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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
JANUARY 28, 1995
COMMISSION FILE NUMBER
1-13536
FEDERATED DEPARTMENT STORES, INC.
151 WEST 34TH STREET
NEW YORK, NY 10001
(212) 695-4400
AND
7 WEST SEVENTH STREET
CINCINNATI, OHIO 45202
(513) 579-7000
INCORPORATED IN DELAWARE I.R.S. NO. 13-3324058
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- - ------------------------------------------------------------- -------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred
Stock New York Stock Exchange
Senior Convertible Discount Notes Due February 15, 2004 New York Stock Exchange
Series C Warrants New York Stock Exchange
Series D Warrants New York Stock Exchange
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Registrant has filed all reports required to be filed by Section 12, 13, or
15(d) of the Act during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in a definitive proxy statement incorporated by reference in Part III
of this Form 10-K.
There were 182,708,184 shares of the Company's Common Stock outstanding as
of March 31, 1995, excluding shares held in the treasury of the Company or by
subsidiaries of the Company. The aggregate market value of the shares of such
Common Stock, excluding shares held in the treasury of the Company or by
subsidiaries of the Company, based upon the last sale price as reported on the
New York Stock Exchange Composite Tape on March 30, 1995, was approximately
$4,133,800,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to Registrant's Annual
Meeting of Shareholders, to be held on May 19, 1995 (the "Proxy Statement"), are
incorporated by reference in Part III hereof.
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EXPLANATORY NOTE
Prior to December 19, 1994, each of Federated Department Stores, Inc.
("Federated") and R.H. Macy & Co., Inc. ("Macy's") was subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith filed various reports
and other information with the Securities and Exchange Commission (the
"Commission") under Commission file numbers 1-163 and 33-6192, respectively. On
December 19, 1994, Federated acquired Macy's in a reverse acquisition structured
as a merger (the "Merger") of Federated with and into Macy's, with Macy's as the
surviving corporation in the Merger (the "Company"), changing its name to
"Federated Department Stores, Inc." Because the substance of the Merger
constituted an acquisition of Macy's by Federated, the Company, which is subject
to the information requirements of the Exchange Act and in accordance therewith
files various reports and other information with the Commission under Commission
file number 1-13536, prepares such reports and other information as if Federated
had been the surviving corporation in the Merger.
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Unless the context otherwise requires, (i) references herein to the
"Company" are, for all periods prior to December 19, 1994 (the "Merger Date"),
references to Federated and its subsidiaries and their respective predecessors,
and, for all periods following the Merger, references to the surviving
corporation in the Merger and its subsidiaries, and (ii) references to "1994",
"1993", and "1992" are references to the Company's fiscal years ended January
28, 1995, January 29, 1994 and January 30, 1993, respectively.
ITEM 1. BUSINESS
General. The Company is one of the leading operators of full-line
department stores in the United States, with 355 department stores in 35 states
as of January 28, 1995. The Company's department stores sell a wide range of
merchandise, including men's, women's and children's apparel and accessories,
cosmetics, home furnishings and other consumer goods, and are diversified by
size of store, merchandising character and character of community served. The
Company's department stores are located at urban or suburban sites, principally
in densely populated areas across the United States. The Company also operates
more than 135 specialty and clearance stores under the names "Aeropostale,"
"Charter Club" and "MCO," and a mail order catalog business under the name
"Bloomingdale's By Mail."
The Company operates, and is in the process of integrating, the businesses
operated separately by Federated, Macy's and their respective subsidiaries prior
to the Merger. Subsequent to the Merger, among other things, the Company has (i)
realigned operating management; (ii) discontinued the operations of the 12-store
I. Magnin specialty chain; (iii) commenced the consolidation of the Abraham &
Straus/Jordan Marsh division with the Macy's East division; (iv) commenced the
consolidation of the Lazarus division with the Rich's division; and (v)
commenced the consolidation of certain purchasing, support and other operations.
The following table sets forth certain information with respect to each of
the Company's retail operating divisions as of January 28, 1995:
GROSS
NUMBER OF 1994 SQUARE
STORES SALES FEET(A)
--------- ------------ -----------
(MILLIONS) (THOUSANDS)
Abraham & Straus/Jordan Marsh......................... 34 $ 1,441.1 8,999
Bloomingdale's........................................ 16 1,297.5(b) 4,439
The Bon Marche........................................ 40 873.0 4,892
Burdines.............................................. 46 1,258.5 7,648
Lazarus............................................... 51 1,130.3 10,212
Rich's/Goldsmith's.................................... 25 999.7 4,991
Stern's............................................... 22 707.4 3,946
--- ----------- -----------
Subtotal......................................... 234 7,707.5 45,127
--- ----------- -----------
Macy's East........................................... 64 327.5(c) 17,162
Macy's West/Bullock's................................. 57 255.1(c) 11,845
--- ----------- -----------
Total Department Stores.......................... 355 8,290.1 74,134
--- ----------- -----------
Macy's Specialty...................................... 122 17.8(c) 420
MCO................................................... 14 8.0(c) 704
--- ----------- -----------
Total............................................ 491 $ 8,315.9 75,258
========== =========== ===========
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- - ---------------
(a) Reflects total square footage of store locations, including office, storage,
service and other support space that is not dedicated to direct merchandise
sales, but excluding warehouses and distribution terminals not located at
store sites.
(b) Includes $105.3 million of sales of the Company's Bloomingdale's By Mail
subsidiary.
(c) Represents sales subsequent to the Merger Date. Sales of divisions acquired
pursuant to the Merger for the fiscal year ended January 28, 1995 were as
follows:
Macy's East...................... $3,447.7
Macy's West...................... 2,334.8
Macy's Specialty................. 128.4
MCO.............................. 83.1
--------
Total....................... $5,994.0
========
In general, each of the Company's retail operating divisions is a separate
subsidiary of the Company. However, (i) following its consolidation with the
Abraham & Straus/Jordan Marsh division, the Macy's East division will comprise
three separate subsidiaries of the Company, (ii) the Macy's West division
comprises two separate subsidiaries of the Company, and (iii) following the
consolidation of the Rich's and Lazarus divisions, the consolidated
Rich's/Lazarus division will comprise three separate subsidiaries of the
Company.
The Company provides electronic data processing and other support functions
to its retail operating divisions on an integrated, Company-wide basis. FACS
Group, Inc. ("FACS"), the Company's financial and credit services subsidiary,
establishes and monitors credit policies on a Company-wide basis, and provides
proprietary credit services, including statement processing and mailing, credit
authorizations, new account development and processing, customer service and
collections to each of the retail operating divisions that were divisions of
Federated prior to the Merger. GE Capital Consumer Card Co. ("GE Credit"), which
in 1991 purchased all of the consumer credit card accounts originated by the
retail operating divisions of Macy's, continues to provide credit services to
the retail operating divisions that were divisions of Macy's prior to the
Merger. The Company and GE Credit are currently engaged in negotiations with
respect to possible modifications to the contractual arrangements previously
entered into between Macy's and GE Credit with respect to such services. The
Company's data processing subsidiary, Federated Systems Group, Inc. ("FSG"),
provides operational electronic data processing and management information
services to each of the Company's retail operating divisions. In addition, a
specialized staff maintained in the Company's corporate offices provides
services for all divisions in such areas as store design and construction, real
estate, insurance, supply purchasing, merchandise accounts payable and
logistics, as well as various other corporate office functions. FACS, FSG, a
specialized service subsidiary and certain departments in the Company's
corporate offices offer their services to unrelated third parties as well.
Federated Merchandising, a division of the Company based in New York City,
coordinates the team buying process which enables the Company to centrally
develop and execute consistent Company-wide merchandise strategies while
retaining the ability to tailor merchandise assortments and merchandising
strategies to the particular character and customer base of the Company's
various department store franchises. Macy's Product Development, which was a
division of Macy's prior to the Merger, is in the process of being integrated
with Federated Merchandising, and will then be responsible for the private label
development for all of the Company's retail operating divisions, other than
Bloomingdale's and Stern's.
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The Company and its predecessors have been operating department stores
since 1830. Federated was organized as a Delaware corporation in 1929. On
February 4, 1992, Allied Stores Corporation ("Allied") was merged into
Federated. On May 26, 1994, Federated acquired Joseph Horne Co., Inc.
("Horne's") pursuant to a subsidiary merger. On December 19, 1994, Federated
acquired Macy's pursuant to the Merger.
Both Allied and Federated were among the leading independent retailers in
the United States prior to being acquired by Campeau Corporation ("Campeau") in
1986 and 1988, respectively, in highly leveraged transactions. During the course
of 1989, it became apparent that the indebtedness of Allied and Federated could
not be supported by operations and, on January 15, 1990, Federated, Allied and
substantially all of their respective subsidiaries (collectively, the
"Federated/Allied Companies") commenced proceedings under chapter 11 of the
United States Bankruptcy Code to reorganize and restructure their acquisition
debt and other liabilities. The Federated/Allied Companies emerged from
bankruptcy pursuant to a plan of reorganization (the "Federated POR") on
February 4, 1992. As a result of the Federated POR, Campeau ceased to have any
direct or indirect equity interest in the Company.
Macy's was organized as a Delaware corporation in 1985 to effect the
acquisition of the former R.H. Macy & Co., Inc. in a leveraged buyout.
Thereafter, in 1988, Macy's acquired the I. Magnin and
Bullock's/Bullock's-Wilshire divisions of Federated. An economic downturn,
competitive industry conditions and other factors subsequently produced a
liquidity crisis for Macy's. As a result, in January, 1992, Macy's and
substantially all of its subsidiaries (the "Macy's Debtors") commenced
proceedings under chapter 11 of the United States Bankruptcy Code to reorganize
and restructure their acquisition debt and other liabilities.
The Merger was effected pursuant to a plan of reorganization for the Macy's
Debtors (the "Macy's POR") proposed jointly by Federated and the Macy's Debtors.
In addition to the Merger, the Macy's POR provided for (i) the cancellation of
all existing capital stock and other equity interests in Macy's without payment
of any consideration therefor, (ii) the cancellation of certain indebtedness and
the discharge of related claims against the Macy's Debtors in exchange for cash,
new indebtedness of the Company and new equity interests in the Company, (iii)
the discharge of other prepetition claims against the Macy's Debtors, (iv) the
settlement of certain contingent claims and releases of certain claims of the
Macy's Debtors and other persons or entities, and (v) the assumption, assumption
and assignment, or rejection of each executory contract and unexpired lease to
which any Macy's Debtor was a party.
For additional information regarding the respective reorganization
proceedings of the Federated/Allied Companies and the Macy's Debtors, see Item 3
"Legal Proceedings."
The Company's executive offices are located at 151 W. 34th Street, New
York, New York 10001, telephone number: (212) 695-4400 and at 7 West Seventh
Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000.
Employees. As of January 28, 1995, the Company had approximately 111,700
regular full-time and part-time employees. Because of the seasonal nature of the
retail business, the number of employees rises to a peak in the Christmas
season. Approximately 10% of the Company's employees as of January 28, 1995 were
represented by unions. Management considers its relations with employees to be
satisfactory.
Seasonality. The department store business is seasonal in nature with a
high proportion of sales and operating income generated in the months of
November and December. Working capital requirements fluctuate during the year,
increasing somewhat in mid-summer in anticipation of the fall merchandising
season and increasing substantially prior to the Christmas season when the
Company must carry significantly higher inventory levels.
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Purchasing. The Company purchases merchandise from many suppliers, no one
of which accounted for more than 5% of the Company's net purchases during 1994.
The Company has no long-term purchase commitments or arrangements with any of
its suppliers, and believes that it is not dependent on any one supplier. The
Company considers its relations with its suppliers to be satisfactory.
Competition. The retailing industry, in general, and the department store
business, in particular, are intensely competitive. Generally, the Company's
stores are in competition not only with other department stores in the
geographic areas in which they operate but also with numerous other types of
retail outlets, including specialty stores, general merchandise stores,
off-price and discount stores, new and established forms of home shopping
(including mail order catalogs, television and computer services) and
manufacturers' outlets.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company:
NAME AGE POSITION WITH THE COMPANY
-------------------------- -------- -----------------------------------------------------
Allen I. Questrom........ 55 Chairman of the Board and Chief Executive Officer;
Director
James M. Zimmerman....... 51 President and Chief Operating Officer; Director
Ronald W. Tysoe.......... 42 Vice Chairman of the Board and Chief Financial
Officer; Director
Thomas G. Cody........... 53 Executive Vice President - Legal and Human Resources
Dennis J. Broderick...... 46 Senior Vice President, General Counsel and Secretary
John E. Brown............ 55 Senior Vice President and Controller
Karen M. Hoguet.......... 38 Senior Vice President - Planning and Treasurer
Allen I. Questrom has been Chairman of the Board and Chief Executive
Officer of the Company since February 1990. Prior thereto, he was President and
Chief Executive Officer of the Neiman-Marcus division of the Neiman-Marcus
Group, Inc. from September 1988 to February 1990.
James M. Zimmerman has been President and Chief Operating Officer of the
Company since May 1988.
Ronald W. Tysoe has been Vice Chairman and Chief Financial Officer of the
Company since April 1990. Prior thereto, he was President and Treasurer of
Federated Stores, Inc. ("FSI"), the former indirect parent of Federated, from
1987 to 1992, Chief Financial Officer of FSI from April 1990 to February 1992
and President of Campeau from April 1989 to January 1990.
Thomas G. Cody has been Executive Vice President - Legal and Human
Resources of the Company since May 1988.
Dennis J. Broderick has been Secretary of the Company since July 1993 and
Senior Vice President and General Counsel of the Company since January 1990;
prior thereto, he served as Vice President and General Counsel of Allied and
General Counsel of the Company since May 1988 and Vice President of the Company
since February 1988.
John E. Brown has been Senior Vice President of the Company since September
1988 and Controller of the Company since January 1992.
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Karen M. Hoguet has been Senior Vice President - Planning of the Company
since April 1991 and Treasurer of the Company since January 1992; prior thereto,
she served as Vice President of the Company and Allied since December 1988.
ITEM 2. PROPERTIES
The properties of the Company consist primarily of stores and related
retail facilities, including warehouses and distribution centers. The Company
also owns or leases other properties, including corporate office space in New
York and Cincinnati and other facilities at which centralized operational
support functions are conducted. As of January 28, 1995, the Company operated
355 department stores, of which 181 stores were entirely or mostly owned and 174
stores were entirely or mostly leased. The Company's interests in approximately
20% of its owned stores and approximately 6% of its leased stores are subject to
security interests in favor of certain third-party creditors. (See Note 10 to
the Consolidated Financial Statements.) Pursuant to various shopping center
agreements, the Company is obligated to operate certain stores within the
centers for periods of up to 20 years. Some of these agreements require that the
stores be operated under a particular name.
The number of stores and total gross square feet (in thousands) of store
space operated by the Company as of the end of each of the last two fiscal years
were as follows:
JANUARY 28, 1995 JANUARY 29, 1994
------------------------- -------------------------
NUMBER OF GROSS NUMBER OF GROSS
OPERATING DIVISION STORES SQUARE FEET STORES SQUARE FEET
- - --------------------------------------------- --------- ----------- --------- -----------
(thousands) (thousands)
Abraham & Straus/Jordan Marsh................ 34 8,999 35 9,327
Bloomingdale's............................... 16 4,439 16 4,372
The Bon Marche............................... 40 4,892 39 4,697
Burdines..................................... 46 7,648 43 7,321
Lazarus...................................... 51 10,212 40 7,807
Rich's/Goldsmith's........................... 25 4,991 25 4,925
Stern's...................................... 22 3,946 21 3,879
Macy's East.................................. 64 17,162 N/A N/A
Macy's West.................................. 57 11,845 N/A N/A
MCO.......................................... 14 704 N/A N/A
Macy's Specialty............................. 122 420 N/A N/A
--- ------ --- ------
491 75,258 219 42,328
=== ====== === ======
ITEM 3. LEGAL PROCEEDINGS
The Federated POR was confirmed by the United States Bankruptcy Court for
the Southern District of Ohio, Western Division (the "Ohio Bankruptcy Court"),
in Consolidated Case No. 1-90-00130 on January 10, 1992. Notwithstanding the
confirmation and effectiveness of the Federated POR, the Ohio Bankruptcy Court
continues to have jurisdiction to, among other things, resolve disputed
prepetition claims against the Federated/Allied Companies; resolve matters
related to the assumption, assumption and assignment, or rejection of executory
contracts pursuant to the Federated POR; and to resolve other matters that may
arise in connection with or relate to the Federated POR.
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Pursuant to the Federated POR, and based on the Company's estimate of the
amount of such claims that ultimately will be allowed by the Ohio Bankruptcy
Court, the Company provided for the payment of all remaining bankruptcy claims.
During 1994, the Company reduced selling, general and administrative expenses by
$23.8 million to reflect the favorable settlement of disputed bankruptcy claims.
The Company believes that it has adequately provided for the resolution of all
bankruptcy claims and other matters related to the Federated POR remaining at
January 28, 1995.
The Macy's POR was confirmed by the United States Bankruptcy Court for the
Southern District of New York (the "New York Bankruptcy Court") in Case No. 92 B
10477 (BRL) on December 8, 1994. Notwithstanding the confirmation and
effectiveness of the Macy's POR, the New York Bankruptcy Court continues to have
jurisdiction to, among other things, resolve disputed prepetition claims against
the Macy's Debtors; resolve matters related to the assumption, assumption and
assignment, or rejection of executory contracts pursuant to the Macy's POR; and
to resolve other matters that may arise in connection with or relate to the
Macy's POR. Except as described below, provision was made under the Macy's POR
in respect of all prepetition liabilities of the Macy's Debtors.
Certain claims or portions thereof (collectively, the "Cash Payment
Claims") against the Macy's Debtors which, to the extent allowed by the New York
Bankruptcy Court, will be paid in cash pursuant to the Macy's POR are currently
disputed by the Company. The aggregate amount of disputed Cash Payment Claims
ultimately allowed by the New York Bankruptcy Court may be more or less than the
estimated allowed amount thereof. As of March 30, 1995, the aggregate face
amount of disputed Cash Payment Claims was approximately $846.9 million, while
the estimated allowed amount thereof was approximately $355.7 million. Although
there can be no assurance with respect thereto, the Company believes that the
actual allowed amount of disputed Cash Payment Claims will not be materially
greater than the estimated allowed amount thereof.
In connection with the Federated POR and the reorganization proceedings of
FSI, the Internal Revenue Service (the "IRS") audited the tax returns of FSI and
the Federated/Allied Companies for tax years 1984 through 1989 and asserted
certain claims against the Federated/Allied Companies and other members of the
FSI consolidated tax group. The issues raised by the IRS audit were resolved by
agreement with the IRS except for two issues involving the use by the
Federated/Allied Companies of an aggregate of $27.0 million of net operating and
capital loss carryforwards of an acquired company and the deductibility of
approximately $176.3 million of so-called "break-up fees." These issues were
litigated before the Ohio Bankruptcy Court and resolved in favor of the
Federated/Allied Companies; however, the IRS pursued appeals on both issues to
the United States District Court for the Southern District of Ohio, which
affirmed the decision of the Ohio Bankruptcy Court on August 2, 1994. On
September 30, 1994, the IRS filed a notice of appeal to the United States Court
of Appeals for the Sixth Circuit with respect to the issue relating to "break up
fees" only, where such appeal is currently pending. Although there can be no
assurance with respect thereto, the Company does not expect that the ultimate
resolution of this issue will have a material adverse effect on the Company's
financial position or results of operations.
The Company is also a party to certain disputes with the IRS relating to
certain deductions claimed by and certain loss carryforwards utilized by
Federated and its predecessors which the IRS seeks to disallow. Although there
can be no assurance with respect thereto, the Company does not expect that the
ultimate resolution of such disputes will have a material adverse effect on the
Company's financial position or results of operations.
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The Company and its subsidiaries are also involved in various proceedings
that are incidental to the normal course of their business. The Company does not
expect that any of such proceedings will have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders of the Company was held on November 29,
1994 for the purpose of considering and voting upon (i) the approval and
adoption of an Agreement and Plan of Merger between Federated and Macy's and
(ii) the approval of a new equity incentive plan for the Company (the "1995
Equity Plan").
The number of votes cast for or against each such matter is set forth
below:
WITHHELD/
FOR AGAINST ABSTENTIONS
------------- ------------- ------------
Agreement and Plan of Merger..................... 92,777,521 1,427,862 154,406
1995 Equity Plan................................. 71,436,132 21,875,464 1,048,193
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the trading symbol "FD." The following table sets forth for each fiscal
quarter during 1994 and 1993 the high and low sales prices per share of Common
Stock as reported on the NYSE Composite Tape:
1994 1993
------------------ ------------------
LOW HIGH LOW HIGH
------- ------- ------- -------
1st Quarter............................. 20.750 25.250 17.375 22.750
2nd Quarter............................. 19.000 22.750 19.000 25.000
3rd Quarter............................. 18.750 23.625 18.000 23.500
4th Quarter............................. 17.875 20.875 19.250 23.125
The Company has not paid any dividends on its Common Stock during its two
most recent fiscal years, and does not anticipate paying any dividends on the
Common Stock in the foreseeable future. In addition, the covenants in certain
debt instruments to which the Company is a party restrict the ability of the
Company to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Consolidated Financial Statements and the notes thereto and the other
information contained elsewhere in this report. References to "1994", "1993",
"1992", "1991", and "1990" are references to the Company's fiscal years ended
January 28, 1995, January 29, 1994, January 30, 1993, February 1, 1992 and
February 2, 1991, respectively.
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1, FEBRUARY 2,
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Operations Data (a): |
Net sales, including leased |
department sales................... $ 8,315,877 $7,229,406 $7,079,941 | $ 6,932,323 $ 7,141,983
----------- ---------- ---------- | ----------- -----------
Cost of sales........................ 5,131,363 4,373,941 4,229,396 | 4,202,223 4,394,976
Selling, general and administrative |
expenses........................... 2,549,122 2,323,546 2,420,684 | 2,463,128 2,611,834
Business integration and |
consolidation expenses............. 85,867 -- -- | -- --
----------- ---------- ---------- | ----------- -----------
Operating income..................... 549,525 531,919 429,861 | 266,972 135,173
Interest expense (b)................. (262,115) (213,544) (258,211) | (504,257) (639,527)
Interest income...................... 43,874 49,405 60,357 | 67,260 83,585
----------- ---------- ---------- | ----------- -----------
Income (loss) before reorganization |
items, income taxes, extraordinary |
items and cumulative effect of |
change in accounting principle..... 331,284 367,780 232,007 | (170,025) (420,769)
Reorganization items (c)............. -- -- -- | (1,679,936) (127,032)
Federal, state and local income tax |
(expense) benefit.................. (143,668) (170,987) (99,299) | 613,989 276,355
Extraordinary items (d).............. -- (3,545) (19,699) | 2,165,515 --
Cumulative effect of change in |
accounting principle (e)........... -- -- -- | (93,151) --
----------- ---------- ---------- | ----------- -----------
Net income (loss).................... $ 187,616 $ 193,248 $ 113,009 | $ 836,392 $ (271,446)
=========== ========== ========== | =========== ===========
Earnings per Share of Common Stock (f): |
Income before extraordinary items.... $ 1.41 $ 1.56 $ 1.19 | $ -- $ --
Net income........................... 1.41 1.53 1.01 | -- --
Average number of shares outstanding |
(f).................................. 132,862 126,293 111,350 | -- --
Depreciation and amortization.......... $ 285,861 $ 229,781 $ 230,124 | $ 260,884 $ 278,227
Capital expenditures................... $ 397,664 $ 312,960 $ 207,931 | $ 201,631 $ 93,143
Balance Sheet Data (at year end) (a):
Cash................................. $ 206,490 $ 222,428 $ 566,984 $ 1,002,482 | $ 453,560
Working capital...................... 2,478,376 1,967,569 2,227,336 1,923,812 | 1,957,037
Total assets......................... 12,379,712 7,419,427 7,019,770 7,501,145 | 9,150,056
Short-term debt...................... 463,042 10,099 12,944 771,605 | 309,268
Liabilities subject to settlement |
under reorganization proceedings... -- -- -- -- | 6,475,129
Long-term debt (including preferred |
shares)............................ 4,529,220 2,786,724 2,809,757 3,176,687 | 1,361,778
Shareholders' equity (deficit)....... 3,639,610 2,278,244 2,074,980 1,454,132 | (1,398,528)
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- - ---------------
(a) As a result of the Company's emergence from bankruptcy and its adoption of
fresh-start reporting as of February 1, 1992, the Company's Consolidated
Balance Sheets at and after February 1, 1992 and its Consolidated Statements
of Operations for periods after February 1, 1992 are not comparable to the
Consolidated Financial Statements for prior periods and therefore are
separated by a black line.
(b) Excludes interest on unsecured prepetition indebtedness of $301,576,000 and
$290,979,000, respectively, for 1991 and 1990.
(c) Reflects the net expense incurred in connection with the chapter 11
reorganization of the Federated/Allied Companies.
(d) The extraordinary items for 1993 and 1992 are described in Note 4 to the
Consolidated Financial Statements. The extraordinary item for 1991 was a
gain resulting from the discharge of prepetition claims pursuant to the
Federated POR.
(e) Reflects the cumulative effect of the adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits other than Pensions," as of February
1, 1992.
(f) Per share and share data are not presented for periods during which there
were no publicly held shares of common stock of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company acquired Horne's and Macy's on May 26, 1994 and December 19,
1994, respectively. Under the purchase method of accounting, the assets,
liabilities and results of operations associated with such acquired businesses
have been included in the Company's financial position and results of operations
since the respective dates on which such businesses were acquired. Accordingly,
the financial position and results of operations of the Company as of the end of
and for 1994 are not directly comparable to the financial position and results
of operations of the Company as of the end of and for prior fiscal years, and
are not necessarily indicative of the financial position or results of
operations that may be reported by the Company as of future dates or for future
periods. The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto contained elsewhere in
this report.
RESULTS OF OPERATIONS
Comparison of the 52 Weeks Ended January 28, 1995 and January 29, 1994. Net
sales for 1994 were $8,315.9 million, compared to $7,229.4 million for 1993, an
increase of 15.0%. During 1994, the Company added 142 department stores and more
than 135 specialty and clearance stores and closed six department stores. Of the
142 department stores added, 121 were added as a result of the acquisition of
Macy's, and 10 were added as a result of the acquisition of Horne's. All of the
specialty and clearance stores were added through the Macy's acquisition. On a
comparable store basis, net sales increased 3.1%.
Cost of sales was 61.7% of net sales for 1994, compared to 60.5% for 1993.
The increase reflects the impact of higher levels of markdowns taken to offer
more value to customers consistent with the competitive environment and to keep
in-store inventories fresh and fashion-current. Cost of sales includes a credit
of $11.3 million in 1994, compared to a charge of $2.8 million in 1993,
resulting from the valuation of merchandise inventory on the last-in, first-out
basis.
Selling, general and administrative expenses were 30.7% of net sales for
1994, compared to 32.1% for 1993. The decrease reflects the continued emphasis
on controlling expenses, enhanced efficiencies and productivity resulting from
the Company's ongoing investments in retail technology, and increased revenue
10
13
from credit operations resulting from higher accounts receivable balances in
1994. In addition, operating expenses were reduced by $23.8 million in 1994 and
$24.0 million in 1993 as a result of adjustments for the favorable settlement of
disputed bankruptcy claims.
Business integration and consolidation expenses for 1994 consisted of $27.0
million associated with the integration of 10 former Horne's stores into the
Company, $45.8 million associated with the integration of Macy's into the
Company and $13.1 million of severance charges related to the consolidation of
the Company's Rich's/Goldsmith's and Lazarus divisions announced on January 20,
1995. The Company presently expects to incur approximately $225.0 million of
additional business integration and consolidation expenses in the 53 weeks ended
February 3, 1996 as a result of the Macy's acquisition and the consolidation of
the Rich's/Goldsmith's and Lazarus divisions.
Net interest expense was $218.2 million for 1994, compared to $164.1
million for 1993. The higher interest expense in 1994 is principally due to the
higher levels of borrowings incurred in connection with the acquisition of
Macy's, including the issuance of a $340.0 million promissory note on December
31, 1993 to fund the Company's initial investment in Macy's. Cash interest
payments, net of interest received, were $166.8 million for 1994 compared to
$136.6 million for 1993.
Income tax expense was $143.7 million for 1994. This amount differs from
the amount computed by applying the federal income tax statutory rate of 35.0%
to income before income taxes and extraordinary items principally because of
state and local income taxes and permanent differences arising from the
amortization of intangible assets.
Management believes that the turnaround of existing deferred tax
liabilities and tax planning strategies will generate sufficient taxable income
in future periods such that it is more likely than not that the gross deferred
tax assets, net of the valuation allowance, at the end of 1994 will be realized.
Management evaluates the realizability of deferred tax assets quarterly.
Extraordinary items of $3.5 million in 1993 relate to the after-tax
expenses associated with debt prepayments.
Comparison of the 52 Weeks Ended January 29, 1994 and January 30, 1993. Net
sales for 1993 were $7,229.4 million, compared to $7,079.9 million for 1992, an
increase of 2.1%. On a comparable store basis, net sales increased 1.9%. The
sales performance reflected the continuing effects of key merchandising
strategies put into effect in 1991, such as team buying and improved inventory
management, as well as improvements in net sales for home-related merchandise,
partially offset by softer apparel sales and the effects of the sluggish economy
in the Northeast. Additionally, net sales for 1992 were positively affected by
strong overall general merchandise sales, a post-hurricane sales surge in South
Florida and the positive impact of a one-time program to clear old inventory
undertaken at the end of 1991.
Cost of sales was 60.5% of net sales for 1993, compared to 59.7% for 1992.
The increase reflected the impact of higher levels of markdowns taken to keep
in-store inventories fresh and fashion-current. In addition, cost of sales for
the first quarter of 1992 benefited from the one-time strategy to clear old
inventory marked down at the end of fiscal 1991. Cost of sales included charges
of $2.8 million in 1993, compared to $8.5 million in 1992, resulting from the
valuation of merchandise inventory on the last-in, first-out basis.
Selling, general and administrative expenses were 32.1% of net sales for
1993, compared to 34.2% for 1992. The decrease was primarily due to reduced
costs from streamlining of operations at the divisions. In addition, operating
expenses were reduced by $24.0 million in 1993 as a result of an adjustment for
the
11
14
favorable settlement of disputed bankruptcy claims. Excluding this adjustment,
selling, general and administrative expenses would have been 32.5% of net sales
for 1993.
Net interest expense was $164.1 million for 1993, compared to $197.9
million for 1992. Net interest expense for 1993 was positively impacted by the
prepayment of long-term debt. Cash interest payments, net of interest received,
were $136.6 million for 1993 compared to $136.3 million for 1992.
Income tax expense was $171.0 million, excluding extraordinary items, for
1993. This amount differs from the amount computed by applying the federal
income tax statutory rate of 35.0% to income before income taxes and
extraordinary items principally because of state and local income taxes, a
charge of $14.2 million for the impact of the tax rate increase on deferred
taxes and permanent differences arising from the amortization of reorganization
value in excess of amounts allocable to identifiable assets.
Extraordinary items of $3.5 million in 1993 and $19.7 million in 1992
relate to the after-tax expenses associated with debt prepayments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash from
operations and certain credit facilities that are available to it.
Net cash provided by operating activities in 1994 was $161.5 million, a
reduction of $249.0 from the net cash provided by operating activities in 1993
of $410.5 million. The primary factors which contributed to this decrease were
higher accounts receivable balances in 1994 generated by increases in
proprietary credit sales and a Company policy change to lower its minimum
monthly payment requirement, increased income tax payments and seasonal
decreases in Macy's accounts payable and accrued liabilities (as partially
offset by seasonal decreases in Macy's merchandise inventories) during the
period between December 19, 1994 and January 28, 1995. The increase in accounts
receivable balances was partially funded by increased short-term borrowings
associated with the receivables.
The Company is a party to a bank credit facility providing for up to $800.0
million of term borrowings and up to $2,000.0 million of revolving credit
borrowings (including a $500.0 million letter of credit subfacility). The
Company also has in effect a facility to finance its customer accounts
receivable which provides for, among other things, the issuance from time to
time of up to $375.0 million of receivables backed commercial paper. As of
January 28, 1995, the Company had $800.0 million of term borrowings, $900.0
million of long-term revolving credit borrowings, $25.0 million of seasonal
working capital revolving credit borrowings, $56.1 million of standby letters of
credit and $108.6 million of trade letters of credit outstanding under its bank
credit facility and $274.9 million of commercial paper borrowings outstanding
under its receivables backed commercial paper facility.
Net cash provided by financing activities was $776.1 million in 1994.
During 1994, the Company incurred debt totaling $2,526.9 million and repaid debt
in the amount of $1,594.1 million. Debt incurred consisted of $1,725.0 million
of borrowings under the Company's bank credit facility, the issuance of $450.0
million of 10% Senior Notes due 2001, $274.9 million of borrowings under the
Company's receivables-backed commercial paper program and the sale of $77.0
million of receivables-backed certificates. The major components of debt repaid
were $953.5 million of notes assumed in the acquisition of Macy's, a $340.0
million promissory note and $289.2 million of Series A Secured Notes.
Net cash used in investing activities was $953.5 million in 1994 compared
to $405.1 million in 1993. In 1994, $575.4 million of cash was invested in
connection with acquisitions of Macy's and Horne's and $386.8
12
15
million was invested in property and equipment. The total purchase prices,
including noncash items, for the acquisitions of Macy's and Horne's were
$3,815.9 million and $116.0 million, respectively.
The Company's budgeted capital expenditures are approximately $2,800.0
million for the 1995 to 1998 period, with approximately 68% being budgeted for
existing stores, 21% being budgeted for new stores and 11% being budgeted for
technology. Management presently anticipates funding such expenditures from
operations. However, depending upon conditions in the capital and other
financial markets and other factors, the Company may from time to time consider
the issuance of debt or other securities, the proceeds of which could be used to
refinance existing debt or for capital projects or other corporate purposes.
Management believes the department store business will continue to
consolidate. Accordingly, the Company intends from time to time to consider the
possible acquisition of department store assets and companies.
Management believes that, with respect to its current operations, cash on
hand and funds from operations, together with its credit facilities, will be
sufficient to cover its reasonably foreseeable working capital, capital
expenditure and debt service requirements. Acquisition transactions, if any, are
expected to be financed through a combination of cash on hand and from
operations and the possible issuance from time to time of long-term debt or
other securities.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth in the Company's
Consolidated Financial Statements and supplementary data contained in this
report and is incorporated herein by this reference. Specific financial
statements and supplementary data can be found at the pages listed in the
following index.
PAGE
INDEX NUMBER
- - ----------------------------------------------------------------------------------- --------
Management's Report................................................................ F-2
Independent Auditors' Report....................................................... F-3
Consolidated Statements of Income for the 52 weeks ended January 28, 1995, January
29, 1994 and January 30, 1993.................................................... F-4
Consolidated Balance Sheets at January 28, 1995 and January 29, 1994............... F-5
Consolidated Statements of Cash Flows for the 52 weeks ended January 28, 1995,
January 29, 1994 and January 30, 1993............................................ F-6
Notes to Consolidated Financial Statements......................................... F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by this item is set forth under Item 1 "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement, and in Item 1A "Executive Officers of the
Registrant", and incorporated herein by reference.
13
16
ITEM 11. EXECUTIVE COMPENSATION
Information called for by this item is set forth under "Executive
Compensation" and "Compensation Committee Report on Executive Compensation" in
the Proxy Statement and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by this item is set forth under "Stock Ownership" in
the Proxy Statement and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by this item is set forth under "Compensation
Committee Interlocks and Insider Participation" and under "Certain Relationships
and Related Transactions" in the Proxy Statement and incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS:
The list of financial statements required by this item is set forth in Item
8 "Consolidated Financial Statements and Supplementary Data" and is incorporated
herein by reference.
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are inapplicable, not required, or
the information is included elsewhere in the Consolidated Financial Statements
or the notes thereto.
3. EXHIBITS:
The following exhibits are filed herewith or incorporated by reference as
indicated below.
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
2.1 Agreement and Plan of Merger, dated Exhibit 2.1 to the Registration
as of August 16, 1994, between Macy's Statement on Form S-4 (Registration
and the Company No. 33-85480) filed on October 21,
1994 ("S-4 Registration Statement")
2.2 Second Amended Joint Plan of Exhibit 2.2 to S-4 Registration
Reorganization of Macy's and Certain Statement
of Its Subsidiaries
2.2.1 Modifications to the Second Amended Exhibit 2.1.1 to the Current Report
Joint Plan of Reorganization of on Form 8-K (File No. 1-13536), filed
Macy's and Certain of Its on January 3, 1995 ("1995 Form 8-K")
Subsidiaries
14
17
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
2.3 Findings of Fact, Conclusions of Law Exhibit 2.1.2 of 1995 Form 8-K
and Order Confirming Second Amended
Joint Plan of Reorganization of
Macy's and Certain of Its
Subsidiaries, as Modified
3.1 Certificate of Incorporation
3.1.1 Certificate of Designations of Series
A Junior Participating Preferred
Stock
3.2 By-Laws
4.1 Certificate of Incorporation See Exhibit 3.1
4.2 By-Laws See Exhibit 3.2
4.3 Rights Agreement
4.4 Indenture, dated as of December 15, Exhibit 4.1 to the Registration
1994, between the Company and The Statement on Form S-3 (Registration
First National Bank of Boston, as No. 33-88328) filed on January 9,
Trustee 1995 ("S-3 Registration Statement")
4.4.1 Third Supplemental Indenture, dated
as of January 23, 1995, between the
Company and The First National Bank
of Boston, as Trustee
4.5 Senior Convertible Discount Note Exhibit 10.8 to the Company's Annual
Indenture, dated as of April 8, 1993, Report on Form 10-K (File No. 1-163)
between the Company and The First for the fiscal year ended January 30,
National Bank of Boston, as Trustee 1993 ("1992 Form 10-K")
4.5.1 Supplemental Indenture to Senior
Convertible Discount Note Indenture
dated as of December 19, 1994
4.6 Series C Warrant Agreement
4.7 Series D Warrant Agreement
10.1 Series A Warrant Agreement Exhibit 10.6 to the Registration
Statement on Form 10 (File No.
1-10951), filed November 27, 1991, as
amended ("Form 10")
10.1.1 Amendment No. 1, dated as of November Exhibit 10.1.1 to the Company's
3, 1993, to the Series A Warrant Annual Report on Form 10-K (File No.
Agreement 1-163) for the fiscal year ended
January 29, 1994 ("1993 Form 10-K")
10.2 Series B Warrant Agreement Exhibit 10.7 to Form 10
10.3 Credit Agreement, dated as of
December 19, 1994, among the Company,
Citibank, N.A., Chemical Bank,
Citicorp Securities, Inc., Chemical
Securities, Inc. and the initial
lenders named therein
15
18
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
10.4 Senior Convertible Discount Note Exhibit 10.5 to Form 10
Agreement
10.4.1 Supplemental Agreement to Senior
Convertible Discount Note Agreement
dated as of December 19, 1994
10.5 Loan Agreement, dated as of December Exhibit 10.12 to Allied's Annual
30, 1987 (the "Prudential Loan Report on Form 10-K (File No. 1-970)
Agreement"), among Prudential, Allied for the fiscal year ended January 2,
Stores Corporation ("Allied"), and 1988
certain subsidiaries of Allied named
therein
10.5.1 Amendment No. 1, dated as of December Exhibit 10.9.1 to Form 10
29, 1988, to the Prudential Loan
Agreement
10.5.2 Amendment No. 2, dated as of November Exhibit 10.9.2 to Form 10
17, 1989, to the Prudential Loan
Agreement
10.5.3 Amendment No. 3, dated as of February Exhibit 10.9.3 to Form 10
5, 1992, to the Prudential Loan
Agreement
10.6 Loan Agreement, dated as of May 26, Exhibit 10.47 to S-4 Registration
1994, among Lazarus PA (formerly Statement
Joseph Horne Co., Inc.), the banks
listed thereon, and PNC Bank, Ohio,
National Association, as Agent
("PNC")
10.7 Guaranty Agreement, dated as of May Exhibit 10.48 to S-4 Registration
26, 1994, made by the Company in Statement
favor of the banks listed on the
Lazarus PA Mortgage Term Loan and PNC
("Guaranty Agreement")
10.7.1 Amendment No. 1 to Guaranty Agreement
dated as of February 28, 1995
10.8 Amended and Restated Pooling and Exhibit 4.10 to Prime's Current
Servicing Agreement, dated as of Report on Form 8-K (File No. 0-2118),
December 15, 1992 (the "Pooling and dated March 29, 1993
Servicing Agreement"), among the
Company, Prime Receivables
Corporation ("Prime") and Chemical
Bank, as Trustee
10.8.1 First Amendment, dated as of December Exhibit 10.10.1 to 1993 Form 10-K
1, 1993, to the Pooling and Servicing
Agreement
10.8.2 Second Amendment, dated as of Exhibit 10.10.2 to 1993 Form 10-K
February 28, 1994, to the Pooling and
Servicing Agreement
16
19
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
10.8.3 Third Amendment, dated as of May 31,
1994, to the Pooling and Servicing
Agreement
10.9 Assumption Agreement under the Exhibit 10.10.3 to 1993 Form 10-K
Pooling and Servicing Agreement,
dated as of September 15, 1993
10.10 Series 1992-1 Supplement, dated as of Exhibit 4.6 to Prime's Registration
December 15, 1992, to the Pooling and Statement on Form 8-A (File No. 0-
Servicing Agreement 2118), filed January 22, 1993, as
amended ("Prime's Form 8-A")
10.11 Series 1992-2 Supplement, dated as of Exhibit 4.7 to Prime's Form 8-A
December 15, 1992, to the Pooling and
Servicing Agreement
10.12 Series 1992-3 Supplement, dated as of Exhibit 4.8 to Prime's Current Report
January 5, 1993, to the Pooling and on Form 8-K (File No. 0-2118), dated
Servicing Agreement January 29, 1993
10.13 Receivables Purchase Agreement, dated Exhibit 10.2 to Prime's Form 8-A
as of December 15, 1992 (the
"Receivables Purchase Agreement"),
among Abraham & Straus, Inc.,
Bloomingdale's, Inc., Burdines, Inc.,
Jordan Marsh Stores Corporation,
Lazarus, Inc., Rich's Department
Stores, Inc., Stern's Department
Stores, Inc., The Bon, Inc., and
Prime
10.13.1 First Amendment, dated as of June 23, Exhibit 10.14.1 to 1993 Form 10-K
1993, to the Receivables Purchase
Agreement
10.13.2 Second Amendment, dated as of Exhibit 10.14.2 to 1993 Form 10-K
December 1, 1993, to the Receivables
Purchase Agreement
10.13.3 Third Amendment, dated as of February Exhibit 10.14.3 to 1993 Form 10-K
28, 1994, to the Receivables Purchase
Agreement
10.13.4 Fourth Amendment, dated as of May 31,
1994, to the Receivables Purchase
Agreement
10.13.5 First Supplement, dated as of Exhibit 10.14.4 to 1993 Form 10-K
September 15, 1993, to the
Receivables Purchase Agreement
17
20
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
10.14 Depositary Agreement, dated as of Exhibit 10.15 to 1992 Form 10-K
December 31, 1992, among Deerfield
Funding Corporation ("Deerfield"),
the Company, and Chemical Bank, as
Depositary
10.15 Liquidity Agreement, dated as of Exhibit 10.16 to 1992 Form 10-K
December 31, 1992, among Deerfield,
the Company, the financial
institutions named therein, and
Credit Suisse, New York Branch, as
Liquidity Agent
10.16 Pledge and Security Agreement, dated Exhibit 10.17 to 1992 Form 10-K
as of December 31, 1992, among
Deerfield, the Company, Chemical
Bank, as Depositary and Collateral
Agent, and the Liquidity Agent
10.17 Commercial Paper Dealer Agreement, Exhibit 10.18 to 1992 Form 10-K
dated as of December 31, 1992, among
Deerfield, the Company, and Goldman
Sachs Money Markets, L.P.
10.18 Commercial Paper Dealer Agreement, Exhibit 10.19 to 1992 Form 10-K
dated as of December 31, 1992, among
Deerfield, the Company, and Shearson
Lehman Brothers, Inc.
10.19 Tax Sharing Agreement Exhibit 10.10 to Form 10
10.20 Ralphs Tax Indemnification Agreement Exhibit 10.1 to From 10
10.21 Account Purchase Agreement dated as Exhibit 19.2 to Macy's Quarterly
of May 10, 1991 by and among Monogram Report on Form 10-Q for the fiscal
Bank, USA, Macy's, Macy Credit quarter ended May 4, 1991 (File No.
Corporation ("Macy Credit"), Macy 33-6192), as amended under cover of
Funding, Macy's California, Inc. Form 8, dated October 3, 1991
("MCAL"), Macy's Northeast, Inc. ("Macy's May 1991 Form 10-Q")*
("MNE"), Macy's South, Inc.,
Bullock's Inc., I. Magnin, Inc.,
Master Servicer, and Macy Specialty
Stores, Inc.
10.22 Commercial Accounts Agreement dated Exhibit 19.3 to Macy's May 1991 Form
as of May 10, 1991 ("Commercial 10-Q*
Accounts Agreement") by and among
General Electric Capital Corporation
("GECC"), Macy's, Macy Credit, Macy
Funding, MCAL, MNE, Macy's South,
Inc., Bullock's Inc., I. Magnin,
Inc., Master Servicer, and Macy
Specialty Stores, Inc.
18
21
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
10.23 Credit Card Program Agreement dated Exhibit 19.4 to Macy's May 1991 Form
as of May 10, 1991 ("Credit Card 10-Q
Program Agreement") by and among
Monogram Bank, USA ("Monogram"),
Macy's, MCAL, MNE, Macy's South,
Inc., Bullock's, Inc., I. Magnin,
Inc., and Macy Specialty Stores, Inc.
10.24 Amendment, dated January 27, 1992, to Exhibit 19.6 to Macy's Quarterly
Credit Card Program Agreement and Report on Form 10-Q (File No.
Commercial Accounts Agreement between 33-6192) for the fiscal quarter ended
Monogram and GECC and Macy's and February 1, 1992
certain subsidiaries
10.25 Letter, dated January 27, 1992 Exhibit 19.2 to Macy's Quarterly
("Waiver Letter"), from Monogram Report on Form 10-Q (File No.
accepted and agreed to by Macy's and 33-6192) for the fiscal quarter ended
certain of its subsidiaries and, as October 31, 1992 ("Macy's October
to Sections 4 and 12 of the Waiver 1992 Form 10-Q")
Letter, by GECC
10.26 Stipulation among Monogram, GECC, Exhibit 19.3 to Macy's October 1992
Macy's and Certain of Its Form 10-Q
Subsidiaries, the Official Unsecured
Bondholders' Committee, and the
Official Unsecured Creditors'
Committee and related Order of the
Bankruptcy Court, dated November 24,
1992
10.27 First Secured Term Loan Agreement, Exhibit 19.5 to Macy's May 1991 Form
dated as of May 10, 1991, by and 10-Q*
between MCAL, Macy's South, Inc., and
Bullock's, Inc. and GECC (the "First
Secured Term Loan Agreement")
10.28 First Amendment to First Secured Term Exhibit 10.61 to Macy's Annual Report
Loan Agreement and First Amendment to on Form 10-K (File No. 33-6192) for
Note, each dated as of October 15, the fiscal year ended August 3, 1991
1991 ("Macy's 1991 Form 10-K")
10.29 Transfer Agreement, dated as of May Exhibit 19.4 to Macy Credit's
10, 1991, by and among Macy Credit, Quarterly Report on Form 10-Q for the
MCAL, MNE, Macy's South, Inc., fiscal quarter ended May 4, 1992
Bullock's, Inc., and I. Magnin, Inc.
10.30 Letter Agreement, dated September 25, Exhibit 10.63 to Macy's 1991 Form
1991, among Monogram, Macy's, MCAL, 10-K
MNE, Macy's South Inc., Bullock's
Inc., I. Magnin, Inc., and Macy
Specialty Stores, Inc.
10.31 1995 Executive Equity Incentive Exhibit 10.65 to S-4 Registration
Plan** Statement
19
22
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
10.32 1992 Incentive Bonus Plan** Exhibit 10.12 to Form 10
10.33 Form of Severance Agreement**
10.34 Form of Indemnification Agreement** Exhibit 10.14 to Form 10
10.35 Master Severance Plan for Key Exhibit 10.1.5 to the Company's
Employees** Annual Report on Form 10-K (File No.
33-6192) for the fiscal year ended
February 3, 1990 ("1989 Form 10-K")
10.36 Performance Bonus Plan for Key Exhibit 10.1.6 to 1989 Form 10-K
Employees**
10.37 Senior Executive Medical Plan** Exhibit 10.1.7 to 1989 Form 10-K
10.38 Employment Agreement, dated as of Exhibit 10.59 to S-4 Registration
June 24, 1994, between Allen I. Statement
Questrom and the Company**
10.39 Amended and Restated Employment Exhibit 10.82 to S-4 Registration
Agreement, dated as of February 5, Statement
1994 (as signed July 8, 1994) and
letter agreements dated August 16,
1994, August 20, 1994 and September
19, 1994, between Myron E. Ullman III
and the Company**
10.39.1 Letter agreement dated December 6,
1994 between Myron E. Ullman III and
the Company relating to Amended and
Restated Employment Agreement dated
as of February 5, 1994**
10.39.2 Termination agreement, dated December
7, 1994, as modified by letter dated
January 24, 1995, between Myron E.
Ullman III and the Company**
10.40 Form of Employment Agreement for Exhibit 10.31 to 1993 Form 10-K
Executives and Key Employees**
10.41 Supplementary Executive Retirement Exhibit 10.32 to 1993 Form 10-K
Plan, as Amended**
10.42 Executive Deferred Compensation Plan Exhibit 4.1 to Registration Statement
(adopted October 29, 1993)** on Form S-8 (Registration No.
33-50831), filed October 29, 1993
10.43 First Amendment to the Executive Exhibit 10.2 to the Company's
Deferred Compensation Plan** Quarterly Report on Form 10-Q (File
No. 33-6192) for the fiscal quarter
ended October 29, 1994 ("October 1994
Form 10-Q")
20
23
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- - --------------- ------------------------------------- -------------------------------------
10.44 Retirement Income and Thrift Exhibit 4.1 to the Registration
Incentive Plan (as amended and Statement on Form S-8 (Registration
restated effective as of January 1, No. 33-59107), filed January 14, 1994
1987 and containing all amendments
through December 31, 1993)**
10.45 Amendment to Retirement Income and Exhibit 3.1 to October 1994 Form 10-Q
Thrift Incentive Plan**
11 Exhibit of Primary and Fully Diluted
Earnings Per Share
21 Subsidiaries
23 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney
- - ---------------
* Confidential portions of this Exhibit were omitted and filed separately with
the SEC pursuant to Rule 24b-2 under the Exchange Act.
** Constitutes a compensatory plan or arrangement
21
24
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.
FEDERATED DEPARTMENT STORES, INC.
By /s/ Dennis J. Broderick
---------------------------------
Date: April 20, 1995 Dennis J. Broderick
Senior Vice President, General
Counsel and Secretary
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 INDICATED ON APRIL 20, 1995.
SIGNATURE TITLE
- - ---------------------------------------- ---------------------------------------------------
* Chairman of the Board and Chief Executive Officer
- - ---------------------------------------- (principal executive officer) and Director
Allen I. Questrom
* Vice Chairman and Chief Financial Officer
- - ---------------------------------------- (principal financial officer) and Director
Ronald W. Tysoe
* Senior Vice President and Controller (principal
- - ---------------------------------------- accounting officer)
John E. Brown
*
- - ---------------------------------------- Director
Robert A. Charpie
*
- - ---------------------------------------- Director
Lyle Everingham
*
- - ---------------------------------------- Director
Meyer Feldberg
*
- - ---------------------------------------- Director
Earl G. Graves
*
- - ---------------------------------------- Director
George V. Grune
*
- - ---------------------------------------- Director
Gertrude G. Michelson
*
- - ---------------------------------------- Director
G. William Miller
*
- - ---------------------------------------- Director
Joseph Neubauer
*
- - ---------------------------------------- Director
Laurence A. Tisch
*
- - ---------------------------------------- Director
Myron E. Ullman, III
*
- - ---------------------------------------- Director
Paul W. Van Orden
*
- - ---------------------------------------- Director
Karl M. von der Heyden
*
- - ---------------------------------------- Director
Marna C. Whittington
*
- - ---------------------------------------- Director
James M. Zimmerman
*The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and directors and filed herewith.
By /s/ Dennis J. Broderick
--------------------------------
Dennis J. Broderick
Attorney-in-Fact
22
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Management's Report................................................ F-2
Independent Auditors' Report....................................... F-3
Consolidated Statements of Income for the 52 weeks ended January
28, 1995, January 29, 1994 and January 30, 1993.................. F-4
Consolidated Balance Sheets at January 28, 1995 and January 29,
1994............................................................. F-5
Consolidated Statements of Cash Flows for the 52 weeks ended
January 28, 1995, January 29, 1994 and January 30, 1993.......... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
26
MANAGEMENT'S REPORT
To the Shareholders of
Federated Department Stores, Inc.:
The integrity and consistency of the consolidated financial statements of
Federated Department Stores, Inc., and subsidiaries which were prepared in
accordance with generally accepted accounting principles, are the responsibility
of management and properly include some amounts that are based upon estimates
and judgments.
The Company maintains a system of internal accounting controls, which is
supported by a program of internal audits with appropriate management follow-up
action, to provide reasonable assurance, at appropriate cost, that the Company's
assets are protected and transactions are properly recorded. Additionally, the
integrity of the financial accounting system is based on careful selection and
training of qualified personnel, organizational arrangements which provide for
appropriate division of responsibilities and communication of established
written policies and procedures.
The consolidated financial statements of the Company have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. Their report
expresses their opinion as to the fair presentation, in all material respects,
of the financial statements and is based upon their independent audit conducted
in accordance with generally accepted auditing standards.
The Audit Review Committee, composed solely of outside directors, meets
periodically with the independent certified public accountants, the internal
auditors and representatives of management to discuss auditing and financial
reporting matters. In addition, the independent certified public accountants and
the Company's internal auditors meet periodically with the Audit Review
Committee without management representatives present and have free access to the
Audit Review Committee at any time. The Audit Review Committee is responsible
for recommending to the Board of Directors the engagement of the independent
certified public accountants, which is subject to shareholder approval, and the
general oversight review of management's discharge of its responsibilities with
respect to the matters referred to above.
Allen I. Questrom
Chairman and Chief Executive Officer
James M. Zimmerman
President and Chief Operating Officer
Ronald W. Tysoe
Vice Chairman and Chief Financial Officer
John E. Brown
Senior Vice President and Controller
F-2
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Federated Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Federated
Department Stores, Inc. and subsidiaries (the "Company") as of January 28, 1995
and January 29, 1994, and the related consolidated statements of income and cash
flows for each of the fifty-two week periods ended January 28, 1995, January 29,
1994 and January 30, 1993. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Federated
Department Stores, Inc. and subsidiaries as of January 28, 1995 and January 29,
1994, and the results of their operations and their cash flows for each of the
fifty-two week periods ended January 28, 1995, January 29, 1994 and January 30,
1993, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Cincinnati, Ohio
February 28, 1995
F-3
28
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
------------ ------------ ------------
Net Sales, including leased department sales..... $8,315,877 $7,229,406 $7,079,941
------------ ------------ ------------
Cost of sales.................................... 5,131,363 4,373,941 4,229,396
Selling, general and administrative expenses..... 2,549,122 2,323,546 2,420,684
Business integration and consolidation
expenses....................................... 85,867 -- --
------------ ------------ ------------
Operating Income................................. 549,525 531,919 429,861
Interest expense................................. (262,115) (213,544) (258,211)
Interest income.................................. 43,874 49,405 60,357
------------ ------------ ------------
Income Before Income Taxes and Extraordinary
Items.......................................... 331,284 367,780 232,007
Federal, state and local income tax expense...... (143,668) (170,987) (99,299)
------------ ------------ ------------
Income Before Extraordinary Items................ 187,616 196,793 132,708
Extraordinary items.............................. -- (3,545) (19,699)
------------ ------------ ------------
Net Income....................................... $ 187,616 $ 193,248 $ 113,009
============ ============ ============
Earnings per Share:
Income before extraordinary items.............. $ 1.41 $ 1.56 $ 1.19
Extraordinary items............................ -- (.03) (.18)
------------ ------------ ------------
Net Income............................. $ 1.41 $ 1.53 $ 1.01
============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
29
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
JANUARY 28, JANUARY 29,
1995 1994
------------ ------------
ASSETS
Current Assets:
Cash.......................................................... $ 206,490 $ 222,428
Accounts receivable........................................... 2,265,651 1,758,935
Merchandise inventories....................................... 2,380,621 1,180,844
Supplies and prepaid expenses................................. 99,559 46,660
Deferred income tax assets.................................... 238,127 88,754
------------ ------------
Total Current Assets.................................. 5,190,448 3,297,621
Property and Equipment -- net................................... 5,349,912 2,576,884
Intangible Assets -- net........................................ 1,006,547 337,720
Notes Receivable................................................ 408,134 408,818
Other Assets.................................................... 424,671 798,384
------------ ------------
Total Assets.......................................... $12,379,712 $7,419,427
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................... $ 463,042 $ 10,099
Accounts payable and accrued liabilities...................... 2,183,711 1,209,744
Income taxes.................................................. 65,319 110,209
------------ ------------
Total Current Liabilities............................. 2,712,072 1,330,052
Long-Term Debt.................................................. 4,529,220 2,786,724
Deferred Income Taxes........................................... 993,451 804,181
Other Liabilities............................................... 505,359 220,226
Shareholders' Equity............................................ 3,639,610 2,278,244
------------ ------------
Total Liabilities and Shareholders' Equity............ $12,379,712 $7,419,427
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
30
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
--------------- --------------- ---------------
Cash flows from operating activities:
Net income........................................................... $ 187,616 $ 193,248 $ 113,009
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment.......... 260,485 207,914 205,554
Amortization of intangible assets................................ 22,662 18,762 18,762
Amortization of financing costs.................................. 11,468 10,163 20,995
Amortization of original issue discount.......................... 29,435 16,846 15,593
Amortization of unearned restricted stock........................ 2,714 3,105 5,808
Loss on early extinguishment of debt............................. -- 3,545 19,699
Changes in assets and liabilities, net of effects of acquisition
of companies:
Increase in accounts receivable................................ (310,934) (215,101) (28,456)
(Increase) decrease in merchandise inventories................. 28,620 (31,910) 18,412
(Increase) decrease in supplies and prepaid expenses........... 2,450 (6,592) 2,547
(Increase) decrease in other assets not separately
identified................................................... 2,697 20,229 (20,179)
Increase (decrease) in accounts payable and accrued liabilities
not separately identified.................................... (124,662) 70,679 2,898
Increase in current income taxes............................... 61,149 65,990 24,520
Increase (decrease) in deferred income taxes................... (12,057) 54,917 27,225
Increase (decrease) in other liabilities not separately
identified................................................... (184) (1,291) 15,169
--------------- --------------- ---------------
Net cash provided by operating activities.................. 161,459 410,504 441,556
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of companies net of cash acquired........................ (575,408) (109,325) --
Purchase of property and equipment................................... (386,847) (309,536) (198,505)
Disposition of property and equipment................................ 8,723 1,097 10,431
Decrease in notes receivable......................................... -- 12,636 --
--------------- --------------- ---------------
Net cash used by investing activities...................... (953,532) (405,128) (188,074)
--------------- --------------- ---------------
Cash flows from financing activities:
Debt issued.......................................................... 2,526,861 -- 979,141
Financing costs...................................................... (66,602) (633) (26,518)
Debt repaid.......................................................... (1,594,136) (391,986) (2,133,014)
Increase (decrease) in outstanding checks............................ (95,010) 35,776 (10,620)
Acquisition of treasury stock........................................ (354) (179) --
Issuance of common stock............................................. 5,376 7,090 502,031
--------------- --------------- ---------------
Net cash provided (used) by financing activities........... 776,135 (349,932) (688,980)
--------------- --------------- ---------------
Net decrease in cash................................................... (15,938) (344,556) (435,498)
Cash beginning of period............................................... 222,428 566,984 1,002,482
--------------- --------------- ---------------
Cash end of period..................................................... $ 206,490 $ 222,428 $ 566,984
=============== =============== ===============
Supplemental cash flow information:
Interest paid........................................................ $ 211,457 $ 186,658 $ 197,138
Interest received.................................................... 44,675 50,019 60,869
Income taxes paid (net of refunds received).......................... 93,647 49,588 47,554
Schedule of noncash investing and financing activities:
Capital lease obligations for new store fixtures................... 10,817 3,424 9,426
Property and equipment transferred to other assets................. 6,645 5,316 13,395
Common stock issued for the Executive Deferred Compensation Plan... 2,070 686 --
Debt and merger related liabilities issued, reinstated or assumed
in acquisition of companies...................................... 1,414,969 340,000 --
Equity issued to third parties in acquisition of company........... 1,166,014 -- --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
31
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federated Department Stores, Inc. (the "Company") is a retail organization
operating department stores selling a wide range of merchandise including
women's, men's and children's apparel, cosmetics, home furnishings, and other
consumer goods.
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated.
Cash includes cash and liquid investments with original maturities of three
months or less.
Installments of deferred payment accounts receivable maturing after one
year are included in current assets in accordance with industry practice. Such
accounts are accepted on customary revolving credit terms and offer the customer
the option of paying the entire balance on a 25-day basis without incurring
finance charges. Alternatively, customers may make scheduled minimum payments
and incur competitive finance charges. Minimum payments vary from 4.2% to 100.0%
of the account balance, depending on the size of the balance. Profits on
installment sales are included in income when the sales are made. Finance charge
income is included as a reduction of selling, general and administrative
expenses.
Substantially all merchandise inventories are valued by the retail method
and stated on the LIFO (last-in, first-out) basis, which is generally lower than
market.
Depreciation and amortization are provided primarily on a straight-line
basis over the shorter of estimated asset lives or related lease terms. Real
estate taxes and interest on construction in progress and land under development
are capitalized. Amounts capitalized are amortized over the estimated lives of
the related depreciable assets.
Intangible assets are amortized on a straight-line basis over their
estimated lives (see Note 8). The carrying value of intangible assets is
periodically reviewed by the Company and impairments are recognized when the
expected future operating cash flows derived from such intangible assets is less
than their carrying value.
Financing costs are amortized over the life of the related debt.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method prescribed in SFAS No. 109, deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and net
operating loss and tax credit carryforwards. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-7
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions" ("SFAS No. 106"), which requires that the cost of these benefits be
recognized in the financial statements over an employee's term of service with
the Company.
Earnings per share are computed on the basis of daily average number of
shares outstanding during the year. Any dilution from the potential issuance of
shares under employee compensation plans would be less than 3.0%. Fully diluted
earnings per share include the effect of the potential issuance of shares for
employee compensation plans as well as for the Senior Convertible Discount Notes
and, unless disclosed, any such dilution would be less than 3.0%.
2. ACQUISITION OF COMPANIES
On December 31, 1993, Federated Noteholding Corporation ("FNC"), a wholly
owned subsidiary of the Company, paid $109.3 million in cash and issued a
promissory note (the "Promissory Note") in the principal amount of $340.0
million to The Prudential Insurance Company of America ("Prudential"), in
exchange for 50% of a claim (the "Prudential Claim") held by Prudential in the
Chapter 11 reorganization of R. H. Macy & Co., Inc. ("Macy's") and an option to
acquire the remaining 50% of the Prudential Claim (the "Prudential Option").
This investment was included in other assets in the Company's Consolidated
Balance Sheet at January 29, 1994.
On December 19, 1994, the Company completed its acquisition of Macy's
pursuant to a Plan of Reorganization (the "Macy's POR") of Macy's and
substantially all of its subsidiaries (collectively, the "Macy's Debtors").
Pursuant to the Macy's POR, Macy's merged with the Company, which became
responsible for making distributions of cash and debt and equity securities to
the holders of allowed claims against the Macy's Debtors pursuant to the Macy's
POR. In connection with the acquisition, FNC exercised the Prudential Option,
whereby it acquired the remainder of the Prudential Claim in exchange for $469.6
million in cash , and repaid the full amount of indebtedness under the
Promissory Note. The total purchase price of the acquisition, net of amounts
issued or paid to wholly owned subsidiaries of the Company (including FNC), was
approximately $3,815.9 million and consisted of the following:
(MILLIONS)
Cash payments, including exercise of the Prudential
Option and transaction costs...................... $ 830.4
Assumption of merger-related liabilities............ 192.5
Issuance, reinstatement or assumption of debt....... 1,182.4
Issuance of 55.6 million shares of common stock..... 1,047.6
Issuance of warrants to purchase 18.0 million shares
of common stock................................... 118.4
Cost of the initial investment in the Prudential
Claim, net of a $4.7 million cash distribution.... 444.6
----------
$3,815.9
==========
The Macy's acquisition was accounted for under the purchase method and,
accordingly, the results of operations of Macy's have been included in the
Company's results of operations since the date of acquisition
F-8
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
and the purchase price has been allocated to Macy's assets and liabilities based
on their estimated fair values at the date of acquisition. Based upon
management's initial estimates, the excess of cost over net assets acquired is
approximately $308.5 million (see Note 8).
The following unaudited pro forma condensed statements of operations give
effect to the Macy's acquisition and related financing transactions as if such
transactions had occurred at the beginning of the periods presented.
52 WEEKS 52 WEEKS
ENDED ENDED
JANUARY 28, JANUARY 29,
1995 1994
------------ ------------
(MILLIONS, EXCEPT PER SHARE
DATA)
Net sales........................................ $ 13,947.1 $ 13,445.7
Income (loss) before extraordinary items......... 81.7 (7.2)
Net income....................................... 71.1 174.6*
Earnings per share............................... $ .39 $ .96*
* Includes a favorable cumulative effect adjustment of $185.3 million, or $1.02
per share, for the adoption of SFAS No. 109 by Macy's.
The foregoing unaudited pro forma condensed statements of operations give
effect to, among other pro forma adjustments, the following:
(i) Interest expense on debt incurred to finance the acquisition, the reversal of Macy's
historical interest expense and the reversal of the Company's historical interest
expense on certain indebtedness redeemed in connection with the acquisition;
(ii) Amortization of deferred debt expense related to debt incurred to finance the
acquisition;
(iii) Amortization, over 20 years, of the excess of cost over net assets acquired, and
amortization, over 40 years, of tradenames acquired;
(iv) Depreciation and amortization adjustments related to fair market value of assets
acquired; and
(v) Adjustments to income tax expense related to the above.
The foregoing unaudited pro forma information is provided for illustrative
purposes only and does not purport to be indicative of results that actually
would have been achieved had the Macy"s acquisition been consummated on the
first day of the period presented or of future results.
On May 26, 1994, the Company purchased Joseph Horne Co., Inc. ("Horne's"),
a department store retailer operating ten stores in Pittsburgh and Erie,
Pennsylvania for approximately $116.0 million, including the assumption of $40.0
million of mortgage debt and transaction costs. The acquisition was accounted
for under the purchase method of accounting and the purchase price approximated
the estimated fair value of the assets and liabilities acquired. Results of
operations for the stores acquired are included in the Consolidated Financial
Statements from the date of acquisition. Pro forma financial results have not
been presented for this acquisition since it did not significantly affect the
results of operations of the Company.
F-9
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
3. BUSINESS INTEGRATION AND CONSOLIDATION EXPENSES
Business integration and consolidation expenses represent the costs
associated with the integration of the Horne's and Macy's businesses with the
Company's other businesses and the consolidation of the operations of certain of
the Company's retail operating divisions.
The Company recorded a $45.8 million charge in the 52 weeks ended January
28, 1995 for the integration of Macy's into the Company, including the
consolidation of the Macy's East division with the Company's Abraham &
Straus/Jordan Marsh division and the consolidation of central merchandising
divisions. The major components of the charge include $13.0 million in severance
expenses for Abraham & Straus/Jordan Marsh employees, $12.3 million in penalties
associated with terminating certain merchandise purchasing agreements and $14.1
million of losses incurred on stores closed and property writedowns related to
stores sold as a result of the Macy's acquisition.
The Company recorded a $27.0 million charge in the 52 weeks ended January
28, 1995 for the integration of the ten Horne's department stores and related
facilities and merchandising and operating functions into the Company. The $27.0
million charge includes $12.1 million for the costs of operating the Horne's
central office during a transitional period and the incremental costs associated
with converting the Horne's stores to Lazarus stores (including advertising,
credit card issuance and promotion, data processing conversion and other name
change expenses). The remainder of the charge relates to inventory valuation
adjustments of Horne's merchandise in lines which the Company, subsequent to the
acquisition, eliminated or replaced with Lazarus merchandise lines.
Finally, as a result of the consolidation of the Company's
Rich's/Goldsmith's and Lazarus divisions, which was announced on January 20,
1995, a $13.1 million charge was recorded for severance related to the
elimination of duplicative positions.
4. EXTRAORDINARY ITEMS
The extraordinary item for the 52 weeks ended January 29, 1994 represents
costs of $3.5 million, net of income tax benefit of $2.3 million, associated
with the prepayment of the entire $355.0 million outstanding principal amount of
the Company's Series B Secured Notes.
On December 15, 1992, Prime Receivables Corporation ("Prime"), an indirect
wholly owned special-purpose financing subsidiary of the Company, completed the
public offering of $981.0 million ($979.1 million discounted amount) of
asset-backed debt securities. In connection with the offerings, the Company's
former receivables financing facilities were terminated. During the 52 weeks
ended January 30, 1993, the Company recorded an extraordinary item of $6.1
million, net of income tax benefit of $3.9 million, resulting primarily from the
non-cash write-off of accrued financing costs associated with the prepayment of
the receivables facilities.
On May 28, 1992, the Company completed a public offering of 46.0 million
shares of Common Stock. The net proceeds from the stock offering of $502.0
million and cash on hand were applied to the prepayment or redemption of a total
of $950.0 million of long-term debt. During the 52 weeks ended January 30, 1993,
the Company recorded an extraordinary item of $13.6 million, net of income tax
benefit of $8.8 million, resulting primarily from the non-cash write-off of
accrued financing costs associated with the debt prepayments.
F-10
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
5. ACCOUNTS RECEIVABLE
JANUARY 28, JANUARY 29,
1995 1994
----------- ------------
(MILLIONS)
Due from customers......................................... $ 2,087.9 $1,702.2
Less allowance for doubtful accounts....................... 44.9 36.9
----------- ------------
2,043.0 1,665.3
Other receivables.......................................... 222.7 93.6
----------- ------------
Net receivables............................................ $ 2,265.7 $1,758.9
========== ===========
Sales through the Company's credit plans were $3,916.9 million, $3,743.1
million and $3,575.2 million for the 52 weeks ended January 28, 1995, January
29, 1994 and January 30, 1993, respectively. The credit plans relating to
operations of the Company that were previously conducted through divisions of
Macy's are owned by a third party.
Finance charge income amounted to $320.3 million, $243.6 million and $225.1
million for the 52 weeks ended January 28, 1995, January 29, 1994 and January
30, 1993, respectively.
Changes in allowance for doubtful accounts are as follows:
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
----------- ----------- -----------
(MILLIONS)
Balance, beginning of year................... $ 36.9 $ 45.3 $ 59.2
Charged to costs and expenses................ 66.5 50.3 52.0
Net uncollectible balances written off....... (58.5) (58.7) (65.9)
----------- ----------- -----------
Balance, end of year......................... $ 44.9 $ 36.9 $ 45.3
========== ========== ==========
6. INVENTORIES
Merchandise inventories were $2,380.6 million at January 28, 1995, compared
to $1,180.8 million at January 29, 1994. At January 28, 1995, the cost of
inventories using the LIFO method approximated the cost of such inventories
using the first-in, first-out method. Inventories were $11.3 million lower at
January 29, 1994 than they would have been had the retail method been applied
using the first-in, first-out method. The application of the LIFO method
resulted in a pre-tax credit of $11.3 million for the 52 weeks ended January 28,
1995 and a pre-tax charge of $2.8 million for the 52 weeks ended January 29,
1994.
F-11
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
7. PROPERTIES AND LEASES
JANUARY 28, JANUARY 29,
1995 1994
----------- ------------
(MILLIONS)
Land....................................................... $ 888.6 $ 446.0
Buildings on owned land.................................... 2,162.2 899.8
Buildings on leased land and leasehold improvements........ 1,055.7 549.4
Store fixtures and equipment............................... 1,765.9 996.4
Property not used in operations............................ 6.5 6.6
Leased properties under capitalized leases................. 62.6 49.0
----------- ------------
5,941.5 2,947.2
Less accumulated depreciation and amortization............. 591.6 370.3
----------- ------------
$ 5,349.9 $2,576.9
========== ===========
Buildings on leased land and leasehold improvements includes approximately
$176.4 million at January 28, 1995 and $160.8 million at January 29, 1994 of
intangible assets relating to favorable leases which are being amortized over
the related lease terms.
In connection with various shopping center agreements, the Company is
obligated to operate certain stores within the centers for periods of up to 20
years. Some of these agreements require that the stores be operated under a
particular name.
The Company leases a portion of the real estate and personal property used
in its operations. Most leases require the Company to pay real estate taxes,
maintenance and other executory costs; some also require additional payments
based on percentages of sales and some contain purchase options.
Minimum rental commitments (excluding executory costs) at January 28, 1995,
for noncancellable leases are:
CAPITAL OPERATING
LEASES LEASES TOTAL
----------- ----------- -----------
(MILLIONS)
Fiscal year:
1995........................................... $ 11.2 $ 158.2 $ 169.4
1996........................................... 11.0 151.2 162.2
1997........................................... 10.9 132.8 143.7
1998........................................... 10.6 114.4 125.0
1999........................................... 10.0 105.7 115.7
After 1999..................................... 94.9 1,000.8 1,095.7
----------- ----------- -----------
Total minimum lease payments..................... 148.6 $ 1,663.1 $ 1,811.7
========== ==========
Less amount representing interest................ 77.1
-----------
Present value of net minimum capital lease
payments....................................... $ 71.5
==========
F-12
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Capitalized leases are included in the Consolidated Balance Sheets as
property and equipment while the related obligation is included in short-term
($4.0 million) and long-term ($67.5 million) debt. Amortization of assets
subject to capitalized leases is included in depreciation and amortization
expense. Total minimum lease payments shown above have not been reduced by
minimum sublease rentals of approximately $8.9 million on capital leases and
$17.2 million on operating leases.
Rental expense consists of:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Real estate (excluding executory
costs)
Capital leases --
Contingent rentals.............. $ 3.3 $ 3.4 $ 3.5
Operating leases --
Minimum rentals................. 78.9 68.5 63.6
Contingent rentals.............. 10.4 8.7 8.5
------- ------- -------
92.6 80.6 75.6
------- ------- -------
Less income from subleases --
Capital leases.................. 0.6 0.8 0.8
Operating leases................ 0.9 1.2 6.1
------- ------- -------
1.5 2.0 6.9
------- ------- -------
$ 91.1 $ 78.6 $ 68.7
=============== =============== ===============
Personal property --
Operating leases................... $ 37.4 $ 38.1 $ 36.4
=============== =============== ===============
8. INTANGIBLE ASSETS
52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994
---------------- -----------------
(MILLIONS)
Reorganization value in excess of amount
allocable to identifiable assets............... $ 300.2 $ 375.2
Excess of cost over net assets acquired --
Macy's......................................... 308.5 --
Tradenames -- Macy's............................. 458.0 --
---------------- -----------------
1,066.7 375.2
Less accumulated amortization.................... 60.2 37.5
---------------- -----------------
Intangible assets -- net......................... $1,006.5 $ 337.7
=============== ================
Intangible assets are being amortized on a straight-line basis over 20
years, except for tradenames which are being amortized over 40 years. During the
52 weeks ended January 28, 1995, the Company recorded $75.0 million of tax
benefits as a reduction of reorganization value in excess of amounts allocable
to identifiable assets (see Note 12).
F-13
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
9. NOTES RECEIVABLE
JANUARY 28, JANUARY 29,
1995 1994
----------- ------------
(MILLIONS)
9 1/2% note relating to the sale of certain divisions in
1988 and maturing in two equal installments on May 3,
1997 and May 3, 1998..................................... $ 400.0 $ 400.0
Other...................................................... 8.1 8.8
----------- ------------
$ 408.1 $ 408.8
========== ===========
The $400.0 million note, which is supported by a letter of credit, was
transferred to a grantor trust which borrowed $352.0 million under a note
monetization facility and transferred such proceeds to the Company (see Note
10).
10. FINANCING
JANUARY 28, JANUARY 29,
1995 1994
----------- ------------
(MILLIONS)
Short-term debt:
Bank credit facility..................................... $ 25.0 $ --
Receivables backed commercial paper...................... 274.9 --
Current portion of long-term debt........................ 163.1 10.1
----------- ------------
Total short-term debt............................ $ 463.0 $ 10.1
========== ===========
Long-term debt:
Bank credit facility..................................... $ 1,700.0 $ --
Receivables backed certificates.......................... 1,056.8 979.5
Senior notes............................................. 450.0 --
Mortgages................................................ 415.1 345.1
Senior convertible discount notes........................ 306.6 289.0
Tax notes................................................ 177.4 32.0
Note monetization facility............................... 352.0 352.0
Promissory note.......................................... -- 340.0
Series A secured notes................................... -- 289.2
Subsidiary trade obligations............................. -- 101.5
Capitalized leases....................................... 67.5 53.8
Other.................................................... 3.8 4.6
----------- ------------
Total long-term debt............................. $ 4,529.2 $2,786.7
========== ===========
F-14
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Interest and financing costs were as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Interest on debt.......................... $244.9 $197.5 $232.0
Amortization of financing costs........... 11.5 10.2 21.0
Interest on capitalized leases............ 6.2 6.0 5.3
------- ------- -------
Subtotal............................. 262.6 213.7 258.3
Less:
Interest capitalized on construction...... (0.5) (0.2) (0.1)
Interest income........................... (43.9) (49.4) (60.3)
------- ------- -------
$218.2 $164.1 $197.9
=============== =============== ===============
Future maturities of long-term debt, other than capitalized leases and
including unamortized original issue discount of $2.0 million, are shown below:
(MILLIONS)
Fiscal year:
1996........................................... $ 155.3
1997........................................... 903.7
1998........................................... 467.9
1999........................................... 913.9
2000........................................... 973.2
After 2000..................................... 1,049.7
On December 19, 1994, the Company entered into a $2,800.0 million bank
credit facility (the "Bank Credit Facility") providing for up to $800.0 million
of term borrowings and up to $2,000.0 million of revolving credit loans.
Utilizing the Bank Credit Facility and cash on hand, the Company paid off its
previous working capital facility, which was scheduled to expire on April 3,
1995, exercised its option to acquire the remainder of the Prudential Claim for
$469.6 million, repaid all indebtedness under a $340.0 million promissory note
and the $280.7 million Series A secured notes and made certain cash payments in
connection with the acquisition of Macy's.
In connection with the acquisition of Macy's, the Company issued $953.5
million of notes. On January 27, 1995, the Company issued $450.0 million of 10%
Senior Notes due 2001 and utilized the proceeds thereof, together with
borrowings under the Bank Credit Facility and the proceeds from the sale of
$77.0 million of receivables backed certificates, to prepay the $953.5 million
of notes in their entirety.
The following summarizes certain provisions of the Company's long-term
debt:
BANK CREDIT FACILITY
The Bank Credit Facility consists of a $2,000.0 million revolving credit
facility (the "Revolving Loan Facility") and an $800.0 million term loan
facility (the "Term Loan Facility").
F-15
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The Revolving Loan Facility provides for revolving credit loans ("Revolving
Loans" and, together with the loans under the Term Loan Facility, the "Loans")
of up to $2,000.0 million, of which an aggregate of $1,100.0 million is
available for seasonal working capital purposes (including a letter of credit
subfacility). For 30 consecutive calendar days during the period from December 1
to March 1, commencing December 1, 1995, total borrowings plus the aggregate
stated amounts of stand-by letters of credit under the Revolving Loan Facility
may not exceed $1,000.0 million ($1,100 million in the case of the period from
December 1, 1995 to March 1, 1996). The Company's ability to effect borrowings
under the Revolving Loan Facility is not subject to any borrowing base
requirements or limitations. The Revolving Loan Facility matures on March 31,
2000, with the Revolving Loans then outstanding to be repaid in full on such
date.
The Term Loan Facility matures on January 29, 2000 and does not require any
amortization of principal prior to May 4, 1996. Commencing on May 4, 1996, the
Company is required to make quarterly amortization payments totaling, on an
annual basis: $100.0 million in the first year thereafter; $150.0 million in the
second year thereafter; $200.0 million in the third year thereafter; and $350.0
million in the fourth year thereafter. The Company is permitted by the terms of
the Credit Agreement to make voluntary prepayments of amounts outstanding under
the Term Loan Facility at any time without penalty or premium. Until such time
as the Company has obtained an investment grade rating with respect to its
long-term senior unsecured debt, repayments of certain amounts outstanding under
the Term Loan Facility are required upon the occurrence of certain events.
Loans under the Bank Credit Facility (other than "competitive bid loans,"
if any) bear interest at a rate equal to, at the Company's option, (i) the
administrative agent's Base Rate (as defined in the bank credit agreement) in
effect from time to time or (ii) the administrative agent's Eurodollar rate
(adjusted for reserves) plus 1.0% subject to adjustment based on the Company's
long-term debt rating and interest coverage ratio. The Company is able to borrow
up to $1,000.0 million under the Revolving Loan Facility in competitive bid
loans at either fixed rates or Eurodollar-based rates as bid by the lenders in
the Revolving Loan Facility. The Company pays a commitment fee of 0.25% per
annum, subject to adjustment, on the unused portion of the Revolving Loan
Facility.
The Company has purchased interest rate caps covering an aggregate notional
amount of $1,400.0 million for a period of three years from December 15, 1994.
Pursuant to such caps, the Eurodollar rate with reference to which interest on
$500.0 million of the Company's variable rate indebtedness is determined is
effectively limited to a maximum rate of 8% per annum throughout such three-year
period and the Eurodollar rate with reference to which interest on $900.0
million of the Company's variable rate indebtedness is determined is effectively
limited to a maximum rate of 7% per annum in the first year of such three-year
period, 8% per annum in the second year of such three-year period and 9% per
annum thereafter.
RECEIVABLES BACKED CERTIFICATES
On December 15, 1992, Prime issued $981.0 million ($979.1 million
discounted amount) of asset-backed certificates in four separate classes to
finance its purchases of revolving consumer credit card receivables generated by
the Company's department store operations (other than operations previously
conducted by divisions of Macy's). The four classes of certificates are: (i)
$450.0 million in aggregate principal amount of 7.05% Class A-1 Asset-Backed
Certificates, Series 1992-1 due December 15, 1997; (ii) $450.0 million in
F-16
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
aggregate principal amount of 7.45% Class A-2 Asset-Backed Certificates, Series
1992-2 due December 15, 1999; (iii) $40.5 million in aggregate principal amount
of 7.55% Class B-1 Asset-Backed Certificates, Series 1992-1 due January 15,
1998; and (iv) $40.5 million in aggregate principal amount of 7.95% Class B-2
Asset-Backed Certificates, Series 1992-2 due January 18, 2000. On January 20,
1995 Prime entered into an agreement pursuant to which it effectively sold an
additional $77.0 million of asset-backed certificates to a third party, with
such certificates bearing interest at the purchaser's commercial paper rate plus
0.9% and maturing as to $38.5 million in 1998 and $38.5 million in 2000. The
certificates represent undivided interests in the assets of a master trust
originated by Prime.
RECEIVABLES BACKED COMMERCIAL PAPER
On January 5, 1993, an indirect wholly owned special purpose financing
subsidiary of the Company entered into a liquidity facility with a syndicate of
banks providing for the issuance of up to $375.0 million of receivables backed
commercial paper. Borrowings under the liquidity facility are secured by an
interest in the master trust originated by Prime and are subject to interest
rate caps effectively limiting the rate of interest thereon to 10% per annum. As
of January 28, 1995 there was $274.9 million of such commercial paper
outstanding and at January 29, 1994 there was no such commercial paper
outstanding.
SENIOR NOTES
The Senior Notes were issued by the Company on January 27, 1995. The Senior
Notes are unsecured obligations of the Company which mature on February 15, 2001
and bear interest at 10% per annum from January 27, 1995, payable semiannually
on February 15 and August 15, of each year, commencing on August 15, 1995. The
Senior Notes are not redeemable at the option of the Company prior to maturity
and are not subject to a sinking fund.
MORTGAGES
Certain of the Company's real estate subsidiaries are parties to a mortgage
loan facility providing for secured borrowings. Borrowings under the facility
will mature in 2002 and bear interest at 9.99% per annum. Borrowings under the
facility are secured by liens on certain real property. As of January 28, 1995
and January 29, 1994, there was $345.1 million outstanding under the mortgage
loan facility. In addition, in connection with the acquisitions of Horne's and
Macy's in 1994, the Company assumed mortgage debt of $40.0 million and $32.6
million, respectively.
THE SENIOR CONVERTIBLE DISCOUNT NOTES
The Convertible Notes are unsecured obligations of the Company which mature
on February 15, 2004 and bear interest at the rate of 9.72% per annum from
February 15, 1995, payable semiannually on February 15 and August 15 of each
year, commencing August 15, 1995. Prior to February 15, 1995, the Convertible
Notes accreted original issue discount at the rate of 6.0% per annum.
At any time at the option of a holder of Convertible Notes, such holder
will have the right to convert the principal of any such holder's Convertible
Notes into fully-paid and non-assessable shares of Common Stock at the rate of
27.86 shares of Common Stock for each $1,000 stated principal amount of
Convertible Notes,
F-17
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
provided that such conversion rate will be appropriately adjusted in order to
prevent dilution of such conversion rights in the event of certain changes in or
events affecting the Common Stock and certain consolidations, mergers, sales,
leases, transfers, or other dispositions to which the Company is a party. In
addition, if at any time the closing per share price of the Common Stock is
$42.00 or more for 20 consecutive trading days, or if the aggregate outstanding
stated principal amount of the Convertible Notes is $12.5 million or less, the
Company may require the conversion of all outstanding Convertible Notes into
Common Stock.
On each of February 15, 2002 and 2003, the Company will pay an amount equal
to 33.3% of the aggregate stated principal amount of the Convertible Notes
initially outstanding, and will pay any remaining balance on February 15, 2004,
in each case together with accrued interest to the date of payment. In addition,
subject to the limitations contained in certain other debt instruments to which
the Company is a party, at any time on or after February 15, 1995, the Company
may make optional prepayments or redemptions of the Convertible Notes in whole
or part. All such prepayments will be made at 100% of the stated principal
amount so prepaid or redeemed, together with interest accrued to the date of
prepayment or redemption.
TAX NOTES
The Tax Notes represent agreements with taxing authorities with respect to
claims to be paid over varying periods of time up to six years, with unpaid
balances bearing interest at rates ranging from 8.0% to 9.35% per annum.
NOTE MONETIZATION FACILITY
On May 3, 1988, the Company sold certain divisions for consideration which
included a $400.0 million promissory note. The Company subsequently transferred
the note to a grantor trust of which it is the beneficiary. The trust borrowed
$352.0 million under a note monetization facility, using the note as collateral,
and distributed the proceeds of such borrowing to the Company. The borrowing
under the note monetization facility matures in two equal installments on May 3,
1997 and 1998, and bears interest at a variable interest rate based on LIBOR,
subject to certain adjustments. An interest rate swap agreement was entered into
for the note monetization facility which, in effect, converted the variable
interest rate to a fixed rate of 10.344%. The Company is not an obligor on the
borrowing under the note monetization facility or the interest rate swap
agreement, and the lender's recourse thereunder is limited to the trust's assets
and the Company's interest in the trust.
SUBSIDIARY TRADE OBLIGATIONS
As of January 28, 1995, the subsidiary trade obligations, relating to the
Company's reorganization proceedings, were included in short-term debt on the
Consolidated Balance Sheet. Such obligations were thereafter paid in full on
February 6, 1995.
F-18
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
(MILLIONS)
Merchandise and expense accounts payable........ $ 1,299.2 $ 833.4
Business integration and consolidation
expenses...................................... 57.8 --
Merger related liabilities...................... 173.1 --
Taxes other than income taxes................... 123.3 52.5
Accrued wages and vacation...................... 81.2 50.3
Accrued interest................................ 29.3 25.3
Other........................................... 419.8 248.2
----------- -----------
$ 2,183.7 $ 1,209.7
========== ==========
Included in the liability for business integration and consolidation
expenses at January 28, 1995 is $26.1 million of accrued severance related to
approximately 750 employees of the Abraham & Straus/Jordan Marsh,
Rich's/Goldsmith's and Lazarus divisions (see Note 3).
12. TAXES
Total income taxes were allocated as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Income from operations.............. $143.7 $171.0 $ 99.3
Extraordinary items................. -- (2.3) (12.7)
------- ------- -------
Total income taxes.................. $143.7 $168.7 $ 86.6
=============== =============== ===============
F-19
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Income tax expense attributable to income from operations is as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
--------------------------- --------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------ ------- -------- ------
(MILLIONS)
Federal............... $ 82.0 $ 31.4 $113.4 $127.9 $ 10.4 $138.3 $64.4 $ 14.2 $ 78.6
State and local....... 21.2 9.1 30.3 33.6 (0.9) 32.7 16.1 4.6 20.7
------- -------- ------ ------- -------- ------ ------- -------- ------
$103.2 $ 40.5 $143.7 $161.5 $ 9.5 $171.0 $80.5 $ 18.8 $ 99.3
======== ========= ====== ======== ========= ====== ======== ========= ======
The income tax expense attributable to income from operations reported
differs from the expected tax computed by applying the federal income tax
statutory rate of 35% for the 52 weeks ended January 28, 1995 and January 29,
1994 and 34% for the 52 weeks ended January 30, 1993 to income before income
taxes and extraordinary items. The reasons for this difference and their tax
effects are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Expected tax.............................. $115.9 $128.7 $ 78.9
State and local income taxes, net of
federal income tax expense.............. 19.7 21.2 13.7
Permanent difference arising from
amortization of intangible assets....... 7.9 6.6 6.4
Effect of federal tax rate change on
deferred income taxes................... -- 14.2 --
Other..................................... 0.2 0.3 0.3
------- ------- -------
$143.7 $171.0 $ 99.3
=============== =============== ===============
F-20
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
JANUARY 28, JANUARY 29,
1995 1994
----------- -----------
(MILLIONS)
Deferred tax assets:
Operating loss carryforwards............... $ 378.3 $ --
Accrued liabilities accounted for on a cash
basis for tax purposes................... 174.6 130.1
Postretirement benefits other than
pensions................................. 180.8 78.4
Capital lease debt......................... 28.6 22.7
Allowance for doubtful accounts............ 18.1 14.8
Alternative minimum tax credit
carryforwards............................ 37.3 21.0
Other...................................... 77.7 46.6
----------- -----------
Total gross deferred tax assets....... 895.4 313.6
Less valuation allowance.............. (114.7) --
----------- -----------
Net deferred tax assets............... 780.7 313.6
----------- -----------
Deferred tax liabilities:
Excess of book basis over tax basis of
property and equipment................... (1,119.2) (605.9)
Prepaid pension expense.................... (76.7) (95.2)
Deferred gain from sale of divisions....... (81.6) (82.2)
Merchandise inventories.................... (98.6) (68.1)
Effects of reorganization transactions..... (136.4) (167.8)
Other...................................... (23.5) (9.8)
----------- -----------
Total gross deferred tax
liabilities......................... (1,536.0) (1,029.0)
----------- -----------
Net deferred tax liability............ $ (755.3) $ (715.4)
========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and tax planning strategies in
making this assessment. Because tax law limits the use of Macy's net operating
loss carryforwards ("Macy's NOL's") to subsequent taxable income of the acquired
enterprise in a consolidated tax return for the combined enterprise, management
has recorded a valuation allowance of $114.7 million to reflect the estimated
amount of deferred tax assets related to such Macy's NOL's which may not be
realized. Subsequent adjustments, if any, to this valuation allowance related to
Macy's NOL's will be recorded as reductions of excess of cost over value of net
assets acquired.
As of January 28, 1995, the Company estimated that the Macy's NOL's were
approximately $950.0 million which are available to offset future taxable income
through 2009. The Company also had alternative minimum tax credit carryforwards
of $37.3 million which are available to reduce future regular income taxes, if
any, over an indefinite period.
F-21
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
In connection with the joint plan of reorganization of Federated Stores,
Inc. ("FSI"), the former parent of the Company and certain of its subsidiaries,
the FSI consolidated tax group (which, with respect to periods prior to February
4, 1992, included the Company and such subsidiaries) triggered certain gains
(the "Gains") estimated at approximately $1,800.0 million. The Company believes
that net operating and capital losses ("NOLs") sufficient to offset the Gains
were available at the time the Gains were triggered and, accordingly, that the
Company will have no regular federal income tax liability in respect thereof and
that it has adequately provided for its estimated alternative minimum tax
liability. Management does not expect that the resolution of issues related to
the Gains will have a material adverse effect on the Company's financial
position or results of operations. Further, the realization of any unrecorded
tax benefits related to the NOLs generated prior to February 4, 1992 will be
recorded as reductions of reorganization value in excess of amounts allocable to
identifiable assets. During the year ended January 28, 1995, the Company
recorded $75.0 million of tax benefits related to such NOLs and reduced
reorganization value in excess of amounts allocable to identifiable assets
accordingly.
In connection with their respective reorganization proceedings, the
Internal Revenue Service ("IRS") audited the tax returns of the Company and
certain of its subsidiaries and the FSI consolidated tax group for tax years
1984 through 1989 and asserted certain claims against the Company and such
subsidiaries and other members of the FSI consolidated tax group. The issues
raised by the IRS audit were resolved by agreement with the IRS except for two
issues involving the use by the Company of an aggregate of $27.0 million of NOLs
of an acquired company and the deductibility of approximately $176.3 million of
so-called "break-up fees." These issues were litigated before the Bankruptcy
Court for the Southern District of Ohio and resolved in favor of the Company;
however, the IRS pursued appeals on both issues to the United States District
Court for the Southern District of Ohio (the "Ohio District Court"), which
affirmed the decision of the Bankruptcy Court on August 2, 1994. On September
30, 1994, the IRS filed a notice of appeal to the United States Court of Appeals
for the Sixth Circuit with respect to the issue relating to "break-up fees"
only, where such appeal is currently pending. Although there can be no assurance
with respect thereto, management does not expect that the ultimate resolution of
this issue will have a material adverse effect on the Company's financial
position or results of operations.
13. RETIREMENT PLANS
The Company has defined benefit plans ("Pension Plans") and defined
contribution plans ("Savings Plans") which cover substantially all employees who
work 1,000 hours or more in a year. In addition, the Company has defined benefit
supplementary retirement plans which include benefits, for certain employees, in
excess of qualified plan limitations. For the 52 weeks ended January 28, 1995,
and the 52 weeks ended January 29, 1994, net retirement expense for these plans
totaled $3.0 million and $2.7 million, respectively. For the 52 weeks ended
January 30, 1993, net retirement income for these plans totaled $1.1 million. In
connection with the acquisition of Macy's, the Company added a pension plan, a
savings plan and a supplementary retirement plan. The pension plan and
supplementary retirement plan are included in the projected actuarial present
value of benefit obligations at December 31, 1994. The impact on pension income
or expense for the 52 weeks ended January 28, 1995 was not material for any Macy
retirement plan added.
Measurements of plan assets and obligations for the Pension Plans and the
defined benefit supplementary retirement plans are calculated as of December 31
of each year. In addition, for such plans, the discount rates
F-22
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
used to determine the actuarial present value of projected benefit obligations
ranged from 8.0% to 8.5% as of December 31, 1994 and was 7.0% as of December 31,
1993. The assumed rate of increase in future compensation levels ranged from
5.0% to 6.0% as of December 31, 1994 and was 5.0% as of December 31, 1993. The
long-term rate of return on assets (Pension Plans only) ranged from 9.0% to
9.75% as of December 31, 1994 and was 9.75% as of December 31, 1993.
PENSION PLANS
Net pension income for the Company's Pension Plans included the following
actuarially determined components:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Service cost....................... $ 19.9 $ 17.5 $ 16.8
Interest cost...................... 39.9 39.0 36.9
Actual return on assets............ 5.1 (94.1) (48.6)
Net amortization and deferrals..... (73.7) 24.9 (19.6)
Cost of special termination
benefits......................... -- 7.8 --
------- ------- -------
$ (8.8) $ (4.9) $(14.5)
=============== =============== ===============
The following table sets forth the projected actuarial present value of
benefit obligations and funded status at December 31, 1994 and 1993, for the
Pension Plans:
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
(MILLIONS)
Accumulated benefit obligations.................. $ 888.5 $536.4
Less: Present value of net accumulated benefits
available under a Savings Plan................. 30.9 43.5
------------ ------------
Net accumulated benefit obligations, including
vested benefits of $839.7 million and $478.7
million, respectively.......................... 857.6 492.9
Projected compensation increases................. 137.6 75.7
------------ ------------
Projected benefit obligations.................... 995.2 568.6
------------ ------------
Plan assets (primarily stocks, bonds and U.S.
government securities)......................... 1,075.3 744.9
Unrecognized loss................................ 127.6 52.9
Unrecognized prior service cost.................. 1.9 8.9
------------ ------------
1,204.8 806.7
------------ ------------
Prepaid pension expense.......................... $ 209.6 $238.1
============ ============
F-23
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The Company's policy is to fund the Pension Plans at or above the minimum
required by law. At December 31, 1994 and 1993, the Company had met the full
funding limitation. Plan assets are held by independent trustees.
In connection with a salary reduction program at one division, the Company
provided, in 1993, $7.8 million of special termination benefits to eligible
employees who elected to retire within a specified time period.
SUPPLEMENTARY RETIREMENT PLANS
Net pension expense for the supplementary retirement plans included the
following actuarially determined components:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Service cost............................ $ 0.8 $ 0.3 $ 0.3
Prior service cost...................... -- -- 7.9
Interest cost on projected benefit
obligations........................... 1.7 1.2 0.6
Net amortization and deferral........... 1.0 (0.3) (0.4)
------- ------- -------
$ 3.5 $ 1.2 $ 8.4
=============== =============== ===============
The following table sets forth the projected actuarial present value of
unfunded benefit obligations at December 31, 1994 and 1993, for the
supplementary retirement plans:
DECEMBER 31, DECEMBER 31,
1994 1993
----------- -----------
(MILLIONS)
Accumulated benefit obligations, including vested
benefits of $20.7 million and $14.0 million,
respectively........................................ $ 21.1 $ 14.2
Projected compensation increases...................... 19.7 3.5
----------- -----------
Projected benefit obligations......................... 40.8 17.7
Unrecognized gain..................................... 4.4 3.6
Unrecognized prior service cost....................... (7.6) (1.1)
----------- -----------
Accrued supplementary retirement obligation........... $ 37.6 $ 20.2
============ ============
In December 1992, the Company reestablished a percentage of the benefits
for former employees who had retired prior to January 15, 1990. This action
increased the accumulated benefit obligation by $7.9 million at December 31,
1992, which was expensed as prior service cost in the 52 weeks ended January 30,
1993.
SAVINGS PLANS
The Savings Plans include a voluntary savings feature for eligible
employees. For one plan, the Company's contribution is based on the Company's
annual earnings and minimum Company contribution is
F-24
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
20% of employee's eligible savings. For the other plan, the Company's
contribution is based on a percentage of employee savings. Savings expense
amounted to $8.3 million for the 52 weeks ended January 28, 1995, $6.4 million
for the 52 weeks ended January 29, 1994, and $5.0 million for the 52 weeks ended
January 30, 1993.
DEFERRED COMPENSATION PLAN
During 1993, the Company implemented a deferred compensation plan wherein
eligible executives may elect to defer a portion of their compensation each year
as either stock or cash credits. The Company transfers shares to a trust to
cover the number it estimates will be needed for distribution of stock credits
currently outstanding. At January 28, 1995 and January 29, 1994, the liability
under the plan which is reflected in other liabilities is $3.9 million and $1.1
million, respectively. Expense for the 52 weeks ended January 28, 1995 and the
52 weeks ended January 29, 1994 was immaterial.
14. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to pension and other supplemental benefits, certain retired
employees are currently provided with specified health care and life insurance
benefits. Eligibility requirements for such benefits vary by division and
subsidiary, but generally state that benefits are available to employees who
retire after a certain age with specified years of service. Certain employees
are either ineligible for such benefits or are subject to having such benefits
modified or terminated. The postretirement benefit obligations related to
persons previously employed by Macy's are included in the projected actuarial
present value of benefit obligations at December 31, 1994. The impact on
postretirement benefit expense for the 52 weeks ended January 28, 1995 was not
material.
Net postretirement benefit expense included the following actuarially
determined components:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Service cost....................... $ 0.7 $ 1.0 $ 3.5
Interest cost...................... 9.1 9.7 15.1
Net amortization and deferral...... (5.8) (5.8) --
------- ------- -------
$ 4.0 $ 4.9 $ 18.6
=============== =============== ===============
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- - --------------------------------------------------------------------------------
The measurement of the postretirement benefit obligations is calculated as
of December 31. The following table sets forth the projected actuarial present
value of unfunded postretirement benefit obligations at December 31, 1994 and
1993:
DECEMBER 31, DECEMBER 31,
1994 1993
----------- -----------
(MILLIONS)
Accumulated postretirement benefit obligation:
Retirees........................................ $ 246.6 $ 112.0
Fully eligible active plan participants......... 48.9 14.6
Other active plan participants.................. 89.6 11.4
----------- -----------
Accumulated postretirement benefit obligation... 385.1 138.0
Unrecognized net gain........................... 44.4 35.5
Unrecognized prior service cost................. 20.7 22.9
----------- -----------
Accrued postretirement benefit obligation....... $ 450.2 $ 196.4
========== ==========
The discount rate used in determining the actuarial present value of
unfunded postretirement benefit obligations ranged from 8.0% to 8.5% as of
December 31, 1994 and was 7.0% as of December 31, 1993.
The future medical benefits provided by the Company for certain employees
are based on a fixed amount per year of service, and the accumulated
postretirement benefit obligation is not affected by increases in health care
costs. However, the future medical benefits provided by the Company for certain
other employees are affected by increases in health care costs. For purposes of
determining the present values of unfunded postretirement benefit obligations,
the annual growth rate in the per capita cost of various components of such
medical benefit obligations was assumed to range from 11.5% to 19.0% in the
first year, and to decrease gradually for each such component to 6.0% in the
twelfth year and to remain at that level thereafter. The foregoing growth rate
assumption has a significant effect on such determination. To illustrate,
increasing such assumed growth rates by one percentage point would increase the
present value of unfunded postretirement benefit obligations as of December 31,
1994 by $35.1 million.
15. EQUITY PLAN
The Company has implemented an equity plan intended to provide an equity
interest in the Company to key management personnel and thereby provide
additional incentives for such persons to devote themselves to the maximum
extent practicable to the businesses of the Company and its subsidiaries. The
equity plan is administered by the Compensation Committee of the Board of
Directors (the "Compensation Committee"). The Compensation Committee is
authorized to grant options, stock appreciation rights and restricted stock to
officers and key employees of the Company and its subsidiaries. The equity plan
also provides for the award of options to non-employee directors.
F-26
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Stock option transactions are as follows:
52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994
------------------------- -------------------------
(SHARES IN THOUSANDS) SHARES GRANT PRICE SHARES GRANT PRICE
------- -------------- ------- --------------
Outstanding, beginning of year............ 3,038.5 $11.625-25.000 1,828.5 $11.625-18.375
Granted................................... 3,597.4 18.625-23.625 1,575.3 19.375-25.000
Canceled.................................. (218.2) 11.625-23.625 (268.2) 15.625-20.875
Exercised................................. (266.2) 11.625-20.875 (97.1) 11.625-16.875
------- -------------- ------- --------------
Outstanding, end of year.................. 6,151.5 $11.625-25.000 3,038.5 $11.625-25.000
======= ============== ======= ==============
Exercisable, end of year.................. 1,904.1 $11.625-25.000 814.1 $11.625-20.875
======= ============== ======= ==============
As of January 28, 1995, 1,966,700 shares of Common Stock were available for
additional grants pursuant to the Company's former equity plan, of which 331,400
shares were available for grants in the form of restricted stock. In the year
ended January 28, 1995, 418,000 shares of Common Stock were granted in the form
of restricted stock. Effective February 15, 1995, the Company's former equity
plan was terminated and a total of 11,966,700 shares of Common Stock (including
331,400 shares available for grants as restricted stock) became available for
issuance under the Company's current equity plan.
16. SHAREHOLDERS' EQUITY
The authorized shares of the Company consist of 125.0 million shares of
preferred stock ("Preferred Stock"), par value of $.01 per share with no shares
issued, and 500.0 million shares of Common Stock, par value of $.01 per share
with 212.2 million shares of Common Stock issued and 182.6 million shares of
Common Stock outstanding at January 28, 1995. 126.3 million and 126.0 million
shares of Common Stock were issued and outstanding at January 29, 1994 and
January 30, 1993, respectively.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Subject to
preferential rights that may be applicable to any Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. However, it
is not presently anticipated that dividends will be paid on Common Stock in the
foreseeable future and certain of the debt instruments to which the Company is a
party restrict the payment of dividends.
PREFERRED SHARE PURCHASE RIGHTS
Each share of Common Stock is accompanied by one right (a "Right") issued
pursuant to the Share Purchase Rights Agreement between the Company and The Bank
of New York, as Rights Agent. Each Right entitles the registered holder thereof
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Series A Preferred
Shares"), of the Company at a price (the "Purchase Price") of $62.50 per one
one-hundredth of a Series A Preferred Share (subject to adjustment).
F-27
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- - --------------------------------------------------------------------------------
In general, the Rights will not become exercisable or transferable apart
from the shares of Common Stock with which they were issued unless a person or
group of affiliated or associated persons becomes the beneficial owner of, or
commences a tender offer that would result in beneficial ownership of, 20% or
more of the outstanding shares of Common Stock (any such person or group of
persons being referred to as an "Acquiring Person"). Thereafter, under certain
circumstances, each Right (other than any Rights that are or were beneficially
owned by an Acquiring Person, which Rights will be void) could become
exercisable to purchase at the Purchase Price a number of shares of Common Stock
having a market value equal to two times the Purchase Price. The Rights will
expire on February 4, 2002, unless earlier redeemed by the Company at a
redemption price of $.03 per Right (subject to adjustment).
FUTURE STOCK ISSUANCES
The Company is authorized to issue 8.6 million shares of Common Stock
(subject to adjustment) upon the conversion of the Convertible Notes, 5.2
million shares of Common Stock (subject to adjustment) upon the exercise of the
Series A Warrants and Series B Warrants and 18.0 million shares of Common Stock
(subject to adjustment) upon the exercise of the Series C Warrants and Series D
Warrants. The warrants have the following terms:
SHARES PER EXERCISE EXPIRATION
WARRANT PRICE DATE
---------- ---------- ----------
Series A...................... 1.047 $25.00 2/15/96
Series B...................... 1.047 35.00 2/15/00
Series C...................... 1.000 25.93 12/19/99
Series D...................... 1.000 29.92 12/19/01
F-28
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Shareholders' Equity consists of the following:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994 JANUARY 30, 1993
---------------- ---------------- ----------------
(MILLIONS)
Preferred stock......................... $ -- $ -- $ --
Common stock:
Balance, beginning of year......... 1.3 1.3 0.8
Issuance of common stock........... 0.8 -- 0.5
---------------- ---------------- ----------------
Balance, end of year............... 2.1 1.3 1.3
---------------- ---------------- ----------------
Additional paid-in capital:
Balance, beginning of year......... 1,975.7 1,968.0 1,453.3
Issuance of common stock........... 1,617.7 7.7 514.7
Issuance of warrants............... 118.4 -- --
Cancellation of treasury stock..... (0.5) -- --
---------------- ---------------- ----------------
Balance, end of year............... 3,711.3 1,975.7 1,968.0
---------------- ---------------- ----------------
Unearned restricted stock:
Balance, beginning of year......... (4.1) (7.3) --
Cancellation (issuance) of common
stock............................ (7.1) 0.1 (13.1)
Amortization....................... 2.7 3.1 5.8
---------------- ---------------- ----------------
Balance, end of year............... (8.5) (4.1) (7.3)
---------------- ---------------- ----------------
Treasury stock:
Balance, beginning of year......... (0.9) -- --
Additions.......................... (558.7) (0.9) --
Cancellations...................... 0.5 -- --
---------------- ---------------- ----------------
Balance, end of year............... (559.1) (0.9) --
---------------- ---------------- ----------------
Accumulated equity:
Balance, beginning of year......... 306.2 113.0 --
Net income......................... 187.6 193.2 113.0
---------------- ---------------- ----------------
Balance, end of year............... 493.8 306.2 113.0
---------------- ---------------- ----------------
Total shareholders' equity.............. $3,639.6 $2,278.2 $2,075.0
=============== =============== ===============
F-29
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Changes in the number of shares held in the treasury are as follows:
52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 28, 1995 JANUARY 29, 1994
---------------- ----------------
(THOUSANDS)
Balance, beginning of year.......... 40.6 --
Additions:
Acquisition of Macy's.......... 29,474.2 --
Restricted stock............... 15.7 8.5
Deferred compensation plan..... 98.4 32.1
Cancellations....................... (24.2) --
---------------- -----
Balance, end of year................ 29,604.7 40.6
=============== ===============
In connection with the acquisition of Macy's, 29.5 million shares were
issued to wholly owned subsidiaries of the Company and are reflected as treasury
shares in the Consolidated Financial Statements. Additions to treasury stock for
restricted stock represent shares accepted in lieu of cash to cover employee tax
liability upon lapse of restrictions. Under the deferred compensation plan,
shares are maintained in a trust to cover the number estimated to be needed for
distribution of stock credits currently outstanding.
17. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and short-term investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
Accounts receivable
The carrying amount approximates fair value because of the short average
maturity of the instruments, and bad debt expense can be reasonably estimated
and has been reserved for against the receivable balance.
Notes receivable
The fair value of notes receivable is estimated using discounted cash flow
analysis, based on estimated market discount rates.
Other assets
As of January 28, 1995, the Company's long-term investment consisted of its
ownership of approximately 6.58% of the common stock of Ralphs Grocery Company
("Ralphs"), the fair value of which was estimated as of such date based on the
terms of the pending sale thereof. As of January 29, 1994, no quoted market
prices existed for the Company's long-term investments (which then included the
Company's initial investment in the Prudential Claim) and, therefore, a
reasonable estimate of fair value could not be made without incurring excessive
costs. Additional information pertinent to the value of the investments is
provided below.
F-30
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Long-term debt
The fair values of the Company's long-term debt are estimated based on the
quoted market prices for publicly traded debt or by using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Interest rate swap agreement
The fair value of the interest rate swap agreement is obtained from dealer
quotes. The value represents the estimated amount the Company would pay to
terminate the agreement at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap counterparties. The
interest rate swap agreement pertains to the note monetization facility and,
although currently in a net payable position, management intends to hold the
agreement to its maturity date.
Interest rate cap agreements
The fair values of the interest rate cap agreements are estimated based on
current settlement prices of comparable contracts obtained from dealer quotes.
The estimated fair values of the Company's financial instruments are as
follows:
JANUARY 28, 1995 JANUARY 29, 1994
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- ---------- --------------- ----------
(MILLIONS)
Cash and short-term investments..... $ 207.4 $ 207.4 $ 222.4 $ 222.4
Notes receivable.................... 408.1 406.1 408.8 459.7
Other assets........................ 43.0 52.4 475.2 N/A
Long-term debt...................... 4,499.7 4,518.5 2,732.9 2,843.1
Interest rate swap agreement........ -- (20.5) -- (63.3)
Interest rate cap agreements........ 24.0 19.5 6.7 --
F-31
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The estimated fair values and related unrecognized loss of the Company's
interest rate swap and cap agreements are as follows:
JANUARY 28, 1995 JANUARY 29, 1994
----------------------------------- -----------------------------------
NOTIONAL CARRYING FAIR UNRECOGNIZED CARRYING FAIR UNRECOGNIZED
AMOUNT RATE TERM VALUE VALUE GAIN (LOSS) VALUE VALUE GAIN (LOSS)
- - -------- ---- ----------------------- -------- ----- ------------ -------- ----- ------------
(MILLIONS)
Interest Rate Caps:
$ 500.0 8% 12/15/94 to 12/15/97 $ 7.3 $ 6.1 $ (2.1) $ -- $ -- $ --
$ 900.0 7% 12/15/94 to 12/15/95
8% 12/15/95 to 12/15/96
9% 12/15/96 to 12/15/97 11.9 10.3 (1.6) -- -- --
$ 375.0 10% 2/3/95 to 1/3/01 4.5 2.7 (1.8) 3.9 -- (3.9)
$ 38.5 11% 1/20/95 to 3/15/98 0.1 0.1 -- -- -- --
$ 38.5 11% 1/20/95 to 3/15/00 0.2 0.3 0.1 -- -- --
$1,000.0 7% 2/3/94 to 2/3/95 -- -- -- 2.8 -- (2.8)
Interest Rate Swap:
$ 352.0 10.344% $176.0 to 5/3/97 and
$176.0 to 5/3/98 -- (20.5) (20.5) -- (63.3) (63.3)
The interest rate cap agreements in effect at January 28, 1995 are used to
hedge interest rate risk related to variable rate indebtedness under the
Company's bank credit facility and receivable backed commercial paper program.
These interest rate cap agreements are recorded at cost and are amortized on a
straight-line basis over the life of the cap. The $1,000.0 million interest rate
cap agreement in effect at January 29, 1994 related to variable rate
indebtedness of the Company which was thereafter retired.
The interest rate swap agreement described in the foregoing table relates
to a note monetization facility, which bears interest based on LIBOR, subject to
certain adjustments. The interest rate swap agreement converts this variable
rate debt (LIBOR plus 0.40%) to a fixed rate of 10.344%. The trust that is the
borrower under the note monetization facility receives fixed-rate interest on
the promissory note constituting such trust's principal asset.
The fair value of the Company's investment in Ralph's is based on the
pending sale thereof in exchange for $24.7 million in cash and $9.9 million in
debentures, for a total of $34.6 million. The investment is carried at cost of
$25.2 million and $25.9 million in the Consolidated Balance Sheets at January
28, 1995 and January 29, 1994, respectively. The Company's initial investment in
the Prudential Claim was carried at its original cost of $449.3 million in the
Consolidated Balance Sheet at January 29, 1994.
Commitments to extend credit under revolving agreements relate primarily to
the aggregate unused credit limits and unused lines of credit for the Company's
credit plans. These commitments generally can be terminated at the option of the
Company. It is unlikely the total commitment amount will represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash
F-32
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
investments in what it believes to be high credit quality financial instruments.
Credit risk with respect to trade receivables is concentrated in the geographic
regions in which the Company operates stores. Such concentrations, however, are
considered to be limited due to the Company's large number of customers and
their dispersion across many regions.
18. QUARTERLY RESULTS (UNAUDITED)
Unaudited quarterly results for the 52 weeks ended January 28, 1995 and the
52 weeks ended January 29, 1994, were as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA)
52 Weeks Ended January 28, 1995:
Net sales.................................. $1,653.6 $1,596.1 $1,926.8 $3,139.4
Operating income........................... 103.4 59.0 129.3 257.8
Income before extraordinary items.......... 32.2 3.8 44.3 107.3
Net income................................. $ 32.2 $ 3.8 $ 44.3 $ 107.3
Earnings per share:
Income before extraordinary items....... $ .25 $ .03 $ .35 $ .71
Net income.............................. .25 .03 .35 .71
Fully diluted earnings per share:
Income before extraordinary items....... .25 .03 .35 .68
Net income.............................. .25 .03 .35 .68
52 Weeks Ended January 29, 1994:
Net sales.................................. $1,590.3 $1,502.3 $1,789.3 $2,347.5
Operating income........................... 82.9 58.4 103.0 287.6
Income before extraordinary items.......... 21.7 8.8 20.3 146.0
Net income................................. $ 18.1 $ 8.8 $ 20.3 $ 146.0
Earnings per share:
Income before extraordinary items....... $ .17 $ .07 $ .16 $ 1.16
Net income.............................. .14 .07 .16 1.16
Fully diluted earnings per share:
Income before extraordinary items....... .17 .07 .16 1.10
Net income.............................. .14 .07 .16 1.10
19. LEGAL PROCEEDINGS
A plan of reorganization (the "Federated POR") of the Company and certain
of its subsidiaries (the "Federated/Allied Companies") was confirmed by the
United States Bankruptcy Court for the Southern District of Ohio (the "Ohio
Bankruptcy Court") on January 10, 1992. Notwithstanding the confirmation and
effectiveness of the Federated POR, the Ohio Bankruptcy Court continues to have
jurisdiction to, among other things, resolve disputed prepetition claims against
the Federated/Allied Companies, resolve matters related to the assumption,
assumption and assignment, or rejection of executory contracts pursuant to the
Federated POR, and to resolve other matters that may arise in connection with or
relate to the Federated
F-33
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
POR. The Company, upon emergence from Chapter 11, provided for the payment of
all remaining bankruptcy claims based upon management's estimate of the amount
of such claims that would ultimately be allowed by the Ohio Bankruptcy Court.
During 1994 and 1993, the Company reduced selling, general and administrative
expenses by $23.8 million and $24.0 million, respectively, to reflect the
favorable settlement of disputed bankruptcy claims. Management believes that the
Company has adequately provided for the resolution of all bankruptcy claims and
other matters related to the Federated POR remaining at January 28, 1995. (See
Note 12 for a description of legal proceedings relating to certain federal
income tax issues.)
The Macy's POR was confirmed by the United States Bankruptcy Court for the
Southern District of New York (the "New York Bankruptcy Court") on December 8,
1994. Notwithstanding the confirmation and effectiveness of the Macy's POR, the
New York Bankruptcy Court continues to have jurisdiction to, among other things,
resolve disputed prepetition claims against the Macy's Debtors, resolve matters
related to the assumption, assumption and assignment, or rejection of executory
contracts pursuant to the Macy's POR, and to resolve other matters that may
arise in connection with or relate to the Macy's POR. Except as described below,
provision was made under the Macy's POR in respect of all prepetition
liabilities of the Macy's Debtors.
Certain claims or portions thereof (collectively, the "Cash Payment
Claims") against the Macy's Debtors which, to the extent allowed by the New York
Bankruptcy Court, will be paid in cash pursuant to the Macy's POR are currently
disputed by the Company. The aggregate amount of disputed Cash Payment Claims
ultimately allowed by the New York Bankruptcy Court may be more or less than the
estimated allowed amount thereof. The aggregate face amount of disputed Cash
Payment Claims was approximately $846.9 million, while the estimated allowed
amount thereof was approximately $355.7 million. Although there can be no
assurance with respect thereto, management believes that the actual allowed
amount of disputed Cash Payment Claims will not be materially greater than the
estimated allowed amount thereof.
The Company and its subsidiaries are also involved in various legal
proceedings incidental to the normal course of their business. Management does
not expect that any of such proceedings will have a material adverse effect on
the Company's results of operations and financial position.
F-34