SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 1996
Commission File Number 001-14346
SAKS HOLDINGS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 52-1685667
(State or other jurisdiction of (I.R.S. Employer or
incorporation organization) Identification No.)
12 East 49th Street, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 940-4048
(Registrant's telephone number, including area code)
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.
1) Yes /X/ No / /
2) Yes /X/ No / /
As of November 2, 1996 there were outstanding 63,113,452 shares of the
issuer's common stock, $.01 par value.
SAKS HOLDINGS, INC.
INDEX
Page
Part I. Financial Information Number
Item 1. Condensed Consolidated Balance Sheets as of
November 2, 1996, October 28, 1995 and
February 3, 1996 1
Condensed Consolidated Statements of Operations
for the Third quarter and Nine months ended
November 2, 1996 and October 28, 1995 2
Condensed Consolidated Statements of Cash Flows
for the Nine months ended November 2, 1996 and
October 28, 1995 3
Notes to Condensed Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Part II. Other Information
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 2, October 28, February 3,
(in thousands) 1996 1995 1996
-----------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 17,529 $ 7,132 $ 6,627
Accounts receivable, net 54,085 38,840 37,426
Inventories 499,601 416,888 339,723
Other current assets and restricted cash 50,878 35,300 61,538
-----------------------------------------
Total current assets 622,093 498,160 445,314
Property and equipment, net 797,145 781,262 780,264
Intangibles and other assets 135,156 143,579 140,609
-----------------------------------------
Total Assets $ 1,554,394 $ 1,423,001 $ 1,366,187
-----------------------------------------
-----------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable, trade $ 200,926 $ 179,896 $ 119,399
Accrued liabilities 97,486 116,462 119,312
Taxes other than income taxes 18,915 34,896 21,456
Current portion of long term debt 0 19,825 26,463
Other 4,790 4,412 4,772
-----------------------------------------
Total current liabilities 322,117 355,491 291,402
Long term debt 606,841 865,890 840,239
Other non current liabilities 143,024 146,075 151,371
-----------------------------------------
Total liabilities 1,071,982 1,367,456 1,283,012
Stockholders' equity 482,412 55,545 83,175
-----------------------------------------
Total Liabilities and Stockholders' Equity $ 1,554,394 $ 1,423,001 $ 1,366,187
-----------------------------------------
-----------------------------------------
See Notes to the Unaudited Condensed Consolidated Financial Statements
1
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS of OPERATIONS
(UNAUDITED)
Third Quarter Ended Nine Months Ended
(In thousands except for November 2, October 28, November 2, October 28,
per share amounts) 1996 1995 1996 1995
------------------------------ ----------------------------
Net sales $ 476,271 $ 407,990 $ 1,344,516 $ 1,145,783
Cost of sales, including buying & occupancy (319,624) (274,942) (940,796) (800,333)
----------------------------- ----------------------------
Gross margin 156,647 133,048 403,720 345,450
Selling, general and administrative expenses (124,977) (116,121) (355,494) (326,860)
Impairment and special charges 0 (27,515) 0 (36,415)
----------------------------- ----------------------------
Operating income (loss) 31,670 (10,588) 48,226 (17,825)
Interest expense, net (15,860) (24,731) (58,022) (68,180)
----------------------------- ----------------------------
Income (loss) before income taxes
and extraordinary charge 15,810 (35,319) (9,796) (86,005)
Income taxes 0 0 0 0
----------------------------- ----------------------------
Income (loss) before extraordinary charge 15,810 (35,319) (9,796) (86,005)
Extraordinary charge-loss on early
extinguishment of debt (6,455) 0 (9,795) (5,684)
----------------------------- ----------------------------
Net income (loss) $ 9,355 $ (35,319) $ (19,591) $ (91,689)
----------------------------- ----------------------------
----------------------------- ----------------------------
Net income (loss) per share before extraordinary charge $ 0.25 $ (0.79) $ (0.18) $ (1.91)
----------------------------- ----------------------------
----------------------------- ----------------------------
Net income (loss) per share $ 0.15 $ (0.79) $ (0.35) $ (2.04)
----------------------------- ----------------------------
----------------------------- ----------------------------
Weighted average shares outstanding 64,408 44,955 55,892 44,955
----------------------------- ----------------------------
----------------------------- ----------------------------
See Notes to the Unaudited Condensed Consolidated Financial Statements
2
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
(UNAUDITED)
(in thousands) Nine Months Ended
November 2, October 28,
1996 1995
--------------------------
Net income (loss) and depreciation and amortization $ 35,831 $ (34,929)
Adjustments to reconcile to net cash used in operating activities:
Extraordinary charge - loss on early extinguishment of debt 9,795 5,684
Impairment and special charges 0 36,415
Change in operating assets and liabilities (134,375) (50,885)
-------------------------
Net cash used in operating activities (88,749) (43,715)
Cash flows from investing activities:
Proceeds from sale and sale-leaseback of assets 22,593 3,750
Capital expenditures, net of construction allowances received (71,445) (60,213)
Proceeds from sale of subordinated certificates 0 13,427
Other 4,396 3,294
-------------------------
Net cash used in investing activities (44,456) (39,742)
Cash flows from financing activities:
Additional paid-in-capital from initial public offering 417,769 0
Net payment under senior credit facility (198,101) (4,467)
Proceeds from Commercial Mortgage Pass-Through Certificates 0 335,000
Payment of Euronotes 0 (335,000)
Proceeds from issuance 5 1/2% Convertible Subordinated Notes 276,000 0
Proceeds from Term Loans 0 125,000
Payment of Term Loans (283,602) (9,913)
Payment of 9% Subordinated Notes (50,000) 0
Payment of REMIC Certificates (4,159) 0
Financing costs (11,918) (26,876)
Other (1,882) (2,783)
-------------------------
Net cash provided by financing activities 144,107 80,961
-------------------------
Increase (decrease) in cash and cash equivalents $ 10,902 $ (2,496)
-------------------------
-------------------------
See Notes to the Unaudited Condensed Consolidated Financial Statements
3
SAKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Saks
Holdings, Inc. and its subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation have been included.
The retail industry is seasonal in nature, and historically the results of
operations for interim periods may not be indicative of the results for the full
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's consolidated financial
statements for the year ended February 3, 1996 which were previously filed.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
2. Initial Public Offering
In May 1996, the Company completed an initial public offering (the
"Offering"). The Company sold approximately 18 million shares of common stock
at an initial offering price of $25.00 per share. The net proceeds from the
Offering were $417.8 million. The net proceeds from the Offering were
primarily used to prepay term loan borrowings under the Senior Credit
Facility (the "Facility") and repay outstanding balances on the revolving
credit portion of the Facility. The Company recorded an extraordinary charge
of $3.3 million ($.06 per share for the nine months ended November 2, 1996)
associated with the accelerated write-off of deferred financing costs related
to these pre-payments. Effective with the Offering, the Company amended the
Facility to reduce the spread on its variable interest rate borrowings under
the Facility and change the availability of borrowings under the Facility.
3. 5 1/2% Convertible Subordinated Notes
In September 1996, the Company issued $276 million aggregate principal amount
of 5 1/2% Convertible Subordinated Notes (the "Notes"). The net cash proceeds
after offering expenses and financing costs were $267.5 million. The Notes are
due on September 15, 2006 and are convertible at any time prior to maturity
into shares of the Company's common stock at a conversion rate of 24.0601
shares of common stock for each $1,000 principal amount of Notes, which is
equivalent to a conversion price of approximately $41.563 per share. If all
of the Notes are converted, a total of 6,640,588 shares of common stock will
be issued. The Notes are redeemable at the Company's option at any time
4
on or after September 15, 1999 at the redemption prices set forth in the Notes.
The Notes are unsecured obligations subordinated in right of payment to all
existing and future senior indebtedness of the Company and are effectively
subordinated in right of payment to all indebtedness and other liabilities of
its subsidiaries. The Notes contain no sinking fund requirements.
The net proceeds from the issuance of the Notes were primarily used to prepay
term loan borrowings under the the Facility and repay outstanding balances
on the revolving credit portion of the Facility. During the third quarter of
fiscal 1996, the Company prepaid its $50 million 9% Subordinated Notes.
Additionally, during the third quarter of fiscal 1996, the Company
recorded an additional extraordinary charge of $6.5 million ($.12 per share
for the nine months ended November 2, 1996) associated with the accelerated
write-off of deferred financing costs related to these pre-payments.
Concurrent with the issuance of the Notes, the Company completed an offering of
9.2 million shares of common stock at an offering price of $33.25 per share.
All shares offered in this transaction were sold by certain shareholders and the
Company did not receive any of the proceeds of the sale. The Company paid $.8
million of fees and expenses related to the offering.
4. Credit Agreement
In October 1996, the Company entered into a credit agreement (the "New Credit
Agreement") which amended and restated the Facility. Under the New Credit
Agreement, the revolving credit commitments were increased to $350 million and
the maturity of the revolving credit commitments was extended to October 30,
2001. The availability under the New Credit Agreement is reduced by any standby
or commercial letters of credit. As of November 2, 1996, the Company has $344
million of borrowing capacity under the New Credit Agreement.
5. Special Charges
During the nine month period ended October 28, 1995, the Company recorded
special charges totaling $36.4 million ($.81 per share for the nine months
ended October 28, 1995). The charges recorded consist of exit costs of its
Yonkers distribution center (see note 7), the integration costs of former I.
Magnin store locations and writedown of capitalized EDP software and amounted
to $19.0 million, $8.9 million and $8.5 million, respectively.
6. Receivables Securitization
SFA Finance Company ("Finco") is a wholly owned subsidiary established for
the purpose of purchasing proprietary credit card receivables (the
"Receivables") from Saks & Company ("Saks"), a wholly owned subsidiary of
Saks Holdings, Inc. In April 1996, Saks Master Trust (the "New Receivables
Trust") was formed pursuant to a pooling and servicing agreement among Finco,
Saks, as servicer, and Bankers Trust Company, as trustee (the "New Accounts
Receivable Trustee"). The assets of the New Receivables Trust currently
consist principally of a certificate evidencing the entire interest in the
Transition Certificate, Series 1996-1 (the "Transition Certificate"), which
is the second outstanding series issued by SFA Master Trust. The Transition
Certificate represents the interest in the assets of the SFA Master Trust not
represented by Series 1991-2 and has a principal amount which will fluctuate
from time to time according to the level of receivables in the SFA
5
Master Trust in excess of the amount required to support the Series 1991-2
Certificates. On the date on which Series 1991-2 has been fully liquidated (the
"Existing Trust Termination Date"), the assets of the SFA Master Trust will be
transferred to the New Receivables Trust in exchange for the cancellation of the
Transition Certificate. After the Existing Trust Termination Date, Saks will
continue to receive a fee for servicing the Receivables for the New Receivables
Trust.
In April 1996, the New Receivables Trust sold two series of certificates of
beneficial interests. These certificates represent undivided interests in the
receivables generated from time to time by Saks by a portfolio of accounts
meeting the designated eligibility requirements. Series 1996-1 is a medium term
series that matures in April 1999. Approximately $297 million of Class A Series
1996-1 Certificates and $53 million of Class B Series 1996-1 Certificates were
sold in non-public transactions. Approximately $47 million of subordinated
Series 1996-1 Certificates were privately placed at the same time. All such
certificates bear interest at fixed spreads over one-month LIBOR. Finco retains
approximately $16.5 million of subordinated Series 1996-1 Certificates. Series
1996-1 has a substantial prefunded amount, which will be invested in Receivables
(via the Transition Certificate) as cash allocable to Series 1991-2 is no longer
reinvested in Receivables, but instead is accumulated in order to make the
principal payment due with respect thereto in November 1996.
Series 1996-2 is a series with a variable principal amount. The Class A Series
1996-2 Certificates have a maximum outstanding principal balance of $100
million and have been privately placed. Subordinated Series 1996-2 Certificates,
with an aggregate maximum outstanding principal balance of approximately $13.4
million, also were privately placed. All Series 1996-2 Certificates bear
interest at fixed spreads over one-month LIBOR. Finco will retain up to
approximately $5.0 million of subordinated Series 1996-2 Certificates. The
principal balance of Series 1996-2 is currently zero.
7. Commitments and Contingencies
Saks is a defendant in a suit pending in the Supreme Court of the State of New
York, County of New York, in which the plaintiff, a former Saks employee,
contends, among other things, that Saks was negligent in hiring a co-worker who
allegedly assaulted the plaintiff. The plaintiff is seeking $10 million in
damages. Saks has moved to dismiss the action. Saks believes that, subject to a
self-insured retention, the claim is covered by Saks' insurance. In connection
with the suit, Saks also is in litigation with one of its insurance providers
regarding the provider's duties and obligations under its insurance contract
with Saks. Saks does not believe that the resolution of these suits will have a
material adverse impact on its financial position or results of operations.The
Company also is involved in various other suits and claims in the ordinary
course of business. Management does not believe that the disposition of such
suits will have a material adverse effect on the financial position or
continuing operations of the Company.
The Company has entered into an agreement to sell its current distribution
facility, located in Yonkers, New York. The sale is subject to the successful
rezoning of the property. If rezoned, proceeds associated with the sale would
fall within a range of $20 to $25 million. A sale of the distribution center in
this price range could result in a gain on sale of $8 to $13 million.
Management is unable to determine at this time if this transaction will be
completed.
6
The Company has entered into an agreement with Dayton Hudson Corporation and
certain of its affiliates to acquire three Marshall Field store locations in
Texas, adding 250,000 square feet of store space. Two of these stores are
intended to replace two smaller stores currently operated by Saks in Houston and
Dallas. Saks intends to spend approximately $100 million in connection with the
acquisition and renovation of these stores. Completion of the transaction is
subject to certain conditions and the acquired stores are scheduled to open in
the third quarter of 1997.
8. Accounting for the Impairment of Long-Lived Assets
In 1996, the Company adopted the provisions Statement of Financial Accounting
Standards No.121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Statement prescribes the accounting
for the impairment of long-lived assets, such as property, plant and equipment
and intangible assets, as well as the accounting for long-lived assets that are
held for disposal. The statement requires that such assets be reviewed only when
events or circumstances indicate that an impairment might exist. The adoption of
this Statement in 1996 did not have a material effect on the results of
operations or financial position of the Company.
7
SAKS HOLDINGS, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations for the Nine Months Ended November 2, 1996
Compared with the Nine Months Ended October 28, 1995
Net sales for the nine months ended November 2, 1996 were $1,344.5 million,
an increase of $198.7 million, or 17.3%, over net sales of $1,145.8 million
for the nine months ended October 28, 1995. Comparable sales increased 12.3%
from the fiscal 1995 period. Because fiscal 1995 included 53 weeks, the nine
month periods in fiscal 1995 and 1996 are not comparable. Adjusting for the
one calendar week difference in the periods, the increases in net sales and
comparable sales were 16.0% and 11.2% respectively.
Full-line and resort store net sales increased $130.2 million, or 12.7 %, from
$1,026.8 million for the nine months ended October 28, 1995 to $1,157.0 million
for the nine months ended November 2, 1996. Comparable sales for full-line and
resort stores increased 11.2% from the comparable calendar period in fiscal
1995. Off 5th store net sales for the nine months ended November 2, 1996
increased $59.6 million, or 84.9%, from $70.1 million for the nine months ended
October 28, 1995 to $129.7 million, primarily as a result of opening sixteen new
stores in the fourth quarter of 1995 and the first three quarters of 1996.
Comparable sales for Off 5th stores increased 10.2% from the comparable calendar
period in fiscal 1995. Folio catalog net sales for the nine months ended
November 2, 1996 increased by $9.0 million, or 18.5%, from $48.9 million for the
nine months ended October 28, 1995 to $57.9 million.
Cost of sales includes the cost of merchandise and buying and occupancy costs.
Cost of sales increased $140.5 million, or 17.6%, during the nine months ended
November 2, 1996 compared to the nine months ended October 28, 1995. As a
percentage of net sales, cost of sales, including buying and occupancy costs,
was 70.0% for the nine months ended November 2, 1996 which was comparable to
69.9% for the nine months ended October 28, 1995.
Selling, general and administrative expenses increased by $28.6 million or 8.8%
to $355.5 million for the nine months ended November 2, 1996 from the comparable
period in fiscal 1995, primarily due to higher sales volume related costs. As
a percentage of net sales, selling, general and administrative expenses were
26.4% for the nine months ended November 2, 1996 compared to 28.5% for the nine
months ended October 28, 1995. The improvement in the selling, general and
administrative expense rate resulted primarily from expense leverage associated
with the sales growth.
Special charges of $36.4 million ($.81 per share) were recorded during the
nine months ended October 28, 1995. The charges recorded consist of exit
costs of the Yonkers distribution center, the integration costs of former I.
Magnin store locations and writedown of capitalized EDP software and amounted
to $19.0 million, $8.9 million and $8.5 million, respectively.
8
Operating income was $48.2 million for the nine months ended November 2, 1996,
an increase of $66.1 million from the nine months ended October 28, 1995.
Excluding the special charges in the nine months ended October 28, 1995,
operating income increased by $29.6 million.
Interest expense decreased 14.9% to $58.0 million for the nine months ended
November 2, 1996 compared to the nine months ended October 28, 1995, due to
reduced debt levels following the Company's initial public offering and the
exchange of higher cost debt with lower cost debt associated with the
September issuance by the Company of 5 1/2% Convertible Subordinated Notes
due 2006.
The Company anticipates that the income tax provision for the full year will not
be material, therefore no tax benefit or provision has been reflected in the
nine month period ended November 2, 1996.
Net loss for the nine months ended November 2, 1996 was $19.6 million, an
improvement of $72.1 million from the nine months ended October 28, 1995.
Earnings per share comparisons between 1996 and 1995 are not meaningful as a
result of the change in average shares outstanding.
Supplemental information:
The Company completed its initial public offering of common stock during May
1996. In order to provide meaningful comparisons, pro forma results as if the
offering had been completed at the beginning of fiscal 1995 are provided. The
pro forma results adjust reported nine month results to give effect to the
elimination of management fees, interest savings on debt repayments and the
elimination of early extinguishment of debt charges and to reflect an
increase in the number of shares outstanding. On a pro forma basis, the
Company's net income was $1.4 million or $.02 per share for the nine months
ended November 2, 1996, compared to a net loss of $58.7 million or $.91 per
share for the nine months ended October 28, 1995. The Company's 1995 pro
forma loss includes special charges of $36.4 million or $.57 per share. The
charges recorded consist of exit costs of its Yonkers distribution center,
the integration costs of former I. Magnin store locations and writedown of
capitalized EDP software and amounted to $19.0 million, $8.9 million and $8.5
million, respectively.
Results of Operations for the Third Quarter Ended November 2, 1996
Compared with the Third Quarter Ended October 28, 1995
Net sales for the third quarter ended November 2, 1996 were $476.3 million,
an increase of $68.3 million or 16.7% over net sales of $408.0 million for
the third quarter ended October 28, 1995. Comparable sales increased 11.2%
from the fiscal 1995 period. Because fiscal 1995 included 53 weeks, the
third quarter periods in fiscal 1995 and 1996 are not comparable. Adjusting
for the one calendar week difference in the periods, the increases in net
sales and comparable sales were 14.4% and 9.2% respectively.
9
Full-line and resort store net sales increased $43.7 million, or 12.1%, from
$361.3 million for the third quarter ended October 28, 1995 to $405.0 million
for the third quarter ended November2,1996. Comparable sales for full-line and
resort stores increased 9.7% from the comparable calendar period in fiscal 1995.
Off 5th store net sales for the third quarter ended November 2, 1996 increased
$22.2 million, or 74.5%, from $29.9 million for the third quarter ended October
28, 1995 to $52.1 million, primarily as a result of opening sixteen new stores
in the fourth quarter of 1995 and the first three quarters of 1996. Comparable
sales for Off 5th stores increased 7.3% from the comparable calendar period in
fiscal 1995. Folio catalog net sales for the third quarter ended November 2,
1996 increased by $2.4 million, or 14.0%, from $16.8 million for the third
quarter ended October 28, 1995 to $19.2 million.
Cost of sales includes the cost of merchandise and buying and occupancy costs.
Cost of sales increased $44.7 million, or 16.3%, during the third quarter ended
November 2, 1996 compared to the third quarter ended October 28, 1995. As a
percentage of net sales, cost of sales, including buying and occupancy costs,
was 67.1% for the third quarter ended November 2, 1996 compared to 67.4% for the
third quarter ended October 28, 1995. The slight decrease in the cost of sales
rate for the third quarter ended November 2, 1996 was primarily due to improved
leverage of buying and occupancy costs associated with sales growth.
Selling, general and administrative expenses increased by $8.9 million or 7.6%
to $125.0 million in the third quarter ended November 2, 1996 from the
comparable period in fiscal 1995, primarily due to higher sales volume related
costs. As a percentage of net sales, selling, general and administrative
expenses were 26.2% for the third quarter ended November 2, 1996 compared to
28.5% for the third quarter ended October 28, 1995. The improvement in the
selling, general and administrative expense rate resulted primarily from expense
leverage associated with sales growth.
Special charges of $27.5 million ($.61 per share) were recorded during the
quarter ended October28, 1995. The charges recorded consist of exit costs of
the Yonkers distribution center and writedown of capitalized EDP software and
amounted to $19.0 million and $8.5 million, respectively.
Operating income was $31.7 million for the third quarter ended November 2, 1996,
an improvement of $42.3 million from the third quarter ended October 28, 1995.
Interest expense decreased 35.9% to $15.9 million in the third quarter ended
November 2, 1996 compared to the third quarter ended October 28, 1995, due to
reduced debt levels following the Company's initial public offering and and the
exchange of higher cost debt with lower cost debt associated with the September
issuance by the Company of 5 1/2% Convertible Subordinated Notes due 2006.
The Company anticipates that the income tax provision for the full year will not
be material, therefore no tax benefit or provision has been reflected in the
third quarter period ended November 2, 1996.
Net income for the third quarter ended November 2, 1996 was $9.4 million, an
improvement of $44.7 million from the third quarter ended October 28, 1995.
Earnings per share comparisons between 1996 and 1995 are not meaningful as a
result of the change in average shares outstanding.
10
Supplemental information:
The Company completed its initial public offering of common stock during May
1996. In order to provide meaningful comparisons, pro forma results as if the
offering had been completed at the beginning of fiscal 1995 are provided. The
pro forma results adjust reported third quarter results to give effect to the
elimination of management fees, interest savings on debt repayments and the
elimination of early extinguishment of debt charges and to reflect an increase
in shares outstanding. On a pro forma basis, the net income was $15.8 million or
$.25 per share for the third quarter ended November 2, 1996 compared to a net
loss of $26.0 million or $.40 per share for the nine months ended October 28,
1995. The 1995 pro forma loss includes special charges of $27.5 million or
$.43 per share. The charges recorded consist of exit costs of its Yonkers
distribution center and writedown of capitalized EDP software and amounted to
$19.0 million and $8.5 million, respectively.
Changes in Financial Condition and Liquidity since February 3, 1996
The Company completed an initial public offering of 18 million shares of
common stock during May 1996. The net proceeds of $417.8 million were
primarily used to prepay term loan borrowings under the Company's Senior
Credit Facility (the "Facility") and repay outstanding balances on the
revolving credit portion of the Facility. Upon completion of the offering,
the Company amended the Facility to reduce the spread on its variable
interest rate borrowings and to change availability of borrowings under the
Facility.
In September 1996, the Company issued $276 million aggregate principal amount
of 5 1/2% Convertible Subordinated Notes due 2006. The net cash proceeds after
offering expenses were $267.5 million. The net proceeds from the issuance of
the 5 1/2% Convertible Subordinated Notes due 2006 were primarily used to
prepay term loan borrowings under the the Facility and repay outstanding
balances on the revolving credit portion of the Facility. During the third
quarter the Company prepaid its $50 million 9% Subordinated Notes.
In October 1996, the Company entered into a credit agreement (the "New Credit
Agreement") which amended and restated the Facility. Under the New Credit
Agreement, the revolving credit commitments were increased to $350 million and
the maturity of the revolving credit commitments was extended to October 30,
2001. The availability under the New Credit Agreement is reduced by any standby
or commercial letters of credit. As of November 2, 1996, the Company has $344
million of borrowing capacity under the New Credit Agreement.
During the fiscal 1996 period, the Company financed its working capital needs
and capital expenditures primarily with cash provided by operations and by the
Facility. The following discussion analyzes liquidity and capital resources by
operating, investing and financing activities as presented in the Company's
Condensed Consolidated Statements of Cash Flows.
Net cash used in operating activities was $88.7 million during the nine
months ended November 2, 1996 compared to $43.7 million used in the nine
months ended October 28, 1995. This increase was primarily attributable to
an increase in working capital accounts in the 1996 period. The primary items
affecting working capital in the 1996 period were an increase in merchandise
inventories of $161.8 million due to a seasonal increase, the addition of new
stores and an increase to support existing store sales growth. This increase
was partially offset by an increase in accounts payable and accrued
liabilities of $51.7 million due to the timing of the related payments.
11
Net cash used in investing activities was $44.5 million during the nine
months ended November 2, 1996 compared to $39.7 million in the nine months
ended October 28, 1995. Capital expenditures were $71.4 million, net of
construction allowances, during the nine months ended November 2, 1996 and
consisted principally of construction of new stores and remodeling existing
stores. Capital expenditures, net of construction allowances in the nine
months ended October 28, 1995 were $60.2 million. Proceeds from the sale and
sale-leaseback of assets was $22.6 million during the nine months ended
November 2, 1996 compared to $3.8 million during the nine months ended
October 28, 1995. The increase in 1996 is due to a $22.6 million
sale-leaseback of one of the Company's store locations. In November 1996,
the Company opened three new full-line and resort stores and six additional
Off 5th stores completing its 1996 store opening plan.
Net cash provided from financing activities during the nine months ended
November 2, 1996 was $144.1 million compared to $81.0 million in the nine
months ended October 28, 1995. The 1996 amount reflects the proceeds from
the Company's May 1996 initial public offering of common stock and issuance
of the 5 1/2% Convertible Subordinated Notes due 2006, net of debt
repayments. The 1995 amount reflects increased borrowings used to acquire
four former I. Magnin store locations, net of financing costs related to the
refinancing of real estate borrowings.
In April 1996, the company replaced its existing accounts receivable
securitization program with a new facility. The program includes $413 million
in floating rate medium term notes and $118 million in variable principal
floating rate series. The medium term notes and variable principal amount
series mature in April 1999. In August 1996, the Company entered interest rate
swap agreements with a notional amount of $250 million to reduce its exposure to
changes in prevailing market interest rates.
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SAKS HOLDINGS, INC.
PART II OTHER INFORMATION
Item 1 Legal proceedings Not Applicable
Item 2 Changes in securities Not Applicable
Item 3 Defaults upon senior securities Not Applicable
Item 4 Submission of matters to a vote of security holders Not Applicable
Item 5 Other Information Not Applicable
Item 6(a) Exhibits Exhibit 27: Financial Data Schedule
Item 6(b) Reports on Form 8-K Not Applicable
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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 HOLDINGS, INC.
-------------------
(Registrant)
/s/ Mark E. Hood
------------------------
Date: December 12, 1996 Mark E. Hood
Senior Vice President - Finance
Chief Accounting Officer
14