FORM 10-K
Annual Report Pursuant to Section 13
For the Fiscal Year Ended February | Commission File Number 1-13536 |
Federated Department Stores, Inc.
7 West Seventh Street
| Incorporated in Delaware | I.R.S. No. 13-3324058 |
Securities Registered Pursuant to Section 12(b) of the Act:
| Name of Each Exchange on | ||
| Title of Each Class | ||
| Common Stock, par value $.01 per share | New York Stock Exchange | |
| Rights to Purchase Series A Junior Participating Preferred Stock | ||
| New York Stock Exchange | ||
| 8.5% Senior Notes due 2003 | New York Stock Exchange | |
| 7.45% Senior Debentures due 2017 | New York Stock Exchange | |
| 6.79% Senior Debentures due 2027 | New York Stock Exchange | |
| 7% Senior Debentures due 2028 | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
None
The Company has filed all reports required to be filed by Section 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 not contained herein, and will not be contained, to the best of registrant’s knowledge, in registrant’s definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by checkmark whether registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes þ No o
There were 201,126,374187,327,448 shares of the Company’s Common Stock outstanding as of April 5, 2002,4, 2003, excluding shares held in the treasury of the Company or by subsidiaries of the Company.
The aggregate market value of the shares of suchCompany’s 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 5,August 2, 2002, was approximately $7,954,500,000.$6,299,600,000.
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 17, 200216, 2003 (the “Annual Meeting”), are incorporated by reference in Part III hereof.
Unless the context requires otherwise references to “2002,” “2001,” “2000,” “1999,”“1999” and “1998” and “1997” are references to the Company’s fiscal years ended February 1, 2003, February 2, 2002, February 3, 2001, January 29, 2000 and January 30, 1999 and January 31, 1998, respectively.
Forward-Looking Statements
This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “think,” “estimate” or “continue” or the negative or other variations thereof and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including (a) risks and uncertainties relating to the possible invalidity of the underlying beliefs and assumptions, (b) possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions, (c) actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials, and (d) attacks or threats of attacks by terrorists or war. Furthermore, future results of the operations of the Company could differ materially from historical results or current expectations because of a variety of factors that affect the Company, including transaction costs associated with the renovation, conversion and transitioning of retail stores in regional markets; the outcome and timing of sales and leasing in conjunction with the disposition of retail store properties; the retention, reintegration and transitioning of displaced employees; competitive pressures from department and specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels; and general consumer-spending levels, including the impact of the availability and level of consumer debt, and the effects of the weather. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as “Risk Factors” and “Special Considerations” in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those reflected in such forward-looking statements.
Item 1. Business.
General.The Company is a Delaware corporation. The Company and its predecessors have been operating department stores since 1820.
As of February 1, 2003, the Company, through its subsidiaries, is one of the leading operators of full-lineoperated 394 department stores in the United States, with 397 department stores in 34 states, Puerto Rico and Guam as of February 2, 2002. The Company’s subsidiaries operate 459 stores (including61 furniture galleries and other specialty stores)stores under the names “Bloomingdale’s,” “The Bon Marché,” “Burdines,” “Goldsmith’s,” “Lazarus,” “Macy’s” and “Rich’s.” The stores are located in 34 states, Puerto Rico and Guam, with 145 stores being located on the west coast, 103 stores in the southeast, 93 stores in the northeast, 51 stores in the midwest and the remaining 63 stores spread in other areas of the United States and its territories. The 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,
1
The Company, through its Bloomingdale’s and Macy’s West subsidiaries, conducts direct-to-customer mail catalog and electronic commerce businesses under the names “Bloomingdale’s By Mail” and “macys.com.” Prior to February 1, 2002, the Company conducted
1
Through its subsidiary, Fingerhut Companies, Inc. (“Fingerhut”), the Company also sellspreviously sold a broad range of products and services through catalogs, direct marketing and the Internet, including (i) Figi’s, a food and gift catalog business; (ii) Arizona Mail Order and Bedford Fair, both apparel catalog businesses; and (iii) Popular Club, a membership-based general merchandise catalog business. Fingerhut also providesprovided services to third parties.
On January 16, 2002, the Company announced that it intendsCompany’s Board of Directors approved a plan to dispose of the operations of Fingerhut, and that, if its efforts to find a buyer for Fingerhut are not successful,including the Company will close the Fingerhut catalog operation and wind down and collect out the Fingerhut receivables portfolio. The Company expects to sell as ongoing businesses Arizona Mail Order, Figi’s and Popular Club Plan. ThePlan businesses conducted by Fingerhut’s subsidiaries, which were acquired by the Company has entered into a non-binding letteron March 18, 1999. During 2002, the Company, through separate transactions with third parties, sold substantially all of intent with a third party for the saleassets of Fingerhut and its subsidiaries, including the Fingerhut core catalog operation, the Fingerhut receivables portfolio and related assets, the operations of Arizona Mail Order and Figi’s as a going concern,ongoing businesses, the operations of Popular Club Plan, as an ongoing business and is currently engaged in negotiations with this party. However, there can be no assurance that this transaction will be consummated.
Accordingly, effectivecertain real property assets. Effective February 2, 2002, the Company began reporting FingerhutFingerhut’s results as discontinued operations in itsthe Company’s consolidated financial statements. The historical percentage of the Company’s consolidated net sales attributable to Fingerhut was 7% for the 52 weeks ended February 2, 2002 and 10% for the 53 weeks ended February 3, 2001. Because the Fingerhut core catalog operation, the related receivables portfolio and the Arizona Mail Order, Figi’s and Popular Club Plan operations constituted a single business segment, the Company treated their disposition as a liquidation of the segment. The Company now operates in one segment as an operator of department stores.
The Company provides various support functions to its retail operating divisions (except Fingerhut) on an integrated, company-wide basis.
| • | The Company’s financial, administrative and credit services subsidiary, FACS Group, Inc. (“FACS”), provides | |
| • | The Company’s data processing subsidiary, Federated Systems Group, Inc. (“FSG”), provides (directly and pursuant to outsourcing arrangements with third parties) operational electronic data |
2
| processing and management information services to each of the Company’s retail operating and service divisions. | ||
| • | Federated Merchandising Group (“FMG”), a division of the Company, helps the Company to centrally develop and execute consistent merchandise strategies while retaining the ability to tailor merchandise assortments and strategies to the particular character and customer base of the Company’s various department store franchises. FMG is also responsible for all of the private label development of the Company’s retail operating divisions. However, Bloomingdale’s sources some of its private label merchandise through Associated Merchandising Corporation. | |
| • | Federated Logistics and Operations (“FLO”), a division of a subsidiary of the Company, provides warehousing and merchandise distribution services, store design and construction services and certain supply purchasing services for the Company’s retail operating divisions. | |
| • | A specialized staff maintained in the Company’s corporate offices provides services for all divisions of the Company in such areas as accounting, real estate and insurance, as well as various other corporate office functions. |
2
FACS, FSG, FMG and certain departments in the Company’s corporate offices also offer their services to unrelated third parties.
Fingerhut conducts its retail business though its principal subsidiaries Fingerhut Corporation, Figi’s Inc., Arizona Mail Order Company, Inc., Bedford Fair Apparel, Inc., Popular Club Plan, Inc. and Axsys National Bank, which provides credit for customers’ purchases in the form of revolving credit card loans. Other subsidiaries of Fingerhut support its retail operations by providing data processing, credit processing services, customer service, telemarketing and fulfillment services, as well as other corporate office functions. Fingerhut also receives from FACS call center and collections support.
The Company and its predecessors have been operating department stores since 1820. Federated Department Stores, Inc., the Company’s predecessor prior to the acquisition of R.H. Macy & Co., Inc. pursuant to a merger, was organized as a Delaware corporation in 1920. The Company is the surviving entity following such merger. On October 11, 1995, the Company acquired Broadway Stores, Inc. (“Broadway”) pursuant to a subsidiary merger. On March 18, 1999, the Company acquired Fingerhut pursuant to a subsidiary merger. On July 9, 2001, the Company acquired Liberty House, Inc. pursuant to a stock purchase agreement.
The Company’s executive offices are located at 7 West Seventh Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000 and 151 West 34th Street, New York, New York 10001, telephone number: (212) 494-1602.
Employees.As of February 2, 2002,1, 2003, the Company had approximately 115,000113,000 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 2, 20021, 2003 were represented by unions. Management considers its relations with employees to be satisfactory.
Seasonality.The retail 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 2001.2002. The Company has no long-term purchase commitments or arrangements with any of its suppliers, and believes that it is not dependent on any one supplier. The Company considers its relations with its suppliers to be satisfactory.
Competition.The retailing industry, in general, and the department store and direct-to-customer businesses, in particular, are intensely competitive. Generally, the Company’s stores and direct-to-customer business operations compete with other department stores in the geographic areas in which they operate, as well as 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 the Internet, mail order catalogs and television) and manufacturers’ outlets. The operators of department stores with which the Company competes to a substantial degree include Dillard’s, J.C. Penney, Kohl’s, May, Nordstrom, and Sears. The Company seeks to attract customers by offering superior selections, value pricing, and strong private label merchandise in stores that are located in premier locations, and by providing an exciting
3
Available Information. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge through its internet website athttp://www.fds.com as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
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 | ||||
| James M. Zimmerman | Chairman of the | |||||
| Terry J. Lundgren | President | |||||
| Ronald W. Tysoe | Vice | |||||
| Thomas G. Cody | ||||||
| Tom Cole | 54 | Vice Chair | ||||
| Janet E. Grove | 51 | Vice Chair | ||||
| Susan D. Kronick | 51 | Vice Chair | ||||
| Karen M. Hoguet | Senior Vice President and Chief Financial Officer | |||||
| Dennis J. Broderick | Senior Vice President, General Counsel and Secretary | |||||
| Joel A. Belsky | Vice President and Controller | |||||
James M. Zimmerman has been Chairman of the Board since May 1997, and Chief Executive Officer of the Company sincefrom May 1997;1997 until February 25, 2003; prior thereto he served as the President and Chief Operating Officer of the Company since May 1988.
Terry J. Lundgren has been President and Chief Executive Officer of the Company since February 26, 2003; prior thereto he served as the President/ Chief Operating Officer and Chief Merchandising Officer of the Company since April 15, 2002. Prior to April 15, 2002 Mr. Lundgren served as the President and Chief Merchandising Officer of the Company since May 1997 and served as the Chairman of the Company’s Federated Merchandising Group division from February 1994 until February 19, 1998.
Ronald W. Tysoe has been Vice Chairman,Chair, Finance and Real Estate, of the Company since April 1990 and served as Chief Financial Officer of the Company from April 1990 until October 31, 1997.
Thomas G. Cody has been Vice Chair, Legal, Human Resources, Internal Audit and External Affairs, since February 26, 2003; prior thereto he served as the Executive Vice President, Legal and Human Resources, of the Company since May 1988.
Tom Cole has been Vice Chair, Support Operations, since February 26, 2003 and Chairman of FLO since 1995, FSG since 2001 and FACS since 2002.
Janet E. Grove has been Vice Chair, Merchandising, Private Brand and Product Development, since February 26, 2003 and Chairman of FMG since 1998 and Chief Executive Officer of FMG since 1999.
4
Susan D. Kronick has been Vice Chair, Department Store Divisions, since February 26, 2003; prior thereto she served as Group President, Regional Department Stores, since 2001.
Karen M. Hoguet has been Senior Vice President of the Company since April 1991 and Chief Financial Officer of the Company since October 31, 1997. Prior to July 6, 1999, Mrs. Hoguet also served as the Treasurer of the Company sincefrom January 1992.1992 until July 6, 1999.
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.
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.
Item 2. Properties.
The properties of the Company consist primarily of stores and related retail facilities, including warehouses and distribution and fulfillment centers. The Company also owns or leases other properties, including corporate office space in Cincinnati and New York and other facilities at which centralized operational support functions are conducted. As of February 2, 2002,1, 2003, the Company operated 459455 stores in 34 states, Puerto Rico and Guam, comprising a total of 84,000,000approximately 83,500,000 square feet. Of such stores, 217198 were entirely or mostly owned, 171 were leased and 24286 stores were entirely or mostly leased.operated under arrangements where the Company owned the building and leased the land. All owned properties are held free and clear of mortgages. 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.
4
Most leases require the Company to pay real estate taxes, maintenance and other costs; some also require additional payments based on percentages of sales and some contain purchase options. Certain of the Company’s real estate leases have terms that extend for significant numbers of years and provide for rental rates that increase over time.
Item 3. Legal Proceedings.
The Company and certain members of its senior management have been named defendants in five substantially identical purported class action complaints filed on behalf of persons who purchased shares of the Company between February 23, 2000 and July 20, 2000. Originally filed in August, September and October 2000, in the United States District Court for the Southern District of New York, the actions have been consolidated into a single case (In Re Federated Department Stores, Inc. Securities Litigation, Case No. 00-CV-6362 (RCC)) and a consolidated amended complaint (the “Complaint”) has been filed. The Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, on the basis that the Company, among other things, made false and misleading statements regarding its financial condition and results of operations and failed to disclose material information relating to the credit delinquency problem at Fingerhut. The plaintiffs are seeking unspecified amounts of compensatory damages and costs, including legal fees. Management believes that the allegations contained in the Complaint are without merit and intends to defend vigorously against those allegations. A motion to dismiss the Complaint is pending. Discovery has not commenced.
On February 14 and February 26, 2002, two essentially identical shareholder derivative lawsuits were filed in a Minnesota state court, purportedly on behalf of the Company, naming as defendants the Company’s directors, its Fingerhut subsidiary and certain officers of Fingerhut. The defendants have removed these lawsuits to the United States District Court for the District of Minnesota.Minnesota (Wesenberg vs.
5
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.” As of February 2, 2002,1, 2003, the Company had approximately 11,40012,932 stockholders of record. The following table sets forth for each fiscal quarter during 20012002 and 20002001 the high and low sales prices per share of Common Stock as reported on the NYSE Composite Tape:
| 2001 | 2000 | 2002 | 2001 | |||||||||||||||||||||||||||||
| Low | High | Low | High | Low | High | Low | High | |||||||||||||||||||||||||
| 1st Quarter | 38.43 | 49.90 | 31.63 | 44.75 | 36.83 | 44.26 | 38.43 | 49.90 | ||||||||||||||||||||||||
| 2nd Quarter | 35.78 | 48.45 | 21.00 | 40.88 | 31.39 | 44.10 | 35.78 | 48.45 | ||||||||||||||||||||||||
| 3rd Quarter | 26.05 | 40.09 | 23.81 | 30.19 | 23.59 | 38.13 | 26.05 | 40.09 | ||||||||||||||||||||||||
| 4th Quarter | 33.00 | 43.05 | 28.31 | 46.06 | 25.50 | 34.75 | 33.00 | 43.05 | ||||||||||||||||||||||||
The Company has not paid any dividends on its Common Stock during its two most recent fiscal years, and does not anticipatebut may consider paying any dividends on the Common Stock in the foreseeable future.
56
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 | 52 Weeks | 52 Weeks | 53 Weeks | 52 Weeks | 52 Weeks | |||||||||||||||||||||||||||||||||
| Ended | Ended | Ended | Ended | Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||||||
| February 2, | February 3, | January 29, | January 30, | January 31, | February 1, | February 2, | February 3, | January 29, | January 30, | |||||||||||||||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||
| (millions, except per share data) | (millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Operations Data: | Consolidated Statement of Operations Data: | Consolidated Statement of Operations Data: | ||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 15,651 | $ | 16,638 | $ | 16,029 | $ | 15,365 | $ | 15,220 | Net sales | $ | 15,435 | $ | 15,651 | $ | 16,638 | $ | 16,029 | $ | 15,365 | |||||||||||||||||||||
| Cost of sales | 9,584 | 9,955 | 9,576 | 9,218 | 9,200 | Cost of sales | 9,255 | 9,584 | 9,955 | 9,576 | 9,218 | |||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 4,801 | 4,912 | 4,760 | 4,692 | 4,679 | Selling, general and administrative expenses | 4,837 | 4,801 | 4,912 | 4,760 | 4,692 | |||||||||||||||||||||||||||||||
| Asset impairment and restructuring charges | 162 | 80 | – | – | – | Asset impairment and restructuring charges | – | 162 | 80 | – | – | |||||||||||||||||||||||||||||||
| Operating income | 1,104 | 1,691 | 1,693 | 1,455 | 1,341 | Operating income | 1,343 | 1,104 | 1,691 | 1,693 | 1,455 | |||||||||||||||||||||||||||||||
| Interest expense | (331 | ) | (327 | ) | (320 | ) | (304 | ) | (418 | ) | Interest expense | (311 | ) | (331 | ) | (327 | ) | (320 | ) | (304 | ) | |||||||||||||||||||||
| Interest income | 7 | 6 | 13 | 12 | 35 | Interest income | 16 | 7 | 6 | 13 | 12 | |||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes and extraordinary items | 780 | 1,370 | 1,386 | 1,163 | 958 | Income from continuing operations before income taxes and extraordinary items | 1,048 | 780 | 1,370 | 1,386 | 1,163 | |||||||||||||||||||||||||||||||
| Federal, state and local income tax expense | (262 | ) | (549 | ) | (561 | ) | (478 | ) | (383 | ) | Federal, state and local income tax expense | (410 | ) | (262 | ) | (549 | ) | (561 | ) | (478 | ) | |||||||||||||||||||||
| Income from continuing operations before extraordinary items | 518 | 821 | 825 | 685 | 575 | Income from continuing operations before extraordinary items | 638 | 518 | 821 | 825 | 685 | |||||||||||||||||||||||||||||||
| Discontinued operations (a) | (784 | ) | (1,005 | ) | (30 | ) | – | – | Discontinued operations (a) | 180 | (784 | ) | (1,005 | ) | (30 | ) | – | |||||||||||||||||||||||||
| Extraordinary items (b) | (10 | ) | – | – | (23 | ) | (39 | ) | Extraordinary items (b) | – | (10 | ) | – | – | (23 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | (276 | ) | $ | (184 | ) | $ | 795 | $ | 662 | $ | 536 | Net income (loss) | $ | 818 | $ | (276 | ) | $ | (184 | ) | $ | 795 | $ | 662 | |||||||||||||||||
| Basic earnings (loss) per share: | Basic earnings (loss) per share: | Basic earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 2.65 | $ | 4.01 | $ | 3.92 | $ | 3.27 | $ | 2.74 | Income from continuing operations | $ | 3.23 | $ | 2.65 | $ | 4.01 | $ | 3.92 | $ | 3.27 | |||||||||||||||||||||
| Net income (loss) | (1.41 | ) | (.90 | ) | 3.78 | 3.16 | 2.56 | Net income (loss) | 4.15 | (1.41 | ) | (.90 | ) | 3.78 | 3.16 | |||||||||||||||||||||||||||
| Diluted earnings (loss) per share: | Diluted earnings (loss) per share: | Diluted earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 2.59 | $ | 3.97 | $ | 3.76 | $ | 3.06 | $ | 2.58 | Income from continuing operations | $ | 3.21 | $ | 2.59 | $ | 3.97 | $ | 3.76 | $ | 3.06 | |||||||||||||||||||||
| Net income (loss) | (1.38 | ) | (.89 | ) | 3.62 | 2.96 | 2.41 | Net income (loss) | 4.12 | (1.38 | ) | (.89 | ) | 3.62 | 2.96 | |||||||||||||||||||||||||||
| Average number of shares outstanding | Average number of shares outstanding | 195.1 | 204.3 | 210.0 | 209.1 | 209.2 | Average number of shares outstanding | 196.6 | 195.1 | 204.3 | 210.0 | 209.1 | ||||||||||||||||||||||||||||||
| Depreciation and amortization | Depreciation and amortization | $ | 689 | $ | 651 | $ | 665 | $ | 624 | $ | 590 | Depreciation and amortization | $ | 680 | $ | 689 | $ | 651 | $ | 665 | $ | 624 | ||||||||||||||||||||
| Capital expenditures | Capital expenditures | $ | 651 | $ | 786 | $ | 782 | $ | 695 | $ | 696 | Capital expenditures | $ | 627 | $ | 651 | $ | 786 | $ | 782 | $ | 695 | ||||||||||||||||||||
| Balance Sheet Data (at year end): | Balance Sheet Data (at year end): | Balance Sheet Data (at year end): | ||||||||||||||||||||||||||||||||||||||||
| Cash | $ | 636 | $ | 222 | $ | 173 | $ | 307 | $ | 142 | Cash | $ | 716 | $ | 636 | $ | 222 | $ | 173 | $ | 307 | |||||||||||||||||||||
| Working capital (c) | 2,822 | 2,404 | 2,363 | 2,904 | 3,134 | Total assets | 14,441 | 16,112 | 17,012 | 17,692 | 13,464 | |||||||||||||||||||||||||||||||
| Total assets | 15,044 | 15,574 | 15,901 | 13,464 | 13,738 | Short-term debt (c) | 946 | 1,012 | 1,117 | 772 | 524 | |||||||||||||||||||||||||||||||
| Short-term debt | 1,012 | 1,117 | 772 | 524 | 556 | Long-term debt | 3,408 | 3,859 | 3,845 | 3,801 | 3,057 | |||||||||||||||||||||||||||||||
| Long-term debt | 3,859 | 3,845 | 3,801 | 3,057 | 3,919 | Shareholders’ equity | 5,762 | 5,564 | 5,822 | 6,552 | 5,709 | |||||||||||||||||||||||||||||||
| Shareholders’ equity | 5,564 | 5,822 | 6,552 | 5,709 | 5,256 | |||||||||||||||||||||||||||||||||||||
| (a) | Discontinued operations include the after-tax operations of Fingerhut Companies, Inc. in 2001, 2000 and 1999. 2001 includes the estimated after-tax loss on the disposal of discontinued operations of $770 million. 2002 represents adjustments to the estimated loss on disposal of discontinued operations |
| (b) | The extraordinary items for 2001 |
| (c) |
67
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In January 2003, the Company announced and commenced the implementation of its plans to integrate the stores of Rich’s and Macy’s in the metro Atlanta area and operate these and all other Rich’s stores under a combined “Rich’s-Macy’s” nameplate. As part of the consolidation, seven stores were closed. The Company currently anticipates that two locations will be renovated and reopened as Bloomingdale’s, one location will be renovated and reopened as a Rich’s-Macy’s furniture gallery and four locations will be sold or leased for other retail use. In the near term, the store closings and store closing costs are expected to have a negative impact on net sales and operating income, but in the longer term all of these actions are expected to positively affect operating income, cash flows from operations and return on investment.
On January 16, 2002, the Company’s Board of Directors approved a plan to dispose of the operations of Fingerhut Companies, Inc. (“Fingerhut”), including the Arizona Mail Order, Figi’s and Popular Club Plan businesses conducted by Fingerhut’s subsidiaries, which were acquired by the Company on March 18, 1999. The decision to dispose of Fingerhut was based on management’s determination that there was no longer strategic value to Federated in retaining the Fingerhut operations and there was no expectation, based on Fingerhut’s historical earnings and future prospects, that this business would contribute meaningfully to the Company’s future financial performance. The plan of disposition approved by the Company’s board of directors contemplated a disposal by liquidation of the Fingerhut core catalog operations and a disposal by sale of Fingerhut’s three catalog subsidiaries, Arizona Mail Order, Figi’s and Popular Club Plan. As of February 1, 2003, substantially all Fingerhut assets had been disposed of and substantially all Fingerhut liabilities had been settled.
The Company’s Consolidated Financial Statements for all periods account for Fingerhut Companies, Inc. (“Fingerhut”) as a discontinued operation as a result of the Company’s decision to dispose of the Fingerhut operations. Unless otherwise indicated, the following discussion relates to the Company’s continuing operations.
On July 9, 2001, the Company completed its acquisition of Liberty House, Inc. (“Liberty House”), a department store retailer operating 11 department stores and seven resort and specialty stores in Hawaii and one department store in Guam. The total purchase price of the Liberty House acquisition was approximately $200 million, consisting of approximately $183 million of cash and the assumption of approximately $17 million of indebtedness. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Liberty House have been included in the Company’s results of operations from the date of acquisition and the purchase price has been allocated to Liberty House’s assets and liabilities based on their estimated fair values as of that date. All Liberty House stores were subsequently converted to Macy’s stores in 2001.
On February 2, 2001, the Company decided to close its Stern’s department store division, and to convert most of its Stern’s stores to Macy’s and Bloomingdale’s stores, in order to expand and strengthen Macy’s and Bloomingdale’s. Also, on November 29, 2001, the Company announced the reorganization of its department store-related catalog and e-commerce operations to conduct its continuing Internet and catalog business exclusively throughmacys.comand Bloomingdale’s By Mail.
As a result of continuing declines in interest rates and the market value of the Company’s defined benefit pension plan assets, the Company was required to increase its minimum pension liability and reduce stockholders’ equity at February 1, 2003 by $261 million, net of tax effect. This adjustment did not affect the Company’s reported earnings or pension plan funding requirements. However, the Company
8
The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Forward-Looking Statements.”
Results of Operations
Comparison of the 52 Weeks Ended February 1, 2003 and the 52 Weeks Ended February 2, 2002.Net income for 2002 totaled $818 million compared to a net loss for 2001 of $276 million.
Net sales for 2002 totaled $15,435 million, compared to net sales of $15,651 million for 2001, a decrease of 1.4%. The overall sales trend in 2002 was negatively impacted by a difficult economic climate. On a comparable store basis (sales from stores in operation throughout 2001 and 2002), net sales decreased 3.0% compared to 2001. By family of business, sales were relatively strong in private brands, furniture, jewelry and young men’s. The weakest businesses were the soft home areas – tabletop (china, silver, glass), textiles and housewares.
Cost of sales was 60.0% of net sales for 2002, compared to 61.2% for 2001. Cost of sales as a percent of net sales, excluding $53 million in inventory valuation adjustments, was 60.9% in 2001. The cost of sales rate in 2002 benefited from lower net markdowns resulting from the lower inventory levels throughout 2002. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.
Selling, general and administrative expenses (“SG&A”) were 31.3% of net sales for 2002 compared to 30.7% for 2001. Finance charge income on proprietary accounts receivable was $353 million for 2002, down from $361 million in 2001, primarily due to the decrease in average accounts receivable balances. Amounts charged to expense for doubtful proprietary accounts receivable were $143 million for 2002, compared to $128 million in 2001, reflecting slightly higher delinquency rates during 2002. Included in SG&A expenses for 2002 were approximately $68 million of costs, 0.4% of net sales, incurred in the fourth quarter in connection with the Rich’s-Macy’s consolidation and other announced store closings. These costs were primarily real estate related and also included severance. In 2001, there was approximately $29 million of costs, 0.2% of net sales, incurred in the fourth quarter in connection with store closings included in SG&A expenses, also primarily related to real estate write-downs. SG&A expenses in 2002 benefited from lower goodwill and intangible amortization as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Effective February 3, 2002, the Company ceased amortizing goodwill and indefinite lived intangible assets. SG&A expenses in 2001 included amortization expense of $28 million, 0.2% of net sales, related to goodwill and indefinite lived intangible assets. The effect of the non-amortization provisions of SFAS No. 142 was offset by the impact of higher occupancy related expenses, such as depreciation, rent, taxes and insurance.
During 2001, the Company incurred asset impairment and restructuring charges related to its department store business. These costs related primarily to the closing of its Stern’s department store division and subsequent integration into its Macy’s and Bloomingdale’s operations, the acquisition of Liberty House and subsequent integration into Macy’s and the reorganization of its department-store-
9
Net interest expense was $295 million for 2002 compared to $324 million for 2001, primarily due to lower levels of borrowings.
The Company’s effective income tax rate of 39.1% for 2002 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 other items. The Company’s effective income tax rate of 33.6% for 2001 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of its Stern’s subsidiary, state and local income taxes and permanent differences arising from the amortization of intangible assets and other items. Income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Company’s investment in Stern’s Department Stores, Inc. upon disposition.
During 2002, through various transactions, the Company completed the sale of the Arizona Mail Order, Figi’s and Popular Club Plan businesses conducted by Fingerhut’s subsidiaries, completed the sale of Fingerhut’s core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from the foregoing sale transactions and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations for 2002 totaling $307 million of income before income taxes, or $180 million after income taxes. As of February 1, 2003, substantially all Fingerhut assets had been disposed of and substantially all Fingerhut liabilities had been settled.
Comparison of the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001.The net loss for 2001 was $276 million compared to a net loss of $184 million for 2000.
10
Net sales for 2001 totaled $15,651 million, compared to net sales of $16,638 million for 2000, a decrease of 5.9%. The sales decrease reflects a weak economy, the events of September 11th and the closing of Stern’s. The overall sales trend was disappointing, particularly in such categories as men’s, tabletop (china, silver, glass) and luggage. However, sales were relatively strong in private brands, juniors’ and young men’s. On a comparable store basis (sales from stores in operation throughout 2000 and 2001, including Stern’s stores in operation throughout the first quarter of 2000 and 2001, and adjusting for the impact of the 53rd week in 2000), net sales for 2001 decreased 5.3% compared to 2000.
Cost of sales was 61.2% of net sales for 2001, compared to 59.8% for 2000. Cost of sales as a percent of net sales, excluding the $53 million of inventory valuation adjustments, was 60.9% in 2001, reflecting higher markdowns taken in 2001 which were needed, given the large decline in sales, to reduce inventories to more appropriate levels, particularly in fashion apparel categories. The Company ended 2001 with inventories down 7%, compared to 2000, which should position the Company well for future gross margin improvement.2000. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.
Selling, general and administrative (“SG&A”)&A expenses were 30.7% of net sales for 2001, compared to 29.5% for 2000. SG&A expenses decreased 2.2% in actual dollars compared to 2000, however, due to the lower sales level, SG&A expenses increased 1.2 percentage points as a percent of net sales. The Company was able to reduce total selling expenses, although not enough to compensate for the sales decrease. In 2001, there was approximately $29 million of costs, 0.2% of net sales, incurred in the fourth quarter in connection with store closings included in SG&A expenses, primarily related to real estate write-downs. Additionally, an increase in relatively fixed costs, such as depreciation and amortization, utilities, etc., contributed greatly to the higher SG&A expense rate. Finance charge income was $361 million for 2001, up from $349 million in 2000, primarily due to the growth in average accounts receivable balances. Amounts charged to expense for doubtful accounts receivable were $128 million for 2001, compared to $106 million in 2000, also due to the growth in average accounts receivable balances.
During 2001, the Company incurred asset impairment and restructuring charges related to its department store business. These costs related primarily to the closing of its Stern’s department store division and subsequent integration into its Macy’s and Bloomingdale’s operations, the acquisition of Liberty House and subsequent integration into Macy’s and the reorganization of its department-store-related catalog and e-commerce operations. The Company recorded $215 million of asset impairment and restructuring charges during 2001, including $53 million of inventory valuation adjustments as a part of cost of sales. The
7
11
Net interest expense was $324 million for 2001, compared to $321 million for 2000.
The Company’s effective income tax rate of 33.6% for 2001 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of its Stern’s subsidiary, state and local income taxes and permanent differences arising from the amortization of intangible assets and other items. Income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Company’s investment in Stern’s Department Stores, Inc. upon disposition. The Company’s effective income tax rate of 40.1% for 2000 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.
The net loss from discontinued operations includes only the results of Fingerhut.the operating segment of Fingerhut (including its three catalog subsidiaries, Arizona Mail Order, Figi’s, and Popular Club Plan). The net loss from discontinued operations for 2001 was $14 million, compared to a loss of $1,005 million for 2000. The loss in 2000 included $882 million of pre-tax charges related to intangible, investment and fixed asset write-downs and other costs and expenses associated with the downsizing of the Fingerhut core catalog operations. In 2001, the Company also reportedrecorded a $770 million loss related to the disposal of Fingerhut, including $292 million of estimated operating losses expected during the wind-down period.
Comparison of the 53 weeks ended February 3, 2001 and the 52 weeks ended January 29, 2000. Net sales for 2000 totaled $16,638 million, compared to net sales of $16,029 million for 1999, an increase of 3.8%. On a comparable store basis (sales from stores in operation throughout 1999 and 2000 and adjusting for the impact of the 53rd week in 2000), net sales for 2000 increased 2.0% compared to 1999.
Cost of sales was 59.8% of net sales for 2000, compared to 59.7% for 1999. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either year.
SG&A expenses were 29.5% of net sales for 2000, compared to 29.7% for 1999. SG&A expenses improved 0.2 percentage points as a percent of net sales, principally due to the impact of lower depreciation and amortization expense. Finance charge income was $349 million for 2000, up from $327 million in 1999, primarily due to the growth in average accounts receivable balances. Amounts charged to expense for doubtful accounts receivable were $106 million for 2000, compared to $83 million in 1999, also due to the growth in average accounts receivable balances.
During 2000, the Company recorded asset impairment and restructuring charges related to the closing of the Company’s Stern’s department store division, primarily consisting of the asset write-downs associated with the planned disposition of certain of its properties totaling $54 million. During the same period, the Company recorded a write-down of $26 million for certain venture capital investments as a result of the Company’s determination, based on uncertain financing alternatives and comparisons to their market value or
8
Net interest expense was $321 million for 2000 compared to $307 million for 1999. The higher interest expense for 2000 is due primarily to the higher level of outstanding borrowings.
Income tax expense was $549 million for 2000. This amount differs from the amount computed by applying the federal income tax statutory rate of 35.0% to income before income taxes because of permanent differences arising from the amortization of intangible assets and the effect of state and local income taxes.
The net loss from discontinued operations includes the results of Fingerhut. The net loss from discontinued operations for 2000 was $1,005 million, compared to a loss of $30 million for 1999. The loss in 2000 included $882 million of pre-tax charges related to intangible, investment and fixed asset write-downs and other costs and expenses associated with the downsizing of the core catalog operations.
Liquidity and Capital Resources
The Company’s principal sources of liquidity are cash from operations, cash on hand and certain availablethe credit facilities.facilities, described below.
Net cash provided by continuing operating activities in 20012002 was $1,372$1,168 million, compared to $1,332$1,372 million for 2000.2001. Cash provided by operating activities in 20012002 reflects the lower income from continuing operations, a decreasesmaller decreases in accounts receivable, merchandise inventories, in 2001 as compared toaccounts payable and accrued liabilities, an increase in 2000, a greater decrease in accounts payable, a decrease incurrent income taxes in 2001 as compared to an increase in 2000 and a decrease in accounts receivable in 2001 as compared to an increase in 2000.deferred income taxes.
Net cash used by continuing investing activities was $771$637 million for 2001, including the purchase2002. Continuing investing activities for 2002 included purchases of Liberty House. Investingproperty and equipment totaling $568 million and capitalized software of $59 million. Continuing investing activities for 2001 also included the acquisition of Liberty House at a net cash cost of $175 million, purchases of property and equipment totaling $615 million and capitalized software of $36 million. Investing activities for 2000 included purchases of property and equipment totaling $720 million and capitalized software of $66 million. The Company opened ninethirteen full line department stores, threeone home store and one furniture galleries and two bedding storesgallery during 2001.2002.
The Company intends to open 11six new department stores, two new home stores and a newfour furniture gallerygalleries in 2002 and its2003, all before the next Christmas season. The Company’s budgeted capital expenditures are approximately $2,200$650 million for the 2002 to 2004 period, including $7002003, $650 million for 2002.2004 and $650 million for 2005. Management presently anticipates funding such expenditures with cash from operations.
Net cash used by the Company for allcontinuing financing activities was $95$1,375 million in 2001. During 2001, the Company issued $500 million of 6.625% Senior Notes due 2011 and $500 million of 6.625% Senior Notes due 2008.2002. The Company repaid $1,140$1,015 million of borrowings during 2001,2002, consisting principally of $649$598 million of net short-term borrowings, the $350 million 6.125% Term Enhanced ReMarketable Securitiesreceivables backed financings and $110$400 million of 10% Senior Notes.8.125% senior notes. The Company purchased 7.411.4 million shares of its Common Stock under its stock repurchase program during 20012002 at an
12
Net cash provided to the Company issued 9.0by discontinued operations was $924 million, sharesafter the payment of approximately $529 million of related debt, for the 52 weeks ended February 1, 2003, primarily due to the sale of Fingerhut’s core catalog accounts receivable portfolio and the sale of the Arizona Mail Order, Figi’s and Popular Club Plan businesses and various other Fingerhut assets.
The Company finances its Common Stock and received $267 millionproprietary credit card receivables, which arise solely from sales originated in proceeds from the exerciseconduct of the Company’s Series B Warrants,retail operations, using on-balance sheet financing arrangements, including term receivables-backed certificates issued by a subsidiary of the Company together with receivables-backed commercial paper issued by another subsidiary of the Company. At February 1, 2003, these arrangements included a $375 million asset-backed commercial paper program. Under the $375 million commercial paper program, a special purpose subsidiary of the Company issues commercial paper backed by a Class A Variable Funding Certificate issued out of the Prime Credit Card Master Trust which expired on December 19, 2001.
9
Inholds the proprietary receivables. If the subsidiary is unable to issue commercial paper to fund maturities of outstanding commercial paper, it has a liquidity facility with a number of banks which will fund loans in order to facilitate comparisons with major competitors,repay the commercial paper. The commercial paper investors have no recourse back to the Company. As of February 1, 2003, and February 2, 2002, there was no such commercial paper or loan outstanding.
The Company structured and finances its non-proprietary credit card receivables, using an off-balance sheet arrangement which currently is set to expire in 2002. However,arise from transactions originated by merchants that accept third-party credit cards issued by the Company intends to extend the arrangement. Under this arrangement,Company’s FDS Bank subsidiary, using on-balance sheet financing arrangements. Under these arrangements, a special purpose subsidiary of the Company sells itsClass A and Class B Variable Funding Certificates issued out of the Prime Credit Card Master Trust II (“Trust II”) which holds the non-proprietary credit card receivables to a wholly-owned special purpose entity which in turn transfers the purchased receivables to a bankruptcy-remote, qualified special purpose entity (the “trust”). The special purpose entity has sold interests in the trust to twothree unrelated bank commercial paper conduit programs. Proceeds from this sale plus excess cash flow from the trust are used to buy the receivables from FDS Bank. The two commercial paper conduit programs have agreed to buy interests in the trustpurchase certificates of up to $600$700 million in the aggregate. These interests are variable and fluctuateReceivables-backed financings classified as short-term debt at February 1, 2003, consist of $486 million of debt under these arrangements.
Prior to July 2002, the Company financed its non-proprietary credit card receivables through an off-balance sheet sale arrangement. During July 2002, in connection with the levelextension of receivables.the financing arrangement related to the Company’s non-proprietary credit card receivables, the Company’s special purpose subsidiary took certain actions which resulted in the consolidation of Trust II for financial reporting purposes. In particular, the documentation governing the arrangement was amended to provide the Company’s special purpose subsidiary the ability to unilaterally remove transferred assets from Trust II. Under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” this amendment disqualified the arrangement for sale treatment and requires secured borrowing treatment for all sales of the Company’s non-proprietary credit card receivables pursuant to this arrangement. The principal assets and liabilities of Trust II consist of non-proprietary credit card receivables transferred by the Company to Trust II in transactions previously accounted for as sales under SFAS No. 140 and the related debt issued by Trust II. As a result of the Company’s actions, the transfer of receivables and debt are being treated as secured borrowings as of and subsequent to July 5, 2002. All assets and liabilities of Trust II were consolidated at fair value. These actions increased the Company’s consolidated assets and debt by $479 million at July 5, 2002.
13
The Company is a party to a five-year $1,200 million revolving credit facility that expires in June 2006 and a 364-day $400 million revolving credit facility that expires in June 2003 (which the Company expects to extend annually, subject to an assessment of liquidity needs). At February 1, 2003, the Company had no borrowings outstanding under either of these facilities, but had $31 million of letters of credit outstanding under the five-year facility. The issuance of commercial paper under the Company’s $1,600 million unsecured commercial paper facility program will have the effect, while such commercial paper is outstanding, of reducing the Company’s borrowing capacity under the Company’s $1,600 million bank credit agreements by an amount equal to the face amount of such commercial paper. As of February 2, 2002, the gross amount of receivables in the trust1, 2003, there was $630 million, and the bank conduit programs held $500 million of interests.no such commercial paper outstanding. The trust has issued three classes of certificates: Class A, Class B and Class C certificates. The bank conduit programs hold the Class A and Class B certificates and the Company holds the Class C certificates. The Company also holds a required 2% seller’s interest and the residual interest in the trust. The Company’s interest is valued at $111 million and is included in other assets on the Company’s Consolidated Balance Sheet as of February 2, 2002. The bank conduit programs held $438 million in Class A certificates and $62 million in Class B certificates as of February 2, 2002. The Company held the Class C certificate in the amount of $62 million, which certificate is subordinate to the Class A and Class B certificates. Beyond the value of the receivables in the trust, the bank conduit programs have no recourse back to the Company. All income from the sale of the receivables to the trust is accounted for in SG&A expenses.
The Company’s bank credit agreements governing those facilities require the Company to maintain certain financial ratios.a specified interest coverage ratio of no less than 3.25 and a specified leverage ratio of no more than .62. At February 2, 2002,1, 2003, the Company was well withinin compliance with these covenants.requirements by significant margins. Management believes that the likelihood of the Company defaulting on athe foregoing debt covenantcovenants is not probableremote absent any material negative event affecting the U.S. economy as a whole. However, if the Company’s results of operations or operating ratios deteriorate to a point where the Company is not in compliance with any of its debt covenants and the Company is unable to obtain a waiver, much of the Company’s debt would be in default and callable.could become due and payable immediately.
At February 2, 2002,1, 2003, the Company had contractual obligations as follows:
| Obligations Due by Period | ||||||||||||||||||||||||||||||||||||||||
| Obligations Due by Period | Within | 2-3 | 4-5 | After 5 | ||||||||||||||||||||||||||||||||||||
| Total | 1 Year | Years | Years | Years | ||||||||||||||||||||||||||||||||||||
| Within | 2-3 | 4-5 | After 5 | |||||||||||||||||||||||||||||||||||||
| Total | 1 Year | Years | Years | Years | ||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||||
| Short-term debt | $ | 1,006 | $ | 1,006 | $ | – | $ | – | $ | – | $ | 940 | $ | 940 | $ | – | $ | – | $ | – | ||||||||||||||||||||
| Long-term debt | 3,808 | – | 705 | 403 | 2,700 | 3,354 | – | 653 | 1 | 2,700 | ||||||||||||||||||||||||||||||
| Capital lease obligations | 100 | 12 | 21 | 16 | 51 | 116 | 11 | 20 | 16 | 69 | ||||||||||||||||||||||||||||||
| Operating leases | 2,671 | 162 | 304 | 281 | 1,924 | 2,709 | 162 | 308 | 296 | 1,943 | ||||||||||||||||||||||||||||||
| Off-balance sheet financings | 500 | 500 | – | – | – | |||||||||||||||||||||||||||||||||||
| Letters of credit | 68 | 68 | – | – | – | 53 | 53 | – | – | – | ||||||||||||||||||||||||||||||
| $ | 8,153 | $ | 1,748 | $ | 1,030 | $ | 700 | $ | 4,675 | $ | 7,172 | $ | 1,166 | $ | 981 | $ | 313 | $ | 4,712 | |||||||||||||||||||||
Management believes the department store business and other retail businesses will continue to consolidate. Accordingly, the Company intends from time to time to consider additional acquisitions of, and investments in, department stores and other complementary assets and companies. Acquisition transactions, if
10
Management believes that, with respect to itsthe Company’s current operations, cash on hand and funds from operations, together with its credit facilities and other capital resources, will be sufficient to cover itsthe Company’s reasonably foreseeable working capital, capital expenditure and debt service requirements. Itsrequirements in both the near term and over the longer term. The Company’s ability to generate funds from operations are impactedmay be affected by thenumerous factors, including general economic environment;conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain its liquidity levels. TheFor short term liquidity, the Company also relies on its $1,600 million unsecured commercial paper facility, a $375 million on-balance sheet asset-backed commercial paper program relating to the Company’s proprietary credit card receivables and two off-balance sheetthree asset-backed bank conduit commercial paper programs relating to the Company’s non-proprietary credit card receivables (discussed above) in an aggregate amount of $600 million, for short term liquidity.$700 million. Access to the unsecured commercial paper program is dependent on the Company’s credit rating; a downgrade in its short-term rating would hinder its ability to access this market. If the Company is unable to access the unsecured commercial paper market, it has the ability to access $1,600 million pursuant to its bank credit
14
Management believes the department store business and other retail businesses will continue to consolidate. The Company intends from time to time to consider additional acquisitions of, and investments in, department stores and other complementary assets and companies. 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.
Critical Accounting Policies
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its customerproprietary and non-proprietary accounts receivable based on a combination of factors, including analysis of historical trends, aging of accounts receivable, write-off experience and expectations of future performance. Proprietary and non-proprietary accounts receivable are considered delinquent if more than one scheduled minimum payment is missed. Delinquent proprietary accounts are generally written off automatically after the passage of 210 days without receiving a full scheduled monthly payment. Delinquent non-proprietary accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. The Company reserves for doubtful proprietary accounts based on a loss-to-collections rate and doubtful non-proprietary accounts based on a roll-reserve rate. At February 2, 2002,1, 2003, a 0.1 percentage point change in the result of the loss-to-collections rate would impact the proprietary reserve for doubtful accounts by approximately $2 million. At February 1, 2003, a 0.1 percentage point change in the result of the roll-reserve rate would impact the non-proprietary reserve for doubtful accounts by approximately $1 million.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requires management judgments and contains estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
11
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross profit reduction is recognized in the
15
Shrinkage is estimated as a percentage of sales for the period from the last inventory date to the end of the fiscal period. Such estimates are based on experience and the most recent physical inventory results. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that minimize shrinkage experience. Physical inventories are taken within each merchandise department at least twice annually and inventory records are adjusted accordingly.
Long-Lived Asset Impairment and Restructuring Charges
The carrying value of long-lived assets are periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of that assetthose assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
For long-lived assets held for disposal whether by abandonment or sale, an impairment charge is recorded if the carrying amount of the assets exceeds its fair value less costs to sell. Such valuations include estimations of fair values and incremental direct costs to dispose, and time periods over whichtransact a sale. For long-lived assets to sellbe abandoned, the assets.Company considers the asset to be disposed of when it ceases to be used. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, depreciation estimates are revised accordingly. In addition, liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.
Self-Insurance Reserves
The Company is self-insured for workers compensation and public liability claims up to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ from such accrued amounts.
Pension and Other Employee BenefitSupplementary Retirement Plans
The Company through its actuaries, utilizeshas a funded defined benefit pension plan (the “Pension Plan”) and an unfunded defined benefit supplementary retirement plan (the “SERP”). The Company accounts for these plans using SFAS No. 87, “Employers’ Accounting for Pensions.” Under SFAS No. 87, pension expense is recognized on an accrual basis over employees’ approximate service periods. Pension expense calculated under SFAS No. 87 is generally independent of funding decisions or requirements.
16
The fair value of the Pension Plan assets decreased from $1,480 million at February 2, 2002 to $1,276 million at February 1, 2003. Lower investment returns (in the case of the Pension Plan), benefit payments and declining discount rates resulted in the funded status of the Pension Plan changing from $83 million overfunded at February 2, 2002 to $207 million underfunded at February 1, 2003 and the underfunded status of the SERP increasing from $180 million at February 2, 2002 to $216 million at February 1, 2003. Funding requirements for the Pension Plan are determined by government regulations, not SFAS No. 87. Although no funding contribution was required, the Company made a $50 million voluntary funding contribution to the Pension Plan in 2002. The Company currently anticipates that it will not be required to make any additional contribution to the Pension Plan until 2005.
At February 1, 2003, the Company had unrecognized actuarial losses of $513 million for the Pension Plan and $90 million for the SERP. These losses will be recognized as a component of pension expense in future years in accordance with SFAS No. 87.
The calculation of pension expense and pension liability requires the use of a number of assumptions. Changes in these assumptions when estimatingcan result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the liabilities for pension and other employee benefit plans. Thesemost critical assumptions where applicable, includerelate to the long-term rate of return on plan assets (in the case of the Pension Plan), the discount ratesrate used to determine the actuarial present value of projected benefit obligations and the weighted average rate of increase of future compensation levels.
The Company has assumed that the Pension Plan assets will generate a long-term rate of return of 9.0% for 2003. This rate is lower than the assumed rate of 9.75% used for 2002. The Company develops its long-term rate of return assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Pension expense increases as the expected rate of return on the Pension Plan assets decreases. Lowering the expected long-term rate of return on the Pension Plan assets by 0.75% (from 9.75% to 9.0%) increased the estimated 2003 pension expense by approximately $12 million.
The Company discounted its future pension obligations using a rate of 6.75% at December 31, 2002, compared to 7.25% at December 31, 2001. The Company determines the appropriate discount rate based on the current yield earned on an index of investment-grade long-term bonds. Pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 0.50% (from 7.25% to 6.75%) increased pension liability at February 1, 2003 by approximately $69 million and increased estimated 2003 pension expense by approximately $4 million.
The assumed weighted average rate of increase in future compensation levels was 5.8% as of December 31, 2002 and December 31, 2001 for the long-termPension Plan and 7.7% as of December 31, 2002 and December 31, 2001 for the SERP. The Company develops its increase of future compensation level assumption based on recent experience. Pension liability and future pension expense both increase as the weighted average rate of return on assetsincrease of future compensation levels is increased. Increasing the weighted average rate of increase of future compensation levels by 0.25% would increase the projected benefit obligation at February 1, 2003 by approximately $6 million and the growth in health care costs. The cost of these benefits is recognized in the financial statements over an employee’s term of service with the Company.
12
increase estimated 2003 pension expense by approximately $1 million.
Discontinued Operations
DiscontinuedAt February 2, 2002, discontinued operations includeincluded management’s best estimates of the amounts expected to be realized on the sale or wind-down of assets and businesses of the Fingerhut operations,
17
Included in the estimated loss on disposal, the Company recorded losses related to Fingerhut’s core catalog accounts receivable portfolio through thean estimated four year wind-down period. The calculated loss includesincluded estimates regarding customer payment rates, write-off rates, finance charge income, late fee income, and operating expenses, such as collection costs, necessary to carry out the wind-down of the portfolio. These estimates were based on a third party offer to purchase the portfolio, historical experience and industry data where available.
The estimated loss from the Fingerhut core catalog operations during the wind-down period includesincluded assumptions of revenues to be earned and estimated expenses to be incurred based on historical experience as well as through detailed departmental plans regarding the costs necessary to complete the liquidation in the planned timeframe.
Losses on inventory were recognized based on estimated recovery values expected to be received from a third party liquidator. Write-downs of property, plant and equipment were based on historical recovery rates for similar liquidations of personal property and brokerage quotes, where available, for real estate properties. Other assets, such as tradenames, customer lists, supplies, prepaid expenses, and capitalized software, were written-down to estimated net realizable value, which in some cases was zero due to their lack of marketability.
The loss on sale of the Fingerhut subsidiaries was estimated using market value quotes from an investment bank, projected net book values of each subsidiary at the expected sale dates, and expenses necessary to disconnect the subsidiaries’ support functions from Fingerhut’s core catalog operations.
Severance and retention were estimated based on the then current workforce, employment needs through the wind-down period, employment agreements where applicable, years of service, and estimated payout based on the general severance and retention plan offered to employees. Remaining lease obligations or contractual cancellation penalties were estimated based on a review of the contract terms in place.
Estimated interest expense has beenwas allocated to discontinued operations based upon the debt balances attributable to those operations.
As of February 1, 2003, substantially all Fingerhut assets had been disposed of and substantially all Fingerhut liabilities had been settled.
New Pronouncements
In 2001,2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 141, “Business Combinations,146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” and clarifies the requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 142, “Goodwill and Other Intangible Assets,”146 is effective for all business combinationsexit or disposal activities initiated after June 30, 2001 and for fiscal years beginning after December 15, 2001, respectively. SFAS No. 141 eliminates31, 2002. The adoption of this statement did not have a material impact on the poolingCompany’s consolidated financial position, results of interests method of accounting for business combinations with limited exceptions for transactions initiated prior to July 1, 2001operations or cash flows.
1318
In 2002, the criteria for recording intangible assets separate from goodwill. The provisions ofFASB issued SFAS No. 141 were used as guidance145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds or amends existing authoritative pronouncements to account for the acquisition of Liberty House. Under the provisions ofmake various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated lives.
Application of the nonamortization provisions of SFAS No. 142, beginning in the first quarter of 2002,145 is expected to result in reductions to annual goodwill amortization of $28 million and an increase in annual income from continuing operations of approximately $24 million. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets, and theeffective for transactions occurring after May 15, 2002. The Company does not anticipate that the adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Also in 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation” and APB Opinion No. 28, “Interim Financial Reporting” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation and amends the disclosure provisions therein. The Company does not anticipate that the adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In 2002, the FASB issued EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” This issue addresses the reseller’s accounting for cash consideration received from a vendor. The Company’s current accounting policy related to certain consideration received from a vendor is consistent with the provisions of this issue and therefore, the Company does not anticipate that the adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In 2001, the FASB issued SFAS No. 144,143, “Accounting for the Impairment or Disposal of Long-Lived Assets.Asset Retirement Obligations.” This Statement supersedes SFAS No. 121 but retains manystatement establishes accounting standards for recognition and measurement of its fundamental provisions. Additionally, this Statement expandsa liability for the scopecosts of discontinued operations to include more disposal transactions.asset retirement obligations. The provisions of the Statementthis statement are effective for financial statements issued for fiscal years beginning after DecemberJune 15, 2001.2002. The Company does not anticipate that itsthe adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Outlook
On February 26, 2002,25, 2003, the Company issued earnings guidance for 20022003 and expects to achieve earnings per share from continuing operations of $3.30$3.05 to $3.55: 25$3.25: 14 to 3019 cents a share in the first quarter, 5055 to 60 cents a share in the second quarter and $2.45$2.44 to $2.65$2.54 a share in the second half of the fiscal year, which ends February 1, 2003.January 31, 2004. These estimates include store-closing costs of $35 million in the first quarter and $5 million in both the second quarter and the second half of the year. Additionally, a comparable store sales increase of 1flat to down 1.5 percent is forecasted for 2002:2003: down 2 to 3 percent in the first quarter, flattishdown 1 to 2 percent in the second quarter and between down 1 percent to up 3 to 3.51 percent in the second half of 2002.2003. In estimating comparable store sales and earnings per share, the Company assumed that general economic conditions and consumer confidence and demand would be such that the forecasted amounts of comparable store sales would be achieved, the gross margin rate would be flat for the year, although it is likely to be down compared to 2002 for the first half of the year, and SG&A dollars, excluding the aforementioned store-closing costs, are assumed to increase 2 to 2.5 percent, with larger increases assumed in the second half of the year when the sales growth is assumed to be higher. The accuracy of these assumptions and of the resulting forecasts is subject to uncertainties and circumstances beyond the Company’s control. Consequently, actual results could differ materially from the forecasted results.
19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in interest rates which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its customer lending and borrowing activities, which are described in Notes 6 and 10 to the Consolidated Financial Statements. The majority of the Company’s borrowings are under fixed rate instruments. However, the Company, from time to time, may use interest rate swap and interest rate cap agreements to help manage its exposure to interest rate movements and reduce borrowing costs. See Notes 10 and 17 to the Consolidated Financial Statements, which are incorporated herein by reference.
Based on the Company’s market risk sensitive instruments (including variable rate debt and derivative financial instruments) outstanding at February 2, 2002,1, 2003, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows as of such date.
14
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 Operations for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 | F-4 | |||
| Consolidated Balance Sheets at February | F-5 | |||
| Consolidated Statements of Changes in Shareholders’ Equity for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 | F-6 | |||
| Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 | F-7 | |||
| Notes to Consolidated Financial Statements | F-8 | |||
20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information called for by this item is set forth under Item 1 “Election of Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement, and in Item 1A “Executive Officers of the Registrant,” and incorporated herein by reference.
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 andof Certain Beneficial Owners and Management.Management and Related Stockholder Matters.
Information called for by this item is set forth under “Stock Ownership”Ownership “ in the Proxy Statement and incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.Information called for by this item is set forth under “Certain Relationships and Related Transactions” in the Proxy Statement and incorporated herein by reference.
15Item 14. Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Subsequent to the date of this evaluation, there have not been any significant changes in the Company’s internal controls or, to management’s knowledge, in other factors that could significantly affect the Company’s internal controls.
21
PART IV
Item 14.15. 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 “ItemItem 8 Consolidated“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 (File No. 001-135361) for the fiscal year ended January 28, 1995 (the “1994 Form 10-K”) | ||
| 3.1.1 | Certificate of Designations of Series A Junior Participating Preferred Stock | Exhibit 3.1.1 to the 1994 Form 10-K | ||
| 3.2 | By-Laws | Exhibit | ||
| 4.1 | Certificate of Incorporation | See Exhibits 3.1 and 3.1.1 | ||
| 4.2 | By-Laws | See Exhibit 3.2 | ||
| 4.3 | Rights Agreement, dated as of December 19, 1994, between the Company and the Bank of New York, as rights agent | Exhibit 4.3 to the 1994 Form 10-K | ||
| 4.4 | Indenture, dated as of December 15, 1994, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company | Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (Registration No. | ||
1622
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Seventh Supplemental Indenture, dated as of May 22, 1996, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company | Exhibit 4 to the Company’s Current Report on Form 8-K, dated as of May 21, 1996 | |||
| Eighth Supplemental Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company | Exhibit 2 to the Company’s Current Report on Form 8-K dated as of July 15, 1997 (the “July 1997 Form 8-K”) | |||
| Ninth Supplemental Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company | Exhibit 3 to the July 1997 Form 8-K | |||
| 4.5 | Indenture, dated as of September 10, 1997, between the Company and Citibank, N.A., as Trustee | Exhibit 4.4 to the Company’s Amendment Number 1 to Form S-3 dated as of September 11, 1997 | ||
| 4.5.1 | First Supplemental Indenture, dated as of February 6, 1998, between the Company and Citibank, N.A., as Trustee | Exhibit 2 to the Company’s Current Report on Form 8-K dated as of February 6, 1998 | ||
| 4.5.2 | Third Supplemental Trust Indenture, dated as of March 24, 1999, between the Company and Citibank, N.A., as Trustee | Exhibit 4.2 to the Company’s Registration Statement on Form S-4 (Registration No. | ||
| 4.5.3 | Fourth Supplemental Trust Indenture, dated as of June 6, 2000, between the Company and Citibank, N.A., as Trustee | Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated as of June 5, 2000 | ||
| 4.5.4 | Fifth Supplemental Trust Indenture dated as of March 27, 2001, between the Company and Citibank, N.A., as Trustee | Exhibit 4 to the Company’s Current Report on Form 8-K dated as of March 21, 2001 | ||
| 4.5.5 | Sixth Supplemental Trust Indenture dated as of August 23, 2001, between the Company and Citibank, N.A., as Trustee | Exhibit 4 to the Company’s Current Report on Form 8-K dated as of August 22, 2001 | ||
1723
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| 10.1 | Amended and Restated 364-Day Credit Agreement, dated as of June 28, 2002, by and among the Company, as Borrower, the Initial Lenders Named Herein, as Initial Lenders, Citibank, N.A., as Administrative Agent and as Paying Agent, JPMorgan Chase Bank, as Administrative Agent, Fleet National Bank, as Syndication Agent, Bank of America, N.A., Credit Suisse First Boston and U.S. Bank National Association, as Documentation Agents, and Salomon Smith Barney, Inc. and J.P. Morgan Securities, Inc., as lead arrangers and bookrunners (the “364 Day Credit Agreement”) | Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended August 3, 2002 (the “August 2002 Form 10-Q”) | ||
| 10.1.1 | Letter Amendment to the 364-Day Credit Agreement, dated October 21, 2002 | |||
| 10.2 | Five-Year Credit Agreement, dated as of June 29, 2001, by and among the Company, the Initial Lenders named therein, Citibank, N.A., as Administrative Agent and Paying Agent, JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent, Fleet National Bank, as Syndication Agent, and the Bank of America, N. A., The Bank of New York and Credit Suisse First Boston, as Documentation Agents (the “Five Year Credit Agreement”) | Exhibit 10.2 to the | ||
| 10.2.1 | Letter Amendment to the Five-Year Credit Agreement, dated as of October 21, 2002 | |||
| 10.3 | Amended and Restated Pooling and Servicing Agreement, dated as of December 15, 1992 (the “Pooling and Servicing Agreement”), among the Company, Prime Receivables Corporation (“Prime”) and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), successor to Chemical Bank, as Trustee | Exhibit 4.10 to Prime’s Current Report on Form 8-K (File No. 0-2118), dated March 29, 1993 | ||
| 10.3.1 | First Amendment, dated as of December 1, 1993, to the Pooling and Servicing Agreement | Exhibit 10.10.1 to the Company’s Annual Report on Form 10-K (File No. 1-10951) for the fiscal year ended January 29, 1994 (the “1993 Form 10-K”) | ||
24
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| 10.3.2 | Second Amendment, dated as of February 28, 1994, to the Pooling and Servicing Agreement | Exhibit 10.10.2 to the 1993 Form 10-K | ||
| 10.3.3 | Third Amendment, dated as of May 31, 1994, to the Pooling and Servicing Agreement | Exhibit 10.8.3 to the 1994 Form 10-K | ||
| 10.3.4 | Fourth Amendment, dated as of January 18, 1995, to the Pooling and Servicing Agreement | Exhibit 10.6.4 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 3, 1996 (the “1995 Form 10-K”) | ||
| 10.3.5 | Fifth Amendment, dated as of April 30, 1995, to the Pooling and Servicing Agreement | Exhibit 10.6.5 to the 1995 Form 10-K | ||
| 10.3.6 | Sixth Amendment, dated as of July 27, 1995, to the Pooling and Servicing Agreement | Exhibit 10.6.6 to the 1995 Form 10-K | ||
| 10.3.7 | Seventh Amendment, dated as of May 14, 1996, to the Pooling and Servicing Agreement | Exhibit 10.6.7 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 1, 1997 (the “1996 Form 10-K”) | ||
| 10.3.8 | Eighth Amendment, dated as of March 3, 1997, to the Pooling and Servicing Agreement | Exhibit 10.6.8 to the 1996 Form 10-K | ||
18
| 10.3.9 | Ninth Amendment, dated as of August 28, 1997, to the Pooling and Servicing Agreement | Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended November 1, 1997 | ||
| 10.3.10 | Tenth Amendment, dated as of August 3, 1998, to the Pooling and Servicing Agreement | Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 31, 1998 | ||
| 10.3.11 | Eleventh Amendment, dated as of March 23, 2000, to the Pooling and Servicing Agreement | Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 29, 2000 (the “July 2000 Form | ||
| 10.3.12 | Twelfth Amendment, dated as of November 20, 2001, to the Pooling and Servicing Agreement | Exhibit 10.3.12 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 2, 2002 (the “2001 Form 10-K”) | ||
| 10.4 | Assumption Agreement under the Pooling and Servicing Agreement, dated as of September 15, 1993 | Exhibit 10.10.3 to the 1993 Form 10-K | ||
| 10.5 | Series 1992-3 Supplement, dated as of January 5, 1993, to the Pooling and Servicing Agreement | Exhibit 4.8 to Prime’s Current Report on Form 8-K (File No. 0-2118), dated January 29, 1993 | ||
1925
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Series | Exhibit | |||
| Receivables Purchase Agreement, dated 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 | Exhibit 10.2 to Prime’s Registration Statement on Form 8-A filed January 22, 1993, as amended | |||
| First Amendment, dated as of June 23, 1993, to the Receivables Purchase Agreement | Exhibit 10.14.1 to 1993 Form 10-K | |||
| Second Amendment, dated as of December 1, 1993, to the Receivables Purchase Agreement | Exhibit 10.14.2 to 1993 Form 10-K | |||
| Third Amendment, dated as of February 28, 1994, to the Receivables Purchase Agreement | Exhibit 10.14.3 to 1993 Form 10-K | |||
| Fourth Amendment, dated as of May 31, 1994, to the Receivables Purchase Agreement | Exhibit 10.13.4 to the 1994 Form 10-K | |||
| Fifth Amendment, dated as of April 30, 1995, to the Receivables Purchase Agreement | Exhibit 10.12.5 to the 1995 Form 10-K | |||
| Sixth Amendment, dated as of August 26, 1995, to the Receivables Purchase Agreement | Exhibit 10.13.6 to the 1996 Form 10-K | |||
| Seventh Amendment, dated as of August 26, 1995, to the Receivables Purchase Agreement | Exhibit 10.13.7 to the 1996 Form 10-K | |||
| Eighth Amendment, dated as of May 14, 1996, to the Receivables Purchase Agreement | Exhibit 10.13.8 to the 1996 Form 10-K | |||
| Ninth Amendment, dated as of March 3, 1997, to the Receivables Purchase | Exhibit 10.13.9 to the 1996 Form 10-K | |||
| Tenth Amendment, dated as of March 23, 2000, to the Receivables Purchase Agreement | Exhibit 10.2 to the July 2000 Form 10-Q | |||
| Eleventh Amendment, dated as of November 20, 2001, to Receivables Purchase Agreement | Exhibit 10.10.11 to the 2001 Form 10-K | |||
| First Supplement, dated as of September 15, 1993, to the Receivables Purchase Agreement | Exhibit 10.14.4 to 1993 Form 10-K | |||
2026
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Exhibit | ||||
| Depository Agreement, dated as of December 31, 1992, among Deerfield Funding Corporation, now known as Seven Hills Funding Corporation (“Seven Hills”), the Company, and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Depository | Exhibit 10.15 to Company’s Annual Report on Form 10-K (File No. 1-10951) for the fiscal year ended January 30, 1993 (“1992 Form 10-K”) | |||
| Liquidity Agreement, dated as of December 31, 1992, among Seven Hills, the Company, the financial institutions named therein, and Credit Suisse, New York Branch, as Liquidity Agent | Exhibit 10.16 to 1992 Form 10-K | |||
| Pledge and Security Agreement, dated as of December 31, 1992, among Seven Hills, the Company, JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Depository and Collateral Agent, and the Liquidity Agent | Exhibit 10.17 to 1992 Form 10-K | |||
| Commercial Paper Dealer Agreement, dated as of December 31, 1992, among Seven Hills, the Company, and Goldman Sachs Money Markets, L.P. | Exhibit 10.18 to 1992 Form 10-K | |||
| 10.12 | Commercial Paper Dealer Agreement, dated as of November 2, 2001, between Seven Hills, the Company and Banc One Capital Markets, Inc. | Exhibit 10.18 to the 2001 Form 10-K | ||
| 10.13 | Commercial Paper Dealer Agreement, dated as of November 15, 2001, between Seven Hills, the Company and Credit Suisse First Boston | Exhibit 10.19 to the 2001 Form 10-K | ||
| 10.14 | Receivables Purchase Agreement, dated as of January 22, 1997, among FDS Bank (successor in interest to FDS National Bank) and Prime II Receivables Corporation (“Prime II”) | Exhibit 10.19 to the 1996 Form 10-K | ||
2127
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Class A Certificate Purchase Agreement, dated as of January 22, 1997, among Prime II, FDS Bank (successor in interest to FDS National Bank), The Class A Purchasers Parties thereto and Credit Suisse First Boston, New York Branch, as Agent | Exhibit 10.20 to the 1996 Form 10-K | |||
| Class B Certificate Purchase Agreement, dated as of January 22, 1997, among Prime II, FDS Bank (successor in interest to FDS National Bank), The Class B Purchasers Parties thereto and Credit Suisse First Boston, New York Branch, as Agent | Exhibit 10.21 to the 1996 Form 10-K | |||
| Class A Certificate Purchase Agreement, dated as of July 6, 1999, by and among Prime II, as Transferor, FDS Bank (successor in interest to FDS National Bank), as Servicer, The Class A Purchasers, and PNC Bank, National Association, as Agent and Administrative Agent (the “1999 Class A Certificate Purchase Agreement”) | Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended July 31, 1999 (the “July 1999 Form 10-Q”) | |||
| 10.17.1 | First Amendment to the 1999 Class A Certificate Purchase Agreement, dated as of August 3, 1999 | Exhibit 10.7 to the July 1999 Form 10-Q | ||
| Exhibit 10.27.2 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for fiscal year ended February 3, 2001 (the “2000 Form 10-K”) | ||||
| 10.17.3 | Third Amendment to the 1999 Class A Certificate Purchase Agreement, dated as of July 30, 2002 | Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q/ A for the period ended August 3, 2002 (the “August 2002 Form 10-Q/ A”) | ||
| 10.18 | Class B Certificate Purchase Agreement, dated as of July 6, 1999, by and among Prime II, as Transferor, FDS Bank (successor in interest to FDS National Bank), as Servicer, The Class A Purchasers, and PNC Bank, National Association, as Agent and Administrative Agent (the “1999 Class B Certificate Purchase Agreement”) | Exhibit | ||
| 10.18.1 | First Amendment to the 1999 Class B Certificate Purchase Agreement, dated as of August 3, 1999 | Exhibit 10.9 to the July 1999 Form 10-Q | ||
2228
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Second Amendment to | ||||
| Exhibit 10.28.2 to the 2000 Form 10-K | ||||
| Third Amendment to the 1999 Class B Certificate Purchase Agreement, dated as of July 30, 2002 | Exhibit 10.4 to the August 2002 Form 10-Q/ A | |||
| 10.19 | Class A Certificate Purchase Agreement, dated as of November 6, 2002, by and among Prime II, as Transferor, FDS Bank, as Servicer, The Class A Purchasers, and Bank One, NA (Main Office Chicago), as Agent and Administrative Agent | |||
| 10.20 | Class B Certificate Purchase Agreement, dated as of November 6, 2002, by and among Prime II, as Transferor, FDS Bank, as Servicer, The Class A Purchasers, and Bank One, NA (Main Office Chicago), as Agent and Administrative Agent | |||
| 10.21 | Pooling and Servicing Agreement, dated as of January 22, 1997, (the “Prime II Pooling and Servicing Agreement”) among Prime II, FDS Bank (successor in interest to FDS National Bank) and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee | Exhibit 10.22 to the 1996 Form 10-K | ||
| First Amendment to Prime II Pooling and Servicing Agreement, dated as of July 5, 2002, by and among Prime II, as Transferor, FDS Bank, as Servicer, and JPMorgan Chase Bank, as Trustee | Exhibit 10.2 to the August 2002 Form 10-Q | |||
| 10.22 | Series 1997-1 Variable Funding Supplement, dated as of January 22, 1997, to the Prime II Pooling and Servicing Agreement | Exhibit 10.23 to the 1996 Form 10-K | ||
| 10.22.1 | First Amendment to Series 1997-1 Variable Funding Supplement, dated as of June 19, 2000, to the Prime II Pooling and Servicing Agreement | Exhibit 10.4 to the July 2000 Form 10-Q | ||
| 10.22.2 | Second Amendment to Series 1997-1 Variable Funding Supplement, dated as of July 5, 2002, to the Prime II Pooling and Servicing Agreement | Exhibit 10.5 to the August 2002 Form 10-Q | ||
2329
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Series 1999-1 Variable Funding Supplement, dated as of July 6, 1999, to the Prime II Pooling and Servicing Agreement | Exhibit 10.5 to the July 1999 Form 10-Q | |||
| First Amendment to Series 1999-1 Variable Funding Supplement, dated as of August 1, 2000, to the Prime II Pooling and Servicing Agreement | Exhibit 10.3 to the July 2000 Form 10-Q | |||
| Second Amendment to Series 1999-1 Variable Funding Supplement, dated as of July 5, 2002, to the Prime II Pooling and Servicing Agreement | Exhibit 10.6 to the August 2002 Form 10-Q | |||
| 10.24 | Series 2002-1 Variable Funding Supplement, dated as of November 6, 2002, to the Prime II Pooling and Servicing Agreement | |||
| 10.25 | Commercial Paper Issuing and Paying Agent Agreement, dated as of January 30, 1997, between Citibank, N.A. and the Company | Exhibit 10.25 to the 1996 Form 10-K | ||
| Commercial Paper Dealer Agreement, dated as of March 12, 1999, between the Company, as Issuer, and Goldman Sachs & Co., as Dealer | Exhibit 10.2 to the May 1999 Form 10-Q | |||
| Commercial Paper Dealer Agreement, dated as of March 12, 1999, between the Company, as Issuer, and Banc One Capital Markets, Inc. (successor in interest to First Chicago Capital Markets, Inc.), as Dealer | Exhibit 10.3 to the May 1999 Form 10-Q | |||
| Commercial Paper Dealer Agreement, dated as of March 12, 1999, between the Company, as Issuer, and J.P. Morgan Securities Inc. (formerly known as Chase Securities, Inc.), as Dealer | Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended May 1, 1999 (the “May 1999 Form | |||
| Tax Sharing Agreement | Exhibit 10.10 to the Company’s Registration Statement on Form 10, filed November 27, 1991, as amended (the “Form 10”) | |||
| Ralphs Tax Indemnification Agreement | Exhibit 10.1 to Form 10 | |||
30
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Account Purchase Agreement dated as of May 10, 1991, by and among Monogram Bank, USA, Macy’s, Macy Credit Corporation, Macy Funding, Macy’s California, Inc., Macy’s Northeast, Inc., Macy’s South, Inc., Bullock’s Inc., I. Magnin, Inc., Master Servicer, and Macy Specialty Stores, Inc. ** | Exhibit 19.2 to Macy’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 1991 (File No. 33-6192), as amended under cover of Form 8, dated October 3, 1991 | |||
24
| Amended and Restated Credit Card Program Agreement, dated as of June 4, 1996, among GE Capital Consumer Card Co. (“GE Bank”), FDS Bank (successor in interest to FDS National Bank), Macy’s East, Inc., Macy’s West, Inc., Federated Western Properties, Inc. (successor in interest to Bullock’s, Inc. and Broadway Stores, Inc.), FACS Group, Inc., and MSS-Delaware, Inc. ** | Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended August 3, 1996 (the “August 1996 Form 10-Q”) | |||
| Amended and Restated Trade Name and Service Mark License Agreement, dated as of June 4, 1996, among the Company, GE Bank and General Electric Capital Corporation (“GE Capital”) | Exhibit 10.2 to the August 1996 Form 10-Q | |||
| FACS Credit Services and License Agreement, dated as of June 4, 1996, by and among GE Bank, GE Capital and FACS Group, Inc. ** | Exhibit 10.3 to the August 1996 Form 10-Q | |||
| FDS Guaranty, dated as of June 4, 1996 | Exhibit 10.4 to the August 1996 Form 10-Q | |||
| GE Capital Credit Services and License Agreement, dated as of June 4, 1996, among GE Capital, FDS Bank (successor in interest to FDS National Bank), the Company and FACS Group, Inc. ** | Exhibit 10.5 to the August 1996 Form 10-Q | |||
| GE Capital/ GE Bank Credit Services Agreement, dated as of June 4, 1996, among GE Capital and GE Bank ** | Exhibit 10.6 to the August 1996 Form 10-Q | |||
31
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| Amended and Restated Commercial Accounts Agreement, dated as of June 4, 1996, among GE Capital, the Company, FDS Bank (successor in interest to FDS National Bank), Macy’s East, Inc., Macy’s West, Inc., Federated Western Properties, Inc. (successor in interest to Bullock’s, Inc. and Broadway Stores, Inc.), FACS Group, Inc. and MSS-Delaware, Inc. ** | Exhibit 10.7 to the August 1996 Form 10-Q | |||
| 10.39 | 1992 Executive Equity Incentive Plan * | Exhibit 10.12 to Form 10 | ||
| 10.40 | 1995 Executive Equity Incentive Plan, as amended and restated as of May 19, 2000 * | Appendix A to the Company’s proxy statement on Schedule 14A, filed April 19, 2000 | ||
| 10.41 | 1992 Incentive Bonus Plan, as amended and restated as of May 17, 2002* | Appendix A to the Company’s Proxy Statement filed on April 17, 2002 | ||
| 10.42 | Form of Indemnification Agreement* | Exhibit 10.14 to Form 10 | ||
| 10.43 | Senior Executive Medical Plan* | Exhibit 10.1.7 to the Company’s Annual Report on Form 10-K (File No. 1-163) for the fiscal year ended February 3, 1990 | ||
| 10.44 | Employment Agreement, dated as of August 27, 1999, between James M. Zimmerman and | Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2000 | ||
| 10.44.1 | Amended Exhibit A, dated as of | |||
| 10.44.2 | Amended Exhibit A, dated as of February | |||
| 10.45 | Employment Agreement, dated as of March 1, 2003, between Terry J. Lundgren and | |||
| 10.46 | Form of | Exhibit | ||
| 10.47 | Form of Severance Agreement (for Executives and Key Employees other than Executive Officers)* | Exhibit 10.44 to the | ||
| 10.48 | Form of Second Amended and Restated Severance Agreement (for Executive Officers)* | Exhibit 10.45 to the 1998 Form 10-K | ||
2532
| Exhibit | ||||
| Number | Description | Document if Incorporated by Reference | ||
| 10.49 | ||||
| Supplementary Executive Retirement Plan, as amended and restated as of January 1, | Exhibit 10.46 to the 1996 Form 10-K | |||
| Executive Deferred Compensation Plan, as | Exhibit 10.47 to the 1996 Form 10-K | |||
| Profit Sharing 401(k) Investment Plan (amending and restating the Retirement Income and Thrift Incentive Plan) effective as of April 1, | Exhibit 10.48 to the 1996 Form 10-K | |||
26
| Cash Account Pension Plan (amending and restating the Company Pension Plan) effective as of January 1, | Exhibit 10.49 to the 1996 Form 10-K | |||
| 21 | Subsidiaries | |||
| 22 | Consent of KPMG LLP | |||
| 23 | Powers of Attorney | |||
| 99 | Certifications by Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act | |||
| * | 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. |
(b) Reports on Form 8-K.
| (i) | Current report on Form 8-K, dated November 18, 2002, reporting matters under item 9 thereof. | |
| (ii) | Current report on Form 8-K, dated November 25, 2002, reporting matters under item 9 thereof. | |
| (iii) | Current report on Form 8-K, dated December 9, 2002, reporting matters under item 9 thereof. | |
| (iv) | Current report on Form 8-K, dated December 16, 2002, reporting matters under item 9 thereof. | |
| (v) | Current report on Form 8-K, dated December 17, 2002, reporting matters under item 9 thereof. | |
| (vi) | Current report on Form 8-K, dated December 23, 2002, reporting matters under item 9 thereof. | |
| (vii) | Current report on Form 8-K, dated December 30, 2002, reporting matters under item 9 thereof. | |
| (viii) | Current report on Form 8-K, dated January 13, 2003, reporting matters under item 9 thereof. |
33
| (ix) | Current report on Form 8-K, dated January 21, 2003, reporting matters under item 9 thereof. | |
| (x) | Current report on Form 8-K, dated January 27, 2003, reporting matters under item 9 thereof. |
34
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 |
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, 2002.16, 2003.
| Signature | Title | |
| * James M. Zimmerman | Chairman of the Board and Director | |
| * Terry J. Lundgren | President and Chief Executive Officer (principal executive officer) and Director | |
* Ronald W. Tysoe | Vice | |
* Karen M. Hoguet | Senior Vice President and Chief Financial Officer | |
* Joel A. Belsky | Vice President and Controller (principal accounting officer) | |
* Meyer Feldberg | Director | |
* Earl G. Graves, Sr. | Director | |
* Sara Levinson | Director | |
* Joseph Neubauer | Director | |
* Joseph A. Pichler | Director | |
* Karl M. von der Heyden | Director | |
* Craig E. Weatherup | Director | |
* Marna C. Whittington | Director |
* 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 |
2835
CERTIFICATIONS
I, Terry L. Lundgren, Chief Executive Officer of Federated Department Stores, Inc., certify that:
| 1. | I have reviewed this annual report on Form 10-K of Federated Department Stores, Inc.; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c. | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| /s/ TERRY L. LUNDGREN | |
| Terry L. Lundgren |
April 16, 2003
36
I, Karen M. Hoguet, Chief Financial Officer of Federated Department Stores, Inc., certify that:
| 1. | I have reviewed this annual report on Form 10-K of Federated Department Stores, Inc.; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a. | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c. | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| /s/ KAREN M. HOGUET | |
| Karen M. Hoguet |
April 16, 2003
37
[THIS PAGE INTENTIONALLY LEFT BLANK]
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| Management’s Report | F-2 | |||
| Independent Auditors’ Report | F-3 | |||
| Consolidated Statements of Operations for the 52 | F-4 | |||
| Consolidated Balance Sheets at February | F-5 | |||
| Consolidated Statements of Changes in Shareholders’ Equity for the 52 | F-6 | |||
| Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 | F-7 | |||
| Notes to Consolidated Financial Statements | F-8 | |||
F-1
MANAGEMENT’S REPORT
To the Shareholders of
The integrity and consistency of the consolidated financial statements of Federated Department Stores, Inc. and subsidiaries, which were prepared in accordance with accounting principles generally accepted in the United States of America, 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 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 auditing standards generally accepted in the United States of America.
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.
James M. Zimmerman
Terry J. Lundgren
Karen M. Hoguet
Joel A. Belsky
F-2
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of Federated Department Stores, Inc. and subsidiaries as of February 2, 20021, 2003 and February 3, 2001,2, 2002, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the fifty-two week period ended February 1, 2003, the fifty-two week period ended February 2, 2002 and the fifty-three week period ended February 3, 2001 and the fifty-two week period ended January 29, 2000.2001. 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 auditing standards generally accepted in the United States of America. 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 2, 20021, 2003 and February 3, 2001,2, 2002, and the results of their operations and their cash flows for the fifty-two week period ended February 1, 2003, the fifty-two week period ended February 2, 2002 and the fifty-three week period ended February 3, 2001, and the fifty-two week period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 9 to the consolidated financial statements, during the fifty-two week period ended February 1, 2003, Federated Department Stores, Inc. and subsidiaries adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
| KPMG LLP |
Cincinnati, Ohio
F-3
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions, except per share data)
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||||
| Net sales | Net sales | $ | 15,651 | $ | 16,638 | $ | 16,029 | Net sales | $ | 15,435 | $ | 15,651 | $ | 16,638 | ||||||||||||
| Cost of sales: | Cost of sales: | Cost of sales: | ||||||||||||||||||||||||
| Recurring | 9,531 | 9,955 | 9,576 | Recurring | 9,255 | 9,531 | 9,955 | |||||||||||||||||||
| Inventory valuation adjustments | 53 | – | – | Inventory valuation adjustments | – | 53 | – | |||||||||||||||||||
| Total cost of sales | Total cost of sales | 9,584 | 9,955 | 9,576 | Total cost of sales | 9,255 | 9,584 | 9,955 | ||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | 4,801 | 4,912 | 4,760 | Selling, general and administrative expenses | 4,837 | 4,801 | 4,912 | ||||||||||||||||||
| Asset impairment and restructuring charges | 162 | 80 | – | |||||||||||||||||||||||
| Asset impairment charges | Asset impairment charges | – | 52 | 74 | ||||||||||||||||||||||
| Restructuring charges | Restructuring charges | – | 110 | 6 | ||||||||||||||||||||||
| Operating income | Operating income | 1,104 | 1,691 | 1,693 | Operating income | 1,343 | 1,104 | 1,691 | ||||||||||||||||||
| Interest expense | Interest expense | (331 | ) | (327 | ) | (320 | ) | Interest expense | (311 | ) | (331 | ) | (327 | ) | ||||||||||||
| Interest income | Interest income | 7 | 6 | 13 | Interest income | 16 | 7 | 6 | ||||||||||||||||||
| Income from continuing operations before income taxes and extraordinary item | Income from continuing operations before income taxes and extraordinary item | 780 | 1,370 | 1,386 | Income from continuing operations before income taxes and extraordinary item | 1,048 | 780 | 1,370 | ||||||||||||||||||
| Federal, state and local income tax expense | Federal, state and local income tax expense | (262 | ) | (549 | ) | (561 | ) | Federal, state and local income tax expense | (410 | ) | (262 | ) | (549 | ) | ||||||||||||
| Income from continuing operations before extraordinary item | Income from continuing operations before extraordinary item | 518 | 821 | 825 | Income from continuing operations before extraordinary item | 638 | 518 | 821 | ||||||||||||||||||
| Discontinued operations: | Discontinued operations: | Discontinued operations: | ||||||||||||||||||||||||
| Loss from discontinued operations, net of tax effect | (14 | ) | (1,005 | ) | (30 | ) | Loss from discontinued operations, net of tax effect | – | (14 | ) | (1,005 | ) | ||||||||||||||
| Loss on disposal of discontinued operations, including $292 million of estimated operating losses during the phase-out period, net of tax effect | (770 | ) | – | – | Income (loss) on disposal of discontinued operations, net of tax effect | 180 | (770 | ) | – | |||||||||||||||||
| Extraordinary item, net of tax effect | Extraordinary item, net of tax effect | (10 | ) | – | – | Extraordinary item, net of tax effect | – | (10 | ) | – | ||||||||||||||||
| Net income (loss) | Net income (loss) | $ | (276 | ) | $ | (184 | ) | $ | 795 | Net income (loss) | $ | 818 | $ | (276 | ) | $ | (184 | ) | ||||||||
| Basic earnings (loss) per share: | Basic earnings (loss) per share: | Basic earnings (loss) per share: | ||||||||||||||||||||||||
| Income from continuing operations | $ | 2.65 | $ | 4.01 | $ | 3.92 | Income from continuing operations | $ | 3.23 | $ | 2.65 | $ | 4.01 | |||||||||||||
| Loss from discontinued operations | (4.01 | ) | (4.91 | ) | (.14 | ) | Income (loss) from discontinued operations | .92 | (4.01 | ) | (4.91 | ) | ||||||||||||||
| Extraordinary item | (.05 | ) | – | – | Extraordinary item | – | (.05 | ) | – | |||||||||||||||||
| Net income (loss) | $ | (1.41 | ) | $ | (.90 | ) | $ | 3.78 | Net income (loss) | $ | 4.15 | $ | (1.41 | ) | $ | (.90 | ) | |||||||||
| Diluted earnings (loss) per share: | Diluted earnings (loss) per share: | Diluted earnings (loss) per share: | ||||||||||||||||||||||||
| Income from continuing operations | $ | 2.59 | $ | 3.97 | $ | 3.76 | Income from continuing operations | $ | 3.21 | $ | 2.59 | $ | 3.97 | |||||||||||||
| Loss from discontinued operations | (3.92 | ) | (4.86 | ) | (.14 | ) | Income (loss) from discontinued operations | .91 | (3.92 | ) | (4.86 | ) | ||||||||||||||
| Extraordinary item | (.05 | ) | – | – | Extraordinary item | – | (.05 | ) | – | |||||||||||||||||
| Net income (loss) | $ | (1.38 | ) | $ | (.89 | ) | $ | 3.62 | Net income (loss) | $ | 4.12 | $ | (1.38 | ) | $ | (.89 | ) | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(millions)
| February 2, 2002 | February 3, 2001 | February 1, 2003 | February 2, 2002 | |||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||
| Current Assets: | Current Assets: | Current Assets: | ||||||||||||||||||
| Cash | $ | 636 | $ | 222 | Cash | $ | 716 | $ | 636 | |||||||||||
| Accounts receivable | 2,379 | 2,435 | Accounts receivable | 2,945 | 2,379 | |||||||||||||||
| Merchandise inventories | 3,376 | 3,626 | Merchandise inventories | 3,359 | 3,376 | |||||||||||||||
| Supplies and prepaid expenses | 124 | 121 | Supplies and prepaid expenses | 124 | 124 | |||||||||||||||
| Deferred income tax assets | 21 | 4 | Deferred income tax assets | 10 | 21 | |||||||||||||||
| Net assets of discontinued operations | 744 | 1,436 | Assets of discontinued operations | – | 1,812 | |||||||||||||||
| Total Current Assets | 7,280 | 7,844 | Total Current Assets | 7,154 | 8,348 | |||||||||||||||
| Property and Equipment – net | Property and Equipment – net | 6,506 | 6,621 | Property and Equipment – net | 6,379 | 6,506 | ||||||||||||||
| Intangible Assets – net | 683 | 617 | ||||||||||||||||||
| Goodwill | Goodwill | 262 | 305 | |||||||||||||||||
| Other Intangible Assets – net | Other Intangible Assets – net | 378 | 378 | |||||||||||||||||
| Other Assets | Other Assets | 575 | 492 | Other Assets | 268 | 575 | ||||||||||||||
| Total Assets | $ | 15,044 | $ | 15,574 | Total Assets | $ | 14,441 | $ | 16,112 | |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||
| Current Liabilities: | Current Liabilities: | Current Liabilities: | ||||||||||||||||||
| Short-term debt | $ | 1,012 | $ | 1,117 | Short-term debt | $ | 946 | $ | 1,012 | |||||||||||
| Accounts payable and accrued liabilities | 2,645 | 2,642 | Accounts payable and accrued liabilities | 2,584 | 2,645 | |||||||||||||||
| Income taxes | 57 | 245 | Income taxes | 71 | 57 | |||||||||||||||
| Liabilities of discontinued operations | – | 1,068 | ||||||||||||||||||
| Total Current Liabilities | 3,714 | 4,004 | ||||||||||||||||||
| Total Current Liabilities | 3,601 | 4,782 | ||||||||||||||||||
| Long-Term Debt | Long-Term Debt | 3,859 | 3,845 | Long-Term Debt | 3,408 | 3,859 | ||||||||||||||
| Deferred Income Taxes | Deferred Income Taxes | 1,345 | 1,362 | Deferred Income Taxes | 998 | 1,345 | ||||||||||||||
| Other Liabilities | Other Liabilities | 562 | 541 | Other Liabilities | 672 | 562 | ||||||||||||||
| Shareholders’ Equity | 5,564 | 5,822 | ||||||||||||||||||
| Shareholders’ Equity: | Shareholders’ Equity: | |||||||||||||||||||
| Common stock (190.2 and 200.8 million shares outstanding) | 3 | 3 | ||||||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 15,044 | $ | 15,574 | Additional paid-in capital | 5,106 | 5,098 | |||||||||||||
| Accumulated equity | 3,185 | 2,367 | ||||||||||||||||||
| Treasury stock | (2,252 | ) | (1,881 | ) | ||||||||||||||||
| Unearned restricted stock | (7 | ) | (11 | ) | ||||||||||||||||
| Accumulated other comprehensive loss | (273 | ) | (12 | ) | ||||||||||||||||
| Total Shareholders’ Equity | 5,762 | 5,564 | ||||||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 14,441 | $ | 16,112 | ||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(millions)
| Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Unearned | Other | Total | Additional | Unearned | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common | Paid-In | Accumulated | Treasury | Restricted | Comprehensive | Shareholders’ | Common | Paid-In | Accumulated | Treasury | Restricted | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||
| Stock | Capital | Equity | Stock | Stock | Income (Loss) | Equity | Stock | Capital | Equity | Stock | Stock | Loss | Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance at January 30, 1999 | $ | 2 | $ | 4,406 | $ | 2,032 | $ | (720 | ) | $ | (1 | ) | $ | (10 | ) | $ | 5,709 | |||||||||||||||||||||||||||||||||||||||
| Net Income | 795 | 795 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment, net of income tax effect | 10 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | 805 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | (267 | ) | (267 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued under stock plans | 52 | (4 | ) | (9 | ) | 39 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued upon exercise of warrants | 1 | 233 | 234 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock plan amortization | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan distributions | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax benefit related to stock plan activity | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity issued in acquisition | 12 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 29, 2000 | 3 | 4,719 | 2,827 | (990 | ) | (7 | ) | – | 6,552 | $ | 3 | $ | 4,719 | $ | 2,827 | $ | (990 | ) | $ | (7 | ) | $ | – | $ | 6,552 | |||||||||||||||||||||||||||||||
| Net loss | (184 | ) | (184 | ) | (184 | ) | (184 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment, net of income tax effect | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive loss | (186 | ) | (186 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | (601 | ) | (601 | ) | (601 | ) | (601 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued under stock plans | 8 | 8 | (5 | ) | 11 | 8 | 8 | (5 | ) | 11 | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued upon exercise of warrants | 35 | 35 | 35 | 35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock plan amortization | 6 | 6 | 6 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan distributions | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax benefit related to stock plan activity | 4 | 4 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 3, 2001 | 3 | 4,766 | 2,643 | (1,582 | ) | (6 | ) | (2 | ) | 5,822 | 3 | 4,766 | 2,643 | (1,582 | ) | (6 | ) | (2 | ) | 5,822 | ||||||||||||||||||||||||||||||||||||
| Net loss | (276 | ) | (276 | ) | (276 | ) | (276 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment, net of income tax effect | (10 | ) | (10 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive loss | (286 | ) | (286 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | (297 | ) | (297 | ) | (297 | ) | (297 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued under stock plans | 55 | (3 | ) | (10 | ) | 42 | 55 | (3 | ) | (10 | ) | 42 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock issued upon exercise of warrants | 267 | 267 | 267 | 267 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock plan amortization | 5 | 5 | 5 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan distributions | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax benefit related to stock plan activity | 10 | 10 | 10 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 2, 2002 | $ | 3 | $ | 5,098 | $ | 2,367 | $ | (1,881 | ) | $ | (11 | ) | $ | (12 | ) | $ | 5,564 | 3 | 5,098 | 2,367 | (1,881 | ) | (11 | ) | (12 | ) | 5,564 | |||||||||||||||||||||||||||||
| Net income | 818 | 818 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability adjustment, net of income tax effect | (261 | ) | (261 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | 557 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | (391 | ) | (391 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued under stock plans | 4 | 19 | 23 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock plan amortization | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan distributions | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax benefit related to stock plan activity | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 1, 2003 | $ | 3 | $ | 5,106 | $ | 3,185 | $ | (2,252 | ) | $ | (7 | ) | $ | (273 | ) | $ | 5,762 | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | ||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | ||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) | $ | (276 | ) | $ | (184 | ) | $ | 795 | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
| Loss from discontinued operations | 784 | 1,005 | 30 | |||||||||||||
| Depreciation and amortization | 657 | 617 | 628 | |||||||||||||
| Amortization of intangible assets | 28 | 31 | 36 | |||||||||||||
| Amortization of financing costs | 7 | 6 | 6 | |||||||||||||
| Amortization of unearned restricted stock | 4 | 3 | 1 | |||||||||||||
| Asset impairment and restructuring charges | 215 | 80 | – | |||||||||||||
| Loss on early extinguishment of debt | 10 | – | – | |||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| (Increase) decrease in accounts receivable | 83 | (105 | ) | (126 | ) | |||||||||||
| (Increase) decrease in merchandise inventories | 305 | (258 | ) | (109 | ) | |||||||||||
| Increase in supplies and prepaid expenses | – | – | (5 | ) | ||||||||||||
| Increase in other assets not separately identified | (52 | ) | (25 | ) | (27 | ) | ||||||||||
| Increase (decrease) in accounts payable and accrued liabilities not separately identified | (236 | ) | (23 | ) | 240 | |||||||||||
| Increase (decrease) in current income taxes | (181 | ) | 19 | 127 | ||||||||||||
| Increase in deferred income taxes | 17 | 174 | 146 | |||||||||||||
| Increase (decrease) in other liabilities not separately identified | 7 | (8 | ) | (7 | ) | |||||||||||
| Net cash provided by operating activities | 1,372 | 1,332 | 1,735 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchase of property and equipment | (615 | ) | (720 | ) | (745 | ) | ||||||||||
| Acquisition of Liberty House, Inc., net of cash acquired | (175 | ) | – | – | ||||||||||||
| Capitalized software | (36 | ) | (66 | ) | (37 | ) | ||||||||||
| Investments in companies | – | (4 | ) | (37 | ) | |||||||||||
| Disposition of property and equipment | 55 | 70 | 46 | |||||||||||||
| Net cash used by investing activities | (771 | ) | (720 | ) | (773 | ) | ||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Debt issued | 1,000 | 750 | 1,516 | |||||||||||||
| Financing costs | (16 | ) | (6 | ) | (10 | ) | ||||||||||
| Debt repaid | (1,140 | ) | (361 | ) | (525 | ) | ||||||||||
| Increase (decrease) in outstanding checks | 37 | (38 | ) | (3 | ) | |||||||||||
| Acquisition of treasury stock | (299 | ) | (603 | ) | (267 | ) | ||||||||||
| Issuance of common stock | 323 | 53 | 290 | |||||||||||||
| Net cash provided (used) by financing activities | (95 | ) | (205 | ) | 1,001 | |||||||||||
| Net cash provided by continuing operations | 506 | 407 | 1,963 | |||||||||||||
| Net cash used by discontinued operations | (92 | ) | (358 | ) | (2,097 | ) | ||||||||||
| Net increase (decrease) in cash | 414 | 49 | (134 | ) | ||||||||||||
| Cash beginning of period | 222 | 173 | 307 | |||||||||||||
| Cash end of period | $ | 636 | $ | 222 | $ | 173 | ||||||||||
| Supplemental cash flow information: | ||||||||||||||||
| Interest paid | $ | 351 | $ | 345 | $ | 329 | ||||||||||
| Interest received | 7 | 6 | 13 | |||||||||||||
| Income taxes paid (net of refunds received) | 221 | 351 | 327 | |||||||||||||
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | ||||||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | ||||||||||||||
| Cash flows from continuing operating activities: | ||||||||||||||||
| Net income (loss) | $ | 818 | $ | (276 | ) | $ | (184 | ) | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by continuing operating activities: | ||||||||||||||||
| (Income) loss from discontinued operations | (180 | ) | 784 | 1,005 | ||||||||||||
| Depreciation and amortization | 676 | 657 | 617 | |||||||||||||
| Amortization of intangible assets | – | 28 | 31 | |||||||||||||
| Amortization of financing costs | 5 | 7 | 6 | |||||||||||||
| Amortization of unearned restricted stock | 4 | 4 | 3 | |||||||||||||
| Asset impairment and restructuring charges | – | 215 | 80 | |||||||||||||
| Loss on early extinguishment of debt | – | 10 | – | |||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| (Increase) decrease in accounts receivable | 39 | 83 | (105 | ) | ||||||||||||
| (Increase) decrease in merchandise inventories | 17 | 305 | (258 | ) | ||||||||||||
| Increase in other assets not separately identified | (87 | ) | (52 | ) | (25 | ) | ||||||||||
| Decrease in accounts payable and accrued liabilities not separately identified | (1 | ) | (236 | ) | (23 | ) | ||||||||||
| Increase (decrease) in current income taxes | 14 | (181 | ) | 19 | ||||||||||||
| Increase (decrease) in deferred income taxes | (119 | ) | 17 | 174 | ||||||||||||
| Increase (decrease) in other liabilities not separately identified | (18 | ) | 7 | (8 | ) | |||||||||||
| Net cash provided by continuing operating activities | 1,168 | 1,372 | 1,332 | |||||||||||||
| Cash flows from continuing investing activities: | ||||||||||||||||
| Purchase of property and equipment | (568 | ) | (615 | ) | (720 | ) | ||||||||||
| Capitalized software | (59 | ) | (36 | ) | (66 | ) | ||||||||||
| Increase in notes receivable, net of payments | (30 | ) | – | – | ||||||||||||
| Acquisition of Liberty House, Inc., net of cash acquired | – | (175 | ) | – | ||||||||||||
| Investments in companies | – | – | (4 | ) | ||||||||||||
| Disposition of property and equipment | 20 | 55 | 70 | |||||||||||||
| Net cash used by continuing investing activities | (637 | ) | (771 | ) | (720 | ) | ||||||||||
| Cash flows from continuing financing activities: | ||||||||||||||||
| Debt issued | 7 | 1,000 | 750 | |||||||||||||
| Financing costs | (1 | ) | (16 | ) | (6 | ) | ||||||||||
| Debt repaid | (1,015 | ) | (1,140 | ) | (361 | ) | ||||||||||
| Increase (decrease) in outstanding checks | (3 | ) | 37 | (38 | ) | |||||||||||
| Acquisition of treasury stock | (392 | ) | (299 | ) | (603 | ) | ||||||||||
| Issuance of common stock | 29 | 323 | 53 | |||||||||||||
| Net cash used by continuing financing activities | (1,375 | ) | (95 | ) | (205 | ) | ||||||||||
| Net cash provided (used) by continuing operations | (844 | ) | 506 | 407 | ||||||||||||
| Net cash provided (used) by discontinued operations | 924 | (92 | ) | (358 | ) | |||||||||||
| Net increase in cash | 80 | 414 | 49 | |||||||||||||
| Cash beginning of period | 636 | 222 | 173 | |||||||||||||
| Cash end of period | $ | 716 | $ | 636 | $ | 222 | ||||||||||
| Supplemental cash flow information: | ||||||||||||||||
| Interest paid | $ | 335 | $ | 351 | $ | 345 | ||||||||||
| Interest received | 14 | 7 | 6 | |||||||||||||
| Income taxes paid (net of refunds received) | 123 | 221 | 351 | |||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-7
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 men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods.
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. The Company from time to time invests in companies engaged in complementary businesses. Investments in companies in which the Company has the ability to exercise significant influence, but not control, are accounted for by the equity method. All other investments are carried at cost. The Company’s investments in companies engaged in complementary businesses amounted to approximately $10 million at February 2, 2002 and $17 million at February 3, 2001 (see Note 4). All significant intercompany transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Certain reclassifications were made to prior years’ amounts to conform with the classifications of such amounts for the most recent year.
The Company operates in one segment as an operator of department stores.
Fingerhut Companies, Inc. (“Fingerhut”), a wholly-owned subsidiary, is being accounted for as a discontinued operation (see Note 2). Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of this business have been segregated from those of continuing operations for all periods presented.
Cash includes cash and liquid investments with original maturities of three months or less.
The Company offers proprietary credit to its customers under regular 30-dayrevolving accounts and also offers non-proprietary revolving accounts.account credit cards. Such revolving 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 finance charges which are competitive with other retailers.retailers and lenders, respectively. Minimum payments vary from 2.5% to 100.0% of the account balance, depending on the size of the balance. The Company also offers proprietary credit on deferred billing terms for periods not to exceed one year. Such accounts are convertible to revolving credit, if unpaid, at the end of the deferral period. Finance charge income is treated as a reduction of selling, general and administrative expenses.
The Company evaluates the collectibility of its proprietary and non-proprietary accounts receivable based on a combination of factors, including analysis of historical trends, aging of accounts receivable, write-off experience and expectations of future performance. Proprietary and non-proprietary accounts receivable are considered delinquent if more than one scheduled minimum payment is missed. Delinquent
F-8
proprietary accounts are generally written off automatically after the passage of 210 days without receiving a full scheduled monthly payment. Delinquent non-proprietary accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. The Company reserves for doubtful proprietary accounts based on a loss-to-collections rate. At February 2, 2002,rate and doubtful non-proprietary accounts based on a 0.1 percentage point change in the loss-to-collections rate would impact the reserve for doubtful accounts by $2 million.
F-8
Merchandise inventories are valued at lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requires management judgments and contains estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross profit reduction is recognized in the period the markdown is recorded.
Shrinkage is estimated as a percentage of sales for the period from the last inventory date to the end of the fiscal period. Such estimates are based on experience and the most recent physical inventory results. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that minimize shrinkage experience. Physical inventories are taken within each merchandise department at least twice annually and inventory records are adjusted accordingly.
The Company receives cash or allowances from merchandise vendors as purchase price adjustments and in connection with cooperative advertising programs. Purchase price adjustments are credited to cost of sales and cooperative advertising paymentsallowances are credited against advertising expense.expense in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”
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 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.
The Company receives contributions from developers and merchandise vendors to fund building improvements and the construction of vendor shops. Such contributions are netted against the capital expenditures.
F-9
The carrying value of long-lived assets are periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of that assetthose assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
F-9
For long-lived assets held for disposal whether by abandonment or sale, an impairment charge is recorded if the carrying amount of the assetsasset exceeds its fair value less costs to sell. Such valuations include estimations of fair values and incremental direct costs to transact a sale. For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, depreciation estimates are revised accordingly. Prior to February 3, 2002, for long-lived assets held for disposal, whether by abandonment or sale, an impairment charge was recorded if the carrying amount of the assets exceeded its fair value less costs to sell. Such valuations included estimations of fair values, costs to dispose, and time periods over which to sell the assets.
In addition, liabilities arise such as severance, contractual obligations and other accruals associated with store closings arise from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.
IntangibleGoodwill and intangible assets arehaving indefinite lives, which were previously amortized on a straight-line basis over their estimated lives (see Note 9). The Company reviews the carrying value of goodwillperiods benefited, are no longer being amortized to earnings, but instead are subject to periodic testing for impairment. Goodwill and other intangiblesintangible assets of a reporting unit are tested for impairment whenever significant events or changes occur which might impair recovery of recorded asset costs. The Company assesses the recoverability of the carrying value of goodwill based upon estimates of future discounted cash flows from related operations.
In 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,”on an annual basis and SFAS No. 142, “Goodwill and Othermore frequently if certain indicators are encountered. Intangible Assets,” effective for all business combinations initiated after June 30, 2001 and for fiscal years beginning after December 15, 2001, respectively. SFAS No. 141 eliminates the pooling of interests method of accounting for business combinations and broadens the criteria for recording intangible assets separate from goodwill. Under the provisions of SFAS No. 142, goodwill and intangible assets deemed to have indefinitewith determinable useful lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives.
The Company capitalizes purchased and internally developed software and amortizes such costs to expense on a straight-line basis over 2-5 years. Capitalized software is included in other assets.
The Company is self-insured for workers compensation and public liability claims up to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ from such accrued amounts.
The Company, through its actuaries, utilizes assumptions when estimating the liabilities for pension and other employee benefit plans. These assumptions, where applicable, include the discount rates used to determine the actuarial present value of projected benefit obligations, the rate of increase in future compensation levels, the long-term rate of return on assets and the growth in health care costs. The cost of these benefits is recognized in the financial statements over an employee’s term of service with the Company.
F-10
Company and the prepaid pension or accrued liabilities are reported in other assets or other liabilities, as appropriate.
Sales of merchandise are recorded at the time of delivery and reported net of merchandise returns. An estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly.
Advertising and promotional costs, net of cooperative advertising allowances, amounted to $713 million for the 52 weeks ended February 1, 2003, $750 million for the 52 weeks ended February 2, 2002 and $808 million for the 53 weeks ended February 3, 2001 and $784 million for the 52 weeks ended January 29, 2000, respectively.2001. Department store non-direct response advertising and promotional costs are expensed as incurred. Direct response advertising and promotional costs for Bloomingdale’s By Mail are deferred and expensed over the period during which the sales are expected to occur, generally one to four months.
F-10
Shipping and handling fees and costs do not represent a significant portion of the Company’s operations and both items have consistently been included in selling, general and administrative expenses. Shipping and handling fees amounted to $43 million, $44$43 million and $43$44 million for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3,1, 2001, and the 52 weeks ended January 29, 2000, respectively. Shipping and handling costs amounted to $39 million, $41 million $42 million and $43$42 million for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3,1, 2001, and the 52 weeks ended January 29, 2000, respectively.
Financing costs are amortized on a straight-line basisusing the effective interest method 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 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 Company accounts for its stock-based employee compensation plan in accordance withrecords derivative transactions according to the provisions of Statement of Financial Accounting Principles BoardStandards (“APB”SFAS”) Opinion No. 25 and related interpretations (see Note 15).
Certain reclassifications were made to prior years’ amounts to conform with the classifications of such amounts for the most recent year.
Effective February 4, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities and measurement of those instruments at fair value. The Company makes limited use of derivative financial instruments. On the date that the Company enters into a derivative contract, the Company designates the derivative instrument as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument, each of which would receive different accounting treatment. Prior to entering into a hedge transaction, the Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. Derivative instruments that the Company may use as part of its interest rate risk management strategy include interest rate swap and interest rate cap agreements (see Note 17). Based
The Company accounts for its stock-based employee compensation plan in accordance with Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations (see Note 15). No
F-11
stock-based employee compensation cost is reflected in net income, as all options granted under the plan have an exercise price at least equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for options granted subsequent to January 28, 1995.
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||
| (millions, except per share data) | |||||||||||||
| Net income (loss), as reported | $ | 818 | $ | (276 | ) | $ | (184 | ) | |||||
| Deduct total stock-based employee compensation cost determined in accordance with SFAS No. 123, net of related tax benefit | (42 | ) | (47 | ) | (42 | ) | |||||||
| Pro forma net income (loss) | $ | 776 | $ | (323 | ) | $ | (226 | ) | |||||
| Earnings (loss) per share: | |||||||||||||
| Basic – as reported | $ | 4.15 | $ | (1.41 | ) | $ | (.90 | ) | |||||
| Basic – pro forma | $ | 3.93 | $ | (1.65 | ) | $ | (1.11 | ) | |||||
| Diluted – as reported | $ | 4.12 | $ | (1.38 | ) | $ | (.89 | ) | |||||
| Diluted – pro forma | $ | 3.91 | $ | (1.62 | ) | $ | (1.09 | ) | |||||
In 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” and clarifies the requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material impact on the Company’s minimal useconsolidated financial position, results of derivatives,operations or cash flows.
In 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement rescinds or amends existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for transactions occurring after May 15, 2002. The Company does not anticipate that the adoption of this statement didwill have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Also in 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation” and APB Opinion No. 28, “Interim Financial Reporting” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation and amends the disclosure provisions therein. The Company does not anticipate that the adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
F-12
In 2002, the FASB issued EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” This issue addresses the reseller’s accounting for cash consideration received from a vendor. The Company’s current accounting policy related to certain consideration received from a vendor is consistent with the provisions of this issue and therefore, the Company does not anticipate that the adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. The provisions of the Statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not anticipate that the adoption of this statement will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
2. Discontinued Operations
On January 16, 2002, the Company announced the planned dispositionCompany’s Board of Directors approved a plan to dispose of the operations of Fingerhut, Companies, Inc. (“Fingerhut”) through sale or liquidation. In connection with this announcement,including the Arizona Mail Order, Figi’s and Popular Club Plan businesses conducted by Fingerhut’s subsidiaries, which were acquired by the Company recorded a $770 million loss, which is net of income tax benefit of $435 million, or $3.85 per diluted share, representingon March 18, 1999.
During 2002, through various transactions, the write-down of certain core catalog assets, severance, lease cancellation and real estate carrying costs related to the core catalog operations, the expected losses onCompany completed the sale of the Arizona Mail Order, Figi’s and Popular Club Plan businesses conducted by Fingerhut’s subsidiaries, completed the sale of Fingerhut’s core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and completed the sale of various other catalogFingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. As of February 1, 2003, substantially all Fingerhut assets had been disposed of and substantially all Fingerhut liabilities had been settled. Proceeds from the foregoing sale transactions and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets. This favorable variance, together with the favorable variance in actual operating losses described below, resulted in an adjustment to the loss on disposal of discontinued operations as well as an accrual for 2002 totaling $307 million of income before income taxes, or $180 million of income after income taxes.
The Company originally estimated operating losses during the Fingerhut phase-out period.period of $292 million, net of tax effect. Actual operating losses for the 52 weeks ended February 1, 2003 were approximately $37 million, net of tax effect. This favorable variance resulted from the earlier than planned disposition of Fingerhut assets and is reflected in the $180 million adjustment to the loss on disposal of discontinued operations described above.
F-11 The disposal of the operations of Fingerhut, including the Arizona Mail Order, Figi’s and Popular Club Plan businesses conducted by Fingerhut’s subsidiaries, generated $924 million of cash during the 52 weeks ended February 1, 2003, after the payment of approximately $529 million of related debt.
F-13
The $770 million loss on disposal includes management’s best estimates of the amounts expected to be realized onIn connection with the sale or wind-down of assets and businesses of the Fingerhut operations as well as estimates regarding the timing of those dispositions. Currently, assuming a buyer cannot be found, the Fingerhut core catalog business liquidationaccounts receivable portfolio, the Company entered into certain indemnification agreements with the purchaser. The indemnification agreements extend for a period of five years subsequent to the closing of this transaction. The maximum amount of potential future payments cannot be determined because the indemnification is planned for completion duringan unlimited obligation. Based on the second or third quarternature of fiscal year 2002 andthese indemnifications, the credit operation liquidation is planned for completion within four years. Fingerhut’s other operations, including Arizona Mail Order, Figi’s, and Popular Club Plan, are anticipatedCompany considers the probability of future payments to be sold as ongoing businesses by the end of fiscal year 2002. The amounts the Company will ultimately realize could differ in the coming twelve months from the amounts assumed in arriving at theremote.
A loss on disposal of the discontinued operations.
IncludedFingerhut operations was recorded in the fourth quarter of fiscal 2001. This loss on disposal areincluded significant estimated losses related to Fingerhut’sassociated with the wind-down of the operations of Fingerhut, the wind-down of the Fingerhut core catalog accounts receivable portfolio, through the four yearsale of inventory and property and equipment, the sale of subsidiary catalog businesses and severance and retention costs
Estimated losses associated with the wind-down period. The calculated loss includesof the Fingerhut core catalog accounts receivable portfolio were based upon various assumptions and estimates, regardingincluding an assumed four-year wind-down period and estimated customer payment rates, write-off rates, finance charge income, late fee income, and operating expenses, such as collection costs, necessary to carry out the wind-down of the portfolio.costs. These assumptions and estimates were based on a third party offer to purchase the portfolio, historical experience and industry data where available.
The estimated loss fromEstimated losses associated with the Fingerhut core catalog operations were based upon various assumptions and estimates, including with respect to revenues and expenses during the wind-down period includesperiod. Those assumptions of revenues to be earned and estimated expenses to be incurredestimates were based on historical experience as well as throughand derived from detailed departmental plans regarding the costs necessary to complete the liquidation in the planned timeframe.
Losses on inventory were recognized based on estimated recovery values expected to be received from a third party liquidator. Write-downs of property, plant and equipment were based on historical recovery rates for similar liquidations of personal property and brokerage quotes, where available, for real estate properties. Other assets, such as tradenames, customer lists, supplies, prepaid expenses, and capitalized software, were written-down to estimated net realizable value, which in some cases was zero due to their lack of marketability.
The loss on sale of the Fingerhut subsidiaries was estimated using market value quotes from an investment bank, projected net book values of each subsidiary at the expected sale dates, and expenses necessary to disconnect the subsidiaries’ support functions from Fingerhut’s core catalog operations.
Severance and retention were estimated based on the then current workforce, employment needs through the wind-down period, employment agreements where applicable, years of service, and estimated payout based on the general severance and retention plan offered to employees. Remaining lease obligations or contractual cancellation penalties were estimated based on a review of the contract terms in place.
The after-tax loss from discontinued operations for the 52 weeks ended February 2, 2002 was $14 million, or $.07 per diluted share.
Estimated interest expense has been allocated to discontinued operations based upon the debt balances attributable to those operations.
Results of the Fingerhut operations have been classified as Interest expense allocated to discontinued operations was $82 million for the 52 weeks ended February 2, 2002 and prior periods have been restated. Federated$116 million for the 53 weeks ended February 3,
F-14
2001. Additionally, interest expense of $77 million was included in the estimated operating losses from the measurement date to the disposal date, which was included in the loss on disposal of discontinued operations.
The net assets of Fingerhut included within discontinued operations were as follows:
| February 2, | ||||
| 2002 | ||||
| (millions) | ||||
| Current assets | $ | 1,715 | ||
| Other assets | 97 | |||
| Current liabilities | (539 | ) | ||
| Total debt | (529 | ) | ||
| $ | 744 | |||
The Company acquired Fingerhut on March 18, 1999. Discontinued operations include Fingerhut sales which totaled $1,244 million for the 52 weeks ended February 2, 2002 and $1,769 million for the 53 weeks ended February 3, 2001 and $1,687 million for the 52 weeks ended January 29, 2000.2001. The loss
F-12
from discontinued operations was $22 million, net of an income tax benefit of $8 million for the 52 weeks ended February 2, 2002 and $1,257 million, net of an income tax benefit of $252 million for the 53 weeks ended February 3, 2001 and $40 million, net of an income tax benefit of $10 million for the 52 weeks ended January 29, 2000.2001.
During the 53 weeks ended February 3, 2001, the Company recorded asset impairment and restructuring charges related to its Fingerhut business totaling $882 million, $35 million of which were included in cost of sales.million. In response to a significant credit delinquency problem associated with Fingerhut’s core catalog operations, the Company reevaluated the long-term operating projections of, and performed an asset impairment analysis for, each Fingerhut business. This analysis included projected future undiscounted and discounted cash flows disaggregated for each Fingerhut business unit under a variety of operating assumptions, under a two-step impairment test.
First, using undiscounted projected future cash flows for each Fingerhut business, management determined that an impairment existed for only one of the businesses, and a write-down of certain fixed assets and goodwill was recorded in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Secondly, using discounted projected cash flows at a discount rate commensurate with the Company’s cost of capital, management determined that an impairment existed at several other Fingerhut businesses, including the core catalog business, and a write-down of goodwill and credit file intangibles was recorded in accordance with APB Opinion No. 17, “Intangible Assets.”
As a result of the above, the Company recorded asset write-downs of $673 million for goodwill and credit file intangibles and $18 million for Fingerhut fixed assets during the 53 weeks ended February 3, 2001. During this same period, the Company recorded a write-down of $105 million forof certain publicstrategic equity investments made and non-publicheld by Fingerhut Internet-related and other venture capital investments as a result of the Company’s determination, based on uncertain financing alternatives and comparisons to their market values or market values of similar publicly traded businesses, that these equity investments were impaired on an other than temporary basis. These investments were in companies that, through commercial relationships entered into in connection with the investments, expanded Fingerhut’s Internet offerings and direct marketing strategic initiatives (e.g.,
F-15
through website affiliations) and were integrally related – in terms of their genesis, purpose, nature, implementation and oversight – to the operations of Fingerhut.
The Company also recorded $86 million of restructuring costs during the 53 weeks ended February 3, 2001 related to the downsizing of the Fingerhut core catalog operations, including $35 million of inventory valuation adjustments as a part of cost of sales.adjustments. The remaining $51 million of restructuring costs consisted of write-downs of property and other assets associated with the closing of collection and call centers and other duplicate facilities totaling $26 million, an adjustment to the carrying value of certain accounts receivable associated with a discontinued business amounting to $9 million and related severance costs totaling $16 million, of which $6 million had been paid to employees and $10 million was accrued as of February 3, 2001.million. The severance costs covered approximately 2,100 employees.
F-13
The net assets of Fingerhut included within discontinued operations are as follows:
| February 2, | February 3, | |||||||
| 2002 | 2001 | |||||||
| (millions) | ||||||||
| Current assets | $ | 2,134 | $ | 2,292 | ||||
| Other assets | 265 | 582 | ||||||
| Current liabilities | (1,118 | ) | (261 | ) | ||||
| Total debt | (528 | ) | (1,133 | ) | ||||
| Other liabilities | (9 | ) | (44 | ) | ||||
| $ | 744 | $ | 1,436 | |||||
3. Acquisition
On July 9, 2001, the Company completed its acquisition of Liberty House, Inc. (“Liberty House”), a department store retailer operating 11 department stores and seven resort and specialty stores in Hawaii and one department store in Guam. The total purchase price of the Liberty House acquisition was approximately $200 million, includingconsisting of approximately $183 million of cash and the assumption of approximately $17 million of borrowed indebtedness. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Liberty House have been included in the Company’s results of operations from the date of acquisition and the purchase price has been allocated to Liberty House’s assets and liabilities based on their estimated fair values as of that date. The amount of goodwill and other identifiable intangibles related to the Liberty House acquisition amounted to $95$84 million. Such goodwill has not been amortized, in accordance with the provisions of SFAS No. 142.
4. Asset Impairment and Restructuring Charges
During the 52 weeks ended February 2, 2002, the Company incurred asset impairment and restructuring charges related to its department store business. These costs related primarily to the closing of its Stern’s department store division and subsequent integration into its Macy’s and Bloomingdale’s operations, the acquisition of Liberty House and subsequent integration into Macy’s and the reorganization of its department-store-related catalog and e-commerce operations.
The Company recorded $215 million of restructuring charges during 2001, including $53 million of inventory valuation adjustments, primarily related to discontinued merchandise lines, as a part of cost of sales.sales during 2001. The $53 million of inventory valuation adjustments includesincluded $33 million related to the Stern’s conversion, $17 million related to the Liberty House integration and $3 million related to the catalog and e-commerce reorganization. The remaining $162 millionThese inventory valuation adjustments consist of restructuring charges includes $38 millionmarkdowns on merchandise that was sold at Stern’s, Liberty House or through the Company’s catalog and e-commerce channels and that would not continue to be sold following the conversion of costs associated with converting the Stern’s stores into Macy’s (including store remodeling costs, advertising, credit card issuance and promotion and other name change expenses), $35 million of costs to close and sell certain Stern’s stores, $18 million of severance costs related to the Stern’s closure, $9 million of Stern’s duplicate central office costs, $10 million of cost associated with converting the Liberty House stores into Macy’s (including advertising, credit card issuance and promotionthe reorganization of the catalog and other name change expenses), $4 million of Liberty House duplicate central office costs, $40 million of fixed asset and capitalized software write-downse-commerce business.
F-14F-16
Asset impairment charges consist of:
| 52 Weeks Ended | 53 Weeks Ended | |||||||
| February 2, 2002 | February 3, 2001 | |||||||
| (millions) | ||||||||
| Catalog and e-commerce reorganization | $ | 40 | $ | – | ||||
| Stern’s store closures | 8 | 43 | ||||||
| Equity investments | 4 | 26 | ||||||
| Stern’s accounts receivable | – | 5 | ||||||
| $ | 52 | $ | 74 | |||||
During the 52 weeks ended February 2, 2002, asset impairment charges included fixed asset and capitalized software write-downs related to the catalog and e-commerce reorganization and $4 million of other exit costs associated withlosses on Stern’s stores which the catalogCompany expected to close and e-commerce reorganization.
Ofsell. Also during the $18 million of Stern’s severance costs, covering approximately 2,500 people, $16 million had been paid to employees and $2 million was accrued as of February 2, 2002. As of52 weeks ended February 2, 2002, $18 millionthe Company recorded a write-down of accruals relatedan investment as a result of the Company’s determination, based on uncertain financing alternatives and a comparison to market values of similar publicly traded businesses, that this equity investment was impaired on an other asset impairment and restructuring charges remained unpaid.than temporary basis.
During the 53 weeks ended February 3, 2001, the Company decided to close its Stern’s department store division, converting 19 of Stern’s 24 locations to Macy’s and Bloomingdales, and recorded asset impairment and restructuring charges totaling $54 million. Of this amount, $43 million relates to impairmentincluded losses ofon Stern’s stores which the Company expected to close and sell $5 million representsand an adjustment to the carrying value of certain accounts receivable whichthat would be uncollectable because of the division closing, and $6 million relates to lease termination and other liabilities for the stores the Company expected to close, none of which had been paid as of February 3, 2001.Stern’s closure. During this same period, the Company recorded a write-down of $26 million for certain venture capital investments as a result of the Company’s determination, based on uncertain financing alternatives and comparisons to their market value or market values of similar publicly traded businesses, that these equity investments were impaired on an other than temporary basis.
Restructuring charges consist of:
| 52 Weeks Ended | 53 Weeks Ended | |||||||
| February 2, 2002 | February 3, 2001 | |||||||
| (millions) | ||||||||
| Stern’s store conversions | $ | 38 | $ | – | ||||
| Stern’s severance | 18 | – | ||||||
| Stern’s lease obligations | 14 | 6 | ||||||
| Stern’s store closures | 13 | – | ||||||
| Stern’s duplicate central costs | 9 | – | ||||||
| Liberty House store conversions | 10 | – | ||||||
| Liberty House duplicate central costs | 4 | – | ||||||
| Catalog and e-commerce reorganization | 4 | – | ||||||
| $ | 110 | $ | 6 | |||||
During the 52 weeks ended February 2, 2002, restructuring charges included costs associated with converting the Stern’s stores into Macy’s (including store remodeling costs, advertising, credit card issuance and promotion and other name change expenses), severance costs related to the Stern’s closure, costs to close and sell certain Stern’s stores (including lease obligations and other store closing expenses), Stern’s duplicate central office costs, costs associated with converting the Liberty House stores into Macy’s
F-17
(including advertising, credit card issuance and promotion and other name change expenses), Liberty House duplicate central office costs and other exit costs associated with the catalog and e-commerce reorganization.
During the 53 weeks ended February 3, 2001, restructuring charges included costs to close and sell certain Stern’s stores, primarily related to lease obligations.
In general, the Company recorded restructuring charges as expenses when they were incurred. The only costs that were accrued at the time management committed to the store closure, store conversion or reorganization plans were severance costs and lease obligations related to the Stern’s closure, pursuant to EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”
The following table shows the activity associated with the Stern’s restructuring accruals:
| February 2, | Restructuring | February 1, | ||||||||||||||
| 2002 | Charges | Payments | 2003 | |||||||||||||
| (millions) | ||||||||||||||||
| Long-term lease obligations | $ | 18 | $ | – | $ | (4 | ) | $ | 14 | |||||||
| Severance | $ | 2 | $ | – | $ | (2 | ) | $ | – | |||||||
The $14 million reserve that the Company still expects to pay out relates to liabilities associated with the disposition of Stern’s properties.
| February 3, | Restructuring | February 2, | ||||||||||||||
| 2001 | Charges | Payments | 2002 | |||||||||||||
| (millions) | ||||||||||||||||
| Long-term lease obligations | $ | 6 | $ | 14 | $ | (2 | ) | $ | 18 | |||||||
| Severance | $ | – | $ | 18 | $ | (16 | ) | $ | 2 | |||||||
The $18 million reserve that the Company expected to pay out related to liabilities associated with the disposition of Stern’s properties. The 2001 restructuring charge for severance covered approximately 2,500 people and the remaining accrual at February 2, 2002 related to approximately 50 people.
5. Extraordinary Item
The extraordinary item for the 52 weeks ended February 2, 2002 represents costs of $16 million, net of income tax benefit of $6 million, associated with the repurchase of the $350 million 6.125% Term Enhanced ReMarketable Securities.
F-18
6. Accounts Receivable
| February 2, | February 3, | February 1, | February 2, | |||||||||||||
| 2002 | 2001 | 2003 | 2002 | |||||||||||||
| (millions) | (millions) | |||||||||||||||
| Due from customers | $ | 2,305 | $ | 2,291 | ||||||||||||
| Due from proprietary credit card holders | $ | 2,232 | $ | 2,305 | ||||||||||||
| Less allowance for doubtful accounts | 85 | 79 | ||||||||||||||
| 2,147 | 2,226 | |||||||||||||||
| Due from non-proprietary credit card holders | 667 | – | ||||||||||||||
| Less allowance for doubtful accounts | 79 | 71 | 20 | – | ||||||||||||
| 2,226 | 2,220 | 647 | – | |||||||||||||
| Other receivables | 153 | 215 | 151 | 153 | ||||||||||||
| $ | 2,379 | $ | 2,435 | $ | 2,945 | $ | 2,379 | |||||||||
Sales through the Company’s proprietary credit plans were $4,128 million for the 52 weeks ended February 1, 2003, $4,154 million for the 52 weeks ended February 2, 2002 and $4,384 million for the 53 weeks ended February 3, 2001 and $4,245 million for the 52 weeks ended January 29, 2000.2001. The credit plans relating to certain operations of the Company are owned by a third party. Finance charge income related to proprietary credit card holders amounted to $353 million for the 52 weeks ended February 1, 2003, $361 million for the 52 weeks ended February 2, 2002 and $349 million and for the 53 weeks ended February 3, 20012001. Subsequent to July 5, 2002, finance charge income related to non-proprietary credit card holders amounted to $33 million. Prior to July 5, 2002 under the financing arrangement related to the Company’s non-proprietary credit card receivables, all transfers of the Company’s non-proprietary credit card receivables to a trust qualified for sale treatment and $327 million andtherefore were accounted for as off-balance sheet financing transactions (see Note 10).
Changes in the 52 weeks ended January 29, 2000.allowance for doubtful accounts related to proprietary credit card holders are as follows:
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | ||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | ||||||||||
| (millions) | ||||||||||||
| Balance, beginning of year | $ | 79 | $ | 71 | $ | 63 | ||||||
| Charged to costs and expenses | 143 | 128 | 106 | |||||||||
| Net uncollectible balances written off | (137 | ) | (120 | ) | (98 | ) | ||||||
| Balance, end of year | $ | 85 | $ | 79 | $ | 71 | ||||||
F-15Changes in the allowance for doubtful accounts related to non-proprietary credit card holders are as follows:
| 52 Weeks Ended | ||||
| February 1, 2003 | ||||
| (millions) | ||||
| Balance, at consolidation | $ | 20 | ||
| Charged to costs and expenses | 17 | |||
| Net uncollectible balances written-off | (17 | ) | ||
| Balance, end of year | $ | 20 | ||
F-19
Changes in the allowance for doubtful accounts are as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | ||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | ||||||||||
| (millions) | ||||||||||||
| Balance, beginning of year | $ | 71 | $ | 63 | $ | 77 | ||||||
| Charged to costs and expenses | 128 | 106 | 83 | |||||||||
| Net uncollectible balances written off | (120 | ) | (98 | ) | (97 | ) | ||||||
| Balance, end of year | $ | 79 | $ | 71 | $ | 63 | ||||||
7. Inventories
Merchandise inventories were $3,359 million at February 1, 2003, compared to $3,376 million at February 2, 2002, compared to $3,626 million at February 3, 2001.2002. At these dates, the cost of inventories using the LIFO method approximated the cost of such inventories using the FIFO method. The application of the LIFO method did not impact cost of sales for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 or the 53 weeks ended February 3, 2001 or the 52 weeks ended January 29, 2000.2001.
8. Properties and Leases
| February 2, | February 3, | February 1, | February 2 | |||||||||||||||
| 2002 | 2001 | 2003 | 2002 | |||||||||||||||
| (millions) | (millions) | |||||||||||||||||
| Land | Land | $ | 972 | $ | 992 | Land | $ | 956 | $ | 972 | ||||||||
| Buildings on owned land | Buildings on owned land | 2,387 | 2,347 | Buildings on owned land | 2,366 | 2,387 | ||||||||||||
| Buildings on leased land and leasehold improvements | Buildings on leased land and leasehold improvements | 1,674 | 1,698 | Buildings on leased land and leasehold improvements | 1,694 | 1,674 | ||||||||||||
| Fixtures and equipment | Fixtures and equipment | 4,257 | 4,095 | Fixtures and equipment | 4,419 | 4,257 | ||||||||||||
| Leased properties under capitalized leases | Leased properties under capitalized leases | 81 | 73 | Leased properties under capitalized leases | 84 | 81 | ||||||||||||
| 9,371 | 9,205 | 9,519 | 9,371 | |||||||||||||||
| Less accumulated depreciation and amortization | 2,865 | 2,584 | Less accumulated depreciation and amortization | 3,140 | 2,865 | |||||||||||||
| $ | 6,506 | $ | 6,621 | $ | 6,379 | $ | 6,506 | |||||||||||
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. Certain of the Company’s real estate leases have terms that extend for significant numbers of years and provide for rental rates that increase over time. In addition, certain of these leases contain covenants that restrict the ability of the tenant (typically a subsidiary of the Company) to take specified actions (including the payment of dividends or other amounts on account of its capital stock) unless the tenant satisfies certain financial tests.
F-16F-20
Minimum rental commitments (excluding executory costs) at February 2, 2002,1, 2003, for noncancellable leases are:
| Capitalized | Operating | Capitalized | Operating | |||||||||||||||||||||||
| Leases | Leases | Total | Leases | Leases | Total | |||||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||||
| Fiscal year: | Fiscal year: | Fiscal year: | ||||||||||||||||||||||||
| 2002 | $ | 12 | $ | 162 | $ | 174 | 2003 | $ | 11 | $ | 162 | $ | 173 | |||||||||||||
| 2003 | 11 | 155 | 166 | 2004 | 11 | 159 | 170 | |||||||||||||||||||
| 2004 | 10 | 149 | 159 | 2005 | 9 | 149 | 158 | |||||||||||||||||||
| 2005 | 9 | 139 | 148 | 2006 | 8 | 151 | 159 | |||||||||||||||||||
| 2006 | 7 | 142 | 149 | 2007 | 8 | 145 | 153 | |||||||||||||||||||
| After 2006 | 51 | 1,924 | 1,975 | After 2007 | 69 | 1,943 | 2,012 | |||||||||||||||||||
| Total minimum lease payments | Total minimum lease payments | 100 | $ | 2,671 | $ | 2,771 | Total minimum lease payments | 116 | $ | 2,709 | $ | 2,825 | ||||||||||||||
| Less amount representing interest | Less amount representing interest | 43 | Less amount representing interest | 56 | ||||||||||||||||||||||
| Present value of net minimum capitalized lease payments | Present value of net minimum capitalized lease payments | $ | 57 | Present value of net minimum capitalized lease payments | $ | 60 | ||||||||||||||||||||
Capitalized leases are included in the Consolidated Balance Sheets as property and equipment while the related obligation is included in short-term ($6 million) and long-term ($5154 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 $1 million on capitalized leases and $43$40 million on operating leases.
Rental expense consists of:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||||||
| Real estate (excluding executory costs) | Real estate (excluding executory costs) | Real estate (excluding executory costs) | ||||||||||||||||||||||||||
| Capitalized leases – | Capitalized leases – | |||||||||||||||||||||||||||
| Contingent rentals | $ | 2 | $ | 3 | $ | 3 | Contingent rentals | $ | 2 | $ | 2 | $ | 3 | |||||||||||||||
| Operating leases – | Operating leases – | |||||||||||||||||||||||||||
| Minimum rentals | 160 | 159 | 142 | Minimum rentals | 168 | 160 | 159 | |||||||||||||||||||||
| Contingent rentals | 22 | 21 | 23 | Contingent rentals | 20 | 22 | 21 | |||||||||||||||||||||
| 184 | 183 | 168 | 190 | 184 | 183 | |||||||||||||||||||||||
| Less income from subleases – | Less income from subleases - | |||||||||||||||||||||||||||
| Capitalized leases | 2 | 3 | 3 | Capitalized leases | 1 | 2 | 3 | |||||||||||||||||||||
| Operating leases | 20 | 22 | 20 | Operating leases | 20 | 20 | 22 | |||||||||||||||||||||
| 22 | 25 | 23 | 21 | 22 | 25 | |||||||||||||||||||||||
| $ | 162 | $ | 158 | $ | 145 | $ | 169 | $ | 162 | $ | 158 | |||||||||||||||||
| Personal property — Operating leases | Personal property — Operating leases | $ | 22 | $ | 23 | $ | 21 | Personal property — Operating leases | $ | 17 | $ | 22 | $ | 23 | ||||||||||||||
F-17F-21
9. Goodwill and Other Intangible Assets
| February 2, | February 3, | |||||||
| 2002 | 2001 | |||||||
| (millions) | ||||||||
| Goodwill | $ | 508 | $ | 415 | ||||
| Identifiable intangibles | 460 | 458 | ||||||
| 968 | 873 | |||||||
| Less accumulated amortization | 285 | 256 | ||||||
| $ | 683 | $ | 617 | |||||
Effective February 3, 2002, the Company adopted SFAS No. 142,“Goodwill has beenand Other Intangible Assets.” Upon adoption, the Company ceased amortizing goodwill and indefinite lived intangible assets and determined that an impairment loss was not present. Impairment will be examined on an annual basis and more frequently if certain indicators are encountered. Intangible assets with determinable useful lives will continue to be amortized on a straight-line basis over its estimated useful life, ranging from 20 to 40 years. Identifiable intangibles include tradenames and customer lists and have been amortized on a straight-line basis over their estimated useful lives, ranging from 7 to 40 years. The Company reviews the carrying value of goodwill and other intangibles for impairment whenever significant events or changes occur which might impair recovery of recorded asset costs.lives.
The Company recorded $94$43 million of tax benefits as a reduction to goodwill during the 5352 weeks ended February 3, 20011, 2003 (see Note 12).
Upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,”The following summarizes the Company will discontinue the practice of amortizingCompany’s goodwill and indefinite livedother intangible assets and will initiate an annual review for impairment. Impairment will be examined more frequently if certain indicatorsamortization expense:
| February 1, | February 2, | ||||||||
| 2003 | 2002 | ||||||||
| (millions) | |||||||||
| Amortizing intangible assets | |||||||||
| Customer lists | $ | 2 | $ | 2 | |||||
| Less accumulated amortization | – | – | |||||||
| $ | 2 | $ | 2 | ||||||
| Non-amortizing intangible assets | |||||||||
| Goodwill | $ | 262 | $ | 305 | |||||
| Tradenames | 376 | 376 | |||||||
| $ | 638 | $ | 681 | ||||||
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||
| (millions) | |||||||||||||
| Amortization expense | |||||||||||||
| Continuing operations | $ | – | $ | 28 | $ | 31 | |||||||
| Discontinued operations | – | 22 | 43 | ||||||||||
| $ | – | $ | 50 | $ | 74 | ||||||||
The customer lists are encountered. Intangible assets with a determinablebeing amortized over their estimated useful life will continue to be amortized over that period.of 7 years.
F-22
ApplicationThe following is an illustration of the nonamortization provisions of SFAS No. 142, beginning in the first quarter of 2002, is expected to result in reductions to annual goodwill amortization of $28 million and an increase in annualimpact on income from continuing operations of approximately $24 million.and net income, including discontinued operations, as if SFAS No. 142 was effective beginning January 30, 2000:
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||
| (millions, except per share data) | |||||||||||||
| Income from continuing operations | |||||||||||||
| Reported income from continuing operations | $ | 638 | $ | 518 | $ | 821 | |||||||
| Intangible asset and goodwill amortization | – | 24 | 27 | ||||||||||
| Adjusted income from continuing operations | $ | 638 | $ | 542 | $ | 848 | |||||||
| Basic earnings per share: | |||||||||||||
| Reported income from continuing operations | $ | 3.23 | $ | 2.65 | $ | 4.01 | |||||||
| Intangible asset and goodwill amortization | – | .12 | .13 | ||||||||||
| Adjusted income from continuing operations | $ | 3.23 | $ | 2.77 | $ | 4.14 | |||||||
| Diluted earnings per share: | |||||||||||||
| Reported income from continuing operations | $ | 3.21 | $ | 2.59 | $ | 3.97 | |||||||
| Intangible asset and goodwill amortization | – | .12 | .13 | ||||||||||
| Adjusted income from continuing operations | $ | 3.21 | $ | 2.71 | $ | 4.10 | |||||||
| Net income (loss) | |||||||||||||
| Reported net income (loss) | $ | 818 | $ | (276 | ) | $ | (184 | ) | |||||
| Intangible asset and goodwill amortization | – | 37 | 58 | ||||||||||
| Adjusted net income (loss) | $ | 818 | $ | (239 | ) | $ | (126 | ) | |||||
| Basic earnings (loss) per share: | |||||||||||||
| Reported net income (loss) | $ | 4.15 | $ | (1.41 | ) | $ | (.90 | ) | |||||
| Intangible asset and goodwill amortization | – | .19 | .28 | ||||||||||
| Adjusted net income (loss) | $ | 4.15 | $ | (1.22 | ) | $ | (.62 | ) | |||||
| Diluted earnings (loss) per share: | |||||||||||||
| Reported net income (loss) | $ | 4.12 | $ | (1.38 | ) | $ | (.89 | ) | |||||
| Intangible asset and goodwill amortization | – | .19 | .28 | ||||||||||
| Adjusted net income (loss) | $ | 4.12 | $ | (1.19 | ) | $ | (.61 | ) | |||||
F-18F-23
10. Financing
The Company’s debt excluding the debt of Fingerhut which is included in discontinued operations, was as follows:
| February 2, | February 3, | February 1, | February 2, | |||||||||||||||
| 2002 | 2001 | 2003 | 2002 | |||||||||||||||
| (millions) | (millions) | |||||||||||||||||
| Short-term debt: | Short-term debt: | Short-term debt: | ||||||||||||||||
| Receivables backed financings | $ | 598 | $ | 609 | ||||||||||||||
| 8.125% Senior Notes due 2002 | 400 | – | ||||||||||||||||
| Capital lease and other short-term obligations | 14 | 8 | Receivables backed financings | $ | 486 | $ | 598 | |||||||||||
| 6.125% Term Enhanced ReMarketable Securities | – | 350 | 8.5% Senior Notes due 2003 | 450 | – | |||||||||||||
| 10.0% Senior Notes due 2001 | – | 110 | 8.125% Senior Notes due 2002 | – | 400 | |||||||||||||
| Commercial Paper Program | – | 40 | Capital lease and other short-term obligations | 10 | 14 | |||||||||||||
| $ | 1,012 | $ | 1,117 | $ | 946 | $ | 1,012 | |||||||||||
| Long-term debt: | Long-term debt: | Long-term debt: | ||||||||||||||||
| Receivables backed financings | $ | 400 | $ | 997 | Receivables backed financings | $ | 400 | $ | 400 | |||||||||
| 6.625% Senior notes due 2008 | 500 | – | 6.625% Senior notes due 2008 | 500 | 500 | |||||||||||||
| 6.625% Senior notes due 2011 | 500 | – | 6.625% Senior notes due 2011 | 500 | 500 | |||||||||||||
| 8.5% Senior notes due 2003 | 450 | 450 | 6.9% Senior debentures due 2029 | 400 | 400 | |||||||||||||
| 6.9% Senior debentures due 2029 | 400 | 400 | 6.3% Senior notes due 2009 | 350 | 350 | |||||||||||||
| 6.3% Senior notes due 2009 | 350 | 350 | 8.5% Senior notes due 2010 | 350 | 350 | |||||||||||||
| 8.5% Senior notes due 2010 | 350 | 350 | 7.45% Senior debentures due 2017 | 300 | 300 | |||||||||||||
| 7.45% Senior debentures due 2017 | 300 | 300 | 7.0% Senior debentures due 2028 | 300 | 300 | |||||||||||||
| 7.0% Senior debentures due 2028 | 300 | 300 | 6.79% Senior debentures due 2027 | 250 | 250 | |||||||||||||
| 6.79% Senior debentures due 2027 | 250 | 250 | 8.5% Senior notes due 2003 | – | 450 | |||||||||||||
| 8.125% Senior notes due 2002 | – | 400 | Capital lease and other long-term obligations | 58 | 59 | |||||||||||||
| Capital lease and other long-term obligations | 59 | 48 | ||||||||||||||||
| $ | 3,408 | $ | 3,859 | |||||||||||||||
| $ | 3,859 | $ | 3,845 | |||||||||||||||
Interest expense was as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||
| Interest on debt | $ | 321 | $ | 318 | $ | 310 | $ | 301 | $ | 321 | $ | 318 | ||||||||||||
| Amortization of financing costs | 7 | 6 | 6 | 5 | 7 | 6 | ||||||||||||||||||
| Interest on capitalized leases | 6 | 7 | 7 | 6 | 6 | 7 | ||||||||||||||||||
| 334 | 331 | 323 | 312 | 334 | 331 | |||||||||||||||||||
| Less interest capitalized on construction | 3 | 4 | 3 | 1 | 3 | 4 | ||||||||||||||||||
| $ | 331 | $ | 327 | $ | 320 | $ | 311 | $ | 331 | $ | 327 | |||||||||||||
F-19F-24
Future maturities of long-term debt, other than capitalized leases, are shown below:
| (millions) | |||||
| Fiscal year: | |||||
| 2003 | $ | 453 | |||
| 2004 | 252 | ||||
| 2005 | 402 | ||||
| 2006 | 1 | ||||
| 2007 | – | ||||
| After 2007 | 2,700 | ||||
| (millions) | |||||
| Fiscal year: | |||||
| 2004 | $ | 251 | |||
| 2005 | 402 | ||||
| 2006 | 1 | ||||
| 2007 | – | ||||
| 2008 | 500 | ||||
| After 2008 | 2,200 | ||||
The information set forth in the preceding table assumes that holders of the 6.79% senior debentures due 2027 will elect to have such debentures repaid in full in 2004.
During the 52 weeks ended February 2, 2002,1, 2003, the Company issued debt totaling $1,000 million, consisting of $500repaid $1,015 million of 6.625% Senior Notes due 2008 and $500 million of 6.625% Senior Notes due 2011. The Company repaid debt of $1,140 million in 2001,borrowings, consisting principally of $649$598 million of net short-term borrowings, the $350 million 6.125% Term Enhanced ReMarketable Securitiesreceivables backed financings and $110$400 million of 10%8.125% Senior Notes.
During July 2002, in connection with the extension of the financing arrangement related to the Company’s non-proprietary credit card receivables, the Company’s special purpose subsidiary took certain actions which resulted in the consolidation of the Prime Credit Card Master Trust II (“Trust II”) for financial reporting purposes. In particular, the documentation governing the arrangement was amended to provide the Company’s special purpose subsidiary the ability to unilaterally remove transferred assets from Trust II. Under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” this amendment disqualified the arrangement for sale treatment and requires secured borrowing treatment for all sales of the Company’s non-proprietary credit card receivables pursuant to this arrangement. The principal assets and liabilities of Trust II consist of non-proprietary credit card receivables transferred by the Company to Trust II in transactions previously accounted for as sales under SFAS No. 140 and the related debt issued by Trust II. As a result of the Company’s actions, the transfer of receivables and debt are being treated as secured borrowings as of and subsequent to July 5, 2002. All assets and liabilities of Trust II were consolidated at fair value. These actions increased the Company’s consolidated assets and debt by $479 million at July 5, 2002.
The Company’s bank credit agreements require the Company to maintain certain financial ratios. At February 2, 2002,1, 2003, the Company was well withinin compliance with these covenants.requirements by significant margins. Management believes that the likelihood of the Company defaulting on a debt covenant is not probableremote absent any material negative event affecting the U.S. economy as a whole. However, if the Company’s results of operations or operating ratios deteriorate to a point where the Company is not in compliance with any of its debt covenants and the Company is unable to obtain a waiver, much of the Company’s debt would be in default and callable.could become due and payable immediately.
F-25
The following summarizes certain components of the Company’s debt:
Receivables Backed Financings
Receivables backed financings classified as short-term debt consistThe Company finances its proprietary credit card receivables, which arise solely from sales originated in the conduct of current amounts due under certain receivables backedthe Company’s retail operations, using on-balance sheet financing arrangements, including term receivables-backed certificates issued by a subsidiary of the Company together with receivables backedreceivables-backed commercial paper issued by another subsidiary of the Company. At February 1, 2003, these arrangements included a $375 million asset-backed commercial paper program. Under the $375 million commercial paper program, a special purpose subsidiary of the Company issues commercial paper backed by a Class A Variable Funding Certificate issued out of the Prime Credit Card Master Trust (the “Trust”) which holds the proprietary receivables. If the subsidiary is unable to issue commercial paper to fund maturities of outstanding commercial paper, it has a liquidity facility with a number of banks which will fund loans in order to repay the commercial paper. The commercial paper investors have no recourse back to the Company. As of February 1, 2003, and February 2, 2002, there was no such commercial paper or loan outstanding.
At February 1, 2003, these arrangements also included $400 million of receivables backed certificates representing undivided interests in the Trust. Investors in this debt have no recourse back to the Company. This debt is classified as long-term debt, bears interest at 6.7% and matures in November 2005.
The Company finances its non-proprietary credit card receivables, which arise from transactions originated by merchants that accept third-party credit cards issued by the Company’s FDS Bank subsidiary, using on-balance sheet financing arrangements. Under these arrangements, a special purpose subsidiary of the Company sells Class A and Class B Variable Funding Certificates issued out of Trust II which holds the non-proprietary receivables to three unrelated bank commercial paper conduit programs. The commercial paper conduit programs have agreed to purchase certificates of up to $700 million in the aggregate. Receivables-backed financings classified as short-term debt at February 1, 2003, consist of $486 million of debt under these arrangements with an average interest rate of 1.4%.
The entire proprietary and non-proprietary accounts receivable portfolios are used to secure the applicable receivables-backed financing programs.
Prior to July 2002, the financing of the Company’s non-proprietary credit card receivables was through an off-balance sheet sale arrangement. Under this arrangement, FDS Bank, a subsidiary of the Company, (of which none and $370 million were outstanding as of February 2, 2002 and February 3, 2001, respectively). At February 2, 2002, the short-termsold its non-proprietary credit card receivables backed financings bear interest at 6.76%. Receivables backed financings classified as long-term debt consist of receivables backed certificates issued by ato another wholly-owned special purpose subsidiary of the Company which certificates represent undividedin turn transferred the purchased receivables to Trust II, a bankruptcy-remote, qualified special purpose entity. A special purpose subsidiary of the Company had sold certain interests in Trust II to unrelated bank commercial paper conduit programs. Proceeds from these sales plus excess cash flow from Trust II were used to buy the receivables from FDS Bank. The two commercial paper conduit programs had agreed to buy interests of up to $600 million in the aggregate. These interests were variable and fluctuated with the level of receivables. Trust II had issued three classes of certificates: Class A, Class B and Class C certificates. The bank conduit programs held the Class A and Class B certificates and the Company’s special purpose subsidiary retained the Class C certificates, which were subordinated interests that served as a mastercredit enhancement to the Class A and Class B certificates
F-26
and exposed the Company’s retained trust originatedassets to possible credit losses. The Company’s special purpose subsidiary also held a required 2% seller’s interest and the residual interest in the trust. The investors and the trust had no recourse against the Company beyond the trust assets. In order to maintain the committed level of securitized assets, the Company’s special purpose subsidiary reinvested cash collections on securitized accounts in additional balances. During the period that the non-proprietary credit card receivables were financed off-balance sheet in the 52 weeks ended February 1, 2003, proceeds from collections which were reinvested amounted to $1,336 million. During the 52 weeks ended February 2, 2002, proceeds from collections which were reinvested amounted to $3,057 million.
Prior to July 2002, the issuance of the certificates to outside investors was considered to be a sale, which resulted in an immaterial gain to the Company. The Company also retained servicing responsibilities for which it received annual servicing fees, approximating 2% of the outstanding balances. During the period that the non-proprietary credit card receivables were financed off-balance sheet in the 52 weeks ended February 1, 2003, $5 million of servicing fees were received. During the 52 weeks ended February 2, 2002, $12 million of servicing fees were received.
The Company’s special purpose subsidiary intended to hold its Class��C certificates and contractually required seller’s interest to maturity. The residual interest was considered available-for-sale. Due to the revolving nature of the underlying credit card receivables, the high principal payment rate and the reserve for anticipated credit losses, the carrying value of the retained interest in transferred credit card receivables approximated fair value and was included in other assets. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed during the 52 weeks ended February 1, 2003 and February 2, 2002 include the estimated payment rate, anticipated credit losses and the discount rate applied to the residual cash flows. During the period that the non-proprietary credit card receivables were financed off-balance sheet in the 52 weeks ended February 1, 2003, the weighted average estimated payment rate was 44.2%, the anticipated credit losses averaged 5.3% and the discount rate used on the residual cash flows was 10.2%. For the 52 weeks ended February 2, 2002, the weighted average estimated payment rate was 42.1%, the anticipated credit losses averaged 5.2% and the discount rate used on the residual cash flows was 10.5%.
As of February 2, 2002, the securitized non-proprietary credit card balances were $630 million, the related retained interest included in other assets was $111 million and purchased interests of $500 million were held by such subsidiary, bear interest at 6.70% and mature in November 2005.third parties under this off-balance sheet arrangement.
Bank Credit Agreements
The Company and certain financial institutions are parties to (i) the Five-Year Credit Agreement, pursuant to which such financial institutions have provided the Company with a $1,200 million revolving loan facility which expires June 29, 2006 (the “Five-Year Facility”) and (ii) the 364-Day Credit Agreement, pursuant to which such financial institutions have provided the Company with a $400 million revolving loan facility which expires June 28, 2002,27, 2003, and must be extended annually (the “364-Day Facility” and, together with the Five-Year Facility, the “Revolving Loan Facilities”). The Company’s obligations under the Revolving Loan Facilities are not secured or guaranteed.
F-20F-27
As of February 2, 20021, 2003 and February 3, 2001,2, 2002, there were no revolving credit loans outstanding under the Revolving Loan Facilities. However, there were $46$31 million and $45$46 million of standby letters of credit outstanding under the Revolving Loan Facilities at February 2, 20021, 2003 and February 3, 2001,2, 2002, respectively. Revolving loans under the Revolving Loan Facilities bear interest based on various published rates.
Commercial Paper
The Company established a $1,600 million program for the issuance from time to time of unsecured commercial paper. The issuance of commercial paper under the program will have the effect, while such commercial paper is outstanding, of reducing the Company’s borrowing capacity under the Revolving Loan Facilities by an amount equal to the principal amount of such commercial paper. As of February 1, 2003 and February 2, 2002, and February 3, 2001, there was none and $40 million, respectively, ofno such commercial paper outstanding.
Senior Notes and Debentures
The senior notes and the senior debentures are unsecured obligations of the Company. The holders of the senior debentures due 2027 may elect to have such debentures repaid on July 15, 2004 at 100% of the principal amount thereof, together with accrued and unpaid interest to the date of repayment.
Other Financing Arrangements
In addition to the financing arrangements discussed above, the Company entered into arrangements providing for off balance sheet financing of up to $600 million of non-proprietary credit card receivables arising under accounts owned by the Company.
In order to facilitate comparisons with major competitors, the Company structured and finances its non-proprietary credit card receivables using an off-balance sheet arrangement which currently is set to expire in 2002. However, the Company intends to extend the arrangement. Under this arrangement, FDS Bank, a subsidiary of the Company, sells its non-proprietary credit card receivables to a wholly-owned special purpose entity which in turn transfers the purchased receivables to a bankruptcy-remote, qualified special purpose entity (the “trust”). The special purpose entity has sold interests in the trust to two unrelated bank commercial paper conduit programs. Proceeds from this sale plus excess cash flow from the trust are used to buy the receivables from FDS Bank. The two commercial paper conduit programs have agreed to buy interests in the trust of up to $600 million in the aggregate. These interests are variable and fluctuate with the level of receivables. The trust has issued three classes of certificates: Class A, Class B and Class C certificates. The bank conduit programs hold the Class A and Class B certificates and the Company holds the Class C certificates, which are subordinated interests that serve as a credit enhancement to the Class A and Class B certificates and expose the Company’s retained trust assets to possible credit losses. The Company also holds a required 2% seller’s interest and the residual interest in the trust. The investors and the trust have no recourse against the Company beyond the trust assets. In order to maintain the committed level of securitized assets, the Company reinvests cash collections on securitized accounts in additional balances. During the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001, proceeds from collections which were reinvested amounted to $3,057 million and $2,734 million, respectively.
F-21
The issuance of the certificates to outside investors is considered to be a sale, which results in an immaterial gain to the Company. The Company also retains servicing responsibilities for which it receives annual servicing fees, approximating 2% of the outstanding balances. During the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001, $12 million and $11 million, respectively, of servicing fees were received.
As of February 2, 2002, the securitized non-proprietary credit card balances were $630 million and the related retained interest included in other assets was $111 million. As of February 3, 2001, the securitized non-proprietary credit card balances were $580 million and the related retained interest included in other assets was $80 million. For the 52 weeks ended February 2, 2002, the net charge-offs related to the non-proprietary credit card receivables were $24 million and the delinquency rate at February 2, 2002 was 3.0%. For the 53 weeks ended February 3, 2001, the net charge-offs related to the non-proprietary credit card receivables were $19 million and the delinquency rate at February 3, 2001 was 2.6%.
The Company intends to hold its Class C certificates and contractually required seller’s interest to maturity. The residual interest is considered available-for-sale. Due to the revolving nature of the underlying credit card receivables, the high principal payment rate and the reserve for anticipated credit losses, the carrying value of the Company’s retained interest in transferred credit card receivables approximates fair value and is included in other assets. Key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed during the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 include the estimated payment rate, anticipated credit losses and the discount rate applied to the residual cash flows. The weighted average estimated payment rate was 42.1% for the 52 weeks ended February 2, 2002 and 42.7% for the 53 weeks ended February 3, 2001, anticipated credit losses averaged 5.2% for the 52 weeks ended February 2, 2002 and 4.4% for the 53 weeks ended February 3, 2001 and the discount rate used on the residual cash flows was 10.5% for the 52 weeks ended February 2, 2002 and 11.0% for the 53 weeks ended February 3, 2001.
For each 0.1 percentage point change in anticipated credit losses, the Company’s retained interest in securitized receivables at February 2, 2002 would change by $1 million. The anticipated credit losses are the primary variable assumption that is subject to a sensitivity analysis.
As of February 2, 2002 and February 3, 2001, purchased interests of $500 million and $484 million, respectively, were held by third parties under this off-balance sheet arrangement.
There were also $22 million and $32 million of trade letters of credit outstanding at February 2, 20021, 2003 and February 3, 2001, respectively.
F-22
11. Accounts Payable and Accrued Liabilities
| February 2, | February 3, | February 1, | February 2, | |||||||||||||
| 2002 | 2001 | 2003 | 2002 | |||||||||||||
| (millions) | (millions) | |||||||||||||||
| Merchandise and expense accounts payable | $ | 1,677 | $ | 1,724 | $ | 1,568 | $ | 1,677 | ||||||||
| Liabilities to customers | 378 | 359 | 394 | 378 | ||||||||||||
| Taxes other than income taxes | 103 | 107 | 110 | 103 | ||||||||||||
| Accrued wages and vacation | 93 | 94 | 92 | 93 | ||||||||||||
| Accrued interest | 80 | 69 | 66 | 80 | ||||||||||||
| Other | 314 | 289 | 354 | 314 | ||||||||||||
| $ | 2,645 | $ | 2,642 | $ | 2,584 | $ | 2,645 | |||||||||
Liabilities to customers include an estimated allowance for future sales returns of $43$42 million and $42$43 million at February 2, 20021, 2003 and February 3, 2001,2, 2002, respectively. Adjustments to the allowance for future sales returns, which amounted to a credit of $1 million for the 52 weeks ended February 1, 2003, a charge of $1 million for the 52 weeks ended February 2, 2002 and January 29, 2000 and a credit of $1 million for the 53 weeks ended February 3, 2001, are reflected in cost of sales. Included in other liabilities at February 1, 2003 is $6 million of severance, related to the Rich’s-Macy’s consolidation, to be paid in conjunction with an ongoing benefit arrangement.
12. Taxes
Income tax expense is as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | ||||||||||||||||||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | ||||||||||||||||||||||||||||||||||
| Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | ||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||
| Federal | $ | 263 | $ | (51 | ) | $ | 212 | $ | 474 | $ | (23 | ) | $ | 451 | $ | 581 | $ | (118 | ) | $ | 463 | |||||||||||||||
| State and local | 60 | (10 | ) | 50 | 98 | – | 98 | 109 | (11 | ) | 98 | |||||||||||||||||||||||||
| $ | 323 | $ | (61 | ) | $ | 262 | $ | 572 | $ | (23 | ) | $ | 549 | $ | 690 | $ | (129 | ) | $ | 561 | ||||||||||||||||
F-23F-28
12. Taxes
Income tax expense is as follows:
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | ||||||||||||||||||||||||||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | ||||||||||||||||||||||||||||||||||
| Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | ||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||
| Federal | $ | 386 | $ | (50 | ) | $ | 336 | $ | 263 | $ | (51 | ) | $ | 212 | $ | 474 | $ | (23 | ) | $ | 451 | |||||||||||||||
| State and local | 86 | (12 | ) | 74 | 60 | (10 | ) | 50 | 98 | – | 98 | |||||||||||||||||||||||||
| $ | 472 | $ | (62 | ) | $ | 410 | $ | 323 | $ | (61 | ) | $ | 262 | $ | 572 | $ | (23 | ) | $ | 549 | ||||||||||||||||
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, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 and the 52 weeks ended January 29, 2000 to income from continuing operations before income taxes and extraordinary item. The reasons for this difference and their tax effects are as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||
| Expected tax | $ | 273 | $ | 480 | $ | 485 | $ | 367 | $ | 273 | $ | 480 | ||||||||||||
| State and local income taxes, net of federal income tax benefit | 37 | 63 | 64 | 48 | 37 | 63 | ||||||||||||||||||
| Permanent difference arising from the amortization of intangible assets | 6 | 7 | 9 | – | 6 | 7 | ||||||||||||||||||
| Disposition of a subsidiary | (44 | ) | – | – | – | (44 | ) | – | ||||||||||||||||
| Other | (10 | ) | (1 | ) | 3 | (5 | ) | (10 | ) | (1 | ) | |||||||||||||
| $ | 262 | $ | 549 | $ | 561 | $ | 410 | $ | 262 | $ | 549 | |||||||||||||
In connection with the Stern’s restructuring, income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Company’s investment in Stern’s Department Stores, Inc. upon disposition.
F-29
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 2, | February 3, | February 1, | February 2, | |||||||||||||||||
| 2002 | 2001 | 2003 | 2002 | |||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||
| Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | ||||||||||||||||||
| Operating loss carryforwards | $ | 60 | $ | 46 | Operating loss carryforwards | $ | 142 | $ | 60 | |||||||||||
| Accrued liabilities accounted for on a cash basis for tax purposes | 181 | 148 | Post employment and postretirement benefits | 243 | 195 | |||||||||||||||
| Postretirement benefits other than pensions | 135 | 145 | Accrued liabilities accounted for on a cash basis for tax purposes | 192 | 181 | |||||||||||||||
| Allowance for doubtful accounts | 58 | 31 | Allowance for doubtful accounts | 64 | 58 | |||||||||||||||
| Capitalized lease debt | 21 | 24 | Capitalized lease debt | 24 | 21 | |||||||||||||||
| Other | 171 | 114 | Other | 105 | 111 | |||||||||||||||
| Total gross deferred tax assets | 626 | 508 | Total gross deferred tax assets | 770 | 626 | |||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | Deferred tax liabilities: | ||||||||||||||||||
| Excess of book basis over tax basis of property and equipment | (1,304 | ) | (1,319 | ) | Excess of book basis over tax basis of property and equipment | (1,310 | ) | (1,304 | ) | |||||||||||
| Merchandise inventories | (151 | ) | (141 | ) | Merchandise inventories | (197 | ) | (151 | ) | |||||||||||
| Deductible intangibles | (124 | ) | (126 | ) | Deductible intangibles | (125 | ) | (124 | ) | |||||||||||
| Prepaid pension expense | (93 | ) | (69 | ) | Prepaid pension expense | – | (93 | ) | ||||||||||||
| Other | (278 | ) | (211 | ) | Other | (126 | ) | (278 | ) | |||||||||||
| Total gross deferred tax liabilities | (1,950 | ) | (1,866 | ) | Total gross deferred tax liabilities | (1,758 | ) | (1,950 | ) | |||||||||||
| Net deferred tax liability | $ | (1,324 | ) | $ | (1,358 | ) | Net deferred tax liability | $ | (988 | ) | $ | (1,324 | ) | |||||||
F-24
During the year52 weeks ended February 3, 2001,1, 2003, the Company recorded an additional $94$43 million of tax benefits related to an acquired enterprise’s net operating loss carryforwards (“NOLs”) and reduced goodwill accordingly. As of February 2, 2002,1, 2003, the Company had NOLs of approximately $171$407 million which are available through 2009.
13. Retirement Plans
The Company has a defined benefit plan (“Pension Plan”) and a defined contribution plan (“Savings Plan”) which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has a defined benefit supplementary retirement plan which includeincludes benefits, for certain employees, in excess of qualified plan limitations. For the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3,1, 2001 and the 52 weeks ended January 29, 2000 net retirement expense for these plans totaled $32 million, $22 million $27 million and $35$27 million, respectively.
Measurement of plan assets and obligations for the Pension Plan and the defined benefit supplementary retirement plan 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 6.75% as of December 31, 2002 and 7.25% as of December 31, 2001 and 7.50% as of December 31, 2000.2001. The assumed weighted average rate of increase in future compensation levels was 5.8% as of December 31, 20012002 and 5.0% as of December 31, 20002001 for the Pension Plan and 7.7% as of December 31, 20012002 and 5.0% as of December 31, 20002001 for the defined benefit supplementary retirement plan. The long-term rate of return on assets (Pension Plan only) was 9.75% as of December 31, 2001 and December 31, 2000.
F-25F-30
retirement plan. The long-term rate of return on assets (Pension Plan only) was 9.00% as of December 31, 2002 and 9.75% as of December 31, 2001.
Pension Plan
The following provides a reconciliation of benefit obligations, plan assets and funded status of the Pension Plan as of December 31, 20012002 and 2000:2001:
| 2001 | 2000 | ||||||||
| (millions) | |||||||||
| Change in projected benefit obligation | |||||||||
| Projected benefit obligation, beginning of year | $ | 1,368 | $ | 1,295 | |||||
| Service cost | 35 | 34 | |||||||
| Interest cost | 97 | 98 | |||||||
| Plan amendments | 1 | – | |||||||
| Actuarial loss | 10 | 71 | |||||||
| Benefits paid | (114 | ) | (130 | ) | |||||
| Projected benefit obligation, end of year | $ | 1,397 | $ | 1,368 | |||||
| Changes in plan assets (primarily stocks, bonds and U.S. government securities) | |||||||||
| Fair value of plan assets, beginning of year | $ | 1,670 | $ | 1,811 | |||||
| Actual return on plan assets | (76 | ) | (11 | ) | |||||
| Benefits paid | (114 | ) | (130 | ) | |||||
| Fair value of plan assets, end of year | $ | 1,480 | $ | 1,670 | |||||
| Funded status | $ | 83 | $ | 302 | |||||
| Unrecognized net (gain) loss | 149 | (94 | ) | ||||||
| Unrecognized prior service cost | 2 | 2 | |||||||
| Prepaid pension expense | $ | 234 | $ | 210 | |||||
Net pension income for the Company’s Pension Plan included the following actuarially determined components:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | ||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | ||||||||||
| (millions) | ||||||||||||
| Service cost | $ | 35 | $ | 34 | $ | 35 | ||||||
| Interest cost | 97 | 98 | 92 | |||||||||
| Expected return on assets | (156 | ) | (151 | ) | (142 | ) | ||||||
| Cost of special termination benefits | – | – | 3 | |||||||||
| $ | (24 | ) | $ | (19 | ) | $ | (12 | ) | ||||
In connection with a program to modify certain health care benefits for future retirees at one division, the Company incurred $3 million during the 52 weeks ended January 29, 2000 of special termination benefits to eligible employees who elected to retire within a specified time period.
As permitted under SFAS No. 87, “Employers�� Accounting for Pensions,” the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the Pension Plans.
F-26
The Company’s policy is to fund the Pension Plan at or above the minimum required by law. For the 2001 and 2000 plan years, no funding contribution was required or made. Plan assets are held by independent trustees.
Supplementary Retirement Plan
The following provides a reconciliation of benefit obligations, plan assets and funded status of the supplementary retirement plan as of December 31, 2001 and 2000:
| 2001 | 2000 | 2002 | 2001 | |||||||||||||||
| (millions) | (millions) | |||||||||||||||||
| Change in projected benefit obligation | Change in projected benefit obligation | Change in projected benefit obligation | ||||||||||||||||
| Projected benefit obligation, beginning of year | $ | 137 | $ | 116 | Projected benefit obligation, beginning of year | $ | 1,397 | $ | 1,368 | |||||||||
| Service cost | 5 | 4 | Service cost | 37 | 35 | |||||||||||||
| Interest cost | 12 | 9 | Interest cost | 98 | 97 | |||||||||||||
| Plan amendments | (1 | ) | 2 | Plan amendments | – | 1 | ||||||||||||
| Actuarial loss | 36 | 14 | Actuarial loss | 67 | 10 | |||||||||||||
| Benefits paid | (9 | ) | (8 | ) | Benefits paid | (116 | ) | (114 | ) | |||||||||
| Projected benefit obligation, end of year | $ | 180 | $ | 137 | Projected benefit obligation, end of year | $ | 1,483 | $ | 1,397 | |||||||||
| Change in plan assets | ||||||||||||||||||
| Changes in plan assets (primarily stocks, bonds and U.S. government securities) | Changes in plan assets (primarily stocks, bonds and U.S. government securities) | |||||||||||||||||
| Fair value of plan assets, beginning of year | $ | 1,480 | $ | 1,670 | ||||||||||||||
| Fair value of plan assets, beginning of year | $ | – | $ | – | Actual return on plan assets | (138 | ) | (76 | ) | |||||||||
| Company contributions | 9 | 8 | Company contributions | 50 | – | |||||||||||||
| Benefits paid | (9 | ) | (8 | ) | Benefits paid | (116 | ) | (114 | ) | |||||||||
| Fair value of plan assets, end of year | $ | – | $ | – | Fair value of plan assets, end of year | $ | 1,276 | $ | 1,480 | |||||||||
| Funded status | $ | (180 | ) | $ | (137 | ) | Funded status | $ | (207 | ) | $ | 83 | ||||||
| Unrecognized net loss | 65 | 36 | Unrecognized net loss | 513 | 149 | |||||||||||||
| Unrecognized prior service cost | 2 | 4 | Unrecognized prior service cost | 2 | 2 | |||||||||||||
| Accrued benefit cost | $ | (113 | ) | $ | (97 | ) | Net amount recognized | $ | 308 | $ | 234 | |||||||
| Amounts recognized in the statement of financial position | Amounts recognized in the statement of financial position | Amounts recognized in the statement of financial position | ||||||||||||||||
| Accrued benefit cost | $ | (135 | ) | $ | (105 | ) | Prepaid benefit cost | $ | – | $ | 234 | |||||||
| Intangible asset | 2 | 4 | Accrued benefit cost | (106 | ) | – | ||||||||||||
| Accumulated other comprehensive income | 20 | 4 | Intangible asset | 2 | – | |||||||||||||
| Accumulated other comprehensive loss | 412 | – | ||||||||||||||||
| Net amount recognized | Net amount recognized | $ | (113 | ) | $ | (97 | ) | Net amount recognized | $ | 308 | $ | 234 | ||||||
The accumulated benefit obligation for the supplementary retirement planPension Plan was $135 million and $105$1,382 million as of December 31, 2001 and December 31, 2000, respectively.2002.
F-27F-31
Net pension costsincome for the supplementary retirement planCompany’s Pension Plan included the following actuarially determined components:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||
| Service cost | $ | 5 | $ | 4 | $ | 4 | $ | 37 | $ | 35 | $ | 34 | ||||||||||||
| Interest cost | 12 | 9 | 9 | 98 | 97 | 98 | ||||||||||||||||||
| Amortization of prior service cost | 2 | 2 | 1 | |||||||||||||||||||||
| Recognition of net actuarial loss | 6 | 2 | 4 | |||||||||||||||||||||
| Expected return on assets | (159 | ) | (156 | ) | (151 | ) | ||||||||||||||||||
| $ | 25 | $ | 17 | $ | 18 | $ | (24 | ) | $ | (24 | ) | $ | (19 | ) | ||||||||||
As permitted under SFAS No. 87, “Employers’ Accounting for Pensions,” the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plans.Pension Plan.
The Company’s policy is to fund the Pension Plan at or above the minimum required by law. For the 2002 plan year, no funding contribution was required; however, a $50 million voluntary funding contribution was made. For the 2001 plan year, no funding contribution was required or made. Plan assets are held by independent trustees.
F-32
Supplementary Retirement Plan
The following provides a reconciliation of benefit obligations, plan assets and funded status of the supplementary retirement plan as of December 31, 2002 and 2001:
| 2002 | 2001 | ||||||||
| (millions) | |||||||||
| Change in projected benefit obligation | |||||||||
| Projected benefit obligation, beginning of year | $ | 180 | $ | 137 | |||||
| Service cost | 6 | 5 | |||||||
| Interest cost | 13 | 12 | |||||||
| Plan amendments | – | (1 | ) | ||||||
| Actuarial loss | 33 | 36 | |||||||
| Benefits paid | (16 | ) | (9 | ) | |||||
| Projected benefit obligation, end of year | $ | 216 | $ | 180 | |||||
| Change in plan assets | |||||||||
| Fair value of plan assets, beginning of year | $ | – | $ | – | |||||
| Company contributions | 16 | 9 | |||||||
| Benefits paid | (16 | ) | (9 | ) | |||||
| Fair value of plan assets, end of year | $ | – | $ | – | |||||
| Funded status | $ | (216 | ) | $ | (180 | ) | |||
| Unrecognized net loss | 90 | 65 | |||||||
| Unrecognized prior service cost | 1 | 2 | |||||||
| Accrued benefit cost | $ | (125 | ) | $ | (113 | ) | |||
| Amounts recognized in the statement of financial position | |||||||||
| Accrued benefit cost | $ | (169 | ) | $ | (135 | ) | |||
| Intangible asset | 1 | 2 | |||||||
| Accumulated other comprehensive loss | 43 | 20 | |||||||
| Net amount recognized | $ | (125 | ) | $ | (113 | ) | |||
The accumulated benefit obligation for the supplementary retirement plan was $169 million and $135 million as of December 31, 2002 and December 31, 2001, respectively.
F-33
Net pension costs for the supplementary retirement plan included the following actuarially determined components:
| 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | ||||||||||
| February 1, 2003 | February 2, 2002 | February 3, 2001 | ||||||||||
| (millions) | ||||||||||||
| Service cost | $ | 6 | $ | 5 | $ | 4 | ||||||
| Interest cost | 13 | 12 | 9 | |||||||||
| Amortization of prior service cost | 1 | 2 | 2 | |||||||||
| Recognition of net actuarial loss | 8 | 6 | 2 | |||||||||
| $ | 28 | $ | 25 | $ | 17 | |||||||
As permitted under SFAS No. 87, “Employers’ Accounting for Pensions,” the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan.
Savings PlansPlan
The Savings Plan includes a voluntary savings feature for eligible employees. The Company’s contribution is based on the Company’s annual earnings and the minimum contribution is 33 1/3% of an employee’s eligible savings. Expense for the Savings PlansPlan amounted to $28 million for the 52 weeks ended February 1, 2003, $21 million for the 52 weeks ended February 2, 2002 and $29 million for the 53 weeks ended February 3, 2001 and $29 million for the 52 weeks ended January 29, 2000.2001.
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 itmanagement estimates will be needed for distribution on account of stock credits currently outstanding. At February 2, 20021, 2003 and February 3, 2001,2, 2002, the liability under the plan, which is reflected in other liabilities, was $34$37 million and $31$34 million, respectively. Expense for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 and the 53 weeks ended February 3, 2001 and the 52 weeks ended January 29, 2000, was immaterial.
14. | 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-28F-34
The following provides a reconciliation of benefit obligations, plan assets and funded status of the postretirement obligations as of December 31, 20012002 and 2000:2001:
| 2001 | 2000 | 2002 | 2001 | |||||||||||||||
| (millions) | (millions) | |||||||||||||||||
| Change in accumulated postretirement benefit obligation | Change in accumulated postretirement benefit obligation | Change in accumulated postretirement benefit obligation | ||||||||||||||||
| Accumulated postretirement benefit obligation, beginning of year | $ | 271 | $ | 270 | Accumulated postretirement benefit obligation, beginning of year | $ | 280 | $ | 271 | |||||||||
| Service cost | 1 | 1 | Service cost | 1 | 1 | |||||||||||||
| Interest cost | 19 | 20 | Interest cost | 19 | 19 | |||||||||||||
| Actuarial loss | 18 | 10 | Actuarial loss | 6 | 18 | |||||||||||||
| Benefits paid | (29 | ) | (30 | ) | Benefits paid | (30 | ) | (29 | ) | |||||||||
| Accumulated postretirement benefit obligation, end of year | $ | 280 | $ | 271 | Accumulated postretirement benefit obligation, end of year | $ | 276 | $ | 280 | |||||||||
| Change in plan assets | Change in plan assets | Change in plan assets | ||||||||||||||||
| Fair value of plan assets, beginning of year | $ | – | $ | – | Fair value of plan assets, beginning of year | $ | – | $ | – | |||||||||
| Company contributions | 29 | 30 | Company contributions | 30 | 29 | |||||||||||||
| Benefits paid | (29 | ) | (30 | ) | Benefits paid | (30 | ) | (29 | ) | |||||||||
| Fair value of plan assets, end of year | $ | – | $ | – | Fair value of plan assets, end of year | $ | – | $ | – | |||||||||
| Funded status | $ | (280 | ) | $ | (271 | ) | Funded status | $ | (276 | ) | $ | (280 | ) | |||||
| Unrecognized net gain | (29 | ) | (56 | ) | Unrecognized net gain | (17 | ) | (29 | ) | |||||||||
| Unrecognized prior service cost | (28 | ) | (35 | ) | Unrecognized prior service cost | (21 | ) | (28 | ) | |||||||||
| Accrued benefit cost | Accrued benefit cost | $ | (337 | ) | $ | (362 | ) | Accrued benefit cost | $ | (314 | ) | $ | (337 | ) | ||||
Net post retirementpostretirement benefit expense included the following actuarially determined components:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||
| Interest cost | 19 | 20 | 20 | 19 | 19 | 20 | ||||||||||||||||||
| Amortization of prior service cost | (7 | ) | (7 | ) | (7 | ) | (7 | ) | (7 | ) | (7 | ) | ||||||||||||
| Recognition of net actuarial gain | (9 | ) | (9 | ) | (8 | ) | (6 | ) | (9 | ) | (9 | ) | ||||||||||||
| Reduction for special termination benefits | – | – | (4 | ) | ||||||||||||||||||||
| $ | 4 | $ | 5 | $ | 2 | $ | 7 | $ | 4 | $ | 5 | |||||||||||||
The discount rate used in determining the actuarial present value of unfunded postretirement benefit obligations was 6.75% as of December 31, 2002 and 7.25% as of December 31, 2001 and 7.50% as of December 31, 2000.2001.
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 7.0% to 13.0%11.0% in the first year, and to decrease gradually for each such component to 6.0% by 2005 and to remain at that level thereafter. The foregoing growth-rate assumption has a significant effect on such determination. To illustrate, increasing such assumed
F-29F-35
illustrate, increasing such assumed growth rates by one percentage point would increase the present value of unfunded postretirement benefit obligation as of December 31, 20012002 by $8$9 million and the net periodic postretirement benefit expense for 20012002 by $1 million. Alternatively, decreasing such assumed growth rates by one percentage point would decrease the present value of unfunded postretirement benefit obligations as of December 31, 20012002 by $8$9 million and the net periodic postretirement benefit expense for 20012002 by $1 million.
As permitted under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan.
15. 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 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 | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||||
| Option | Option | Option | Option | Option | Option | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||||||||||||||||||||
| (shares in thousands) | (shares in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding, beginning of year | 24,082.8 | $ | 36.08 | 17,307.1 | $ | 38.95 | 13,660.8 | $ | 36.72 | 25,612.6 | $ | 37.49 | 24,082.8 | $ | 36.08 | 17,307.1 | $ | 38.95 | ||||||||||||||||||||||||||||||
| Granted | 3,995.0 | 42.91 | 8,248.3 | 30.08 | 5,775.0 | 41.13 | 4,403.5 | 42.66 | 3,995.0 | 42.91 | 8,248.3 | 30.08 | ||||||||||||||||||||||||||||||||||||
| Canceled | (958.1 | ) | 38.65 | (1,055.4 | ) | 40.36 | (658.8 | ) | 40.33 | (1,498.3 | ) | 40.19 | (958.1 | ) | 38.65 | (1,055.4 | ) | 40.36 | ||||||||||||||||||||||||||||||
| Exercised | (1,507.1 | ) | 28.57 | (417.2 | ) | 25.97 | (1,469.9 | ) | 26.10 | (822.7 | ) | 29.71 | (1,507.1 | ) | 28.57 | (417.2 | ) | 25.97 | ||||||||||||||||||||||||||||||
| Outstanding, end of year | 25,612.6 | $ | 37.49 | 24,082.8 | $ | 36.08 | 17,307.1 | $ | 38.95 | 27,695.1 | $ | 38.40 | 25,612.6 | $ | 37.49 | 24,082.8 | $ | 36.08 | ||||||||||||||||||||||||||||||
| Exercisable, end of year | 11,759.7 | $ | 36.58 | 9,040.5 | $ | 34.92 | 5,800.3 | $ | 31.33 | 14,840.3 | $ | 38.36 | 11,759.7 | $ | 36.58 | 9,040.5 | $ | 34.92 | ||||||||||||||||||||||||||||||
| Weighted average fair value of options granted during the year | $ | 19.62 | $ | 14.33 | $ | 17.54 | $ | 20.73 | $ | 19.62 | $ | 14.33 | ||||||||||||||||||||||||||||||||||||
F-30F-36
The following summarizes information about stock options which remain outstanding as of February 2, 2002:1, 2003:
| Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||||||||||||
| Average | Weighted | Weighted | Average | Weighted | Weighted | |||||||||||||||||||||||||||||||||||
| Remaining | Average | Average | Remaining | Average | Average | |||||||||||||||||||||||||||||||||||
| Range of | Number | Contractual | Exercisable | Number | Exercise | Number | Contractual | Exercisable | Number | Exercise | ||||||||||||||||||||||||||||||
| Exercise Price | Outstanding | Life | Price | Exercisable | Price | Outstanding | Life | Price | Exercisable | Price | ||||||||||||||||||||||||||||||
| (thousands) | (thousands) | (thousands) | (thousands) | |||||||||||||||||||||||||||||||||||||
| $11.63–25.00 | 1,604.4 | 2.5 years | $ | 21.29 | 1,604.4 | $ | 21.29 | |||||||||||||||||||||||||||||||||
| $18.63–25.00 | 1,367.2 | 1.6 years | $ | 21.37 | 1,367.2 | $ | 21.37 | |||||||||||||||||||||||||||||||||
| 25.01–40.00 | 14,130.7 | 7.1 years | 32.56 | 6,572.9 | 33.56 | 13,093.4 | 6.1 years | 32.57 | 7,982.2 | 33.18 | ||||||||||||||||||||||||||||||
| 40.01–79.44 | 9,877.5 | 7.6 years | 47.19 | 3,582.4 | 48.95 | 13,234.5 | 7.4 years | 45.92 | 5,490.9 | 50.13 | ||||||||||||||||||||||||||||||
As of February 2, 2002, 8.31, 2003, 5.4 million shares of Common Stock were available for additional grants pursuant to the Company’s equity plan, of which 105,300 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, 2003. During the 52 weeks ended February 2, 2002, 234,278 shares of Common Stock were granted in the form of restricted stock, with 221,278 shares at a market value of $43.00 fully vesting after four years and 13,000 shares at a market value of $38.60 fully vesting after three years. During the 53 weeks ended February 3, 2001, 122,700 shares of Common Stock were granted in the form of restricted stock at a market value of $39.81 vesting ratably over a four-year period. During the 52 weeks ended January 29, 2000, 212,600 shares of Common Stock were granted in the form of restricted stock at market values ranging from $39.25 to $46.75 vesting ratably over a four-year period. 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. There have been no grants of stock appreciation rights under the equity plan.
The Company applies APB 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 SFAS No. 123, “Accounting for Stock-Based Compensation,” for options granted subsequent to January 28, 1995, the Company’s net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | ||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | ||||||||||||
| (millions, except per share data) | ||||||||||||||
| Net income (loss) | As Reported | $ | (276 | ) | $ | (184 | ) | $ | 795 | |||||
| Pro forma | (323 | ) | (226 | ) | 758 | |||||||||
| Basic earnings (loss) per share | As Reported | (1.41 | ) | (.90 | ) | 3.78 | ||||||||
| Pro forma | (1.65 | ) | (1.11 | ) | 3.60 | |||||||||
| Diluted earnings (loss) per share | As Reported | (1.38 | ) | (.89 | ) | 3.62 | ||||||||
| Pro forma | (1.62 | ) | (1.09 | ) | 3.45 | |||||||||
F-31
The fair value of each option grant 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 | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||
| Dividend yield | – | – | – | – | – | – | ||||||||||||||||||
| Expected volatility | 39.1% | 37.0% | 32.5% | 41.5% | 39.1% | 37.0% | ||||||||||||||||||
| Risk-free interest rate | 4.6% | 6.3% | 5.4% | 5.2% | 4.6% | 6.3% | ||||||||||||||||||
| Expected life | 6 years | 6 years | 6 years | 6 years | 6 years | 6 years | ||||||||||||||||||
16. Shareholders’ Equity
The authorized shares of the Company consist of 125.0 million shares of preferred stock (“Preferred Stock”), par value of $.01 per share, with no shares issued, and 500.0 million shares of Common Stock, par value of $.01 per share, with 265.3 million shares of Common Stock issued and 190.2 million shares of Common Stock outstanding at February 1, 2003 and 265.0 million shares of Common Stock issued and 200.8 million shares of Common Stock outstanding at February 2, 2002 and 254.4 million shares of Common Stock issued and 197.6 million shares of Common Stock outstanding at February 3, 2001 (with shares held in the Company’s treasury or by subsidiaries of the Company being treated as issued, but not outstanding).
The Company purchased 11.4 million shares of its Common Stock in 2002 at a cost of approximately $390 million and 7.4 million shares of its Common Stock in 2001 at a cost of approximately $300 million and 17.6 million shares of its Common Stock in 2000 at an approximate cost of $600$300 million,
F-37
under its stock repurchase program. On May 18, 2001, the Board of Directors approved a $500 million increase to the current stock repurchase program increasing the authorization to $1,500 million. As of February 2, 2002,1, 2003, the Company had approximately $600$210 million of the $1,500 million authorization remaining. The Company may continue or, from time to time, suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.
In 2001, the Company issued 9.0 million shares of its Common Stock upon the exercise of the Company’s Series D warrants. In 2000, the Company issued 1.0 million shares of its Common Stock upon the exercise of the Company’s Series B Warrants.
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 in its discretion, out of funds legally available therefor. However, it is not presently anticipated that dividends will be paid on Common Stock in the foreseeable future.
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
F-32
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 December 19, 2004 unless earlier redeemed by the Company at a redemption price of $.03 per Right (subject to adjustment).
Treasury Stock
Treasury stock contains shares repurchased under the stock repurchase program, shares issued to wholly owned subsidiaries of the Company in connection with an acquisition, shares maintained in a trust related to the deferred compensation plans and shares repurchased to cover employee tax liabilities related to other stock plan activity.
F-38
Changes in the number of shares held in the treasury are as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||||
| (thousands) | (thousands) | |||||||||||||||||||||||||
| Balance, beginning of year | Balance, beginning of year | 26,735.3 | 9,439.9 | 3,819.4 | Balance, beginning of year | 34,170.8 | 26,735.3 | 9,439.9 | ||||||||||||||||||
| Additions: | Additions: | Additions: | ||||||||||||||||||||||||
| Repurchase program | 7,408.0 | 17,573.3 | 5,631.7 | Repurchase program | 11,431.1 | 7,408.0 | 17,573.3 | |||||||||||||||||||
| Restricted stock | 32.7 | 42.7 | 5.8 | Restricted stock | 32.4 | 32.7 | 42.7 | |||||||||||||||||||
| Deferred compensation plans | 13.9 | 9.1 | 4.1 | Deferred compensation plans | 3.3 | 13.9 | 9.1 | |||||||||||||||||||
| Distributions through stock plans | Distributions through stock plans | (19.1 | ) | (329.7 | ) | (21.1 | ) | Distributions through stock plans | (588.2 | ) | (19.1 | ) | (329.7 | ) | ||||||||||||
| Balance, end of year | Balance, end of year | 34,170.8 | 26,735.3 | 9,439.9 | Balance, end of year | 45,049.4 | 34,170.8 | 26,735.3 | ||||||||||||||||||
Additions to treasury stock for restricted stock and the deferred compensation plans represent shares accepted in lieu of cash to cover employee tax liabilities upon lapse of restrictions for restricted stock and upon distribution of Common Stock under the deferred compensation plans.
F-33
Under the deferred compensation plans, shares are maintained in a trust to cover the number estimated to be needed for distribution on account of stock credits currently outstanding. Changes in the number of shares held in the trust are as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||
| (thousands) | (thousands) | |||||||||||||||||||||||
| Balance, beginning of year | 554.1 | 483.8 | 434.5 | 560.0 | 554.1 | 483.8 | ||||||||||||||||||
| Additions | 45.1 | 96.2 | 63.6 | 36.6 | 45.1 | 96.2 | ||||||||||||||||||
| Distributions | (39.2 | ) | (25.9 | ) | (14.3 | ) | (15.0 | ) | (39.2 | ) | (25.9 | ) | ||||||||||||
| Balance, end of year | 560.0 | 554.1 | 483.8 | 581.6 | 560.0 | 554.1 | ||||||||||||||||||
17.��Financial Instruments and Concentrations of Credit Risk
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and short-term investments
The carrying amount approximates fair value because of the short maturity of these instruments.
Accounts receivable
The carrying amount approximates fair value because of the short average maturity of the instruments, and because the carrying amount reflects a reasonable estimate of losses from doubtful accounts.
F-39
Notes Receivable
The fair value of notes receivable is estimated using discounted cash flow analysis, based on estimated market discount rates.
Long-term debt
The fair values of the Company’s long-term debt, excluding capitalized leases, 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 or receive to terminate the agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties.
F-34
The estimated fair values of certain financial instruments of the Company are as follows:
| February 2, 2002 | February 3, 2001 | February 1, 2003 | February 2, 2002 | |||||||||||||||||||||||||||||||||||||||||||||
| Notional | Carrying | Fair | Notional | Carrying | Fair | Notional | Carrying | Fair | Notional | Carrying | Fair | |||||||||||||||||||||||||||||||||||||
| Amount | Amount | Value | Amount | Amount | Value | Amount | Amount | Value | Amount | Amount | Value | |||||||||||||||||||||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Notes receivable | $ | 30 | $ | 30 | $ | 30 | $ | – | $ | – | $ | – | ||||||||||||||||||||||||||||||||||||
| Long-term debt | $ | 3,808 | $ | 3,808 | $ | 3,893 | $ | 3,797 | $ | 3,797 | $ | 3,799 | 3,354 | 3,354 | 3,634 | 3,808 | 3,808 | 3,893 | ||||||||||||||||||||||||||||||
| Interest rate cap agreements | 375 | – | – | 375 | 1 | 1 | 375 | – | – | 375 | – | – | ||||||||||||||||||||||||||||||||||||
| Interest rate swap agreements | 600 | 1 | 1 | – | – | – | – | – | – | 600 | 1 | 1 | ||||||||||||||||||||||||||||||||||||
The interest rate cap agreements are used, in effect, to hedge interest rate risk related to a portion of the variable rate indebtedness under the Company’s Receivables Backed Financings.
The interest rate swap agreements arewere used, in effect, to convert a portion of the Company’s fixed-rate debt to variable rate debt.
Commitments to extend credit under revolving agreements relate primarily to the aggregate unused credit limits and unused lines of credit extended to customers under 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 customer accounts receivable. The Company places its
F-40
temporary cash investments in what it believes to be high credit quality financial instruments. Credit risk with respect to customer accounts receivable 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-35
18. Earnings Per Share
The reconciliation of basic earnings per share to diluted earnings per share based on income from continuing operations before extraordinary item is as follows:
| 52 Weeks Ended | 53 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 52 Weeks Ended | 53 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| February 2, 2002 | February 3, 2001 | January 29, 2000 | February 1, 2003 | February 2, 2002 | February 3, 2001 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income | Shares | Income | Shares | Income | Shares | Income | Shares | Income | Shares | Income | Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (millions, except per share data) | (millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before extraordinary item and average number of shares outstanding | Income from continuing operations before extraordinary item and average number of shares outstanding | $ | 518 | 195.1 | $ | 821 | 204.3 | $ | 825 | 210.0 | Income from continuing operations before extraordinary item and average number of shares outstanding | $ | 638 | 196.6 | $ | 518 | 195.1 | $ | 821 | 204.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares to be issued under deferred compensation plans | Shares to be issued under deferred compensation plans | .6 | .5 | .4 | Shares to be issued under deferred compensation plans | .7 | .6 | .5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 518 | 195.7 | $ | 821 | 204.8 | $ | 825 | 210.4 | $ | 638 | 197.3 | $ | 518 | 195.7 | $ | 821 | 204.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic earnings per share | $ | 2.65 | $ | 4.01 | $ | 3.92 | Basic earnings per share | $ | 3.23 | $ | 2.65 | $ | 4.01 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | Effect of dilutive securities: | Effect of dilutive securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants | 1.8 | 1.1 | 6.9 | Warrants | – | 1.8 | 1.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock options | 2.1 | 1.1 | 2.3 | Stock options | 1.4 | 2.1 | 1.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 518 | 199.6 | $ | 821 | 207.0 | $ | 825 | 219.6 | $ | 638 | 198.7 | $ | 518 | 199.6 | $ | 821 | 207.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted earnings per share | $ | 2.59 | $ | 3.97 | $ | 3.76 | Diluted earnings per share | $ | 3.21 | $ | 2.59 | $ | 3.97 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In addition to the warrants and stock options reflected in the foregoing table, stock options to purchase 23.0 million, 10.0 million 9.2 million and 4.79.2 million shares of common stock at prices ranging from $35.31$32.44 to $79.44 per share were outstanding at February 1, 2003, February 2, 2002 and February 3, 2001, and January 29, 2000, respectively, but were not included in the computation of diluted earnings per share because the exercise price thereof exceeded the average market price and their inclusion would have been antidilutive.
F-36F-41
19. Quarterly Results (unaudited)
Unaudited quarterly results for the 52 weeks ended February 2, 20021, 2003 and the 5352 weeks ended February 3, 2001,2, 2002, were as follows:
| First | Second | Third | Fourth | |||||||||||||||||||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||||||||||
| (millions, except per share data) | ||||||||||||||||||||||||||||||||||||
| 52 Weeks Ended February 1, 2003: | 52 Weeks Ended February 1, 2003: | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,453 | $ | 3,486 | $ | 3,479 | $ | 5,017 | ||||||||||||||||||||||||||||
| Cost of sales | 2,078 | 2,051 | 2,112 | 3,014 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,154 | 1,135 | 1,179 | 1,369 | ||||||||||||||||||||||||||||||||
| Income from continuing operations | 89 | 133 | 75 | 341 | ||||||||||||||||||||||||||||||||
| Discontinued operations (a) | – | 149 | 31 | – | ||||||||||||||||||||||||||||||||
| Net income | 89 | 282 | 106 | 341 | ||||||||||||||||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||||||||||||||
| First | Second | Third | Fourth | Income from continuing operations | .44 | .66 | .38 | 1.78 | ||||||||||||||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Net income | .44 | 1.40 | .54 | 1.78 | ||||||||||||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||||||||||||
| Income from continuing operations | .43 | .66 | .38 | 1.78 | ||||||||||||||||||||||||||||||||
| (millions, except per share data) | Net income | .43 | 1.39 | .54 | 1.78 | |||||||||||||||||||||||||||||||
| 52 Weeks Ended February 2, 2002: | 52 Weeks Ended February 2, 2002: | 52 Weeks Ended February 2, 2002: | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,556 | $ | 3,488 | $ | 3,475 | $ | 5,132 | Net sales | $ | 3,556 | $ | 3,488 | $ | 3,475 | $ | 5,132 | |||||||||||||||||||
| Cost of sales | 2,177 | 2,135 | 2,143 | 3,129 | Cost of sales | 2,177 | 2,135 | 2,143 | 3,129 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,175 | 1,113 | 1,192 | 1,321 | Selling, general and administrative expenses | 1,175 | 1,113 | 1,192 | 1,321 | |||||||||||||||||||||||||||
| Asset impairment and restructuring charges (see Note 4) | 26 | 27 | 14 | 95 | Asset impairment and restructuring charges (see Note 4) | 26 | 27 | 14 | 95 | |||||||||||||||||||||||||||
| Income from continuing operations | 58 | 124 | 26 | 310 | Income from continuing operations before extraordinary item | 58 | 124 | 26 | 310 | |||||||||||||||||||||||||||
| Discontinued operations (a) | – | (14 | ) | (13 | ) | (757 | ) | Discontinued operations (a) | – | (14 | ) | (13 | ) | (757 | ) | |||||||||||||||||||||
| Net income (loss) | 58 | 110 | 3 | (447 | ) | Net income (loss) | 58 | 110 | 3 | (447 | ) | |||||||||||||||||||||||||
| Basic earnings (loss) per share: | Basic earnings (loss) per share: | |||||||||||||||||||||||||||||||||||
| Income from continuing operations | .30 | .63 | .13 | 1.57 | Income from continuing operations | .30 | .63 | .13 | 1.57 | |||||||||||||||||||||||||||
| Net income (loss) | .30 | .56 | .02 | (2.27 | ) | Net income (loss) | .30 | .56 | .02 | (2.27 | ) | |||||||||||||||||||||||||
| Diluted earnings (loss) per share: | Diluted earnings (loss) per share: | |||||||||||||||||||||||||||||||||||
| Income from continuing operations | .29 | .62 | .13 | 1.55 | Income from continuing operations | .29 | .62 | .13 | 1.55 | |||||||||||||||||||||||||||
| Net income (loss) | .29 | .55 | .02 | (2.23 | ) | Net income (loss) | .29 | .55 | .02 | (2.23 | ) | |||||||||||||||||||||||||
| 53 Weeks Ended February 3, 2001: | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 3,573 | $ | 3,679 | $ | 3,782 | $ | 5,604 | ||||||||||||||||||||||||||||
| Cost of sales | 2,152 | 2,173 | 2,295 | 3,335 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,152 | 1,104 | 1,218 | 1,438 | ||||||||||||||||||||||||||||||||
| Asset impairment and restructuring charges (see Note 4) | – | – | – | 80 | ||||||||||||||||||||||||||||||||
| Income from continuing operations | 118 | 194 | 109 | 400 | ||||||||||||||||||||||||||||||||
| Discontinued operations (a) | (29 | ) | (131 | ) | (777 | ) | (68 | ) | ||||||||||||||||||||||||||||
| Net income (loss) | 89 | 63 | (668 | ) | 332 | |||||||||||||||||||||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||
| Income from continuing operations | .56 | .94 | .54 | 2.01 | ||||||||||||||||||||||||||||||||
| Net income (loss) | .42 | .31 | (3.32 | ) | 1.67 | |||||||||||||||||||||||||||||||
| Diluted earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||
| Income from continuing operations | .55 | .93 | .54 | 1.99 | ||||||||||||||||||||||||||||||||
| Net income (loss) | .41 | .30 | (3.32 | ) | 1.65 | |||||||||||||||||||||||||||||||
| (a) | Discontinued operations include the after-tax operations of Fingerhut Companies, Inc. in the 52 weeks ended February 2, 2002. The fourth quarter of 2001 includes the estimated after-tax loss on the disposal of discontinued operations of $770 million. The second and third quarter of 2002 represent adjustments to the estimated loss on disposal of discontinued operations. |
F-37F-42