SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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 2, 1997
[ ] 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 (IRS 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 5, 1997, was 1,534,462
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED QUARTER ENDED
-------------------- ---------------------
August 2 August 3 August 2 August 3
1997 1996 1997 1996
Revenues
Net sales--owned departments $76,464,126 $38,934,764 $36,600,810 $18,475,898
Net sales--leased departments 8,738,525 5,832,385 4,505,672 3,024,636
---------- ---------- ---------- ----------
Total net sales 85,202,651 44,767,149 41,106,482 21,500,534
Investment income 54,091 51,919 22,212 23,150
Other income 318,022 1,888 7,812 855
---------- ---------- ---------- ----------
85,574,764 44,820,956 41,136,506 21,524,539
Costs and Expenses
Cost of merchandise and
services sold 60,201,226 30,838,884 27,318,346 14,003,501
Operating expenses 29,300,794 16,008,651 14,321,019 8,020,620
Interest 1,318,038 872,418 738,564 435,071
Operating (income) loss and
costs related to integration
of Steinbach Stores, Inc. - (1,393,917) - (741,058)
---------- ---------- ---------- ----------
90,820,058 46,326,036 42,377,929 21,718,134
Earnings (Loss) Before Income
Taxes (5,245,294) (1,505,080) (1,241,423) (193,595)
Federal income taxes - - - -
---------- ---------- ---------- ----------
Net Earnings (Loss) $(5,245,294) $(1,505,080) $(1,241,423) $ (193,595)
========== ========== ========== ==========
Per Share Data:
Net earnings (loss) $ (3.46) $ (1.57) $ (0.81) $ (0.20)
Average number of common and
common equivalent shares
outstanding for earnings per
share 1,517,187 957,878 1,523,796 957,878
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 2 February 1 August 3
1997 1997 1996
-------- ---------- --------
Assets
Current Assets
Cash and cash equivalents
(cash equivalents of $390,161 at
8/2/97, $176,728 at 2/1/97 and
$292,927 at 8/3/96) $ 859,451 $ 215,316 $ 1,662,200
Accounts receivable, less allowances
($66,558 at 8/2/97, $66,258 at
2/1/97, and $66,558 at 8/3/96 2,586,206 2,813,759 2,461,731
Inventories at FIFO cost 41,350,640 46,555,769 19,855,739
Deferred property taxes 992,459 1,396,848 972,322
Other current assets 1,169,110 1,950,510 1,436,240
---------- ---------- ----------
Total Current Assets 46,957,866 52,932,202 26,388,232
---------- ---------- ----------
Other Assets
Deposits under EDC financing
arrangements 634,308 634,308 634,308
Deferred tax asset 1,580,000 1,580,000 1,580,000
Miscellaneous 2,892,712 2,922,660 2,526,790
---------- ---------- ----------
5,107,020 5,136,968 4,741,098
---------- ---------- ----------
Properties
Land 315,000 315,000 315,000
Buildings 13,291,910 13,274,001 10,206,055
Leasehold improvements 7,130,920 6,757,605 6,189,471
Furniture, fixtures and equipment 7,426,202 7,359,066 7,119,994
---------- ---------- ----------
28,164,032 27,705,672 23,830,520
Less: Allowance for depreciation
and amortization 15,909,560 15,086,513 14,466,683
---------- ---------- ----------
12,254,472 12,619,159 9,363,837
---------- ---------- ----------
Total Assets $ 64,319,358 $ 70,688,329 $ 40,493,167
========== ========== ==========
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 2 February 1 August 3
1997 1997 1996
-------- ---------- --------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 12,066,701 $ 17,587,798 $ 5,080,371
Notes payable short term 23,487,354 18,092,794 10,108,641
Compensation and amounts withheld therefrom 1,065,099 1,424,667 734,190
Property taxes 1,120,639 1,353,131 941,928
Income taxes 34,972 34,972 310,126
Other taxes 283,936 670,062 490,211
Current maturities of long-term debt 605,855 575,000 525,000
Current maturities of capital lease obligations 202,495 263,869 185,474
---------- ---------- ----------
Total Current Liabilities 38,867,051 40,002,293 18,375,941
---------- ---------- ----------
Long-Term Liabilities
Long-term debt 4,750,000 4,750,000 5,325,000
Capital lease obligations 6,226,469 6,307,565 3,638,939
Other 1,973,445 1,982,053 1,761,165
---------- ---------- ----------
12,949,914 13,039,618 10,725,104
---------- ---------- ----------
Shareholders' Equity
Common stock, (authorized 4,000,000 shares,
outstanding 1,523,796 shares at 8/2/97,
1,507,387 shares at 2/1/97 and 957,878
shares at 8/3/96) 1,523,796 1,507,387 957,878
Other capital 3,368,420 3,283,560 1,211,350
Retained earnings 7,610,177 12,855,471 9,222,894
---------- ---------- ----------
12,502,393 17,646,418 11,392,122
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $ 64,319,358 $ 70,688,329 $ 40,493,167
========== ========== ==========
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
August 2 August 3
1997 1996
Operating Activities
Net earnings (loss) $ (5,245,294) $ (1,505,080)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization 825,293 630,765
Amortization of restricted stock award - 13,756
Changes in operating assets and liabilities
(Increase) decrease in net accounts receivable 227,553 (446,813)
(Increase) decrease in inventories 5,205,129 1,395,219
(Increase) decrease in prepaid expense and
other assets 1,215,737 184,300
Increase (decrease) in accounts payable (5,521,095) (198,817)
(Increase) decrease in accrued compensation
and other liabilities (986,794) (223,907)
----------- ----------
Net Cash Provided By (Used In) Operating Activities (4,279,471) (150,577)
Investment Activities
Purchase of properties (460,607) (236,010)
Net Cash Used in Investment Activities ----------- ----------
(460,607) (236,010)
Financing Activities
Proceeds from revolving line of credit 95,442,875 51,342,970
Principal payments on revolving line of
credit (90,048,315) (49,733,721)
Principal payments on capital lease obligations (111,615) (111,857)
Proceeds from sale of common stock 101,268 10,782
----------- ----------
Net Cash Provided By (Used In) Financing Activities 5,384,213 1,508,174
----------- ----------
Increase (Decrease) in Cash and Cash Equivalents 644,135 1,121,587
Cash and Cash Equivalents at beginning of year 215,316 540,613
----------- ----------
Cash and Cash Equivalents at End of Period $ 859,451 $ 1,662,200
=========== ==========
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 2, 1997
Note A - Basis of Presentation
The accompanying condensed, consolidated, and unaudited financial statements
for 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. As a result,
the financial statements 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 necessary for a
fair presentation of quarterly operating results are reflected herein, and
are of a normal, recurring nature. For purposes of this report the
"Company" refers to Crowley, Milner and Company ("Crowley's") and its
wholly-owned subsidiary, Steinbach Stores, Inc. ("Steinbach"), collectively.
Given the seasonal nature of the specialty department store business,
operating results for the six months ended August 2, 1997 are not
necessarily indicative of the results that may be expected for the year
ending January 31, 1998.
It is suggested that these condensed, consolidated and unaudited financial
statements be read in conjunction with the financial statements and notes to
financial statements included in the Company's Annual Report on Form 10-K
for the year ended February 1, 1997.
Note B - Acquisition of Steinbach Stores, Inc. and presentation of financial
information
As previously reported by the Company in its Annual Report on Form 10-K
filed for the year ended February 1, 1997, effective August 31, 1996,
Crowley's acquired from the shareholders of Steinbach (the "Steinbach
Shareholders") all of the issued and outstanding shares of the capital stock
of Steinbach in exchange for 514,800 shares of Common Stock of Crowley's
pursuant to the terms of an Agreement and Plan of Reorganization, dated
November 17, 1995, as amended, between Crowley's and the Steinbach
Shareholders. As a result of the acquisition, Steinbach, with 15 retail
department stores in Connecticut, New Hampshire, New York, New Jersey and
Vermont, at the effective time of the acquisition became a wholly-owned
subsidiary of Crowley's as of August 31, 1996. The acquisition was accounted
for as a purchase for financial reporting purposes. Under purchase
accounting, Crowley's allocated the total cost of acquiring the Steinbach
common stock to the assets and liabilities of Steinbach.
In connection with the Steinbach acquisition, Crowley's entered into a
separate Interim Operating Agreement with the Steinbach Shareholders, which
provided that, during the period from December 31, 1995 through August 31,
1996, the 15 acquired Steinbach stores would be operated under the
management and supervision of Crowley's with all revenues, costs and
expenses relating to the stores being the responsibility of Crowley's. The
operating results of Steinbach through August 31, 1996 are reflected as a
separate line item on the Company's consolidated condensed statements of
income. Since August 31, 1996, the Company's operating results are reported
on a consolidated basis.
Notwithstanding the purchase accounting treatment, inasmuch as the Company
acquired only 15 of 27 stores and did not acquire the corporate office or
distribution center of Steinbach, the Company views the acquisition, from an
accounting perspective, as an asset purchase of those stores that were
actually acquired. Pro forma financial information for the acquired stores
(exclusive of the Steinbach store located in North Utica, which was closed
in December 1996) for the quarter and six months ended August 2, 1997, and
for the comparable periods last year, are as follows:
Six Months Ended Quarter Ended
August 2, 1997 August 3, 1996 August 2, 1997 August 3, 1996
-------------- -------------- -------------- --------------
Comparable store sales $39,702,438 $33,258,844 $19,779,985 $17,721,907
Gross Profit 10,874,674 14,387,330 6,511,105 7,535,983
Operating Expenses 15,026,718 13,484,517 7,373,057 6,630,113
Interest Expense (related
to Line of Credit) 552,039 252,250 298,915 192,250
Net Income (Loss) (4,683,642) 1,393,917 (1,158,713) 741,058
Note C - Anticipated Effect of Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS"), and
attempts to simplify the approach for computing EPS previously required in
APB Opinion No. 15. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, and while it did not have
an impact on the quarterly information presented herein, it may impact
future quarters.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statement on Forward-Looking Information
This quarterly report includes various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs concerning future events.
Statements containing expressions such as "believes", "anticipates" or
"expects" used in the Company's press releases and reports filed with the
Securities and Exchange Commission (including periodic reports on Form 10-K
and Form 10-Q) are intended to identify forward-looking statements. All
forward-looking statements involve risks and uncertainties. Although the
Company believes its expectations are based upon reasonable assumptions
within the bounds of its knowledge of its business and operations, there can
be no assurances that actual results will not materially differ from
expected results.
The Company cautions that these and similar statements included in this
report and in previously filed periodic reports are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation, the following: risks associated with the leasing and opening of
two new Steinbach stores, as well as placement of same into service in the
fourth quarter of 1997; the ability of the Company in the future to locate
and obtain favorable store sites, negotiate acceptable lease terms, obtain
adequate merchandise supply and hire and train employees; the ability of the
Company to gauge the fashion tastes of its customers and provide merchandise
that satisfies customer demand; management's ability to manage the Company's
vendors and private label sources; increased competition in existing
markets; loss or retirement of key executives; adverse economic conditions
in the Company's markets; severe and unusual weather in the Company's
markets; and adverse results of significant litigation matters.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. The Company undertakes
no obligation to publicly release any revisions to such forward-looking
statements to reflect events or circumstances after the date hereof.
RESULTS OF OPERATIONS
As detailed in Note A to the Notes To Consolidated Condensed Financial
Statements ("Notes"), for purposes of this report the "Company" refers to
Crowley, Milner and Company ("Crowley's") and its wholly-owned subsidiary,
Steinbach Stores, Inc. ("Steinbach"), collectively.
As detailed in Note B to the Notes, Crowley's acquired Steinbach effective
August 31, 1996. As a result of the acquisition, Steinbach, with 15 retail
department stores in Connecticut, New Hampshire, New York, New Jersey and
Vermont, became a wholly-owned subsidiary of Crowley's as of August 31,
1996.
As also detailed in Note B to the Notes, in connection with the Steinbach
acquisition, during the period from December 31, 1995 through August 31,
1996, the 15 acquired Steinbach stores were operated under the management
and supervision of Crowley's with all revenues, costs and expenses relating
to the stores being the responsibility of Crowley's for such period. The
operating results of Steinbach through August 31, 1996 were reflected as a
separate line item on the Company's consolidated condensed statements of
income. Since August 31, 1996, the Company's operating results are reported
on a consolidated basis.
In light of the above, and to assist the reader in the review of this
report, the Steinbach operating results for the quarter and six months ended
August 3, 1996 were combined with the Crowley's operating results for those
reporting periods.
Quarter Ended August 2, 1997 Compared To Quarter Ended August 3, 1996
Quarter Ended
August 2 August 3
Comparable 1997 1996
Store
Sales Crowley's $21,326,497 $20,243,585
Steinbach 19,779,985 17,721,907
---------- ----------
Consolidated for 1997 $41,106,482
Combined/Proforma for 1996 $37,965,492
The Company's consolidated comparable net store sales for the quarter ended
August 2, 1997 increased 8.2%, to $41.1 million, from the $38.0 million of
combined comparable net store sales for the quarter ended August 3, 1996.
For Crowley's, comparable net store sales for the quarter ended August 2,
1997 increased 5.4%, to $21.3 million, from the $20.2 million recorded for
the quarter ended August 3, 1996. (Crowley's closed its Birmingham store on
March 23, 1997. Sales for the Birmingham store for the second quarter of
1996 were approximately $1.3 million.) The sales increase occurred evenly
during the quarter, and management believes that a promotional campaign to
aggressively market the Crowley's proprietary credit card significantly
contributed to the sales performance.
As indicated in Note B to the Notes, comparable net store sales for
Steinbach for the quarter ended August 2, 1997 increased 11.6%, to $19.8
million, from the $17.7 million for the quarter ended August 3, 1996.
Although management was encouraged by the sales performance, much of the
sales improvement, as was the case in the first quarter, was driven by an
extensive and aggressive sales promotion to move out clearance merchandise
(see further discussion below).
Quarter Ended
August 2 August 3
Gross 1997 1996
Profit
Crowley's $ 7,277,031 $ 7,497,033
Steinbach 6,511,105 7,535,983
--------- --------
Consolidated for 1997 $13,788,136
Combined/Proforma for 1996 $15,033,016
The Company's consolidated gross profit for the quarter ended August 2, 1997
decreased 8.0%, to $13.8 million, from the $15.0 million of combined gross
profit for the quarter ended August 3, 1996.
For the second quarter, Crowley's gross profit dollars were comparable to
last year's second quarter performance ($7.3 million in 1997 versus $7.5
million in 1996), and as a percentage of net sales, the gross profit
percentage remained relatively constant (34.1% in 1997 versus 34.9% in
1996).
As was disclosed in the Company's Quarterly Report on Form 10-Q filed for
the quarter ended May 3, 1997, it was management's belief that higher
markdowns would be required through the second quarter to adjust the
inventory levels in the men's area of the Steinbach stores to their planned
levels. These higher markdowns are reflected in the second quarter results
for Steinbach. Steinbach's gross profit dollars for the second quarter
decreased sharply when compared to last year's second quarter performance
($6.5 million in 1997 versus $7.5 million in 1996). As a percentage of net
sales, the gross profit percentage dropped to 32.9% for the quarter ended
August 2, 1997 from 40.7% for the comparable period in 1996. Management
believes that as a result of the extensive markdowns taken in the Steinbach
stores for the first two quarters of 1997, markdowns for the third and
fourth quarters will be more in line with management's expectations.
Quarter Ended
August 2 August 3
Operating 1997 1996
Expenses
Crowley's $ 6,947,962 $ 8,020,620
Steinbach 7,373,057 6,630,113
--------- ---------
Consolidated for 1997 $14,321,019
Combined/Proforma for 1996 $14,650,733
The Company's consolidated operating expenses for the quarter ended August
2, 1997 decreased 2.3%, to $14.3 million, from the $14.7 million of combined
operating expenses for the quarter ended August 3, 1996. Operating expenses
expressed as a percentage of net sales decreased significantly to 34.8% in
the second quarter of 1997 from 38.6% for the comparable period last year.
Management attributes this improvement to the 8.2% sales increase, together
with the cost efficiencies that the Company has been able to effect since
the acquisition, particularly in the area of insurance expense.
For Crowley's, operating expenses expressed as a percentage of net sales
decreased to 32.6% for the quarter ended August 2, 1997 from 37.3% for the
comparable period in 1996. The decrease is primarily attributable to the
allocation of a pro rata share of corporate overhead expense to Steinbach
during the quarter ended August 2, 1997. No corporate overhead was
allocated to Steinbach prior to August 31, 1996, the effective date of the
acquisition by Crowley's. For Steinbach, operating expenses expressed as a
percentage of net sales remained relatively constant at 37.2%. However,
operating expenses at Steinbach increased to $7,373,057 for the first six
months of 1997 from $6,630,110 for the comparable period in 1996. The
increase is primarily attributable to the allocation of a pro rata share of
corporate overhead expense to Steinbach during the quarter ended August 2,
1997.
Quarter Ended
Interest August 2 August 3
Expense 1997 1996
Line of
Credit Crowley's $ 195,144 $ 209,859
Steinbach 298,915 192,250
------- --------
Consolidated for 1997 $ 494,059
Combined/Proforma for 1996 $ 402,109
The Company's consolidated interest expense related to its line of credit
for the quarter ended August 2, 1997 increased 22.9%, to $494,000, from the
$402,000 of interest expense incurred on a combined basis for the quarter
ended August 3, 1996. The Company's consolidated interest expense related
to its line of credit and expressed as a percentage of net sales increased
to 1.2% in the second quarter of 1997 from 1.1% on a combined basis for the
comparable period last year. Notwithstanding the overall decline in the
Company's borrowing rate as a result of amending the terms of its credit
facility in September 1996 (see additional explanation in "Other
Developments"), effective September 5, 1996, the Company's borrowing rate
dropped from prime plus 1.00% to prime plus 0.25%, the increase in
consolidated interest expense for the quarter ended August 2, 1997 is
primarily attributed to the higher inventory levels maintained in the
Steinbach stores that were funded by the revolving line of credit.
For Crowley's, interest expense related to the line of credit for the
quarter ended August 2, 1997 decreased to $195,000 from $210,000 for the
comparable period last year. Interest expense expressed as a percentage of
net sales remained constant at 1.0% for the second quarters of 1997 and
1996, respectively. For Steinbach, interest expense related to the line of
credit for the quarter ended August 2, 1997 increased to $299,000 from
$192,000 for the comparable period last year. Interest expense expressed as
a percentage of net sales increased significantly to 1.5% for the quarter
ended August 2, 1997 from 1.0% for the comparable period in 1996. Although
higher inventory levels contributed to the majority of the increase in
interest expense, management also believes that a refinement in the method
in which interest expense was calculated and allocated to the Steinbach
stores during the current year explains the balance of the increase.
Management believes that the new calculation and allocation method more
properly reflects the interest expense incurred by the Steinbach stores.
For accounting purposes, both Crowley's and Steinbach are required to
capitalize a portion of the lease expense related to certain of their
respective store locations, and to reclassify a portion of the lease expense
as interest expense. On a consolidated basis, for the quarters ended August
2, 1997 and August 3, 1996, the amount of lease payments reclassified as
interest expense and interest other than interest incurred on the revolver
was approximately $245,000, and $225,000, respectively.
Quarter Ended
August 2 August 3
Net Income 1997 1996
(Loss)
Crowley's $ (82,710) $ (934,653)
Steinbach (1,158,713) 741,058
---------- --------
Consolidated for 1997 $ (1,241,423)
Combined/Proforma for 1996 $ (193,595)
On a consolidated basis, the Company reported a net loss of $1,241,423, or
$0.81 per share, for the second quarter of 1997 compared to a combined net
loss of $193,595 or $0.20 per share, for the second quarter of 1996.
For Crowley's, for the quarter ended August 2, 1997, a net loss of $82,710
was recorded compared to a net loss of $934,653 for last year's second
quarter. The improvement largely is attributable to the allocation of
approximately $942,000 of corporate overhead to Steinbach. For Steinbach,
for the quarter ended August 2, 1997 a net loss of $1,158,713 was recorded
compared to net income of $741,058 for last year's second quarter. The $1.9
million decline from last year's second quarter operating results is
attributable in large part to a $1 million decline in gross profit (from
$7.5 million to $6.5 million) arising from the aggressive promotion to clear
out clearance merchandise. The balance of the change results from the
allocation of approximately $942,000 of corporate overhead expenses to
Steinbach during the second quarter of 1997. No corporate overhead was
allocated to Steinbach prior to August 31, 1996, the effective date of the
acquisition by Crowley's.
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, thus pre-tax and after-tax results
are the same.
Six Months Ended August 2, 1997 Compared To Six Months Ended August 3, 1996
Six Months Ended
August 2 August 3
Comparable 1997 1996
Store
Sales Crowley's $44,090,600 $42,245,673
Steinbach 39,702,438 33,258,844
---------- ----------
Consolidated for 1997 $83,793,038
Combined/Proforma for 1996 $75,504,517
The Company's consolidated comparable net store sales for the six months
ended August 2, 1997 increased 11.0%, to $83.8 million, from the $75.5
million of combined comparable net store sales for the six months ended
August 3, 1996.
For Crowley's, comparable net store sales for the six months ended August 2,
1997 increased 4.4%, to $44.1 million, from the $42.2 million recorded for
the six months ended August 3, 1996. (Crowley's closed its Birmingham store
on March 23, 1997. Sales for the Birmingham store for 1997 and for the
first six months of 1996 were approximately $1.4 million and $2.5 million,
respectively.) The increase is attributable to an extensive and aggressive
sales promotion effort in March to move fall and winter clearance
merchandise, and to a promotional campaign in the second quarter to market
Crowley's proprietary credit card.
As indicated in Note B to the Notes, comparable net store sales for
Steinbach for the six months ended August 2, 1997 showed a 19.4% improvement
to $39.7 million from the $33.3 million for the six months ended August 3,
1996. Much of the sales improvement was driven by an extensive and
aggressive sales promotion to move out fall and winter clearance merchandise
during the first two quarters of the year. Management believes that, as a
result of the extensive sales promotions, the clearance merchandise has been
reduced to a normal level in the Steinbach stores.
Six Months Ended
August 2 August 3
Gross 1997 1996
Profit
Crowley's $14,126,751 $13,928,265
Steinbach 10,874,674 14,387,330
---------- ----------
Consolidated for 1997 $25,001,425
Combined/Proforma for 1996 $28,315,595
The Company's consolidated gross profit for the six months ended August 2,
1997 decreased 11.7%, to $25.0 million, from the $28.3 million of combined
gross profit for the six months ended August 3, 1996.
For the six months ended August 2, 1997, Crowley's gross profit increased
approximately $200,000, to $14.1 million, from $13.9 million reported during
the first six months of 1996. Notwithstanding Crowley's aggressive sales
promotion effort to move out fall and winter clearance items during the
first quarter of 1997, Crowley's gross profit percentage remained constant
at approximately 31% for the first six months of 1997 and 1996.
Steinbach's gross profit percentage dropped from 41.4% for the first six
months of 1996 to 27.4% for the first six months of 1997. The gross profit
percentage for 1996 of 41.4%, however, includes a one-time reversal of a
$3.3 million markdown reserve. Absent this one-time reversal, the gross
profit percentage for the first six months of 1996 would have been 31.9%.
Steinbach's gross profit percentage for the first six months of 1997 was
impacted significantly by the extensive sales promotion effort that was
required to move the fall and winter clearance merchandise, particularly in
the first quarter. Management believes that, as a result of the extensive
markdowns taken in the Steinbach stores for the first two quarters of 1997,
markdowns for the third and fourth quarters will be more in line with
management's expectations.
Six Months Ended
August 2 August 3
Operating 1997 1996
Expenses
Crowley's $14,274,076 $16,008,651
Steinbach 15,026,718 13,484,517
---------- ----------
Consolidated for 1997 $29,300,794
Combined/Proforma for 1996 $29,493,168
The Company's consolidated operating expenses for the six months ended
August 2, 1997 decreased approximately $200,000 to $29.3 million from the
$29.5 million of combined operating expenses incurred for the six months
ended August 3, 1996. Operating expenses expressed as a percentage of net
sales decreased significantly to 34.4% for the first six months of 1997 from
39.1% for the comparable period last year. Management attributes this
improvement to the 11.0% sales increase, together with the cost efficiencies
that the Company has experienced since the acquisition, particularly in the
area of insurance expense.
For the six months ended August 2, 1997, Crowley's operating expenses,
expressed as a percentage of net sales, decreased to 31.4% from 35.8% for
the comparable period last year. The decrease is primarily attributable to
the allocation of a pro rata share of corporate overhead expense to
Steinbach. No corporate overhead was allocated to Steinbach prior to August
31, 1996, the effective date of the acquisition by Crowley's. For Steinbach,
operating expenses expressed as a percentage of net sales dropped to 37.8%
for the first six months of 1997 from 40.5% for the comparable period last
year. Management attributes this positive trend principally to the 19.4%
improvement in the Steinbach stores sales performance for the first six
months of the year. Operating expenses for Steinbach increased to
$15,026,718 for the first six months of 1997 from $13,484,517 for the
comparable period in 1996. The increase is primarily attributable to the
allocation of a pro rata share of corporate overhead expense to Steinbach
during the first six months ended August 2, 1997.
Six Months Ended
Interest August 2 August 3
Expense 1997 1996
Line of
Credit Crowley's $ 377,389 $ 421,191
Steinbach 552,039 252,250
------- -------
Consolidated for 1997 $ 929,428
Combined/Proforma for 1996 $ 674,241
The Company's consolidated interest expense related to the line of credit
for the six months ended August 2, 1997 increased 37.8% to approximately
$929,000 from $674,000 of interest expense incurred on a combined basis for
the first six months of 1996. The Company's consolidated interest expense
expressed as a percentage of net sales increased to 1.1% for the first six
months of 1997 from 0.89% for the comparable period a year ago.
Notwithstanding the overall decline in the Company's borrowing rate, as a
result of amending the terms of its credit facility in September 1996 (see
additional explanation in "Other Developments"), effective September 5,
1996, the Company's borrowing rate dropped from prime plus 1.00% to prime
plus 0.25%, the increase in consolidated interest expense for the first six
months of 1997 is primarily attributed to the higher inventory levels
maintained in the Steinbach stores that were funded by the revolving line of
credit.
For Crowley's, interest expense related to the line of credit for the six
months ended August 2, 1997 decreased to $377,000 from $421,000 for the
comparable period last year. Interest expense expressed as a percentage of
net sales decreased to 0.9% for the six months ended August 2, 1997 from
1.0% for the comparable period in 1996.
For Steinbach, interest expense related to the line of credit for the six
months ended August 2, 1997 increased to $552,000 from $252,000 for the
comparable period last year. Interest expense expressed as a percentage of
net sales increased significantly to 1.4% for the six months ended August 2,
1997 from 0.7% for the comparable period in 1996. Although higher inventory
levels are responsible for the majority of the increase in interest expense,
management also believes that a refinement in the method in which interest
expense was calculated and allocated to the Steinbach stores during the
current year contributed to the balance of the increase.
For accounting purposes, both Crowley's and Steinbach are required to
capitalize a portion of the lease expense related to certain of their
respective store locations, and to reclassify a portion of the lease expense
as interest expense. On a consolidated basis, for the six month periods
ended August 2, 1997 and August 3, 1996, the amount of lease payments
reclassified as interest and interest other than interest incurred on the
revolver was approximately $389,000, and $450,000, respectively.
Six Months Ended
August 2 August 3
Net Income 1997 1996
(Loss)
Crowley's $ (561,652) $(2,898,997)
Steinbach (4,683,642) 1,393,917
---------- ----------
Consolidated for 1997 $(5,245,294)
Combined/Proforma for 1996 $(1,505,080)
On a consolidated basis, for the six months ended August 2, 1997 the Company
reported a net loss of $5,245,294, or $3.46 per share, compared to a
combined net loss of $1,505,080, or $1.57 per share, for the comparable
period last year.
For Crowley's, for the six months ended August 2, 1997, a net loss of
$561,652 was recorded compared to a net loss of $2,898,997 during the first
six months of 1996. The $2.3 million improvement is attributable to an
increase in gross profit dollars of approximately $200,000, and the
allocation of approximately $1.9 million of corporate overhead to Steinbach.
For Steinbach, for the six months ended August 2, 1997, a net loss of
$4,683,642 was recorded compared to net income of $1,393,917 for the first
six months of last year. The $6.1 million change can be attributed
primarily to a $3.5 million decline in gross profit (from $14.4 million to
$10.9 million) arising from an aggressive promotion to clear out fall and
winter clearance merchandise. As indicated previously, the gross profit for
the first six months of 1996 includes a reversal of a $3.3 million markdown
reserve. The other factors which contributed to the $6.1 million change
include: the allocation of $1.9 million of corporate overhead expenses
during the first six months of 1997; an increase to interest expense of
$300,000 as a result of the increased inventory levels required to
adequately stock the stores during the six months; and the one-time reversal
of a price reduction reserve in the first quarter of 1996 of $700,000.
The merchandising for the Crowley's and Steinbach stores is virtually
identical, yet the difference in the first six month's gross profit
performance between the two companies is significant. Management believes
that the difference can be primarily attributed to the poor performance in
menswear at the Steinbach stores during the first six months, principally
the first quarter. Traditionally, Steinbach's men's departments had been
very promotional and the Company attempted to upgrade the merchandise during
the year. However, the new merchandising approach did not move goods in the
manner projected by management. This exacerbated the level of markdowns
required to reduce the inventory to acceptable levels. In light of the
performance of the menswear area in the first quarter, the Company hired a
new Vice President - General Merchandise Manager of the menswear area.
With this addition, and with a more dedicated focus to controlling inventory
levels, particularly in Steinbach's men's division, management believes that
as a result of the extensive promotional efforts, at the end of the second
quarter the inventory levels in the men's area are within an acceptable
range of their planned levels, and that it has taken the appropriate
steps to address the performance issue in Steinbach's men's division.
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 six months, thus pre-tax and after-tax results are
the same.
FINANCIAL CONDITION
Cash and cash equivalents for the Company increased to $860,000 from
$215,000 at February 1, 1997. The cash and cash equivalents balance at
August 3, 1996 was $1.7 million. The decrease in cash and cash equivalent
balances between August 3, 1996 and August 2, 1997 can be attributed to the
change in the nature of short-term liabilities.
Net cash used in operating activities was $4.3 million for the first six
months of 1997, compared with net cash used in operating activities of
$151,000 reported during the first six months of 1996. This difference is
explained by the $5.2 million loss reported during the period, together with
the decrease in the Company's accounts payable ($5.5 million) and accrued
expenses ($1.0 million), which were offset by the decrease in the Company's
inventories ($5.2 million) and prepaid expenses ($1.2 million). Management
believes that the decrease in the Company's inventories is evidence of the
Company's diligent and focused efforts to better control its inventory
levels. In addition, the decrease in accounts payable and accrued expenses
is the result of the Company's dedication to more timely process and pay
vendor payables as compared to the turnaround time experienced in the early
stages of the Steinbach acquisition.
Investing activities used cash of $461,000 during the first six months of
1997, compared to $236,000 of cash used in investing activities for the
first six months of 1996. Investing activities included capital
expenditures for the modernization and refixturing of existing stores, and
upgrades to the Company's information systems.
Financing activities provided cash of $5.4 million during the first six
months of 1997, compared to $1.5 million of cash provided last year. This
increase is attributable to increased borrowings on the Company's revolving
line of credit to fund merchandise purchases and the losses incurred during
the first six months. On July 3, 1997, the Company amended its revolving
line of credit to increase its borrowing capacity from $24 million to
$35 million, with an additional borrowing capacity up to $42 million during
the peak borrowing periods. For additional information related to the
amended revolving line of credit, see "Other Developments" below.
At August 2, 1997, the Company's working capital improved slightly to $8.1
million from the $8.0 million of working capital available at August 3,
1996. At August 2, 1997, the Company's working capital ratio was 1.21, down
from 1.44 reported at August 3, 1996.
During the six month periods ended August 2, 1997 and August 3, 1996, the
Company has not paid or declared any cash dividends with respect to its
stock.
OTHER DEVELOPMENTS
The Company plans to open new Steinbach stores located in Mohegan, New York
in Westchester County (42,000 square feet) and Trumbull, Connecticut (54,000
square feet) in time for the Fall 1997 season, and these openings are
progressing on schedule.
As disclosed in its Current Report on Form 8-K filed on July 9, 1997, the
Company amended its Loan and Security Agreement with Congress Financial
Corporation (Central) to increase its revolving line of credit from $24
million to $35 million, with an additional borrowing capacity up to $42
million during the peak borrowing periods of September 1 through November 30
of each year. In addition, the facility for letters of credit was expanded
from $5 million to $10 million. The Loan and Security Agreement was amended
effective July 3, 1997, to reflect these terms. The Company believes that
this expanded facility, together with cash provided by operating activities,
will be sufficient to meet the current funding needs, as well as the needs
for planned expansion, renovation of its current stores, and funding of the
Company's "Year 2000" solution.
With respect to the Company's "Year 2000" solution, in the fourth quarter of
1997, the Company will commence, for all of its systems, a year 2000 date
conversion project to address all necessary code changes, testing, and
implementation. Based on an extensive study, the Company expects to spend
approximately $2.5 million during the period of fiscal year 1998 through
fiscal year 1999 to modify its computer information systems enabling proper
processing of transactions relating to the year 2000 and beyond. The
estimated funding needs of $2.5 million anticipate a "total solution" to the
"Year 2000" issue, which includes hardware, software, and all related
collateral support. The timetable for the Company to convert from its
current management information system to one which is "Year 2000" compliant
anticipates a "go live" date of February 1999. There can be no assurance
that the systems of other companies on which the Company's systems rely also
will be timely converted or that any such failure to convert by another
company would not have an adverse effect on the Company's systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 22,
1997 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 the Board'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 April 22, 1997), and the results of the
shareholder voting, were as follows:
1. Election of directors to hold office until Annual Meeting of
Shareholders in 2000.
Donald N. Bailey For 1,465,399; Withheld 630
Thomas R. Ketteler For 1,465,399; Withheld 630
Julius L. Pallone For 1,465,229; Withheld 800
Jerome L. Schostak For 1,463,229; Withheld 2,800
2. Appointment of Ernst & Young LLP as auditors for fiscal year
ended January 31, 1998:
For 1,448,829
Against 16,200
Abstain 1,000
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
On July 9, 1997, the Company filed a Current Report on Form 8-K,
dated July 3, 1997, pursuant to which it reported under Item 5 on
the consummation of Amendment No. 1 to the Amended and Restated Loan
and Security Agreement, effective as of September 5, 1996, among
Crowley, Milner and 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 5, 1997 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).