FORM 10-Q EXHIBIT INDEX ON
PAGE 15
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Commission file number 0-22682
CARSON PIRIE SCOTT & CO.
(Exact name of registrant as specified in its charter)
ILLINOIS 37-0175980
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
331 West Wisconsin Avenue, Milwaukee, Wisconsin 53203
(Address of principal executive offices) (Zip Code)
414-347-4141
(Registrant's telephone number, including area code)
--------------------------------------------
(Former name, former address and former fiscal year,
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
Number of shares outstanding of each of the issuer's classes of common
stock, as of September 5, 1997:
Common Stock, $.01 par value 15,801,298 shares, exclusive
of 21,555,068 shares held by subsidiaries of the registrant
Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Carson Pirie Scott & Co. and Subsidiaries
Consolidated Balance Sheets
As of August 2, 1997
(Unaudited)
(dollars in thousands)
August 2, February 1,
Assets 1997 1997
- -------------------- -------- -----------
Current assets:
Cash and cash equivalents $ 17,887 20,618
Accounts receivable, net 237,398 267,433
Merchandise inventories 198,502 190,646
Other current assets 19,630 16,265
-------- ---------
Total current assets 473,417 494,962
Property, fixtures and
equipment, net 190,220 174,260
Net deferred tax assets 39,095 42,909
Other assets 10,785 11,916
--------- ---------
$ 713,517 724,047
========= ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current maturities of
long-term debt $ 2,765 2,854
Accounts payable 66,903 58,178
Accrued expenses 96,161 96,978
------- -------
Total current liabilities 165,829 158,010
Long-term debt,
less current maturities 139,825 159,635
Other liabilities 49,989 47,585
------- -------
Total liabilities 355,643 365,230
------- -------
Shareholders' equity:
Common stock 158 159
Paid-in capital 171,616 176,954
Unamortized stock compensation (28) (167)
Unrealized gain on investments 118 96
Retained earnings 186,010 181,775
------- -------
Total shareholders' equity 357,874 358,817
------- -------
$ 713,517 724,047
======= =======
See accompanying notes to consolidated financial statements.
Page 2
Carson Pirie Scott & Co. and Subsidiaries
Consolidated Statements of Operations
Three months ended August 2, 1997 and August 3, 1996
(Unaudited)
(dollars in thousands, except per share amounts)
Three months ended
----------------------
August 2, August 3,
1997 1996
-------- ---------
Net sales $ 243,765 224,986
Cost of sales (154,268) (141,464)
Selling, general and
administrative expenses (74,192) (71,470)
Depreciation and amortization (5,003) (4,031)
Other expense (3,554) (42)
------- --------
Income from operations 6,748 7,979
Interest expense, net (4,055) (3,391)
-------- --------
Income before income taxes 2,693 4,588
Income tax expense (1,066) (1,808)
-------- --------
Net income $ 1,627 2,780
======== ========
Primary net income
per share $ 0.10 0.17
======== ========
Weighted average number
of common and common
equivalent shares 16,447,657 16,782,011
=========== ===========
See accompanying notes to consolidated financial statements.
Page 3
Carson Pirie Scott & Co. and Subsidiaries
Consolidated Statements of Operations
Six months ended August 2, 1997 and August 3, 1996
(Unaudited)
(dollars in thousands, except per share amounts)
Six months ended
----------------------
August 2, August 3,
1997 1996
-------- ---------
Net sales $ 501,899 461,755
Cost of sales (322,023) (295,206)
Selling, general and
administrative expenses (150,484) (142,710)
Depreciation and amortization (10,050) (8,063)
Other expense (4,011) (135)
------- -------
Income from operations 15,331 15,641
Interest expense, net (8,318) (7,135)
Gain on sale of
marketable securities - 14,892
Other expense - (2,827)
-------- -------
Income before income taxes 7,013 20,571
Income tax expense (2,777) (8,105)
-------- --------
Net income $ 4,236 12,466
======== ========
Primary net income
per share $ 0.26 0.74
======== ========
Weighted average number
of common and common
equivalent shares 16,478,631 16,791,250
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4
Carson Pirie Scott & Co. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended August 2, 1997 and August 3, 1996
(Unaudited)
(dollars in thousands)
Six months ended
-----------------------
August 2, August 3,
1997 1996
-------- ---------
Net cash provided by
operating activities $ 50,992 35,619
------- ------
Cash flows from investing activities:
Proceeds from sale of
marketable securities 100 31,094
Purchases of property
and equipment (27,556) (27,243)
Proceeds from disposition
of assets - 603
------- -------
Net cash provided (used) by
investing activities (27,456) 4,454
------- -------
Cash flows from financing activities:
Stock options exercised 1,909 481
Repurchase of common stock (7,445) (7,366)
Repayments of long-term
debt and other obligations (1,489) (1,713)
Net repayments under
receivables facility (20,211) (45,000)
Debt issuance costs and other 969 (4,913)
------- -------
Net cash used by
financing activities (26,267) (58,511)
-------- -------
Net decrease in cash
and cash equivalents (2,731) (18,438)
Cash and cash equivalents at
beginning of the period 20,618 44,384
------- -------
Cash and cash equivalents
at end of the period $ 17,887 25,946
======= =======
See accompanying notes to consolidated financial statements.
Page 5
Carson Pirie Scott & Co. and Subsidiaries
Notes to Consolidated Financial Statements
August 2, 1997
(Unaudited)
(1) The Company
Carson Pirie Scott & Co.(CPS) and its subsidiaries (together, the Company)
operate 52 traditional department stores and four furniture stores which are
located in Illinois, Wisconsin, Indiana and Minnesota.
(2) Opinion of Management
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring accruals,
considered necessary to present fairly the Company's consolidated financial
statements. All intercompany balances and transactions have been eliminated in
consolidation. The accompanying consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
filed in CPS's annual report on Form 10-K for the year ended February 1, 1997.
The results of operations for the six months ended August 2, 1997 are not
necessarily indicative of the results to be expected for the full year due to
the seasonal nature of the retail industry.
(3) Derivative Financial Instruments
Interest rate cap agreements are used by the Company in the management of its
interest rate risk. The net amounts paid under interest rate cap agreements
designated as hedges are capitalized and recognized over the life of the
underlying debt agreements, as an adjustment to interest expense. When
applicable, the related amounts receivable from the counter - parties are
included in other current assets. The Company deferred gains and losses related
to various hedged interest rate derivative financial instrument agreements since
the underlying debt was outstanding.
(4) Year 2000 Information System Preparation Costs
The Company previously disclosed on a Form 8-K dated June 30, 1997 filed with
the Securities and Exchange Commission that the Company entered into a lease
agreement to upgrade its mainframe computer system processor. The new processor
provides the Company with increased capacity that is necessary for the Company
to operate its existing systems and simultaneously test year 2000 information
system upgrades. The terminated lease was recorded by the Company as a capital
lease and the $3.1 million undepreciated asset value was written down to zero.
Page 6
Carson Pirie Scott & Co. and Subsidiaries
Notes to Consolidated Financial Statements
August 2, 1997
(Unaudited)
The Company records year 2000 information system preparation costs in other
expense. The Company anticipates these costs will be approximately $5.1 million
in 1997, of which $4.3 million was recorded for the six months ended August 2,
1997. The Company estimated in its first quarter 10-Q that year 2000 costs would
be approximately $2.0 million in 1997. The estimate increased to $5.1 million to
reflect the lease termination.
(5) Share Repurchases
During the six months ended August 2, 1997, the Company repurchased 244,300
shares of its common stock for $7.4 million under its $20.0 million buyback
program.
Page 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial information, discussion, and analysis which follow are based upon
and should be read in conjunction with the Consolidated Financial Statements and
the Notes thereto.
Results of Operations
Comparison of the three months ended August 2, 1997 and August 3, 1996
Net sales. Net sales were $243.8 million for the three months ended August 2,
1997 as compared to $225.0 million for the three months ended August 3, 1996, an
increase of $18.8 million or 8.3%. The net sales increase was due to new store
openings, offset slightly by the closing of one underperforming location, and a
5.5% comparable store sales increase. The Company opened department store
locations at the Cherryvale Mall located in Rockford, Illinois in June 1996 and
at the Fox Valley Mall located in Aurora, Illinois in October 1996. In addition,
the Company opened a freestanding furniture location in Brookfield, Wisconsin in
October, 1996. The 5.5% comparable store sales increase for the quarter was
broad-based encompassing most merchandise categories.
Gross margin. Gross margin was $89.5 million for the 1997 three-month period
versus $83.5 million for the 1996 three-month period, an increase of $6.0
million or 7.2%. Gross margin as a percentage of net sales was 36.7% for the
1997 three-month period compared to 37.1% for the comparable prior period. The
margin rate decrease was primarily due to the mix of merchandise sold and a
higher level of markdowns.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $74.2 million for the 1997 three-month period
versus $71.5 million for the 1996 three-month period, an increase of $2.7
million or 3.8%. Selling, general and administrative expenses as a percentage of
sales were 30.4% and 31.8% for the quarters ended August 2, 1997 and August 3,
1996, respectively. The decrease in rate resulted primarily from the controlling
of fixed expenses, which were distributed over a larger sales base in the
current period.
Depreciation and amortization. Depreciation and amortization increased to $5.0
million for the three months ended August 2, 1997 from $4.0 million for the
three months ended August 3, 1996. Depreciation expense increased $1.0 million
for the 1997 period as the Company's capital expenditure program increased the
carrying value of property, fixtures and equipment. The Company anticipates that
the level of depreciation expense will continue to rise as the Company continues
its capital expenditures for new store acquisitions and store renovations.
Other expense. The Company recorded $3.7 million in year 2000 information system
preparation costs for the quarter ended August 2, 1997, which includes the
write-down of the terminated lease described in Note 4 to the Consolidated
Financial Statements.
Page 8
Interest expense, net. Interest expense, net increased to $4.1 million for the
three-month period ended August 2, 1997 as compared to $3.4 million for the
three-month period ended August 3, 1996. The increase was due primarily to the
absence of interest income in 1997 from the Company's interest in 9% Junior
Subordinated Exchange Debentures Due 2004 of County Seat Holdings, Inc., which
were written down to zero in the third quarter of 1996 and subsequently sold in
the first quarter of 1997.
Income tax expense. Income tax expense for the three months ended August 2, 1997
and August 3, 1996 was $1.1 million and $1.8 million, respectively, resulting in
effective income tax rates of 39.6% and 39.4%, respectively. These rates differ
from the federal statutory rate of 35.0% due primarily to state and local income
taxes.
Comparison of the six months ended August 2, 1997 and August 3, 1996
Net sales. Net sales were $501.9 million for the six months ended August 2, 1997
as compared to $461.8 million for the six months ended August 3, 1996, a
increase of $40.1 million or 8.7%. The net sales increase was due to new store
openings, offset slightly by the closing of one underperforming location, and a
4.7% comparable store sales increase. The Company opened department store
locations at the Cherryvale Mall located in Rockford, Illinois in June 1996 and
at the Fox Valley Mall located in Aurora, Illinois in October 1996. In addition,
the Company opened a freestanding furniture location in Brookfield, Wisconsin in
October, 1996. The 4.7% comparable store sales increase was broad-based
encompassing most merchandise categories.
Gross margin. Gross margin was $179.9 million for the 1997 six-month period
versus $166.5 million for the 1996 six-month period, an increase of $13.4
million or 8.0%. Gross margin as a percentage of net sales was 35.8% for the
1997 six-month period compared to 36.1% for the comparable prior period. The
gross margin rate decrease was primarily due to the mix of merchandise sold and
higher markdowns in the second quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $150.5 million for the 1997 six-month period versus
$142.7 million for the 1996 six-month period, an increase of $7.8 million or
5.4%. Selling, general and administrative expenses as a percentage of sales were
30.0% and 30.9% for the six months ended August 2, 1997 and August 3, 1996,
respectively. The increase in expense dollars was primarily due to costs
associated with new stores, higher wage rates and higher bad debt more than
offset by finance charge income. The decrease in rate resulted primarily from
the controlling of fixed expenses, which were distributed over a larger sales
base in the current period.
Page 9
Depreciation and amortization. Depreciation and amortization increased to $10.1
million for the six months ended August 2, 1997 from $8.1 million for the six
months ended August 3, 1996. Depreciation expense increased $2.0 million for the
1997 period as the Company's capital expenditure program increased the carrying
value of property, fixtures and equipment. The Company anticipates that the
level of depreciation expense will continue to rise as the Company continues its
capital expenditures for new store acquisitions and store renovations.
Other expense. The Company recorded $4.3 million in year 2000 information system
preparation costs for the six months ended August 2, 1997, which includes the
write-down of the terminated lease described in Note 4 of the Consolidated
Financial Statements.
Interest expense, net. Interest expense, net increased to $8.3 million for the
six-month period ended August 2, 1997 as compared to $7.1 million for the
six-month period ended August 3, 1996. The increase was due primarily to the
absence of interest income in 1997 from the Company's interest in 9% Junior
Subordinated Exchange Debentures Due 2004 of County Seat Holdings, Inc., which
were written down to zero in the third quarter of 1996 and subsequently sold in
the first quarter of 1997.
Gain on sale of marketable securities. During the six months ended August 3,
1996, the Company sold 1,026,550 shares of Proffitt's, Inc. common stock for
$31.1 million and realized a gain of $14.9 million.
Other expense. The Company made a $2.5 million cash contribution to the Carson
Pirie Scott Foundation during the six months ended August 3, 1996.
Income tax expense. Income tax expense for the six months ended August 2, 1997
and August 3, 1996 was $2.8 million and $8.1 million, respectively, resulting in
effective income tax rates of 39.6% and 39.4%, respectively. These rates differ
from the federal statutory rate of 35.0% due primarily to state and local income
taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents position on August 2, 1997 totaled $17.9
million and outstanding debt totaled $142.6 million, resulting in a net debt
position (Net Debt) of $124.7 million. Net Debt is outstanding debt less cash
and cash equivalents. The Company believes Net Debt is a useful measure of its
liquidity position given the Company's ability to apply cash to its outstanding
debt. For the six months ended August 2, 1997, Net Debt declined $17.2 million,
which is primarily due to net cash provided by operations, offset by
expenditures under the Company's capital expenditure program and repurchases of
common stock under the CPS buyback program.
National Bank of the Great Lakes (NBGL), the Company's wholly owned subsidiary,
extends credit to the Company's customers through the NBGL credit card program.
The NBGL credit card program is subject to economic and competitive factors,
many of which are beyond the Company's control, that may materially affect the
future profitability of the NBGL credit card program.
Page 10
Among these factors are increasing competition from third party cards, which has
negatively affected the percentage of net sales transacted on the NBGL credit
card. The percentage of net sales transacted on NBGL credit cards declined
approximately 3.2 percentage points for the six months ended August 2, 1997
compared to the six months ended August 3, 1996 and may continue to decline.
Despite this decrease in penetration, NBGL generated an additional $2.9 million
in finance charge income during the six months ended August 2, 1997 on its
credit card portfolio due to higher average balances. Another factor is the
increasing number of personal bankruptcy filings by holders of NBGL's credit
cards, which may continue to increase. NBGL write-offs related to customer
bankruptcy filings increased from $1.8 million for the six months ended August
3, 1996 to $2.6 million for the six months ended August 2, 1997. These factors
and others could materially affect the profitability of the NBGL credit
operations.
A subsidiary of the Company has the right to borrow, subject to certain
limitations, including compliance with certain restrictive covenants, up to
$216.0 million under a receivables facility. As of August 2, 1997, borrowings
under the receivables facility totaled $93.3 million. In addition, the Company
has the right to borrow, subject to certain limitations, up to $150.0 million
under a working capital facility. The working capital facility had outstanding
letters of credit for $18.9 million as of August 2, 1997, which reduce
availability. No cash borrowings were outstanding under the working capital
facility during the six months ended August 2, 1997. In May 1997, the
receivables and working capital facilities were amended. The working capital
facility was amended to reduce fees and extend the maturity of the facility to
June 2000. The receivables facility was amended to reduce fees, extend the
maturity of $125.0 million of the facility to June 2000 and adjust the maturity
on the remaining $75.0 million of the facility to May 1998. The remaining $16.0
million commitment under the receivables facility matures in June 2000.
In fiscal 1997, the Company anticipates spending $60 million for capital
expenditures which will be allocated as follows: store programs of $46 million
which includes the completion of five store renovations, and the purchase of one
store in February 1997 that was previously leased by the Company; technology
programs of $4 million and other programs of $10 million.
As of February 1, 1997, the Company had federal and state net operating loss
(NOL) carryforwards of approximately $128 million. Although subject to certain
limitations, the future utilization of the NOL carryforwards and other tax
benefits will enable the Company to reduce its cash requirements for income tax
payments in the next several fiscal years from that which would otherwise be
payable.
Page 11
The Company believes that it will have sufficient funds available from cash on
hand, cash from operations, the receivables facility and the working capital
facility to satisfy the Company's needs for working capital, planned capital
expenditures, debt service and operations during the next several fiscal years.
However, the Company can give no assurance that the Company's future operating
performance, net sales and cash flows, all of which are subject to financial,
general and regional economic, competitive and other factors affecting the
Company, many of which are beyond its control, will be adequate to generate
sufficient funds to meet the Company's needs during the next several fiscal
years.
For the year ending January 31, 1998, or fiscal 1997, the Company will adopt the
Financial Accounting Standards Board's (FASB) Statement of Financial Standards
No. 128, "Earnings per Share" (SFAS No. 128), which specifies changes in the
computation, presentation and disclosure requirements of earnings per share
information. The Company does not believe the adoption of SFAS No. 128 will have
a material impact on its annual earnings per share calculation.
For the year ending January 30, 1999, or fiscal 1998, the Company will adopt the
FASB's Statement of Financial Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130), which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. In addition, in fiscal 1998, the Company will adopt FASB's
Statement of Financial Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131), which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and related disclosures to
shareholders.
Seasonality and Inflation
The Company's business is seasonal in nature with a high proportion of sales and
net income generated in November and December. Over the last several years, the
Company's customers have demonstrated an inclination to buy closer to the time
of need. In response, the Company has been adjusting the flow of merchandise to
better anticipate customer buying patterns.
Working capital requirements fluctuate during the year, increasing somewhat in
mid-summer in anticipation of the fall merchandising season and increasing
substantially prior to the Christmas season when the Company must carry
significantly higher inventory levels. Inflationary pressures on the cost of
merchandise inventory and operating expenses have been low, and historically,
have been offset by a combination of comparable-store sales increases and
improved productivity.
Page 12
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held an annual meeting of shareholders on June 4, 1997 for
the following purposes:
Item 1: To elect seven directors;
Item 2: To approve the 1997 Senior Executive Bonus Plan;
Item 3: To approve the 1993 Stock Incentive Plan, as amended and
restated as of March 19, 1997; and
Item 4: To ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent accountants for the fiscal year ending January 31, 1998.
The number of votes cast for and withheld for each nominee for the
Company's Board of Directors were as follows:
FOR WITHHELD
Stanton J. Bluestone 14,421,843 379,556
John W. Burden III 14,421,843 379,556
Mark Dickstein 14,421,843 379,556
Chaim Y. Edelstein 14,421,843 379,556
William I. Jenkins 14,421,843 379,556
Mark L. Kaufman 14,421,843 379,556
Michael R. MacDonald 14,421,843 379,556
The number of votes cast for, against, abstain, and nonvote for Items 2,
3 and 4 were as follows:
FOR AGAINST ABSTAIN NONVOTE
Item 2 14,511,614 242,845 4,840 42,100
Item 3 11,380,381 3,401,754 6,334 12,930
Item 4 14,796,389 4,015 995 0
Page 13
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
----------
See Exhibit Index on page 15 of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
--------------------------
The following reports on Form 8-K were filed on the dates indicated
below during the quarter ended August 2, 1997:
May 16, 1997 Reported under Item 5 the Company's earnings
for the first quarter.
June 30, 1997 Reported under Item 5 the Company's agreement
to upgrade its mainframe computer system processor
and the write-down to zero of the undepreciated
asset value of the capital lease for the existing
processor.
SIGNATURE
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 thereunder duly authorized.
Date: September 15, 1997
Carson Pirie Scott & Co.
/s/ David J. Biese
----------------------------
David J. Biese
Vice President, Controller
(chief accounting officer
and authorized officer)
Page 14
EXHIBIT INDEX
Copies of documents listed below which are identified with an asterisk (*)have
previously been filed with the Securities and Exchange Commission (the
Commission) as exhibits to registration statements or reports filed with the
Commission and are incorporated into this Quarterly Report on Form 10-Q by
reference and made a part hereof. The exhibit number and the file number of each
document previously filed and incorporated into this Quarterly Report on Form
10-Q by reference are set forth below. Exhibits not identified with an asterisk
are filed with this Quarterly Report on Form 10-Q.
Exhibit Sequential Page
Number Description Numbers
- --------- --------------- ---------------
10.1B Second Amendment of Amended and Restated
Receivables Purchase Agreement, dated
as of May 15, 1997.
10.2A First Amendment to Revolving Credit
and Guaranty Agreement, dated as of
May 15, 1997.
10.3B Second Amendment of Liquidity Agreement,
dated as of May 15, 1997.
10.3C Third Amendment of Liquidity Agreement,
dated as of July 2, 1997.
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule.
Page 15