales $230,352 $215,455 $262,591 $269,848 $264,327 $324,801
Gross
profit 58,318 39,204 70,359 74,021 77,203 2,867
Operating
income
(loss) 4,252 (26,348) 8,391 (8,332) 12,560 (220,971)
Quarters'
operating
Income as
a percent
of total N/A N/A N/A N/A N/A N/A
Income
(loss)
before
cumulative
effect of
a change
in
accounting
principle (24,201) (97,837) (2,269) (15,091) 224 (260,067)
Net income
(loss) (24,201) (97,837) (4,671) (15,091) 224 (262,352)
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.
Liquidity and Capital Resources
Total working capital increased to $201.1 million at July
29, 2000 from a deficit of $268.6 million at January 29, 2000.
During the period, accounts receivable increased $254.0 million
due to the termination of the Accounts Receivable Program,
merchandise inventories decreased $26.0 million as a result of
the disruption in the flow of merchandise during the period and
current debt decreased $257.2 million as a result of the
reclassification of the Petition Date debt to long-term
liabilities.
On June 2, 2000, the Company entered into a three year,
$450.0 million DIP Financing Agreement with a lender to finance,
among other things, the Company's working capital requirements
during Chapter 11 reorganization proceedings. On June 26, 2000,
the Company was given full and final approval of the DIP
Financing Agreement by the Court. Borrowings under the DIP
Financing Agreement are limited to the availability under a
borrowing base which includes eligible inventory and accounts
receivable and certain leasehold interest. Borrowings under the
DIP Financing Agreement are payable upon maturity and the daily
interest rates are based upon a Base rate or Eurodollar rate plus
an applicable margin based on availability as set forth in the
DIP Financing Agreement.
Initial borrowings under the DIP Financing Agreement were
used to terminate the Company's existing Accounts Receivable
Program, retire the Senior Revolving Credit Facility and to pay
closing costs associated with the DIP Financing Agreement. As a
result of the retirement of the Company's existing Accounts
Receivable Program, accounts receivable generated under the
Company's private label credit card program will no longer be
transferred to the Trust but, rather, will be owned by SRI. Such
receivables, along with substantially all of the Company's other
assets, serve as collateral for the DIP Financing Agreement.
Borrowings outstanding under the DIP Financing Agreement at July
29, 2000 totaled $245.0 million. Availability under the DIP
Financing Agreement at July 29, 2000 was $136.6 million.
The DIP Financing Agreement contains covenants which, among
other things, restrict the (i) incurrence of additional debt,
(ii) incurrence of capital lease obligations, (iii) aggregate
amount of capital expenditures and (iv) transactions with related
parties. In addition, the DIP Financing Agreement requires the
Company to maintain compliance with a certain specified level of
earnings before depreciation, interest, taxes and special
charges.
The Company's primary capital requirements are for working
capital, debt service under the DIP Financing Agreement,
professional fees during the reorganization process and capital
expenditures. Management believes cash interest payments under
the DIP Financing Agreement will be approximately $21.0 million
for the remainder of 2000. Capital expenditures for 2000 are
expected to be $10.0 million primarily reflecting maintenance
expenditures at the Company's stores and infrastructure
investment. Management believes that there should be sufficient
liquidity under the DIP Financing Agreement to fund the Company's
working capital requirements during the reorganization
proceedings.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires
that all derivative financial instruments be recorded in the
financial statements. SFAS No. 133 is effective for the Company
in the first quarter of 2001, and the Company is in the process
of ascertaining the impact this new standard will have on its
financial statements.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 is
effective for the Company in the fourth quarter of 2000, and the
Company is ascertaining the impact this pronouncement will have
on its financial statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company and its subsidiaries are
involved in various litigation matters arising in the ordinary
course of its business.
Due to the bankruptcy filing mentioned previously, certain
of the cases mentioned below have been stayed pursuant to the
automatic stay of the Court. These cases require Court approval
or must be specifically exempt for litigation proceedings to
continue.
On March 30, 1999, a class action lawsuit was filed against
the Company and certain of its officers, directors and
stockholders in the United States District Court for the Southern
District of Texas by John C. Weld, Jr., a stockholder who
purchased 125 shares of the Company's common stock on August 3,
1998, alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder (the "Weld Suit"). The Company believed that the
allegations of the Weld Suit are without merit, and on July 23,
1999, the Company filed a motion to dismiss. United States
District Judge Kenneth Hoyt entered an order on December 8, 1999
dismissing the Weld Suit. The order has been appealed by Mr.
Weld.
On March 28, 2000, the Company filed a lawsuit against Carl
Tooker, the Company's former Chairman, Chief Executive Officer
and President in the District Court of Harris County, Texas. The
lawsuit is an action for damages arising from transactions
Mr. Tooker engaged in or directed while serving as President,
Chief Executive Officer and Chairman of the Board of Directors of
the Company which transactions benefited him personally or were
otherwise contrary to his duties as an officer and director. (See
Form 8-K dated March 9, 2000). The suit also seeks recovery of
debt owed by Mr. Tooker to the Company pursuant to loans and
promissory notes Mr. Tooker caused the Company to make to him
while serving in those capacities, and for conversion of stock
collateral pledged to the Company to secure his indebtedness.
The Company also seeks a mandatory injunction requiring
Mr. Tooker to deposit into the registry of the Court all
remaining stock collateral in his possession, and for a
declaratory judgment that Mr. Tooker was properly terminated "for
cause" under the terms of his employment agreement. The Company
seeks to recover not less than an aggregate of $2,755,672,
accrued interest, punitive damages, costs and reasonable
attorneys' fees.
On or about April 27, 2000 Mr. Tooker filed an Answer and
Counterclaim against the Company and a Third Party Petition
against the Company's Interim President, Chief Executive Officer
and Chairman of the Board, John J. Wiesner, Martin Stringer,
counsel to the Special Committee, and the law firm of McKinney &
Stringer, P.C. The answer generally denies all allegations made
by the Company. Mr. Tooker seeks damages from the Company of
approximately $3.9 million, plus attorney's fees, interest, and
costs for breach of his employment contract, and a like amount,
including punitive damages, from the third-party defendants for
alleged tortious interference with his employment contract. Mr.
Tooker also seeks to impose a constructive trust on the $300,000
in the Company's possession for certain contractual benefits he
claims to be due under his employment agreement. The remaining
claims seek damages against the Company and in part against the
third-party defendants, totaling $18 million, plus punitive
damages, fees, interest and costs, on theories of defamation,
civil conspiracy, breach of fiduciary duty and breach of duty of
good faith and fair dealing. The case is in its initial
development, prior to any discovery. The Company and the third-
party defendants dispute his allegations and intend to vigorously
defend all of Mr. Tooker's claims.
In March 2000, eleven former employees of SRI d/b/a Palais
Royal, filed two separate suits in the United States District
Court for the Southern District of Texas against the Company, SRI
and Mary Elizabeth Pena, arising out of alleged conduct occurring
over an unspecified time while the plaintiffs were working at one
or more Palais Royal stores in the Houston, Texas area. The
plaintiffs allege that on separate occasions they were falsely
accused of stealing merchandise and other company property and
giving discounts for purchases against company policy. The suits
accuse the defendants of defamation, false imprisonment,
intentional infliction of mental distress, assault and violation
of the Racketeer Influenced and Corrupt Organizations (RICO) Act.
The claims seek unspecified damages for mental anguish, lost
earnings, exemplary damages, treble damages, interest, attorneys'
fees and costs. The Company denies the allegations and intends
to vigorously defend the claims.
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.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
Substantially all of the Company's liabilities are subject
to settlement under reorganization proceedings. The Company's
debt to banks and bondholders is in default of the terms of the
applicable loan agreements, notes and debentures. For financial
reporting purposes, those liabilities and obligations have been
classified as liabilities subject to compromise under
reorganization proceedings. The ultimate adequacy of security
for any secured debt obligations and settlement of all
liabilities and obligations cannot be determined until a plan of
reorganization is confirmed.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
On June 6, 2000, the New York Stock Exchange informed the
Company that the trading of the Company's stock would be
suspended immediately. Following the suspension, application was
made by the New York Stock Exchange to the Securities and
Exchange Commission to delist the Company's stock. The Company's
stock is currently being quoted on the OTC Bulletin Board under
the symbol SGEEQ.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a News Release on Form 8-K dated May
1, 2000 related to Stage Stores Inc. announcing the
departure of the Company's Vice Chairman and Chief
Financial Officer.
The Company filed a News Release on Form 8-K dated June
1, 2000 related to Stage Stores Inc. announcing a major
restructuring under Chapter 11 of the United States
Bankruptcy Code and commencement of its reorganization
proceedings in the United States Bankruptcy Court in
Houston, Texas.
The Company filed a News Release on Form 8-K dated
June 1, 2000 related to Stage Stores Inc. announcing
the $450 million debtor-in-possession credit agreement
and announcing that on June 6, 2000, the New York Stock
Exchange informed the Company that the trading of the
Company's stock will be suspended immediately.
The Company filed a News Release on Form 8-K dated June
27, 2000 related to Stage Stores Inc. announcing the
final Court approval of its $450 million debtor-in-
possession credit agreement.
The Company filed a News Release on Form 8-K dated July
18, 2000 related to Stage Stores Inc. announcing Court
approval of its plan to close 120 under performing
stores as part of its reorganization process.
The Company filed a News Release on Form 8-K dated
August 8, 2000 related to Stage Stores Inc. announcing
the employment of its new President and Chief Executive
Officer.
The Company filed a News Release on Form 8-K dated
September 8, 2000 related to Stage Stores Inc.
announcing Court approval of the Company's request to
extend the exclusivity period until March 31, 2001.
The Company also announced the resignation of Richard
Jolosky from the Company's Board of Directors for
personal reasons.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STAGE STORES, INC.
October 13, 2000 /s/ James Scarborough
(Date) James Scarborough
President and Chief Executive
Officer
October 13, 2000 /s/ Charles M. Sledge
(Date) Charles M. Sledge
Senior VP Finance, Treasurer
and Corporate Secretary
