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 November 1, 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 December 12, 1997, was 1,544,462 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) NINE MONTHS ENDED QUARTER ENDED ----------------- ------------- November 1 November 2 November 1 November 2 1997 1996 1997 1996 ---- ---- ---- ---- Revenues Net sales--owned departments $121,887,917 $76,281,197 $45,423,791 $37,346,433 Net sales--leased departments 12,855,347 9,741,100 4,116,822 3,908,715 ----------- ---------- ---------- ---------- Total net sales 134,743,264 86,022,297 49,540,613 41,255,148 Investment income 79,071 112,077 24,980 60,158 Other income 336,175 429,857 18,153 427,969 ----------- ---------- ---------- ---------- 135,158,510 86,564,231 49,583,746 41,743,275 Costs and Expenses Cost of merchandise and services sold 91,852,634 57,545,476 1,651,408 26,706,592 Operating expenses 45,456,624 30,505,417 16,155,830 14,496,766 Interest 2,354,251 1,541,412 1,036,213 668,994 Operating (income) loss and costs related to integration of Steinbach Stores, Inc. - (837,213) - 556,704 ----------- ---------- ---------- ---------- 139,663,509 88,755,092 48,843,451 42,429,056 Earnings (Loss) Before Income Taxes (4,504,999) (2,190,861) 740,295 (685,781) Federal income taxes - - - - ----------- ---------- ---------- ---------- Net Earnings (Loss) $ (4,504,999) $(2,190,861) $ 740,295 $ (685,781) =========== ========== ========== ========== Per Share Data: Net earnings (loss) $ (2.93) $ (2.03) $ 0.48 $ (0.52) Average number of common and common equivalent shares outstanding for earnings per share 1,535,834 1,077,016 1,544,344 1,320,895 CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) November 1 February 1 November 2 1997 1997 1996 ---- ---- ---- Assets Current Assets Cash and cash equivalents (cash equivalents of $513,196 at 11/1/97, $176,728 at 2/1/97, and $351,312 at 11/2/96) $ 697,917 $ 215,316 $ 441,811 Accounts receivable, less allowances ($66,558 at 11/1/97, $66,258 at 2/1/97, and $66,558 at 11/2/96) 1,906,036 2,813,759 6,267,116 Inventories at FIFO cost 56,753,197 46,555,769 61,316,683 Deferred property taxes 231,881 1,396,848 789,370 Other current assets 893,957 1,950,510 2,842,676 ---------- ---------- ---------- Total Current Assets 60,482,988 52,932,202 71,657,656 Other Assets Deposits under EDC financing arrangements 634,308 634,308 634,308 Deferred tax asset 1,580,000 1,580,000 - Miscellaneous 2,909,703 2,922,660 2,774,748 ---------- ---------- ---------- 5,124,011 5,136,968 3,409,056 Properties Land 321,150 315,000 315,000 Buildings 13,311,168 13,274,001 13,270,672 Leasehold improvements 7,965,237 6,757,605 5,374,618 Furniture, fixtures and equipment 7,992,611 7,359,066 8,054,412 ---------- ---------- ---------- 29,590,166 27,705,672 27,014,702 Less: Allowance for depreciation and amortization 16,315,210 15,086,513 15,603,763 ---------- ---------- ---------- 13,274,956 12,619,159 11,410,939 ---------- ---------- ---------- Total Assets $78,881,955 $70,688,329 $86,477,651 ========== ========== ========== CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) November 1 February 1 November 2 1997 1997 1996 ---- ---- ---- Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 19,554,591 $ 17,587,798 $ 35,458,276 Notes payable short term 30,752,215 18,092,794 20,513,622 Compensation and amounts withheld therefrom 1,067,949 1,424,667 1,054,198 Property taxes 162,120 1,353,131 782,563 Income taxes 34,972 34,972 109,972 Other taxes 337,880 670,062 781,879 Current maturities of long-term debt 575,000 575,000 525,000 Current maturities of capital lease obligations 263,977 263,869 284,199 ---------- ---------- ---------- Total Current Liabilities 52,748,704 40,002,293 59,509,709 Long-Term Liabilities Long-term debt 4,750,000 4,750,000 5,325,000 Capital lease obligations 6,139,902 6,307,565 6,424,225 Other 1,977,372 1,982,053 1,976,157 ---------- ---------- ---------- 12,867,274 13,039,618 13,725,382 Shareholders' Equity Common stock, (authorized 4,000,000 shares, outstanding 1,544,462 shares at 11/1/97, 1,507,387 shares at 2/1/97 and 1,501,378 shares at 11/2/96) 1,544,462 1,507,387 1,501,378 Other capital 3,371,043 3,283,560 3,204,069 Retained earnings 8,350,472 12,855,471 8,537,113 ---------- ---------- ---------- 13,265,977 17,646,418 13,242,560 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $78,881,955 $70,688,329 $86,477,651 ========== ========== ========== CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED November 1 November 2 1997 1996 ---- ---- Operating Activities Net earnings (loss) $ (4,504,999) $ (2,190,861) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 1,224,794 976,152 Amortization of restricted stock award - 57,193 Changes in operating assets and liabilities Gain on termination of capital lease - (372,514) (Increase) decrease in net accounts receivable 907,723 (2,118,667) (Increase) decrease in inventories (10,197,428) (19,135,556) (Increase) decrease in prepaid expense and other assets 2,234,477 (949,188) Increase (decrease) in accounts payable 2,482,609 10,971,666 Increase (decrease) in accrued compensation and other liabilities (2,400,408) 1,599,249 ---------- ---------- Net Cash Provided By (Used In) Operating Activities (10,253,232) (11,162,526) Investment Activities Purchase of properties (1,880,591) (327,933) ---------- ---------- Steinbach Acquisition - (486,122) Net Cash Used in Investment Activities (1,880,591) (814,055) Financing Activities Proceeds from revolving line of credit 156,640,179 106,056,568 Principal payments on revolving line of credit (143,980,758) (94,042,338) Principal payments on capital lease obligations (167,555) (323,415) Proceeds from sale of common stock 124,558 186,964 ----------- ---------- Net Cash Provided By (Used In) Financing Activities 12,616,424 11,877,779 ----------- ---------- Increase (Decrease) in Cash and Cash Equivalents 482,601 (98,802) Cash and Cash Equivalents at beginning of year 215,316 540,613 ----------- ---------- Cash and Cash Equivalents at End of Period $ 697,917 $ 441,811 =========== ========== NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS November 1, 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 nine months ended November 1, 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, became a wholly-owned subsidiary of Crowley's. The Steinbach 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 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 have been 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 Steinbach 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, New York, which was closed in December 1996) for the quarter and nine months ended November 1, 1997, and for the comparable periods last year, was as follows: Nine Months Ended Quarter Ended November 1, November 2, November 1, November 2, 1997 1996 1997 1996 ---- ---- ---- ---- Comparable store sales $61,075,935 $53,266,788 $21,373,497 $20,007,944 Gross Profit 18,828,155 22,320,137 7,953,481 7,932,807 Operating Expenses 23,149,393 21,806,877 8,122,675 8,322,365 Interest Expense (related to Line of Credit) 961,056 528,321 409,018 276,071 Net Income (Loss) (5,400,707) 737,422 (717,066) (656,495) 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note on Forward-Looking Statements This report includes various "forward-looking statements" within the meaning of the Private Securities Reform Act of 1995 that represent the Company's expectations or beliefs concerning future events and involve risks and uncertainties. Expressions such as "believes", "anticipates" or "expects" are intended to identify these forward-looking statements. Although the Company believes its expectations are based upon reasonable assumptions, the Company cautions that such forward-looking statements are subject to important factors that could cause actual results to differ materially from those anticipated. These factors include, but are not limited to, increasing competition in existing markets; adverse economic conditions either nationally or in existing markets; unexpected or severe weather conditions, and possible unavailability of merchandise from existing vendors. The Company is under no obligation to update such forward-looking statements to reflect events or circumstances after the date hereof. Results of Operations As detailed in Note A of 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 of the Notes, Crowley's acquired Steinbach effective August 31, 1996, and Steinbach became a wholly-owned subsidiary of Crowley's as of that date. During the period from December 31, 1995 through August 31, 1996, the 15 acquired Steinbach stores were operated by 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 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. To assist the reader in the review of this report, the Steinbach operating results for the quarter and nine months ended November 2, 1996 were combined with the Crowley's operating results for those reporting periods, on a pro forma basis as if Steinbach had been owned by Crowley's throughout the period. Quarter Ended November 1, 1997 Compared To Quarter Ended November 2, 1996 Quarter Ended Nov 1 Nov 2 Percentage Comparable 1997 1996 Increase Store ----- ----- ---------- Sales Crowley's $27,337,682 $24,836,609 10.1% Steinbach 21,373,497 20,007,944 6.8% ---------- ---------- ---- Consolidated for 1997 48,711,179 Combined/Pro forma for 1996 44,844,553 8.6% For Crowley's, the sales increase for the quarter occurred during the months of August and October. Management believes that a successful "back to school" sales promotion bolstered August's performance and that October sales were enhanced by the initiation of a deferred billing credit card program, together with a novel Halloween promotional mailer. As was the case during the second quarter, a promotional campaign to aggressively market the Crowley's proprietary credit card also contributed to the sales performance. For Steinbach, the majority of the sales increase for the quarter occurred in October. As was the case with Crowley's stores, October sales were augmented by the initiation of a deferred billing credit card program, together with the novel Halloween promotional mailer. Also, a promotional campaign to aggressively market the Steinbach proprietary credit card contributed to the sales performance. Quarter Ended Nov 1 Nov 2 Percentage 1997 1996 Increase ---- ---- ------- Gross Crowley's $9,935,724 $8,401,108 18.3% Profit Steinbach 7,953,481 7,932,807 0.7% --------- --------- ----- Consolidated for 1997 17,889,205 Combined/Pro forma for 1996 16,333,915 9.5% For the third quarter, as a percentage of net sales, Crowley's gross profit was 36.3% compared to last year's third quarter performance of 33.7%. Management attributes the improvement in large part to an effort which attempted to accelerate promotional markdowns into the second quarter of the year. By taking markdowns earlier, the extent of the markdowns for the third quarter was be lessened. Steinbach's gross profit as a percentage of sales was 35.9% compared to last year's third quarter performance of 37.3%. As noted in the Form 10-Q filed for the quarter ended November 2, 1996, Steinbach's gross profit percentage was enhanced by positive adjustments to both merchandise ($250,000) and gift certificate redemptions ($225,000). Absent these positive adjustments in 1996, Steinbach's gross profit as a percentage of sales would have been 35.0%. Thus, Steinbach's gross profit percentage for the quarter improved to 35.9% from 35.0%, and is comparable to Crowley's gross profit percentage for the quarter. As was the case with Crowley's, management attributes the improvement in large part to an effort which accelerated promotional markdowns into the second quarter of the year. Quarter Ended Nov 1 Nov 2 Percentage 1997 1996 Decrease ---- ---- -------- Operating Crowley's $8,033,155 $8,427,445 (4.7%) Expenses Steinbach 8,122,675 8,322,365 (2.4%) --------- --------- ---- Consolidated for 1997 16,155,830 Combined/Pro forma for 1996 16,749,810 (3.5%) The Company's consolidated operating expenses for the quarter ended November 1, 1997 expressed as a percentage of net sales were 32.6% compared to 35.1% for the comparable period last year. Management attributes this improvement to the 8.6% sales increase, together with cost efficiencies that the Company has effected since the Steinbach acquisition. Areas in which the Company has realized cost efficiencies include general liability, worker's compensation and unemployment insurance, pension administration and contribution, and previously outsourced contract services, such as cleaning, rubbish removal and security. For Crowley's, operating expenses as a percentage of net sales decreased to 29.4% for the quarter ended November 1, 1997, from 32.0% for the comparable period in 1996. Together with the sales increase and the cost efficiencies detailed above, the decrease was attributable to the allocation of a pro rata share of corporate overhead expense to Steinbach during the quarter ended November 1, 1997. No corporate overhead was allocated to Steinbach prior to August 31, 1996, the effective date of the Steinbach acquisition by Crowley's. For Steinbach, operating expenses expressed as a percentage of net sales remained relatively constant at 36.6%. This percentage remained constant because the increase in Steinbach's sales base and the savings effected by the cost efficiencies detailed above were offset by the allocation of corporate overhead from Crowley's. Quarter Ended Interest Nov 1 Nov 2 Percentage Expense 1997 1996 Increase Line of ---- ---- -------- Credit Crowley's $262,202 $250,128 4.8% Steinbach 409,018 276,071 48.2% ------- ------- ---- Consolidated for 1997 671,220 Combined/Pro forma for 1996 526,199 27.6% The Company's consolidated interest expense related to its line of credit was 1.4% as a percentage of net sales in the third quarter of 1997 compared to 1.1% on a combined basis for the comparable period last year. The increase in consolidated interest expense was attributable to higher inventory levels that were funded by the revolving line of credit, notwithstanding a decrease in the Company's borrowing rate as a result of amending the terms of its credit facility in September 1996 from prime plus 1.00% to prime plus 0.25%. Although higher inventory levels contributed to the majority of the increase in interest expense, a refinement in the method by which interest expense was calculated and allocated to the Steinbach stores during the current year also contributed to the increase for Steinbach. For accounting purposes, both Crowley's and Steinbach are required to capitalize a portion of lease expense related to certain store locations, and to reclassify a portion of this lease expense as interest expense. On a consolidated basis, for the quarters ended November 1, 1997 and November 2, 1996, the amount of lease payments reclassified as interest expense and other non-revolver interest was approximately $365,000, and $143,000, respectively. Quarter Ended Nov 1 Nov 2 Percentage Net Income 1997 1996 Increase (Loss) ---- ---- -------- Crowley's $ 1,457,361 $(29,286) nm Steinbach (717,066) (656,495) 9.2% --------- ------- ---- Consolidated for 1997 740,295 Combined/Pro forma for 1996 (685,781) nm - ------------ nm= not meaningful On a consolidated basis, the Company reported earnings of $0.48 per share for the third quarter of 1997 compared to a combined net loss of $0.52 per share for the third quarter of 1996. As detailed above, the improvement in Crowley's performance for the third quarter can be attributed to enhanced gross margin results and to a reduction in operating expenses. For Steinbach, the third quarters of 1996 and 1997 were very comparable. Absent the one-time adjustments to gross margin effected in 1996, gross margin performance improved in 1997, and the reduction in operating expenses was offset by the allocation of corporate overhead. The Company is in a net operating loss carryforward position, and as a result, pre-tax and after-tax results were the same. Nine Months Ended November 1, 1997 Compared To Nine Months Ended November 2, 1996 Nine Months Ended Nov 1 Nov 2 Percentage Comparable 1997 1996 Increase Store ---- ---- -------- Sales Crowley's $71,428,282 $67,082,282 6.5% Steinbach 61,075,935 53,266,788 14.7% ---------- ---------- ----- Consolidated for 1997 132,504,217 Combined/Pro forma for 1996 120,349,070 10.1% For Crowley's, the sales increase was attributable to an extensive and aggressive sales promotion effort in March to move fall and winter clearance merchandise, a promotional campaign in the second and third quarter to market Crowley's proprietary credit card, a successful "back to school" sales promotion, the initiation of a deferred billing credit card program, and a novel Halloween promotional mailer. Also note that Crowley's closed its Birmingham store on March 23, 1997. Sales for the Birmingham store for 1997 and for the first nine months of 1996 were approximately $1.4 million and $4.0 million, respectively. Much of the sales improvement for the Steinbach stores 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. As was the case with Crowley's stores, October sales were augmented with the initiation of a deferred billing credit card program, together with the novel Halloween promotional mailer. Nine Months Ended Nov 1 Nov 2 Percentage Gross 1997 1996 Increase/(Decrease) Profit ---- ---- ------------------ Crowley's $24,062,475 $22,329,373 7.8% Steinbach 18,828,155 22,320,137 (15.6%) ---------- ---------- ---- Consolidated for 1997 42,890,630 Combined/Pro forma for 1996 44,649,510 (3.9%) 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 improved to 33% from 31.4% for the first nine months of 1997 and 1996. Management's continued efforts to reduce inventory shrinkage, particularly in the area of credit card fraud, contributed to the improvement in gross profit percentage. Steinbach's gross profit percentage dropped from 39.9% for the first nine months of 1996 to 30.4% for the first nine months of 1997. The gross profit percentage for 1996 of 39.9%, 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 nine months of 1996 would have been 33.9%. Steinbach's gross profit percentage for the first nine 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 and second quarters. As a result of the extensive markdowns taken in the Steinbach stores for the first two quarters of 1997, markdowns for the third quarter were more in line with management's expectations. However, Steinbach's markdown problems in the first two quarters continue to hamper year-to-date performance. Nine Months Ended Nov 1 Nov 2 Percentage Operating 1997 1996 Increase/(Decrease) Expenses ---- ---- ----------------- Crowley's $22,307,231 $24,436,096 (8.7%) Steinbach 23,149,393 21,806,877 6.2% Consolidated for 1997 45,456,624 Combined/Pro forma for 1996 46,242,973 (1.7%) On a consolidated basis, operating expenses as a percentage of net sales decreased significantly to 33.7% for the first nine months of 1997 from 36.4% for the comparable period last year. As noted earlier, management attributes this improvement to the 8.6% sales increase, together with the cost efficiencies that the Company has experienced since the Steinbach acquisition. Areas in which the Company has realized cost efficiencies include general liability, worker's compensation and unemployment insurance, pension administration and contribution, and previously outsourced contract services, such as cleaning, rubbish removal and security. For the nine months ended November 1, 1997, Crowley's operating expenses, expressed as a percentage of net sales, decreased to 30.6% from 34.4% for the comparable period last year. Together with the sales increase and the cost efficiencies detailed above, the decrease was attributable to the allocation of a pro rata share of corporate overhead expense to Steinbach. For Steinbach, operating expenses expressed as a percentage of net sales dropped to 37.4% for the first nine months of 1997 from 38.9% for the comparable period last year. Management attributes this positive trend to the 14.7% improvement in the Steinbach comparable stores sales performance for the first nine months of the year and the cost efficiencies detailed above. However, the impact of the increased sales and cost efficiencies were mitigated somewhat by the allocation of corporate overhead from Crowley's. Nine Months Ended Interest Nov 1 Nov 2 Percentage Expense 1997 1996 Increase/(Decrease) Line of ---- --- ----------------- Credit Crowley's $639,591 $672,119 (4.8%) Steinbach 961,056 528,321 81.9% Consolidated for 1997 1,600,647 Combined/Pro forma for 1996 1,200,440 33.3% The Company's consolidated interest expense expressed as a percentage of net sales increased to 1.1% for the first nine months of 1997 from 0.94% for the comparable period a year ago. The increase in consolidated interest expense was attributable to the higher inventory levels that were funded by the revolving line of credit, notwithstanding a decrease in the Company's borrowing rate as a result of amending the terms of its credit facility in September 1996 from prime plus 1.00% to prime plus 0.25%. Although higher inventory levels contributed to the majority of the increase in interest expense, a refinement in the method by which interest was calculated and allocated to the Steinbach stores during the current year contributed to the increase for Steinbach. For Crowley's, interest expense expressed as a percentage of net sales decreased to 0.9% for the nine months ended November 1, 1997 from 1.0% for the comparable period in 1996, and for Steinbach, interest expense expressed as a percentage of net sales increased significantly to 1.6% for the nine months ended November 1, 1997 from 0.9% for the comparable period in 1996. 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 nine month periods ended November 1, 1997 and November 2, 1996, the amount of lease payments reclassified as interest and interest other than interest incurred on the revolver was approximately $754,000, and $679,000, respectively. Nine Months Ended Nov 1 Nov 2 Percentage Net Income 1997 1996 Increase/(Decrease) (Loss) ---- ---- ------------------ Crowley's $ 895,708 $(2,928,562) nm Steinbach (5,400,707) 737,701 nm --------- --------- -- Consolidated for 1997 (4,504,999) Combined/Proforma for 1996 (2,190,861) nm - -------------- nm= not meaningful On a consolidated basis, for the nine months ended November 1, 1997 the Company reported a net loss of $2.93 per share, compared to a combined net loss of $2.03 per share for the comparable period last year. For Crowley's, the improvement in earnings performance was attributable to an increase in gross profit dollars of approximately $1.3 million, and the allocation of approximately $2.9 million of corporate overhead to Steinbach. For Steinbach, the change in earnings performance can be attributed to a $3.5 million decline in gross profit (from $22.3 million to $18.8 million) arising from an aggressive promotion to clear out fall and winter clearance merchandise(as indicated previously, the gross profit for the first nine months of 1996 includes a reversal of a $3.3 million markdown reserve), together with the allocation of $2.9 million of corporate overhead expenses during the first nine months of 1997; an increase to interest expense of $600,000 as a result of the increased inventory levels required to adequately stock the stores during the nine 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 nine month's gross profit performance between the two companies was significant. Management believes that the difference can be primarily attributed to the poor performance in menswear at the Steinbach stores during the first nine months, principally the first two quarters. Traditionally, Steinbach's men's department has 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 during the first and second quarters of this fiscal year. 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. Management believes that with this addition, and with a more dedicated focus to controlling inventory levels, particularly in Steinbach's men's division, and as a result of the extensive promotional efforts, at the end of the third quarter the inventory levels in the men's area were within an acceptable range of their planned levels, and that it has taken the appropriate steps to address the performance issue of Steinbach's men's division. The Company is in a net operating loss carryforward position, and as a result, pre-tax and after-tax results were the same. Financial Condition Cash and cash equivalents for the Company increased to $698,000 from $215,000 at February 1, 1997. The cash and cash equivalents balance at November 2, 1996 was $442,000. Net cash used in operating activities was $10.3 million for the first nine months of 1997, compared with net cash used in operating activities of $11.2 million reported during the first nine months of 1996. The detail supporting the net cash used in operating activities evidences that the Company has made significant strides in controlling its inventory levels. The increase in inventories dropped to $10.2 million for the first nine months of 1997, from $19.1 million in 1996, with a comparable showing in accounts payable balances (an increase of $2.5 million in 1997 from $11.0 million in 1996). However, this improvement was overshadowed by the increase in the net loss for the first nine months of 1997 over 1996 ($4.5 million compared to $2.1 million). Investing activities used cash of $1.9 million during the first nine months of 1997, compared to $814,000 of cash used in investing activities for the first nine months of 1996. Investing activities included capital expenditures for the modernization and refixturing of existing stores, expenditures related to the fixturing of two new Steinbach stores which opened in October 1997, and upgrades to the Company's information systems. Financing activities provided cash of $12.6 million during the first nine months of 1997, compared to $11.9 million of cash provided last year. This increase was attributable to increased borrowings on the Company's revolving line of credit to fund merchandise purchases and the losses incurred during the first nine 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. At November 1, 1997, the Company's working capital decreased to $7.7 million from the $12.2 million of working capital available at November 2, 1996. At November 1, 1997, the Company's working capital ratio was 1.14, down slightly from 1.18 reported at November 2, 1996. The reduction in working capital and the change in the working capital ratio evidence the Company's efforts to reduce its inventory levels ($56.7 million in 1997 compared to $61.3 million in 1996) and better manage its vendor relationships (accounts payable to vendors dropped to $19.6 million in 1997 from $35.5 million in 1996, and receivables due from vendors fell to $1.9 million from $6.3 million in 1996). During the nine month periods ended November 1, 1997, and November 2, 1996, the Company did not pay or declare any cash dividends with respect to its stock. Other Developments The Company opened new Steinbach stores in Mohegan (Westchester County), New York (42,000 square feet) and Trumbull (Fairfield County), Connecticut (54,000 square feet) as scheduled in late October 1997. Both stores are leased, the Mohegan store for an initial term of 10 years (with two renewal options) and the Trumbull store for an initial term of five years (also with two renewal options). 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 July 1998. To finance the "Year 2000" solution, the Company has entered into a lease agreement with IBM Credit Corporation ("IBM"). IBM has agreed to finance the total solution, including hardware, software and related collateral support. The term of the lease is 36 months, commencing February 1, 1998. 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. Not applicable. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits No. Description 27 Financial Data Schedule (EDGAR filing only). (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter. 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: December 11, 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).