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 July 31, 1999
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: July 31, 1999
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 144,811,130 shares as of July 31,
1999
SAKS INCORPORATED
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance
Sheets - July 31, 1999, January 30,
1999, and August 1, 1998 . . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Income
- Three Months and Six Months Ended July 31,
1999 and August 1, 1998. . . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash
Flows - Six Months Ended July 31, 1999 and
August 1, 1998 . . . . . . . . . . . . . . . . . . . .5
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . .6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 25
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SAKS INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
July 31, August 1,
1999 January 30, 1998
(Unaudited) 1999 (Unaudited)
----------- ---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $22,683 $32,752 $31,411
Retained interest in accounts receivable 160,816 159,596 137,418
Merchandise inventories 1,516,710 1,406,182 1,369,498
Other current assets 87,373 110,426 82,627
Deferred income taxes 74,094 83,958 72,938
----------- ----------- -----------
Total current assets 1,861,676 1,792,914 1,693,892
Property and Equipment, net 2,224,033 2,118,555 1,822,735
Goodwill and Intangibles, net 582,571 586,297 333,462
Cash Placed in Escrow for Debt Redemption 363,753
Deferred Income Taxes 236,750 249,816 236,875
Other Assets 67,720 77,646 70,175
----------- ----------- -----------
TOTAL ASSETS $4,972,750 $5,188,981 $4,157,139
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $354,175 $360,388 $376,671
Accrued expenses and other current liabilities 439,011 529,128 367,982
Current portion of long-term debt 10,633 15,523 13,642
----------- ----------- -----------
Total current liabilities 803,819 905,039 758,295
Senior Debt 1,946,928 2,110,395 980,840
Other Long-Term Liabilities 160,219 165,972 142,165
Subordinated Debt 276,000
Shareholders' Equity 2,061,784 2,007,575 1,999,839
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,972,750 $5,188,981 $4,157,139
=========== =========== ===========
See notes to condensed consolidated financial statements.
SAKS INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------------- ------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $1,426,535 $1,283,744 $2,971,056 $2,696,346
Cost of sales 912,609 829,140 1,907,002 1,742,154
----------- ----------- ----------- -----------
Gross margin 513,926 454,604 1,064,054 954,192
Selling, general and administrative expenses 315,263 301,346 635,686 607,511
Other operating expenses 122,137 113,772 248,263 228,956
Store pre-opening costs 1,245 626 3,437 2,998
Merger and integration costs 10,052 3,995 18,449 5,951
Losses from long-lived assets 1,858 1,855
Year 2000 expenses 2,485 2,602 3,992 4,127
----------- ----------- ----------- -----------
Operating income 62,744 30,405 154,227 102,794
Other income (expense):
Interest expense (34,312) (24,498) (69,288) (49,292)
Other income (expense), net 2,824 626 2,820 754
----------- ----------- ----------- -----------
Income before provision for income taxes
and extraordinary items 31,256 6,533 87,759 54,256
Provision for income taxes 12,437 3,551 35,205 23,150
----------- ----------- ----------- -----------
Income before extraordinary items 18,819 2,982 52,554 31,106
Extraordinary loss on extinguishment of
debt, net of taxes - (334) (9,261) (334)
----------- ----------- ----------- -----------
Net income $18,819 $2,648 $43,293 $30,772
=========== =========== =========== ===========
Basic earnings per common share:
Income before extraordinary items $0.13 $0.02 $0.36 $0.22
Extraordinary items - - (0.06) -
----------- ----------- ----------- -----------
Net income $0.13 $0.02 $0.30 $0.22
=========== =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary items $0.13 $0.02 $0.36 $0.21
Extraordinary items - - (0.06) -
----------- ----------- ----------- -----------
Net income $0.13 $0.02 $0.29 $0.21
=========== =========== =========== ===========
Weighted average common shares:
Basic 144,774 142,869 144,600 142,302
Diluted 147,242 146,969 147,453 146,463
See notes to condensed consolidated financial statements.
SAKS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
Six Months Ended
---------------------
July 31, August 1,
1999 1998
---------- ----------
Operating Activities:
Net income $43,293 $30,772
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 82,614 71,570
Losses from long-lived assets 1,855
Extraordinary loss on extinguish-
ment of debt 7,310
Deferred income taxes 22,930 16,694
Change in operating assets and
liabilities, net (184,296) 138,824
--------- ---------
Net Cash (Used In) Provided By
Operating Activities (28,149) 259,715
Investing Activities:
Purchases of property and equipment,
net (178,499) (159,731)
Proceeds from the sale of assets 2,500
Acquisition of Dillard's and Brody's
stores (4,053) (17,676)
--------- ---------
Net Cash Used In Investing Activities (182,552) (174,907)
Financing Activities:
Proceeds from long-term borrowings 550,000
Payments on long-term debt and
capital lease obligations (10,416) (112,932)
Net repayments under credit and
receivables facilities (472,100) (9,550)
Proceeds from issuance of stock 5,236 18,221
Release of cash held in escrow for
debt redemption 363,753
Payment of REMIC certificates (235,841)
--------- ---------
Net Cash Provided By (Used In)
Financing Activities 200,632 (104,261)
Decrease In Cash and Cash Equivalents (10,069) (19,453)
Cash and cash equivalents at beginning
of period 32,752 50,864
--------- ---------
Cash and cash equivalents at end of
period $22,683 $31,411
========= =========
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 six
month periods ended July 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending January
29, 2000. 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 on Form 10-K for the year ended January
30, 1999.
The accompanying balance sheet at January 30, 1999 has been
derived from the audited financial statements at that date.
In conjunction with the Company's acquisition of Saks Holdings,
Inc.("SHI"), management restated the Company's financial
statements in 1998, as required by pooling of interest
accounting, to include the historical results of SHI. In
preparing those financial statements in 1998, management changed
SHI's classification of several items to conform to the Company's
classifications. During this process, management inadvertently
classified employee compensation and similar expenses related to
store management and store merchandise stock employees as Cost of
Sales. These costs should have been classified as Selling,
General and Administrative ("SGA") costs. Accordingly, the
accompanying results of operations have been restated to reflect
the reclassification of $9,710 and $19,266 from Cost of Sales to
SGA for the three month and six month periods ended August 1,
1998, respectively. These reclassifications have no effect on
previously reported net income and shareholders' equity.
NOTE 2 -- BUSINESS COMBINATIONS
Effective September 17, 1998, Proffitt's, Inc. combined its
business with 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. In conjunction with the merger, Proffitt's, Inc.
changed its corporate name to Saks Incorporated.
For the three month and six month periods ended July 31, 1999 and
August 1, 1998, the Company incurred certain merger and
integration costs ("M&I") related to several prior business
combinations, including SHI. These costs, primarily consisting
of the consolidation and conversion of redundant systems and
administrative operations, were (before income taxes) $10.1
million and $4.0 million, respectively, for the three months
ended July 31, 1999 and August 1, 1998 and $18.4 million and $6.0
million, respectively, for the six months ended July 31, 1999 and
August 1, 1998.
A reconciliation of the aforementioned costs to the amounts of
merger and integration costs remaining unpaid at July 31, 1999 is
as follows (in thousands):
Amounts unpaid at January 30, 1999
related to prior M&I events $31,951
M&I costs for the period 18,449
Amounts paid during the period (37,836)
Amounts representing non-cash changes -
----------
Amounts unpaid at July 31, 1999 $12,564
==========
The components of the aforementioned amounts unpaid are as
follows (in thousands):
July 31, January 30,
1999 1999
----------- -----------
Direct merger costs $6,058 $17,530
Severance 4,994 6,638
Contractual obligations to be paid within
one year of merger 5,900
Contractual obligations with extended payment
terms (such as rents on abandoned leases
and payments on abandoned contracts) 298 348
Other (includes all merger and integration
efforts) 1,214 1,535
--------- ---------
Totals $12,564 $31,951
========= =========
NOTE 3 -- EARNINGS PER COMMON SHARE
Calculations of earnings per common share ("EPS") for the three
and six months ended July 31, 1999 and August 1, 1998 are as
follows (income and shares in thousands):
For the Three Months Ended For the Three Months Ended
July 31, 1999 August 1, 1998
------------------------- -------------------------
Weighted Per Weighted Per
Average Share Average Share
Income (a) Shares Amount Income(a) Shares Amount
-------- -------- -------- -------- -------- -------
Basic EPS $18,819 144,774 $0.13 $2,982 142,869 $0.02
Effect of dilutive stock options
(based on the treasury stock
method using the average price) 2,468 4,100
-------- -------- ------- -------- -------- -------
Diluted EPS $18,819 147,242 $0.13 $2,982 146,969 $0.02
======== ======== ======= ======== ======== =======
For the Six Months Ended For the Six Months Ended
July 31, 1999 August 1, 1998
------------------------- -------------------------
Weighted Per Weighted Per
Average Share Average Share
Income (a) Shares Amount Income(a) Shares Amount
-------- -------- -------- -------- ---------- ------
Basic EPS $52,554 144,600 $0.36 $31,106 142,302 $0.22
Effect of dilutive stock options
(based on the treasury stock
method using the average price) 2,853 4,161
-------- -------- ------- -------- -------- -------
Diluted EPS $52,554 147,453 $0.36 $31,106 146,463 $0.21
======== ======== ======= ======== ======== =======
(a) Income before extraordinary items.
NOTE 4 -- CONTINGENCIES
The Company is involved in several legal proceedings arising in
the 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 ongoing
material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
NOTE 5 -- SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 provides companies the
opportunity to aggregate two or more operating segments into a
single operating segment if the segments have similar
characteristics. In applying SFAS No. 131, the Company
identified three reportable segments, which are as follows:
department stores, catalog and furniture stores. The catalog and
furniture stores segments represent less than three percent of
the Company's total revenues, assets and operating profit.
Consistent with its practice in 1998, the three identified
segments are combined within the Company's condensed consolidated
financial statements.
NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133," which amended the
effective date provisions of SFAS No. 133. The new statement
defers application to all fiscal quarters of all fiscal years
beginning after June 15, 2000. Thus, SFAS No. 133 will be
effective for the Company in the first quarter of 2001, and the
Company is in the process of ascertaining the impact this new
standard will have on its financial statements.
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" in 1998. Components of the Company's comprehensive
income for the year ended January 30, 1999 included the net loss
of $0.9 million and a minimum pension liability adjustment of
$7.5 million, net of taxes. The Company had no components of
comprehensive income for the three month or six month periods
ended July 31, 1999 and August 1, 1998 other than net income.
NOTE 7 -- SUBSEQUENT EVENT
In July of 1999, the Board of Directors of the Company authorized
a share repurchase of up to five million shares, or approximately
3.5% of the outstanding common stock. As of September 9, 1999,
900,000 shares have been repurchased under the plan.
NOTE 8 -- 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 the
subsidiaries of Saks Incorporated with material assets, except
for Saks Credit Corporation ("SCC"), Saks Transitional Credit
Corporation ("STCC"), National Bank of the Great Lakes ("NBGL"),
and SHI real estate financing subsidiaries and related trusts
("REMICs"); and 3) on a combined basis, SCC, STCC, NBGL, and
REMICs, the only active non-guarantor subsidiaries of the Senior
Notes.
On June 30, 1999, in connection with the Company's restructured
accounts receivable securitization program (see Management's
Discussion and Analysis, "Liquidity and Capital Resources"), the
Company formed SCC and STCC as special purpose entities. These
entities replaced Proffitt's Credit Corporation and SFA Finance
Company as the Company's special purpose entities.
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.
On January 31, 1999, immediately following the Company's fiscal
year end, the Company restructured its legal entity composition.
This restructuring changed the composition of Saks Incorporated
to include only the operations of a small group of corporate
employees and the majority of the Company's long-term debt. The
consolidating financial statements presented for the three and
six months ended July 31, 1999 reflect this new legal entity
composition. The consolidating financial statements presented
for the three and six months ended August 1, 1998 reflect the
legal entity composition in place at the time. Certain prior
year reclassifications to the condensed consolidating financial
statements have been made to conform to current year
presentation. 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 JULY 31, 1999 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
ASSETS
Current Assets
Cash and cash equivalents ($15,380) $38,063 $22,683
Retained interest in accounts
receivable 160,816 160,816
Merchandise inventories 1,516,710 1,516,710
Deferred income taxes 74,099 (5) 74,094
Intercompany borrowings $46,033 ($46,033)
Other current assets 82,336 5,037 87,373
--------- --------- --------- --------- ---------
Total Current Assets 46,033 1,657,765 203,911 (46,033) 1,861,676
Property and Equipment, net 1,698,803 525,230 2,224,033
Goodwill and Intangibles, net 582,571 582,571
Other Assets 61,462 6,258 67,720
Deferred Income Taxes 236,750 236,750
Investment in and Advances to
Subsidiaries 3,838,987 1,625,155 (5,464,142)
--------- --------- --------- --------- ---------
Total Assets $3,885,020 $5,862,506 $735,399 ($5,510,175) $4,972,750
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $354,175 $354,175
Accrued expenses and other current
liabilities $22,618 391,578 $24,815 439,011
Intercompany borrowings 46,033 ($46,033)
Current portion of long-term debt 10,633 10,633
--------- --------- --------- --------- ---------
Total Current Liabilities 22,618 756,386 70,848 (46,033) 803,819
Senior Debt 1,785,900 161,028 1,946,928
Deferred Income Taxes (8,237) 8,237
Other Long-Term Liabilities 14,718 143,771 1,730 160,219
Investment By and Advances From Parent 4,809,558 654,584 (5,464,142)
Shareholders' Equity 2,061,784 2,061,784
--------- --------- --------- --------- ---------
Total Liabilities and
Shareholders' Equity $3,885,020 $5,862,506 $735,399 ($5,510,175) $4,972,750
========== ========== ========== ========== ==========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1999 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
Net sales $1,426,535 $1,426,535
Costs and expenses
Cost of sales 912,609 912,609
Selling, general and administrative
expenses $2,481 333,420 $22,556 ($43,194) 315,263
Other operating expenses 176 132,244 (10,283) 122,137
Store pre-opening costs 1,245 1,245
Merger and integration costs 10,052 10,052
Year 2000 expenses 2,485 2,485
--------- --------- --------- --------- ---------
Operating income (loss) (2,657) 34,480 (12,273) 43,194 62,744
Other income (expense)
Finance charge income, net 43,194 (43,194)
Intercompany exchange fees (7,612) 7,612
Intercompany servicer fees 7,820 (7,820)
Equity in earnings of subsidiaries 38,535 4,319 (42,854)
Interest expense, net (31,752) (2,560) (34,312)
Other income (expense), net 2,824 2,824
--------- --------- --------- --------- ---------
Income before provision (benefit)
for income taxes 4,126 39,271 30,713 (42,854) 31,256
Provision (benefit) for income taxes (14,693) 15,616 11,514 12,437
--------- --------- --------- --------- ---------
Net income $18,819 $23,655 $19,199 ($42,854) $18,819
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JULY 31, 1999 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
Net sales $2,971,056 $2,971,056
Costs and expenses
Cost of sales 1,907,002 1,907,002
Selling, general and administrative
expenses $4,895 670,261 $48,083 ($87,553) 635,686
Other operating expenses 867 267,960 (20,564) 248,263
Store pre-opening costs 3,437 3,437
Merger and integration costs 18,449 18,449
Year 2000 expenses 3,992 3,992
--------- --------- --------- --------- ---------
Operating income (loss) (5,762) 99,955 (27,519) 87,553 154,227
Other income (expense)
Finance charge income, net 87,553 (87,553)
Intercompany exchange fees (15,796) 15,796
Intercompany servicer fees 18,630 (18,630)
Equity in earnings of subsidiaries 84,855 8,410 (93,265)
Interest expense, net (62,697) (5,853) (738) (69,288)
Other income (expense), net 2,820 2,820
--------- --------- --------- --------- ---------
Income before provision (benefit) for
income taxes and extraordinary items 16,396 108,166 56,462 (93,265) 87,759
Provision (benefit) for income taxes (26,897) 41,103 20,999 35,205
--------- --------- --------- --------- ---------
Income before extraordinary items 43,293 67,063 35,463 (93,265) 52,554
Extraordinary items, net of taxes (9,261) (9,261)
--------- --------- --------- --------- ---------
Net income $43,293 $67,063 $26,202 ($93,265) $43,293
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 1999 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
OPERATING ACTIVITIES
Net income $43,293 $67,063 $26,202 ($93,265) $43,293
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries (84,855) (8,410) 93,265
Depreciation and amortization 75,644 6,970 82,614
Deferred income taxes 22,930 22,930
Extraordinary loss on extinguishment
of debt 7,310 7,310
Changes in operating assets and
liabilities, net (179,315) (4,981) (184,296)
-------- -------- -------- -------- --------
Net Cash Provided By (Used In)
Operating Activities (41,562) (22,088) 35,501 (28,149)
INVESTING ACTIVITIES
Purchases of property and equipment,
net (151,733) (26,766) (178,499)
Acquisition of Dillard's and Brody's
stores (4,053) (4,053)
-------- -------- -------- -------- --------
Net Cash Used In Investing
Activities (155,786) (26,766) (182,552)
FINANCING ACTIVITIES
Inter-company borrowings, contributions
and distributions (61,940) (164,092) 226,032
Proceeds from long-term borrowings 550,000 550,000
Payments on long-term debt and capital
lease obligations (10,416) (10,416)
Net repayments under credit
facilities (472,100) (472,100)
Payment of REMIC certificates (235,841) (235,841)
Release of cash held in escrow for
debt redemption 363,753 363,753
Proceeds from issuance of stock 5,236 5,236
-------- -------- -------- -------- --------
Net Cash Provided By (Used In)
Financing Activities 21,196 189,245 (9,809) 200,632
Increase (Decrease) In Cash and Cash
Equivalents (20,366) 11,371 (1,074) (10,069)
Cash and cash equivalents at beginning
of period 20,366 (26,751) 39,137 32,752
-------- -------- -------- -------- --------
Cash and cash equivalents at end
of period ($15,380) $38,063 $22,683
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT AUGUST 1, 1998 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $14,318 ($30,757) $47,850 $31,411
Retained interest in accounts
receivable 1,588 252 135,578 137,418
Merchandise inventories 202,944 1,166,554 1,369,498
Deferred income taxes 6,901 62,626 3,411 72,938
Intercompany borrowings 20,465 ($20,465)
Other current assets 13,237 61,991 7,399 82,627
--------- --------- --------- --------- ---------
Total Current Assets 259,453 1,260,666 194,238 (20,465) 1,693,892
Property and Equipment, net 195,960 1,049,673 577,102 1,822,735
Goodwill and Intangibles, net 19,389 314,073 333,462
Other Assets 4,127 41,552 24,496 70,175
Deferred Income Taxes (16,291) 253,166 236,875
Investment in and Advances to
Subsidiaries 1,888,154 1,344,924 (3,233,078)
--------- --------- --------- --------- ---------
Total Assets $2,350,792 $4,264,054 $795,836 ($3,253,543) $4,157,139
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $54,795 $321,876 $376,671
Accrued expenses and other current
liabilities 40,736 300,161 $27,085 367,982
Intercompany borrowings 20,465 ($20,465)
Current portion of long-term debt 452 13,190 13,642
--------- --------- --------- --------- ---------
Total Current Liabilities 95,983 635,227 47,550 (20,465) 758,295
Senior Debt 242,455 437,544 300,841 980,840
Other Long-Term Liabilities 12,515 127,871 1,779 142,165
Subordinated Debt 276,000 276,000
Investment by and Advances from Parent 2,787,412 445,666 (3,233,078)
Shareholders' Equity 1,999,839 1,999,839
--------- --------- --------- --------- ---------
Total Liabilities and Shareholders'
Equity $2,350,792 $4,264,054 $795,836 ($3,253,543) $4,157,139
=========== =========== =========== =========== ===========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 1, 1998 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
Net sales $163,524 $1,120,220 $1,283,744
Costs and expenses
Cost of sales 104,023 725,117 829,140
Selling, general and administra-
tive expenses 34,217 282,767 $20,736 ($36,374) 301,346
Other operating expenses 13,970 109,202 (9,400) 113,772
Store pre-opening costs 162 464 626
Merger and integration costs 2,528 1,467 3,995
Losses from long-lived assets 359 1,499 1,858
Year 2000 expenses 553 2,049 2,602
-------- -------- -------- -------- --------
Operating income (loss) 7,712 (2,345) (11,336) 36,374 30,405
Other income (expense)
Finance charge income, net 36,374 (36,374)
Intercompany exchange fees (1,197) (4,589) 5,786
Intercompany servicer fees 6,701 (6,701)
Equity in earnings of subsidiaries (723) 6,281 (5,558)
Interest expense, net (1,744) (15,464) (7,290) (24,498)
Other income (expense), net (102) 728 626
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
extraordinary items 3,946 (8,688) 16,833 (5,558) 6,533
Provision (benefit) for income taxes 1,298 (3,858) 6,111 3,551
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items 2,648 (4,830) 10,722 (5,558) 2,982
Extraordinary items, net of taxes (334) (334)
-------- -------- -------- -------- --------
Net income (loss) $2,648 ($5,164) $10,722 ($5,558) $2,648
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED AUGUST 1, 1998 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
Net sales $337,832 $2,358,514 $2,696,346
Costs and expenses
Cost of sales 218,829 1,523,325 1,742,154
Selling, general and administrative
expenses 70,571 568,368 $44,049 ($75,477) 607,511
Other operating expenses 27,808 219,163 (18,015) 228,956
Store pre-opening costs 624 2,374 2,998
Merger and integration costs 3,947 2,004 5,951
Losses from long-lived assets 356 1,499 1,855
Year 2000 expenses 884 3,243 4,127
--------- --------- --------- --------- ---------
Operating income (loss) 14,813 38,538 (26,034) 75,477 102,794
Other income (expense)
Finance charge income, net 75,477 (75,477)
Intercompany exchange fees (2,731) (12,579) 15,310
Intercompany servicer fees 12,940 (12,940)
Equity in earnings of subsidiaries 24,446 13,113 (37,559)
Interest expense, net (2,967) (29,902) (16,423) (49,292)
Other income (expense), net 4 750 754
--------- --------- --------- --------- ---------
Income before provision for income
taxes and extraordinary items 33,565 22,860 35,390 (37,559) 54,256
Provision for income taxes 2,793 7,558 12,799 23,150
--------- --------- --------- --------- ---------
Income before extraordinary items 30,772 15,302 21,591 (37,559) 31,106
Extraordinary items, net of taxes (334) (334)
--------- --------- --------- --------- ---------
Net income $30,772 $14,968 $22,591 ($37,559) $30,772
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 1, 1998 (Unaudited)
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
OPERATING ACTIVITIES
Net income $30,772 $14,968 $22,591 ($37,559) $30,772
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries (24,446) (13,113) 37,559
Depreciation and amortization 6,898 55,153 9,519 71,570
Deferred income taxes 7,504 8,299 891 16,694
Losses from long-lived assets 356 1,499 1,855
Changes in operating assets and
liabilities, net (22,190) (115,153) 276,167 138,824
--------- --------- --------- --------- ---------
Net Cash Provided By (Used In)
Operating Activities (1,106) (48,347) 309,168 259,715
INVESTING ACTIVITIES
Purchases of property and equipment,
net (18,226) (134,949) (6,556) (159,731)
Proceeds from sale of assets 2,500 2,500
Acquisition of Brody's stores (17,676) (17,676)
--------- --------- --------- --------- ---------
Net Cash Used In Investing
Activities (33,402) (134,949) (6,556) (174,907)
FINANCING ACTIVITIES
Inter-company borrowings, contri-
butions and distributions 114,090 55,725 (169,815)
Payments on long-term debt and
capital lease obligations (98,027) (14,905) (112,932)
Net repayments under credit and
receivables facilities 115,450 (125,000) (9,550)
Proceeds from issuance of stock 17,358 863 18,221
--------- --------- --------- --------- ---------
Net Cash Provided By (Used In)
Financing Activities 33,421 157,133 (294,815) (104,261)
Increase (Decrease) In Cash and
Cash Equivalents (1,087) (26,163) 7,797 (19,453)
Cash and cash equivalents at beginning
of period 15,405 (4,594) 40,053 50,864
--------- --------- --------- --------- ---------
Cash and cash equivalents at end
of period $14,318 ($30,757) $47,850 $31,411
========= ========= ========= ========= =========
SAKS INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEETS AT JANUARY 30, 1999
(Dollar Amounts In Thousands)
Non-
Guarantor Guarantor
Saks Sub- Sub- Consol-
Incorporated sidiaries sidiaries Eliminations idated
---------- ---------- ---------- ---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $20,366 ($26,751) $39,137 $32,752
Retained interest in accounts
receivable 54 220 159,322 159,596
Merchandise inventories 221,585 1,184,597 1,406,182
Deferred income taxes (3,217) 87,175 83,958
Intercompany borrowings 11,070 ($11,070)
Other current assets 19,471 90,810 145 110,426
--------- --------- --------- --------- ---------
Total Current Assets 269,329 1,336,051 198,604 (11,070) 1,792,914
Property and Equipment, net 342,355 1,270,766 505,434 2,118,555
Goodwill and Intangibles, net 125,717 460,580 586,297
Other Assets 1,196 55,592 20,858 77,646
Deferred Income Taxes 249,816 249,816
Cash Placed in Escrow for Debt
Redemption 363,753 363,753
Investment in and Advances to
Subsidiaries 3,112,552 1,350,621 (4,463,173)
--------- --------- --------- --------- ---------
Total Assets $3,851,149 $5,087,179 $724,896 ($4,474,243) $5,188,981
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $48,768 $311,620 $360,388
Accrued expenses and other
current liabilities 39,118 452,000 $38,010 529,128
Intercompany borrowings 11,070 ($11,070)
Current portion of long-term debt 452 15,071 15,523
--------- --------- --------- --------- ---------
Total Current Liabilities 88,338 778,691 49,080 (11,070) 905,039
Senior Debt 1,709,093 165,461 235,841 2,110,395
Deferred Income Taxes 18,893 (27,045) 8,152
Other Long-Term Liabilities 27,250 136,992 1,730 165,972
Investment by and Advances from Parent 4,033,080 430,093 (4,463,173)
Shareholders' Equity 2,007,575 2,007,575
--------- --------- --------- --------- ---------
Total Liabilities and
Shareholders' Equity $3,851,149 $5,087,179 $724,896 ($4,474,243) $5,188,981
========== ========== ========== ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Accounts receivable, inventory, accounts payable and debt
balances fluctuated throughout the year due to the seasonal
nature of the retail industry.
Merchandise inventory and property and equipment balances at July
31, 1999 increased over August 1, 1998 balances primarily due to
new store locations opened during the last 12 months, as well as
the acquisition of 15 stores from Dillard's in October and
December 1998.
Goodwill and intangibles at July 31, 1999 increased over August
1, 1998 balances primarily due to the goodwill and intangibles
associated with the acquisition of the 15 stores from Dillard's.
Senior debt at July 31, 1999 increased over senior debt at August
1, 1998 primarily due to borrowings related to the acquisition of
the 15 stores from Dillard's and related working capital
requirements for these stores.
In conjunction with the SHI merger and the acquisition of the
Dillard's stores, the Company initiated a series of refinancing
activities between September 1998 and July 1999 that were
designed to provide appropriate debt maturities and increase
overall liquidity.
Included within the Company's senior debt are real estate and
mortgage notes. The July 31, 1999 real estate and mortgage notes
balance declined from the August 1, 1998 balance by $320 million
primarily due to the repurchase of $65 million and $236 million
of outstanding REMIC mortgage certificates in September 1998 and
February 1999, respectively.
Also included within the Company's senior debt are senior notes
payable. The July 31, 1999 notes payable balance increased by
$1.5 billion from the August 1, 1998 balance due to the November
and December 1998 issuance of $1.1 billion in senior notes and
the February and July 1999 issuances of $200 million and $350
million in senior notes, respectively, all with maturities
ranging from 2004 to 2019 and interest rates between 7% and 8-
1/4%, offset by the September 1998 tender of the Company's $125
million 8.125% senior notes. The Company entered into an
interest rate swap in connection with the July 1999 $350 million
senior note issuance, which swaps a fixed rate with a variable
interest rate.
At July 31, 1999, the Company had total debt outstanding of
approximately $1.96 billion. At that time, the Company had an
additional $1.1 billion available to borrow under its existing
credit facilities of which $600 million expired in 2003 and $500
million expired September 1999. The Company reduced its 364 day
revolving credit facility in March 1999 from $750 million to $500
million. On August 26, 1999, subsequent to the end of the fiscal
quarter, the Company replaced its existing $500 million 364 day
revolving credit facility with a new $250 million 364 day
facility maturing August 2000.
At July 31, 1999, subordinated debt decreased from the balance at
August 1, 1998 due to the fourth quarter 1998 repurchase of $274
million of SHI's 5-1/2% Convertible Subordinated Notes due
September 2006. The Company's acquisition of SHI triggered a
change in control provision in the notes that required the
Company to repurchase at par plus accrued interest any notes
tendered to it.
On June 30, 1999, as a result of the acquisition of SHI, the
Company terminated SHI's accounts receivable securitization
facility and sold the SHI receivables through the Company's
accounts receivable securitization facilities. The Company's
credit card bank, National Bank of the Great Lakes, sells an
undivided interest in its accounts receivable to SCC which sells
the receivables to Saks Credit Card Master Trust ("SCCMT"). At
July 31, 1999, the Company had $497 million in fixed rate term
certificates outstanding, $401 million in floating rate term
certificates outstanding and $111 million outstanding under its
variable funding certificates.
RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS
ENDED JULY 31, 1999
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 Six Months Ended
------------------ --------------------
7/31/99 8/1/98 7/31/99 8/1/98
------- ------- ------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 64.0 64.6 64.2 64.6
Selling, general & admin-
istrative expenses 22.1 23.5 21.4 22.5
Other operating expenses 8.6 8.9 8.3 8.5
Store pre-opening costs 0.1 0.0 0.1 0.1
Merger and integration costs 0.7 0.3 0.6 0.2
Losses from long-lived assets 0.0 0.1 0.0 0.1
Year 2000 expenses 0.2 0.2 0.1 0.2
----- ----- ----- -----
Operating income 4.4 2.4 5.2 3.8
Other income (expense):
Interest expense (2.4) (1.9) (2.3) (1.8)
Other income (expense), net 0.2 0.0 0.1 0.0
----- ----- ----- -----
Income before provision for income
taxes and extraordinary items 2.2 0.5 3.0 2.0
Provision for income taxes 0.9 0.3 1.2 0.9
----- ----- ----- -----
Income before extraordinary items 1.3 0.2 1.8 1.1
Extraordinary loss, net of taxes (0.0) (0.0) (0.3) (0.0)
----- ----- ----- -----
NET INCOME 1.3% 0.2% 1.5% 1.1%
===== ===== ===== =====
Net sales
For the three months ended July 31, 1999, total Company sales
were $1.43 billion, an 11% increase over $1.28 billion in the
prior year. For the six months ended July 31, 1999, total Company
sales were $2.97 billion, a 10% increase over $2.70 billion in
the prior year. The sales increase for the quarter and six
months was primarily attributable to additional sales from new
stores opened, the Dillard's stores acquired in October and
December 1998, and a comparable store sales increase of 4% for
the quarter and 3% on a year to date basis.
Gross margin
For the three months and six months ended July 31, 1999, the
Company's gross margin percentage increased 60 and 40 basis
points, respectively, over the prior year. This improvement
reflected reduced levels of clearance merchandise, continued
efficiencies in distribution and logistics, increased penetration
of higher margin proprietary brand merchandise and the conversion
of the shoe departments at the Carson Pirie Scott stores from
leased to owned.
Selling, general and administrative expenses ("SGA")
SGA decreased as a percentage of net sales for the three months
and six months ended July 31, 1999 by 140 and 110 basis points,
respectively. This expense leverage primarily resulted from
targeted cost reductions related to each of the Company's
completed business combinations and certain productivity
efficiencies.
Merger and integration costs ("M&I")
The Company incurred certain M&I costs totaling $10.1 million, or
0.7% of net sales, for the three months ended July 31, 1999 and
$18.4 million, or 0.6% of net sales, for the six months ended
July 31, 1999 primarily related to the Company's integration of
SHI. These charges were primarily related to costs incurred in
the conversion and consolidation of systems and administrative
operations.
Year 2000 expenses ("Y2K")
The Company's Y2K compliance project began in 1997. From
commencement of the Y2K project through July 31, 1999, the
Company's Y2K expenses have totaled $21.0 million. Company
management anticipates that additional Y2K expenses will total
approximately $2.5 million for the balance of 1999. The
Company's significant systems became Y2K compliant in September
1999. Testing for a majority of the Company's systems has been
completed; however, the Company plans to continue its system
testing into the fourth quarter of 1999. The costs of the
project and the date on which the Company plans to complete
modifications are based on management's best estimates, which
were derived utilizing assumptions of future events including the
continued availability of certain resources, third party
modification plans and representations and other factors.
However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those
plans. For complete disclosure of the Company's Y2K issues,
refer to "Management's Discussion and Analysis" contained in the
Company's Annual Report to Shareholders on Form 10-K for the
fiscal year ended January 30, 1999.
Interest expense
For the three months ended July 31, 1999, interest expense
increased in dollars and as a percentage of net sales by $9.8
million and 50 basis points, respectively. For the six months
ended July 31, 1999, interest expense increased in dollars and as
a percentage of net sales by $20.0 million and 50 basis points,
respectively. The increase was primarily due to additional
indebtedness related to the fall 1998 cash purchase of 15 stores
and related inventory and accounts receivable from Dillard's.
Income before extraordinary items
Income before extraordinary items for the three months ended July
31, 1999 totaled $18.8 million, or $.13 per diluted share,
compared to income before extraordinary items of $3.0 million,
or $.02 per diluted share, for the three months ended August 1,
1998. Income before extraordinary items for the six months ended
July 31, 1999 totaled $52.6 million, or $.36 per diluted share,
compared to income before extraordinary items of $31.1 million,
or $.21 per diluted share, for the six months ended August 1,
1998. The improvement in income over the prior year primarily
was due to higher gross margin performance and leverage on SGA.
Extraordinary item
The extraordinary loss for the six months ended July 31, 1999
related to the February 1999 repurchase of $236 million of
outstanding REMIC mortgage certificates. In conjunction with
this debt restructuring, the Company incurred charges related to
the early extinguishment of debt totaling $9.3 million after
taxes.
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. When
used throughout this Form 10-Q, words such as "believes,"
"estimates," "plans," "expects," "should," "may," "anticipates"
and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
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.
Management 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 management makes on
related subjects in its reports with the Securities and Exchange
Commission and in its press releases.
SAKS INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits.
(a) Exhibits.
10.1 Fifth Amended and Restated Employment Agreement
between R. Brad Martin, Chairman and Chief
Executive Officer, and Saks Incorporated
10.2 Credit Agreement among Saks Incorporated, Bank
of America, N.A. as Agent, several Banks as
Agents, and several Banks as Lenders, dated as
of August 26, 1999
10.3 Second Amended and Restated Credit Agreement
among Saks Incorporated, Bank of America, N.A.
as Agent, several other Banks as Agents, and
several Banks as Lenders, dated as of August
26, 1999
27.1 Financial Data Schedule
(b) Form 8-K Reports.
Date Filed Subject
---------- -------
July 23, 1999 The Company's issuance an sale of
$350 million of 7% Notes due 2004
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 there unto duly authorized.
SAKS INCORPORATED
______________________________
Registrant
September 10, 1999
______________________________
Date
/s/ Douglas E. Coltharp
______________________________
Douglas E. Coltharp
Executive Vice President and
Chief Financial Officer
EXHIBIT LIST
Exhibit
No. Document Page
- ------- ----------- ----
10.1 Fifth Amended and Restated Employment Agreement
between R. Brad Martin, Chairman and Chief
Executive Officer, and Saks Incorporated
10.2 Credit Agreement among Saks Incorporated, Bank of
America, N.A. as Agent, several Banks as Agents,
and several Banks as Lenders, dated as of August
26, 1999
10.3 Second Amended and Restated Credit Agreement among
Saks Incorporated, Bank of America, N.A. as Agent,
several other Banks as Agents, and several Banks
as Lenders, dated as of August 26, 1999
27.1 Financial Data Schedule