TO: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 2
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED May 1, 1999
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 preceding 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 2,208,015 shares
Other shares, none
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
INDEX
TITLE PAGE NO.
Condensed Balance Sheet 1
Condensed Income Statement 3
Three Months Ended May 1, 1999 & May 2, 1998
Condensed Statement of Cash Flows 4
May 1, 1999 & May 2, 1998
Notes to Condensed Financial Statements 5
Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
Other Information 11
Signatures 12
Form 10-Q
Item 1. Financial Statements
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED BALANCE SHEET - MAY 1, 1999 & JANUARY 30, 1999
In Thousands (000 omitted)
ASSETS AND OTHER DEBITS
Current Assets: APRIL JANUARY
1999 1999
<S> <C> <C>
Cash and cash items $ 575 $ 1,193
ST Notes Receivable 400 0
Income Tax Refund Rec 1,242 1,242
Accounts and Notes Receivable 36,776 45,173
Less allowance for doubtful accounts 1,360 1,053
Net Accounts Receivable and Notes Receivable 35,416 44,120
Inventories:
Finished goods - LIFO cost, retail method 40,220 39,793
Supplies - FIFO cost 2,935 1,850
Prepaid Expenses 1,224 1,019
Deferred Income Taxes 3,836 3,836
Total Current Assets $85,848 93,053
Property:
Property, plant and equipment $46,213 $42,045
Less accumulated depreciation, depletion
and amortization of property, plant and
equipment 15,435 14,673
Capital Leases, Net Accumulated Amortization
(Note 1) 8,898 9,256
Total Property $39,676 $36,628
Other Assets and Deferred Charges:
Other Assets 322 322
Investment in Subsidiary 304 304
LT Note Receivable 2,107 2,107
TOTAL ASSETS AND OTHER DEBITS $128,257 $132,414
</TABLE>
See notes to condensed financial statements
-1-
<PAGE>
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED BALANCE SHEET - MAY 1, 1999 & JANUARY 30, 1999
In Thousands (000 omitted)
LIABILITIES, RESERVES AND STOCKHOLDERS EQUITY
APRIL JANUARY
1999 1999
Current Liabilities:
<S> <C> <C>
Accounts payable - trade $ 4,371 $ 7,407
Short term borrowings - banks (Note 2) 52,649 0
Current portion of long-term debt 417 408
Current portion of obligations under capital
leases 1,441 1,506
Accrued liabilities
Outstanding gift certificates 1,923 1,965
Other accrued liabilities 12,220 14,489
Deferred gain on sale and leaseback 1,748 1,757
Total Current Liabilities $ 74,769 $ 27,532
Long-Term Debt:
Bonds, mortgages and similar debt (Note 2) 1,361 48,512
Capital Lease - Long Term Portion (Note 1) 14,461 14,780
Other Liabilities and Deferred Credits:
Deferred Fed Income Taxes 0 0
Deferred Gross Profit 1,635 2,081
Stockholders Equity:
Capital shares $ 14,960 $ 14,867
Pension Liability Adjustment (3,399) (3,399)
Other stockholders equity 24,470 28,041
Total Stockholders Equity $ 36,031 $ 39,509
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $128,257 $132,414
</TABLE>
See notes to condensed financial statements
-2-
Form 10-Q
<TABLE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED INCOME STATEMENT THREE MONTHS ENDED May 1, 1999 & MAY 2, 1998
In Thousands (000 omitted)
1999 1998
<S> <C> <C>
Net Sales $48,636 $53,930
Cost of goods sold, direct merchandising and
buying costs 33,800 37,554
Other revenues 1,349 1,552
Other costs and expenses applicable to other revenue 0 0
Selling, general and administrative expenses 17,623 18,511
Provision for doubtful accounts and notes 252 257
Other Income:
Miscellaneous other income 436 487
Income Deductions:
Interest and amortization of debt discount
and expenses 857 679
Interest Expense on Capital Leases (Note 1) 361 402
Miscellaneous income deductions 1,099 549
Net loss before income tax expense and
extraordinary items $(3,571) $(1,983)
Income tax expense 0 0
Net loss before extraordinary items $(3,571) $(1,983)
Extraordinary items less applicable tax 0 0
Net Loss $(3,571) $(1,983)
Weighted avg. number of common shares outstanding 2,208,015 2,199,437
Earnings per common share $ (1.62) $ (0.90)
Cash dividends per common share $ 0.00 $ 0.16
</TABLE>
See notes to condensed financial statements
-3-
<TABLE>
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
CONDENSED STATEMENT OF CASH FLOWS May 1, 1999 & MAY 2, 1998
In Thousands (000 omitted)
April April
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income (loss) $(3,571) $(1,984)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,115 1,080
Deferred gross profit (2,202) (2,306)
Deferred income taxes 0 0
Provision for losses on accounts receivable 252 257
Decrease (increase) in assets:
Accounts receivable 8,053 7,109
Inventories (1,513) (1,919)
Prepaid expenses (205) (237)
Other Assets 0 0
Increase (decrease) in liabilities
Accounts payable -- trade ( 624) (2,372)
Accrued liabilities (565) (890)
Net cash provided by operating activities 740 (1,262)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,163) (3,151)
Proceeds from sale of property, plant and equipment 0 3,156
Net cash used in investing activities (4,163) 5
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 50,237 0
Additions (Reductions) to long-term debt (note 2) (47,151) 1,256
Principal payments on long-term debt obligations
under capital leases (374) (412)
Stock options exercised and sales of capital stock 0 0
(Purchase) Sale of treasury stock 93 31
Cash dividends 0 (352)
Long Term Investments 0 300
Long Term Note Receivable 0 (550)
Net cash provided by (used in) financing activities 2,805 272
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (618) (985)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,193 1,619
CASH AND CASH EQUIVALENTS AT END OF PERIOD 575 634
</TABLE>
-4-
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 2053. 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 up to 67 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 May 1, 1999 and the results of operations for three months ended May 1,
1999, and May 2, 1998 and cash flows for three months
ended May 1, 1999 and May 2, 1998.
The financial covenants of the loan agreement require ZCMI to maintain
working capital of $14,000,000 through July 31, 1999, then maintain
working capital of $20,000,000 thereafter. For purposes of the loan
agreement, Working capital is defined as Current Assets less Current
Liabilities and the outstanding principal balance under the loan
agreement, whether classified as long term liabilities or short term
liabilities. After calculating for the working capital covenant and
excluding long term mortgages, it was found that ZCMI was not in
compliance with the covenant. ZCMI is currently in negotiations with the
banking group to resolve the issue.
3. The results of operations for the three months period ended May 1, 1999
are not necessarily indicative of the results to be expected for the full
year.
-5-
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Prospective Information:
The continuing construction of the major interstate in the Salt Lake
Valley became overwhelming during 1998. The impact of the construction
drove many customers to competing stores not located close to the
interstate freeway. This construction is now at the halfway point and will
be continuing for two more years. Along with the interstate construction
project, ZCMI began construction on the most profitable unit in the
Company which contributed to a significant loss during 1998. These
situations combined with unplanned slower sales in the
construction-impacted South Towne store resulted in higher markdowns and
lower gross margin in the fall of 1998.
The University Mall store construction began in the fall of fiscal 1998
under the terms of a contract with the developer and local government
which stipulated the immediate construction of an addition to the
building. The construction is expected to be finished by mid-June 1999.
The store, which is presently owned, will then be sold to the developer
and leased back. That transaction, together with the incentives from local
government and the developer, and the sales and leaseback of fixturing,
will cover costs of a majority of the construction.
Future estimated capital expenditures include normal equipment and fixture
replacement estimated at $750,000 in excess of the University Mall
remodeling project. 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.
2. Liquidity and Capital Resources:
The quick and current ratios are 1.5 and 3.5, respectively for the first
quarter of 1999 as compared with 2.1 and 4.9 during 1998. This indicates
that the Company's liquidity remains adequate, although substantially
reduced. These ratios will fluctuate from quarter to quarter due to the
seasonality of inventory requirements. Lines of credit which the Company
has with banks, together with letters of credit, will be closely monitored
to provide required liquidity for current operations.
On April 15, 1999, ZCMI extended the terms of notes payable under various
line of credit agreements. Prior to the extension, notes had maturity
dates ranging from May 31, 1999 through July 31, 1999. Under the terms of
the extension agreements, the maturity date was extended to November 1,
2000 on all notes. In addition, the loan extension agreement contains
various loan covenants including
(Continued on page 7)
-6-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued from page 6)
financial covenants ZCMI must meet. The financial covenants require ZCMI
to (a)maintain working capital of at least $14,000,000 for the period
January 31, 1999 through July 31, 1999 and at least $20,000,000
thereafter; (b) maintain tangible net worth of at least $34,800,000 for
the quarter ending July 31, 1999 and increasing each quarter thereafter
through the quarter ending October 31, 2000 at which time tangible net
worth must equal $35,900,000; and (c) not incur net losses before taxes
greater than the following amounts for each of the stated quarters on an
on-going basis:
<TABLE>
Quarter Ending Amount of Loss
<C> <C>
July 31 $4,500,000
October 31 5,300,000
January 31 1,500,000
April 30 2,800,000
Based upon the Company's balance sheet at May 1, 1999, ZCMI was not
in compliance with the working capital requirement and is in negotiations
with the banking group to resolve the issue.
</TABLE>
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. This
decline is furthered by the reduction of sales resulting in declining
customer balances.
Long term notes have increased as a result of borrowing for the University
Mall remodeling, offset by a decline in Accounts Payable resulting from
tight control of purchasing.
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
May 1, 1999 May 2, 1998
<S> <C> <C>
Net Sales 100.0% 100.0%
Other Income, net 2.8 2.9
102.8 102.9
Costs and expenses:
Costs & merchandise sold 69.5 69.6
Selling, general & admin. 36.2 34.3
Income(loss) from operations (2.9) (1.0)
Interest expense, net 4.4 2.7
Net loss (7.3) (3.7)
</TABLE>
(Continued on page 8)
-7-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued from page 7)
Comparisons between the first 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 first 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
first quarter.
Sales decreased by 9.8% in the first quarter of 1999 over the first
quarter of 1998.
Costs of goods sold have remained steady at 69.5% for the three month
period ended May 1, 1999 as compared to 69.6% for the same period for
1998.
Selling, general and administrative expenses have increased as a percent
of sales. As of May 1, 1999, they were 36.2% of sales while they were
34.3% of sales as of May 2, 1998.
Depreciation and equipment lease expenses were a major cause of the
increase in operating expenses in the first quarter of 1999. This
increase is a result of the expansion and remodeling in the Layton Hills
and University Mall stores. Property tax expense also increased as a
result of the remodeling additions. Early retirement packages were
offered to certain employees of ZCMI at the stores and at the Service
Center which contributed to an increase in payroll and payroll taxes.
These increases were offset by lower health care expense, lower pension
expense and reduction of corporate promotional discounts. Interest income
has decreased over last year as accounts receivables decreased. This is a
result of further erosion of proprietary credit card usage by consumers.
Total operating expenses were less than the prior year, but because sales
were lower, the percentage of expense to sales has substantially
increased.
Year 2000 Issues
ZCMI has developed and is implementing 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
(Continued on page 9)
-8-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued from page 8)
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. As of the end of the fiscal
year, approximately 85% of the programming had been completed. Vendor
developed software is anticipated to be made Y2K compliant through
upgrades and updates or replacement of vendor software by the end of the
second quarter 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 respect to utility suppliers and
banks, could have a material adverse effect on the operating results and
financial position of ZCMI. ZCMI has made 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
will be spent on equipment in the first half of 1999. Normal salary and
fringe benefit costs was spent on the resolution of the Y2K issue during
the last half of fiscal 1998 and will also be spent during 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.
(Continued on page 10)
-9-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued from page 9)
Different Y2K impact 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 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.
"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-
Form 10-Q
ZIONS COOPERATIVE MERCANTILE INSTITUTION
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are filed with this report:
27 Financial Data Schedule
b) On February 11, 1999, the Company filed a current report on Form 8-K
to report the determination of the Board of Directors of the Company
not to declare a dividend for the quarter ending January 30, 1999.
-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 CO-OPERATIVE MERCANTILE INSTITUTION
Date October 7, 1999 Keith C. Saunders
Keith C. Saunders, Secretary
Executive Vice President
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> MAY-01-1999
<CASH> 575,000
<SECURITIES> 0
<RECEIVABLES> 38,418,000
<ALLOWANCES> 1,360,000
<INVENTORY> 43,155,000
<CURRENT-ASSETS> 85,848,000
<PP&E> 69,943,000
<DEPRECIATION> 30,267,000
<TOTAL-ASSETS> 128,257,000
<CURRENT-LIABILITIES> 74,769,000
<BONDS> 0
0
0
<COMMON> 2,160
<OTHER-SE> 36,028,840
<TOTAL-LIABILITY-AND-EQUITY> 128,257,000
<SALES> 48,636,000
<TOTAL-REVENUES> 49,985,000
<CGS> 33,800,000
<TOTAL-COSTS> 51,423,000
<OTHER-EXPENSES> 1,099,000
<LOSS-PROVISION> 252,000
<INTEREST-EXPENSE> 1,218,000
<INCOME-PRETAX> (3,571,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,571,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,571,000)
<EPS-BASIC> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
