-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qd3adzCFiIEiYG+aGcivrT+TIHCJSEC8wJeORn8STA0jAHYAeW/Em60PJMiq3dDq NdyxxxXpZ0tUOanjEFF7TA== /in/edgar/work/0000006885-00-000054/0000006885-00-000054.txt : 20001016 0000006885-00-000054.hdr.sgml : 20001016 ACCESSION NUMBER: 0000006885-00-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000729 FILED AS OF DATE: 20001013 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAGE STORES INC CENTRAL INDEX KEY: 0000006885 STANDARD INDUSTRIAL CLASSIFICATION: [5311 ] IRS NUMBER: 760407711 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14035 FILM NUMBER: 740012 BUSINESS ADDRESS: STREET 1: 10201 MAIN ST CITY: HOUSTON STATE: TX ZIP: 77025 BUSINESS PHONE: 7136675601 MAIL ADDRESS: STREET 1: 10201 MAIN STREET CITY: HOUSTON STATE: TX ZIP: 77025 FORMER COMPANY: FORMER CONFORMED NAME: APPAREL RETAILERS INC DATE OF NAME CHANGE: 19930908 10-Q 1 0001.txt 3 Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ____ Commission file number 001-14035 Stage Stores, Inc. (Exact name of registrant as specified in its charter) DELAWARE 76-0407711 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identifications No.) 10201 Main Street, Houston, 77025 Texas (Zip Code) (Address of principal executive offices) (713) 667-5601 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No _ The number of shares of common stock of Stage Stores, Inc. outstanding as of October 13, 2000 was 26,850,223 shares of Common Stock and 1,250,584 shares of Class B Common Stock. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Stage Stores, Inc. (Debtor-in-Possession) Consolidated Condensed Balance Sheet (in thousands, except par values) July 29, January 2000 29, 2000 ASSETS (unaudited) Cash and cash equivalents $ 22,083 $ 20,179 Undivided interest in accounts receivable trust -- 41,600 Accounts receivable, net 295,616 -- Merchandise inventories, net 235,123 261,104 Prepaid expenses and other current assets 17,447 23,866 Total current assets 570,269 346,749 Property, equipment and leasehold improvements, net 158,152 181,834 Other assets 16,380 26,104 Total assets $744,801 $554,687 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 71,331 $40,955 Accrued expenses and other current liabilities 52,848 72,177 Debtor-in-possession credit facility 245,028 -- Current portion of long-term debt -- 9,830 Long-term debt classified as current -- 492,393 Total current liabilities 369,207 615,355 Liabilities subject to compromise under reorganization proceedings 565,216 -- Other long-term liabilities 6,914 14,299 Total liabilities 941,337 629,654 Preferred stock, par value $1.00, non- voting, 3 shares authorized, no shares issued or outstanding -- -- Common stock, par value $0.01, 75,000 shares authorized, 26,850 and 26,834 shares issued and outstanding, respectively 268 268 Class B common stock, par value $0.01, non-voting, 3,000 shares authorized, 1,250 shares issued and outstanding 13 13 Additional paid-in capital 267,059 266,590 Accumulated deficit (459,538) (337,500) Accumulated other comprehensive income (4,338) (4,338) Stockholders' deficit (196,536) (74,967) Commitments and contingencies -- -- Total liabilities and stockholders' deficit $ 744,801 $554,687 The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Consolidated Condensed Statement of Operations (in thousands, except per share amounts) (unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended July 29, July 31, July 29, July 31, 2000 1999 2000 1999 Net sales $215,455 $269,848 $445,807 $532,439 Cost of sales and related buying, occupancy and distribution expenses 176,251 195,827 348,285 388,059 Gross profit 39,204 74,021 97,522 144,380 Selling, general and administrative expenses 65,552 66,888 119,573 128,107 Store opening and closure program costs -- 15,465 -- 16,214 Operating income (loss) (26,348) (8,332) (22,051) 59 Interest, net 10,529 12,646 23,957 24,757 Loss before reorganization items, income tax, and cumulative effect of a change in accounting principle (36,877) (20,978) (46,008) (24,698) Reorganization items (60,935) -- (75,980) -- Loss before income tax and cumulative effect of a change in accounting principle (97,812) (20,978) (121,988) (24,698) Income tax expense (benefit) 25 (5,887) 50 (7,338) Loss before cumulative effect of a change in accounting principle (97,837) (15,091) (122,038) (17,360) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- -- -- (2,402) Net loss $(97,837) $(15,091) $(122,038) $(19,762) Basic loss per common share data: Basic loss per common share before cumulative effect of a change in accounting principle $ (3.48) $ (0.54) $ (4.34) $ (0.62) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- -- -- (0.09) Basic loss per common share $ (3.48) $ (0.54) $ (4.34) $ (0.71) Basic weighted average common shares outstanding 28,100 28,022 28,093 27,990 Diluted loss per common share data: Diluted loss per common share before cumulative effect of a change in accounting principle $ (3.48) $ (0.54) $ (4.34) $ (0.62) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- -- -- (0.09) Diluted loss per common share $ (3.48) $ (0.54) $ (4.34) $ (0.71) Diluted weighted average common shares outstanding 28,100 28,022 28,093 27,990 The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Consolidated Condensed Statement of Cash Flows (in thousands) (unaudited) Twenty-six Weeks Ended July 29, July 29, 2000 1999 Cash flows from operating activities: Net loss $ (122,038) $ (19,762) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 25,781 27,578 Deferred income taxes -- (2,120) Accretion of discount 7,780 591 Amortization of debt issue costs 14,610 1,517 Cumulative effect of a change in accounting principle -- 2,402 Change in working capital (143,161) (24,218) Total adjustments (94,990) 5,750 Net cash used in operating activities (217,028) (14,012) Cash flows from investing activities: Additions to property, equipment and leasehold improvements (2,350) (11,045) Net cash used in investing activities (2,350) (11,045) Cash flows from financing activities: Proceeds from debtor-in-possession credit facility 245,028 -- Proceeds from (payments on) pre-petition working capital facility (13,000) 23,300 Proceeds from issuance of common stock -- 252 Payments on long-term debt (204) (2,357) Additions to debt issue costs (10,542) -- Net cash provided by financing activities 221,282 21,195 Net increase (decrease) in cash and cash equivalents 1,904 (3,862) Cash and cash equivalents: Beginning of period 20,179 12,832 End of period $ 22,083 $ 8,970 Supplemental disclosure of cash flow information: Interest paid $ 10,983 $ 22,311 Income taxes paid (refunded) $ (14) $ 162 The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Consolidated Statement of Stockholders' Deficit For the Twenty-six Weeks Ended July 29, 2000 (in thousands) Shares Outstanding Shares of common stock issued: Beginning balance 26,834 Issuance of stock 16 Ending balance 26,850 Shares of Class B stock issued: Beginning balance 1,250 Ending balance 1,250 Stockholders' Deficit Common stock issued: Beginning balance $ 268 Issuance of stock -- Ending balance 268 Class B stock issued: Beginning balance 13 Ending balance 13 Additional Paid-in Capital: Beginning balance 266,590 Issuance of stock 469 Ending balance 267,059 Accumulated deficit and accumulated other comprehensive income: Beginning balance (341,838) Comprehensive loss: Net loss (122,038) Other comprehensive loss -- Total comprehensive loss (122,038) Ending balance (463,876) Total Stockholders' Deficit $(196,536) Accumulated other comprehensive loss: Beginning balance $ (4,338) Ending balance $ (4,338) The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Notes to Unaudited Consolidated Condensed Financial Statements 1. The accompanying Unaudited Consolidated Condensed Financial Statements of Stage Stores, Inc. ("Stage Stores") have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Those adjustments, which include only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of the results of operations for a full year. The Unaudited Consolidated Condensed Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto for the year ended January 29, 2000 filed with Stage Stores' Annual Report on Form 10-K. The fiscal years discussed herein end on the Saturday nearest to January 31 in the following calendar year. For example, references to "2000" mean the fiscal year ending February 3, 2001. Certain reclassifications have been made to prior year balances to conform with the reclassifications of such amounts in the current period. 2. Stage Stores conducts its business primarily through its wholly-owned subsidiary Specialty Retailers, Inc. ("SRI") which, as of July 29, 2000, operated 506 family apparel stores in 22 states located primarily in the south central and midwestern United States. Stage Stores and SRI are collectively referred to herein as the "Company". 3. On June 1, 2000 (the "Petition Date"), Stage Stores, SRI and Specialty Retailer, Inc. (NV) filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Southern District of Texas (the "Court"). Under Chapter 11, the Company is operating its business as debtor-in-possession (see Note 2 to the Company's Consolidated Financial Statements filed with Stage Stores' Annual Report on Form 10-K for the year ended January 29, 2000). The accompanying Unaudited Consolidated Condensed Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. Further, a plan of reorganization could materially change the amounts reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of a plan of reorganization. The ability of the Company to continue as a going concern is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with debtor-in-possession financing agreements and the ability to generate sufficient cash from operations and financing sources to meet the Company's obligations. Additionally, the accompanying Unaudited Consolidated Condensed Financial Statements do not include any adjustments that would be required if the Company were in liquidation. Substantially all of the Company's pre-petition liabilities are subject to compromise under reorganization proceedings. Those petition date liabilities that are expected to be paid or comprised under a plan of reorganization are separately classified in the accompanying Unaudited Consolidated Condensed Balance Sheet and, as of July 29, 2000, include the following items (in thousands): Long-term debt $ 512,575 Accounts payable 20,090 Accrued expenses and other liabilities 32,551 $ 565,216 The Company ceased accruing interest on pre-petition long- term June 1, 2000. Reported interest differs from stated contractual interest by $4.6 million for the thirteen and twenty- six weeks ended July 29, 2000. On June 2, 2000, the Company entered into a three year, $450.0 million debtor-in-possession financing agreement (the "DIP Financing Agreement") with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. The Court has entered a final order approving the terms of the DIP Financing Agreement. Borrowings under the DIP Financing Agreement are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interests. Borrowings under the DIP Financing Agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing Agreement. Initial borrowings under the DIP Financing Agreement were used to terminate the Company's existing Accounts Receivable Program, retire the Senior Revolving Credit Facility and for certain closing costs associated with the DIP Financing Agreement. As a result of the termination of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to a special purpose trust (the "Trust") but, rather, will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing Agreement. The DIP Financing Agreement contains covenants which, among other things, restrict the (i) incurrence of additional debt, (ii) incurrence of capital lease obligations, (iii) aggregate amount of capital expenditures and (iv) transactions with related parties. In addition, the DIP Financing Agreement requires the Company to maintain compliance with a certain specified level of earnings before depreciation, interest, taxes and special charges. On June 7, 2000, the Company paid the Trust $288.1 million in cash and surrendered its retained interest in the Trust in exchange for all accounts receivable balances held by the Trust on that date. The Trust used the cash proceeds to retire all remaining certificates and pay other costs associated with the termination of the Trust. The accounts receivable balances repurchased by the Company have been recorded at $312.3 million, the aggregate of the cash paid and the estimated fair value of the retained interest surrendered. The Company accretes the yield resulting from the estimated net future cash flows associated with these balances using the interest method. The yield is recorded in selling, general and administrative expenses in the accompanying financial statements. Service charge income, late fees and estimated bad debt expense related to credit sales made after June 7, 2000 are also included in selling, general and administrative expense in the accompanying financial statements. During July 2000, the Court approved the Company's plan to close 120 stores as part of its restructuring process (the "2000 Store Closing Plan"). The Company has engaged third parties to manage the inventory liquidation process in these stores. The Company estimates the 2000 Store Closing Plan will be completed within the current fiscal year. The net expense resulting from the Company's Chapter 11 filing and subsequent reorganization efforts (which include the 2000 Store Closing Plan) has been separated from ordinary operations and is classified as reorganization items in the accompanying Consolidated Condensed Statement of Operations. Components of reorganization items for the thirteen and twenty- six weeks ended July 29, 2000 are as follows (in thousands): Thirteen Twenty- Weeks six Ended Weeks July 29, Ended 2000 July 29, 2000 Costs associated with the 2000 Store Closing Plan (including loss on Inventory, lease damages and severance) $ 28,731 $ 28,731 Professional fees associated with the bankruptcy 4,917 4,917 Write-off of pre-petition debt issue costs and original issue discount 17,987 17,987 Write-off of assets associated with the 2000 Store Closing Plan and other miscellaneous assets 3,145 18,190 Write-down of undivided interest in accounts receivable trust 6,155 6,155 Total $ 60,935 $ 75,980 Net cash used in operating activities for reorganization items was approximately $3.7 million, related primarily to professional fees and retainers during the twenty-six weeks ended July 29, 2000. 4. Prior to the Petition Date, the Company charged $0.5 million against the store closure accrual it established in 1999 relating to the store closure program announced during February 2000. The accrued balance relating to this store closure program was $7.3 million as of July 29, 2000 and has been included in liabilities subject to compromise under reorganization proceedings. 5. The Company has provided a full valuation allowance against the net deferred tax assets generated during the twenty- six weeks ended July 29, 2000. See Note 11 to the Audited Consolidated Financial Statements for the year ended January 29, 2000, included in Stage Stores Annual Report on Form 10-K. 6. From time to time the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. Due to the bankruptcy filing mentioned previously, certain of the cases mentioned below have been stayed pursuant to the automatic stay of the Court. These cases require Court approval or must be specifically exempt for litigation proceedings to continue. On March 30, 1999, a class action lawsuit was filed against the Company and certain of its officers, directors and stockholders in the United States District Court for the Southern District of Texas by John C. Weld, Jr., a stockholder who purchased 125 shares of the Company's common stock on August 3, 1998, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the "Weld Suit"). The Company believed that the allegations of the Weld Suit are without merit, and on July 23, 1999, the Company filed a motion to dismiss. United States District Judge Kenneth Hoyt entered an order on December 8, 1999 dismissing the Weld Suit. The order has been appealed by Mr. Weld. On March 28, 2000, the Company filed a lawsuit against Carl Tooker, the Company's former Chairman, Chief Executive Officer and President in the District Court of Harris County, Texas. The lawsuit is an action for damages arising from transactions Mr. Tooker engaged in or directed while serving as President, Chief Executive Officer and Chairman of the Board of Directors of the Company which transactions benefited him personally or were otherwise contrary to his duties as an officer and director. (See Form 8-K dated March 9, 2000). The suit also seeks recovery of debt owed by Mr. Tooker to the Company pursuant to loans and promissory notes Mr. Tooker caused the Company to make to him while serving in those capacities, and for conversion of stock collateral pledged to the Company to secure his indebtedness. The Company also seeks a mandatory injunction requiring Mr. Tooker to deposit into the registry of the Court all remaining stock collateral in his possession, and for a declaratory judgment that Mr. Tooker was properly terminated "for cause" under the terms of his employment agreement. The Company seeks to recover not less than an aggregate of $2,755,672, accrued interest, punitive damages, costs and reasonable attorneys' fees. On or about April 27, 2000 Mr. Tooker filed an Answer and Counterclaim against the Company and a Third Party Petition against the Company's Interim President, Chief Executive Officer and Chairman of the Board, John J. Wiesner, Martin Stringer, counsel to the Special Committee, and the law firm of McKinney & Stringer, P.C. The answer generally denies all allegations made by the Company. Mr. Tooker seeks damages from the Company of approximately $3.9 million, plus attorney's fees, interest, and costs for breach of his employment contract, and a like amount, including punitive damages, from the third-party defendants for alleged tortious interference with his employment contract. Mr. Tooker also seeks to impose a constructive trust on the $300,000 in the Company's possession for certain contractual benefits he claims to be due under his employment agreement. The remaining claims seek damages against the Company and in part against the third-party defendants, totaling $18 million, plus punitive damages, fees, interest and costs, on theories of defamation, civil conspiracy, breach of fiduciary duty and breach of duty of good faith and fair dealing. The case is in its initial development, prior to any discovery. The Company and the third- party defendants dispute his allegations and intend to vigorously defend all of Mr. Tooker's claims. In March 2000, eleven former employees of SRI d/b/a Palais Royal, filed two separate suits in the United States District Court for the Southern District of Texas against the Company, SRI and Mary Elizabeth Pena, arising out of alleged conduct occurring over an unspecified time while the plaintiffs were working at one or more Palais Royal stores in the Houston, Texas area. The plaintiffs allege that on separate occasions they were falsely accused of stealing merchandise and other company property and giving discounts for purchases against company policy. The suits accuse the defendants of defamation, false imprisonment, intentional infliction of mental distress, assault and violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The claims seek unspecified damages for mental anguish, lost earnings, exemplary damages, treble damages, interest, attorneys' fees and costs. The Company denies the allegations and intends to vigorously defend the claims. Management believes that none of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the financial position, results of operations or cash flows of the Company or its subsidiaries. 7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivative financial instruments be recorded in the financial statements. SFAS No. 133 is effective for the Company in the first quarter of 2001, and the Company is in the process of ascertaining the impact this new standard will have on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 is effective for the Company in the fourth quarter of 2000, and the Company is ascertaining the impact this pronouncement will have on its financial statements. 8. The following Unaudited Consolidating Condensed Financial Statements for Stage Stores and its wholly-owned subsidiaries is presented to satisfy disclosure requirements pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934 with respect to wholly-owned subsidiaries of Stage Stores. Stage Stores does not prepare separate financial statements and related disclosures for its wholly-owned subsidiaries SRI and Specialty Retailers, Inc. (NV), a wholly-owned subsidiary of Stage Stores which was incorporated during June 1997, because management has determined that such information is not material to investors. SRI is the primary obligor under the 8.5% Senior Notes due 2005 and the 9% Senior Subordinated Notes due 2007 (see Note 6 to the Company's Consolidated Financial Statements filed with Stage Stores' Annual Report on Form 10-K for the year ended January 29, 2000). Stage Stores and Specialty Retailers, Inc. (NV) are guarantors of such indebtedness. The Consolidating Condensed Financial Statements for Stage Stores and its wholly-owned subsidiaries, including all significant intercompany transactions eliminated in consolidation, are presented below. The results of operations of SRPC as reported are not indicative of the total operating performance of the Company's Accounts Receivable Program. Consolidating Condensed Balance Sheet July 29, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivables Eliminations Consolidated Inc. Purchase Co. ASSETS Cash and cash $ 19,898 $ -- $ -- $ 19,898 equivalents Accounts 295,616 -- -- 295,616 receivable, net Merchandise 235,123 -- -- 235,123 inventories, net Prepaid expenses 17,447 -- -- 17,447 and other current assets Total current 568,084 -- -- 568,084 assets Property, 158,152 -- -- 158,152 equipment and leasehold improvements, net Other assets 16,320 -- 16,320 Investment in 37,035 -- (37,035) -- subsidiaries Total assets $ 779,591 $ -- $ (37,035) $ 742,556 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 71,331 $ -- $ -- $ 71,331 Accrued expenses 52,586 -- -- 52,586 and other current liabilities Debtor-in-posses 245,028 -- -- 245,028 sion credit Facility Total current liabilities 368,945 -- -- 368,945 Intercompany 231,915 (37,035) -- 194,880 notes/advances Liabilities 565,216 -- -- 565,216 subject to compromise under reorganization proceedings Other long-term 6,914 -- -- 6,914 liabilities Investment in -- -- -- -- subsidiaries Total liabilities 1,172,990 (37,035) -- 1,135,955 Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common -- -- -- -- stock Additional paid- in capital 3,317 34,253 (34,253) 3,317 Accumulated earnings (392,378) 2,782 (2,782) (392,378) (deficit) Accumulated (4,338) -- -- (4,338) other comprehensive income Stockholders' equity (393,399) 37,035 (37,035) (393,399) Total $ 779,591 $ -- $ (37,035) $ 742,556 liabilities and stockholders' equity Consolidating Condensed Balance Sheet July 29, 2000 (in thousands, unaudited) Stage Specialty Eliminations Stage Stores Stores, Inc. Retailers, Consolidated Inc. (NV) ASSETS Cash and cash $ 2 $2,183 $ -- $ 22,083 equivalents Accounts -- -- -- receivable, net 295,616 Merchandise -- -- -- inventories, 235,123 net Prepaid expenses -- -- -- and other 17,447 current assets Total current 2 2,183 -- 570,269 assets Property, -- -- -- 158,152 equipment and leasehold improvements, net Other assets -- 60 -- 16,380 Investment in -- -- -- -- subsidiaries Total assets $ 2 $ 2,243 $ -- $ 744,801 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ -- $ -- $ -- $ 71,331 Accrued expenses -- 262 -- 52,848 and other current liabilities Debtor-in-posses -- -- -- sion credit 245,028 Facility Total current -- liabilities -- 262 369,207 Intercompany (194,351) -- -- notes/advances (529) Liabilities 565,216 subject to compromise under reorganization proceedings Other long-term -- -- -- 6,914 liabilities Investment in -- -- subsidiaries 196,067 (197,067) Total (194,089) liabilities 196,538 (197,067) 941,337 Preferred stock -- -- -- -- Common stock -- -- 268 268 Class B common -- -- stock 13 13 Additional paid- in capital 267,059 160,915 (164,232) 267,059 Accumulated earnings (459,538) 35,417 356,961 (459,538) (deficit) Accumulated -- other (4,338) 4,338 (4,338) comprehensive income Stockholders' equity (196,536) 196,332 197,067 (196,536) Total liabilities and stockholders' equity $ 2 $ 2,243 $ -- $ 744,801 Consolidating Condensed Balance Sheet January 29, 2000 (in thousands) Specialty SRI SRI SRI Retailers, Receivables Eliminations Consolidated Inc. Purchase Co. ASSETS Cash and cash $ 18,077 $ -- $ -- $ 18,077 equivalents Undivided -- 41,600 interest in (13,101) 54,701 accounts receivable trust Merchandise -- -- 261,104 inventories, net 261,104 Prepaid expenses 220 -- 7,945 7,725 Other current 8,491 -- 15,921 assets 7,430 Total current 63,412 -- 344,647 assets 281,235 Property, -- -- 180,761 equipment and 180,761 leasehold improvements, net Other assets 2,608 -- 26,044 23,436 Investment in -- (36,690) -- subsidiaries 36,690 Total assets $ $ 66,020 $ $ 551,452 522,122 (36,690) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ 40,955 $ -- $ -- $ 40,955 Accrued expenses and other current liabilities 69,385 2,770 -- 72,155 Current portion -- -- 9,830 of long-term 9,830 debt Long-term debt -- -- 492,393 classified as 492,393 current Total current 2,770 -- 615,333 liabilities 612,563 Long-term debt -- -- -- -- Other long-term -- -- 14,299 liabilities 14,299 Intercompany 26,560 -- 187,279 notes/advances 160,719 Investment in -- -- -- -- subsidiaries Total 29,330 -- 816,911 liabilities 787,581 Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common -- -- -- -- stock Additional paid- in capital 3,317 33,908 (33,908) 3,317 Accumulated (2,782) (264,438) earnings (264,438) 2,782 (deficit) Accumulated other -- -- (4,338) comprehensive (4,338) income Stockholders' 36,690 (265,459) equity (deficit) (265,459) (36,690) Total $ 522,122 $ 66,020 $ $ 551,452 liabilities and (36,690) stockholders' equity (deficit) Consolidating Condensed Balance Sheet January 29, 2000 (in thousands) Stage Specialty Stage Stores Stores, Inc. Retailers, Eliminations Consolidated Inc. (NV) ASSETS Cash and cash $ 102 $ $ -- $ 20,179 equivalents 2,000 Undivided -- -- -- interest in 41,600 accounts receivable trust Merchandise -- -- -- inventories, net 261,104 Prepaid expenses -- -- -- 7,945 Other current -- -- -- assets 15,921 Total current 102 2,000 -- assets 346,749 Property, -- 1,073 -- equipment and 181,834 leasehold improvements, net Other assets -- -- 60 26,104 Investment in -- -- -- -- subsidiaries Total assets $ 102 $ $ -- $ 3,133 554,687 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ -- $ -- $ -- $ 40,955 Accrued expenses 22 -- -- 72,177 and other current liabilities Current portion -- -- -- 9,830 of long-term debt Long-term debt -- -- -- classified as 492,393 current Total current -- -- liabilities 22 615,355 Long-term debt -- -- -- -- Other long-term -- -- -- liabilities 14,299 Intercompany 18 -- -- notes/advances (187,297) Investment in -- (75,029) -- subsidiaries 75,029 Total (75,029) liabilities 75,069 (187,297) 629,654 Preferred stock -- -- -- -- Common stock -- -- 268 268 Class B common -- -- stock 13 13 Additional paid- in capital 266,590 160,915 (164,232) 266,590 Accumulated 234,923 earnings (337,500) 29,515 (337,500) (deficit) Accumulated other -- 4,338 comprehensive (4,338) (4,338) income Stockholders' 75,029 equity (deficit) (74,967) 190,430 (74,967) Total $ 102 $ $ -- $ 554,687 liabilities and 3,133 stockholders' equity (deficit) Consolidating Condensed Statement of Operations Twenty-six Weeks Ended July 29, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivables Eliminations Consolidated Inc. Purchase Co. Net sales $ 445,807 $ -- $ -- $ 445,807 Cost of sales 348,285 348,285 and related -- -- buying, occupancy and distribution expenses Gross profit 97,522 97,522 -- -- Selling, general (2,063) and 122,102 -- 120,039 administrative expenses Operating income (loss) (24,580) 2,063 -- (22,517) Interest expense, net 29,884 (229) -- 29,655 Income (loss) (54,464) (52,172) before 2,292 -- reorganization items and income taxes Reorganization (73,688) (75,980) items (2,292) -- Income (loss) before income (128,152) -- -- (128,152) taxes Income tax (212) (212) expense -- -- (benefit) Income (loss) (127,940) (127,940) before equity -- -- in net earnings of subsidiaries Equity in net earnings of -- -- -- -- subsidiaries Net income $ (127,940) $ -- $ -- $ (127,940) (loss) Consolidating Condensed Statement of Operations Twenty-six Weeks Ended July 29, 2000 (in thousands, unaudited) Stage Specialty Eliminations Stage Stores Stores, Inc. Retailers, Consolidated Inc. (NV) Net sales $ -- $ -- $ -- $ 445,807 Cost of sales -- 348,285 and related -- -- buying, occupancy and distribution expenses Gross profit -- 97,522 -- -- Selling, general (466) 119,573 and -- -- administrative expenses Operating income -- (22,051) (loss) 466 -- Interest -- (5,698) 23,957 expense, net -- Income (loss) -- (46,008) before 6,164 -- reorganization items and income taxes Reorganization -- items -- -- (75,980) Income (loss) (121,988) before income -- 6,164 -- taxes Income tax -- 50 expense 262 -- (benefit) Income (loss) -- (122,038) before equity 5,902 -- in net earnings of subsidiaries Equity in net (131,882) earnings of -- 131,882 -- subsidiaries Net income $ (131,882) $ 5,902 $ 131,882 $ (122,038) (loss) Consolidating Condensed Statement of Operations Twenty-six Weeks Ended July 31, 1999 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivables Eliminations Consolidated Inc. Purchase Co. Net sales $ $ -- $ -- $ 532,439 532,439 Cost of sales 388,059 -- -- 388,059 and related buying, occupancy and distribution expenses Gross profit 144,380 -- -- 144,380 Selling, general 131,504 (3,298) -- 128,206 and administrative expenses Store opening 16,214 -- -- 16,214 and closure program costs Operating income (3,338) 3,298 -- (40) (loss) Interest 30,813 2,095 -- 32,908 expense, net Income (loss) (34,151) 1,203 -- (32,948) before income taxes Income tax (10,694) 445 -- (10,249) expense (benefit) Income (loss) (23,457) 758 -- (22,699) before equity in net earnings of subsidiaries and cumulative effect of a change in accounting principle Equity in net earnings of subsidiaries (448) -- 448 -- Income (loss) (23,905) 758 448 (22,699) before cumulative effect of a change in accounting principle Cumulative (1,196) (1,206) -- (2,402) effect of a change in accounting principle, net of tax - reporting costs of start-up activities Net income $ (25,101) $ (448) $ 448 $ (25,101) (loss) Consolidating Condensed Statement of Operations Twenty-six Weeks Ended July 31, 1999 (in thousands, unaudited) Stage Specialty Eliminations Stage Stores Stores, Inc. Retailers, Consolidated Inc. (NV) Net sales $ -- $ -- $ -- $532,439 Cost of sales -- -- -- 388,059 and related buying, occupancy and distribution expenses Gross profit -- -- -- 144,380 Selling, general 69 (168) -- 128,107 and administrative expenses Store opening and closure program costs -- -- -- 16,214 Operating income (69) 168 -- 59 (loss) Interest -- (8,151) -- 24,757 expense, net Income (loss) (69) 8,319 -- (24,698) before income taxes Income tax -- 2,911 -- (7,338) expense (benefit) Income (loss) (69) 5,408 -- (17,360) before equity in net earnings of subsidiaries and cumulative effect of a change in accounting principle Equity in net (19,693) -- 19,693 -- earnings of subsidiaries Income (loss) (19,762) 5,408 19,693 (17,360) before cumulative effect of a change in accounting principle Cumulative -- -- -- (2,402) effect of a change in accounting principle, net of tax - reporting costs of start-up activities Net income $ (19,762) $ 5,408 $ 19,693 $ (19,762) (loss) Consolidating Condensed Statement of Cash Flows Twenty-six Weeks Ended July 29, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivables Eliminations Consolidated Inc. Purchase Co. Cash flows from operating activities: Net cash used in operating $ (6,140) $ -- $(217,111) activities $(210,971) Cash flows from investing activities: Investment in subsidiary -- -- -- -- Additions to (2,350) (2,350) property, -- -- equipment and leasehold improvements Proceeds from the sales of (6,140) 6,140 -- -- accounts receivable, net Net cash (8,490) (2,350) provided by 6,140 -- (used in) investing activities Cash flows from financing activities: Proceeds from debtor-in- 245,028 -- -- 245,028 possession credit facility Proceeds from working capital (13,000) -- -- (13,000) facility Proceeds from issuance of -- -- -- common stock -- Payments on long- (204) -- -- (204) term debt (10,542) Additions to -- -- (10,542) debt issue costs Net cash provided by 221,282 -- -- 221,282 (used in) Financing activities Net increase (decrease) in 1,821 -- -- 1,821 cash and cash equivalents Cash and cash equivalents: Beginning of period 18,077 -- -- 18,077 End of period $ 19,898 $ 19,898 -- -- Consolidating Condensed Statement of Cash Flows Twenty-six Weeks Ended July 29, 2000 (in thousands, unaudited) Stage Specialty Stage Stores Stores, Inc. Retailers, Eliminations Consolidated Inc. (NV) Cash flows from operating activities: Net cash used $ (100) in operating $ 183 $ -- $(217,028) activities Cash flows from investing activities: Investment in subsidiary -- -- -- -- Additions to property, equipment and leasehold -- -- -- improvements (2,350) Proceeds from the sales of -- -- -- -- accounts receivable, net Net cash (2,350) provided by -- -- -- (used in) investing activities Cash flows from financing activities: Proceeds from debtor-in- -- -- -- 245,028 possession credit facility Proceeds from working capital -- -- -- (13,000) facility Proceeds from issuance of -- -- -- -- common stock Payments on long- -- -- -- (204) term debt Additions to -- -- -- (10,542) debt issue costs Net cash provided by -- -- -- 221,282 (used in) Financing activities Net increase (decrease) in (100) 183 -- 1,904 cash and cash equivalents Cash and cash equivalents: Beginning of 102 period 2,000 -- 20,179 End of period $ 2 $ 2,183 -- $ 22,083 Consolidating Condensed Statement of Cash Flows Twenty-six Weeks Ended July 31, 1999 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivables Eliminations Consolidated Inc. Purchase Co. Cash flows from operating activities: Net cash $2,965 $ (16,723) $ -- $ (13,758) provided by (used in) operating activities Cash flows from investing activities: Investment in -- -- -- -- subsidiary Additions to (11,045) -- -- (11,045) property, equipment and leasehold improvements Proceeds from 16,723 the sales of (16,723) accounts -- -- receivable, net Net cash (27,768) 16,723 -- (11,045) provided by (used in) investing activities Cash flows from financing activities: Proceeds from 23,300 -- -- 23,300 working capital facility Proceeds from issuance of common stock -- -- -- -- Proceeds from -- -- -- -- capital contribution Payments on long- (2,357) -- -- (2,357) term debt Net cash 20,943 -- -- 20,943 provided by (used in) financing activities Net (decrease) (3,860) -- -- (3,860) in cash and cash equivalents Cash and cash equivalents: Beginning of 10,882 -- -- 10,882 period End of period $ 7,022 $ -- $ -- $ 7,022 Consolidating Condensed Statement of Cash Flows Twenty-six Weeks Ended July 31, 1999 (in thousands, unaudited) Stage Specialty Stage Stores Stores, Inc. Retailers, Eliminations Consolidated Inc. (NV) Cash flows from operating activities: Net cash $ -- $(254) $ -- $(14,012) provided by (used in) operating activities Cash flows from investing activities: Investment in (252) -- 252 -- subsidiary Additions to property, equipment and leasehold improvements -- -- -- (11,045) Proceeds from the sales of accounts -- -- -- -- receivable, net Net cash (252) -- 252 (11,045) provided by (used in) investing activities Cash flows from financing activities: Proceeds from -- -- -- 23,300 working capital facility Proceeds from 252 -- 252 issuance of common stock Proceeds from -- 252 (252) -- capital contribution Payments on long- -- -- -- (2,357) term debt Net cash 252 252 (252) 21,195 provided by (used in) financing activities Net (decrease) -- (2) -- (3,862) in cash and cash equivalents Cash and cash equivalents: Beginning of 2 1,948 -- 12,832 period End of period $ 2 $1,946 $ -- $ 8,970 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Certain items discussed or incorporated by reference herein contain forward-looking statements that involve risks and uncertainties including, but not limited to, the ability to obtain financing on terms reasonably satisfactory to the Company, the ability of the Company to obtain normal trade terms from its vendors, the ability of the Company to comply with the various covenant requirements contained in the Company's DIP Financing Agreement and the demand for apparel. The demand for apparel can be affected by weather patterns, levels of competition, competitors' marketing strategies, changes in fashion trends, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening and closing plans. The occurrence of the above has had and can continue to have a material and adverse impact on the Company's operating results. See "Risk Factors" below. Certain information herein contains estimates which represent management's best judgment as of the date hereof based on information currently available; however, the Company does not intend to update this information to reflect developments or information obtained after the date hereof and disclaims any legal obligation to the contrary. General Overview. The Company operates family apparel stores offering moderately priced, nationally recognized brand name apparel, accessories, cosmetics and footwear, the majority of which are located in small towns and communities primarily in the south central and midwestern United States. The Company has recognized the high level of brand awareness and demand for fashionable, quality apparel by consumers in small markets and has identified these markets as a strategically important and under served niche. The Company has developed a franchise focused on small markets offering a broad range of brand name merchandise with a high level of customer service in convenient locations. Significant Events. On June 1, 2000, Stage Stores, SRI and Specialty Retailers, Inc. (NV) filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. Under Chapter 11, the Company will operate its business as debtor- in-possession. Additionally, a creditor committee has been formed and will have the right to review and object to any non-ordinary course of business transactions and participate in the formulation of any plan or plans of reorganization. As of the Petition Date, actions to collect pre-petition indebtedness are stayed and other contractual obligations may not be enforced against the Company. In addition, the Company may reject executory contracts and lease obligations, and parties affected by these rejections may file claims with the Court in accordance with the reorganization process. Substantially all liabilities as of the Petition Date are subject to settlement under a plan of reorganization to be voted upon by all impaired classes of creditors and equity security holders and approved by the Court. On June 2, 2000, the Company entered into a three year, $450.0 million DIP Financing Agreement with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. The Court has entered a final order approving the terms of the DIP Financing Agreement. Borrowings under the DIP Financing Agreement are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interests. Borrowings under the DIP Financing Agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing Agreement. Initial borrowings under the DIP Financing Agreement were used to terminate the Company's existing Accounts Receivable Program, retire the Senior Revolving Credit Facility and for certain closing costs associated with the DIP Financing Agreement. As a result of the termination of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to the Trust but, rather, will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing Agreement. On June 7, 2000, the Company paid the Trust $288.1 million in cash and surrendered its retained interest in the Trust in exchange for all accounts receivable balances held by the Trust on that date. The Trust used the cash proceeds to retire all remaining certificates and pay other costs associated with the termination of the Trust. The accounts receivable balances repurchased by the Company have been recorded at $312.3 million, the aggregate of the cash paid and the estimated fair value of the retained interest surrendered. The Company accretes the yield resulting from the estimated net future cash flows associated with these balances using the interest method. The yield is recorded in selling, general and administrative expenses in the accompanying financial statements. Service charge income, late fees and estimated bad debt expense related to credit sales made after June 7, 2000 are also included in selling, general and administrative expense in the accompanying financial statements. During July 2000, the Court approved the Company's 2000 Store Closing Plan which consisted of the closure of 120 stores as part of its reorganization process. The Company has engaged third parties to manage the liquidation process in these stores. In conjunction with the 2000 Store Closing Plan, the Company recorded charges aggregating $43.7 million for the 26 weeks ended July 29, 2000, comprised of a $14.4 million loss on inventory, $13.2 million of estimated lease damages to be settled in the bankruptcy process, $1.0 million of severance and a $15.1 million write-off of the fixed assets and prepaid supplies associated with the 120 stores to be closed. This charge is reflected in reorganization items in the accompanying Consolidated Condensed Statement of Operations. On August 8, 2000, the Company announced the employment of James Scarborough as its new President and Chief Executive Officer, subject to the necessary Court approval. Jack Wiesner, who was serving as Chairman of the Board and Interim President and Chief Executive Officer of the Company will continue as Chairman of the Board and will oversee the Company's Chapter 11 proceedings and reorganization process. The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 29, 2000. Results of Operations Thirteen Weeks Ended July 29, 2000 Compared to Thirteen Weeks Ended July 31, 1999 Sales for the thirteen weeks ended July 29, 2000 ("current year second quarter") decreased 20.1% to $215.5 million from $269.8 million for the thirteen weeks ended July 31, 1999 ("prior year second quarter"). The decrease in sales for the current year second quarter reflects, among other things, (i) the net reduction of 177 stores since the end of the prior year second quarter and (ii) an 18.0% decline in comparable store sales during the period. Management believes comparable store sales were negatively impacted by lower inventory levels throughout the spring season as a result of a contraction in trade support prior to the Company's Chapter 11 filing from the Company's vendors and factors. The contraction in trade support caused a significant disruption in the Company's spring and summer merchandise receipt flows. Gross profit decreased 47.0% to $39.2 million for the current year second quarter from $74.0 million for the prior year second quarter. Gross profit, as a percent of sales, decreased to 18.2% for the current year second quarter from 27.4% for the prior year second quarter. The lower gross profit percentage for the current year second quarter reflects, among other things, (i) additional markdowns taken to implement the Company's new markdown program, (ii) the impact of the liquidation sales during the period from the stores in the 2000 store closure program which do not generate any gross margin dollars, (iii) the negative sales leverage associated with the Company's fixed buying, occupancy and distribution expenses which are included in cost of goods sold and (iv) lower vendor discounts as a result of reduced inventory purchases. Selling, general and administrative ("SG&A") expenses for the current year second quarter decreased 2.0% to $65.6 million from $66.9 million in the prior year second quarter and, as a percent of sales, increased to 30.4% from 24.8% in the comparable period last year. SG&A expenses for the current year second quarter includes certain charges recorded during the period totaling $14.2 million. These charges were comprised primarily of (i) $2.6 million of operating costs at the stores which are in the process of being closed, (ii) a $9.7 million reduction in income from the Company's private label credit card program associated with the accounting for receivables repurchased from the previously existing Trust and (iii) $1.3 million of employee severance expense. Store opening and closure program costs of $15.5 million for the prior year second quarter reflect the costs associated with the store closure program which was implemented during the period which resulted in the closure of approximately 35 under performing stores. There were no store opening and closure program costs recorded during the current year second quarter. As a result of the factors discussed above, the operating loss for the current year second quarter was $26.3 million as compared to a loss of $8.3 million for the prior year second quarter. Net interest expense for the current year second quarter decreased 16.7% to $10.5 million from $12.6 million for the prior year second quarter due to a lower level of average borrowings outstanding subsequent to the Petition Date as compared to the amount of borrowings outstanding on the Petition Date, offset somewhat by a higher interest rate on the post-Petition Date borrowings. As a result of the Chapter 11 filing, the interest accrual on the borrowings outstanding on the Petition Date was suspended. During the current year second quarter, the Company recorded non-recurring costs related to its Chapter 11 filing and reorganization process totaling $60.9 million. This charge consisted of, among other things, (i) charges aggregating $28.7 million related to the 2000 store closing plan, (ii) $4.9 million of professional fees associated with the bankruptcy, (iii) an $18.0 million charge related to the write-off of pre-petition debt issue costs and original issue discount, (iv) a charge of $3.1 million for the impairment of intangible assets and (v) a charge of $6.2 million related to the write-down of the undivided interest in accounts receivable trust. As a result of the foregoing, the Company's net loss for the current year second quarter was $97.8 million as compared to a net loss for the prior year second quarter of $15.1 million. Twenty-six Weeks Ended July 29, 2000 Compared to Twenty-six Weeks Ended July 31, 1999 Sales for the twenty-six weeks ended July 29, 2000 ("current year ") decreased 16.2% to $445.8 million from $532.4 million for the twenty-six weeks ended July 31, 1999 ("prior year"). The decrease in sales for the current year reflects, among other things, (i) the impact of fewer stores in operation during the first two quarters of the current year as compared to the number of stores in operation during the first two quarters of the prior year and (ii) a 14.3% decline in comparable store sales during the period. Management believes comparable store sales were negatively impacted by lower inventory levels throughout the spring season as a result of a contraction in trade support prior to the Company's Chapter 11 filing from the Company's vendors and factors. The contraction in trade support caused a significant disruption in the Company's spring and summer merchandise receipt flows. Gross profit decreased 32.4% to $97.5 million for the current year from $144.4 million for the prior year. Gross profit, as a percent of sales, decreased to 21.8% for the current year from 27.1% for the prior year second quarter. The lower gross profit percentage for the current year reflects, among other things, (i) the impact of the increased level of promotional and liquidation activity utilized during the current year first quarter, (ii) additional mark downs taken during the current year second quarter to implement the Company's new markdown program, (ii) the impact of the liquidation sales during the current year from the stores in the 2000 store closure program which do not generate any gross margin dollars, (iii) the negative sales leverage associated with the Company's fixed buying, occupancy and distribution expenses which are included in cost of goods sold and (iv) lower vendor discounts as a result of reduced inventory purchases. Selling, general and administrative ("SG&A") expenses for the current year decreased 6.7% to $119.6 million from $128.1 million in the prior year and, as a percent of sales, increased to 26.8% from 24.0% in the comparable period last year. SG&A expenses for the current year includes certain charges recorded during the period totaling $16.3 million. These charges were comprised primarily of (i) $4.6 million of operating costs at the stores which are in the process of being closed, (ii) a $9.7 million reduction in income from the Company's private label credit card program associated with the accounting for receivables repurchased from the previously existing Trust and (iii) $1.3 million of employee severance expense. Store opening and closure program costs of $16.2 million for the prior year reflect the costs associated with the opening of 10 new stores during the prior year first quarter ($0.7 million) as well as the costs associated with the store closure program which was implemented during the prior year second quarter ($15.5 million) which resulted in the closure of approximately 35 under performing stores. As a result of the factors discussed above, the operating loss for the current year was $22.1 million as compared to operating income of $0.1 million for the prior year. Net interest expense for the current year decreased 3.2% to $24.0 million from $24.8 million for the prior year. The current year benefited from a lower level of average borrowings outstanding subsequent to the Petition Date as compared to the amount of borrowings outstanding on the Petition Date, offset somewhat by a higher interest rate on the post-Petition Date borrowings. As a result of the Chapter 11 filing, the interest accrual on the borrowings outstanding on the Petition Date was suspended. During the current year, the Company recorded non-recurring costs related to its Chapter 11 filing and reorganization process totaling $76.0 million. This charge, which is classified as reorganization items in the Consolidated Condensed Statement of Operations, consisted of, among other things, (i) charges aggregating $43.7 million related to the 2000 store closing plan, (ii) $4.9 million of professional fees associated with the bankruptcy, (iii) an $18 million charge related to the write-off of pre-petition debt issue costs and original issue discount, (iv) a charge of $3.1 million for the impairment of intangible assets and (v) a charge of $6.2 million related to the write-down of the undivided interest in accounts receivable trust.. As a result of the foregoing, the Company's net loss for the current year was $122.0 million as compared to a net loss for the prior year of $17.4 million before the cumulative effect of a change in accounting principal. In connection with the adoption of SOP 98-5, the Company recorded the cumulative effect of change in accounting principle, net of tax, of $2.4 million during the prior year first quarter. The charge reflects the write-off of the unamortized organizational costs associated with the Company's accounts receivable trust and credit card bank. Seasonality and Inflation The Company's business is seasonal and annual results of operations are highly dependent upon the fourth quarter as quarterly sales and profits are traditionally lower during the first three quarters (February through October) and higher during the fourth quarter (November through January). In addition, working capital requirements fluctuate throughout the year, increasing substantially in October and November due to requirements for significantly higher inventory levels in anticipation of the holiday season. The following table shows certain unaudited financial information for the Company by quarter (dollars in thousands): 2000 1999 Q1 Q2 Q1 Q2 Q3 Q4 Net sales $230,352 $215,455 $262,591 $269,848 $264,327 $324,801 Gross profit 58,318 39,204 70,359 74,021 77,203 2,867 Operating income (loss) 4,252 (26,348) 8,391 (8,332) 12,560 (220,971) Quarters' operating Income as a percent of total N/A N/A N/A N/A N/A N/A Income (loss) before cumulative effect of a change in accounting principle (24,201) (97,837) (2,269) (15,091) 224 (260,067) Net income (loss) (24,201) (97,837) (4,671) (15,091) 224 (262,352) The Company does not believe that inflation had a material effect on its results of operations during the past two years. However, there can be no assurance that the Company's business will not be affected by inflation in the future. Liquidity and Capital Resources Total working capital increased to $201.1 million at July 29, 2000 from a deficit of $268.6 million at January 29, 2000. During the period, accounts receivable increased $254.0 million due to the termination of the Accounts Receivable Program, merchandise inventories decreased $26.0 million as a result of the disruption in the flow of merchandise during the period and current debt decreased $257.2 million as a result of the reclassification of the Petition Date debt to long-term liabilities. On June 2, 2000, the Company entered into a three year, $450.0 million DIP Financing Agreement with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 26, 2000, the Company was given full and final approval of the DIP Financing Agreement by the Court. Borrowings under the DIP Financing Agreement are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interest. Borrowings under the DIP Financing Agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing Agreement. Initial borrowings under the DIP Financing Agreement were used to terminate the Company's existing Accounts Receivable Program, retire the Senior Revolving Credit Facility and to pay closing costs associated with the DIP Financing Agreement. As a result of the retirement of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to the Trust but, rather, will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing Agreement. Borrowings outstanding under the DIP Financing Agreement at July 29, 2000 totaled $245.0 million. Availability under the DIP Financing Agreement at July 29, 2000 was $136.6 million. The DIP Financing Agreement contains covenants which, among other things, restrict the (i) incurrence of additional debt, (ii) incurrence of capital lease obligations, (iii) aggregate amount of capital expenditures and (iv) transactions with related parties. In addition, the DIP Financing Agreement requires the Company to maintain compliance with a certain specified level of earnings before depreciation, interest, taxes and special charges. The Company's primary capital requirements are for working capital, debt service under the DIP Financing Agreement, professional fees during the reorganization process and capital expenditures. Management believes cash interest payments under the DIP Financing Agreement will be approximately $21.0 million for the remainder of 2000. Capital expenditures for 2000 are expected to be $10.0 million primarily reflecting maintenance expenditures at the Company's stores and infrastructure investment. Management believes that there should be sufficient liquidity under the DIP Financing Agreement to fund the Company's working capital requirements during the reorganization proceedings. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivative financial instruments be recorded in the financial statements. SFAS No. 133 is effective for the Company in the first quarter of 2001, and the Company is in the process of ascertaining the impact this new standard will have on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 is effective for the Company in the fourth quarter of 2000, and the Company is ascertaining the impact this pronouncement will have on its financial statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. Due to the bankruptcy filing mentioned previously, certain of the cases mentioned below have been stayed pursuant to the automatic stay of the Court. These cases require Court approval or must be specifically exempt for litigation proceedings to continue. On March 30, 1999, a class action lawsuit was filed against the Company and certain of its officers, directors and stockholders in the United States District Court for the Southern District of Texas by John C. Weld, Jr., a stockholder who purchased 125 shares of the Company's common stock on August 3, 1998, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the "Weld Suit"). The Company believed that the allegations of the Weld Suit are without merit, and on July 23, 1999, the Company filed a motion to dismiss. United States District Judge Kenneth Hoyt entered an order on December 8, 1999 dismissing the Weld Suit. The order has been appealed by Mr. Weld. On March 28, 2000, the Company filed a lawsuit against Carl Tooker, the Company's former Chairman, Chief Executive Officer and President in the District Court of Harris County, Texas. The lawsuit is an action for damages arising from transactions Mr. Tooker engaged in or directed while serving as President, Chief Executive Officer and Chairman of the Board of Directors of the Company which transactions benefited him personally or were otherwise contrary to his duties as an officer and director. (See Form 8-K dated March 9, 2000). The suit also seeks recovery of debt owed by Mr. Tooker to the Company pursuant to loans and promissory notes Mr. Tooker caused the Company to make to him while serving in those capacities, and for conversion of stock collateral pledged to the Company to secure his indebtedness. The Company also seeks a mandatory injunction requiring Mr. Tooker to deposit into the registry of the Court all remaining stock collateral in his possession, and for a declaratory judgment that Mr. Tooker was properly terminated "for cause" under the terms of his employment agreement. The Company seeks to recover not less than an aggregate of $2,755,672, accrued interest, punitive damages, costs and reasonable attorneys' fees. On or about April 27, 2000 Mr. Tooker filed an Answer and Counterclaim against the Company and a Third Party Petition against the Company's Interim President, Chief Executive Officer and Chairman of the Board, John J. Wiesner, Martin Stringer, counsel to the Special Committee, and the law firm of McKinney & Stringer, P.C. The answer generally denies all allegations made by the Company. Mr. Tooker seeks damages from the Company of approximately $3.9 million, plus attorney's fees, interest, and costs for breach of his employment contract, and a like amount, including punitive damages, from the third-party defendants for alleged tortious interference with his employment contract. Mr. Tooker also seeks to impose a constructive trust on the $300,000 in the Company's possession for certain contractual benefits he claims to be due under his employment agreement. The remaining claims seek damages against the Company and in part against the third-party defendants, totaling $18 million, plus punitive damages, fees, interest and costs, on theories of defamation, civil conspiracy, breach of fiduciary duty and breach of duty of good faith and fair dealing. The case is in its initial development, prior to any discovery. The Company and the third- party defendants dispute his allegations and intend to vigorously defend all of Mr. Tooker's claims. In March 2000, eleven former employees of SRI d/b/a Palais Royal, filed two separate suits in the United States District Court for the Southern District of Texas against the Company, SRI and Mary Elizabeth Pena, arising out of alleged conduct occurring over an unspecified time while the plaintiffs were working at one or more Palais Royal stores in the Houston, Texas area. The plaintiffs allege that on separate occasions they were falsely accused of stealing merchandise and other company property and giving discounts for purchases against company policy. The suits accuse the defendants of defamation, false imprisonment, intentional infliction of mental distress, assault and violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The claims seek unspecified damages for mental anguish, lost earnings, exemplary damages, treble damages, interest, attorneys' fees and costs. The Company denies the allegations and intends to vigorously defend the claims. Management believes that none of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the financial position, results of operations or cash flows of the Company or its subsidiaries. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities Substantially all of the Company's liabilities are subject to settlement under reorganization proceedings. The Company's debt to banks and bondholders is in default of the terms of the applicable loan agreements, notes and debentures. For financial reporting purposes, those liabilities and obligations have been classified as liabilities subject to compromise under reorganization proceedings. The ultimate adequacy of security for any secured debt obligations and settlement of all liabilities and obligations cannot be determined until a plan of reorganization is confirmed. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information On June 6, 2000, the New York Stock Exchange informed the Company that the trading of the Company's stock would be suspended immediately. Following the suspension, application was made by the New York Stock Exchange to the Securities and Exchange Commission to delist the Company's stock. The Company's stock is currently being quoted on the OTC Bulletin Board under the symbol SGEEQ. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K The Company filed a News Release on Form 8-K dated May 1, 2000 related to Stage Stores Inc. announcing the departure of the Company's Vice Chairman and Chief Financial Officer. The Company filed a News Release on Form 8-K dated June 1, 2000 related to Stage Stores Inc. announcing a major restructuring under Chapter 11 of the United States Bankruptcy Code and commencement of its reorganization proceedings in the United States Bankruptcy Court in Houston, Texas. The Company filed a News Release on Form 8-K dated June 1, 2000 related to Stage Stores Inc. announcing the $450 million debtor-in-possession credit agreement and announcing that on June 6, 2000, the New York Stock Exchange informed the Company that the trading of the Company's stock will be suspended immediately. The Company filed a News Release on Form 8-K dated June 27, 2000 related to Stage Stores Inc. announcing the final Court approval of its $450 million debtor-in- possession credit agreement. The Company filed a News Release on Form 8-K dated July 18, 2000 related to Stage Stores Inc. announcing Court approval of its plan to close 120 under performing stores as part of its reorganization process. The Company filed a News Release on Form 8-K dated August 8, 2000 related to Stage Stores Inc. announcing the employment of its new President and Chief Executive Officer. The Company filed a News Release on Form 8-K dated September 8, 2000 related to Stage Stores Inc. announcing Court approval of the Company's request to extend the exclusivity period until March 31, 2001. The Company also announced the resignation of Richard Jolosky from the Company's Board of Directors for personal reasons. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STAGE STORES, INC. October 13, 2000 /s/ James Scarborough (Date) James Scarborough President and Chief Executive Officer October 13, 2000 /s/ Charles M. Sledge (Date) Charles M. Sledge Senior VP Finance, Treasurer and Corporate Secretary EX-27.1 2 0002.txt WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. [TYPE] EXHIBIT 27.1
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STAGE STORES, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 6-MOS 2/3/01 7/29/00 22,083 0 295,616 0 235,123 570,269 158,152 0 744,801 369,207 0 281 0 0 (196,817) 744,801 445,807 445,807 348,285 348,285 0 0 23,957 (121,988) 50 (122,038) 0 0 0 (122,038) (4.34) (4.34)
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