<PAGE> 1
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 July 31, 1999
--------------------------------------------
[ ] 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 000-26207
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BELK, INC.
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(Exact Name of Registrant as Specified In Its Charter)
<TABLE>
<S> <C>
Delaware 56-2058574
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
</TABLE>
2801 West Tyvola Road, Charlotte, North Carolina 28217-4500
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(Address of Principal Executive Offices) (Zip Code)
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 [ ]
At September 1, 1999, the registrant had issued and outstanding 54,452,339
shares of class A common stock and 774,444 shares of class B common stock.
<PAGE> 2
BELK, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited, except where otherwise noted)
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended July 31, 1999 and August 1, 1998 4
Condensed Consolidated Balance Sheets as of July 31, 1999
and January 30, 1999 5
Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended July 31, 1999 6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
July 31, 1999 and August 1, 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
THIS INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral
statements made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Statements
regarding future events and developments and the Company's future performance,
as well as our expectations, beliefs, plans, estimates or projections relating
to the future, are forward-looking statements within the meaning of these laws.
You can identify these forward-looking statements through our use of words such
as "may," "will," "intend," "project," "expect," "anticipate," "believe,"
"estimate," "continue," or other similar words. Forward-looking statements in
this document include information concerning possible future cost savings
resulting from restructuring and consolidating thirteen of our operating
divisions and our ability to address Y2K issues. These forward-looking
statements are subject to risks and uncertainties which may cause our actual
results to differ significantly from the results we discuss in such
forward-looking statements. These forward-looking statements are reasonable;
however, you should not place undue reliance on such statements.
For a more detailed explanation of the risks and uncertainties that might
cause our results to differ from those we project in our forward-looking
statements, we refer you to the section captioned "This Information Contains
Forward-Looking Statements" in our Annual Report on Form 10-K that we filed
with the Securities and Exchange Commission on April 30, 1999. Our other
filings with the Securities and Exchange Commission may contain additional
information concerning the risks and uncertainties listed above, and other
factors you may wish to consider. Upon request, we will provide copies of these
filings to you free of charge.
Our forward-looking statements are based on current expectations and speak
only as of the date of such statements. We undertake no obligation to publicly
update or revise any forward-looking statement, even if future events or new
information may impact the validity of such statements.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
BELK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 480,557 $ 452,932 $ 984,343 $ 903,208
Cost of goods sold (including occupancy
and buying expenses) 322,514 305,004 662,442 609,786
Selling, general and administrative
expenses 132,100 127,459 264,461 249,457
Restructuring charge -- -- 7,068 --
----------- ----------- ----------- -----------
Income from operations 25,943 20,469 50,372 43,965
Interest expense, net (9,681) (9,522) (18,397) (18,001)
Gain (loss) on sale of property and
equipment (92) 603 334 606
Gain (loss) on sale of investment
securities 29 (1,029) 43 (900)
Other income, net 357 425 692 380
----------- ----------- ----------- -----------
Income from operations before income
taxes and equity in earnings of
unconsolidated entities 16,556 10,946 33,044 26,050
Income taxes 6,290 4,550 12,560 10,420
----------- ----------- ----------- -----------
Income from operations before equity
in earnings of unconsolidated
entities 10,266 6,396 20,484 15,630
Equity in earnings of unconsolidated
entities, net of income taxes -- -- -- 188
----------- ----------- ----------- -----------
Net income before extraordinary item 10,266 6,396 20,484 15,818
Extraordinary item - loan prepayment
penalty, net of income tax benefit
of $670 -- -- -- (1,004)
----------- ----------- ----------- -----------
Net income $ 10,266 $ 6,396 $ 20,484 $ 14,814
=========== =========== =========== ===========
Basic income per share
Net income before extraordinary
item $ 0.19 $ 0.11 $ 0.37 $ 0.28
=========== =========== =========== ===========
Extraordinary item $ -- $ -- $ -- $ (0.02)
=========== =========== =========== ===========
Net income $ 0.19 $ 0.11 $ 0.37 $ 0.26
=========== =========== =========== ===========
Dividends per share $ -- -- $ 0.235 N/A
=========== =========== =========== ===========
Weighted average shares outstanding 55,226,783 56,682,252 55,676,696 56,682,252
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
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BELK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, January 30,
1999 1999
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(audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,941 $ 18,313
Accounts receivable, net 303,386 351,143
Merchandise inventory 505,827 482,247
Prepaid expenses and other current assets 17,842 29,852
---------- ----------
Total current assets 846,996 881,555
Investment securities 23,507 24,164
Property and equipment, net 569,076 560,949
Prepaid pension costs 101,359 101,352
Other assets 27,517 25,898
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Total assets $1,568,455 $1,593,918
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 218,974 $ 228,328
Lines of credit and notes payable 221,084 4,264
Accrued income taxes 11,381 20,993
Current installments of long-term
debt and capital lease obligations 9,127 5,001
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Total current liabilities 460,566 258,586
Long-term debt and capital lease obligations,
excluding current installments 194,500 398,712
Deferred compensation and other noncurrent liabilities 135,861 148,685
---------- ----------
Total liabilities 790,927 805,983
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Stockholders' equity:
Common stock, 55.2 million and 56.7 million shares
issued and outstanding at July 31, 1999
and January 30, 1999, respectively 552 567
Paid-in capital 569,346 586,641
Retained earnings 207,709 200,203
Accumulated other comprehensive income (loss) (79) 524
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Total stockholders' equity 777,528 787,935
---------- ----------
Total liabilities and stockholders' equity $1,568,455 $1,593,918
========== ==========
</TABLE>
See accompanying notes to financial statements.
5
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BELK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
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<S> <C> <C> <C> <C> <C>
Balance at January 30, 1999 $ 567 $ 586,641 $ 200,203 $ 524 $ 787,935
Comprehensive income:
Net income - - 20,484 - 20,484
Unrealized loss on investments
net of income tax benefit of $370 - - - (603) (603)
---------
Total comprehensive income 19,881
---------
Cash dividends - - (12,978) - (12,978)
Repurchase and retirement of stock (15) (17,295) - - (17,310)
------- ---------- ---------- ------ ---------
Balance at July 31, 1999 $ 552 $ 569,346 $ 207,709 $ (79) $ 777,528
======= ========== ========== ====== =========
</TABLE>
See accompanying notes to financial statements.
6
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BELK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> Six Months Ended
-----------------------
July 31, August 1,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,484 $ 14,814
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 31,768 26,425
Restructuring charge 7,068 --
Gain (loss) on sale of property and equipment
and investments (376) 319
Equity in earnings of unconsolidated entities,
net of income taxes -- (188)
Change in:
Accounts receivable, net 47,757 49,276
Merchandise inventory (23,580) (36,905)
Prepaid expenses and other current assets 8,964 (12,075)
Accounts payable and accrued expenses (23,251) 2,098
Other assets and liabilities (11,031) (8,078)
-------- ---------
Net cash provided by operating activities 57,803 35,686
-------- ---------
Cash flows from investing activities:
Purchases of property, equipment and investments (45,608) (69,419)
Cash acquired from Belk-Simpson Reorganization -- 11,861
Proceeds from sale of property and equipment 3,589 1,022
Proceeds from sale of investments 5,201 17,746
-------- ---------
Net cash used by investing activities (36,818) (38,790)
-------- ---------
Cash flows from financing activities:
Proceeds from notes payable 11,979 246,671
Proceeds from issuance of long-term debt 42,000 125,000
Principal payments on long-term debt and
capital lease obligations (52,345) (289,856)
Net proceeds from lines of credit 9,297 (53,097)
Dividends paid (12,978) (8,854)
Repurchase of common stock (17,310) (4,053)
-------- ---------
Net cash provided (used) by financing activities (19,357) 15,811
-------- ---------
Net increase in cash and cash equivalents 1,628 12,707
Cash and cash equivalents at beginning of period 18,313 16,263
-------- ---------
Cash and cash equivalents at end of period $ 19,941 $ 28,970
======== =========
Supplemental schedule of noncash investing
and financing activities:
Increase in property and equipment through
assumption of capital leases $ 5,802 $ 10,001
Increase in assets and liabilities due to
reorganization - 39,369
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
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 consolidated balance sheet as of
July 31, 1999 and January 30, 1999 and the statements of income, stockholders'
equity and cash flows for the three month and six month periods ended July 31,
1999 reflect the adjustments to merge the companies pursuant to the
Reorganization. The statements of income, stockholders' equity and cash flows
for the six month period ended August 1, 1998 include three months of
pre-Reorganization historical combined results of operations of the Predecessor
Companies and three months of post-Reorganization consolidated results of
operations of the Company. The calculation of net income per share for the
three months and six months ended August 1, 1998 assumes that the Belk, Inc.
shares of common stock issued in connection with the Reorganization have been
outstanding since February 1, 1998.
On May 2, 1998, a majority of the shareholders of one of the Predecessor
Companies, Belk-Simpson Company, Greenville, South Carolina ("Belk-Simpson"),
redeemed their shares in Belk-Simpson (the "Belk-Simpson Reorganization"). Prior
to the Belk-Simpson Reorganization, the 37% investment in Belk-Simpson was
accounted for under the equity method of accounting. Subsequent to the
Belk-Simpson Reorganization, Belk-Simpson is included in the consolidated
financial statements as a wholly-owned subsidiary.
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) RESTRUCTURING CHARGE
During the first quarter of fiscal year 2000, the Company recorded a $7.1
million charge in connection with the consolidation of its thirteen operating
divisions into four expanded regional divisions. During the second quarter, the
Company closed the excess facilities and eliminated 340 positions as a result
of streamlining operations related to the restructuring. The excess property
and equipment is being disposed of or sold. The restructuring charge and its
utilization are as follows:
<TABLE>
<CAPTION>
Original Balance at
Accrual Utilized July 31, 1999
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<S> <C> <C> <C>
Employee Severance Costs $3,424 $2,149 $1,275
Disposal of Excess Property and
Equipment 3,644 2,154 1,490
------ ------ ------
Total $7,068 $4,303 $2,765
====== ====== ======
</TABLE>
8
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BELK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
(3) ACCOUNTING POLICIES
The condensed financial statements included herein as of July 31, 1999 and
for the three months and six months ended July 31, 1999 and August 1, 1998 have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to 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 Form 10-K for the fiscal year ended January 30, 1999. 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) EFFECT OF NEW ACCOUNTING STANDARDS AND STATEMENTS
As of January 31, 1999, the Company has adopted Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which establishes standards for the costs of
computer software developed or obtained for internal use. The Company currently
anticipates that adoption of the standard will result in capitalization of
approximately $3 million of fiscal year 2000 expenditures that historically
would have been expensed. The Company has capitalized $1 million of costs for
internal use software during the first six months of fiscal year 2000.
(5) BORROWINGS
The Company's accounts receivable securitization financing agreement
expires on April 27, 2000 and, accordingly, the outstanding balance as of July
31, 1999 of $207,539 has been included in current liabilities. However, the
agreement may be renewed by mutual consent of the parties and it is the
Company's intent to renew the accounts receivable securitization agreement. The
Company utilizes this facility as long-term financing.
The Company utilizes interest rate swaps to manage the interest rate risk
associated with its borrowings. As of July 31, 1999, the interest rate swap
agreements had a net fair market value of approximately $7.6 million.
9
<PAGE> 10
BELK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
On April 30, 1999, the Company sold certain leasehold improvements for $42
million and is leasing them back over the next nine years. The Company is
required to repurchase the leasehold improvements at the end of the lease. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 98,
"Accounting for Leases" and SFAS No. 66, "Accounting for Sales of Real Estate,"
the Company is accounting for the sale-leaseback as financing. The agreement
contains restrictions consistent with those of existing loan agreements. Future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000 $ 6,368
2001 6,368
2002 6,368
2003 6,368
2004 6,368
After 2004 23,745
--------
Total 55,585
Less imputed interest (14,139)
--------
Present value of future minimum lease payments $ 41,446
========
</TABLE>
(6) COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income.
Other comprehensive income is comprised of net unrealized losses on
investments, net of income tax benefit of $370 and $257 for the six months
ended July 31, 1999 and August 1, 1998, respectively, and income tax benefit of
$549 and $1,174 for the three months ended July 31, 1999 and August 1, 1998,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net Income $10,266 $ 6,396 $20,484 $14,814
Other Comprehensive Loss (896) (1,844) (603) (403)
------- ------- ------- -------
Total Comprehensive Income $ 9,370 $ 4,552 $19,881 $14,411
======= ======= ======= =======
</TABLE>
10
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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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 67.1% 67.3% 67.3% 67.5%
Selling, general and
administrative expenses 27.5% 28.1% 26.9% 27.6%
Restructuring charge 0.0% 0.0% 0.7% 0.0%
Income from operations 5.4% 4.5% 5.1% 4.9%
Interest expense, net 2.0% 2.1% 1.9% 2.0%
Income from continuing operations 2.1% 1.4% 2.1% 1.8%
Comparable stores revenues increase 4.1% 1.7% 4.8% 1.8%
</TABLE>
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JULY 31, 1999 AND
AUGUST 1, 1998
Revenues. The Company's revenues for the second quarter of fiscal year 2000
increased 6.1%, or $27.6 million, to $480.6 million from $452.9 million over the
same period in 1999. The increase was primarily due to a 4.1% increase in
revenue from comparable stores.
For the six months ended July 31, 1999, the Company's revenues were $984.3
million, a 9.0% increase from $903.2 million for the same period of the prior
fiscal year. The increase resulted primarily due to a 4.8% increase in revenue
from comparable stores and the inclusion of Belk-Simpson's first quarter
revenues of $16.3 million in the consolidated operating results during the
current fiscal year as a result of the Reorganization, which increased revenues
for the six months ended July 31, 1999 by 1.8%.
Cost of goods sold. As a percentage of revenues, cost of goods sold
decreased to 67.1% and 67.3% for the three and six months ended July 31, 1999,
respectively. This compares to 67.3% and 67.5% for the same periods in fiscal
year 1999. This reduction resulted from decreases in buying costs due to a more
efficient purchasing structure.
Selling, general and administrative expenses. As a percentage of revenues,
SG&A expenses decreased to 27.5% and 26.9% for the three and six months ended
July 31, 1999, respectively, from 28.1% and 27.6% for the same periods in fiscal
year 1999. The decrease is attributable to reductions in personnel costs due to
improved operating efficiencies and reduced bad debt losses on the Company's
proprietary credit card receivables partially offset by $1.7 million of
incremental costs incurred in excess of expense savings during the three months
ended July 31, 1999 in connection with establishing the Company's four expanded
regional divisions. These incremental costs consist primarily of one-time
expenses for hiring and relocating employees and converting the Company's
systems to support the larger division size.
Restructuring charge. During the first quarter of fiscal year 2000, the
Company recorded a $7.1 million charge in connection with the consolidation of
its thirteen operating divisions into four expanded regional divisions.
The charge consisted of $3.4 million of employee severance costs and $3.7
million related to the disposal of excess assets in the closing division
offices.
11
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The Company anticipates that the consolidation of operating divisions will
reduce operating expenses on an annualized basis and permit the Company to
intensify its customer focus by achieving a more unified and consistent
execution of its marketing, merchandising and advertising strategies and by
simplifying decision making processes. The Company has updated its estimates of
such savings to approximately $12 million annually after taking into account
the revised costs associated with relocating the Southern division office and
other additional information available after completing the consolidation of
the operating divisions. Due to the costs associated with the conversion to the
new division structure during fiscal year 2000, net expense savings will be
realized starting in fiscal year 2001.
Income from operations. The Company's income from operations for the six
months ended July 31, 1999 includes a $7.1 million restructuring charge related
to the consolidation of its operating divisions and $1.7 million of incremental
selling, general and administrative expenses associated with establishing its
four expanded regional divisions. Excluding the impact of these additional
costs, income from operations for the first six months of fiscal year 2000
increased $15.2 million, or 35%, over the corresponding period in fiscal year
1999.
Net Income. Net income for the first six months of fiscal year 2000
increased by $5.7 million over the same period of last year. However, the first
six months of fiscal year 2000 includes a $4.4 million restructuring charge,
net of income taxes of $2.7 million and $1.1 million of incremental selling,
general and administrative expenses, net of income taxes of $.6 million
associated with establishing the Company's four expanded regional divisions.
The first six months of fiscal year 1999 included a $1.0 million extraordinary
charge, net of income taxes of $.7 million. Excluding these items, net income
in the first six months of fiscal year 2000 increased by $10.1 million, or 64%,
over the corresponding period in fiscal year 1999.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The retail business is highly seasonal with approximately one-third of
annual revenues being generated in the fourth quarter, which includes the
Christmas selling season. As a result, a disproportionate amount of the
Company's operating and net income is realized during the fourth quarter and
significant variations can occur when comparing the Company's financial
condition between quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash on hand, cash flow
from operations, and borrowings under debt facilities.
Expenditures for property and equipment were $40.1 million for the six
months ended July 31, 1999, compared to $69.4 million in the first six months
of last year. During the first six months of fiscal year 2000, the Company
relocated and expanded three stores in existing markets to new facilities, one
in Clinton, North Carolina; one in Morganton, North Carolina; and another in
Mt. Pleasant, South Carolina. One minor renovation was completed in the Greer,
South Carolina store. The Company plans to open two additional stores as
relocations and complete renovations and/or expansions at 14 stores during the
current fiscal year, which, when combined with other categories will result in
fiscal year 2000 capital expenditures of approximately $100 million.
12
<PAGE> 13
Net cash used by financing activities was $19.4 million for the first six
months of fiscal year 2000, a result of lower seasonal working capital needs
compared to the first six months of fiscal year 1999.
On April 30, 1999, the Company sold certain leasehold improvements for $42
million and is leasing them back over the next nine years. The Company is
required to repurchase the leasehold improvements at the end of the lease. In
accordance with SFAS No. 98, "Accounting for Leases" and SFAS No. 66
"Accounting for Sales of Real Estate," the Company is accounting for the
sale-lease back as financing. The Company used the proceeds from the sale to
reduce borrowings under its existing debt facilities.
The Company's accounts receivable securitization financing agreement
expires on April 27, 2000 and, accordingly, the outstanding balance as of July
31, 1999 of $207.5 million has been included in current liabilities. However,
the agreement may be renewed by mutual consent of the parties and it is the
Company's intent to renew the facility and utilize it as long-term financing.
Management of the Company believes that cash flows from operations and the
Company's existing credit facilities will be sufficient to cover working
capital needs, capital expenditures and debt service requirements.
BELK NATIONAL BANK
During the first quarter of fiscal year 2000, the Company formed Belk
National Bank, a wholly-owned subsidiary, in order to standardize the interest
rate terms of Belk charge customer accounts across the thirteen states in which
Belk operates and to set competitive interest rates comparable to other
retailers. The bank began operations in May 1999.
YEAR 2000 ISSUES
In January 1996, the Company began converting its computer systems to be
Y2K compliant. This was necessary due to the use of two digit fields to
represent the year in many computer systems, which could cause the year "00" to
be recognized as 1900 instead of 2000. Failure to obtain Y2K compliance could
result in significant disruption to the Company's operations and information
processing.
A Y2K executive steering committee was designated to oversee all aspects of
the Company's progress towards Y2K compliancy. Under direction of the steering
committee, the Company developed a Y2K compliance plan that focuses on 5 major
areas as follows:
1. Information systems.
2. Imbedded chip devices.
3. Merchandise vendors.
4. Service providers.
5. User developed or installed software.
The plan generally covers the following 6 phases:
1. Inventory the Company's systems (including all equipment with imbedded
chips), merchandise vendors, service providers, and user developed or
installed software.
2. Assess whether Y2K compliance issues exist for each system, device or
provider identified.
3. Establish a timetable and detailed plans for obtaining compliance.
4. Repair and replace systems and/or devices requiring modification.
5. Validate Y2K compliancy through testing of modifications.
6. Develop contingency plans.
13
<PAGE> 14
*Phases 1,2,3 and 6 above apply to merchandise vendors and service
providers as well as to Company systems.
The Company is 100% complete with testing of all key information
technology ("IT") systems and has implemented "Clean Management" procedures
to ensure that any new systems or modifications to current systems are tested
before implementation to ensure compliancy. The Company is 99% complete with
the upgrade, replacement and testing phases of non-IT systems. These systems,
such as PBX, security, and heating and air-conditioning systems, include
imbedded chip processors that may be affected by the Y2K issue.
The Company has also surveyed its merchandise vendors as to their Y2K
readiness. The Company has received responses from 100% of its branded and
private label merchandise vendors. Responses are scored and follow-up conference
calls scheduled for all vendors obtaining a low confidence score. The Company
has scored 90% of branded vendor responses and 95% of private label vendor
responses with either a moderate or high confidence factor. Contingency Plans
have been developed for low confidence merchandise vendors. In addition, 99% of
the Company's EDI trading partners have successfully passed a basic Y2K purchase
order invoice translator test, with the few remaining trading partners scheduled
by the end of September 1999.
The Company has surveyed all non-merchandise providers as to their Y2K
readiness. These providers include energy and utility companies, real estate
firms, advertising and sales promotion vendors, supply vendors, transportation
and logistics companies, technology providers, credit services providers and
others. The Company has received responses from over 99% of these providers. The
Company has scored 89% of these vendors with either a moderate or high
confidence factor. Follow-ups are in process with those vendors who have not
responded or who have obtained a low confidence score. By the end of September
1999, these follow-ups will either be completed or contingency plans will be
updated for those providers who remain at a low confidence rating.
The Company has completed 100% of its Y2K contingency plans for critical
business processes. The plans address internal Y2K failures, as well as
failures of key external business providers to support the merchandise and
services needs of the Company. Plans will be tested and updated as necessary
throughout 1999, as the Company monitors the Y2K readiness progress of key
business partners.
The total cost of the Y2K project is estimated to be $5.7 million and is
being funded through operating cash flows. This cost primarily consists of
internal labor costs to repair and test IT and non-IT systems. The Company is
expensing all costs associated with the project as incurred. At July 31, 1999,
$5.6 million had been expensed. The Company has not experienced any significant
delays in other IT projects due to the implementation of the Y2K plan as of
July 31, 1999.
Although the Company has substantially achieved full Y2K readiness, there
is the potential for certain of the Company's systems to experience Y2K
failures. This is due to the uncertainties inherent in the Y2K problem,
including key business partner failures, failure to identify all systems
affected, failure to successfully remediate all systems affected, and other
similar uncertainties. A worst-case scenario could include disruption in the
Company's ability to advertise, purchase and sell merchandise, extend customer
credit, keep accurate accounting records, and perform customer service. Should
this occur, the Company's liquidity, future operating results and financial
position may be materially impacted.
Readers are cautioned that forward-looking statements contained in this
Y2K discussion should be read in conjunction with the cautionary statement
included in this 10-Q under "This Information Contains Forward-Looking
Statements."
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's quantitative and
qualitative market risk disclosures.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 26, 1999. 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, Class I directors, whose term expired at the annual meeting in
1999, were elected. Mr. Thomas M. Belk, Jr., Mr. J. Kirk Glenn, Jr. and
Mrs. Sarah Belk Gambrell were re-elected to the office of Class I director, to
hold office until the annual meeting of stockholders in 2002. A total of
528,992,129 votes were cast in favor of Mr. Thomas M. Belk, Jr., 182,900 votes
were withheld and 54,610 votes were cast against. A total of 529,047,349 votes
were cast in favor of Mr. J. Kirk Glenn, Jr. and 182,900 votes were withheld. A
total of 528,184,289 votes were cast in favor of Mrs. Sarah Belk Gambrell,
182,900 votes were withheld and 862,450 shares were cast against.
Messrs. H.W. McKay Belk, Karl G. Hudson, Jr. and B. Frank Matthews, II continue
to serve as Class II directors. Messrs. John M. Belk, John R. Belk and
John A. Kuhne continue to serve as Class III directors. 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
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form S-4, File No. 333-42935).
3.2 Form of Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to the Company's Registration Statement on
Form S-4, File No. 333-42935).
27.1 Financial Data Schedules (for SEC use only)
(b) Reports on Form 8-K
None.
15
<PAGE> 16
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: September 14, 1999 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
(Chief Accounting Officer)
16
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