1
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 October 28, 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 December 19, 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)
October 28, January 29,
2000 2000
ASSETS (unaudited) (unaudited)
Cash and cash equivalents $ 14,911 $20,179
Undivided interest in accounts
receivable trust -- 41,600
Accounts receivable, net 276,377 --
Merchandise inventories, net 271,303 261,104
Prepaid expenses and other current
assets 15,498 23,866
Total current assets 578,089 346,749
Property, equipment and leasehold
improvements, net 153,463 181,834
Other assets 15,178 26,104
Total assets $ 746,730 $554,687
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 68,815 $40,955
Accrued expenses and other current
liabilities 49,661 72,177
Debtor-in-possession credit facility 265,453 --
Current portion of long-term debt -- 9,830
Long-term debt classified as current -- 492,393
Total current liabilities 383,929 615,355
Liabilities subject to compromise
under reorganization proceedings 568,546 --
Other long-term liabilities 6,729 14,299
Total liabilities 959,204 629,654
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 (475,476) (337,500)
Accumulated other comprehensive
income (4,338) (4,338)
Stockholders' deficit (212,474) (74,967)
Commitments and contingencies -- --
Total liabilities and
stockholders' deficit $ 746,730 $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 Thirty-nine Weeks
Ended Ended
October October October October
28, 2000 30, 1999 28, 2000 30, 1999
Net sales $216,582 $264,327 $662,389 $796,766
Cost of sales and
related buying,
occupancy and
distribution expenses 166,427 187,124 514,712 575,183
Gross profit 50,155 77,203 147,677 221,583
Selling, general and
administrative expenses 55,083 63,715 174,656 191,822
Store opening and
closure program costs -- 928 -- 17,142
Operating income (loss) (4,928) 12,560 (26,979) 12,619
Interest, net 7,819 12,192 31,776 36,949
Income (loss) before
reorganization items,
income tax, and
cumulative effect of a
change in accounting
principle (12,747) 368 (58,755) (24,330)
Reorganization items (3,166) -- (79,146) --
Income (loss) before
income tax and
cumulative effect of a
change in accounting
principle (15,913) 368 (137,901) (24,330)
Income tax expense
(benefit) 25 144 75 (7,194)
Income (loss) before
cumulative effect of a
change in accounting
principle (15,938) 224 (137,976) (17,136)
Cumulative effect of a
change in accounting
principle, net of tax
reporting costs of
start-up activities -- -- -- (2,402)
Net income (loss) $ $ $ $
(15,938) 224 (137,976) (19,538)
Basic income ( loss)
per common share data:
Basic income (loss) per
common share before
cumulative effect of a
change in accounting
principle $ (0.57) $ 0.01 $ (4.91) $ (0.61)
Cumulative effect of a
change in accounting
principle, net of tax
reporting costs of
start-up activities -- -- -- (0.09)
Basic income (loss) per
common share $ (0.57) $ 0.01 $ (4.91) $(0.70)
Basic weighted average
common shares
outstanding 28,100 28,083 28,098 28,015
Diluted income (loss)
per common share data:
Diluted income (loss)
per common share before
cumulative effect of a
change in
Accounting principle $ (0.57) $ 0.01 $ (4.91) $ (0.61)
Cumulative effect of a
change in accounting
principle, net of tax -
reporting costs of
start-up activities -- -- -- (0.09)
Diluted income (loss)
per common share $ (0.57) $ 0.01 $ (4.91) $ (0.70)
Diluted weighted
average common shares
outstanding 28,100 28,231 28,098 28,015
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)
Thirty-nine Weeks Ended
October 28, October 30,
2000 1999
Cash flows from operating activities:
Net loss $ (137,976 ) $ (19,538)
Adjustments to reconcile net loss to net
cash used in operating
Activities:
Depreciation and amortization 31,525 36,329
Deferred income taxes -- (2,015)
Accretion of discount 7,780 920
Amortization of debt issue costs 15,885 2,234
Cumulative effect of a change in
accounting principle -- 2,402
Change in working capital (160,837) (29,517)
Total adjustments (105,647) 10,353
Net cash used in operating activities (243,623) (9,185)
Cash flows from investing activities:
Additions to property, equipment and
leasehold improvements (3,848) (13,166)
Proceeds from retirement of fixtures and
equipment 567 --
Net cash used in investing activities (3,281) (13,166)
Cash flows from financing activities:
Proceeds from debtor-in-possession credit
facility 265,453 --
Proceeds from (payments on) pre-petition
working capital facility (13,000) 19,150
Proceeds from issuance of common stock -- 262
Payments on long-term debt (204) (2,360)
Additions to debt issue costs (10,613) --
Net cash provided by financing
activities 241,636 17,052
Net decrease in cash and cash equivalents
(5,268) (5,299)
Cash and cash equivalents:
Beginning of period 20,179 12,832
End of period $ 14,911 $ 7,533
Supplemental disclosure of cash flow
information:
Interest paid $ 12,905 $ 26,815
Income taxes paid $ 7 $ 188
The accompanying notes are an integral part of this statement.
Stage Stores, Inc.
(Debtor-in-Possession)
Consolidated Statement of Stockholders' Deficit
For the Thirty-nine Weeks Ended October 28, 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 (137,976)
Other comprehensive
loss --
Total comprehensive loss (137,976)
Ending balance (479,814)
Total Stockholders' Deficit $(212,474)
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 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 current year
presentation.
2. Stage Stores conducts its business primarily through its
wholly-owned subsidiary Specialty Retailers, Inc. ("SRI") which, as
of October 28, 2000, operated 469 family apparel stores in 20 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 Retailers, 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 presented in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" and 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 October 28, 2000, include the following
items (in thousands):
Long-term debt $ 514,568
Accounts payable 21,414
Accrued expenses and other
liabilities 32,564
Liabilities subject to
compromise $ 568,546
The Company ceased accruing interest on pre-petition long-term
debt on June 1, 2000. Reported interest differs from stated
contractual interest by $11.7 million for the thirty-nine weeks ended
October 28, 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 terms of the DIP Financing Agreement
have been approved 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 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. As of
October 28, 2000, availability under the DIP Financing Agreement was
$126.9 million. The weighted average borrowing rate for amounts
outstanding under the DIP Financing Agreement at October 28, 2000 was
9.55%.
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 $288.4 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,
which aggregated $324.3 million. 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 engaged third parties to manage the
inventory liquidation process in these stores. The 2000 Store
Closing Plan has been substantially completed.
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 Unaudited
Consolidated Condensed Statement of Operations. Components of
reorganization items for the thirteen and thirty-nine weeks ended
October 28, 2000 are as follows (in thousands):
Thirteen Thirty-
Weeks nine
Ended Weeks
October Ended
28, 2000 October
28, 2000
Costs associated with the 2000 Store
Closing Plan (including loss on
inventory, lease damages and severance) $ 542 $ 29,273
Write-off of fixed assets associated
with the 2000 Store Closing Plan
and other miscellaneous assets (378) 17,812
Professional fees associated with the
bankruptcy 3,415 8,332
Write-off of pre-petition debt issue
costs and original issue discount -- 17,987
Write-down of undivided interest in
accounts receivable trust -- 6,155
Other (413) (413)
Total $ 3,166 $ 79,146
Net cash used in operating activities for reorganization items
was approximately $6.7 million, related primarily to professional
fees and retainers during the thirty-nine weeks ended October 28,
2000.
4. Prior to the Petition Date, the Company charged $0.5 million
against the store closure accrual for lease damages it established in
1999. The accrued balance relating to this store closure program was
$7.3 million as of October 28, 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 thirty-nine weeks
ended October 28, 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.
With respect to the Tooker matter as discussed in the Company's
quarterly report on Form 10-Q for the period ended July 29, 2000, on
November 21 and 22, 2000, the Company participated in a mediation
with the other parties involved in the Tooker litigation. The
parties reached an agreement in principle to settle all claims in the
case. The settlement documents are being prepared and have not been
reviewed by the parties or finalized for public disclosure. The
settlement is subject to approval by the bankruptcy court following
proper notice to interested parties in that proceeding. The special
committee of the Company's Board of Directors overseeing the Tooker
litigation has authorized the terms of the settlement, subject to
further approvals described above.
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.
On November 3, 2000, the Company received a copy of the SEC's
August 3, 2000 Order Directing Private Investigation "In the Matter
of Stage Stores, Inc." (the "Order"). The Order is a confidential
document directing a non-public investigation into related party
transactions previously reported by the Company. The Company is
cooperating with the SEC in the investigation.
The Company has been named as one of 135 defendants in a patent
infringement action brought by The Lemelson Medical, Education &
Research Foundation in the United States District Court for the
District of Arizona, Case No. CIV-000663 PHX PGR. The plaintiff
claims to be the owner of various patents covering optical scanning
devices commonly used by retail outlets at check out counters to scan
prices for customer purchases. The complaint seeks injunctive relief
to prevent alleged continuing infringement and unspecified damages
for alleged past infringement. The court and the plaintiff have been
advised of the Company's bankruptcy filing, and the Company has
asserted the protection of the bankruptcy stay. The remaining
defendants have formed a common defense group and plan to vigorously
defend against the claims. The Company disputes the plaintiff's
allegations and plans to monitor the action closely.
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,"as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB No. 133" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment to SFAS No. 133", 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.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" which replaced SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilites".
SFAS No. 140 is effective for transfers entered into after March 31,
2001, and the Company is in the process of ascertaining the impact
this new standard 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 and
one half percent 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 Unaudited 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
October 28, 2000
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers Receivabl Eliminati Consolida
, Inc. es ons ted
Purchase
Co.
ASSETS
Cash and cash $ 12,406 $ -- $ -- $ 12,406
equivalents
Accounts 276,377 -- -- 276,377
receivable, net
Merchandise 271,303 -- --
inventories, 271,303
net
Prepaid expenses -- --
and other 15,498 15,498
current assets
Total current 575,584 -- -- 575,584
assets
Property, 153,463 -- -- 153,463
equipment and
leasehold
improvements,
net
Other assets 15,116 -- 15,116
Investment in -- --
subsidiaries 37,035 (37,035)
Total assets $ 781,198 $ -- $(37,035) $ 744,163
LIABILITIES AND
STOCKHOLDERS'
EQUITY
(DEFICIT)
Accounts payable
$ 68,815 $ -- $ -- $ 68,815
Accrued expenses -- --
and other 49,235 49,235
current
liabilities
Debtor-in-posses 265,453 -- -- 265,453
sion credit
facility
Total current --
liabilities 383,503 -- 383,503
Intercompany 231,845 -- 194,810
notes/advances (37,035)
Liabilities 568,546
subject to
compromise
under
reorganization 568,546
proceedings
Other long-term -- --
liabilities 6,729 6,729
Investment in -- -- -- --
subsidiaries
Total -- 1,153,588
liabilities 1,190,623 (37,035)
Preferred stock -- -- -- --
Common stock -- -- -- --
Class B common -- -- -- --
stock
Additional paid-
in capital 3,317 34,253 (34,253) 3,317
Accumulated
earnings (408,404) 2,782 (2,782) (408,404)
(deficit)
Accumulated -- --
other (4,338) (4,338)
comprehensive
income
Stockholders'
equity (409,425) 37,035 (37,035) (409,425)
(deficit)
Total
liabilities and
stockholders'
equity
(deficit)
$ 781,198 $ -- $(37,035) $ 744,163
Consolidating
Condensed Balance
Sheet
October 28, 2000
(in thousands,
unaudited)
Stage Specialty Eliminati Stage
Stores, Retailers ons Stores
Inc. , Inc. Consolida
(NV) ted
ASSETS
Cash and cash $ 2 $2,503 $ -- $ 14,911
equivalents
Accounts -- -- --
receivable, net 276,377
Merchandise -- -- --
inventories, 271,303
net
Prepaid expenses -- -- --
and other 15,498
current assets
Total current 2 2,503 -- 578,089
assets
Property, -- -- -- 153,463
equipment and
leasehold
improvements,
net
Other assets -- 62 -- 15,178
Investment in -- -- -- --
subsidiaries
Total assets $ 2 $ 2,565 $ -- $ 746,730
LIABILITIES AND
STOCKHOLDERS'
EQUITY
(DEFICIT)
Accounts payable $ -- $ -- $ -- $
68,815
Accrued expenses
and other
current
liabilities -- 426 -- 49,661
Debtor-in-posses -- -- --
sion credit 265,453
facility
Total current -- --
liabilities 426 383,929
Intercompany (194,281) -- --
notes/advances (529)
Liabilities 568,546
subject to
compromise
under
reorganization
proceedings
Other long-term -- -- -- 6,729
liabilities
Investment in -- --
subsidiaries 213,005 (213,005)
Total (193,855)
liabilities 212,476 (213,005) 959,204
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 (475,476) 35,505 372,899 (475,476)
(deficit)
Accumulated --
other (4,338) 4,338 (4,338)
comprehensive
income
Stockholders'
equity (212,474) 196,420 213,005 (212,474)
(deficit)
Total
liabilities and
stockholders'
equity
(deficit)
$ 2 $ 2,565 $ -- $ 746,730
Consolidating Condensed
Balance Sheet
January 29, 2000
(in
thousands,unaudi
ted)
Specialty SRI SRI SRI
Retailers Receivabl Eliminati Consolida
, Inc. es ons ted
Purchase
Co.
ASSETS
Cash and cash $18,077 $ -- $ -- $18,077
equivalents
Undivided
interest in (13,101) 54,701 -- 41,600
accounts
receivable trust
Merchandise -- --
inventories, net 261,104 261,104
Prepaid expenses 220 --
7,725 7,945
Other current 8,491 --
assets 7,430 15,921
Total current 63,412 --
assets 281,235 344,647
Property,
equipment and 180,761 -- -- 180,761
leasehold
improvements,
net
Other assets 2,608 --
23,436 26,044
Investment in -- --
subsidiaries 36,690 (36,690)
Total assets $ $ 66,020 $ $
522,122 (36,690) 551,452
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable $40,955 $ -- $ -- $
40,955
Accrued expenses 2,770
and other 69,385 -- 72,155
current
liabilities
Current portion -- --
of long-term 9,830 9,830
debt
Long-term debt -- --
classified as 492,393 492,393
current
Total current 2,770 --
liabilities 612,563 615,333
Other long-term -- --
liabilities 14,299 14,299
Intercompany 26,560 --
notes/advances 160,719 187,279
Investment in -- -- --
subsidiaries --
Total 29,330 --
liabilities 787,581 816,911
Preferred stock -- -- --
--
Common stock -- -- --
--
Class B common -- -- --
stock --
Additional paid-
in capital 3,317 33,908 (33,908) 3,317
Accumulated 2,782
earnings (264,438) (2,782) (264,438)
(deficit)
Accumulated other
comprehensive (4,338) -- -- (4,338)
income
Stockholders' 36,690
equity (deficit) (265,459) (36,690) (265,459)
Total $522,122 $66,020 $ $
liabilities and (36,690) 551,452
stockholders'
equity (deficit)
Consolidating Condensed
Balance Sheet
January 29, 2000
(in
thousands,unaudi
ted)
Stage Specialty Stage
Stores, Retailers Eliminati Stores
Inc. , Inc. ons Consolida
(NV) ted
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 --
assets 102 2,000 346,749
Property, --
equipment and -- 1,073 181,834
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 --
and other 22 -- 72,177
current
liabilities
Current portion --
of long-term -- -- 9,830
debt
Long-term debt --
classified as -- -- 492,393
current
Total current --
liabilities 22 -- 615,355
Other long-term --
liabilities -- -- 14,299
Intercompany (187,297) --
notes/advances 18 --
Investment in (75,029)
subsidiaries 75,029 -- --
Total (187,297) (75,029)
liabilities 75,069 629,654
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 (337,500) 234,923
earnings 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
Thirty-nine Weeks
Ended October 28, 2000
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivabl Eliminati Consolidat
Inc. es ons ed
Purchase
Co.
Net sales $662,389 $ -- $ -- $662,389
Cost of sales 514,712 514,712
and related -- --
buying,
occupancy and
distribution
expenses
Gross profit 147,677 147,677
-- --
Selling, general (2,063)
and 177,405 -- 175,342
administrative
expenses
Operating income
(loss) (29,728) 2,063 -- (27,665)
Interest
expense, net 37,735 (229) -- 37,506
Income (loss) (67,463) (65,171)
before 2,292 --
reorganization
items and
income taxes
Reorganization (76,854) (79,146)
items (2,292) --
Income (loss)
before income (144,317) -- -- (144,317)
taxes
Income tax (351) (351)
expense -- --
(benefit)
Income (loss) (143,966) (143,966)
before equity -- --
in net earnings
of subsidiaries
Equity in net
earnings of -- -- -- --
subsidiaries
Net income
(loss) $(143,966) $ -- $ -- $(143,966)
Consolidating Condensed
Statement of Operations
Thirty-nine Weeks
Ended October 28, 2000
(in thousands,
unaudited)
Stage Specialty Eliminati Stage
Stores, Retailers ons Stores
Inc. , Inc. Consolidat
(NV) ed
Net sales $ -- $ -- $ -- $662,389
Cost of sales -- 514,712
and related -- --
buying,
occupancy and
distribution
expenses
Gross profit -- 147,677
-- --
Selling, general (686) 174,656
and -- --
administrative
expenses
Operating income -- (26,979)
(loss) 686 --
Interest -- (5,730) 31,776
expense, net --
Income (loss) -- (58,755)
before 6,416 --
reorganization
items and
income taxes
Reorganization --
items -- -- (79,146)
Income (loss) (137,901)
before income -- 6,416 --
taxes
Income tax -- 75
expense 426 --
(benefit)
Income (loss)
before equity
in net earnings
of subsidiaries 5,990 --
-- (137,976)
Equity in net (137,976)
earnings of -- 137,976 --
subsidiaries
Net income $(137,976) $ 5,990 $ 137,976 $(137,976)
(loss)
Consolidating Condensed
Statement of Operations
Thirty-nine Weeks
Ended October 30, 1999
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivabl Eliminati Consolidat
Inc. es ons ed
Purchase
Co.
Net sales $796,766 $ -- $ -- $796,766
Cost of sales 575,183 -- -- 575,183
and related
buying,
occupancy and
distribution
expenses
Gross profit 221,583 -- -- 221,583
Selling, general 197,017 (4,951) -- 192,066
and
administrative
expenses
Store opening 17,142 -- -- 17,142
and closure
program costs
Operating income 7,424 4,951 -- 12,375
(loss)
Interest 46,180 3,151 -- 49,331
expense, net
Income (loss) (38,756) 1,800 -- (36,956)
before income
taxes
Income tax (12,317) 666 -- (11,651)
expense
(benefit)
Income (loss) (26,439) 1,134 -- (25,305)
before equity
in net earnings
of subsidiaries
and cumulative
effect of a
change in
accounting
principle
Equity in net (72) -- 72 --
earnings of
subsidiaries
Income (loss) (26,511) 1,134 72 (25,305)
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 $ (27,707) $ (72) $ 72 $ (27,707)
(loss)
Consolidating Condensed
Statement of Operations
Thirty-nine Weeks
Ended October 30, 1999
(in thousands,
unaudited)
Stage Specialty Eliminati Stage
Stores, Retailers ons Stores
Inc. , Inc. Consolidat
(NV) ed
Net sales $ -- $ -- $ -- $796,766
Cost of sales -- -- -- 575,183
and related
buying,
occupancy and
distribution
expenses
Gross profit -- -- -- 221,583
Selling, general 107 (351) -- 191,822
and
administrative
expenses
Store opening -- -- -- 17,142
and closure
program costs
Operating income (107) 351 -- 12,619
(loss)
Interest -- (12 -- 36,949
expense, net ,382)
Income (loss) (107) 12,733 -- (24,330)
before income
taxes
Income tax -- 4,457 -- (7,194)
expense
(benefit)
Income (loss) (107) 8,276 -- (17,136)
before equity
in net earnings
of subsidiaries
and cumulative
effect of a
change in
accounting
principle
Equity in net (19,431) -- 19,431 --
earnings of
subsidiaries
Income (loss) (19,538) 8,276 19,431 (17,136)
before
cumulative
effect of a
change in
accounting
principle
Cumulative
effect of a
change in
accounting
principle, net
of tax -
reporting costs
of start-up
activities
-- -- -- (2,402)
Net income $ (19,538) $ 8,276 $ 19,431 $ (19,538)
(loss)
Consolidating Condensed
Statement of Cash Flows
Thirty-nine Weeks
Ended October 28, 2000
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivabl Eliminati Consolidat
Inc. es ons ed
Purchase
Co.
Cash flows from
operating activities:
Net cash
provided by $ (6,140) $ --
(used in)
operating
activities
$(237,886) $(244,026)
Cash flows from
investing activities:
Additions to
property, (3,848) -- -- (3,848)
equipment and
leasehold
improvements
Proceeds from 567 567
retirement of -- --
fixtures and
equipment
Proceeds from
the sales of (6,140) 6,140 -- --
accounts
receivable, net
Net cash
provided by
(used in)
investing 6,140 --
activities (9,421) (3,281)
Cash flows from
financing activities:
Proceeds from
debtor-in- 265,453 -- -- 265,453
possession
credit facility
Payments on pre-
petition (13,000) -- -- (13,000)
working capital
facility
Proceeds from -
issuance of -- -- -- -
common stock
Payments on long-
term debt -- -- (204)
Additions to (204) -- -- (10,613)
debt issue (10,613)
costs
Net cash
provided by 241,636 -- -- 241,636
(used in)
Financing
activities
Net increase
(decrease) in (5,671) -- -- (5,671)
cash and cash
equivalents
Cash and cash
equivalents:
Beginning of
period 18,077 -- -- 18,077
$ 12,406 $ 12,406
-- --
End of period
Consolidating Condensed
Statement of Cash Flows
Thirty-nine Weeks
Ended October 28, 2000
(in thousands,
unaudited)
Stage Specialty Stage
Stores, Retailers Eliminati Stores
Inc. , Inc. ons Consolidat
(NV) ed
Cash flows from
operating activities:
Net cash $
provided by $ (100) $ 503 --
(used in)
operating
activities
$(243,623)
Cash flows from
investing activities:
Additions to
property, -- -- -- (3,848)
equipment and
leasehold
improvements
Proceeds from 567
retirement of -- -- --
fixtures and
equipment
Proceeds from
the sales of -- -- -- --
accounts
receivable, net
Net cash (3,281)
provided by -- -- --
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from
debtor-in- -- -- -- 265,453
possession
credit facility
Payments on pre-
petition
working capital
facility -- -- --
(13,000)
Proceeds from
issuance of -- -- -- --
common stock
Payments on long- (204)
term debt -- -- -- (10,613)
Additions to
debt issue
costs
Net cash
provided by -- -- -- 241,636
(used in)
Financing
activities
Net increase
(decrease) in (100) 503 -- (5,268)
cash and cash
equivalents
Cash and cash
equivalents:
Beginning of
period 102 2,000 -- 20,179
$ 2 $ 2,503 $ 14,911
--
End of period
Consolidating Condensed
Statement of Cash Flows
Thirty-nine Weeks
Ended October 30, 1999
(in thousands,
unaudited)
Specialty SRI SRI SRI
Retailers, Receivabl Eliminati Consolidat
Inc. es ons ed
Purchase
Co.
Cash flows from
operating activities:
Net cash used
in operating
activities
$(1,485) $ (7,437) $ -- $ (8,922)
Cash flows from
investing activities:
Investment in -- -- -- --
subsidiary
Additions to (13,166) -- -- (13,166)
property,
equipment and
leasehold
improvements
Proceeds from 7,437
the sales of (7,437)
accounts -- --
receivable, net
Net cash (20,603) 7,437 -- (13,166)
provided by
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from 19,150 -- -- 19,150
working capital
facility
Proceeds from -- -- -- --
issuance of
common stock
Proceeds from -- -- -- --
capital
contribution
Payments on long- (2,360) -- -- (2,360)
term debt
Net cash 16,790 -- -- 16,790
provided by
(used in)
financing
activities
Net decrease in (5,298) -- -- (5,298)
cash and cash
equivalents
Cash and cash
equivalents:
Beginning of 10,882 -- -- 10,882
period
End of period $ 5,584 $ -- $ -- $ 5,584
Consolidating Condensed
Statement of Cash Flows
Thirty-nine Weeks
Ended October 30, 1999
(in thousands,
unaudited)
Stage Specialty Stage
Stores, Retailers Eliminati Stores
Inc. , Inc. ons Consolidat
(NV) ed
Cash flows from
operating activities:
Net cash used $ -- $(263) $ -- $(9,185)
in operating
activities
Cash flows from
investing activities:
Investment in (262) -- 262 --
subsidiary
Additions to -- -- -- (13,166)
property,
equipment and
leasehold
improvements
Proceeds from
the sales of
accounts -- -- -- --
receivable, net
Net cash (262) -- 262 (13,166)
provided by
(used in)
investing
activities
Cash flows from
financing activities:
Proceeds from -- -- -- 19,150
working capital
facility
Proceeds from
issuance of --
common stock 262 262
Proceeds from -- 262 --
capital (262)
contribution
Payments on long- -- -- -- (2,360)
term debt
Net cash 262 262 17,052
provided by (262)
(used in)
financing
activities
Net decrease in -- (1) -- (5,299)
cash and cash
equivalents
Cash and cash
equivalents:
Beginning of 2 1,948 -- 12,832
period
End of period $ 2 $1,947 $ -- $ 7,533
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 mid western 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 is operating its business as debtor-in-possession.
Additionally, a creditor committee has been formed and has 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 terms of the DIP Financing Agreement
have been approved 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 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 $288.4 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 engaged third parties to
manage the liquidation process in these stores, which has been
completed. In conjunction with the 2000 Store Closing Plan, the
Company recorded charges aggregating $43.9 million for the thirty-
nine weeks ended October 28, 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 $14.7
million write-off of the fixed assets and prepaid supplies and $0.6
of other expenses associated with the 120 stores in the 2000 Store
Closing Plan. 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. 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 October 28, 2000 Compared to Thirteen Weeks
Ended October 30, 1999
Sales for the thirteen weeks ended October 28, 2000 ("current
year third quarter") decreased 18.1% to $216.6 million from $264.3
million for the thirteen weeks ended October 30, 1999 ("prior year
third quarter"). The decrease in sales for the current year third
quarter reflects, among other things, (i) the net reduction of 185
stores since the end of the prior year third quarter and (ii) a 4.4%
decline in comparable store sales during the period. Comparable
store sales for the current year third quarter improved from the
18.0% decline in comparable store sales for the previous quarter
ended July 29, 2000 as the Company benefited from increased inventory
receipts and improved merchandise mix. Trade support from the
Company's vendors and factors, which had contracted prior to the
Company's Chapter 11 filing, has improved significantly since the
filing.
Gross profit decreased 35.0% to $50.2 million for the current
year third quarter from $77.2 million for the prior year third
quarter. Gross profit, as a percent of sales, decreased to 23.2% for
the current year third quarter from 29.2% for the prior year third
quarter. The lower gross profit percentage for the current year
third quarter reflects, among other things, (i) an increase in the
level of markdowns taken on spring/summer clearance merchandise
and(ii) the negative sales leverage associated with the Company's
fixed buying, occupancy and distribution expenses which are included
in cost of goods sold.
Selling, general and administrative ("SG&A") expenses for the
current year third quarter decreased 13.5% to $55.1 million from
$63.7 million in the prior year third quarter and, as a percent of
sales, increased to 25.4% from 24.1% in the comparable period last
year. SG&A expenses for the current year third quarter benefited
from, among other things, (i) the net reduction of 185 stores since
the end of the prior year third quarter and (ii) the Company's
continuing efforts in controlling SG&A expenses. SG&A expenses for
the current year third quarter includes certain charges recorded
during the period totaling $13.7 million. These charges were
comprised primarily of (i) $1.2 million of operating costs at the
stores which were in the process of being closed and (ii) a $12.5
million reduction in income from the Company's private label credit
card program which resulted from the accounting for receivables
repurchased from the previously existing Trust.
Store opening and closure program costs of $0.9 million for the
prior year third quarter reflect the costs associated with the store
closure program. There were no store opening and closure program
costs recorded during the current year third quarter.
As a result of the factors discussed above, the operating loss
for the current year third quarter was $4.9 million as compared to
operating income of $12.6 million for the prior year third quarter.
Net interest expense for the current year third quarter
decreased 36.0% to $7.8 million from $12.2 million for the prior year
third 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 third quarter, the Company recorded non-
recurring costs related to its Chapter 11 filing and reorganization
process totaling $3.2 million. This charge consisted primarily of
professional fees associated with the bankruptcy process.
As a result of the foregoing, the Company's net loss for the
current year third quarter was $15.9 million as compared to net
income for the prior year third quarter of $0.2 million.
Thirty-nine Weeks Ended October 28, 2000 Compared to Thirty-nine
Weeks Ended October 30, 1999
Sales for the thirty-nine weeks ended October 28, 2000 ("current
year ") decreased 16.9% to $662.4 million from $796.8 million for the
thirty-nine weeks ended October 30, 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 current year
as compared to the number of stores in operation during the prior
year and (ii) an 11.1% 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 33.4% to $147.7 million for the current
year from $221.6 million for the prior year. Gross profit, as a
percent of sales, decreased to 22.3% for the current year from 27.8%
for the prior year. 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, (iii) 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, (iv)
the negative sales leverage associated with the Company's fixed
buying, occupancy and distribution expenses which are included in
cost of goods sold and (v) lower vendor discounts during the first
two quarters of the current year as a result of reduced inventory
purchases.
Selling, general and administrative expenses for the current
year decreased 8.9% to $174.7 million from $191.8 million in the
prior year and, as a percent of sales, increased to 26.4% from 24.1%
in the comparable period last year. SG&A expenses for the current
year benefited from, among other things, (i) the net reduction of 185
stores since the end of the prior year third quarter and (ii) the
Company's continuing efforts in controlling SG&A expenses. SG&A
expenses for the current year includes certain charges totaling $30.0
million. These charges were comprised primarily of (i) $5.7 million
of operating costs at the stores which are in the process of being
closed, (ii) a $22.2 million reduction in income from the Company's
private label credit card program which resulted from 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 $17.1 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 ($16.4 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 $27.0 million as compared to operating
income of $12.6 million for the prior year.
Net interest expense for the current year decreased 13.8% to
$31.8 million from $36.9 million for the prior year. The current
year benefited from a lower level of average borrowings outstanding
accruing interest 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 $79.1 million. This charge, which is classified as
reorganization items in the Unaudited Consolidated Condensed
Statement of Operations, consisted of, among other things, (i)
charges aggregating $43.5 million related to the 2000 store closing
plan, (ii) $8.3 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 was $138.0 million as compared to a net loss for the
prior year of $17.1 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
Q1 Q2 Q3
Net sales $230,352 $215,455 $216,582
Gross profit 58,318 39,204 50,155
Operating
income (loss) 4,207 (26,348) (4,928)
Income (loss)
before
cumulative
effect of a
change in
accounting
principle (24,201) (97,837) (15,938)
Net income
(loss) (24,201) (97,837) (15,938)
1999
Q1 Q2 Q3 Q4
Net sales $262,591 $269,848 $264,327 $324,801
Gross profit 70,359 74,021 77,203 2,867
Operating
income (loss) 8,391 (8,332) 12,560 (220,971)
Income (loss)
before
cumulative
effect of a
change in
accounting
principle (2,269) (15,091) 224 (260,067)
Net income
(loss) (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 $194.2 million at October 28,
2000 from a deficit of $268.6 million at January 29, 2000, an
increase of $462.8 million. This increase is comprised of (in
thousands):
Increase in accounts receivable due
to repurchase of accounts receivable
from the previously existing Trust $234,777
Increase in merchandise inventory as
a result of the improvement in the
flow of merchandise during the
period 10,199
Borrowings under the DIP Financing
Agreement (265,453)
Reclassification of the pre-petition
debt to liabilities subject to
compromise under reorganization
proceedings 502,223
Other items (18,980)
Total $462,766
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 are no longer be transferred to the Trust but,
rather, are 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 October 28, 2000 totaled $265.5 million. Availability
under the DIP Financing Agreement at October 28, 2000 was $126.9
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 was
in compliance with this covenant at October 28, 2000.
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.
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," as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of FASB No. 133" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - An Amendment to SFAS No. 133", 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.
In September 2000, the FASB issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which replaced SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilites". SFAS No. 140 is effective for
transfers entered into after March 31, 2001, and the Company is in
the process of ascertaining the impact this new standard 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.
With respect to the Tooker matter as discussed in the Company's
quarterly report on Form 10-Q for the period ended July 29, 2000, on
November 21 and 22, 2000, the Company participated in a mediation
with the other parties involved in the Tooker litigation. The
parties reached an agreement in principle to settle all claims in the
case. The settlement documents are being prepared and have not been
reviewed by the parties or finalized for public disclosure. The
settlement is subject to approval by the bankruptcy court following
proper notice to interested parties in that proceeding. The special
committee of the Company's Board of Directors overseeing the Tooker
litigation has authorized the terms of the settlement, subject to
further approvals described above.
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.
On November 3, 2000, the Company received a copy of the SEC's
August 3, 2000 Order Directing Private Investigation "In the Matter
of Stage Stores, Inc." (the "Order"). The Order is a confidential
document directing a non-public investigation into related party
transactions previously reported by the Company. The Company is
cooperating with the SEC in the investigation.
The Company has been named as one of 135 defendants in a patent
infringement action brought by The Lemelson Medical, Education &
Research Foundation in the United States District Court for the
District of Arizona, Case No. CIV-000663 PHX PGR. The plaintiff
claims to be the owner of various patents covering optical scanning
devices commonly used by retail outlets at check out counters to scan
prices for customer purchases. The complaint seeks injunctive relief
to prevent alleged continuing infringement and unspecified damages
for alleged past infringement. The court and the plaintiff have been
advised of the Company's bankruptcy filing, and the Company has
asserted the protection of the bankruptcy stay. The remaining
defendants have formed a common defense group and plan to vigorously
defend against the claims. The Company disputes the plaintiff's
allegations and plans to monitor the action closely.
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 pre-petition 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
4.1 $450,000,000 Debtor-in-Possession Credit Agreement dated as
of June 2, 2000 among Specialty Retailers, Inc., a Debtor
and Debtor-in-Possession, as Borrower, Stage Stores, Inc.
as Parent Guarantor, The Initial Lenders, Initial Issuing
Bank and Swing Line Bank named therein as Initial Lenders,
Initial Issuing Bank and Swing Line Bank and Citicorp USA,
Inc. as Collateral Agent and as Administrative Agent.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
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 in the Company's bankruptcy proceeding
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.
December 19, 2000 /s/ James Scarborough
(Date) James Scarborough
President and Chief Executive
Officer
December 19, 2000 /s/ Charles M. Sledge
(Date) Charles M. Sledge
Senior VP Finance, Treasurer
and Corporate Secretary
