Commission File No. 1-13113
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q/A
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended May 4, 2002
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
For Quarter Ended: May 4, 2002
Commission File Number: 1-13113
Exact name of registrant as specified in its charter:
SAKS INCORPORATED
-----------------
State of Incorporation: Tennessee
I.R.S. Employer Identification Number: 62-0331040
Address of Principal Executive Offices (including zip code):
750 Lakeshore Parkway, Birmingham, Alabama 35211
------------------------------------------------
Registrant's telephone number, including area code:
(205) 940-4000
--------------
Indicate by check mark whether 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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.10 Par Value - 142,895,598 shares as of December 18, 2002
- -------------------------------------------------------------------------
Introduction
This Form 10-Q/A amends the Form 10-Q filed by Saks Incorporated (Saks) on June
17, 2002 for the quarter ended May 4, 2002. This Form 10-Q/A amends Item 1, Item
2 and Item 3 of Part I of Saks' original Form 10-Q filing only, and all other
portions of Saks' original 10-Q filing remain in effect.
SAKS INCORPORATED
Index
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - May 4, 2002,
February 2, 2002 and May 5, 2001
Condensed Consolidated Statements of Income - Three
Months Ended May 4, 2002 and May 5, 2001
Condensed Consolidated Statements of Cash Flows -
Three Months Ended May 4, 2002 and May 5, 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II OTHER INFORMATION
Item 6. Exhibits and reports on form 8-K
ITEM 1. Financial Statements
SAKS INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
May 4, February 2, May 5,
2002 2002 2001
-------------- ------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 100,463 $ 99,102 $ 75,073
Retained interest in accounts receivable 259,631 239,420 274,377
Merchandise inventories 1,358,634 1,295,878 1,576,021
Other current assets 101,054 74,960 66,277
Deferred income taxes, net 54,448 60,569 28,657
------------ ------------ ------------
Total current assets 1,874,230 1,769,929 2,020,405
Property and Equipment, net 2,224,013 2,246,818 2,278,415
Goodwill and Intangibles, net 314,852 360,580 385,776
Deferred Income Taxes, net 165,916 173,077 173,816
Other Assets 51,683 45,117 49,615
------------ ------------ ------------
TOTAL ASSETS $ 4,630,694 $4,595,521 $ 4,908,027
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 376,530 $ 282,750 $ 370,311
Accrued expenses and other current liabilities 484,112 498,967 469,872
Current portion of long-term debt 4,807 5,061 5,628
------------ ------------ ------------
Total current liabilities 865,449 786,778 845,811
Long-Term Debt 1,330,865 1,356,580 1,617,039
Other Long-Term Liabilities 183,118 180,726 123,585
------------ ------------ ------------
Total liabilities 2,379,432 2,324,084 2,586,435
Commitments and Contingencies
Shareholders' Equity 2,251,262 2,271,437 2,321,592
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,630,694 $ 4,595,521 $ 4,908,027
============ ============ ============
See notes to condensed consolidated financial statements.
SAKS INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share amounts)
Three Months Ended
-------------------------------
May 4, 2002 May 5, 2001
-------------- -------------
Net sales $ 1,426,227 $ 1,464,350
Cost of sales (excluding depreciation and amortization) 889,373 917,789
-------------- ---------------
Gross margin 536,854 546,561
Selling, general and administrative expenses 332,778 343,242
Other operating expenses 140,012 141,848
Store pre-opening costs 835 582
Integration charges - 1,123
Losses (gains) from long-lived assets 926 (312)
-------------- ---------------
Operating income 62,303 60,078
Other income (expense):
Interest expense (31,074) (34,601)
Other income, net 385 223
-------------- ---------------
Income before income taxes, extraordinary
items and cumulative effect of a
change in accounting principle 31,614 25,700
Provision for income taxes 11,856 9,843
-------------- ---------------
Income before extraordinary items and
cumulative effect of a change in
accounting principle 19,758 15,857
Extraordinary gain on extinguishment of
debt, net of taxes 443 10,641
Cumulative effect of a change in
accounting principle, net of taxes (45,593) -
-------------- ---------------
Net income (loss) $ (25,392) $ 26,498
============== ===============
Basic earnings per common share:
Income before extraordinary item and
cumulative effect of accounting change $ 0.14 $ 0.11
Extraordinary items - 0.08
Cumulative effect of accounting change (0.32) -
-------------- ---------------
Net income (loss) $ (0.18) $ 0.19
============== ===============
Diluted earnings per common share:
Income before extraordinary items and
cumulative effect of accounting change $ 0.13 $ 0.11
Extraordinary items - 0.07
Cumulative effect of accounting change (0.31) -
-------------- ---------------
Net income (loss) $ (0.17) $ 0.18
============== ===============
Weighted average common shares:
Basic 142,427 141,901
Diluted 147,250 145,852
See notes to condensed consolidated financial statements.
SAKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Three Months Ended
--------------------------------------
May 4, 2002 May 5, 2001
------------------ ------------------
Operating Activities:
Net income (loss) $ (25,392) $ 26,498
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 52,474 54,127
Losses (gains) from long-lived assets 926 (312)
Extraordinary gain on extinguishment of debt, net (443) (10,641)
Cumulative effect of accounting change, net 45,593 -
Provision for employee deferred compensation 1,767 1,569
Deferred income taxes 13,282 14,833
Change in operating assets and liabilities, net (29,879) (135,132)
------------ ------------
Net Cash Provided By (Used In) Operating Activities 58,328 (49,058)
Investing Activities:
Purchases of property and equipment (33,994) (54,701)
Proceeds from the sale of property and equipment - 7,170
Proceeds from the sale of stores, net of
repurchased receivables - 275,452
------------ ------------
Net Cash (Used In) Provided By Investing Activities (33,994) 227,921
Financing Activities:
Payments on long-term debt and capital lease obligations (25,883) (167,802)
Purchases and retirements of common stock - (1,304)
Proceeds from issuance of common stock 2,910 656
------------ ------------
Net Cash Used In Financing Activities (22,973) (168,450)
Increase In Cash and Cash Equivalents 1,361 10,413
Cash and cash equivalents at beginning of period 99,102 64,660
------------ ------------
Cash and cash equivalents at end of period $ 100,463 $ 75,073
============ ============
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the 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. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended May 4, 2002 are not
necessarily indicative of the results that may be expected for the year ending
February 1, 2003. The financial statements include the accounts of Saks
Incorporated and its subsidiaries (collectively, the "Company"). All
intercompany amounts and transactions have been eliminated. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
February 2, 2002.
The Company is a national retailer currently operating through subsidiaries
luxury and traditional department stores. The Company operates the Saks
Department Store Group ("SDSG"), which consists of stores operated under the
following nameplates: Proffitt's, McRae's, Younkers, Parisian, Herberger's,
Carson Pirie Scott ("Carson's"), Bergner's, and Boston Store. The Company also
operates Saks Fifth Avenue Enterprises ("SFAE"), which consists of Saks Fifth
Avenue stores and Saks Off 5th stores.
The accompanying balance sheet at February 2, 2002 has been derived from the
audited financial statements at that date but does not include all required
generally accepted accounting principles disclosures.
Net sales include sales of merchandise (net of returns and exclusive of sales
taxes), commissions from leased departments, and shipping and handling revenues
related to merchandise sold. Revenues from shipping and handling included in net
sales for the three months ended May 4, 2002 and May 5, 2001 were $625 and
$2,688, respectively. Commissions from leased departments were $9,473 and $9,578
for the three months ended May 4, 2002 and May 5, 2001, respectively. Leased
department sales were $65,712 and $64,074 for the three months ended May 4, 2002
and May 5, 2001, respectively, and were excluded from net sales.
In order to maintain consistency and comparability between periods presented,
certain other amounts have been reclassified from previously reported financial
statements to conform to the financial statement presentation of the current
period. These reclassifications have no effect on previously reported net
income, shareholders' equity or cash flows.
NOTE 2 - INTEGRATION CHARGES
The Company incurred no integration charges for the three months ended May 4,
2002. For the three months ended May 5, 2001, the Company incurred certain
integration charges primarily related to the consolidation of three SDSG
southern distribution centers.
A reconciliation of the aforementioned costs to the amounts of integration
charges remaining unpaid at May 4, 2002 is as follows:
Amounts unpaid at February 2, 2002 and
related to prior integration events $ 2,846
Amounts paid during the period (528)
------------
Amounts unpaid at May 4, 2002, principally severance (to be
paid through 2004) $ 2,318
============
NOTE 3 - EARNINGS PER COMMON SHARE
Calculations of earnings per common share ("EPS") for the three months ended May
4, 2002 and May 5, 2001 are as follows (income and shares in thousands):
For the Three Months Ended For the Three Months Ended
May 4, 2002 May 5, 2001
------------------------------------ ------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income (a) Shares Amount Income (a) Shares Amount
------------ ----------- ----------- ------------ ----------- -----------
Basic EPS $ 19,758 142,427 $ 0.14 $ 15,857 141,901 $ 0.11
Effect of dilutive stock options
(based on the treasury stock
method using the average price) 4,823 3,951
------------ ----------- ----------- ------------ ----------- -----------
Diluted EPS $ 19,758 147,250 $ 0.13 $ 15,857 145,852 $ 0.11
============ =========== =========== ============ =========== ===========
(a) Income before extraordinary items and cumulative effect of accounting change
Additionally, the Company had 8,748 and 9,256 options to purchase shares of
common stock outstanding at May 4, 2002 and May 5, 2001, respectively, that were
not included in the computation of diluted EPS because the exercise price of the
options was greater than the market price of the common shares. At May 4, 2002,
these options had exercise prices ranging from $12.69 to $48.78 per share. If
the market price becomes greater than the exercise price, these options will be
dilutive and the treasury stock method will be applied to determine the number
of dilutive shares.
NOTE 4 - ACCOUNTS RECEIVABLE SECURITIZATION
The Company's and the certificate holders' owned interest in the credit card
receivables at May 4, 2002 and May 5, 2001 was as follows:
May 4, May 5,
2002 2001
--------------------------------
Amount of receivables securitized $ 1,253,511 $ 1,273,459
Certificate amounts sold to third-party investors (1,085,353) (1,101,126)
--------------------------------
Retained interest in amount of receivables securitized 168,158 172,333
Restricted cash associated with securitization 33,786 36,966
Fair value of residual interest in certificate amounts sold
to third-party investors 40,227 36,352
Receivables not securitized 17,460 28,726
--------------------------------
Retained interest in accounts receivable $ 259,631 $ 274,377
================================
Prior to maturity of the certificates, the Company has access to the cash
generated by the receivables net of allocations of cash to investors
representing the coupon interest rate on the beneficial interest. Upon maturity,
the certificate owners are repaid with cash collections of principal payments
made by customers until which time their ownership interests are satisfied,
"paid down," after which the Company receives all such cash to recover its
residual ownership interest in the pool of receivables. During the period
beginning in July 2002 and continuing through November 2002, certificates
representing $713,500 of the outstanding certificates at May 4, 2002 will mature
and will be required to be paid down.
Consistent with past practices, the Company anticipates that selling new
certificates to investors will be sufficient to maintain funding of proprietary
credit card receivables under terms similar to those currently in place.
Although maturing certificates are repaid with collections of principal payments
accumulated prior to maturity, new receivables created under the Company's
proprietary credit cards have historically caused the aggregate pool of
receivables to remain relatively constant or to grow at a slow rate. As a
result, the aggregate amount of certificates sold has remained relatively
constant or grown commensurate with the pool of receivables held in the trust.
Income, losses and expenses associated with the credit card receivables are
included in selling, general and administrative expenses. For the three months
ended May 4, 2002 and May 5, 2001, these amounts are as follows:
May 4, May 5,
2002 2001
--------------------------------
Finance charge income and fees $ 65,580 $ 68,537
Securitization gains - -
Finance charge income and fees retained by
certificate holders (9,217) (17,092)
Bad debt expense:
Write-offs, net of recoveries, including fraud (23,231) (21,322)
Change in the allowance for bad debts 1,246 5,316
--------------------------------
(21,985) (16,006)
Net credit card contribution before operating and
marketing expenses, overhead and other
financing costs $ 34,378 $ 35,439
================================
NOTE 5 - CONTINGENCIES
The Company is involved in several legal proceedings arising from its normal
business activities, and reserves for such claims have been established where
appropriate. Management believes that none of these legal proceedings will have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. The Company is routinely under audit by
federal, state or local authorities in the areas of income taxes and the
remittance of sales and use taxes. These audits include questioning the timing
and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various tax filing
positions, the Company accrues charges for probable exposures. Based on annual
evaluations of tax positions, the Company believes it has appropriately accrued
for probable exposures.
NOTE 6 - SEGMENT INFORMATION
The Company conducts its business through two segments, Saks Department Stores
Group and Saks Fifth Avenue Enterprises. Operating Income for the segments
includes the revenue, cost of sales, direct selling, general, and administrative
expenses, other direct operating expenses for the respective segment and an
allocation of certain operating expenses shared by the two segments. "Other"
consists of the assets, revenue and expenses associated with the corporate
offices, certain accounting, finance, human resource, and information technology
activities and other items managed on a company-wide basis.
Three Months Ended
----------------------------------
May 4, May 5,
2002 2001
----------------------------------
Net Sales:
Saks Department Stores Group $ 818,195 $ 825,346
Saks Fifth Avenue Enterprises 608,032 639,004
----------------------------------
$ 1,426,227 $ 1,464,350
==================================
Operating Income:
Saks Department Stores Group $ 40,458 $ 38,871
Saks Fifth Avenue Enterprises 35,257 30,832
Other (10,041) (6,860)
Certain items, net (3,371) (2,765)
----------------------------------
$ 62,303 $ 60,078
==================================
Depreciation and Amortization:
Saks Department Stores Group $ 27,618 $ 29,722
Saks Fifth Avenue Enterprises 24,257 24,031
Other 599 374
----------------------------------
$ 52,474 $ 54,127
==================================
Total Assets:
Saks Department Stores Group $ 2,283,803 $ 2,373,677
Saks Fifth Avenue Enterprises 1,803,003 2,054,418
Other 543,888 479,932
----------------------------------
$ 4,630,694 $ 4,908,027
==================================
Capital Expenditures:
Saks Department Stores Group $ 9,376 $ 12,363
Saks Fifth Avenue Enterprises 9,452 26,190
Other 15,166 16,148
----------------------------------
$ 33,994 $ 54,701
==================================
For the three-month periods ended May 4, 2002 and May 5, 2001, Operating Income
includes charges and losses associated with certain unusual or infrequently
occurring events and transactions aggregating to $3,371 and $2,765,
respectively. The current period certain items primarily relate to the
reorganization of the Saks Direct business and the consolidation or elimination
of various operating activities. The prior period certain items primarily relate
to corporate and integration activities and the sale of previously owned
distribution and store locations.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets", became effective for the
Company in the first quarter of fiscal year 2002. This standard revised the
financial accounting and reporting for goodwill and certain intangible assets.
Among the revisions were the discontinuation of the amortization of goodwill and
certain intangible assets, and the periodic testing (at least annually) for the
impairment of goodwill at a reporting unit level, and additional financial
statement disclosures. The standard required a goodwill impairment test as of
the adoption date.
Consistent with its reportable segments, the Company identified its reporting
units under SFAS 142 to be SDSG and SFAE. The fair value of these reporting
units was estimated using the expected present value of associated future cash
flows and market values of related businesses, where appropriate. The Company
completed its impairment test during the first quarter of 2002 and determined
that $45,593 of non-deductible goodwill recorded within the SFAE reporting unit
was impaired under the fair value test. This impairment was the result of
sequential periods of decreased operating profit and generally reduced market
values for luxury retailers. Accordingly, the Company has recognized a charge
for the cumulative change of adopting the accounting standard as shown in the
accompanying condensed consolidated statements of income.
The changes in the carrying amounts of goodwill for the three months ended May
4, 2002 and the components of other amortizable assets at May 4, 2002 are as
follows:
SDSG SFAE Consolidated
--------------- --------------- ------------------
Goodwill balance at February 2, 2002 $ 308,522 $ 45,593 $ 354,115
Cumulative effect of adopting
SFAS No 142 - (45,593) (45,593)
--------------- --------------- ------------------
Goodwill balance at May 5, 2002 308,522 - 308,522
Other amortizable intangible assets:
Carrying amount of credit card base 8,115 - 8,115
Accumulated amortization (1,785) - (1,785)
--------------- --------------- ------------------
Other amortizable intangible assets 6,330 - 6,330
--------------- --------------- ------------------
Total Goodwill and Intangibles at May 5, 2002 $ 314,852 $ - $ 314,852
=============== =============== ==================
The Company also maintained other amortizable assets at May 4, 2002, which
consisted primarily of customer lists. The carrying amount and related
accumulated amortization of those assets at May 4, 2002 was $14,595 and $11,888,
respectively, and were included in other assets in the accompanying condensed
consolidated balance sheets.
The Company reassessed the lives of its amortizable intangible assets and other
amortizable assets in connection with the adoption of the standard, which
resulted in no changes to the useful lives. The components of amortization
expense for the three months ended May 4, 2002 and the related estimated
amortization expense for the next five fiscal years are as follows:
Amortizable Other
Intangible Amortizable Total
Assets Assets Amortization
---------------- ---------------- -----------------
Aggregate Amortization Expense:
Three months ended May 4, 2002 $ 135 $ 241 $ 376
Estimated Annual Amortization Expense:
Fiscal 2002 $ 541 $ 964 $ 1,505
Fiscal 2003 $ 541 $ 964 $ 1,505
Fiscal 2004 $ 541 $ 876 $ 1,417
Fiscal 2005 $ 541 $ 27 $ 568
Fiscal 2006 $ 541 $ 27 $ 568
The following table presents income and related earnings per share data,
adjusted for the effect of the change in goodwill amortization, for the three
month periods ended May 4, 2002 and May 5, 2001 and for the three prior fiscal
years.
For the Three Months Ended For the Year Ended
- --------------------------------------------------------------------------- --------------------------------------
May 4, May 5, February 2, February 3, January 29,
2002 2001 2002 2001 2000
--------------- ------------- ------------ ------------ ------------
Reported income before extraordinary items $ 19,758 $ 15,857 $ (15,736) $ 75,216 $ 198,904
Add back: goodwill amortization - 3,779 13,083 18,286 17,606
--------------- -------------- ------------ ------------ ------------
Adjusted income before extraordinary items $ 19,758 $ 19,636 $ (2,653) $ 93,502 $ 216,510
=============== ============== ============ ============ ============
Reported net income $ (25,392) $ 26,498 $ 322 $ 75,216 $ 189,643
Add back: goodwill amortization - 3,779 13,083 18,286 17,606
--------------- -------------- ------------ ------------ ------------
Adjusted net income $ (25,392) $ 30,277 $ 13,405 $ 93,502 $ 207,249
=============== ============== ============ ============ ============
Basic earnings per common share:
Reported income before extraordinary items $ 0.14 $ 0.11 $ (0.11) $ 0.53 $ 1.38
Add back: goodwill amortization - 0.02 0.09 0.13 0.12
--------------- -------------- ------------ ------------ ------------
Adjusted income before extraordinary items $ 0.14 $ 0.13 $ (0.02) $ 0.66 $ 1.50
=============== ============== ============ ============ ============
Reported net income $ (0.18) $ 0.19 $ 0.00 $ 0.53 $ 1.32
Goodwill amortization - 0.02 0.09 0.13 0.12
--------------- -------------- ------------ ------------ ------------
Adjusted net income $ (0.18) $ 0.21 $ 0.09 $ 0.66 $ 1.44
=============== ============== ============ ============ ============
Diluted earnings per common share:
Reported income before extraordinary items $ 0.13 $ 0.11 $ (0.11) $ 0.53 $ 1.36
Add back: goodwill amortization - 0.02 0.09 0.13 0.12
--------------- -------------- ------------ ------------ ------------
Adjusted income before extraordinary items $ 0.13 $ 0.13 $ (0.02) $ 0.66 $ 1.48
=============== ============== ============ ============ ============
Reported net income $ (0.17) $ 0.18 $ 0.00 $ 0.53 $ 1.30
Goodwill amortization - 0.02 0.09 0.13 0.12
--------------- -------------- ------------ ------------ ------------
Adjusted net income $ (0.17) $ 0.20 $ 0.09 $ 0.66 $ 1.42
=============== ============== ============ ============ ============
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
became effective in the first quarter of 2002. This standard emphasizes and
resolves certain issues related to the recognition and measurement of the
impairment of long-lived assets, whether held and used or to be disposed of by
sale. This standard also extends the reporting of discontinued operations,
separate from continuing operations, to include "a component of an entity" that
has either been disposed of or is held for sale. It is not expected that this
standard will have a significant effect on the Company's consolidated financial
position or results of operations; however, the standard may impact the
presentation of income and expenses associated with closed or disposed stores.
In April 2002, the FASB issued SFAS No. 145, which addresses a variety of
accounting practices. The items that are most relevant to the Company include
the removal of the requirement to classify all gains or losses from the
extinguishment of debt as extraordinary and a requirement that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
standard is effective for the Company's fiscal year beginning in February 2003.
The Company does not expect that the standard will have a significant impact on
its financial position or results of operations.
NOTE 9 - DEBT REPURCHASES
During the three months ended May 4, 2002, the Company utilized operating cash
flows to repurchase $24,250 of its senior notes due 2004 at a discount to the
carrying value. This repurchase resulted in an extraordinary gain on
extinguishment of debt of $709 ($443 net of taxes).
NOTE 10 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial information for:
1) Saks Incorporated; 2) on a combined basis, the guarantors of Saks
Incorporated's senior notes (which are all of the subsidiaries of Saks
Incorporated except for National Bank of the Great Lakes ("NBGL"), the
subsidiaries associated with the Company's proprietary credit card
securitization program, and other immaterial subsidiaries); and 3) on a combined
basis, NBGL, the subsidiaries associated with the Company's proprietary credit
card securitization program, and other immaterial subsidiaries, which
collectively represent the only subsidiaries of the Company that are not
guarantors of the senior notes. The condensed consolidating financial statements
presented as of and for the three-month periods ended May 4, 2002 and May 5,
2001 and as of February 2, 2002 reflect the legal entity compositions at the
respective dates. Separate financial statements of the guarantor subsidiaries
are not presented because the guarantors are jointly, severally, fully and
unconditionally liable under the guarantees. Borrowings and the related interest
expense under the Company's revolving credit agreement are allocated to Saks
Incorporated and the guarantor subsidiaries under an intercompany revolving
credit arrangement. There are also management and royalty fee arrangements
between Saks Incorporated and the subsidiaries. At May 4, 2002, Saks
Incorporated was the sole obligor for a majority of the Company's long-term
debt, owned one store location and maintained a small group of corporate
employees.
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT MAY 4, 2002
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $62,000 $32,108 $6,355 $100,463
Retained interest in accounts receivable 259,631 259,631
Merchandise inventories $3,504 1,355,130 1,358,634
Deferred income taxes, net 70,136 (15,688) 54,448
Intercompany borrowings 4,628 15,029 ($19,657)
Other current assets 101,054 101,054
------------ ------------ ------------ ------------ ------------
Total Current Assets 65,504 1,563,056 265,327 (19,657) 1,874,230
Property and Equipment, net 7,556 2,216,457 2,224,013
Goodwill and Intangibles, net 314,852 314,852
Other Assets 15,700 32,054 3,929 51,683
Deferred Income Taxes, net 165,916 165,916
Investment in and Advances to Subsidiaries 3,379,999 140,953 (3,520,952)
------------ ------------ ------------ ------------ ------------
Total Assets $3,468,759 $4,433,288 $269,256 ($3,540,609) $4,630,694
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $876 $375,654 $376,530
Accrued expenses and other current liabilities 30,630 453,482 484,112
Intercompany borrowings 15,029 $4,628 ($19,657)
Current portion of longterm debt 4,807 4,807
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 31,506 848,972 4,628 (19,657) 865,449
Long-Term Debt 1,185,756 145,109 1,330,865
Other LongTerm Liabilities 235 182,883 183,118
Investment by and Advances from Parent 3,256,324 264,628 (3,520,952)
Shareholders' Equity 2,251,262 2,251,262
------------ ------------ ------------ ------------ ------------
Total Liabilities and Shareholders' Equity $3,468,759 $4,433,288 $269,256 ($3,540,609) $4,630,694
============ ============ ============ ============ ============
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 4, 2002
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $3,838 $1,422,389 $1,426,227
Costs and expenses (excluding depreciation and
amortization)
Cost of sales 2,413 886,960 889,373
Selling, general and administrative expenses 2,782 364,192 $22,167 ($56,363) 332,778
Other operating expenses 922 139,090 140,012
Store preopening costs 835 835
Losses (gains) from long-lived assets 926 926
------------ ------------ ------------ ------------ ------------
Operating income (loss) (2,279) 30,386 (22,167) 56,363 62,303
Other income (expense)
Finance charge income, net 56,363 (56,363)
Intercompany exchange fees (10,793) 10,793
Intercompany servicer fees 13,367 (13,367)
Equity in earnings of subsidiaries (7,787) 10,906 (3,119)
Interest expense (25,190) (5,049) (835) (31,074)
Other income (expense), net 385 385
------------ ------------ ------------ ------------ ------------
Income before income taxes (35,256) 39,202 30,787 (3,119) 31,614
Provision (benefit) for income taxes (9,421) 10,470 10,807 11,856
------------ ------------ ------------ ------------ ------------
Income before extraordinary item and change in
accouting principle (25,835) 28,732 19,980 (3,119) 19,758
Extraordinary gain on extinguishment of debt, net
of taxes 443 443
Cumulative change in accounting principle, net of taxes (45,593) (45,593)
------------ ------------ ------------ ------------ ------------
Net income (loss) ($25,392) ($16,861) $19,980 ($3,119) ($25,392)
============ ============ ============ ============ ============
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 4, 2002
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) ($25,392) $28,732 $19,980 ($48,712) ($25,392)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries (37,806) (10,906) 48,712
Extraordinary gain on extinguishment of debt (443) (443)
Cumulative change in accounting principle 45,593 45,593
Depreciation and amortization 263 52,211 52,474
Provision for employee deferred compensation 1,767 1,767
Deferred income taxes 12,308 974 13,282
Losses (gains) from long-lived assets 926 926
Changes in operating assets and liabilities, net 8,495 (18,290) (20,084) (29,879)
------------ ------------ ------------ ------------ ------------
Net Cash Provided By (Used In) Operating
Activities (7,523) 64,981 870 58,328
INVESTING ACTIVITIES
Purchases of property and equipment (33,994) (33,994)
------------ ------------ ------------ ------------ ------------
Net Cash Used In Investing Activities (33,994) 0 (33,994)
FINANCING ACTIVITIES
Intercompany borrowings, contributions and
distributions 23,777 (23,791) 14
Payments on long-term debt and capital lease
obligations (24,164) (1,719) (25,883)
Proceeds from issuance of common stock 2,910 2,910
------------ ------------ ------------ ------------ ------------
Net Cash Provided By (Used In) Financing
Activities 2,523 (25,510) 14 (22,973)
Increase (Decrease) In Cash and Cash Equivalents (5,000) 5,477 884 1,361
Cash and cash equivalents at beginning of period 67,000 26,631 5,471 99,102
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $62,000 $32,108 $6,355 $100,463
============ ============ ============ ============ ============
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT MAY 5, 2001
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $59,100 ($13,079) $29,052 $75,073
Retained interest in accounts receivable 274,377 274,377
Merchandise inventories $3,660 1,565,646 6,715 1,576,021
Deferred income taxes, net 42,834 (14,177) 28,657
Intercompany borrowings 29,874 23,475 ($53,349)
Other current assets 65,347 930 66,277
------------ ------------ ------------ ------------ ------------
Total Current Assets 62,760 1,690,622 320,372 (53,349) 2,020,405
Property and Equipment, net 8,467 2,262,529 7,419 2,278,415
Goodwill and Intangibles, net 385,776 385,776
Other Assets 16,808 29,786 3,021 49,615
Deferred Income Taxes, net 173,816 173,816
Investment in and Advances to Subsidiaries 3,729,116 115,559 (3,844,675)
------------ ------------ ------------ ------------ ------------
Total Assets $3,817,151 $4,658,088 $330,812 ($3,898,024) $4,908,027
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $1,098 $368,433 $780 $370,311
Accrued expenses and other current liabilities 38,995 428,250 2,627 469,872
Intercompany borrowings (11,500) 34,975 29,874 ($53,349)
Current portion of long term debt 5,628 5,628
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 28,593 837,286 33,281 (53,349) 845,811
Long Term Debt 1,466,710 150,329 1,617,039
Other Long Term Liabilities 256 123,329 123,585
Investment by and Advances from Parent 3,547,144 297,531 (3,844,675)
Shareholders' Equity 2,321,592 2,321,592
------------ ------------ ------------ ------------ ------------
Total Liabilities and Shareholders' Equity $3,817,151 $4,658,088 $330,812 ($3,898,024) $4,908,027
============ ============ ============ ============ ============
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 5, 2001
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Net sales $3,997 $1,456,502 $3,851 $1,464,350
Costs and expenses (excluding depreciation and
amortization)
Cost of sales 2,473 911,270 4,046 917,789
Selling, general and administrative expenses 2,636 367,918 24,134 ($51,446) 343,242
Other operating expenses 834 140,348 666 141,848
Store preopening costs 582 582
Integration costs 1,123 1,123
Losses (gains) from longlived assets (312) (312)
---------- ---------- ---------- ---------- ----------
Operating income (loss) (1,946) 35,573 (24,995) 51,446 60,078
Other income (expense)
Finance charge income, net 51,446 (51,446)
Intercompany exchange fees (10,644) 10,644
Intercompany servicer fees 13,780 (13,780)
Equity in earnings of subsidiaries 35,197 7,095 (42,292)
Interest expense (29,603) (4,272) (726) (34,601)
Other income (expense), net (68) 291 223
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,580 41,823 22,589 (42,292) 25,700
Provision (benefit) for income taxes (12,277) 14,334 7,786 9,843
---------- ---------- ---------- ---------- ----------
Income before extraordinary item 15,857 27,489 14,803 (42,292) 15,857
Extraordinary gain on extinguishment of debt, net of
taxes 10,641 10,641
---------- ---------- ---------- ---------- ----------
Net income $26,498 $27,489 $14,803 ($42,292) $26,498
========== ========== ========== ========== ==========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 5, 2001
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $26,498 $27,489 $14,803 ($42,292) $26,498
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries (35,197) (7,095) 42,292
Extraordinary gain on extinguishment of debt (10,641) (10,641)
Depreciation and amortization 258 53,624 245 54,127
Provision for employee deferred compensation 1,569 1,569
Deferred income taxes 14,250 583 14,833
Losses (gains) from long lived assets (312) (312)
Changes in operating assets and liabilities, net 15,168 (102,191) (48,109) (135,132)
------------ ------------ ------------ ------------ ------------
Net Cash Provided By (Used In) Operating
Activities (2,345) (14,235) (32,478) (49,058)
INVESTING ACTIVITIES
Purchases of property and equipment (53,754) (947) (54,701)
Proceeds from the sale of assets 7,170 7,170
Proceeds from the sale of stores, net of
repurchased receivables 275,452 275,452
------------ ------------ ------------ ------------ ------------
Net Cash Provided by (Used In) Investing Activities 228,868 (947) 227,921
FINANCING ACTIVITIES
Intercompany borrowings, contributions and
distributions 188,546 (223,211) 34,665
Payments on term debt and capital lease
obligations (166,453) (1,349) (167,802)
Purchases and retirements of common stock (1,304) (1,304)
Proceeds from issuance of common stock 656 656
------------ ------------ ------------ ------------ ------------
Net Cash Provided By (Used In) Financing
Activities 21,445 (224,560) 34,665 (168,450)
Increase (Decrease) In Cash and Cash Equivalents 19,100 (9,927) 1,240 10,413
Cash and cash equivalents at beginning of period 40,000 (3,152) 27,812 64,660
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $59,100 ($13,079) $29,052 $75,073
============ ============ ============ ============ ============
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT FEBRUARY 2, 2002
(Dollar Amounts In Thousands)
Saks Guarantor NonGuarantor
Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $67,000 $26,631 $5,471 $99,102
Retained interest in accounts receivable 239,420 239,420
Merchandise inventories 3,349 1,292,529 1,295,878
Deferred income taxes, net 75,283 (14,714) 60,569
Intercompany borrowings 2,880 30,286 ($33,166)
Other current assets 74,960 74,960
------------ ------------ ------------ ------------ ------------
Total Current Assets 70,349 1,472,283 260,463 (33,166) 1,769,929
Property and Equipment, net 7,804 2,239,014 2,246,818
Goodwill and Intangibles, net 360,580 360,580
Other Assets 15,207 26,163 3,747 45,117
Deferred Income Taxes, net 173,077 173,077
Investment in and Advances to Subsidiaries 3,417,119 166,107 (3,583,226)
------------ ------------ ------------ ------------ ------------
Total Assets $3,510,479 $4,437,224 $264,210 ($3,616,392) $4,595,521
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $1,005 $281,745 $282,750
Accrued expenses and other current liabilities 21,979 476,933 55 498,967
Intercompany borrowings 5,490 24,796 2,880 ($33,166)
Current portion of long-term debt 5,061 5,061
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 28,474 788,535 2,935 (33,166) 786,778
Long-Term Debt 1,210,006 146,574 1,356,580
Other Long-Term Liabilities 562 180,164 180,726
Investment by and Advances from Parent 3,321,951 261,275 (3,583,226)
Shareholders' Equity 2,271,437 2,271,437
------------ ------------ ------------ ------------ ------------
Total Liabilities and Shareholders'
Equity $3,510,479 $4,437,224 $264,210 ($3,616,392) $4,595,521
============ ============ ============ ============ ============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, certain items from the
Company's Condensed Consolidated Statements of Income expressed as percentages
of net sales (numbers may not total due to rounding).
Three Months Ended
---------------------------
May 4, May 5,
2002 2001
---------------------------
Net sales 100.0% 100.0%
Costs and expenses:
Cost of sales (excluding depreciation and amortization) 62.4 62.7
Selling, general & administrative expenses 23.3 23.4
Other operating expenses 9.8 9.7
Store pre-opening costs 0.1 0.0
Integration charges - 0.1
Losses (gains) from long-lived assets 0.1 (0.0)
-------- --------
Operating income 4.4 4.1
Other income (expense):
Interest expense (2.2) (2.4)
Other income (expense), net 0.0 0.0
-------- --------
Income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle 2.2 1.8
Provision for income taxes 0.8 0.7
-------- --------
Income before extraordinary item and cumulative effect of a
change in accounting principle 1.4 1.1
Extraordinary gain, net of taxes 0.0 0.7
Cumulative effect of a change in accounting principle,
net of taxes (3.2) -
-------- --------
Net income (loss) -1.8% 1.8%
======== ========
THREE MONTHS ENDED MAY 4, 2002 COMPARED TO THREE MONTHS ENDED MAY 5, 2001
ITEM 2. MANAGEMENT'S DISCUSSION OF OPERATIONS
Operating income increased to $62.3 million for the three months ended May 4,
2002 from $60.1 million for the three months ended May 5, 2001. The increase of
$2.2 million was attributable to an increase in operating income at SDSG of $1.6
million and an increase in operating income at SFAE of $4.4 million, partially
offset by an increase of $3.8 million in costs not allocated to the business
segments.
The year-over-year increase in operating income at SDSG was primarily due to a
1.0% increase in comparable store sales, a decrease in markdowns and the
cessation of goodwill amortization and was partially offset by an increase in
insurance expense. The increase in operating income at SFAE was due primarily to
expense reductions of $3.6 million attributable to the reorganization
initiatives of the catalog and E-commerce operations. SFAE's comparable store
sales and markdowns were relatively flat year over year. The Company's overall
sales decline was associated with the cessation of the catalog operations and
store closings. Due to the lack of profit contribution from these businesses,
operating income was not materially impacted by the closings. The increase in
other costs and certain items not allocated to the business segments consisted
of $2.2 million of charges to complete the reorganization of Saks Direct, $1.6
million of other charges, primarily associated with the downsizing of corporate
and divisional management structure and the accelerated timing associated with
certain corporate expenses.
The Company believes through a combination of focused merchandising and
operational strategies coupled with improving economic conditions, it should
experience low to mid-single digit growth in comparable store sales.
Additionally, the Company anticipates sales growth of 1% to 2% per year
resulting from square footage growth related to new stores. The Company also
feels that if the merchandising and inventory management strategies are executed
properly combined with the anticipated effect of our investment in technology
and continued operational expense efficiencies or reductions, the operating
margin percent should improve.
NET SALES
For the three months ended May 4, 2002, total Company sales decreased $38.1
million, or 2.6%, versus the prior year period. Total sales for the three-month
period decreased by $7.1 million and $31.0 million at SDSG and SFAE,
respectively. The sales decline at SDSG was attributable to $21.4 million in
sales associated with nine stores sold to The May Department Stores Company in
the first quarter of 2001, offset by a comparable stores sales increase of 1.0%
and new store sales of $7.1 million. The sales decline at SFAE was primarily due
to $29.2 million resulting from the cessation of the catalog operations and $8.1
million attributable to store closings.
GROSS MARGIN
For the three months ended May 4, 2002, gross margin was $536.9 million, or
37.6% of net sales, compared to $546.6 million, or 37.3% of net sales, for the
three months ended May 5, 2001. The decline of $9.7 million was attributable to
the loss of $20.9 million in gross margin from the sale or closure of
underproductive stores and catalog operations, offset by $4.8 million of
incremental margin associated with new store additions and the balance
attributable to the comparable store sales increase and reduced markdowns from
the consolidated comparable store sales increase. The improvement in gross
margin rate was primarily due to less promotional activity and fewer
corresponding markdowns, primarily at SDSG.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SGA")
For the three months ended May 4, 2002, SGA was $332.8 million, or 23.3% of net
sales, compared to $343.2 million, or 23.4% of net sales, for the three months
ended May 5, 2001. The decrease of $10.4 million in expenses was largely due to
a reduction of $15.4 million from the reorganization of the Saks Direct
business, the absence of expenses associated with the sale or closure of
underproductive stores and various other cost reduction and reorganization
initiatives. These decreases were partially offset by $2.0 million in rising
health care and retirement expenses, $2.0 million of higher property and
casualty insurance premiums and expenses associated with new store additions and
comparable store expenses. The rate deterioration was primarily attributable to
a decline in expense leverage associated with the decline in sales.
OTHER OPERATING EXPENSES
For the three months ended May 4, 2002, other operating expenses were $140.0
million, or 9.8% of net sales, compared to $141.8 million, or 9.7% of net sales,
for the three months ended May 5, 2001. The decrease of $1.8 million was due to
the discontinuation of goodwill amortization, which represented $3.7 million,
partially offset by the net expense increases in deprecation and rental expenses
associated with new store additions, the remodel and expansion of comparable
stores and closed stores. The decline in expense leverage was principally due to
the inability to reduce fixed expenses, relative to the decline in total sales.
INTEGRATION CHARGES
For the three months ended May 4, 2002, there were no integration charges
compared to $1.1 million for the three months ended May 5, 2001. The 2001
charges were principally related to the consolidation of three SDSG southern
distribution centers.
LOSSES FROM LONG-LIVED ASSETS
For the three months ended May 4, 2002, the Company incurred losses from
long-lived assets of $0.9 million principally due to the write-off of fixed
assets related to the consolidation of various operating activities. For the
three months ended May 5, 2001, gains from long-lived assets of $0.3 million
primarily related to the disposition of store and distribution locations.
INTEREST EXPENSE
For the three months ended May 4, 2002, interest expense was $31.1 million, or
2.2% of net sales, compared to $34.6 million, or 2.4% of net sales, for the
three months ended May 5, 2001. The improvement was primarily the result of a
reduction in year-over-year average debt levels.
INCOME TAXES
The effective tax rates for the three months ended May 4, 2002 and May 5, 2001
were 37.5% and 38.3%, respectively. The decrease in the effective rate is
attributable to the discontinuation of non-deductible goodwill amortization.
EXTRAORDINARY ITEMS
The extraordinary gain for the three months ended May 4, 2002 resulted from the
repurchase of $24 million in senior notes and the recognition of gains related
to the prior termination of a related interest rate swap agreement. The
extraordinary gain for the three months ended May 5, 2001 related to the prior
period repurchases of $183 million in senior notes at a discount to the recorded
value.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
For the three months ended May 4, 2002, the Company recorded a non-cash charge
of $45.6 million for the write-off of non-deductible SFAE goodwill in accordance
with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets".
NET INCOME
Net income decreased from $26.5 million for the three months ended May 5, 2001
to a loss of $25.4 million for the three months ended May 4, 2002. The decrease
was primarily due to the cumulative effect of a change in accounting principle,
offset by the improvement in operating income and a reduction in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
The retained interest in accounts receivable, inventory, accounts payable and
debt balances fluctuate throughout the year due to the seasonal nature of the
Company's business.
Gross accounts receivable were $1,271.0 million and $1,302.2 million at May 4,
2002 and May 5, 2001, respectively. The decrease was primarily due to the
decline in total sales resulting from the disposition of various stores and the
catalog business.
Merchandise inventory balances at May 4, 2002 decreased from May 5, 2001 largely
due to a comparable stores inventory reduction of approximately 10% and the
elimination of inventory related to store closings and the discontinuation of
the catalog operations.
Property and equipment balances at May 4, 2002 decreased over May 5, 2001
balances due primarily to depreciation on existing assets during the last twelve
months, offset by capital expenditures related to new store additions and
investments in information technology, as well as expansions, replacements and
the remodeling of existing stores.
Goodwill and intangibles at May 4, 2002 decreased from May 5, 2001 largely due
to the write-off of SFAE goodwill associated with the adoption of SFAS 142 and
the write-off of the Bullock & Jones goodwill in connection with the
reorganization of Saks Direct.
CASH FLOW
The primary needs for cash are to acquire or construct new stores, renovate and
expand existing stores, to provide working capital for new and existing stores
and to service debt. The Company anticipates that cash generated from operating
activities, borrowings under its revolving credit agreement and maintaining a
proprietary credit card securitization program will be sufficient to meet its
financial commitments and fund opportunities for future growth.
Cash provided by (used in) operating activities was $58.3 million for the three
months ended May 4, 2002 and $(49.1) million for the three months ended May 5,
2001. Cash provided by operating activities principally represents income before
depreciation and amortization charges, losses from long-lived assets and changes
in working capital. The increase in 2002 from 2001 was primarily due to improved
working capital management, principally resulting from reduced inventories and
improved accounts payable leverage.
Cash (used in) provided by investing activities was $(34.0) million for the
three months ended May 4, 2002 and $227.9 million for the three months ended May
5, 2001. Cash used in investing activities principally consists of construction
of new stores and renovation and expansion of existing stores and investments in
support areas (e.g., technology, distribution centers, e-commerce
infrastructure). The change from "net cash provided by" in 2001 to "net cash
used in" in 2002 was primarily attributable to the $275.5 million of proceeds
from the sale of nine SDSG stores in early 2001.
Cash used in financing activities was $23.0 million for the three months ended
May 4, 2002 and $168.5 for the three months ended May 5, 2001. The decrease in
2002 from 2001 was largely attributable to the prior year utilization of cash
received from the sale of the nine SDSG stores to pay down debt.
CASH BALANCES AND LIQUIDITY
The Company's primary sources of short-term liquidity are comprised of cash on
hand and availability under its $700 million revolving credit facility. At May
4, 2002 and May 5, 2001, the Company maintained cash and cash equivalent
balances of $100.5 million and $75.1 million, respectively. These amounts
consisted principally of invested cash and approximately $30 million of store
operating cash. At May 4, 2002 the Company had no funded borrowings under its
$700 million revolving credit facility, and had $114.9 million in unfunded
letters of credit representing utilization. Unutilized availability under the
facility was $585.1 million. The amount of cash on hand issued under the
facility and availability under the Company's revolving credit agreement are
influenced by a number of factors, including sales, retained accounts receivable
and inventory levels, vendor terms, the level of capital expenditures, cash
requirements related to financing instruments, and the Company's tax payment
obligations, among others.
Another source of liquidity for the Company has been the securitization of
proprietary credit card receivables issued by National Bank of the Great Lakes
("NBGL"), the Company's national credit card bank subsidiary, into the
asset-backed securitization market. At May 4, 2002 the Company had $1,085
million of receivables sold, $1,011 million of which is comprised of three
series having fixed amounts outstanding that are due at maturity, and $74
million of which is comprised of outstanding amounts under committed
bank-sponsored conduit programs. The bank-sponsored conduit programs, which are
annually renewable, provide for funding of up to $315 million of receivables. An
aggregate of $577 million in asset-backed instruments sold to investors will
mature in 2002. The remaining $434 million in asset-backed instruments held by
investors will mature in 2006. The Company believes it will be successful in
amortizing the customer payment to satisfy the principal due on the maturing
certificates and new receivables will be sold through new asset-backed
instruments. However, to do so, the Company may be subject to higher pricing or
more restrictive terms than those it currently enjoys. Factors that may
influence the pricing, terms and the Company's overall access to the
asset-backed securitization market include the general economic environment,
liquidity in the asset-backed securitization market, the quality of NBGL's
accounts receivable portfolio and the Company's operating performance, among
others.
CAPITAL STRUCTURE
At May 4, 2002, the Company's capital and financing structure was comprised of
(1) senior unsecured notes, (2) the $700 million secured revolving credit
facility, (3) the sale of beneficial interest in proprietary credit card
receivables, (4) capital and operating leases and (5) real estate mortgage
financing. Total indebtedness at May 4, 2002 was $1,336 million, representing a
decrease of $287 million from the prior period balance of $1,623 million. The
decrease in debt reflects a reduction in working capital needs, lower capital
expenditures and the utilization of operating cash flow to pay down debt. This
reduction in debt also reflects a decline in the debt to total capitalization
percentage from 41.1% at May 5, 2001 to 37.2% at May 4, 2002.
The Company had $ 1,186 million of senior unsecured senior notes outstanding as
of May 4, 2002 comprised of six separate series having maturities ranging from
2004 to 2019. The terms of each senior note call for all principal to be repaid
at maturity. The senior notes have substantially identical terms except for the
maturity dates and the interest coupons payable to investors. Each senior note
contains limitations on the amount of secured indebtedness the Company may
incur. During the three months ended May 4, 2002, the Company repurchased $24
million in senior notes, through open market repurchases, resulting in an
extraordinary gain on debt extinguishment of $0.4 million, net of taxes, related
to the prior termination of a related interest rate swap agreement.
At May 4, 2002 the Company had $138 million in capitalized operating leases
covering various properties and pieces of equipment. The terms of the
capitalized leases provide the lessor with a security interest in the asset
being leased and require the Company to make periodic lease payments,
aggregating between $4 million and $6 million per year.
The Company's other principal commercial commitments are comprised of (1)
guarantee of $20 million residual value of leased transportation equipment, (2)
short-term merchandise purchase commitments, (3) short-term construction
commitments, (4) common area maintenance costs and (5) contingent rent payments.
Substantially all of the Company's merchandise purchase commitments are
cancelable up to several weeks prior to a date that precedes the vendor's
scheduled shipment date.
PROPRIETARY CREDIT CARDS RECEIVABLE SECURITIZATION
The Company's proprietary credit cards are owned and issued by National Bank of
the Great Lakes ("NBGL"), a wholly owned subsidiary of the Company. Receivables
generated from the sale of merchandise on these credit cards are sold by NBGL to
another wholly owned subsidiary, Saks Credit Corporation ("SCC"). SCC transfers
the receivables to a trust, Saks Credit Card Master Trust ("SCCMT"), which sells
certificates representing an undivided beneficial interest in the pool of
receivables held in SCCMT to third-party investors. The certificates have
maturity dates and represent an ownership in the cash generated by the credit
card receivables. The Company retains an interest in the receivables held in
SCCMT, which is subordinate to the sold certificates in its rights to the cash
flows of the receivables held in SCCMT.
At May 4, 2002, SCCMT held credit card receivables aggregating $1,253.5 million,
while certificates of ownership aggregating $1,085.4 million were sold to
third-party investors. Prior to maturity of the certificates, the Company has
access to the cash generated by the receivables net of allocations of cash to
investors representing the coupon interest rate on the beneficial interest. Upon
maturity, the certificate owners are repaid with cash collections of principal
payments made by customers until which time their ownership interests are
satisfied, "paid down," after which the Company receives all such cash to
recover its residual ownership interest in the pool of receivables. During the
period beginning in July 2002 and continuing through November 2002, certificates
representing $713.5 million of the outstanding certificates at May 4, 2002 will
mature and will be required to be paid down.
Consistent with past practices, the Company anticipates that selling new
certificates to investors will be sufficient to maintain funding of proprietary
credit card receivables under terms that may be subject to higher pricing or
more restrictive than those currently in place. Although maturing certificates
are repaid with collections of principal payments accumulated prior to maturity,
new receivables created under the Company's proprietary credit cards have
historically caused the aggregate pool of receivables to remain relatively
constant or to grow at a slow rate. As a result, the aggregate amount of
certificates sold has remained relatively constant or grown commensurate with
the pool of receivables held in SCCMT.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, which addresses a variety of
accounting practices. The items that are most relevant to the Company include
the removal of the requirement to classify all gains or losses from the
extinguishment of debt as extraordinary and a requirement that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
standard is effective for the Company's fiscal year beginning in February 2003.
The Company does not expect that the standard will have a significant impact on
the Company's financial position or results of operations.
FORWARD-LOOKING INFORMATION
Certain information presented in this report addresses future results or
expectations and is considered "forward-looking" information within the
definition of the Federal securities laws. Forward-looking statements can be
identified through the use of words such as "may," "will," "intend," "plan,"
"project," "expect," "anticipate," "should," "would," "believe," "estimate,"
"contemplate," "possible," "attempts", "seeks", and "point." The
forwarding-looking information is premised on many factors. Actual consolidated
results might differ materially from projected forward-looking information if
there are any material changes in management's assumptions.
The forward-looking information and statements are based on a series of
projections and estimates that involve risks and uncertainties. Potential risks
and uncertainties include such factors as: the level of consumer spending for
apparel and other merchandise carried by the Company and its ability to respond
quickly to consumer trends; adequate and stable sources of merchandise; the
competitive pricing environment within the department and specialty store
industries as well as other retail channels; favorable customer response to
planned changes in customer service formats; the effectiveness of planned
advertising, marketing and promotional campaigns; favorable customer response to
increased relationship marketing efforts and proprietary credit card loyalty
programs; appropriate inventory management; effective and timely execution of
home office consolidations; reduction of corporate overhead; effective
operations of NBGL's credit card operations; and changes in interest rates. For
additional information regarding these and other risk factors, please refer to
Exhibit 99.1 of the Company's Form 10-K for the year ended February 2, 2002
filed with the Securities and Exchange Commission, which may be accessed via
EDGAR through the Internet at www.sec.gov.
The Company undertakes no obligation to correct or update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Readers are advised, however, to consult any further disclosures the Company
makes on related subjects in its reports with the Securities and Exchange
Commission and in its press releases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk primarily arises from changes in interest
rates and the U.S. equity, securitization and bond markets. The effects of
changes in interest rates on earnings generally have been small relative to
other factors that also affect earnings, such as sales and operating margins.
The Company seeks to manage exposure to adverse interest rate changes through
its normal operating and financing activities, and if appropriate, through the
use of derivative financial instruments. Although the Company maintains no
derivative financial instruments at May 4, 2002, such instruments can be used as
part of an overall risk management program in order to manage the costs and
risks associated with various financial exposures. The Company does not enter
into derivative instruments for trading purposes, as defined in risk management
policies.
The effects of changes in the U.S. equity and bond markets serve to increase or
decrease the value of pension plan assets, resulting in increased or decreased
cash funding by the Company. The Company seeks to manage exposure to adverse
equity and bond returns by maintaining diversified mutual fund investment
portfolios and utilizing professional managers. The Company maintains no
derivative financial instruments as a part of the investment risk management
program.
SAKS INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits.
(a) Exhibits
There are no exhibits to this filing.
(b) Form 8-K Reports.
The following 8-K's were filed during the quarter ended May 4, 2002:
Date Filed Subject
---------- -------
February 8, 2002 Appointment of the Company's stock
transfer agent and registrar.
April 15, 2002 Approval of a First Amended
and Restated Rights Agreement
appointing the Company's new rights
agent.
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.
SAKS INCORPORATED
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Registrant
December 27, 2002
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Date
/s/ Douglas E. Coltharp
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Douglas E. Coltharp
Executive Vice President,
Chief Financial Officer and
Principal Financial Officer