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 October 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 2,204,984 shares
Other shares, none
<PAGE>
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
INDEX
TITLE PAGE NO.
Condensed Balance Sheet 1
Condensed Income Statement 3
Three Months Ended Oct 31, 1998 & Nov 1, 1997
Condensed Income Statement 4
Nine Months Ended Oct 31, 1998 & Nov 1, 1997
Statements of Cash Flows 5
Three Months Ended Oct 31, 1998 & Nov 1, 1997
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of the 7
Condensed Income Statement
Other Information 12
Signatures 13
<PAGE>
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED BALANCE SHEET - OCTOBER 31, 1998 & JANUARY 31, 1998
In Thousands (000 omitted)
ASSETS AND OTHER DEBITS
Current Assets: OCTOBER JANUARY
1998 1998
<S> <C> <C>
Cash and short term investments $ 694 $ 1,619
Accounts and Notes Receivable 39,571 50,056
Less allowance for doubtful accounts 2,286 1,286
Net Accounts Receivable and Notes Receivable 37,285 48,770
Inventories:
Finished goods 53,067 48,497
Supplies 3,453 1,175
Prepaid Expenses 958 1,075
Deferred Income Taxes 2,496 2,496
Total Current Assets $ 97,953 $103,632
Property:
Property, plant and equipment $ 37,370 $ 37,472
Less accumulated depreciation, depletion
and amortization of property, plant and
equipment 14,009 13,737
Capital Leases, Net Accumulated Amortization
(Note 1) 9,544 10,747
Total Property $ 32,905 $ 34,482
Other Assets and Deferred Charges
Other Assets 322 621
Investment in Subsidiary 304 304
LT Note Receivable 500 0
TOTAL ASSETS AND OTHER DEBITS $131,984 $139,039
</TABLE>
See notes to financial statements
-1-
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED BALANCE SHEET - OCTOBER 31, 1998 & JANUARY 31, 1998
In Thousands (000 omitted)
LIABILITIES, RESERVES AND STOCKHOLDERS EQUITY
OCTOBER JANUARY
1998 1998
Current Liabilities:
<S> <C> <C>
Accounts payable - trade $ 5,667 $ 9,415
Short term borrowings - banks 6,899 0
Current portion of long-term debt 398 372
Current portion of obligations under
capital leases 1,574 1,620
Accrued liabilities
Outstanding gift certificates 2,025 2,011
Other accrued liabilities 11,447 12,109
Deferred gain on sale and leaseback 1,749 1,827
Total Current Liabilities $ 29,759 $ 27,354
Long-Term Debt:
Bonds, mortgages and similar debt 44,414 40,772
Capital Lease - Long Term Portion (Note 1) 15,155 16,285
Other Liabilities and Deferred Credits:
Deferred Fed Income Taxes 790 789
Deferred Gross Profit 2,501 3,837
Stockholders Equity:
Capital shares $ 14,767 $ 14,709
Pension Liability Adjustment (2,271) (2,271)
Retained Earnings 26,869 37,564
Total Stockholders Equity $ 39,365 $ 50,002
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $131,984 $139,039
</TABLE>
See notes to financial statements
-2-
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED OCTOBER 31, 1998 & NOVEMBER 1, 1997
In Thousands (000 omitted)
1998 1997
<S> <C> <C>
Net Sales $ 56,657 $ 60,577
Cost of goods sold, direct merchandising and
buying costs 39,812 42,401
Other revenues 1,359 1,430
Other costs and expenses applicable to other revenue
Selling, general and administrative expenses 20,884 18,915
Provision for doubtful accounts and notes 356 356
Other Income:
Miscellaneous other income 463 149
Income Deductions:
Interest and amortization of debt discount and
expenses 698 756
Interest Expense on Capital Leases (Note 1) 404 364
Miscellaneous income deductions 687 373
Net loss before income tax expense
and extraordinary items $ (4,362) (1,009)
Income tax expense 0 0
Net loss before extraordinary items $ (4,362) $ (1,009)
Extraordinary items less applicable tax 0 0
Net Loss $ (4,362) $ (1,009)
Weighted average number of common shares outstanding 2,204,984 2,204,984
Earnings per common share ($ 1.98) ($ 0.46)
Cash dividends per common share $ 0.16 $ 0.16
</TABLE>
See notes to condensed financial statements
-3-
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENT OF OPERATIONS
FOR NINE MONTHS ENDED OCTOBER 31, 1998 & NOVEMBER 1, 1997
In Thousands (000 omitted)
1998 1997
<S> <C> <C>
Net Sales $161,978 $167,478
Cost of goods sold, direct merchandising and
buying costs 113,634 115,007
Other revenues 4,250 4,092
Other costs and expenses applicable to other revenue
Selling, general and administrative expenses 57,542 55,696
Provision for doubtful acounts and notes 867 817
Other Income:
Miscellaneous other income 1,141 424
Income Deductions:
Interest and amortization of debt discount
and expenses 2,071 1,885
Interest Expense on Capital Leases (Note 1) 1,210 1,092
Miscellaneous income deductions 1,634 1,146
Net loss before income tax expense
and extraordinary items (9,589) (3,649)
Income tax expense 0 0
Net loss before extraordinary items $ (9,589) $ (3,649)
Extraordinary items less applicable tax 0 0
Net Loss $ (9,589) $ (3,649)
Weighted average number of common shares outstanding 2,204,984 2,204,984
Earnings per common share $ (4.35) $ (1.65)
Cash dividends per common share $ 0.16 $ 0.16
</TABLE>
See notes to financial statements
-4-
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED OCTOBER 31, 1998 & NOVEMBER 1, 1997
In Thousands (000 omitted)
OCTOBER OCTOBER
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income (Loss) $(9,590) $(3,649)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,346 3,364
Deferred gross profit (3,163) (3,362)
Deferred income taxes 0 0
Provision for losses on accounts receivable 867 817
Decrease (increase) in assets:
Accounts receivable 10,618 8,306
Inventories (6,848) (10,826)
Prepaid expenses (117) (64)
Other assets 0 0
Increase (decrease) in liabilities:
Accounts payable - trade 2,903 3,109
Accrued liabilities 1,188 797
Net cash provided by operating activities (562) (1,508)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, plant and equipment (5,906) (1,880)
Proceeds from sale of property,
plant, and equipment 4,136 0
Net cash used in investing activities (1,770) (1,880)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 2,700 (6,000)
Additions to (from) long-term debt 1,191 11,544
Principal payments on long-term debt &
obligations under capital leases (1,237) (1,193)
Stock options exercised and sales of capital stock
Purchase of treasury stock (43) (112)
Sale of treasury stock 52 25
Cash dividends (1,056) (1,050)
Long Term Investments 300 (600)
Long Term Note Receivable (500) 0
Net cash provided by (used in) financing activities 1,407 2,614
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (925) (774)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,619 1,467
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 694 $ 693
</TABLE>
-5-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
Notes to 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 October 31, 1998 and January 31, 1998 and the results of operations for
the three months ended October 31, 1998 and November 1, 1997, for nine
months ended October 31, 1998 and November 1, 1997 and changes in
financial position for three months ended October 31, 1998 and November 1,
1997.
3. The results of operations for the three months period ended October 31,
1998 and November 1, 1997 and the nine months period ended October 31,
1998 and November 1, 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 nine
months in sales. This lack of sales has forced larger than normal markdowns
to clear inventories, contributing to weak gross margins and a substantial
loss for the first nine months 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 during 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 were
affected in the third quarter 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 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.
(Continued on page 8)
-7-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED INCOME STATEMENTS
(Continued from page 7)
2. Liquidity and Capital Resources:
The quick and current ratios are 1.3 and 3.3, respectively for the third
quarter 1998 as compared to 1.2 and 3.1 for the same time period in 1997.
This indicates that the Company's liquidity remains 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 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 increased levels of inventory has increased short-term debt.
Inventories increased 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 NINE MONTHS ENDED
Oct 31,1998 Nov 1,1997 Oct 31,1998 Nov 1,1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Other income, net 2.4 2.4 2.6 2.4
102.4 102.4 102.6 102.4
Costs and expenses:
Costs of mdse sold 70.3 70.0 70.1 68.7
Selling,general & admin 36.9 31.2 35.5 33.3
Income(loss) from oper. (4.8) 1.2 (3.0) 0.4
Interest expense, net 2.9 2.9 2.9 2.6
Net loss (7.7) (1.7) (5.9) (2.2)
</TABLE>
Comparisons between the third 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 third quarter, due to the variation in
sesonal 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
third quarter. (Continued on page 9)
-8-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED INCOME STATEMENTS
(Continued from page 8)
Sales decreased by 6.5% in the third quarter of 1998 over the third
quarter of 1997 due to factors explained previously.
Cost of goods sold remained steady at 70.26% for the three month period
ended October 31, 1998 as compared to the same period for 1997.
Markdowns have increased to 22.1% of sales as of October 31, 1998 as
compared to 18.2% of sales on November 1, 1997. Selling, general, and
administrative expenses have increased as a percent of sales in
comparison to last year. As of October 31, 1998, they were 36.86% of
sales while they were 31.22% of sales as of November 1, 1997.
For the first nine months of 1998, cost of goods sold as a percent of
sales increased to 70.1%, while for the same time period in 1997 cost of
goods sold as a percent of sales was 68.7%. Selling, general, and
administrative expenses increased to 35.5% as a percent of sales.
Operating expenses increased in the first nine months 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. An increase in
lease expense from the ongoing reconstruction projects has also
contributed to an increase in operating expense. 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
As a result of many requests for certification of compliance regarding
Year 2000 issues, ZCMI has prepared the following statement for
disclosure of that certification. This statement has been created as of
October 26, 1998 and will be updated for any changes occurring in the
content.
ZCMI has developed a comprehensive strategy for updating its systems for
Year 2000 ( Y2K')compliance. The information technology ( IT') systems
include custom in-house software developed by employees of ZCMI and
software purchased or programmed by outside parties. These IT systems
include financial, credit, merchandising, Electronic Data Interchange
(EDI), and other types of systems as well as personal computer systems.
All software used in IT systems has been identified and assessed to
determine the extent of programming necessary to become Y2K compliant.
Programming required to be Y2K compliant is expected to be completed by
the end of the first fiscal quarter of 1999. Approximately 85% of the
programming is complete as of the date of this disclosure. Vendor
(Continued on page 10)
-9-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED INCOME STATEMENTS
(Continued from page 9)
developed software is anticipated to be made Y2K compliant through
upgrades and updates or replacement of vendor software by the end of the
second quarer of 1999.
ZCMI has identified some non-IT systems which may be impacted by the Y2K
problem, mostly involving vendors of elevator, escalator, fax machines,
and other equipment and is in the process of determining through
equipment suppliers, as well as equipment testing, the extent of any
renovations which may be required to make the equipment Y2K compliant.
These non-IT systems are minor in nature and would not significantly
impact the Company's operation.
ZCMI has also identified third parties with which there are significant
working relationships that could, in the event of a Y2K related failure,
have a material effect on its financial position and operating results.
Those third parties include energy and utility suppliers, merchandise
suppliers, communication vendors, and banking partners, including
bankcard merchants and processors. These relationships, especially with
the utility suppliers and banks, could have a material adverse effect on
the operating results and financial position of ZCMI. ZCMI is making
inquiries with these third parties to assess their Y2K readiness and
compliance. This process will be ongoing throughout the current and
next fiscal year.
ZCMI expects that costs to address Y2K issues will total approximately
$200,000 as part of normal fixed asset procurement. Nearly all of this
cost will be spent on equipment in the first half of 1999. Normal
salary and fringe benefit costs will be spent on the resolution of the
Y2K issue during the last half of fiscal 1998 and the first half of
fiscal 1999. Y2K issues have received a high priority within ZCMI and,
as a result, normal maintenance of some It systems have been delayed.
While such non-Y2K maintenance is expected to enhance operational
efficiencies and improve the quality of information available to
management, the delay of such maintenance is not expected to have an
impact on operations or the financial position of ZCMI.
Worst case Y2K scenarios could be as insignificant as a minor
interruption in shipping of merchandise resulting from an unanticipated
problem in the IT systems of any of the third parties with whom ZCMI
does business. The pervasiveness of the Y2K issue makes it likely that
previously unidentified issues will require remediation during the
normal course of business. In such a case, transactions can be held
until the IT system and other systems are repaired and the interruption
would have a minor effect on the operations and financial position of
ZCMI. On the other hand, a worst case Y2K scenario could be as
catastrophic as an extended loss of utility service resulting from the
(Continued on page 11)
-10-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED INCOME STATEMENTS
(Continued from page 10)
loss of power or communication ability from third party utilities. Such
an interruption would force ZCMI to close the affected stores until
power was restored and business could be conducted with customers. Such
a closure, if prolonged, could have a material effect on operating
results and financial position.
This statement is prepared for the purposes stated above and for
disclosure in quarterly and annual reports to the Securities and
Exchange Commission and, as such, is the extent of disclosure the
executive officers and senior management of ZCMI are willing to make at
the present time. As a public company, ZCMI is sensitive to the
disclosure given to any vendor, stockholder, or associated entity and
the disclosure contained herein is the absolute amount of any assurance
that ZCMI will achieve Year 2000 readiness.
"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.
-11-
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 October 31, 1998.
2. There were no securities of the Company sold by the Company during
the three months ended October 31, 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.
3. Shareholder proposals for action at the 1999 Annual Meeting that
are not requested to be included in the Company's 1999 Proxy
Statement must be received by the Company on or before March 20,
1998, which is the date provided in Rule 14a-4 as 45 days prior to
the day of the month on which the 1998 Proxy Statement was first
mailed to shareholders.
Shareholder proposals for action at the 1999 Annual Meeting that
are requested to be included in the Company's 1999 Proxy Statement
must be received by the Company on or before January 5, 1998, which
is 120 days prior to the day of the month on which the 1998 Proxy
Statement was first mailed to shareholders.
Item 6. Exhibits and Reports on Form 8-K.
None.
-12-
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:December 11, 1998 Keith C. Saunders
Keith C. Saunders,
Executive Vice President - CFO
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 694,000
<SECURITIES> 0
<RECEIVABLES> 39,571,000
<ALLOWANCES> (2,286,000)
<INVENTORY> 56,520,000
<CURRENT-ASSETS> 97,953,000
<PP&E> 61,941,000
<DEPRECIATION> (29,036,000)
<TOTAL-ASSETS> 131,984,000
<CURRENT-LIABILITIES> 29,759,000
<BONDS> 0
0
0
<COMMON> 14,767,000
<OTHER-SE> 24,958,000
<TOTAL-LIABILITY-AND-EQUITY> 131,984,000
<SALES> 161,978,000
<TOTAL-REVENUES> 166,228,000
<CGS> 113,634,000
<TOTAL-COSTS> 113,634,000
<OTHER-EXPENSES> 57,542,000
<LOSS-PROVISION> 867,000
<INTEREST-EXPENSE> 3,281,000
<INCOME-PRETAX> (9,589,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,589,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,589,000)
<EPS-PRIMARY> (4.35)
<EPS-DILUTED> (4.35)
</TABLE>
