SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended May 3, 1997
Commission File Number 001-14346
SAKS HOLDINGS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 52-1685667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 East 49th Street, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 940-4048
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
1) Yes |X| No |_|
2) Yes |X| No |_|
As of May 3, 1997 there were outstanding 63,404,136 shares of the issuer's
common stock, $.01 par value.
<PAGE>
SAKS HOLDINGS, INC.
INDEX
Page
Part I. Financial Information Number
Item 1. Condensed Consolidated Balance Sheets
as of May 3, 1997, May 4, 1996 and
February 1, 1997 1
Condensed Consolidated Statements
of Operations for the Thirteen weeks
ended May 3, 1997 and May 4, 1996 2
Condensed Consolidated Statements
of Cash Flows for the Thirteen weeks
ended May 3, 1997 and May 4, 1996 3
Notes to Condensed Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-8
Part II. Other Information
Item 1 Legal Proceedings 9
Item 2 Changes in Securities 9
Item 3 Defaults upon Senior Securities 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 5 Other Information 9
Item 6 Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
May 3, May 4, February 1,
(in thousands) 1997 1996 1997
----------------------------------
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 10,369 $ 10,935 $ 52,955
Accounts receivable, net 58,444 54,750 42,195
Inventories 495,398 379,931 435,666
Other current assets and restricted cash 54,828 51,497 69,791
---------- ---------- ----------
Total current assets 619,039 497,113 600,607
Property and equipment, net 837,236 779,052 824,080
Intangibles and other assets 162,922 141,033 148,176
---------- ---------- ----------
Total Assets $1,619,197 $1,417,198 $1,572,863
========== ========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable, trade $ 179,209 $ 128,354 $ 146,462
Accrued liabilities 88,023 104,126 139,681
Taxes other than income taxes 13,514 16,219 13,616
Current portion of long-term debt and
capital lease obligations 5,505 27,054 5,437
---------- ---------- ----------
Total current liabilities 286,251 275,753 305,196
Long - term debt 642,041 909,339 591,841
Other noncurrent liabilities 149,975 151,741 147,156
---------- ---------- ----------
Total liabilities 1,078,267 1,336,833 1,044,193
Shareholders' equity 540,930 80,365 528,670
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $1,619,197 $1,417,198 $1,572,863
========== ========== ==========
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
1
<PAGE>
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS of OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
(in thousands except for May 3, May 4,
per share amounts) 1997 1996
--------------------------
<S> <C> <C>
Net sales $ 520,417 $ 464,479
Cost of sales, including buying & occupancy costs (366,696) (323,172)
--------------------------
Gross margin 153,721 141,307
Selling, general and administrative expenses (127,344) (120,038)
--------------------------
Operating income 26,377 21,269
Interest expense, net (13,570) (24,221)
--------------------------
Income (loss) before income taxes
and extraordinary charge 12,807 (2,952)
Income taxes (200) 0
--------------------------
Income (loss) before extraordinary charge 12,607 (2,952)
Extraordinary charge-loss on early
extinguishment of debt (3,352) 0
--------------------------
Net income (loss) $ 9,255 $ (2,952)
==========================
Net income (loss) per share before extraordinary charge $ 0.20 $ (0.07)
==========================
Net income (loss) per share $ 0.14 $ (0.07)
==========================
Weighted average shares outstanding 64,330 44,967
==========================
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
2
<PAGE>
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) Thirteen Weeks Ended
May 3, May 4,
1997 1996
-----------------------
<S> <C> <C>
Net income and depreciation and amortization $ 26,934 $ 15,338
Adjustments to reconcile to net cash used in operating activities:
Extraordinary charge - loss on early extinguishment
of debt 3,352 0
Change in operating assets and liabilities (80,308) (57,694)
-----------------------
Net cash used in operating activities (50,022) (42,356)
-----------------------
Cash flows from investing activities:
Proceeds from sale and sale-leaseback of assets 1,413 0
Capital expenditures, net of construction allowances
received (31,042) (13,954)
-----------------------
Net cash used in investing activities (29,629) (13,954)
-----------------------
Cash flows from financing activities:
Net borrowings under senior credit facility 65,200 69,100
Purchase/payment of Commercial Mortgage Pass-Through
Certificates (30,000) (4,159)
Financing costs 0 (3,539)
Other 1,865 (784)
-----------------------
Net cash provided by financing activities 37,065 60,618
-----------------------
(Decrease) increase in cash and cash equivalents $(42,586) $ 4,308
=======================
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
3
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Saks Holdings,
Inc. and its subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation have been included. The retail
industry is seasonal in nature, and historically the results of operations for
interim periods may not be indicative of the results for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's consolidated financial statements
for the year ended February 1, 1997 which were previously filed.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
2. Income Taxes
The Company has net operating loss carryforwards, at February 1, 1997 of
approximately $761 million, which are available to offset taxes otherwise
payable on its future taxable income. The carryforwards begin to expire unless
utilized in fiscal years 2005 through 2011.
Saks' results of operations, consistent with the retail industry, are seasonal
in nature with a majority of its earnings derived in its fourth quarter. The
Company currently expects that it will be required under generally accepted
accounting principles to recognize the benefit of its net operating loss
carryforwards in its 1997 fourth quarter results. If recognition is required,
the net operating loss carryforwards would increase 1997 fourth quarter earnings
by an estimated $275 million, and would also result in recording an asset for
the deferred tax benefit and a corresponding increase to shareholders' equity in
the Company's balance sheet. The recognition of the net operating loss
carryforwards in the Company's 1997 financial statements would result in 1997
pretax earnings being subject to an estimated forty one percent effective tax
rate (excluding the recognition of operating loss carryforwards) and would also
be reflected in reported results on an ongoing basis beginning in 1998 when its
pretax earnings would become subject to an estimated forty one percent effective
income tax rate.
4
<PAGE>
3. Initial Public Offering
In May 1996, the Company completed an initial public offering (the "Offering").
The Company sold approximately 18 million shares of common stock at an initial
offering price of $25.00 per share. The net proceeds from the Offering were
approximately $417.8 million. The net proceeds from the Offering were primarily
used to prepay term loan borrowings under the Credit Facility and repay
outstanding balances on the revolving credit portion of the Credit Facility.
4. 5 1/2% Convertible Subordinated Notes
In September 1996, the Company issued $276 million aggregate principal amount of
5 1/2% Convertible Subordinated Notes (the "Notes") for net cash proceeds after
offering expenses and financing costs of $267.5 million. The Notes are due on
September 15, 2006 and are convertible at any time prior to maturity into shares
of the Company's common stock at a conversion rate of 24.0601 shares of common
stock for each $1,000 principal amount of Notes, which is equivalent to a
conversion price of approximately $41.563 per share. If all of the Notes are
converted, a total of 6,640,588 shares of common stock will be issued.
The net proceeds from the issuance of the Notes were primarily used to prepay
term loan borrowings under the Credit Facility and repay outstanding balances on
the revolving credit portion of the Credit Facility.
5. Extraordinary Charge
In February 1997, the Company acquired an additional $15.0 million of its
mortgage certificates with an annual fixed interest rate of 12.36%, effectively
prepaying the mortgage certificates. The Company recorded an extraordinary
charge of $3.4 million associated with the repurchase premium and accelerated
write-off of deferred financing costs related to the repurchase.
6. Commitments and Contingencies
The Company is from time to time involved in routine litigation incidental to
the course of its business. Management does not believe that the disposition of
such litigation will have a material adverse effect on the financial position or
results of operations of the Company.
The Company has entered into an agreement to sell its current distribution
facility, located in Yonkers, New York. The sale is subject to the successful
rezoning of the property. If rezoned, proceeds associated with the sale would
fall within a range of $20 to $25 million. A sale of the distribution center in
this price range could result in a gain on sale of $8 to $13 million. Management
is unable to determine at this time if this transaction will be completed.
5
<PAGE>
Saks Holdings, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations for the Thirteen Weeks Ended May 3, 1997
Compared with the Thirteen Weeks ended May 4, 1996
Net sales for the thirteen weeks ended May 3, 1997 were $520.4 million, an
increase of $55.9 million, or 12.0%, over net sales of $464.5 million for the
thirteen weeks ended May 4, 1996. Comparable sales increased 2.6% from the
fiscal 1996 period. Comparable sales in the 1996 fiscal period increased 13.3%
from the comparable 1995 period.
Full-line, resort and main street store net sales increased $35.3 million, or
8.8%, from $402.5 million for the thirteen weeks ended May 4, 1996 to $437.8
million for the thirteen weeks ended May 3, 1997. Comparable sales for
full-line, resort and main street stores increased 3.8% in fiscal 1997.
Comparable sales in the 1996 fiscal period increased 12.6% from the comparable
1995 period. The increase in comparable sales in the 1997 first quarter was
adversely affected by softness in demand for casual bridge apparel, the shift in
Easter Calendar and cooler weather. Off 5th store net sales for the thirteen
weeks ended May 3, 1997 increased $22.9 million, or 59.8%, from $38.3 million
for the thirteen weeks ended May 4, 1996 to $61.3 million, primarily as a result
of opening fifteen net new stores during the last three quarters of 1996 and the
first quarter of 1997. Comparable sales for Off 5th stores decreased 2.8% from
the fiscal 1996 period. Comparable sales in the 1996 fiscal period increased
14.9% from the comparable 1995 period. The decline in comparable sales in the
1997 first quarter resulted in part from Off 5th's lower than planned sell-off
inventory levels (residual merchandise from Saks and Folio). Folio catalog net
sales for the thirteen weeks ended May 3, 1997 decreased by $2.2 million, or
9.4%, from $23.6 million for the thirteen weeks ended May 4, 1996 to $21.4
million. Folio sales in the 1996 fiscal period increased 22.8% from the
comparable 1995 period. The decline in Folio sales in the 1997 first quarter
reflects a continued demand softness initially experienced in late spring 1996.
Cost of sales includes the cost of merchandise and buying and occupancy costs.
Cost of sales increased $43.5 million, or 13.5%, during the thirteen weeks ended
May 3, 1997 compared to the thirteen weeks ended May 4, 1996. As a percentage of
net sales, cost of sales, including buying and occupancy costs, was 70.5% for
the thirteen weeks ended May 3, 1997 compared to 69.6% for the thirteen weeks
ended May 4, 1996. The increase in the cost of sales rate was due to an increase
in the penetration of lower margin Off 5th sales, an increase in markdown rates
and fixed occupancy costs associated with new stores.
6
<PAGE>
Selling, general and administrative expenses increased by $7.3 million or 6.1%
to $127.3 million for the thirteen weeks ended May 3, 1997 from the comparable
period in fiscal 1996, primarily due to higher sales volume related costs. As a
percentage of net sales, selling, general and administrative expenses were 24.5%
for the thirteen weeks ended May 3, 1997 compared to 25.8% for the thirteen
weeks ended May 4, 1996. The improvement in the selling, general and
administrative expense rate resulted from an increased penetration of Off 5th
stores, which have a lower expense rate as well as expense leverage associated
with the sales growth.
An extraordinary charge of $3.4 million or $0.05 per share was recorded during
the thirteen weeks ended May 3, 1997, which related to the repurchase of high
cost debt.
Operating income was $26.4 million for the thirteen weeks ended May 3, 1997, an
increase of $5.1 million from the thirteen weeks ended May 4, 1996.
Interest expense decreased 44% to $13.6 million for the thirteen weeks ended May
3, 1997 compared to the thirteen weeks ended May 4, 1996, due to reduced debt
levels following the Company's initial public offering and the exchange of
higher cost debt with lower cost debt associated with the September issuance by
the Company of 5 1/2% Convertible Subordinated Notes due 2006, and a reduction
of the spread on its variable interest rate borrowings.
Income taxes were $0.2 million for the thirteen weeks ended May 3, 1997 compared
to $0 for the thirteen weeks ended May 4, 1996. The interim tax provision
reflected in 1997 consists primarily of a current provision relating to federal
alternative minimum tax. In 1996, the Company anticipated that the income tax
provision for the full year would be immaterial, accordingly no tax provision
was reflected in first quarter results. See Note 2 to the Condensed Consolidated
Financial Statements for additional discussion on income taxes.
Net income, before extraordinary charge, for the thirteen weeks ended May 3,
1997 was $12.6 million or $0.20 per share, an improvement of $15.6 million or
$0.27 per share from the thirteen weeks ended May 4, 1996.
Supplemental information:
The Company completed its initial public offering of common stock during May
1996. In order to provide meaningful comparisons, pro forma results as if the
offering had been completed at the beginning of fiscal 1996 are provided. For
the thirteen weeks ended May 3, 1997, the Company's net income, before
extraordinary charge, was $12.6 million or $0.20 per share, an increase of 120%,
compared to pro forma net income, before extraordinary charge, of $5.7 million
or $0.09 per share for the thirteen weeks ended May 4, 1996. The pro forma
results adjust 1996 reported results to give effect to the elimination of
management fees, interest savings on debt repayments and to reflect an increase
in the number of shares outstanding.
7
<PAGE>
Changes in Financial Condition and Liquidity since February 1, 1997
In February 1997, the Company acquired an additional $15.0 million of its
mortgage certificates with an annual fixed interest rate of 12.36%. The Company
recorded an extraordinary charge of $3.4 million associated with the repurchase
premium and accelerated write-off of deferred financing costs.
During the fiscal 1997 period, the Company financed its working capital needs
and capital expenditures primarily with cash on hand at the beginning of the
period, cash provided by operations and borrowings under the Credit Facility.
The following discussion analyzes liquidity and capital resources by operating,
investing and financing activities as presented in the Condensed Consolidated
Statements of Cash Flows.
Net cash used in operating activities was $50.0 million during the thirteen
weeks ended May 3, 1997 compared to $42.4 million used in the thirteen weeks
ended May 4, 1996. This increase was primarily attributable to increases in
working capital accounts offset by increased net income in the 1997 period. The
primary items affecting working capital in the 1997 period were a net increase
in merchandise inventories of $59.7 million. The increase was due to the
addition of new stores, seasonal inventory increases and an increase to support
existing store sales growth. This increase was offset in part by an increase in
accounts payable of $32.7 million related to the growth in inventory. Working
capital was also affected by a decrease in accrued liabilities of $33.1 million
due to the first quarter settlement of the January 1997 repurchase of $15.0
million of mortgage certificates, and the first quarter redemption of Saks First
gift checks.
Net cash used in investing activities was $29.6 million during the thirteen
weeks ended May 3, 1997 compared to $14.0 million in the thirteen weeks ended
May 4, 1996. Capital expenditures were $31.0 million, net of construction
allowances, during the thirteen weeks ended May 3, 1997 and consisted
principally of construction of new stores and remodeling existing stores.
Capital expenditures, net of construction allowances, in the thirteen weeks
ended May 4, 1996 were $14.0 million. Proceeds from the sale and sale-leaseback
of assets were $1.4 million during the thirteen weeks ended May 3, 1997 compared
to $0 during the thirteen weeks ended May 4, 1996. In March 1997, the Company
opened a new resort store in Hilton Head, SC and an Off 5th store in Las Vegas,
NV.
Net cash provided from financing activities during the thirteen weeks ended May
3, 1997 was $37.1 million compared to $60.6 million in the thirteen weeks ended
May 4, 1996. The decrease in first quarter 1997 compared to first quarter 1996
was primarily a result of the repurchase of mortgage certificates.
This filing contains forward-looking information, within the meaning of The
Private Securities Litigation Reform Act of 1995, regarding expectations and
estimates of future earnings, tax benefits and financial reporting requirements.
Such forward-looking statements involve risks, uncertainties and other factors
that may cause the actual results to be materially different from such
forward-looking statements. Such factors include, among others, levels of
operating earnings and changes in business strategy or development plans, tax
laws or financial reporting requirements. For more details, see the Company's
other filings with the Securities and Exchange Commission.
8
<PAGE>
SAKS HOLDINGS, INC.
PART II OTHER INFORMATION
Item 1 Legal proceedings Not Applicable
Item 2 Changes in securities Not Applicable
Item 3 Defaults upon senior securities Not Applicable
Item 4 Submission of matters to a vote
of security holders Not Applicable
Item 5 Other Information Not Applicable
Item 6(a) Exhibits
3.01* Amended and Restated Certificate of Incorporation of Saks
Holdings, as filed with the Delaware Secretary of State on
May 28, 1996.
3.02* Bylaws of Saks Holdings, as adopted on August 6, 1990.
4.01* See Exhibits 3.01 as to the rights of holders of Saks
Holdings' Common Stock.
4.02* Form of Stock Certificate of Common Stock of Saks Holdings.
4.03.1** Credit Agreement, dated as of October 8, 1996, among Saks,
the several lenders from time to time party thereto and The
Chase Manhattan Bank, as administrative agent (the "Credit
Facility").
4.03.2** Consent No. 1 to the Credit Facility, dated as of January
17, 1997.
4.04* Amended and Restated Loan and Security Agreement, dated as
of May 12, 1995, between Fifth Avenue Capital Trust ("FACT")
and certain direct and indirect wholly-owned subsidiaries of
Saks (the "Borrowers").
4.05* Trust and Servicing Agreement, dated as of May 12, 1995,
among FACT, Bankers Trust Company, as servicer, and Marine
Midland Bank, as trustee.
4.06* Amended and Restated Trust Agreement, dated as of May 12,
1995, among Saks, HNY, Inc. and Wilmington Trust Company, as
owner trustee.
4.07* Registration Rights Agreement, dated as of August 16, 1996,
among Saks Holdings and certain stockholders of Saks
Holdings.
11.01 Statement Re: Computation of Per Share Earnings.
27.01 Financial Data Schedule.
Item 6(b) Reports on Form 8-K Item 5 Form 8-K,
filed June 5, 1997
- -----------
* Incorporated herein by reference to Saks Holdings' registration statement
on Form S-1 (File No. 333-2426).
** Incorporated herein by reference to Saks Holdings' report on Form 10-K/A
filed May 5, 1997 (File No. 001-14346).
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAKS HOLDINGS, INC.
-------------------------------------
(Registrant)
/s/ Mark E. Hood
-------------------------------------
Date: June 12, 1997 Mark E. Hood
Senior Vice President - Finance
Chief Accounting Officer
10
EX-11.01 - Statement Re: Computation of Earnings Per Share
Thirteen Weeks Ended
May 3, May 4,
1997 1996
-----------------------------------------
(in thousands except for per share amounts)
Average shares outstanding 63,344 44,967
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 986 --
-------- --------
Total 64,330 44,967
======== ========
Income (loss) before extraordinary charge $ 12,607 $ (2,952)
======== ========
Net income (loss) $ 9,255 $ (2,952)
======== ========
Per share amounts:
Income (loss) before extraordinary charge $ .20 $ (.07)
======== ========
Net income (loss) $ .14 $ (.07)
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 10,369
<SECURITIES> 0
<RECEIVABLES> 71,300
<ALLOWANCES> 12,856
<INVENTORY> 500,398
<CURRENT-ASSETS> 624,039
<PP&E> 1,108,699
<DEPRECIATION> 271,463
<TOTAL-ASSETS> 1,619,197
<CURRENT-LIABILITIES> 286,251
<BONDS> 642,041
0
0
<COMMON> 634
<OTHER-SE> 540,296
<TOTAL-LIABILITY-AND-EQUITY> 1,619,197
<SALES> 520,417
<TOTAL-REVENUES> 520,417
<CGS> 366,696
<TOTAL-COSTS> 494,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,570
<INCOME-PRETAX> 12,806
<INCOME-TAX> 200
<INCOME-CONTINUING> 12,606
<DISCONTINUED> 0
<EXTRAORDINARY> (3,352)
<CHANGES> 0
<NET-INCOME> 9,255
<EPS-PRIMARY> .14
<EPS-DILUTED> 0
</TABLE>
