ITEM 1. BUSINESS
Recent Developments
As a result of the Company's poor financial performance, lack of adequate trade support to fund its inventory working capital requirements, lack of sufficient financial flexibility and liquidity, and violations under certain covenants under its various debt agreements, the Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") on June 1, 2000 in the United States Bankruptcy Court for the Southern District of Texas ( the "Court"). The Company has negotiated a $450.0 million debtor-in-possession financing agreement (the "DIP Financing") with a lender to finance the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 2, 2000, the Court approved among other things, the proposed DIP Financing subject to certain conditions. Under the Court's Interim Order, the Court limited the amount available under the DIP Financing to $385.0 million pending a Final Order. Proceeds under the DIP Financing will be used to retire the Company's existing Accounts Receivable Program and Senior Revolving Credit Facility (defined herein) and for general working capital purposes.
Under Chapter 11, the Company will operate its business as debtor-in-possession, subject to the approval of the Bankruptcy Court for certain proposed actions. Additionally, one or more creditor committees will be formed and would 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 Bankruptcy 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 Bankruptcy Court.
General
Stage Stores, Inc. (the "Company" or "Stage Stores") operates family apparel stores offering moderately priced, nationally recognized brand name apparel, accessories, cosmetics and footwear in approximately 500 small towns and communities throughout the United States. Stage Stores was formed in 1988 when the management of Palais Royal, together with several venture capital firms, acquired the family-owned Bealls and Palais Royal chains which were originally founded in the 1920's. 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.
As a result of its small market focus, Stage Stores generally faces less competition for brand name apparel because consumers in small markets generally are able to shop for branded merchandise only in regional malls. In those small markets where the Company does compete for brand name apparel sales, such competition generally comes from local retailers, small regional chains and, to a lesser extent, national department stores. The Company believes it has a competitive advantage over local retailers and smaller regional chains due to its: (i) economies of scale, (ii) historically good vendor relationships and (iii) proprietary credit card program. The Company believes it has a competitive advantage in small markets over national department stores due to its experience with smaller markets. In addition, due to minimal merchandise overlap, Stage Stores generally does not directly compete for branded apparel sales with national discounters such as Wal-Mart.
At January 29, 2000, the Company, through its wholly-owned subsidiary Specialty Retailers, Inc. ("SRI"), operated 648 stores (averaging approximately 16,000 selling square feet) in thirty- three states throughout the United States. Although the Company's stores may be operated under its "Stage", "Bealls" and "Palais Royal" trade names depending on the geographical market, the Company operates the vast majority of the stores under one concept and strategy. Approximately 70% of these stores are located in small markets and communities with populations at or below 30,000. The remainder of the Company's stores operate in metropolitan areas, such as Houston, Texas.
The Company's merchandising strategy focuses on the traditionally higher margin categories of women's, men's and children's branded apparel, accessories, cosmetics and footwear. Merchandise mix may vary from store to store to accommodate differing demographic factors. The Company currently purchases merchandise from a vendor base of approximately six hundred and fifty vendors. Over 85% of 1999 sales consisted of branded merchandise, including nationally recognized brands such as Levi Strauss, Liz Claiborne, Chaps/Ralph Lauren, Calvin Klein, Sag Harbor, Hanes, Nike, Reebok and Haggar Apparel. Levi accounted for approximately 6.4% of the Company's 1999 retail purchases. No other vendor accounted for more than 5%. In addition, the Company, through its membership in Associated Merchandising Corporation ("AMC"), a cooperative buying service, purchases imported merchandise for its private label program. The membership provides the Company with synergistic purchasing opportunities allowing it to augment its branded merchandise assortments. Private label merchandise purchased through AMC accounted for approximately 5% of the Company's total retail purchases for 1999.
The Company offers a carefully chosen but broad selection of moderately-priced, branded merchandise which is divided into distinct departments as follows (percentages represent each department's contribution to Company sales):
Department 1999 1998
Men's/Young Men 19% 20% Misses Sportswear 15 15 Shoes 12 11 Juniors 10 10 Children 8 9 Accessories & Gifts 8 8 Special Sizes 6 6 Cosmetics 5 5 Intimate 4 4 Dresses & Suits 3 3 Boys 3 3 Activewear 3 2 Junior Dresses 2 2 Coats 2 2 100% 100%
Employees
During 1999, the Company employed an average of 15,686 full and part-time employees at all of its locations, of which 1,948 were salaried and 13,738 were hourly. The Company's central office (which includes corporate, credit and distribution center offices) employed an average of 607 salaried and 1,036 hourly employees during 1999. In its stores during 1999, the Company employed an average of 1,341 salaried and 12,702 hourly employees. Such averages will vary during the year as the Company traditionally hires additional employees and increases the hours of part-time employees during peak seasonal selling periods. There are no collective bargaining agreements in effect with respect to any of the Company's employees. The Company believes that relationships with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in a 130,000 square foot building in Houston, Texas. The Company leases the building and most of the land at its Houston facility. The Company owns a 450,000 square foot distribution center and a credit department facility, both located in Jacksonville, Texas. The Jacksonville distribution center and credit department facility collateralizes the Company's Credit Facility (as defined herein). See Note 6 to the Consolidated Financial Statements.
At January 29, 2000, the Company operated 648 stores located in thirty-three states as follows: Number of State Stores Alabama 4 Arizona 4 Arkansas 28 Colorado 7 Florida 2 Georgia 1 Illinois 15 Indiana 16 Iowa 13 Kansas 25 Louisiana 50 Maryland 1 Michigan 7 Minnesota 11 Mississippi 17 Missouri 22 Montana 6 Nebraska 4 Nevada 3 New Mexico 25 New York 2 Ohio 25 Oklahoma 66 Oregon 8 Pennsylvania 2 South Carolina 1 South Dakota 6 Texas 263 Virginia 1 Washington 4 West Virgina 1 Wisconsin 3 Wyoming 5 Total 648
Full line stores range in size from approximately 4,100 to 68,000 selling square feet, with the average being approximately 16,000 selling square feet. The Company's stores are primarily located in strip shopping centers. All store locations are leased except for three Bealls stores and one Stage store, aggregating 138,000 selling square feet, which are owned. The majority of leases provide for a base rent plus contingent rentals, generally based upon a percentage of net sales.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of their business.
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 Part 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS
No matters were submitted to a vote of security holders during the quarter ended January 29, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's authorized common equity securities consist of par value $0.01 per share common stock ("Common Stock") and par value $0.01 per share Class B common stock ("Class B Common Stock"). Prior to April 16, 1998, the Common Stock was quoted on the NASDAQ National Market System under the symbol "STGE". Beginning April 16, 1998, the Company's Common Stock started trading on the New York Stock Exchange under the symbol "SGE". As of May 30, 2000, there was one holder of Class B Common Stock and 299 holders of record of Common Stock. The following table sets forth, for the periods indicated, the high, low and closing prices for the Common Stock as reported by the New York Stock Exchange: Common Stock Prices High Low Close Quarter ended May 2, 1998 $53.00 $35.75 $51.13 Quarter ended August 1, 1998 53.75 25.00 25.44 Quarter ended October 31, 1998 26.13 8.75 13.25 Quarter ended January 30, 1999 15.00 6.75 8.00 Quarter ended May 1, 1999 9.25 5.00 6.44 Quarter ended July 31, 1999 8.13 5.06 6.44 Quarter ended October 30, 1999 9.75 4.81 4.81 Quarter ended January 29, 2000 5.00 1.38 1.38
The Company has not declared or paid any cash dividends on its Common Stock since its initial public offering and does not expect to pay cash dividends for the foreseeable future. The Company anticipates that, for the foreseeable future, earnings will be reinvested in the business and used to service indebtedness. The Company's existing indebtedness limits its ability to pay dividends. The declaration and payment of dividends by the Company are subject to the discretion of the Board. Any future determination to pay dividends will depend on the Company's results of operations, financial condition, capital requirements, contractual restrictions under its current indebtedness and other factors deemed relevant by the Board.
On June 6, 2000, the New York Stock Exchange informed the Company that the trading of the Company's stock will be suspended immediately. Following the suspension, application will be made by the New York Stock Exchange to the Securities and Exchange Commission to delist the Company's stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data for the periods indicated. The selected consolidated financial data were derived from, and should be read in conjunction with, the Company's Consolidated Financial Statements. All dollar amounts are stated in thousands, except for per share data.
Fiscal Year 1999 1998 Statement of operations data: Net sales $1,121,567 1,173,547 Cost of sales and related buying, occupancy and distribution expenses 897,117 839,238 Gross profit 224,450 (2) 334,309 Selling, general and Administrative expenses 387,816 (3) 271,477 Store opening and closure program costs 44,986 (4) 10,192 Operating income (loss) (208,352) 52,640 Interest, net 48,634 46,471 Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle (256,986) 6,169 Income tax expense 20,217 (5) 2,455 Income (loss) before extraordinary item and cumulative effect of change in accounting principle (277,203) 3,714 Extraordinary item, net of tax, early retirement of debt (749) -- Cumulative effect of change in accounting principle, net of tax, reporting costs of start-up activities (3,938) -- Net income (loss) $(281,890) 3,714
Basic earnings per common share before extraordinary item and cumulative effect of change in accounting principle $(9.89) $0.13 Basic earnings (loss) per common share $(10.06) $0.13 Basic weighted average common shares outstanding 28,028 27,885 Diluted earnings per common share before extraordinary item and cumulative effect of change in accounting principle $(9.89) $0.13 Diluted earnings (loss) per common share $(10.06) $0.13 Diluted weighted average common shares outstanding 28,028 28,428 Margin and other data: Gross profit margin 20.0% 28.5% Selling, general and administrative expense rate 34.6% 23.1% Operating income (loss) margin (18.6%) 4.5% Store data: Comparable store sales growth (7.0%) (3.0%) Store Openings 10 86 Store Closings 41 14 Number of stores open at end of period 648 679 Total selling area square footage (thousands) 10,290 10,548 Balance sheet data (at end of period): Working capital $(258,281) $368,138 Total assets 554,687 857,680 Long-term debt -- 487,968 Stockholders' equity (deficit) (74,967) 204,392
Fiscal Year 1997 1996 Statement of operations data: Net sales $1,073,316 $776,550 Cost of sales and related buying, occupancy and distribution expenses 730,179 532,563 Gross profit 343,137 243,987 Selling, general and Administrative expenses 240,011 172,579 Store opening and closure program costs 8,686 2,838 Operating income (loss) 94,440 68,570 Interest, net 38,277 45,954 Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle 56,163 22,616 Income tax expense 21,623 8,594 Income (loss) before extraordinary item and cumulative effect of change in accounting principle 34,540 14,022 Extraordinary item, net of tax, early retirement of debt (18,295) (16,081) Cumulative effect of change in accounting principle, net of tax, reporting costs of start-up activities -- -- Net income (loss) $16,245 $(2,059) Basic earnings per common share before extraordinary item and cumulative effect of change in accounting principle $1.34 $0.91 Basic earnings (loss) per common share $0.63 $(0.13) Basic weighted average common shares outstanding 25,808 15,394 Diluted earnings per common share before extraordinary item and cumulative effect of change in accounting principle $1.30 $0.88 Diluted earnings (loss) per common share $0.61 $(0.13) Diluted weighted average common shares outstanding 26,483 15,927 Margin and other data: Gross profit margin 32.0% 31.4% Selling, general and administrative expense rate 22.4% 22.2% Operating income (loss) margin 8.8% 8.8% Store data: Comparable store sales growth 4.1% 3.3% Store Openings 301 (6) 69 Store Closings 9 10 Number of stores open at end of period 607 315 Total selling area square footage (thousands) 9,557 5,670 Balance sheet data (at end of period): Working capital $318,064 $235,219 Total assets 759,396 509,283 Long-term debt 395,248 298,453 Stockholders' equity (deficit) 205,078 92,266
Fiscal Year 1995 (1) Statement of operations data: Net sales $682,624 Cost of sales and related buying, occupancy and distribution expenses 468,347 Gross profit 214,277 Selling, general and Administrative expenses 149,102 Store opening and closure program costs 3,689 Operating income (loss) 61,486 Interest, net 43,989 Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle 17,497 Income tax expense 6,767 Income (loss) before extraordinary item and cumulative effect of change in accounting principle 10,730 Extraordinary item, net of tax, early retirement of debt -- Cumulative effect of change in accounting principle, net of tax, reporting costs of start-up activities -- Net income (loss) $10,730 Basic earnings per common share before extraordinary item and cumulative effect of change in accounting principle $0.88 Basic earnings (loss) per common share $0.88 Basic weighted average common shares outstanding 12,255 Diluted earnings per common share before extraordinary item and cumulative effect of change in accounting principle $0.86 Diluted earnings (loss) per common share $0.86 Diluted weighted average common shares outstanding 12,483 Margin and other data: Gross profit margin 31.4% Selling, general and administrative expense rate 21.8% Operating income (loss) margin 9.0% Store data: Comparable store sales growth 0.8% Store Openings 68 Store Closings 0 Number of stores open at end of period 256 Total selling area square footage (thousands) 4,886 Balance sheet data (at end of period): Working capital $170,108 Total assets 408,254 Long-term debt 380,039 Stockholders' equity (deficit) (72,314)
________________________
(1) 1995 includes 53 weeks. Comparable store sales growth for 1995 has been determined based on a comparable 52 week period.
(2) Includes $69.3 million of unusual charges related to store closings, lower of cost or market reserves for seasonal inventory and LIFO inventory reserves. See Item 7
ITEM 7. 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 debt agreements 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 any of the above have 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 in approximately 500 small towns and communities throughout the 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 profitable and underserved 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.
At January 29, 2000, the Company, through its wholly-owned subsidiary Specialty Retailers, Inc., operated 648 stores (averaging approximately 16,000 selling square feet) in thirty- three states throughout the United States. Although the Company's stores may be operated primarily under its "Stage", "Bealls" and "Palais Royal" trade names depending on the geographical market, the Company operates the vast majority of the stores under one concept and strategy. Approximately 70% of these stores are located in small markets and communities with populations at or below 30,000. The remainder of the Company's stores operate in metropolitan areas, such as suburban Houston, Texas.
Significant Events. As a result of the Company's poor financial performance, lack of adequate trade support to fund its inventory working capital requirements, lack of sufficient financial flexibility and liquidity, and violations under certain covenants under its various debt agreements, the Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") on June 1, 2000 in the United States Bankruptcy Court for the Southern District of Texas ( the "Court"). The Company has negotiated a $450.0 million debtor-in- possession financing agreement (the "DIP Financing") with a lender to finance the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 2, 2000, the Court approved among other things, the proposed DIP Financing subject to certain conditions. Under the Court's Interim Order, the Court limited the amount available under the DIP Financing to $385.0 million pending a Final Order. Proceeds under the DIP Financing will be used to retire the Company's existing Accounts Receivable Program and Senior Revolving Credit Facility (defined herein) and for general working capital purposes.
Under Chapter 11, the Company will operate its business as debtor-in-possession, subject to the approval of the Bankruptcy Court for certain proposed actions. Additionally, one or more creditor committees will be formed and would 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 Bankruptcy 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 Bankruptcy Court.
As a result of the Company's poor financial performance for 1999, the Company performed a cash flow analysis as required under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed of" and Accounting Principles Board Opinion No. 17. This analysis resulted in the Company recording an impairment loss of $41.7 million in 1999, consisting of $26.0 million in incremental depreciation and amortization related to property, equipment and leasehold improvements associated with underperforming stores and $15.7 million related to goodwill. The impairment loss is included in selling, general and administrative expense in the accompanying statement of operations. As a result of the impact of the Company's Bankruptcy Filing on June 1, 2000 on estimated future cash flows, the Company reevaluated the recoverability of its remaining goodwill. Based upon this re-evaluation, the Company wrote-off the remaining balance of goodwill amounting to $67.9 million and other intangible assets amounting to $1.0 million during 1999.
The accompanying consolidated 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 and circumstances relating to this event, including the Company's highly leveraged financial structure and recurring losses from operations as reflected in the consolidated financial statements, 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. Additionally, there will likely be additional store closures as part of the reorganization process which would result in additional adjustments. 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 agreements and the ability to generate sufficient cash from operations and financing sources to meet obligations. Additionally, the accompanying consolidated financial statements do not include any adjustments that would be required if the Company were in liquidation.
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 current liabilities. 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.
On March 9, 2000, the Company announced that it had completed a new $35.0 million senior revolving credit facility. The new facility increased the current borrowing capacity of the Company to $235.0 million when combined with its existing $200.0 million revolving credit facility. Both facilities will expire on June 14, 2002. The new $35.0 million facility is secured by a perfected first priority security interest on the inventory of the Company. Additionally, the Company granted the lenders under the existing $200.0 million revolving credit facility a secondary lien on $50.0 million of inventory as well as a first lien on store furniture and fixtures and certain other assets. The $50.0 million secondary lien will be reduced by any amounts outstanding under the new $35.0 million senior revolving credit facility. Therefore, the maximum lien on the Company's inventory is $50.0 million under the combined facilities. Under the terms of the new credit facility, the Company will issue warrants to the lenders to purchase 7.5% of the Company's outstanding common stock. The exercise price under the warrants will be determined based upon the average closing price of the Company's stock for the 30 days following the date of commitment. The warrants will expire on March 6, 2003. The Company repaid amounts outstanding under the Senior Revolving Credit Facility with proceeds from its DIP Financing. See "Liquidity and Capital Resources" below as well as Note 6 to the Consolidated Financial Statements. On February 22, 2000, the Company announced the departure of Carl Tooker who was Chairman, Chief Executive Officer and President of the Company. The Company stated that Mr. Tooker's departure was the result of an inquiry conducted by a special committee consisting of all of the non-management members of the Board of Directors, which reviewed transactions between the Company and Mr. Tooker. The effect of the transactions has been included in the Company's results for prior periods and are not material to the financial condition or operations of the Company; however, these transactions had not been properly reported to the Company's Board of Directors. With Mr. Tooker's departure, the Board will oversee operations and coordinate the search for a new Chief Executive Officer. The Board has appointed Director John J. (Jack) Wiesner Chairman, Interim Chief Executive Officer and President. The other members of the Board have agreed to assist Mr. Wiesner as necessary. The Company is actively conducting a search for a new Chief Executive Officer. In addition, certain other members of senior management have resigned from the Company. The duties of these members of senior management have been reassigned to existing members of management. On February 3, 2000, the Company announced that its bank lending group had amended certain provisions contained within its $200.0 million Credit Facility Agreement. The amendment, which was effective as of that date, waived the Company's compliance with the financial covenants contained in the credit agreement for the fourth quarter of 1999. In addition, the amendment revised the financial covenants for the first three quarters of 2000 as well as the requirements under the clean down provision.
During the fourth quarter of 1999, the Company recorded certain significant pretax charges aggregating $205.7 million. Of the total, $62.0 million was charged to cost of sales, $115.9 million was charged to selling, general and administrative ("SG&A") expenses while the balance of $27.8 million was charged to store opening and closure program costs. With respect to the charge to cost of sales, $54.0 million related to a lower of cost or market reserve for excess fall clearance inventory and inventory to be liquidated in connection with the store closure program announced on February 3, 2000 (see below) while $8.0 million was a LIFO charge resulting from an overall decrease in the level of inventory at year end. The charge to SG&A expenses for the fourth quarter is comprised of a $110.6 million write down of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 and Accounting Principles Board Opinion No. 17 (of this amount, $84.6 million relates to goodwill and other intangibles and the remaining amount relates to other long-lived assets), a $2.8 million provision against certain miscellaneous receivables, $0.6 million associated with severance for the Company's work force reduction program and $1.9 million associated with certain costs related to the refinancing of the Company's accounts receivable program completed in November 1999. The store opening and closure costs of $27.8 million for the fourth quarter reflect the costs associated with additional store closures announced on February 3, 2000. In addition, income tax expense includes an $89.5 million valuation allowance recorded during the fourth quarter related to certain deferred tax assets (see Note 11 - Income Taxes to the Consolidated Financial Statements).
On November 9, 1999, the Company completed a refinancing of the existing term and revolving certificates outstanding under its Accounts Receivable Program (see Note 4 to the Company's Consolidated Financial Statements). In connection with the refinancing, the Company's special purpose off-balance sheet trust (the "Trust") replaced the previously existing term and revolving certificates with new term and revolving certificates (the "New Certificates"). The New Certificates provided the Company with a maximum availability of $329.9 million, subject to the amount of receivables held in the Trust. Based upon the amount of receivables in the Trust at the time of closing, the Company received approximately $292.4 million of proceeds. Of this amount, approximately $259.3 million was used to retire the outstanding balances under the previously existing Trust certificates, which were scheduled to begin amortizing in December of 1999. The remainder of the proceeds were used to redeem the previously existing $30.0 million aggregate principle amount of SRI Receivables Purchase Co., Inc. ("SRPC") 12.5% Trust certificate-backed notes and to pay for other costs associated with the refinancing. In connection with the refinancing, the Company recorded an after-tax extraordinary charge of approximately $0.7 million in the fourth quarter of 1999 related to the early retirement of debt. The Company also recorded an additional $1.9 million of pretax costs in selling, general and administrative ("SG&A") expenses associated with the refinancing during the fourth quarter of 1999. The Company redeemed the New Certificates with proceeds from its DIP Financing.
During the second quarter of 1999, the Company announced a store closure program under which the Company closed approximately 35 under performing stores during the last three quarters of the year. In connection with the store closure program, the Company recorded a total of $23.7 million of pretax costs during the second and third quarters of 1999, of which $7.3 million is included in cost of sales while the remaining $16.4 million is included in store opening and closure program costs. Of the total $23.7 million of costs, approximately $2.5 million represented severance and lease termination costs, approximately $2.5 million represented operating costs for the stores in the closure program during the second and third quarters of 1999, approximately $7.3 million represented a lower of cost or market reserve related to the inventory to be liquidated in the stores in the closure program while the balance related primarily to the write-off of fixed assets and intangibles associated with the stores in the closure program.
The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein. Results of Operations
The following sets forth the results of operations as a percentage of sales for the periods indicated: Fiscal Year 1999 1998 1997 Net sales 100.0% 100.0% 100.0% Cost of sales and related buying, occupancy and distribution expenses 80.0 71.5 68.0 Gross profit margin 20.0 28.5 32.0 Selling, general and administrative expenses 34.6 23.1 22.4 Store opening and closure program costs 4.0 0.9 0.8 Operating income (loss) margin (18.6) 4.5 8.8 Net interest expense 4.3 4.0 3.6 Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle (22.9)% 0.5% 5.2%
1999 Compared to 1998
Sales for the year ended January 29, 2000 decreased 4.4% to $1,121.6 million from $1,173.5 million for the year ended January 30, 1999. The decrease in sales for 1999 reflects, among other things, the net reduction of 31 stores during the year and a 7.0% decline in comparable store sales. Management believes the majority of the decline in comparable store sales was attributable to (i) the impact on the first quarter of the aggressive management of the Company's inventory levels throughout the 1998 fall selling season, (ii) the impact on the second and third quarters of the Company's more conservative promotional cadence throughout the two periods and (iii) the impact on the fourth quarter of the softness in the Company's sales during the Christmas selling period.
The Company's aggressive inventory management activities that were put into place during the 1998 fall selling season negatively impacted the Company's merchandise mix and, to a lesser extent, the Company's customer base. As a result, the Company began the first quarter with significantly lower levels of inventory on a comparable store basis as compared to the prior year's first quarter levels, particularly with respect to clearance merchandise. The lower levels of clearance inventory, as well as the continued aggressive pricing on this clearance merchandise throughout February, was a significant contributor to the decline in comparable store sales for the first quarter. In addition, sales for the Easter selling period were softer than expected as a result of lower than planned inventory levels during the period.
Sales results for the second and third quarters were negatively impacted by a reduction in the number of promotional events and a lower level of price discounting as compared to the same periods in the prior year. While the Company anticipated that this strategy would negatively impact sales, the more conservative promotional cadence was designed to improve merchandise margins by increasing the sell-through of regular priced goods. In addition, comparable store sales for the third quarter were negatively impacted by a reduction in the level of clearance activities during the early part of the quarter as compared to last year. Due to inventory management initiatives that the Company put into place during the early part of 1999, the level of seasonal clearance merchandise on hand at the beginning of the third quarter of 1999 was significantly below last year's level and, therefore, sales for the third quarter of 1999 were negatively impacted as compared to the third quarter of 1998.
Finally, management believes that the weakness in sales over the Christmas holiday period reflects an increased level of competitive promotional activity during the period as well as inventory management issues during the fourth quarter of 1999. As a result, the Company ended the year with an abnormally high portion of its inventory in fall clearance product which has required significant markdowns to sell during the first quarter of 2000. As a result, the Company recorded a lower of cost or market reserve for this seasonal inventry during the fourth quarter (see Item 7 "Significant Events" above and further discussion below).
Gross profit decreased 32.8% to $224.5 million for 1999 from $334.3 million for 1998. Gross profit, as a percent of sales, decreased to 20.0% for the current year from 28.5% for the prior year. The lower gross profit percentage for 1999 reflects, among other things, (i) the impact of the increased level of promotional activity utilized during the fourth quarter of 1999, (ii) the negative sales leverage associated with the Company's fixed buying, occupancy and distribution expenses which are included in cost of goods sold, (iii) lower vendor discounts on new store inventory purchases and reduced levels of store grand opening sales, which typically carry a higher level of gross margin, as a result of the reduction in the number of new stores opened during 1999 as compared to 1998, (iv) the recording of lower of cost or market reserves during the second and fourth quarters aggregating $61.3 million, (v) an $8.0 million LIFO charge relating to an overall decrease in inventories which resulted in the liquidation of certain high cost historical inventory layers and (vi) higher than anticipated net shrinkage expense. The lower of cost or market reserves recorded during these two periods relate to inventory to be liquidated in conjunction with store closures and the excess Christmas clearance inventory as discussed above. The decline in the gross profit percentage was partially offset by higher merchandise margins during the second and third quarters of the current year resulting from a reduction in the level of clearance sales and a more conservative promotional cadence followed during these periods.
SG&A expenses for 1999 increased 42.8% to $387.8 million from $271.5 million in the comparable period of 1998 and, as a percent of sales, increased to 34.6% from 23.1% in the comparable period last year. SG&A expenses for 1999 reflect, among other things, a $110.6 million write down of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 and Accounting Principles Board Opinion No. 17 consisting of increased depreciation and amortization of $26.0 million related to property, equipment and leasehold improvements associated with underperforming stores and associated goodwill and other intangibles of $84.6 million, a $2.8 million provision against certain miscellaneous receivables, $0.6 million of severance for workforce reduction programs and $1.9 million associated with certain costs related to the refinancing of the Company's Accounts Receivable Program which was completed in November 1999. SG&A expenses for the current year benefited from an increase in the fair value of the Company's retained interest in its accounts receivable trust, the result of which is included in SG&A expenses, reduced payroll and payroll related costs and the Company's continuing efforts in controlling SG&A expenses. The reduction in payroll related costs was primarily associated with reduced vacation expense resulting from a change in the Company's employee benefit program during the first quarter of this year. The current year SG&A expenses also benefited from a reduction in operating costs associated with the stores included in the store closure program which was implemented during the second quarter of 1999.
Store opening and closure program costs for 1999 of $45.0 million reflect $0.8 million of costs associated with 10 new stores opened during 1999, as well as costs associated with the Company's store closure programs.
As a result of the factors discussed above, the Company had an operating loss of $208.4 million for 1999 as compared to operating income of $52.6 million for the comparable period in 1998.
Net interest expense for 1999 increased 4.5% to $48.6 million from $46.5 million for the comparable period in 1998 due to a higher level of average borrowings outstanding and an increase in overall borrowing rates.
Income tax expense for 1999 of $20.3 million includes an $89.5 million valuation allowance provided for certain deferred tax assets.
As a result of the foregoing, the Company's net loss, before extraordinary item and the cumulative effect of change in accounting principle, for the year ended January 29, 2000 was $277.2 million as compared to net income of $3.7 million for the year ended January 30, 1999.
In connection with the adoption of SOP 98-5, the Company recorded the cumulative effect of change in accounting principle, net of tax, of $3.9 million during the first quarter of 1999. The charge reflects the write-off of the unamortized organizational costs associated with the Company's accounts receivable trust and credit card bank. During the fourth quarter of 1999, the Company recorded an extraordinary item, net of tax, of $0.7 million in connection with the early retirement in November 1999 of the $30.0 million aggregate principal amount of SRPC 12.5% Trust certificate-backed notes.
1998 Compared to 1997
Sales for the year ended January 30, 1999 increased 9.3% to $1,173.5 million from $1,073.3 million for the year ended January 31, 1998. The increase in sales was primarily due to an approximately $132.8 million increase in sales from stores opened or acquired during 1998 and 1997 which are not included in comparable store sales, partly offset by a 3.0% decline in comparable store sales. Management believes the majority of the decline in comparable store sales was attributable to (i) the extreme hot weather and drought conditions during the second quarter of 1998 in a substantial portion of the Company's market area, (ii) the unseasonably warm weather which existed throughout the majority of the 1998 Christmas selling period, (iii) the implementation of a "value pricing" program on selected private label merchandise and (iv) the aggressive but prudent management of the Company's inventory levels throughout the fall selling season.
The extreme weather conditions which impacted the majority of the Company's markets during late June and July 1998 resulted in reduced customer traffic and changed customers' spending patterns during this period. As a result, comparable store sales for the second quarter decreased 5.0%. Unseasonably warm weather conditions in most markets in the third and fourth quarters of 1998 negatively impacted the sales of the traditional cold weather categories of merchandise. In response, the Company accelerated its promotional activities during this period by increasing the level of permanent and promotional markdowns on its seasonal merchandise. This strategy lowered the average retail unit price of merchandise sold during the fall selling season which negatively impacted net sales. As a result of these factors and those discussed below, comparable store sales for the fall selling season decreased 4.3%.
In order to mitigate any potential economic impact that the record summer heat and drought conditions had on the small market communities in which the Company operates, the Company implemented a value pricing strategy on a small portion of its private label merchandise. Under the value pricing strategy, the Company reduced the price point on certain key private label basic items for the fall season. The program was designed to generate sufficient additional unit sales to offset the reduction in the average unit selling price. Due to the increased promotional activities discussed above during the fourth quarter, the program did not accomplish its goals. For 1999, based upon the results of this program, the Company eliminated the value pricing strategy from its merchandise mix.
Finally, the Company aggressively managed its inventory levels throughout the fall selling season due to the softness in overall sales. Actions taken to control inventory levels included a significant reduction in the aggregate amount of merchandise receipts for the fall selling season as well as the acceleration of the Company's promotional activities discussed above. The significant reduction in the receipt flow for the fall selling season negatively impacted the freshness and content of certain of the Company's merchandise offerings thereby further depressing sales levels. However, as a result of its aggressive promotional activities and prudent management of its inventory levels, retail inventory per square foot on a comparable store basis at year-end 1998 was approximately 8% lower than the corresponding 1997 level. Management believes it has identified the content issues within its merchandise offerings created during 1998 and has put plans in place to address these issues in 1999.
Gross profit decreased 2.6% to $334.3 million in 1998 from $343.1 million in 1997. Gross profit as a percent of sales decreased to 28.5% in 1998 from 32.0% in 1997. Contributing to the decline in gross profit were the higher levels of markdowns designed to stimulate traffic during the adverse weather conditions in the second quarter and the aggressive discounting and promotional activity during the second half of the year designed to drive unit sales and liquidate seasonal merchandise. In addition, the lower gross profit percentage reflects the impact of fixed buying, occupancy, and distribution expense components included in cost of goods sold in relation to lower sales levels as well as higher shrinkage expense.
Selling, general and administrative expenses increased 13.1% to $271.5 million in 1998 from $240.0 million in 1997. Selling, general and administrative expenses as a percent of sales for 1998 increased to 23.1% from 22.4% in 1997. Factors contributing to the increase in selling, general and administrative expenses as a percent of sales were the negative leverage resulting from the reduced sales level and the increased promotional expense associated with the aggressive management of the Company's inventory level discussed above. Advertising expenses as a percentage of sales were 4.3% in 1998 as compared to 3.7% in 1997. Offsetting these increases were approximately $5.6 million of certain duplicative and one-time costs associated with the CR Anthony acquisition which were incurred in 1997 as well as the positive impact of the Company's newly formed credit card bank which has allowed the Company to charge its customers a service charge and late fee rate structure consistent with other national apparel retailers.
Store opening and closure costs for 1998 increased to $10.2 million from $8.7 million for the same period in 1997 due to an increase in the number of stores opened during 1998 as compared to 1997.
Operating income for 1998 decreased to $52.6 million from $94.4 million in 1997 due to the factors discussed above. Operating income as a percent of sales for 1998 was 4.5% as compared to 8.8% in 1997. Net interest expense for 1998 increased 21.4% to $46.5 million from $38.3 million in 1997 due to higher levels of borrowings under the Credit Facilities resulting from the Company's expansion program.
The Company's net income before extraordinary items for 1998 decreased to $3.7 million as compared to $34.5 million in 1997 due to the impact of the factors discussed above.
Seasonality and Inflation
The Company's business is seasonal and sales traditionally are lower during the first nine months of the year (February through October) and higher during the last three months of the year (November through January). Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters.
Fiscal Year 1999 Q1 Q2 Q3 Q4 Net sales $262,591 $269,848 $264,327 $324,801 Gross profit 70,359 74,021 77,203 2,867 Operating inc. (loss) 8,391 (8,332) 12,560 (220,971) Quarters' operating income as a pecent of annual N/A N/A N/A N/A Income (loss) before extraordinary item and cummulative effect of a change in accounting principle (2,269) (15,091) 224 (260,067) Net income (loss) (4,671) (15,091) 224 (262,352)
Fiscal Year 1998 Q1 Q2 Q3 Q4 Net sales $272,788 $271,805 $271,605 $357,349 Gross profit 87,225 82,239 75,252 89,593 Operating inc. (loss) 25,278 12,678 7,226 7,458 Quarters'operating income as a percent of annual 48% 24% 14% 14% Income (loss) before extraordinary item and cummulative effect of change in accounting principle 9,035 765 (3,152) (2,934) Net income (loss) 9,035 765 (3,152) (2,934)
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
As a result of the Company's poor financial performance, lack of adequate trade support to fund its inventory working capital requirements, lack of sufficient financial flexibility and liquidity, and violations under certain covenants under its various debt agreements, the Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") on June 1, 2000 in the United States Bankruptcy Court for the Southern District of Texas ( the "Court"). The Company has negotiated a $450.0 million debtor-in-possession financing agreement (the "DIP Financing") with a lender to finance the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 2, 2000, the Court approved among other things, the proposed DIP Financing subject to certain conditions. Under the Court's Interim Order, the Court limited the amount available under the DIP Financing to $385.0 million pending a Final Order. Proceeds under the DIP Financing will be used to retire the Company's existing Accounts Receivable Program and Senior Revolving Credit Facility and for general working capital purposes.
If the Company receives a Final Order approving the DIP Financing as proposed, management believes there should be sufficient liquidity to fund the Company's working capital requirements during the reorganization proceedings; however there can be no assurances the entire $450.0 million DIP Financing will be approved by the Court.
Under Chapter 11, the Company will operate its business as debtor-in-possession, subject to the approval of the Bankruptcy Court for certain proposed actions. Additionally, one or more creditor committees will be formed and would 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 Bankruptcy 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 Bankruptcy Court.
Total working capital decreased $626.4 million to a deficit of $258.3 million at January 29, 2000 from $368.1 million at January 30, 1999. The most significant changes in working capital were: (i) a decrease of $80.2 million in inventories associated with the net reduction of 31 stores during 1999 as well as certain significant charges and reserves recorded during the fourth quarter of 1999 aggregating $62.0 million, as discussed in "Results of Operations" above, and (ii) a reduction of $28.2 million in undivided interest in accounts receivable trust due to a higher level of borrowings outstanding under the Company's Accounts Receivable Program, of which $30.0 million of the increase represents borrowings related to the retirement of the SRPC notes in November 1999, and (iii) the reclassification of long-term debt of $492.4 million to current as a result of certain covenant violations under the respective debt agreements.
The Company's primary capital requirements are for working capital, debt service and capital expenditures. Cash interest payments were $45.5 million in 1999. Capital expenditures are generally for new store openings, remodeling of existing stores and facilities, customary store maintenance and operating system enhancements and upgrades. Capital expenditures were $22.0 million during 1999 as compared to $88.7 million in 1998. Capital expenditures during 1999 were primarily related to 10 new store openings, remodeling of existing stores and the implementation of a new merchandising system. Management estimates that capital expenditures will be approximately $15.0 million for 2000. As discussed above, all of the Company debt has been classified as current in the accompanying financial statements.
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 March 2000, the FASB issued interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation which provides guidance for certain issues arising from the application of APB Opinion No. 25; the Company is currently evaluating the impact of application of this interpretation on its financial statements.
Risk Factors
Current Bankruptcy Proceeding: As a result of the Company's poor financial performance, lack of adequate trade support to fund its inventory working capital requirements, lack of sufficient financial flexibility and liquidity, and violations under certain covenants under its various debt agreements, the Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code on June 1, 2000 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, subject to the approval of the Bankruptcy Court for certain proposed actions. Additionally, one or more creditor committees will be formed and would 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. There can be no assurances that the Company will be successful in reorganizing under Chapter 11 which could result in liquidation.
Leverage and Restrictive Covenants: Due to the level of the Company's indebtedness under the DIP Financing, any material or adverse development affecting the business of the Company could significantly limit its ability to withstand competitive pressures or adverse economic conditions, to take advantage of expansion opportunities or other significant business opportunities that may arise, to meet its obligations as they become due or to comply with the various covenant requirements contained in the Company's DIP Financing. In addition, the Company's DIP Financing imposes operating and financial restrictions on the Company and certain of its subsidiaries. Such restrictions limit the Company's ability to incur additional indebtedness, to make dividend payments and to make capital expenditures in excess of authorized amounts.
Availability of Merchandise Product on Normal Trade Terms: The Company is highly dependent on obtaining merchandise product on normal trade terms. Due to the Company's recent financial performance, some of the Company's key vendors have become more restrictive in granting trade credit through either reducing the Company's credit lines or shortening payment terms. In addition, the majority of the Company's factors have required letters of credit to partially secure the credit lines that these factors have provided to the Company. The tightening of credit from the vendor or factor community has had a material adverse impact on the Company's business and financial condition.
Economic and Market Conditions: A substantial portion of the Company's operations are located in the central United States. In addition, many of the Company's stores are situated in small towns and rural environments that are substantially dependent upon the local economy. The retail apparel business is dependent upon the level of consumer spending, which may be adversely affected by an economic downturn or a decline in consumer confidence. An economic downturn, particularly in the central United States and any state (such as Texas) from which the Company derives a significant portion of its net sales, could have a material and adverse effect on the Company's business and financial condition.
The Company's success depends, in part, upon its ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner. Although the Company attempts to stay abreast of emerging lifestyle and consumer preferences affecting its merchandise, any sustained failure by the Company to identify and respond to such trends could have a material and adverse effect on the Company's business and financial condition.
The Company's business is seasonal and its quarterly sales and profits traditionally have been lower during the first three fiscal quarters of the year (February through October) and higher during the fourth fiscal quarter (November through January). In addition, working capital requirements fluctuate throughout the year, increasing substantially in October and November in anticipation of the holiday season due to requirements for significantly higher inventory levels. Any substantial decrease in sales for the last three months of the year could have a material and adverse effect on the Company's business and financial condition.
The Company's business depends, in part, on normal weather patterns across its markets. Any unusual weather patterns in the Company's markets can have a material and adverse impact on the Company's business and financial condition.
Competition: The retail apparel business is highly competitive. Although competition varies widely from market to market, the Company faces substantial competition, particularly in its Houston area markets, from national, regional and local department and specialty stores. Some of the Company's competitors are considerably larger than the Company and have substantially greater financial and other resources. Although the Company currently offers branded merchandise not available at certain other retailers (including large national discounters) in its small market stores, there can be no assurance that existing or new competitors will not carry similar branded merchandise in the future, which could have a material and adverse effect on the Company's business and financial condition.
Dependence on Key Personnel: The success of the Company depends to a large extent on its management team. Certain members of senior management, including the former Chief Executive Officer, the Chief Financial Officer, the Chief Merchandising Officer and the Chief Information Officer have departed from the Company. Although the responsibilities of these individuals have been reassigned to other members of management, their departure could have a material adverse effect on the Company's business and financial condition.
Consumer Credit Risks - Private Label Credit Card Portfolio: Sales under the Company's private label credit card program represent a significant portion of the Company's business. In recent years, some retailers have experienced substantial increases in the rate of charge-offs in their credit card portfolios. Any significant deterioration in the quality of the Company's accounts receivable portfolio or any adverse changes in laws regulating the granting or servicing of credit (including late fees and the finance charge applied to outstanding balances) could have a material and adverse effect on the Company's business and financial condition.
Interest Rate Risk: Borrowings under the Company's DIP Financing bear a floating rate of interest. If market rates of interest increase, the Company's financial results could be materially and adversely affected. See "Liquidity and Capital Resources."
Centralized Operations: The Company's buying, credit, distribution and other corporate operations are highly centralized in three main locations. The Company's operations could be materially affected if a catastrophic event (such as, but not limited to, fire, hurricanes or floods) impacts use of these facilities. There can be no assurances that the Company would be successful in obtaining alternative servicing facilities in a timely manner if such a catastrophic event should occur.
Year 2000 Compliance: The Company is currently not aware of any Year 2000 problems with its information systems or peripheral systems and hardware. However, the success to date of the Company's Year 2000 efforts cannot guarantee that a Year 2000 problem affecting its systems or those of its major third party vendors will not become apparent in the future. In the event that the Company or any of its major third party vendors does encounter any Year 2000 problems, the Company's business or operations could be adversely affected.
The aggregate cost that was paid to third parties who assisted in the Company's Year 2000 efforts was approximately $2.5 million. These costs were expensed as incurred. These amounts did not include any costs associated with the implementation of contingency plans or the costs associated with the replacement of information systems, hardware or equipment, substantially all of which was capitalized.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See: "Risk Factors", above.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Schedules" included on page 31 for information required under this Item 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, ages and all positions held by the directors and executive officers of Stage Stores as of June 1, 2000: Name Age Position John Wiesner 62 Chairman, Interim Chief Executive Officer and President Ernest Cruse 49 Senior Vice President Director of Stores Barry Gold 57 Executive Vice President Administration and Assistant to CEO Ron Lucas 52 Executive Vice President, Human Resources Charles Sledge 34 Senior Vice President Finance, Treasurer and Corporate Secretary Jack Bush 65 Director Harold Compton 52 Director Robert Huth 54 Director Richard Jolosky 65 Director Carl Tooker 52 Director
Mr. Wiesner, who had been a Director since July 1997, was appointed Chairman, Interim Chief Executive Officer and President in February 2000 upon the departure of Carl Tooker, the Company's former Chairman, Chief Executive Officer and President. Prior to joining the Company, Mr. Wiesner held varying positions at CR Anthony, including Chairman of the Board, Chief Executive Officer from 1987 to 1997. Mr. Wiesner is also a Director of Lamonts, Elder-Beerman, Inc. and Loewen Group, Inc. and an advisory director of Fiesta Foods, Inc.
Mr. Cruse has been with the Company since 1966 and is currently Senior Vice President, Director of Stores. Prior to assuming this position, Mr. Cruse was Senior Vice President of Planning and Allocation from February 1999 to February 2000, Senior Vice President, Territorial Manager of Stores from February 1997 to February 1999, Vice President, Regional Manager of Stores from September 1995 to February 1997, and Vice President, District Manager of Stores from February 1984 to September 1995.
Mr. Gold joined the Company in March 2000 as Executive Vice President, Administration and Assistant to the Chief Executive Officer. Prior to joining the Company, Mr. Gold was Executive Vice President of Operations, Logistics and Loss Prevention since March 1998 for Jumbo Sports. Jumbo Sports filed a voluntary Chapter 11 Petition under the Federal bankruptcy laws on January 1, 1999. Mr. Gold previously served as Executive Vice President of Stores and Operations for L. Luria and Son, a specialty retailer, from 1996 to 1998. L. Luria and Son filed for protection under Chapter 11 of the Bankruptcy Code on August 13, 1997. Prior to that he served as Chief Financial Officer of The Flax Art and Design Company, Inc. and Vice Chairman/Chief Operating Officer of Fisher Big Wheel.
Mr. Lucas joined the Company in July 1995 as Senior Vice President, Human Resources and was promoted to Executive Vice President, Human Resources in March 1998. Between 1987 and 1995, Mr. Lucas served as Vice President, Human Resources at two different divisions of Limited, Inc., the Limited Stores Division and Lane Bryant. Previously, he spent seventeen years at the Venture Stores Division of May Co. where from 1985 to 1987 he was Vice President, Organization Development.
Mr. Sledge joined the Company in April 1996 as Vice President, Controller and was promoted to Senior Vice President Finance and Treasurer in April 1999. Prior to joining the Company, Mr. Sledge was a Senior Audit Manager with PricewaterhouseCoopers, LLP, where he was employed since 1989.
Mr. Bush has been a Director since December 1997. Mr. Bush is also President of Raintree Partners, Inc., a management consulting firm where he has served since 1995. He served as Chairman, Director and Chief Executive Officer of Jumbo Sports from December 1997 to March 1999. Jumbo Sports filed a voluntary Chapter 11 Petition under the Federal bankruptcy laws on January 1, 1999. He also serves as a Director of TeleQuip Company and Chairman of the Strategic Board of Directors of the College of Business and Public Administration at the University of Missouri. From August 1991 to August 1995, Mr. Bush was President, a Director and a consultant to Michaels Stores, Inc. From April 1996 to April 1999, he served as Chief Concept Officer of Aaron Bros. Holding Company. Mr. Bush is also Chairman of an internet company, IdeaForest.com.
Mr. Compton has been a Director since March 1997. Mr. Compton is currently Chief Executive Officer of CompUSA, Inc. From September 1994 to March 2000, Mr. Compton was President of CompUSA Stores and from August 1994 to February 2000, he served as Executive Vice President of CompUSA, Inc. Mr. Compton served as President and Chief Operating Officer of Central Electric Inc. from December 1993 to August 1994 and as Executive Vice President- Operations & Human Resources of HomeBase, Inc. from 1989 to 1993. Mr. Compton is also a Director of Linens `N Things, Inc.
Mr. Huth has been a Director since March 1997. Mr. Huth is currently Director, Chief Executive Officer and President of David's Bridal where he has served since May 1999. Previously, he served as Director, President and Chief Operating Officer of David's Bridal from 1995 to May 1999. Prior to joining David's Bridal, Mr. Huth served as Director, Executive Vice President and Chief Financial Officer of Melville Corporation from 1987 to 1995.
Mr. Jolosky has been a Director since March 1997. From January 1996 until his retirement in October 1999, Mr. Jolosky was President and Vice Chairman of Payless ShoeSource, Inc. Mr. Jolosky served as President and Chief Executive Officer of Silverman Jewelry Company from 1995 to 1996 and as Chief Executive Officer of the Richard Allen Company from 1992 to 1995.
Although Mr. Tooker was terminated as President and Chief Executive Officer and ceased serving as Chairman of the Board of Directors on February 21, 2000, he continues to serve as a Director until the expiration of his term at the Company's annual shareholders meeting which is unscheduled as of June 1, 2000.
DIRECTOR AND OFFICER AND TEN PERCENT STOCKHOLDER SECURITIES REPORTS
Federal securities laws require the Company's directors and officers, and persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission, the New York Stock Exchange and the Secretary of the Company initial reports of ownership and reports of changes in ownership of the Common Stock of the Company.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports are required, during 1999, all of the Company's officers, directors and greater-than-ten- percent beneficial owners made all required filings except the following: the Form 4 for the March 1999 period for Ron Lucas and the former executives of the Company, Carl Tooker, James Marcum, Stephen Lovell, Jim Bodemuller and Gregg Kennedy, were not filed on a timely basis.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Directors who are full-time employees or affiliates of the Company, including John Wiesner subsequent to his appointment on February 21, 2000 as Chairman, Interim Chief Executive Officer and President, receive no additional compensation for serving on the Board of Directors. Directors who are not full-time employees or affiliates of the Company, namely Messrs. Bush, Compton, Huth, Jolosky and Wiesner (prior to February 21, 2000), receive quarterly cash compensation of $5,000 for services rendered as Director and $1,000 for each committee meeting the Director attends. In addition, such Directors are eligible for annual option grants which vest over a four year period. During 1999, such directors did not receive any option grants. Mr. Wiesner also received monthly compensation under a preexisting severance agreement he had with C. R. Anthony Co., which the Company acquired in 1997.
Summary Compensation Table
The following summarizes, for the fiscal years indicated, the principal components of compensation for the Company's Chief Executive Officer (the "CEO") and the four highest compensated executive officers (collectively, the "named executive officers") as of January 29, 2000. Sections omitted are not applicable.
Annual Compensation Other Annual Fiscal Salary Bonus Compensation Name and Principal Position Year ($) ($)(1) ($)
Carl Tooker, (4) 1999 795,000 -- 510,950 (5) Former Chairman, Chief 1998 758,333 -- 137,658 (6) Executive Officer and President 1997 683,438 645,000 119,341 (7)
James Marcum, (20) 1999 437,500 -- 36,812 (8) Former Director, Vice Chairman 1998 420,833 -- 62,539 (9) and Chief Financial Officer 1997 377,563 322,000 110,945 (10)
Stephen Lovell, (11) 1999 437,500 -- 34,201 (12) Former Vice Chairman and 1998 420,833 -- 62,404 (13) Chief Field Operations Officer 1997 363,044 322,000 527,017 (14)
Gregg Kennedy, (21) 1999 325,000 -- 15,169 (15) Former Executive VP and 1998 99,375 15,000 20,921 (16) Chief Merchandising Officer 1997 -- -- --
Jim Bodemuller, (21) 1999 308,333 -- 32,025 (17) Former Executive VP and 1998 292,624 -- 16,485 (18) Chief Information Officer 1997 188,493 187,000 23,679 (19)
Long-term Compensation Awards
Securities Restricted Underlying All Other Fiscal Stock Options/ Comp. Name and Principal Position Year ($)(2) SARs (#) ($)(3)
Carl Tooker, (4) 1999 212,500 45,000 4,448 Former Chairman, Chief 1998 744,750 35,000 9,282 Executive Officer and President 1997 3,225,000 50,000 9,282
James Marcum, (20) 1999 93,750 20,000 1,934 Former Director, Vice Chairman 1998 372,375 42,000 2,127 and Chief Financial Officer 1997 806,250 15,000 1,483
Stephen Lovell, (11) 1999 93,750 20,000 1,934 Former Vice Chairman and 1998 372,375 42,000 3,232 Chief Field Operations Officer 1997 806,250 15,000 2,332
Gregg Kennedy, (21) 1999 93,750 40,000 2,819 Former Executive VP and 1998 -- 12,000 1,140 Chief Merchandising Officer 1997 -- -- --
Jim Bodemuller, (21) 1999 62,500 12,500 4,448 Former Executive VP and 1998 211,013 25,000 6,781 Chief Information Officer 1997 161,250 35,000 1,832 _______________________________ (1) Amounts reflect bonuses earned during the fiscal year covered (and paid during the subsequent fiscal year).
(2) Represents the restricted stock awards to the named executives multiplied by the market price of the underlying common stock as of the grant date. These shares are subject to various vesting requirements.
(3) Amounts reflect premiums paid for life insurance coverage.
(4) Mr. Tooker's employment with the Company was terminated on February 21, 2000.
(5) Amount shown reflects the value realized upon the exercise of options for common stock of $460,899 during 1999. Value realized is based upon the fair market value of the stock at the exercise date minus the exercise price. Amount shown also reflects the value realized upon the issuance of common stock pursuant to vested restricted stock awards of $34,313 during 1999. Value realized is based upon the fair market value of the stock at the date of vesting. Amount shown also reflects automobile allowance of $12,000 and health insurance benefits of $3,739 paid to Mr. Tooker during 1999.
(6) Amount shown reflects imputed interest on executive loans of $78,263, a distribution related to options vested of $38,000, housing allowance of $5,000, automobile allowance of $12,000 and health insurance benefits of $4,395 paid to Mr. Tooker during 1998.
(7) Amounts shown reflects imputed interest on executive loans of $45,685, a distribution related to options vested of $38,000, housing and automobile allowances of $32,000 and health insurance benefits of $3,656 paid to Mr. Tooker during 1997.
(8) Amount shown reflects the value realized upon the issuance of common stock pursuant to vested restricted stock awards of $17,156 during 1999. Value realized is based upon the fair market value of the stock at the date of vesting. Amount shown also reflects housing allowance of $2,011, automobile allowance of $12,000 and health insurance benefits of $5,645 paid to Mr. Marcum during 1999.
(9) Amount shown reflects imputed interest on executive loans of $24,977, housing allowance of $18,777, automobile allowance of $12,000 and health insurance benefits of $6,785 paid to Mr. Marcum during 1998.
(10) Amount shown reflects moving expenses of $74,490, imputed interest on executive loans of $20,485, housing and automobile allowances of $12,000 and health insurance benefits of $3,970 paid to Mr. Marcum during 1997.
(11) Mr. Lovell ceased serving as Chief Field Operations Officer on February 22, 2000 and left the Company on March 31, 2000.
(12) Amount shown reflects the value realized upon the issuance of common stock pursuant to vested restricted stock awards of $17,156 during 1999. Value realized is based upon the fair market value of the stock at the date of vesting. Amount shown also reflects automobile allowance of $12,000 and health insurance benefits of $5,045 paid to Mr. Lovell during 1999.
(13) Amount shown reflects imputed interest on executive loans of $42,880, automobile allowance of $12,000 and health insurance benefits of $7,524 paid to Mr. Lovell during 1998.
(14) Amount shown reflects the value realized by Mr. Lovell upon the exercise of options for common stock of $485,941 during 1997. Value realized is based upon the fair market value of the stock at the exercise date minus the exercise price. Amount shown also reflects imputed interest on executive loans of $25,015, housing and automobile allowances of $12,000, and health insurance benefits of $4,061 paid to Mr. Lovell during 1997.
(15) Amount shown reflects moving expenses of $240, automobile allowance of $12,000 and health insurance benefits of $2,929 paid to Mr. Kennedy during 1999.
(16) Amount shown reflects moving expenses of $20,921 paid to Mr. Kennedy during 1998.
(17) Amount shown reflects the value realized upon the issuance of common stock pursuant to vested restricted stock awards of $9,722 during 1999. Value realized is based upon the fair market value of the stock at the date of vesting. Amount shown also reflects moving expense of $7,118, automobile allowance of $12,000 and health insurance benefits of $3,185 paid to Mr. Bodemuller during 1999.
(18) Amount shown reflects automobile allowance of $12,000 and health insurance benefits of $4,485 paid to Mr. Bodemuller during 1998.
(19) Amount reflects moving expenses of $20,270, housing and automobile allowances of $2,000 and health insurance benefits of $1,409 paid to Mr. Bodemuller during 1997.
(20) Mr. Marcum resigned from the Company effective May 1, 2000.
(21) Messers. Bodemuller and Kennedy resigned from the Company effective May 26, 2000.
Option/SAR Grants During 1999
The following discloses options granted during 1999 to the named executive officers:
Individual Grants
Number of % of Total Securities Options/ Underlying SARs Options/ Granted to SAR's Employees Granted in Fiscal Exercise or Expiration Name (#)(1) Year (%) Base Price ($) Date
Carl Tooker 45,000 9.04 7.25 3/31/09
James Marcum 20,000 4.02 7.25 3/31/09
Stephen Lovell 20,000 4.02 7.25 3/31/09
Gregg Kennedy 40,000 8.04 7.56 2/12/09
Jim Bodemuller 12,500 2.51 7.25 3/31/09
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
5% 10% Annual Annual Growth Growth Name Rate ($) Rate ($)
Carl Tooker 205,177 519,958
James Marcum 91,190 231,093
Stephen Lovell 91,190 231,093
Gregg Kennedy 190,241 482,107
Jim Bodemuller 56,994 144,433
___________________
(1) All of such options were granted under the 1996 Incentive Plan. The options granted under the Stock Option Plan are subject to vesting.
Aggregated Option/SAR Exercises During 1999 and 1999 Year-End Option/SAR Values
The following summarizes exercises of stock options (granted in prior years) by the named executive officers during 1999, as well as the number and value of all unexercised options held by the named executive officers at the end of 1999:
Shares Acquired on Value Name Exercise (#) Realized ($)(1)
Carl Tooker 75,782 460,899 James Marcum -- -- Stephen Lovell -- -- Gregg Kennedy -- -- Jim Bodemuller -- --
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at at FY-End (#) FY-End ($)(2)
Exercisable/ Exercisable/ Name Unexercisable Unexercisable
Carl Tooker 133,211/238,341 --/-- James Marcum 117,463/106,364 --/-- Stephen Lovell 70,096/115,836 --/-- Gregg Kennedy 3,000/49,000 --/-- Jim Bodemuller 23,750/48,750 --/--
___________ (1) Value realized is based upon the fair market value of the stock at the exercise date minus the exercise price.
(2) Value is based upon the closing price of the Common Stock on January 28, 2000 of $1.38 minus the exercise price.
Employment Agreements
At year-end, the named executive officers had employment agreements with the Company which provided for their initial base salaries as well as annual incentive bonuses as agreed to with the Compensation Committee. The employment agreements also provide for annual performance reviews, salary increases at the discretion of the Compensation Committee and participation in all other bonus and benefit plans available to executive officers of the Company. The employment agreements in effect for the named executive officers for the fiscal year ended January 29, 2000 may vary slightly from officer to officer. The details are contained in copies of the various agreements referenced as exhibits attached to the Form 10-K.
Generally, the employment agreements provide that if the Company terminates an officer other than for good cause (as defined in the respective employment agreements), the officer would be entitled to two times his base salary. In addition, the officer would be entitled to his targeted bonus amounts, any accrued or unpaid bonus, salary and deferred compensation, any expense allowances and any earned but unpaid benefits under the Company's benefit plans (the "Additional Payments"). In addition, any unvested stock options and restricted stock awards would continue to vest during this two year period. (In the case of Mr. Tooker, his employment agreement provided for three times base salary and the Additional Payments described above if terminated without cause. Since both Mr. Tooker and Mr. Lovell were terminated for cause on February 21, 2000 and March 31, 2000 respectively, they are not entitled to payments under their respective employment agreements nor do their vesting rights extend past the date of termination). In the event the Company elects not to permit the automatic renewal of an officer's employment contract at the end of a term (one year), or in the event an officer is terminated or resigns for good reason (as defined in the respective employment agreements) following a change of control, the employment agreements provide that the respective individual would be entitled to three times his base salary plus the Additional Payments described above. In the event of a change of control of the Company in which the Company does not survive, all unvested options for the purchase of Common Stock and restricted stock held by the aforementioned individuals would vest immediately and the respective individual would also be entitled to certain other payments as specified in the employment agreements. The employment agreements also contain certain non-compete and confidentiality provisions. Each of the employment agreements renews annually in accordance with its terms. As a result of his dismissal from the Company for cause, the Company is not obligated to make any payments to Mr. Tooker under his employment agreement. Additionally, as a result of their resignation from the Company after year-end, the employment agreements for Messrs. Marcum, Bodemuller and Kennedy terminated.
Company Retirement Plans
Retirement Plan
The Stage Stores, Inc. Retirement Plan (the "Plan") is a qualified defined benefit plan. Benefits under the Plan are administered through a trust arrangement providing benefits in the form of monthly payments or a single lump sum payment. The Plan covers substantially all employees who have completed one year of service with 1,000 hours of service as of June 30, 1998. Effective June 30, 1998, the Plan was frozen. There were no future benefit accruals after that date. Any service after that date will continue toward vesting and eligibility for normal and early retirement.
The Plan is administered by the retirement plan committee (the "Retirement Committee"), and the Company appoints its three to five members. All determinations of the Retirement Committee are made in accordance with the provisions of the Plan in a uniform and nondiscriminatory manner.
Generally, a participant is eligible for a benefit on his/her normal retirement date, which is the later of age 65 or the fifth anniversary of the date of hire. A participant may elect an early retirement benefit if he/she is at least 55 years old, has ten (10) Years of Service (as defined below) and retires from active employment with the Company. Early retirement benefits are reduced according to a formula established in the Plan based upon each full month that the participant's age is less than 65 on the date the payments commence. If a participant who is vested terminates employment, he/she is entitled to a deferred benefit payable at his/her normal retirement date or an earlier date, if requested, but not before age 55.
The amount of a participant's retirement benefit is based on each Year of Credited Service (as defined below) and on his/her earnings for that year. The individual yearly benefits are then totaled to determine the annual benefit at age 65. The annual amount of the participant's normal retirement benefit is derived, subject to certain limitations, by adding (i) 1% of earnings up to $30,600 plus 1-1/2% of the excess of such earnings over $30,600 for each Year of Credited Service earned on or after July 1, 1989 through December 31, 1991, (ii) 1% of earnings up to $31,800 plus 1-1/2% of the excess of such earnings over $31,800 for each Year of Credited Service earned after December 31, 1991 and (iii) 1% of earnings up to $42,500 plus 1-1/2% of the excess of such earnings over $42,500 for each Year of Credited Service earned after December 31, 1994 through June 30, 1998. The normal retirement benefit formula produces an annual benefit which is paid to the participant in equal monthly installments. The standard form of payment for a single participant is a monthly benefit payable for the participant's life only. The standard form of payment for a married participant is a 50% joint and survivor benefit, which provides a reduced monthly benefit to the participant during his/her lifetime, and 50% of that benefit to the participant's spouse for his/her lifetime in the event of the participant's death. Other forms of the payment are also provided including lump sum payouts, but they require participant election. In addition, the Retirement Committee may elect to pay the benefit equivalent of a benefit payable at normal retirement date in the form of a lump sum payment, if the lump sum payment does not exceed $5,000.
Any participant who is credited with 1,000 or more hours of service in a calendar year receives a "Year of Service", while any participant who is credited with 1,284 or more hours of service in a calendar year receives a "Year of Credited Service". Years of Service determine a participant's eligibility for benefits under the Plan, and the percentage vested in those benefits. After five Years of Service, a participant is 100% vested.
The Plan is funded entirely by Company contributions that are held by a trustee for the exclusive benefit of the participants. The Company voluntarily agreed to contribute the amounts necessary to provide the assets required to meet the future benefits payable to Plan participants. Under the Retirement Plan, contributions are not specifically allocated to individual participants.
The Benefit Equalization Plan
The Specialty Retailers, Inc. Benefit Equalization Plan (the "Equalization Plan") is a non-qualified defined benefit plan which is intended to replace the benefits that cannot be provided under the terms of the Retirement Plan on account of certain limitations imposed under the Internal Revenue Code (for example, the Retirement Plan cannot consider compensation for a participant which is in excess of $160,000 when determining the participant's benefit). Effective June 30, 1998, the Equalization Plan was frozen. There were no future benefit accruals after that date. Any service after that date will continue toward vesting and eligibility for normal and early retirement. The Equalization Plan is unfunded. However, upon a change of control as defined in the Equalization Plan, the Company is required to deposit into a rabbi trust sufficient funds to cover all obligations then accrued under the Equalization Plan. The Equalization Plan was terminated May 31, 2000.
Supplemental Employee Retirement Plan
In 1996, the Company adopted the Specialty Retailers, Inc. Supplemental Executive Retirement Plan (the "SERP"). The SERP provides for supplemental retirement benefits for certain key executives of the Company upon retirement at or after age 65 with at least fifteen (15) years of credited service with the Company. The SERP provides for annual retirement compensation of 50% of the retiree's average annual base salary for the three years preceding retirement, less amounts received under the Company's defined benefit retirement plans. Participants in the SERP may elect to receive reduced early retirement benefits at or after age 55 with at least fifteen (15) years of credited service. Upon a change in control as defined in the SERP, the Company is required to deposit into a rabbi trust, sufficient funds to cover all obligations then accrued under the SERP. If a participant's employment is terminated after a change in control by the Company without cause or by the participant for good reason, the participant will be fully vested in the benefit that would have been payable at age 55. This amount will be paid to the participant in a lump sum upon termination of employment.
The SERP was terminated by the Board of Directors on March 7, 2000. At the time of termination, there were no participants eligible for benefits under this plan.
Company Deferred Compensation Plan
The Specialty Retailers, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan") provides executive officers and other key employees of the Company with the opportunity to participate in an unfunded, deferred compensation program that is not qualified under the Code. Generally, the Code and the Employee Retirement Income Security Act of 1974, as amended, restrict contributions to a 401(k) plan by highly compensated employees. The Deferred Compensation Plan is intended to allow participants to defer income at the same rates as those employees not restricted by such regulations. Under the Deferred Compensation Plan, participants may defer up to 15% of their salary and bonus (not otherwise covered by the Company's 401(k) plan) and earn a rate of return based on select indices chosen by each participant. The Company may, but is not obligated to, establish a grantor trust for the purposes of holding assets to provide benefits to the participants. The Company will match 50% of the first 6% of each participant's contributions to the Deferred Compensation Plan not otherwise covered by the Company's 401(k) plan. Company contributions vest over five years of service.
The Deferred Compensation Plan was terminated by the Board of Directors on March 7, 2000. The Company paid the participants their appropriate account balances during April 2000.
Compensation Committee Report
The Compensation Committee of the Board of Directors is responsible for administering and making recommendations to the Board of Directors the amount of compensation of senior executives of the Company. During 1999, the Compensation Committee consisted of Messrs. Compton and Jolosky.
The Company's executive compensation programs are designed to align the interests of senior management with those of the Company's stockholders. There are three key components of executive compensation: base salary, pay for performance (bonus plan), and long-term performance incentive. It is the intent of these programs to attract, motivate and retain senior executives. It is the philosophy of the Compensation Committee to allocate a significant portion of cash compensation to variable performance- based compensation in order to reward executives for high achievement.
Base Salary
The salaries for senior executives are based upon a combination of factors including past individual performance, competitive salary levels, and an individual's potential for making significant contributions to future Company performance.
Bonus Plan
Each of the named executive officers and certain other key personnel of the Company participate in an executive/management bonus plan (the "Bonus Plan") The Bonus Plan provides for annual bonus awards based upon individual performance and actual operating results compared to planned operating results. Bonus payments are subject to modification at the discretion of the Compensation Committee. Due to the Company's poor 1999 performance, no bonuses were paid to the named executive officers for such year. In addition, during 1999, the Compensation Committee recommended and the Board of Directors approved a special bonus plan designed to retain certain key executives. No bonuses were paid to the named executive officers under this bonus plan.
Stock Options and Restricted Stock
Stock options and restricted stock are an important component of senior executive compensation. The 1993 Stock Option Plan and the 1996 Equity Incentive Plan were designed to motivate senior executives and other key employees to contribute to the long-term growth of stockholder value. Generally, options granted under such plans have been, and are expected to be, granted with a price equal to the market price of the Common Stock on the date of the grant and vest over four years. This approach is designed to encourage the creation of long-term stockholder value since the full benefit of such options cannot be realized unless the stock price exceeds the exercise price. Restricted stock is generally issued with long-term vesting schedules. This approach provides a retention incentive for the recipient as well as the creation of long-term stockholder value. Pursuant to the 1996 Equity Incentive Plan, the Compensation Committee recommended, and the Board of Directors approved, an award of restricted stock to the named executive officers during 1999 as follows: Mr. Tooker - 34,000 shares; Mr. Marcum - 15,000 shares; Mr. Lovell - 15,000 shares; Mr. Kennedy - 15,000 shares; and Mr. Bodemuller - 10,000 shares. These awards vest 25% per year on each of the first through fourth anniversaries of the grant date. The vesting rights applicable to grants made to Mr. Tooker and Mr. Lovell are limited by virtue of their termination.
Chief Executive Officer
The compensation policies described above applied as well to the compensation of Mr. Tooker. The Compensation Committee was directly responsible for making recommendations to the Board of Directors for approval of Mr. Tooker's salary level and all awards and grants to Mr. Tooker under incentive components of the compensation program. The overall compensation package of Mr. Tooker was designed to recognize the fact that he bore primary responsibility for increasing the value of stockholders' investments. Accordingly, a substantial portion of Mr. Tooker's compensation was incentive-based, providing greater compensation as direct and indirect financial measures of stockholder value increase. Mr. Tooker's compensation was thus structured and administered to motivate and reward the successful exercise of these qualities.
Mr. Tooker's base compensation for 1999 was directly related to the Company's overall performance for 1998, as measured by financial and other criteria such as: (i) the financial performance of the Company, (ii) the performance of the senior management team and (iii) other related qualitative factors. Due to the Company's poor 1999 performance, no bonus was paid to Mr. Tooker for such year. As previously discussed, Mr. Tooker left employment with the Company on February 22, 2000.
Conclusion
Through the programs described above, a significant portion of the Company's executive compensation is linked directly to corporate performance and stock price appreciation. The Compensation Committee believes that existing compensation policies and programs are competitive and effectively align executive compensation with the Company's goal of maximizing the return to stockholders.
The Compensation Committee has determined that it is unlikely that the Company would pay amounts during 2000 that would result in the loss of a federal income tax deduction under Section 162(m) of the Code, and accordingly, had not recommended that any special actions be taken or that any plans or programs be revised at this time in light of such provision.
Harold Compton and Richard Jolosky, Compensation Committee
PERFORMANCE GRAPH
The following graph compares the value of $100.00 invested on October 25, 1996 (the date of the initial public offering ("IPO") of the Company) through January 28, 2000 (the last day of public trading in fiscal 1999 at the closing price on the New York Stock Exchange ("NYSE")) in the Common Stock, the S&P 500 and the S&P 500 Retail. The return of the indices is calculated assuming reinvestment of dividends during the period presented. The Company has not paid any dividends since its IPO. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG STAGE STORES, INC., S&P 500 AND S&P 500 RETAIL
-- Line Graph Showing Comparison of Cummulative Total Return -- -- Among Stage Stores, Inc., S&P 500 and S&P 500 Retail --
Date Stage Stores, Inc. S&P 500 Retail S&P 500 10/25/96 $100.00 $100.00 $100.00 1/31/97 $105.30 $94.86 $112.16 1/30/98 $235.04 $139.19 $139.86 1/29/99 $48.48 $221.45 $182.62 1/28/00 $8.33 $237.77 $194.05
Prior to April 16, 1998, the Company's Common Stock was quoted on the NASDAQ National Market System under the symbol "STGE". Beginning April 16, 1998, the Company's Common Stock started trading on the NYSE under the symbol "SGE".
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information regarding ownership of Common Stock as of either May 30, 2000 or based on the latest filings made under Section 13 (d) and 13 (g) of the Securities Exchange Act of 1934 and assuming exercise of options exercisable within sixty days of May 30, 2000 by (i) each person or entity who owns of record or beneficially 5% or more of the Common Stock, (ii) each director and named executive officer and (iii) all directors and named executive officers as a group. Each such stockholder is assumed to have sole voting and investment power as to the shares shown. Known exceptions are noted. As of May 30, 2000, 1,250,584 shares of Class B Common Stock were outstanding, all of which is owned by Court Square Capital Limited, a subsidiary of Citigroup Inc.
Number of Percentage Shares of Shares of Name Common Stock Common Stock
5% Stockholders Brookside Capital Partners 3,980,472 14.2% Fund, L.P. Two Copley Place Boston, MA 02116 AXA Financial, Inc. 2,646,900 9.4% 1290 Avenue of the Americas New York, NY 10104 Citigroup Inc. (1) 2,549,548 9.1% 153 East 53rd Street New York, NY 10043 Lord, Abbett & Co. 2,451,689 8.7% 90 Hudson Street Jersey City, NJ 07302 Thomson Horstman & Bryant, 2,250,400 8.0% Inc. Park 80 West, Plaza Two Saddle Brook, NJ 07663 The Bear Stearns Companies 2,228,800 7.9% Inc. 245 Park Avenue New York, NY 10167 Wellington Management 2,062,800 7.3% Company, LLP. 75 State Street Boston, MA 02109 Directors and Executive Officers John Wiesner 6,750 * Ernest Cruse 12,954 * Barry Gold 0 * Ron Lucas 60,054 * Charles Sledge 16,200 * Jack E. Bush 8,750 * Harold Compton 5,000 * Robert Huth 9,000 * Richard Jolosky 5,000 * All executive officers and directors as a group (9 persons) 126,208 .45% _____________________________________ * Less than 1%.
(1) Citigroup Inc. beneficially owns shares (including Class B Common Stock) through its subsidiaries Citicorp Venture Capital, Court Square Capital Limited and other subsidiaries. Citicorp Venture Capital owns 600,296 shares of Common Stock, Court Square owns 370,068 shares of Common Stock and 1,250,584 shares of non- voting Class B Common Stock and other subsidiaries of Citigroup Inc. own 328,600 shares of Common Stock. Each share of non- voting Class B Common Stock is convertible, subject to certain restrictions, into shares of Common Stock.
(2) Messrs. Tooker, Marcum, Lovell, Kennedy and Bodemuller are no longer officers of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans
The Company had loans outstanding at January 29, 2000 to certain executive officers of the Company in the aggregate principal amount of $2,974,686.
As of January 29, 2000, Mr. Tooker had six loans from the Company outstanding. Mr. Tooker owed the Company $1,109,692 in principal and accrued interest on the loans, which was the largest aggregate amount of indebtedness outstanding owed by Mr. Tooker to the Company at any time during the 1999 fiscal year. The principal balances and rates of interest on the loans are $140,000 (5.70%), $203,200 (5.70%), $175,000 (5.88% up to 7/15/99; 12.0% thereafter), $125,000 (5.74% up to 9/15/99; 12.0% thereafter), $200,000 (8.50%) and $200,000 (9.0%). On February 20, 2000, the Special Committee of the Board determined that a loan in the principal amount of $300,000 was part of the "Ranch Transaction" as described below in "Other Transactions" and should be reflected on the books of the Company as a loan repayment when Mr. Tooker caused the Company to purchase this property and pay him an amount he claimed as his equity in such property. The Company is seeking from Mr. Tooker the full amount of its loss in connection with this transaction, including the amount credited to payment of this loan and has filed suit to recover such amounts.
As of January 29, 2000, Mr. Marcum had five loans from the Company outstanding. Mr. Marcum owed the Company $498,125 in principal and accrued interest on these loans, which was the largest aggregate amount of indebtedness outstanding owed by Mr. Marcum to the Company at any time during the 1999 fiscal year. The principal balances and rates of interest on the loans are $115,000 (5.70%), $75,000 (5.70%), $165,000 (5.88% up to 7/15/99; 12.0% thereafter), $12,500 (8.50%) and $100,000 (9.0%). A News Release regarding Mr. Marcum's resignation was issued by the Company May 24, 2000. As of June 1, 2000, Mr. Marcum's loans with the Company had been repaid in full.
As of January 29, 2000, Mr. Lovell had six loans from the Company outstanding. Mr. Lovell owed the Company $565,544 in principal and accrued interest on the loans, which was the largest aggregate amount of indebtedness outstanding owed by Mr. Lovell to the Company at any time during the 1999 fiscal year. The principal balances and rates of interest on the loans are $150,000 (6.30%), $125,000 (5.87%), $142,679 (5.93%), $25,000 (8.50%), $20,000 (9.0%) and $71,815 (9.0%). On may 31, 2000, the Company and Mr. Lovell entered into a settlement agreement which resolved all outstanding loans and other issues between the Company and Mr. Lovell.
As of January 29, 2000, Mr. Lucas had three loans from the Company outstanding. Mr. Lucas owed the Company $683,043 in principal and accrued interest on the loans, which was the largest aggregate amount of indebtedness owed by Mr. Lucas to the Company at any time during the 1999 fiscal year. The principal balances and rates of interest on the loans are $377,195 (5.98% up to 4/29/99; 12.0% thereafter), $145,000 (8.5%) and $107,298 (9.0%). Arrangements have been made with Mr. Lucas to repay the remaining balances outstanding under his loans.
Consulting Services
Beginning in March 2000, Mr. Bush began providing certain consulting services to the Company. Under his consulting agreement with the Company, Mr. Bush receives a specified daily consulting rate plus reimbursement of any expenses he incurs while performing such consulting services.
Other Transactions
Mr. Tooker's departure as President and Chief Executive Officer follows an inquiry conducted by a Special Committee consisting of all of the non-management members of the Board of Directors, which reviewed certain transactions between the Company and Mr. Tooker. The effects of the transactions reviewed have been reflected in the Company's results for prior periods, and the Committee believes they are not material to the financial condition or operations of the Company. However, these transactions had not been properly reported to the Company's Board of Directors.
Specifically, the Special Committee determined that the Company purchased Mr. Tooker's personal residence in 1997 at a price specified by him, and assumed all liability for the property, including upkeep and existing debt payments, until it was sold in 1999 (the "Ranch Transaction"). The Company sustained a loss of $806,556 as a result of this transaction. Although the payment of these funds has been reflected in the Company's books and records, this transaction was not previously disclosed in prior filings with the SEC, nor was it approved by the Board of Directors.
In another transaction, it was determined that in May, 1997 the Company entered into a severance agreement and a separate consulting contract in connection with the separation of an employee who shortly thereafter became Mr. Tooker's spouse. The Company recorded in its books and records payments to or for the benefit of his spouse beginning in May, 1997, and ending in August 1998, totaling $608,317.48, without the knowledge or approval of the Board of Directors. Additionally, these transactions were not previously disclosed in prior filings with the SEC. The Special Committee also determined that while employed by the Company in 1996 and 1997, this employee entered into transactions with a company with whom her sister was believed to be affiliated, in which the Company paid a total of $313,260 for purchases of clothing inventory. The Special Committee did not find any overcharges with respect to the inventory purchases.
Demand has been made upon Mr. Tooker to reimburse the Company for the unauthorized payments regarding his personal residence and the severance paid to his spouse. In addition, the Company has demanded repayment by Mr. Tooker of outstanding loans he obtained from the Company, with interest thereon, totaling approximately $1.1 million. Some of these loans are secured by collateral which includes securities of the Company.
The Special Committee further determined that during the years 1997 through 1999, the Company maintained a contractual relationship with Stage Planning and Design, Inc. ("SPAD"), believed to be a wholly-owned subsidiary of U.S. Builders, Inc., to manage the construction of store openings and remodeling. Under the terms of this agreement, the Company was required to and did reimburse or pay direct all of SPAD's costs, including all payroll expenses. In 1997, the Company paid SPAD in excess of $2.4 million, and in 1998 in excess of $9.9 million. Until late 1999, Mr. Tooker's son-in-law was an officer and project manager for SPAD, whose compensation was included as a reimbursable expense billed to the Company during this time. Although the expenditures were recorded on the Company's books and records for the years in which they were accrued, the relationship involving Mr. Tooker's son-in-law was not approved by the Board of Directors.
News Releases regarding Mr. Tooker's departure and certain other matters were issued by the Company on February 22, 2000 and March 9, 2000.
In connection with the aforementioned matters, the Company has received and responded to an information request as part of an informal inquiry by the Securities and Exchange Commission.
Transactions with Stockholders
Registration Rights Agreement
The Company is party to a Registration Agreement (the "Registration Agreement") with Court Square pursuant to which such stockholder has the right to cause the Company to register shares of Common Stock (the "registrable securities") under the Securities Act. As of May 30, 2000, 1,620,652 outstanding shares of Common Stock constitute registrable securities and therefore will be eligible for registration pursuant to the Registration Agreement. Under the terms of the Registration Agreement, the holders of at least a majority of the registrable securities can require the Company, subject to certain limitations, to file up to three "long-form" registration statements under the Securities Act covering all or part of the registrable securities, and, subject to certain limitations, to file an unlimited number of "short-form" registration statements under the Securities Act covering all or part of the registrable securities. The Company is obligated to pay all registration expenses (other than underwriting discounts and commissions and subject to certain limitations) incurred in connection with the demand registrations. In addition, the Registration Statement provides the Court Square with "piggyback" registration rights, subject to certain limitations, whenever the Company files a registration statement on a registration form that can be used to register registrable securities.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements
See "Index to Financial Statements and Schedules" on Page 31.
(b) Reports on Form 8-K filed during the last quarter of the period covered by this report.
The Company filed a News Release on Form 8-K dated November 4, 1999 related to Stage Stores, Inc. announcing third quarter 1999 sales.
The Company filed a News Release on Form 8-K dated November 12, 1999 related to Stage Stores, Inc. announcing the completion of the refinancing of the Company's accounts receivable program.
The Company filed a News Release on Form 8-K dated November 18, 1999 related to Stage Stores, Inc. announcing third quarter 1999 results.
The Company filed a News Release on Form 8-K dated December 10, 1999 related to Stage Stores, Inc. announcing the dismissal of the class action lawsuit.
The Company filed a News Release on Form 8-K dated January 6, 2000 related to Stage Stores, Inc. announcing 1999 holiday period sales.
The Company filed a News Release on Form 8-K dated February 3, 2000 related to Stage Stores, Inc. announcing an amendment to the credit agreement, discussing the Company's cost reduction program and reporting fourth quarter 1999 sales.
The Company filed a copy of the Fifth Amendment Agreement to the Credit Agreement, dated as of February 3, 2000, on Form 8-K dated February 7, 2000.
The Company filed a News Release on Form 8-K dated February 23, 2000 related to Stage Stores, Inc. announcing the departure of the Company's President and Chief Executive Officer and a commitment to increase the Company's working capital facility.
The Company filed a News Release on Form 8-K dated March 9, 2000 related to Stage Stores, Inc. announcing fourth quarter and full year 1999 results. The Company also provided additional details on the departure of the Company's President and Chief Executive Officer as announced in a News Release on Form 8-K dated February 23, 2000.
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.
(c) Exhibits - See "Exhibit Index" at X-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
/s/ John J. Wiesner June 6, 2000 John J. Wiesner Chairman, Chief Executive Officer and President (principal executive officer)
STAGE STORES, INC.
/s/ Charles M. Sledge June 6, 2000 Charles M. Sledge Senior VP Finance, Treasurer and Secretary (principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ John J. Wiesner Chairman of the Board June 6, 2000 John J. Wiesner of Directors
/s/ Jack Bush Director June 6, 2000 Jack Bush
/s/ Robert Huth Director June 6, 2000 Robert Huth
/s/ Richard Jolosky Director June 6, 2000 Richard Jolosky
/s/ Harold Compton Director June 6, 2000 Harold Compton
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page Number
Financial Statements
Report of Independent Accountants Consolidated Balance Sheet at January 29, 2000 and January 30, 1999 Consolidated Statement of Operations for 1999, 1998 and 1997 Consolidated Statement of Cash Flows for 1999, 1998 and 1997 Consolidated Statement of Stockholders' Equity for 1999, 1998 and 1997 Notes to Consolidated Financial Statements
Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
EXHIBIT INDEX
The following documents are the exhibits to the Form 10-K. For convenient reference, each exhibit is listed according to the Exhibit Table of Regulation S-K.
Exhibit Number Exhibit
*2.1 Agreement and Plan of Merger, dated as of March 5, 1997, between Stage Stores, Inc. and C.R. Anthony Company (Incorporated by Reference to Exhibit 2.1 of Registration No. 333-27809 on Form S-4).
*2.2 First Amendment to Agreement and Plan of Merger, dated as of May 20, 1997, between Stage Stores, Inc. and C. R. Anthony Company (Incorporated by Reference to Exhibit 2.2 of Registration No. 333-27809 on Form S-4).
*3.1 Amended and Restated Certificate of Incorporation of Stage Stores, Inc. (Incorporated by Reference to Exhibit 3.3 of Registration No. 333-5855 on Form S-1).
*3.2 Amended and Restated By-Laws of Stage Stores, Inc. (Incorporated by Reference to Exhibit 3.4 of Registration No. 333-5855 on Form S-1).
*3.3 Restated Articles Certificate of Incorporation of Specialty Retailers, Inc. (Incorporated by Reference to Exhibit 3.3 of Registration No. 333-32695 on Form S-4).
*3.4 Amended and Restated Bylaws of Specialty Retailers, Inc. (Incorporated by Reference to Exhibit 3.4 of Registration No. 333-32695 on Form S-4).
*3.5 Certificate of Incorporation of Specialty Retailers, Inc. (NV) (Incorporated by Reference to Exhibit 3.5 of Registration No. 333-32695 on Form S-4).
*3.6 Bylaws of Specialty Retailers, Inc. (NV) (Incorporated by Reference to Exhibit 3.6 of Registration No. 333-32695 on Form S-4).
*3.7 Rights Agreement dated as of November 11, 1998 between Stage Stores, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (Incorporated by Reference to Exhibit 1 of Form 8- K of Stage Stores, Inc., dated November 12, 1998).
*4.1 Credit Agreement dated as of June 17, 1997 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston (Incorporated by Reference to Exhibit 4.1 of Registration No. 333-32695 on Form S-4).
*4.2 Amendment Agreement dated as of June 26, 1997 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston to the Credit Agreement dated as of June 17, 1997 (Incorporated by Reference to Exhibit 4.2 on Form 10-K of Stage Stores, Inc., for fiscal year ended January 30, 1999).
*4.3 Second Amendment Agreement dated as of October 1, 1997 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston to the Credit Agreement dated as of June 17, 1997 (Incorporated by Reference to Exhibit 4.3 on Form 10-K of Stage Stores, Inc., for fiscal year ended January 30, 1999).
*4.4 Third Amendment Agreement dated as of October 6, 1998 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston to the Credit Agreement dated as of June 17, 1997. (Incorporated by Reference to Exhibit 4.1 on Form 10-Q of Stage Stores, Inc., dated October 31, 1998).
EXHIBIT INDEX (Continued)
Exhibit Number Exhibit
*4.5 Fourth Amendment Agreement dated as of January 27, 1999 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston to the Credit Agreement dated as of June 17, 1997. (Incorporated by Reference to Form 8-K of Stage Stores, Inc., dated January 28, 1999).
*4.6 Fifth Amendment Agreement dated as of February 3, 2000 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston to the Credit Agreement dated as of June 17, 1997. (Incorporated by Reference to Form 8-K of Stage Stores, Inc., dated February 7, 2000).
**4.7 Sixth Amendment Agreement dated as of February 18, 2000 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston to the Credit Agreement dated as of June 17, 1997.
**4.8 Credit Agreement dated as of March 6, 2000 by and among Specialty Retailers, Inc., Stage Stores, Inc., the banks named therein and Credit Suisse First Boston.
*4.9 Indenture dated as of June 17, 1997 relating to the $200,000,000 aggregate principal amount of 81/2% Senior Notes due 2005 among Specialty Retailers, Inc., Stage Stores, Inc. and State Street Bank and Trust Company, and First Supplemental Indenture dated as of July 2, 1997 (Incorporated by Reference to Exhibit 4.2 of Registration No. 333-32695 on Form S-4).
*4.10 Indenture dated as of June 17, 1997 relating to the $100,000,000 aggregate principal amount of 9% Senior Subordinated Notes due 2007 among Specialty Retailers, Inc., Stage Stores, Inc. and State Street Bank and Trust Company, and First Supplemental Indenture dated as of July 2, 1997 (Incorporated by Reference to Exhibit 4.3 of Registration No. 333-32695 on Form S-4).
*4.11 Indenture between 3 Bealls Holding Corporation and Bankers Trust Company, as Trustee, relating to 3 Bealls Holding Corporation's 9% Subordinated Debentures due 2002 (Incorporated by Reference to Exhibit 4.2 of Registration No. 33-24571 on Form S-4) and First Supplemental Indenture dated August 2, 1993 (Incorporated by Reference to Exhibit 4.4 of Registration No. 33-68258 on Form S-4).
*4.12 Indenture between 3 Bealls Holding Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating to 3 Bealls Holding Corporation's 7% Junior Subordinated Debentures due 2002 (Incorporated by Reference to Exhibit 4.3 of Registration No. 33- 24571 on Form S-4) and First Supplemental Indenture dated August 2, 1993 (Incorporated by Reference to Exhibit 4.5 of Registration No. 33-68258 on Form S-4).
**4.13 Second Amended and Restated Pooling and Servicing Agreement by and among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., and Bankers Trust (Delaware) dated November 1, 1999.
**4.14 Amendment and Consent to the Second Amended and Restated Pooling and Servicing Agreement by and among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., and Bankers Trust (Delaware) dated December 9, 1999.
*4.15 Amended and Restated Receivables Purchase Agreement among SRI Receivables Purchase Co., Inc. and Originators dated May 30, 1996 (Incorporated by Reference to Exhibit 4.7 on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
EXHIBIT INDEX (Continued)
Exhibit Number Exhibit
*4.16 First Amendment to the Amended and Restated Receivables Purchase Agreement among SRI Receivables Purchase Co., Inc. and Originators dated August 1, 1998 (Incorporated by Reference to Exhibit 4.14 on Form 10-K of SRI Receivables Purchase Co., Inc., for fiscal year ended January 30, 1999).
**4.17 Second Amendment to the Amended and Restated Receivables Purchase Agreement among SRI Receivables Purchase Co., Inc. and Originators dated November 9, 1999.
*4.18 Receivables Transfer Agreement among Specialty Retailers, Inc., and Granite National Bank, N.A. dated as of August 1, 1998 (Incorporated by Reference to Exhibit 4.15 on Form 10-K of SRI Receivables Purchase Co., Inc., for fiscal year ended January 30, 1999).
**4.19 First Amendment to the Receivables Transfer Agreement among Specialty Retailers, Inc., and Granite National Bank, N.A. dated as of November 9, 1999.
**4.20 Series 1999-1 Supplement to the Second Amended and Restated Pooling and Servicing Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust "Delaware", dated as of November 9, 1999, including amendments as of December 9, 1999.
**4.21 Issuance Supplement I to the Series 1999-1 Supplement to the Second Amended and Restated Pooling and Servicing Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust "Delaware", dated as of November 9, 1999.
**4.22 Issuance and Indemnity Agreement among Specialty Retailers, Inc., SRI Receivables Purchase Co., Inc., Bankers Trust "Delaware" and R.V.I. Guaranty Co. Ltd, dated as of December 9, 1999.
**4.23 Class A-1 Certificate Purchase Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., the Class A-1 Purchasers parties thereto and Credit Suisse First Boston, dated as of November 9, 1999.
**4.24 Class A-2 Certificate Purchase Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., the Class A-2 Purchasers parties thereto and Credit Suisse First Boston, dated as of November 9, 1999.
**4.25 Class B Certificate Purchase Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., the Class B Purchasers parties thereto and Credit Suisse First Boston, dated as of November 9, 1999.
**4.26 Class C and Class D Certificate Purchase Agreement among SRI Receivables Purchase Co., Inc., Specialty Retailers, Inc., and Credit Suisse First Boston, dated as of November 9, 1999.
*10.1 Registration Agreement by and among Specialty Retailers, Inc., Tyler Capital Fund, L.P. Tyler Massachusetts, L.P., Tyler International, L.P.-I, Tyler International, L.P.-II, Bain Venture Capital, Citicorp Capital Investors, Ltd., Acadia Partners, L.P., Drexel Burnham Lambert Incorporated, and certain other Purchasers, dated December 29, 1988 (Incorporated by Reference to Exhibit 10.10 of Registration No. 33-27714 on Form S-1) and Amendment to Registration Agreement dated August 2, 1993 (Incorporated by Reference to Exhibit 10.5 of Registration No. 33-68258 on Form S-4).
*10.2 Apparel Retailers, Inc. Stock Option Plan (Incorporated by Reference to Exhibit 10.13 of Registration No. 33-68258 on Form S-4).
EXHIBIT INDEX (Continued)
Exhibit Number Exhibit
*10.3 Employment Agreement between Stage Stores, Inc. and Carl E. Tooker dated April 1, 1998. (Incorporated by Reference to Exhibit 10.3 on Form 10-K of Stage Stores, Inc., dated January 31, 1998).
*10.4 Stock Option Agreement between Specialty Retailers, Inc. and Carl E. Tooker dated June 9, 1993 (Incorporated by Reference to Exhibit 10.18 of Registration No. 33-68258 on Form S-4).
*10.5 Employment Agreement between James Marcum and Stage Stores, Inc. dated April 1, 1998. (Incorporated by Reference to Exhibit 10.6 on Form 10-K of Stage Stores, Inc., dated January 31, 1998).
*10.6 Employment Agreement between Stephen Lovell and Stage Stores, Inc. dated April 1, 1998. (Incorporated by Reference to Exhibit 10.7 on Form 10-K of Stage Stores, Inc., dated January 31, 1998).
*10.7 Employment Agreement between Ron Lucas and Stage Stores, Inc. dated April 1, 1998. (Incorporated by Reference to Exhibit 10.8 on Form 10-K of Stage Stores, Inc., dated January 31, 1998).
*10.8 Employment Agreement between Jim Bodemuller and Stage Stores, Inc. dated April 1, 1998. (Incorporated by Reference to Exhibit 10.9 on Form 10-K of Stage Stores, Inc., dated January 31, 1998).
**10.9 Employment Agreement between John J. Wiesner and Stage Stores, Inc. dated February 22, 2000.
**10.10 First Amendment to Employment Agreement between John J. Wiesner and Stage Stores, Inc. dated May 5, 2000.
*10.11 Securities Purchase Agreement among Palais Royal, Inc. and certain selling stockholders of Uhlmans, dated May 9, 1996 (Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Stage Stores, Inc., dated June 12, 1996).
*10.12 Stage Stores, Inc. Amended and Restated 1996 Equity Incentive Plan (Incorporated by Reference to Exhibit A of the Proxy Statement for the annual meeting of stockholders of Stage Stores, Inc., dated April 13, 1999).
*21.1 List of Registrant's Subsidiaries.
**23.1 Consent of PricewaterhouseCoopers LLP.
**27.1 Financial Data Schedule. ________
* Previously Filed ** Filed Herewith
Report of Independent Accountants
To the Board of Directors and Stockholders of Stage Stores, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Stage Stores, Inc. and its subsidiaries (the "Company") at January 29, 2000 and January 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of $281.9 million for the year ended January 29, 2000 and had a working capital deficit and stockholders' deficit of $258.2 million and $75.0 million, respectively, at January 29, 2000. As described in Note 2 to the financial statements, the Company's financial performance to date for the year ending February 3, 2001 has resulted in restrictions on the credit terms for the purchase of merchandise inventory. Additionally, the Company is in violation of certain terms of its loan agreements. As a result, on June 1, 2000 the Company, filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, the Company adopted Statement of Position 98-5, "Reporting on Cost of Start- Up Activities," during the year ended January 29, 2000.
PricewaterhouseCoopers LLP Houston, Texas March 9, 2000, except as to Notes 2, 6, 11, 13 and 14 to the financial statements, which are as of June 1, 2000
Stage Stores, Inc. Consolidated Balance Sheet (in thousands, except par values)
January 29, 2000 January 30, 1999
ASSETS Cash and cash equivalents $20,179 $12,832 Undivided interest in accounts receivable trust 41,600 69,816 Merchandise inventories, net 261,104 341,316 Prepaid expenses 7,945 24,981 Other current assets 26,246 34,436 Deferred income taxes -- 25,056 Total current assets 357,074 508,437
Property, equipment and leasehold improvements, net 181,834 233,263 Goodwill, net -- 92,551 Other assets 15,779 23,429 Total assets $554,687 $857,680
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $40,955 $82,779 Accrued expenses and other current liabilities 72,177 52,706 Current portion of long-term debt 9,830 4,814 Long-term debt classified as current 492,393 -- Total current liabilities 615,355 140,299
Long-term debt including credit facilities -- 487,968 Other long-term liabilities 14,299 21,175 Deferred income taxes -- 3,846 Total liabilities 629,654 653,288
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, 26,834 and 26,718 shares issued and outstanding, respectively 268 267 Class B common stock, par value $0.01, convertible non-voting, 3,000 shares authorized, 1,250 shares issued and outstanding 13 13 Additional paid-in capital 266,590 265,716 Accumulated deficit (337,500) (55,610) Accumulated other comprehensive income (4,338) (5,994) Stockholders' equity (deficit) (74,967) 204,392 Commitments and contingencies -- -- Total liabilities and stockholders' equity (deficit) $554,687 $857,680
Stage Stores, Inc. Consolidated Statement of Operations (in thousands, except earnings per share)
Fiscal Year 1999 1998 1997 Net sales $1,121,567 $1,173,547 $1,073,316 Cost of sales and related buying, occupancy and distribution expenses 897,117 839,238 730,179 Gross profit 224,450 334,309 343,137
Selling, general and administrative expenses 387,816 271,477 240,011 Store opening and closure program costs 44,986 10,192 8,686 Operating income (loss) (208,352) 52,640 94,440
Interest, net 48,634 46,471 38,277
Income (loss) before income tax, extraordinary item and cumulative effect of change in accounting principle (256,986) 6,169 56,163
Income tax expense 20,217 2,455 21,623 Income (loss) before extraordinary item and cumulative effect of change in accounting principle (277,203) 3,714 34,540 Extraordinary item, net of tax -- early retirement of debt (749) -- (18,295) Cumulative effect of change in accounting principle, net of tax - reporting costs of start-up activities (3,938) -- -- Net income (loss) $(281,890) $3,714 $16,245
Basic earnings (loss) per common share data: Basic earnings per common share before extraordinary item and cumulative effect of change in accounting principle $(9.89) 0.13 $1.34
Extraordinary item, net of tax -- early retirement of debt (0.03) -- (0.71) Cumulative effect of change in accounting principle, net of tax - reporting costs of start-up activities (0.14) -- -- Basic earnings (loss) per common share $(10.06) $0.13 $0.63
Basic weighted average common shares outstanding 28,028 27,885 25,808
Diluted earnings (loss) per common share data: Diluted earnings per common share before extraordinary item and cumulative effect of change in accounting principle $(9.89) $0.13 $1.30 Extraordinary item, net of tax -- early retirement of debt (0.03) -- (0.69) Cumulative effect of change in accounting principle, net of tax - reporting costs of start-up activities (0.14) -- -- Diluted earnings (loss) per common share $(10.06) $0.13 $0.61 Diluted weighted average common shares outstanding 28,028 28,428 26,483
Stage Stores, Inc. Consolidated Statement of Cash Flows (in thousands)
Fiscal Year 1999 1998 1997 Cash flows from operating activities:
Net income (loss) $(281,890) $3,714 $16,245 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 173,631 33,474 19,828 Deferred income taxes 20,151 2,371 27,438 Accretion of discount 1,254 1,138 1,231 Amortization of debt issue costs 2,930 2,577 2,274 Loss on early retirement of debt 749 -- 18,295 Cumulative effect of change in accounting principle 3,938 -- -- Changes in operating assets and liabilities: Decrease (increase) in undivided interest in accounts receivable trust 28,216 (8,605) 22,777 Decrease (increase) in merchandise inventories 80,212 (38,201) (76,451)
Decrease (increase) in other assets 24,629 (2,637) (26,970) Increase (decrease) in accounts payable and accrued liabilities (29,919) (9,341) 14,167 Total adjustments 305,791 (19,224) 2,589 Net cash provided by (used in) operating activities 23,901 (15,510) 18,834
Cash flows from investing activities:
Additions to property, equipment and leasehold improvements (22,037) (88,719) (64,859) Acquisitions, net of cash acquired -- -- (4,946) Net cash used in investing activities (22,037) (88,719) (69,805)
Cash flows from financing activities:
Proceeds from: Credit facilities 43,000 96,300 45,700 Long-term debt -- -- 299,718 Common stock 128 955 22,522 Payments on: Long-term debt (34,813) (2,596) (299,533) Additions to debt issue costs (2,832) (913) (12,407) Net cash provided by financing activities 5,483 93,746 56,000
Net increase (decrease) in cash and cash equivalents 7,347 (10,483) 5,029
Cash and cash equivalents: Beginning of year 12,832 23,315 18,286 End of year $20,179 $12,832 $23,315
Supplemental disclosures: Cash flow information: Interest paid $45,528 $43,015 $45,988
Income taxes paid (refunded) $197 $(2,872) $(14,436)
Non-cash investing and financing activities: In connection with various acquisitions, liabilities were assumed as follows: Fair value allocated to assets acquired $-- $-- $120,665 Cash paid for assets acquired, including acquisition expenses -- -- (4,946) Value of Common Stock exchanged -- -- (72,284) Liabilities assumed $-- $-- $43,435
Stage Stores, Inc. Consolidated Statement of Stockholders' Equity (Deficit) (in thousands)
Fiscal Year 1999 1998 1997 Shares Outstanding Shares of common stock issued: Beginning balance 26,718 26,500 22,033 Issuance of stock 116 218 4,467 Ending balance 26,834 26,718 26,500
Shares of Class B stock issued: Beginning balance 1,250 1,250 1,250 Ending balance 1,250 1,250 1,250
Stockholders' Equity (Deficit) Common stock issued: Beginning balance $267 $265 $220 Issuance of stock 1 2 45 Ending balance 268 267 265
Class B stock issued: Beginning balance 13 13 13 Ending balance 13 13 13
Additional Paid-in Capital: Beginning balance 265,716 264,679 169,811 Issuance of stock 874 953 94,761 Vested compensatory stock options -- 84 107 Ending balance 266,590 265,716 264,679
Accumulated deficit and accumulated other comprehensive income: Beginning balance (61,604) (59,879) (77,778) Comprehensive income (loss): Net income (loss) (281,890) 3,714 16,245 Other comprehensive income (loss) 1,656 (5,439) 1,654 Total comprehensive income (loss) (280,234) (1,725) 17,899 Ending balance (341,838) (61,604) (59,879) Total Stockholders' Equity (Deficit) $(74,967) $204,392 $205,078
Accumulated other comprehensive income: Beginning balance $(5,994) $(555) $(2,209) Comprehensive income (loss) - Minimum pension liability adjustment, net of tax 1,656 (5,439) 1,654 Ending balance $(4,338) $(5,994) $(555)
Stage Stores, Inc. Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Stage Stores, Inc. ("Stage Stores" or the "Company"), through its wholly-owned subsidiary, Specialty Retailers, Inc. ("SRI"), operates family apparel stores primarily under the names "Bealls", "Palais Royal" and "Stage" offering nationally recognized brand name family apparel, accessories, cosmetics and footwear. As of January 29, 2000, the Company operated 648 stores in thirty-three states located throughout the United States.
Principles of Consolidation: The consolidated financial statements include the accounts of Stage Stores and its wholly- owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Fiscal Year: References to a particular year are to the Company's fiscal year which is the 52 or 53 week period ending on the Saturday closest to January 31 of the following calendar year (e.g., a reference to "1999" is a reference to the fiscal year ended January 29, 2000).
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers highly liquid investments with initial maturities of less than three months to be cash equivalents in its statement of cash flows.
Accounts Receivable Securitization: The Company securitizes substantially all of its trade accounts receivable through a wholly-owned special purpose entity, SRI Receivables Purchase Co., Inc. ("SRPC"). SRPC holds a retained interest in the securitization vehicle (the "Retained Interest"), a special purpose trust (the "Trust"). The Company accounts for the Retained Interest in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, the Retained Interest is accounted for as an investment in debt securities and classified as trading securities. Accordingly, the Retained Interest is recorded at fair value in the accompanying balance sheet with any change in fair value reflected currently in income. The unrealized gain recorded to income in 1999, 1998 and 1997 was $7.3 million, $3.2 million and $0.7 million, respectively.
Merchandise Inventories: The Company states its merchandise inventories at the lower of cost or market based upon the retail method of accounting, cost being determined using the last-in, first-out ("LIFO") method. Market is estimated on a pool-by-pool basis. The Company believes that the LIFO method, which charges the most recent merchandise costs to the results of current operations, provides a better matching of current costs with current revenues in the determination of operating results. During 1999 inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at higher costs prevailing in prior years as compared with the cost of 1999 purchases, the effect of which increased cost of goods sold by approximately $8.8 million and increased net loss by approximately $8.8 million or $0.31 dollars per share.
Property, Equipment and Leasehold Improvements: Property, equipment and leasehold improvements are stated at cost and depreciated over their estimated useful lives using the straight- line method. The estimated useful lives of leasehold improvements do not exceed the term of the related lease, including renewal options. The estimated useful lives in years are generally as follows:
Buildings 20-25 Store and office fixtures and equipment 5-12 Warehouse equipment 5-15 Leasehold improvements 5-30
Goodwill and Other Intangibles: The Company amortizes goodwill and intangible assets on a straight-line basis over the estimated future periods benefited, not to exceed forty years. Amortization periods for goodwill and other intangibles associated with acquisitions are currently five to forty years. Each year, the Company evaluates the remaining useful life associated with goodwill based upon, among other things, historical and expected long-term results of operations. Accumulated amortization of goodwill was $10.3 million at January 30, 1999.
Debt Issue Costs: Debt issue costs are accounted for as a deferred charge and amortized on a straight-line basis over the term of the related issue. Amortization of debt issue costs were $2.9 million, $2.6 million and $2.3 million for 1999, 1998 and 1997, respectively.
Accrued Expenses and Other Current Liabilities: Accrued expenses and other current liabilities include accrued payroll and related payroll taxes of $8.3 million and $7.3 million at January 29, 2000 and January 30, 1999, respectively.
Financial Instruments: Except for the Retained Interest, the Company records all financial instruments at cost. The cost of all financial instruments, except long-term debt and the Retained Interest, approximates fair value.
Comprehensive income: Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are recorded directly as an adjustment to stockholders' equity. Minimum pension liability adjustment is the Company's only component of comprehensive income. The minimum pension liability adjustments recorded in the accompanying statement of stockholders' equity are net of tax expense (benefit) of ($1.7) million, $3.5 million and ($1.1) million in 1999, 1998 and 1997, respectively.
Store Pre-Opening Expenses: Costs related to the opening of new stores are expensed as incurred.
Advertising Expenses: Advertising costs are charged to operations when the related advertising first takes place. Advertising costs were $52.5 million, $50.4 million and $39.5 million for 1999, 1998 and 1997, respectively. Prepaid advertising costs were $1.3 million and $2.7 million at January 29, 2000 and January 30, 1999, respectively.
Impairment of Assets: The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
Income Taxes: The provision for income taxes is computed based on the pretax income included in the Consolidated Statement of Operations. The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of assets and liabilities. A valuation allowance is to be established if it is more likely than not that some portion of the deferred tax asset will not be realized.
Earnings per Share: Basic earnings per share is computed using the weighted average number of common shares outstanding during the periods. Diluted earnings per share is computed using the weighted average number of common shares as well as all potentially dilutive common share equivalents outstanding. Stock options and restricted stock are the only potentially dilutive share equivalents the Company has outstanding for the periods presented. Incremental shares of 543 thousand and 675 thousand in 1998 and 1997, respectively, were used in the calculation of diluted earnings per common share. All common share equivalents were excluded from the computation of diluted earnings per share in 1999, as they were anti-dilutive. Common share equivalents of 408 thousand and 245 thousand in 1998 and 1997, respectively, were not included in the computation of diluted earnings per share as they were anti-dilutive.
Start-up Costs: In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), effective for fiscal years beginning after December 15, 1998. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. Initial adoption of SOP 98-5 is to be reported as the cumulative effect of a change in accounting principle. The Company adopted SOP 98-5 in the first quarter of 1999 which resulted in a net of tax charge of $3.9 million.
Reclassifications: The accompanying Consolidated Financial Statements include reclassifications from financial statements issued in previous years.
New 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 March 2000, the FASB issued interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation which provides guidance for certain issues arising from the application of APB Opinion No. 25; the Company is currently evaluating the impact of application of this interpretation on its financial statements.
NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS
The Company incurred a net loss of $281.9 million for the year ended January 29, 2000; the Company also had working capital deficit and stockholders' deficit of $258.3 million and $75.0 million respectively, at January 29, 2000.
The Company is highly leveraged and depends on adequate trade support to fund its inventory working capital requirements. As a result of the Company's poor financial performance to date for the year ending February 3, 2001, the vendor community has significantly restricted the Company's access to normal trade terms. As a result, the Company can not currently believe it has sufficient liquidity to fund its working capital requirements
As of June 1, 2000, the Company was in violation of certain covenants under its various debt agreements. As a result, substantially all of the Company's debt has been classified as current in the accompanying balance sheet at January 29, 2000. These violations of the terms of its debt agreements could allow lenders to take actions to accelerate the repayment schedule of these debt instruments. The Company would be unable to pay amounts becoming due as a result of any acceleration of repayment terms.
As a result of the foregoing, the Company filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") on June 1, 2000. Under Chapter 11, the Company is seeking approval to operate as a debtor-in- possession. The Company is currently negotiating with a lender to finance the Company's working capital requirements during Chapter 11 reorganization proceedings, however there can be no assurances the financing will be obtained or approved by the Court.
Under Chapter 11, the Company would intend to operate its business as debtor-in-possession, subject to the approval of the Bankruptcy Court for certain proposed actions. Additionally, one or more creditor committees would be formed and would 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 Bankruptcy 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 Bankruptcy Court.
As a result of the foregoing matters, the estimate of expected future cash flows of stores was lowered. The Company recorded an impairment loss of $41.7 million in 1999, consisting of increased depreciation and amortization of $26.0 million related to property, equipment and leasehold improvements associated with underperforming stores and associated goodwill of $15.7 million. The impairment loss is included in selling, general and administrative expense in the accompanying statement of operations. Additionally, because of the foregoing matters the Company reevaluated the recoverability of its remaining goodwill; as a result the Company wrote-off the remaining balance amounting to $67.9 million and other intangible assets amounting to $1.0 million during 1999.
The accompanying consolidated 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 and circumstances relating to this event, including the Company's highly leveraged financial structure and recurring losses from operations as reflected in the consolidated financial statements, 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. Additionally, there will likely be additional store closures as part of the reorganization process which would result in additional adjustments. 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 agreements and the ability to generate sufficient cash from operations and financing sources to meet obligations. Additionally, the accompanying consolidated financial statements do not include any adjustments that would be required if the Company were in liquidation.
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 current liabilities. 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.
NOTE 3 - STORE CLOSURE PROGRAM
During the second quarter of 1999, the Company implemented a store closure program under which the Company closed 35 underperforming stores during the last three quarters of 1999. During the fourth quarter of 1999, the Company implemented a store closure program to close an additional 64 stores. As of January 29, 2000, 5 of the stores have been closed while the remaining 59 stores are expected to be closed by the end of the third quarter of 2000.
In connection with these closures, the Company recorded $59.0 million of pretax costs, of which $14.8 million is included in cost of sales while the remaining $44.2 million is included in store opening and closure program costs. Of the $59.0 million of costs, approximately $9.4 million represents severance and lease termination costs, approximately $2.8 million represents a reserve for uncollectible accounts receivable associated with the Company's private label credit card program, approximately $3.4 million represents write-off of prepaid supplies and signage, approximately $14.8 million represents a lower of cost or market reserve related to the inventory being liquidated in the stores in the store closure program, while the balance relates primarily to the write-off of fixed assets and intangibles associated with these stores. As of January 29, 2000, the accompanying balance sheet includes a lower of cost or market reserve of $6.2 million related to the inventory remaining to be liquidated in the stores in the closure program and $8.2 million for estimated severance and lease termination costs to be paid.
The stores included in the store closure program had the following operating results prior to store closure charges: 1999 1998 1997 Net sales $56,062 $72,929 $61,281 Gross margin 17,380 26,196 21,292 Direct operating expense 21,942 29,424 20,683 Contribution before corporate allocations $(4,562) $(3,228) $609
NOTE 4 - ACCOUNTS RECEIVABLE SECURITIZATION
Pursuant to the accounts receivable securitization (the "Accounts Receivable Program"), the Company sells substantially all of the accounts receivable generated by the holders of the Company's private label credit card accounts to SRPC on a daily basis in exchange for cash or an increase in the Company's interest. SRPC is a separate limited-purpose subsidiary that is operated in a fashion intended to ensure that its assets and liabilities are distinct from those of the Company and its other affiliates as SRPC's creditors have a claim on its assets prior to becoming available to any creditor of the Company. On November 9, 1999, the Company completed a refinancing of the existing term and revolving certificates outstanding under its Accounts Receivable Program. In connection with the refinancing, the previously existing term and revolving certificates were replaced with new term and revolving certificates (the "New Certificates"). The New Certificates provide the Company with a maximum availability of $329.9 million, subject to the amount of receivables held in the Trust. The New Certificates consists of $283.5 million of revolving certificates and $46.4 million of term certificates. The revolving certificates consist of Class A and Class B Variable Funding Certificates and the term certificates consist of Class C and Class D Floating Rate Asset Backed Certificates. In addition, the trust has issued Class E Certificates, which are subordinate to all of the other certificates. The amount of the outstanding balance under the revolving certificates will vary based upon a number of factors which include, among others, the level of receivables in the Trust and the working capital needs of the Company. The commitment period for the revolving certificates expires in November 2000 and is subject to annual renewal with consent from the holders of the revolving certificates. The term certificates begin to amortize during September 2002. Under certain circumstances, collections on the accounts receivable portfolio which would have otherwise been available to the Company, may be retained within the Trust to be unavailable to the Company until the satisfaction of certain conditions. As of January 29, 2000, $1.2 million was being retained in the Trust. In addition, certain conditions could cause an early amortization event in the Trust. If such an event occurs, the amortization period for all the certificates would begin immediately. The filing of protection under Chapter 11 of Title 11 of the United States Bankruptcy Code would trigger an early amortization event, which results in the acceleration of principle payments to certain classes of certificate holders. Additionally, an amortization event could result in write down in the recorded amount of the undivided interest in the accounts receivable trusts included in the accompanying balance sheet.
Based upon the amount of receivables in the Trust at the time of closing, the Company received $292.4 million of proceeds. Of this amount, $259.3 million was used to retire the outstanding balances under the previously existing Trust certificates, which were scheduled to begin amortizing in December of 1999. The remainder of the proceeds were used to redeem the previously existing $30.0 million aggregate principle amount of SRPC 12.5% Trust certificate-backed notes and other costs associated with the refinancing. In connection with the refinancing, the Company recorded an after-tax extraordinary charge of approximately $0.7 million in the fourth quarter of 1999 related to the early retirement of debt.
Amounts outstanding under the New Certificates are funded by the issuance of commercial paper in the open market through a facility agent at various rates and maturities. If the commercial paper market is unavailable, amounts outstanding under the revolving component of the New Certificates will be funded by a liquidity provider. If accounts receivable balances in the Trust fall below the level required to support the term certificates and revolving certificates, certain principal collections may be retained in the Trust until such time as the receivable balances exceed the certificates then outstanding and the required Company's interest. The Trust may issue additional series of certificates from time to time. Terms of any future series will be determined at the time of issuance. The outstanding balances of the term certificates totaled $46.4 million and $165.0 million at January 29, 2000 and January 30, 1999, respectively. There was $270.7 million and $115.6 million outstanding under the revolving certificates at January 29, 2000 and January 30, 1999, respectively.
Total accounts receivable transferred to the Trust during 1999, 1998 and 1997 were $567.1 million, $585.3 million and $508.9 million, respectively. The cash flows generated from the accounts receivable in the Trust are dedicated to: (i) the purchase of new accounts receivable generated by the Company; (ii) payment of a return on the certificates; and (iii) the payment of a servicing fee to SRI. Any remaining cash flows are remitted to SRPC. The New Certificates entitle the holders to receive a return, based upon the London Interbank Offered Rate ("LIBOR"), plus a specified margin. At January 29, 2000, the blended rate of return on the New Certificates was 6.5%.
Accounts receivable sold to SRPC that subsequently become defaulted are allocated to each certificate class by order of preference. Class A Certificates are senior to all of the other certificates and Class E Certificates are subordinate to all the other certificates. The Class E Certificates are held by the Company and comprise the Company's undivided interest in the Trust. This amount represents the Company's total risk exposure with respect to the Accounts Receivable Program.
NOTE 5 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements were as follows (in thousands): January 29, 2000 January 30, 1999 Land $3,074 $3,074 Buildings 16,980 16,980 Fixtures and equipment 206,632 198,588 Leasehold improvements 132,843 130,870 359,529 349,512 Accumulated depreciation 177,695 116,249 $181,834 $233,263
Depreciation expense was $73.9 million, $25.9 million and $16.8 million for 1999, 1998 and 1997, respectively. Depreciation expense for 1999 includes impairment charges of $26.0 million related to property, equipment and leasehold improvements associated with underperforming stores and $17.3 million of writedown related to stores included in the store closure program. Gains and losses on retirement or disposition of fixed assets are recognized when incurred and are included in income (loss) from operations. See Note 2 to financial statements.
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands): January 29, 2000 Janaury 30, 1999 Senior Notes $200,000 $200,000 Senior Subordinated Notes, net of discount 99,721 99,696 Credit Facility 185,000 142,000 SRPC Notes -- 30,000 Other long-term debt 17,502 21,086 502,223 492,782 Less debt classified as current 492,393 -- Less current maturities 9,830 4,814 $-- $487,968
As of June 1, the Company was in violation of certain of its covenants under its various debt agreements. These violations of the terms of its debt agreements could allow lenders to take actions to accelerate the repayment schedule of these debt instruments. Therefore, the Company's debt has been classified as current.
The Senior Notes were issued during June 1997 by SRI with a principal amount of $200.0 million, bear interest at 8.5% payable semi-annually on January 15 and July 15, and mature July 15, 2005. The Senior Notes are general unsecured obligations and rank senior to all subordinated debt of SRI including the Senior Subordinated Notes.
The Senior Subordinated Notes were issued during June 1997 by SRI with a principal amount of $100.0 million and at a discount which results in a combined effective interest rate of 9.03%. The Senior Subordinated Notes bear interest at 9% payable semi-annually on January 15 and July 15 and mature July 15, 2007. The Senior Subordinated Notes are subordinated to the obligations under the Senior Notes.
Concurrently with the issuance of the Senior Notes and Senior Subordinated Notes, SRI entered into a new credit facility with a group of lenders (the "Credit Facility") which replaced the Company's existing $75.0 million credit facility. The Credit Facility provides for: (i) a $100.0 million working capital and letter of credit facility (the "Working Capital Facility") pursuant to which SRI shall have the right at any time prior to June 17, 2000 to solicit one or more lenders and/or new financial institutions to provide up to $25 million in additional commitments to increase the Working Capital Facility to an amount not to exceed $125 million in the aggregate, subject to certain conditions, of which up to $50 million may be used for letters of credit; and (ii) a $100.0 million expansion facility (the "Expansion Facility"). The Credit Facility matures on June 14, 2002 provided that in addition to certain mandatory reductions in commitments, the commitments under the Expansion Facility will be reduced on the fourth anniversary of the signing of the Credit Facility by the amount, if any, necessary so that total reductions in the amount of the commitments under the Expansion Facility (taking into account all mandatory reductions) will have been at least $25 million. A commitment fee on the unused commitments of each of the Working Capital Facility and Expansion Facility is payable quarterly in arrears. The amount of the commitment fee is determined based on the Adjusted Leverage Ratio (as defined in the Credit Facility), and ranges from 0.25% to 0.50% per annum. Advances under the Working Capital Facility and Expansion Facility bear interest at the Company's option, at the Base Rate plus the applicable Margin Percentage or at the Eurodollar Rate plus the applicable Margin Percentage (each as defined in the Credit Facility). The Margin Percentage is determined from time to time based on the Adjusted Leverage Ratio and was 2.25% for the Base Rate and 3.25% for the Eurodollar Rate at January 29, 2000. The effective interest rate for borrowings outstanding under the Credit Facility was 8.8% at January 29, 2000.
The Credit Facility contains covenants which, among other things, restrict the: (i) incurrence of additional debt; (ii) incurrence of capitalized lease obligations; (iii) payment of dividends; (iv) formation of certain business combinations; (v) acquisition of subordinated debt; (vi) use of proceeds received under the agreement; (vii) aggregate amount of capital expenditures; (viii) transactions with related parties; and (ix) changes in lines of business. In addition, the Credit Facility requires the Company to maintain compliance with certain specified financial covenants, including covenants relating to minimum interest coverage, minimum fixed charge coverage and maximum leverage ratios. The Credit Facility also limits the amount which can be outstanding for a specified length of time each year. A portion of the Credit Facility is collateralized by SRI's distribution center located in Jacksonville, Texas, including equipment located therein and a pledge of SRPC stock. The net book value of the distribution center was approximately $5.4 million at January 29, 2000.
On March 9, 2000, SRI entered into a new $35.0 million senior revolving credit facility (the "Senior Revolving Credit Facility") with certain of the lenders participating in the Credit Facility. The Senior Revolving Credit Facility matures June 14, 2002 and provides for working capital borrowings and is collateralized by a perfected first priority security interest on $50.0 million of inventory. Advances under the Senior Revolving Credit Facility will bear interest at the Company's option, at the Base Rate plus the applicable Margin Percentage or at the Eurodollar Rate plus the applicable Margin Percentage (each as defined in the Senior Revolving Credit Facility). SRI will pay a commitment fee on the unused commitment of 0.50% per annum payable quarterly in arrears. In connection with the Senior Revolving Credit Facility, the Credit Facility was amended to provide (a) a first priority lien on the Company's corporate concentration cash account (b) a second priority lien on inventory equal to $50.0 million less borrowings outstanding under the Senior Revolving Credit Facility (c) a first priority lien on all tangible personal property, including furniture, fixtures and equipment (excluding inventory except to the amount described in (b) above). In addition, the amendment limits the amount of readily available cash or cash equivalents in the Company's corporate concentration cash account to $20.0 million after giving effect to any borrowings under the Credit Facility. Under the terms of the new credit facility, the Company will issue warrants to the lenders to purchase 7.5% of the Company's outstanding common stock. The exercise price under the warrants will be determined based upon the average closing price of the Company's stock for the 30 days following the date of commitment. The warrants will expire on March 6, 2003.
The Company had $2.8 million of availability under the Credit Facility at January 29, 2000. In addition, the Company had cash and cash equivalents on hand of $20.2 million at January 29, 2000. The Company had $6.0 million of availability under the combined credit facilities at May 25, 2000.
During November 1999, the Company retired the $30.0 million aggregate principle amount of SRPC 12.5% Trust Certificate-Backed Notes in connection with the refinancing related to the Accounts Receivable Program (see note 4).
In connection with various acquisitions, the Company has indebtedness which bear interest between 7% and 12% and maturity dates between 2000 through 2004.
Aggregate maturities of long-term debt excluding the Credit Facility for the next five years are: 2000 - $4.8 million; 2001 - $2.6 million; 2002 - $2.7 million; 2003 - $14.2 million and 2004 - - $0.2 million.
Management estimates the fair value of its long-term debt to be $325.7 million and $482.4 million at January 29, 2000 and January 30, 1999, respectively. In developing its estimates, management considered quoted market prices for each instrument, if available, current market interest rates in relation to the coupon interest rates of each instrument, the relative subordination of each instrument and the relative liquidity of the instrument as indicated by the presence or lack of an active market. Given the matters discussed in Note 2, the current market value of the Company's long-term debt would be substantially below the aforementioned amounts.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company's authorized common equity securities consist of par value $0.01 per share common stock ("Common Stock") and par value $0.01 per share Class B common stock ("Class B Common Stock"). Except as otherwise described herein, all shares of Common Stock and Class B Common Stock are identical and entitle the holders thereof to the same rights and privileges (except with respect to voting privileges). Holders of Class B Common Stock may elect at any time to convert any or all of such shares into Common Stock, on a share-for-share basis, to the extent the holder thereof is not prohibited from owning additional voting securities by virtue of regulatory restrictions. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Except as required by law, holders of Class B Common Stock do not have the right to vote on any matters to be voted upon by the stockholders.
During September 1997, the Company completed an offering of approximately 7.1 million shares of common stock, 6.4 million shares of which were secondary shares representing the shares owned by two venture capital firms. The remaining 650,000 shares were issued as primary shares, a result of an over-allotment provision. The shares sold by the Company resulted in net proceeds to the Company of approximately $20.7 million, which were used to reduce borrowings outstanding under the Company's Credit Facility.
In November 1998, the Company adopted a Stockholder Rights Plan designed to protect Company stockholders in the event of takeover activity that would deny them the full value of their investment. Terms of this plan provide for a dividend distribution of one right for each share of Common Stock of the Company to holders of record at the close of business on November 13, 1998. The rights will become exercisable only in the event, with certain exceptions, a person or group of affiliated or associated persons accumulates 15% or more of the Company's voting stock, or if a person or group announces an offer to acquire 15% or more. The rights will expire on November 10, 2008. Each right will entitle the holder to buy one one-hundred thousandth of a share of a new series of preferred stock at a price of $60. In addition, upon the occurrence of certain events, holders of the rights would be entitled to purchase either Company stock or shares in an "acquiring entity" at half of market value. Further, at any time after a person or group acquires 15% or more (but less than 50%) of the Company's outstanding voting stock, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the acquiring person or group, which would become void) for shares of the Company's common stock on a one-for-one basis. The Company generally will be entitled to redeem the rights at $0.01 per right at any time until the tenth day following the acquisition of a 15% position in its voting stock.
NOTE 8 - STOCK OPTION PLANS
In 1993, the Company adopted the Third Amended and Restated Stock Option Plan (the "1993 Stock Option Plan") designed to provide incentives to present and future executive, managerial and other key employees and advisors to the Company (the "Participants") as selected by the Board of Directors or the compensation committee of the Board of Directors (the "Board"). All options granted under the 1993 Stock Option Plan were non- qualified within the meaning of Section 422A of the Internal Revenue Code. The number of shares of common stock which could be granted under the 1993 Stock Option Plan was 1,894,540 shares. As of January 29, 2000, there were 906,124 options outstanding under the 1993 Stock Option Plan.
During 1996, the Company adopted the 1996 Equity Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for the granting of the following types of awards: stock options, stock appreciation rights ("SARs"), restricted stock, performance units, performance grants and other types of awards that the Board deems to be consistent with the purposes of the Incentive Plan. An aggregate of 3,500,000 shares of common stock have been reserved for issuance under the Incentive Plan. No Participant shall be entitled to receive grants of common stock, stock options or SARs with respect to common stock, in any calendar year in excess of 400,000 shares in the aggregate. As of January 29, 2000, there were 1,204,483 options and 378,525 shares of restricted stock outstanding under the Incentive Plan.
The Board will have exclusive discretion to select the Participants and to determine the type, size and terms of each award, to modify the terms of awards, to determine when awards will be granted and paid, and to make all other determinations which it deems necessary or desirable in the interpretation and administration of the Incentive Plan. The Incentive Plan is scheduled to terminate ten years from the date that the Incentive Plan was initially approved and adopted by the stockholders of the Company, unless extended for up to an additional five years by action of the Board. With limited exceptions, including termination of employment as a result of death, disability or retirement, or except as otherwise determined by the Board, rights to these forms of contingent compensation are forfeited if a recipient's employment or performance of services terminates within a specified period following the award. Generally, a Participant's rights and interest under the Incentive Plan will not be transferable except by will or by the laws of descent and distribution.
Options are rights to purchase a specified number of shares of common stock at a price fixed by the Board. The option price may be equal to or greater than the fair market value of the underlying shares of common stock, but in no event less than the fair market value on the date of grant. Options granted under the 1993 Stock Option Plan generally become exercisable in installments of 20% per year on each of the first through the fifth anniversaries of the grant date and have a maximum term of ten years. Options granted under the Incentive Plan generally become exercisable in installments of 25% per year on each of the first through fourth anniversaries of the grant date and have a maximum term of ten years.
A summary of the option activity under the various plans follows: Number of Weighted Outstanding Average Options Option Price Options outstanding at February 1, 1997 1,475,581 6.61 Granted 570,550 23.84 Surrendered (124,015) 13.31 Exercised (208,023) 2.22 Options outstanding at January 31, 1998 1,714,093 12.39 Granted 505,200 38.08 Surrendered (147,185) 26.35 Exercised (217,218) 4.57 Options outstanding at January 30, 1999 1,854,890 19.15 Granted 497,608 6.80 Surrendered (144,107) 25.94 Exercised (97,784) 0.84 Options outstanding at January 29, 2000 2,220,607 16.62
Exercisable options under the various plans at January 30, 1999 and January 31, 1998 were 526,752 and 333,159 with a weighted average exercise price of $7.88 and $2.87, respectively. A summary of outstanding and exercisable options as of January 29, 2000 follows:
Number of Weighted Weighted Average Option Outstanding Average Remaining Price Options Exercise Price Contractual Life
$0.00 - $0.12 5,542 $0.11 2.8 2.42 - 3.75 306,011 2.94 5.7 5.00 - 8.00 729,531 6.36 7.9 9.00 - 13.88 180,635 10.53 8.7 17.00 - 21.15 245,400 20.90 6.5 22.00 - 30.00 346,888 22.82 7.2 33.75 - 42.13 27,000 37.17 7.8 49.75 - 51.88 269,600 51.61 8.2 2,110,607 16.78 7.4
Number of Option Exercisable Weighted Average Price Options Exercise Price
$0.00 - $0.12 5,542 $0.11 2.42 - 3.75 229,722 2.79 5.00 - 8.00 174,858 5.28 9.00 - 13.88 47,053 10.53 17.00 - 21.15 17,500 19.81 22.00 - 30.00 194,125 22.95 33.75 - 42.13 13,000 37.15 49.75 - 51.88 69,689 51.61 751,489 14.56
A summary of the restricted stock activity under the various plans follows: Number of Weighted Shares Average Grant Date Fair Value Unvested restricted stock grants outstanding at February 1, 1997 -- -- Granted 220,000 32.04 Surrendered -- -- Vested -- -- Unvested restricted stock grants outstanding at January 31, 1998 220,000 32.04 Granted 73,300 41.48 Surrendered -- -- Vested -- -- Unvested restricted stock grants outstanding at January 30, 1999 293,300 34.40 Granted 123,750 6.45 Surrendered (20,475) 35.00 Vested (18,050) 41.38 Unvested restricted stock grants outstanding at January 29, 2000 378,525 24.90
The 1999 and 1998 grants vest 25% per year on each of the first through fourth anniversary dates of the grant date and contain certain accelerated vesting provisions. The 1997 grants vest at the end of three year period and contain certain accelerated vesting provisions. The issuance of shares which have vested has been recorded as non-cash increase in stockholders equity.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its plans. Compensation expense was $3.1 million, $3.2 million and $0.5 million in 1999, 1998 and 1997, respectively. The following pro forma data is calculated as if compensation cost for the Company's stock option plans were determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation":
Fiscal Year 1999 1998 1997 Pro forma net income (loss) (in thousands) $(283,396) $1,106 $15,407 Pro forma basic earnings (loss) per common share (10.11) 0.04 0.60 Pro forma diluted earnings (loss) per common share (10.11) 0.04 0.58 Weighted average grant-date value of options granted 5.63 22.30 13.96
The fair value of the options granted is estimated using the Black-Scholes option-pricing model with the following assumptions for 1999: no dividend yield; volatility of 88.95%; risk-free interest rate of 6.7%; assumed forfeiture rate at 100.00% and an expected life of 7.86 years. For 1998, the following assumptions were used: no dividend yield; volatility of 47.32%; risk-free interest rate of 4.9%; assumed forfeiture rate of 71.27% and an expected life of 7.8 years. For 1997, the following assumptions were used: no dividend yield; volatility of 47.32%; risk-free interest rate of 5.5%; assumed forfeiture rate of 76.92% and an expected life of 7.42 years. The pro forma amounts above are not likely to be representative of future years because options vest over several years and additional awards generally are made each year.
NOTE 9 - EMPLOYEE BENEFIT PLANS
Pension benefits for employees are provided under the SSI Restated Retirement Plan (the "Retirement Plan"), a qualified defined benefit plan. Benefits are administered through a trust arrangement which provides monthly payments or lump sum distributions. The Retirement Plan covers substantially all employees who have completed one year of service with 1,000 hours of service as of June 30, 1998. Benefits under the plan are based upon a percentage of the participant's earnings during each year of credited service. Supplemental pension benefits for certain key executives are provided under the SRI Supplemental Executive Retirement Plan (the "Supplemental Retirement Plan"), a non-qualified defined benefit plan.
Information regarding the Retirement Plan and the Supplemental Retirement Plan is as follows (in thousands): January 29, 2000 January 30, 1999 Change in benefit obligation: Benefit obligation at beginning of year $31,639 $34,716 Service cost 731 917 Interest cost 2,109 2,191 Actuarial (gain) loss (2,860) 3,056 Plan disbursements (2,449) (3,913) Plan curtailment -- (5,991) Plan settlement -- 663 Projected benefit obligation at end of year 29,170 31,639
Change in plan assets: Fair value of plan assets at beginning of year 21,711 26,624 Actual return on plan assets 1,089 (1,550) Employer contributions 2,880 550 Plan disbursements (2,449) (3,913) Fair value of plan assets at end of year 23,231 21,711
Funded status (5,939) (9,928) Unrecognized prior service cost 306 326 Unrecognized net actuarial (gain) loss 7,317 9,890 Net amount recognized $1,684 $288
Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability $(5,427) $(9,538) Accumulated other comprehensive income 7,111 9,826 Net amount recognized $1,684 $288
January 29, 2000 January 30, 1999 Weighted-average assumptions as of year end: Discount rate 7.0% 6.5% Expected long-term rate of return on plan assets 9.0% 9.0% Rate of annual compensation increase 5.0% N/A Rate of increase in maximum benefit and compensation limits N/A 3.5% Assumed rate of increase in taxable wage base N/A N/A
The components of pension cost for the Retirement Plan and the Supplemental Retirement Plan were as follows (in thousands): Fiscal Year 1999 1998 1997 Net periodic pension cost for the fiscal year ended: Service cost $731 $917 $1,738 Interest cost 2,109 2,191 2,328 Expected return on plan assets (1,888) (2,367) (2,521) Amortization of prior service cost 20 18 (6) Recognized actuarial loss 512 127 507 Net periodic pension cost $1,484 $886 $2,046
Included in accrued expenses and other accrued liabilities is $6.3 million for estimated contributions to the Retirement Plan in 2000.
The Company's funding policy for the Retirement Plan is to contribute the minimum amount required by applicable regulations. Retirement Plan assets include 100,000 shares of Stage Stores common stock purchased during the Company's initial public offering.
Effective June 30, 1998, the Retirement Plan was frozen. There will be no future benefit accruals after that date. Any service after that date will continue to count toward vesting and eligibility for normal and early retirement. The Company recorded a gain in 1998 of $2.0 million associated with the plan curtailment.
The Company has a contributory 401(k) savings plan covering substantially all qualifying employees. Under the 401(k), participants may contribute up to 15% of their qualifying earnings, subject to certain restrictions. The Company currently matches 50% of each participant's contributions, limited to 6% of each participant's salary. The Company's matching contributions were approximately $1.0 million for 1999, $0.8 million for 1998 and $0.4 million for 1997.
NOTE 10 - OPERATING LEASES
The Company leases stores, service center facilities, the corporate headquarters and equipment under operating leases. A number of store leases provide for escalating minimum rent. Rental expense is recognized on a straight-line basis over the life of such leases. The majority of the Company's store leases provide for contingent rentals, generally based upon a percentage of net sales. The Company has renewal options for most of its store leases; such leases generally require that the Company pay for utilities, taxes and maintenance expense. A summary of rental expense associated with operating leases follows (in thousands): Fiscal Year 1999 1998 1997 Minimum rentals $51,926 $48,022 $37,601 Contingent rentals 3,838 3,993 4,545 Equipment rentals 4,544 3,854 1,240 $60,308 $55,869 $43,386
Minimum rental commitments on long-term operating leases at January 29, 2000, net of sub-leases, are as follows (in thousands): Fiscal Year: 2000 $52,435 2001 47,641 2002 41,197 2003 34,246 2004 27,619 Thereafter 112,888 $316,026 NOTE 11 - INCOME TAXES
All Company operations are domestic. Income tax expense charged to continuing operations consisted of the following (in thousands): Fiscal Year 1999 1998 1997 Federal income tax expense (benefit): Current $-- $(66) $11,012 Deferred 28,617 3,246 8,413 28,617 3,180 19,425 State income tax expense (benefit): Current 66 150 193 Deferred (8,466) (875) 2,005 (8,400) (725) 2,198 $20,217 $2,455 $21,623
A reconciliation between the federal income tax expense charged to continuing operations computed at statutory tax rates and the actual income tax expense recorded follows (in thousands): Fiscal Year 1999 1998 1997 Federal income tax expense at the statutory rate $(91,585) $2,159 $19,657 State income taxes, net (5,460) (471) 1,428 Goodwill amortization 26,040 742 388 Permanent differences, net 1,674 25 150 Valuation reserve 89,548 -- -- $20,217 $2,455 $21,623
In connection with the early retirement of various indebtedness, the Company recorded extraordinary charges of $0.7 million and $18.3 million in 1999 and 1997, respectively, net of applicable income taxes of $0.0 and $11.5 million in 1999 and 1997, respectively. The 1997 income tax benefit relating to the extraordinary items is comprised of a $9.9 million deferred federal tax benefit and a $1.6 million deferred state tax benefit. During 1999, the Company recorded a charge of $3.9 million in connection with the cumulative effect of a change in accounting principle reporting costs of start-up activities, net of applicable income taxes of $0.0 million.
Deferred tax liabilities (assets) consist of the following (in thousands): January 29, 2000 January 30, 1999 Gross deferred tax liabilities: Depreciation and amortization $-- $14,790 State income taxes 5,183 1,838 Other 5,711 7,786 10,894 24,414 Gross deferred tax assets: Retained Certificates (3,033) (2,460) Net operating loss carryforwards (74,747) (25,160) AMT tax credit carryforward (2,686) (3,040) Depreciation and amortization (2,860) -- Accrued expenses (5,109) (4,558) Pensions (2,599) (4,231) Escalating leases (5,884) (1,802) Accrued payroll costs -- (1,445) Inventory reserves (2,841) (2,546) Other (683) (382) (100,442) (45,624) Valuation allowance 89,548 -- Net deferred tax assets $-- $(21,210)
The net change in the valuation allowance for deferred tax assets was an increase of $89.5 million in 1999, which, relates to federal and state net operating loss carryforwards. Based on the projected earnings of the Company and matters set forth in Note 2, management believes it is more likely than not that the net deferred tax assets will not be realized and has, therefore, provided a full valuation allowance against the net deferred tax assets.
The Company has net operating loss carryforwards for federal income tax purposes of approximately $178.9 million, which if not utilized will expire in varying amounts between 2007 and 2021. The Company has net operating loss carryforwards for state income tax purposes of approximately $230.0 million, which if not utilized, will expire in varying amounts between 2002 and 2021. The Company's ability to utilize net operating loss carryforwards may be limited if certain changes in ownership occur or as a result of the bankruptcy process.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial data is summarized as follows (in thousands):
Fiscal Year 1999 Q1 Q2 Q3 Q4 Net sales $262,591 $269,848 $264,327 $324,801 Gross profit 70,359 74,021 77,203 2,867 Operating income (loss) 8,391 (8,332) 12,560 (220,971) Income (loss) before extraordinary item and cumulative effect of change in accounting principle (2,269) (15,091) 224 (260,067) Extraordinary item, net of tax - early retirement of debt -- -- -- (749) Cumulative effect of change in accounting principle, net of tax - reporting costs of start-up activities (2,402) -- -- (1,536) Net income (loss) (4,671) (15,091) 224 (262,352)
Basic earnings (loss) per common share data: Basic earnings per common share before extraordinary item and cumulative effect of change in accounting principle (0.08) (0.54) 0.01 (9.26) Extraordinary item - early retirement of debt, net of tax -- -- -- (0.03) Cumulative effect of change in accounting principle - reporting costs of start-up activities, net of tax (0.09) -- -- (0.05) Basic earnings (loss) per common share (0.17) (0.54) 0.01 (9.34)
Diluted earnings (loss) per common share data: Diluted earnings per common share before extraordinary item cumulative effect of change in accounting principle (0.08) (0.54) 0.01 (9.26) Extraordinary item - early retirement of debt, net of tax -- -- -- (0.03) Cumulative effect of change in accounting principle - reporting costs of start-up activities, net of tax (0.09) -- -- (0.05) Diluted earnings (loss) per common share (0.17) (0.54) 0.01 (9.34)
During the fourth quarter of 1999, the Company recorded certain one-time pretax charges aggregating $205.7 million.
Fiscal Year 1998 Q1 Q2 Q3 Q4
Net sales $272,788 $271,805 $271,605 $357,349 Gross profit 87,225 82,239 75,252 89,593 Operating income 25,278 12,678 7,226 7,458 Net income (loss) 9,035 765 (3,152) (2,934) Basic earnings (loss) per common share 0.33 0.03 (0.11) (0.10) Diluted earnings (loss) per common share 0.32 0.03 (0.11) (0.10)
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has made loans, in an aggregate principal amount of $2.7 million and $2.1 million at January 29, 2000 and January 30, 1999, respectively, to certain present and former executive officers of the Company. These loans are full recourse loans and are secured by a pledge of the shares of common stock owned by such executive officers. The loans provide for interest from 5.7% to 9.0% and mature no later than November 3, 2000. At January 29, 2000, the Company has recorded a reserve of $1.6 million related to these loans for potential uncollectibility.
On February 22, 2000, Carl Tooker left employment with the Company, effective that date. Mr. Tooker was Chairman, Chief Executive Officer and President of the Company. Mr. Tooker's departure follows an inquiry conducted by a Special Committee consisting of all of the non-management members of the Board of Directors, which reviewed certain transactions between the Company and Mr. Tooker. The effects of the transactions reviewed have been reflected in the Company's results for prior periods, and the Committee believes they are not material to the financial condition or operations of the Company. However, these transactions had not been properly reported to the Company's Board of Directors.
The Company purchased Mr. Tooker's personal residence in 1997 at a price specified by him, and assumed all liability for the property, including upkeep and existing debt payments, until it was sold in 1999. The Company sustained a loss of $806,556 as a result of this transaction.
In May, 1997 the Company entered into a severance agreement and a separate consulting contract in connection with the separation of an employee who shortly thereafter became Mr. Tooker's spouse. The Company recorded in its books and records payments to or for the benefit of his spouse beginning in May, 1997, and ending in August 1998, totaling $608,317. The Special Committee also determined that while employed by the Company in 1996 and 1997, this employee entered into transactions with a company with whom her sister was believed to be affiliated, in which the Company paid a total of $313,260 for purchases of clothing inventory. The Special Committee did not find any overcharges with respect to the inventory purchases.
Demand has been made upon Mr. Tooker to reimburse the Company for the unauthorized payments regarding his personal residence and the severance paid to his spouse. In addition, the Company has demanded repayment by Mr. Tooker of outstanding loans he obtained from the Company, with interest thereon, totaling approximately $1.1 million. Some of these loans are secured by collateral which includes securities of the Company. Mr. Tooker has not responded to the Company's demands.
The Special Committee further determined that during the years 1997 through 1999, the Company maintained a contractual relationship with Stage Planning and Design, Inc. ("SPAD"), believed to be a wholly owned subsidiary of U.S. Builders, Inc., to manage the construction of store remodeling. Under the terms of this agreement, the Company was required to and did reimburse or pay direct all of SPAD's costs, including all payroll expenses. In 1997, the Company paid SPAD in excess of $2.4 million, and in 1998 in excess of $9.9 million. Until late 1999, Mr. Tooker's son-in-law was an officer and project manager for SPAD, whose compensation was included as a reimbursable expense billed to the Company during this time. Although the expenditures were recorded on the Company's books and records for the years in which they were accrued, the relationship involving Mr. Tooker's son-in-law was not previously discussed with and approved by the Board of Directors.
In connection with the aforementioned matters, the Company has received and responded to an information request as part of an informal inquiry by the Securities and Exchange Commission.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Litigation: From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business.
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 lawsuit was filed in the District Court of Harris County, Texas, 333 District Court, Case No. 2000-15666. 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. 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 Part Petition against the Company's Chairman, Interim Chief Executive Officer and President, John J. Wiesner, Martin Stringer, the Company's counsel and 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.
Letters of Credit: The Company issues letters of credit to support certain merchandise purchases which are required to be collateralized. The Company had outstanding letters of credit totaling approximately $12.2 million at January 29, 2000, all of which were collateralized by the Credit Facility (see Note 6). These letters of credit expire within twelve months of issuance.
Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash, short-term investments and the accounts receivable transferred to the Trust (see Note 4). The Company's cash management and investment policies restrict investments to low-risk, highly-liquid securities and the Company performs periodic evaluations of the relative credit standing of the financial institutions with which it deals. The credit risk associated with the accounts receivable transferred to the Trust is limited by the large number of customers in the Company's customer base. The Company's customers primarily reside in the central United States.
NOTE 15 - C. R. ANTHONY COMPANY ACQUISITION
During June 1997, the Company acquired C.R. Anthony Company ("CR Anthony") which operated 246 family apparel stores in small markets throughout the central and midwestern United States under the names "Anthony's" and "Anthony's Limited". The Company issued 3,607,044 shares in exchange for the outstanding common stock of CR Anthony. The purchase price for CR Anthony (including the common stock issued by the Company) was approximately $77.2 million, including acquisition costs and net of cash acquired. CR Anthony had net sales of $288.4 million and net income of $4.8 million for the year ended February 1, 1997.
The following unaudited pro forma information gives effect to the acquisition of CR Anthony as if the transaction had occurred at the beginning of the periods presented (in thousands, except per common share data):
Fiscal (unaudited)
Net sales $1,181,816 Income before extraordinary items $33,482 Net income $15,187 Basic earnings per common share before extraordinary items $1.23 Basic earnings per common share $0.56 Diluted earnings per common share before extraordinary items $1.20 Diluted earnings per common share $0.54
The above amounts are based on certain estimates and assumptions which the Company believes are reasonable. The pro forma results do not purport to be indicative of the results which would have occurred if the acquisition or refinancing had actually taken place at the beginning of the periods presented, nor are they necessarily indicative of the results of any future periods.
The acquisition of CR Anthony was accounted for under the purchase method of accounting. Accordingly, the total acquisition cost was allocated to the assets acquired and liabilities assumed at their estimated fair values based upon information currently available to the Company. The excess of the purchase price over the estimated fair value of such assets and liabilities was recognized as goodwill and is being amortized on a straight-line basis over forty years.
NOTE 16 - CONSOLIDATING FINANCIAL STATEMENTS
SRI is the primary obligor under the long-term indebtedness issued in connection with the Note Offering (see Note 64). Stage Stores and Specialty Retailers, Inc. (NV), a wholly-owned subsidiary of Stage Stores (which was incorporated during June, 1997), are guarantors under such indebtedness. The consolidating condensed financial information for Stage Stores and its wholly- owned subsidiaries are presented below. The financial data for SRI Receivables Purchase Co. does not reflect the total consolidated operating performance of the Company's Accounts Receivable Program. For a summary of the total consolidated operating performance of the Company's Accounts Receivable Program, see Note 4.
Consolidating Condensed Balance Sheet January 29, 2000 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated ASSETS Cash and cash equivalents $18,077 $-- $-- $18,077 Undivided interest in accounts receivable trust (13,101) 54,701 -- 41,600 Merchandise inventories, net 261,104 -- -- 261,104 Prepaid expenses 7,725 220 -- 7,945 Other current assets 17,755 8,491 -- 26,246 Total current assets 291,560 63,412 -- 354,972
Property, equipment and leasehold improvements, net 180,761 -- -- 180,761 Other assets 13,111 2,608 -- 15,719 Investment in subsidiaries 36,690 -- (36,690) -- Total assets $522,122 $66,020 $(36,690) $551,452
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 of long-term debt 9,830 -- -- 9,830 Long-term debt classified as current 492,393 -- -- 492,393 Total current liabilities 612,563 2,770 -- 615,333
Long-term debt -- -- -- -- Other long-term liabilities 14,299 -- -- 14,299 Intercompany notes/advances 160,719 26,560 -- 187,279
Investment in subsidiaries -- -- -- -- Total liabilities 787,581 29,330 -- 816,911
Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common stock -- -- -- -- Additional paid- in capital 3,317 33,908 (33,908) 3,317 Accumulated earnings (deficit) (264,438) 2,782 (2,782) (264,438) Accumulated other comprehensive income (4,338) -- -- (4,338)
Stockholders' equity (deficit) (265,459) 36,690 (36,690) (265,459) Total liabilities and stockholders' equity (deficit) $522,122 $66,020 $(36,690) $551,452
Consolidating Condensed Balance Sheet January 29, 2000 (in thousands)
Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated
ASSETS Cash and cash equivalents $102 $2,000 $-- $20,179 Undivided interest in accounts receivable trust -- -- -- 41,600 Merchandise inventories, net -- -- -- 261,104 Prepaid expenses -- -- -- 7,945 Other current assets -- -- -- 26,246 Total current assets 102 2,000 -- 357,074
Property, equipment and leasehold improvements, net -- 1,073 -- 181,834 Other assets -- 60 -- 15,779 Investment in subsidiaries -- -- -- -- Total assets $102 $3,133 $-- $554,687
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $-- $-- $-- $40,955 Accrued expenses and other current liabilities 22 -- -- 72,177 Current portion of long-term debt -- -- -- 9,830 Long-term debt classified as current -- -- -- 492,393 Total current liabilities 22 -- -- 615,355
Long-term debt -- -- -- -- Other long-term liabilities -- -- -- 14,299 Intercompany notes/advances 18 (187,297) -- -- Investment in subsidiaries 75,029 -- (75,029) -- Total liabilities 75,069 (187,297) (75,029) 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 earnings (deficit) (337,500) 29,515 234,923 (337,500) Accumulated other 4,338 comprehensive income (4,338) -- 4,338 (4,338) Stockholders' equity (deficit) (74,967) 190,430 75,029 (74,967) Total liabilities and stockholders' equity (deficit) $102 $3,133 $-- $554,687
Consolidating Condensed Balance Sheet January 30, 1999 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated ASSETS Cash and cash equivalents $10,882 $ -- $-- $10,882
Undivided interest in accounts receivable trust (13,228) 83,044 -- 69,816
Merchandise inventories, net 341,316 -- -- 341,316 Prepaid expenses 24,082 899 -- 24,981 Other current assets 53,566 5,926 -- 59,492 Total current assets 416,618 89,869 -- 506,487 Property, equipment and leasehold improvements, net 231,499 -- -- 231,499 Goodwill, net 92,551 -- -- 92,551 Other assets 18,967 4,402 -- 23,369 Investment in subsidiaries 37,886 -- (37,886) -- Total assets $797,521 $94,271 $(37,886) 853,906
LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $82,779 $-- $-- $82,779 Accrued expenses and other current liabilities 49,726 2,888 -- 52,614 Current portion of long-term debt 4,814 -- -- 4,814 Total current liabilities 137,319 2,888 -- 140,207
Long-term debt 457,968 30,000 -- 487,968 Other long-term liabilities 25,021 -- -- 25,021 Intercompany notes/advances 151,273 23,497 -- 174,770 Total liabilities 771,581 56,385 -- 827,966
Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common stock -- -- -- -- Additional paid-in capital 3,317 32,130 (32,130) 3,317 Accumulated earnings (deficit) 28,617 5,756 (5,756) 28,617 Accumulated other comprehensive income (5,994) -- -- (5,994) Stockholders' equity 25,940 37,886 (37,886) 25,940 Total liabilities and stockholders' equity $797,521 $94,271 $(37,886) $853,906
Consolidating Condensed Balance Sheet January 30, 1999 (in thousands)
Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated
ASSETS Cash and cash equivalents $2 $1,948 $-- $12,832 Undivided interest in accounts receivable trust -- -- -- 69,816 Merchandise inventories, net -- -- -- 341,316 Prepaid expenses -- -- -- 24,981 Other current assets -- -- -- 59,492 Total current assets 2 1,948 -- 508,437
Property, equipment and leasehold improvements, net -- 1,764 -- 233,263 Goodwill, net -- -- -- 92,551 Other assets -- 60 -- 23,429 Investment in subsidiaries 204,349 -- (204,349) -- Total assets $204,351 $3,772 $(204,349) $857,680
LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $-- $-- $-- $82,779 Accrued expenses and other current liabilities 92 -- -- 52,706 Current portion of long-term debt -- -- -- 4,814 Total current liabilities 92 -- -- 140,299
Long-term debt -- -- -- 487,968
Other long-term liabilities -- -- -- 25,021 Intercompany notes/advances (133) (174,637) -- -- Total liabilities (41) (174,637) -- 653,288
Preferred stock -- -- -- -- Common stock 267 -- -- 267 Class B common stock 13 -- -- 13 Additional paid-in capital 265,716 160,040 (163,357) 265,716 Accumulated earnings (deficit) (55,610) 18,369 (46,986) (55,610) Accumulated other comprehensive income (5,994) -- 5,994 (5,994) Stockholders' equity 204,392 178,409 (204,349) 204,392 Total liabilities and stockholders' equity $204,351 $3,772 $(204,349) $857,680
Consolidating Condensed Statement of Operations Fiscal Year ended January 29, 2000 (in thousands)
Specialty SRI Receivables SRI SRI Retailes, Inc. Purchase Co. Eliminations Consolidated
Net sales $1,121,567 $-- $-- $1,121,567 Cost of sales and related buying, occupancy and distribution expenses 897,117 -- -- 897,117 Gross profit 224,450 -- -- 224,450
Selling, general and administrative expenses 389,873 (1,597) -- 388,276 Store opening and closure program costs 44,986 -- -- 44,986 Operating income (210,409) 1,597 -- (208,812)
Interest expense, net 61,894 3,457 -- 65,351
Income (loss) before income taxes, equity in net earnings of subsidiaries, extraordinary item and cumulative effect of change in accounting principle (272,303) (1,860) -- (274,163) Income tax expense (benefit) 14,842 (637) -- 14,205 Income (loss) before equity in net earnings of subsidiaries, extraordinary item and cumulative effect of change in accounting principle (287,145) (1,223) -- (288,368) Equity in net earnings of subsidiaries (2,974) -- 2,974 -- Income (loss) before extraordinary item and cumulative effect of change in accounting principle (290,119) (1,223) 2,974 (288,368) Extraordinary item - early retirement of debt, net of tax (204) (545) -- (749) Cumulative effect of change in accounting principle - reporting costs of start-up activities, net of tax (2,732) (1,206) -- (3,938) Net income (loss) $(293,055) $(2,974) $2,974 $(293,055)
Consolidating Condensed Statement of Operations Fiscal Year ended January 29, 2000 (in thousands) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated
Net sales $-- $-- $-- $1,121,567 Cost of sales and related buying, occupancy and distribution expenses -- -- -- 897,117 Gross profit -- -- -- 224,450
Selling, general and administrative expenses 125 (585) -- 387,816 Store opening and program closure costs -- -- -- 44,986 Operating income (125) 585 -- (208,352)
Interest expense, net -- (16,717) -- 48,634
Income (loss) before income taxes, equity in net earnings of subsidiaries, extraordinary item and cumulative effect of change in accounting principle (125) 17,302 -- (256,986) Income tax expense (benefit) (44) 6,056 -- 20,217 Income (loss) before equity in net earnings of subsidiaries, extraordinary item and cumulative effect of change in accounting principle (81) 11,246 -- (277,203) Equity in net earnings of subsidiaries (281,809) -- 281,809 -- Income (loss) before extraordinary item and cumulative effect of change in accounting principle (281,809) 11,246 281,809 (277,203) Extraordinary item - early retirement of debt, net of tax -- -- -- (749) Cumulative effect of change in accounting principle - reporting costs of start-up activities, net of tax -- -- -- (3,938) Net income (loss) $(281,890) $11,246 $281,809 $(281,890)
Consolidating Condensed Statement of Operations Fiscal Year ended January 30, 1999 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Elimination Consolidated
Net sales $1,173,547 $ -- $ -- $1,173,547 Cost of sales and related buying, occupancy and distribution expenses 839,238 -- -- 839,238 Gross profit 334,309 -- -- 334,309
Selling, general and administrative expenses 277,523 (1,467) -- 276,056 Store opening and closure costs 10,192 -- -- 10,192 Operating income 46,594 1,467 -- 48,061
Interest expense, net 65,345 (3,435) -- 61,910
Income (loss) before income taxes (18,751) 4,902 -- (13,849) Income tax expense (benefit) (6,377) 1,826 -- (4,551) Income (loss) before equity in net earnings of subsidiaries (12,374) 3,076 -- (9,298) Equity in net earnings of subsidiaries 3,076 -- (3,076) -- Net income (loss) $(9,298) $3,076 $(3,076) $(9,298)
Consolidating Condensed Statement of Operations Fiscal Year ended January 30, 1999 (in thousands) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Elimiations Consolidated
Net sales $ -- $ -- $ -- $1,173,547 Cost of sales and related buying, occupancy and distribution expenses -- -- -- 839,238 Gross profit -- -- -- 334,309
Selling, general and administrative expenses 93 (4,672) -- 271,477 Store opening and closure costs -- -- -- 10,192 Operating income (93) 4,672 -- 52,640
Interest expense, net -- (15,439) -- 46,471
Income (loss) before income taxes (93) 20,111 -- 6,169 Income tax expense (benefit) (33) 7,039 -- 2,455 Income (loss) before equity in net earnings of subsidiaries (60) 13,072 -- 3,714 Equity in net earnings of subsidiaries 3,774 -- (3,774) -- Net income (loss) $3,714 $13,072 $(3,774) $3,714
Consolidating Condensed Statement of Operations Fiscal Year ended January 31, 1998 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated
Net sales $1,073,316 $-- $-- $1,073,316 Cost of sales and related buying, occupancy and distribution expenses 730,179 -- -- 730,179 Gross profit 343,137 -- -- 343,137
Selling, general and administrative expenses 242,843 (2,865) -- 239,978 Store opening and closure costs 8,686 -- -- 8,686 Operating income 91,608 2,865 -- 94,473
Interest expense, net 47,746 (1,164) -- 46,582
Income (loss) before income taxes 43,862 4,029 -- 47,891 Income tax expense (benefit) 17,234 1,483 -- 18,717 Income (loss) before equity in net earnings of subsidiaries and extraordinary item 26,628 2,546 -- 29,174 Equity in net earnings of subsidiaries 1,904 -- (1,904) -- Income (loss) before extraordinary item 28,532 2,546 (1,904) 29,174 Extraordinary item - early retirement of debt (17,653) (642) -- (18,295) Net income (loss) $10,879 $1,904 $(1,904) $10,879
Consolidating Condensed Statement of Operations Fiscal Year ended January 31, 1998 (in thousands) Specialty Stage Retailer, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated
Net sales $-- $-- $-- $1,073,316 Cost of sales and related buying, occupancy and distribution expenses -- -- -- 730,177 Gross profit -- -- -- 343,137
Selling, general and administrative expenses 30 3 -- 240,011 Store opening and closure costs -- -- -- 8,686 Operating income (30) (3) -- 94,440
Interest expense, net -- (8,305) -- 38,277
Income (loss) before income taxes (30) 8,302 -- 56,163 Income tax expense (benefit) -- 2,906 -- 21,623 Income (loss) before equity in net earnings of subsidiaries and extraordinary item (30) 5,396 -- 34,540 Equity in net earnings of subsidiaries 16,275 -- (16,275) -- Income (loss) before extraordinary item 16,245 5,396 (16,275) 34,540 Extraordinary item - early retirement of debt -- -- -- (18,295) Net income (loss) $16,245 $5,396 $(16,275) $16,245
Consolidating Condensed Statement of Cash Flows Fiscal Year ended January 29, 2000 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated Cash flows from operating activities: Net cash provided by (used in) operating activities $28,755 $(4,878) $-- $23,877
Cash flows from investing activities: Investment in subsidiaries -- -- -- -- Additions to property, equipment and leasehold improvements (22,037) -- -- (22,037) Proceeds from the sales of accounts receivable, net (34,878) 34,878 -- -- Dividend from subsidiary -- -- -- -- Net cash used in investing activities (56,915) 34,878 -- (22,037)
Cash flows from financing activities: Proceeds from working capital facility 43,000 -- -- 43,000 Proceeds from issuance of commom stock -- -- -- -- Proceeds from capital contribution -- -- -- -- Payments on long-term debt (4,813) (30,000) -- (34,813) Additions to debt issue costs (2,832) -- -- (2,832) Dividend paid -- -- -- -- Net cash provided by (used in) financing activities 35,355 (30,000) -- 5,355
Net increase (decrease) in cash and cash equivalents 7,195 -- -- 7,195
Cash and cash equivalents: Beginning of period 10,882 -- -- 10,882 End of period $18,077 $ -- $ -- $18,077
Consolidating Condensed Statement of Cash Flows Fiscal Year ended January 29, 2000 (in thousands)
Specialty Stage Retailers Stage Stores Stores, Inc. Inc. (NV) Elimiations Consolidated Cash flows from operating activities: Net cash provided by (used in) operating activities $ -- $24 $-- $23,901
Cash flows from investing activities: Investment in subsidiaries (128) -- 128 -- Additions to property, equipment and leasehold improvements -- -- -- (22,037)
Proceeds from the sales of accounts receivable, net -- -- -- -- Dividend from subsidiary 100 -- (100) -- Net cash used in investing activities (28) -- 28 (22,037)
Cash flows from financing activities: Proceeds from working capital facility -- -- -- 43,000 Proceeds from issuance of common stock 128 -- -- 128 Proceeds from capital contribution -- 128 (128) -- Payments on long-term debt -- -- -- (34,813) Additions to debt issue costs -- -- -- (2,832) Dividend paid -- (100) 100 -- Net cash provided by (used in) financing activities 128 28 (28) 5,483
Net increase (decrease) in cash and cash equivalents 100 52 -- 7,347
Cash and cash equivalents: Beginning of period 2 1,948 -- 12,832 End of period $102 $2,000 $ -- $20,179
Consolidating Condensed Statement of Cash Flows Fiscal Year ended January 30, 1999 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Elimination Consolidated Cash flows from operating activities: Net cash provided by (used in) operating activities $(28,747) $11,586 $-- $(17,161)
Cash flows from investing activities: Investment in subsidiaries -- -- -- -- Additions to property, equipment and leasehold improvements (88,047) -- -- (88,047) Proceeds from the sales of accounts receivable, net 2,504 (2,504) -- -- Dividend from subsidiary 9,082 -- (9,082) -- Net cash used in investing activities (76,461) (2,504) (9,082) (88,047)
Cash flows from financing activities: Proceeds from working capital facility 96,300 -- -- 96,300 Proceeds from issuance of common stock -- -- -- -- Proceeds from capital contribution -- -- -- -- Payments on long-term debt (2,596) -- -- (2,596) Additions to debt issue costs (913) -- -- (913) Dividends paid -- (9,082) 9,082 -- Net cash provided by (used in) financing activities 92,791 (9,082) 9,082 92,791
Net increase (decrease) in cash and cash equivalents (12,417) -- -- (12,417)
Cash and cash equivalents: Beginning of period 23,299 -- -- 23,299 End of period $10,882 $-- $-- $10,882
Consolidating Condensed Statement of Cash Flows Fiscal Year ended January 30, 1999 (in thousands) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated Cash flows from operating activities: Net cash provided by (used in) operating activities $(31) $1,682 $-- $(15,510)
Cash flows from investing activities: Investment in subsidiaries (1,038) -- 1,038 -- Additions to property, equipment and leasehold improvements -- (672) -- (88,719) Proceeds from the sales of accounts receivable, net -- -- -- -- Dividend from subsidiary 100 -- (100) -- Net cash used in investing activities (938) (672) 938 (88,719)
Cash flows from financing activities: Proceeds from working capital facility -- -- -- 96,300 Proceeds from issuance of common stock 955 -- -- 955 Proceeds from capital contribution -- 1,038 (1,038) -- Payments on long-term debt -- -- -- (2,596) Additions to det issue costs -- -- -- (913) Dividend paid -- (100) 100 -- Net cash provided by (used in) financing activities 955 938 (938) 93,746
Net increase (decrease) in cash and cash equivalents (14) 1,948 -- (10,483)
Cash and cash equivalents: Beginning of period 16 -- -- 23,315 End of period $2 $1,948 $-- $12,832
Consolidating Condensed Statement of Cash Flows Fiscal Year ended January 31, 1998 (in thousands)
Specialty SRI Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated
Cash flows from operating activities: Net cash provided by (used in) operating activities $36,822 $(17,988) $-- $18,834
Cash flows from investing activities: Acquisitions, net of cash acquired (4,946) -- -- (4,946) Investment in subsidiaries 21,243 -- -- 21,243 Intercompany notes/advances 22,522 -- -- 22,522 Additions to property, equipment and leasehold improvements (64,859) -- -- (64,859) Proceeds from the sales of accounts receivable, net (19,962) 19,962 -- -- Dividend from subsidiary 1,904 -- (1,904) -- Net cash used in investing activities (44,098) 19,962 (1,904) (26,040)
Cash flows from financing activities: Proceeds from working capital facility 45,700 -- -- 45,700 Proceeds from issuance of long-term debt 299,718 -- -- 299,718 Proceeds from issuance of common stock -- -- -- -- Proceeds from capital contribution (21,243) -- -- (21,243) Payments on long-term debt (299,533) -- -- (299,533) Additions to debt issue costs (12,337) (70) -- (12,407) Dividend paid -- (1,904) 1,904 -- Net cash provided by (used in) financing activities 12,305 (1,974) 1,904 12,235
Net indecrease in cash and cash equivalents 5,029 -- -- 5,029
Cash and cash equivalents: Beginning of period 18,270 -- -- 18,270 End of period $23,299 $-- $-- $23,299
Consolidating Condensed Statement of Cash Flows Fiscal Year ended January 31, 1998 (in thousands) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated
Cash flows from operating activities: Net cash provided by (used in) operating activities $-- $-- $-- $18,834
Cash flows from investing activities: Acquisitions, net of cash acquired -- -- -- (4,946) Investment in subsidiaries (21,243) -- -- -- Intercompany notes/advances (1,279) (21,243) -- -- Additions to property, equipment and leasehold improvements -- -- -- (64,859) Proceeds from the sales of accounts receivable, net -- -- -- -- Dividend from subsidiary -- -- -- -- Net cash used in investing activities (22,522) (21,243) -- (69,805)
Cash flows from financing activities: Proceeds from working capital facility -- -- -- 45,700 Proceeds from issuance of long-term debt -- -- -- 299,718 Proceeds from issuance of common stock 22,522 -- -- 22,522 Proceeds from capital contributions -- 21,243 -- -- Payments on long-term debt -- -- -- (299,533) Additions to debt issue costs -- -- -- (12,407) Dividend paid -- -- -- -- Net cash provided by (used in) financing activities 22,522 21,243 -- 56,000
Net increase in cash and cash equivalents -- -- -- 5,029
Cash and cash equivalents: Beginning of period 16 -- -- 18,286 End of period $16 $-- $-- $23,315