-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ATZOoi/T5PYKxBfXxBytprKRGiuqA21jv8TLL8KOuzywFOz68cgOtXerhu/r2kG4 S0+ffdx+S58vhcCDJOCPOg== 0000913569-97-000142.txt : 19970912 0000913569-97-000142.hdr.sgml : 19970912 ACCESSION NUMBER: 0000913569-97-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970802 FILED AS OF DATE: 19970905 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROWLEY MILNER & CO CENTRAL INDEX KEY: 0000025871 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 380454910 STATE OF INCORPORATION: MI FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01594 FILM NUMBER: 97675709 BUSINESS ADDRESS: STREET 1: 2301 W LAFAYETTE CITY: DETROIT STATE: MI ZIP: 48216 BUSINESS PHONE: 3139622400 MAIL ADDRESS: STREET 1: 2301 WEST LAFAYETTE CITY: DETROIT STATE: MI ZIP: 48216 10-Q 1 FORM 10-Q REPORT FOR 2ND QUARTER 1997 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended August 2, 1997 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ Commission File Number: 1-1594 CROWLEY, MILNER AND COMPANY (Exact name of registrant as specified in its charter) Michigan 38-0454910 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 2301 West Lafayette Boulevard, Detroit, Michigan 48216 (Address of principal executive offices)(Zip Code) (313) 962-2400 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report.) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of Registrant's common stock, as of September 5, 1997, was 1,534,462 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED QUARTER ENDED -------------------- --------------------- August 2 August 3 August 2 August 3 1997 1996 1997 1996 Revenues Net sales--owned departments $76,464,126 $38,934,764 $36,600,810 $18,475,898 Net sales--leased departments 8,738,525 5,832,385 4,505,672 3,024,636 ---------- ---------- ---------- ---------- Total net sales 85,202,651 44,767,149 41,106,482 21,500,534 Investment income 54,091 51,919 22,212 23,150 Other income 318,022 1,888 7,812 855 ---------- ---------- ---------- ---------- 85,574,764 44,820,956 41,136,506 21,524,539 Costs and Expenses Cost of merchandise and services sold 60,201,226 30,838,884 27,318,346 14,003,501 Operating expenses 29,300,794 16,008,651 14,321,019 8,020,620 Interest 1,318,038 872,418 738,564 435,071 Operating (income) loss and costs related to integration of Steinbach Stores, Inc. - (1,393,917) - (741,058) ---------- ---------- ---------- ---------- 90,820,058 46,326,036 42,377,929 21,718,134 Earnings (Loss) Before Income Taxes (5,245,294) (1,505,080) (1,241,423) (193,595) Federal income taxes - - - - ---------- ---------- ---------- ---------- Net Earnings (Loss) $(5,245,294) $(1,505,080) $(1,241,423) $ (193,595) ========== ========== ========== ========== Per Share Data: Net earnings (loss) $ (3.46) $ (1.57) $ (0.81) $ (0.20) Average number of common and common equivalent shares outstanding for earnings per share 1,517,187 957,878 1,523,796 957,878
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 2 February 1 August 3 1997 1997 1996 -------- ---------- -------- Assets Current Assets Cash and cash equivalents (cash equivalents of $390,161 at 8/2/97, $176,728 at 2/1/97 and $292,927 at 8/3/96) $ 859,451 $ 215,316 $ 1,662,200 Accounts receivable, less allowances ($66,558 at 8/2/97, $66,258 at 2/1/97, and $66,558 at 8/3/96 2,586,206 2,813,759 2,461,731 Inventories at FIFO cost 41,350,640 46,555,769 19,855,739 Deferred property taxes 992,459 1,396,848 972,322 Other current assets 1,169,110 1,950,510 1,436,240 ---------- ---------- ---------- Total Current Assets 46,957,866 52,932,202 26,388,232 ---------- ---------- ---------- Other Assets Deposits under EDC financing arrangements 634,308 634,308 634,308 Deferred tax asset 1,580,000 1,580,000 1,580,000 Miscellaneous 2,892,712 2,922,660 2,526,790 ---------- ---------- ---------- 5,107,020 5,136,968 4,741,098 ---------- ---------- ---------- Properties Land 315,000 315,000 315,000 Buildings 13,291,910 13,274,001 10,206,055 Leasehold improvements 7,130,920 6,757,605 6,189,471 Furniture, fixtures and equipment 7,426,202 7,359,066 7,119,994 ---------- ---------- ---------- 28,164,032 27,705,672 23,830,520 Less: Allowance for depreciation and amortization 15,909,560 15,086,513 14,466,683 ---------- ---------- ---------- 12,254,472 12,619,159 9,363,837 ---------- ---------- ---------- Total Assets $ 64,319,358 $ 70,688,329 $ 40,493,167 ========== ========== ==========
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 2 February 1 August 3 1997 1997 1996 -------- ---------- -------- Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 12,066,701 $ 17,587,798 $ 5,080,371 Notes payable short term 23,487,354 18,092,794 10,108,641 Compensation and amounts withheld therefrom 1,065,099 1,424,667 734,190 Property taxes 1,120,639 1,353,131 941,928 Income taxes 34,972 34,972 310,126 Other taxes 283,936 670,062 490,211 Current maturities of long-term debt 605,855 575,000 525,000 Current maturities of capital lease obligations 202,495 263,869 185,474 ---------- ---------- ---------- Total Current Liabilities 38,867,051 40,002,293 18,375,941 ---------- ---------- ---------- Long-Term Liabilities Long-term debt 4,750,000 4,750,000 5,325,000 Capital lease obligations 6,226,469 6,307,565 3,638,939 Other 1,973,445 1,982,053 1,761,165 ---------- ---------- ---------- 12,949,914 13,039,618 10,725,104 ---------- ---------- ---------- Shareholders' Equity Common stock, (authorized 4,000,000 shares, outstanding 1,523,796 shares at 8/2/97, 1,507,387 shares at 2/1/97 and 957,878 shares at 8/3/96) 1,523,796 1,507,387 957,878 Other capital 3,368,420 3,283,560 1,211,350 Retained earnings 7,610,177 12,855,471 9,222,894 ---------- ---------- ---------- 12,502,393 17,646,418 11,392,122 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $ 64,319,358 $ 70,688,329 $ 40,493,167 ========== ========== ==========
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED August 2 August 3 1997 1996 Operating Activities Net earnings (loss) $ (5,245,294) $ (1,505,080) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 825,293 630,765 Amortization of restricted stock award - 13,756 Changes in operating assets and liabilities (Increase) decrease in net accounts receivable 227,553 (446,813) (Increase) decrease in inventories 5,205,129 1,395,219 (Increase) decrease in prepaid expense and other assets 1,215,737 184,300 Increase (decrease) in accounts payable (5,521,095) (198,817) (Increase) decrease in accrued compensation and other liabilities (986,794) (223,907) ----------- ---------- Net Cash Provided By (Used In) Operating Activities (4,279,471) (150,577) Investment Activities Purchase of properties (460,607) (236,010) Net Cash Used in Investment Activities ----------- ---------- (460,607) (236,010) Financing Activities Proceeds from revolving line of credit 95,442,875 51,342,970 Principal payments on revolving line of credit (90,048,315) (49,733,721) Principal payments on capital lease obligations (111,615) (111,857) Proceeds from sale of common stock 101,268 10,782 ----------- ---------- Net Cash Provided By (Used In) Financing Activities 5,384,213 1,508,174 ----------- ---------- Increase (Decrease) in Cash and Cash Equivalents 644,135 1,121,587 Cash and Cash Equivalents at beginning of year 215,316 540,613 ----------- ---------- Cash and Cash Equivalents at End of Period $ 859,451 $ 1,662,200 =========== ==========
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS August 2, 1997 Note A - Basis of Presentation The accompanying condensed, consolidated, and unaudited financial statements for the Company 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. As a result, the financial statements 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 necessary for a fair presentation of quarterly operating results are reflected herein, and are of a normal, recurring nature. For purposes of this report the "Company" refers to Crowley, Milner and Company ("Crowley's") and its wholly-owned subsidiary, Steinbach Stores, Inc. ("Steinbach"), collectively. Given the seasonal nature of the specialty department store business, operating results for the six months ended August 2, 1997 are not necessarily indicative of the results that may be expected for the year ending January 31, 1998. It is suggested that these condensed, consolidated and unaudited financial statements be read in conjunction with the financial statements and notes to financial statements included in the Company's Annual Report on Form 10-K for the year ended February 1, 1997. Note B - Acquisition of Steinbach Stores, Inc. and presentation of financial information As previously reported by the Company in its Annual Report on Form 10-K filed for the year ended February 1, 1997, effective August 31, 1996, Crowley's acquired from the shareholders of Steinbach (the "Steinbach Shareholders") all of the issued and outstanding shares of the capital stock of Steinbach in exchange for 514,800 shares of Common Stock of Crowley's pursuant to the terms of an Agreement and Plan of Reorganization, dated November 17, 1995, as amended, between Crowley's and the Steinbach Shareholders. As a result of the acquisition, Steinbach, with 15 retail department stores in Connecticut, New Hampshire, New York, New Jersey and Vermont, at the effective time of the acquisition became a wholly-owned subsidiary of Crowley's as of August 31, 1996. The acquisition was accounted for as a purchase for financial reporting purposes. Under purchase accounting, Crowley's allocated the total cost of acquiring the Steinbach common stock to the assets and liabilities of Steinbach. In connection with the Steinbach acquisition, Crowley's entered into a separate Interim Operating Agreement with the Steinbach Shareholders, which provided that, during the period from December 31, 1995 through August 31, 1996, the 15 acquired Steinbach stores would be operated under the management and supervision of Crowley's with all revenues, costs and expenses relating to the stores being the responsibility of Crowley's. The operating results of Steinbach through August 31, 1996 are reflected as a separate line item on the Company's consolidated condensed statements of income. Since August 31, 1996, the Company's operating results are reported on a consolidated basis. Notwithstanding the purchase accounting treatment, inasmuch as the Company acquired only 15 of 27 stores and did not acquire the corporate office or distribution center of Steinbach, the Company views the acquisition, from an accounting perspective, as an asset purchase of those stores that were actually acquired. Pro forma financial information for the acquired stores (exclusive of the Steinbach store located in North Utica, which was closed in December 1996) for the quarter and six months ended August 2, 1997, and for the comparable periods last year, are as follows:
Six Months Ended Quarter Ended August 2, 1997 August 3, 1996 August 2, 1997 August 3, 1996 -------------- -------------- -------------- -------------- Comparable store sales $39,702,438 $33,258,844 $19,779,985 $17,721,907 Gross Profit 10,874,674 14,387,330 6,511,105 7,535,983 Operating Expenses 15,026,718 13,484,517 7,373,057 6,630,113 Interest Expense (related to Line of Credit) 552,039 252,250 298,915 192,250 Net Income (Loss) (4,683,642) 1,393,917 (1,158,713) 741,058
Note C - Anticipated Effect of Pronouncement In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS"), and attempts to simplify the approach for computing EPS previously required in APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, and while it did not have an impact on the quarterly information presented herein, it may impact future quarters. PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statement on Forward-Looking Information This quarterly report includes various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. Statements containing expressions such as "believes", "anticipates" or "expects" used in the Company's press releases and reports filed with the Securities and Exchange Commission (including periodic reports on Form 10-K and Form 10-Q) are intended to identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Although the Company believes its expectations are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurances that actual results will not materially differ from expected results. The Company cautions that these and similar statements included in this report and in previously filed periodic reports are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, without limitation, the following: risks associated with the leasing and opening of two new Steinbach stores, as well as placement of same into service in the fourth quarter of 1997; the ability of the Company in the future to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate merchandise supply and hire and train employees; the ability of the Company to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand; management's ability to manage the Company's vendors and private label sources; increased competition in existing markets; loss or retirement of key executives; adverse economic conditions in the Company's markets; severe and unusual weather in the Company's markets; and adverse results of significant litigation matters. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof. RESULTS OF OPERATIONS As detailed in Note A to the Notes To Consolidated Condensed Financial Statements ("Notes"), for purposes of this report the "Company" refers to Crowley, Milner and Company ("Crowley's") and its wholly-owned subsidiary, Steinbach Stores, Inc. ("Steinbach"), collectively. As detailed in Note B to the Notes, Crowley's acquired Steinbach effective August 31, 1996. As a result of the acquisition, Steinbach, with 15 retail department stores in Connecticut, New Hampshire, New York, New Jersey and Vermont, became a wholly-owned subsidiary of Crowley's as of August 31, 1996. As also detailed in Note B to the Notes, in connection with the Steinbach acquisition, during the period from December 31, 1995 through August 31, 1996, the 15 acquired Steinbach stores were operated under the management and supervision of Crowley's with all revenues, costs and expenses relating to the stores being the responsibility of Crowley's for such period. The operating results of Steinbach through August 31, 1996 were reflected as a separate line item on the Company's consolidated condensed statements of income. Since August 31, 1996, the Company's operating results are reported on a consolidated basis. In light of the above, and to assist the reader in the review of this report, the Steinbach operating results for the quarter and six months ended August 3, 1996 were combined with the Crowley's operating results for those reporting periods. Quarter Ended August 2, 1997 Compared To Quarter Ended August 3, 1996 Quarter Ended August 2 August 3 Comparable 1997 1996 Store Sales Crowley's $21,326,497 $20,243,585 Steinbach 19,779,985 17,721,907 ---------- ---------- Consolidated for 1997 $41,106,482 Combined/Proforma for 1996 $37,965,492 The Company's consolidated comparable net store sales for the quarter ended August 2, 1997 increased 8.2%, to $41.1 million, from the $38.0 million of combined comparable net store sales for the quarter ended August 3, 1996. For Crowley's, comparable net store sales for the quarter ended August 2, 1997 increased 5.4%, to $21.3 million, from the $20.2 million recorded for the quarter ended August 3, 1996. (Crowley's closed its Birmingham store on March 23, 1997. Sales for the Birmingham store for the second quarter of 1996 were approximately $1.3 million.) The sales increase occurred evenly during the quarter, and management believes that a promotional campaign to aggressively market the Crowley's proprietary credit card significantly contributed to the sales performance. As indicated in Note B to the Notes, comparable net store sales for Steinbach for the quarter ended August 2, 1997 increased 11.6%, to $19.8 million, from the $17.7 million for the quarter ended August 3, 1996. Although management was encouraged by the sales performance, much of the sales improvement, as was the case in the first quarter, was driven by an extensive and aggressive sales promotion to move out clearance merchandise (see further discussion below). Quarter Ended August 2 August 3 Gross 1997 1996 Profit Crowley's $ 7,277,031 $ 7,497,033 Steinbach 6,511,105 7,535,983 --------- -------- Consolidated for 1997 $13,788,136 Combined/Proforma for 1996 $15,033,016 The Company's consolidated gross profit for the quarter ended August 2, 1997 decreased 8.0%, to $13.8 million, from the $15.0 million of combined gross profit for the quarter ended August 3, 1996. For the second quarter, Crowley's gross profit dollars were comparable to last year's second quarter performance ($7.3 million in 1997 versus $7.5 million in 1996), and as a percentage of net sales, the gross profit percentage remained relatively constant (34.1% in 1997 versus 34.9% in 1996). As was disclosed in the Company's Quarterly Report on Form 10-Q filed for the quarter ended May 3, 1997, it was management's belief that higher markdowns would be required through the second quarter to adjust the inventory levels in the men's area of the Steinbach stores to their planned levels. These higher markdowns are reflected in the second quarter results for Steinbach. Steinbach's gross profit dollars for the second quarter decreased sharply when compared to last year's second quarter performance ($6.5 million in 1997 versus $7.5 million in 1996). As a percentage of net sales, the gross profit percentage dropped to 32.9% for the quarter ended August 2, 1997 from 40.7% for the comparable period in 1996. Management believes that as a result of the extensive markdowns taken in the Steinbach stores for the first two quarters of 1997, markdowns for the third and fourth quarters will be more in line with management's expectations. Quarter Ended August 2 August 3 Operating 1997 1996 Expenses Crowley's $ 6,947,962 $ 8,020,620 Steinbach 7,373,057 6,630,113 --------- --------- Consolidated for 1997 $14,321,019 Combined/Proforma for 1996 $14,650,733 The Company's consolidated operating expenses for the quarter ended August 2, 1997 decreased 2.3%, to $14.3 million, from the $14.7 million of combined operating expenses for the quarter ended August 3, 1996. Operating expenses expressed as a percentage of net sales decreased significantly to 34.8% in the second quarter of 1997 from 38.6% for the comparable period last year. Management attributes this improvement to the 8.2% sales increase, together with the cost efficiencies that the Company has been able to effect since the acquisition, particularly in the area of insurance expense. For Crowley's, operating expenses expressed as a percentage of net sales decreased to 32.6% for the quarter ended August 2, 1997 from 37.3% for the comparable period in 1996. The decrease is primarily attributable to the allocation of a pro rata share of corporate overhead expense to Steinbach during the quarter ended August 2, 1997. No corporate overhead was allocated to Steinbach prior to August 31, 1996, the effective date of the acquisition by Crowley's. For Steinbach, operating expenses expressed as a percentage of net sales remained relatively constant at 37.2%. However, operating expenses at Steinbach increased to $7,373,057 for the first six months of 1997 from $6,630,110 for the comparable period in 1996. The increase is primarily attributable to the allocation of a pro rata share of corporate overhead expense to Steinbach during the quarter ended August 2, 1997. Quarter Ended Interest August 2 August 3 Expense 1997 1996 Line of Credit Crowley's $ 195,144 $ 209,859 Steinbach 298,915 192,250 ------- -------- Consolidated for 1997 $ 494,059 Combined/Proforma for 1996 $ 402,109 The Company's consolidated interest expense related to its line of credit for the quarter ended August 2, 1997 increased 22.9%, to $494,000, from the $402,000 of interest expense incurred on a combined basis for the quarter ended August 3, 1996. The Company's consolidated interest expense related to its line of credit and expressed as a percentage of net sales increased to 1.2% in the second quarter of 1997 from 1.1% on a combined basis for the comparable period last year. Notwithstanding the overall decline in the Company's borrowing rate as a result of amending the terms of its credit facility in September 1996 (see additional explanation in "Other Developments"), effective September 5, 1996, the Company's borrowing rate dropped from prime plus 1.00% to prime plus 0.25%, the increase in consolidated interest expense for the quarter ended August 2, 1997 is primarily attributed to the higher inventory levels maintained in the Steinbach stores that were funded by the revolving line of credit. For Crowley's, interest expense related to the line of credit for the quarter ended August 2, 1997 decreased to $195,000 from $210,000 for the comparable period last year. Interest expense expressed as a percentage of net sales remained constant at 1.0% for the second quarters of 1997 and 1996, respectively. For Steinbach, interest expense related to the line of credit for the quarter ended August 2, 1997 increased to $299,000 from $192,000 for the comparable period last year. Interest expense expressed as a percentage of net sales increased significantly to 1.5% for the quarter ended August 2, 1997 from 1.0% for the comparable period in 1996. Although higher inventory levels contributed to the majority of the increase in interest expense, management also believes that a refinement in the method in which interest expense was calculated and allocated to the Steinbach stores during the current year explains the balance of the increase. Management believes that the new calculation and allocation method more properly reflects the interest expense incurred by the Steinbach stores. For accounting purposes, both Crowley's and Steinbach are required to capitalize a portion of the lease expense related to certain of their respective store locations, and to reclassify a portion of the lease expense as interest expense. On a consolidated basis, for the quarters ended August 2, 1997 and August 3, 1996, the amount of lease payments reclassified as interest expense and interest other than interest incurred on the revolver was approximately $245,000, and $225,000, respectively. Quarter Ended August 2 August 3 Net Income 1997 1996 (Loss) Crowley's $ (82,710) $ (934,653) Steinbach (1,158,713) 741,058 ---------- -------- Consolidated for 1997 $ (1,241,423) Combined/Proforma for 1996 $ (193,595) On a consolidated basis, the Company reported a net loss of $1,241,423, or $0.81 per share, for the second quarter of 1997 compared to a combined net loss of $193,595 or $0.20 per share, for the second quarter of 1996. For Crowley's, for the quarter ended August 2, 1997, a net loss of $82,710 was recorded compared to a net loss of $934,653 for last year's second quarter. The improvement largely is attributable to the allocation of approximately $942,000 of corporate overhead to Steinbach. For Steinbach, for the quarter ended August 2, 1997 a net loss of $1,158,713 was recorded compared to net income of $741,058 for last year's second quarter. The $1.9 million decline from last year's second quarter operating results is attributable in large part to a $1 million decline in gross profit (from $7.5 million to $6.5 million) arising from the aggressive promotion to clear out clearance merchandise. The balance of the change results from the allocation of approximately $942,000 of corporate overhead expenses to Steinbach during the second quarter of 1997. No corporate overhead was allocated to Steinbach prior to August 31, 1996, the effective date of the acquisition by Crowley's. Since the Company has fully exhausted all tax loss carrybacks and is in a net operating loss carryforward position, it was unable to tax effect the losses in either year's second quarter, thus pre-tax and after-tax results are the same. Six Months Ended August 2, 1997 Compared To Six Months Ended August 3, 1996 Six Months Ended August 2 August 3 Comparable 1997 1996 Store Sales Crowley's $44,090,600 $42,245,673 Steinbach 39,702,438 33,258,844 ---------- ---------- Consolidated for 1997 $83,793,038 Combined/Proforma for 1996 $75,504,517 The Company's consolidated comparable net store sales for the six months ended August 2, 1997 increased 11.0%, to $83.8 million, from the $75.5 million of combined comparable net store sales for the six months ended August 3, 1996. For Crowley's, comparable net store sales for the six months ended August 2, 1997 increased 4.4%, to $44.1 million, from the $42.2 million recorded for the six months ended August 3, 1996. (Crowley's closed its Birmingham store on March 23, 1997. Sales for the Birmingham store for 1997 and for the first six months of 1996 were approximately $1.4 million and $2.5 million, respectively.) The increase is attributable to an extensive and aggressive sales promotion effort in March to move fall and winter clearance merchandise, and to a promotional campaign in the second quarter to market Crowley's proprietary credit card. As indicated in Note B to the Notes, comparable net store sales for Steinbach for the six months ended August 2, 1997 showed a 19.4% improvement to $39.7 million from the $33.3 million for the six months ended August 3, 1996. Much of the sales improvement was driven by an extensive and aggressive sales promotion to move out fall and winter clearance merchandise during the first two quarters of the year. Management believes that, as a result of the extensive sales promotions, the clearance merchandise has been reduced to a normal level in the Steinbach stores. Six Months Ended August 2 August 3 Gross 1997 1996 Profit Crowley's $14,126,751 $13,928,265 Steinbach 10,874,674 14,387,330 ---------- ---------- Consolidated for 1997 $25,001,425 Combined/Proforma for 1996 $28,315,595 The Company's consolidated gross profit for the six months ended August 2, 1997 decreased 11.7%, to $25.0 million, from the $28.3 million of combined gross profit for the six months ended August 3, 1996. For the six months ended August 2, 1997, Crowley's gross profit increased approximately $200,000, to $14.1 million, from $13.9 million reported during the first six months of 1996. Notwithstanding Crowley's aggressive sales promotion effort to move out fall and winter clearance items during the first quarter of 1997, Crowley's gross profit percentage remained constant at approximately 31% for the first six months of 1997 and 1996. Steinbach's gross profit percentage dropped from 41.4% for the first six months of 1996 to 27.4% for the first six months of 1997. The gross profit percentage for 1996 of 41.4%, however, includes a one-time reversal of a $3.3 million markdown reserve. Absent this one-time reversal, the gross profit percentage for the first six months of 1996 would have been 31.9%. Steinbach's gross profit percentage for the first six months of 1997 was impacted significantly by the extensive sales promotion effort that was required to move the fall and winter clearance merchandise, particularly in the first quarter. Management believes that, as a result of the extensive markdowns taken in the Steinbach stores for the first two quarters of 1997, markdowns for the third and fourth quarters will be more in line with management's expectations. Six Months Ended August 2 August 3 Operating 1997 1996 Expenses Crowley's $14,274,076 $16,008,651 Steinbach 15,026,718 13,484,517 ---------- ---------- Consolidated for 1997 $29,300,794 Combined/Proforma for 1996 $29,493,168 The Company's consolidated operating expenses for the six months ended August 2, 1997 decreased approximately $200,000 to $29.3 million from the $29.5 million of combined operating expenses incurred for the six months ended August 3, 1996. Operating expenses expressed as a percentage of net sales decreased significantly to 34.4% for the first six months of 1997 from 39.1% for the comparable period last year. Management attributes this improvement to the 11.0% sales increase, together with the cost efficiencies that the Company has experienced since the acquisition, particularly in the area of insurance expense. For the six months ended August 2, 1997, Crowley's operating expenses, expressed as a percentage of net sales, decreased to 31.4% from 35.8% for the comparable period last year. The decrease is primarily attributable to the allocation of a pro rata share of corporate overhead expense to Steinbach. No corporate overhead was allocated to Steinbach prior to August 31, 1996, the effective date of the acquisition by Crowley's. For Steinbach, operating expenses expressed as a percentage of net sales dropped to 37.8% for the first six months of 1997 from 40.5% for the comparable period last year. Management attributes this positive trend principally to the 19.4% improvement in the Steinbach stores sales performance for the first six months of the year. Operating expenses for Steinbach increased to $15,026,718 for the first six months of 1997 from $13,484,517 for the comparable period in 1996. The increase is primarily attributable to the allocation of a pro rata share of corporate overhead expense to Steinbach during the first six months ended August 2, 1997. Six Months Ended Interest August 2 August 3 Expense 1997 1996 Line of Credit Crowley's $ 377,389 $ 421,191 Steinbach 552,039 252,250 ------- ------- Consolidated for 1997 $ 929,428 Combined/Proforma for 1996 $ 674,241 The Company's consolidated interest expense related to the line of credit for the six months ended August 2, 1997 increased 37.8% to approximately $929,000 from $674,000 of interest expense incurred on a combined basis for the first six months of 1996. The Company's consolidated interest expense expressed as a percentage of net sales increased to 1.1% for the first six months of 1997 from 0.89% for the comparable period a year ago. Notwithstanding the overall decline in the Company's borrowing rate, as a result of amending the terms of its credit facility in September 1996 (see additional explanation in "Other Developments"), effective September 5, 1996, the Company's borrowing rate dropped from prime plus 1.00% to prime plus 0.25%, the increase in consolidated interest expense for the first six months of 1997 is primarily attributed to the higher inventory levels maintained in the Steinbach stores that were funded by the revolving line of credit. For Crowley's, interest expense related to the line of credit for the six months ended August 2, 1997 decreased to $377,000 from $421,000 for the comparable period last year. Interest expense expressed as a percentage of net sales decreased to 0.9% for the six months ended August 2, 1997 from 1.0% for the comparable period in 1996. For Steinbach, interest expense related to the line of credit for the six months ended August 2, 1997 increased to $552,000 from $252,000 for the comparable period last year. Interest expense expressed as a percentage of net sales increased significantly to 1.4% for the six months ended August 2, 1997 from 0.7% for the comparable period in 1996. Although higher inventory levels are responsible for the majority of the increase in interest expense, management also believes that a refinement in the method in which interest expense was calculated and allocated to the Steinbach stores during the current year contributed to the balance of the increase. For accounting purposes, both Crowley's and Steinbach are required to capitalize a portion of the lease expense related to certain of their respective store locations, and to reclassify a portion of the lease expense as interest expense. On a consolidated basis, for the six month periods ended August 2, 1997 and August 3, 1996, the amount of lease payments reclassified as interest and interest other than interest incurred on the revolver was approximately $389,000, and $450,000, respectively. Six Months Ended August 2 August 3 Net Income 1997 1996 (Loss) Crowley's $ (561,652) $(2,898,997) Steinbach (4,683,642) 1,393,917 ---------- ---------- Consolidated for 1997 $(5,245,294) Combined/Proforma for 1996 $(1,505,080) On a consolidated basis, for the six months ended August 2, 1997 the Company reported a net loss of $5,245,294, or $3.46 per share, compared to a combined net loss of $1,505,080, or $1.57 per share, for the comparable period last year. For Crowley's, for the six months ended August 2, 1997, a net loss of $561,652 was recorded compared to a net loss of $2,898,997 during the first six months of 1996. The $2.3 million improvement is attributable to an increase in gross profit dollars of approximately $200,000, and the allocation of approximately $1.9 million of corporate overhead to Steinbach. For Steinbach, for the six months ended August 2, 1997, a net loss of $4,683,642 was recorded compared to net income of $1,393,917 for the first six months of last year. The $6.1 million change can be attributed primarily to a $3.5 million decline in gross profit (from $14.4 million to $10.9 million) arising from an aggressive promotion to clear out fall and winter clearance merchandise. As indicated previously, the gross profit for the first six months of 1996 includes a reversal of a $3.3 million markdown reserve. The other factors which contributed to the $6.1 million change include: the allocation of $1.9 million of corporate overhead expenses during the first six months of 1997; an increase to interest expense of $300,000 as a result of the increased inventory levels required to adequately stock the stores during the six months; and the one-time reversal of a price reduction reserve in the first quarter of 1996 of $700,000. The merchandising for the Crowley's and Steinbach stores is virtually identical, yet the difference in the first six month's gross profit performance between the two companies is significant. Management believes that the difference can be primarily attributed to the poor performance in menswear at the Steinbach stores during the first six months, principally the first quarter. Traditionally, Steinbach's men's departments had been very promotional and the Company attempted to upgrade the merchandise during the year. However, the new merchandising approach did not move goods in the manner projected by management. This exacerbated the level of markdowns required to reduce the inventory to acceptable levels. In light of the performance of the menswear area in the first quarter, the Company hired a new Vice President - General Merchandise Manager of the menswear area. With this addition, and with a more dedicated focus to controlling inventory levels, particularly in Steinbach's men's division, management believes that as a result of the extensive promotional efforts, at the end of the second quarter the inventory levels in the men's area are within an acceptable range of their planned levels, and that it has taken the appropriate steps to address the performance issue in Steinbach's men's division. Since the Company has fully exhausted all tax loss carrybacks and is in a net operating loss carryforward position, it was unable to tax effect the losses in either year's six months, thus pre-tax and after-tax results are the same. FINANCIAL CONDITION Cash and cash equivalents for the Company increased to $860,000 from $215,000 at February 1, 1997. The cash and cash equivalents balance at August 3, 1996 was $1.7 million. The decrease in cash and cash equivalent balances between August 3, 1996 and August 2, 1997 can be attributed to the change in the nature of short-term liabilities. Net cash used in operating activities was $4.3 million for the first six months of 1997, compared with net cash used in operating activities of $151,000 reported during the first six months of 1996. This difference is explained by the $5.2 million loss reported during the period, together with the decrease in the Company's accounts payable ($5.5 million) and accrued expenses ($1.0 million), which were offset by the decrease in the Company's inventories ($5.2 million) and prepaid expenses ($1.2 million). Management believes that the decrease in the Company's inventories is evidence of the Company's diligent and focused efforts to better control its inventory levels. In addition, the decrease in accounts payable and accrued expenses is the result of the Company's dedication to more timely process and pay vendor payables as compared to the turnaround time experienced in the early stages of the Steinbach acquisition. Investing activities used cash of $461,000 during the first six months of 1997, compared to $236,000 of cash used in investing activities for the first six months of 1996. Investing activities included capital expenditures for the modernization and refixturing of existing stores, and upgrades to the Company's information systems. Financing activities provided cash of $5.4 million during the first six months of 1997, compared to $1.5 million of cash provided last year. This increase is attributable to increased borrowings on the Company's revolving line of credit to fund merchandise purchases and the losses incurred during the first six months. On July 3, 1997, the Company amended its revolving line of credit to increase its borrowing capacity from $24 million to $35 million, with an additional borrowing capacity up to $42 million during the peak borrowing periods. For additional information related to the amended revolving line of credit, see "Other Developments" below. At August 2, 1997, the Company's working capital improved slightly to $8.1 million from the $8.0 million of working capital available at August 3, 1996. At August 2, 1997, the Company's working capital ratio was 1.21, down from 1.44 reported at August 3, 1996. During the six month periods ended August 2, 1997 and August 3, 1996, the Company has not paid or declared any cash dividends with respect to its stock. OTHER DEVELOPMENTS The Company plans to open new Steinbach stores located in Mohegan, New York in Westchester County (42,000 square feet) and Trumbull, Connecticut (54,000 square feet) in time for the Fall 1997 season, and these openings are progressing on schedule. As disclosed in its Current Report on Form 8-K filed on July 9, 1997, the Company amended its Loan and Security Agreement with Congress Financial Corporation (Central) to increase its revolving line of credit from $24 million to $35 million, with an additional borrowing capacity up to $42 million during the peak borrowing periods of September 1 through November 30 of each year. In addition, the facility for letters of credit was expanded from $5 million to $10 million. The Loan and Security Agreement was amended effective July 3, 1997, to reflect these terms. The Company believes that this expanded facility, together with cash provided by operating activities, will be sufficient to meet the current funding needs, as well as the needs for planned expansion, renovation of its current stores, and funding of the Company's "Year 2000" solution. With respect to the Company's "Year 2000" solution, in the fourth quarter of 1997, the Company will commence, for all of its systems, a year 2000 date conversion project to address all necessary code changes, testing, and implementation. Based on an extensive study, the Company expects to spend approximately $2.5 million during the period of fiscal year 1998 through fiscal year 1999 to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The estimated funding needs of $2.5 million anticipate a "total solution" to the "Year 2000" issue, which includes hardware, software, and all related collateral support. The timetable for the Company to convert from its current management information system to one which is "Year 2000" compliant anticipates a "go live" date of February 1999. There can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings in which the Company is a party to which its assets are subject. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 22, 1997 at the principal offices of the Company. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to the Board's nominees for election to the Board of Directors and all such nominees were elected. The matters voted on at the meeting (as more fully described in the Proxy Statement, dated April 22, 1997), and the results of the shareholder voting, were as follows: 1. Election of directors to hold office until Annual Meeting of Shareholders in 2000. Donald N. Bailey For 1,465,399; Withheld 630 Thomas R. Ketteler For 1,465,399; Withheld 630 Julius L. Pallone For 1,465,229; Withheld 800 Jerome L. Schostak For 1,463,229; Withheld 2,800 2. Appointment of Ernst & Young LLP as auditors for fiscal year ended January 31, 1998: For 1,448,829 Against 16,200 Abstain 1,000 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (EDGAR filing only). (b) Reports on Form 8-K On July 9, 1997, the Company filed a Current Report on Form 8-K, dated July 3, 1997, pursuant to which it reported under Item 5 on the consummation of Amendment No. 1 to the Amended and Restated Loan and Security Agreement, effective as of September 5, 1996, among Crowley, Milner and Company, Steinbach Stores, Inc. and Congress Financial Corporation (Central). SIGNATURES Pursuant to the requirements 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. CROWLEY, MILNER AND COMPANY (Registrant) DATE: September 5, 1997 By: /S/ JOHN R. DALLACQUA John R. Dallacqua Vice President-Finance and Chief Financial Officer (principal financial and chief accounting officer and a duly authorized officer of the registrant). EX-27 2 ART 5 FDS FOR 2ND QUARTER 10-Q
5 1 3-MOS JAN-31-1998 AUG-02-1997 859,451 0 2,652,764 66,558 41,350,640 46,957,866 28,164,032 15,909,560 64,319,358 38,867,051 4,750,000 1,523,796 0 0 10,978,597 64,319,358 85,202,651 85,574,764 60,201,226 0 29,300,794 0 1,318,038 (5,245,294) 0 0 0 0 0 (5,245,294) (3.46) (3.46)
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