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 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
<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 2,412 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 $ 24,532 $ 27,532
Long-Term Debt:
Bonds, mortgages and similar debt 51,598 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 average 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 0 0
Additions (Reductions) to long-term debt 3,086 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 changes in financial position for three months
ended May 1, 1999 and May 2, 1998.
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-
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
</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 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 May 1, 1999.
2. There were no securities of the Company sold by the Company
during the three months ended May 1, 1999 which were not
registered under the Securities Act of 1933 in reliance upon an
exemption from registration provided by section 4 (2) of the
Act.
Item 6. Exhibits and Reports on Form 8-K.
None
-11-
Form 10-Q
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
ZIONS CO-OPERATIVE MERCANTILE INSTITUTION
Date June 14, 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> 24,532,000
<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>
