10-Q 1 0001.txt 1 Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 28, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __ to Commission file number 001-14035 Stage Stores, Inc. (Exact name of registrant as specified in its charter) DELAWARE 76-0407711 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identifications No.) 10201 Main Street, Houston, 77025 Texas (Zip Code) (Address of principal executive offices) (713) 667-5601 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No _ _ The number of shares of common stock of Stage Stores, Inc. outstanding as of December 19, 2000 was 26,850,223 shares of Common Stock and 1,250,584 shares of Class B Common Stock. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Stage Stores, Inc. (Debtor-in-Possession) Consolidated Condensed Balance Sheet (in thousands, except par values) October 28, January 29, 2000 2000 ASSETS (unaudited) (unaudited) Cash and cash equivalents $ 14,911 $20,179 Undivided interest in accounts receivable trust -- 41,600 Accounts receivable, net 276,377 -- Merchandise inventories, net 271,303 261,104 Prepaid expenses and other current assets 15,498 23,866 Total current assets 578,089 346,749 Property, equipment and leasehold improvements, net 153,463 181,834 Other assets 15,178 26,104 Total assets $ 746,730 $554,687 LIABILITIES AND STOCKHOLDERS' DEFICIT Accounts payable $ 68,815 $40,955 Accrued expenses and other current liabilities 49,661 72,177 Debtor-in-possession credit facility 265,453 -- Current portion of long-term debt -- 9,830 Long-term debt classified as current -- 492,393 Total current liabilities 383,929 615,355 Liabilities subject to compromise under reorganization proceedings 568,546 -- Other long-term liabilities 6,729 14,299 Total liabilities 959,204 629,654 Preferred stock, par value $1.00, non- voting, 3 shares authorized, no shares issued or outstanding -- -- Common stock, par value $0.01, 75,000 shares authorized, 26,850 and 26,834 shares issued and outstanding, respectively 268 268 Class B common stock, par value $0.01, non-voting, 3,000 shares authorized, 1,250 shares issued and outstanding 13 13 Additional paid-in capital 267,059 266,590 Accumulated deficit (475,476) (337,500) Accumulated other comprehensive income (4,338) (4,338) Stockholders' deficit (212,474) (74,967) Commitments and contingencies -- -- Total liabilities and stockholders' deficit $ 746,730 $554,687 The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Consolidated Condensed Statement of Operations (in thousands, except per share amounts) (unaudited) Thirteen Weeks Thirty-nine Weeks Ended Ended October October October October 28, 2000 30, 1999 28, 2000 30, 1999 Net sales $216,582 $264,327 $662,389 $796,766 Cost of sales and related buying, occupancy and distribution expenses 166,427 187,124 514,712 575,183 Gross profit 50,155 77,203 147,677 221,583 Selling, general and administrative expenses 55,083 63,715 174,656 191,822 Store opening and closure program costs -- 928 -- 17,142 Operating income (loss) (4,928) 12,560 (26,979) 12,619 Interest, net 7,819 12,192 31,776 36,949 Income (loss) before reorganization items, income tax, and cumulative effect of a change in accounting principle (12,747) 368 (58,755) (24,330) Reorganization items (3,166) -- (79,146) -- Income (loss) before income tax and cumulative effect of a change in accounting principle (15,913) 368 (137,901) (24,330) Income tax expense (benefit) 25 144 75 (7,194) Income (loss) before cumulative effect of a change in accounting principle (15,938) 224 (137,976) (17,136) Cumulative effect of a change in accounting principle, net of tax reporting costs of start-up activities -- -- -- (2,402) Net income (loss) $ $ $ $ (15,938) 224 (137,976) (19,538) Basic income ( loss) per common share data: Basic income (loss) per common share before cumulative effect of a change in accounting principle $ (0.57) $ 0.01 $ (4.91) $ (0.61) Cumulative effect of a change in accounting principle, net of tax reporting costs of start-up activities -- -- -- (0.09) Basic income (loss) per common share $ (0.57) $ 0.01 $ (4.91) $(0.70) Basic weighted average common shares outstanding 28,100 28,083 28,098 28,015 Diluted income (loss) per common share data: Diluted income (loss) per common share before cumulative effect of a change in Accounting principle $ (0.57) $ 0.01 $ (4.91) $ (0.61) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- -- -- (0.09) Diluted income (loss) per common share $ (0.57) $ 0.01 $ (4.91) $ (0.70) Diluted weighted average common shares outstanding 28,100 28,231 28,098 28,015 The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Consolidated Condensed Statement of Cash Flows (in thousands) (unaudited) Thirty-nine Weeks Ended October 28, October 30, 2000 1999 Cash flows from operating activities: Net loss $ (137,976 ) $ (19,538) Adjustments to reconcile net loss to net cash used in operating Activities: Depreciation and amortization 31,525 36,329 Deferred income taxes -- (2,015) Accretion of discount 7,780 920 Amortization of debt issue costs 15,885 2,234 Cumulative effect of a change in accounting principle -- 2,402 Change in working capital (160,837) (29,517) Total adjustments (105,647) 10,353 Net cash used in operating activities (243,623) (9,185) Cash flows from investing activities: Additions to property, equipment and leasehold improvements (3,848) (13,166) Proceeds from retirement of fixtures and equipment 567 -- Net cash used in investing activities (3,281) (13,166) Cash flows from financing activities: Proceeds from debtor-in-possession credit facility 265,453 -- Proceeds from (payments on) pre-petition working capital facility (13,000) 19,150 Proceeds from issuance of common stock -- 262 Payments on long-term debt (204) (2,360) Additions to debt issue costs (10,613) -- Net cash provided by financing activities 241,636 17,052 Net decrease in cash and cash equivalents (5,268) (5,299) Cash and cash equivalents: Beginning of period 20,179 12,832 End of period $ 14,911 $ 7,533 Supplemental disclosure of cash flow information: Interest paid $ 12,905 $ 26,815 Income taxes paid $ 7 $ 188 The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Consolidated Statement of Stockholders' Deficit For the Thirty-nine Weeks Ended October 28, 2000 (in thousands) Shares Outstanding Shares of common stock issued: Beginning balance 26,834 Issuance of stock 16 Ending balance 26,850 Shares of Class B stock issued: Beginning balance 1,250 Ending balance 1,250 Stockholders' Deficit Common stock issued: Beginning balance $ 268 Issuance of stock -- Ending balance 268 Class B stock issued: Beginning balance 13 Ending balance 13 Additional Paid-in Capital: Beginning balance 266,590 Issuance of stock 469 Ending balance 267,059 Accumulated deficit and accumulated other Comprehensive income: Beginning balance (341,838) Comprehensive loss: Net loss (137,976) Other comprehensive loss -- Total comprehensive loss (137,976) Ending balance (479,814) Total Stockholders' Deficit $(212,474) Accumulated other comprehensive loss: Beginning balance $ (4,338) Ending balance $ (4,338) The accompanying notes are an integral part of this statement. Stage Stores, Inc. (Debtor-in-Possession) Notes to Unaudited Consolidated Condensed Financial Statements 1. The accompanying Unaudited Consolidated Condensed Financial Statements of Stage Stores, Inc. ("Stage Stores") have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of the results of operations for a full year. The Unaudited Consolidated Condensed Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto for the year ended January 29, 2000 filed with Stage Stores' Annual Report on Form 10-K. The fiscal years discussed herein end on the Saturday nearest to January 31 in the following calendar year. For example, references to "2000" mean the fiscal year ending February 3, 2001. Certain reclassifications have been made to prior year balances to conform with the current year presentation. 2. Stage Stores conducts its business primarily through its wholly-owned subsidiary Specialty Retailers, Inc. ("SRI") which, as of October 28, 2000, operated 469 family apparel stores in 20 states located primarily in the south central and midwestern United States. Stage Stores and SRI are collectively referred to herein as the "Company". 3. On June 1, 2000 (the "Petition Date"), Stage Stores, SRI and Specialty Retailers, Inc. (NV) filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Southern District of Texas (the "Court"). Under Chapter 11, the Company is operating its business as debtor-in-possession (see Note 2 to the Company's Consolidated Financial Statements filed with Stage Stores' Annual Report on Form 10-K for the year ended January 29, 2000). The accompanying Unaudited Consolidated Condensed Financial Statements have been presented in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" and have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. Further, a plan of reorganization could materially change the amounts reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of a plan of reorganization. The ability of the Company to continue as a going concern is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with debtor-in-possession financing agreements and the ability to generate sufficient cash from operations and financing sources to meet the Company's obligations. Additionally, the accompanying Unaudited Consolidated Condensed Financial Statements do not include any adjustments that would be required if the Company were in liquidation. Substantially all of the Company's pre-petition liabilities are subject to compromise under reorganization proceedings. Those petition date liabilities that are expected to be paid or comprised under a plan of reorganization are separately classified in the accompanying Unaudited Consolidated Condensed Balance Sheet and, as of October 28, 2000, include the following items (in thousands): Long-term debt $ 514,568 Accounts payable 21,414 Accrued expenses and other liabilities 32,564 Liabilities subject to compromise $ 568,546 The Company ceased accruing interest on pre-petition long-term debt on June 1, 2000. Reported interest differs from stated contractual interest by $11.7 million for the thirty-nine weeks ended October 28, 2000. On June 2, 2000, the Company entered into a three year, $450.0 million debtor-in-possession financing agreement (the "DIP Financing Agreement") with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. The terms of the DIP Financing Agreement have been approved by the Court. Borrowings under the DIP Financing Agreement are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interests. Borrowings under the DIP Financing Agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing Agreement. As of October 28, 2000, availability under the DIP Financing Agreement was $126.9 million. The weighted average borrowing rate for amounts outstanding under the DIP Financing Agreement at October 28, 2000 was 9.55%. Initial borrowings under the DIP Financing Agreement were used to terminate the Company's existing Accounts Receivable Program, retire the Senior Revolving Credit Facility and for certain closing costs associated with the DIP Financing Agreement. As a result of the termination of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to a special purpose trust (the "Trust") but, rather, will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing Agreement. The DIP Financing Agreement contains covenants which, among other things, restrict the (i) incurrence of additional debt, (ii) incurrence of capital lease obligations, (iii) aggregate amount of capital expenditures and (iv) transactions with related parties. In addition, the DIP Financing Agreement requires the Company to maintain compliance with a certain specified level of earnings before depreciation, interest, taxes and special charges. On June 7, 2000, the Company paid the Trust $288.4 million in cash and surrendered its retained interest in the Trust in exchange for all accounts receivable balances held by the Trust on that date, which aggregated $324.3 million. The Trust used the cash proceeds to retire all remaining certificates and pay other costs associated with the termination of the Trust. The accounts receivable balances repurchased by the Company have been recorded at $312.3 million, the aggregate of the cash paid and the estimated fair value of the retained interest surrendered. The Company accretes the yield resulting from the estimated net future cash flows associated with these balances using the interest method. The yield is recorded in selling, general and administrative expenses in the accompanying financial statements. Service charge income, late fees and estimated bad debt expense related to credit sales made after June 7, 2000 are also included in selling, general and administrative expense in the accompanying financial statements. During July 2000, the Court approved the Company's plan to close 120 stores as part of its restructuring process (the "2000 Store Closing Plan"). The Company engaged third parties to manage the inventory liquidation process in these stores. The 2000 Store Closing Plan has been substantially completed. The net expense resulting from the Company's Chapter 11 filing and subsequent reorganization efforts (which include the 2000 Store Closing Plan) has been separated from ordinary operations and is classified as reorganization items in the accompanying Unaudited Consolidated Condensed Statement of Operations. Components of reorganization items for the thirteen and thirty-nine weeks ended October 28, 2000 are as follows (in thousands): Thirteen Thirty- Weeks nine Ended Weeks October Ended 28, 2000 October 28, 2000 Costs associated with the 2000 Store Closing Plan (including loss on inventory, lease damages and severance) $ 542 $ 29,273 Write-off of fixed assets associated with the 2000 Store Closing Plan and other miscellaneous assets (378) 17,812 Professional fees associated with the bankruptcy 3,415 8,332 Write-off of pre-petition debt issue costs and original issue discount -- 17,987 Write-down of undivided interest in accounts receivable trust -- 6,155 Other (413) (413) Total $ 3,166 $ 79,146 Net cash used in operating activities for reorganization items was approximately $6.7 million, related primarily to professional fees and retainers during the thirty-nine weeks ended October 28, 2000. 4. Prior to the Petition Date, the Company charged $0.5 million against the store closure accrual for lease damages it established in 1999. The accrued balance relating to this store closure program was $7.3 million as of October 28, 2000 and has been included in liabilities subject to compromise under reorganization proceedings. 5. The Company has provided a full valuation allowance against the net deferred tax assets generated during the thirty-nine weeks ended October 28, 2000. See Note 11 to the Audited Consolidated Financial Statements for the year ended January 29, 2000, included in Stage Stores Annual Report on Form 10-K. 6. From time to time the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. Due to the bankruptcy filing mentioned previously, certain of the cases mentioned below have been stayed pursuant to the automatic stay of the Court. These cases require Court approval or must be specifically exempt for litigation proceedings to continue. On March 30, 1999, a class action lawsuit was filed against the Company and certain of its officers, directors and stockholders in the United States District Court for the Southern District of Texas by John C. Weld, Jr., a stockholder who purchased 125 shares of the Company's common stock on August 3, 1998, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the "Weld Suit"). The Company believed that the allegations of the Weld Suit are without merit, and on July 23, 1999, the Company filed a motion to dismiss. United States District Judge Kenneth Hoyt entered an order on December 8, 1999 dismissing the Weld Suit. The order has been appealed by Mr. Weld. With respect to the Tooker matter as discussed in the Company's quarterly report on Form 10-Q for the period ended July 29, 2000, on November 21 and 22, 2000, the Company participated in a mediation with the other parties involved in the Tooker litigation. The parties reached an agreement in principle to settle all claims in the case. The settlement documents are being prepared and have not been reviewed by the parties or finalized for public disclosure. The settlement is subject to approval by the bankruptcy court following proper notice to interested parties in that proceeding. The special committee of the Company's Board of Directors overseeing the Tooker litigation has authorized the terms of the settlement, subject to further approvals described above. In March 2000, eleven former employees of SRI d/b/a Palais Royal, filed two separate suits in the United States District Court for the Southern District of Texas against the Company, SRI and Mary Elizabeth Pena, arising out of alleged conduct occurring over an unspecified time while the plaintiffs were working at one or more Palais Royal stores in the Houston, Texas area. The plaintiffs allege that on separate occasions they were falsely accused of stealing merchandise and other company property and giving discounts for purchases against company policy. The suits accuse the defendants of defamation, false imprisonment, intentional infliction of mental distress, assault and violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The claims seek unspecified damages for mental anguish, lost earnings, exemplary damages, treble damages, interest, attorneys' fees and costs. The Company denies the allegations and intends to vigorously defend the claims. On November 3, 2000, the Company received a copy of the SEC's August 3, 2000 Order Directing Private Investigation "In the Matter of Stage Stores, Inc." (the "Order"). The Order is a confidential document directing a non-public investigation into related party transactions previously reported by the Company. The Company is cooperating with the SEC in the investigation. The Company has been named as one of 135 defendants in a patent infringement action brought by The Lemelson Medical, Education & Research Foundation in the United States District Court for the District of Arizona, Case No. CIV-000663 PHX PGR. The plaintiff claims to be the owner of various patents covering optical scanning devices commonly used by retail outlets at check out counters to scan prices for customer purchases. The complaint seeks injunctive relief to prevent alleged continuing infringement and unspecified damages for alleged past infringement. The court and the plaintiff have been advised of the Company's bankruptcy filing, and the Company has asserted the protection of the bankruptcy stay. The remaining defendants have formed a common defense group and plan to vigorously defend against the claims. The Company disputes the plaintiff's allegations and plans to monitor the action closely. Management believes that none of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the financial position, results of operations or cash flows of the Company or its subsidiaries. 7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment to SFAS No. 133", which requires that all derivative financial instruments be recorded in the financial statements. SFAS No. 133 is effective for the Company in the first quarter of 2001, and the Company is in the process of ascertaining the impact this new standard will have on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 is effective for the Company in the fourth quarter of 2000, and the Company is ascertaining the impact this pronouncement will have on its financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" which replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilites". SFAS No. 140 is effective for transfers entered into after March 31, 2001, and the Company is in the process of ascertaining the impact this new standard will have on its financial statements. 8. The following Unaudited Consolidating Condensed Financial Statements for Stage Stores and its wholly-owned subsidiaries is presented to satisfy disclosure requirements pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934 with respect to wholly-owned subsidiaries of Stage Stores. Stage Stores does not prepare separate financial statements and related disclosures for its wholly-owned subsidiaries SRI and Specialty Retailers, Inc. (NV), a wholly-owned subsidiary of Stage Stores which was incorporated during June 1997, because management has determined that such information is not material to investors. SRI is the primary obligor under the 8 and one half percent Senior Notes due 2005 and the 9% Senior Subordinated Notes due 2007 (see Note 6 to the Company's Consolidated Financial Statements filed with Stage Stores' Annual Report on Form 10-K for the year ended January 29, 2000). Stage Stores and Specialty Retailers, Inc. (NV) are guarantors of such indebtedness. The Unaudited Consolidating Condensed Financial Statements for Stage Stores and its wholly-owned subsidiaries, including all significant intercompany transactions eliminated in consolidation, are presented below. The results of operations of SRPC as reported are not indicative of the total operating performance of the Company's Accounts Receivable Program. Consolidating Condensed Balance Sheet October 28, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers Receivabl Eliminati Consolida , Inc. es ons ted Purchase Co. ASSETS Cash and cash $ 12,406 $ -- $ -- $ 12,406 equivalents Accounts 276,377 -- -- 276,377 receivable, net Merchandise 271,303 -- -- inventories, 271,303 net Prepaid expenses -- -- and other 15,498 15,498 current assets Total current 575,584 -- -- 575,584 assets Property, 153,463 -- -- 153,463 equipment and leasehold improvements, net Other assets 15,116 -- 15,116 Investment in -- -- subsidiaries 37,035 (37,035) Total assets $ 781,198 $ -- $(37,035) $ 744,163 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ 68,815 $ -- $ -- $ 68,815 Accrued expenses -- -- and other 49,235 49,235 current liabilities Debtor-in-posses 265,453 -- -- 265,453 sion credit facility Total current -- liabilities 383,503 -- 383,503 Intercompany 231,845 -- 194,810 notes/advances (37,035) Liabilities 568,546 subject to compromise under reorganization 568,546 proceedings Other long-term -- -- liabilities 6,729 6,729 Investment in -- -- -- -- subsidiaries Total -- 1,153,588 liabilities 1,190,623 (37,035) Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common -- -- -- -- stock Additional paid- in capital 3,317 34,253 (34,253) 3,317 Accumulated earnings (408,404) 2,782 (2,782) (408,404) (deficit) Accumulated -- -- other (4,338) (4,338) comprehensive income Stockholders' equity (409,425) 37,035 (37,035) (409,425) (deficit) Total liabilities and stockholders' equity (deficit) $ 781,198 $ -- $(37,035) $ 744,163 Consolidating Condensed Balance Sheet October 28, 2000 (in thousands, unaudited) Stage Specialty Eliminati Stage Stores, Retailers ons Stores Inc. , Inc. Consolida (NV) ted ASSETS Cash and cash $ 2 $2,503 $ -- $ 14,911 equivalents Accounts -- -- -- receivable, net 276,377 Merchandise -- -- -- inventories, 271,303 net Prepaid expenses -- -- -- and other 15,498 current assets Total current 2 2,503 -- 578,089 assets Property, -- -- -- 153,463 equipment and leasehold improvements, net Other assets -- 62 -- 15,178 Investment in -- -- -- -- subsidiaries Total assets $ 2 $ 2,565 $ -- $ 746,730 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ -- $ -- $ -- $ 68,815 Accrued expenses and other current liabilities -- 426 -- 49,661 Debtor-in-posses -- -- -- sion credit 265,453 facility Total current -- -- liabilities 426 383,929 Intercompany (194,281) -- -- notes/advances (529) Liabilities 568,546 subject to compromise under reorganization proceedings Other long-term -- -- -- 6,729 liabilities Investment in -- -- subsidiaries 213,005 (213,005) Total (193,855) liabilities 212,476 (213,005) 959,204 Preferred stock -- -- -- -- Common stock -- -- 268 268 Class B common -- -- stock 13 13 Additional paid- in capital 267,059 160,915 (164,232) 267,059 Accumulated earnings (475,476) 35,505 372,899 (475,476) (deficit) Accumulated -- other (4,338) 4,338 (4,338) comprehensive income Stockholders' equity (212,474) 196,420 213,005 (212,474) (deficit) Total liabilities and stockholders' equity (deficit) $ 2 $ 2,565 $ -- $ 746,730 Consolidating Condensed Balance Sheet January 29, 2000 (in thousands,unaudi ted) Specialty SRI SRI SRI Retailers Receivabl Eliminati Consolida , Inc. es ons ted Purchase Co. ASSETS Cash and cash $18,077 $ -- $ -- $18,077 equivalents Undivided interest in (13,101) 54,701 -- 41,600 accounts receivable trust Merchandise -- -- inventories, net 261,104 261,104 Prepaid expenses 220 -- 7,725 7,945 Other current 8,491 -- assets 7,430 15,921 Total current 63,412 -- assets 281,235 344,647 Property, equipment and 180,761 -- -- 180,761 leasehold improvements, net Other assets 2,608 -- 23,436 26,044 Investment in -- -- subsidiaries 36,690 (36,690) Total assets $ $ 66,020 $ $ 522,122 (36,690) 551,452 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $40,955 $ -- $ -- $ 40,955 Accrued expenses 2,770 and other 69,385 -- 72,155 current liabilities Current portion -- -- of long-term 9,830 9,830 debt Long-term debt -- -- classified as 492,393 492,393 current Total current 2,770 -- liabilities 612,563 615,333 Other long-term -- -- liabilities 14,299 14,299 Intercompany 26,560 -- notes/advances 160,719 187,279 Investment in -- -- -- subsidiaries -- Total 29,330 -- liabilities 787,581 816,911 Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common -- -- -- stock -- Additional paid- in capital 3,317 33,908 (33,908) 3,317 Accumulated 2,782 earnings (264,438) (2,782) (264,438) (deficit) Accumulated other comprehensive (4,338) -- -- (4,338) income Stockholders' 36,690 equity (deficit) (265,459) (36,690) (265,459) Total $522,122 $66,020 $ $ liabilities and (36,690) 551,452 stockholders' equity (deficit) Consolidating Condensed Balance Sheet January 29, 2000 (in thousands,unaudi ted) Stage Specialty Stage Stores, Retailers Eliminati Stores Inc. , Inc. ons Consolida (NV) ted ASSETS Cash and cash $ 102 $ $ -- $20,179 equivalents 2,000 Undivided -- interest in -- -- 41,600 accounts receivable trust Merchandise -- inventories, net -- -- 261,104 Prepaid expenses -- -- -- 7,945 Other current -- assets -- -- 15,921 Total current -- assets 102 2,000 346,749 Property, -- equipment and -- 1,073 181,834 leasehold improvements, net Other assets -- -- 60 26,104 Investment in -- subsidiaries -- -- -- Total assets $ 102 $ $ -- $ 3,133 554,687 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ -- $ -- $ -- $40,955 Accrued expenses -- and other 22 -- 72,177 current liabilities Current portion -- of long-term -- -- 9,830 debt Long-term debt -- classified as -- -- 492,393 current Total current -- liabilities 22 -- 615,355 Other long-term -- liabilities -- -- 14,299 Intercompany (187,297) -- notes/advances 18 -- Investment in (75,029) subsidiaries 75,029 -- -- Total (187,297) (75,029) liabilities 75,069 629,654 Preferred stock -- -- -- -- Common stock -- 268 -- 268 Class B common -- stock 13 -- 13 Additional paid- in capital 266,590 160,915 (164,232) 266,590 Accumulated (337,500) 234,923 earnings 29,515 (337,500) (deficit) Accumulated other 4,338 comprehensive (4,338) -- (4,338) income Stockholders' 75,029 equity (deficit) (74,967) 190,430 (74,967) Total $ 102 $ $ -- $554,687 liabilities and 3,133 stockholders' equity (deficit) Consolidating Condensed Statement of Operations Thirty-nine Weeks Ended October 28, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivabl Eliminati Consolidat Inc. es ons ed Purchase Co. Net sales $662,389 $ -- $ -- $662,389 Cost of sales 514,712 514,712 and related -- -- buying, occupancy and distribution expenses Gross profit 147,677 147,677 -- -- Selling, general (2,063) and 177,405 -- 175,342 administrative expenses Operating income (loss) (29,728) 2,063 -- (27,665) Interest expense, net 37,735 (229) -- 37,506 Income (loss) (67,463) (65,171) before 2,292 -- reorganization items and income taxes Reorganization (76,854) (79,146) items (2,292) -- Income (loss) before income (144,317) -- -- (144,317) taxes Income tax (351) (351) expense -- -- (benefit) Income (loss) (143,966) (143,966) before equity -- -- in net earnings of subsidiaries Equity in net earnings of -- -- -- -- subsidiaries Net income (loss) $(143,966) $ -- $ -- $(143,966) Consolidating Condensed Statement of Operations Thirty-nine Weeks Ended October 28, 2000 (in thousands, unaudited) Stage Specialty Eliminati Stage Stores, Retailers ons Stores Inc. , Inc. Consolidat (NV) ed Net sales $ -- $ -- $ -- $662,389 Cost of sales -- 514,712 and related -- -- buying, occupancy and distribution expenses Gross profit -- 147,677 -- -- Selling, general (686) 174,656 and -- -- administrative expenses Operating income -- (26,979) (loss) 686 -- Interest -- (5,730) 31,776 expense, net -- Income (loss) -- (58,755) before 6,416 -- reorganization items and income taxes Reorganization -- items -- -- (79,146) Income (loss) (137,901) before income -- 6,416 -- taxes Income tax -- 75 expense 426 -- (benefit) Income (loss) before equity in net earnings of subsidiaries 5,990 -- -- (137,976) Equity in net (137,976) earnings of -- 137,976 -- subsidiaries Net income $(137,976) $ 5,990 $ 137,976 $(137,976) (loss) Consolidating Condensed Statement of Operations Thirty-nine Weeks Ended October 30, 1999 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivabl Eliminati Consolidat Inc. es ons ed Purchase Co. Net sales $796,766 $ -- $ -- $796,766 Cost of sales 575,183 -- -- 575,183 and related buying, occupancy and distribution expenses Gross profit 221,583 -- -- 221,583 Selling, general 197,017 (4,951) -- 192,066 and administrative expenses Store opening 17,142 -- -- 17,142 and closure program costs Operating income 7,424 4,951 -- 12,375 (loss) Interest 46,180 3,151 -- 49,331 expense, net Income (loss) (38,756) 1,800 -- (36,956) before income taxes Income tax (12,317) 666 -- (11,651) expense (benefit) Income (loss) (26,439) 1,134 -- (25,305) before equity in net earnings of subsidiaries and cumulative effect of a change in accounting principle Equity in net (72) -- 72 -- earnings of subsidiaries Income (loss) (26,511) 1,134 72 (25,305) before cumulative effect of a change in accounting principle Cumulative (1,196) (1,206) -- (2,402) effect of a change in accounting principle, net of tax - reporting costs of start-up activities Net income $ (27,707) $ (72) $ 72 $ (27,707) (loss) Consolidating Condensed Statement of Operations Thirty-nine Weeks Ended October 30, 1999 (in thousands, unaudited) Stage Specialty Eliminati Stage Stores, Retailers ons Stores Inc. , Inc. Consolidat (NV) ed Net sales $ -- $ -- $ -- $796,766 Cost of sales -- -- -- 575,183 and related buying, occupancy and distribution expenses Gross profit -- -- -- 221,583 Selling, general 107 (351) -- 191,822 and administrative expenses Store opening -- -- -- 17,142 and closure program costs Operating income (107) 351 -- 12,619 (loss) Interest -- (12 -- 36,949 expense, net ,382) Income (loss) (107) 12,733 -- (24,330) before income taxes Income tax -- 4,457 -- (7,194) expense (benefit) Income (loss) (107) 8,276 -- (17,136) before equity in net earnings of subsidiaries and cumulative effect of a change in accounting principle Equity in net (19,431) -- 19,431 -- earnings of subsidiaries Income (loss) (19,538) 8,276 19,431 (17,136) before cumulative effect of a change in accounting principle Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- -- -- (2,402) Net income $ (19,538) $ 8,276 $ 19,431 $ (19,538) (loss) Consolidating Condensed Statement of Cash Flows Thirty-nine Weeks Ended October 28, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivabl Eliminati Consolidat Inc. es ons ed Purchase Co. Cash flows from operating activities: Net cash provided by $ (6,140) $ -- (used in) operating activities $(237,886) $(244,026) Cash flows from investing activities: Additions to property, (3,848) -- -- (3,848) equipment and leasehold improvements Proceeds from 567 567 retirement of -- -- fixtures and equipment Proceeds from the sales of (6,140) 6,140 -- -- accounts receivable, net Net cash provided by (used in) investing 6,140 -- activities (9,421) (3,281) Cash flows from financing activities: Proceeds from debtor-in- 265,453 -- -- 265,453 possession credit facility Payments on pre- petition (13,000) -- -- (13,000) working capital facility Proceeds from - issuance of -- -- -- - common stock Payments on long- term debt -- -- (204) Additions to (204) -- -- (10,613) debt issue (10,613) costs Net cash provided by 241,636 -- -- 241,636 (used in) Financing activities Net increase (decrease) in (5,671) -- -- (5,671) cash and cash equivalents Cash and cash equivalents: Beginning of period 18,077 -- -- 18,077 $ 12,406 $ 12,406 -- -- End of period Consolidating Condensed Statement of Cash Flows Thirty-nine Weeks Ended October 28, 2000 (in thousands, unaudited) Stage Specialty Stage Stores, Retailers Eliminati Stores Inc. , Inc. ons Consolidat (NV) ed Cash flows from operating activities: Net cash $ provided by $ (100) $ 503 -- (used in) operating activities $(243,623) Cash flows from investing activities: Additions to property, -- -- -- (3,848) equipment and leasehold improvements Proceeds from 567 retirement of -- -- -- fixtures and equipment Proceeds from the sales of -- -- -- -- accounts receivable, net Net cash (3,281) provided by -- -- -- (used in) investing activities Cash flows from financing activities: Proceeds from debtor-in- -- -- -- 265,453 possession credit facility Payments on pre- petition working capital facility -- -- -- (13,000) Proceeds from issuance of -- -- -- -- common stock Payments on long- (204) term debt -- -- -- (10,613) Additions to debt issue costs Net cash provided by -- -- -- 241,636 (used in) Financing activities Net increase (decrease) in (100) 503 -- (5,268) cash and cash equivalents Cash and cash equivalents: Beginning of period 102 2,000 -- 20,179 $ 2 $ 2,503 $ 14,911 -- End of period Consolidating Condensed Statement of Cash Flows Thirty-nine Weeks Ended October 30, 1999 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Receivabl Eliminati Consolidat Inc. es ons ed Purchase Co. Cash flows from operating activities: Net cash used in operating activities $(1,485) $ (7,437) $ -- $ (8,922) Cash flows from investing activities: Investment in -- -- -- -- subsidiary Additions to (13,166) -- -- (13,166) property, equipment and leasehold improvements Proceeds from 7,437 the sales of (7,437) accounts -- -- receivable, net Net cash (20,603) 7,437 -- (13,166) provided by (used in) investing activities Cash flows from financing activities: Proceeds from 19,150 -- -- 19,150 working capital facility Proceeds from -- -- -- -- issuance of common stock Proceeds from -- -- -- -- capital contribution Payments on long- (2,360) -- -- (2,360) term debt Net cash 16,790 -- -- 16,790 provided by (used in) financing activities Net decrease in (5,298) -- -- (5,298) cash and cash equivalents Cash and cash equivalents: Beginning of 10,882 -- -- 10,882 period End of period $ 5,584 $ -- $ -- $ 5,584 Consolidating Condensed Statement of Cash Flows Thirty-nine Weeks Ended October 30, 1999 (in thousands, unaudited) Stage Specialty Stage Stores, Retailers Eliminati Stores Inc. , Inc. ons Consolidat (NV) ed Cash flows from operating activities: Net cash used $ -- $(263) $ -- $(9,185) in operating activities Cash flows from investing activities: Investment in (262) -- 262 -- subsidiary Additions to -- -- -- (13,166) property, equipment and leasehold improvements Proceeds from the sales of accounts -- -- -- -- receivable, net Net cash (262) -- 262 (13,166) provided by (used in) investing activities Cash flows from financing activities: Proceeds from -- -- -- 19,150 working capital facility Proceeds from issuance of -- common stock 262 262 Proceeds from -- 262 -- capital (262) contribution Payments on long- -- -- -- (2,360) term debt Net cash 262 262 17,052 provided by (262) (used in) financing activities Net decrease in -- (1) -- (5,299) cash and cash equivalents Cash and cash equivalents: Beginning of 2 1,948 -- 12,832 period End of period $ 2 $1,947 $ -- $ 7,533 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Certain items discussed or incorporated by reference herein contain forward-looking statements that involve risks and uncertainties including, but not limited to, the ability to obtain financing on terms reasonably satisfactory to the Company, the ability of the Company to obtain normal trade terms from its vendors, the ability of the Company to comply with the various covenant requirements contained in the Company's DIP Financing Agreement and the demand for apparel. The demand for apparel can be affected by weather patterns, levels of competition, competitors' marketing strategies, changes in fashion trends, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening and closing plans. The occurrence of the above has had and can continue to have a material and adverse impact on the Company's operating results. See "Risk Factors" below. Certain information herein contains estimates which represent management's best judgment as of the date hereof based on information currently available; however, the Company does not intend to update this information to reflect developments or information obtained after the date hereof and disclaims any legal obligation to the contrary. General Overview. The Company operates family apparel stores offering moderately priced, nationally recognized brand name apparel, accessories, cosmetics and footwear, the majority of which are located in small towns and communities primarily in the south central and mid western United States. The Company has recognized the high level of brand awareness and demand for fashionable, quality apparel by consumers in small markets and has identified these markets as a strategically important and under served niche. The Company has developed a franchise focused on small markets offering a broad range of brand name merchandise with a high level of customer service in convenient locations. Significant Events. On June 1, 2000, Stage Stores, SRI and Specialty Retailers, Inc. (NV) filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. Under Chapter 11, the Company is operating its business as debtor-in-possession. Additionally, a creditor committee has been formed and has the right to review and object to any non-ordinary course of business transactions and participate in the formulation of any plan or plans of reorganization. As of the Petition Date, actions to collect pre-petition indebtedness are stayed and other contractual obligations may not be enforced against the Company. In addition, the Company may reject executory contracts and lease obligations, and parties affected by these rejections may file claims with the Court in accordance with the reorganization process. Substantially all liabilities as of the Petition Date are subject to settlement under a plan of reorganization to be voted upon by all impaired classes of creditors and equity security holders and approved by the Court. On June 2, 2000, the Company entered into a three year, $450.0 million DIP Financing Agreement with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. The terms of the DIP Financing Agreement have been approved by the Court. Borrowings under the DIP Financing Agreement are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interests. Borrowings under the DIP Financing Agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing Agreement. Initial borrowings under the DIP Financing Agreement were used to terminate the Company's existing Accounts Receivable Program, retire the Senior Revolving Credit Facility and for certain closing costs associated with the DIP Financing Agreement. As a result of the termination of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to the Trust but, rather, will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing Agreement. On June 7, 2000, the Company paid the Trust $288.4 million in cash and surrendered its retained interest in the Trust in exchange for all accounts receivable balances held by the Trust on that date. The Trust used the cash proceeds to retire all remaining certificates and pay other costs associated with the termination of the Trust. The accounts receivable balances repurchased by the Company have been recorded at $312.3 million, the aggregate of the cash paid and the estimated fair value of the retained interest surrendered. The Company accretes the yield resulting from the estimated net future cash flows associated with these balances using the interest method. The yield is recorded in selling, general and administrative expenses in the accompanying financial statements. Service charge income, late fees and estimated bad debt expense related to credit sales made after June 7, 2000 are also included in selling, general and administrative expense in the accompanying financial statements. During July 2000, the Court approved the Company's 2000 Store Closing Plan which consisted of the closure of 120 stores as part of its reorganization process. The Company engaged third parties to manage the liquidation process in these stores, which has been completed. In conjunction with the 2000 Store Closing Plan, the Company recorded charges aggregating $43.9 million for the thirty- nine weeks ended October 28, 2000, comprised of a $14.4 million loss on inventory, $13.2 million of estimated lease damages to be settled in the bankruptcy process, $1.0 million of severance and a $14.7 million write-off of the fixed assets and prepaid supplies and $0.6 of other expenses associated with the 120 stores in the 2000 Store Closing Plan. This charge is reflected in reorganization items in the accompanying Consolidated Condensed Statement of Operations. On August 8, 2000, the Company announced the employment of James Scarborough as its new President and Chief Executive Officer. Jack Wiesner, who was serving as Chairman of the Board and Interim President and Chief Executive Officer of the Company will continue as Chairman of the Board and will oversee the Company's Chapter 11 proceedings and reorganization process. The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 29, 2000. Results of Operations Thirteen Weeks Ended October 28, 2000 Compared to Thirteen Weeks Ended October 30, 1999 Sales for the thirteen weeks ended October 28, 2000 ("current year third quarter") decreased 18.1% to $216.6 million from $264.3 million for the thirteen weeks ended October 30, 1999 ("prior year third quarter"). The decrease in sales for the current year third quarter reflects, among other things, (i) the net reduction of 185 stores since the end of the prior year third quarter and (ii) a 4.4% decline in comparable store sales during the period. Comparable store sales for the current year third quarter improved from the 18.0% decline in comparable store sales for the previous quarter ended July 29, 2000 as the Company benefited from increased inventory receipts and improved merchandise mix. Trade support from the Company's vendors and factors, which had contracted prior to the Company's Chapter 11 filing, has improved significantly since the filing. Gross profit decreased 35.0% to $50.2 million for the current year third quarter from $77.2 million for the prior year third quarter. Gross profit, as a percent of sales, decreased to 23.2% for the current year third quarter from 29.2% for the prior year third quarter. The lower gross profit percentage for the current year third quarter reflects, among other things, (i) an increase in the level of markdowns taken on spring/summer clearance merchandise and(ii) the negative sales leverage associated with the Company's fixed buying, occupancy and distribution expenses which are included in cost of goods sold. Selling, general and administrative ("SG&A") expenses for the current year third quarter decreased 13.5% to $55.1 million from $63.7 million in the prior year third quarter and, as a percent of sales, increased to 25.4% from 24.1% in the comparable period last year. SG&A expenses for the current year third quarter benefited from, among other things, (i) the net reduction of 185 stores since the end of the prior year third quarter and (ii) the Company's continuing efforts in controlling SG&A expenses. SG&A expenses for the current year third quarter includes certain charges recorded during the period totaling $13.7 million. These charges were comprised primarily of (i) $1.2 million of operating costs at the stores which were in the process of being closed and (ii) a $12.5 million reduction in income from the Company's private label credit card program which resulted from the accounting for receivables repurchased from the previously existing Trust. Store opening and closure program costs of $0.9 million for the prior year third quarter reflect the costs associated with the store closure program. There were no store opening and closure program costs recorded during the current year third quarter. As a result of the factors discussed above, the operating loss for the current year third quarter was $4.9 million as compared to operating income of $12.6 million for the prior year third quarter. Net interest expense for the current year third quarter decreased 36.0% to $7.8 million from $12.2 million for the prior year third quarter due to a lower level of average borrowings outstanding subsequent to the Petition Date as compared to the amount of borrowings outstanding on the Petition Date, offset somewhat by a higher interest rate on the post-Petition Date borrowings. As a result of the Chapter 11 filing, the interest accrual on the borrowings outstanding on the Petition Date was suspended. During the current year third quarter, the Company recorded non- recurring costs related to its Chapter 11 filing and reorganization process totaling $3.2 million. This charge consisted primarily of professional fees associated with the bankruptcy process. As a result of the foregoing, the Company's net loss for the current year third quarter was $15.9 million as compared to net income for the prior year third quarter of $0.2 million. Thirty-nine Weeks Ended October 28, 2000 Compared to Thirty-nine Weeks Ended October 30, 1999 Sales for the thirty-nine weeks ended October 28, 2000 ("current year ") decreased 16.9% to $662.4 million from $796.8 million for the thirty-nine weeks ended October 30, 1999 ("prior year"). The decrease in sales for the current year reflects, among other things, (i) the impact of fewer stores in operation during the current year as compared to the number of stores in operation during the prior year and (ii) an 11.1% decline in comparable store sales during the period. Management believes comparable store sales were negatively impacted by lower inventory levels throughout the spring season as a result of a contraction in trade support prior to the Company's Chapter 11 filing from the Company's vendors and factors. The contraction in trade support caused a significant disruption in the Company's spring and summer merchandise receipt flows. Gross profit decreased 33.4% to $147.7 million for the current year from $221.6 million for the prior year. Gross profit, as a percent of sales, decreased to 22.3% for the current year from 27.8% for the prior year. The lower gross profit percentage for the current year reflects, among other things, (i) the impact of the increased level of promotional and liquidation activity utilized during the current year first quarter, (ii) additional mark downs taken during the current year second quarter to implement the Company's new markdown program, (iii) the impact of the liquidation sales during the current year from the stores in the 2000 store closure program which do not generate any gross margin dollars, (iv) the negative sales leverage associated with the Company's fixed buying, occupancy and distribution expenses which are included in cost of goods sold and (v) lower vendor discounts during the first two quarters of the current year as a result of reduced inventory purchases. Selling, general and administrative expenses for the current year decreased 8.9% to $174.7 million from $191.8 million in the prior year and, as a percent of sales, increased to 26.4% from 24.1% in the comparable period last year. SG&A expenses for the current year benefited from, among other things, (i) the net reduction of 185 stores since the end of the prior year third quarter and (ii) the Company's continuing efforts in controlling SG&A expenses. SG&A expenses for the current year includes certain charges totaling $30.0 million. These charges were comprised primarily of (i) $5.7 million of operating costs at the stores which are in the process of being closed, (ii) a $22.2 million reduction in income from the Company's private label credit card program which resulted from the accounting for receivables repurchased from the previously existing Trust and (iii) $1.3 million of employee severance expense. Store opening and closure program costs of $17.1 million for the prior year reflect the costs associated with the opening of 10 new stores during the prior year first quarter ($0.7 million) as well as the costs associated with the store closure program which was implemented during the prior year second quarter ($16.4 million) which resulted in the closure of approximately 35 under performing stores. As a result of the factors discussed above, the operating loss for the current year was $27.0 million as compared to operating income of $12.6 million for the prior year. Net interest expense for the current year decreased 13.8% to $31.8 million from $36.9 million for the prior year. The current year benefited from a lower level of average borrowings outstanding accruing interest subsequent to the Petition Date as compared to the amount of borrowings outstanding on the Petition Date, offset somewhat by a higher interest rate on the post-Petition Date borrowings. As a result of the Chapter 11 filing, the interest accrual on the borrowings outstanding on the Petition Date was suspended. During the current year, the Company recorded non-recurring costs related to its Chapter 11 filing and reorganization process totaling $79.1 million. This charge, which is classified as reorganization items in the Unaudited Consolidated Condensed Statement of Operations, consisted of, among other things, (i) charges aggregating $43.5 million related to the 2000 store closing plan, (ii) $8.3 million of professional fees associated with the bankruptcy, (iii) an $18.0 million charge related to the write-off of pre-petition debt issue costs and original issue discount, (iv) a charge of $3.1 million for the impairment of intangible assets and (v) a charge of $6.2 million related to the write-down of the undivided interest in accounts receivable trust. As a result of the foregoing, the Company's net loss for the current year was $138.0 million as compared to a net loss for the prior year of $17.1 million before the cumulative effect of a change in accounting principal. In connection with the adoption of SOP 98-5, the Company recorded the cumulative effect of change in accounting principle, net of tax, of $2.4 million during the prior year first quarter. The charge reflects the write-off of the unamortized organizational costs associated with the Company's accounts receivable trust and credit card bank. Seasonality and Inflation The Company's business is seasonal and annual results of operations are highly dependent upon the fourth quarter as quarterly sales and profits are traditionally lower during the first three quarters (February through October) and higher during the fourth quarter (November through January). In addition, working capital requirements fluctuate throughout the year, increasing substantially in October and November due to requirements for significantly higher inventory levels in anticipation of the holiday season. The following table shows certain unaudited financial information for the Company by quarter (dollars in thousands): 2000 Q1 Q2 Q3 Net sales $230,352 $215,455 $216,582 Gross profit 58,318 39,204 50,155 Operating income (loss) 4,207 (26,348) (4,928) Income (loss) before cumulative effect of a change in accounting principle (24,201) (97,837) (15,938) Net income (loss) (24,201) (97,837) (15,938) 1999 Q1 Q2 Q3 Q4 Net sales $262,591 $269,848 $264,327 $324,801 Gross profit 70,359 74,021 77,203 2,867 Operating income (loss) 8,391 (8,332) 12,560 (220,971) Income (loss) before cumulative effect of a change in accounting principle (2,269) (15,091) 224 (260,067) Net income (loss) (4,671) (15,091) 224 (262,352) The Company does not believe that inflation had a material effect on its results of operations during the past two years. However, there can be no assurance that the Company's business will not be affected by inflation in the future. Liquidity and Capital Resources Total working capital increased to $194.2 million at October 28, 2000 from a deficit of $268.6 million at January 29, 2000, an increase of $462.8 million. This increase is comprised of (in thousands): Increase in accounts receivable due to repurchase of accounts receivable from the previously existing Trust $234,777 Increase in merchandise inventory as a result of the improvement in the flow of merchandise during the period 10,199 Borrowings under the DIP Financing Agreement (265,453) Reclassification of the pre-petition debt to liabilities subject to compromise under reorganization proceedings 502,223 Other items (18,980) Total $462,766 On June 2, 2000, the Company entered into a three year, $450.0 million DIP Financing Agreement with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 26, 2000, the Company was given full and final approval of the DIP Financing Agreement by the Court. Borrowings under the DIP Financing Agreement are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interest. Borrowings under the DIP Financing Agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing Agreement. Initial borrowings under the DIP Financing Agreement were used to terminate the Company's existing Accounts Receivable Program, retire the Senior Revolving Credit Facility and to pay closing costs associated with the DIP Financing Agreement. As a result of the retirement of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program are no longer be transferred to the Trust but, rather, are owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing Agreement. Borrowings outstanding under the DIP Financing Agreement at October 28, 2000 totaled $265.5 million. Availability under the DIP Financing Agreement at October 28, 2000 was $126.9 million. The DIP Financing Agreement contains covenants which, among other things, restrict the (i) incurrence of additional debt, (ii) incurrence of capital lease obligations, (iii) aggregate amount of capital expenditures and (iv) transactions with related parties. In addition, the DIP Financing Agreement requires the Company to maintain compliance with a certain specified level of earnings before depreciation, interest, taxes and special charges. The Company was in compliance with this covenant at October 28, 2000. The Company's primary capital requirements are for working capital, debt service under the DIP Financing Agreement, professional fees during the reorganization process and capital expenditures. Capital expenditures for 2000 are expected to be $10.0 million, primarily reflecting maintenance expenditures at the Company's stores and infrastructure investment. Management believes that there should be sufficient liquidity under the DIP Financing Agreement to fund the Company's working capital requirements during the reorganization proceedings. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment to SFAS No. 133", which requires that all derivative financial instruments be recorded in the financial statements. SFAS No. 133 is effective for the Company in the first quarter of 2001, and the Company is in the process of ascertaining the impact this new standard will have on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 is effective for the Company in the fourth quarter of 2000, and the Company is ascertaining the impact this pronouncement will have on its financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" which replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilites". SFAS No. 140 is effective for transfers entered into after March 31, 2001, and the Company is in the process of ascertaining the impact this new standard will have on its financial statements. PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. Due to the bankruptcy filing mentioned previously, certain of the cases mentioned below have been stayed pursuant to the automatic stay of the Court. These cases require Court approval or must be specifically exempt for litigation proceedings to continue. On March 30, 1999, a class action lawsuit was filed against the Company and certain of its officers, directors and stockholders in the United States District Court for the Southern District of Texas by John C. Weld, Jr., a stockholder who purchased 125 shares of the Company's common stock on August 3, 1998, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the "Weld Suit"). The Company believed that the allegations of the Weld Suit are without merit, and on July 23, 1999, the Company filed a motion to dismiss. United States District Judge Kenneth Hoyt entered an order on December 8, 1999 dismissing the Weld Suit. The order has been appealed by Mr. Weld. With respect to the Tooker matter as discussed in the Company's quarterly report on Form 10-Q for the period ended July 29, 2000, on November 21 and 22, 2000, the Company participated in a mediation with the other parties involved in the Tooker litigation. The parties reached an agreement in principle to settle all claims in the case. The settlement documents are being prepared and have not been reviewed by the parties or finalized for public disclosure. The settlement is subject to approval by the bankruptcy court following proper notice to interested parties in that proceeding. The special committee of the Company's Board of Directors overseeing the Tooker litigation has authorized the terms of the settlement, subject to further approvals described above. In March 2000, eleven former employees of SRI d/b/a Palais Royal, filed two separate suits in the United States District Court for the Southern District of Texas against the Company, SRI and Mary Elizabeth Pena, arising out of alleged conduct occurring over an unspecified time while the plaintiffs were working at one or more Palais Royal stores in the Houston, Texas area. The plaintiffs allege that on separate occasions they were falsely accused of stealing merchandise and other company property and giving discounts for purchases against company policy. The suits accuse the defendants of defamation, false imprisonment, intentional infliction of mental distress, assault and violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The claims seek unspecified damages for mental anguish, lost earnings, exemplary damages, treble damages, interest, attorneys' fees and costs. The Company denies the allegations and intends to vigorously defend the claims. On November 3, 2000, the Company received a copy of the SEC's August 3, 2000 Order Directing Private Investigation "In the Matter of Stage Stores, Inc." (the "Order"). The Order is a confidential document directing a non-public investigation into related party transactions previously reported by the Company. The Company is cooperating with the SEC in the investigation. The Company has been named as one of 135 defendants in a patent infringement action brought by The Lemelson Medical, Education & Research Foundation in the United States District Court for the District of Arizona, Case No. CIV-000663 PHX PGR. The plaintiff claims to be the owner of various patents covering optical scanning devices commonly used by retail outlets at check out counters to scan prices for customer purchases. The complaint seeks injunctive relief to prevent alleged continuing infringement and unspecified damages for alleged past infringement. The court and the plaintiff have been advised of the Company's bankruptcy filing, and the Company has asserted the protection of the bankruptcy stay. The remaining defendants have formed a common defense group and plan to vigorously defend against the claims. The Company disputes the plaintiff's allegations and plans to monitor the action closely. Management believes that none of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the financial position, results of operations or cash flows of the Company or its subsidiaries. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities Substantially all of the Company's pre-petition liabilities are subject to settlement under reorganization proceedings. The Company's debt to banks and bondholders is in default of the terms of the applicable loan agreements, notes and debentures. For financial reporting purposes, those liabilities and obligations have been classified as liabilities subject to compromise under reorganization proceedings. The ultimate adequacy of security for any secured debt obligations and settlement of all liabilities and obligations cannot be determined until a plan of reorganization is confirmed. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information On June 6, 2000, the New York Stock Exchange informed the Company that the trading of the Company's stock would be suspended immediately. Following the suspension, application was made by the New York Stock Exchange to the Securities and Exchange Commission to delist the Company's stock. The Company's stock is currently being quoted on the OTC Bulletin Board under the symbol SGEEQ. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 4.1 $450,000,000 Debtor-in-Possession Credit Agreement dated as of June 2, 2000 among Specialty Retailers, Inc., a Debtor and Debtor-in-Possession, as Borrower, Stage Stores, Inc. as Parent Guarantor, The Initial Lenders, Initial Issuing Bank and Swing Line Bank named therein as Initial Lenders, Initial Issuing Bank and Swing Line Bank and Citicorp USA, Inc. as Collateral Agent and as Administrative Agent. 27.1 Financial Data Schedule. (b) Reports on Form 8-K The Company filed a News Release on Form 8-K dated August 8, 2000 related to Stage Stores Inc. announcing the employment of its new President and Chief Executive Officer. The Company filed a News Release on Form 8-K dated September 8, 2000 related to Stage Stores Inc. announcing Court approval of the Company's request to extend the exclusivity period in the Company's bankruptcy proceeding until March 31, 2001. The Company also announced the resignation of Richard Jolosky from the Company's Board of Directors for personal reasons. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STAGE STORES, INC. December 19, 2000 /s/ James Scarborough (Date) James Scarborough President and Chief Executive Officer December 19, 2000 /s/ Charles M. Sledge (Date) Charles M. Sledge Senior VP Finance, Treasurer and Corporate Secretary