SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20548
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 3, 1996
[ ] Transition report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from -------- to ---------
Commission File Number: 1-1594
CROWLEY, MILNER AND COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0454910
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2301 West Lafayette Boulevard, Detroit, Michigan 48216
(Address of principal executive offices)(Zip Code)
(313) 962-2400
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since 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, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of Registrant's common stock, as of
September 17, 1996, was 1,472,678
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWLEY, MILNER AND COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
AUGUST 3 JULY 29 AUGUST 3 JULY 29
1996 1995 1996 1995
(as restated) (as restated)
----------- ----------- ----------- -----------
Net Sales $44,767,149 $44,956,521 $21,500,534 $21,363,131
Cost of merchandise
and services sold 30,838,884 31,993,561 14,003,501 14,361,644
----------- ----------- ----------- -----------
13,928,265 12,962,960 7,497,033 7,001,487
Operating, selling
general and admin-
istrative expenses 16,008,651 15,425,306 8,020,620 7,566,972
----------- ----------- ----------- -----------
(2,080,386) (2,462,346) (523,587) (565,485)
Other (charges) credits:
Interest expense (872,418) (816,039) (435,071) (427,562)
Investment Income 51,919 48,434 23,150 29,331
Other 1,888 155,858 855 112,250
Earnings from the
operation of
Steinbach Stores 1,393,917 - 741,058 -
----------- ----------- ----------- -----------
Loss before
income taxes (1,505,080) (3,074,093) (193,595) (851,466)
Income tax credit - - - -
----------- ----------- ----------- -----------
Net loss $(1,505,080) $(3,074,093) $ (193,595) $ (851,466)
=========== =========== =========== ===========
Net loss per share $(1.57) $(3.23) $ (.20) $ (.89)
====== ====== ====== ======
Dividends per share $ .00 $ .00 $ .00 $ .00
====== ====== ====== ======
Average number of
Common equivalent
shares outstanding during
the period 957,878 951,364 957,878 951,364
=========== =========== =========== ===========
CROWLEY, MILNER AND COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
AUGUST 3 FEBRUARY 3 JULY 29
1996 1996 1995
(as restated) (as restated)
---------- ---------- ----------
ASSETS
Current assets
Cash and cash equivalents
(cash equivalents at
8/03/96-$292,927;
2/03/96-$241,047; and
7/29/95 - $338,090) $ 1,662,200 $ 540,613 $ 481,213
Accounts receivable(less:
allowances at 8/03/96-
$66,558; 2/03/96-$61,558;
and 7/29/95-$ 83,854) 2,461,731 2,014,918 750,787
Inventories at FIFO cost 19,855,739 21,250,958 20,010,169
Other current assets 2,408,562 2,567,954 1,879,462
----------- ----------- -----------
Total current assets 26,388,232 26,374,443 23,121,631
Other assets 4,741,098 4,766,006 4,804,740
Property, plant and equipment 23,830,520 23,594,510 24,986,611
Less: Allowance for
depreciation and
amortization 14,466,683 13,835,918 14,968,339
----------- ----------- -----------
9,363,837 9,758,592 10,018,272
----------- ----------- -----------
TOTAL ASSETS $40,493,167 $40,899,041 $37,944,643
=========== =========== ===========
CROWLEY, MILNER AND COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
AUGUST 3 FEBRUARY 3 JULY 29
1996 1996 1995
(as restated) (as restated)
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Accounts payable $ 5,080,371 $ 5,279,188 $ 4,126,343
Short term borrowings 10,108,641 8,499,392 7,554,728
Compensation and amounts
withheld therefrom 734,190 597,556 638,461
Taxes other than income
taxes 1,432,139 1,797,198 1,686,693
Income taxes 310,126 309,495 312,043
Current maturities of long
term debt 525,000 525,000 485,000
Capital lease obligations
- current 185,474 185,402 183,507
----------- ----------- -----------
Total Current Liabilities 18,375,941 17,193,231 14,986,775
Long Term Liabilities
Long term debt 5,325,000 5,325,000 5,850,000
Capital lease obligations 3,638,939 3,750,868 3,837,951
Other 1,761,165 1,757,278 1,605,811
----------- ----------- -----------
10,725,104 10,833,146 11,293,762
Shareholders' Equity
Common stock, authorized
4,000,000 shares;
outstanding 957,878
shares 957,878 966,069 951,364
Other capital 1,211,350 1,178,621 1,140,653
Retained Earnings 9,222,894 10,727,974 9,572,083
----------- ----------- -----------
11,392,122 12,872,664 11,664,106
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $40,493,167 $40,899,041 $37,944,643
=========== =========== ===========
CROWLEY, MILNER AND COMPANY
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
AUGUST 3 JULY 29
1996 1995
(as restated)
---------- ----------
OPERATING ACTIVITIES
Net loss $(1,505,080) $(3,074,093)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 630,765 671,117
Amortization of restricted stock award 13,756 60,485
Changes in Operating Assets and Liabilities:
(Increase) decrease in net accounts receivable (446,813) 291,873
Decrease in inventories 1,395,219 1,999,972
Decrease in prepaid expenses
and other assets 184,300 496,517
Decrease in accounts payable (198,817) (1,687,080)
Decrease in accrued compensation
and other liabilities (223,907) (533,750)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (150,577) (1,774,959)
INVESTMENT ACTIVITIES
Purchase of Properties (236,010) (115,363)
----------- -----------
NET CASH USED IN INVESTMENT ACTIVITIES (236,010) (117,363)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 51,342,970 52,810,509
Principal payments on revolving line
of credit (49,733,721) (49,162,298)
Principal payments on capital lease
obligations (111,857) (85,188)
Purchase of common stock and stock options - (1,228,212)
Proceeds from sale of common stock 10,782 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,508,174 2,334,811
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,121,587 442,489
Cash and cash equivalents at beginning of year 540,613 38,724
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,662,200 $ 481,213
=========== ===========
NOTES TO CONDENSED FINANCIAL STATEMENTS
August 3, 1996
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
thirteen and twenty-six week periods ended August 3, 1996 are not
necessarily indicative of the results that may be expected for the year
ending February 1, 1997, due to the seasonal nature of the retail department
store business. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended February 3, 1996.
Note B - Accounting Change
Effective May 4, 1996, the Company changed its method of valuing inventories
from the last-in, first-out (LIFO) to the first-in, first-out (FIFO) method.
The underlying rationale for this change, and the material impact the change
had on the Company's retained earnings, are discussed below. The change
from LIFO to FIFO has been applied retroactively. The effect of this
restatement was to increase the Company's retained earnings as of May 4,
1996, and as of January 28, 1995, by $5,919,420 and $5,135,672,
respectively. As a part of the restatement from LIFO to FIFO the Company
recorded a deferred tax asset of $1,580,000 and a current federal income tax
liability of $275,000 as a result of the taxable income which the Company
realized for federal income tax purposes due to this change in inventory
methods. The deferred tax asset results from the Company reorganizing a
portion of its net operating loss carryforward.
The Company's ability to obtain a steady flow of retail merchandise largely
is dependent on the short-term credit provided by its vendors that supply
the Company with its goods and their factors. Historically, the Company's
vendors have supplied the Company with goods on a "net 30-day" payment
basis. However, in light of the Company's net operating losses during
fiscal 1995 and the first six months of fiscal 1996, certain of the
Company's vendors and their factors have been requiring the Company to
maintain deposits with such vendors and/or pay for goods prior to shipment.
In addition, the Company has long-term indebtedness in connection with bonds
issued by The Economic Development Corporation of the City of Detroit. The
covenants for these bonds require (among other things) the Company must
maintain a net worth of not less than $5,000,000. Without the increase in
retained that resulted from the change from LIFO to FIFO, the minimum net
worth requirement might have been violated during the current fiscal year.
Given the emphasis on the Company's net worth placed by the Company's
vendors and their factors, management believes that a change in accounting
method for inventory valuation from LIFO to FIFO is appropriate. Management
also believes that the FIFO method of valuing inventories is preferable
because it provides a better measure of the current value of the inventories
and financial position of the Company.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Effective May 4, 1996, the Company changed its method of valuing inventories
from the last-in, first-out (LIFO) to the first-in, first-out (FIFO) method.
The underlying rationale for this change, and the material impact the change
had on the Company's retained earnings, are discussed below. The change
from LIFO to FIFO has been applied retroactively. The effect of this
restatement was to increase the Company's retained earnings as of May 4,
1996, and as of January 28, 1995, by $5,919,420 and $5,135,672,
respectively. As a part of the restatement from LIFO to FIFO the Company
recorded a deferred tax asset of $1,580,000 and a current federal income tax
liability of $275,000 as a result of the taxable income which the Company
realized for federal income tax purposes due to this change in inventory
methods. The deferred tax asset results from the Company reorganizing a
portion of its net operating loss carryforward.
The Company's ability to obtain a steady flow of retail merchandise largely
is dependent on the short-term credit provided by its vendors that supply
the Company with its goods and their factors. Historically, the Company's
vendors have supplied the Company with goods on a "net 30-day" payment
basis. However, in light of the Company's net operating losses during
fiscal 1995 and the first six months of fiscal 1996, certain of the
Company's vendors and their factors have been requiring the Company to
maintain deposits with such vendors and/or pay for goods prior to shipment.
In addition, the Company has long-term indebtedness in connection with bonds
issued by The Economic Development Corporation of the City of Detroit. The
covenants for these bonds require (among other things) the Company must
maintain a net worth of not less than $5,000,000. Without the increase in
retained that resulted from the change from LIFO to FIFO, the minimum net
worth requirement might have been violated during the current fiscal year.
Given the emphasis on the Company's net worth placed by the Company's
vendors and their factors, management believes that a change in accounting
method for inventory valuation from LIFO to FIFO is appropriate. Management
also believes that the FIFO method of valuing inventories is preferable
because it provides a better measure of the current value of the inventories
and financial position of the Company.
Net cash used in operating activities declined sharply for the six months
ended August 3, 1996, when compared with the same period last year. Net
cash used in operating activities amounted to $150,000 compared to
$1,775,000 last year. The decrease is primarily attributable to a reduction
in operating loss and a comparatively smaller decrease in accounts payable
for the period.
Net cash used in investment activities increased slightly for the six months
ended August 3, 1996, due to an increase in capital expenditures.
Net cash provided by financing activities declined slightly for the six
months ended August 3, 1996, compared to the same period last year. The
repurchase of outstanding stock and stock options from one of the Company's
primary shareholders in the six months ended July 29, 1995, caused higher
borrowings during that period. The borrowings outstanding on the Company's
short-term credit facility were significantly higher at August 3, 1996, than
at February 3, 1996, as a result of the vendors and their factors requiring
higher levels of deposits and prepayments on inventory orders.
Working capital was $8,012,000 at August 3, 1996 compared with $9,181,000 at
February 3, 1996 (as restated) and $8,135,000 (as restated) at July 29,
1995.
Results of Operations
For the second quarter ended August 3, 1996, a net loss of $193,595 ($0.20
per share) was recorded, compared with a restated net loss of $851,466
($0.89 per share) for the second quarter last year (earnings were restated
as a result of a change from the LIFO inventory method to the FIFO inventory
method - see "Financial Condition" section). The impact of the change on
current year earnings was not material. For the six months ended August 3,
1996, the net loss was $1,505,080 ($1.57 per share), compared with a
restated net loss of $3,074,093 ($3.23 per share) recorded for the first six
months last year. Total and comparable store sales for the second quarter
increased 1.0% to $21,500,534 from $21,363,131 for the same period last
year. For the six month period, net sales were $44,767,149, a slight
decrease from the $44,956,521 recorded last year.
Gross margins for the quarter improved $495,546, or 7.1%, when compared to
last year's second quarter. Margins, as a percent of sales, were 34.9% for
the second quarter compared with 32.8% for the same period last year. Year
to date margin dollars have increased $965,305, or 7.4%, and as a percent of
sales are 31.1% compared with 28.8% for the same period last year. The
significant improvement in gross margins can be attributed to management's
efforts to enhance procedures to control inventory shrinkage, with a
particular focus in revising and implementing loss prevention techniques and
procedures.
Operating expenses increased $453,648, or 6.0%, for the second quarter, when
compared to the same period last year. Expenses as a percent of sales
amounted to 37.3% in the quarter compared with 35.4% for the second quarter
last year. An increase in payroll expense was the single largest
contributor to the overall expense increase for the second quarter,
accounting for $402,000, or 89%, of the increase in total operating
expenses. The increase in payroll expense was directly attributable to the
increased expenses in managing the Steinbach operation (see below).
Expenses for the six months ended August 3, 1996, have increased $583,000,
or 3.8%, when compared to the same period last year. For the six months,
operating expenses as a percent of sales were 35.8% compared with 34.4% for
the comparable period last year. The higher expense ratio is attributable
to the increased expense in operating the Steinbach operation.
Interest expense charges have increased for the second quarter and six month
periods ended August 3, 1996, when compared to the same period last year,
due primarily to the Company's increased utilization of the short term
working capital facilities provided by Congress Financial. As discussed
above under "Financial Condition", the increased utilization is due in part
to the Company's vendors and their factors requiring higher levels of
deposits and prepayments on inventory orders.
The decrease in other income for the second quarter was attributable to the
absence of a one-time lease termination settlement with a former tenant in
the Company's corporate office building which occurred during the second
quarter of 1995.
As discussed below under the caption "Recent Developments," the Company
acquired all of the stock of Steinbach Stores, Inc., an Ohio corporation
("Steinbach"), effective as of August 31, 1996 (the "Acquisition"). Pending
the consummation of the Acquisition, since December 31, 1995, the Company has
operated the 15 department stores to be acquired as part of the Acquisition
(the "Acquired Stores"), with all of the revenues and all of the costs and
expenses relating thereto accruing for the account of the Company. For the
second quarter and for the six months ended August 3, 1996, the Company
recorded a profit of $741,058, or $0.76 per share, and $1,393,917, or $1.46
per share, respectively, for the operation of these fifteen Acquired Stores.
Such profits are reflected in the Company's net loss for the second quarter
and for the six month period ended August 3, 1996. In addition almost all
of the corporate overhead relating to the operation of the 15 Acquired
Stores has been allocated to the Company. As a result of the closing of the
Steinbach Acquisition, the results of operations for the fifteen Acquired
Stores for all periods prior to August 31, 1996, will be recorded as a
separate line item, and the results of operations after August 31, 1996,
will be reported on a consolidated basis, in the Company's Statements of Income.
Since the Company has fully exhausted all tax loss carrybacks and is in a
net operating loss carryforward position it was unable to tax effect the
losses in either year's second quarter and six month periods, thus pre-tax
and after-tax results are the same.
Recent Developments
As previously reported by the Company in its Current Report on Form 8-K
dated August 31, 1996, effective August 31, 1996, the Company acquired from
the several shareholders (the "Steinbach Shareholders") of Steinbach, all of
the issued and outstanding shares of the capital stock of Steinbach, in
exchange for 514,800 shares of the Common Stock of the Company pursuant to
the terms of an Agreement and Plan of Reorganization, dated November 17,
1995, as amended, between the Company and the Steinbach Shareholders. As a
result of the foregoing, Steinbach, with its 15 retail department stores in
Connecticut, New Hampshire, New Jersey, New York and Vermont, became a
wholly-owned subsidiary of the Company as of August 31, 1996. As of the
date hereof, 1,472,678 shares of Common Stock of the Company are issued and
outstanding, after giving effect to the 514,800 shares issued to the
Steinbach Shareholders pursuant to the Acquisition (representing
approximately 35.0% of such issued and outstanding shares).
As previously reported by the Company in its Current Report on Form 8-K
dated August 31, 1996, effective September 5, 1996, Congress Financial
Corporation (Central), the Company and Steinbach entered into an Amended and
Restated Loan and Security Agreement (the "Amended Loan Agreement") pursuant
to which Congress Financialis providing, on an aggregate basis to the Company
and Steinbach, a fully secured line of credit of up to $24 million and,
included within such line of credit, a facility for letters of credit of up
to $5 million, with the interest rate on the foregoing, subject to certain
terms and conditions, at 25 basis points above the prime rate of CoreStates
Bank, N.A. The Amended Loan Agreement shall continue for a term ending on
November 4, 1999, and from year to year thereafter unless sooner terminated
pursuant to the terms thereof. The Amended Loan Agreement amends and
restates the Loan and Security Agreement, dated November 4, 1994, between
Congress Financial and the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings in which the Company
is a party to which its assets are subject.
ITEM 2. CHANGES IN SECURITIES
Pursuant to the terms of the Amended and Restated Loan and
Security Agreement, dated September 5, 1996, among Congress
Financial Corporation (Central), the Company and Steinbach
Stores, Inc., the Company is prohibited from declaring or
paying any dividends on account of any shares of capital
stock.
In connection with the closing of the acquisition of
Steinbach Stores, Inc. pursuant to the terms of an Agreement
and Plan of Reorganization, dated November 17, 1995, as
amended, between the Company and the shareholders of
Steinbach Stores, Inc., the Board of Directors amended the
Bylaws of the Company, effective as of August 31, 1996, to
"opt out" of the provisions of Act 58 of the Public Acts of
1988 of the State of Michigan, more commonly known as
Chapter 7B of the Michigan Business Corporation Act
pertaining to so-called "control share acquisitions."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 20, 1996, the Company's Annual Meeting of Shareholders was
held at the principal offices of the Company. Proxies for the
Annual Meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, and there was no
solicitation in opposition to management's nominees for election to
the Board of Directors and all such nominees were elected. The
matters voted on at the meeting (as more fully described in the
Proxy Statement, dated July 25, 1996), and the results of the
shareholder voting, were as follows:
1. Election of directors to hold office until Annual Meeting of
Shareholders in 1999.
Joseph C. Keys For 870,290; Withheld 3,577
Richard S. Keys For 870,290; Withheld 3,577
Paul R. Rentenbach For 870,290; Withheld 3,577
James L. Schaye, Jr. For 869,727; Withheld 4,140
2. To approve the issuance of 514,800 shares of common stock
pursuant to the Steinbach Acquisition Agreement;
For 601,585
Against 1,977
Abstain 20,780
Broker non-votes 249,525
3. To approve an amendment to the Crowley, Milner and Company
1992 Incentive Stock Plan (the "1992 Incentive Stock Plan")
to increase the number of shares of Common Stock authorized
for issuance under the 1992 Incentive Stock Plan from
200,000 shares to 300,000 shares;
For 583,062
Against 40,130
Abstain 1,150
Broker non-votes 249,525
4. Appointment of Ernst & Young LLP as auditors for fiscal year
ending February 1, 1997:
For 862,542
Against 4,129
Abstain 1,280
Broker non-votes 5,916
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
--- -----------
3.2 Bylaws of the Company, as amended to date
10.8 Crowley, Milner and Company 1992 Incentive Stock Plan,
effective as of March 25, 1992, as amended to date
(previously filed as an exhibit to the Company's Annual
Report on Form 10-K, as amended, for the fiscal year ended
January 30, 1993, and as an exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended February 3,
1996, and incorporated herein by reference, except for
Amendment No. 2 to such Incentive Stock Plan, which is filed
herewith).
18 Letter from Ernst & Young LLP regarding change in accounting
principle.
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
On September 16, 1996, the Company filed a Current Report on Form 8-
K, dated August 31, 1996, pursuant to which it reported (i) under
Items 1, 2 and 7 on the acquisition of all of the stock of Steinbach
Stores, Inc., an Ohio corporation, as of August 31, 1996, and (ii)
under Item 5 on the consummation of an Amended and Restated Loan and
Security Agreement, effective as of September 5, 1996, among the
Company, Steinbach Stores, Inc. and Congress Financial Corporation
(Central).
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.
CROWLEY, MILNER AND COMPANY
(Registrant)
DATE September 17, 1996 By /S/ John R. Dallacqua
------------------------ ---------------------------
John R. Dallacqua
Vice President-Finance and Chief
Financial Officer (principal
financial and chief accounting
officer) and a duly authorized
officer of the registrant
EXHIBIT INDEX
No. Description
- --- -----------
3.2 Bylaws of the Company, as amended to date
10.8 Crowley, Milner and Company 1992 Incentive Stock Plan, effective as
of March 25, 1992, as amended to date (previously filed as an
exhibit to the Company's Annual Report on Form 10-K, as amended, for
the fiscal year ended January 30, 1993, and as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 3, 1996, and incorporated herein by reference, except for
Amendment No. 2 to such Incentive Stock Plan, which is filed
herewith).
18 Letter from Ernst & Young LLP regarding change in accounting
principle.
27 Financial Data Schedule (EDGAR filing only)