SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 1, 1998
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File Number: 0-23913
COUNTY SEAT STORES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1272706
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
469 Seventh Avenue, 11th Floor
New York, New York 10018
(212) 714-4800
(Address, including Zip Code, and Telephone Number, including Area Code,
of Registrant's Principal Executive Offices)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares of each of the issuers classes of Common Stock, outstanding
as of September 11, 1998 was 20,000,000 shares of Common Stock.
COUNTY SEAT STORES, INC.
FORM 10-Q
INDEX
PAGE NO.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at August 1, 1998
(Unaudited) And January 31, 1998 2
Consolidated Statements of Operations (Unaudited) for the
Thirteen weeks and year to date ended August 1, 1998
and August 2, 1997 3
Consolidated Statements of Cash Flows (Unaudited) for the
Year to date ended August 1, 1998 and August 2, 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION 14
Signatures 15
County Seat Stores, Inc. and Subsidiary
Consolidated Balance Sheets
(Amounts in Thousands, Except Share Amounts)
August 1,
1998 January 31,
(Unaudited) 1998
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,395 $ 22,235
Restricted cash in security account 11,658 11,830
Receivables 2,372 3,530
Merchandise inventories 76,986 55,785
Prepaid expenses 6,112 6,291
----------- -----------
Total current assets 102,523 99,671
----------- -----------
Property and equipment, net 36,315 32,651
----------- -----------
Other Assets:
Debt issuance costs 7,556 8,013
Restricted cash in security account - 5,396
Reorganization value in excess of amounts
allocated to identified assets 60,484 62,961
Other 312 384
----------- -----------
Total other assets 68,352 76,754
----------- -----------
$ 207,190 $ 209,076
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under credit agreement $ 34,928 $ -
Current maturities of long-term debt 1,333 2,475
Accounts payable 19,425 21,252
Accrued expenses 15,804 16,462
Accrued reorganization costs 238 7,036
----------- -----------
Total current liabilities 71,728 47,225
----------- -----------
Long-Term Liabilities:
Long-term debt 79,390 77,632
Other long-term liabilities 1,251 1,600
Shareholders' Equity:
Common stock: par value $.01 per share; 40,000,000 shares
authorized, 20,000,000 issued and outstanding 200 200
Paid-in capital in excess of par value 77,865 77,865
Retained Earnings (accumulated deficit) (23,244) 4,554
----------- -----------
Total shareholders' equity 54,821 82,619
----------- -----------
$ 207,190 $ 209,076
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
County Seat Stores, Inc. and Subsidiary
Consolidated Statements of Operations
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
Predecessor Company
------------------------
13 Weeks 26 Weeks 13 Weeks 26 Weeks
Ended Ended Ended Ended
August 1, August 1, August 2, August 2,
1998 1998 1997 1997
---------- ---------- ---------- ----------
Net sales $ 70,195 $ 133,427 $ 86,897 $ 180,055
Cost of sales, including occupancy,
buying & merchandise handling 52,821 100,080 61,608 138,946
---------- ---------- ---------- ----------
Gross profit 17,374 33,347 25,289 41,109
Selling, general and administrative expenses 25,345 48,020 25,042 48,724
Depreciation and amortization 2,954 5,737 2,079 4,278
Reorganization costs - - 3,719 7,898
Interest expense, net 4,108 7,387 1,453 2,696
---------- ---------- ---------- ----------
Net loss $ (15,033) $ (27,797) $ (7,004) $ (22,487)
========== ========== ========== ==========
Basic and Diluted Loss Per Share $ (0.75) $ (1.39)
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
County Seat Stores, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
Predecessor
Company
----------
26 Weeks 26 Weeks
Ended Ended
August 1, August 2,
1998 1997
---------- ----------
Cash Flows from Operating Activities:
Net (loss) $ (27,797) $ (22,487)
Adjustment to reconcile net (loss) to cash (used in)
operating activities:
Reorganization costs - 3,594
Depreciation and amortization 6,563 4,748
Amortization of debt issuance costs and discount - -
Loss on disposal of property and equipment 134 -
Rent expense in excess of cash outlays 945 884
Changes in operating assets and liabilities:
Receivables 1,159 (1,441)
Merchandise inventories (21,202) (7,983)
Prepaid expenses 178 1,238
Accounts payable (1,827) 948
Accrued expenses (8,403) 2,525
Current maturities of long-term debt (1,142) -
Other non-current assets and liabilities 1,670 17
Operating liabilities subject to compromise - 520
---------- ----------
Net cash (used in) operating activities (49,722) (17,437)
---------- ----------
Cash Flows from Financing Activities:
Borrowings under credit agreement 34,928 19,800
Debt and equity issuance costs (349) (400)
Principal payments on long-term debt - (7)
---------- ----------
Net cash provided by financing activities 34,579 19,393
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures (7,265) (527)
Restricted cash in security account 5,568 -
---------- ----------
Net cash (used in) investing activities (1,697) (527)
---------- ----------
Net (decrease) increase in cash and cash equivalents (16,840) 1,429
Cash and cash equivalents:
Beginning of period 22,235 6,356
---------- ----------
End of period $ 5,395 $ 7,785
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
COUNTY SEAT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of County Seat Stores,
Inc. (County Seat) and its wholly-owned subsidiary, CSS Trade Names, Inc.
(Tradenames) (together, the Company) at August 1, 1998 and for the 13 and
26 weeks ended August 1, 1998 ("1998") and for the 13 and 26 weeks ended
August 2, 1997 ("1997") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The Consolidated Financial Statements include the accounts of County Seat
and CSS Trade Names. All significant intercompany transactions and
balances have been eliminated in consolidation. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The
Consolidated Balance Sheet at January 31, 1998 was taken from the audited
financial statements. The Company's business is affected by the pattern of
seasonality common to most retail apparel businesses. The results for the
current and prior period are not necessarily indicative of future financial
results.
Certain notes and other information have been condensed or omitted from the
interim Consolidated Financial Statements presented in this Quarterly
Report on Form 10-Q. Therefore, these Consolidated Financial Statements
should be read in conjunction with the Company's fiscal 1997 Financial
Statements as filed within the Company's Registration Statement on Form
S-4.
2. REORGANIZATION AND NATURE OF BUSINESS
The Company is a specialty apparel retailer selling both brand name and
private-label jeans and jeanswear. The Company currently operates 414
stores in 41 states. The Company's 376 County Seat stores, located almost
exclusively in regional shopping malls, offer one-stop shopping for daily
casual wear featuring a contemporary "All-American" look. The Company also
operates 14 County Seat Outlet stores offering affordable pricing on County
Seat merchandise and 22 Levi's Outlet stores under license from Levi
Strauss & Co. offering a full range of Levi's and Docker's off-price
merchandise for both adults and children. The Company operates two Old
Farmer's Almanac General Stores, a new retail concept selling products
associated with American country living, under license from Yankee
Publishing, Inc., the publisher of The Old Farmer's Almanac.
The activities of Trade Names consist principally of licensing the rights
to the County Seat service marks to County Seat Stores.
On October 17, 1996, County Seat and Trade Names filed voluntary petitions
for relief under Chapter 11 (Chapter 11) of Title 11 of the United States
Code (the Bankruptcy Code) in the United States Bankruptcy Court for the
District of Delaware (the Court). The Company operated as
debtors-in-possession under the jurisdiction of the Court.
-5-
Following approval by the Court on October 17, 1996, the Company entered
into a debtor-in-possession credit agreement (the DIP Credit Agreement)
with a syndicate of commercial banks to provide working capital and
longer-term financing through the Chapter 11 process.
On August 22, 1997 the Company filed the "First Amended Disclosure
Statement with Respect to the Plan of Reorganization of County Seat Stores,
Inc." (The Plan) with the Court, which was confirmed on October 1, 1997 and
consummated on October 29, 1997 (Effective Date). The Plan segregated
creditors into three classes -- unclassified claims, unimpaired claims and
impaired claims. Unclassified and unimpaired claims were satisfied by cash
payments totaling $4.2 million. In exchange for impaired claims of
approximately $151.0 million, creditors are entitled to receive 20,000,000
shares of Common Stock (100% of County Seat's Stock) valued at $66.9
million, representing 44% recovery of their claims. Previous preferred
stockholders are entitled to receive Series B Warrants valued at $1.6
million in exchange for their claims of $50.3 million. Sam Forman, the
Company's Chief Executive Officer, was granted Series C Warrants to
purchase up to 3,529,410 shares of the Company's Common Stock.
Additionally, a $1.5 million security account was established to pay lease
cures, disputed claims and the holdback of professional fees. Under the
Plan, the old stockholders of the Company did not receive assets of,
securities issued by or interest in the reorganized company.
As provided for in the Plan, the Company sold $85.0 million of 12 3/4%
Senior Notes due November 1, 2004 with Series A Warrants to purchase common
stock (Notes). Each unit consisting of a Note in the principal amount of
$1,000 and one Series A Warrant to purchase 26.8908 shares of the Company's
Common Stock, par value $.01 per share, at an exercise price of $.01 per
share. Net proceeds from the Notes were $65.1 million after an issuance
discount to the initial purchaser of the Notes in the amount of $4.3
million, a deposit into a security account to satisfy interest on the Notes
to May 1, 1999 of $15.5 million, and a $125,000 fee paid to the
underwriters. At August 1, 1998, the Senior Notes were senior to no other
debt of the Company.
Additionally, the Company secured a New Credit Facility (Credit Agreement)
with a syndicate of banks led by BankBoston (Banks). The Company used the
proceeds from the Notes and initial borrowings under the Credit Agreement
to pay claims as described above.
3. BASIS OF PRESENTATION
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and circumstances may
result in revised estimates.
-6-
FRESH START ACCOUNTING
The Company applied Fresh Start Accounting on the Effective Date. Fresh
Start Accounting, as provided for by the American Institute of Certified
Public Accountants Statement of Position 90-7, results in a revaluation of
the Company's assets and liabilities as of the Effective Date, to reflect
the estimated fair market values of those assets and liabilities in
conformity with Accounting Principles Board (APB) No. 16, "Business
Combinations". The valuation differences are charged to Reorganization
Value in Excess of Amounts Allocated to Identified Assets (Excess
Reorganization Value) and is being amortized on a straight-line basis over
15 years.
BORROWINGS UNDER CREDIT AGREEMENT
The Company entered into the second Amendment (Amendment) to the Senior
Credit Facility from BankBoston on May 28, 1998. The Amendment provided for
a reduction in the fixed charge coverage ratio requirement for the second
and third quarters of 1998.
DEFERRED INCOME TAXES
The Company implemented the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes" during fiscal 1994.
SFAS No. 109 utilizes an asset and liability approach and deferred taxes
are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities
give the provision of the enacted tax laws. The Company's tax year-end is
the Saturday closest to July 31.
The Company evaluates the recoverability of its deferred tax assets based
on estimates of future operating income. Based on these estimates and in
consideration of the Company's Chapter 11 filing, the Company recorded a
valuation reserve against the entire balance of deferred assets as of
August 1, 1998.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (SFAS 128). This statement revised the manner in
which earnings per share ("EPS") is calculated, replacing the presentation
of Primary EPS with a presentation of Basic EPS. For entities with complex
capital structures, the statement requires the presentation of both Basic
EPS and Diluted EPS on the face of the Statement of Operations. Under this
statement, Basic EPS is computed on the weighted average number of shares
actually outstanding during the period. Diluted EPS includes the effect of
potential dilution from the exercise of outstanding dilutive stock warrants
into common stock using the treasury stock method. As provided by SFAS 128,
when there is a net loss, the denominator is not adjusted for the dilutive
stock warrants, and as such both Basic and Diluted EPS are presented on the
Statement of Operations, as the same amount.
RECLASSIFICATION
Certain reclassifications have been made to the Unaudited Consolidated
Financial Statements for the prior period in order to conform to the August
1, 1998 presentation.
-7-
CSS TRADENAMES, INC.
CSS Tradenames, Inc. (Tradenames), the only subsidiary of the Company and
which is wholly owned, holds the marks of the Company and fully and
unconditionally guarantees the Senior Notes. Separate financial statements
for Tradenames are not presented herein, as they do not provide meaningful
relevant information to an investor.
4. COMMITMENTS AND CONTINGENCIES
On or about September 29, 1997, RAI Credit Corporation (RAI) filed an
adversary proceeding against the Company in the Court. The Company and RAI
had entered into an Account Purchase and Service Agreement dated July 11,
1997 (Agreement) pursuant to which RAI had agreed to establish and service
a private-label credit card program for the Company. In September 1997, the
Company notified RAI that is was terminating the Agreement on the grounds
that RAI had materially breached and failed to perform under the Agreement.
RAI's complaint alleges that the Company wrongfully terminated the
Agreement and seeks compensatory damages of not less than $10,741,960 and
an injunction prohibiting the Company from entering into a private-label
credit card program with any person other than RAI prior to the beginning
of 1999, as well as attorneys' fees and costs. Currently, this matter is in
the discovery stage.
The Company believes that it has meritorious defenses to RAI's complaint
and has filed counter claims against RAI, which it intends to pursue
vigorously. Although the ultimate outcome of the litigation cannot be
predicted at this time, management believes the resolution of this matter
is not expected to have a material unfavorable outcome to the Company.
However, given the financial condition of the Company, any significant
award of damages against the Company could have a material adverse impact
on the Company's financial position or results of operations.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected financial condition and results of operations during
the periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
The following table sets forth the Company's operating results:
26 Weeks Ended 13 Weeks Ended
-------------- --------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- --------
Net Sales $133.4 $180.1 $70.2 $86.9
Gross Profit 33.3 41.1 17.4 25.3
Selling, general, 48.0 48.7 25.3 25.1
and administrative expenses
Depreciation and 5.7 4.3 3.0 2.1
amortization
Reorganization costs - 7.9 - 3.7
Loss from operations (20.4) (19.8) (10.9) (5.6)
Interest expense, net 7.4 2.7 4.1 1.4
Net loss (27.8) (22.5) (15.0) (7.0)
During the second quarter, the company, according to its original strategic
plan, implemented a new management information system and transferred its
distribution facility to Baltimore, Maryland from Minneapolis, Minnesota. Due
to the difficulties encountered during this transition, the company elected
to begin stocking its fall-back-to-school merchandise in July in lieu of the
remaining spring/summer assortment. This decision was made in order to ensure
a timely presentation of the fall/back-to-school merchandise. The
distribution facility and MIS transitions caused the company to (i) incur
$3.1 million of one time charges and (ii) experience an estimated $4.5
million shortfall in gross profit resulting from lost sales of spring/summer
merchandise.
COMPARISON OF 13 WEEKS ENDED AUGUST 1, 1998 AND 13 WEEKS ENDED AUGUST 2, 1997
Net sales decreased $16.7 million, or 19.2% to $70.2 million for the 13 weeks
ended August 1, 1998 from $86.9 million for the 13 weeks ended August 2, 1997.
The decline in sales was primarily due to (i) the closing of 137 stores during
1997, which accounted for $10.1 million of the decrease in net sales and (ii) a
$7.6 million, or 9.9% decrease in comparable store sales. The decline in net
sales was partially offset by $1.0 million relating to new store sales.
-9-
The number of units sold at a comparable 375 County Seat Stores for the 13 weeks
ended August 1, 1998 is 5.7 million units, which is .9 million units or 18.8%
higher than same period last year. The average price per unit, however, for the
13 weeks ended August 1, 1998 decreased $3.03 or 22.7% to $10.34 from $13.37 per
unit for the 13 weeks ended August 2, 1997. The additional .9 million units sold
during the 13 week period ended August 1, 1998 compared to August 2, 1997,
generated $9.3 million of sales revenue, but the decrease in unit price reduced
sales revenue for the same period by $17.3 million, for a net decrease in sales
revenue of $8.0 million.
Gross profit decreased $7.9 million, or 31.2% to $17.4 million for the 13 weeks
ended August 1, 1998 from $25.3 million for the 13 weeks ended August 2, 1997.
Gross profit as a percentage of sales decreased by 4.2% to 24.8% for the 13
weeks ended August 1, 1998 from 29.0% for the 13 weeks ended August 2, 1997.
This was due to a 2.8% increase, as percentage of sales, in the cost of
merchandise sold. The increased cost of merchandise sold was due primarily to
shipping fall/Back-to-School merchandise to stores the second week of July,
which required the Company to make room at the stores by heavily discounting
summer goods. Additionally, occupancy costs, merchandising and merchandise
handling, which are components of cost of goods sold, as a percentage of sales
increased 1.4%. Occupancy costs decreased $2.9 million to $11.1 million for the
13 weeks ended August 1, 1998 from $14.0 million for the 13 weeks ended August
2, 1997, or a decrease as a percentage of sales by .4%. Merchandise handling
costs, however, increased $.6 million or 1.0% as a percentage of sales to $3.0
million for the 13 weeks ended August 1, 1998 from $2.4 million for the 13 weeks
ended August 2, 1997. The increase is primarily due to the new Baltimore, MD
distribution center incurring additional payroll and contract labor costs of $.8
million to receive and ship fall/Back-to-School goods.
Selling, general and administrative expenses increased $.2 million, or .8% to
$25.3 million for the 13 weeks ended August 1, 1998 from $25.1 million for the
13 weeks ended August 2, 1997. Selling, general, and administrative as a
percentage of net sales increased 7.3% to 36.1% for the 13 weeks ended August 1,
1998 from 28.8% for the 13 weeks ended August 2, 1997. This increase as a
percentage of sales, is the result of $3.1 million of one-time charges related
to the Company's installation of the new management information system and
initiation of the distribution facility during the 13 weeks ended August 1,
1998. These charges include additional payroll of $2.2 million, contract labor
of $.4 million, travel of $.3 million and other one-time charges of $.2 million.
Depreciation and amortization expense increased $0.9 million to $3.0 million for
the 13 weeks ended August 1, 1998 from $2.1 million for the 13 weeks ended
August 2, 1997. The increase was primarily due to amortization expense of $1.1
million of Excess Reorganization Value during the 13 weeks ended August 1, 1998
with none during the comparable period last year.
Loss from operations increased to $(10.9) million for the 13 weeks ended August
1, 1998 from $(5.6) million for the 13 weeks ended August 2, 1997.
The Company incurred reorganization costs of $3.7 million for the 13 weeks ended
August 2, 1997, relating to closing stores, which include lease rejection
claims, disposing of fixed assets, severance payments and other costs associated
with closing stores. No reorganization costs were incurred for the 13 weeks
ended August 1, 1998. For the 13 weeks ended August 1, 1998 the Company incurred
interest expense on the new Senior Notes of $2.7 million. For the same period
last year, while the Company operated under
-10-
the protection of Chapter 11, interest payments were suspended on the old debt,
resulting in $0 of interest expense.
Further, as a result of restructuring, which included closing 320 closing
stores, store operating expenses decreased $2.5 million from $37.8 million
(43.5% as a percentage of net sales) to $35.3 million (50.2% as a percentage of
net sales) for the 13 weeks ended August 2, 1997 and August 1, 1998,
respectively. This includes a decrease in occupancy expenses of $5.0 million
from $19.4 million (22.3% as a percentage of net sales) to $14.4 million (20.6%
as a percentage of net sales) for the same periods.
COMPARISON OF 26 WEEKS ENDED AUGUST 1, 1998 AND 26 WEEKS ENDED AUGUST 2, 1997
Net sales decreased $46.6 million, or 25.9% to $133.4 million for the 26 weeks
ended August 1, 1998 from $180.1 million for the 26 weeks ended August 2, 1997.
The decline in sales was primarily due to (i) the closing of 137 stores during
1997, which accounted for $35.4 million of the decrease in net sales and (ii) a
$12.6 million, or 8.7% decrease in comparable store sales. The decline in net
sales was partially offset by $1.4 million relating to new store sales.
The number of units sold at a comparable 375 County Seat Stores for the 26 weeks
ended August 1, 1998 is 10.2 million units, which is 1.9 million units or 22.9%
higher than same period last year. The average price per unit, however, for the
26 weeks ended August 1, 1998 decreased $3.72 or 25.3% to $10.96 from $14.68 per
unit for the 26 weeks ended August 2, 1997. The additional 1.9 million units
sold during the 26 week period ended August 1, 1998 compared to August 2, 1997,
generated $20.8 of sales revenue, but the decrease in unit price reduced sales
revenue for the same period by $37.9 million, for a net decrease in sales
revenue of $17.1 million.
Gross profit decreased $7.9 million, or 19.2% to $33.3 million for the 26 weeks
ended August 1, 1998 from $41.1 million for the 26 weeks ended August 2, 1997.
Gross profit as a percentage of sales increased by 2.1% to 24.9% for the 26
weeks ended August 1, 1998 from 22.8% for the 26 weeks ended August 2, 1997.
This was due to a 4.8% decrease in the cost of merchandise resulting from the
purchasing goods at a lower cost from overseas suppliers. This was, however,
offset by a .9% increase in occupancy costs and a 1.8% increase in merchandising
and merchandise handling costs. The increase in occupancy costs as a percentage
of sales, relates to lower than expected sales, and the increase in
merchandising and merchandise handling cost is primarily due to the new
Baltimore, MD distribution center incurring additional payroll and contract
labor costs of $.8 million to receive and ship fall/Back-to-School goods.
Selling, general, and administrative expense decreased $0.7 million, or 1.4% to
$48.0 million for the 26 weeks ended August 1, 1998 from $48.7 million for the
26 weeks ended August 2, 1997. As a percentage of net sales, selling, general,
and administrative expenses increased to 36.0% for the 26 weeks ended August 1,
1998 from 27.1% for the 26 weeks ended August 2, 1997.
Depreciation and amortization expense increased $1.4 million to $5.7 million for
the 26 weeks ended August 1, 1998 from $4.3 million for the 26 weeks ended
August 2, 1997. The increase was primarily due to amortization expense of $2.2
million of Excess Reorganization Value, which was offset by a $.7 million
reduction in depreciation expense to $3.5 million for the 26 weeks ended August
1, 1998 from $4.2 for the 26
-11-
weeks ended August 2, 1997. The decrease in depreciation expense is the result
of closing 137 stores during 1997.
Loss from operations increased to $(20.4) million for the 26 weeks ended August
1, 1998 from $(19.8) million for the 13 weeks ended August 2, 1997.
The Company incurred reorganization costs of $7.9 million for the 26 weeks ended
August 2, 1997, relating to closing stores, which include lease rejection
claims, disposing of fixed assets, severance payments and other costs associated
with closing stores. No reorganization costs were incurred for the 26 weeks
ended August 1, 1998. For the 26 weeks ended August 1, 1998 the Company incurred
interest expense on the new Senior Notes of $5.5 million. For the same period
last year, while the Company operated under the protection of Chapter 11,
interest payments were suspended on the old debt, resulting in $0 of interest
expense.
Further, as a result of restructuring the Company during 1996 and 1997, which
included closing 320 closing stores, store operating expenses decreased $7.2
million from $75.0 million (41.6% as a percentage of net sales) to $67.8 million
(50.8% as a percentage of net sales) for the 26 weeks ended August 2, 1997 and
August 1, 1998, respectively. This includes a decrease in occupancy costs of
$9.5 million from $38.3 million (21.3% as a percentage of net sales) to $28.8
million (21.6% as a percentage of net sales) for the same periods.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the 26 weeks ended August 1, 1998
was $49.7 million compared to $17.4 million for the 26 weeks ended August 2,
1997. Cash was used in operations primarily to cover a net loss of $27.8
million during the 26 weeks ended August 1, 1998 (when reduced by $7.5 million
of non-cash depreciation, amortization and rent expense in excess of cash
outlays, the cash impact is $20.3 million), an increase in inventory by $21.2
million and a reduction of accounts payable and accruals by $10.2 million.
During the 26 weeks ended August 2, 1997, cash was used in operations for a
net loss of $22.5 million (which when reduced by $9.2 million of non-cash
reorganization costs, depreciation and amortization, the cash impact is $13.3
million), an increase in inventory of $8.0 million and offset by an increase
in accounts payable and accruals of $3.5 million.
Working capital as of August 1, 1998 was $30.8 million. Working capital as of
August 2, 1997 was $(52.0) million.
During the 26 weeks ended August 1, 1998 the Company invested $7.3 million to
build-out the Company's new distribution center in Baltimore, build-out the
Company's new corporate office in New York, continued its investment in the new
accounting and merchandising computer system, remodeling of stores and store
maintenance. During the 26 weeks ended August 2, 1997 the Company invested $.5
million primarily in store maintenance.
The Credit Agreement provides for a three-year revolving line of credit in an
amount of $115 million. Up to $90 million of such amount may be utilized for
letters of credit and bankers' acceptances. Availability under the Credit
Agreement is limited to certain percentages of eligible inventory, amounts drawn
under the facility as well as outstanding letters of credit and bank acceptances
and is subject to the satisfaction of certain
-12-
conditions. The borrowing base provides for seasonal fluctuations in inventory.
Peak borrowing periods generally occur between June and November. The Company's
peak borrowing periods commence with the sourcing of its merchandise through the
utilization of letters of credit facilities requiring approximately three months
lead-time prior to delivery of such merchandise.
As of August 1, 1998, the Company had approximately $23.8 million of letters of
credit and $1.2 of bankers' acceptances outstanding. Approximately $9.3 million
remained available under the Credit Agreement.
SEASONALITY, INFLATION, ECONOMIC TRENDS AND POTENTIAL DEVELOPMENTS
The Company, like most retailers, has a seasonal pattern of sales and earnings.
The Company has two major selling seasons: back-to-school (third quarter) and
Christmas (fourth quarter). For fiscal years 1997, 1996 and 1995, the
back-to-school and Christmas seasons accounted for approximately 56% of the
Company's fiscal year sales.
The Company's operations are affected by general economic trends, including
inflation. Management believes that the Company and other specialty retailers
have suffered from price competition, which had a negative effect on comparable
stores sales.
-13-
COUNTY SEAT STORES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
None
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
11.1 Statement regarding computation of loss per share
27.1 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed by the Company during
the quarter ended August 1, 1998.
-14-
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, in the City of New York, State of New
York, on September 15, 1998.
COUNTY SEAT STORES, INC.
/s/ BRETT D. FORMAN
-----------------------------
Brett Forman
Executive Vice President, Director
/s/ ALLEN WEISS
-----------------------------
Allen Weiss
Senior Vice President, Chief
Financial Officer
-15-