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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 000-21011
STAGE STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0407711
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10201 MAIN STREET, HOUSTON, TEXAS 77025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 579-2302
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK ($0.01 PAR VALUE) NASDAQ NATIONAL MARKET SYSTEM
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common stock held by non-affiliates as
of March 28, 1997 was $336,658,656.
At March 28, 1997, there were 22,044,459 shares of Common Stock and 1,250,584
shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 15, 1997 (the "Proxy Statement") are incorporated by reference into
Part III.
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PART I
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 "1996" IS A REFERENCE TO THE
FISCAL YEAR ENDED FEBRUARY 1, 1997).
ITEM 1. BUSINESS
GENERAL
Stage Stores, Inc. (the "Company" or "Stage Stores") operates the store
of choice for well-known, national brand name family apparel in over 200 small
towns and communities across the central United States. Stage Stores' history
began in 1988 when the management of Palais Royal, together with a venture
capital firm, acquired the family owned Bealls and Palais Royal chains which
were originally founded in the 1920's. The Company has developed a unique
franchise focused on small markets, differentiating itself from the competition
by offering a broad range of 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 have only been able to shop for branded merchandise in distant
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) strong vendor
relationships, (iii) proprietary credit card program and (iv) sophisticated
operating systems. The Company believes it has a competitive advantage in small
markets over national department stores due to its (i) experience with smaller
markets, (ii) ability to effectively manage merchandise assortments in a
small store format and (iii) established operating systems designed for
efficient management within small 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 February 1, 1997, the Company operated 315 stores through its
"Stage", "Bealls" and "Palais Royal" trade names in nineteen states throughout
the central United States through its wholly-owned subsidiary, Specialty
Retailers, Inc. ("SRI"). Approximately 77% of these stores are located in small
markets and communities with as few as 4,000 people. The Company's store format
(averaging approximately 18,000 total selling square feet) and merchandising
capabilities enable the Company to operate profitably in small markets. The
remainder of the Company's stores operate in metropolitan areas, primarily in
suburban Houston.
The Company's merchandising strategy focuses on the traditionally
higher margin categories of women's, men's and children's branded apparel,
accessories and footwear. Merchandise mix may vary from store to store to
accommodate differing demographic factors. The Company purchases merchandise
from a vendor base of over two thousand vendors. Over 85% of 1996 sales
consisted of branded merchandise, including nationally recognized brands such as
Levi Strauss, Liz Claiborne, Chaps/Ralph Lauren, Calvin Klein, Guess, Hanes,
Nike, Reebok and Haggar Apparel. Levi accounted for approximately 9% of the
Company's 1996 retail purchases. No other vendor accounted for more than 4%. 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 6% of the Company's total retail purchases for 1996.
1
The Company offers a carefully edited 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 1996 1995
---------------------------------- ---------- ----------
Men's/Young Men................... 22% 22%
Misses Sportswear................. 16 15
Juniors........................... 12 13
Accessories & Gifts............... 9 9
Children.......................... 9 9
Shoes............................. 9 8
Intimate.......................... 5 6
Special Sizes..................... 5 5
Cosmetics......................... 5 5
Misses Dresses.................... 4 4
Boys.............................. 3 3
Furs & Coats...................... 1 1
---------- ----------
100% 100%
========== ==========
EMPLOYEES
During 1996, the Company employed an average of 9,606 full and
part-time employees at all of its locations, of which 1,165 were salaried and
8,441 were hourly. The Company's central office (which includes corporate,
credit and distribution center offices) employed an average of 337 salaried and
679 hourly employees during 1996. In its stores during 1996, the Company
employed an average of 828 salaried and 7,762 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. PROPERTIES
The Company's corporate headquarters is located in a one hundred thirty
thousand square foot building in Houston, Texas. The Company leases the building
and most of the land at its Houston facility. The Company owns its four-hundred
fifty thousand square foot distribution center and its credit department
facility, both located in Jacksonville, Texas. The Jacksonville distribution
center collateralizes the Company's Credit Agreements (as defined herein). See
Note 6 to the Consolidated Financial Statements.
At February 1, 1997, the Company operated 315 stores located in
nineteen states as follows: Texas (168 stores); Louisiana (27 stores); Ohio (26
stores); Oklahoma (13 stores); Arkansas (12 stores); Illinois (12 stores); New
Mexico (9 stores); Missouri (6 stores); Mississippi (6 stores); Michigan (6
stores); Indiana (6 stores); Iowa (6 stores); Colorado (5 stores); Alabama (3
stores); Kansas (3 stores); Arizona (3 stores); South Dakota (2 stores);
Minnesota (1 store) and Nebraska (1 store). Stores generally range in size from
12,000 to 30,000 square feet, with the average being 18,000 square feet. In
general, Bealls stores are located in rural markets in Texas, Oklahoma, New
Mexico and Alabama; Palais Royal stores are located in metropolitan Houston and
Stage stores are located in states other than Texas, Oklahoma, New Mexico and
Alabama. 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 which are owned. The majority of leases provide for a base rent plus
contingent rentals, generally based upon a percentage of net sales.
2
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 its business.
Management believes that none of the matters in which the Company or its
subsidiaries are currently involved, either individually or in the aggregate, is
material to the financial position, results of operations, or cash flows of the
Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended February 1, 1997.
PART II
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"). The Common Stock is quoted on the
NASDAQ National Market System under the symbol "STGE". As of March 28, 1997,
(the date of record for Proxy Statement matters) there was one holder of Class B
Common Stock and approximately 2,100 holders of Common Stock. The following
table sets forth, for the periods indicated, the high and low closing bid prices
for the Common Stock as reported by the NASDAQ National Market System. The
Common Stock commenced trading on October 25, 1996.
Common Stock Prices
--------------------------
High Low
------------- -------------
Quarter ended November 2, 1996.................. $ 19.25 $ 18.25
Quarter ended February 1, 1997.................. 20.50 17.38
Since its inception, the Company has not declared or paid any regular
cash or other dividends on its Common Stock other than in connection with the
Distribution (see Item 6. "Selected Financial Data"), 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.
3
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
the Company's Consolidated Financial Statements. Certain reclassifications of
prior year data have been made to conform to the 1996 reporting format. These
reclassifications had no impact on operating income or net income (loss) for the
years presented. All dollar amounts are stated in thousands, except for per
share and store data.
Fiscal Year
-----------------------------------------------------------------------
1996 (1) 1995(2) 1994 1993 (3) 1992
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales ............................................ $ 776,550 $ 682,624 $ 581,463 $ 557,422 $ 504,401
Cost of sales and related buying,
occupancy and distribution expenses ................ 532,563 468,347 398,659 384,843 350,136
--------- --------- --------- --------- ---------
Gross profit ......................................... 243,987 214,277 182,804 172,579 154,265
Selling, general and
administrative expenses ............................ 172,579 149,102 126,200 115,008 99,523
Store opening and closure costs ...................... 2,838 3,689 5,647 199 120
--------- --------- --------- --------- ---------
Operating income (4) ................................. 68,570 61,486 50,957 57,372 54,622
Interest, net ........................................ 45,954 43,989 40,010 36,377 31,771
Other non-operating expense .......................... -- -- -- -- 2,276
--------- --------- --------- --------- ---------
Income before income tax and extraordinary
item ............................................... 22,616 17,497 10,947 20,995 20,575
Income tax expense ................................... 8,594 6,767 4,317 7,569 8,340
--------- --------- --------- ---------
Income before extraordinary item ..................... 14,022 10,730 6,630 13,426 12,235
Extraordinary item ................................... (16,081) -- (308) (16,208) --
--------- --------- --------- --------- ---------
Net income (loss) .................................... $ (2,059) $ 10,730 $ 6,322 $ (2,782) $ 12,235
========= ========= ========= ========= =========
Earnings (loss) per common share (5) ................. $ (0.13) $ 0.84 $ 0.51 $ (0.41) $ 0.82
========= ========= ========= ========= =========
Weighted average common shares
outstanding ........................................ 15,927 12,726 12,393 12,342 12,093
========= ========= ========= ========= =========
MARGIN AND OTHER DATA:
Gross profit margin .................................. 31.4% 31.4% 31.4% 31.0% 30.6%
Selling, general and administrative expense
rate ............................................... 22.2% 21.8% 21.7% 20.6% 19.7%
Operating income margin (4) .......................... 8.8% 9.0% 8.8% 10.3% 10.8%
STORE DATA: (6)
Comparable store sales growth (7) .................... 3.3% 0.8% 4.1% 6.3% 1.8%
Net sales per selling area square foot (7) ........... $ 151 $ 157 $ 157 $ 149 $ 138
Number of stores open at end of period (8) ........... 315 256 188 180 175
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ...................................... $ 235,219 $ 170,108 $ 148,229 $ 156,782 $ 214,430
Total assets ......................................... 509,283 408,254 366,243 343,406 403,824
Long-term debt ....................................... 298,453 380,039 349,775 347,468 296,587
Redeemable preferred stock ........................... -- -- -- -- 17,500
Stockholders' equity (deficit) (9) ................... 92,266 (72,314) (81,193) (87,727) (9,605)
4
- -----------------------------------
(1) During October 1996, the Company successfully completed an initial
public offering of its common stock (the "Offering"). The net proceeds
were used primarily to retire the 12 3/4% Senior Discount Debentures
due 2000 (the "Senior Discount Debentures"). In addition, the Company
replaced its working capital facility during January 1997. As a result
of these transactions, the Company recorded an extraordinary charge of
$16.1 million, net of applicable income taxes of $9.8 million.
(2) 1995 includes 53 weeks.
(3) During 1993, the Company completed (i) the refinancing of its existing
debt and preferred stock (the "Refinancing") and (ii) a cash
distribution (the "Distribution") to the Company's stockholders. As a
result of the Refinancing, the Company recorded an after-tax
extraordinary charge of $16.2 million. Pursuant to the Distribution,
the Company issued the Senior Discount Debentures which were sold at a
discount of approximately $69.1 million. Substantially all of the $80.0
million in proceeds were used to make the Distribution.
(4) Operating income and operating income margin decreased during 1994
compared to 1993 due primarily to the impact of the implementation of
the Company's accounts receivable securitization program, (see Note 3
to the Company's Consolidated Financial Statements) combined with a
$5.2 million provision associated with the closure of a majority of the
stores operated under the Fashion Bar name (the "Store Closure Plan").
See Note 5 to the Company's Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(5) Historical earnings (loss) per common share reflects the impact of a
.94727 for 1 reverse stock split of the common stock consummated
concurrently with the Offering. Loss per common share for 1996 and 1993
includes the impact of the extraordinary item associated with the
Offering and Refinancing, respectively, which reduced earnings per
common share by $1.01 and $1.31, respectively.
(6) Store data exclude Bealls stores scheduled to be closed under the
Bealls 1988 store closure program, except as otherwise noted in Note 8
below and also exclude the Fashion Bar stores included in the Store
Closure Plan. Comparable store sales growth and net sales per selling
square foot for 1995 have been determined based on a comparable
fifty-two week period. Sales are considered comparable after a store
has been in operation fourteen months. Net sales per selling square
foot are calculated for stores open the entire year.
(7) Comparable store sales growth and net sales per selling square foot
including the stores which were part of the Store Closure Plan and the
1988 Bealls store closure plan were as follows:
Fiscal Year
------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------- ------------ ------------ ------------
Comparable store sales growth ........................... 3.3% 0.5% 3.2% 5.4% 1.8%
Net sales per selling area square foot .................. $ 151 $ 150 $ 151 $ 143 $ 138
Excluding the six Bealls stores located on the border of Mexico which
were adversely affected by the peso devaluation in 1994, comparable
store sales growth for 1995 would have increased to 3.0%.
(8) The number of stores open at the end of each period presented excludes
stores in the Store Closure Plan and the Bealls 1988 store closure
program. Stores open at the end of 1992 and 1993 included one and six
stores, respectively, which were previously excluded under the Bealls
1988 store closure program. Such stores are only included in the
Company's results of operations subsequent to their removal from the
store closure program.
(9) Beginning in 1993, stockholders' deficit includes the impact of the
extraordinary charge associated with the Refinancing and Distribution.
Stockholders' equity at the end of 1996 reflects the impact of the
Offering.
5
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 seasonality of demand for apparel which can be affected by
weather patterns, levels of competition, competitors' marketing strategies,
changes in fashion trends and availability of product, the failure to achieve
the expected results of merchandising and marketing plans or store opening or
closing plans. The occurrence of any of the above could have a material adverse
impact on the Company's operating results. See "Risk Factors" below. Certain
information herein contains estimates which represent management's best judgment
as to 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 the store of choice for well-known
national brand name family apparel in over 200 small towns and communities
across the central United States. The Company has recognized the high level of
brand awareness in small markets and has identified these markets as a
profitable and underserved niche. The Company has developed a unique franchise
focused on these small markets, differentiating itself from the competition by
offering a broad range of brand name merchandise with a high level of customer
service in convenient locations.
At February 1, 1997, the Company operated 315 stores through its
"Stage", "Bealls" and "Palais Royal" trade names in nineteen states throughout
the central United States through SRI. Approximately 77% of these stores are
located in small markets and communities with as few as 4,000 people. The
Company's store format (averaging approximately 18,000 total selling square
feet) and merchandising capabilities enable the Company to operate profitably in
small markets. The remainder of the Company's stores operate in metropolitan
areas, primarily in suburban Houston.
In recent years, the Company has undertaken several initiatives to
realize the full potential of its unique franchise in small markets, including
(i) recruiting a new senior management team, (ii) embarking on a store expansion
program to capitalize on available opportunities in new markets through new
store openings and strategic acquisitions, (iii) continuing to refine the
Company's retailing concept and (iv) closing unprofitable stores. As a result of
these initiatives, the lower operating costs of small market stores, the
benefits of economies of scale, and its highly automated facilities and
sophisticated information systems, the Company has among the highest operating
income margins in the apparel retailing industry.
ACQUISITIONS. The Company acquired 45 stores from Beall-Ladymon, Inc.
("Beall-Ladymon") in 1994 and subsequently reopened the stores in the first
quarter of 1995 under the Stage name. On June 3, 1996, the Company completed the
acquisition of Uhlmans Inc. ("Uhlmans"), a privately-owned 34 retail store chain
similar in concept to the Company. The Company has completed the consolidation
of the Uhlmans general office functions, including accounting, data processing,
merchandising, personnel, sales promotion, credit and distribution into similar
functions provided by the Company.
On March 5, 1997, the Company reached a definitive agreement to merge
with C.R. Anthony Company ("CR Anthony") a retailer of branded and private label
apparel for the entire family. CR Anthony operated 224 stores in 13 southwestern
and Rocky Mountain states at February 1, 1997. Under the terms of the agreement,
the Company will acquire the common stock of CR Anthony for a value of $8.00 per
share plus $0.01 per share for every $0.05 per share by which the average
closing price of the Company's common stock exceeds $20.00 share. The average
closing price of the Company's common stock will be determined based upon ten
randomly selected days out of the twenty trading days ending on the fifth
trading day preceding the closing of the transaction.
6
The form of consideration (stock/cash mix) to be paid by the Company
for CR Anthony's common stock will also be determined using a formula based upon
the average closing price of the Company's common stock. The consideration will
be 100% Company common stock so long as the Company's average closing price is
$20.00 per share or higher, and such stock percentage will decline in a linear
fashion to 25% of the consideration if the average closing price of Company
common stock is $15.00 per share. As an example, if the Company's average
closing price was $21.00 per share, CR Anthony's common shareholders would
receive a value of $8.20 per share, 100% of which would be paid in Company
common stock (0.39 shares of Company common stock to be exchanged for each share
of CR Anthony common stock). At prices below $15.00 per share, the Company has
the option to terminate the agreement, or to close and pay 0.1333 shares of
Company common stock and an amount in cash equal to the difference between $8.00
per share and the value of 0.1333 share of Company common stock. The Company is
currently evaluating its financing options for payments to CR Anthony option
holders and stockholders and any one-time costs to be incurred in connection
with the merger of CR Anthony's operations into the Company which could not
otherwise be funded out of existing sources.
The transaction is subject to approval by the shareholders of CR
Anthony and other closing conditions. In addition, the agreement contains
provisions relating to the obligations of the parties in the event of
termination of the agreement. It is expected that the transaction will be
completed by mid-year 1997.
STORE CLOSURE PLAN: During the fourth quarter of 1994, the Company
approved the Store Closure Plan which provided for the closure of 40
underperforming Fashion Bar stores. These stores were primarily located in major
regional malls within the Denver area. Management determined that the
merchandising strategy and market positions of such stores were not compatible
with the Company's overall strategy. Accordingly, the Company accrued $5.2
million for the expected costs associated with the Store Closure Plan during
1994. The Store Closure Plan was substantially completed in 1995.
The financial information, discussion and analysis that follow should
be read in conjunction with the Company's Consolidated Financial Statements. See
"Index to Financial Statements and Schedules" included elsewhere herein.
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of
sales for the periods indicated. Certain income statement reclassifications have
been made to conform to the 1996 format; accordingly, prior year percentages
differ slightly from those previously reported.
Fiscal Year
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ------------ ----------- ------------ -----------
Net sales .................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................................ 68.6 68.6 68.6 69.0 69.4
----- ----- ----- ----- -----
Gross profit margin .......................................... 31.4 31.4 31.4 31.0 30.6
Selling, general and
administrative expenses ................................. 22.2 21.8 21.7 20.6 19.7
Store opening and closure costs .............................. 0.4 0.6 0.9 0.1 0.1
----- ----- ----- ----- -----
Operating income margin ...................................... 8.8 9.0 8.8 10.3 10.8
Net interest expense ......................................... 5.9 6.4 6.9 6.5 6.3
Other non-operating expense .................................. -- -- -- -- 0.4
----- ----- ----- ----- -----
Income before income tax
and extraordinary item................................... 2.9% 2.6% 1.9% 3.8% 4.1%
===== ===== ===== ===== =====
7
1996 COMPARED TO 1995
Sales for 1996 increased 13.8% to $776.5 million from $682.6 million in
1995. The increase in sales was due primarily to a 12.9% increase in sales from
stores opened during 1996 and 1995, combined with a 3.3% increase in comparable
store sales. Total sales for 1996 were not directly comparable to 1995 because
1995 had one additional selling week when compared to 1996. Eliminating the
extra selling week from 1995 (approximately $10.0 million in sales), sales for
1996 increased 15.5%.
Gross profit increased 13.9% to $244.0 million in 1996 from $214.3
million in 1995. Gross profit for 1996 was favorably impacted by an increase in
markup on merchandise sold relating to an improved mix of inventories and a
lower markdown rate, the result of a continued focus and tight control over
inventories. These factors were offset by a $2.4 million decline in LIFO
credits. Gross profit margin was 31.4% in 1996 and 1995.
Selling, general and administrative expenses for 1996 increased 15.8%
to $172.6 million from $149.1 million in 1995. As a percentage of sales, these
expenses increased to 22.2% in 1996 from 21.8% in 1995 due to (i) the extra
selling week in 1995 which had the impact of lowering the selling, general and
administrative expense rate for 1995, (ii) duplicative costs associated with the
acquisition of Uhlmans and (iii) an increase in bad debt expense associated with
the Company's proprietary credit card program, partially offset by an increase
in service charge income as a result of higher fees assessed on delinquent
accounts. Bad debt expense as a percent of sales in 1996 increased to 2.8% from
2.2% in 1995. The increase in bad debt expense was the result of a general rise
in the level of personal bankruptcies in the Company's accounts receivable
portfolio as well as the Company's adoption of higher late fees. Advertising
expenses as a percent of sales for 1996 and 1995 were 3.8% and 3.9%,
respectively.
Operating income for 1996 increased 11.5% to $68.6 million from $61.5
million for 1995 due to the factors discussed above. Operating income as a
percent of sales was 8.8% in 1996 as compared to 9.0% in 1995.
Net interest expense increased 4.5% to $46.0 million in 1996 from $44.0
million in 1995. Net interest expense increased due to the issuance of (i) $30.0
million in aggregate principal amount of 12.5% SRPC Notes during May 1996 and
(ii) $18.3 million in aggregate principal amount of 11% Series D Senior
Subordinated Notes Due 2003 during August 1995. These increases were offset by
decreased accretion of discount on the Senior Discount Debentures which were
retired in October 1996 in connection with the Offering.
In connection with the Offering and the replacement of the Company's
working capital facility, the Company recorded an extraordinary charge of $16.1
million, net of applicable income taxes of $9.8 million.
1995 COMPARED TO 1994
1995 was highlighted by the positive initial results of management's
growth strategy to expand into small markets. Sales increased 17.4% to $682.6
million in 1995 from $581.5 million in 1994. This increase was due to (i) a
$112.5 million increase in sales from stores opened during 1994 and 1995, (ii) a
0.8% increase in comparable store sales in 1995 and (iii) $10.0 million in sales
due to the inclusion of one extra week in 1995 as a result of 1995 being a
53-week year. Such increases were partially offset by the effects of the Store
Closure Plan which was substantially completed in 1995. During 1995, the
devaluation of the Mexican peso, which resulted in extremely weak economic
conditions throughout Mexico, negatively impacted sales at the Company's six
stores located on the Texas/Mexico border. Excluding these stores, comparable
store sales growth for 1995 would have been 3.3%.
Gross profit increased 17.2% to $214.3 million in 1995 from $182.8
million in 1994. Gross margin was 31.4% for both 1995 and 1994. Gross profit for
1995 was favorably impacted by (i) the opening of new stores, which
traditionally experience lower markdown activity during their first six months
of operations, (ii) vendor discount programs granted to the Company to support
new store openings, (iii) the application of buying, occupancy and distribution
costs over a larger sales base and (iv) LIFO credits. These items were offset by
an increase in markdowns resulting from additional promotional events during the
Christmas season intended to increase sales and
8
reduce inventories and an increase in the level of shrinkage. Management
believes that the increased shrinkage was due primarily to the rapid expansion
of stores during 1995.
Selling, general and administrative expenses for 1995 increased 18.1%
to $149.1 million from $126.2 million in 1994. As a percentage of sales, these
expenses increased to 21.8% for 1995 from 21.7% in 1994. The increase resulted
from incremental costs associated with opening stores in new markets, increased
costs associated with the certificates issued under the Accounts Receivable
Program to third party investors and an increase in the bad debt expense to 2.2%
of sales in 1995 from 1.9% of sales in 1994 associated with the Company's credit
card program (including charge-offs resulting from sales of the Mexican border
stores). These increases were partially offset by the application of fixed costs
to a greater volume of sales and the reversal of a $0.8 million litigation
reserve as a result of a favorable court ruling. Advertising expenses as a
percent of sales for 1995 and 1994 were 3.9% and 3.8%, respectively; the
increase was primarily a result of the Company's expansion into new markets.
The 1995 store opening and closure costs of $3.7 million were comprised
of store opening costs related to 68 new stores. The 1994 store opening and
closure costs were comprised of a $5.2 million provision for the Store Closure
Plan and $0.4 million for store opening costs related to ten new stores.
Operating income for 1995 increased 20.6% to $61.5 million from $51.0
million for 1994 due to the factors discussed above. Operating income as a
percent of sales was 9.0% in 1995 as compared to 8.8% for 1994.
Interest expense for 1995 increased 10.0% to $44.0 million from $40.0
million for 1994. The increase in interest expense was due primarily to an
increase in the accretion on the Senior Discount Debentures combined with
interest related to the Series D Senior Subordinated Notes issued in August
1995.
As a result of the factors described above, the Company's net income
for 1995 increased 69.8% to $10.7 million from $6.3 million for 1994.
SEASONALITY AND INFLATION
The Company's business is seasonal and sales and profits 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.
1996 1995
--------------------------------------------- -----------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------- ------------ ----------- ----------- ----------- ----------- ----------- ----------
Net sales ..................... $163,177 $182,750 $ 182,562 $248,061 $142,353 $154,578 $ 159,161 $226,532
Gross profit .................. 52,081 56,623 56,208 79,075 46,283 46,555 48,659 72,780
Operating income .............. 16,045 13,925 12,342 26,258 14,835 11,074 9,724 25,853
Quarters' operating
income as a percent
of annual ...................... 24% 20% 18% 38% 24% 18% 16% 42%
Income (loss) before
extraordinary item ............. $ 2,652 $ 868 $ (265) $ 10,767 $ 2,438 $ 221 $ (899) $ 8,970
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.
9
LIQUIDITY AND CAPITAL RESOURCES
During October 1996, the Company completed the Offering. The net
proceeds from the Offering were approximately $165.7 million after deducting
underwriting discounts and expenses related to the Offering. The net proceeds
were primarily used to retire the Senior Discount Debentures. The remaining
proceeds of approximately $26.5 million were used for general corporate
purposes. The Company's consolidated long-term debt at February 1, 1997 included
$130.0 million of Senior Notes, $116.7 million of Senior Subordinated Notes,
$30.0 million of SRPC Notes and certain other debt.
On June 3, 1996, the Company purchased Uhlmans for approximately $27.3
million, including acquisition costs and net of cash acquired. The Company,
through SRPC, issued $30.0 million in aggregate principal amount of SRPC Notes
during May 1996, the proceeds of which were used to fund the Uhlmans'
acquisition. The SRPC Notes are secured by two certificates of beneficial
ownership in a special purpose trust (the "Retained Certificates"). Interest on
the SRPC Notes is payable semi-annually on June 15 and December 15 of each year,
commencing December 15, 1996. Amounts received by SRPC from the Retained
Certificates are expected to provide a source of cash flows to pay the interest
on the SRPC Notes. The scheduled amortization of principal will commence in
December 2000 and is subject to the collection experience of the receivables
underlying the Trust Certificates at that time. The issuance of the SRPC Notes
does not impact the ability of the Company to issue additional certificates to
third-party investors under the Accounts Receivable Program.
Total working capital increased $65.1 million to $235.2 million at
February 1, 1997 from $170.1 million at February 3, 1996, due primarily to the
acquisition of Uhlmans through the issuance of the SRPC Notes and the Offering.
The Company's primary capital requirements are for working capital,
debt service and capital expenditures. Based upon the current capital structure,
management anticipates cash interest payments to be approximately $35.0 million
during each of 1997 and 1998. Capital expenditures are generally for new store
openings, remodeling of existing stores and facilities and customary store
maintenance. Capital expenditures in 1996 were $26.1 million as compared to
$28.6 million in 1995. Management expects capital expenditures (excluding any
capital expenditures resulting from the potential acquisition of CR Anthony) to
be approximately $35.0 million during 1997, consisting primarily of 55 new store
openings and remodeling of existing stores. Required aggregate principal
payments on debt total $2.6 million for each of 1997 and 1998.
The Company's short-term liquidity needs are provided by (i) existing
cash balances, (ii) operating cash flows, (iii) the Accounts Receivable Program
and (iv) the Credit Agreements (as defined below). The Company expects to fund
its long-term liquidity needs from its operating cash flows, the issuance of
debt and/or equity securities, the securitization of its accounts receivable and
bank borrowings.
On January 31, 1997, SRI entered into amended and restated revolving
credit agreements with a bank (the "Credit Agreements") to help fund its annual
working capital needs. The Credit Agreements provide for a base borrowing level
of $50.0 million, additional seasonal borrowings of $10.0 million and a letter
of credit facility of an additional $15.0 million (the "L/C Facility") for a
total commitment of $75.0 million. As of February 1, 1997, no borrowings were
outstanding under the Credit Agreements. Seasonal borrowings are available from
August 15 through January 15 of each calendar year. As of February 1, 1997, $8.0
million of the L/C Facility was used to collateralize letters of credit. The
Credit Agreements are available through January 29, 2000.
The Company securitizes all of its trade accounts receivables through a
wholly-owned special purpose entity, SRI Receivables Purchase Co., Inc.
("SRPC"). SRPC holds a retained interest in the securitization vehicle, a
special purpose trust (the "Trust") which is represented by the Retained
Certificates. The Company transfers, on a daily basis, all of the accounts
receivable generated from purchases by the holders of the Company's proprietary
credit card to SRPC. SRPC is a separate limited-purpose subsidiary that is
operated in a manner 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
10
claim on its assets prior to such assets becoming available to any creditor of
the Company. SRPC transfers, on a daily basis, the accounts receivable purchased
from the Company to the Trust in exchange for cash or an increase in the
Retained Certificates. The remaining interest in the Trust is held by
third-party investors which are represented by the Trust Certificates (as
defined below). The Retained Certificates are effectively subordinated to the
interests of such third-party investors, and are pledged to secure the SRPC
Notes which were issued to finance the Uhlmans acquisition.
Since its inception, the Trust has issued $165.0 million of term
certificates and a $40.0 million revolving certificate (collectively, the "Trust
Certificates") to third parties representing undivided interests in the Trust.
The holder of the revolving certificate agreed to purchase interests in the
Trust equal to the amount of accounts receivable in the Trust above the level
required to support the term certificates (aggregating $204.1 million at
February 1, 1997), up to a maximum of $40.0 million. As of February 1, 1997,
there was no outstanding balance under the revolving certificate. The Retained
Certificates are effectively subordinated to the interests of third-party
investors, and are pledged to secure the SRPC Notes. If the amount of accounts
receivable in the Trust falls below the level required to support the Trust
Certificates, certain principal collections may be retained in the Trust until
such time as the accounts receivable balances exceed the amount of accounts
receivable required to support the Trust Certificates and any required
transferor's interest. SRPC receives distributions from the Trust of cash in
excess of amounts required to satisfy the Trust's obligations to third-party
investors on the Trust Certificates. Cash so received by SRPC may be used to
purchase additional accounts receivable from, or make distributions to, the
Company after SRPC has satisfied its obligations on the SRPC Notes. The Trust
may issue additional series of certificates from time to time on various terms.
Terms of any future series will be determined at the time of issuance.
Management believes that funds provided by operations, together with
funds available under the Credit Agreements and the Accounts Receivable Program
will be adequate to meet the Company's anticipated requirements for working
capital, interest payments, planned capital expenditures and principal payments
on debt. Estimates as to working capital needs and other expenditures may be
materially affected if the foregoing sources are not available or do not
otherwise provide sufficient funds to meet the Company's obligations.
RISK FACTORS
LEVERAGE AND RESTRICTIVE COVENANTS: Due to the level of the Company's
indebtedness, any material adverse development affecting the business of the
Company could significantly limit its ability to withstand competitive pressures
and adverse economic conditions, to take advantage of expansion opportunities or
other significant business opportunities that may arise, or to meet its
obligations as they become due. The Company's debt 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. The Company will begin
to incur significant scheduled principal repayment obligations on its
indebtedness beginning in 1999, and expects that it will be necessary to
refinance this indebtedness upon the respective maturity of such debt through
additional debt issuances or through additional equity financing. No assurance
can be given that the Company will be able to obtain such financing, or that
such financing will be available on favorable terms.
See "Liquidity and Capital Resources."
FUTURE GROWTH AND RECENT ACQUISITIONS; LIQUIDITY: Key components of the
Company's growth strategy are to (i) continue to identify and acquire new store
locations where the Company believes it can operate profitably and (ii) identify
and consummate strategic acquisitions (including the acquisition of C.R. Anthony
(see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations"). Such expansions and acquisitions could be material in
size and cost. The Company's ability to achieve its expansion plans is dependent
upon many factors, including the availability and permissibility under
restrictive covenants of financing, general and market specific economic
conditions, the identification of suitable markets, the availability and leasing
of suitable sites on acceptable terms, the hiring, training and retention of
qualified management and other store personnel and the integration of new stores
into the Company's information systems and operations. As a result, there can be
no
11
assurance that the Company will be able to achieve its targets for opening new
stores (including acquisitions) or that such new stores will operate profitably
when opened or acquired.
The Company's growth strategy may significantly expand the Company's
capital expenditure and working capital requirements, and the Company's ability
to meet such requirements may be adversely affected by the Company's level of
indebtedness and the restrictive covenants contained therein, especially in
periods of economic downturn.
ECONOMIC AND MARKET CONDITIONS; SEASONALITY: Substantially all 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 adverse effect on the Company's business and financial
condition. The Company currently has seven stores located near the Texas- Mexico
border and has plans to open several additional stores in that region. Economic
conditions in Mexico, particularly the significant devaluation of the Mexican
peso, adversely affected sales during 1995. Deterioration of the economic
conditions in Mexico in the future could adversely affect the Company's sales.
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 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 adverse effect 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 begin to carry similar
branded merchandise, which could have a material 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 executive management team, including the Company's President
and Chief Executive Officer, Carl Tooker. Although the Company has entered into
employment agreements with each of the Company's executive officers, it is
possible that members of executive management may leave the Company, and such
departures could have a material adverse effect on the Company's business and
financial condition. The Company does not maintain key-man life insurance on any
of its executive officers.
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, there have been substantial
increases in the rate of charge-offs on the Company's accounts receivable. To
date, aggregate increases in finance and service charges have offset a
significant portion of the increases in charge-offs. However, further
deterioration in the quality of the Company's accounts receivable portfolio or
any adverse changes in laws
12
regulating the granting or servicing of credit (including late fees and the
finance charge applied to outstanding balances) could have a material adverse
effect on the Company's business and financial condition. There can be no
assurance that the rate of charge-offs on the Company's accounts receivable
portfolio will not increase further or that increases in finance charges and
late fee collections will continue to offset any such increases in charge-offs.
ACCOUNTS RECEIVABLE PROGRAM: The Company currently securitizes
substantially all of the receivables derived from its proprietary credit card
accounts through the Accounts Receivable Program. Under this program, the
Company causes such receivables to be transferred to the Trust, which from time
to time issues certificates to investors backed by such receivables. The
Accounts Receivable Program has provided the Company with substantially more
liquidity (through the issuance and sale of such certificates) than it would
have had without this program. There can be no assurance that the Company will
be able to continue to securitize its receivables in this manner. There can be
no assurance that receivables will continue to be generated by credit card
holders, or that new credit card accounts will continue to be established at the
rate historically experienced by the Company. Any decline in the generation of
receivables or in the rate or pattern of cardholder payments on accounts could
have a material adverse effect on the Company's business and financial
condition. In addition, significant increases in the floating rates paid on
investor certificates and/or significant deterioration in the performance of the
Company's receivables portfolio could trigger an early repayment requirement,
which could materially adversely affect liquidity. See "Liquidity and Capital
Resources."
INTEREST RATE RISK: Although the Company is protected to a certain
extent by interest rate caps, investors in the receivables-backed certificates
of the Trust receive interest payments on such certificates based on a floating
rate. If the interest rate on these certificates increases, the Company's
operating results could be materially adversely affected. See "Liquidity and
Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Schedules" included on page for
information required under this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
PART III
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 April 1, 1997:
NAME Age Position
- --------------------------- ------- ----------------------------------------
Carl Tooker 49 Chairman, President and Chief Executive
Officer
Mark Shulman 48 Director, Executive Vice President/Chief
Merchandising Officer
James Marcum 37 Executive Vice President/Chief Financial
Officer
Stephen Lovell 41 Executive Vice President/Director of
Stores
Ron Lucas 49 Senior Vice President/Human Resources
Joshua Beckenstein 38 Director
Adam Kirsch 35 Director
Peter Mulvihill 38 Director
Harold Compton 49 Director
Robert Huth 51 Director
Richard Jolosky 62 Director
Mr. Tooker joined the Company as Director, President and Chief
Operating Officer on July 1, 1993. On July 1, 1994, Mr. Tooker was appointed
Chief Executive Officer and on January 27, 1997, Mr. Tooker was elected Chairman
of the Board. Mr. Tooker succeeds Mr. Bernard Fuchs, age 70, who retired. Mr.
Tooker has 25 years of experience in the retail industry, 18 of which were spent
in the May Co. where he served as Chairman and Chief Operating Officer of
Filene's of Boston from 1988 to 1990. In 1990, Mr. Tooker joined Rich's, a
division of Federated Department Stores, Inc., as President and Chief Operating
Officer, and in 1991 Mr. Tooker was promoted to Chief Executive Officer of
Rich's where he served until joining the Company in 1993.
Mr. Shulman joined the Company in January 1994 as Executive Vice
President and Chief Merchandising Officer with 24 years of retailing experience.
Effective December 1996, Mr. Shulman was appointed to the Board of Directors.
Prior to joining the Company, Mr. Shulman held varying positions with
Bloomingdales, Rikes and I. Magnin, all of which are divisions of Federated
Department Stores, Inc. Mr. Shulman served as President and Chief Executive
Officer of Ann Taylor from 1985 to 1987, President and Chief Executive Officer
of Henri Bendel (a division of the Limited) from 1987 to 1990, President and
Chief Operating Officer of Bonjour, Inc. from 1990 to 1992, and president of
Leslie Fay Dress Division from 1992 to 1994.
Mr. Marcum joined the Company in June 1995 as Executive Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Marcum held
various positions at the Melville Corporation where he was employed since 1983.
Mr. Marcum served as Treasurer of Melville Corporation from 1986 to 1989, Vice
President and Controller of Marshalls, Inc., a division of the Melville
Corporation, from 1989 to 1990 and from 1990 to 1995 as Senior Vice President
and Chief Financial Officer of Marshalls, Inc. From 1980 to 1983, Mr. Marcum was
employed at Coopers and Lybrand L.L.P.
14
Mr. Lovell joined the Company in June 1995 as Executive Vice President
and Director of Stores. Before joining the Company, Mr. Lovell served in various
positions at Hit or Miss, a division of TJX Companies, where he was employed
since 1980 and where he served since January 1987 as Senior Vice President and
Director of Stores.
Mr. Lucas joined the Company in July 1995 as Senior Vice President,
Human Resources. 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. Bekenstein has been a Director since December 1988 and was Vice
Chairman of the Board of Directors and Chief Financial Officer of the Company
from May 1992 until June 1995 when Mr. Marcum was appointed Chief Financial
Officer. In March 1996, Mr. Bekenstein resigned as Vice Chairman. Mr. Bekenstein
continues to serve as a Director. Mr. Bekenstein has been a Managing Director of
Bain Capital, Inc. since May 1993 and a General Partner of Bain Venture Capital
since its inception in 1987. Mr. Bekenstein also currently serves on the Board
of Directors of Waters Corporation.
Mr. Kirsch has been a Director since June 1992 and has been a Managing
Director of Bain Capital, Inc. since May 1993 and a General Partner of Bain
Venture Capital since 1990 and was an associate and principal of Bain from 1987
to 1990. Mr. Kirsch also currently serves as a Director of Brookstone, Inc.,
Duane Reade Holding Corp., Diagnostics Holdings Inc. and the Wesley-Jessen
Corporation.
Mr. Mulvihill has been a Director since December 1988. Mr. Mulvihill
has served as a Managing Director of Oak Hill Partners, Inc. (the management
company for Acadia) since 1993. From June 1987 to 1993, Mr. Mulvihill worked for
and was associated with Rosecliff, Inc. (the predecessor of Oak Hill). Prior to
joining Rosecliff, Mr. Mulvihill was an investment banker with Drexel Burnham
Lambert Incorporated in the corporate finance department from 1985 to 1987. Mr.
Mulvihill also serves as a director of Harvest Foods, Inc., an Arkansas- based
grocery chain.
Mr. Compton has been a Director since March 1997. Mr. Compton has
served as Director, Executive Vice President and Chief Executive Officer of
CompUSA, Inc. since 1995. Previously, he served as a Director, Executive Vice
President-Operations, from 1994 to 1995. Prior to joining CompUSA, Mr. Compton
served as President and Chief Operating Officer of Central Electric, Inc. from
1993 to 1994. From 1989 to 1993, Mr. Compton served as Executive Vice
President-Operations & Human Resources of HomeBase, Inc.
Mr. Huth has been a Director since March 1997. Mr. Huth has served as
President of David's Bridal from 1995 to the present. Prior to joining David's
Bridal, Mr. Huth was employed by Melville Corporation from 1987 to 1995, where
he served as Director, Executive Vice President and Chief Executive Officer.
Previously, Mr. Huth was a Partner at KPMG Peat Marwick.
Mr. Jolosky has been a Director since March 1997. Mr. Jolosky has
served as President of Payless ShoeSource, Inc. from 1985 to 1988, and again,
since 1996 to the present. Before becoming President, Mr. Jolosky served as
Executive Vice President Merchandising from 1982 to 1988. Mr. Jolosky served as
President and Chief Executive Officer of Silverman Jewelry Company from 1995 to
1996. He also served as Chief Executive Officer of the Richard Allen Company
from 1992 to 1995, and President and Chief Executive Officer of T & J Shoe
Company from 1988 to 1989.
Certain other information regarding directors and officers is
incorporated herein by reference to the information under the heading "Director
and Officer and Ten Percent Stockholder Security Reports" in the Proxy
Statement.
15
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Information regarding compensation of directors is incorporated herein
by reference to the information under the heading "Compensation of Directors" in
the Proxy Statement.
COMPENSATION OF EXECUTIVE OFFICERS
Information regarding compensation of executive officers is
incorporated herein by reference to the information under the heading "Executive
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by reference to the information under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference to the information under the heading "Certain
Relationships and Related Transactions" in the Proxy Statement.
PART IV
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 19.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated November 25, 1996 was filed
under Item 5 to report that the Company issued a press release
to announce operating results for the three and nine months
ended November 2, 1996.
A Current Report on Form 8-K dated March 5, 1997 was filed
under Item 5 to report that the Company issued a press release
to announce the agreement to acquire the C.R. Anthony Company.
(c) Exhibits - See "Exhibit Index" at X-1.
16
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/ CARL TOOKER April 4, 1997
Carl Tooker
President, Chairman and
Chief Executive
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/ CARL TOOKER Chairman, President and Chief Executive
Carl Tooker Officer (principal executive officer) April 4, 1997
/S/ MARK SHULMAN Director and Executive Vice President/
Mark Shulman Chief Merchandising Officer April 4, 1997
/S/ JAMES MARCUM Executive Vice President and
James Marcum Chief Financial Officer
(principal financial and accounting officer) April 4, 1997
/S/ JOSHUA BEKENSTEIN Director April 4, 1997
Joshua Bekenstein
/S/ ADAM KIRSCH Director April 4, 1997
Adam Kirsch
/S/ PETER MULVIHILL Director April 4, 1997
Peter Mulvihill
17
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
NUMBER
FINANCIAL STATEMENTS
Report of Independent Accountants............................................F-1
Consolidated Balance Sheet at February 1, 1997 and February 3, 1996..........F-2
Consolidated Statement of Operations for 1996, 1995 and 1994.................F-3
Consolidated Statement of Cash Flows for 1996, 1995 and 1994.................F-4
Consolidated Statement of Stockholders' Equity for 1996, 1995 and 1994.......F-6
Notes to Consolidated Financial Statements...................................F-7
SCHEDULES
I. Condensed Financial Information of the Registrant......................S-1
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Stage Stores, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Stage Stores, Inc. and its subsidiaries at February 1, 1997 and
February 3, 1996, and the results of their operations and their cash flows for
each of the three years in the period ended February 1, 1997, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards 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.
PRICE WATERHOUSE LLP
Houston, Texas
March 12, 1997
F-1
STAGE STORES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except par value and number of shares)
February 1, February 3,
1997 1996
--------- ---------
ASSETS
Cash and cash equivalents ...................... $ 18,286 $ 20,273
Undivided interest in accounts receivable trust 80,672 56,515
Merchandise inventories ........................ 187,717 150,032
Prepaid expenses ............................... 15,690 17,378
Other current assets ........................... 32,797 12,225
--------- ---------
Total current assets ..................... 335,162 256,423
Property, equipment and leasehold
improvements, net ............................ 111,189 93,118
Goodwill, net .................................. 47,173 30,876
Other assets ................................... 15,759 27,837
--------- ---------
$ 509,283 $ 408,254
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................... $ 54,336 $ 41,494
Accrued interest ............................... 12,908 12,327
Accrued employee compensation costs ............ 10,068 7,892
Accrued expenses and other current
liabilities .................................. 22,631 24,602
--------- ---------
Total current liabilities ................ 99,943 86,315
Long-term debt ................................. 298,453 380,039
Other long-term liabilities .................... 12,638 14,214
Deferred income taxes .......................... 5,983 --
--------- ---------
Total liabilities ........................ 417,017 480,568
========= =========
Preferred stock, par value $1.00, non-voting,
2,500 shares authorized, no shares
issued or outstanding ........................ -- --
Common stock, par value $0.01, 75,000,000 shares
authorized, 22,033,303 and 10,866,041 shares
issued and outstanding, respectively ......... 220 109
Class B common stock, par value $0.01,
non-voting, 3,000,000 shares authorized,
1,250,584 and 1,391,303 shares
issued and outstanding, respectively ......... 13 14
Additional paid-in capital ..................... 169,811 3,800
Accumulated deficit ............................ (77,778) (76,237)
--------- ---------
Stockholders' equity (deficit) .............. 92,266 (72,314)
--------- ---------
Commitments and contingencies .................. -- --
--------- ---------
$ 509,283 $ 408,254
========= =========
The accompanying notes are an integral part of this statement.
F-2
STAGE STORES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except earnings per share)
Fiscal Year
---------------------------------
1996 1995 1994
--------- -------- ---------
Net sales ............................ $ 776,550 $682,624 $ 581,463
Cost of sales and related buying,
occupancy and distribution expenses 532,563 468,347 398,659
--------- -------- ---------
Gross profit ......................... 243,987 214,277 182,804
Selling, general and
administrative expenses ............ 172,579 149,102 126,200
Store opening and closure costs ...... 2,838 3,689 5,647
--------- -------- ---------
Operating income ..................... 68,570 61,486 50,957
Interest, net ........................ 45,954 43,989 40,010
--------- -------- ---------
Income before income tax and
extraordinary item ................ 22,616 17,497 10,947
Income tax expense ................... 8,594 6,767 4,317
--------- -------- ---------
Income before extraordinary item ..... 14,022 10,730 6,630
Extraordinary item - early retirement
of debt ........................... (16,081) -- (308)
--------- -------- ---------
Net income (loss) .................... $ (2,059) $ 10,730 $ 6,322
========= ======== =========
EARNINGS (LOSS) PER COMMON SHARE DATA:
Earnings per common share before
extraordinary item ................ $ 0.88 $ 0.84 $ 0.54
Extraordinary item - early retirement
of debt ........................... (1.01) -- (0.03)
--------- -------- ---------
Earnings (loss) per common share after
extraordinary item ................ $ (0.13) $ 0.84 $ 0.51
========= ======== =========
Weighted average common shares
outstanding ........................ 15,927 12,726 12,393
========= ======== =========
The accompanying notes are an integral part of this statement.
F-3
STAGE STORES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Fiscal Year
---------------------------------
1996 1995 1994
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ (2,059) $ 10,730 $ 6,322
--------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ..................... 14,181 12,816 9,997
Deferred income taxes ............................. 15,650 (4,065) (3,608)
Accretion of discount ............................. 11,097 13,940 12,286
Amortization of debt issue costs .................. 2,104 1,860 1,674
Issuance of long-term debt in lieu of
interest payment ................................ -- 147 282
Loss on early retirement of debt .................. 16,081 -- 308
Changes in operating assets and liabilities:
Decrease (increase) in undivided interest in
accounts receivable trust .................... (18,815) 7,885 (11,974)
Increase in merchandise inventories ............. (28,199) (31,650) (14,077)
Increase in other assets ........................ (3,339) (6,611) (3,265)
Increase (decrease) in accounts payable and
accrued liabilities .......................... (6,614) 1,202 11,861
--------- -------- --------
Total adjustments ............................. 2,146 (4,476) 3,484
--------- -------- --------
Net cash provided by operating activities ....... 87 6,254 9,806
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted investments ....... -- (100) 10,811
Acquisitions, net of cash acquired .................. (27,346) (1,167) (20,840)
Additions to property, equipment and leasehold
improvements, net ................................. (26,096) (28,638) (19,706)
--------- -------- --------
Net cash used in investing activities ........... (53,442) (29,905) (29,735)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Long-term debt .................................... 30,000 16,458 --
Common stock ...................................... 165,969 68 97
Payments on:
Long-term debt .................................... (140,677) (266) (10,442)
Redemption of common stock ........................ (46) (122) --
Additions to debt issue costs ..................... (3,878) (807 (448)
--------- -------- --------
Net cash provided by (used in)
financing activities .......................... 51,368 15,331 (10,793)
--------- -------- --------
Net decrease in cash and cash
equivalents ................................... (1,987) (8,320) (30,722)
Cash and cash equivalents:
Beginning of year ................................. 20,273 28,593 59,315
--------- -------- --------
End of year ....................................... $ 18,286 $ 20,273 $ 28,593
========= ======== ========
The accompanying notes are an integral part of this statement.
F-4
STAGE STORES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(in thousands)
Fiscal Year
1996 1995 1994
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid ........................ $ 32,094 $ 27,845 $ 28,414
======== ======== ========
Income taxes paid .................... $ 6,988 $ 5,939 $ 5,198
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased Uhlmans, Inc. on June 3, 1996, Mammouth, Inc. and
Szolds, Inc. during 1995 and a significant portion of the assets of
Beall-Ladymon, Inc. during 1994. In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value allocated to assets acquired $ 35,001 $ 1,702 $ 24,043
Cash paid for assets acquired, including
acquisition expenses ................. (27,346) (1,167) (20,840)
Purchase price payable at closing ...... -- (393) --
-------- --------- --------
Liabilities assumed .................... $ 7,655 $ 142 $ 3,203
======== ========= ========
The accompanying notes are an integral part of this statement.
F-5
STAGE STORES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except numbers of shares)
Common Stock
------------------------------------------
Class B
------------------- Additional
Shares Shares Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
---------- ------ ----------- ------ --------- -------- ---------
Balance, January 29, 1994 ....... 10,735,544 $107 1,391,303 $ 14 $ 3,228 $(91,076) $ (87,727)
---------- ---- --------- ---- --------- -------- ---------
Net income ...................... -- -- -- -- -- 6,322 6,322
Vested compensatory stock options -- -- -- -- 247 -- 247
Issuance of stock ............... 45,469 -- -- -- 97 -- 97
Adjustment for minimum
pension liability ............. -- -- -- -- -- (132) (132)
---------- ---- --------- ---- --------- -------- ---------
Balance, January 28, 1995 ....... 10,781,013 107 1,391,303 14 3,572 (84,886) (81,193)
Net income ...................... -- -- -- -- -- 10,730 10,730
Vested compensatory stock options -- -- -- -- 284 -- 284
Issuance of stock ............... 115,208 2 -- -- 66 -- 68
Adjustment for minimum
pension liability ............. -- -- -- -- -- (2,081) (2,081)
Retirement of stock ............. (30,180) -- -- -- (122) -- (122)
---------- ---- --------- ---- --------- -------- ---------
Balance, February 3, 1996 ....... 10,866,041 109 1,391,303 14 3,800 (76,237) (72,314)
Net loss ........................ -- -- -- -- -- (2,059) (2,059)
Vested compensatory stock options -- -- -- -- 198 -- 198
Issuance of stock ............... 11,032,236 110 -- -- 165,859 -- 165,969
Conversion of Class B common
stock ......................... 140,719 1 (140,719) (1) -- -- --
Adjustment for minimum
pension liability ............. -- -- -- -- -- 518 518
Retirement of stock ............. (5,693) -- -- -- (46) -- (46)
---------- ---- --------- ---- --------- -------- ---------
Balance, February 1, 1997 ....... 22,033,303 $220 1,250,584 $ 13 $ 169,811 $(77,778) $ 92,266
========== ==== ========= ==== ========= ======== =========
The accompanying notes are an integral part of this statement.
F-6
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 branded fashion apparel and accessories
for women, men and children. As of February 1, 1997, the Company operated 315
stores in nineteen states located throughout the central 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 "1996" is a reference to
the fiscal year ended February 1, 1997). All fiscal years presented consisted of
52 weeks except for 1995 which consisted of 53 weeks.
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.
ACCOUNTS RECEIVABLE SECURITIZATION: The Company securitizes 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, a special purpose trust (the "Trust"), which is
represented by two certificates of beneficial ownership in the Trust (the
"Retained Certificates"). The Company accounts for the Retained Certificates
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115,
the Retained Certificates are accounted for as debt securities and classified as
trading securities. Accordingly, the Retained Certificates are recorded at fair
value in the accompanying balance sheet with any change in fair value reflected
currently in income.
MERCHANDISE INVENTORIES: The Company states its merchandise inventories at
the lower of cost or market, cost being determined using the retail 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.
Some companies use the retail first-in, first-out ("FIFO") method in valuing
their inventories. If the retail FIFO method had been used, inventories at
February 1, 1997 and February 3, 1996 would have been lower by $5.3 million and
$3.5 million, respectively.
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 as follows:
Buildings ............................................ 20-25
Store and office fixtures and
equipment .......................................... 7-12
Warehouse equipment .................................. 5-15
Leasehold improvements ............................... 15-50
F-7
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 and the tax basis of assets and liabilities.
EARNINGS (LOSS) PER COMMON SHARE: Common stock options outstanding are
treated as common stock equivalents in the computation of earnings or loss per
common share using the treasury stock method. Prior to the initial public
offering of the Company's common stock (see Note 2), the fair value of the
Company's common stock was determined in good faith by the Board of Directors
based upon the Company's historical and projected financial performance.
STOCK SPLIT: Share and per share amounts for all periods presented reflect
the impact of a .94727 for 1 reverse stock split of the Company's common stock
consummated concurrently with the Company's initial public offering.
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 $2.1 million, $1.9 million and $1.7
million for 1996, 1995 and 1994, respectively.
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 $5.4 million and
$4.7 million at February 1, 1997 and February 3, 1996, respectively.
STORE PRE-OPENING EXPENSES: Pre-opening expenses of new stores are
charged to operations in the year the store opens.
ADVERTISING EXPENSES: Advertising costs are charged to operations when the
related advertising first takes place. Advertising costs were $29.7 million,
$25.9 million and $22.3 million for 1996, 1995 and 1994, respectively. Prepaid
advertising costs were $1.2 million and $0.5 million at February 1, 1997 and
February 3, 1996, respectively.
STATEMENT OF CASH FLOWS: The Company considers highly liquid investments
with initial maturities of less than three months to be cash equivalents in its
statement of cash flows.
FINANCIAL INSTRUMENTS: Except for the Retained Certificates, the Company
records all financial instruments at cost. The cost of all financial
instruments, except long-term debt and the Retained Certificates, approximates
fair value.
IMPAIRMENT OF ASSETS: The Company adopted Statement of Financial
Accounting Standard No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" during the first
quarter of 1996. The adoption of SFAS 121 did not have a material effect on the
Company's financial position or results of operations.
RECLASSIFICATIONS: The accompanying consolidated financial statements
include reclassifications from financial statements issued in previous years.
F-8
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - INITIAL PUBLIC OFFERING OF COMMON STOCK
During October 1996, the Company completed an initial public offering
whereby the Company sold 10,750,000 shares of its common stock to the public.
The net proceeds of $165.7 million were used primarily to retire the 12 3/4%
Senior Discount Debentures due 2000 (the "Senior Discount Debentures"). In
addition, the Company replaced its working capital facility in January 1997. As
a result of the early retirement of the Senior Discount Debentures and the
replacement of the working capital facility, the Company recorded an
extraordinary charge of $16.1 million, net of applicable income taxes of $9.8
million.
NOTE 3 - ACCOUNTS RECEIVABLE SECURITIZATION
Pursuant to the accounts receivable securitization (the "Accounts
Receivable Program"), the Company transfers 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 Retained
Certificates. 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. The
Trust currently has $165.0 million of term certificates and a $40.0 million
revolving certificate outstanding which represent undivided interests in the
Trust. The holder of the revolving certificate has agreed to purchase interests
in the Trust equal to the amount of accounts receivable in the Trust above the
level required to support the Retained Certificates, up to a maximum of $40.0
million. 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
Retained Certificates. 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 $165.0
million at February 1, 1997 and February 3, 1996. There were no balances
outstanding under the revolving certificates at February 1, 1997 or February 3,
1996.
Total accounts receivable transferred to the Trust during 1996, 1995 and
1994 were $441.4 million, $411.6 million and $362.3 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 the Company. The term
certificates entitle the holders to receive a return, based upon the London
Interbank Offered Rate ("LIBOR"), plus a specified margin paid on a quarterly
basis. Principal payments commence on December 31, 1999 but can be accelerated
upon occurrence of certain events. The revolving certificate entitles the holder
to receive a return based upon a floating LIBOR rate, plus a specified margin,
or prime rate, at the option of the Company paid on a monthly basis. The Company
is currently protected against increases above 12% under an agreement entered
into with a bank. The Company is exposed to a loss in the event of
non-performance by the bank. However, the Company does not anticipate
non-performance by the bank. At February 1, 1997, the average rate of return on
the term certificates was 6.5%. The purchase commitment for the revolving
certificate is five years, subject to renewal at the option of the parties. The
revolving certificate holders are entitled to repayment in the event the
accounts receivable decrease below that required to support such certificates.
F-9
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The impact of the Accounts Receivable Program on the Company's statement
of operations for the years presented is as follows (in thousands):
Fiscal Year
------------------------------
1996 1995 1994
-------- -------- ---------
Finance charge income billed to
cardholders............................. $48,555 $41,321 $35,183
Return paid to certificateholders....... (11,428) (11,529) (8,200)
Servicing and bad debt expenses......... (37,626) (28,551) (22,504)
Other................................... 279 (62) (1,552)
-------- -------- ---------
$ (220) $ 1,179 $ 2,927
======== ======== =========
NOTE 4 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements were as follows (in
thousands):
February 1, February 3,
1997 1996
-------------- --------------
Land..................................... $ 3,074 $ 3,074
Buildings................................ 16,308 16,313
Fixtures and equipment................... 104,958 88,794
Leasehold improvements................... 63,022 49,290
---------- ----------
187,362 157,471
Accumulated depreciation................. 76,173 64,353
---------- ----------
$ 111,189 $ 93,118
========== ==========
Depreciation expense was $12.3 million, $10.8 million and $8.5 million for
1996, 1995 and 1994, respectively.
NOTE 5 - STORE CLOSURES
During 1994, the Company approved a store closure plan (the "Store Closure
Plan") which provided for the closure of forty Fashion Bar stores. These stores
were primarily located in major regional malls within the Denver area.
Management determined that the merchandising strategy and market positions of
such stores were not compatible with the Company's overall merchandising
philosophy or growth strategy. The Company accrued $5.2 million for the expected
costs associated with the Store Closure Plan in 1994. The Company substantially
completed the Store Closure Plan during 1995. Net sales and operating income
attributable to the stores closed were $23.2 million and $0.6 million,
respectively, in 1994. Such amounts were not material during 1996 and 1995.
F-10
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
February 1, February 3,
1997 1996
-------------- --------------
SRI Senior Notes......................... $ 130,000 $ 130,000
SRI Senior Subordinated Notes, net of
discount.............................. 116,686 116,530
Revolving Credit Agreements.............. -- --
SRPC Notes............................... 30,000 --
Bealls Holding Subordinated Notes, net
of discount........................... 11,945 11,319
FB Holdings Subordinated Notes, net of
discount.............................. 4,174 4,125
Bealls Holding Junior Subordinated
Debentures, net of discount........... 6,408 6,221
Port Arthur IDRB......................... 1,877 2,002
Senior Discount Debentures, net of
discount.............................. -- 109,817
Other long term debt..................... -- 301
---------- ----------
301,090 380,315
Current maturities....................... 2,637 276
---------- ----------
$ 298,453 $ 380,039
========== ==========
The Company used the proceeds of the initial public offering of the
Company's common stock to retire the Senior Discount Debentures at 112.7% of the
accreted value ($120.0 million). Prior to their retirement, the Senior Discount
Debentures bore interest at 12 3/4% of the accreted value. During the time the
Senior Discount Debentures were outstanding, no cash interest was paid.
The SRI Senior Notes were issued with a principal amount of $150.0 million
and bear interest at 10% payable semi-annually on February 15 and August 15. The
Company is required to make a mandatory sinking fund payment on August 15, 1999
equal to 25% of the original principal amount. The Company has purchased $20.0
million of the SRI Senior Notes which satisfied a portion of the August 15, 1999
sinking fund requirement. The SRI Senior Notes are general unsecured obligations
and rank senior to all subordinated debt of the Company including the SRI Senior
Subordinated Notes. At February 1, 1997 and February 3, 1996, an affiliate of a
significant stockholder held $44.2 million of SRI Senior Notes. Interest expense
related to SRI Senior Notes held by related parties was $4.4 million for 1996
and 1995, and $2.9 million for 1994.
The SRI Senior Subordinated Notes consist of two series with principal
balances of $100.0 million and $18.3 million. The $18.3 million series was
issued at a discount which results in a combined effective interest rate for
both series of 11.3%. Both series bear interest at 11% payable semi-annually on
February 15 and August 15. SRI is required to make a mandatory sinking fund
payment in 2002 equal to forty percent of the original principal amount of both
series. The SRI Senior Subordinated Notes are subordinated to the obligations
under the SRI Senior Notes.
The SRI Senior Notes and SRI Senior Subordinated Notes contain restrictive
covenants which, among other things, limit (i) SRI's ability to sell certain
assets, pay dividends, retire its common stock or retire certain debt, (ii) its
ability to incur additional debt or issue stock and (iii) certain related party
transactions.
F-11
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On January 31, 1997, SRI entered into amended and restated revolving
credit agreements with a bank (the "Credit Agreements") to help fund its annual
working capital needs. The Credit Agreements provide for a base borrowing level
of $50.0 million, seasonal borrowings of an additional $10.0 million and letters
of credit of an additional $15.0 million for a total commitment of $75.0
million. Prior to this amended agreement, the Company's total availability under
the working capital facility was $35.0 million. The Credit Agreements are
available through January 29, 2000 and provide for a commitment fee of 0.5% per
annum on the average daily unused portion of the commitment amount paid on a
quarterly basis. Interest is charged on outstanding loans at a base rate set
forth in the agreement plus a specified margin. The specified margin range is
0.5% to 2.75% based on calculated debt service ratios as defined in the
agreement. The effective interest rate at February 1, 1997 was 9.25%. As of
February 1, 1997 the Company had no borrowings outstanding under the Credit
Agreements. The Credit Agreements contain covenants which, among other things,
restrict the (i) incurrance of additional debt, (ii) purchase of certain
investments, (iii) payment of dividends, (iv) formation of certain business
combinations, (v) disposition of certain assets, (vi) acquisition of
subordinated debt, (vii) use of proceeds received under the agreement, (viii)
aggregate amount of capital expenditures and (ix) transactions with related
parties. The Credit Agreements also contain certain financial covenants which
require among other things, the maintenance of the debt service ratio above
predetermined levels, the amount of earnings before interest, taxes,
depreciation and amortization on an annual and quarterly basis above
predetermined levels, and the ratio of consolidated current assets to
consolidated current liabilities above 2.5. A portion of the Credit Agreements
are secured by SRI's distribution center located in Jacksonville, Texas,
including equipment located therein, a pledge of SRPC stock and a pledge of the
Company's trademarks. The net book value of the distribution center was
approximately $6.6 million at February 1, 1997.
During 1996, the Company issued $30.0 million in aggregate principal
amount of 12.5% Trust Certificate-Backed Notes (the "SRPC Notes"). The SRPC
Notes are collateralized by the Retained Certificates. Interest and principal
payments are made from amounts otherwise received by SRPC from funds associated
with the Retained Certificates and are non-recourse to the Company to the extent
these funds are insufficient to make scheduled interest and principal payments.
Interest is payable semi-annually on June 15 and December 15 of each year
commencing December 15, 1996. Principal repayments are scheduled to begin during
December 2000.
The increasing rate 3 Bealls Holding, Inc. ("Bealls Holding") Subordinated
Debentures Due 2002 (the "Bealls Holding Subordinated Debentures") in aggregate
principal amount of approximately $15.0 million bear interest at 10% through
1994, 11% in 1995 and 12% thereafter until maturity. Interest is payable
semi-annually on June 30 and December 31. Original issue discount of $7.3
million is being charged to interest expense over the term to maturity using the
effective interest method. The combination of coupon interest payments and
original issue discount results in an effective interest rate of 20.9%. The
Bealls Holding Subordinated Debentures may be prepaid, at the Company's option,
at their face value. The Company is required to redeem the Bealls Holding
Subordinated Debentures beginning no later than December 31, 1997, in no more
than six equal annual installments. The Bealls Holding Subordinated Debentures
are subordinated to all debt of the Company. SRI is the primary obligor under
these debentures.
In connection with a previous acquisition, a subsidiary of the Company
issued approximately $3.6 million aggregate principal amount of 7% FB Holdings
Subordinated Notes Due 2000 ("FB Holdings Subordinated Notes"). The FB Holdings
Subordinated Notes were recorded at their estimated fair value at issuance date
of $3.1 million. The difference between the estimated fair value and principal
amount of $0.5 million is being charged to interest expense over the term to
maturity using the effective interest method. The FB Holdings Subordinated Notes
are due in two equal installments on June 30, 1999 and 2000. The FB Holdings
Subordinated Notes may be prepaid at any time in whole or in part at SRI's
option. The FB Holdings Subordinated Notes bear interest at 7% per annum,
payable quarterly. The combination of coupon interest payments and original
issue discount results in an effective interest rate of 9.0%. Prior to and
including June 1995, SRI paid interest in the form of additional FB Holdings
Subordinated Notes; thereafter,
F-12
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
interest is being paid in cash. The principal amount of FB Holdings Subordinated
Notes at February 1, 1997 was $4.4 million. The FB Holdings Subordinated Notes
are subordinated to all debt of the Company. SRI is the primary obligor under
these debentures.
In connection with the acquisition of Bealls, Bealls Holding issued the 7%
Bealls Holding Junior Subordinated Debentures Due 2003 ("Bealls Holding Junior
Subordinated Debentures") at a face value of approximately $12.5 million, net of
discount of approximately $8.4 million. Such discount is being charged to
interest expense over the term to maturity using the effective interest method.
The Bealls Holding Junior Subordinated Debentures are limited to an aggregate
principal amount of approximately $18.3 million. Interest is payable
semi-annually on June 30 and December 31. The combination of coupon interest
payments and original issue discount results in an effective interest rate of
39.4%. The principal amount of Bealls Holding Junior Subordinated Debentures
outstanding at February 1, 1997 was $14.3 million. The Bealls Holding Junior
Subordinated Debentures are subordinated to all debt of the Company. SRI is the
primary obligor under these debentures.
The Port Arthur Industrial Development Revenue Bond (the "Port Arthur
IDRB") bears interest at 75% of the prime rate payable monthly. The interest
rate applicable to the Port Arthur IDRB at February 1, 1997 was 6.0%. The Port
Arthur IDRB is collateralized by a building with a net book value of
approximately $0.7 million. Under a separate agreement, SRI is required to make
scheduled annual sinking fund payments ranging from $0.1 million to $0.2
million.
Aggregate maturities of long-term debt for the next five years are: 1997 -
$2.6 million; 1998 - $2.6 million; 1999 - $22.3 million; 2000 - $117.4 million
and 2001 - $ 32.7 million.
Management estimates the fair value of its long-term debt to be $320.1
million and $352.3 million at February 1, 1997 and February 3, 1996,
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.
NOTE 7 - 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, technical 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 February 1, 1997, there were 1,475,581 options outstanding under
the 1993 Stock Option Plan. During 1996, the 1993 Stock Option Plan was frozen
and replaced by the 1996 Equity Incentive Plan (the "Incentive Plan"). The
Incentive Plan provides for the granting of the following types of incentive
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
1,500,000 shares of common stock have been reserved for issuance under the
Incentive Plan; however, 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. There were no grants
made under the Incentive Plan during 1996.
F-13
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, which include nonqualified stock options and ISOs, 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 and
the Incentive 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.
F-14
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the option activity under the various plans follows:
Weighted
Number of Average
Outstanding Option
Options Price
----------- -----------
Options outstanding at January 29,
1994............................. 540,987 $0.46
Granted......................... 186,647 2.27
Surrendered..................... (21,068) 1.25
Exercised....................... (2,720) 0.11
-----------
Options outstanding at January 28,
1995............................. 703,846 0.91
Granted......................... 409,108 2.95
Surrendered..................... (7,435) 1.50
Exercised....................... (99,985) 0.32
-----------
Options outstanding at February 3,
1996............................. 1,005,534 1.80
Granted......................... 783,819 10.72
Surrendered..................... (31,550) 4.48
Exercised....................... (282,222) 1.10
-----------
Options outstanding at February 1,
1997............................. 1,475,581 6.61
===========
Exercisable options at February 3, 1996 and January 28, 1995 were 241,355
and 123,685, respectively. A summary of outstanding and exercisable options as
of February 1, 1997 follows:
Weighted
Average
Number of Remaining Number of
Option Outstanding Contractual Exercisable
Price Options Life Options
- ------------ ------------ ------------ -----------
$0.11 175,318 6.3 75,171
2.27 246,392 7.3 79,777
3.04 260,584 8.4 21,392
5.28 503,212 9.0 5,018
10.56 34,329 9.3 --
21.11 255,746 9.3 --
------------ -----------
1,475,581 181,358
============ ===========
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for its plans.
Compensation expense was $0.3 million for each of 1996, 1995 and 1994. The
following unaudited 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":
F-15
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fiscal Year
--------------------
1996 1995
--------- ---------
Pro forma net income (loss)............. $(2,653) $10,592
Pro forma earnings (loss) per common
share................................. (0.17) 0.83
Weighted average grant date value of
options granted....................... 8.33 3.59
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following assumptions: no dividend yield;
volatility of 34.35%; risk-free interest rate of 6.25%; assumed forfeiture rate
of 68.26% and an expected life of eight 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 8 - EMPLOYEE BENEFIT PLANS
Pension benefits for employees are provided under the SRI 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.
Benefits under the plan are based upon a percentage of the participant's
earnings during each year of credited service.
The following sets forth the funded status of the Retirement Plan and the
amounts recognized in the consolidated financial statements (in thousands):
February 1, February 3,
1997 1996
-------------- --------------
Actuarial present value of benefits:
Vested benefit obligations............ $ (24,650) $ (24,680)
========== ==========
Accumulated benefit obligations....... $ (25,660) $ (25,790)
========== ==========
Projected benefit obligations............ $ (33,790) $ (32,240)
Market value of plan assets, primarily
fixed income and equity securities.... 20,990 20,000
---------- ----------
Pension obligations in excess of assets.. (12,800) (12,240)
Unrecognized prior service income........ (21) (28)
Unrecognized net loss.................... 11,772 10,948
Adjustment required to recognize minimum
liability............................. (3,621) (4,470)
---------- ----------
Accrued pension cost..................... $ (4,670) $ (5,790)
========== ==========
Assumptions utilized in determining projected obligations and funding
amounts:
Discount rate......................... 7.50% 7.00%
Rate of increase in compensation
levels.............................. 4.00% 4.00%
Expected long-term rate of return on
plan assets......................... 9.00% 9.00%
F-16
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
The components of pension cost for the Retirement Plan were as follows (in
thousands):
Fiscal Year
------------------------------
1996 1995 1994
-------- -------- ---------
Service cost............................ $ 1,269 $ 771 $ 887
Interest cost........................... 2,085 2,139 1,995
Actual loss (return) on plan assets..... (2,047) (3,377) 940
Net amortization and deferral........... 789 2,292 (2,174)
-------- -------- ---------
$ 2,096 $ 1,825 $ 1,648
======== ======== =========
NOTE 9 - 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
------------------------------
1996 1995 1994
-------- -------- ---------
Minimum rentals......................... $30,397 $26,943 $22,979
Contingent rentals...................... 3,318 2,618 2,874
Equipment rentals....................... 829 593 784
-------- -------- ---------
$34,544 $30,154 $26,637
======== ======== =========
F-17
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Minimum rental commitments on long-term operating leases at February 1,
1997, net of sub-leases, are as follows (in thousands):
Fiscal Year:
1997........................................... $32,657
1998........................................... 31,087
1999........................................... 29,248
2000........................................... 25,561
2001........................................... 21,614
Thereafter..................................... 107,428
--------
$247,595
========
NOTE 10 - RELATED PARTY TRANSACTIONS
Pursuant to a professional service agreement with an affiliate of a
principal stockholder, the Company paid fees for professional services rendered
and expense reimbursements in the amount of $2.7 million, $0.8 million and $0.6
million for 1996, 1995 and 1994 respectively. Upon consummation of the initial
public offering (see Note 2), such agreement was terminated.
The Company has made loans, in an aggregate principal amount of $1.5
million, to certain 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 7.25%
and mature no later than June 1, 2000.
F-18
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 - INCOME TAXES
All Company operations are domestic. Income tax expense charged to
continuing operations consisted of the following (in thousands):
Fiscal Year
------------------------------
1996 1995 1994
-------- -------- ---------
Federal income tax expense (benefit):
Current.............................. $(7,443) $ 9,772 $ 7,154
Deferred............................. 15,399 (3,630) (3,794)
-------- -------- ---------
7,956 6,142 3,360
-------- -------- ---------
State income tax expense (benefit):
Current.............................. 764 1,060 771
Deferred............................. (126) (435) 186
-------- -------- ---------
638 625 957
-------- -------- ---------
$ 8,594 $ 6,767 $ 4,317
======== ======== =========
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
------------------------------
1996 1995 1994
-------- -------- ---------
Federal income tax expense at the
statutory rate.......................... $ 7,915 $ 6,124 $ 3,831
State income taxes, net................. 414 406 797
Permanent differences, net.............. 265 290 (311)
Other, net.............................. -- (53) --
-------- -------- ---------
$ 8,594 $ 6,767 $ 4,317
======== ======== =========
As a result of the early retirement of the Senior Discount Debentures and
the replacement of the working capital facility, the Company recorded and
extraordinary charge of $16.1 million, net of applicable income taxes of $9.8
million. The 1996 income tax benefit relating to the extraordinary item is
comprised of a $7.7 million current federal tax benefit, a $0.9 million deferred
federal tax benefit and a $1.2 million state tax benefit.
F-19
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax liabilities (assets) consist of the following (in thousands):
February 1, February 3,
1997 1996
-------------- --------------
Gross deferred tax liabilities:
Depreciation and amortization......... $ 12,903 $ 7,485
Inventory reserves.................... 3,735 1,406
State income taxes.................... 495 --
Other................................. 1,660 1,435
---------- ----------
18,793 10,326
---------- ----------
Gross deferred tax assets:
Retained Certificates................. (2,173) (2,502)
Accrued consolidation costs........... (1,318) (1,478)
Net operating loss carryforwards...... (2,961) (82)
Original issue discount............... -- (10,042)
Accrued expenses...................... (1,607) (990)
Pensions.............................. (2,163) (2,686)
Escalating leases..................... (1,482) (962)
Charitable contribution carryforward.. (575) (113)
Accrued payroll costs................. (1,212) (884)
Accrued store closure costs........... -- (558)
Other................................. (403) (780)
---------- ----------
(13,894) (21,077)
---------- ----------
Deferred tax assets valuation allowance.. -- --
---------- ----------
$ 4,899 $ (10,751)
========== ==========
As a result of the extraordinary loss on the early retirement of debt
during 1996, the Company has recorded a $17.0 million federal income tax
receivable which is included in other current assets on the consolidated balance
sheet.
F-20
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 - QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial data is summarized as follows (in
thousands):
Fiscal Year 1996
-------------------------------------
Q1 Q2 Q3 Q4
--------- -------- --------- --------
Net sales........................ $163,177 $182,750 $182,562 $248,061
Gross profit..................... 52,081 56,623 56,208 79,075
Operating income................. 16,045 13,925 12,342 26,258
Income (loss) before
extraordinary item............. 2,652 868 (265) 10,767
Net income (loss)................ 2,652 868 (16,071) 10,492
Earnings (loss) per common share
data:
Earnings (loss) per common
share before extraordinary
item........................ 0.21 0.07 (0.02) 0.45
Extraordinary item - early
retirement of debt......... -- -- (1.12) (0.01)
Earnings (loss) per common
share after extraordinary
item....................... 0.21 0.07 (1.14) 0.44
Fiscal Year 1995
-------------------------------------
Q1 Q2 Q3 Q4
--------- -------- --------- --------
Net sales........................ $142,353 $154,578 $159,161 $226,532
Gross profit..................... 46,283 46,555 48,659 72,780
Operating income................. 14,835 11,074 9,724 25,853
Net income (loss)................ 2,438 221 (899) 8,970
Earnings (loss) per common share
data:
Earnings (loss) per common
share after extraordinary
item....................... 0.19 0.02 (0.07) 0.70
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LITIGATION: The Company is subject to claims and litigation arising in the
normal course of its business. The Company does not believe that any of these
proceedings will have a material adverse effect on its financial position or its
results of operations.
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 $8.0 million at February 1, 1997, all of
which were collateralized by the Credit Agreements (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
F-21
STAGE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3). 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. Substantially all of the Company's customers
reside in the central United States.
NOTE 14 - SUBSEQUENT EVENT
On March 5, 1997, the Company reached a definitive agreement to merge with
C.R. Anthony Company ("CR Anthony"), a retailer of branded and private label
apparel for the entire family which operated 224 stores in 13 southwestern and
Rocky Mountain states at February 1, 1997. Under the terms of the agreement, the
Company will acquire the common stock of CR Anthony for a value of $8.00 per
share plus $0.01 per share for every $0.05 per share by which the average
closing price of the Company's common stock exceeds $20.00 per share. The
Company's average closing price will be determined based upon ten randomly
selected days out of the twenty trading days ending on the fifth trading day
preceding the closing of the transaction.
The form of consideration (stock/cash mix) to be paid by the Company for
CR Anthony's common stock will also be determined using a formula based upon the
average closing price of the Company's stock. The consideration will be 100%
Company common stock so long as the Company's average closing price is $20.00
per share or higher, and such stock percentage will decline in a linear fashion
to 25% of the consideration if the average closing price of Company common stock
is $15.00 per share. As an example, if the Company's average closing price was
$21.00 per share, CR Anthony's common shareholders would receive a value of
$8.20 per share, 100% of which would be paid in Company common stock (0.39
shares of Company common stock to be exchanged for each share of CR Anthony
common stock). At prices below $15.00 per share, the Company has the option to
terminate the agreement, or to close and pay 0.1333 shares of Company common
stock and an amount in cash equal to the difference between $8.00 per share and
the value of 0.1333 share of Company common stock. The Company is currently
evaluating its financing options for payments to CR Anthony option holders and
stockholders and any one-time costs to be incurred in connection with the merger
of CR Anthony's operations into the Company which could not otherwise be funded
out of existing sources.
The transaction is subject to approval by the shareholders of CR Anthony
and other closing conditions. In addition, the agreement contains provisions
relating to the obligations of the parties in the event of termination of the
agreement. It is expected that the transaction will be completed by mid-year
1997.
F-22
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 on Form 8-K of Stage Stores, Inc., dated March 5, 1997).
*3.1 Form of 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 Form of By-Laws of Stage Stores, Inc. (Incorporated by Reference to
Exhibit 3.4 of Registration No. 333-5855 on Form S-1).
**4.1 Amended and Restated Revolving Credit Agreement by and among Stage
Stores, Inc., Specialty Retailers, Inc., Palais Royal, Inc. and the
First National Bank of Boston, as agent for itself and other financial
institutions dated January 31, 1997.
**4.2 Amended and Restated Seasonal Revolving Credit Agreement by and among
Stage Stores, Inc., Specialty Retailers, Inc., Palais Royal, Inc., and
the First National Bank of Boston, as agent for itself and other
financial institutions dated January 31, 1997.
*4.3 Form of Indenture among Specialty Retailers, Inc., The First National
Bank of Boston, as Trustee, and Palais Royal, Inc., as Guarantor,
relating to the 10% Senior Notes due 2000 of Specialty Retailers, Inc.
(including form of note) (Incorporated by Reference to Exhibit 4.2 of
Registration No. 33-68258 on Form S-4).
*4.4 Form of Indenture among Specialty Retailers, Inc., The First National
Bank of Boston, as Trustee, and Palais Royal, Inc., as Guarantor,
relating to the 11% Senior Subordinated Notes due 2003 of Specialty
Retailers, Inc. (including form of note) (Incorporated by Reference to
Exhibit 4.3 on Registration No. 33-68258 on Form S-4).
*4.5 Form of 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).
*4.6 Form of 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).
*4.7 Indenture by and between Specialty Retailers, Inc. and The First
National Bank of Boston, as Trustee, relating to the 11% Series C and
Series D Senior Subordinated Notes due 2003 of Specialty Retailers, Inc.
dated July 27, 1995 (including form of note), (Incorporated by Reference
to Exhibit 4.1 on Form 10-Q of Apparel Retailers, Inc., dated October
28, 1995).
X-1
EXHIBIT INDEX
(Continued)
EXHIBIT
NUMBER EXHIBIT
*4.8 Form of Indenture among SRI Receivables Purchase Co., Inc., Specialty
Retailers, Inc., as Administrative Agent, and Bankers Trust Company, as
Trustee and Collateral Agent, relating to the 12.5% Trust
Certificate-Backed Notes of SRI Receivables Purchase Co., Inc.
(including form of note). (Incorporated by Reference to Exhibit 4.1 on
Form 10-Q of Apparel Retailers Inc., dated May 4, 1996).
*4.9 Amended and Restated Pooling and Servicing Agreement by and among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and Bankers
Trust (Delaware) dated August 11, 1995 (Incorporated by Reference to
Exhibit 4.6 on Form 10-Q of Apparel Retailers, Inc., dated October 28,
1995).
*4.10 First Amendment to Amended and Restated Pooling and Servicing Agreement
by and among SRI Receivables Purchase Co., Inc., Specialty Retailers,
Inc. and Bankers Trust (Delaware) dated May 30, 1996 (Incorporated by
Reference to Exhibit 4.2 on Form 10-Q of Apparel Retailers, Inc., dated
May 4,1996).
*4.11 Amended and Restated Series 1993-1 Supplement among SRI Receivables
Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust
(Delaware) dated May 30, 1996 (Incorporated by Reference to Exhibit 4.3
on Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
*4.12 Amended and Restated Series 1993-2 Supplement among SRI Receivables
Purchase Co., Inc., Specialty Retailers, Inc. and Bankers Trust
(Delaware) dated May 30, 1996 (Incorporated by Reference to Exhibit 4.4
on Form 10-Q of Apparel Retailers, Inc., dated May 4 , 1996).
*4.13 First Amendment to the Series 1993-2 Supplement and Revolving
Certificate Purchase Agreement by and among Specialty Retailers, Inc.,
SRI Receivables Purchase Co., Inc., Bankers Trust (Delaware) as Trustee
for the SRI Receivables Master Trust, the financial institutions parties
thereto and National Westminster Bank Plc, New York branch dated August
11, 1995 (Incorporated by Reference to Exhibit 4.5 on Form 10-Q of
Apparel Retailers, Inc., dated May 4, 1996).
*4.14 Amended and Restated Series 1995-1 Supplement by and among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and Bankers
Trust (Delaware) on behalf of the Series 1995-1 Certificateholders dated
May 30, 1996 (Incorporated by Reference to Exhibit 4.6 on Form 10-Q of
Apparel Retailers, Inc., dated May 4, 1996).
*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).
*4.16 Certificate Purchase Agreements between SRI Receivables Purchase Co.,
Inc. and the Purchasers of the Series 1993-1 Offered Certificates
(Incorporated by Reference to Exhibit 4.10 of Registration No. 33-68258
on Form S-4).
*4.17 Revolving Certificate Purchase Agreement between SRI Receivables
Purchase Co., Inc., the Facility Agent and the Revolving Purchasers with
respect to the Class A-R Certificates (Incorporated by Reference to
Exhibit 4.11 of Registration No. 33-68258 on Form S-4).
*4.18 Certificate Purchase Agreement among SRI Receivables Purchase Co.,
Specialty Retailers, Inc. and the Certificate Purchaser dated August 11,
1995 (Incorporated by Reference to Exhibit 4.9 on Form 10-Q of Apparel
Retailers, Inc., dated October 28, 1995).
X-2
EXHIBIT INDEX
(Continued)
EXHIBIT
NUMBER EXHIBIT
*10.1 Registration Rights Agreement dated as of May 30, 1996 by and among SRI
Receivables Purchase Co., Inc. and BT Securities Corporation relating to
the sale of SRI Receivables Purchase Co., Inc. 12.5% Trust
Certificate-Backed Notes.
*10.2 Equity Stock Purchase 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 10.9 of Registration No. 33-27714
on Form S-1) and Amendment to Equity Stock Purchase Agreement dated
September 21, 1992 and August 2, 1993 (Incorporated by Reference to
Exhibit 10.4 of Registration No. 33-68258 on Form S-4).
*10.3 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).
*10.4 Apparel Retailers, Inc. Stock Option Plan (Incorporated by Reference to
Exhibit 10.13 to Registration No. 33-68258 on Form S-4).
*10.5 Employment Agreement between Stage Stores, Inc. and Carl E. Tooker dated
June 12, 1996 (Incorporated by Reference to Exhibit 10.17 of
Registration No. 33-5855 on Form S-1).
*10.6 Stock Option Agreement between Specialty Retailers, Inc. and Carl E.
Tooker dated June 9, 1993 (Incorporated by Reference to Exhibit 10.18 to
Registration No. 33-68258 on Form S-4).
*10.7 Purchase Agreement dated July 20, 1995 by and among Specialty Retailers,
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, relating to
the sale of the Company's 11% Series C Senior Subordinated Notes due
2003 (Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Apparel
Retailers, Inc., dated October 28, 1995).
*10.8 Registration Rights Agreement dated July 27, 1995 by and between
Specialty Retailers, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation, relating to the sale of the Company's 11% Series C Senior
Subordinated Notes due 2003 (Incorporated by Reference to Exhibit 10.2
on Form 10-Q of Apparel Retailers, Inc., dated October 28, 1995).
*10.9 Employment Agreement between Mark Shulman and Stage Stores, Inc. dated
June 12, 1996 (Incorporated by Reference to Exhibit 10.23 of
Registration No. 333-5855 of Form S-1).
*10.10 Stock Option Agreement between Mark Shulman and Apparel Retailers, Inc.,
dated January 31, 1994 (Incorporated by Reference to Exhibit 10.2 on
Form 10-Q of Apparel Retailers, Inc., dated April 29, 1995).
*10.11 Employment Agreement between James Marcum and Stage Stores, Inc. dated
June 12, 1996 (Incorporated by Reference to Exhibit 10.24 of
Registration No. 333-5855 of Form S-1).
X-3
EXHIBIT INDEX
(Continued)
EXHIBIT
NUMBER EXHIBIT
*10.12 Employment between Stephen Lovell and Stage Stores, Inc. dated June 12,
1996 (Incorporated by Reference to Exhibit 10.25 of Registration No.
333-5855 of Form S-1).
*10.13 Employment Agreement between Ron Lucas and Stage Stores, Inc. dated June
12, 1996 (Incorporated by Reference to Exhibit 10.28 of Registration No.
333-5855 of Form S-1).
*10.14 Purchase Agreement dated September 2, 1994 by and among Palais Royal,
Inc. and Beall-Ladymon Corporation relating to the sale of certain
assets of Beall-Ladymon Corporation (Incorporated by Reference to
Exhibit 10.1 on Form 10-Q of Apparel Retailers, Inc., dated July 30,
1994).
*10.15 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).
*10.16 Termination Option Agreement, dated as of March 5, 1997, between Stage
Stores, Inc. and C.R. Anthony Company (Incorporated by Reference to
Exhibit 10.1 on Form 8-K of Stage Stores, Inc., dated March 5, 1997).
*10.17 Stage Stores, Inc. Equity Incentive Plan (Incorporated by Reference to
Exhibit 10.29 of Registration No. 333-5855 of Form S-1).
**12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
**21.1 List of Registrant's Subsidiaries.
- ----------
* Previously Filed
** Filed Herewith
X-4
Schedule I
STAGE STORES, INC.
CONDENSED BALANCE SHEET
(in thousands, except par value and numbers of shares)
February 1, February 3,
1997 1996
--------- ---------
ASSETS
Cash and cash equivalents ............................ $ 16 $ 9
Intercompany advances ................................ 64,217 7,240
Debt issue costs, net of amortization ................ -- 4,163
Investment in subsidiary ............................. 41,066 35,340
Deferred income taxes ................................ -- 10,042
--------- ---------
$ 105,299 $ 56,794
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ..................................... $ 111 $ 6,369
Long-term debt ....................................... -- 109,817
--------- ---------
Total liabilities .............................. 111 116,186
--------- ---------
Preferred stock, par value $1.00, non-voting, 2,500
shares authorized, zero shares issued
and outstanding .................................... -- --
Common Stock, par value $0.01, 75,000,000 shares
authorized, 22,033,303 and 10,866,041 shares
issued and outstanding, respectively ............... 220 109
Class B common stock, par value $0.01, non-voting,
3,000,000 shares authorized, 1,250,584 and 1,391,303
shares issued and outstanding, respectively ........ 13 14
Additional paid-in capital ........................... 169,811 3,800
Accumulated deficit .................................. (64,856) (63,315)
--------- ---------
Stockholders' equity (deficit) ....................... 105,188 (59,392)
--------- ---------
$ 105,299 $ 56,794
========= =========
The accompanying notes are an integral part of this condensed
financial information.
S-1
Schedule I
(continued)
STAGE STORES, INC.
CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(in thousands)
Fiscal Year
--------------------------------
1996 1995 1994
-------- -------- --------
Selling, general and administrative expenses $ 17 $ -- $ --
Interest income ............................ 14 18 30
Interest expense ........................... 10,953 13,511 11,954
-------- -------- --------
Loss before income tax and equity in
earnings of subsidiary ................... (10,956) (13,493) (11,924)
Income tax benefit ......................... (3,690) (4,550) (4,022)
-------- -------- --------
Loss before equity in earnings
of subsidiary ............................ (7,266) (8,943) (7,902)
Equity in earnings of subsidiaries ......... 5,207 19,673 14,224
-------- -------- --------
Net income (loss) .......................... (2,059) 10,730 6,322
Accumulated deficit:
Beginning of year ........................ (63,315) (71,964) (78,154)
Adjustment for minimum pension
liability ............................... 518 (2,081) (132)
-------- -------- --------
End of year .............................. $(64,856) $(63,315) $(71,964)
======== ======== ========
The accompanying notes are an integral part of this condensed
financial information.
S-2
Schedule I
(continued)
STAGE STORES, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
Fiscal Year
---------------------------------
1996 1995 1994
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................. $ (2,059) $ 10,730 $ 6,322
--------- -------- --------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Accretion of discount ........................... 10,229 13,070 11,515
Amortization of debt issue costs ................ 4,163 438 437
Deferred federal income tax ..................... 10,042 (4,402) (3,879)
Equity in earnings of subsidiaries .............. (5,207) (19,673) (14,224)
Changes in operating assets and liabilities:
Increase (decrease) in accrued liabilities .... (6,061) (641) 7,116
Intercompany advances ......................... (56,977) (243) (7,382)
--------- -------- --------
Total adjustments ........................... (43,811) (11,451) (6,417)
--------- -------- --------
Net cash used in operating activities ......... (45,870) (721) (95)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt .................................. (120,046) -- --
Issuance of common stock ........................ 165,969 68 97
Redemption of common stock ...................... (46) (122) --
Additions to debt issue cost .................... -- -- --
Dividends paid .................................. -- -- --
--------- -------- --------
Net cash provided by (used in) financing activities 45,877 (66) 97
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 7 (787) 2
Cash and cash equivalents:
Beginning of year ............................... 9 796 794
--------- -------- --------
End of year ..................................... $ 16 $ 9 $ 796
========= ======== ========
The accompanying notes are an integral part of this condensed
financial information.
S-3
Schedule I
(continued)
STAGE STORES, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE 1 - BASIS OF PRESENTATION:
The accompanying condensed financial statements present the financial
position and results of operations of Stage Stores, Inc. (the "Company") on a
separate company basis. The condensed financial statements of the Company have
been prepared in accordance with Rule 10-01 of Regulation S-X and do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. The Company's investment in its
wholly-owned subsidiary is accounted for using the equity method.
The Company's fiscal year ends on the Saturday nearest to January 31 in
the following calendar year. For example, references to "1995" mean the fiscal
year ended February 3, 1996.
NOTE 2 - INCOME TAXES:
The Company files a consolidated federal income tax return with its
subsidiaries. The Company's recorded tax benefit represents the impact of its
tax assets and liabilities on the consolidated group.
NOTE 3 - INITIAL PUBLIC OFFERING OF COMMON STOCK:
During October 1996, the Company completed an initial public offering
whereby the Company sold 10,750,000 shares of its common stock to the public.
The net proceeds of $165.7 million were used primarily to retire the 12 3/4%
Senior Discount Debentures due 2000.
NOTE 4 - SUBSEQUENT EVENT:
On March 5, 1997, the Company entered into an Agreement and Plan of Merger
with C.R. Anthony Company, an Oklahoma Corporation ("CR Anthony"). The
consummation of the transaction is subject to certain conditions, including
approval by the shareholders of CR Anthony.
S-4