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 October 31, 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 December 14, 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 October 31, 1998 (Unaudited)
And January 31, 1998 2
Consolidated Statements of Operations (Unaudited) for the
Thirteen weeks and year to date ended October 31, 1998
and November 1, 1997 3
Consolidated Statements of Cash Flows (Unaudited) for the
Year to date ended October 31, 1998 and November 1, 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION 18
Signatures 19
County Seat Stores, Inc. and Subsidiary
Consolidated Balance Sheets
(Amounts in Thousands, Except Share Amounts)
October 31
1998 January 31,
(Unaudited) 1998
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,057 $ 22,235
Restricted cash in security account 12,178 11,830
Receivables 2,377 3,530
Merchandise inventories 83,906 55,785
Prepaid expenses 2,578 6,291
---------- ----------
Total current assets 106,096 99,671
---------- ----------
Property and equipment, net 33,868 32,651
---------- ----------
Other Assets:
Debt issuance costs 7,167 8,013
Restricted cash in security account - 5,396
Reorganization value in excess of amounts
allocated to identified assets 62,119 62,961
Other 276 384
---------- ----------
Total other assets 69,562 76,754
---------- ----------
$ 209,526 $ 209,076
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under credit agreement $ 47,926 $ -
Current maturities of long-term debt 645 2,475
Accounts payable 15,599 21,252
Accrued expenses 21,130 16,462
Accrued reorganization costs 1,600 7,036
---------- ----------
Total current liabilities 86,900 47,225
---------- ----------
Long-Term Liabilities:
Long-term debt 79,190 77,632
Other long-term liabilities 1,309 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) (35,938) 4,554
---------- ----------
Total shareholders' equity 42,127 82,619
---------- ----------
$ 209,526 $ 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 Ended 39 Weeks Ended 13 Weeks Ended 39 Weeks Ended
October 31, October 31, November 1, November 1,
1998 1998 1997 1997
---------- ---------- ---------- ----------
Net sales $ 85,922 $ 219,349 $ 97,082 $ 277,137
Cost of sales, including occupancy,
buying & merchandise handling, and
includes a special charge of $11,975 in
the 39 weeks ended November 1, 1997 61,685 161,766 75,559 214,799
---------- ---------- ---------- ----------
Gross profit 24,237 57,583 21,523 62,338
Selling, general and administrative expenses 26,946 74,967 23,035 71,465
Depreciation and amortization 5,520 11,256 1,858 6,136
Reorganization costs - - 30,507 38,405
Interest expense, net 4,465 11,852 1,323 4,019
---------- ---------- ---------- ----------
Loss before extraordinary item (12,694) (40,492) (35,200) (57,687)
Extraordinary gain - - 131,863 131,863
Net income/(loss) $ (12,694) $ (40,492) $ 96,663 $ 74,176
========== ========== ========== ==========
Basic and Diluted Loss Per Share $ (0.63) $ (2.02)
========== ==========
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
--------------
39 Weeks Ended 39 Weeks Ended
October 31, November 1,
1998 1997
---------- ----------
Cash Flows from Operating Activities:
Net income/(loss) $ (40,492) $ 74,176
Adjustment to reconcile net (loss) to cash (used in)
operating activities:
Reorganization costs - 20,156
Extraordinary item - (131,863)
Depreciation and amortization 8,767 6,136
Amortization of debt issuance costs and debt discount 1,196 538
Loss on disposal of property and equipment 2,490 4,915
Rent expense in excess of cash outlays 1,247 1,215
Changes in operating assets and liabilities:
Receivables 1,154 (960)
Merchandise inventories (28,122) (2,073)
Prepaid expenses 3,712 1,268
Accounts payable (5,653) (5,373)
Accrued expenses (1,749) (1,190)
Current maturities of long-term debt (1,830) 292
Other non-current assets and liabilities (989) -
---------- ----------
Net cash (used in) operating activities (60,269) (32,763)
---------- ----------
Cash Flows from Financing Activities:
Borrowings under credit agreement 47,926 (26,324)
Issuance of long-term debt - 85,000
Notes payable, taxes - 1,400
Debt and equity issuance costs (349) (5,872)
---------- ----------
Net cash provided by financing activities 47,577 54,204
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures (13,410) (1,423)
Proceeds from the sale of the Brooklyn Park,
MN distribution center 3,876 -
Restricted cash in security account 5,048 (17,004)
---------- ----------
Net cash (used in) investing activities (4,486) (18,427)
---------- ----------
Net (decrease) increase in cash and cash equivalents (17,178) 3,014
Cash and cash equivalents:
Beginning of period 22,235 6,356
---------- ----------
End of period $ 5,057 $ 9,370
========== ==========
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 October 31, 1998 and for the 13 and 39
weeks ended October 31, 1998 ("1998") and for the 13 and 39 weeks ended November
1, 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. GOING CONCERN CONSIDERATION
The Company is currently in default of certain covenants in connection with
its borrowings under the Senior Credit Facility, (hereinafter defined) has
been incurring losses from operations, is highly leveraged and has
experienced operational problems that have resulted in negative trends in
retail sales and gross margin which have had a material adverse effect on the
Company's short-term liquidity. The combination of these factors raises
substantial doubt about the Company's ability to continue as a going concern.
Thus, management has been informed that the Company's independent public
accountants anticipate issuing a going concern opinion on the consolidated
financial statements at January 30, 1999. Management plans to address this
situation by (i.) obtaining a waiver from the lenders under the Senior Credit
Facility of existing covenant defaults thereunder, (ii) with the consent of
the lenders to the Senior Credit Facility, amending certain covenants and
borrowing base advance rates under the Senior Credit Facility, (iii) raising
capital through the issuance of additional debt during the fourth quarter
1998 and (iv.) implementing a cost savings strategy and explore restructuring
its Senior Notes (hereinafter defined). If unable to improve its liquidity,
implement a cost savings strategy and restructure its existing indebtedness,
the Company will receive a going concern opinion for its financial statements
in future periods.
3. 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 423 stores in
41 states. The Company's 380 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 15 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 six 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 debtor-in-possession under the
jurisdiction of the Court.
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.
Upon surrender of their stock certificates, former holders of County Seat's
Senior Exchangeable Preferred Stock 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 former holders of the Company's common stock 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
(Senior 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. Pursuant to a registration
rights agreement governing the Senior Notes, the interest rate payable on such
notes has increased from 12.75% to 14.25%. At October 31, 1998, the Senior
Notes were senior to no other debt of the Company.
Additionally, the Company secured a new credit facility (Senior Credit Facility)
with a syndicate of banks led by BankBoston (Banks). The Company used the
proceeds from the Senior Notes and initial borrowings under the Credit Agreement
to pay claims as described above. On October 31, 1998, the Company defaulted on
the debt covenants contained in the Senior Credit Facility. Refer to Note 6
for further discussion.
4. 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.
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
See Note 6 - "Subsequent Events - Default Under Senior Credit Facility" for
discussion about Company's default under the Senior Credit Facility.
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 basis of assets and liabilities given 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 October
31, 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 October 31, 1998
presentation.
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.
5. 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. All facts
and expert witness discovery have been completed.
On December 2, 1998 in connection with a settlement conference among the parties
in the U.S. Bankruptcy Court in Delaware, a settlement agreement was placed on
the record by the presiding judge. Such settlement agreement provided, among
other things, that RAI would accept, in full and final payment of its allowed
administrative claim in the Company's bankruptcy case, the sum of $450,000 to be
paid by no later than May 21, 1999. The Company has become aware that,
notwithstanding the foregoing agreement, RAI has attempted to repudiate such
settlement agreement. Although management intends to enforce the settlement
agreement with RAI, the Company believes, based on the advice of it attorneys,
that the likelihood of enforcing such settlement agreement is difficult to
determine. A hearing has been scheduled for December 21, 1998 regarding the
settlement.
Although the ultimate outcome of the litigation cannot be predicted at this
time, management believes that 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.
6. SUBSEQUENT EVENTS
DEFAULT UNDER SENIOR CREDIT FACILITY
Currently the Company is highly leveraged. This factor, coupled with certain
operational problems, resulted in negative trends in the Company's retail sales
and gross margins, and in turn losses from operations, all of which have had a
material adverse effect on the Company's results of operations and short-term
liquidity. Because the Company's cash flows from operations and available
capital have been insufficient to meet certain of its current obligations, as of
December 2, 1998, approximately $7.2 million was past due to certain of the
Company's trade creditors (of which approximately $2.5 million was owed to
Levi-Strauss & Co.) and amounts were outstanding with respect to a significant
portion of its leases. The Company's current liquidity also was adversely
affected on December 3, 1998, when the Company was notified by BankBoston that
the Company is in default under its fixed charge coverage ratio requirement
contained in the Senior Credit Facility, which default entitles BankBoston to,
among other things, accelerate the indebtedness outstanding thereunder and cause
such indebtedness to become immediately due and payable. BankBoston has notified
the Company, however, that (i.) it presently intends to continue to provide
financing to the Company at reduced levels as described below, (ii.) that all
borrowings under the Senior Credit Facility shall (including letter's of credit
and bankers acceptances) be due and payable on demand, and (iii.) that any
further accommodations to extend credit to the Company will be at BankBoston's
sole discretion. Advance rates (based on a percentage of inventory after certain
adjustments) and letter of credit of credit financing will be determined on the
basis set forth below:
Applicable
Advance Rate Trade L/C Sub-Limit
12/1/98 through 12/7/98: 68.0% $17,000,000
12/8/98 through 12/14/98: 65.0% $17,000,000
12/15/98 through 12/21/98: 63.0% $15,000,000
12/22/98 through 12/28/98: 62.0% $15,000,000
12/29/98 thereafter 60.0% $12,000,000
Management is currently seeking to address its liquidity requirements by
actively pursuing a potential private offering of new debt and equity
securities not registered under the Securities Act of 1933 (the "New
Financing"), when if successful, could result in the Company realizing net
cash proceeds of approximately $23 million by fiscal year-end 1998. The
Consummation of such New Financing would be conditioned upon obtaining from
the lenders under the Senior Credit Facility waivers of existing covenant
defaults, an increase in advance rates from those described above and relaxed
asset-coverage and other financial covenants contained therein. The proceeds
of the New Financing would be used by the Company to reduce or repay amounts
outstanding under the Senior Credit Facility. The securities to be sold in
the New Financing may not be offered or sold in the United States absent a
registration or an applicable exemption from the registration requirements.
At the same time, among other things, the Company is implementing a
cost-savings strategy and increasing its focus upon its private-label
merchandise, which includes focusing on the sales of its private-label denims
and exiting from its Levis-Strauss denim business. In that regard, the
Company's license agreement with Levi-Strauss relating to its Levis-Strauss
Outlet Stores has been terminated.
The combination of these factors raises substantial doubt about the Company's
ability to continue as a going concern. Thus, management has been informed
that the Company's independent public accountants anticipate issuing a going
concern opinion on the consolidated financial statements at January 30, 1999.
Management plans to address this situation by (i.) obtaining a waiver from
the lenders under the Senior Credit Facility of existing covenant defaults
thereunder, (ii) with the consent of the lenders to the Senior Credit
Facility, amending certain covenants and borrowing base advance rates under
the Senior Credit Facility, (iii) raising capital through the issuance of
additional debt during the fourth quarter 1998 and (iv.) implementing a cost
savings strategy and explore restructuring its Senior Notes (hereinafter
defined). If unable to improve its liquidity, implement a cost savings
strategy and restructure its existing indebtedness, the Company will receive
a going concern opinion for its financial statements in future periods.
SALE OF LEVI OUTLET STORES
On December 15, 1998, the Company and a third party ("Buyer") signed a letter of
intent (" The Letter") stating the terms and conditions of the sale of the
Company's Levi Outlet stores to the Buyer. The Letter states that the Buyer will
purchase the assets (which include inventory, furniture and fixtures) and will
assume the relevant 22 store leases but will assume no other liabilities. The
Company expects to close the transaction with the Buyer during the first quarter
of 1999. The Letter is subject to, among other conditions, the execution of a
definitive purchase agreement. There can be no assurance that this sale will be
consummated by the Company.
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:
39 Weeks Ended 13 Weeks Ended
----------------- ------------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997 1998 1997
-------- ------- -------- -------
Net Sales $219.3 $277.1 $85.9 $97.1
Gross Profit 57.6 62.3 24.2 21.5
Selling, general, 75.0 71.5 26.9 23.0
And administrative expenses
Depreciation and 11.2 6.1 5.5 1.9
Amortization
Reorganization costs - 38.4 - 30.5
Loss from operations (28.6) (53.7) (8.2) (33.9)
Interest expense, net 11.9 4.0 4.5 1.3
Loss before taxes
and extraordinary item (40.5) (57.7) (12.7) (35.2)
COMPARISON OF 13 WEEKS ENDED OCTOBER 31, 1998 AND 13 WEEKS ENDED
NOVEMBER 1, 1997
Net sales decreased $11.2 million, or 11.5% to $85.9 million for the 13 weeks
ended October 31, 1998 from $97.1 million for the 13 weeks ended November 1,
1997. The decline in sales was primarily due to (i) the closing of 88 stores
during 1997 and 1998, which accounted for $7.6 million of the decrease in net
sales and (ii) a $4.0 million, or 5.6% decrease in comparable County Seat store
sales and (iii.) $1.5 million, or 12.1% decrease in comparable County Seat
Outlet, Levi's Outlet and Old Farmer's Almanac store sales. The decline in net
sales was partially offset by $1.9 million relating to sales from stores opened
during 1998.
The number of units sold at a comparable 375 County Seat stores for the 13 weeks
ended October 31, 1998 is 6.1 million units, which is 0.7 million units or 13.0%
higher than same period last year. The average price per unit, however, for the
13 weeks ended October 31, 1998 decreased because of lower prices by $2.11 or
15.1% to $11.87 from $13.98 per unit for the 13 weeks ended November 1, 1997.
Gross profit, which includes the cost of merchandise, occupancy costs, buying
and merchandise handling costs ("Gross Profit"), increased $2.7 million, or
12.6% to $24.2 million for the 13 weeks ended October 31, 1998 from $21.5
million for the 13 weeks ended November 1, 1997. Gross Profit as a percentage of
sales increased by 6.0% to 28.2% for the 13 weeks ended October 31, 1998 from
22.2% for the 13 weeks ended November 1, 1997. Retail gross profit, which is
defined as sales less the cost of merchandise ("Retail Gross Profit") increased
$3.6, due to (i) a special charge of $12.0 million required to liquidate excess
inventory taken in the third quarter of 1997 but not in the third quarter of
1998, (ii.) an $0.8 million increase from new store sales, (iii.) offset by $3.9
million from the comparable stores sales decrease, (iv.) and $5.2 million in
lost Retail Gross Profit from the 88 stores closed during 1997 and 1998. The
increase in Retail Gross Profit for the 13 weeks ended October 31, 1998 of $3.6
million is offset by $0.9 in additional occupancy, buying and merchandise
handling costs. Merchandise handling costs, increased $1.2 million for the third
quarter 1998 to $3.8 million from $2.6 million. This increase was offset by a
reduction in occupancy and merchandise handling expenses of $0.3 million.
Selling, general and administrative expenses increased $3.9 million, or 17.0% to
$26.9 million for the 13 weeks ended October 31, 1998 from $23.0 million for the
13 weeks ended November 1, 1997. Selling, general, and administrative as a
percentage of net sales increased 7.7% to 31.4% for the 13 weeks ended October
31, 1998 from 23.7% for the 13 weeks ended November 1, 1997.
Depreciation and amortization expense increased $3.6 million to $5.5 million for
the 13 weeks ended October 31, 1998 from $1.9 million for the 13 weeks ended
November 1, 1997. The increase was primarily due to (i.) a $0.4 loss on the
disposition of the Brooklyn Park, Minnesota distribution center, (ii.) a $1.7
million loss on disposal of old store leasehold improvements, written off when
after the completion of 122 store refurbishings, (iii.) $0.4 million loss on the
disposal of leasehold improvements from the closure of stores during the third
quarter 1998, (iv.) $0.2 million increase in depreciation expense resulting from
the addition of the $6.2 million of assets during the third quarter 1998, and
(v.) and amortization expense of $0.9 million of Excess Reorganization Value
during the 13 weeks ended October 31, 1998 with none during the comparable
period last year.
The Company incurred reorganization costs of $30.5 million for the 13 weeks
ended November 1, 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 October 31, 1998. For the 13 weeks ended October 31, 1998 the
Company incurred interest expense on the new Senior Notes of $3.0 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 no
interest expense.
Loss from operations decreased $25.6 to $(8.2) million for the 13 weeks ended
October 31, 1998 from $(33.9) million for the 13 weeks ended November 1, 1997.
Further, as a result of restructuring, which included closing 320 stores, store
operating expenses decreased $1.1 million from $34.9 million (36.0% as a
percentage of net sales) to $33.8 million (39.3% as a percentage of net sales)
for the 13 weeks ended November 1, 1997 and October 31, 1998, respectively. This
includes a decrease in occupancy expenses of $1.1 million from $16.2 million
(26.8% as a percentage of net sales) to $14.9 million (32.8% as a percentage of
net sales) for the same periods.
The Company incurred $4.5 million of net interest expense for the 13 weeks ended
October 31, 1998 compared to $1.3 million for the prior year's corresponding
period. The Senior Notes accounted for $3.0 million of this expense for the
period ended October 31, 1998 and there was no debt outstanding in the prior
year's corresponding period. A tax benefit was not recorded during the 13 weeks
periods and as such, loss before taxes, loss before extraordinary items and net
loss is $12.7 million for the 13 weeks ended October 31, 1998. An extraordinary
gain of $131.9 million resulting from the discharge of debt in accordance with
the Company's emergence
from bankruptcy and the application of Fresh Start Accounting was recorded for
the13 weeks ended November 1, 1997. As a result, for the 13 weeks ended November
1, 1997 loss before extraordinary gain was $35.2 million and net income was
$96.7 million.
COMPARISON OF 39 WEEKS ENDED OCTOBER 31, 1998 AND 39 WEEKS ENDED
NOVEMBER 1, 1997
Net sales decreased $57.8 million, or 20.9% to $219.3 million for the 39 weeks
ended October 31, 1998 from $277.1 million for the 39 weeks ended November 1,
1997. The decline in sales was primarily due to (i) the closing of 204 stores
during 1997 and 1998, which accounted for $33.1 million of the decrease in net
sales and (ii) a $14.7 million, or 7.5% decrease in comparable County Seat
store sales, (iii.) $1.6 million, or 4.7% decrease in comparable County Seat
Outlet, Levi's Outlet and Old Farmer's Almanac store sales and (iv) a $10.5
million liquidation sale in the first quarter of 1997. The decline in net sales
was partially offset by $2.1 million relating to sales from stores opened during
1998.
The number of units sold at a comparable 375 County Seat stores for the 39 weeks
ended October 31, 1998 is 16.3 million units, which is 2.6 million units or
19.0% higher than same period last year. The average price per unit, however,
for the 39 weeks ended October 31, 1998 decreased due to lower prices by $2.11
or 15.1% to $11.87 from $13.98 per unit for the 39 weeks ended November 1, 1997.
Gross Profit decreased $4.8 million, or 7.6% to $57.6 million for the 39 weeks
ended October 31, 1998 from $62.3 million for the 39 weeks ended November 1,
1997. Gross Profit as a percentage of sales increased by 3.8% to 26.3% for the
39 weeks ended October 31, 1998 from 22.5% for the 39 weeks ended November 1,
1997. Retail Gross Profit decreased $9.8 million, consisting of (i.) a decrease
in comparable store sales accounting for $5.9 million, (ii.) a $0.9 million
increase from new stores, and (iii.) a $4.8 million in lost gross margin from
the 204 stores closed during 1997 and 1998. The decrease in Retail Gross Profit
for the 39 weeks ended October 31, 1998 of $9.8 million is offset by a reduction
of occupancy, buying and merchandise handling costs of $5.0 million. This
decrease for the 39 weeks ended October 31, 1998 consists of (i.) decreased
occupancy costs of $7.0 million from $41.1 million to $34.1 million for the 39
weeks ended November 1, 1997 and October 31, 1998, due to the closure of 204
stores, (ii.) offset by $0.1 million increase in buying and (iii.) a $1.8
million increase in merchandise handling costs. Merchandise handling costs,
increased $1.8 million for the 39 weeks ended October 31, 1998 to $9.3 million
from $7.5 million for the prior year's comparable period.
Selling, general and administrative expenses increased $3.5 million, or 4.9% to
$75.0 million for the 39 weeks ended October 31, 1998 from $71.5 million for the
39 weeks ended November 1, 1997. Selling, general, and administrative expenses
as a percentage of net sales increased 8.4% to 34.2% for the 39 weeks ended
October 31, 1998 from 25.8% for the 39 weeks ended November 1, 1997.
Depreciation and amortization expense increased $5.1 million to $11.3 million
for the 39 weeks ended October 31, 1998 from $6.2 million for the 39 weeks ended
November 1, 1997. The increase was primarily due to (i.) a $0.4 million loss on
the disposition of the Brooklyn Park, Minnesota distribution center, (ii.) a
$1.7 million loss on disposal of old store leasehold improvements, written off
when after the completion of 122 store refurbishings, (iii.) $0.4 loss on the
disposal of leasehold improvements from the closure of stores during the third
quarter 1998, (iv.) $0.3 million decrease in depreciation expense resulting from
the disposal of fixed assets of 204 closed stores during 1997 and 1998, and (v.)
and amortization expense of $3.1 million of
Excess Reorganization Value during the 39 weeks ended October 31, 1998 with none
during the prior year's comparable period.
The Company incurred reorganization costs of $38.4 million for the 39 weeks
ended November 1, 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 39
weeks ended October 31, 1998. For the 39 weeks ended October 31, 1998 the
Company incurred interest expense on the Senior Notes of $8.5 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 no
interest expense.
Loss from operations decreased $25.1 million to $(28.6) million for the 39 weeks
ended October 31, 1998 from $(53.7) million for the 39 weeks ended November 1,
1997.
Further, as a result of restructuring the Company during 1996 and 1997, which
included closing 320 stores, store operating expenses decreased $11.8 million
from $109.9 million (39.6% as a percentage of net sales) to $98.1 million (44.7%
as a percentage of net sales) for the 39 weeks ended November 1, 1997 and
October 31, 1998, respectively. This includes a decrease in occupancy costs of
$11.0 million from $54.7 million (33.4% as a percentage of net sales) to $43.7
million (37.7% as a percentage of net sales) for the same periods.
The Company incurred $11.9 million of net interest expense for the 39 weeks
ended October 31, 1998 compared to $4.0 million for the same period last year.
The Senior Notes accounted for $8.5 million of this expense for the period ended
October 31, 1998 and no interest was charged for the same period last year as
there was no debt outstanding. A tax benefit was not recorded during the 39
weeks ended October 31, 1998 and as such, loss before taxes, loss before
extraordinary item and net loss is $40.5 million. An extraordinary gain of
$131.9 million resulting from the discharge of debt in accordance with the
Company's emergence from bankruptcy and the application of Fresh Start
Accounting was recorded during the 39 weeks ended November 1, 1997. As a result,
for the 39 weeks ended November 1, 1997 loss before extraordinary gain was $57.7
million and net income was $74.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the 39 weeks ended October 31, 1998
was $60.3 million compared to $32.8 million for the 39 weeks ended November 1,
1997. Cash was used in operations primarily to cover a net loss of $40.5
million during the 39 weeks ended October 31, 1998 (when reduced by $13.7
million of non-cash depreciation, amortization, loss on disposal of property and
equipment and rent expense in excess of cash outlays, the cash impact is $26.8
million), an increase in inventory by $28.1 million and a reduction of accounts
payable and accruals by $1.3 million. During the 39 weeks ended November 1,
1997, after the impact of non-cash (i.) reorganization costs of $20.2 million,
(ii.) extraordinary gain of $131.9 million, (iii.) depreciation and amortization
of $6.7 million, (iv.) loss on disposal of property and equipment of $4.9
million and (v.) $1.2 million in rent expense in excess of cash outlays, cash
was used to cover a cash loss of $24.7 million. Additionally, cash was used to
pay for an increase in inventory of $2.1 million and a decrease in accounts
payable and accruals of $6.0 million.
Working capital as of October 31, 1998 was $20.7 million. Working capital as of
November 1, 1997 was $41.7 million.
During the 39 weeks ended October 31, 1998 the Company invested $13.4 million to
build-out the Company's new distribution center in Baltimore, Maryland and the
Company's new corporate office in New York, continued its investment in the new
accounting and merchandising computer system and remodeling of stores and store
maintenance. During the 39 weeks ended November 1, 1997 the Company invested
$1.4 million primarily in store maintenance.
On December 3, 1998, the Company was notified by BankBoston that the Company is
in default under its fixed charge coverage ratio requirement contained in the
Senior Credit Facility, which default entitles BankBoston to, among other
things, accelerate the indebtedness outstanding thereunder and cause such
indebtedness to become immediately due and payable. BankBoston has notified the
Company, however, that (i.) it presently intends to continue to provide
financing to the Company at reduced levels as described below, (ii.) that all
borrowings under the Senior Credit Facility shall (including letter's of credit
and bankers acceptances) be due and payable on demand, and (iii.) that any
further accommodations to extend credit to the Company will be at BankBoston's
sole discretion. Advance rates (based on a percentage of inventory after certain
adjustments) and letter of credit of credit financing will be determined on the
basis set forth below:
Applicable
Advance Rate Trade L/C Sub-Limit
12/1/98 through 12/7/98: 68.0% $17,000,000
12/8/98 through 12/14/98: 65.0% $17,000,000
12/15/98 through 12/21/98: 63.0% $15,000,000
12/22/98 through 12/28/98: 62.0% $15,000,000
12/29/98 thereafter 60.0% $12,000,000
Management is currently seeking to address its liquidity requirements by
actively pursuing a potential private offering of new debt and equity
securities not registered under the Securities Act of 1933 (the "New
Financing"), when if successful, could result in the Company realizing net
cash proceeds of approximately $23 million by fiscal year-end 1998. The
Consummation of such New Financing would be conditioned upon obtaining from
the lenders under the Senior Credit Facility waivers of existing covenant
defaults, an increase in advance rates from those described above and relaxed
asset-coverage and other financial covenants contained therein. The proceeds
of the New Financing would be used by the Company to reduce or repay amounts
outstanding under the Senior Credit Facility. The securities to be sold in
the New Financing may not be offered or sold in the United States absent a
registration or an applicable exemption from the registration requirements.
At the same time, among other things, the Company is implementing a
cost-savings strategy and increasing its focus upon its private-label
merchandise, which includes focusing on the sales of its private-label denims
and exiting from its Levis-Strauss denim business. In that regard, the
Company's license agreement with Levi-Strauss relating to its Levis-Strauss
Outlet Stores has been terminated.
The combination of these factors raises substantial doubt about the Company's
ability to continue as a going concern. Thus, management has been informed that
their independent public accountants anticipate issuing a going concern opinion
on the consolidated financial statements at January 30, 1999. Management plans
to address this situation by (i.) obtaining a waiver from the lenders under the
Senior Credit Facility of existing covenant defaults thereunder, (ii) with the
consent of the lenders to the Senior Credit Facility, amending certain covenants
and borrowing base advance rates under the Senior Credit Facility, (iii) raising
capital through the issuance of
additional debt during the fourth quarter 1998 and (iv.) implementing a cost
savings strategy and explore restructuring its Senior Notes (hereinafter
defined). If unable to improve its liquidity, implement a cost savings strategy
and restructure its existing indebtedness, the Company will receive a going
concern opinion for its financial statements in future periods.
On December 15, 1998, the Company and a third party ("Buyer") signed a letter of
intent (" The Letter") stating the terms and conditions of the sale of the
Company's Levi Outlet stores to the Buyer. The Letter states that the Buyer will
purchase the assets (which include inventory, furniture and fixtures) and will
assume the relevant 22 store leases but will assume no other liabilities. The
Company expects to close the transaction with the Buyer during the first quarter
of 1999. The Letter is subject to, among other conditions, the execution of a
definitive purchase agreement. There can be no assurance that this sale will be
consummated by the Company.
As of October 31, 1998, the Company had approximately $16.3 million of letters
of credit and bankers' acceptances outstanding. Approximately $9.3 million
remained available under the Senior Credit Facility.
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.
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain sections of this Quarterly Report on Form 10-Q, including the preceding
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain various forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events. Wherever used, the words
"expect," "plan," "anticipate," "believe," and similar expressions identify
forward-looking statements.
Any such forward-looking statements are subject to risks and uncertainties that
could cause the Company's actual results of operations to differ materially from
historical results or current expectations. Some of these risks include, without
limitation, ongoing competitive pressures in the retail industry, the
sufficiency of the Company's working capital and cash flows from operating
activities, the ability of the Company to obtain adequate merchandise supply,
risks associated with challenging international retail environments, changes in
the level of consumer spending or preferences in apparel, trade restrictions and
political or financial instability in countries where the Company's goods are
manufactured and/or disruption to operations from Year 2000 issues, and other
factors that may be described in the Company's filings with the Securities and
Exchange Commission. Future economic and industry trends that could potentially
impact revenues and profitability remain difficult to predict.
The Company does not undertake to publicly update or revise its forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
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
See Note 6 in Part 1
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 October 31, 1998.
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 December 21, 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