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UNITED STATES 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 SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
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 Identification No.)
incorporation or organization)
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 September 14, 1998 there were outstanding 64,084,832 shares of the
issuer's common stock, $.01 par value.
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SAKS HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
Part I. Financial Information.
Item 1. Financial Statements.
<S> <C>
Condensed Consolidated Balance Sheets as of August 1, 1998
(unaudited), August 2, 1997(unaudited), and January 31, 1998.......................... 1
Condensed Consolidated Statements of Operations (unaudited) for the
three and six months ended August 1, 1998 and August 2, 1997.......................... 2
Condensed Consolidated Statements of Cash Flows (unaudited) for the six
months ended August 1, 1998 and August 2, 1997........................................ 3
Notes to Condensed Consolidated Financial Statements (unaudited)...................... 4-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 6-13
Part II. Other Information.
Item 1. Legal Proceedings............................................................ 14
Item 2. Changes In Securities........................................................ 14
Item 3. Defaults Upon Senior Securities.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.......................... 14
Item 5. Other Information............................................................ 14
Item 6. Exhibits and Reports on Form 8-K............................................. 14-15
Signatures ........................................................................... 16
</TABLE>
i
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Part I. Financial Information
Item 1. Financial Statements
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) (Unaudited) (Unaudited)
August 1, August 2, January 31,
1998 1997 1998
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.................................. $7,690 $9,678 $11,468
Accounts receivable, net................................... 67,853 50,153 69,696
Inventories................................................ 600,193 469,277 543,113
Other current assets....................................... 73,987 80,579 106,128
-------------- ------------ ------------
Total current assets............................. 749,723 609,687 730,405
Property and equipment, net..................................... 990,838 872,946 941,098
Deferred income tax assets...................................... 329,061 0 323,793
Intangibles and other assets.................................... 102,969 138,939 107,099
-------------- ------------ ------------
Total assets.................................................... $2,172,591 $1,621,572 $2,102,395
-------------- ------------ ------------
-------------- ------------ ------------
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable, trade................................... $184,018 $190,984 $183,640
Accrued liabilities....................................... 110,797 81,169 135,888
Taxes other than income taxes............................. 14,816 14,110 19,681
Income taxes payable...................................... 23 0 3,249
Current portion of capital lease obligations.............. 4,458 5,505 4,458
-------------- ------------ ------------
Total current liabilities...................... 314,112 291,768 346,916
Long-term debt................................................. 829,041 652,391 713,591
Obligations under capital leases............................... 109,556 111,348 114,554
Other noncurrent liabilities................................... 43,165 38,843 47,437
-------------- ------------ ------------
Total liabilities.............................. 1,295,874 1,094,350 1,222,498
Shareholders' equity........................................... 876,717 527,222 879,897
-------------- ------------ ------------
Total liabilities and shareholders' equity..................... $2,172,591 $1,621,572 $2,102,395
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
1
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SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
(In thousands, except for per share amounts) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales................................................... $509,589 $454,703 $1,092,474 $975,120
Cost of sales, including buying and occupancy............... 375,152 338,919 792,173 705,615
-------------- --------------- ------------ -------------
Gross margin...................................... 134,437 115,784 300,301 269,505
Selling, general and administrative expenses................ 130,049 116,434 264,443 243,777
Special charge.............................................. 6,431 0 6,431 0
-------------- --------------- ------------ -------------
Operating income (loss)........................... (2,043) (650) 29,427 25,728
Interest expense, net....................................... 16,646 13,918 33,498 27,489
-------------- --------------- ------------ -------------
Loss before income taxes.................................... (18,689) (14,568) (4,071) (1,761)
Income tax benefit.......................................... 7,569 396 1,650 196
-------------- --------------- ------------ -------------
Loss before extraordinary charge and cumulative effect of
change in accounting for pre-opening costs.................. (11,120) (14,172) (2,421) (1,565)
Extraordinary charge - loss on early extinguish
of debt, net of taxes....................................... 0 0 0 3,352
Cumulative effect of change in accounting for
pre-opening cost, net of taxes.............................. 0 0 5,314 0
-------------- --------------- ------------ -------------
Net loss.................................................... $(11,120) $(14,172) $(7,735) $(4,917)
-------------- --------------- ------------ -------------
-------------- --------------- ------------ -------------
Net loss per share before extraordinary charge and cumulative
effect of change in accounting for pre-opening costs
Basic................................................ $(0.17) $(0.22) $(0.04) $(0.02)
Diluted.............................................. $(0.17) $(0.22) $(0.04) $(0.02)
Net loss per share
Basic................................................ $(0.17) $(0.22) $(0.12) $(0.08)
Diluted.............................................. $(0.17) $(0.22) $(0.12) $(0.08)
Weighted average shares outstanding
Basic................................................ 63,974 63,413 63,835 63,379
Diluted.............................................. 63,974 63,413 63,835 63,379
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
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SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) Six Months Ended
August 1, August 2,
1998 1997
-------- ---------
<S> <C> <C>
Net loss.................................................................. ($7,735) ($4,917)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization.............................. 37,432 34,831
Special charge............................................. 6,431 0
Income taxes............................................... (1,650) (196)
Extraordinary charge....................................... 0 3,352
Cumulative effect of change in accounting for pre-opening
costs.................................................. 5,314 0
Change in operating assets and liabilities................. (77,739) (43,144)
----------- ----------
----------- ----------
Net cash used in operating activities..................................... (37,947) (10,074)
----------- ----------
Net cash used in investing activities, principally capital expenditures... (83,991) (79,926)
----------- ----------
Cash flow from financing activities:
Borrowings under revolving credit facility, net............ 115,450 75,550
Repayment of REMIC Certificates............................ 0 (30,000)
Other...................................................... 2,710 1,173
----------- ----------
Net cash provided by financing activities................................. 118,160 46,723
----------- ----------
Decrease during the period................................. ($3,778) ($43,277)
----------- ----------
----------- ----------
Supplemental disclosure of cash flow information:
Interest paid.............................................. $26,831 $22,160
Taxes paid................................................. $3,226 $1,519
----------- ----------
----------- ----------
Supplemental disclosure of non-cash investing and financing activities:
Capital leases............................................. $0 $2,520
----------- ----------
----------- ----------
</TABLE>
See Notes to 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 January 31, 1998, 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. Change in Accounting for Pre-Opening Costs
In the first quarter of fiscal 1998, the Company implemented Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This
Statement requires companies to expense start-up costs, such as pre-opening
costs, as incurred. The Company would have been required to implement this
Statement for fiscal 1999, however early implementation was elected. The
Company's prior accounting policy expensed such costs over a twelve-month period
following store opening. The cumulative effect of this change in accounting for
pre-opening costs reduced net income in first quarter of fiscal 1998 by $5.3
million, or $0.08 per diluted share.
3. Income Taxes
The continued improvement in operating income in fiscal 1997, as well as the
Company's estimates of future profitability, enabled the Company to record in
the fourth quarter of fiscal 1997 a tax benefit of $290 million, or $4.10 per
diluted share. This benefit reflects the elimination of the valuation allowance
related to deferred tax assets resulting in the recognition of the tax benefit
associated with the Company's net operating loss carryforwards ("NOL"s). If
4
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future income is significantly different than current estimates the deferred tax
asset value may become impaired. As a result of the NOL recognition, in the
fourth quarter of 1997 the Company also began recording an income tax provision
using a 41% annual effective tax rate. The NOLs will continue to offset any
future cash taxes other than AMT liability and state income taxes in certain
locations until approximately the year 2001.
4. Special Charge
In the second quarter of 1998, the Company recorded a special charge of $6.4
million pre-tax, or $0.06 per diluted share after tax, relating primarily to the
settlement of litigation, which provided for the termination of lease and
closing of operations of the former Saks Fifth Avenue store at the Houston
Pavilion.
5. Extraordinary Charge
In February 1997, the Company re-acquired $15.0 million of its outstanding
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.
7. Impact of Other Recently Issued Accounting Standards
In February 1998, the Financial Accounting Standards Board issued Statement No.
132 ("SFAS 132"), "Employer Disclosure about Pensions and Other Post Retirement
Benefits." This statement significantly changes current financial statement
disclosure requirements. The most significant effects of SFAS 132 are that it:
1) standardizes the disclosure requirements for pensions and other post
retirement benefits and presents them in one footnote; 2) requires that
additional information be disclosed regarding changes in benefit obligation and
fair value of plan assets; 3) eliminates certain disclosures that are no longer
useful, including general descriptions of plans; and 4) permits the aggregation
of information about certain plans. SFAS 132 does not change the existing
measurement or recognition provisions under the existing applicable statement.
SFAS 132 is effective for fiscal 1998.
5
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In June 1998, the Financial Accounting Standards Board issued Statement No.133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for fiscal 1999. The Company expects the impact of SFAS 133 to be
immaterial.
8. Merger of Saks Holdings, Inc. and Proffitt's, Inc.
On July 5, 1998 the Company announced that it had reached an agreement to merge
with Proffitt's, Inc., in a transaction intended to be accounted for as a
pooling of interests. Subject to requisite stockholder approvals, stockholders
of Saks will receive .82 share of Proffitt's in exchange for each share of Saks
stock. The special meeting of stockholders to approve the previously announced
merger and related matters is scheduled for September 16, 1998. Assuming receipt
of the requisite stockholder approvals, the merger is expected to be consummated
shortly after the special meeting.
9. Purchase of Bullock & Jones
During the second quarter, the Company announced an agreement to purchase the
assets of Bullock & Jones, an established upscale men's wear brand with a
nationwide catalog operation and a store on Union Square in San Francisco. In
fiscal 1997, combined sales for Bullock & Jones were approximately $30 million,
with two-thirds of the Company's sales derived from catalog sales. The Company
believes that Bullock & Jones will complement Folio's well established women's
business, while at the same time provide further growth opportunities for the
Saks Fifth Avenue Men's franchise. The Company intends to leverage the operating
infrastructure of its Folio division to expand the Bullock & Jones direct mail
business. This transaction closed August 1, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations for the Six Months Ended August 1, 1998, Compared with the
Six Months Ended August 2, 1997
6
<PAGE>
Net sales for the six months ended August 1, 1998 were $1,092.5 million, an
increase of $117.4 million, or 12.0%, over net sales of $975.1 million reported
in the six months ended August 2, 1997. Comparable sales increased 7.3% from the
1997 fiscal period.
Full-Line, Resort and Main Street stores net sales for the six months ended
August 1, 1998 were $909.1 million, an increase of $90.7 million, or 11.1%, from
$818.4 million for the six months ended August 2, 1997. Comparable sales for
Full-Line, Resort and Main Street stores increased 7.9% from the 1997 fiscal
period. The growth in Full-Line, Resort and Main Street stores net sales in
fiscal 1998 results from both the Company's real estate growth and expansion
strategy, as well as the Company's merchandise and customer focus initiatives.
Off 5th's net sales for the six month period ended August 1, 1998 were $145.0
million, an increase of $23.1 million, or 19.0%, from $121.9 million for the six
month period of August 2, 1997. The increase is primarily a result of opening
ten new stores since the beginning of 1997. The Company closed five of its
smaller Off 5th store locations in fiscal 1998. Comparable sales for Off 5th
increased 1.6% from the fiscal 1997 period. Folio catalog net sales for the six
month period ended August 1, 1998 were $38.3 million, an increase of $3.5
million, or 10.1%, from $34.8 million for the six month period ended August 2,
1997. The increase in catalog net sales is a result of an increase in
circulation in the second quarter, as well as a significant increase in demand.
Beginning in the second quarter, the Company has included store expansions in
its comparable sales calculation, which is consistent with other department
store retailers. The Company believes this methodology better reflects the
strategic investment in its existing store base, which are among its most
productive stores. All comparable store increases reported have been restated
using this methodology.
Cost of sales includes the cost of merchandise and buying and occupancy costs.
Cost of sales in the six months ended August 1, 1998 was $792.2 million, an
increase of $86.6 million compared to $705.6 million in the six months ended
August 2, 1997, or a 12.3% increase. The overall increase resulted primarily
from the 12.0% increase in sales. As a percentage of net sales, cost of sales
including buying and occupancy costs was 72.5% for the six month period ended
August 1, 1998, compared to 72.4% in fiscal 1997. The increase in the cost of
sales rate was primarily due to increased occupancy costs associated with the
Company's real estate growth strategy, which has resulted in 16 new stores and 9
store expansions since the beginning of fiscal 1997, offset by improvement in
the markdown rate.
Selling, general and administrative expenses for the six month period ended
August 1, 1998 were $264.4 million, an increase of $20.7 million, or 8.5%, from
the comparable period in fiscal 1997 primarily due to higher sales volume
related costs. As a percentage of net sales, selling, general and administrative
expenses were 24.2% for the six month period ended August 1, 1998, compared to
25.0% for the six month period ended August 2, 1997. The improvement in the
selling, general and administrative expense rate resulted from leverage from the
Company's sales growth, ongoing expense management and improved credit card
related income. Lower pre-opening expenses due to the
7
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early implementation of SOP 98-5 on start-up costs were offset by higher
advertising and payroll costs.
During the second quarter of fiscal 1998, the Company recorded a special charge
of $6.4 million pre-tax, or $0.06 per diluted share after tax, relating to the
settlement of litigation, which provided for the termination of lease and
closing of the former Saks Fifth Avenue store at the Houston Pavilion, which was
replaced by the Houston Galleria store.
Operating income was $29.4 million for the six month period ended August 1,
1998, an increase of $3.7 million, or 14.4%, from operating income for the six
month period ended August 2, 1997. Excluding the special charge discussed above,
operating income increased by 39.4% to $35.9 million.
Interest expense in the six months ended August 1, 1998 was $33.5 million, an
increase of 21.9% compared to the same period in fiscal 1997. This increase is
due to higher borrowings under the Company's bank revolving credit facility as a
result of the capital expenditures and related growth associated with the
Company's real estate growth and expansion strategy.
The Company recorded an income tax benefit of $1.7 million for the six months
ended August 1, 1998, which reflects a 40.5% tax rate, compared to $0.2 million
for the six months ended August 2, 1997.
Net loss before extraordinary charge and cumulative effect of change in
accounting for pre-opening costs for the six months ended August 1, 1998 was
$2.4 million or $(0.04) per diluted share. The Company recorded a pro forma
fully-taxed net loss of $1.0 million, or $(0.02) per diluted share for the six
months ended August 2, 1997. Net income before extraordinary charge and
cumulative effect of change in accounting for pre-opening costs and special
charge for the six months ended August 1, 1998 was $1.4 million or $.02 per
diluted share.
An extraordinary charge of $3.4 million, or $0.05 per diluted share, was
recorded during the six month period ended August 2, 1997, which related to the
repurchase of high cost debt.
Results of Operations for the Three Months Ended August 1, 1998, Compared with
the Three Months Ended August 2, 1997
Net sales for the three months ended August 1, 1998 were $509.6 million, an
increase of $54.9 million, or 12.1%, over net sales of $454.7 million reported
in the six months ended August 2, 1997. Comparable sales increased 7.4% from the
1997 fiscal period.
8
<PAGE>
Full-Line, Resort and Main Street stores net sales for the three months ended
August 1, 1998 were $418.1 million, an increase of $37.4 million, or 9.8%, from
$380.7 million for the three months ended August 2, 1997. Comparable sales for
Full-Line, Resort and Main Street stores increased 6.8% from the 1997 fiscal
period. The growth in Full-Line, Resort and Main Street stores net sales in
fiscal 1998 results from both the Company's real estate growth and expansion
strategy, as well as the Company's merchandise and customer focus initiatives.
Off 5th's net sales for the three months period ended August 1, 1998 were $73.6
million, an increase of $13.1 million, or 21.7%, from $60.5 million for the
three months ended August 2, 1997. The increase is primarily a result of opening
ten new stores since the beginning of 1997. The Company closed five of its
smaller Off 5th store locations in fiscal 1998. Comparable sales for Off 5th
increased 5.6% from the comparable fiscal 1997 period. Folio catalog net sales
for the three months period ended August 1, 1998 were $17.9 million, an increase
of $4.4 million, or 32.6%, from $13.5 million for the three month period ended
August 2, 1997. The increase in catalog net sales is a result of an increase in
circulation in the second quarter, as well as a significant increase in demand.
Cost of sales includes the cost of merchandise and buying and occupancy costs.
Cost of sales in the three months ended August 1, 1998 was $375.2 million, an
increase of $36.2 million compared to $338.9 million in the three months ended
August 2, 1997, or a 10.7% increase. The overall increase resulted primarily
from the 12.1% increase in sales. As a percentage of net sales, cost of sales
including buying and occupancy costs was 73.6% for the three months period ended
August 1, 1998, compared to 74.5% in fiscal 1997. The decrease in the cost of
sales rate was primarily due to easier comparisons from the second quarter of
fiscal 1997 when cost of sales increased 0.7% from fiscal 1996. In addition,
there was an improvement in the markdown rate partially offset by an increase in
occupancy costs.
Selling, general and administrative expenses for the three month period ended
August 1, 1998 were $130.0 million, an increase of $13.6 million, or 11.7%, from
the comparable period in fiscal 1997 primarily due to higher sales volume
related costs. As a percentage of net sales, selling, general and administrative
expenses were 25.5% for the three months period ended August 1, 1998, compared
to 25.6% for the three months period ended August 2, 1997. The second quarter
expense rate comparison anniversaries the cost reduction efforts, which were
executed in fiscal 1997, where expenses declined 160 percentage points from
fiscal 1996. Additionally, since the second quarter is the lowest sales period,
the leverage against fixed costs from sales growth is lower than in other
quarters.
During the second quarter, the Company recorded a special charge of $6.4 million
pre-tax, or $0.06 per diluted share after tax, relating to the settlement of
litigation, which provided for the termination of lease and closing of the
former Saks Fifth Avenue store at the Houston Pavilion, which was replaced by
the Houston Galleria store.
9
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Operating loss was $2.0 million for the three months ended August 1, 1998,
compared to an operating loss of $0.7 for the three months period ended August
2, 1997. Excluding the special charge operating income was $4.4 million, an
increase of $5.0 million.
Interest expense in the three months ended August 1, 1998 was $16.6 million, an
increase of $2.7 million, or 19.6%, compared to the same period in fiscal 1997.
This increase is due to higher borrowings under the Company's bank revolving
credit facility as a result of the capital expenditures and related growth
associated with the Company's real estate growth and expansion strategy.
The Company recorded an income tax benefit of $7.6 million for the three months
ended August 1, 1998, which reflects a 40.5% tax rate, compared to $0.4 million
for the three months ended August 2, 1997. Net loss before special charge for
the three months ended August 1, 1998, was $7.3 million, or $0.11 per diluted
share, which is an improvement of $1.3 million, or $0.03 per diluted share, over
pro forma fully-taxed net loss of $8.6 million, or $0.14 per diluted share, for
the three months ended August 2, 1997.
Changes in Financial Condition and Liquidity since January 31, 1998
During the fiscal 1998 period, the Company financed its working capital needs
and capital expenditures with cash provided by operations, borrowings under its
credit facility, the continued sale of proprietary credit card receivables under
its securitization program, and utilization of lease financing and developer
contributions. The following discussion analyzes liquidity and capital resources
by operating, investing and financing activities as presented in the Company's
Consolidated Statements of Cash Flows.
Net cash used in operating activities was $37.9 million during the six months
ended August 1, 1998, compared to $10.1 million used in the six months ended
August 2, 1997. This increase was primarily attributable to an increase in
working capital accounts. The primary items affecting working capital in the
1998 period were a net increase in merchandise inventories, net of an increase
in trade accounts payable of $52.8 million, and a decrease in accrued
liabilities and taxes other than income taxes of $31.5 million. The increase in
merchandise inventories and trade accounts payable was due to the addition of
new stores, and an increase to support existing store sales growth. The decrease
in accrued liabilities primarily reflects the redemption of Saks First gift
checks.
Net cash used in investing activities was $84.0 million during the six months
ended August 1, 1998, compared to $79.9 million in the six months ended August
2, 1997, and consisted entirely of capital expenditures. Capital expenditures
during the six months ended August 1, 1998 principally represented the
construction of new stores and remodeling existing stores. During the spring of
1998, the Company opened new Main Street stores in Blackhawk, CA and Santa
10
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Barbara, CA, totaling nearly 100,000 square feet and plans to open an additional
three stores and complete three major renovations in the fall of 1998, which
will add approximately 260,000 square feet to the core store base. In addition,
the Company opened one Off 5th store in Woodbury Common Premium Outlets in
Central Valley, NY and closed five smaller format Off 5th stores in Memphis, TN,
Gulfport, MS, Auburn, WA, Phoenix, AZ and Foley, AL. The Company plans to open
three Off 5th stores in the fall of 1998. Proceeds from the sale and
sale-leaseback of assets were $3.4 during the six months ended August 2, 1997.
Net cash provided by financing activities during the six months ended August 1,
1998 was $118.2 million compared to $46.7 million in the six months ended August
2, 1997. In 1998, the cash provided by financing activities was the result of
net borrowing under the credit facility. Cash provided by financing activities
in 1997 resulted from net borrowings under the credit facility, offset by the
repurchase of mortgage certificates.
The continued improvement in operating income in fiscal 1997, as well as the
Company's estimates of future profitability, enabled the Company to record in
the fourth quarter of fiscal 1997 a tax benefit of $290 million, or $4.10 per
diluted share. This benefit reflects the elimination of the valuation allowance
related to deferred tax assets resulting in the recognition of the tax benefit
associated with the Company's net operating loss carryforwards ("NOLs"). If
future income is significantly different than current estimates the deferred tax
asset value may become impaired. As a result, in the fourth quarter of 1997, the
Company also began recording an income tax provision using a 41% annual
effective tax rate. The utilization of these NOLs will continue to offset any
future cash taxes other than AMT liability and state income taxes in certain
locations until approximately the year 2001.
In June 1997, the Company entered into a $100.5 million operating lease
agreement, which can be used to finance qualified properties placed in service
by December 31, 1999. Under this agreement , the lessor has agreed to acquire
and construct new store sites in order to lease them to the Company. The lease
requires a variable rent payment related to LIBOR interest rates. The Company
has guaranteed a substantial residual value of the properties under lease. The
Company has guaranteed approximately $23.2 million at August 1, 1998. The
Company may purchase the assets under lease or elect for the properties to be
sold to a third party. At August 1, 1998, there was approximately $72.2 million
available under this lease agreement to fund capital expenditures. The initial
lease term ends in October 2001 and may be extended at the mutual consent of the
lessor and the Company.
In fiscal 1998, the Company expects capital expenditures to be approximately
$250 million as the Company continues to execute it's growth strategy. The
Company plans to add a total of one new Full-Line store, one new Resort store,
three new Main Street stores and four Off 5th stores, in addition to completing
four major expansions and one remodel. The Company's capital expenditures in
1999 and 2000 are currently anticipated to total approximately $400 million.
11
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The Company expects that these projects will be funded by cash generated from
operations, the continued sale of receivables under the securitization program,
borrowings under the credit facility, lease financing and developer
contributions. The Company has evaluated various financing alternatives
including an increase in its credit facility, an increase in lease financing,
and issuance of debentures. The Company's receivable securitization program
expires in April 1999.
On July 5, 1998 the Company announced that it had reached an agreement to
merge with Proffitt's, Inc. ("Proffitt's"). Subject to requisite stockholder
approvals, the Company's stockholders will receive .82 share of Proffitt's
stock in exchange for each share of the Company's stock. The special meeting
of stockholders to approve the previously announced merger and related
matters is scheduled for September 16, 1998. Assuming receipt of the
requisite stockholder approvals, the merger is expected to be consummated
shortly after the special meeting. The merger will necessitate restructuring
certain of the Company's financing vehicles. Completion of the merger will
enhance the Company's ability to finance its growth as cash flow and capital
markets access of the merged company will be greater than prior to the
merger. In the event that the proposed merger with Proffitt's is not
consummated, the Company believes it will have sufficient resources to fund
its planned capital growth and operating requirements.
The Company's business is seasonal, with a significant percentage of net sales
and operating income occurring in the fourth quarter. Seasonality also affects
the Company's working capital requirements and cash flow, as inventories build
in September and peak in October in anticipation of the holiday selling season.
Each of Proffitt's and the Company has undertaken efforts to address the year
2000 problem with respect to the processing of date-sensitive information by
such company's information systems. Integration after the merger of the two
companies' efforts to become year 2000 compliant may present significant
operational challenges. Failure to timely integrate these efforts could delay
the realization of certain synergies expected to result from the merger.
Independent of the proposed merger with Proffitt's, the Company is currently
working to resolve the potential impact of the year 2000 on the processing of
date-sensitive information by the Company's computerized information systems.
The potential year 2000 problem is the result of computer programs having been
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company or its vendors are unable
to resolve such processing issues in a timely manner, it could result in a
material financial risk. Accordingly, the Company plans to devote the necessary
resources to resolve all significant year 2000 issues in a timely manner.
12
<PAGE>
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, real estate projects, year 2000
expense 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, changes in consumer preferences or fashion trends, levels
of operating earnings, delays in anticipated store openings and expansions,
success in integrating distribution personnel and operations, adverse weather
conditions during peak selling seasons, changes in demographic or retail
environments, competitive influences, significant increases in paper, printing
and postage costs, changes in the Company's relationship with designers and
other resources 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.
13
<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.
On April 20, 1998, the Annual Meeting of Stockholders of
the Company was held in New York. There were 63,721,183
shares of common stock outstanding on the record date and
entitled to vote at the meeting.
b) The following directors were elected:
<TABLE>
<CAPTION>
Vote For Vote Withheld
<S> <C> <C>
Philip B. Miller 50,367,731 2,408,778
Brian E. Kendrick 50,369,333 2,407,176
E. Garrett Bewkes III 50,365,983 2,450,526
Jon P. Hedley 50,367,244 2,409,265
Charles J. Philippin 50,354,894 2,421,615
Brian Ruder 50,423,055 2,353,454
Stephen I. Sadove 50,424,289 2,352,220
Savio W. Tung 50,357,894 2,418,615
</TABLE>
c) The selection of PricewaterhouseCoopers LLP as independent
auditors for the fiscal year ending January 30, 1999 was
ratified with 52,723,035 shares voting in favor, 33,165 shares
voting against and 20,309 abstaining.
Item 5 Other Information. Not Applicable
Item 6 (a) Exhibits.
Exhibit No. Exhibit
3.01* Amended and Restated Certificate of
Incorporation of Saks Holdings, Inc., as
filed with the Delaware Secretary of State
on May 28, 1996.
3.02** Bylaws of Saks Holdings, Inc., as amended
and restated effective February 27, 1998.
14
<PAGE>
11.01 Statement Re: Computation of Earnings per share.
27.01 Financial Data Schedule.
Item 6 (b) Reports on Form 8-K.
A report on Form 8-K was filed with the Commission on July 4,
1998 regarding a definitive agreement and plan of merger with
Proffitt's, Inc.
* Incorporated herein by reference to Saks Holdings, Inc.'s
registration statement on Form S-1 (File No. 333-2426).
**Incorporated herein by reference to Saks Holdings, Inc.'s
report on Form 8-K (File No.001-14346).
15
<PAGE>
SIGNATURES
Pursuant to the requirement 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)
Dated: September 15, 1998 /s/ Mark E. Hood
-------------------------------
Mark E. Hood
Executive Vice President
Chief Financial Officer
16
<PAGE>
Exhibit 11.01 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
Average shares outstanding - Basic.................... 63,974 63,413 63,835 63,379
----------- ----------- ----------- -----------
Effect of dilutive stock options - ................... 0 0 0 0
----------- ----------- ----------- -----------
Average shares outstanding - Diluted ................. 63,974 63,413 63,835 63,379
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income before extraordinary charge and
cumulative effect of change in accounting for
pre-opening costs............................... $(11,120) $(14,172) $(2,421) $(1,565)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss............................................. $(11,120) $(14,172) $(7,735) $(4,917)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Loss per share before extraordinary charge and
cumulative effect of change in accounting for
pre-opening costs
Basic........................................... $(0.17) $(0.22) $(0.04) $(0.02)
Diluted......................................... $(0.17) $(0.22) $(0.04) $(0.02)
Loss per share
Basic............................................ $(0.17) $(0.22) $(0.12) $(0.08)
Diluted.......................................... $(0.17) $(0.22) $(0.12) $(0.08)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EARNINGS
PER SHARE ARE IN CONFORMITY WITH THE REQUIREMENTS OF SFAS 128, EARNINGS PER
SHARE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 7,690
<SECURITIES> 0
<RECEIVABLES> 81,435
<ALLOWANCES> 13,582
<INVENTORY> 600,193
<CURRENT-ASSETS> 749,723
<PP&E> 1,293,157
<DEPRECIATION> 302,319
<TOTAL-ASSETS> 2,172,591
<CURRENT-LIABILITIES> 314,112
<BONDS> 829,041
0
0
<COMMON> 640
<OTHER-SE> 876,077
<TOTAL-LIABILITY-AND-EQUITY> 2,172,591
<SALES> 1,092,474
<TOTAL-REVENUES> 1,092,474
<CGS> 792,173
<TOTAL-COSTS> 1,056,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,498
<INCOME-PRETAX> 2,360
<INCOME-TAX> (1,650)
<INCOME-CONTINUING> 1,405
<DISCONTINUED> 0
<EXTRAORDINARY> 6,431
<CHANGES> 5,314
<NET-INCOME> (7,735)
<EPS-PRIMARY> (.12)<F1>
<EPS-DILUTED> (.12)<F2>
<FN>
<F1>Represents basic earnings per share in accordance with SFAS No. 128, earnings
per share.
<F2>Represents diluted earnigs per share in accordance with SFAS No. 128, earnings
per share.
</FN>
</TABLE>
