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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
FEBRUARY 1, 1997
COMMISSION FILE NUMBER
1-13536
FEDERATED DEPARTMENT STORES, INC.
151 WEST 34TH STREET
NEW YORK, NEW YORK 10001
(212) 695-4400
AND
7 WEST SEVENTH STREET
CINCINNATI, OHIO 45202
(513) 579-7000
INCORPORATED IN DELAWARE I.R.S. NO. 13-3324058
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred
Stock New York Stock Exchange
Series C Warrants New York Stock Exchange
Series D Warrants New York Stock Exchange
10% Senior Notes due 2001 New York Stock Exchange
8.125% Senior Notes due 2002 New York Stock Exchange
5% Convertible Notes due 2003 New York Stock Exchange
8.5% Senior Notes due 2003 New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
The Company 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 208,379,561 shares of the Company's Common Stock outstanding as
of April 4, 1997, 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 April 4, 1997, was approximately
$6,980,700,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Proxy Statement") relating
to the Company's Annual Meeting of Stockholders to be held on May 16, 1997 (the
"Annual Meeting"), are incorporated by reference in Part III hereof.
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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 Department Stores, Inc. ("Federated") and its
subsidiaries and their respective predecessors, and, for all periods following
the merger (the "Merger") of Federated and R.H. Macy & Co., Inc. ("Macy's") on
the Merger Date, references to the surviving corporation in the Merger and its
subsidiaries, and (ii) references to "1996", "1995", "1994", "1993" and "1992"
are references to the Company's fiscal years ended February 1, 1997, February 3,
1996, 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 411 department stores in 33 states
as of February 1, 1997. 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 150 specialty stores under the names "Aeropostale" and "Charter Club",
and a mail order catalog business under the name "Bloomingdale's By Mail".
The following table sets forth certain information with respect to each of
the Company's retail operating divisions:
FEBRUARY 1, 1997 FEBRUARY 3, 1996
------------------------- -------------------------
GROSS GROSS
NUMBER OF SQUARE NUMBER OF SQUARE
STORES FEET(A) STORES FEET(A)
--------- ----------- --------- -----------
(THOUSANDS) (THOUSANDS)
Bloomingdale's................................ 21 5,578 17 4,689
The Bon Marche................................ 42 5,038 41 4,960
Burdines...................................... 48 7,942 47 7,884
Macy's East................................... 90 23,673 89 23,355
Macy's West................................... 109 21,093 116 22,518
Rich's/Lazarus/Goldsmith's.................... 76 14,780 75 14,672
Stern's....................................... 25 4,915 27 5,425
Macy's Specialty.............................. 153 561 153 555
--- ------ --- ------
Total............................... 564 83,580 565 84,058
=== ====== === ======
- ---------------
(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.
In general, each of the Company's retail operating divisions is a separate
subsidiary of the Company. However, the Macy's West division and the
Rich's/Lazarus/Goldsmith's division each comprises 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. In
addition, the Company's financial and credit services subsidiary, FACS Group,
Inc. ("FACS"), which is based near Cincinnati, Ohio, establishes and monitors
credit policies on a Company-wide basis. FACS also provides proprietary credit
services, including credit authorizations, new account development and
processing, and customer service, to each retail operating
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division of the Company and collection services to each of the retail operating
divisions that were divisions of Federated prior to the Merger and in respect of
the "Macy's" credit card accounts owned by the Company. GE Capital Consumer Card
Co. ("GE Bank"), which purchased all of the "Macy's" credit card accounts owned
by Macy's prior to the Merger (and with which the Company has an agreement
regarding the allocation of the ownership of "Macy's" credit card accounts
originated subsequent to the Merger) provides statement processing and mailing
to each retail operating division of the Company and collection services in
respect of the GE Bank-owned "Macy's" credit card accounts. The Company's data
processing subsidiary, Federated Systems Group, Inc. ("FSG"), which is based
near Atlanta, Georgia, provides (directly and pursuant to outsourcing
arrangements with third parties) 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 in Cincinnati provides services for all divisions in such
areas as store design and construction, accounting, real estate, insurance and
supply purchasing, 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 Group, a division of the Company based in New York City,
helps the Company to centrally develop and execute consistent 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. Federated Merchandising Group is
also responsible for the private label development of the Company's retail
operating divisions except for Bloomingdale's (which has its own private label
program) and Stern's (which sources its private label merchandise through
Associated Merchandising Corporation). Federated Logistics, a division of
Federated Corporate Services, Inc., a subsidiary of the Company, based in
Secaucus, New Jersey, provides warehousing and merchandise distribution services
for the Company's retail operating divisions.
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. pursuant
to a subsidiary merger. On December 19, 1994, Federated acquired Macy's pursuant
to the Merger. On October 11, 1995, the Company acquired Broadway Stores, Inc.
("Broadway") pursuant to a subsidiary merger.
The Company's executive offices are located at 151 West 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 February 1, 1997, the Company had approximately 117,100
regular full-time and part-time employees. Because of the seasonal nature of the
retail business, the number of employees peaks in the Christmas season.
Approximately 10% of the Company's employees as of February 1, 1997 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.
Purchasing. The Company purchases merchandise from many suppliers, no one
of which accounted for more than 5% of the Company's net purchases during 1996.
The Company has no long-term purchase
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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........ 57 Chairman of the Board and Chief Executive Officer;
Director
James M. Zimmerman....... 53 President and Chief Operating Officer; Director
Ronald W. Tysoe.......... 44 Vice Chairman of the Board and Chief Financial Officer;
Director
Thomas G. Cody........... 55 Executive Vice President -- Legal and Human Resources
Dennis J. Broderick...... 48 Senior Vice President, General Counsel and Secretary
Karen M. Hoguet.......... 40 Senior Vice President -- Planning and Treasurer
Joel A. Belsky........... 43 Vice President and Controller
Allen I. Questrom has been Chairman of the Board and Chief Executive
Officer of the Company since February 1990. Mr. Questrom has announced his
decision to resign all his positions with the Company effective as of the close
of business on the day of the Annual Meeting.
James M. Zimmerman has been President and Chief Operating Officer of the
Company since May 1988. Mr. Zimmerman has been elected by the Board of Directors
of the Company as Chairman and Chief Executive Officer of the Company, effective
as of the close of business on the day of the Annual Meeting.
Ronald W. Tysoe has been Vice Chairman and Chief Financial Officer of the
Company since April 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.
Karen M. Hoguet has been Senior Vice President -- Planning of the Company
since April 1991 and Treasurer of the Company since January 1992.
Joel A. Belsky has been Vice President and Controller of the Company since
October 1996; prior thereto, he served as Divisional Vice President and Deputy
Controller of the Company since March 1993, and prior thereto as Vice President
of Finance and Chief Financial Officer of the Rich's/Goldsmith's division of the
Company (now Rich's/Lazarus/Goldsmith's).
Upon Mr. Questrom's retirement, effective as of the close of business on
the day of the Annual Meeting, Terry J. Lundgren will become President and Chief
Merchandising Officer of the Company and is expected to be elected as a director
following the Annual Meeting. Mr. Lundgren, age 44, has been Chairman of
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Federated Merchandising Group, a division of the Company, since February 1994;
prior thereto he was Chairman and Chief Executive Officer of The Neiman Marcus
Group, Inc. since February 1990.
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 February 1, 1997, the Company operated
411 department stores, of which 203 stores were entirely or mostly owned and 208
stores were entirely or mostly leased. The Company's interests in approximately
27% of its owned stores and approximately 6% of its leased stores are subject to
security interests in favor of certain third-party creditors. See "Mortgages"
and "Secured Promissory Note" in Note 9 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.
See "Item 1. Business" for information regarding 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. Such information is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in various proceedings that
are incidental to the normal course of their businesses. 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.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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 1996 and 1995 the high and low sales prices per share of Common
Stock as reported on the NYSE Composite Tape:
1996 1995
--------------- ---------------
LOW HIGH LOW HIGH
------ ------ ------ ------
1st Quarter.................................. 26.125 34.750 18.500 23.125
2nd Quarter.................................. 29.375 36.625 20.875 28.125
3rd Quarter.................................. 31.125 36.125 24.500 30.125
4th Quarter.................................. 30.000 37.000 25.000 29.750
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.
52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Income Data:
Net sales, including leased department
sales................................... $15,228,999 $15,048,513 $ 8,315,877 $ 7,229,406 $ 7,079,941
----------- ----------- ----------- ---------- ----------
Cost of sales:
Recurring............................... 9,288,686 9,317,784 5,131,363 4,373,941 4,229,396
Inventory valuation adjustments related
to consolidation...................... 65,681 91,637 14,880 -- --
----------- ----------- ----------- ---------- ----------
Total cost of sales....................... 9,354,367 9,409,421 5,146,243 4,373,941 4,229,396
Selling, general and administrative
expenses:
Recurring............................... 4,738,483 4,748,331 2,549,122 2,323,546 2,420,684
Business integration and consolidation
expenses.............................. 242,950 202,293 70,987 -- --
Charitable contribution to Federated
Department Stores Foundation.......... -- 25,581 -- -- --
----------- ----------- ----------- ---------- ----------
Total selling, general and administrative
expenses................................ 4,981,433 4,976,205 2,620,109 2,323,546 2,420,684
Operating income.......................... 893,199 662,887 549,525 531,919 429,861
Interest expense.......................... (498,616) (508,132) (262,115) (213,544) (258,211)
Interest income........................... 46,852 47,104 43,874 49,405 60,357
----------- ----------- ----------- ---------- ----------
Income before income taxes and
extraordinary items..................... 441,435 201,859 331,284 367,780 232,007
Federal, state and local income tax
expense................................. (175,571) (127,306) (143,668) (170,987) (99,299)
Extraordinary items (a)................... -- -- -- (3,545) (19,699)
----------- ----------- ----------- ---------- ----------
Net income................................ $ 265,864 $ 74,553 $ 187,616 $ 193,248 $ 113,009
=========== =========== =========== ========== ==========
Earnings per Share of Common Stock:
Income before extraordinary items......... $ 1.28 $ .39 $ 1.41 $ 1.56 $ 1.19
Net income................................ 1.28 .39 1.41 1.53 1.01
Average number of shares outstanding........ 207,537 191,503 132,862 126,293 111,350
Depreciation and amortization............... $ 533,362 $ 496,911 $ 285,861 $ 229,781 $ 230,124
Capital expenditures........................ $ 846,016 $ 699,306 $ 397,664 $ 312,960 $ 207,931
Balance Sheet Data (at year end):
Cash...................................... $ 148,794 $ 172,518 $ 206,490 $ 222,428 $ 566,984
Working capital........................... 2,831,603 3,262,296 2,375,654 1,967,569 2,227,336
Total assets.............................. 14,264,143 14,295,050 12,276,990 7,419,427 7,019,770
Short-term debt........................... 1,094,557 733,115 463,042 10,099 12,944
Long-term debt............................ 4,605,916 5,632,232 4,529,220 2,786,724 2,809,757
Shareholders' equity...................... 4,669,154 4,273,686 3,639,610 2,278,244 2,074,980
- ---------------
(a) The extraordinary items for 1993 and 1992 were after-tax expenses associated
with debt prepayments.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company acquired Macy's on December 19, 1994 and effected other
acquisitions (and dispositions) during its 1994 fiscal year. Additionally, in
its 1995 fiscal year, the Company acquired Broadway and recorded the acquisition
as of July 29, 1995. 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 of acquisition. Accordingly, the financial position
and results of operations of the Company presented and discussed herein are
generally not directly comparable between the periods presented. 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 February 1, 1997 and the 53 Weeks Ended
February 3, 1996. Net sales for 1996 were $15,229.0 million compared to
$15,048.5 million for 1995, an increase of 1.2%. On a comparable store basis,
net sales for 1996 increased 3.1 percent compared to the first 52 weeks of 1995.
Net sales for 1996 were somewhat negatively impacted by the Company's efforts to
gradually reduce the degree to which it utilizes promotional selling practices
with respect to home-related merchandise.
Cost of sales was 61.4% of net sales for 1996, compared to 62.5% for 1995.
Cost of sales includes one-time inventory valuation adjustments related to
merchandise in lines of business that were eliminated or replaced in connection
with the consolidation of merchandise inventories for acquired and pre-existing
businesses. In 1996, cost of sales includes $65.7 million of inventory valuation
adjustments in connection with the integration of Broadway into the Company. In
1995, cost of sales includes $69.1 million of inventory valuation adjustments in
connection with the integration of Macy's into the Company and $22.5 million of
inventory valuation adjustments in connection with the consolidation of the
Company's Rich's/Goldsmith's and Lazarus divisions. Also, in 1995, cost of sales
was negatively impacted by greater markdowns at stores operated as Broadway
locations. Excluding these stores in 1995 and the inventory valuation
adjustments discussed above, cost of sales would have been 61.0% of net sales
for 1996, compared to 61.3% for 1995. The lower level of promotional activity
for home-related merchandise and increased sales of higher margin private label
merchandise contributed to the improvement for 1996. The valuation of
merchandise inventory on the last-in, first-out basis did not impact cost of
sales in either year.
Selling, general and administrative expenses were 32.7% of net sales for
1996, compared to 33.1% for 1995. Selling, general and administrative expenses
include one-time costs related to the integration and consolidation of acquired
and pre-existing businesses as business integration and consolidation expenses
("BICE"). In 1996, selling, general and administrative expenses include, under
the caption BICE, $167.7 million of costs associated with the integration of
Broadway into the Company, $33.7 million of costs related to the integration of
Macy's into the Company and $41.5 million of costs related to other support
operation restructurings, primarily the centralization of the Company's
merchandise distribution function. In 1995, selling, general and administrative
expenses include, under the caption BICE, $139.8 million of costs associated
with the integration of Macy's into the Company, $48.1 million of costs
associated with the integration of Broadway into the Company and $14.4 million
of costs related to the consolidation of the Company's Rich's/Goldsmith's and
Lazarus divisions, and also include a $25.6 million charitable contribution to
Federated Department Stores Foundation. Excluding these items for both 1996 and
1995, selling, general and administrative expenses would have been 31.1% of net
sales for 1996, compared to 31.6% for 1995. The improvement for 1996 primarily
reflects the operating efficiencies resulting from the integration of Macy's
into the Company in fiscal 1995 and other support operation restructurings
(primarily merchandise distribution).
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Selling, general and administrative expenses in 1996 reflect higher
expenses for doubtful customer accounts receivable, partially offset by higher
finance charge revenues. Amounts charged to expense for doubtful accounts
receivable were $171.9 million for 1996, compared to $126.9 million for 1995.
The increase reflects higher average accounts receivable balances, the
consolidation of certain credit card nameplates, the effects of closing stores
in certain markets and general economic conditions in the geographic areas in
which the Company operates. Partially offsetting the increase in amounts charged
to expense for doubtful accounts, finance charge income grew to $429.5 million
in 1996, compared to $405.2 million in 1995, primarily due to higher average
accounts receivable balances.
Net interest expense was $451.8 million for 1996 compared to $461.0 million
for 1995. The lower interest expense for 1996 is principally due to the lower
levels of borrowings.
The Company's effective income tax rate of 39.8% for 1996 differs from the
federal income tax statutory rate of 35.0% principally because of the effect of
state and local income taxes and permanent differences arising from the
amortization of intangible assets.
Comparison of the 53 Weeks Ended February 3, 1996 and the 52 Weeks Ended
January 28, 1995. Net sales for 1995 were $15,048.5 million compared to
$8,315.9 million for 1994, an increase of 81.0%. Including sales of the Macy's
stores that were open throughout both periods being compared, and adjusting for
the impact of the 53rd week in 1995, comparable store sales increased 2.7% in
1995. Net sales for 1995 included $1,050.3 million of Broadway sales.
Cost of sales was 62.5% of net sales for 1995, compared to 61.9% for 1994.
Cost of sales included one-time inventory valuation adjustments related to
merchandise in lines of business that were eliminated or replaced in connection
with the consolidation of merchandise inventories for acquired and pre-existing
businesses. In 1995, cost of sales included $69.1 million of inventory valuation
adjustments in connection with the integration of Macy's into the Company and
$22.5 million of inventory valuation adjustments in connection with the
consolidation of the Company's Rich's/Goldsmith's and Lazarus divisions. In
1994, cost of sales included $14.9 million of inventory valuation adjustments in
connection with the integration of Horne's into the Company's Lazarus division.
Also, in 1995, cost of sales was negatively impacted by markdowns at stores
operated as Broadway locations. Excluding these stores and the inventory
valuation adjustments discussed above, cost of sales would have been 61.3% of
net sales for 1995 and 61.7% for 1994. The valuation of merchandise inventory on
the last-in, first-out basis did not impact cost of sales in 1995 and resulted
in a credit of $11.3 million to cost of sales in 1994.
Selling, general and administrative expenses were 33.1% of net sales for
1995, compared to 31.5% for 1994. Selling, general and administrative expenses
included one-time costs related to the integration and consolidation of acquired
and pre-existing businesses under the caption BICE. In 1995, selling, general
and administrative expenses included, under the caption BICE, $139.8 million of
costs associated with the integration of Macy's into the Company, $48.1 million
of costs associated with the integration of Broadway into the Company and $14.4
million of costs related to the consolidation of the Company's
Rich's/Goldsmith's and Lazarus divisions, and also included a $25.6 million
charitable contribution to Federated Department Stores Foundation. In 1994,
selling, general and administrative expenses included, under the caption BICE,
$45.8 million of costs associated with the integration of Macy's into the
Company, $12.1 million of costs associated with the integration of Horne's into
the Company and $13.1 million of costs associated with the consolidation of the
Company's Rich's/Goldsmith's and Lazarus divisions. Excluding these items for
both 1995 and 1994, selling, general and administrative expenses would have been
31.6% of net sales for 1995, compared to 30.7% for 1994. Because the credit card
programs relating to Macy's are owned by
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a third party, revenue from credit operations decreased in 1995 as a percentage
of sales. Because selling, general and administrative expenses are reported net
of revenue from credit operations, such decrease was the major factor
contributing to the increase in 1995 in the selling, general and administrative
expense rate and more than offset the Company's improved expense control. In
addition, operating expenses were reduced by $23.8 million in 1994 as a result
of an adjustment for the favorable settlement of bankruptcy claims.
Selling, general and administrative expenses in 1995 reflected higher
finance charge income and increased expenses for doubtful customer accounts
receivable. Finance charge income was $405.2 million for 1995 compared to $320.3
million for 1994. The increase reflected higher average accounts receivable
balances. Amounts charged to expense for doubtful accounts receivable grew to
$126.9 million in 1995, compared to $66.5 million recorded in 1994. The increase
reflected the higher average accounts receivable balances, the consolidation of
certain credit card nameplates, the effects of closing stores in certain markets
and general economic conditions in the geographic areas in which the Company
operates.
Net interest expense was $461.0 million for 1995, compared to $218.2
million for 1994. The higher interest expense in 1995 was principally due to the
higher levels of borrowings resulting from the Macy's and Broadway acquisitions.
Cash interest payments, net of interest received, were $398.0 million for 1995
compared to $166.8 million for 1994.
The Company's effective income tax rate of 63.1% for 1995 differed from the
federal income tax statutory rate of 35.0% principally because of permanent
differences arising from the non-deductibility of approximately $65.0 million of
losses of Broadway and the amortization of intangible assets, and the effect of
state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash from
operations and certain available credit facilities.
Net cash provided by operating activities in 1996 was $1,220.5 million, an
increase of $926.0 million from the net cash provided by operating activities in
1995 of $294.5 million. In addition to improved operating results, the primary
factors which contributed to this improvement were decreases in accounts
receivable and lower increases in merchandise inventories, both changes due to
Broadway store closings, and increases in non-merchandise payables and accrued
liabilities. Cash provided from operations in 1995 was negatively impacted by
higher payments of non-merchandise payables and accrued liabilities (including
liabilities related to the Macy's acquisition).
The Company is a party to a bank credit facility providing for up to $515.7
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
February 1, 1997, the Company had $515.7 million of term borrowings, $310.0
million of revolving credit borrowings, $48.1 million of standby letters of
credit and $112.5 million of trade letters of credit outstanding under its bank
credit facility and $146.0 million of commercial paper borrowings outstanding
under its receivables backed commercial paper facility.
Net cash used in investing activities was $649.8 million in 1996 compared
to $633.2 million in 1995. In 1996, capital expenditures for property and
equipment were $846.0 million and dispositions of property and equipment,
principally Broadway stores and merchandise distribution facilities, totaled
$196.2 million. During
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1996, the Company opened seven new department stores and two new furniture
galleries and closed ten stores, five of which were Broadway stores. In 1995,
capital expenditures for property and equipment were $696.5 million, and the
Company added $16.3 million in cash as a result of the acquisition of Broadway.
The total purchase price for Broadway, consisting solely of non-cash items, was
$1,620.0 million.
Net cash used by the Company for all financing activities was $594.4
million in 1996 compared to $304.8 million net cash provided for all financing
activities in 1995. During 1996, the Company incurred debt totaling $688.7
million and repaid debt totaling $1,334.9 million. Debt incurred consisted of
$450.0 million of 8 1/2% Senior Notes due 2003 and $238.8 million of
asset-backed certificates. The major components of debt repaid consisted of
$386.5 million of commercial paper borrowings under a receivables based credit
facility of a subsidiary of Broadway which was terminated on May 14, 1996, $64.0
million of asset-backed notes issued by a subsidiary of Broadway and $284.3
million of term borrowings and $530.0 million of revolving credit loans under
the Company's bank credit facility. In 1996, the Company issued 4.1 million
shares of common stock and received $99.0 million in proceeds upon the exercise
of its Series A Warrants, which expired on February 15, 1996. On January 22,
1997, the Company entered into an arrangement providing for off balance sheet
financing of up to $200.0 million of non-proprietary credit card receivables
arising under accounts owned by the Company. At February 1, 1997, $103.5 million
of borrowings were outstanding under this arrangement.
The Company intends to open six new department stores in 1997 and its
budgeted capital expenditures are approximately $2,300.0 million for the 1997 to
1999 period. Management presently anticipates funding such expenditures from
operations. In addition, the Company intends to close seven to ten department
stores in 1997.
Management believes the department store business will continue to
consolidate. Accordingly, the Company intends from time to time to consider
additional acquisitions of department store assets and companies.
Management of the Company 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. Depending upon conditions in the capital
markets and other factors, the Company will from time to time consider the
issuance of debt or other securities, or other possible capital markets
transactions, the proceeds of which could be used to refinance current
indebtedness or for other corporate purposes.
9
11
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.
INDEX PAGE
- -------------------------------------------------------------------------------------- ----
Management's Report................................................................... F-2
Independent Auditors' Report.......................................................... F-3
Consolidated Statements of Income for the 52 weeks ended February 1, 1997, the 53
weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995................ F-4
Consolidated Balance Sheets at February 1, 1997 and February 3, 1996.................. F-5
Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 1997, the 53
weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995................ F-6
Notes to Consolidated Financial Statements............................................ F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
12
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 and Exchange Act
of 1934" in the Proxy Statement, and in Item 1A "Executive Officers of the
Registrant," and incorporated herein by reference.
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
- -------------- ------------------------------------- -------------------------------------
3.1 Certificate of Incorporation Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal
year ended January 28, 1995 (the
"1994 Form 10-K")
11
13
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
3.1.1 Certificate of Designations of Series Exhibit 3.1.1 to the 1994 Form 10-K
A Junior Participating Preferred
Stock
3.2 By-Laws Exhibit 3.2 to the 1994 Form 10-K
4.1 Certificate of Incorporation See Exhibit 3.1
4.2 By-Laws See Exhibit 3.2
4.3 Rights Agreement, dated as of Decem- Exhibit 4.3 to the 1994 Form 10-K
ber 15, 1994, between the Company and
the Bank of New York, as rights agent
4.4 Indenture, dated as of December 15, Exhibit 4.1 to the Company's
1994, between the Company and State Registration Statement on Form S-3
Street Bank and Trust Company (Registration No. 33-88328) filed on
(successor to The First National Bank January 9, 1995 (the "S-3
of Boston), as Trustee Registration Statement")
4.4.1 Third Supplemental Indenture, dated Exhibit 4.4.1 to the 1994 Form 10-K
as of January 23, 1995, between the
Company and State Street Bank and
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.4.2 Fourth Supplemental Indenture, dated Exhibit 4.2 to the Company's
as of September 27, 1995, between the Registration Statement on Form 8-A,
Company and State Street Bank and dated November 29, 1995
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.4.3 Fifth Supplemental Indenture, dated Exhibit 2 to the Company's
as of October 6, 1995, between the Registration Statement on Form 8-A,
Company and State Street Bank and dated October 4, 1995
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.4.4 Sixth Supplemental Indenture, dated Exhibit 4.4.4 to the Company's Annual
as of February 1, 1996, between the Report on Form 10-K for the fiscal
Company and State Street Bank and year ended January 28, 1995 (the 1995
Trust Company (successor to The First Form 10-K")
National Bank of Boston), as Trustee
4.4.5 Seventh Supplemental Indenture, dated Exhibit 4.2 to the Company's
as of May 22, 1996, between the Quarterly Report on Form 10-Q for the
Company and State Street Bank and period ended May 4, 1996 (the "May
Trust Company (successor to The First 1996 Form 10-Q")
National Bank of Boston), as Trustee
4.5 Series C Warrant Agreement Exhibit 4.6 to the 1994 Form 10-K
4.6 Series D Warrant Agreement Exhibit 4.7 to the 1994 Form 10-K
4.7 Series E Warrant Agreement Exhibit 4.9 to the 1995 Form 10-K
12
14
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
4.8 Warrant Agreement Exhibit 4.1 to Broadway's Annual
Report on Form 10-K (File No. 1-8765)
for the fiscal year ended January 30,
1993 (the "Broadway 1992 Form 10-K")
4.8.1 Letter Agreement, dated October 11, Exhibit 4.5.1 to the October 1995
1995, between Broadway and The Bank Form 10-Q
of New York
4.9 Series B Warrant Agreement Exhibit 10.7 to the Company's
Registration Statement on Form 10
(File No. 1-10951), filed November
27, 1991, as amended (the "Form 10")
10.1 Credit Agreement, dated as of Decem- Exhibit 10.3 to the 1994 Form 10-K
ber 19, 1994, among the Company, Ci-
tibank, N.A., The Chase Manhattan
Bank, successor to Chemical Bank
("Chase Bank"), Citicorp Securities,
Inc., Chase Securities, Inc.,
successor to Chemical Securities,
Inc., and the initial lenders named
therein (the "Working Capital Credit
Agreement")
10.1.1 Amendment #2 and Waiver, dated as of Exhibit 10.5 to the October 1995 Form
August 30, 1995, to the Working 10-Q
Capital Credit Agreement
10.1.2 Amendment #3, dated as of April 26, Exhibit 4.1 to the May 1996 Form 10-Q
1996, to the Working Capital Credit
Agreement
10.1.3 Amendment #4, dated as of September
9, 1996, to the Working Capital
Credit Agreement
10.1.4 Amendment #5, dated as of January 6,
1997, to the Working Capital Credit
Agreement
10.2 Loan Agreement, dated as of December Exhibit 10.12 to Allied's Annual
30, 1987 (the "Prudential Loan Agree- Report on Form 10-K (File No. 1-970)
ment"), among Prudential, Allied for the fiscal year ended January 2,
Stores Corporation ("Allied"), and 1988
certain subsidiaries of Allied named
therein
10.2.1 Amendment No. 1, dated as of Decem- Exhibit 10.9.1 to Form 10
ber 29, 1988, to the Prudential Loan
Agreement
10.2.2 Amendment No. 2, dated as of Novem- Exhibit 10.9.2 to Form 10
ber 17, 1989, to the Prudential Loan
Agreement
13
15
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.2.3 Amendment No. 3, dated as of February Exhibit 10.9.3 to Form 10
5, 1992, to the Prudential Loan
Agreement
10.3 Loan Agreement, dated as of May 26, Exhibit 10.47 to the 1994 S-4
1994 (the "Lazarus PA Mortgage Term Registration Statement
Loan"), among Lazarus PA, Inc.
(formerly Joseph Horne Co., Inc.),
the banks listed thereon, and PNC
Bank, Ohio, National Association, as
Agent ("PNC")
10.3.1 First Amendment to the Lazarus PA Exhibit 10.6 to the October 1995 Form
Mortgage Term Loan 10-Q
10.4 Guaranty Agreement, dated as of May Exhibit 10.48 to the 1994 S-4
26, 1994, made by the Company in Registration Statement
favor of the banks listed on the
Lazarus PA Mortgage Term Loan and PNC
10.4.1 Amendment #1 to Guaranty Agreement, Exhibit 10.7.1 to the 1994 Form 10-K
dated as of February 28, 1995, made
by the Company in favor of the banks
listed on the Lazarus PA Mortgage
Term Loan and PNC
10.5 Amended and Restated Term Loan Agree- Exhibit 4.23 to Broadway's Annual
ment, dated as of October 8, 1992, by Report on Form 10-K (File No. 1-8765)
and among the Banks party thereto, for the fiscal year ended January 30,
Bank of America National Trust and 1993, as amended (the "Broadway 1992
Savings Association as Agent for 10-K")
Banks and Carter Hawley Hale Stores,
Inc.
10.5.1 Master Capitalized Interest Note, Exhibit 4.24 to the Broadway 1992
dated as of October 8, 1992, in favor 10-K
of Bank of America National Trust and
Savings Association as Agent for
certain banks in the amount of
$10,750,830.46
10.5.2 Master Principal Note, dated as of Exhibit 4.25 to the Broadway 1992
October 8, 1992, in favor of Bank of 10-K
America National Trust and Savings
Association as Agent for certain
banks in the amount of $89,662,770.00
10.5.3 First Amendment to Amended and Re- Exhibit 10.2.3 to the October 1995
stated Term Loan Agreement, dated as Form 10-Q
of October 11, 1995, by and among
Broadway, the Banks party thereto and
Bank of America National Trust and
Savings Association, as Agent for
Banks
14
16
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.5.4 Second Amendment to Amended and Re- Exhibit 10.5.4 to the 1995 Form 10-K
stated Term Loan Agreement, dated as
of December 1, 1995, by and among
Broadway, the Banks party thereto and
Bank of America National Trust and
Savings Association, as Agent for
Banks
10.6 Amended and Restated Pooling and Ser- Exhibit 4.10 to Prime's Current
vicing Agreement, dated as of Decem- Report on Form 8-K (File No. 0-2118),
ber 15, 1992 (the "Pooling and dated March 29, 1993
Servicing Agreement"), among the
Company, Prime Receivables
Corporation ("Prime") and The Chase
Manhattan Bank, successor to Chemical
Bank, as Trustee
10.6.1 First Amendment, dated as of December Exhibit 10.10.1 to the Company's
1, 1993, to the Pooling and Servicing Annual Report on Form 10-K (File No.
Agreement 1-10951) for the fiscal year ended
January 29, 1994 (the "1993 Form
10-K")
10.6.2 Second Amendment, dated as of Febru- Exhibit 10.10.2 to the 1993 Form 10-K
ary 28, 1994, to the Pooling and
Servicing Agreement
10.6.3 Third Amendment, dated as of May 31, Exhibit 10.8.3 to the 1994 Form 10-K
1994, to the Pooling and Servicing
Agreement
10.6.4 Fourth Amendment, dated as of Janu- Exhibit 10.6.4 to the 1995 Form 10-K
ary 18, 1995, to the Pooling and
Servicing Agreement
10.6.5 Fifth Amendment, dated as of April Exhibit 10.6.5 to the 1995 Form 10-K
30, 1995, to the Pooling and
Servicing Agreement
10.6.6 Sixth Amendment, dated as of July 27, Exhibit 10.6.6 to the 1995 Form 10-K
1995, to the Pooling and Servicing
Agreement
10.6.7 Seventh Amendment, dated as of May
14, 1996, to the Pooling and
Servicing Agreement
10.6.8 Eighth Amendment, dated as of March
3, 1997, to the Pooling and Servicing
Agreement
10.7 Assumption Agreement under the Exhibit 10.10.3 to the 1993 Form 10-K
Pooling and Servicing Agreement,
dated as of September 15, 1993
15
17
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.8 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, filed January
Servicing Agreement 22, 1993, as amended ("Prime's Form
8-A")
10.9 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
10.10 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
10.11 Series 1995-1 Supplement, dated as of Exhibit 4.7 to Prime's Registration
July 27, 1995, to the Pooling and Statement on Form S-1, filed July 14,
Servicing Agreement 1995, as amended
10.12 Series 1996-1 Supplement, dated as of Exhibit 4 to the May 1996 Prime 8-K
May 14, 1996, to the Pooling and
Servicing Agreement
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 Decem- Exhibit 10.14.2 to 1993 Form 10-K
ber 1, 1993, to the Receivables
Purchase Agreement
10.13.3 Third Amendment, dated as of Febru- Exhibit 10.14.3 to 1993 Form 10-K
ary 28, 1994, to the Receivables
Purchase Agreement
10.13.4 Fourth Amendment, dated as of May 31, Exhibit 10.13.4 to the 1994 Form 10-K
1994, to the Receivables Purchase
Agreement
10.13.5 Fifth Amendment, dated as of April Exhibit 10.12.5 to the 1995 Form 10-K
30, 1995, to the Receivables Purchase
Agreement
10.13.6 Sixth Amendment, dated as of August
26, 1995, to the Receivables Purchase
Agreement
16
18
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.13.7 Seventh Amendment, dated as of Au-
gust 26, 1995, to the Receivables
Purchase Agreement
10.13.8 Eighth Amendment, dated as of May 14,
1996, to the Receivables Purchase
Agreement
10.13.9 Ninth Amendment, dated as of March 3,
1997, to the Receivables Purchase
Agreement
10.13.10 First Supplement, dated as of Septem- Exhibit 10.14.4 to 1993 Form 10-K
ber 15, 1993, to the Receivables
Purchase Agreement
10.13.11 Second Supplement, dated as of May Exhibit 10.12.7 to the 1995 Form 10-K
31, 1994, to the Receivables Purchase
Agreement
10.14 Depository Agreement, dated as of Exhibit 10.15 to Company's Annual
December 31, 1992, among Deerfield Report on Form 10-K (File No.
Funding Corporation, now known as 1-10951) for the fiscal year ended
Seven Hills Funding Corporation January 30, 1993 ("1992 Form 10-K")
("Seven Hills"), the Company, and
Chase Bank, as Depository
10.15 Liquidity Agreement, dated as of Exhibit 10.16 to 1992 Form 10-K
December 31, 1992, among Seven Hills,
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 Seven
Hills, the Company, Chase Bank, as
Depository 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
Seven Hills, 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
Seven Hills, the Company, and
Shearson Lehman Brothers, Inc.
10.19 Receivables Purchase Agreement, dated
as of January 22, 1997, among FDS
National Bank and Prime II
Receivables Corporation ("Prime II")
17
19
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.20 Class A Certificate Purchase
Agreement, dated as of January 22,
1997, among Prime II, FDS National
Bank, The Class A Purchasers Parties
thereto and Credit Suisse First
Boston, New York Branch, as Agent
10.21 Class B Certificate Purchase
Agreement, dated as of January 22,
1997, among Prime II, FDS National
Bank, The Class B Purchasers Parties
thereto and Credit Suisse First
Boston, New York Branch, as Agent
10.22 Pooling and Servicing Agreement,
dated as of January 22, 1997, (the
"Prime II Pooling and Servicing
Agreement") among Prime II, FDS
National Bank and The Chase Manhattan
Bank, as Trustee
10.23 Series 1997-1 Supplement, dated as of
January 22, 1997, to the Prime II
Pooling and Servicing Agreement
10.24 Commercial Paper Dealer Agreement,
dated as of January 30, 1997, between
the Company and Citicorp Securities,
Inc.
10.25 Commercial Paper Issuing and Paying
Agent Agreement, dated as of January
30, 1997, between Citibank, N.A. and
the Company
10.26 Commercial Paper Dealer Agreement,
dated as of January 30, 1997, between
the Company and Lehman Brothers, Inc
10.27 Tax Sharing Agreement Exhibit 10.10 to Form 10
10.28 Ralphs Tax Indemnification Agreement Exhibit 10.1 to Form 10
10.29 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 Corpo- quarter ended May 4, 1991 (File No.
ration, Macy Funding, Macy's 33-6192), as amended under cover of
California, Inc., Macy's Northeast, Form 8, dated October 3, 1991
Inc., Macy's South, Inc., Bullock's ("Macy's May 1991 Form 10-Q")
Inc., I. Magnin, Inc., Form 10-Q")
Master Servicer, and Macy Specialty
Stores, Inc.**
18
20
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.30 Amended and Restated Credit Card Pro- Exhibit 10.1 to the Company's
gram Agreement, dated as of June 4, Quarterly Report on Form 10-Q for the
1996, among GE Capital Consumer Card period ended August 3, 1996 (the
Co. ("GE Bank"), FDS National Bank, "August 1996 Form 10-Q")
Macy's East, Inc., Macy's West, Inc.,
Bullock's, Inc., Broadway Stores,
Inc., FACS Group, Inc., and
MSS-Delaware, Inc.**
10.31 Amended and Restated Trade Name and Exhibit 10.2 to the August 1996 Form
Service Mark License Agreement, dated 10-Q
as of June 4, 1996, among the
Company, GE Bank and General Electric
Capital Corporation ("GE Capital")
10.32 FACS Credit Services and License Exhibit 10.3 to the August 1996 Form
Agreement, dated as of June 4, 1996, 10-Q
by and among GE Bank, GE Capital and
FACS Group, Inc.**
10.33 FDS Guaranty, dated as of June 4, Exhibit 10.4 to the August 1996 Form
1996 10-Q
10.34 GE Capital Credit Services and Exhibit 10.5 to the August 1996 Form
License Agreement, dated as of June 10-Q
4, 1996, among GE Capital, FDS
National Bank, the Company and FACS
Group, Inc.**
10.35 GE Capital/GE Bank Credit Services Exhibit 10.6 to the August 1996 Form
Agreement, dated as of June 4, 1996, 10-Q
among GE Capital and GE Bank**
10.36 Amended and Restated Commercial Ac- Exhibit 10.7 to the August 1996 Form
counts Agreement, dated as of June 4, 10-Q
1996, among GE Capital, the Company,
FDS National Bank, Macy's East, Inc.,
Macy's West, Inc., Bullock's, Inc.,
Broadway Stores, Inc., FACS Group,
Inc. and MSS-Delaware, Inc.**
10.37 1992 Executive Equity Incentive Plan* Exhibit 10.12 to Form 10
10.38 1995 Executive Equity Incentive Plan,
as amended and restated as of
February 28, 1997*
10.39 1992 Incentive Bonus Plan* Exhibit 10.12 to Form 10
10.40 Form of Severance Agreement* Exhibit 10.33 to the 1994 Form 10-K
10.41 Form of Indemnification Agreement* Exhibit 10.14 to Form 10
10.42 Senior Executive Medical Plan* Exhibit 10.1.7 to 1989 Form 10-K
10.43 Employment Agreement, dated as of Exhibit 10.59 to the 1994 S-4
June 24, 1994, between Allen I. Registration Statement
Questrom and the Company*
19
21
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ------------------------------------- -------------------------------------
10.44 Employment Agreement, dated as of
March 10, 1997, between James M. Zim-
merman and the Company*
10.45 Form of Employment Agreement for Exhibit 10.31 to 1993 Form 10-K
Executives and Key Employees*
10.46 Supplementary Executive Retirement
Plan, as amended and restated as of
January 1, 1997*
10.47 Executive Deferred Compensation Plan*
10.48 Profit Sharing 401(k) Investment Plan
(amending and restating the
Retirement Income and Thrift
Incentive Plan) effective as of April
1, 1997*
10.49 Cash Account Pension Plan (amending
and restating The Federated Pension
Plan) effective as of January 1,
1997*
11 Statement Regarding Computation of
Earnings
21 Subsidiaries
23 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney
27 Financial Data Schedule
- ---------------
* Constitutes a compensatory plan or arrangement.
** Confidential portions of this Exhibit were omitted and filed separately with
the SEC pursuant to Rule 24b-2 under the Exchange Act.
20
22
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
------------------------------------
Dennis J. Broderick
Senior Vice President, General
Counsel and Secretary
Date: April 17, 1997
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 17, 1997.
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
* Vice President and Controller
- ------------------------------------------------- (principal accounting officer)
Joel A. Belsky
* Director
- -------------------------------------------------
Lyle Everingham
* Director
- -------------------------------------------------
Meyer Feldberg
* Director
- -------------------------------------------------
Earl G. Graves, Sr.
* Director
- -------------------------------------------------
George V. Grune
* Director
- -------------------------------------------------
Joseph Neubauer
* Director
- -------------------------------------------------
Paul W. Van Orden
* Director
- -------------------------------------------------
Karl M. von der Heyden
* Director
- -------------------------------------------------
Craig E. Weatherup
* 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
21
23
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 February
1, 1997, the 53 weeks ended February 3, 1996 and the 52 weeks
ended January 28, 1995........................................... F-4
Consolidated Balance Sheets at February 1, 1997 and February 3,
1996............................................................. F-5
Consolidated Statements of Cash Flows for the 52 weeks ended
February 1, 1997, the 53 weeks ended February 3, 1996 and the 52
weeks ended January 28, 1995..................................... F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
24
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 audits 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
Joel A. Belsky
Vice President and Controller
F-2
25
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 as of February 1, 1997 and February 3,
1996, and the related consolidated statements of income and cash flows for the
fifty-two week period ended February 1, 1997, the fifty-three week period ended
February 3, 1996 and the fifty-two week period ended January 28, 1995. 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 February 1, 1997 and February 3,
1996, and the results of their operations and their cash flows for the fifty-two
week period ended February 1, 1997, the fifty-three week period ended February
3, 1996 and the fifty-two week period ended January 28, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Cincinnati, Ohio
March 4, 1997
F-3
26
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------ ------------ ------------
Net sales, including leased department sales..... $15,228,999 $15,048,513 $8,315,877
----------- ----------- ----------
Cost of sales:
Recurring...................................... 9,288,686 9,317,784 5,131,363
Inventory valuation adjustments related to
consolidation............................... 65,681 91,637 14,880
----------- ----------- ----------
Total cost of sales.............................. 9,354,367 9,409,421 5,146,243
Selling, general and administrative expenses:
Recurring...................................... 4,738,483 4,748,331 2,549,122
Business integration and consolidation
expenses.................................... 242,950 202,293 70,987
Charitable contribution to Federated Department
Stores Foundation........................... -- 25,581 --
----------- ----------- ----------
Total selling, general and administrative
expenses....................................... 4,981,433 4,976,205 2,620,109
----------- ----------- ----------
Operating income................................. 893,199 662,887 549,525
Interest expense................................. (498,616) (508,132) (262,115)
Interest income.................................. 46,852 47,104 43,874
----------- ----------- ----------
Income before income taxes....................... 441,435 201,859 331,284
Federal, state and local income tax expense...... (175,571) (127,306) (143,668)
----------- ----------- ----------
Net income....................................... $ 265,864 $ 74,553 $ 187,616
=========== =========== ==========
Earnings per share............................... $ 1.28 $ .39 $ 1.41
=========== =========== ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
27
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
================================================================================
FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ----------------
ASSETS
Current Assets:
Cash........................................................... $ 148,794 $ 172,518
Accounts receivable............................................ 2,834,321 2,842,077
Merchandise inventories........................................ 3,245,996 3,094,848
Supplies and prepaid expenses.................................. 109,678 176,411
Deferred income tax assets..................................... 88,513 74,511
------------ ------------
Total Current Assets................................... 6,427,302 6,360,365
Property and Equipment -- net.................................... 6,524,757 6,305,167
Intangible Assets -- net......................................... 717,404 744,689
Notes Receivable................................................. 204,400 415,066
Other Assets..................................................... 390,280 469,763
------------ ------------
Total Assets........................................... $ 14,264,143 $ 14,295,050
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................................ $ 1,094,557 $ 733,115
Accounts payable and accrued liabilities....................... 2,492,195 2,358,543
Income taxes................................................... 8,947 6,411
------------ ------------
Total Current Liabilities.............................. 3,595,699 3,098,069
Long-Term Debt................................................... 4,605,916 5,632,232
Deferred Income Taxes............................................ 830,943 732,936
Other Liabilities................................................ 562,431 558,127
Shareholders' Equity............................................. 4,669,154 4,273,686
------------ ------------
Total Liabilities and Shareholders' Equity............. $ 14,264,143 $ 14,295,050
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
28
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
================================================================================
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
Cash flows from operating activities:
Net income...................................................... $ 265,864 $ 74,553 $ 187,616
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment..... 504,119 444,830 260,485
Amortization of intangible assets........................... 27,285 47,451 22,662
Amortization of financing costs............................. 26,762 21,702 11,468
Amortization of original issue discount..................... 459 1,202 29,435
Amortization of unearned restricted stock................... 1,958 4,630 2,714
Changes in assets and liabilities, net of effects of
acquisition of companies:
(Increase) decrease in accounts receivable.............. 222,828 (21,098) (310,934)
(Increase) decrease in merchandise inventories.......... (151,148) (361,991) 28,620
(Increase) decrease in supplies and prepaid expenses.... 66,731 (67,745) 2,450
(Increase) decrease in other assets not separately
identified............................................ (11,608) 61,483 2,697
Increase (decrease) in accounts payable and accrued
liabilities not separately identified................. 176,691 (83,220) (124,662)
Increase (decrease) in current income taxes............. 2,536 (45,437) 61,149
Increase (decrease) in deferred income taxes............ 84,005 192,079 (12,057)
Increase (decrease) in other liabilities not separately
identified............................................ 4,005 26,068 (184)
----------- ----------- -----------
Net cash provided by operating activities........... 1,220,487 294,507 161,459
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of companies, net of cash acquired.................. -- 16,262 (575,408)
Purchase of property and equipment.............................. (846,016) (696,488) (386,847)
Disposition of property and equipment........................... 196,222 46,992 8,723
----------- ----------- -----------
Net cash used by investing activities............... (649,794) (633,234) (953,532)
----------- ----------- -----------
Cash flows from financing activities:
Debt issued..................................................... 688,665 1,347,106 2,526,861
Financing costs................................................. (11,120) (27,236) (66,602)
Debt repaid..................................................... (1,334,898) (1,020,117) (1,594,136)
Decrease in outstanding checks.................................. (65,010) (9,647) (95,010)
Acquisition of treasury stock................................... (1,415) (1,006) (354)
Issuance of common stock........................................ 129,361 15,655 5,376
----------- ----------- -----------
Net cash provided (used) by financing activities.... (594,417) 304,755 776,135
----------- ----------- -----------
Net decrease in cash.............................................. (23,724) (33,972) (15,938)
Cash beginning of period.......................................... 172,518 206,490 222,428
----------- ----------- -----------
Cash end of period................................................ $ 148,794 $ 172,518 $ 206,490
=========== =========== ===========
Supplemental cash flow information:
Interest paid................................................... $ 465,360 $ 444,398 $ 211,457
Interest received............................................... 45,637 46,445 44,675
Income taxes paid (net of refunds received)..................... 21,124 35,103 93,647
Schedule of noncash investing and financing activities:
Capital lease obligations for new store fixtures............ -- 2,818 10,817
Common stock issued for the Executive Deferred Compensation
Plan...................................................... 2,926 2,501 2,070
Debt and merger related liabilities issued, reinstated or
assumed in acquisition.................................... -- 1,267,074 1,414,969
Equity issued in acquisition................................ -- 352,902 1,166,014
Debt and equity issued for purchase of debt................. -- 429,665 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
29
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 that sell 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. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates and assumptions are subject to inherent
uncertainties, which may result in actual amounts differing from reported
amounts.
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 2.5% 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.
Estimated asset lives range from 15 to 50 years for buildings and building
equipment and 3 to 15 years for store fixtures and equipment. 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 7). The carrying value of intangible assets is
periodically reviewed by the Company and impairments are recognized when the
present value of the expected future operating cash flows derived from such
intangible assets is less than their carrying value.
Advertising and promotional costs, which are generally expensed as
incurred, amounted to $617.6 million for the 52 weeks ended February 1, 1997,
$633.2 million for the 53 weeks ended February 3, 1996 and $347.5 million for
the 52 weeks ended January 28, 1995.
Financing costs are amortized over the life of the related debt.
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
F-7
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
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. 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.
The cost of postretirement benefits other than pensions is recognized in
the financial statements over an employee's term of service with the Company.
The Company accounts for its stock-based employee compensation plan in
accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25") and
related Interpretations (see Note 14).
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 warrant agreements or stock option plans would be less than 3.0%.
Fully diluted earnings per share include the effect of the potential issuance of
shares under warrant agreements or stock option plans, as well as for
convertible debt and, unless disclosed, any such dilution would be less than
3.0%.
Certain reclassifications were made to prior years' amounts to conform with
the classifications of such amounts for the most recent year.
2. ACQUISITION OF COMPANIES
The Company completed its acquisition of Broadway Stores, Inc. ("Broadway")
pursuant to an Agreement and Plan of Merger dated August 14, 1995. The total
purchase price of the Broadway acquisition was approximately $1,620.0 million,
consisting of (i) 12.6 million shares of common stock and options to purchase an
additional 1.5 million shares of common stock valued at $352.9 million and (ii)
$1,267.1 million of Broadway debt. In addition, a wholly owned subsidiary of the
Company purchased $422.3 million of mortgage indebtedness of Broadway for 6.8
million shares of common stock of the Company and a $242.3 million promissory
note.
The Broadway acquisition was accounted for under the purchase method and,
accordingly, the results of operations of Broadway have been included in the
Company's results of operations since July 29, 1995 and the purchase price has
been allocated to Broadway's assets and liabilities based on the estimated fair
value of these assets and liabilities as of that date.
The following unaudited pro forma condensed statement of income gives
effect to the Broadway acquisition and related financing transactions as if such
transactions had occurred at the beginning of the period presented.
53 WEEKS ENDED
FEBRUARY 3, 1996
---------------------------------
(MILLIONS, EXCEPT PER SHARE DATA)
Net sales.............................................. $15,933.1
Net income............................................. 24.3
Earnings per share..................................... .12
F-8
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
The foregoing unaudited pro forma condensed statement of income gives
effect to, among other pro forma adjustments, the following:
(i) Interest expense on debt incurred in connection with the acquisition, the
reversal of certain of Broadway's historical interest expense;
(ii) Amortization, over 20 years, of the excess of cost over net assets
acquired;
(iii) Depreciation and amortization adjustments related to the fair market value
of assets acquired;
(iv) Adjustments to income tax expense related to the above; and
(v) Adjustments for shares issued.
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 acquisition been consummated on the first day
of the period presented.
On December 19, 1994, the Company acquired R. H. Macy & Co., Inc.
("Macy's") pursuant to a Plan of Reorganization of Macy's and substantially all
of its subsidiaries. The total purchase price of the Macy's acquisition was
approximately $3,815.9 million.
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 and the purchase
price has been allocated to Macy's assets and liabilities based on the estimated
fair value of these assets and liabilities at the date of acquisition.
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.
3. INVENTORY VALUATION ADJUSTMENTS RELATED TO CONSOLIDATION AND BUSINESS
INTEGRATION AND CONSOLIDATION EXPENSES
In connection with the consolidation of merchandise inventories for
acquired and pre-existing businesses, the Company recorded one-time inventory
valuation adjustments related to merchandise in lines of business that were
eliminated or replaced as a separate component of cost of sales. For the 52
weeks ended February 1, 1997, the amount recorded related to the consolidation
of Broadway into the Company's Macy's West division. For the 53 weeks ended
February 3, 1996, $69.1 million related to 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 $22.5 million related to
the consolidation of the Company's Rich's/Goldsmith's and Lazarus divisions. For
the 52 weeks ended January 28, 1995, the amount recorded related to the
consolidation of Horne's into the Company's Lazarus division.
F-9
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Additionally, the Company incurred certain one-time costs related to the
integration and consolidation of acquired and pre-existing businesses and
classified such costs as business integration and consolidation expenses as a
separate component of selling, general and administrative expenses.
During the 52 weeks ended February 1, 1997, the Company recorded $242.9
million of business integration and consolidation expenses, consisting of $167.7
million of costs associated with the integration of Broadway into the Company,
$33.7 million of costs related to the integration of Macy's into the Company and
$41.5 million of costs related to other support operation restructurings. The
major components of the Broadway integration expenses were $90.4 million of
costs associated with converting the Broadway stores to other nameplates of the
Company (including advertising, credit card issuance and promotion and other
name change expenses), $28.6 million of costs associated with operating Broadway
central office functions for a transitional period and $48.7 million of other
costs and expenses associated with the integration of Broadway into the Company,
including the disposition of properties. The costs associated with the
integration of Macy's into the Company primarily related to the administration
and integration of Company-wide policies and procedures and the elimination of
duplicative or non-continuing facilities. The costs associated with other
support operation restructurings primarily related to the closure and
disposition of warehouses and distribution centers in connection with the
centralization of the Company's merchandise distribution function.
During the 53 weeks ended February 3, 1996, the Company recorded $202.3
million of business integration and consolidation expenses associated with the
integration of Macy's and Broadway into the Company ($139.8 million and $48.1
million, respectively) and the consolidation of the Company's Rich's/Goldsmith's
and Lazarus divisions ($14.4 million). The primary components of the Macy's
integration expenses were $31.1 million of costs to close and sell certain
stores, $38.4 million of costs to convert a number of stores to other
nameplates, $30.8 million of severance costs and $39.5 million of other costs
and expenses associated with integrating Macy's into the Company. The major
components of the Broadway integration expenses were $23.3 million of costs to
close certain stores, $8.7 million of costs to refinance certain indebtedness
and $16.1 million of other costs and expenses associated with integrating
Broadway into the Company.
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 also recorded $12.1 million of costs 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,
including 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).
F-10
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Finally, as a result of the consolidation of the Company's
Rich's/Goldsmith's and Lazarus divisions, the Company recorded a $13.1 million
charge in the 52 weeks ended January 28, 1995 for severance related to the
elimination of duplicative positions.
4. ACCOUNTS RECEIVABLE
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
Due from customers............................... $ 2,523.4 $ 2,698.8
Less allowance for doubtful accounts............. 96.2 83.5
--------- ---------
2,427.2 2,615.3
Other receivables................................ 407.1 226.8
--------- ---------
Net receivables.................................. $ 2,834.3 $ 2,842.1
========= =========
Sales through the Company's credit plans were $4,191.3 million for the 52
weeks ended February 1, 1997, $4,323.8 million for the 53 weeks ended February
3, 1996 and $3,916.9 million for the 52 weeks ended January 28, 1995,
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. As
of February 1, 1997, other receivables includes $200.0 million of a note
receivable maturing on May 3, 1997 (see Note 8).
Finance charge income amounted to $429.5 million for the 52 weeks ended
February 1, 1997, $405.2 million for the 53 weeks ended February 3, 1996 and
$320.3 million for the 52 weeks ended January 28, 1995, respectively.
Changes in allowance for doubtful accounts are as follows:
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, 1997 FEBRUARY 3, 1996 JANUARY 28, 1995
---------------- ---------------- ----------------
(MILLIONS)
Balance, beginning of year......... $ 83.5 $ 44.9 $ 36.9
Charged to costs and expenses...... 171.9 126.9 66.5
Acquired........................... -- 16.8 --
Net uncollectible balances written
off.............................. (159.2) (105.1) (58.5)
-------- -------- ------
Balance, end of year............... $ 96.2 $ 83.5 $ 44.9
======== ======== ======
5. INVENTORIES
Merchandise inventories were $3,246.0 million at February 1, 1997, compared
to $3,094.8 million at February 3, 1996. At these dates, the cost of inventories
using the LIFO method approximates the cost of such inventories using the
first-in, first-out method. The application of the LIFO method did not impact
the 52 weeks ended February 1, 1997 or the 53 weeks ended February 3, 1996 and
resulted in a pre-tax credit of $11.3 million for the 52 weeks ended January 28,
1995.
F-11
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
6. PROPERTIES AND LEASES
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
Land.......................................................... $ 1,047.6 $ 1,050.6
Buildings on owned land....................................... 2,307.0 2,400.4
Buildings on leased land and leasehold improvements........... 1,547.0 1,389.0
Store fixtures and equipment.................................. 2,917.5 2,352.1
Leased properties under capitalized leases.................... 78.0 80.6
--------- ---------
7,897.1 7,272.7
Less accumulated depreciation and amortization................ 1,372.3 967.5
--------- ---------
$ 6,524.8 $ 6,305.2
========= =========
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 February 1, 1997,
for noncancellable leases are:
CAPITALIZED OPERATING
LEASES LEASES TOTAL
----------- --------- --------
(MILLIONS)
Fiscal year:
1997.............................................. $ 13.6 $ 174.6 $ 188.2
1998.............................................. 13.1 151.4 164.5
1999.............................................. 12.6 139.0 151.6
2000.............................................. 12.6 132.8 145.4
2001.............................................. 12.1 128.7 140.8
After 2001........................................ 86.6 1,167.4 1,254.0
------- --------- --------
Total minimum lease payments........................ 150.6 $ 1,893.9 $2,044.5
========= ========
Less amount representing interest................... 72.0
-------
Present value of net minimum capitalized lease
payments.......................................... $ 78.6
=======
Capitalized leases are included in the Consolidated Balance Sheets as
property and equipment while the related obligation is included in short-term
($5.4 million) and long-term ($73.2 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 $8.2 million on capitalized leases and
$17.8 million on operating leases.
F-12
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Rental expense consists of:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Real estate (excluding executory costs)
Capitalized leases --
Contingent rentals................ $ 3.8 $ 4.4 $ 3.3
Operating leases --
Minimum rentals................... 150.9 137.4 78.9
Contingent rentals................ 21.0 19.6 10.4
------ ------ ------
175.7 161.4 92.6
------ ------ ------
Less income from subleases --
Capitalized leases................ 0.6 0.7 0.6
Operating leases.................. 2.7 1.7 0.9
------ ------ ------
3.3 2.4 1.5
------ ------ ------
$172.4 $159.0 $ 91.1
====== ====== ======
Personal property --
Operating leases.................. $ 59.7 $ 63.5 $ 37.4
====== ====== ======
7. INTANGIBLE ASSETS
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
Reorganization value in excess of amount allocable to
identifiable assets......................................... $ 100.2 $ 100.2
Excess of cost over net assets acquired....................... 294.1 294.1
Tradenames.................................................... 458.0 458.0
------- -------
852.3 852.3
Less accumulated amortization................................. 134.9 107.6
------- -------
Intangible assets -- net...................................... $ 717.4 $ 744.7
======= =======
Intangible assets are being amortized on a straight-line basis over 20
years, except for tradenames which are being amortized over 40 years.
F-13
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
8. NOTES RECEIVABLE
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
9.5% note relating to the sale of certain divisions in 1988
and maturing in two equal installments on May 3, 1997 and
May 3, 1998................................................. $ 200.0 $ 400.0
Other......................................................... 4.4 15.1
------- -------
$ 204.4 $ 415.1
======= =======
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 9).
The portion of the note maturing on May 3, 1997, $200.0 million, is classified
in accounts receivable as of February 1, 1997 (see Note 4).
9. FINANCING
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
Short-term debt:
Receivables backed certificates............................. $ 529.0 $ --
Note monetization facility.................................. 176.0 --
Receivables backed commercial paper......................... 146.0 117.0
Bank credit facility........................................ 131.4 100.0
Current portion of long-term debt........................... 112.2 65.6
Broadway receivables based financing........................ -- 450.5
--------- ---------
Total short-term debt.................................... $ 1,094.6 $ 733.1
========= =========
Long-term debt:
Receivables backed certificates............................. 1,364.5 1,654.3
Bank credit facility........................................ 694.3 1,540.0
10.0% Senior notes due 2001................................. 450.0 450.0
8.5% Senior notes due 2003.................................. 450.0 --
8.125% Senior notes due 2002................................ 400.0 400.0
Mortgages................................................... 370.4 455.7
Convertible subordinated notes.............................. 350.0 350.0
Secured promissory note..................................... 220.8 242.3
Note monetization facility.................................. 176.0 352.0
Capitalized leases.......................................... 73.2 81.1
Other....................................................... 56.7 106.8
--------- ---------
Total long-term debt..................................... $ 4,605.9 $ 5,632.2
========= =========
F-14
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Interest and financing costs were as follows:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Interest on debt....................... $463.9 $478.2 $244.9
Amortization of financing costs........ 26.8 21.7 11.5
Interest on capitalized leases......... 8.8 9.1 6.2
------ ------ ------
Subtotal............................. 499.5 509.0 262.6
Less:
Interest capitalized on
construction...................... (0.9) (0.9) (0.5)
Interest income...................... (46.8) (47.1) (43.9)
------ ------ ------
$451.8 $461.0 $218.2
====== ====== ======
Future maturities of long-term debt, other than capitalized leases and
including unamortized original issue discount of $1.3 million, are shown below:
(MILLIONS)
Fiscal year:
1998..................................................... $ 390.3
1999..................................................... 816.7
2000..................................................... 564.9
2001..................................................... 704.9
2002..................................................... 1,239.8
After 2002............................................... 817.4
On May 14, 1996, Prime Receivables Corporation, a wholly owned subsidiary
of the Company ("Prime"), issued $238.8 million of asset-backed certificates and
the Company terminated the receivables based credit facility of Broadway
Receivables Inc., another wholly owned subsidiary.
On May 22, 1996, the Company issued $450.0 million of 8.5% Senior Notes due
2003, and subsequently prepaid $195.4 million of term borrowings under its bank
credit facility. The total payments, in 1996, with respect to the term
borrowings under the bank credit facility were $284.3 million including required
principal payments.
The following summarizes certain provisions of the Company's debt:
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 purchases of revolving consumer credit card receivables generated by the
Company's department store operations. 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
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%
F-15
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
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 $77.0
million of certificates are subject to interest rate caps intended to
effectively limit the rate of interest thereon to 11.0% per annum. On July 27,
1995, Prime issued an additional $598.0 million of asset-backed certificates in
two separate classes. The two classes are: (i) $546.0 million in aggregate
principal amount of 6.75% Class A Asset-Backed Certificates, Series 1995-1 due
August 15, 2002 and (ii) $52.0 million in aggregate principal amount of 6.90%
Class B Asset-Backed Certificates, Series 1995-1 due September 15, 2002. On May
14, 1996, Prime issued an additional $238.8 million of asset-backed certificates
in two separate classes. The two classes are: (i) $218.0 million in aggregate
principal amount of 6.70% Class A Asset-Backed Certificates Series 1996-1 due
May 1, 2001, and (ii) $20.8 million in aggregate principal amount of 6.85% Class
B Asset-Backed Certificates, Series 1996-1 due June 1, 2001. All of the
foregoing certificates represent undivided interests in the assets of a master
trust originated by Prime.
BANK CREDIT FACILITY
The Bank Credit Facility consists of a $2,000.0 million revolving credit
facility (the "Revolving Loan Facility") and $515.7 million term loan facility
(the "Term Loan Facility").
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 ($1,350.0 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. However, the Company is
required to make quarterly amortization payments totaling, on an annual basis,
$131.4 million, $175.3 million and $209.0 million for the 52 weeks ended January
31, 1998, January 30, 1999 and January 29, 2000, respectively, subject to
adjustment in certain circumstances. 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 0.75% subject to adjustment based on the Company's
long-term debt rating and interest
F-16
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
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. The Company has also entered into interest rate swap
agreements covering an aggregate notional amount of $400.0 million. The
Eurodollar rate with reference to which interest on the Company's variable rate
indebtedness is determined is effectively converted to a fixed rate of 5.3275%
on $100.0 million of borrowings from January 9, 1996 to January 9, 1998, 5.2625%
on $100.0 million of borrowings from January 23, 1996 to January 25, 1999,
5.225% on $100.0 million of borrowings from January 18, 1996 to January 18, 1998
and 5.01% on $100.0 million of borrowings from February 12, 1996 to February 12,
1998.
UNSECURED COMMERCIAL PAPER
On January 30, 1997, the Company established a facility for the issuance
from time to time of unsecured commercial paper. The maximum principal amount of
commercial paper that may be outstanding under the facility at any particular
time is $400.0 million. The issuance of commercial paper under the facility will
have the effect, while such commercial paper is outstanding, of reducing the
Company's borrowing capacity under the Revolving Loan Facility by an amount
equal to the principal amount of such commercial paper. As of February 1, 1997,
no such commercial paper was outstanding.
SENIOR NOTES
The Senior Notes are unsecured obligations of the Company, 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. The outstanding balance
under the mortgage loan facility was $345.1 million ($60.5 million included in
short-term debt) as of February 1, 1997 and $345.1 million as of February 3,
1996.
In addition to the mortgage indebtedness described above, the Company and
certain of its subsidiaries are obligated under certain other mortgage notes,
which are secured by liens on certain real property of the Company's
subsidiaries. The aggregate principal amount of such mortgage notes was $93.8
million ($8.0 mil-
F-17
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
lion included in short-term debt) as of February 1, 1997 and $118.8 million
($8.2 million included in short-term debt) as of February 3, 1996.
CONVERTIBLE SUBORDINATED NOTES
On September 27, 1995, the Company issued Convertible Subordinated Notes
which are unsecured obligations of the Company and are subordinate to all
existing and future Senior Debt of the Company and all indebtedness and other
liabilities of the Company's subsidiaries. The Convertible Subordinated Notes
mature on October 1, 2003 and bear interest at the rate of 5% per annum from
September 27, 1995, payable in arrears on October 1 and April 1 of each year,
commencing April 1, 1996.
At any time prior to maturity, unless previously redeemed or repurchased,
each holder of Convertible Subordinated Notes will have the right to convert the
principal of such holder's Convertible Subordinated Notes into fully-paid and
non-assessable shares of Common Stock at the rate of 29.2547 shares of Common
Stock for each $1,000 stated principal amount of Convertible Subordinated Notes,
provided that such conversion rate will be appropriately adjusted in order to
prevent dilution of such conversion right 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, the Convertible Subordinated Notes will be redeemable at the Company's
option, in whole or in part, at anytime on or after October 1, 1998, at
specified redemption prices plus accrued interest to the date of redemption. The
Convertible Subordinated Notes are not subject to a sinking fund.
SECURED PROMISSORY NOTE
The Secured Promissory Note bears interest at 8.2%, matures in October 2000
and is secured by liens on certain real property and the stock of a special
purpose subsidiary of the Company.
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.
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
F-18
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
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
February 1, 1997 and February 3, 1996 there was $146.0 million and $117.0
million of such commercial paper outstanding, respectively.
OTHER FINANCING ARRANGEMENT
In addition to the financing arrangements discussed above, on January 22,
1997, the Company entered into an arrangement providing for off balance sheet
financing of up to $200.0 million of non-proprietary credit card receivables
arising under accounts owned by the Company. At February 1, 1997, $103.5 million
of borrowings were outstanding under this arrangement.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
Merchandise and expense accounts payable...................... $ 1,698.8 $ 1,592.7
Business integration and consolidation expenses............... 34.2 13.0
Merger related liabilities.................................... 46.6 64.4
Taxes other than income taxes................................. 119.5 94.6
Accrued wages and vacation.................................... 78.2 81.4
Accrued interest.............................................. 62.4 64.3
Other......................................................... 452.5 448.1
--------- ---------
$ 2,492.2 $ 2,358.5
========= =========
11. TAXES
Income tax expense is as follows:
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, 1997 FEBRUARY 3, 1996 JANUARY 28, 1995
--------------------------- --------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------ ------- -------- ------
(MILLIONS)
Federal.................... $176.1 $(30.9) $145.2 $ 91.1 $ 13.5 $104.6 $ 82.0 $ 31.4 $113.4
State and local............ 35.9 (5.5) 30.4 19.5 3.2 22.7 21.2 9.1 30.3
------ ------ ------ ------ ------ ------ ------ ------ ------
$212.0 $(36.4) $175.6 $110.6 $ 16.7 $127.3 $103.2 $ 40.5 $143.7
====== ====== ====== ====== ====== ====== ====== ====== ======
The income tax expense reported differs from the expected tax computed by
applying the federal income tax statutory rate of 35% for the 52 weeks ended
February 1, 1997, the 53 weeks ended February 3, 1996 and
F-19
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
the 52 weeks ended January 28, 1995 to income before income taxes. The reasons
for this difference and their tax effects are as follows:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Expected tax........................... $154.5 $ 70.7 $115.9
State and local income taxes, net of
federal income tax expense........... 19.7 14.7 19.7
Permanent difference arising from
amortization of intangible assets.... 9.5 16.6 7.9
Permanent difference resulting from
Broadway acquisition................. -- 22.7 --
Other.................................. (8.1) 2.6 0.2
------ ------ ------
$175.6 $127.3 $143.7
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
(MILLIONS)
Deferred tax assets:
Operating loss carryforwards................................ $ 327.8 $ 417.0
Accrued liabilities accounted for on a cash basis for tax
purposes................................................. 189.5 160.4
Postretirement benefits other than pensions................. 179.1 179.5
Capitalized lease debt...................................... 31.2 34.6
Allowance for doubtful accounts............................. 38.4 31.7
Alternative minimum tax credit carryforwards................ 52.7 48.9
Other....................................................... 147.6 133.8
---------- ----------
Total gross deferred tax assets.......................... 966.3 1,005.9
---------- ----------
Deferred tax liabilities:
Excess of book basis over tax basis of property and
equipment................................................ (1,376.3) (1,335.7)
Prepaid pension expense..................................... (67.4) (71.8)
Deferred gain from sale of divisions........................ (81.6) (81.6)
Merchandise inventories..................................... (115.3) (131.6)
Other....................................................... (68.1) (43.8)
---------- ----------
Total gross deferred tax liabilities..................... (1,708.7) (1,664.5)
---------- ----------
Net deferred tax liability............................... $ (742.4) $ (658.6)
========== ==========
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
F-20
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
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 an
acquired enterprise's net operating loss carryforwards to subsequent taxable
income of the acquired enterprise in a consolidated tax return for the combined
enterprise, management had recorded a valuation allowance of $114.7 million to
reflect the estimated amount of deferred tax assets related to Macy's net
operating loss carryforwards (the "Macy's NOLs") that may not be realized.
During the year ended February 3, 1996, management reassessed the realizability
of the Macy's NOLs and determined, based upon the Company's then-current tax
planning strategies and other available information, that the portion of the
Company's future taxable income attributable to the acquired Macy's enterprise
would more likely than not be sufficient to utilize the entire amount of the
deferred tax asset related to Macy's NOLs. Consequently, the $114.7 million
valuation allowance was eliminated through a reduction in excess of cost over
net assets acquired.
As of February 1, 1997, the Company estimated that the Macy's NOLs, which
are available to offset future taxable income of the acquired Macy's enterprise
through 2008, were approximately $554.7 million and that Broadway's net
operating loss carryforwards, which are available to offset future taxable
income of the acquired Broadway enterprise through 2009, were approximately
$302.6 million. The Company also had alternative minimum tax credit
carryforwards of $52.7 million, which are available to reduce future income
taxes, if any, over an indefinite period.
In connection with the joint plan of reorganization ("POR") 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 believed 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 would have no regular federal income tax liability
in respect thereof and that it had adequately provided for its estimated
alternative minimum tax liability. During the year ended January 28, 1995, the
Company recorded $75.0 million of tax benefits related to NOLs generated prior
to February 4, 1992 and reduced reorganization value in excess of amounts
allocable to identifiable assets accordingly. The remaining issues related to
the Gains and the POR were resolved on January 5, 1996 and the Company recorded
$200.0 million of tax benefits related to such NOLs as a reduction of
reorganization value in excess of amounts allocable to identifiable assets.
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. All of the
issues raised by the IRS audit have been resolved, except for an issue involving
the deductibility of approximately $176.3 million of so-called "break-up fees."
This issue was resolved in favor of the Company by the Bankruptcy Court for the
Southern District of Ohio, the decision of which was affirmed by the United
States District Court for the Southern District of Ohio. Thereafter, the IRS
filed an appeal of such decision in the United States Court of Appeals for the
Sixth Circuit, where such appeal currently is pending. Management believes that
the ultimate resolution of this issue will not have a material adverse effect on
the Company's financial position or results of operations.
F-21
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
12. 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 February 1, 1997,
the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28, 1995, net
retirement expense for these plans totaled $29.2 million, $21.8 million and $3.0
million, respectively.
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. The discount rates used to determine the actuarial present value
of projected benefit obligations under such plans were 7.75% as of December 31,
1996 and 7.25% as of December 31, 1995. The assumed average rate of increase in
future compensation levels under such plans was 5.0% as of December 31, 1996 and
December 31, 1995. The long-term rate of return on assets (Pension Plans only)
was 9.75% as of December 31, 1996 and December 31, 1995.
Effective January 1, 1997, the Company amended and merged its Pension Plans
and supplementary retirement plans and, during the first quarter of fiscal 1997,
amended and merged its Savings Plans. These amendments and mergers are not
expected to have a material impact on net retirement expense.
PENSION PLANS
Net pension expense (income) for the Company's Pension Plans included the
following actuarially determined components:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Service cost......................... $ 36.2 $ 31.3 $ 19.9
Interest cost........................ 93.6 82.6 39.9
Actual return on assets.............. (192.7) (243.2) 5.1
Net amortization and deferrals....... 74.4 134.5 (73.7)
-------- -------- ------
$ 11.5 $ 5.2 $ (8.8)
======== ======== ======
F-22
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
The following table sets forth the projected actuarial present value of
benefit obligations and funded status at December 31, 1996 and 1995, for the
Pension Plans:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(MILLIONS)
Net accumulated benefit obligations, including vested
benefits of $1,163.6 million and $1,213.2 million,
respectively........................................... $1,189.6 $1,244.5
Projected compensation increases......................... 91.6 97.8
-------- --------
Projected benefit obligations............................ 1,281.2 1,342.3
-------- --------
Plan assets (primarily stocks, bonds and U.S. government
securities)............................................ 1,468.6 1,363.4
Unrecognized (gain) loss................................. (15.5) 162.9
Unrecognized prior service cost.......................... 3.9 1.9
Unrecognized net asset................................... -- 0.9
-------- --------
1,457.0 1,529.1
-------- --------
Prepaid pension expense.................................. $ 175.8 $ 186.8
======== ========
The Company's policy is to fund the Pension Plans at or above the minimum
required by law. At December 31, 1996 and 1995, the Company had met the full
funding limitation. Plan assets are held by independent trustees.
SUPPLEMENTARY RETIREMENT PLANS
Net pension expense for the supplementary retirement plans included the
following actuarially determined components:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Service cost......................... $ 1.9 $ 1.6 $ 0.8
Prior service cost................... -- 1.1 --
Interest cost on projected benefit
obligations........................ 4.9 3.0 1.7
Net amortization and deferral........ .8 0.7 1.0
------ ------ ------
$ 7.6 $ 6.4 $ 3.5
====== ====== ======
F-23
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
The following table sets forth the projected actuarial present value of
unfunded benefit obligations at December 31, 1996 and 1995, for the
supplementary retirement plans:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(MILLIONS)
Accumulated benefit obligations, including vested
benefits of $65.1 million and $68.4 million,
respectively........................................... $ 66.1 $ 69.9
Projected compensation increases......................... 9.1 16.1
------ ------
Projected benefit obligations............................ 75.2 86.0
Unrecognized gain (loss)................................. 6.1 (6.2)
Unrecognized prior service cost.......................... (5.5) (6.5)
------ ------
Accrued supplementary retirement obligation.............. $ 75.8 $ 73.3
====== ======
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 the minimum Company contribution is 20% of an employee's
eligible savings. For the other plans, the Company's contribution is based on a
percentage of employee savings. Expense for the Savings Plans amounted to $10.1
million for the 52 weeks ended February 1, 1997, $10.2 million for the 53 weeks
ended February 3, 1996 and $8.3 million for the 52 weeks ended January 28, 1995.
DEFERRED COMPENSATION PLAN
The Company has a deferred compensation plan wherein eligible executives
may elect to defer a portion of their compensation each year as either stock
credits or cash credits. The Company transfers shares to a trust to cover the
number it estimates will be needed for distribution on account of stock credits
currently outstanding. At February 1, 1997, February 3, 1996 and January 28,
1995, the liability under the plan, which is reflected in other liabilities, was
$11.8 million, $7.5 million and $3.9 million, respectively. Expense for the 52
weeks ended February 1, 1997, the 53 weeks ended February 3, 1996 and the 52
weeks ended January 28, 1995 was immaterial.
13. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to pension and other supplemental benefits, certain retired
employees currently are 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 eligible
employees who retire after a certain age with specified years of service.
Certain employees are subject to having such benefits modified or terminated.
F-24
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Net postretirement benefit expense included the following actuarially
determined components:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Service cost......................... $ 4.9 $ 5.5 $ 0.7
Interest cost........................ 27.2 28.9 9.1
Net amortization and deferral........ (6.6) (6.8) (5.8)
------ ------ ------
$ 25.5 $ 27.6 $ 4.0
====== ====== ======
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, 1996 and
1995:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(MILLIONS)
Accumulated postretirement benefit obligation:
Retirees................................................. $280.0 $292.7
Fully eligible active plan participants.................. 38.9 47.1
Other active plan participants........................... 45.2 56.3
------ ------
Accumulated postretirement benefit obligation............ 364.1 396.1
Unrecognized net gain.................................... 69.4 35.5
Unrecognized prior service cost.......................... 16.0 18.6
------ ------
Accrued postretirement benefit obligation................ $449.5 $450.2
====== ======
The discount rate used in determining the actuarial present value of
unfunded postretirement benefit obligations was 7.75% as of December 31, 1996
and 7.25% as of December 31, 1995.
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 5.5% to 10.5% in the first
year, and to decrease gradually for each such component to 5.5% by 2003 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 obligation as of December 31, 1996 by $22.8
million.
14. EQUITY PLAN
The Company has adopted 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
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48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
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.
Stock option transactions are as follows:
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, 1997 FEBRUARY 3, 1996 JANUARY 28, 1995
------------------------ ------------------------ ------------------------
SHARES GRANT PRICE SHARES GRANT PRICE SHARES GRANT PRICE
------- -------------- ------- -------------- ------- --------------
(SHARES IN THOUSANDS)
Outstanding, beginning
of year.............. 7,415.7 $11.625-28.500 6,151.5 $11.625-25.000 3,038.5 $11.625-25.000
Granted................ 3,057.8 33.125-34.625 2,291.1 19.000-28.500 3,597.4 18.625-23.625
Canceled............... (403.9) 15.625-33.125 (435.6) 16.000-23.625 (218.2) 11.625-23.625
Exercised.............. (929.4) 11.625-25.000 (591.3) 15.625-23.625 (266.2) 11.625-20.875
------- -------------- ------- -------------- ------- --------------
Outstanding, end of
year................. 9,140.2 $11.625-34.625 7,415.7 $11.625-28.500 6,151.5 $11.625-25.000
======= ============== ======= ============== ======= ==============
Exercisable, end of
year................. 3,136.8 $11.625-28.500 2,750.2 $11.625-25.000 1,904.1 $11.625-25.000
======= ============== ======= ============== ======= ==============
As of February 1, 1997, 6,922,400 shares of Common Stock were available for
additional grants pursuant to the Company's equity plan, of which 204,900 shares
were available for grant in the form of restricted stock. No shares of Common
Stock were granted in the form of restricted stock during the 52 weeks ended
February 1, 1997 or the 53 weeks ended February 3, 1996. During the 52 weeks
ended January 28, 1995, 418,000 shares of Common Stock were granted in the form
of restricted stock at market values ranging from $18.625-$23.625 with vesting
periods ranging from immediate to five years. Compensation expense is recorded
for all restricted stock grants based on the amortization of the fair market
value at the time of grant of the restricted stock over the period the
restrictions lapse (see Note 15). There have been no grants of stock
appreciation rights under the equity plan.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for compensation cost under its equity plan. Had
compensation cost for the Company's equity plan been determined consistent with
Statement of Financial Accounting Standards No. 123 for options granted
subsequent to January 28, 1995, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3,
1997 1996
-------------- --------------
(MILLIONS, EXCEPT PER SHARE DATA)
Net income As Reported............................ $265.9 $ 74.6
Pro forma.............................. 257.5 71.6
Earnings As Reported............................ 1.28 .39
per share Pro forma.............................. 1.24 .37
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49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
The fair value of each option grant subsequent to January 28, 1995 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used.
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3,
1997 1996
-------------- --------------
Dividend yield....................................... -- --
Expected volatility.................................. 25.2% 31.5%
Risk-free interest rate.............................. 6.1% 7.0%
Expected life........................................ 6 years 6 years
Subsequent to January 28, 1995, option awards have been granted with an
exercise price equal to 100% of fair market value at the time of grant, with a
10-year term and vesting either ratably over three or four years or vesting
entirely at the end of three or four years. A summary of stock option
transactions for stock options granted subsequent to January 28, 1995 is shown
below:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, 1997 FEBRUARY 3, 1996
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
(SHARES IN THOUSANDS)
Outstanding, beginning of year............................. 2,187.9 $21.790 -- $ --
Granted.................................................... 3,057.8 33.138 2,291.1 21.816
Canceled................................................... (212.5) 28.156 (103.2) 22.375
Exercised.................................................. (66.2) 22.375 -- --
------- ------- ------- -------
Outstanding, end of year................................... 4,967.0 $28.496 2,187.9 $21.790
======= ======= ======= =======
Exercisable, end of year................................... 334.1 $22.480 -- $ --
======= ======= ======= =======
Weighted average fair value of options granted during
year..................................................... $13.037 $ 9.887
======= =======
The following summarizes information about stock options granted subsequent
to January 28, 1995, which remain outstanding as of February 1, 1997:
OPTIONS OUTSTANDING
----------------------------------------------------- OPTIONS EXERCISABLE
RANGE WEIGHTED AVERAGE --------------------------------
OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
(THOUSANDS) (THOUSANDS)
$ 19.000-28.500 2,006.8 8 years $ 21.647 334.1 $ 22.480
33.125-34.625 2,960.2 9 years 33.139 -- --
15. 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
F-27
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
value of $.01 per share, with 237.8 million shares of Common Stock issued and
208.0 million shares of Common Stock outstanding at February 1, 1997, 232.4
million shares of Common Stock issued and 202.7 million shares of Common Stock
outstanding at February 3, 1996, and 212.2 million shares of Common Stock issued
and 182.6 million shares outstanding at January 28, 1995 (with shares held in
the Company's treasury or by subsidiaries of the Company being treated as
issued, but not outstanding).
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).
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 10.2 million shares of Common Stock
(subject to adjustment) upon the conversion of the Convertible Subordinated
Notes, 1.0 million shares of Common Stock (subject to adjustment) upon the
exercise of the Company's Series B Warrants, 9.0 million shares of Common Stock
(subject to adjustment) upon the exercise of the Company's Series C Warrants,
9.0 million shares of Common Stock (subject to adjustment) upon the exercise of
the Company's Series D Warrants and
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51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
0.2 million shares of Common Stock (subject to adjustment) upon the exercise of
the Company's Series E Warrants. The warrants have the following terms:
SHARES PER EXERCISE EXPIRATION
WARRANT PRICE DATE
---------- ---------- ----------
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
Series E...................... 0.270 17.00 10/08/99
In addition to the stock options described in Note 14, the Company issued
options to purchase 1.5 million shares of Common Stock at prices ranging from
$14.81 to $51.85 in connection with the acquisition of Broadway (of which
options to purchase 0.6 million shares of Common Stock remained outstanding as
of February 1, 1997).
F-29
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Shareholders' Equity consists of the following:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, 52 WEEKS ENDED
1997 1996 JANUARY 28, 1995
-------------- -------------- ----------------
(MILLIONS)
Preferred stock.................................. $ -- $ -- $ --
-------- -------- --------
Common stock:
Balance, beginning of year.................. $ 2.3 $ 2.1 $ 1.3
Issuance of common stock.................... 0.1 0.2 0.8
-------- -------- --------
Balance, end of year........................ 2.4 2.3 2.1
-------- -------- --------
Additional paid-in capital:
Balance, beginning of year.................. 4,268.4 3,711.3 1,975.7
Issuance of common stock.................... 131.3 557.1 1,617.7
Issuance of warrants........................ -- -- 118.4
Cancellation of treasury stock.............. -- -- (0.5)
-------- -------- --------
Balance, end of year........................ 4,399.7 4,268.4 3,711.3
-------- -------- --------
Unearned restricted stock:
Balance, beginning of year.................. (3.2) (8.5) (4.1)
Cancellation (issuance) of common stock..... 0.2 0.7 (7.1)
Amortization................................ 1.9 4.6 2.7
-------- -------- --------
Balance, end of year........................ (1.1) (3.2) (8.5)
-------- -------- --------
Treasury stock:
Balance, beginning of year.................. (562.2) (559.1) (0.9)
Additions................................... (4.3) (3.1) (558.7)
Deductions.................................. 0.4 -- --
Cancellations............................... -- -- 0.5
-------- -------- --------
Balance, end of year........................ (566.1) (562.2) (559.1)
-------- -------- --------
Accumulated equity:
Balance, beginning of year.................. 568.4 493.8 306.2
Net income.................................. 265.9 74.6 187.6
-------- -------- --------
Balance, end of year........................ 834.3 568.4 493.8
-------- -------- --------
Total shareholders' equity....................... $4,669.2 $4,273.7 $3,639.6
======== ======== ========
F-30
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
Changes in the number of shares held in the treasury are as follows:
52 WEEKS ENDED 53 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3,
1997 1996
-------------- --------------
(THOUSANDS)
Balance, beginning of year............... 29,728.9 29,604.7
Additions:
Restricted stock.................... 41.9 40.8
Deferred compensation plan.......... 90.6 83.4
Distributions from deferred compensation
plan................................... (18.9) --
-------- --------
Balance, end of year..................... 29,842.5 29,728.9
======== ========
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 on account of stock credits currently outstanding.
16. 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 because the carrying amount reflects a
reasonable estimate of losses from doubtful accounts.
Notes receivable
The fair value of notes receivable is estimated using discounted cash flow
analysis, based on estimated market discount rates.
Other assets
Other assets primarily represent investments in joint ventures accounted
for on the equity basis. Based on recent appraisals, the carrying value of such
investments approximates their fair value.
F-31
54
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 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.
Interest rate swap agreements
The fair values of the interest rate swap agreements are obtained from
dealer quotes. The values represent the estimated amount the Company would pay
to terminate the agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap counterparties. The
interest rate swap agreements pertain to the note monetization and working
capital facilities and, although currently in net payable positions, management
intends to hold these agreements to their maturity dates.
The estimated fair values of the Company's financial instruments are as
follows:
FEBRUARY 1, 1997 FEBRUARY 3, 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(MILLIONS)
Cash and short-term investments........... $ 148.8 $ 148.8 $ 172.5 $ 172.5
Notes receivable.......................... 204.4 203.3 415.1 422.3
Other assets.............................. 16.9 16.9 30.4 30.4
Long-term debt............................ 4,532.7 4,702.6 5,551.1 5,747.3
Interest rate cap agreements.............. 7.5 0.2 15.8 0.8
Interest rate swap agreements............. -- (8.3) -- (30.9)
F-32
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
The estimated fair values and related unrecognized loss of the Company's
interest rate cap and swap agreements are as follows:
FEBRUARY 1, 1997 FEBRUARY 3, 1996
------------------------------------ ------------------------------------
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 $2.2 $ -- $ (2.2) $4.7 $ 0.1 $ (4.6)
$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 3.6 -- (3.6) 7.8 0.1 (7.7)
$375.0 10% 02/03/95 to 01/03/01 1.5 0.2 (1.3) 3.0 0.4 (2.6)
$ 38.5 11% 01/20/95 to 03/15/98 -- -- 0.1 0.1 --
$ 38.5 11% 01/20/95 to 03/15/00 0.2 -- (0.2) 0.2 0.1 (0.1)
Interest Rate Swaps:
$352.0 9.9440% $176.0 to 5/3/97 and
$176.0 to 5/3/98 -- (11.7) (11.7) -- (29.9) (29.9)
$100.0 5.3275% 1/9/96 to 1/9/98 -- 0.5 0.5 -- (0.5) (0.5)
$100.0 5.2625% 1/23/96 to 1/25/99 -- 1.5 1.5 -- (0.2) (0.2)
$100.0 5.2250% 1/18/96 to 1/18/98 -- 0.5 0.5 -- (0.3) (0.3)
$100.0 5.0100% 2/12/96 to 2/12/98 -- 0.9 0.9 -- -- --
The interest rate cap agreements in effect at February 1, 1997 are used to
hedge interest rate risk related to variable rate indebtedness under the
Company's bank credit facility and receivables backed commercial paper program,
as well as certain asset-backed certificates. These interest rate cap agreements
are recorded at cost and are amortized on a straight-line basis over the life of
the cap.
The interest rate swap agreements described in the foregoing table relate
to the note monetization and bank credit facilities. The note monetization
facility bears interest based on LIBOR, subject to certain adjustments. The
interest rate swap agreement for the note monetization facility effectively
converts this variable rate debt (LIBOR plus 0.40%) to a fixed rate of 10.344%
(9.944% fixed rate plus 0.40%). 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 other interest rate swap
agreements are used, in effect, to fix the interest on a portion of the debt
outstanding under the bank credit facilities.
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 that the total commitment amount will represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash 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 because of the Company's large number of customers and their dispersion
across many regions.
F-33
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
================================================================================
17. QUARTERLY RESULTS (UNAUDITED)
Unaudited quarterly results for the 52 weeks ended February 1, 1997 and the
53 weeks ended February 3, 1996, were as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA)
52 Weeks Ended February 1, 1997:
Net sales............................... $3,300.7 $3,284.2 $3,609.1 $5,035.0
Operating income........................ 55.3 75.8 187.3 574.8
Net income (loss)....................... (37.9) (27.2) 41.8 289.2
Earnings (Loss) per share............... (.18) (.13) .20 1.39
Fully diluted earnings (loss) per
share................................ (.18) (.13) .20 1.32
53 Weeks Ended February 3, 1996:
Net sales............................... $2,988.0 $3,047.2 $3,748.4 $5,264.9
Operating income........................ 10.8 1.8 105.0 545.3
Net income (loss)....................... (57.0) (66.9) (46.4) 244.9
Earnings (Loss) per share............... (.31) (.37) (.24) 1.21
Fully diluted earnings (loss) per
share................................ (.31) (.36) (.23) 1.15
F-34