SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended May 4, 1996.
or
___ Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from ________ to ________.
Commission File No. N/A
COUNTY SEAT STORES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41 - 1272706
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17950 Preston Road, Suite 1000
Dallas, Texas 75252-5638
(Address of principal executive offices)
(214) 248-5100
(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 registrantwas required to file such reports).
YES X NO______
(2) has been subject to such filing requirements for the past
90 days. YES X NO
As of June 18, 1996, 1,000 shares of Common Stock were
outstanding.
<PAGE>
COUNTY SEAT STORES, INC.
INDEX
Part I. Financial Information
Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
as of May 4, 1996, April 29,
1995 and February 3, 1996 3
Consolidated Statements of
Operations for the thirteen
weeks ended May 4, 1996 and
April 29, 1995 4
Consolidated Statements of
Cash Flows for the thirteen
weeks ended May 4, 1996 and
April 29, 1995 5
Notes to Interim Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8 - K 15
Signatures 16
2
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Part I. - Item 1. Consolidated Financial Statements
<TABLE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Amounts)
(Unaudited)
<CAPTION>
May 4, April 29, February 3,
1996 1995 1996
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,834 $ 7,783 $ 8,166
Receivables 2,651 2,076 2,658
Merchandise inventories 126,224 124,880 110,744
Prepaid expenses 11,255 10,211 11,188
Deferred tax benefit 6,228 4,801 989
Total current assets 154,192 149,751 133,745
Property and equipment, at cost 120,031 114,014 120,277
Less--Accumulated depreciation and amortization (63,927) (50,357) (61,674)
Property and equipment, net 56,104 63,657 58,603
Other Assets, net:
Debt issuance costs 4,094 4,654 3,073
Deferred income taxes 2,308 6,186 2,368
Excess of purchase price over net assets acquired - 75,763 -
Other 1,059 1,249 1,303
Total other assets, net 7,461 87,852 6,744
$217,757 $301,260 $199,092
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Borrowings under credit agreement $ 41,000 $ - $ 27,000
Current maturities of long-term debt 25 18,442 25
Accounts payable 51,383 58,454 36,754
Accrued expenses 17,726 18,739 19,913
Accrued income taxes 3,032 1,659 3,007
Total current liabilities 113,166 97,294 86,699
Long-term debt 130,025 126,258 130,031
Other long-term liabilities 11,170 11,075 11,242
Commitments and contingencies
Redeemable preferred stock 46,378 37,366 44,319
Shareholders' Equity (Deficit):
Common stock: par value $1.00 per share; 1,000
shares authorized, issued and outstanding 1 1 1
Paid-in capital 49,789 49,789 49,789
Accumulated deficit (132,772) (20,523) (122,989)
Total shareholders' equity (deficit) (82,982) 29,267 (73,199)
$217,757 $301,260 $199,092
See accompanying Notes To Interim Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share Amounts)
(Unaudited)
<CAPTION>
13 Weeks Ended
May 4, April 29,
1996 1995
<S> <C> <C>
Net sales $121,604 $124,189
Cost of sales, including buying and occupancy 95,529 94,938
Gross profit 26,075 29,251
Selling, general and administrative expenses 31,302 29,873
Depreciation and amortization 2,959 3,256
Loss from operations (8,186) (3,878)
Interest expense, net 4,687 5,111
Loss before income taxes (12,873) (8,989)
Income taxes (5,149) (4,071)
Net loss $ (7,724) $ (4,918)
See accompanying Notes To Interim Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<CAPTION>
13 Weeks Ended
May 4, April 29,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(7,724) $ (4,918)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 2,959 3,256
Amortization of debt issuance costs and discount 249 538
Rent expense in excess of cash outlays, net 62 76
Deferred tax benefit (5,149) (1,424)
Changes in operating assets and liabilities:
Receivables (134) 2,774
Merchandise inventories (15,480) (28,608)
Prepaid expenses (67) (322)
Accounts payable 15,102 18,380
Accrued expenses (2,114) (3,469)
Accrued income taxes (5) (2,924)
Other non-current assets and liabilities (5) (317)
Net cash used for operating activities (12,306) (16,958)
Cash Flows from Financing Activities:
Short-term borrowings 14,000 -
Debt issuance costs and prepayment premiums (1,032) -
Principal payments on long-term debt and capital leases (6) (12)
Repayment of long-term debt - (1,000)
Advance to parent - (183)
Net cash provided by (used for) financing activities 12,962 (1,195)
Cash Flows from Investing Activities:
Capital expenditures (989) (4,533)
Proceeds from disposal of property and equipment 1 10
Net cash used for investing activities (988) (4,523)
Net Decrease in Cash and Cash Equivalents (332) (22,676)
Cash and Cash Equivalents:
Beginning of period 8,166 30,459
End of period $ 7,834 $ 7,783
Cash Paid During the Period For:
Interest $ 7,286 $ 6,557
Income taxes $ 5 $ 277
See accompanying Notes To Interim Consolidated Financial Statements.
</TABLE>
5
<PAGE>
COUNTY SEAT STORES, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Business
The accompanying interim consolidated financial statements
represent those of County Seat Stores, Inc. (County Seat) and its
wholly-owned subsidiary, CSS Trade Names, Inc. (Trade Names)
(together, the Company). The Company is a wholly-owned
subsidiary of County Seat, Inc. (CSI).
The Company is the nation's largest specialty retailer selling
both brand name and private-label jeans and jeanswear. The
Company operated 744 stores in 48 states as of May 4, 1996.
The Company's 685 County Seat stores, located almost
exclusively in regional shopping malls, offer one-stop shopping
for daily casual wear featuring a contemporary jeanswear look.
The Company's wide selection of designer brands, including
Girbaud, Guess?, Calvin Klein, Tommy Hilfiger and popular
national brands such as Levi's as well as its proprietary brands,
County Seat [Registered Trademark], Nuovo [Registered
Trademark] and Ten Star [Registered Trademark] makes County
Seat a destination store for jeans. The Company operates 34
County Seat Outlet stores offering discount pricing on special
purchase and clearance merchandise and 21 Levi's Outlet stores
under license from Levi Strauss & Co. offering a full range of
Levi's and Docker's off-price merchandise for both adults and
children. The Company also operates four The Old Farmer's
Almanac General Stores, a new retail concept selling products
associated with American country living, under license from
Yankee Publishing, Inc., the publisher of The Old Farmer's
Almanac.
The activities of Trade Names consist principally of licensing
the rights to the County Seat service marks to these stores.
2. Basis of Presentation
The accompanying interim consolidated financial statements
are unaudited and do not contain all disclosures required by
generally accepted accounting principles to be included in a
complete set of financial statements. The significant accounting
policies and certain financial information which are normally
included in financial statements prepared in accordance with
generally accepted accounting principles, but which are not
required for interim purposes, have been condensed or omitted.
Accordingly, these statements should be read in conjunction with
the Company's audited financial statements as of and for the year
ended February 3, 1996 included in the Company's Annual
Report on Form 10-K.
In the opinion of management, the accompanying interim
consolidated financial statements reflect all normally recurring
adjustments that are necessary for a fair presentation of the
interim periods. Due to the seasonal nature of the Company's
business, operating results for the interim periods are not
necessarily indicative of results for the full year. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
generally accepted accounting principles requires Management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
<PAGE>
3. Credit Agreement
The Credit Agreement is funded through a syndicate of
commercial lenders providing a senior secured reducing revolving
credit facility to fund seasonal working capital requirements and
the May 1995 redemption in full of all of the Company's then
outstanding senior notes. Effective February 3, 1996, the
Company and CSI amended the Credit Agreement to provide an
increased borrowing commitment, secure borrowings with all
assets of the Company, make certain financial covenants less
restrictive and further limit capital expenditures. The Company
incurred fees and expenses of approximately $1,300,000 in the
first quarter of fiscal 1996 related to the amendment to the Credit
Agreement, which will be amortized over its remaining term.
The commitment under the Credit Agreement provides for
borrowings up to $135,000,000 including a $50,000,000 letter of
credit facility. Availability under the Credit Agreement is limited
to the lesser of certain percentages of eligible inventory or
$125,000,000 through June 27, 1996, increasing to $135,000,000
from June 28, 1996 through December 31, 1996. The
commitment under the Credit Agreement will reduce to
$125,000,000 on December 31, 1996. In addition, the
commitment will be reduced if the Company generates defined
excess cash flow levels. The Credit Agreement matures on
December 31, 1999. The Company anticipates that a portion of
the borrowings under the terms of the Credit Agreement will be
held for a period of longer than twelve months. At May 4, 1996,
cash borrowings under the Credit Agreement of $25,000,000
were classified as long-term debt.
The Credit Agreement and the indenture for the Company's
12% senior subordinated notes contain certain covenants which,
among other things, limit the amount of debt of the Company,
restrict the payment of interest on CSI's 9% junior subordinated
exchange debentures, restrict the payment of cash dividends on
County Seat's Series A senior exchangeable preferred stock and
the CSI Series A junior exchangeable preferred stock, limit
capital expenditures and rent under operating leases and require
the Company to maintain certain financial ratios. At May 4,
1996, the Company was in compliance with all restrictive and
financial covenants.
<TABLE>
Loans, borrowing base and letter of credit commitments
under the Credit Agreement were as follows (dollars in
thousands):
<CAPTION>
13 Weeks Ended
May 4,
1996
<S> <C>
At Period-End
Short-term borrowings outstanding. . . . . . . . . . . . . . . . $ 41,000
Long-term borrowings outstanding . . . . . . . . . . . . . . . . 25,000
Borrowing base . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
Available borrowing base . . . . . . . . . . . . . . . . . . . . 17,068
Letter of credit commitments outstanding . . . . . . . . . . . . 20,771
During the Period
Days loans were outstanding. . . . . . . . . . . . . . . . . . . 91
Maximum loan borrowing . . . . . . . . . . . . . . . . . . . . . $ 66,000
Average loan borrowing . . . . . . . . . . . . . . . . . . . . . 56,290
Weighted average interest rate . . . . . . . . . . . . . . . . . 8.19%
</TABLE>
7
<PAGE>
4. Redeemable Preferred Stock
The aggregate redemption value of the County Seat Stores,
Inc. Series A and Series B senior exchangeable preferred stock,
par value $.01, (together, the County Seat Senior Preferred) was
$47,439,000 at May 4, 1996. In the thirteen weeks ended May
4, 1996, the Company recorded $2,059,000 of dividends and
accretion related to the County Seat Senior Preferred.
Of the 4,000,000 shares of County Seat Senior Preferred
authorized, 1,458,455 shares were issued and outstanding at May
4, 1996.
Cumulative dividends on the County Seat Stores, Inc. Series
B senior exchangeable preferred stock compound as if a stock
dividend was declared at each quarterly dividend date.
Undeclared, unpaid stock dividends were $9,516,000 and
equivalent to 380,649 shares at May 4, 1996. These equivalent
shares are not issued or outstanding.
5. Related Party Transactions
Affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation (DLJ) held 1,407,630 shares of CSI junior
exchangeable preferred stock (CSI Junior Preferred) and 582,337
shares of County Seat Senior Preferred as of May 4, 1996.
Undeclared, unpaid stock dividends on the CSI Junior Preferred
and County Seat Senior Preferred held by affiliates of DLJ, if
issued, would be equivalent to 42,229 shares and 197,738 shares,
respectively, as of May 4, 1996. In addition, affiliates of DLJ
held 917,746 shares of CSI common stock as of May 4, 1996.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
<TABLE>
The following table sets forth the Company's operating results as a
percentage of net sales for the periods indicated:
<CAPTION>
13 Weeks Ended
May 4, April 29,
1996 1995
<S> <C> <C>
Statement of Operations Data:
Net sales 100.0% 100.0%
Cost of sales, including buying and occupancy 78.6 76.4
Gross profit 21.4 23.6
Selling, general and administrative expenses 25.7 24.1
Depreciation and amortization 2.4 2.6
Loss from operations (6.7) (3.1)
Interest expense, net 3.9 4.1
Loss before income taxes (10.6) (7.2)
Income taxes (4.2) (3.2)
Net Loss (6.4)% (4.0)%
Number of Stores:
Openings 4 14
Closings (5) (1)
Net increase (decrease) (1) 13
End of period 744 714
</TABLE>
Thirteen Weeks Ended May 4, 1996 Compared to Thirteen Weeks
Ended April 29, 1995
Net sales for the first quarter of fiscal 1996 were $121.6 million,
$2.6 million or 2.1% below net sales of $124.2 million reported in the
first quarter of fiscal 1995. A $9.5 million decrease in sales from
comparable stores and a $1.4 million reduction in sales due to store
closings were partially offset by an $8.3 million increase in net sales
from new store locations. Comparable store sales in the first quarter
of fiscal 1996 decreased 7.8% from the first quarter of fiscal 1995,
which reflected a 2.2% increase over the first quarter of fiscal 1994.
Men's apparel and accessories contributed a decrease of 8.3% and
women's apparel and accessories contributed an increase of 0.5% to the
comparable store sales results. The Company defines comparable
stores to be stores that have reached their thirteenth full month of
operations, excluding closed stores. Stores open less than thirteen full
months are defined as new stores.
Gross profit after buying and occupancy expense was $26.1 million
in the first quarter of fiscal 1996, a decrease of $3.2 million, or 10.9%
compared to the first quarter of fiscal 1995. The decrease was
primarily due to lower comparable store sales, additional buying and
occupancy costs from new store locations and a lower retail margin
rate, partially offset by sales from new stores. Gross profit as a
percentage of net sales decreased to 21.4% in the first quarter of fiscal
1996 from 23.6% in the first quarter of fiscal 1995. Retail margin
decreased 0.2% as a percentage of net sales in the first quarter of fiscal
1996 compared to the first quarter of fiscal 1995 reflecting promotional
pricing in men's apparel. Buying and occupancy costs increased 2.0%
as a percentage of sales due to the decrease in comparable store sales
and increased occupancy costs from new store locations.
Selling, general and administrative expenses ("SG&A") increased
$1.4 million, or 4.8%, in the first quarter of fiscal 1996 compared to
the first quarter of fiscal 1995. The increase was primarily due to store
operating expenses associated with new stores opened in fiscal 1996
and 1995. SG&A in the first quarter of fiscal 1995 included $0.4
million for a non-recurring consulting fee. SG&A as a percentage of
net sales increased to 25.7% in the first quarter of fiscal 1996
compared to 24.1% in the first quarter of fiscal 1995. The increase in
SG&A as a percentage of net sales was primarily due to comparable
stores reporting lower sales combined with approximately constant
operating expenses.
9
<PAGE>
Depreciation and amortization expense decreased $0.3 million to
$3.0 million in the first quarter of fiscal 1996 from $3.3 million in the
first quarter of fiscal 1995. The remaining balance of goodwill was
written off in the third quarter of fiscal 1995. The decrease in
depreciation and amortization expense in the first quarter of fiscal 1996
was primarily due to the reduction in amortization expense related to
goodwill, partially offset by increased amortization of other assets.
Depreciation and amortization decreased as a percentage of net sales to
2.4% in the first quarter of fiscal 1996 from 2.6% in the first quarter
of fiscal 1995, primarily as a result of the reduction in goodwill
amortization.
Net interest expense decreased $0.4 million, or 7.8%, to $4.7
million in the first quarter of fiscal 1996 from $5.1 million the first
quarter of fiscal 1995. The decrease was primarily due to lower
interest expense and issuance cost amortization of $1.6 million on the
Senior Notes, reflecting the May 1995 redemption of the Senior Notes,
partially offset by a $1.2 million increase in interest expense on
borrowings under the Credit Agreement (see "-Liquidity and Capital
Resources"). Additional interest expense related to higher total debt
outstanding was substantially offset by a lower net effective interest
rate. Other net interest expense was substantially unchanged as lower
discount and issuance cost amortization was offset by lower interest
income.
The Company recorded an income tax benefit of $5.1 million in the
first quarter of fiscal 1996 compared to $4.1 million in the first quarter
of fiscal 1995. The effective income tax rates of 40.0% and 45.3% in
the first quarters of fiscal 1996 and fiscal 1995, respectively, differ
from the statutory federal rate primarily due to the effect of state
income taxes and non-deductible goodwill and debt discount
amortization in the first quarter of fiscal 1995.
The net loss of $7.7 million in the first quarter of fiscal 1996
compared to a net loss of $4.9 million in the first quarter of fiscal 1995
was due to the factors discussed above.
Liquidity and Capital Resources
Financing and Operating Activities
In the third quarter of fiscal 1995, the Company revised its
projections regarding its ability to operate on a profitable basis in the
long term. These projections indicate modification of its capital
structure may be required. The Company's projections of net income
and discounted future cash flows utilized in estimating the fair value of
the Company's goodwill in the third quarter of fiscal 1995 indicate a
refinancing of its existing long-term debt and its obligations under the
redeemable preferred stock may be required at some time in the future.
Management developed projections of net income and cash flows based
on expectations for store growth, retail gross margin rates and
operating expense performance. These expectations were based on the
Company's most recent 5-year experience, and Management's best
estimates of expected future performance, as well as overall
assumptions regarding the economy and the mall-based specialty retail
apparel industry. The critical assumptions used in these projections
were an annual sales growth rate of 2%, consistent gross margin rates,
an annual expense inflation rate of 3%, and the ability to refinance debt
maturities as they come due at a cost consistent with the historical cost
of the current long-term debt. The Company believes, and these
projections indicate, that cash flow generated from operations in fiscal
1996 through fiscal 1999 should be sufficient to service its current debt
obligations. No assurance can be given that the Company will be
successful in efforts to address its capital structure issues or operate on
a profitable basis in the long-term. Management intends to improve the
Company's financial condition and reduce its dependence on borrowing
by slowing expansion, controlling expenses, closing certain unprofitable
stores, improving distribution center productivity and tightening
inventory controls. The Company is also evaluating opportunities to
effect the sale and leaseback of its distribution center to provide
additional liquidity.
Net cash provided by operating activities is the primary source of
liquidity and capital for the Company. After the impact of cash interest
payments, cash used for operations for the thirteen weeks ended May
4, 1996 and April 29, 1995 was $12.3 million and $17.0 million,
10
<PAGE>
respectively. Because of the seasonal nature of the Company's
business, positive net cash flow from operations is typically not
generated through the first three quarters of the fiscal year. The
decrease in cash used for operations in the thirteen weeks ended May
4, 1996 compared to the thirteen weeks ended April 29, 1995 was
primarily due to lower net spending on merchandise inventories,
partially offset by reduced cash generated from operations. Additional
liquidity to fund working capital activities is provided through
borrowings under the Credit Agreement and open account trade terms
from vendors. Trade terms are negotiated with each vendor and may
be modified from time to time. County Seat is not dependent upon
factors to support the Company's purchases from its suppliers. County
Seat generates cash on a daily basis by selling merchandise for cash or
payments with national credit cards. County Seat does not offer its
own credit card.
Due to the seasonal nature of County Seat's business, working
capital requirements increase as inventory levels peak in anticipation of
the back-to-school and holiday shopping seasons. Working capital is
used to support County Seat's new store growth, and sales growth in
existing stores. Working capital at May 4, 1996 and April 29, 1995
was $41.0 million and $52.5 million, respectively. The decrease in
working capital at May 4, 1996 compared to April 29, 1995 was due
to a $41.0 million increase in short-term borrowings (a portion of
which reflects the refinancing of the Senior Notes in May, 1995),
partially offset by a $18.4 million reduction in current maturities of
long-term debt, a $7.1 million decrease in accounts payable and a net
increase of $4.0 million in other working capital components.
Net cash capital expenditures were $1.0 million in the first thirteen
weeks of fiscal 1996. County Seat has spent capital primarily to open
new stores and improve existing store locations. In fiscal 1996, the
Company expects to reduce the number of new store openings in
comparison to prior years and focus on improving the profitability of
existing stores. Due to decreased cash flow and restrictive debt
covenants, the Company's ability to grow through new store openings
is constrained. The Credit Agreement limits the level of capital
expenditures to $4.0 million, $3.6 million, $5.0 million and $5.0
million in fiscal 1996, 1997, 1998 and 1999, respectively. The capital
expenditure limits will be increased if the Company generates defined
excess cash flow levels. In fiscal 1996, the Company plans to spend
$4.0 million on capital expenditures including approximately $1.9
million to fund the addition of approximately eight new stores and two
store relocations. The remaining capital expenditures are expected to
be used primarily to make improvements at existing store locations and
to improve distribution center productivity. The Company expects to
fund capital expenditures primarily through cash generated from
operations.
The Company's long-term borrowings, excluding current
maturities, were $130.0 million at May 4, 1996, including $25.0
million of borrowings under the Credit Agreement classified as long-
term debt. Borrowings under the Credit Agreement will generally not
be subject to final repayment prior to the maturity of the Credit
Agreement on December 31, 1999. The Company made cash interest
payments of $7.3 million in the thirteen weeks ended May 4, 1996.
The Company expects that cash flow from operations and available
borrowings will be sufficient to meet its debt service obligations;
however, no assurance can be given that sufficient cash flow will be
realized. If the Company is unable to generate sufficient cash flow, it
will have to adopt one or more alternatives, such as reducing or
delaying planned capital expenditures, restructuring or refinancing its
indebtedness, closing less profitable stores or seeking additional equity
capital. There can be no assurance that, in the event of such inability
to generate sufficient cash flow, any of these strategies could be
effected on satisfactory terms, if at all.
At May 4, 1996, the recorded value of the Company's 12% Senior
Subordinated Notes ("the Notes") was estimated to have exceeded the
fair market value by approximately $31.5 million. The Company
believes the decrease in the estimated fair market value of the
Company's long-term debt is related to several factors: the Company's
disappointing operating performance in the third and fourth quarters of
fiscal 1995; the indefinite postponement of CSI's proposed initial public
stock offering intended to modify its long-term capital structure; and
the write-off of certain long-lived assets in the third quarter of fiscal
1995 which reflected the change in Management's expectations of
future Company performance. As a consequence of the foregoing
factors, the Notes were downgraded by Moody's and Standard &
Poor's bond rating agencies in the fourth quarter of fiscal 1995.
Management believes that the decrease in the estimated fair market
value of the Company's long-term debt as of May 4, 1996 will not
have a material near-term impact on the Company's cash flows or
operations. However, a continuation of decreased fair market value of
the Company's long-term debt in the future would indicate a higher
cost of long-term capital in the event of the need for additional long-
term financing.
11
<PAGE>
The Company's cash requirements are related to funding working
capital for operations, capital expenditures and debt service. In
addition to funding working capital needs through cash generated by
operations, the Company has resources available under the Credit
Agreement to provide seasonal working capital funding. The Credit
Agreement is funded through a syndicate of commercial lenders
providing a senior secured reducing revolving credit facility to fund
seasonal working capital requirements and the May 1995 redemption in
full of all the Company's then outstanding senior notes. The Credit
Agreement matures on December 31, 1999. Effective February 3,
1996, the Company amended the Credit Agreement to provide an
increased borrowing commitment, secure borrowings with all assets of
the Company, make certain financial covenants less restrictive and
further limit capital expenditures. If the Company meets its projections
of cash flow and earnings, the Company believes it will be in a position
to meet its restrictive financial covenants over the remaining term of
the Credit Agreement. No assurance can be given that the Company
will achieve its cash flow and earnings projections and meet its future
restrictive financial covenants. The Company incurred approximately
$1.3 million in fees in the first quarter of fiscal 1996 related to the
amendment to the Credit Agreement, which will be amortized over its
remaining term.
The commitment under the Credit Agreement provides for
borrowings up to $135 million, including a $50 million letter of credit
facility. Availability under the Credit Agreement is limited to the
lesser of certain percentages of eligible inventory or $125 million
through June 27, 1996, increasing to $135 million from June 28, 1996
through December 31, 1996. The commitment under the Credit
Agreement will reduce to $125 million on December 31, 1996. In
addition, the commitment will be reduced if the Company generates
defined excess cash flow levels. Availability under the Credit
Agreement is reduced by any amounts drawn under the facility as well
as outstanding letters of credit. The Credit Agreement also requires
that for a period of 30 consecutive days after each December 15 and
before each February 15 of the following year, the Company must not
have any aggregate borrowings (including Bankers Acceptances)
outstanding under the Credit Agreement, less cash on deposit, in excess
of $50 million. The limit on the aggregate borrowings during this 30
day period will be reduced if the Company generates defined excess
cash flow levels. Borrowings under the facility are secured by the
Company's assets and guaranteed by CSI. CSI's guarantee is secured
by a pledge of its primary asset, the outstanding common stock of the
Company.
At the option of the Company, interest is payable on borrowings
under the Credit Agreement at variable rates equal to approximately a
prime rate plus 1.5% or a Eurodollar rate plus 2.5%. The Credit
Agreement provides for a commitment fee during the period prior to
maturity of 0.5% of the unutilized commitment under the Credit
Agreement. At May 4, 1996, the Company had cash borrowings
outstanding of $66.0 million, $17.1 million available for borrowing
under the Credit Agreement, banker's acceptances outstanding of $21.2
million, and outstanding commitments under the letter of credit facility
of $20.8 million. Fluctuations in market interest rates affect the cost
of the Company's borrowings under the Credit Agreement. The impact
of fluctuations in market interest rates in the thirteen weeks ended May
4, 1996 were not significant to the operating results of the Company.
At May 4, 1996, borrowings under the Credit Agreement accrued
interest at a rate of 8.2%.
The Credit Agreement and the indenture for the Notes contain a
number of financial and other restrictive covenants, including
limitations on the ability of the Company to pay dividends on or
redeem Common Stock beyond certain specified amounts. In addition,
the Credit Agreement is subject to customary events of default,
including, but not limited to, payment defaults, defaults under other
agreements and changes of control. At May 4, 1996, the Company
was in compliance with all restrictive and financial covenants, as
amended.
In fiscal 1995, the Company entered into an agreement with
Yankee Publishing, Inc., the publisher of The Old Farmer's Almanac,
to license the name The Old Farmer's Almanac General Store [Service
Mark Pending Registration] for retail stores to be owned and operated
by County Seat in shopping malls in the United States, Canada and
Mexico. The Company plans to open a limited number of test stores
to evaluate the feasibility of this concept. The Company is currently
operating four of these test stores. If the test stores prove to be
successful, the Company anticipates that substantial capital expenditures
and working capital financing would be required to roll out the concept.
12
<PAGE>
CSI is a holding company, the primary asset of which is the
common stock of the Company. Substantially all of CSI's operations
are conducted through the Company, and CSI is dependent on the cash
flow of the Company to meet its payment obligations with respect to
obligations under CSI's 9% Exchange Debentures. In fiscal 1995, the
Company paid dividends of $2.1 million to CSI to fund semi-annual
interest payments on CSI's 9% Exchange Debentures. Although the
Credit Agreement and the indenture for the Notes generally impose
restrictions on the payment of dividends by the Company to CSI, these
agreements permit the Company to pay dividends to CSI to fund
scheduled interest payments on CSI's 9% Exchange Debentures so long
as no default exists under such agreements. To the extent the Company
is precluded from paying such dividends to CSI at a time when CSI is
required to make cash payments with respect to the 9% Exchange
Debentures, the holders of such Debentures may exercise certain of
their remedies, including, without limitation, the right to accelerate
such indebtedness. In the event of a failure to repay such defaulted
indebtedness, the holders of the 9% Exchange Debentures could
foreclose upon the assets of CSI including the common stock of the
Company. The exercise of such rights by the holders of the 9%
Exchange Debentures would constitute an event of default under the
Credit Agreement, and, with respect to a change of control of the
Company, the indenture for the Notes, entitling the banks under the
Credit Agreement and the holders of the Notes to require the Company
to repay such indebtedness. In the event of a failure to repay such
defaulted indebtedness, holders of indebtedness of the Company or CSI
could, through various legal remedies, foreclose upon the assets of the
Company. No assurance can be given that the Company will have
access to resources sufficient to repay defaulted indebtedness if so
required.
At May 4, 1996, the Company's redeemable preferred stock
consisted of $46.4 million Series A and Series B County Seat Stores,
Inc. senior exchangeable preferred stock ("Stores Senior Preferred")
and CSI's redeemable preferred stock consisted of $61.3 million Series
A and Series B County Seat, Inc. junior exchangeable preferred stock
("Junior Preferred"). Under the terms of the Series A redeemable
preferred stock, the Company and CSI have the option of declaring
stock dividends in lieu of cash dividends through February 15, 2000.
Cumulative stock dividends on each of the Series B redeemable
preferred stock compound as if a stock dividend was declared at each
quarterly dividend date. Dividends currently accrue at an annual rate
of $4.50 per share and $3.00 per share on the Stores Senior Preferred
and Junior Preferred, respectively. A dividend rate increase of $0.125
per quarter per share will occur if dividends remain unpaid for two
consecutive quarters. Effective with the quarterly dividend at February
29, 1996, CSI is restricted from declaring dividends on the Junior
Preferred until sufficient net earnings are generated to permit the
declaration of dividends under Delaware corporate law.
The Company is included in the consolidated federal income tax
return of CSI. The tax year-end for the Company and CSI is the
Saturday closest to July 31. At the tax year ended Saturday, July 29,
1995, the Company and CSI had regular income tax operating loss
carryforwards of approximately $6.4 million which can be used to
reduce future income tax payments by approximately $2.5 million,
subject to certain limitations. The Company accounts for income taxes
in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". This standard requires, among
other things, recognition of future tax benefits, measured by enacted tax
rates, attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that realization of such
benefits is more likely than not. Management cannot predict with
assurance that there will be sufficient operating income to fully utilize
its deferred income tax assets. Therefore, deferred tax assets have
been reduced by a valuation allowance of $8.6 million, as realization
of these long-term assets is dependent upon future earnings. The
Company has recognized the remaining $8.5 million of deferred tax
assets on the basis of expected taxable income over the remainder of
the current fiscal year.
13
<PAGE>
Seasonality
<TABLE>
The Company, like most retailers, has a seasonal pattern of sales
and income. The Company has two major selling seasons:
back-to-school in the third quarter and Christmas in the fourth quarter.
The table below sets forth by quarter, 1996, 1995 and 1994 net sales,
gross profit and income (loss) from operations.
<CAPTION>
Fiscal First Second Third Fourth Total
Year Quarter Quarter Quarter Quarter Year
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
1996 Net sales. . . . . . . . . . . . . . $121,604
Gross profit . . . . . . . . . . . . 26,075
Income (loss) from operations. . . . (8,186)
1995 Net sales. . . . . . . . . . . . . . $124,189 $130,110 $159,476 $205,450 $619,225
Gross profit . . . . . . . . . . . . 29,251 34,987 41,073 61,900 167,211
Income (loss) from operations(1) . . (3,878) (713) (75,243) 20,868 (58,966)
1994 Net sales. . . . . . . . . . . . . . $112,937 $119,923 $157,338 $198,129 $588,327
Gross profit . . . . . . . . . . . . 27,535 33,255 46,209 60,850 167,849
Income (loss) from operations. . . . (4,172) 552 12,143 23,020 31,543
____________________
(1)Income (loss) from operations for the third quarter of fiscal 1995
includes a non-recurring charge of $80.2 million for the write-off of
certain long-lived assets.
</TABLE>
Inflation, Economic Trends and Potential Developments
Although its operations are affected by general economic trends, the
Company does not believe that inflation has had a material effect on the
results of its operations during the past three fiscal years. On the other
hand, Management believes that the Company and other specialty
retailers have suffered from price "deflation", which has had a negative
impact on sales and gross margin. The Company believes that poor
economic conditions have adversely affected its sales and profitability
in prior years and may affect results in future periods.
With the stated intention of enhancing its brand image, Levi Strauss
has announced plans to open approximately 190 full price retail and
outlet stores offering only Levi's or Dockers merchandise. Since these
stores will carry certain products which are competitive with products
carried by County Seat, it is possible that the Company could
experience an erosion of sales at stores which are located in close
proximity to Levi Strauss stores.
14
<PAGE>
Part II.
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8 - K: none
15
<PAGE>
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.
Dated: June 18, 1996
COUNTY SEAT STORES, INC.
By /s/Edward A. Tomechko
Edward A. Tomechko
Senior Vice President and
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial and accounting officer
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS
FOR THE 13 WEEK PERIOD ENDED MAY 4, 1996 INCLUDED IN THE COMPANY'S FORM
10Q FOR SUCH PERIOD, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> MAY-04-1996
<CASH> 7834
<SECURITIES> 0
<RECEIVABLES> 2651
<ALLOWANCES> 0
<INVENTORY> 126224
<CURRENT-ASSETS> 154192
<PP&E> 120031
<DEPRECIATION> 63927
<TOTAL-ASSETS> 217757
<CURRENT-LIABILITIES> 113166
<BONDS> 130025
46378
0
<COMMON> 1
<OTHER-SE> (82983)
<TOTAL-LIABILITY-AND-EQUITY> 217757
<SALES> 121604
<TOTAL-REVENUES> 121604
<CGS> 95529
<TOTAL-COSTS> 95529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4687
<INCOME-PRETAX> (12873)
<INCOME-TAX> (5149)
<INCOME-CONTINUING> (7724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7724)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
