SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal quarter ended
May 5,August 4, 2001.
FEDERATED DEPARTMENT STORES, INC.
7 West Seventh St.
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602
Delaware 1-13536 13-3324058
(StateState of (Commission File No.) (I.R.S. Employer
of Incorporation) Identification Number)
The Registrant has filed all reports required to be filed by
Section 12, 13 or 15 (d)15(d) of the Act during the preceding 12
months and has been subject to such filing requirements for the
past 90 days.
194,892,944192,676,172 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of June 2,September 1, 2001.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(MILLIONS, EXCEPT PER SHARE FIGURES)Consolidated Statements of Income
(Unaudited)
(millions, except per share figures)
13 Weeks Ended 1326 Weeks Ended
May 5,August 4, July 29, August 4, July 29,
2001 April 29,2000 2001 2000
Net Sales $ 3,822 $ 4,032$3,732 $4,065 $7,554 $8,097
Cost of sales:
Recurring 2,287 2,3952,251 2,379 4,538 4,774
Inventory valuation adjustments
related to Stern's closure 197 - 26 -
Total cost of sales 2,306 2,3952,258 2,379 4,564 4,774
Selling, general and
administrative expenses 1,292 1,3841,235 1,466 2,527 2,850
Restructuring charges 2728 - 55 -
Operating Income 197 253211 220 408 473
Interest expense (101) (100)(110) (202) (210)
Interest income 4 1 2 5 3
Income Before Income Taxes 100 154111 112 211 266
Federal, state and local income
tax expense (42) (65)(1) (49) (43) (114)
Net Income $ 58110 $ 8963 $ 168 $ 152
Basic earnings per share $ .30.56 $ .42.31 $ .85 $ .73
Diluted earnings per share $ .29.55 $ .41.30 $ .83 $ .72
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(MILLIONS)
May 5,Consolidated Balance Sheets
(Unaudited)
(millions)
August 4, February 3, AprilJuly 29,
2001 2001 2000
ASSETS:
Current Assets:
Cash $ 519330 $ 322 $ 249296
Accounts receivable 3,6563,427 4,072 4,0313,818
Merchandise inventories 4,0503,994 3,812 3,8693,932
Supplies and prepaid expenses 196221 200 217231
Deferred income tax assets 290310 294 176183
Total Current Assets 8,7118,282 8,700 8,5428,460
Property and Equipment - net 6,7106,735 6,830 6,7416,757
Intangible Assets - net 884942 896 1,7201,703
Other Assets 618659 586 652655
Total Assets $16,923$16,618 $17,012 $17,655$17,575
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 1,399801 $ 1,722 $ 1,3521,714
Accounts payable and accrued liabilities 2,946 2,903 3,0062,903 2,992
Income taxes 104116 244 8397
Total Current Liabilities 4,4493,820 4,869 4,4414,803
Long-Term Debt 4,7925,163 4,374 4,7574,452
Deferred Income Taxes 1,3591,306 1,393 1,4481,458
Other Liabilities 558559 554 548
Shareholders' Equity 5,7655,770 5,822 6,4616,314
Total Liabilities and Shareholders'
Equity $16,923$16,618 $17,012 $17,655$17,575
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWs
(UNSUDITED)
(MILLIONS)
13Consolidated Statements of Cash Flows
(Unaudited)
(millions)
26 Weeks Ended 1326 Weeks Ended
May 5,August 4, 2001 AprilJuly 29, 2000
Cash flows from operating activities:
Net income $ 58168 $ 89152
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 170 161337 322
Amortization of intangible assets 12 2125 42
Amortization of financing costs 1 23 4
Amortization of unearned restricted stock 12 3
Restructuring charges 4681 -
Changes in assets and liabilities:
Decrease in accounts receivable 418 284673 499
Increase in merchandise inventories (237) (277)
Decrease(124) (340)
Increase in supplies and prepaid expenses 4 13
Increase(19) (1)
Decrease in other assets not separately
identified (4) (13)(25) (32)
Decrease in accounts payable and accrued
liabilities not separately identified (58) (78)(152) (74)
Decrease in current income taxes (140) (142)(128) (126)
Increase (decrease) in deferred income taxes (29)(68) 1
Increase (decrease) in other liabilities not
separately identified 13 (6)
Net cash provided by operating activities 243 58776 444
Cash flows from investing activities:
Purchase of property and equipment (53) (69)(222) (251)
Acquisition of Liberty House, Inc.,
net of cash acquired (173) -
Capitalized software (28) (15)(45) (37)
Investments in companies - (35)(31)
Disposition of property and equipment - -27 53
Net cash used by investing activities (81) (119)(413) (266)
Cash flows from financing activities:
Debt issued 500 237350
Financing costs (7) -(10) (3)
Debt repaid (402) (1)(662) (57)
Increase in outstanding checks 60 3639 2
Acquisition of treasury stock (147) (218)(270) (431)
Issuance of common stock 31 3848 39
Net cash providedused by financing activities 35 92(355) (100)
Net increase in cash 197 318 78
Cash at beginning of period 322 218
Cash at end of period $ 519330 $ 249296
Supplemental cash flow information:
Interest paid $ 112200 $ 108196
Interest received 2 15 3
Income taxes paid (net of refunds received) 205 210219 242
Schedule of non cash investing and financing
activities:
Debt assumed in acquisition 17 -
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting Policies
A description of the Company's significant accounting policies
is included in the Company's Annual Report on Form 10-K for
the fiscal year ended February 3, 2001 (the "2000 10-K"). The
accompanying Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and
notes thereto in the 2000 10-K.
Substantially all department store merchandise inventories are
valued by the retail method and stated on the LIFO (last-in,
first-out) basis, which is generally lower than market.
Fingerhut merchandise inventories are stated at the lower of
FIFO (first-in, first-out) cost or market.
Because of the seasonal nature of the retail business, the
results of operations for the 13 and 26 weeks ended May 5,August 4,
2001 and AprilJuly 29, 2000 (which do not include the Christmas
season) are not indicative of such results for the fiscal
year.
The Consolidated Financial Statements as of and for the 13 and
26 weeks ended May 5,August 4, 2001 and AprilJuly 29, 2000, in the
opinion of management, include all adjustments (consisting
only of normal recurring adjustments) considered necessary to
present fairly, in all material respects, the consolidated
financial position and results of operations of the Company
and its subsidiaries.
Effective February 4, 2001, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as
amended, which establishes the accounting and financial
reporting requirements for derivative instruments. The
adoption of this standard did not have a material impact on
the Company's consolidated financial position, results of
operations or cash flows.
In June 2001, the Financial Accounting Standards Board issued
SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other 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 with limited exceptions
for transactions initiated prior to July 1, 2001 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 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, is expected to result
in an increase in annual net income of approximately $27
million. During 2002, the Company will perform the first of
the required impairment tests of goodwill and indefinite-lived
intangible assets and has not yet determined what effect, if
any, the results of these tests will have on the Company's
consolidated financial position or results of operations.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
2. RESTRUCTURING CHARGESAcquisition
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, including the assumption of $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. Based upon
management's initial estimates, the amount of goodwill related
to the Liberty House acquisition amounted to $68 million at
August 4, 2001. Such goodwill will not be amortized, in
accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets."
3. Restructuring Charges
The Company recorded $46$81 million of restructuring charges
during the first quarter of 2001 primarily related to the closure of the Stern's
department store division, including $19$26 million of inventory
valuation adjustments as a part of cost of sales. The
remaining $27$55 million of restructuring charges includes $8$15
million of costs associated with converting the Stern's stores
to Macy's (including advertising, credit card issuance and
promotion and other name change expenses), $10 million of
costs to close and sell certain Stern's stores, $9 million of
duplicate central office costs $8and $15 million of severance
costs and $4 million of advertising costs.related to the Stern's closure. Of the $8$15 million of
severance costs incurred, covering approximately 3002,250
employees, $5$14 million had been paid to employees and $3$1
million was accrued as of May 5,August 4, 2001.
With respect to the Fingerhut restructuring initiated in 2000
and the $10 million of severance costs which had been accrued
at February 3, 2001, $5$7 million was paid to employees during
the first quarter of 2001 and $5$3 million remains accrued as of May 5,August 4, 2001.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACCOUNTS RECEIVABLE4. Taxes
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.
5. Accounts Receivable
Accounts receivable consists of $1,408$1,274 million of Fingerhut
accounts receivable, net of $531$483 million of allowance for
doubtful accounts and $2,248$2,153 million of other Federated
accounts receivable, net of $70$73 million of allowance for
doubtful accounts as of May 5,August 4, 2001; $1,637 million of
Fingerhut accounts receivable, net of $584 million of
allowance for doubtful accounts and $2,435 million of other
Federated accounts receivable, net of $71 million of allowance
for doubtful accounts as of February 3, 2001; and $1,879$1,660
million of Fingerhut accounts receivable, net of $327$511 million
of allowance for doubtful accounts and $2,152$2,158 million of other
Federated accounts receivable, net of $57 million of allowance
for doubtful accounts as of AprilJuly 29, 2000.
4. SEGMENT DATAFEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
6. Financing - Subsequent Event
On August 23, 2001, the Company issued $500 million of 6.625%
Senior Notes due 2008. The proceeds were used to repurchase
the $350 million 6.125% Term Enhanced ReMarketable Securities
("TERMS"), repay short-term borrowings and for general
corporate purposes. As a result, $350 million of short-term
debt was reclassified to long-term debt as of August 4, 2001.
On September 4, 2001, the $350 million TERMS were repurchased
and as a result, the Company will record an extraordinary item
of approximately $9 million, net of the income tax benefit, in
the 13-week period ending November 3, 2001.
7. Segment Data
The Company conducts its business through two segments,
department stores and Fingerhut. The department store
segment, through store locations and related mail catalog and
electronic commerce businesses, sells a wide range of
merchandise, including men's, women's and children's apparel
and accessories, cosmetics, home furnishings and other
consumer goods. Fingerhut sells a broad range of products and
services directly to consumers via catalogs, direct marketing
and the Internet. "Corporate and other" consists of the
income or expense associated with the corporate office and
certain items managed on a company-wide basis (e.g.,
intangibles, financial instruments, investments, retirement
benefits and properties held for sale or disposition).
The financial information for each segment is reported on the
basis used internally by the Company to evaluate performance
and allocate resources. At the beginning of Fiscal 2001, the
Company reorganized its business segments for making operating
decisions and assessing performance. Certain reclassifications
were made to prior period amounts to conform with the
classifications of such amounts for the most recent period.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements
(Unaudited)
13 Weeks Ended May 5, April26 Weeks Ended
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
(millions)
Net SalesSales:
Department Stores $3,556 $3,573$3,488 $3,679 $7,044 $7,252
Fingerhut 266 459244 386 510 845
Total $3,822 $4,032$3,732 $4,065 $7,554 $8,097
Operating incomeincome:
Department Stores $ 211232 $ 288413 $ 443 $ 701
Fingerhut 30 (3)7 (168) 37 (171)
Corporate and other (44) (32)(28) (25) (72) (57)
Total $ 197211 $ 253220 $ 408 $ 473
For the 13 and 26 weeks ended May 5,August 4, 2001, the operating
income for the department store segment includes costs and
expenses associated with the closure of the Stern's department
store division (see Note 2)3).
Depreciation and amortization
expenseexpense:
Department Stores $ 160159 $ 151 $ 319 $ 302
Fingerhut 9 107 8 16 18
Corporate and other 14 2415 23 29 47
Total $ 183181 $ 185182 $ 364 $ 367
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. EARNINGS PER SHARENotes to Consolidated Financial Statements
(Unaudited)
8. Earnings Per Share
The following table setstables set forth the computation of basic and
diluted earnings per share:
13 Weeks Ended
May 5,August 4, 2001 AprilJuly 29, 2000
(millions, except per share data) Income Shares Income Shares
Net income and average number
of shares outstanding $110 194.0 $ 58 197.5 $ 89 212.363 206.1
Shares to be issued under deferred
compensation plans - .5.6 - .5
$ 58 198.0 $ 89 212.8110 194.6 63 206.6
Basic earnings per share $ .30.56 $ .42.31
Effect of dilutive securities:
Warrants - 2.92.5 - 1.91.0
Stock options - 3.22.5 - 1.6.9
$110 199.6 $ 58 204.1 $ 89 216.363 208.5
Diluted earnings per share $ .29.55 $ .41.30
26 Weeks Ended
August 4, 2001 July 29, 2000
(millions, except per share data) Income Shares Income Shares
Net income and average number
of shares outstanding $168 195.7 $152 209.2
Shares to be issued under deferred
compensation plans - .6 - .5
168 196.3 152 209.7
Basic earnings per share $ .85 $ .73
Effect of dilutive securities:
Warrants - 2.7 - 1.5
Stock options - 2.8 - 1.2
$168 201.8 $152 212.4
Diluted earnings per share $ .83 $ .72
In addition to the warrants and stock options reflected in the
foregoing table,tables, stock options to purchase 4.610.1 million and
9.612.7 million shares of common stock, at prices ranging from
$38.06$34.38 to $79.44 per share, were outstanding at May 5,August 4, 2001
and AprilJuly 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.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement's Discussion and Analysis
of Financial Condition and Results of Operations
For purposes of the following discussion, all references to
"first"second quarter of 2001" and "first"second quarter of 2000" are to
the Company's 13-week fiscal periods ended May 5,August 4, 2001 and
AprilJuly 29, 2000, respectively, and all references to "2001" and
"2000" are to the Company's 26-week fiscal periods ended
August 4, 2001 and July 29, 2000, respectively.
RESULTS OF OPERATIONS
COMPARISON OF THEResults of Operations
Comparison of the 13 WEEKS ENDED MAY 5,Weeks Ended August 4, 2001 AND APRILand July 29, 2000
Net sales for the firstsecond quarter of 2001 totaled $3,822$3,732
million, compared to net sales of $4,032$4,065 million for the
firstsecond quarter of 2000, a decrease of 5.2%8.2%, in part
reflecting the strategic downsizing of Fingerhut.Fingerhut and the
closing of Stern's. Net sales for department stores for the
firstsecond quarter of 2001 were $3,556$3,488 million, compared to net
sales of $3,573$3,679 million for the firstsecond quarter of 2000, a
decrease of 0.5%5.2%. On a comparable store basis (sales from
stores in operation throughout the first quarter
of 2000 and the first quarter of 2001), net sales for
department stores for the firstsecond quarter of 2001 decreased
1.5%4.8% compared to the firstsecond quarter of 2000. Net sales for
Fingerhut totaled $266$244 million for the firstsecond quarter of 2001
compared to $459$386 million for the firstsecond quarter of 2000,
reflecting the strategic downsizing of that business.
On June 7,July 5, 2001, the Company reported that Maylowered its fall comparable store
sales projections to minus 1-2 percent and, as a result of
continued weak sales in its department store sales were down 3.3%, on a comparable store basis,
compared to the same period last year. The Company believes
that, unless the department store sales trend improves, it is
likely thatsegment, lowered
earnings for the second quarter will fall below
expectations. The Company still hopes to attain its projected
earnings of $4.00 to $4.25 a shareexpectations for fiscal 2001 althoughto between $3.60 and
$3.90 a share, excluding restructuring charges. Subsequently,
the Company noted, due to the current economic climate, that
it may be difficultis unlikely that the Company would deliver earnings at the
higher end of that range and as such lowered the top end of
the range to achieve unless there is sales improvement.$3.80 a share.
Cost of sales was 60.3%60.5% of net sales for the firstsecond quarter of
2001, compared to 59.4%58.5% for the firstsecond quarter of 2000. Cost
of sales as a percent of net sales for department stores,
excluding the $19$7 million SternsStern's restructuring charges, was
60.7%61.0% in the firstsecond quarter of 2001, an increase of 0.51.9
percentage points compared to the same period a year ago,
reflecting higher markdowns taken in the firstsecond quarter of
2001 which enabled the Company to keep inventories both
current and at appropriate levels. Cost of sales as a percent
of net sales for Fingerhut was 48.6%50.3% in the firstsecond quarter of
2001, a decrease of 4.33.1 percentage points, primarily due to a
shift in the 2001 sales mix to higher margin product
categories. The valuation of department store merchandise
inventories on the last-in, first-out basis did not impact
cost of sales in either period.
Selling, general and administrative ("SG&A") expenses were
33.8%33.1% of net sales for the firstsecond quarter of 2001 compared to
34.3%36.1% for the firstsecond quarter of 2000. Department store SG&A
expenses increased 0.51.7 percentage points to 32.2%31.4% as a percent
of department store net sales in the second quarter of 2001,
reflecting relatively flat operating expenses on the decreased
sales level. Fingerhut's SG&A expenses as a percent of net
sales were 46.9%, a decrease of 43.1 percentage points,
primarily as a result of the higher bad debt expenses recorded
in the second quarter of 2000.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The Company recorded $35 million of restructuring charges
during the second quarter of 2001 primarily related to the
closure of the Stern's department store division, including $7
million of inventory valuation adjustments as a part of cost
of sales. The remaining $28 million of restructuring charges
includes $8 million of costs associated with converting the
Stern's stores to Macy's (including advertising, credit card
issuance and promotion and other name change expenses), $10
million of costs to close and sell certain Stern's stores, $1
million of duplicate central office costs and $7 million of
severance related to the Stern's closure. As previously
communicated, the Company anticipates incurring approximately
$15 million of additional restructuring charges related to the
closure of Stern's and approximately $50-$60 million of
additional restructuring charges related to the Macy's West
integration of Liberty House during the remainder of 2001.
Net interest expense was $100 million for the second quarter
of 2001, compared to $108 million for the second quarter of
2000, primarily due to the lower levels of borrowings.
The Company's effective income tax rate for the second quarter
of 2001 differs from the federal income tax statutory rate of
35.0% principally because of the effect of the disposition of
a subsidiary, state and local income taxes and permanent
differences arising from the amortization of intangible
assets. Income tax expense for the second quarter of 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.
Comparison of the 26 Weeks Ended August 4, 2001 and July 29, 2000
Net sales for 2001 totaled $7,554 million, compared to net
sales of $8,097 million for 2000, a decrease of 6.7%, in part
reflecting the strategic downsizing of Fingerhut and the
closing of Stern's. Net sales for department stores for 2001
were $7,044 million, compared to net sales of $7,252 million
for 2000, a decrease of 2.9%. 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), net sales for department stores for
2001 decreased 3.1% compared to 2000. Net sales for Fingerhut
totaled $510 million for 2001 compared to $845 million for
2000, reflecting the strategic downsizing of that business.
Cost of sales was 60.4% of net sales for 2001, compared to
59.0% for 2000. Cost of sales as a percent of net sales for
department stores, excluding the $26 million Stern's
restructuring charges, was 60.8% in 2001, an increase of 1.2
percentage points compared to the same period a year ago,
reflecting higher markdowns taken in 2001 which enabled the
Company to keep inventories both current and at appropriate
levels. Cost of sales as a percent of net sales for Fingerhut
was 49.4% in 2001, a decrease of 3.7 percentage points,
primarily due to a shift in the 2001 sales mix to higher
margin product categories. The valuation of department store
merchandise inventories on the last-in, first-out basis did
not impact cost of sales in either period.
SG&A expenses were 33.5% of net sales for 2001 compared to
35.2% for 2000. Department store SG&A expenses increased 1.1
percentage points to 31.8% as a percent of department store
net sales in 2001, reflecting slightly higher operating
expenses on the decreased sales level. Fingerhut's SG&A
expenses as a percent of net sales were 40.2%43.4%, a decrease of
7.623.7 percentage points, primarily as a result of lowerthe higher
bad debt expenses recorded in 2000.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and higher
finance charge income in the first quarterAnalysis
of 2001 compared to
the first quarterFinancial Condition and Results of 2000.Operations (Continued)
The Company recorded $46$81 million of restructuring costscharges
during the first quarter of 2001 primarily related to the closure of the Stern's
department store division, including $19$26 million of inventory
valuation adjustments as a part of cost of sales. The remaining
$27$55 million of restructuring charges includes $15 million of
costs includes $8associated with converting the Stern's stores to Macy's
(including advertising, credit card issuance and promotion and
other name change expenses), $10 million of costs to close and
sell certain Stern's stores, $9 million of duplicate central
office costs $8and $15 million of severance costs and $4 million of advertising costs. As
previously communicated, the Company anticipates incurring
approximately $30-$50 million of additional restructuring
charges related to the
closure of Stern's during the remainder
of 2001.closure.
Net interest expense was $97$197 million for the first quarter of 2001, compared to
$99$207 million for 2000, primarily due to the first quarterlower levels of
2000.borrowings.
The Company's effective income tax rate of 41.8% for the
first quarter of 2001 differs from
the federal income tax statutory rate of 35.0% principally
because of the effect of the disposition of a subsidiary,
state and local income taxes and permanent differences arising
from the amortization of intangible assets. LIQUIDITY AND CAPITAL RESOURCESIncome 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.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from
operations, cash on hand and certain available credit
facilities.
Net cash provided by operating activities in the first quarter
of 2001 was $243$776
million, compared to the $58$444 million provided
in the first quarterfor 2000, as a result of 2000, reflecting a
greater decrease in accounts receivable due to the strategic downsizing of the
Fingerhut business.and a smaller increase
in merchandise inventories.
Net cash used by investing activities was $81$413 million for
2001, including the first quarterpurchase of 2001.Liberty House. Investing
activities for the first
quarter of 2001 also included purchases of property and
equipment totaling $53$222 million and capitalized software of
$28$45 million. The Company opened one department store in
Redding, California, one furniture gallery in Cherry Hill, New
Jersey and one furniture gallery in Queens, New York in August
and plans to open 9 neweight additional department stores 3 new
furniture galleries and 2 newtwo
bedding stores during the remainder of 2001.
Net cash provided toused by the Company byfor all financing activities was
$35$355 million for the first quarter ofin 2001. During the
first quarter of 2001, the Company issued $500
million of 6.625% Senior Notes due 2011. The Company repaid
$402$662 million of borrowings during the first quarter of 2001, consisting principally
of $290$547 million of net short-term borrowings and $110 million
of 10% Senior Notes. The Company purchased 3.46.4 million shares
of its Common Stock under its stock repurchase program during
the first quarter of 2001 at an approximate cost of $140$270 million. 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 May 5,August 4, 2001, including the effect of the
May 18, 2001 authorization, the Company had
approximately $750$630 million of the $1,500 million stock
repurchase program 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.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
On June 29, 2001, the Company entered into new bank credit
agreements which replaced its existing bank credit agreements.
The new credit agreements provide for a $1,200 million
unsecured revolving credit facility with a termination date of
June 29, 2006 and a $400 million unsecured revolving credit
facility with a termination date of June 28, 2002. As of
August 4, 2001, there were no revolving credit loans
outstanding under the new bank credit agreements.
On August 23, 2001, the Company issued $500 million of 6.625%
Senior Notes due 2008. The proceeds were used to repurchase
the $350 million 6.125% Term Enhanced ReMarketable Securities
("TERMS"), repay short-term borrowings and for general
corporate purposes. As a result, $350 million of short-term
debt was reclassified to long-term debt as of August 4, 2001.
On September 4, 2001, the $350 million TERMS were repurchased
and as a result, the Company will record an extraordinary item
of approximately $9 million, net of the income tax benefit, in
the 13-week period ending November 3, 2001.
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,
Internet-related companies, catalog companies and other
complementary assets and companies.
Management believes that, with respect to its current
operations, cash on hand and funds from operations, together
with its credit facilities, will be sufficient to cover its
reasonably foreseeable working capital, capital expenditure
and debt service requirements. Acquisition transactions, if
any, are expected to be financed through a combination of cash
on hand and from operations and the possible issuance from
time to time of long-term debt or other securities. Depending
upon conditions in the capital markets and other factors, the
Company will from time to time consider the issuance of debt
or other securities, or other possible capital markets
transactions, the proceeds of which could be used to refinance
existing indebtedness or for other corporate purposes.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEMItem 1. LEGAL PROCEEDINGSLegal Proceedings
The Company and certain members of its senior management
have been named defendants in five substantially identical
purported class action complaints (the "Complaints") filed
on behalf of persons who purchased shares of the Company
between February 23, 2000 and July 20, 2000. The Complaints
were filed on August 24, August 30, September 15, September
26 and October 6, 2000, in the United States District Court
for the Southern District of New York. The Complaints
allege 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 Complaints are without merit
and intends to defend vigorously against those allegations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's stockholders was held on
May 18, 2001. The Company's stockholders voted on the
following items at such meeting:
i. The stockholders approved the election of four
Directors for a three-year term expiring at the 2004
Annual Meeting of the Company's stockholders. The
votes for such elections were as follows: Sara
Levinson - 130,813,501 votes in favor and 42,715,707
votes withheld; Joseph Neubauer - 130,811,728 votes in
favor and 42,717,480 votes withheld; Joseph A. Pichler
- 130,815,878 votes in favor and 42,713,330 votes
withheld; and Karl M. von der Heyden - 130,816,318
votes in favor and 42,712,890 votes withheld. There
were no broker non-votes on this item.
ii. The stockholders ratified the employment of KPMG LLP as
the Company's independent accountants for the fiscal
year ending February 2, 2002. The votes for the
ratification were 170,478,162, the votes against the
ratification were 1,942,374, the votes abstained were
1,109,122, and there were no broker non-votes.
iii. The stockholders approved a stockholder's proposal
seeking the adoption of a system for the annual
election of directors. The votes for the proposal were
103,783,592, the votes against the proposal were
42,363,283, the votes abstained were 13,573,954, and
there were 13,808,379 broker non-votes.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEMItem 5. OTHER INFORMATIONOther Information
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, and (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. 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; and 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-
spendingconsumer-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-lookingforward-
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.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEMItem 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K
(a)A. Exhibits
4.1 Fifth Supplemental Trust Indenture10.1 364-Day Credit Agreement, dated as of March 27,June 29,
2001, by and among the Company, andas Borrower, the
Initial Lenders Named Herein, as Initial Lenders,
Citibank, N.A., as Trustee (incorporatedAdministrative Agent and as
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and Bank of America, N.A., The
Bank of New York and Credit Suisse First Boston,
as Documentation Agents.
10.2 Five Year Credit Agreement, dated as of June 29,
2001, by reference to Exhibit 4and among the Company, as Borrower, the
Initial Lenders Named Herein, as Initial Lenders,
Citibank, N.A., as Administrative Agent and as
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and Bank of America, N.A., The
Bank of New York and Credit Suisse First Boston,
as Documentation Agents
10.3 First Amendment dated as of May 25, 2001 to the
Company's Current
Report on Form 8-K filed onAmended and Restated Pooling and Servicing Agreement,
dated March 26, 2001).
(b)18, 1998, by and among Fingerhut Receivables,
Inc., as Transferor, Axsys National Bank, as Servicer,
and The Bank of New York (Delaware), as Trustee.
B. Reports on Form 8-K
1. Current Report on Form 8-K filed on March 22,dated June 19, 2001
reporting matters under Item 5 and the related
exhibit under Item 7 thereof.
2. Current Report on Form 8-K filed on March 26,dated July 9, 2001
reporting matters under Item 5 and the related
exhibit under Item 7 thereof.
FEDERATED DEPARTMENT STORES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunder duly authorized.
FEDERATED DEPARTMENT STORES, INC.
Date June 19,September 18, 2001 /s/ Dennis J. Broderick
Dennis J. Broderick
Senior Vice President, General
Counsel and Secretary
/s/ Joel A. Belsky
Joel A. Belsky
Vice President and Controller
(Principal Accounting Officer)