TO: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED July 31, 1998
COMMISSION FILE NUMBER 0-1391
ZIONS COOPERATIVE MERCANTILE INSTITUTION
A UTAH CORPORATION
SALT LAKE CITY, UTAH 84137
TELEPHONE NUMBER 801:579-6404
IRS EMPLOYEE IDENTIFICATION NUMBER 87-0196220
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 prceding 12 months (or of such charter 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 outstanding: Common Stock 2,200,445 shares
Other shares, none
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
INDEX
TITLE PAGE NO.
Balance Sheet 1
August 1, 1998 & January 31, 1998
Statement of Income 3
Three Months Ended August 1, 1998 & August 2, 1997
Statement of Income 4
Six Months Ended August 1, 1998 & August 2, 1997
Condensed Statement of Cash Flows 5
Three Months Ended August 1, 1998 and August 2,1997
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of the 7
Condensed Income Statements
Other Information 11
Signatures 12
ZIONS COOPERATIVE MERCANTILE INSTITUTION
BALANCE SHEET - AUGUST 1, 1998 & JANUARY 31, 1998
In Thousands (000 omitted)
ASSETS AND OTHER DEBITS
<TABLE>
Current Assets: JULY JANUARY
1998 1998
<S> <C> <C>
Cash and cash items $ 673 $ 1,619
Accounts and Notes Receivable 38,784 50,056
Less allowance for doubtful accounts 1,897 1,286
Net Accounts Receivable
and Notes Receivable 36,887 48,770
Inventories:
Finished goods - LIFO cost,
retail method 48,373 48,497
Supplies - FIFO cost 2,649 1,175
Prepaid Expenses 1,062 1,075
Deferred Income Taxes 2,496 2,496
Total Current Assets $92,140 103,632
Property:
Property, plant and equipment $34,922 $37,472
Less accumulated depreciation, depletion
and amortization of property,
plant & equipment 12,864 13,737
Capital Leases, Net Accumulated Amortization
(Note 1) 9,945 10,747
Total Property - Net $32,003 $34,482
Other Assets and Deferred Charges:
Other Assets 322 621
Investment in Subsidiary 304 304
LT Note Receivable 520 0
TOTAL ASSETS AND OTHER DEBITS $125,289 $139,039
</TABLE>
See Notes to condensed financial statements
-1-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
BALANCE SHEET - AUGUST 1, 1998 & JANUARY 31, 1998
In Thousands (000 omitted)
LIABILITIES, RESERVES AND STOCKHOLDERS EQUITY
<TABLE>
JULY JANUARY
1998 1998
<S> <C> <C>
Current Liabilities:
Accounts payable - trade $ 3,554 $ 9,415
Short term borrowings - banks 2,784 0
Current portion of long-term debt 389 372
Current portion of obligations under capital
leases 1,676 1,620
Accrued liabilities
Outstanding gift certificates 1,922 2,011
Other accrued liabilities 10,243 12,109
Deferred gain on sale and leaseback 1,924 1,827
Total Current Liabilities $22,492 $27,354
Long-Term Debt:
Bonds, mortgages and similar debt 39,473 40,772
Capital Lease - Long Term
Portion (Note 1) 15,532 16,285
Other Liabilities and Deferred Credits:
Deferred Fed Income Taxes 789 789
Deferred Gross Profit 2,879 3,837
Stockholders Equity:
Capital shares $14,762 $14,709
Pension Liability Adjustment (2,271) (2,271)
Other stockholders equity 31,633 37,564
Total Stockholders Equity $44,124 $50,002
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $125,289 $139,039
</TABLE>
See notes to condensed financial statements
-2-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED AUGUST 1, 1998 & AUGUST 2,1997
In Thousands (000 omitted)
<TABLE>
1998 1997
<S> <C> <C>
Net Sales $51,391 $52,561
Cost of goods sold, direct merchandising and
buying costs 36,268 35,712
Other revenues 1,339 1,250
Other costs and expenses applicable to
other revenue 0 0
Selling, general and administrative expenses 18,147 18,488
Provision for doubtful accounts and notes 254 229
Other Income:
Miscellaneous other income 191 107
Income Deductions:
Interest and amortization of debt discount and
expenses 694 525
Interest Expense on Capital Leases (Note 1) 404 365
Miscellaneous income deductions 398 408
Net loss before income tax expense and
extraordinary items $(3,244) $(1,809)
Income tax expense 0 0
Net loss before extraordinary items $(3,244) $(1,809)
Extraordinary items less applicable tax 0 0
Net Loss $(3,244) $(1,809)
Weighted average number of
common shares outstanding 2,200,445 2,201,947
Earnings per common share $ (1.47) $ (0.82)
Cash dividends per common share $ 0.16 $ 0.16
</TABLE>
See notes to condensed financial statements
-3-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED AUGUST 1, 1998 & AUGUST 2, 1997
In Thousands (000 omitted)
<TABLE>
1998 1997
<S> <C> <C>
Net Sales $105,321 $106,901
Cost of goods sold, direct merchandising and
buying costs 73,822 72,606
Other revenues 2,891 2,662
Other costs and expenses applicable
to other revenue 0 0
Selling, general and
administrative expenses 36,658 36,781
Provision for doubtful accounts and notes 511 461
Other Income:
Miscellaneous other income 678 275
Income Deductions:
Interest and amortization of debt discount
and expenses 1,373 1,129
Interest Expense on
Capital Leases (Note 1) 806 728
Miscellaneous income deductions 947 773
Net loss before income tax expense and
extraordinary items (5,227) (2,640)
Income tax expense 0 0
Net loss before extraordinary items (5,227) (2,640)
Extraordinary items less applicable tax 0 0
Net loss $ (5,227) $ (2.640)
Weighted average number of
common shares outstanding 2,200,445 2,201,947
Earnings per common share $( 2.38) $ (1.20)
Cash dividends per common share $ 0.16 $ 0.16
</TABLE>
See notes to condensed financial statements
-4-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED STATEMENT OF CASH FLOWS
AUGUST 1, 1998 & AUGUST 2, 1997
In Thousands (000 omitted)
<TABLE>
July July
1998 1997
<S> <C> <C>
Net Income (loss) $(5,227) $(2,640)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,192 2,167
Deferred gross profit (2,786) (2,883)
Deferred income taxes 0 0
Provision for losses on accounts receivable 511 461
Decrease (increase) in assets:
Accounts receivable 11,372 10,782
Inventories (1,350) (462)
Prepaid expenses 13 (148)
Other Assets 0 0
Increase (decrease) in liabilities:
Accounts payable -- trade (625) (5,280)
Accrued liabilities 114 (2,338)
Net cash provided by operating activities 4,214 (339)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,849) (2,252)
Proceeds from sale of property,
plant and equipment 4,136 0
Net cash used in investing activities 287 (2,252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 0 (3,000)
Additions (reductions) to long-term debt (3,750) 6,819
Principal payments on long-term debt & obligations
under capital leases (825) (916)
Stock options exercised and sales of capital stock
(Purchase)Sale of treasury stock 52 6
Cash dividends (704) (705)
Long Term Investments 300 (600)
Long Term Note Receivable (520) 0
Net cash provided by (used in)
financing activities (5,447) 1,491
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (946) (1,101)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,619 1,467
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 673 $ 367
</TABLE>
-5-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
Notes to Condensed Financial Statements
1. The Company has non-cancellable leases covering store space which
expire on various dates through 2016. Some of the leases contain
provisions for additional annual lease payments based on a percentage
of sales at the leased store. The leases have renewal options for
additional periods ranging from 50 to 69 years.
2. In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of August 1, 1998 and January 31, 1998 and the results of
operations for the three months ended August 1, 1998 and August 2,
1997, for six months ended August 1, 1998 and August 2, 1997 and
changes in financial position for three months ended August 1, 1998
and August 2, 1997.
3. The results of operations for the three months period ended August
1,1998 and August 2, 1997 and the six months period ended August 1,
1998 and August 2, 1997 are not necessarily indicative of the results
to be expected for the full year.
-6-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED INCOME STATEMENTS
1. Prospective Information:
Major freeway construction, combined with commuter transit
construction, and a slowdown in the economy in general has
contributed to a slow first half in sales. This lack of sales has
forced larger than normal markdowns, contributing to weak gross
margins and a substantial loss for the first half of 1998.
Continuing construction on the major freeway in the Salt Lake Valley
has affected sales in the Downtown Salt Lake City, Cottonwood, Valley
Fair, South Towne and Fashion Place stores, traditionally the major
market areas of the Company. This freeway construction will continue
to affect sales for the next three years. Commuter transit
construction in front of and near the Downtown Salt Lake City store
has also affected sales in that location.
Capital expenditures during fiscal 1997 consisted of a major addition
to the Layton Hills store. An additional 38,000 square feet was
added to the store, based on a lease option with the mall. The
project was substantially finished by December 15, 1997, with the
exception of new fixturing which was installed in February 1998.
Also, new Polo shops were constructed in the Downtown and Cottonwood
stores in addition to smaller remodeling projects. Lastly, a new
database marketing system and a software system to further automate
receiving functions were also implemented.
Estimated capital expenditures for fiscal 1998 include normal
equipment and fixture replacement estimated at $1,000,000 and the
completion of a 42,000 square foot expansion and complete remodel of
the University Mall store. The University Mall store, which is
presently owned, will be sold and leased back to the mall and that
transaction together with incentives from the city of Orem and mall
developer, is estimated to cover all costs except approximately
$2,500,000 of the expansion and remodeling cost, which will be sold
and leased back. Sales at the University Mall location will be
affected by this remodel.
It is anticipated that these capital expenditures will be financed by
continuing operations, internally generated funds, the leasing of
fixtures and buildings, and by short-term and long-term debt. With
continued favorable short-term loan rates to the Company and the
expected dollar level of debt financing required, Management still
considers short-term borrowing to be the best strategy to meet its
working capital needs.
The East Bay Mall Outlet Store closed on April 25, 1998. This store
had been converted to an outlet store during fiscal 1992. No new
stores are planned for opening during the current fiscal year.
2. Liquidity and Capital Resources:
The quick and current ratios are 1.7 and 4.1, respectively for the
second quarter 1998 as compared to 1.6 and 3.7 for the same time
period in 1997. This indicates that the Company's liquidity is more
than adequate. These ratios will fluctuate from quarter to quarter
due to the seasonality of inventory requirements. The liquidity is
considered adequate to finance current operations, pay dividends, and
provide for capital expenditures. The lines of credit that the
Company has ($54,000,000) are more than adequate to handle the
borrowing requirements for the above mentioned items.
3. Material Changes:
Accounts Receivable balances normally decline from prior year end
balances due to customer payments on Christmas merchandise as well
as the customer using a third party charge card instead of a ZCMI
charge card.
Funding for the purchases of inventory has increased short-term debt
while long-term borrowing has greatly decreased. Inventories
decreased because of the seasonal trend in inventory levels.
4. Interim Period Reporting:
The following table summarizes the changes in selected operating
indicators, illustrating the relationships of various income and
expense items to net sales for each period presented:
<TABLE>
PERCENT OF NET SALES
THREE MONTHS ENDED
Aug 1, 1998 Aug 2, 1997
<S> <C> <C>
Net Sales 100.0% 100.0%
Other Income, net 2.6 2.4
102.6 102.4
Costs and expenses:
Costs & merchandise sold 70.6 67.9
Selling, general & admin. 35.3 35.2
Income(loss) from operations (3.3) (0.7)
Interest expense, net (3.0) (2.7)
Net loss (6.3) (3.4)
</TABLE>
Comparisons between the second quarter of our fiscal year and the
fourth quarter of the prior year in the department store industry are
not only meaningless, but if made, could be misleading. The Company
and the industry typically records about 33% of its annual sales in
the fourth quarter versus about 20% in the second quarter, due to the
variation in seasonal buying patterns of consumers. Variations in
net income is even greater due to the relatively fixed expenses that
accrue rather evenly throughout the year. As a result many retailers
have net losses in the second quarter.
Sales decreased by 2.2% in the second quarter of 1998 compared to the
second quarter of 1997 due to factors explained previously.
Cost of goods sold has increased to 70.57% for the three month period
ended August 1, 1998 as compared to 67.94% for the same period for
1997. Markdowns have increased to 21.3% of sales as of August 1,
1998 as compared to 18.3% during the same period ending on August 2,
1997. The increase in markdowns is the result of an overstock of
merchandise and a decrease in sales. These two factors are a result
of the previously mentioned construction in the major market areas of
the Salt Lake Valley. Selling, general, and administrative expenses
have remained steady as a percent of sales. As of August 1, 1998,
they were 35.31% of sales while they were 35.17% of sales as of
August 2, 1997. This comes despite an increase in the minimum wage.
For the first six months of 1998, cost of goods sold increased as a
percent of sales to 70.1%, as compared to 67.9% for the same time
period in 1997 as explained above. Selling, general, and
administrative expenses increased slightly to 34.81% for the first
six months of 1998 as a percent of sales as compared to 34.41% for
the first six months of 1997.
Operating expenses increased in the first half of 1998 due mainly to
an increase in payroll and bad debt expenses. Payroll has continued
to increase dramatically during the year due to an increase in the
minimum wage in September 1997 along with competitive wages that
continue to rise in the prime market areas of ZCMI. Interest income
has continued to increase over last year as a result of changes in
interest rates on accounts, while at the same time interest expense
incurred from borrowing has offset this increase.
Year 2000 Issues
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
System failures or miscalculations could result from programs
recognizing dates using "00" as the year 1900 rather than the year
2000. During fiscal 1997, ZCMI has tested various programs and has
communicated with major suppliers to determien the extent that this
issue will affect the Company's operations. ZCMI has determined that
the extent of the effect on the Company is minimal, due to the recent
conversion in computer hardware to the AS/400 system and the total
rewrite of programs at that time. At the present time, many systems
are already completed. There are numerous systems involved in this
issue, however, and ZCMI has numerous suppliers which interface
with systems in use. ZCMI anticipates that projects converting
any remaining problems with older software or outside purchased
equipment, as well as POS terminal programs and all other types of
equipment which may be affected, will be completed prior to October
1999. The costs of these conversions will be expensed during the
normal course of business and are not expected to be material.
Contingency plans are in place for critical systems and are not
anticipated to be needed.
"Safe Harbor" Statement
Certain information included in this 10-Q contains statements that
are forward looking. Such forward-looking information involves
important risks and uncertainties that could significantly affect
anticipated results in the future, including, but not limited to,
uncertainties affecting retail in general, such as consumer
confidence and demand for soft goods; risks relating to leverage and
debt service; competition within primary markets in which the
Company's stores are located; and the need for, and costs associated
with, store renovations and other capital expenditures.
-10-
<PAGE>
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to routine legal proceedings incident to
its business none of which, in the opinion of management, will
have a material adverse effect on The Company's business or
financial condition.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
1. The Company was not required to report material or unusual
charges or credits to income pursuant to item 10 (a) or a
change in independent accountants pursuant to item 12 of Form
8-K for any of the three months ended August 1, 1998.
2. There were no securities of the Company sold by the Company
during the three months ended August 1, 1998 which were not
registered under the Securities Act of 1933 in reliance upon an
exemption from registration provided by section 4 (2) of the
Act.
Item 6. Exhibits and Reports on Form 8-K.
None.
-11-
Form 10-Q
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 authorized.
ZIONS COOPERATIVE MERCANTILE INSTITUTION
Date September 14, 1998 Keith C. Saunders
Keith C. Saunders
Executive Vice President-CFO
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 673,000
<SECURITIES> 0
<RECEIVABLES> 38,784,000
<ALLOWANCES> (1,897,000)
<INVENTORY> 36,887,000
<CURRENT-ASSETS> 92,140,000
<PP&E> 59,492,000
<DEPRECIATION> (27,489,000)
<TOTAL-ASSETS> 125,289,000
<CURRENT-LIABILITIES> 22,492,000
<BONDS> 0
0
0
<COMMON> 14,762,000
<OTHER-SE> 29,362,000
<TOTAL-LIABILITY-AND-EQUITY> 125,289,000
<SALES> 105,321,000
<TOTAL-REVENUES> 2,891,000
<CGS> 73,822,000
<TOTAL-COSTS> 73,822,000
<OTHER-EXPENSES> 36,658,000
<LOSS-PROVISION> 511,000
<INTEREST-EXPENSE> 2,179,000
<INCOME-PRETAX> (5,227,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,227,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,227,000)
<EPS-PRIMARY> (2.38)
<EPS-DILUTED> (2.38)
</TABLE>
