SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 30, 1999
Commission File No. 0-1391
ZIONS COOPERATIVE MERCANTILE INSTITUTION
(Exact name of registrant as specified in charter)
Utah 87-0196220
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
2200 South 900 West, Salt Lake City, Utah 84137
(Address of principal executive offices Zip Code)
Registrant's telephone number, including area code 801-579-6179
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Capital Stock - $.001 par value; outstanding at
April 28, 1999, 2,159,593 shares.
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 for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
Aggregate market value at April 28, 1999 of the voting stock held by
non-affiliates of the Registrant was $31,584,047.
DOCUMENTS INCORPORATED BY REFERENCE
(1) The Registrant's Annual Report to Stockholders for the year ended
January 30, 1999 (Part II).
(2) The Registrant's 1998 Proxy Statement (Notice of Annual Meeting of
Shareholders to be held May 26, 1999) pursuant to Regulation 14A (Parts I
and III).
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) Zions Cooperative Mercantile Institution (Registrant) was
organized as a Utah Corporation in 1868 and was the first
full-line department store in the United States. Notwithstanding
the Registrant's name, the Registrant does not operate as a
cooperative, and operates on a for-profit basis. The Registrant
is in the retail line of business: operating both full-line,
conventional department stores, men's and women's ready to wear,
and a specialty store. The full-line stores are located in
downtown 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 store is located in St. George,
Utah. The Registrant is one of the major tenants with full-line
stores in six suburban regional shopping centers in Utah and two
suburban regional shopping centers in Idaho.
(b) Not applicable as Registrant operates one line of business as
previously described.
(c) (1) (i) No department or class accounted for 10% or more of
revenue in any of the last three fiscal years.
(ii) through (iv) Not applicable
(v) The business of the Registrant follows the seasonal
pattern of full-line department stores.
(vi) The Registrant offers to sell on the basis of cash, bank
credit card, its own option charge account, third party
credit cards. Registrant's option charge account is a
typical revolving charge account with finance charges
assessed on the unpaid balance at 1-3/4% per month.
Registrant's sales made on credit vary by store but range
from approximately one-third to one-half of sales at each
store location.
(vii) through (ix) Not applicable
(x) Substantial competition is found in all store locations
from other full-line, conventional department stores,
chain department stores, discount stores, and specialty
stores.
(xi) and (xii) Not applicable
(xiii) At year end the Registrant had 2,465 employees
(full-time equivalent), a decrease of 33 from the prior
year.
(d) The Registrant has no operations in any foreign country,
nor does the Registrant have any sales nor obtain revenue from
any foreign country. The Registrant's operations are limited to
the States of Utah and Idaho.
ITEM 2. PROPERTIES.
The Registrant owns or leases eleven major retail department
stores in the States of Utah and Idaho as follows:
Downtown Salt Lake City, Utah, a store of approximately 331,000
square feet on the same site as and part of a large downtown covered
shopping mall with parking for 2,300 cars. The move into the facility was
completed in 1976. The store was completely remodeled over a two year
period ended December 31, 1992. This building is considered adequate for
present needs. The lease on this facility, which is recorded as a capital
lease, will expire in 2016.
Suburban store in Cottonwood Mall, 4835 Highland Drive, Salt Lake
City, Utah erected in 1962 containing approximately 150,000 square feet on
two levels. In 1978 a third level was added to the facility, increasing the
total space of the store to 220,000 square feet. The first and second
floors of the store were completely remodeled during 1979. The first floor
was again partially remodeled and the second floor partially remodeled,
adding 16,600 square feet during the year ended February 3, 1996. This
building is considered adequate for present needs. The operating lease
expires February 1, 2012.
Downtown Ogden, Utah, was an owned building erected in 1967. This
building was sold during the year ended January 28, 1995 and the store
location was moved across Washington Boulevard to the Ogden City Mall. The
mall location contains approximately 135,000 square feet on two levels. The
building is considered adequate for present needs. The operating lease
expires September 2004.
Suburban store in Valley Fair Mall, 3601 South 2700 West, Salt
Lake City, Utah is a one-level store of approximately 105,000 square feet
erected in 1970. This store is one of three main anchor tenants of the
mall. The store was partially remodeled during the year ended January 28,
1995. This building is considered adequate for present needs. The
operating lease expires July 26, 2009.
Suburban store in University Mall, 1300 South State Street, Orem,
Utah is an owned, three-level store of approximately 163,000 square feet.
Provisions have been made to enable the store to expand to 225,000 square
feet on three levels when necessary. The store is one of four major anchor
stores for the mall. The store is currently being remodeled to add 40,000
square feet.
Suburban store in Cache Valley Mall, 1400 North Main Street,
Logan, Utah is a one-level store of approximately 61,000 square feet. The
store is one of three major anchor stores of the mall. This building is
considered adequate for present needs. The operating lease expires May 1,
2001.
Suburban store in Layton Hills Mall, l400 North Hill Field Road,
Layton, Utah is a two-level store of approximately 123,596 square feet. The
store is one of three major anchor stores of the mall. This building is
considered adequate for present needs. The second floor was partially
remodeled during the year ended February 3, 1996. An additional 38,000
square feet was added on both levels during the year ended January 30, 1999.
The operating lease expires May 31, 2015.
Suburban store in Pine Ridge Mall, 4235 Yellowstone Avenue,
Chubbuck, Idaho is a two-level store of approximately 123,000 square feet.
The store is one of three major anchor stores of the mall. This building is
considered adequate for present needs. The operating lease expires July 28,
2006.
Suburban store in Grand Teton Mall, 2420 East 17th Street, Idaho
Falls, Idaho is a two-level store of approximately 123,000 square feet. The
store is one of three major anchor stores of the mall. This building is
considered adequate for present needs. The operating lease expires July 31,
2009.
Suburban store in South Towne Center, 10600 South 110 West, Sandy,
Utah is a two-level store of approximately 200,000 square feet. The store is
one of four major anchor stores of the center. The store was partially
remodeled in the year ended February 1, 1997. This building is considered
adequate for present needs. The operating lease expires July 31, 2011.
Suburban store in Red Cliffs enclosed mall, 1720 East Red Cliff
Drive, St. George, Utah is a one level store of approximately 40,000 square
feet. The store is one of three major anchor stores for the mall. This
building is considered adequate for present needs. The operating lease
expires July 5, 2015.
The Registrant leases two men's and women's ready to wear and one
specialty department store in the state of Utah as follows:
Suburban men's and women's ready to wear store in Fashion Place
Mall, 6253 South State Street, Murray, Utah is a one-level store of
approximately 26,000 square feet. This building is considered adequate for
present needs. The operating lease expires August 1, 1999.
Suburban men's and women's ready to wear store in Foothill
Village, 1420 Foothill Boulevard, Salt Lake City, Utah is a one-level store
of approximately 25,000 square feet. The building is considered adequate
for present needs. The operating lease expires August 3, 2003.
Downtown specialty store in St. George, Utah, a store specializing
in home furnishings The store contains 30,000 square feet and is considered
adequate for present needs. The operating lease expires May 1, 1999.
The Registrant also leases a corporate headquarters/service center
building in Salt Lake City, Utah, for its central office functions and for
the receiving, marking, and distribution of all materials for sale in the
Company's stores. This building comprising 343,000 square feet was
completed and occupied in April 1975 and is considered adequate for present
needs. During the two years ended January 31, 1992, ZCMI upgraded its
distribution system and increased capacity approximately 34,000 square feet
by adding two mezzanine floors. The lease, which is recorded as a capital
lease, expires August 1, 2015. Two additional small warehouses are leased
for storage of display and other items, comprising approximately 12,000
square feet in total.
ITEM 3. LEGAL PROCEEDINGS.
There were no pending legal proceedings of a material nature to
which Registrant was subject at January 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
Cash dividends are declared quarterly in January, April, July, and October
each year. The range of high and low bid quotations for ZCMI's capital
stock is shown below for each quarterly period during the past two years.
The stock is traded on the over-the-counter market in Salt Lake City and is
quoted in the local newspapers.
<TABLE>
Year Ended
Quarter 1999 1998
<S> <C> <C> <C> <C>
1 $14.37 - $15.12 $12.50 - $12.63
2 $14.50 - $15.00 $12.50 - $13.25
3 $14.62 - $15.00 $13.25 - $14.63
4 $15.12 - $15.88 $14.50 - $14.50
</TABLE>
The approximate number of stockholders at April 15,1999 was 1,540.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data
(Dollars in thousands except per share amounts
<TABLE>
Year ended: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Sales & Other Income $247,495 $257,474 $259,599 $254,371 $244,924
Net Income (Loss) (8,466) 209 1,838 582 3,624
Total Assets 132,414 139,039 137,618 136,505 144,630
Long-Term Debt 29,292 57,057 42,955 56,406 50,974
Per Share Amounts:
Earnings (Loss) (3.93) 0.09 0.84 0.27 1.69
Cash Dividends Declared 0.48 0.63 0.60 0.60 0.60
Book Value 18.29 23.24 23.92 23.64 24.91
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Management's Discussion and Analysis of Operations
Overview of 1998
A myriad of unfortunate situations combined with construction on the most
profitable unit in the company and continuing construction on the main
interstate freeway in the company's major market area contributed a
significant loss. Slow sales in the spring forced higher markdowns and
reduced gross margins during the summer. This situation combined with
unplanned slower sales in the construction-impacted Southtowne store
resulted in higher markdowns and lower gross margin later in the fall.
A planned remodeling effort was completed in the Layton Hills Mall store,
which resulted in increased sales in that unit. However, as a result of
competition in the Utah County market, it was decided to immediately begin
remodeling in the University Mall store. This remodeling was undertaken in
the fall of the year, a prime retailing season, in order to gain
construction rebates from local government and the mall developer. The
remodeling had a substantial effect on sales in this most profitable unit in
ZCMI, along with increasing interest expense to finance the construction.
The continuing construction on 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. The resulting slower sales contributed to the lower gross
margin through exceptionally higher markdowns as has been noted above.
As shown below, total sales decreased 4.3% for fiscal 1998, compared to a
decrease of 0.9% for fiscal 1997, and a slight 1.9% increase in fiscal 1996.
The East Bay store, which had been converted to an outlet store in fiscal
1992, was closed on May 1st, 1998. Comparable store sales for locations
open during all of fiscal 1998 had a decrease of 4.0%, compared to a
decrease of 0.9% for fiscal 1997, and a 2.3% increase for fiscal 1996.
<TABLE>
Sales
Fiscal Year 1998 1997 1996
<S> <C> <C> <C>
Total sales $238,143,100 $248,828,800 $251,180,200
Comp. store sales 237,848,000 247,651,000 249,781,000
Other Income 9,352,204 8,645,431 8,419,260
Net Income (Loss) (8,466,414) 209,410 1,837,625
Total sales % incr. (decr.) (4.3) (0.9) 1.9
Comp. store sales
% incr. (decr.) (4.0) (0.9) 2.3
Other Inc. % increase 8.2 2.7 6.1
Earnings (Loss) per
common share ($3.93) $0.09 $0.84
</TABLE>
Other income increased 8.2% for fiscal 1998 as compared to an increase of
2.7% for fiscal 1997 and 6.1% for fiscal 1996. Other income is primarily
interest income from customer accounts and amortization of deferred gross
profit from the sales of furniture, fixture, and equipment. Interest income
had been declining as a result of continuing consumer usage of third party
credit, but this trend was reversed as ZCMI increased the interest rate on
outstanding account balances to 21% from the previous 18% and began to
charge late payment fees. This change was effective in September 1997. An
analysis of the average percent of total credit balances paid and annual
turnover of credit balances is shown below.
Analysis of Credit Balances
<TABLE>
Fiscal Year: 1998 1997 1996
<S> <C> <C> <C>
Average Monthly Collection Percent 22.27% 21.79% 21.97%
Annual Turnover 2.67 2.61 2.61
</TABLE>
The average monthly collection percent has increased to 22.27% in fiscal
1998 as a result of customers paying balances more quickly to avoid interest
charges. The increase also reflects the utilization of low interest third
party credit by consumers to pay off higher interest debt.
Retailing Overview
The retailing industry has been affected by consolidations within store
groups. These consolidations are expected to slow as the number of
available acquisition targets decrease and retailers try to increase
efficiency. Sales will continue to be difficult as many major areas are
overstored and some fallout of retailers will happen as a result of the
intensified competition for the consumer buying dollar.
The economy in the market areas of ZCMI continues to be steady, although the
economy is expected to slow in the future. Competition has increased in
these market areas, particularly from national lower to middle price point
retailers. This competition will impact sales growth in those lower to
middle price point areas. As noted, continuing construction on the freeway
system will have an affect on some units in the company.
ZCMI has taken an aggressive position to combat the increasing competition
and loss of gross margin. The management of ZCMI formulated a plan called
"Project 2000" and are currently implementing the structure of that plan
throughout the organization to both reduce expense and increase revenue and
profitability. It is expected to be fully implemented during the current
fiscal year.
Analysis of Operations
Cost of Merchandise Sold
Cost of merchandise sold includes the cost of merchandise and the related
buying cost. Cost of merchandise sold increased to 72.3% during fiscal
1998, as compared to 68.6% in fiscal 1997 and 68.9% in fiscal 1996 as
depicted in the chart below.
<TABLE>
Fiscal Year 1998 1997 1996
<S> <C> <C> <C>
Cost of Merchandise Sold $172,060,464 $170,665,413 $172,950,259
Costs as a percent of Sales 72.3% 68.6% 68.9%
</TABLE>
The increase in cost of merchandise sold results from increases in costs of
purchases, in markdowns taken as described above, and in shrinkage. These
changes are shown below:
<TABLE>
Cost of Merchandise Sold Factors
(as a percent to total sales)
Fiscal Year: 1998 1997 1996
<S> <C> <C> <C>
Cost purchases percent 55.5% 54.9% 55.3%
Markdowns (costed) 13.7 11.2 11.0
Shrinkage (costed) 1.2 0.7 0.7
Discounts on invoices (1.4) (1.4) (1.4)
Workroom costs 1.3 1.2 1.3
Other buying costs 2.0 2.0 2.0
Total costs of merchandise sold 72.3% 68.6% 68.9%
</TABLE>
Comparisons between the fiscal periods noted above are affected by several
trends. The increase in the costs of purchases is affected by the
calculation of LIFO inventories. This calculation resulted in a charge to
cost of merchandise sold of $1,294,627 during fiscal 1998. LIFO
calculations resulted in a credit to cost of merchandise sold of $534,800
during fiscal 1997 while the LIFO charge to cost of merchandise sold during
fiscal 1996 was $96,863. Markdowns increased as a result of slower sales
and inventories which were consistently above allowances and the causes of
those slower sales are detailed above.
Selling, General, and Administrative Expenses
As shown in the chart below, selling, general and administrative expenses
increased to 34.0% as a percent to sales and other income during fiscal
1998. This compares to 31.9% in fiscal 1997 and 30.7% in fiscal 1996.
Selling, General and Administrative Expenses
<TABLE>
Fiscal Year 1998 1997 1996
<S> <C> <C> <C>
Selling, general and
administrative expenses $84,253,239 $82,196,580 $79,713,352
Expenses as a percent to sales
and other income 34.0% 31.9% 30.7%
Percent increase 2.5 3.1 3.0
</TABLE>
Expenses have increased as a result of changes in the minimum wage laws,
affecting payroll and payroll taxes. As part of "Project 2000" described
above, some restructuring charges also affected expense. Depreciation and
equipment lease expense have also increased as a result of the expansion and
remodeling in the Layton Hills store. Property tax expense also increased
as a result of remodeling additions. These increases were offset by lower
health care expense, lower pension expense and reduction of corporate
promotional discounts. The dollar increase in expense was substantially
less than the prior year dollar increase, but because sales were lower, the
percentage of expense to sales has substantially increased.
FINANCIAL CONDITION
Financial Objective
The objectives of ZCMI's financial policy are to provide the Company and its
shareholders with an improved return on investment, a solid capital
structure and a degree of financial flexibility. The Company expects that
funds required to finance expansion and refurbishment of existing stores and
future expansions will be provided by internally generated funds, the
leasing of buildings and fixtures, and by short-term and long-term debt
financing.
Cash Flows
Company funds generated by operations, investing and financing activities as
reported in the Statement of Cash Flows are summarized below. See also
Notes to Financial Statements for additional information regarding the
Statement of Cash Flows.
Net cash from operating activities during fiscal 1998 after amortization,
depreciation, and other non-cash adjustments, provided more cash than was
used. Cash was provided by sharply higher accounts receivable payments and
by substantial reduction in inventory needs. Cash was used in operating
activities through payments on accounts payable.
Net cash from investing activities during fiscal 1998 used more cash than
was provided. Cash was provided from the proceeds of the sale of property,
plant and equipment which was subsequently leased back. Cash was used to
purchase property, plant and equipment used in the remodeling of the ZCMI
Layton Hills Mall store and in the remodeling of the University Mall store.
The categories of capital expenditures are summarized below:
Capital Expenditures
<TABLE>
Fiscal Year: 1998 1997 1996
<S> <C> <C> <C>
Furniture, fixtures and equipment $2,094,070 $4,616,034 $3,887,631
Store remodeling and improvement 5,823,920 4,608,485 1,360,802
Total Capital Expenditures $7,917,990 9,224,519 5,248,433
</TABLE>
Capital expenditures during fiscal 1998 consisted of the completion of the
addition to the Layton Hills store and the beginning of a 40,000 square foot
addition to the University Mall store. The University Mall store
construction was begun 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 June 1, 1999. The store, which is presently
owned, will then be sold to the developer and leased back. That
transaction, together with incentives from local government and the
developer, and the sale and leaseback of fixturing, is estimated to cover
all costs of construction with the exception of approximately $2,500,000 of
the costs.
Capital expenditures during fiscal 1997 consisted of the beginning 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 begun in the fall of the fiscal year in order to comply with the lease
option and was substantially finished by December 15, 1997 with the
exception of new fixturing which was installed by the end of 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.
Capital expenditures during fiscal 1996 consisted of the completion of a
major remodeling project on the second floor of the South Towne Mall store.
A reengineering of the advertising area was completed, at which time the
computer equipment, together with upgraded computer equipment in the buying
area, were sold and leased back. The furniture delivery truck fleet was
replaced with newer vehicles and the merchandising software project was
completed.
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 and financing activities as described
in financial objectives. Lines of credit, as shown in detail in the chart
below, are considered adequate to fund the amounts necessary for capital
expenditures, dividends and other cash needs.
Unsecured Lines of Credit
<TABLE>
Fiscal Year 1998 1997 1996
<S> <C> <C> <C>
Used lines of credit $47,043,187 $38,897,019 $34,000,000
Unused lines of credit 6,956,813 15,102,981 26,000,000
Total $54,000,000 $54,000,000 $60,000,000
</TABLE>
Some covenants with respect to the lines of credit were non-compliant, but
these were waived and a loan syndication agreement was signed with all the
financial institutions involved in the lines of credit detailed above. The
agreement, which was signed on April 15, 1999, guarantees lines of credit to
$53,000,000, and is subject to review during the fourth quarter of fiscal
1999. Several covenants are contained in the agreement, as mentioned in
the notes to the financial statements, and the agreement is secured by
inventory and accounts receivable.
Net cash used in financing activities during fiscal 1998 provided more cash
than was used in financing activities. Cash was provided from utilitization
of lines of credit with long term maturities as well as the sale of ZCMI
capital stock to the employee 401K plan. Cash was used to reduce principal
balances on the mortgage, promissory notes, and obligations under capital
leases, as well as in the payment of dividends.
As a result of the above, there was a decrease in cash and cash equivalents
during fiscal 1998.
Financial Ratios:
Liquidity and capital resources can be measured by the following ratios:
Ratios
<TABLE>
Fiscal Year 1998 1997 1996
<S> <C> <C> <C>
Cash and short-term
investments $ 1,193,261 $ 1,619,319 $ 1,467,308
Net accounts receivable 44,120,355 48,770,039 50,573,755
Total 45,313,616 50,389,358 52,041,063
Total current assets 93,052,515 103,632,072 103,693,709
Total current liabilities 27,532,449 27,353,797 37,899,526
Quick ratio 1.65 times 1.84 times 1.37 times
Current ratio 3.38 times 3.79 times 2.74 times
Long term debt $ 65,204,788 $ 59,049,190 $ 45,159,529
Stockholders equity 39,509,476 50,001,773 51,775,920
Total capitalization $104,714,264 $109,050,963 $ 96,935,449
LT Debt to equity ratio 165.0% 118.1% 87.2%
LT Debt to capitalization
ratio 62.3% 54.1% 46.6%
Return on equity (21.4%) 0.4% 3.5%
</TABLE>
As indicated in the table above, the quick ratio has increased from 1.37
times in fiscal 1996 to 1.65 times in fiscal 1998. This results from a
decrease in net Accounts Receivable and the reclassification of lines of
credit to long term debt from short term debt. The reclassification in the
last two fiscal years came as a result of renegotiated credit lines. The
decrease in Accounts Receivable comes as a result of further erosion of
proprietary credit card usage by consumers as discussed above. The current
ratio also increased from 2.74 times in fiscal 1996 to 3.38 times in fiscal
1998 for much the same reasons. Also affected by the reclassification of
debt are both the debt to equity ratio and the debt to capitalization ratio.
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 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 cost
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.
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.
Anticipated Effect of Pronouncements
During the past fiscal year, ZCMI was required to adopt SFAS No. 130
entitled "Reporting Comprehensive Income", as well as adopting SFAS 131
entitled "Disclosure About Segments of an Enterprise and Related
Information" and SFAS 132 entitled "Employers' Disclosure about Pensions and
Other Postretirement Benefits. Their effects were not material and they
appear in the financial statements as required by the pronouncements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information for response to the financial statements portion of
this item is contained in Exhibit 13 attached to this report. Selected
quarterly financial data required by this item is not furnished because
ZCMI's capital stock is not quoted on the National Association of Securities
Dealers Automated Quotation System.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change of accountants nor disagreement with
accountants during the twenty-four months prior to January 30, 1999.
Therefore, no response to this item is necessary.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information for response to this item is contained in the 1998
Proxy Statement incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information for response to this item is contained in the 1998
Proxy Statement incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information for response to this item is contained in the 1998
Proxy Statement incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information for response to this item is contained in the 1998
Proxy Statement incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: Page
Independent Auditors' Report *
Balance Sheets as of January 30, 1999 and
January 31, 1998 *
Statements of Income for the Years Ended
January 30, 1999, January 31, 1998, and
February 1, 1997 *
Statements of Stockholders' Equity for the
Years Ended January 30, 1999, January 31, 1998,
and February 1, 1997 *
Statements of Cash Flows for the Years Ended
January 30, 1999, January 31, 1998, and
February 1, 1997 *
Notes to Financial Statements *
Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the information is shown
in the financial statements.
* Refer to Exhibit 13, attached to this form 10-K
3. Exhibits
Exhibit No.
(3) Articles of incorporation and by-laws Previously filed
(4) Instruments defining the rights of
security holders, including indentures Previously filed
(9) Voting Trust Agreements None
(10) Material contracts Previously filed
(11) Statement regarding computation of Refer to Annual Report
per share earnings to Stockholders for
year ended January 30,
1999 incorporated
herein by reference
(12) Statements regarding computation
of ratios Not applicable
(13) Annual report to stockholders Filed Attached
(18) Letter regarding change in accounting
principles Not applicable
(19) Previously unfiled documents None
(22) Subsidiaries of ZCMI None
(23) Published report regarding matters
submitted to vote of stockholders None
(25) Power of attorney None
(29) Information from reports furnished to
state insurance regulatory authorities None
(b) Reports on Form 8-K None
(c) Refer to (a) (3) above
(d) Separate financial statements - not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) ZIONS COOPERATIVE MERCANTILE INSTITUTION
By (Signature and Title)/s/ KEITH C. SAUNDERS EXECUTIVE V.P. - CFO
Date , 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
(Signature and Title) /s/ Richard H. Madsen President and Director
(Date) , 1999
(Signature and Title) /s/ Keith C. Saunders Executive V.P., CFO, and
Director
(Date) , 1999
(Signature and Title) /s/ R. Barry Arnold Vice President and Director
(Date) , 1999
(Signature and Title) /s/ Patricia Madsen Director
(Date) , 1999
(Signature and Title) /s/ S. F. Eccles Director
(Date) , 1999
(Signature and Title) /s/ A. Blaine Huntsman Director
(Date) , 1999
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-1272 of Zions Cooperative Mercantile Institution on Form S-8 of our
report dated April 19, 1999, appearing in this Annual Report on Form 10-K of
Zions Cooperative Mercantile Institution for the year ended January 30,
1999.
Salt Lake City, Utah
April 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 1,193,261
<SECURITIES> 0
<RECEIVABLES> 45,173,168
<ALLOWANCES> (1,052,813)
<INVENTORY> 41,642,032
<CURRENT-ASSETS> 93,052,515
<PP&E> 65,775,213
<DEPRECIATION> 29,146,541
<TOTAL-ASSETS> 132,414,132
<CURRENT-LIABILITIES> 27,532,449
<BONDS> 0
0
0
<COMMON> 2,160
<OTHER-SE> 39,507,316
<TOTAL-LIABILITY-AND-EQUITY> 132,414,132
<SALES> 238,143,100
<TOTAL-REVENUES> 247,495,304
<CGS> 172,060,464
<TOTAL-COSTS> 260,719,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,376,352
<INTEREST-EXPENSE> 4,405,515
<INCOME-PRETAX> (13,223,914)
<INCOME-TAX> 4,757,500
<INCOME-CONTINUING> (8,466,414)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,466,414)
<EPS-PRIMARY> (3.93)
<EPS-DILUTED> (3.93)
</TABLE>
ZIONS COOPERATIVE
MERCANTILE INSTITUTION
Financial Statements as of January 30, 1999 and January 31, 1998 and for Each
of the Three Years in the Period Ended January 30, 1999 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 30, 1999 and January 31, 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 30, 1999. 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 30, 1999 and January 31,
1998, and the results of its operations and its cash flows for each of the
three years in the period ended January 30, 1999 in conformity with generally
accepted accounting principles.
<TABLE>
April 19, 1999
ZIONS COOPERATIVE MERCANTILE INSTITUTION
BALANCE SHEETS AS OF JANUARY 30, 1999 AND JANUARY 31, 1998
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $1,193,261 $1,619,319
Accounts receivable (less allowance for
doubtful accounts of $1,052,813 and
$1,285,622, respectively) 44,120,355 48,770,039
Income tax refund receivable 1,242,000
Inventories 41,642,032 49,671,933
Prepaid expenses 1,018,937 1,074,590
Deferred income taxes 3,835,930 2,496,191
Total current assets 93,052,515 103,632,072
PROPERTY, PLANT, AND EQUIPMENT:
Land 177,058 177,058
Buildings and improvements 4,115,988 4,256,933
Leasehold improvements 18,679,551 16,505,903
Furniture, fixtures, and equipment 14,169,260 13,392,564
Leased property under capital leases 23,729,951 24,570,847
Construction in progress 4,903,405 3,139,587
Total 65,775,213 62,042,892
Less accumulated depreciation and
amortization 29,146,541 27,561,257
Property, plant, and
equipment - net 36,628,672 34,481,635
DEFERRED INCOME TAXES 2,107,407
OTHER ASSETS 625,538 925,538
TOTAL $132,414,132 $139,039,245
</TABLE>
See notes to financial statements.
<TABLE>
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
BALANCE SHEETS AS OF JANUARY 30, 1999 AND JANUARY 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $7,406,513 $9,414,512
Current portion of long-term debt 407,557 372,250
Current portion of obligations under
capital leases 1,505,617 1,620,410
Accrued liabilities:
Salaries and commissions 1,945,539 2,001,202
Sales, payroll, and other taxes 4,138,548 4,140,998
Income taxes payable 69,644
Outstanding gift certificates 1,965,120 2,010,863
Pension liability 4,159,235 2,558,959
Other 4,247,335 3,337,941
Deferred gain on sale and leaseback 1,756,985 1,827,018
Total current liabilities 27,532,449 27,353,797
LONG-TERM DEBT 48,511,693 40,771,989
DEFERRED INCOME TAXES 789,567
LONG-TERM DEFERRED GAIN ON SALE
AND LEASEBACK 2,080,593 3,837,578
OBLIGATIONS UNDER CAPITAL LEASES 14,779,921 16,284,541
TOTAL LIABILITIES 92,904,656 89,037,472
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Capital stock - par value $.001; 5,000,000 shares authorized;
2,159,593 and 2,151,660 shares issued at January 30,
1999 and January 31, 1998, respectively 2,160 2,152
Paid-in capital 14,864,929 14,706,971
Accumulated other comprehensive loss, net of deferred
tax effect of $2,039,471 and $1,362,858,
respectively (3,399,120) (2,271,431)
Retained earnings 28,041,507 37,564,081
Total stockholders' equity - net 39,509,476 50,001,773
TOTAL $132,414,132 $139,039,245
</TABLE>
See notes to financial statements.
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 30, 1999,
JANUARY 31, 1998, AND FEBRUARY 1, 1997
1999 1998 1997
<S> <C> <C> <C>
NET SALES AND OTHER INCOME $247,495,304 $257,474,231 $259,599,460
COSTS AND EXPENSES:
Cost of merchandise sold 172,060,464 170,665,413 172,950,259
Selling, general, and
administrative expenses 84,253,239 82,196,580 79,713,352
Interest expense:
Borrowings 2,718,728 2,514,357 2,495,892
Capital leases 1,686,787 1,762,823 1,918,675
Total costs and expenses 260,719,218 257,139,173 257,078,178
INCOME (LOSS) BEFORE INCOME
TAX (EXPENSE) BENEFIT (13,223,914) 335,058 2,521,281
INCOME TAX (EXPENSE) BENEFIT 4,757,500 (125,648) (683,656)
NET INCOME (LOSS) $(8,466,414) $209,410 $1,837,625
NET INCOME (LOSS) PER COMMON SHARE:
Basic $(3.93) $0.10 $0.85
Diluted $(3.93) $0.09 $0.84
AVERAGE COMMON SHARES:
Basic 2,155,627 2,158,071 2,162,114
Diluted 2,155,627 2,224,736 2,189,322
See notes to financial statements.
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998, AND FEBRUARY 1,
1997(Page 1 of 2)
</TABLE>
<TABLE>
Capital Stock Paid-in
Total Shares Amount Capital
<S> <C> <C> <C> <C>
BALANCE, FEB. 4, 1996 $51,062,144 2,159,745 $2,160 $14,729,203
Comprehensive income:
Net income 1,837,625
Other comprehensive income:
Excess of accumulated benefit
obligation over fair value of pension
plan asset, net of deferred
taxes of $61,124 101,876
Total comprehensive
income 1,939,501
Purchases of treasury
stock (79,816)
Issuance of capital stock
(net of 6,726 shares of
treasury stock) 166,830 4,738 4 87,010
Cash dividends
($.60 a share) (1,312,739)
BALANCE, FEBRUARY 1, 1997 51,775,920 2,164,483 2,164 14,816,213
Comprehensive loss:
Net income 209,410
Other comprehensive expense:
Excess of accumulated benefit obligation over fair value of pension
plan asset, net of
deferred taxes of
$278,732 (464,557)
Total comprehensive
loss (255,147)
Purchases of treasury
stock (335,523)
Issuance of capital stock (net of 25,008 shares
of treasury stock) 226,269 (12,823) (12) (109,242)
Cash dividends ($.63 a
share) (1,409,746)
BALANCE, JANUARY 31, 1998 50,001,773 2,151,660 2,152 14,706,971
Comprehensive loss:
Net loss (8,466,414)
Other comprehensive expense:
Excess of accumulated benefit obligation over fair value of pension
plan asset, net
of deferred taxes
of $676,613 (1,127,689)
Total comprehensive
loss (9,594,103)
Purchases of
treasury stock (31,871)
Issuance of capital stock (net of 2,215 shares
of treasury stock) 189,837 7,933 8 157,958
Cash dividends ($.48
a share) (1,056,160)
BALANCE, JANUARY 30,1999 $39,509,476 2,159,593 $2,160 $14,864,929
</TABLE>
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998, AND FEBRUARY 1,
1997(Page 2 of 2)
<TABLE>
Other
Comprehensive
Treasury Stock Income Retained
Shares Amount (Expense) Earnings
<S> <C> <C> <C>
BALANCE, FEBRUARY 4, 1996 NONE NONE $(1,908,750) $38,239,531
Comprehensive income:
Net income 1,837,625
Other comprehensive income:
Excess of accumulated benefit obligation over
fair value of pension plan asset, net of deferred
taxes of $61,124 101,876
Total comprehensive income
Purchases of treasury stock 6,726 $(79,816)
Issuance of capital stock
(net of 6,726 shares of
treasury stock) (6,726) 79,816
Cash dividends ($.60 a share) (1,312,739)
BALANCE, FEBRUARY 1, 1997 NONE NONE (1,806,874) 38,764,417
Comprehensive loss:
Net income 209,410
Other comprehensive expense:
Excess of accumulated benefit obligation
over fair value of pension plan asset, net of
deferred taxes of $278,732 (464,557)
Total comprehensive loss
Purchases of treasury stock 25,008 (335,523)
Issuance of capital stock (net of 25,008 shares
of treasury stock) (25,008) 335,523
Cash dividends ($.63 a share) (1,409,746)
BALANCE, JANUARY 31, 1998 NONE NONE (2,271,431) 37,564,081
Comprehensive loss:
Net loss (8,466,414)
Other comprehensive expense:
Excess of accumulated benefit obligation over fair value of pension
plan asset, net of deferred
taxes of $676,613 (1,127,689)
Total comprehensive loss
Purchases of treasury
stock 2,215 (31,871)
Issuance of capital stock (net of 2,215 shares
of treasury stock) (2,215) 31,871
Cash dividends ($.48 a share) (1,056,160)
BALANCE, JANUARY 30, 1999 NONE NONE $(3,399,120) $28,041,507
</TABLE>
See notes to financial statements.
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998, AND FEBRUARY 1, 1997
<TABLE>
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(8,466,414) $209,410 $1,837,625
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,307,139 4,219,426 4,198,198
Deferred income taxes (3,560,100) 56,003 (346,582)
Amortization of deferred gain on sale
and leaseback (1,827,018) (1,868,340) (1,697,217)
Change in operating assets and liabilities:
Accounts receivable 4,649,684 1,803,716 147,484
Income tax refund
receivable (1,242,000)
Inventories 8,029,901 (610,126) (3,184,439)
Prepaid expenses 55,653 32,858 213,237
Other assets 300,000 (300,000) (27,639)
Accounts payable - trade (2,007,999) 145,153 1,899,283
Accrued liabilities 531,868 (280,450) 3,726,055
Net cash provided by
operating activities 770,714 3,407,650 6,766,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant,
and equipment (7,917,554) (9,658,193) (5,242,358)
Proceeds from sale of
property, plant, and equipment 1,463,378 5,295,000 4,820,027
Net cash used in
investing activities (6,454,176) (4,363,193) (422,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings (2,500,000)
Proceeds from long-term debt 8,146,168 4,897,019
Principal payments on
long-term debt (371,157) (338,855) (1,611,007)
Principal payments on obligations
under capital leases (1,619,413) (1,931,622) (2,237,721)
Proceeds from sale of
capital stock 189,837 226,281 166,830
Purchase of treasury stock (31,871) (335,523) (79,816)
Cash dividends (1,056,160) (1,409,746) (1,312,739)
Net cash provided by (used in)
financing activities 5,257,404 1,107,554 (7,574,453)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (426,058) 152,011 (1,230,779)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,619,319 1,467,308 2,698,087
CASH AND CASH EQUIVALENTS AT
END OF YEAR $1,193,261 $1,619,319 $1,467,308
</TABLE>
<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998, AND FEBRUARY 1, 1997
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
INFORMATION:
Cash paid during the year for:
Interest $4,550,814 $4,334,995 $4,434,585
Income taxes 114,244 1,390,014 145,676
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
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) 1,804,302 743,289 (163,000)
(Increase) decrease in deferred tax assets and corresponding
(increase) decrease in stockholders' equity due to
pension liability
adjustment (Note 6) (676,613) (278,732) 61,124
</TABLE>
See notes to financial statements.<PAGE>
ZIONS COOPERATIVE MERCANTILE INSTITUTION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 30, 1999
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 a men's and women's ready to
wear specialty store. 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 store is located in 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 $7,317,000 and $6,022,000 higher
at January 30, 1999 and January 31, 1998, 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 $21,913,000, $23,680,000, and $22,914,000
for the years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively. Included in net sales and other income are finance charges on
retail credit accounts receivable totaling approximately $5,616,000,
$5,669,000, and $5,653,000 for the years ended January 30, 1999, January 31,
1998, and February 1, 1997, respectively. Net sales and other income also
include the amortization of deferred gain on sale and leaseback totaling
approximately $1,827,000, $1,868,000, and $1,697,000 for the years ended
January 30, 1999, January 31, 1998, and February 1, 1997, respectively (see
Note 2).
Income Taxes - ZCMI accounts for its taxes following an asset and liability
approach for financial accounting and reporting for income taxes.
Net Income Per Common Share - ZCMI computes net income per common share under
the provisions of SFAS No. 128, Earnings Per Share. 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.
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 30, 1999
and January 31, 1998 is as follows (see Note 7):
<TABLE>
1999 1998
<S> <C> <C>
Buildings and improvements $15,747,559 $15,747,559
Furniture, fixtures, and equipment 7,982,392 8,823,288
Total 23,729,951 24,570,847
Less accumulated amortization 14,473,678 13,823,928
Net assets under capital leases $9,256,273 $10,746,919
</TABLE>
<PAGE>
Approximate future minimum lease payments on both capital and noncancelable
operating leases at January 30, 1999 was as follows:
<TABLE>
Capital Operating
Leases Leases
<S> <C> <C>
Year ending:
2000 $3,051,045 $10,709,160
2001 2,526,230 10,157,236
2002 2,121,220 8,396,888
2003 1,937,470 5,868,379
2004 1,665,757 4,055,730
Later years 19,372,469 20,621,366
Total minimum lease payments 30,674,191 $59,808,759
Less amount representing interest 14,388,653
Present value of net minimum lease
payments 16,285,538
Less current portion 1,505,617
Long-term portion $14,779,921
</TABLE>
Approximate total operating lease expense was as follows:
<TABLE>
Year Ended
1999 1998 1997
<S> <C> <C> <C>
Minimum rentals on noncancelable
operating leases $10,452,932 $9,815,658 $9,520,162
Contingent rentals on noncancelable
operating leases 196,954 141,246 91,000
Other operating lease expenses 287,136 177,939 139,000
Total $10,937,022 $10,134,843 $9,750,162
</TABLE>
Contingent rentals on capital leases, which were included in expense, totaled
approximately $141,301, $106,409, and $274,000 for the years ended January 30,
1999, January 31, 1998, and February 1, 1997, respectively.
During the years ended January 30, 1999, January 31, 1998, and February 1,
1997, ZCMI sold certain furniture, fixtures, and equipment with a net book
value of approximately $1,463,000, $4,776,000, and $1,215,000 for approximately
$1,463,000, $5,295,000, and $4,820,000, 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 30, 1999, January 31,
1998, and February 1, 1997 of approximately $-0-, $519,000, and $3,605,000,
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 30, 1999, January 31, 1998, and February 1, 1997 totaled approximately
$1,827,000, $1,868,000, and $1,697,000, respectively.
33. INCOME TAXES
ZCMI has recorded current and long-term deferred tax assets and deferred tax
liabilities as of January 30, 1999 and January 31, 1998 as follows:
<TABLE>
1999 1998
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Deferred tax assets $3,835,930 $4,260,847 $2,496,191 $1,444,466
Deferred tax liabilities (2,153,440) (2,234,033)
Total $3,835,930 $2,107,407 $2,496,191 $(789,567)
</TABLE>
Deferred tax assets and liabilities as of January 30, 1999 and January 31, 1998
consisted of the following temporary differences and carryforward items:
<TABLE>
1999 1998
Assets Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable $394,804 $482,108
Inventory 9,753 36,650
Deferred gross profit on sale
leaseback transactions 658,869 $780,223 679,758 $1,444,466
Accrued vacation expense
not currently recognized
for income tax purposes 283,603 281,974
Pension liability 2,236,326 959,610
Net operating loss carryforward 3,480,624
Accrued liabilities not
currently recognized
for income tax purposes 195,027 29,586
Charitable contribution 57,548 26,505
Total $3,835,930 $4,260,847 $2,496,191 $1,444,466
Liabilities
Net property, plant, and
equipment for financial
reporting in excess of tax
basis $(489,413) $(271,389)
Capital and operating leases
treated differently for
income tax purposes (1,664,027) (1,962,644)
Total None $(2,153,440) None $(2,234,033)
</TABLE>
Computed "expected" income taxes on income for financial reporting purposes are
reconciled to income tax expense as follows:
Year Ended
1999 1998 1997
Federal income taxes at the statutory rate
(expense) benefit $4,628,370 $(117,270) $(882,449)
Increase or decrease resulting from:
State income taxes 129,130 (13,419) (102,533)
Other 5,041 301,326
Income tax (expense) benefit $4,757,500 $(125,648) $(683,656)
Consisting of:
Current:
Federal $1,126,025 $(62,207) $(893,047)
State 71,375 (7,438) (137,191)
Total 1,197,400 (69,645) (1,030,238)
Deferred:
Federal 3,502,345 (50,022) 311,924
State 57,755 (5,981) 34,658
Total 3,560,100 (56,003) 346,582
Total expense $4,757,500 $(125,648) $(683,656)
4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt consisted of the following as of
January 30, 1999 and January 31, 1998:
<TABLE>
1999 1998
<S> <C> <C>
Unsecured notes payable to banks under lines of
credit, due at various dates through July 1999,
collateralized by inventory and
accounts receivable $47,043,187 $38,897,019
Mortgage note, 8%, due in monthly installments through
February 2003 889,117 1,074,173
Note payable, 10.255%, due in quarterly installments
through December 2002 986,946 1,173,047
Total 48,919,250 41,144,239
Less current portion 407,557 372,250
Long-term portion $48,511,693 $40,771,989
</TABLE>
Interest rates on the borrowings under lines of credit are variable. At
January 30, 1999 and January 31, 1998, interest rates on these borrowings
averaged 6.5%.
On April 15, 1999, ZCMI extended the terms of four notes payable totaling
$34,000,000 to banks under various line of credit agreements. Prior to the
extension, the four 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 four notes. In addition, the loan
extension agreement contains various loan covenants including 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
<S> <C>
July 31 $4,500,000
October 31 5,300,000
January 31 1,500,000
April 30 2,800,000
</TABLE>
Due to the extended terms of repayment, the four notes totaling
$34,000,000 have been classified as long-term liabilities in the
accompanying balance sheet as of January 30, 1999.
Land and buildings with net book values of approximately $1,910,000 at
January 30, 1999 were pledged as collateral to the mortgage note.
Furniture, fixtures, and equipment with a net book value of approximately
$1,093,000 at January 30, 1999 were pledged as collateral on the note
payable having a balance of $986,946 as of January 30, 1999.
Short-term borrowings and long-term debt at January 30, 1999 matures as
follows:
<TABLE>
Amount
Year ending:
<S> <C>
2000 $ 407,557
2001 47,487,512
2002 486,555
2003 537,626
Total $48,919,250
</TABLE>
ZCMI had unused lines of credit available with various banks totaling
approximately $6,957,000 at January 30, 1999. 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 30, 1999 amounted to approximately $310,000.
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
1999 1998 1997
<S> <C> <C> <C>
Options outstanding - beginning of year 5,000 5,000
Granted
Exercised
Forfeited (5,000)
Options outstanding - end of year None None 5,000
Options exercisable None None 5,000
Price of outstanding options N/A N/A $16.50
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>
<TABLE>
Year Ended
1999 1998 1997
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 122,450 $11.25 124,000 $11.25
Granted 124,000 $11.25
Canceled (1,500)
Exercised (1,550) $11.25
Outstanding -
end of year 120,950 $11.25 122,450 $11.25 124,000 $11.25
Options exercisable 120,950 122,450 None
Remaining contractual
life 7.6 years 8.6 years 9.6 years
Fair market value
of options granted $1.67
</TABLE>
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 diluted net income (loss) per common share would have changed to the pro
forma amounts indicated below:
<TABLE>
Year Ended Year Ended Year Ended
January 30, January 31, February 1,
1999 1998 1997
Net income (loss):
<S> <C> <C> <C>
As reported $(8,466,414) $209,410 $1,837,625
Pro forma (8,482,930) 192,894 1,824,564
Earnings per common share (diluted):
As reported $ (3.93) $0.09 $0.84
Pro forma (3.93) 0.09 0.83
</TABLE>
The fair value of each option granted in 1997 was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used:
Dividend yield 5.33%
Expected volatility 17.29%
Risk free interest rate ranges 6.14% to 6.57%
Expected lives ranges 2.75 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 30, 1999, January 31, 1998, and February 1,
1997, ZCMI recorded $68,625, $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.
Disclosures regarding the plans in conformity with SFAS No. 132, Employers'
Disclosure About Pensions and Other Postretirement Benefits, which was adopted
for the year ended January 30, 1999 are shown below:
<TABLE>
Year Ended
1999 1998 1997
<S> <C> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning
of year $29,044,871 $26,090,000 $26,025,000
Service cost 641,225 565,653 567,000
Interest cost 1,941,712 1,959,502 2,017,000
Actuarial loss (gain) 438,642 2,156,982 (269,045)
Benefits paid (1,886,926) (1,727,266) (2,249,955)
Benefit obligation at
end of year 30,179,524 29,044,871 26,090,000
Change in plan assets:
Fair value of plan assets at
beginning of year 25,590,769 23,568,000 23,575,000
Actual return on plan assets 920,700 3,750,035 1,835,455
Employer contribution 358,201 407,500
Benefits paid (1,886,926) (1,727,266) (2,249,955)
Fair value of plan assets at
end of year 24,982,744 25,590,769 23,568,000
Funded status (5,196,780) (3,454,102) (2,522,000)
Unrecognized net obligation at
January 1, 1987 (371,194) (556,597) (742,000)
Unrecognized prior service cost (12,662) (104,831) (197,000)
Unrecognized actuarial loss 6,859,992 5,190,860 4,823,000
Net amount recognized $1,279,356 $1,075,330 $1,362,000
</TABLE>
Amounts recognized in the balance sheets consist of:
<TABLE>
Year Ended
1999 1998 1997
<S> <C> <C> <C>
Accrued pension cost $(4,159,235) $(2,558,959) $(1,529,000)
Accumulated other comprehensive loss
before tax effect 5,438,591 3,634,289 2,891,000
Net amount recognized $1,279,356 $1,075,330 $1,362,000
</TABLE>
Weighted average assumptions as of year end:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.75 % 7.00 % 7.75 %
Expected return on plan assets 9.50 % 9.50 % 9.50 %
Rate of compensation increase 4.00 % 4.00 % 4.00 %
</TABLE>
Components of net periodic benefit cost:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Service cost - benefits earned
during the period $641,225 $565,653 $567,000
Interest cost on projected
benefit obligation 1,941,712 1,959,502 2,017,000
Expected (return) on plan assets (2,352,240) (2,184,549) (1,834,000)
Amortization of unrecognized
transition asset (185,403) (185,403) (185,403)
Amortization of prior service cost (92,169) (92,169) (92,169)
Recognized net actuarial loss 201,050 223,636 1,572
Net periodic pension cost $154,175 $286,670 $474,000
</TABLE>
During the years ended January 30, 1999, 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 30, 1999, January 31,
1998, and February 1, 1997, ZCMI recorded an increase to the pension liability
of $1,804,302, $743,289, and $163,000, respectively, and a decrease to
stockholders' equity of $1,127,689, $464,557, and $101,876, 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 30, 1999, January 31, 1998, and
February 1, 1997 were approximately $284,000, $223,000, and $214,000,
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
30, 1999, 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
$6,741,000 and $7,135,000 at January 30, 1999 and January 31, 1998,
respectively, are leased from a major stockholder under capital leases.
Included in obligations under capital leases are approximately $13,255,000 and
$13,525,000 at January 30, 1999 and January 31, 1998, respectively, pertaining
to these leases. Lease payments of approximately $1,906,000, $1,893,000, and
$1,796,000 were made on these leases for the years ended January 30, 1999,
January 31, 1998, and February 1, 1997, respectively. Included in costs and
expenses are transactions with companies in which a major ZCMI stockholder has
a significant interest totaling approximately $3,710,000, $3,695,000, and
$3,971,000 for the years ended January 30, 1999, January 31, 1998, and February
1, 1997, respectively. Included in net sales are transactions with major ZCMI
stockholders totaling approximately $322,000, $399,500, and $350,000 for the
years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively.
