ZIONS COOPERATIVE
MERCANTILE INSTITUTION
Financial Statements as of January 31, 1998 and February 1, 1997 and for
Each of the Three Years in the Period Ended January 31, 1998 and Independent
Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Zions Cooperative Mercantile Institution:
We have audited the accompanying balance sheets of Zions Cooperative
Mercantile Institution (ZCMI) as of January 31, 1998 and February 1, 1997,
and the related statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of ZCMI's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ZCMI at January 31, 1998 and February
1, 1997, and the results of its operations and its cash flows for each of
the three years in the period ended January 31, 1998 in conformity with
generally accepted accounting principles.
March 27, 1998
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
BALANCE SHEETS AS OF JANUARY 31, 1998 AND FEBRUARY 1, 1997
ASSETS 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and short-term investments $ 1,619,319 $ 1,467,308
Accounts receivable (less allowance for doubtful
accounts of $1,285,622
and $1,334,154, respectively) 48,770,039 50,573,755
Inventories 49,671,933 49,061,807
Prepaid expenses 1,074,590 1,107,448
Deferred income taxes 2,496,191 1,483,391
Total current assets 103,632,072 103,693,709
PROPERTY, PLANT, AND EQUIPMENT:
Land 177,058 177,058
Buildings and improvements 4,256,933 4,253,922
Leasehold improvements 16,505,903 15,468,375
Furniture, fixtures, and equipment 13,392,564 12,992,530
Leased property under capital
leases 24,570,847 31,364,742
Construction in progress 3,139,587 682,160
Total 62,042,892 64,938,787
Less accumulated depreciation and
amortization 27,561,257 31,835,765
Property, plant, and
equipment - net 34,481,635 33,103,022
DEFERRED INCOME TAXES 196,135
OTHER ASSETS 925,538 625,538
TOTAL $ 139,039,245 $ 137,618,404
</TABLE>
See notes to financial statements. (Continued)
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
BALANCE SHEETS AS OF JANUARY 31, 1998 AND FEBRUARY 1, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable - trade $ 9,414,512 $ 9,269,359
Short-term borrowings - banks 10,000,000
Current portion of long-term debt 372,250 340,041
Current portion of obligations
under capital leases 1,620,410 1,864,206
Accrued liabilities:
Salaries and commissions 2,001,202 2,071,931
Sales, payroll, and other taxes 4,140,998 3,575,688
Income taxes payable 69,644 1,284,563
Outstanding gift certificates 2,010,863 1,934,568
Pension liability 2,558,959 1,528,987
Other 3,337,941 4,004,320
Deferred gain on sale and leaseback 1,827,018 1,923,988
Total current liabilities 27,353,797 37,797,651
LONG-TERM DEBT 40,771,989 26,246,034
DEFERRED INCOME TAXES 789,567
LONG-TERM DEFERRED GAIN ON SALE
AND LEASEBACK 3,837,578 5,089,551
OBLIGATIONS UNDER CAPITAL LEASES 16,284,541 16,709,248
TOTAL LIABILITIES 89,037,472 85,842,484
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Capital stock - par value $.001; 5,000,000 shares authorized;
2,151,660 and 2,164,483 shares issued at January 31,
1998 and February 1, 1997,
respectively 2,152 2,164
Paid-in capital 14,706,971 14,816,213
Pension liability adjustment (2,271,431) (1,806,875)
Retained earnings 37,564,081 38,764,418
Stockholders' equity - net 50,001,773 51,775,920
TOTAL $ 139,039,245 $ 137,618,404
</TABLE>
See notes to financial statements. (Concluded)
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
<TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 1998,
FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
1998 1997 1996
<S> <C> <C> <C>
NET SALES AND OTHER INCOME $257,474,231 $259,599,460 $254,371,323
COSTS AND EXPENSES:
Cost of merchandise sold 170,665,413 172,950,259 171,161,111
Selling, general, and
administrative expenses 82,196,580 79,713,352 77,417,255
Interest expense:
Borrowings 2,514,357 2,495,892 2,938,466
Capital leases 1,762,823 1,918,675 2,072,060
Total costs and expenses 257,139,173 257,078,178 253,588,892
INCOME BEFORE INCOME TAX
EXPENSE 335,058 2,521,281 782,431
INCOME TAX EXPENSE 125,648 683,656 200,791
NET INCOME $ 209,410 $ 1,837,625 $ 581,640
EARNINGS PER COMMON SHARE -
Basic and diluted $ 0.09 $ 0.84 $ 0.27
AVERAGE COMMON SHARES -
Basic and diluted 2,224,736 2,189,322 2,153,600
</TABLE>
See notes to financial statements.
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
Pension
Capital Stock Paid-in Treasury Stock Liability Retained
Shares Amount Capital Shares Amount Adjustment Earnings
BALANCE, JANUARY 28, 1995
<C> <C> <C> <C> <C> <C> <C>
2,150,322 $ 2,150 $14,618,479 NONE NONE NONE $38,950,051
Purchases of treasury stock 5,350 $ 54,035
Issuance of capital stock(net of 5,350 shares of treasury stock)
9,423 10 110,724 (5,350) (54,035)
Pension liability adjustment (Note 6) $(1,908,750)
Net income 581,640
Cash dividends ($.60 a share) (1,292,160)
BALANCE, FEBRUARY 3, 1996
2,159,745 2,160 14,729,203 NONE NONE (1,908,750) 38,239,531
Purchases of treasury stock 6,726 79,816
Issuance of capital stock(net of 6,726 shares of treasury stock)
4,738 4 87,010 (6,726)(79,816)
Pension liability adjustment (Note 6) 101,875
Net income 1,837,626
Cash dividends ($.60 a share) (1,312,739)
BALANCE, FEBRUARY 1, 1997
2,164,483 2,164 14,816,213 NONE NONE (1,806,875) 38,764,418
Purchases of treasury stock 25,008 335,523
Issuance of capital stock(net of 25,008 shares of treasury stock)
(12,823) (12) (109,242) (25,008)(335,523)
Pension liability adjustment (Note 6) (464,556)
Net income 209,410
Cash dividends ($.63 a share) (1,409,747)
BALANCE, JANUARY 31, 1998
2,151,660 $2,152 $14,706,971 NONE NONE $(2,271,431)$37,564,081
</TABLE>
See notes to financial statements.
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 209,410 $ 1,837,626 $ 581,640
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,219,426 4,198,197 4,457,778
Deferred income taxes 56,003 (346,582) (199,209)
Amortization of deferred gain
on sale and leaseback (1,868,340) (1,697,217)(1,302,992)
Change in operating assets and liabilities:
Accounts receivable 1,803,716 147,484 3,957,543
Inventories (610,126) (3,184,439) 534,626
Prepaid expenses 32,858 213,237 (560,145)
Other assets (300,000) (27,639)
Accounts payable - trade 145,153 1,899,283 722,576
Accrued liabilities (280,450) 3,726,055 (6,620,863)
Net cash provided by operating
activities 3,407,650 6,766,005 1,570,954
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant,
and equipment (9,658,193) (5,242,358)(2,528,970)
Proceeds from sale of property,
plant, and equipment 5,295,000 4,820,027 5,040,000
Net cash provided by (used in)
investing activities (4,363,193) (422,331) 2,511,030
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings (2,500,000)(9,000,000)
Proceeds from long-term debt 4,897,019 8,093,095
Principal payments on long-term debt (338,855) (1,611,007) (263,919)
Principal payments on obligations
under capital leases (1,931,621) (2,237,721)(1,730,540)
Proceeds from sale of capital stock 226,281 166,830 164,769
Purchase of treasury stock (335,523) (79,816) (54,035)
Cash dividends (1,409,747) (1,312,739)(1,292,160)
Net cash provided by (used in)
financing activities 1,107,554 (7,574,453)(4,082,790)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 152,011 (1,230,779) (806)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,467,308 2,698,087 2,698,893
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,619,319 $1,467,308 $2,698,087
</TABLE>
<TABLE>
(Continued)
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
1998 1997 1996
SUPPLEMENTAL DISCLOSURES OF CASH
INFORMATION:
Cash paid during the year for:
<S> <C> <C> <C>
Interest $4,334,995 $4,434,585 $5,077,498
Income taxes 1,390,014 145,676 1,468,899
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for the acquisition
of property under capital lease 481,248
Deferred gain on sale and leaseback of property, plant,
and equipment 519,000 3,605,000 $2,050,948
Transfer from long-term debt to short-term
borrowings - banks 10,000,000
Transfer from short-term borrowings to long-term
debt - banks 10,000,000
Increase (decrease) in accrued liabilities and
corresponding decrease (increase) in stockholders'
equity due to pension liability
adjustment (Note 6) 743,289 163,000 3,054,000
Decrease (increase) in deferred tax assets and
corresponding increase (decrease) in stockholders'
equity due to pension liability
adjustment (Note 6) (278,733) (61,125) (1,145,250)
</TABLE>
See notes to financial statements. (Concluded)
ZIONS COOPERATIVE MERCANTILE INSTITUTION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations - Zions Cooperative Mercantile Institution (ZCMI) was
organized as a Utah corporation in 1868 and was the first full-line
department store in the United States. ZCMI is in the retail line of
business, operating both full-line conventional department stores and men's
and women's ready to wear specialty stores and outlet stores. The full-line
conventional department stores are located in Salt Lake City and Ogden, Utah
and in regional shopping centers in the suburban Salt Lake City, Orem,
Logan, Sandy, Layton, and St. George, Utah areas and in Pocatello and Idaho
Falls, Idaho. The specialty and outlet stores are located in Provo and St.
George, Utah.
Use of Estimates in Preparing Financial Statements - 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.
Inventories - Substantially all inventories are valued at the lower of cost
or market, using the retail method, on the last-in, first-out (LIFO) basis.
If the inventories had been valued on the first-in, first-out basis, total
inventory values would have been approximately $6,022,000 and $6,600,000
higher at January 31, 1998 and February 1, 1997, respectively.
Property, Plant, and Equipment - Property, plant, and equipment are stated
at cost. For financial statement purposes, the straight-line method of
depreciation is used for buildings, and the sum-of-the-years digits and
straight-line methods are used for leasehold improvements and furniture,
fixtures, and equipment, over estimated useful lives ranging from 3 to 50
years. See Note 2 for information concerning leased property under capital
leases.
Net Sales and Other Income - Net sales includes proceeds, net of returns,
from merchandise, services, and licensed departments. The sales of licensed
departments amounted to approximately $23,680,000, $22,914,000, and
$21,690,000 for the years ended January 31, 1998, February 1, 1997, and
February 3, 1996, respectively. Included in net sales and other income are
finance charges on retail credit accounts receivable totaling approximately
$5,669,000, $5,653,000, and $5,716,000 for the years ended January 31, 1998,
February 1, 1997, and February 3, 1996, respectively. Net sales and other
income also include the amortization of deferred gain on sale and leaseback
totaling approximately $1,868,000, $1,697,000, and $1,303,000 for the years
ended January 31, 1998 February 1, 1997, and February 3, 1996, respectively
(see Note 2).
Income Taxes - ZCMI accounts for its taxes based on Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
Statement requires an asset and liability approach for financial accounting
and reporting for income taxes.
Net Income Per Common Share - Effective January 31, 1998, ZCMI adopted SFAS
No. 128, "Earnings Per Share," and retroactively restated its earnings per
share for 1997 and 1996, to conform with the statement. Accordingly, net
income per common share is computed by both the basic method, which uses the
weighted average number of ZCMI's common shares outstanding, and the diluted
method, which includes the dilutive common shares from stock options, as
calculated using the treasury stock method. The amounts of such options are
not significant and, accordingly, ZCMI's basic and dilutive earnings per
share are the same.
Statements of Cash Flows - For purposes of the statements of cash flows,
ZCMI considers short-term investments with original maturities of three
months or less, to be cash equivalents.
Financial Instruments - The carrying amounts reported in the balance sheets
for cash and short-term investments approximate fair value because of the
immediate or short-term maturity of these financial instruments. The
carrying amount of the long-term debt approximates fair value.
Fiscal Year - ZCMI's fiscal year ends on the Saturday nearest the end of
January.
2. COMMITMENTS AND CONTINGENCIES
ZCMI has noncancelable leases covering store premises, fixtures, and
equipment which expire on various dates to 2017. Leases covering store
premises contain provisions for additional annual lease payments based on
a percentage of sales and have renewal options for various additional
periods ranging up to 67 years.
Minimum rentals of capital leases have been capitalized at the present value
of the rentals at the inception of the lease and the obligation for such
amount is recorded as a liability. Amortization of capital lease property,
which is included with depreciation expense, is computed on the
straight-line basis over the lease terms and interest expense is accrued on
the basis of the outstanding lease obligation.
Leased property under capital leases by major classes as of January 31, 1998
and February 1, 1997 is as follows (see Note 7):
<TABLE>
1998 1997
<S> <C> <C>
Buildings and improvements $ 15,747,559 $ 15,747,559
Furniture, fixtures, and equipment 8,823,288 15,617,183
Total 24,570,847 31,364,742
Less accumulated amortization 13,823,928 20,148,406
Net assets under capital leases $ 10,746,919 $ 11,216,336
</TABLE>
Approximate future minimum lease payments on both capital and noncancelable
operating leases at January 31, 1998 was as follows:
<TABLE>
Capital Operating
Leases Leases
Year ending:
<C> <C> <C>
1999 $ 3,306,201 $ 10,101,781
2000 3,051,015 10,221,233
2001 2,526,230 9,669,309
2002 2,121,220 7,908,961
2003 1,937,470 5,459,618
Later years 21,692,767 23,620,325
Total minimum lease payments 34,634,903 $ 66,981,227
Less amount representing interest 16,729,982
Present value of net minimum
lease payments 17,904,921
Less current portion 1,620,410
Long-term portion $ 16,284,511
</TABLE>
Approximate total operating lease expense was as follows:
<TABLE>
Year Ended
1998 1997 1996
Minimum rentals on noncancelable
<S> <C> <C> <C>
operating leases $ 9,815,658 $ 9,520,162 $ 8,773,000
Contingent rentals on noncancelable
operating leases 141,246 91,000 99,000
Other operating lease expenses 177,939 139,000 696,000
Total $ 10,134,843 $ 9,750,162 $ 9,568,000
</TABLE>
Contingent rentals on capital leases, which were included in expense,
totaled approximately $106,409, $274,000, and $251,000 for the years ended
January 31, 1998, February 1, 1997, and February 3, 1996, respectively.
During the years ended January 31, 1998, February 1, 1997, and February 3,
1996, ZCMI sold certain furniture, fixtures, and equipment with a net book
value of approximately $4,776,000, $1,215,000, and $2,989,000 for
approximately $5,295,000, $4,820,000, and $5,040,000, respectively. ZCMI
agreed to lease back such furniture, fixtures, and equipment under operating
lease agreements. The resulting gains on sale for the years ended January
31, 1998, February 1, 1997, and February 3, 1996 of approximately $519,000,
$3,605,000, and $2,051,000, respectively, are being amortized over the lease
terms ranging from 5 to 10 years. Amortization of gains on all sale
leasebacks for the years ended January 31, 1998, February 1, 1997, and
February 3, 1996 totaled approximately $1,868,000, $1,697,000, and
$1,303,000, respectively.
3. INCOME TAXES
ZCMI has recorded current and long-term deferred tax assets and deferred tax
liabilities as of January 31, 1998 and February 1, 1997 as follows:
<TABLE>
1998 1997
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Deferred tax assets $ 2,496,191 $ 1,444,466 $ 1,483,391 $ 2,630,077
Deferred tax liabilities (2,234,033) (2,433,942)
Total $ 2,496,191 $ (789,567)$ 1,483,391 $ 196,135
</TABLE>
Deferred tax assets and liabilities as of January 31, 1998 and February 1,
1997 consisted of the following temporary differences and carryforward
items:
<TABLE>
1998 1997
Assets Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable $ 482,108 $ 500,307
Deferred gross profit on sale
leaseback transactions 679,758 $ 1,444,466 $ 2,630,077
Accrued vacation expense
not currently recognized
for income tax purposes 281,974 342,052
Pension liability adj. 959,610 573,359
Other 92,741 67,673
Total $2,496,191 $ 1,444,466 $1,483,391 $ 2,630,077
Liabilities
Net property, plant, and
equipment for financial
reporting in excess of tax
basis $ (271,389) $ (920,168)
Capital and operating leases
treated differently for
income tax purposes (1,962,644) (1,513,774)
Total None $(2,234,033) None $(2,433,942)
</TABLE>
Computed "expected" income taxes on income for financial reporting purposes
are reconciled to income tax expense as follows:
<TABLE>
Year Ended
1998 1997 1996
<S> <C> <C> <C>
Federal income taxes at the
statutory rate $ 117,270 $ 882,449 $274,327
Increase (decrease) resulting from:
State income taxes 13,419 102,533 27,377
Other (5,041) (301,326) (100,913)
Income tax expense $ 125,648 $ 683,656 $200,791
Consisting of:
Current:
Federal $ 62,207 $ 893,047 $357,280
State 7,438 137,191 42,720
Total 69,645 1,030,238 400,000
Deferred:
Federal 50,022 (311,924) (177,933)
State 5,981 (34,658) (21,276)
Total 56,003 (346,582) (199,209)
Total expense $ 125,648 $ 683,656 $ 200,791
</TABLE>
4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt consisted of the following as of
January 31, 1998 and February 1, 1997:
<TABLE>
1998 1997
<S> <C> <C>
Unsecured notes payable to banks under lines of credit,
due at various dates through July 1999 $38,897,019 $34,000,000
Mortgage note, 8%, due in monthly installments through
February 2003 1,074,173 1,245,044
Note payable, 10.255%, due in quarterly installments
through December 2002 1,173,047 1,341,031
Total 41,144,239 36,586,075
Less current portion 372,250 10,340,041
Long-term portion $40,771,989 $26,246,034
</TABLE>
Interest rates on the borrowings under lines of credit are variable. At
January 31, 1998 and February 1, 1997, interest rates on these borrowings
averaged 6.5% and 6.4%, respectively.
Land and buildings with net book values of approximately $1,983,000 and
$2,062,000 at January 31, 1998 and February 1, 1997, respectively, were
pledged as collateral to the mortgage note. Furniture, fixtures, and
equipment with a net book value of approximately $1,223,017 at January 31,
1998 were pledged as collateral on the note payable having a balance of
$1,173,047 as of January 31, 1998.
Short-term borrowings and long-term debt at January 31, 1998 matures as
follows:
<TABLE>
Amount
Year ending:
<C> <C>
1999 $ 372,250
2000 39,285,503
2001 442,888
2002 484,999
2003 554,579
Thereafter 4,020
Total $41,144,239
</TABLE>
ZCMI had unused lines of credit available with various banks totaling
approximately $15,103,000 at January 31, 1998. This amount is generally
available at the prime interest rate or lower. In addition to the lines of
credit, ZCMI had available letters of credit totaling $3,000,000. Open
letters of credit at January 31, 1998 amounted to approximately $585,549.
5. EMPLOYEE STOCK OPTIONS
ZCMI had an incentive stock option plan for its key employees which expired
in 1992, under which options to purchase capital stock were granted at a
price not less than fair market value on the date of grant. Changes in
options granted under this incentive stock option plan and other related
information are as follows:
<TABLE>
Year Ended
1998 1997 1996
<S> <C> <C> <C>
Options outstanding - beginning of year 5,000 5,000 18,900
Granted
Exercised
Forfeited (5,000) (13,900)
Options outstanding - end of year None 5,000 5,000
Options exercisable None 5,000 5,000
Price of outstanding options N/A $16.50 $16.50
</TABLE>
During the year ended February 1, 1997, ZCMI instituted the Equity-Based
Incentive Plan under which options to purchase capital stock were granted
at a price not less than the fair market value on the date of the grant.
Changes in options granted under the plan and the fair market value of such
options is as follows:
<TABLE>
Year Ended
1998 1997
Number Exercise Number Exercise
of Shares Price of Shares Price
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 124,000 $11.25 $ 11.25
Granted 124,000
Canceled
Exercised (1,550) $11.25
Outstanding - end of year 122,450 $11.25 124,000 $11.25
Options exercisable 122,450 None
Remaining contractual life 8.6 years 9.6 years
Fair market value of options granted $1.16 $1.67
</TABLE>
The following table summarizes information about stock options outstanding
at January 31, 1998:
Options Outstanding Options Exercisable
Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
$11.25 122,450 8.58 years $11.25 122,450 $11.25
ZCMI accounts for stock options granted using Accounting Principles Board
Opinion No. 25. Accordingly, no compensation cost has been recognized for
its equity based incentive plan. Had compensation cost for ZCMI's stock
based compensation plan been determined based on the fair value at the grant
dates for awards under those plans consistent with SFAS No. 123, ZCMI's net
income and earnings per common share would have changed to the pro forma
amounts indicated below:
Year Ended Year Ended
January 31, February 1,
1998 1997
Net income:
As reported $209,410 $1,837,626
Pro forma 192,894 1,824,564
Earnings per common share:
As reported $0.09 $0.84
Pro forma 0.09 0.83
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended January 31,
199 and February 1, 1997.
Year Ended
1998 1997
Dividend yield 5.69 % 5.33 %
Expected volatility 15.80 % 17.29 %
Risk free interest rate ranges 5.16% to 5.40% 6.14% to 6.57%
Expected lives ranges 1 year to 8 years 2.75 years to 10 years
As part of the Equity-Based Incentive Plan, restricted stock awards were
granted to certain officers of ZCMI. Under this grant, 46,000 nonvested
restricted stock awards were granted during the year ended February 1, 1997.
The fair market value of this grant was determined to be $517,500. The
shares vest from 1999 through 2007 with the total compensation cost related
to this grant to be recognized from the date of grant through the final
vesting date. During the years ended January 31, 1998 and February 1, 1997,
ZCMI recorded $68,625 and $66,625, respectively, of compensation expense
related to this grant.
6. EMPLOYEE BENEFIT PLANS
ZCMI has a trusteed, noncontributory retirement plan covering substantially
all of its employees. Benefits are based on years of service and
compensation history. ZCMI's funding policy is to contribute annually the
minimum amount required by law.
The components of the net pension cost for the years ended January 31, 1998,
February 1, 1997, and February 3, 1996 were as follows:
<TABLE>
Year Ended
1998 1997 1996
<S> <C> <C> <C>
Service cost - benefits earned
during year $ 565,653 $ 567,000 $ 445,000
Interest cost on projected benefit
obligation 1,959,502 2,017,000 1,975,000
Actual return on plan assets (3,419,922) (1,834,000) (3,522,000)
Net amortization and deferral 1,181,437 (276,000) 1,500,000
Net periodic pension cost $ 286,670 $ 474,000 $ 398,000
</TABLE>
Actuarial assumptions used at January 1, 1997, 1996, and 1995 to compute the
above information were:
1997 1996 1995
Weighted average discount rate 7.0% 7.75% 9.0%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
The following table sets forth the funded status and amounts recognized in
ZCMI's balance sheets at January 31, 1998 and February 1, 1997,
respectively, as of the actuarial valuation dates shown:
<TABLE>
January 1,
1998 1997
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(27,653,624) $(24,714,000)
Accumulated benefit obligation $(28,149,728) $(25,097,000)
Projected benefit obligation $(29,044,871) $(26,090,000)
Plan assets at fair value 25,590,769 23,568,000
Plan assets less than projected
benefit obligation (3,454,102) (2,522,000)
Unrecognized prior service costs (104,831) (197,000)
Unrecognized net loss 5,190,860 4,823,000
Unrecognized net obligation at February 1, 1986
being recognized over 15 years (556,597) (742,000)
Additional liability for unfunded accumulated
benefit obligation (3,634,289) (2,891,000)
Pension liability recognized in the
balance sheet $ (2,558,959) $ (1,529,000)
</TABLE>
Actuarial assumptions used at January 1, 1998 and 1997 to compute the above
information were:
1998 1997
Weighted average discount rate 7.00% 8.00%
Rate of increase in compensation levels 4.00% 4.00%
During the years ended January 31, 1998 and February 1, 1997, ZCMI
recognized the additional minimum liability aspects of SFAS No. 87,
"Employers' Accounting for Pensions". SFAS No. 87 requires the recognition
of an additional pension liability in the amount of the unfunded accumulated
benefit obligation in excess of accrued pension liability with an equal
amount to be recognized as either an intangible asset or a reduction of
equity. Based upon plan actuarial and asset information as of January 31,
1998 and February 1, 1997, ZCMI recorded an increase to the pension
liability of $743,299 and $163,000, respectively, and a decrease to
stockholders' equity of $278,733 and $61,125, respectively.
ZCMI has an employees' savings plan, which is a qualified, contributory
savings plan based on Section 401(k) of the Internal Revenue Code. Total
ZCMI contributions for the years ended January 31, 1998, February 1, 1997,
and February 3, 1996 were approximately $223,000, $214,000, and $204,000,
respectively. Under the plan, employees are also given the option to
purchase ZCMI stock. The plan also allows ZCMI to elect to contribute
shares of its common stock, at current market prices, into the plan for up
to 100% of the employer matching contributions made to the plan for any
period. As of January 31, 1998, no shares have been contributed to this
plan.
7. RELATED PARTY TRANSACTIONS
ZCMI's Downtown Store and Service Center, with net book values of
approximately $7,135,000 and $7,529,000 at January 31, 1998 and February 1,
1997, respectively, are leased from a major stockholder under capital
leases. Included in obligations under capital leases are approximately
$13,524,618 and $13,768,000 at January 31, 1998 and February 1, 1997,
respectively, pertaining to these leases. Lease payments of approximately
$1,906,000 were made on these leases for each of the years ended January 31,
1998, February 1, 1997, and February 3, 1996. Included in costs and
expenses are transactions with companies in which a major ZCMI stockholder
has a significant interest totaling approximately $3,694,576, $3,971,000,
and $2,984,000 for the years ended January 31, 1998, February 1, 1997, and
February 3, 1996, respectively. Included in net sales are transactions with
major ZCMI stockholders totaling approximately $399,500, $350,000, and
$289,000 for the years ended January 31, 1998, February 1, 1997, and
February 3, 1996, respectively.
8. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The adoption
of SFAS No. 130 will require ZCMI to add disclosure to the financial
statements about comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information". SFAS No. 131 established standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosure about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997.
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