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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended OCTOBER 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 333-42935
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BELK, INC.
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(Exact Name of Registrant as Specified In Its Charter)
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<S> <C>
Delaware 56-2058574
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2801 West Tyvola Road, Charlotte, North Carolina 28217-4500
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, including Area Code (704) 357-1000
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check |X| 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 Yes [x] No
Number of shares of Class A common stock outstanding as of the close of business
on December 1, 1998: 55,073,341
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BELK, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited, except where otherwise noted)
Condensed Consolidated Statements of Income for the 2
Three and Nine Months Ended October 31, 1998 and November 1, 1997
Condensed Consolidated Balance Sheets as of 3
October 31, 1998 and January 31, 1998
Condensed Consolidated Statement of Changes in Stockholders' Equity for the 4
Nine Months Ended October 31, 1998
Condensed Consolidated Statements of Cash Flows for the 5
Nine Months Ended October 31, 1998 and November 1, 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
BELK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Predecessor
Belk, Inc. Companies Belk, Inc. Companies
----------- ----------- ----------- -----------
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 479,183 $ 460,516 $ 1,382,391 $ 1,342,918
Cost of goods sold (including occupancy
and buying expenses) 327,585 309,141 937,371 909,694
Selling, general and administrative expenses 135,154 129,159 384,610 373,853
----------- ----------- ----------- -----------
Income from operations 16,444 22,216 60,410 59,371
Interest expense, net (8,747) (8,522) (26,748) (24,912)
Gain (loss) on sale of property and equipment 153 (320) 759 (177)
Gain (loss) on sale of investment securities 449 126 (451) 416
Other income (expense), net 464 (683) 844 (335)
----------- ----------- ----------- -----------
Income from continuing operations before income
taxes and equity in earnings of unconsolidated
entities 8,763 12,817 34,814 34,363
Income taxes 3,505 5,335 13,925 13,745
----------- ----------- ----------- -----------
Income from continuing operations before equity in
earnings of unconsolidated entities 5,258 7,482 20,889 20,618
Equity in earnings of unconsolidated entities, net of
income tax expense of $13 for the three months ended
November 1, 1997 and $120 and $227 for the nine months
ended October 31, 1998 and November 1, 1997, respectively -- 35 188 442
----------- ----------- ----------- -----------
Income from continuing operations 5,258 7,517 21,077 21,060
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit of $184 and $814 for the three and
nine months ended November 1, 1997, respectively -- (293) (1,273)
Loss on disposal of discontinued operations, net of
income tax benefit of $2,474 for the three and
nine months ended November 1, 1997 -- (3,870) -- (3,870)
----------- ----------- ----------- -----------
Net income before extraordinary item 5,258 3,354 21,077 15,917
Extraordinary item - loan prepayment penalty,
net of income tax benefit of $670 -- -- (1,004) --
----------- ----------- ----------- -----------
Net income $ 5,258 $ 3,354 $ 20,073 $ 15,917
=========== =========== =========== ===========
Basic earnings per share $ 0.10 N/A N/A N/A
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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BELK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Belk, Inc. Companies
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October 31, January 31,
1998 1998
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ASSETS (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,481 $ 16,263
Accounts receivable, net 318,487 353,509
Merchandise inventory 615,313 431,169
Prepaid expenses and other current assets 27,556 39,117
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Total current assets 984,837 840,058
Investments in unconsolidated entities -- 38,846
Investment securities 25,049 37,223
Property and equipment, net 527,933 395,771
Prepaid pension costs 101,619 2,250
Intangible assets, net -- 17,620
Other assets 23,854 16,734
Total assets ---------- ----------
$1,663,292 $1,348,502
========== ==========
LIABILITIES, DEFERRED INCOME AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 291,928 $ 191,093
Lines of credit and notes payable 348,293 59,323
Current installments of long-term
debt and capital lease obligations 3,926 89,133
Accrued income taxes 33 3,363
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Total current liabilities 644,180 342,912
Long-term debt and capital lease obligations,
excluding current installments 151,182 210,449
Deferred compensation and other noncurrent liabilities 107,090 79,374
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Total liabilities 902,452 632,735
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Deferred income 11,765 11,982
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Stockholders' equity:
Common stock, par value of $.01 per share; at October 31, 1998,
420 million shares authorized and 55.1 million outstanding 551 70,629
Paid-in capital 584,985 470
Retained earnings 163,345 618,834
Accumulated other comprehensive income 194 13,852
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Total stockholders' equity 749,075 703,785
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Total liabilities, deferred income and stockholders' equity $1,663,292 $1,348,502
========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 3
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
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<CAPTION>
Accumulated
other
Comprehensive Common Paid-in Retained comprehensive
income Stock capital earnings income Total
------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1998,
Predecessor companies $ 70,629 $ 470 $ 618,834 $ 13,852 $703,785
Comprehensive income:
Net income $20,073 -- -- 20,073 -- 20,073
Unrealized gains on investments,
net of income taxes (1,227) -- -- -- (1,227) (1,227)
-------
Comprehensive income $18,846
=======
Cash dividends -- -- (8,854) -- (8,854)
Repurchase of stock (50) -- (3,959) -- (4,009)
Acquisition of Belk companies (70,028) 584,515 (462,749) (12,431) 39,307
------- -------- --------- -------- --------
Balance at October 31, 1998, Belk, Inc. $ 551 $584,985 $ 163,345 $ 194 $749,075
======= ======== ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
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BELK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Belk, Inc. Companies
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Nine Months Ended
---------------------------
October 31, November 1,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,073 $ 15,917
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 40,147 39,608
(Gain) loss on sale of property and equipment and investments (308) (239)
Equity in earnings of unconsolidated
entities, net of income taxes (188) (442)
Change in:
Accounts receivable, net 47,935 9,960
Merchandise inventory (168,052) (102,272)
Prepaid expenses and other current assets (17,058) (2,299)
Accounts payable and accrued expenses 95,901 40,060
Other assets and liabilities (2,701) 862
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Net cash provided by operating activities 15,749 1,155
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Cash flows from investing activities:
Purchases of property and equipment and investments (101,510) (58,828)
Proceeds from sale of property and equipment 1,387 2,469
Proceeds from sale of investments 19,444 5,041
Acquisition of business, net of cash acquired 11,861 --
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Net cash used by investing activities (68,818) (51,318)
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Cash flows from financing activities:
Proceeds (payments) from notes payable and lines of credit 238,980 (506)
Proceeds from issuance of long-term debt 125,000 95,109
Principal payments on long-term debt and
capital lease obligations (290,830) (71,883)
Dividends paid (8,854) (8,846)
Repurchase of common stock (4,009) (1,763)
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Net cash provided by financing activities 60,287 12,111
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Net increase (decrease) in cash and cash equivalents 7,218 (38,052)
Cash and cash equivalents at beginning of year 16,263 56,115
--------- ---------
Cash and cash equivalents at end of period $ 23,481 $ 18,063
========= =========
Supplemental schedule of noncash investing
and financing activities:
Increase in property and equipment and debt
from new capital leases $ 18,922 $ --
Acquisition of net assets of retail companies 39,307 --
</TABLE>
See accompanying notes to financial statements.
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BELK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ACQUISITION AND BASIS OF PRESENTATION
On April 15 and 16, 1998, the shareholders of the 112 companies previously
comprising the Belk Companies (the "Predecessor Companies") voted to approve the
reorganization (the "Reorganization") of the Predecessor Companies into a single
operating entity, Belk, Inc. (the "Company"), pursuant to a Plan and Agreement
of Reorganization, dated November 25, 1997, as amended, among the Company, Belk
Acquisition Co. and the Predecessor Companies (the "Reorganization Agreement").
The accompanying balance sheet at October 31, 1998 and the statements of income
for the three and nine month periods ended October 31, 1998 reflect the
adjustments to merge the companies pursuant to the Reorganization. The statement
of income for the nine month period ended October 31, 1998 includes three months
of pre-Reorganization historical combined results of operations of the
Predecessor Companies and six months of post-Reorganization consolidated results
of operations of the Company. The balance sheet at January 31, 1998, along with
the statements of income for the three and nine month periods ended November 1,
1997, have been prepared for purposes of depicting the combined financial
position and results of operations of the Predecessor Companies on a historical
cost basis. Because of the purchase price allocation, the accompanying
consolidated financial statements of the Company are not directly comparable to
those of the Predecessor Companies.
The Company has restated previously issued financial results for the nine
months ended November 1, 1997 to recognize revenues received as reimbursement
for advertising costs that were not originally recorded, to capitalize certain
store design costs that had been expensed and to reclassify certain costs from
SG&A expenses to cost of goods sold to conform with the classification used for
previous fiscal years. The effect of these adjustments was to increase net
income by $2.7 million for the nine months ended November 1, 1997. There was no
impact on the year ended January 31, 1998.
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
As discussed in note 1 above, on April 15 and 16, 1998, the shareholders of
the Predecessor Companies voted to approve the Reorganization. The following
unaudited pro forma condensed statements of operations are based upon the
combined statements of operations of the Predecessor Companies, adjusted to give
effect to the Reorganization as if it had occurred at the beginning of each
period presented. The unaudited pro forma condensed statements of operations
reflect the preliminary allocation of the purchase price as the purchase price
allocation has not been finalized.
The Reorganization is reflected in the following unaudited pro forma
condensed statements of operations as a purchase business combination in
accordance with the provisions of Accounting Principles Board Opinion Number 16,
and the Securities and Exchange Commission's Staff Accounting Bulletin Number
97. Belk Enterprises, Inc. was deemed to be the acquiring corporation in the
Reorganization because its shareholders received a larger portion of the voting
rights in the Company than any other Predecessor Company. Pro forma basic
earnings per share are computed based on the 55,073,341 outstanding common
shares of the Company issued in connection with the Reorganization. The Company
anticipates that additional common shares of the Company will be issued in the
course of resolving desents filed by certain shareholders. The issuance of those
shares would increase the total number of shares outstanding and would reduce
earnings per share.
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BELK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
October 31, 1998 November 1, 1997
---------------------------------------------------------
Reported Pro Forma Reported Pro Forma
----------- ------------ ----------- ------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues...................................... $1,382,391 $1,398,694 $1,342,918 $1,388,317
Income before discontinued operations and
extraordinary item......................... 21,077 21,187 21,060 21,849
Net income.................................... 20,073 20,183 15,917 16,706
Basic earnings per share:
Income before discontinued operations and
extraordinary item...................... N/A $0.38 N/A $0.40
Discontinued operations.................... N/A 0.00 N/A (0.09)
Extraordinary item......................... N/A (0.02) N/A 0.00
Net income................................. N/A 0.37 N/A 0.30
</TABLE>
(3) ACCOUNTING POLICIES
The condensed financial statements included herein as of October 31, 1998
and for the three and nine months ended October 31, 1998 and November 1, 1997
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to quarterly
reports on Form 10-Q. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Special Financial Report on Form 10-K for the fiscal year ended January 31,
1998. 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.
Due to the seasonal nature of the retail industry, earnings for periods
which exclude the holiday season are not necessarily indicative of the results
that may be expected for the full fiscal year.
(4) INCOME TAXES
The Company determines its deferred tax provision under the liability
method, whereby deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts using presently enacted tax
rates. As a result of the Reorganization, deferred taxes were revalued and the
resulting change to the underlying assets and liabilities was recorded as a
purchase accounting adjustment.
(5) EFFECT OF NEW ACCOUNTING STANDARDS AND STATEMENTS
As of February 1, 1998, the Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components. Adoption of this standard had no material effect on the
Company's financial position, results of operations or cash flows.
The Financial Accounting Standards Board has issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes reporting and disclosure standards for an enterprise's operating
segments and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which revises employers' disclosures about pension and
other postretirement benefit plans. Both statements are effective for the
Company's fiscal year ending January 31, 1999. Adoption of these standards will
not impact the Company's financial position, results of operations or cash
flows, and any effect will be limited to the form and content of its
disclosures.
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BELK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
(6) BORROWINGS
In April 1998, the Company repaid a $30.4 million mortgage note with
proceeds from a bridge facility. The loss on extinguishment of the mortgage,
including a $1.0 million, net of tax prepayment penalty is reported as an
extraordinary loss.
In June 1998, the Company finalized a $300 million accounts receivable
securitization, borrowed $257 million and used the proceeds to repay a majority
of the Company's existing debt. In July 1998, the Company closed on a $125
million ten year variable rate bond facility and used the proceeds to retire
substantially all of the Company's remaining debt, to repurchase stock from the
dissenting shareholders, and to purchase six store properties previously leased
by the Company (See note 7). In September 1998, the Company replaced a $128.5
million line of credit with a $150 million line of credit that bears interest at
London Interbank Offered Rate (LIBOR) plus approximately 60 basis points. The
debt facilities place certain restrictions on mergers, consolidations and the
sale of the Company's assets and require the maintenance of minimum financial
ratios. The accounts receivable securitization expires on June 18, 1999, bears
interest at LIBOR plus approximately 35 basis points and limits borrowings to
approximately 80% of the Company's customer accounts receivable. The $125
million bond facility bears interest at a variable rate based on the market for
the bonds that has historically approximated one-month LIBOR.
The Company has entered into interest rate swap agreements with various
financial institutions to manage the exposure to changes in interest rates on
its LIBOR based indebtedness. The amount of indebtedness covered by the interest
rate swaps is $350 million for 1999, $325 million for 2000, $300 million for
2001 through 2007, and $250 million for 2008.
(7) ACQUISITIONS
In July 1998, the Company purchased the land and buildings of six Belk
stores located in Virginia and West Virginia. The properties were formerly
leased from various real estate partnerships. The purchase price of $32.7
million was funded from proceeds of a variable rate bond facility.
In September 1998, the Company exchanged with Dillard's, Inc. nine Belk
stores located in Virginia and Tennessee plus two additional stores to be
constructed for seven Mercantile, Inc. stores located in Jacksonville, Florida
and Columbia, South Carolina. The net book value of the Belk stores, plus the
two stores to be constructed was $49.5 million. In accordance with APB 29,
"Accounting for Nonmonetary Transactions," the Company recorded the acquired
stores at the net book value of the surrendered assets. The Company also sold to
and purchased from Dillard's, Inc. certain personal property, principally
inventory and customer accounts receivable, related to the exchanged stores.
In October 1998, the Company purchased two Stone & Thomas department stores
in Charlottesville, Virginia and Bluefield, West Virginia from Elder-Beerman
Stores Corp. The purchase price of $4.4 million was funded from operating cash
flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to revenues of certain items in the Company's statements
of income.
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
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October 31, November 1, October 31, November 1,
1998 1997 1998 (1) 1997
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<S> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................... 68.4% 67.1% 67.8% 67.7%
Selling, general and administrative
expenses.............................. 28.2% 28.0% 27.8% 27.8%
Income from operations................ 3.4% 4.8% 4.4% 4.4%
Interest expense, net................. 1.8% 1.9% 1.9% 1.9%
Income from continuing operations..... 1.1% 1.6% 1.5% 1.6%
Comparable stores revenues increase... 0.3% (0.1)% 1.6% 1.2%
</TABLE>
(1) The nine month period ended October 31, 1998 includes three months of
pre-Reorganization historical combined results of operations and six months of
post-Reorganization results of operations. Prior to the Reorganization,
Belk-Simpson Company, Greenville, South Carolina ("Belk-Simpson") was accounted
for under the equity method of accounting.
COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1998 AND
NOVEMBER 1, 1997
Revenues. The Company's revenues for the third quarter of fiscal year
1999 increased 4.1%, or $18.7 million, to $479.2 million from $460.5 million for
the same period of fiscal year 1998. The increase resulted primarily from
including the Belk-Simpson revenues in the consolidated operating results
subsequent to the Reorganization which contributed $16.6 million, or 3.5% in
revenues for the three months ended October 31, 1998. Excluding the impact of
the Reorganization, revenues for the third quarter of fiscal year 1999 increased
0.5%, or $2.1 million, over the third quarter of fiscal year 1998. On a
comparable stores basis, revenues increased 0.3% for the quarter.
For the nine months ended October 31, 1998, the Company's revenues were
$1.38 billion, a 2.9% increase from $1.34 billion for the same period of the
prior year. The increase resulted primarily from including the Belk-Simpson
revenues of $31.5 million, or 2.3% in revenues during the nine month period. On
a comparable stores basis, revenues increased 1.6% for the nine months ended
October 31, 1998.
Cost of Goods Sold. As a percentage of revenues, cost of goods sold for
the third quarter of fiscal year 1999 increased to 68.4% compared to 67.1% for
the same period of fiscal year 1998. The third quarter increase was the result
of higher levels of markdowns compared to the markdowns during the same period
of fiscal year 1998 due to additional markdowns associated with the stores
obtained from Dillard's, Inc. and higher markdowns in existing stores designed
to promote sales in response to a weak retail environment and unseasonably warm
weather. The higher markdown levels were partially offset by decreases in buying
costs due to a more efficient purchasing structure.
For the nine months ended October 31, 1998, cost of goods sold
increased slightly to 67.8% compared to 67.7% for the same period of fiscal year
1998 as a result of increased markdowns in the current year as discussed above,
partially offset by decreases in buying costs due to a more efficient purchasing
structure.
Income From Operations. The Company's income from operations for the
three months and nine months ended October 31, 1998 were negatively impacted by
approximately $2.0 million of additional costs incurred in connection with the
store exchange with Dillard's, Inc. These costs consist primarily of additional
markdowns, costs associated with the closing of the surrendered stores, costs of
opening the acquired stores and costs of preparing the Company's Summerville
distribution center for the additional volume of merchandise processed for the
acquired stores.
Interest Expense, Net. Interest expense, net increased $0.2 million, or
2.6%, in the third quarter of fiscal year 1999 and $1.8 million, or 7.4%, for
the nine month period ended October 31, 1998 when compared with the same periods
in fiscal
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year 1998. The increase was primarily due to higher average outstanding
borrowings offset by reduced effective interest rates due to the refinancing of
higher rate debt facilities. The borrowings were utilized to fund the Company's
capital expenditures and to repurchase stock from stockholders exercising their
appraisal rights in connection with the Reorganization. Short-term borrowings
had a weighted average interest rate of 6.13% for the nine months ended October
31, 1998.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its revenues, operating income and net
income. The highest revenue period for the Company is the fourth quarter, which
includes the Christmas selling season. A disproportionate amount of the
Company's revenues and a substantial amount of the Company's operating and net
income are realized during the fourth quarter. If for any reason the Company's
revenues are below seasonal norms during the fourth quarter, the Company's
annual results of operations could be adversely affected. The Company's
inventory levels generally reach their highest in anticipation of increased
revenues during these months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash on hand, cash flow
from operations, and borrowings under debt facilities. Effective on May 2, 1998,
the numerous debt facilities utilized by the Predecessor Companies were assumed
by the Company. The Company has consolidated the existing debt facilities with
the combination of a $300 million variable rate accounts receivable
securitization, a $125 million ten year variable rate bond facility and two
seasonal line of credit agreements totaling $185 million. The Company finalized
the $300 million accounts receivable securitization on June 12, 1998, borrowed
$257 million and used the proceeds to repay the majority of existing debt. On
July 23, 1998, the Company closed on a $125 million ten year variable rate bond
facility and used the proceeds to retire substantially all of the Company's
remaining debt. In September 1998, the Company replaced a $128.5 million line of
credit with a $150 million line of credit that bears interest at LIBOR plus
approximately 60 basis points. The debt facilities place certain restrictions on
mergers, consolidations and the sale of the Company's assets and require
maintenance of minimum financial ratios. The accounts receivable securitization
limits borrowings under the facility to approximately 80% of the Company's
customer accounts receivable.
Although the interest rates on all of the Company's debt agreements
vary with LIBOR or commercial paper rates, the Company has entered into interest
rate swap agreements with various financial institutions to manage the exposure
to changes in interest rates. The amount of indebtedness covered by the interest
rate swaps is $350 million through 1999, $325 million for 2000, $300 million for
2001 through 2007 and $250 million for 2008.
Operating activities provided cash of $15.7 million during the first
nine months of fiscal year 1999 as compared to $1.2 million for the same period
of fiscal year 1998. The increase in cash provided by operating activities
compared to the prior period was due to decreases in accounts receivable from
customers, increases in accounts payable and an increase in net income,
partially offset by increases in the seasonal build-up of merchandise inventory
levels and in prepaid expenses.
Cash flows from investing activities used cash of $68.8 million during
the first nine months of fiscal year 1999 as compared to $51.3 million for the
same period of fiscal year 1998. The increase in cash used for investing
activities was primarily due to an increase in capital expenditures partially
offset by increases in proceeds from the sale of investments and cash acquired
from the acquisition of the Belk-Simpson retail operations in the
Reorganization, which was previously accounted for on the equity method.
Expenditures for property and equipment were $95.4 million during the
first nine months of fiscal year 1999, compared to $54.9 million in last year's
first nine months. During the third quarter of fiscal year 1999, the Company
purchased two Stone & Thomas department stores in Virginia and West Virginia and
exchanged nine Belk stores located in Virginia and Tennessee, plus two
additional stores to be constructed, for seven Mercantile stores located in
Jacksonville, Florida and Columbia, South Carolina. The Company also sold to and
purchased from Dillard's, Inc. certain personal property, principally inventory
and customer accounts receivable, related to the exchanged stores. During the
first nine months of fiscal year 1999, the Company opened seven new stores and
plans to complete significant renovations to and/or expansions of five existing
stores and update its point-of-sale register systems during the current fiscal
year. Total capital expenditures for fiscal year 1999 are expected to be
approximately $130 million.
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Net cash provided by financing activities amounted to $60.3 million
during the first nine months of fiscal year 1999, a result of increased
borrowings, compared to $12.1 million for the same period of fiscal year 1998.
During the second quarter of fiscal year 1999, the Company entered into a $300
million accounts receivable securitization, borrowed $257 million and used the
proceeds to repay the majority of higher rate debt. The Company also closed on a
$125 million ten year variable rate bond facility and used the proceeds to
retire all remaining higher rate debt and to fund capital expenditures.
Management of the Company believes that cash flows from operations and
their planned credit facilities will be sufficient to cover working capital
needs, capital expenditures and debt service agreements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Advisory Board issued
Statement of Position (SOP) No. 98-1, "Accounting for Internal Use Software,"
which establishes standards for the costs of computer software developed or
obtained for internal use. The Company will implement the standard in fiscal
year 2000. The Company expects implementation of SOP No. 98-1 to cause
approximately $6 million of fiscal year 2000 expenditures to be capitalized that
historically would have been expensed.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes standards for accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The standard is effective for the Company starting in fiscal
year 2001. The impact of SFAS No. 133 on the Company's financial statements has
not been determined.
YEAR 2000 ISSUES
In January 1996, the Company began converting its computer systems to
be Year 2000 compliant (e.g. to recognize the difference between '99 and '00 as
one year instead of negative 99 years). At October 31, 1998, approximately 80%
of the Company's systems were compliant, with substantially all systems expected
to be compliant by February 1999. The total cost of the project is estimated to
be $5.7 million and is being funded through operating cash flows. The Company is
expensing all costs associated with these system changes. As of October 31,
1998, $4.4 million had been expensed.
The Company is in the process of determining the Year 2000 status of its
principal business partners. The Company is also developing contingency plans to
address critical business processes in the event of Year 2000 problems and
expects to complete these plans by March 31, 1999. Although management believes
that the Company will successfully complete the conversion of its computer
systems to be Year 2000 compliant, any problems with such conversion or any
problems with its principal business partners' or government agencies'
conversion could have a material impact on the Company's future results of
operations.
Page 11
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on August 26, 1998. The
only action taken by the stockholders at the meeting was the election of
directors. In accordance with the Company's Amended and Restated Certificate of
Incorporation, all of the Company's existing directors were reelected and
divided into three classes serving staggered terms. Mr. Thomas M. Belk, Jr., Mr.
J. Kirk Glenn and Mrs. Sarah Belk Gambrell were elected to the office of Class I
director to hold office until the annual meeting of stockholders in 1999. Mr.
H.W. McKay Belk, Mr. Karl G. Hudson, Jr. and Mr. B. Frank Matthews, II were
elected to the office of Class II director to hold office until the annual
meeting of stockholders in 2000. Mr. John M. Belk, Mr. John R. Belk and Mr. John
A. Kuhne were elected to the office of Class III director to hold office until
the annual meeting of stockholders in 2001. A total of 531,175,890 votes were
cast in favor of the election of each nominee, and no votes were cast against or
withheld. Mr. John M. Belk continues to serve as Chairman of the Board of
Directors.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BELK, INC.
Dated: December 11, 1998 By: /s/ Ralph A. Pitts
-------------------------------------
Ralph A. Pitts
Executive Vice President,
General Counsel and
Corporate Secretary
(Authorized Officer of the Registrant)
By: /s/ Bill R. Walton
-------------------------------------
Bill R. Walton
Senior Vice President, Treasurer
and Controller
(Principal Accounting Officer)
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
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0
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