Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: May 1, 2004

or

For the transition period from              to             

Commission File Number: 1-13113

SAKS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (205) 940-4000

Indicate by check mark whether 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  ¨

Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of May 1, 2004, the number of shares of the Registrant’s Common Stock outstanding was 142,739,980.

Table of Contents

TABLE OF CONTENTS

2

Table of Contents

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

3

Table of Contents

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

4

Table of Contents

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

5

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended May 1, 2004 are not necessarily indicative of the results that may be expected for the year ending January 29, 2005. The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004.

The accompanying balance sheet at January 31, 2004 has been derived from the audited financial statements at that date but does not include all required generally accepted accounting principles disclosures.

The Company is a national retailer currently operating, through subsidiaries, traditional and luxury department stores. The Company operates the Saks Department Store Group (“SDSG”), which consists of stores operated under the following nameplates: Proffitt’s, McRae’s, Younkers, Parisian, Herberger’s, Carson Pirie Scott, Bergner’s, and Boston Store and Club Libby Lu specialty stores. The Company also operates Saks Fifth Avenue Enterprises (“SFAE”), which consists of Saks Fifth Avenue stores and Saks Off 5^th stores.

Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments and shipping and handling revenues related to merchandise sold. Commissions from leased departments were $11,133 and $9,956 for the three months ended May 1, 2004 and May 3, 2003, respectively. Leased department sales were $74,489 and $67,857 for the three months ended May 1, 2004 and May 3, 2003, respectively, and were excluded from net sales.

Cash and cash equivalents primarily consists of cash on hand in the stores, deposits with banks and investments in mutual funds that have original maturities of three months or less. Certain cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents included $500,000 and $463,000 at May 1, 2004 and May 3, 2003,

6

Table of Contents

respectively, invested principally in various short-term bond funds, which were marked to market. At May 1, 2004, the Company had approximately $200,000 invested in a single short-term bond fund. Income earned on these cash equivalents was $486 and $1,202 for the three-month periods ended May 1, 2004 and May 3, 2003, respectively, and was reflected in Interest Expense. Cash of approximately $283,000 was used to fund a special one-time dividend on May 17, 2004. The remaining portion of less than $3,000 will be paid prospectively as restricted shares vest.

NOTE 2 - EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) have been computed based on the weighted average number of common shares outstanding.

Additionally, the Company had 7,297 and 27,195 options to purchase shares of common stock outstanding at May 1, 2004 and May 3, 2003, respectively, which were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average quarterly market price of the common shares. If the average quarterly market price becomes greater than the exercise price, these options will be dilutive, and the treasury stock method will be applied to determine the number of dilutive shares.

The Company’s convertible notes were also not considered in the calculation of dilutive shares because the terms of the notes include a conversion price in excess of the current market value of the Company’s stock and the holder cannot convert until the share price exceeds the conversion price by 20% for a specified trading period.

NOTE 3 - DEBT AND SHARE ACTIVITY

At May 1, 2004, the Company had interest rate swap agreements with notional amounts of $150,000 and $100,000, which swapped coupon rates of 8.25% and 7.50%, respectively, for floating rates. The fair value of these swaps at May 1, 2004 was a loss of $6,319.

7

Table of Contents

On March 23, 2004, the Company issued $230,000 of convertible senior notes that bear interest of 2.0% and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of 53.5087 shares per one thousand dollars in principal amount of notes. The conversion rate reflects an adjustment required by the special one-time dividend. The most significant terms and conditions related to the convertible senior notes include: the Company can settle a conversion with shares and cash (limited to the principal); the holder may put the debt back to the Company in 2014 or 2019; the holder cannot convert until the Company’s share price exceeds the conversion price by 20% for a certain trading period; the Company can call the debt after year seven; the conversion rate is subject to a dilution adjustment; and the holder can convert upon a significant credit rating decline and upon a call. The Company used approximately $25,000 of the proceeds from the issuances to enter into a convertible note hedge and written call options on its common stock to limit the exposure to dilution from the conversion of the notes by increasing the effective conversion premium.

During the three-month period ended May 1, 2004, the company repurchased 744 of the Company’s common shares in the amount of $12,082. At May 1, 2004, there were 21,148 shares remaining available for repurchase under existing share repurchase programs. Included in prior year repurchase activity were shares repurchased subject to a June 2004 price settlement agreement containing a cap and a floor. The Company’s maximum and likely exposure under this agreement is approximately $5,000.

NOTE 4 – EMPLOYEE BENEFIT PLANS

The Company sponsors defined benefit pension plans for a significant portion of its employees. The Company generally funds pension costs currently, subject to regulatory funding requirements.

The components of net periodic pension expense for the three months ended May 1, 2004 and May 3, 2003 are as follows:

The Company expects minimal funding requirements in the current year.

8

Table of Contents

NOTE 5 – SHAREHOLDERS’ EQUITY

On March 15, 2004, the Company’s Board of Directors declared a special one-time cash dividend of $2.00 per common share to shareholders of record as of April 30, 2004. As of May 1, 2004, the Company had recorded a dividend payable and reduced retained earnings for the $285,551 dividend. Approximately $283,000 was paid out on May 17, 2004. The remaining portion of the dividend will be paid prospectively as restricted shares vest.

As a result of the special one-time dividend, the anti-dilution provisions of the employee stock plans prompted the exercise price and number of stock options to be adjusted pro-rata for the change in the share price on the ex-dividend date (April 28, 2004). The effect of this anti-dilution adjustment is presented below:

The following table summarizes the changes in shareholders’ equity for the three months ended May 1, 2004:

9

Table of Contents

NOTE 6 – STOCK BASED COMPENSATION

The Company recorded compensation expense for all stock-based compensation plan issuances prior to 2003 using the intrinsic value method. Compensation expense, if any, was measured as the excess of the market price of the stock over the exercise price of the award on the measurement date. In 2003, the Company began expensing the fair value of all stock-based grants over the vesting period on a prospective basis utilizing the Black-Scholes model.

If compensation cost for the Company’s stock-based compensation plan issuances prior to 2003 had been determined under the fair value method, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below.

NOTE 7 - CONTINGENCIES

The Company is involved in several legal proceedings arising from its normal business activities, and reserves for such claims have been established where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

10

Table of Contents

The Company is routinely under audit by federal, state or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company believes it has appropriately accrued for probable exposures.

Under the terms of a customer proprietary credit card program with Household Bank (SB), N.A. (“Household”), there are certain provisions that would allow each party to terminate the program agreement. If Household were to terminate the program agreement, the Company might be required to return to Household a declining portion of the premium it received when the credit card portfolio was sold to Household in 2003. The maximum contingent payment had the program been terminated early at May 1, 2004 would have been approximately $130,000. If the Company were to terminate the alliance, the Company would have the right to purchase the credit card accounts and associated accounts receivable from Household at their fair value.

At May 1, 2004 the Company maintained cash and cash equivalents of $568,536, of which approximately $500,000 was invested in various money market and short-term bond funds. It is the Company’s policy to have no more than $200,000 invested in any single obligor. At May 1, 2004 the Company’s largest investment with a single obligor was approximately $200,000.

NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB revised standards associated with disclosures about pensions and other postretirement benefits. This standard became effective at the end of fiscal year 2003 and the Company has provided the revised disclosures.

In March 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act was signed into law in December 2003. Any measures of the accumulated projected benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect any amounts associated with the Act since the effects of the Act on the Company’s plan remain unknown until regulations are developed. The adoption of future guidance is not expected to have a material effect on the Company’s financial position or its results of operations.

11

Table of Contents

NOTE 9 - SEGMENT INFORMATION

The following tables represent summary segment financial information and are consistent with management’s view of the business operating structure.

12

Table of Contents

“Operating Income” for the segments includes sales; cost of sales; direct selling, general, and administrative expenses; other direct operating expenses for the respective segment; and an allocation of certain operating expenses, including depreciation, shared by the two segments. Items not allocated are those items not considered by the chief operating decision maker in measuring the assets and profitability of the segments. These amounts are generally represented by two categories: (1) general corporate assets and expenses and other amounts including, but not limited to, treasury, investor relations, legal and finance support services, and general corporate management; and (2) certain items, while often times related to the operations of a segment, are not considered by segment operating management, corporate operating management and the chief operating decision maker in assessing segment operating performance. During the three-month periods ended May 1, 2004 and May 3, 2003, items not allocated were comprised of the following:

Losses from long-lived assets in 2004 primarily consisted of charges associated with store closures and the write-off of software.

Losses from long-lived assets in 2003 primarily consisted of charges associated with the consolidation of various operating activities. Integration charges in 2003 primarily related to the consolidation of Younkers home office into Carson Pirie Scott. Other items consisted of the revisions made to previous store closing cost estimates.

NOTE 10 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for: (1) Saks Incorporated; (2) on a combined basis, the guarantors of Saks Incorporated’s Senior Notes (which are all of the subsidiaries of Saks Incorporated except for National Bank of The Great Lakes (“NBGL”), the subsidiaries associated with the Company’s former proprietary credit card securitization program, and other immaterial subsidiaries); and (3) on a combined basis, NBGL, the subsidiaries associated with the Company’s former proprietary credit card securitization program, and other immaterial subsidiaries, which collectively represent the only subsidiaries of the Company that are not guarantors of the Senior Notes. The condensed consolidating financial statements presented as of and for the three-month periods ended May 1, 2004 and May 3, 2003 and as of January 31, 2004 reflect the legal entity compositions at the respective dates. In December 2003, NBGL and the subsidiaries associated with the Company’s former proprietary credit card securitization program were dissolved. Thus, there were no assets or liabilities associated with non-guarantor subsidiaries at January 31, 2004 or May 1, 2004. Separate financial

13

Table of Contents

statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Company’s revolving credit agreement are allocated to Saks Incorporated and the guarantor subsidiaries under an intercompany revolving credit arrangement. There are also management and royalty fee arrangements among Saks Incorporated and the subsidiaries. At May 1, 2004, Saks Incorporated was the sole obligor for a majority of the Company’s long-term debt, owned one store location and maintained a small group of corporate employees.

14

Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT MAY 1, 2004

(Dollar Amounts In Thousands)

15

Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MAY 1, 2004

(Dollar Amounts In Thousands)

16

Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MAY 1, 2004

(Dollar Amounts In Thousands)