UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(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 Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
For Quarter Ended: October 31, 1998
Commission File Number: 1-13113
Exact name of registrant as specified in its charter:
SAKS INCORPORATED (formerly PROFFITT'S, INC.)
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 -- 143,327,976 shares as of October
31, 1998
SAKS INCORPORATED
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets October
31, 1998, January 31, 1998, and November 1, 1997. . . . . .3
Condensed Consolidated Statements of Income --
Three and Nine Months Ended October 31, 1998 and
November 1, 1997. . . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows
-- Nine Months Ended October 31, 1998 and
November 1, 1997. . . . . . . . . . . . . . . . . . . . . .5
Notes to Condensed Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 28
SAKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, November 1,
1998 January 31, 1997
(unaudited) 1998 (unaudited)
----------- ----------- -------------
ASSETS
Current assets
Cash and cash equivalents $3,937 $50,864 $37,651
Trade accounts receivable 182,898 412,209 380,324
Merchandise inventories 1,768,242 1,244,682 1,562,152
Other current assets 77,301 111,621 89,503
Deferred income taxes 12,593 71,814 19,449
--------- --------- ---------
Total current assets 2,044,971 1,891,190 2,089,079
Property and equipment, net 2,061,741 1,725,979 1,658,486
Goodwill and intangibles, net 518,275 327,307 360,802
Deferred income taxes 345,055 257,848
Other assets 73,376 67,929 73,807
--------- --------- ---------
TOTAL ASSETS $5,043,418 $4,270,253 $4,182,174
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $546,752 $333,794 $582,283
Accrued expenses and other current
liabilities 484,437 454,034 355,313
Current portion of long-term debt 12,632 13,058 43,266
--------- --------- ---------
Total current liabilities 1,043,821 800,886 980,862
Senior debt 1,692,538 1,093,806 1,069,797
Deferred income taxes 31,123
Other long-term liabilities 148,421 144,068 140,879
Subordinated debt 276,000 286,964 387,334
Shareholders' equity 1,882,638 1,944,529 1,572,179
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $5,043,418 $4,270,253 $4,182,174
========= ========= =========
See notes to condensed consolidated financial statements.
SAKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
10/31/98 11/1/97 10/31/98 11/1/97
----------- ----------- ----------- -----------
Net sales $1,472,817 $1,417,041 $4,169,163 $3,907,510
Costs and expenses:
Cost of sales 988,769 903,197 2,750,189 2,540,006
Selling, general and admin-
istrative expenses 345,947 304,471 934,192 846,942
Other operating expenses 124,134 108,049 353,090 311,900
Store pre-opening costs 3,130 7,569 6,128 12,804
Merger, restructuring and
integration costs 92,777 (1,830) 98,728 1,272
Loss on long-lived assets 17,096 161 18,951 191
Year 2000 expenses 951 343 5,078 4,705
ESOP expenses 7,938 9,470
--------- --------- --------- ---------
Operating income (loss) (99,987) 87,143 2,807 180,220
Other income (expense):
Interest expense (27,133) (29,379) (76,425) (86,876)
Other income (expense), net (18,407) (707) (17,653) (318)
--------- --------- --------- ---------
Income (loss) before provision
for income taxes (145,527) 57,057 (91,271) 93,026
Provision (benefit) for income
taxes (39,373) 17,451 (16,223) 32,956
--------- --------- --------- ---------
Income (loss) before extra-
ordinary loss (106,154) 39,606 (75,048) 60,070
Extraordinary loss on early
extinguishment of debt, net
of taxes 21,556 612 21,890 5,084
--------- --------- --------- ---------
NET INCOME (LOSS) ($127,710) $38,994 ($96,938) $54,986
========= ========= ========= =========
Basic earnings (loss) per share:
Income (loss) before extra-
ordinary loss ($0.74) $0.29 ($0.53) $0.44
Extraordinary loss (0.15) (0.01) (0.15) (0.04)
--------- --------- --------- ---------
Income (loss) ($0.89) $0.28 ($0.68) $0.40
========= ========= ========= =========
Diluted earnings (loss) per share:
Income (loss) before extra-
ordinary loss ($0.74) $0.28 ($0.53) $0.43
Extraordinary loss (0.15) (0.01) (0.15) (0.03)
--------- --------- --------- ---------
Net income (loss) ($0.89) $0.27 ($0.68) $0.39
========= ========= ========= =========
Weighted average common shares:
Basic 143,289 138,009 142,631 136,369
Diluted 143,289 143,983 142,631 139,727
See notes to condensed consolidated financial statements.
SAKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
---------------------------
October 31, November 1,
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income (loss) ($96,938) $54,986
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 111,434 99,695
Asset write-offs 43,951 191
Extraordinary loss on extinguishment of debt 8,781 3,352
ESOP expenses 8,786
Deferred income taxes (27,986) 7,123
Other 3,379
Changes in operating assets and liabilities, net 88,256 (186,494)
----------- -----------
Net cash provided by (used in) operating activities 127,498 (8,982)
INVESTING ACTIVITIES
Purchases of property and equipment, net (300,488) (249,707)
Proceeds from sale of assets 2,500 26,077
Acquisition of Dillard's stores, Brody's, and Bullock &
Jones (484,076)
----------- -----------
Net cash used in investing activities (782,064) (223,630)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 1,081,800 122,446
Payments on long-term debt and capital lease obligations (235,538) (150,675)
Net borrowings (repayments) under credit and receivables
facilities (261,750) 203,689
Purchase and retirement of common shares (474) (13,095)
Proceeds from issuance of common shares 23,601 22,289
ESOP loan repayment 9,778
Payments to preferred and common shareholders (1,124)
----------- -----------
Net cash provided by financing activities 607,639 193,308
Decrease in cash and cash equivalents (46,927) (39,304)
Cash and cash equivalents at beginning of period 50,864 76,955
----------- -----------
Cash and cash equivalents at end of period $3,937 $37,651
=========== ===========
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
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 the 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 and nine month periods ended October 31, 1998
are not necessarily indicative of the results that may be expected
for the year ending January 30, 1999. The financial statements
include the accounts of Saks Incorporated (the "Company;" formerly
Proffitt's, Inc.) and its subsidiaries, including its special
purpose receivables financing subsidiaries. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report for the
year ended January 31, 1998 as restated and filed on Form 8-K on
November 30, 1998.
The accompanying balance sheet at January 31, 1998 has been derived
from the audited financial statements at that date.
NOTE 2 -- BUSINESS COMBINATIONS
Effective September 17, 1998, Proffitt's, Inc. combined its
business with Saks Holdings, Inc. ("SHI"), the holding company of
Saks & Company which did business as Saks Fifth Avenue, Off 5th,
Folio, and Bullock & Jones. The merger has been accounted for as
a pooling-of-interests, and accordingly, the consolidated financial
statements have been restated for the prior periods to include the
results of operations, financial position, and cash flows of SHI.
In conjunction with the merger, Proffitt's, Inc. changed its
corporate name to Saks Incorporated.
Separate results of the combined entities were as follows:
Three Months Ended Nine Months Ended
---------------------- ---------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
-------- -------- -------- --------
Revenue
Proffitt's $896,166 $873,974 $2,506,442 $2,394,530
SHI 576,651 543,067 1,662,721 1,512,980
----------- ----------- ----------- -----------
Total $1,472,817 $1,417,041 $4,169,163 $3,907,510
=========== =========== =========== ===========
Extraordinary Item
Proffitt's $11,984 $612 $12,318 $1,732
SHI 9,572 9,572 3,352
----------- ----------- ----------- -----------
Total $21,556 $612 $21,890 $5,084
=========== =========== ============ ===========
Net Income (Loss)
Proffitt's $(16,654) $15,356 $18,247 $35,514
SHI (111,056) 23,638 (115,185) 19,472
----------- ----------- ------------ ----------
Total $(127,710) $38,994 $(96,938) $54,986
=========== =========== ============= ==========
The net losses for the three and nine month periods ended October
31, 1998 include merger, restructuring and integration costs
related to the SHI merger of approximately $86.5 million of which
approximately $28.6 million and $57.9 million were direct expenses
of Proffitt's and SHI, respectively.
Effective January 31, 1998, immediately before the Company's prior
fiscal year end, the Company combined its business with Carson
Pirie Scott & Co. ("Carson's"), a retail department store chain
currently operating 51 department and 4 free-standing furniture
stores in the Midwest. The merger has been accounted for as a
pooling-of-interests, and accordingly, the consolidated financial
statements have been restated for the prior year to include the
results of operations, financial position, and cash flows of
Carson's. Prior to the merger with the Company, Carson's financed
its trade accounts receivables with a $200 million receivables
facility. In connection with the merger, the Carson's receivables
facility was terminated and the $125 million outstanding balance
was repaid in February 1998 with the proceeds from the sale of
Carson's receivables under the Company's existing receivables
securitization agreements.
On March 6, 1998, the Company acquired Brody Brothers Dry Goods
Company, Inc. ("Brody's"), which operated six department stores in
North Carolina. Consideration was paid in cash and was immaterial
to the Company. Four of the Brody's locations were converted into
Proffitt's stores, and two stores were permanently closed. The
operations of these stores are reflected in the financial
statements subsequent to the date of the acquisition.
On August 2, 1998, SHI purchased the assets of Bullock & Jones,
which operates a catalog operation and one store in San Francisco.
Consideration was paid in cash and was immaterial to the Company.
The operations of Bullock & Jones are reflected in the financial
statements subsequent to the date of the acquisition.
On October 2, 1998, the Company acquired from Dillard's, Inc. the
real and personal property of 14 store locations, along with
certain inventory and accounts receivable. Consideration was paid
in cash and totaled approximately $440 million. The acquired
stores were converted into the Company's stores as follows:
Proffitt's (6), Parisian (5), McRae's (1), Younkers (1), and
Herberger's (1). The operations of these stores are reflected in
the financial statements subsequent to the date of the acquisition.
An additional store location was purchased from Dillard's in
December 1998.
The respective purchase price for each of the Brody's, Bullock &
Jones, and Dillard's stores acquisition has been allocated first to
identifiable tangible assets and liabilities based on preliminary
estimates of their fair values, with the remainder allocated to
goodwill and other intangible assets to be identified. The excess
of the cost of acquiring these businesses over the fair value of
the acquired tangible assets of approximately $200 million is
included in "goodwill and intangibles" on the balance sheet.
Amortization of goodwill and intangibles is provided on a
straight-line basis over the respective lives of the various
intangible assets ranging from 10 to 40 years.
For the three and nine months ended October 31, 1998 and November
1, 1997, the Company incurred certain integration costs related to
its business combinations with Younkers (completed February 3,
1996), Parisian (completed October 11, 1996), and Herberger's
(completed February 1, 1997). The Company also incurred merger,
restructuring and integration costs resulting from its business
combinations with Carson's, Brody's, Bullock & Jones, and SHI.
Merger, restructuring, and integration costs incurred in the three
and nine month periods ended October 31, 1998 and November 1, 1997
(before income taxes) were as follows (in millions):
Three Months Nine Months
Ended Ended
-------------------- -------------------
10/31/98 11/1/97 10/31/98 11/1/97
-------- -------- -------- -------
Related to SHI merger:
Merger transaction costs,
principally investment banking,
legal, and other direct merger
costs $45.0 $45.0
Severance and related costs 9.2 9.2
Conversion and consolidation of
systems and administrative
operations 7.3 7.3
Abandonment of duplicate assets 25.0 25.0
Related to integration of previously
acquired businesses 6.3 ($1.8) 12.2 $1.3
-------- ------- ------ ------
Total $92.8 ($1.8) $98.7 $1.3
======= ====== ===== =====
A reconciliation of the aforementioned charges to the amounts of
merger, restructuring, and integration (MRI) costs remaining unpaid at
October 31, 1998 is as follows (in thousands):
Amounts unpaid at January 31, 1998 related to prior
MRI events $ 25,094
Adjustments to amounts unpaid at January 31, 1998 0
Amounts related to continuing integration efforts
of prior mergers for the nine months ended October
31, 1998 12,290
Amounts related to SHI merger 86,438
Amounts paid or assets written off during
the nine months ended October 31, 1998 (66,699)
--------
Amounts unpaid at October 31, 1998 $ 57,123
========
The Compoents of the aforementioned unpaid amounts are as
follows (in thousands):
January 31, October 31,
1998 1998
----------- -----------
Direct Merer Costs:
Carson's $ 5,750 $ 650
SFA -- 31,200
Severance paid on last day worked:
Carson's 5,800 2,000
SFA -- 6,000
Continuing integration efforts 595 --
Severance paid over contractual periods:
Carson's 4,000 4,000
Continuing integration efforts 2,400 1,995
Contractual obligations to be paid within
1 year of merger -- 5,000
Contractual obligations with extended payment
terms (i.e. rents on abandoned leases,
payments on abandoned contracts) 4,500 4,500
Other (includes all merger and integration
efforts) 2,049 1,778
------- -------
$25,094 $57,123
"Asset write-offs" of $44 million in the October 31, 1998 Statement of
Cash Flows is comprised principally of the non cash charge associated
with losses from long lived assets of $17.1 million and the $25 million
write-off of duplicate information technology assets reflected
in merger, restructuring and integration costs.
NOTE 3 - EARNINGS PER COMMON SHARE
Calculations of earnings per common share ("EPS") for the
three and nine months ended October 31, 1998 and November
1, 1997 are as follows: (net income and shares in thousands)
For the Quarter Ended For the Quarter Ended
October 31, 1998 November 1, 1997
------------------------------- ------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income (a) Shares Amount Income (a) Shares Amount
--------- --------- --------- - --------- --------- --------
Basis EPS $(106,154) 143,289 $ (0.74) $ 39,606 138,009 $ 0.29
Effect of dilutive stock
options (based on the
treasury stock method
using the average price) -- 458 5,974
---------- --------- --------- --------- -------- -------
Diluted EPS $(106,154) 143,289 $ (0.74) $ 40,064 143,983 $ 0.28
========== ======== ========= ========= ======== ========
For the Nine Months Ended For the Nine Months Ended
October 31, 1998 November 1, 1997
------------------------------- ------------------------------
Weighted Weighted
Average Per Share Average Per Share
Income (a) Shares Amount Income (a) Shares Amount
--------- --------- --------- --------- --------- -------
Basic EPS $ (75,048) 142,631 $ (0.53) $ 60,070 136,369 $ 0.44
Effect of dilutive stock
options (based on the
treasury stock method
using the average price) -- 3,358
---------- -------- --------- --------- -------- --------
Diluted EPS $ (75,048) 142,631 $ (0.53) $ 60,070 139,727 $ 0.43
========== ======== ========= ========= ======== ========
(a) Income (loss) before extraordinary items.
NOTE 4 -- CONTINGENCIES AND SUBSEQUENT EVENT
The Company is involved in several legal proceedings arising from
its normal course of business activities, and accruals for losses
have been established where appropriate. Management believes that
none of these legal proceedings will have an on-going material
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
On December 9, 1998, the United States Bankruptcy Court for the
Eastern District of Wisconsin approved a settlement agreement
resolving the Chapter 11 bankruptcy litigation between Carson's and
Bank One, Wisconsin. Bank One agreed to pay Carson's $42.5 million
to resolve all claims of Carson's. The Bank One payment is net of
any Bank One claim under the plan of reorganization. Pursuant to
Carson's 1993 plan of reorganization, the settlement payment is not
distributable to Carson's Chapter 11 creditors.
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which
requires that all derivative financial instruments be recorded on
the financial statements. SFAS No. 133 is effective for the
Company in the first fiscal quarter of 2000, and the Company is in
the process of ascertaining the impact that this new standard will
have on its financial statements.
NOTE 6 -- 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 wholly-owned subsidiaries of Saks Incorporated, except for
Proffitt's Credit Corporation ("PCC"), Younkers Credit Corporation
("YCC"), the National Bank of the Great Lakes ("NBGL"), SHI real
estate financing subsidiary trusts ("REMIC trusts"), and Saks
Finance Company ("SFC")); and 3) on a combined basis, PCC, YCC,
NBGL, REMIC Trusts, and SFC, the only non-guarantor subsidiaries of
the Senior Notes. Separate financial statements of the guarantor
subsidiaries are not presented because the guarantors are jointly,
severally, and unconditionally liable under the guarantees, and the
Company believes the condensed consolidating financial statements
are more meaningful in understanding the financial position of the
guarantor subsidiaries. Saks Incorporated is comprised of
substantially all of Proffitt's and Younkers' store operations and
certain corporate management and financing functions. Borrowings
and the related interest expense under Saks Incorporated's
revolving credit facility are allocated to Saks Incorporated and
the guaranty subsidiaries under arrangements among Saks
Incorporated and the subsidiaries.
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT OCTOBER 31, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
ASSETS
Current Assets
Cash and cash equivalents $10,022 ($49,792) $43,707 $3,937
Trade accounts receivable 53 227 182,618 182,898
Merchandise inventories 308,183 1,460,059 1,768,242
Deferred income taxes 6,901 2,281 3,411 12,593
Intercompany borrowings 25,188 ($25,188)
Other current assets 16,091 57,762 3,448 77,301
---------- ---------- --------- --------- ----------
Total Current Assets 366,438 1,470,537 233,184 (25,188) 2,044,971
Property and Equipment, net 283,902 1,192,435 585,404 2,061,741
Goodwill and Intangibles, net 98,386 419,889 518,275
Other Assets 4,421 45,344 23,611 73,376
Deferred Income Taxes (16,291) 361,346 345,055
Investment in and Advances
to Subsidiaries 2,593,867 1,433,860 (4,027,727)
---------- ---------- --------- ---------- ----------
Total Assets $3,330,723 $4,923,411 $842,199 ($4,052,915) $5,043,418
=========== =========== ========= ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $85,226 $461,526 $546,752
Accrued expenses and other
current liabilities 41,773 413,904 $28,760 484,437
Intercompany borrowings 25,188 ($25,188)
Current portion of long-
term debt 452 12,180 12,632
---------- ---------- --------- --------- ----------
Total Current Liabilities 127,451 887,610 53,948 (25,188) 1,043,821
Senior Debt 1,293,006 163,691 235,841 1,692,538
Other Long-Term Liabilities 27,628 119,018 1,775 148,421
Subordinated Debt 276,000 276,000
Investment by and Advances
from Parent 3,477,092 550,635 (4,027,727)
Shareholders' Equity 1,882,638 1,882,638
---------- ---------- --------- --------- ----------
Total Liabilities and
Shareholders' Equity $3,330,723 $4,923,411 $842,199 ($4,052,915) $5,043,418
========== ========== ========== =========== ==========
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT JANUARY 31, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
ASSETS
Current Assets
Cash and cash equivalents $15,405 ($4,594) $40,053 $50,864
Trade accounts receivable 113 273 411,823 412,209
Merchandise inventories 171,212 1,073,470 1,244,682
Deferred income taxes 6,797 58,570 6,447 71,814
Intercompany borrowings 30,715 90,293 ($121,008)
Other current assets 6,777 98,292 6,552 111,621
---------- ---------- --------- --------- ----------
Total Current Assets 231,019 1,316,304 464,875 (121,008) 1,891,190
Property and Equipment, net 186,266 953,642 586,071 1,725,979
Goodwill and Intangibles, net 7,340 319,967 327,307
Other Assets 2,297 39,731 25,901 67,929
Deferred Income Taxes (8,683) 266,531 257,848
Investment in and Advances
to Subsidiaries 1,959,326 1,352,541 (3,311,867)
---------- ---------- --------- --------- ----------
Total Assets $2,377,565 $4,248,716 $1,076,847 ($3,432,875) $4,270,253
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $39,713 $294,081 $333,794
Accrued expenses and other
current liabilities 45,563 380,800 $27,671 454,034
Intercompany borrowings 121,008 ($121,008)
Current portion of long-
term debt 452 12,606 13,058
---------- ---------- --------- --------- ----------
Total Current Liabilities 85,728 687,487 148,679 (121,008) 800,886
Senior Debt 336,545 331,420 425,841 1,093,806
Other Long-Term Liabilities 10,763 131,476 1,829 144,068
Subordinated Debt 286,964 286,964
Investment by and Advances
from Parent 2,811,369 500,498 (3,311,867)
Shareholders' Equity 1,944,529 1,944,529
---------- ---------- --------- --------- ----------
Total Liabilities and
Shareholders' Equity $2,377,565 $4,248,716 $1,076,847 ($3,432,875) $4,270,253
=========== =========== =========== =========== ===========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
Net sales $194,349 $1,278,468 $1,472,817
Costs and expenses
Cost of sales 120,116 868,653 988,769
Selling, general and
administrative expenses 36,802 337,387 $21,390 ($49,632) 345,947
Other operating expenses 16,661 115,759 (8,286) 124,134
Store pre-opening costs 618 2,512 3,130
Merger, restructuring and
integration costs 31,427 61,350 92,777
Losses from long-lived
assets 1 17,095 17,096
Year 2000 expenses 951 951
---------- ---------- --------- --------- ----------
Operating income (loss) (11,276) (125,239) (13,104) 49,632 (99,987)
Other income (expense)
Finance charge income, net 49,632 (49,632)
Intercompany gain (loss) on
sale of receivables (1,654) (2,485) 4,139
Intercompany servicer fees 7,879 (7,879)
Equity in earnings (losses)
of subsidiaries (89,566) (551) 90,117
Interest expense, net (3,400) (18,041) (5,692) (27,133)
Other income (expense), net (9,742) (8,665) (18,407)
---------- ---------- --------- --------- ----------
Income (loss) before provision
for income taxes and extra-
ordinary item (115,638) (147,102) 27,096 90,117 (145,527)
Provision (benefit) for
income taxes 88 (48,771) 9,310 (39,373)
---------- ---------- --------- --------- ----------
Income (loss) before extra-
ordinary item (115,726) (98,331) 17,786 90,117 (106,154)
Extraordinary item, net
of taxes 11,984 2,670 6,902 21,556
---------- ---------- --------- --------- ----------
Net income (loss) ($127,710) ($101,001) $10,884 $90,117 ($127,710)
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
Net sales $532,181 $3,636,982 $4,169,163
Costs and expenses
Costs and expenses 338,945 2,411,244 2,750,189
Selling, general and
administrative expenses 107,373 886,489 $65,439 ($125,109) 934,192
Other operating expenses 44,469 334,922 (26,301) 353,090
Store pre-opening costs 1,242 4,886 6,128
Merger, restructuring and
integration costs 35,374 63,354 98,728
Losses from long-lived
assets 357 18,594 18,951
Year 2000 expenses 884 4,194 5,078
---------- ---------- --------- --------- ----------
Operating income (loss) 3,537 (86,701) (39,138) 125,109 2,807
Other income (expense)
Finance charge income, net 125,109 (125,109)
Intercompany gain (loss)
on sale of receivables (4,385) (15,064) 19,449
Intercompany servicer fees 20,819 (20,819)
Equity in earnings (losses)
of subsidiaries (65,120) 12,562 52,558
Interest expense, net (6,367) (47,943) (22,115) (76,425)
Other income (expense),
net (9,738) (7,915) (17,653)
---------- ---------- --------- --------- ----------
Income (loss) before pro-
vision for income taxes
and extraordinary item (82,073) (124,242) 62,486 52,558 (91,271)
Provision (benefit) for
income taxes 2,881 (41,213) 22,109 (16,223)
---------- ---------- --------- --------- ----------
Income (loss) before extra-
ordinary item (84,954) (83,029) 40,377 52,558 (75,048)
Extraordinary item, net of
taxes 11,984 3,004 6,902 21,890
---------- ---------- --------- --------- ----------
Net income (loss) ($96,938) ($86,033) $33,475 $52,558 ($96,938)
========== ========== ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED NOVEMBER 1, 1997
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
Net sales $186,710 $1,230,331 $1,417,041
Costs and expenses
Cost of sales 117,839 785,358 903,197
Selling, general and
administrative expenses 35,668 286,042 $19,171 ($36,410) 304,471
Other operating expenses 14,749 101,749 (8,449) 108,049
Store pre-opening costs 7,569 7,569
Merger, restructuring and
integration costs (1,830) (1,830)
Losses from long-lived
assets (3) 164 161
Year 2000 expenses 343 343
ESOP expenses 7,938 7,938
---------- ---------- --------- --------- ----------
Operating income (loss) 18,457 42,998 (10,722) 36,410 87,143
Other income (expense)
Finance charge income, net 36,410 (36,410)
Intercompany gain (loss) on
sale of receivables (2,219) (6,136) 7,231 1,124
Intercompany servicer fees 3,495 (3,495)
Equity in earnings of
subsidiaries 31,998 14,480 (46,478)
Interest expense, net (2,983) (16,252) (10,144) (29,379)
Other income (expense), net (135) (571) (1) (707)
---------- ---------- --------- --------- ----------
Income before provision for
income taxes and extra-
ordinary item 45,118 38,014 19,279 (45,354) 57,057
Provision for income taxes 6,124 8,156 2,720 451 17,451
---------- ---------- --------- --------- ----------
Income before extraordinary
item 38,994 29,858 16,559 (45,805) 39,606
Extraordinary item, net of
taxes 612 612
---------- ---------- --------- --------- ----------
Net income $38,994 $29,246 $16,559 ($45,805) $38,994
======== ======== ======== ======== ========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED NOVEMBER 1, 1997
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
Net sales $496,667 $3,410,843 $3,907,510
Costs and expenses
Cost of sales 318,702 2,221,304 2,540,006
Selling, general and admin-
istrative expenses 112,558 796,779 $50,762 ($113,157) 846,942
Other operating expenses 39,389 298,492 (25,981) 311,900
Store pre-opening costs 57 12,747 12,804
Merger, restructuring and
integration costs 98 1,174 1,272
Losses from long-lived
assets (8) 199 191
Year 2000 expenses 4,705 4,705
ESOP expenses 9,470 9,470
---------- ---------- --------- --------- ----------
Operating income (loss) 25,871 65,973 (24,781) 113,157 180,220
Other income (expense)
Finance charge income, net 113,157 (113,157)
Intercompany gain (loss) on
sale of receivables (3,262) (15,137) 18,399
Intercompany servicer fees 9,701 (9,701)
Equity in earnings of sub-
sidiaries 47,087 31,905 (78,992)
Interest expense, net (9,082) (46,404) (31,390) (86,876)
Other income (expense), net (271) (169) 122 (318)
---------- ---------- --------- --------- ----------
Income before provision for
income taxes and extra-
ordinary item 60,343 45,869 65,806 (78,992) 93,026
Provision for income taxes 5,357 6,445 21,154 32,956
---------- ---------- --------- --------- ----------
Income before extraordinary
item 54,986 39,424 44,652 (78,992) 60,070
Extraordinary item, net of
taxes 2,448 2,636 5,084
---------- ---------- --------- --------- ----------
Net income $54,986 $36,976 $42,016 ($78,992) $54,986
======== ======== ======== ======== ========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
OPERATING ACTIVITIES
Net income (loss) ($96,938) ($86,033) $33,475 $52,558 ($96,938)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Equity in earnings (losses)
of subsidiaries 65,120 (12,562) (52,558)
Depreciation and amort-
ization 11,018 85,416 15,000 111,434
Deferred income taxes 7,504 (36,381) 891 (27,986)
Extraordinary loss on
extinguishment of debt 8,781 8,781
Asset write-offs 355 43,596 43,951
Changes in operating assets
and liabilities, net (30,696) (116,687) 235,639 88,256
---------- ---------- --------- --------- ----------
Net cash provided by (used
in) operating activities (43,637) (113,870) 285,005 127,498
INVESTING ACTIVITIES
Purchases of property and
equipment, net (32,643) (247,507) (20,338) (300,488)
Proceeds from sale of assets 2,500 2,500
Acquisition of Dillard
stores, Brody's and
Bullock & Jones (230,221) (253,855) (484,076)
---------- ---------- --------- --------- ----------
Net cash used in invest-
ing activities (260,364) (501,362) (20,338) (782,064)
FINANCING ACTIVITIES
Inter-company borrowings,
contributions and dis-
tributions (796,993) 911,906 (114,913)
Proceeds from long-term
borrowings 1,081,800 1,081,800
Payments on long-term
debt (7,535) (206,903) (21,100) (235,538)
Net repayments under
credit and receivables
facilities (136,750) (125,000) (261,750)
Proceeds from issuance
of common shares 21,820 1,781 23,601
Purchase and retirement
of common shares (474) (474)
---------- ---------- --------- --------- ----------
Net cash provided by (used
in) financing activities 298,618 570,034 (261,013) 607,639
Increase (decrease) in cash
and cash equivalents (5,383) (45,198) 3,654 (46,927)
Cash and cash equivalents
at beginning of period 15,405 (4,594) 40,053 50,864
---------- ---------- --------- --------- ----------
Cash and cash equivalents
at end of period $10,022 ($49,792) $43,707 $3,937
======== ======== ======== ======== ========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 1, 1997
(Dollars In Thousands)
Non-
Saks Guarantor Guarantor
Incorp- Subsid- Subsid- Elimin- Consoli-
orated iaries iaries ations dated
-------- -------- -------- -------- --------
OPERATING ACTIVITIES
Net income $54,986 $36,976 $42,016 ($78,992) $54,986
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Equity in earnings of
subsidiaries (47,087) (31,905) 78,992
Depreciation and amort-
ization 10,199 76,649 12,847 99,695
Deferred income taxes 1,689 4,970 464 7,123
Extraordinary loss on
extinguishment of debt 3,352 3,352
Asset write-offs (8) 199 191
ESOP expenses 8,786 8,786
Other 220 3,159 3,379
Changes in operating assets
and liabilities, net (39,995) (165,325) 18,826 (186,494)
---------- ---------- --------- --------- ----------
Net cash provided by (used in)
operating activities (19,996) (66,491) 77,505 (8,982)
INVESTING ACTIVITIES
Purchases of property and
equipment, net (9,642) (190,014) (50,051) (249,707)
Proceeds from sale of
assets 21,347 4,730 26,077
---------- ---------- --------- --------- ----------
Net cash provided by (used
in) investing activities 11,705 (185,284) (50,051) (223,630)
FINANCING ACTIVITIES
Inter-company borrowings,
contributions and distrib-
utions (83,751) 106,303 (22,552)
Proceeds from long-term
borrowings 122,446 122,446
Payments on long-term debt (32,720) (87,955) (30,000) (150,675)
Net borrowings (payments)
under receivables facility 165,500 38,189 203,689
Proceeds from issuance of
common shares 16,407 5,882 22,289
Purchase and retirement of
common shares (13,095) (13,095)
ESOP loan repayment 9,778 9,778
Payments to preferred and
common shareholders (1,124) (1,124)
---------- ---------- --------- --------- ----------
Net cash provided by (used
in) financing activities 9,287 198,384 (14,363) 193,308
Increase (decrease) in cash
and cash equivalents 996 (53,391) 13,091 (39,304)
Cash and cash equivalents at
beginning of period 11,489 45,728 19,738 76,955
---------- ---------- --------- --------- ----------
Cash and cash equivalents at
end of period $12,485 ($7,663) $32,829 $37,651
======== ======== ======== ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Prior year balance sheet information below has been restated to
reflect the January 31, 1998 and September 17, 1998 mergers with
Carson's and SHI, respectively, which were accounted for as
poolings-of-interests.
Accounts receivable, inventory, accounts payable, and senior debt
balances fluctuate throughout the year due to the seasonal nature
of the retail industry.
The October 31, 1998 trade accounts receivable balance decreased
from the January 31, 1998 and November 1, 1997 balances due to
selling a higher percentage of the Company's receivables through
its securitization programs (primarily related to Carson's
receivables which were not previously securitized). The proceeds
of these additional sales of receivables were used to reduce senior
debt balances.
October 31, 1998 merchandise inventory and property and equipment
balances increased over January 31, 1998 and November 1, 1997
balances primarily due to new store locations opened during 1997
and 1998, as well as the acquisitions of the Brody's stores in
March 1998, Bullock & Jones in August 1998, and the 14 Dillard's
stores in October 1998.
October 31, 1998 goodwill and intangibles increased over January
31, 1998 and November 1, 1997 balances primarily due to the
goodwill and intangibles associated with the acquisition of the 14
Dillard's locations.
The October 31, 1998 deferred income tax asset balance increased
over the November 1, 1997 balance primarily due to a decrease in
the valuation allowance offsetting the carrying amount of net
operating loss carryforwards related to SHI.
In conjunction with the SHI merger, the Company initiated a series
of refinancing activities designed to reduce the weighted average
cost of capital, provide appropriate debt maturities, and increase
overall liquidity. The refinancing activities included: (1) on
September 9, 1998, the Company completed a tender offer for its
$125 million 8.125% senior unsecured notes utilizing proceeds from
the revolving credit agreements; (2) during September 1998, SHI
repurchased $65 million of outstanding REMIC mortgage certificate
using proceeds from the SHI revolving credit agreement; and (3) on
September 17, 1998, the Company replaced the existing revolving
credit agreements with $1.5 billion in new revolving credit
facilities (the "New Facilities") which are unsecured, are
scheduled to expire in September 2003, and bear interest at LIBOR
based variable rates. Also on September 17, 1998, the Company
terminated an operating lease arrangement which resulted in the
purchase of properties valued at approximately $30 million. The
Company utilized proceeds from its New Facilities to fund the
termination.
The October 31, 1998 senior debt balance increased over prior
periods primarily due to borrowings related to the acquisition of
the Dillard's stores and related working capital for these stores.
October 31, 1998 subordinated debt decreased from the balance at
November 1, 1997 due to the retirement of approximately $128
million of debentures.
Subsequent to October 31, 1998, the Company continued its
refinancing activities. In November 1998, the Company repurchased
$267.7 million of SHI's 5-1/2% Convertible Subordinated Notes due
September 2006. The Company's merger with SHI triggered the change
in control provision contained in the debenture, and as a result,
the Company made an offer to repurchase the notes in cash at par
plus accrued interest. In November and December, the Company
issued $1.1 billion in senior unsecured notes, with maturities
ranging from 2004 to 2010 and interest rates between 7-1/4% and 8-1/4%.
The proceeds of these notes were used to replenish liquidity
under the New Facilities and to redeem the 5-1/2% Convertible
Subordinated Notes.
At October 31, 1998, the Company had total debt outstanding of
$1.98 billion. The company had an additional $196.9 million
available to borrow under its existing credit facilities which do
not expire until September 2003.
October 31, 1998 equity increased over the balance at November 1,
1997 primarily due to net earnings for the twelve months. October
31, 1998 equity declined over the balance at January 31, 1998
primarily due to the net loss for the nine-month period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Prior year income statement information below has been restated to
reflect the January 31, 1998 merger with Carson's and the September
17, 1998 merger with SHI, both of which were accounted for as
poolings-of-interests.
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 foot due to
rounding).
Three Months Ended Nine Months Ended
------------------ ------------------
10/31/98 11/1/97 10/31/98 11/1/97
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 67.1 63.7 66.0 65.0
Selling, general & administrative
expenses 23.5 21.5 22.4 21.7
Other operating expenses 8.4 7.6 8.5 8.0
Store pre-opening costs 0.2 0.5 0.1 0.3
Merger, restructuring and integration
costs 6.3 (0.1) 2.4 0.0
Losses from long-lived assets 1.2 0.0 0.5 0.0
Year 2000 expenses 0.1 0.0 0.1 0.1
ESOP expenses 0.0 0.6 0.0 0.2
------ ----- ----- -----
Operating (loss) income (6.8) 6.1 0.1 4.6
Other income (expense):
Interest expense (1.8) (2.1) (1.8) (2.2)
Other income (expense), net (1.2) 0.0 (0.4) 0.0
------ ----- ----- -----
Income (loss) before provision for
income taxes (9.9) 4.0 (2.2) 2.4
Provision (benefit) for income taxes (2.7) 1.2 (0.4) 0.8
------ ----- ----- -----
Income (loss) before extraordinary loss (7.2) 2.8 (1.8) 1.5
Extraordinary loss, net of tax (1.5) 0.0 (0.5) (0.1)
------ ----- ----- -----
NET INCOME (LOSS) (8.7)% 2.8% (2.3)% 1.4%
====== ===== ===== =====
Sales
For the third quarter ended October 31, 1998, total Company sales
were $1.47 billion, a 4% increase over $1.42 billion in the prior
year. For the nine months ended October 31, 1998, total Company
sales were $4.17 billion, a 7% increase over $3.91 billion in the
prior year. The sales increase for the third quarter was primarily
attributable to additional sales from new stores opened, the
Brody's stores acquired in March 1998, and the Dillard's stores
acquired in October 1998, offset by flat comparable store sales for
the quarter. The sales increase for the nine months was primarily
due to a comparable store sales gain of 3% combined with sales from
new stores opened, the Brody's stores acquired in March 1998, and
the Dillard's stores acquired in October 1998.
Gross margin
For the third quarter and the nine months ended October 31, 1998,
the Company's gross margin percentage decreased 340 and 100 basis
points, respectively, over the prior year. This decline was
principally attributable to additional merchandise markdowns taken
this year over last year, primarily at the Saks Fifth Avenue
stores. These additional markdowns were offset by margin
improvement which the Company believes resulted from the Company's
improved execution of merchandising strategies, the realization of
benefits related to increased purchasing scale, and shifts in the
merchandise mix of select stores.
Selling, general, and administrative expenses
Selling, general, and administrative expenses ("SGA") increased as
a percentage of net sales for the third quarter and the nine months
ended October 31, 1998 by 200 and 70 basis points, respectively.
In the third quarter of 1998, primarily in conjunction with the
Company's merger with SHI, the Company revised certain estimates
and recorded other charges to SGA totaling $37.2 million, or 2.5%
of sales. These charges included, among other things, amounts to
increase accruals for self-insurance liabilities, legal claims,
and accounts receivable charge-offs. Excluding these charges, SGA
for the quarter and nine months ended October 31, 1998 would have
declined 50 and 20 basis points, respectively, over the prior year.
This expense leverage primarily resulted from targeted cost
reductions related to each of the Company's completed business
combinations, certain productivity efficiencies, and improved
contribution from the Company's proprietary credit card operations.
Other operating expenses
Other operating expenses, which consist of rents, depreciation, and
taxes other than income taxes, increased by 80 and 50 basis points
for the third quarter and nine months ended October 31, 1998,
respectively, over last year. These increases were largely
attributable to the effect of new store openings and the capital
expenditures related to store remodels and corporate infrastructure
enhancements, which increased rent and depreciation.
Merger, restructuring, and integration charges
The Company incurred certain merger, restructuring, and integration
charges ("MRI") in the third quarter of 1998 primarily related to
the Company's merger with SHI. For the third quarter ended October
31, 1998, MRI totaled $92.8 million, or 6.3% of net sales, $86.5
million of which related to the merger with SHI, with the balance
pertaining to the continued integration of prior mergers. Of the
$86.5 million of SHI MRI charges, approximately $45.0 million
related to merger transaction costs such as investment banking,
legal, and other direct merger costs and transfer taxes; $9.2
million related to severance and related costs; $7.3 million
related to a contract termination and costs incurred in the
conversion and consolidation of systems and administrative
operations; and $25.0 million related to the abandonment of
duplicate information technology assets.
Loss on long-lived assets
The Company recorded losses on long-lived assets for the three and
nine month periods ended October 31, 1998 of $17.1 million, or 1.2%
of sales, and $19.0 million, or 0.5% of sales, respectively. These
losses primarily related to the write-off of leasehold improvements
associated with the relocation of a Saks Fifth Avenue store and
costs associated with terminating plans for certain SHI new store
projects that did not meet the Company's investment return
criteria.
Year 2000
The Year 2000 ("Y2K") issue relates to the inability of information
systems to properly recognize and process date-sensitive
information beyond January 1, 2000. Many computer systems and
software products may not be able to interpret dates after December
31, 1999 because such systems and products allow only two digits to
indicate the year in a date. As a result, these systems and
products are unable to distinguish January 1, 2000 from January 1,
1900, which could have adverse consequences on the operations of an
entity and the integrity of information processing.
The Company's management has recognized the need to address the
Year 2000 issue within its internal operational systems as well as
with suppliers and other third parties. As with many other
companies, a significant number of the Company's information
systems have required and will require modification over the next
year in order to render these systems Y2K compliant. The Company
recognizes that failure by the Company to timely resolve internal
Y2K issues could result in an inability of the Company to order
merchandise, to receive and distribute merchandise to its stores,
to pay for merchandise received (which could delay delivery of
undelivered merchandise), to process credit card purchases made
with, and payments made with respect to, the Company's proprietary
credit cards issued by the Company's credit card bank, and, in the
worst case, the Company's total inability to sell merchandise and
to otherwise process its daily business for an indeterminate period
of time (which could result in default or other events permitting
the Company's lenders to terminate and accelerate the Company's
credit and accounts receivable facilities), each of which could
materially and adversely affect the Company's financial condition
and results of operations. However, Company management presently
believes these scenarios are unlikely based on the progress the
Company has made in its Y2K compliance process.
While the Company believes it has made substantial progress in
solving significant Y2K issues, the Company currently estimates
that it will not complete all remediation action until spring 1999.
The Company has not completed the testing of all remediation action
it has taken. The Company expects to complete testing of its
remediation actions by September 1999.
The Company has also commenced a program to identify the Y2K
compliance efforts of its material merchandise suppliers, service
suppliers, store landlords, and shopping mall owners. This program
to identify third party Y2K compliance efforts is ongoing. The
Company believes that its program to identify supplier and third
party compliance efforts will minimize the Company's Y2K exposure.
However, the Company cannot control the conduct of its suppliers
and third parties, and it is possible the Company will experience
significant Y2K problems that are caused by a supplier or third
party.
The Company is also addressing the Y2K issue with its non-information
technology systems ("Non-IT"). Non-IT systems include
among other things, security, fire prevention, and climate control.
The review of Non-IT systems is ongoing, and a plan is in place for
resolving Non-IT Y2K issues by mid-1999.
Based on the Company's Y2K compliance efforts and project status to
date, the Company does not expect to need a significant contingency
plan, and none has been developed. However, the Company will
continue to evaluate the need for contingency plans as the Y2K
project continues and will develop and implement appropriate plans
if such need is identified.
Both internal and external resources are being used to reprogram or
replace non-compliant technologies and to appropriately test Y2K
modifications. The company is funding these modifications and
tests with operating cash flows and established credit
arrangements. The Company's Y2K project began in February 1997.
For the quarters ended October 31, 1998 and November 1, 1997, Y2K
expenses totaled $1.0 million, or 0.1% of sales and $0.3 million,
or 0.0% of sales, respectively. For the nine-month periods ended
October 31, 1998 and November 1, 1997, Y2K expenses totaled $5.1
million, or 0.1% or sales, and $4.7 million, or 0.1% of sales,
respectively. From commencement of the Y2K project through October
31, 1998, the Company's Y2K expenses have totaled $11.7 million.
The Company's management anticipates that additional Y2K expenses
will total approximately $2.5 million for the fourth quarter of
1998 and $5.0 million for 1999.
The Company's cost of the Y2K project, and the dates on which the
Company believes it will substantially complete Y2K modifications,
are based on management's best estimates. There is no certainty or
guarantee that these estimates will be achieved, and actual costs
could be materially greater than anticipated. Specific factors
that might cause such differences include, but are not limited to,
the availability and cost of personnel trained in the Y2K area, the
ability to locate and correct all relevant computer programs, non-
compliance by merchandise and other suppliers and other third
parties, and similar uncertainties.
ESOP expenses
For the quarter and nine months ended November 1, 1997, the Company
incurred expenses of $7.9 million, or 0.6% of net sales, and $9.5
million, or 0.2% of net sales, respectively, related to the
Company's Employee Stock Ownership Plan (the "ESOP") maintained at
Herberger's. The ESOP was terminated in December 1997.
Interest expense
Interest expense decreased as a percentage of net sales for the
third quarter and nine months by 30 and 40 basis points,
respectively, due to lower average borrowings during the periods as
well as more favorable financing terms.
Other income (expense) net
The increase in other expense, net for the third quarter and nine
months ended October 31, 1998 over last year's respective periods
is attributable to two interest rate agreements. SHI had entered
into an interest rate hedging agreement which included an option
feature related to the continuation of SHI's receivables
securitization arrangement. Contemporaneous with the mergers and
the Company's plans for combining the SHI and Saks Incorporated
receivables securitization arrangements, the hedging agreement
and option feature were terminated. Saks Incorporated had entered
into a second interest rate hedging agreement earlier in 1998
related to a planned long-term debt offering. As a result of
the SHI merger and external changes in the public debt markets,
the Company canceled plans for this debt offering and
terminated the hedging agreement.
Income (loss) before extraordinary loss
The loss before extraordinary loss for the quarter ended October
31, 1998 totaled $106.2 million, or $.74 per diluted share,
compared to income before extraordinary loss of $39.6 million, or
$.28 per diluted share, for the quarter ended November 1, 1997.
Loss before extraordinary loss for the nine months ended October
31, 1998 totaled $75.0 million, or $.53 per diluted share, compared
to income before extraordinary loss of $60.1 million, or $.43 per
diluted share, in the prior year. The decline in earnings over the
prior year primarily was due to lower gross margin performance,
increased operating expenses, and merger, restructuring, and
integration costs.
Extraordinary loss
The extraordinary loss for the quarter and nine months ended
October 31, 1998 related to debt extinguishment resulting from
various balance sheet restructuring transactions principally in
conjunction with the SHI merger. This restructuring included the
establishment of a new $1.5 billion revolving credit facility and
the termination of the previous Proffitt's and SHI bank facilities,
the tender of the Company's 8-1/8% Senior Notes, and the repurchase
of certain real estate secured notes.
Forward-looking information
This Form 10-Q contains "forward-looking" statements within the
meaning of the federal securities laws. Forward-looking
information in this Form 10-Q is premised on many factors, some of
which are outlined below. 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 and involve certain 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; the competitive pricing
environment within the department and specialty store industries;
the effectiveness of planned advertising, marketing, and
promotional campaigns; appropriate inventory management;
realization of planned synergies; effective cost containment; and
solution of Year 2000 systems issues by the Company and its
suppliers. For additional information regarding these and other
risk factors, please refer to the Company's public filings with the
Securities and Exchange Commission, which may be accessed via EDGAR
through the internet at www.sec.gov.
SAKS INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) Form 8-K Reports.
The following Form 8-Ks were filed during the quarter
ended October 31, 1998:
Date Filed Subject
August 4, 1998 The Company's agreement to acquire 15
store locations from Dillard's, Inc.
August 20, 1998 The Company's operating results for
the quarter ended August 1, 1998
August 31, 1998 The Company's cash tender offer of 8-1/8%
Senior Notes due 2004
September 10, 1998 The Company's cash tender offer of
8-1/8% Senior Notes due 2004
September 23, 1998 The Company's merger with Saks Holdings, Inc.
September 23, 1998 The Company's refinancing activities,
including a new revolving credit facility
and amendment to the Company's 5-1/2% Notes
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
______________________________
Registrant
12/15/98
______________________________
Date
/s/ Douglas E. Coltharp
______________________________
Douglas E. Coltharp
Executive Vice President
and Chief Financial Officer