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, INC.
(Exact name of registrant as specified in its charter)
Delaware 75 - 2295710
(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, 3,327,042 shares of Common Stock
were outstanding.
<PAGE>
COUNTY SEAT, 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 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8 - K 16
Signatures 17
2
<PAGE>
Part I. - Item 1. Consolidated Financial Statements
<TABLE>
COUNTY SEAT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Amounts)
(Unaudited)
<CAPTION>
May 4, April 29, February 3,
1996 1995 1996
<S> <C> <C> <C>
ASSETS
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 11,386 10,425 11,339
Deferred tax benefit 6,433 6,307 989
Total current assets 154,528 151,471 133,896
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 2,456 6,411 2,486
Excess of purchase price over net assets acquired - 75,763 -
Other 1,059 1,093 1,303
Total other assets, net 7,609 87,921 6,862
$218,241 $303,049 $199,361
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 18,864 20,048 20,526
Accrued income taxes 1,167 2,249 1,111
Total current liabilities 112,439 99,193 85,416
Long-term debt 147,502 143,170 147,365
Other long-term liabilities 12,050 11,651 12,044
Commitments and contingencies
Minority interest-redeemable preferred stock of Stores 46,378 37,366 44,319
Redeemable preferred stock of CSI 61,261 50,769 58,628
Shareholders' Equity (Deficit):
Preferred stock: par value $.01 per share; 5,000,000
shares authorized; no shares issued and outstanding - - -
Common stock: par value $.01 per share; 50,000,000
shares authorized; 3,327,042, 3,326,537 and 3,327,042
shares issued and outstanding, respectively 33 33 33
Paid-in capital 22,193 22,187 22,193
Warrants 2,600 2,600 2,600
Common stock notes receivable (5,060) (4,941) (4,982)
Accumulated deficit (181,155) (58,979) (168,255)
Total shareholders' equity (deficit) (161,389) (39,100) (148,411)
$218,241 $303,049 $199,361
See accompanying Notes To Interim Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
COUNTY SEAT, 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 31,322 29,905
Depreciation and amortization 2,959 3,256
Loss from operations (8,206) (3,910)
Interest expense, net 5,356 5,773
Minority interest-dividends and accretion
of redeemable preferred stock of Stores 2,059 1,693
Loss before income taxes (15,621) (11,376)
Income taxes (5,353) (4,280)
Net loss (10,268) (7,096)
Redeemable preferred stock dividends
and accretion (2,632) (2,176)
Net loss applicable to common shares $(12,900) $ (9,272)
Net loss per common share $ (3.88) $ (2.79)
Weighted average shares outstanding 3,327,042 3,326,537
See accompanying Notes To Interim Consolidated Financial Statements.
</TABLE>
4
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<TABLE>
COUNTY SEAT, 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 $(10,268) $(7,096)
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 392 676
Minority interest-dividends and accretion of
redeemable preferred stock of Stores 2,059 1,693
Rent expense in excess of cash outlays, net 62 76
Deferred tax benefit (5,353) (2,929)
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 (1,589) (2,944)
Accrued income taxes (5) (1,628)
Other non-current assets and liabilities 16 (678)
Net cash used for operating activities (12,306) (17,350)
Cash Flows from Financing Activities:
Short-term borrowings 14,000 -
Debt and equity 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)
Issuance of common stock - 98
Repayment of common stock notes receivable - 111
Net cash provided by (used for) financing activities 12,962 (803)
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, 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, Inc. ("CSI") and its wholly-
owned subsidiary, County Seat Stores, Inc. ("Stores") (together,
"the Company" or "County Seat"). The activities of CSI consist
principally of its investment in Stores.
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.
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.
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 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.
6
<PAGE>
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 the 9% junior subordinated
exchange debentures, restrict the payment of cash dividends on
Stores' 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>
4. Redeemable Preferred Stock
<TABLE>
At May 4, 1996, redeemable preferred stock consisted of the
following (in thousands):
<CAPTION>
Redemption
Value
<S> <C>
Junior exchangeable preferred stock of CSI $61,261
County Seat Stores, Inc. senior 47,439
exchangeable preferred stock
</TABLE>
7
<PAGE>
Junior Exchangeable Preferred Stock
Of the 6,000,000 shares of Series A and Series B junior
exchangeable preferred stock, par value $.01, (together the Junior
Preferred) authorized, 3,085,164 were issued and outstanding at
May 4, 1996.
Dividends on the Series A junior exchangeable preferred stock
(Series A Junior Preferred) are cumulative and payable quarterly
at an annual cash dividend rate of $3 per share. This rate will
increase $0.125 per quarter per share if dividends remain unpaid
for two consecutive quarters. Effective with the quarterly
dividend at February 29, 1996, the Company is restricted from
declaring dividends on the Series A Junior Preferred until
sufficient net earnings are generated to permit the declaration of
dividends under Delaware corporate law. Unpaid dividends on
the Series A Junior Preferred cumulate and compound until paid.
Cumulative undeclared, unpaid Series A Junior Preferred stock
dividends were $1,452,000 and equivalent to 84,137 shares at
May 4, 1996. These equivalent shares are not issued or
outstanding.
Cumulative dividends on the Series B junior exchangeable
preferred stock (Series B Junior Preferred) compound as if a
stock dividend was declared at each quarterly dividend date.
Undeclared, unpaid Series B Junior Preferred stock dividends
were $5,287,000 and equivalent to 306,333 shares at May 4,
1996. These equivalent shares are not issued or outstanding.
County Seat Stores, Inc. Senior Exchangeable Preferred Stock
Of the 4,000,000 shares of County Seat Stores, Inc. Series
A and Series B senior exchangeable preferred stock, par value
$.01, (together, the Stores Senior Preferred) authorized,
1,458,455 shares were issued and outstanding at May 4, 1996.
Cumulative dividends on the Series B Stores 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. Shareholders' Equity
Stock Options
In the first quarter of fiscal 1996, the Company extended the
expiration date of options to purchase 22,275 shares of Common
Stock which were originally granted to management in 1991 with
an expiration date of April 1996. As of May 4, 1996, options to
purchase 226,513 shares of Common Stock have been granted to
management at $6.67 to $15.00 per share under the CSI incentive
stock option plan. At May 4, 1996, grants of 37,800 and 76,649
shares were exercisable at $10.00 and $15.00 per share,
respectively.
Also during the first quarter of fiscal 1996, options to
purchase 6,000 shares of Common Stock were granted to non-
management directors of the Company at $9.00 per share. As of
May 4, 1996, options to purchase 27,000 shares of Common
Stock have been granted to non-management directors at $6.67 to
$15.00 per share. At May 4, 1996, grants of 18,000 shares,
6,000 shares and 2,250 shares were exercisable at $6.67, $9.00
and $15.00 per share, respectively.
8
<PAGE>
6. Related Party Transactions
Affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation (DLJ) held 1,407,630 shares of Junior Preferred and
582,337 shares of Stores Senior Preferred as of May 4, 1996.
Undeclared, unpaid stock dividends on the Junior Preferred and
Stores 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 Common Stock as of May 4, 1996.
7. Net Loss Per Common Share
Net loss per common share was computed by dividing net
loss, after reduction for CSI preferred stock dividends and
accretion, by the weighted average number of common shares and
equivalents outstanding. Common share equivalents included in
the computation represent shares issuable upon assumed exercise
of stock options and warrants which would have a dilutive effect
in periods where there were earnings. Because of net losses
applicable to common shares for all periods presented, the effect
of common share equivalents was antidilutive and they were
excluded from the calculations.
9
<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 25.8 24.1
Depreciation and amortization 2.3 2.6
Loss from operations (6.7) (3.1)
Interest expense, net 4.4 4.7
Minority interest-dividends and accretion of
redeemable preferred stock of Stores 1.7 1.4
Loss before income taxes (12.8) (9.2)
Income taxes (4.4) (3.5)
Net Loss (8.4)% (5.7)%
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 4.7%, 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
10
<PAGE>
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 25.8% 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.
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
2.3% 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 6.9%, to $5.4
million in the first quarter of fiscal 1996 from $5.8 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 charge resulting from the minority interest for dividends and
accretion of Senior Preferred Stock increased $0.4 million to $2.1
million in the first quarter of fiscal 1996 compared to $1.7 million in
the first quarter of fiscal 1995. The increase was due to the accrual of
preferred stock dividends and the compounding nature of the paid-in-
kind dividends with respect to the Senior Preferred Stock.
The Company recorded an income tax benefit of $5.4 million in the
first quarter of fiscal 1996 compared to $4.3 million in the first quarter
of fiscal 1995. The effective income tax rates of 34.3% and 37.6% in
the first quarters of fiscal 1996 and fiscal 1995, respectively, differ
from the statutory federal rate primarily due to the effect of non-
deductible minority interest preferred stock dividend and accretion
charges and debt discount amortization, state income taxes and the
effect of non-deductible goodwill amortization in the first quarter of
fiscal 1995.
The net loss of $10.3 million in the first quarter of fiscal 1996
compared to a net loss of $7.1 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.
11
<PAGE>
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 $17.4 million,
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 $42.1 million and $52.3 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 $5.3 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 $147.5 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") and 9% Exchange Debentures was
estimated to have exceeded the fair market value by approximately
$31.5 million and $5.2 million, respectively. 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 the Company'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
12
<PAGE>
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.
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 Store's
assets and guaranteed by CSI. CSI's guarantee is secured by a pledge
of its primary asset, the outstanding common stock of Stores.
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
13
<PAGE>
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.
CSI is a holding company, the primary asset of which is the
common stock of Stores. Substantially all of CSI's operations are
conducted through Stores, and CSI is dependent on the cash flow of
Stores to meet its payment obligations with respect to obligations under
CSI's 9% Exchange Debentures. In fiscal 1995, Stores 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 Stores to CSI, these agreements permit Stores 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 Stores 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 Stores. 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 Stores, 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 Stores or CSI
could, through various legal remedies, foreclose upon the assets of
Stores. 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 $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 has 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, the Company 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 (See Note 4 of Notes to Interim Consolidated Financial
Statements).
The tax year-end for the Company is the Saturday closest to July
31. At its tax year ended Saturday, July 29, 1995, the Company 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 $8.8 million, as realization of these long-term
assets is dependent upon future earnings. The Company has recognized
the remaining $8.9 million of deferred tax assets on the basis of
expected taxable income over the remainder of the current fiscal year.
14
<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 . . . (8,206)
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). . (3,910) (733) (76,486) 20,895 (60,234)
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 . . . (4,183) 552 12,143 23,020 31,532
____________________
(1)Income (loss) from operations for the third quarter of fiscal 1995 includes non-recurring charges of $1.2 million
for the cost of proposed initial public offering and $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.
15
<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
16
<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, 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
17
<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
FINANICAL 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> 154528
<PP&E> 120031
<DEPRECIATION> 63927
<TOTAL-ASSETS> 218241
<CURRENT-LIABILITIES> 112439
<BONDS> 147502
107639
0
<COMMON> 33
<OTHER-SE> (161422)
<TOTAL-LIABILITY-AND-EQUITY> 218241
<SALES> 121604
<TOTAL-REVENUES> 121604
<CGS> 95529
<TOTAL-COSTS> 95529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5356
<INCOME-PRETAX> (15621)
<INCOME-TAX> (5353)
<INCOME-CONTINUING> (10268)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10268)
<EPS-PRIMARY> (3.88)
<EPS-DILUTED> (3.88)
</TABLE>
