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 July
31, 1999.
FEDERATED DEPARTMENT STORES, INC.
151 West 34th Street
New York, New York 10001
(212) 494-1602
and
7 West Seventh St.
Cincinnati, Ohio 45202
(513) 579-7000
Delaware 1-13536 13-3324058
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification Number)
The Registrant has filed all reports required to be filed by
Section 12, 13 or 15 (d) of the Act during the preceding 12
months and has been subject to such filing requirements for the
past 90 days.
209,940,549 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of August 28, 1999.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income
(Unaudited)
(millions, except per share figures)
13 Weeks Ended 26 Weeks Ended
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
Net Sales $ 4,111 $ 3,523 $ 7,818 $ 6,979
Cost of sales 2,409 2,101 4,675 4,207
Selling, general and
administrative expenses 1,384 1,155 2,600 2,324
Operating Income 318 267 543 448
Interest expense (87) (76) (165) (159)
Interest income 2 2 5 8
Income Before Income Taxes 233 193 383 297
Federal, state and local income
tax expense (96) (86) (159) (130)
Net Income $ 137 $ 107 $ 224 $ 167
Basic earnings per share $ .65 $ .51 $ 1.07 $ .80
Diluted earnings per share $ .61 $ .47 $ 1.02 $ .74
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets
(Unaudited)
(millions)
July 31, January 30, August 1,
1999 1999 1998
ASSETS:
Current Assets:
Cash $ 357 $ 307 $ 281
Accounts receivable 3,512 2,209 2,111
Merchandise inventories 3,635 3,259 3,361
Supplies and prepaid expenses 221 117 118
Deferred income tax assets 142 80 105
Total Current Assets 7,867 5,972 5,976
Property and Equipment - net 6,689 6,572 6,381
Intangible Assets - net 1,807 631 677
Other Assets 516 289 317
Total Assets $16,879 $13,464 $13,351
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 1,402 $ 524 $ 34
Accounts payable and accrued
liabilities 2,905 2,446 2,517
Income taxes 46 98 67
Total Current Liabilities 4,353 3,068 2,618
Long-Term Debt 4,704 3,057 3,890
Deferred Income Taxes 1,240 1,060 977
Other Liabilities 586 570 557
Shareholders' Equity 5,996 5,709 5,309
Total Liabilities and
Shareholders' Equity $16,879 $13,464 $13,351
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
26 Weeks Ended 26 Weeks Ended
July 31, 1999 August 1, 1998
Cash flows from operating activities:
Net income $ 224 $ 167
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 324 298
Amortization of intangible assets 36 13
Amortization of financing costs 3 4
Amortization of unearned restricted stock - 1
Changes in assets and liabilities:
Decrease in accounts receivable 178 331
Increase in merchandise inventories (211) (122)
Increase in supplies and prepaid expenses (19) (3)
(Increase) decrease in other assets not
separately identified (20) 4
Increase in accounts payable and accrued
liabilities not separately identified 30 45
Decrease in current income taxes (52) (21)
Increase (decrease) in deferred
income taxes 1 (9)
Decrease in other liabilities not
separetly identified (7) (8)
Net cash provided by operating
activities 487 700
Cash flows from investing activities:
Acquisition of Fingerhut Companies, Inc.,
net of cash acquired (1,539) -
Purchase of property and equipment (241) (189)
Capitalized software (21) -
Investments in affiliated companies (49) -
Disposition of property and equipment 23 22
Decrease in notes receivable - 200
Net cash provided (used) by
investing activities (1,827) 33
Cash flows from financing activities:
Debt issued 1,299 300
Financing costs (10) (7)
Debt repaid (31) (851)
Increase in outstanding checks 81 79
Acquisition of treasury stock - (154)
Issuance of common stock 51 39
Net cash provided (used) by
financing activities 1,390 (594)
(Continued)
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
26 Weeks Ended 26 Weeks Ended
July 31, 1999 August 1, 1998
Cash flows from
Net increase in cash $ 50 $ 139
Cash at beginning of period 307 142
Cash at end of period $ 357 $ 281
Supplemental cash flow information:
Interest paid $ 144 $ 147
Interest received 4 11
Income taxes paid (net of refunds received) 194 150
Schedule of non cash investing and
financing activities:
Debt assumed in acquisition 125 -
Equity issued in acquisition 12 -
Consolidation of net assets and debt of
previously unconsolidated subsidiary 1,132 -
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary 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 January 30, 1999 (the "1998 10-K"). The
accompanying Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and
notes thereto in the 1998 10-K.
Because of the seasonal nature of the general merchandising
business, the results of operations for the 13 and 26 weeks
ended July 31, 1999 and August 1, 1998 (which do not include
the Christmas season) are not indicative of such results for
the fiscal year.
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.
Direct-to-customer merchandise inventories are stated at the
lower of FIFO (first-in, first-out) cost or market.
The Consolidated Financial Statements for the 13 and 26 weeks
ended July 31, 1999 and August 1, 1998, 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.
2. Acquisition
On March 18, 1999, the Company purchased Fingerhut Companies,
Inc. ("Fingerhut"), a database marketing company that sells a
broad range of products and services directly to consumers via
catalogs, direct marketing and the Internet. The total
purchase price of the Fingerhut acquisition was approximately
$1,720 million, including the assumption of $125 million of
debt and transaction costs.
The Fingerhut acquisition is being accounted for under the
purchase method of accounting and, accordingly, the Company's
results of operations do not include any revenues or expenses
related to the acquisition prior to the closing date and the
purchase price has been allocated to Fingerhut's assets and
liabilities based on the estimated fair value of these assets
and liabilities as of that date.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
3. Segment Data
The Company conducts its business through two segments,
department stores and direct-to-customer. The Company
operates over 400 department stores throughout the country
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. On March 18, 1999,
the Company acquired Fingerhut which, together with
Bloomingdale's By Mail, Macy's By Mail, macys.com and certain
other direct marketing activities, comprises its direct-to-
customer segment. This segment sells a broad range of
products and services directly to consumers via catalogs,
direct marketing and the Internet. Corporate and other
consists of the assets and liabilities, and related income or
expense, associated with the corporate office and certain
items managed on a company-wide basis (e.g., intangibles,
financial instruments, income taxes, 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. Prior year results have not been
restated to conform to the current presentation as it is not
practicable to do so.
13 Weeks Ended 26 Weeks Ended
July 31, August 1, July 31, August 1,
(millions) 1999 1998 1999 1998
Revenues by segment were
as follows:
Department Stores $3,674 $3,523 $7,218 $6,979
Direct-to-Customer 437 - 600 -
Total $4,111 $3,523 $7,818 $6,979
Operating income by segment
was as follows:
Department Stores $ 398 $ 299 $ 671 $ 519
Direct-to-Customer (27) - (29) -
Total segment operating income 371 299 642 519
Corporate and other (53) (32) (99) (71)
Operating income $ 318 $ 267 $ 543 $ 448
Depreciation and amortization
by segment was as follows:
Department Stores $ 151 $ 148 $ 304 $ 295
Direct-to-Customer 14 - 17 -
Corporate and other 22 8 39 16
Total $ 187 $ 156 $ 360 $ 311
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
26 Weeks Ended
July 31, August 1,
(millions) 1999 1998
Year-to-date capital expenditures
(purchase of property and equipment)
by segment were as follows:
Department Stores $ 235 $ 187
Direct-to-Customer 6 -
Corporate and other - 2
Total $ 241 $ 189
Total assets for each segment at the
end of the reporting period were as follows:
Department Stores $12,214 $12,119
Direct-to-Customer 2,288 -
Corporate and other 2,377 1,232
Total $16,879 $13,351
4. Earnings Per Share
The following tables set forth the computation of basic and
diluted earnings per share:
13 Weeks Ended
July 31, 1998 August 1, 1998
(millions, except per share data) Shares Income Shares Income
Net income and average number
of shares outstanding 209.5 $ 137 210.2 $ 107
Shares to be issued under deferred
compensation plans .4 - .3 -
209.9 $ 137 210.5 $ 107
Basic earnings per share $ .65 $ .51
Effect of dilutive securities:
Warrants 8.8 8.9
Stock options 3.2 2.8
Convertible notes - - 10.2 2
221.9 $ 137 232.4 $ 109
Diluted earnings per share $ .61 $ .47
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
13 Weeks Ended
July 31, 1998 August 1, 1998
(millions, except per share data) Shares Income Shares Income
Net income and average number
of shares outstanding 209.0 $ 224 210.3 $ 167
Shares to be issued under deferred
compensation plans .4 - .3 -
209.4 $ 224 210.6 $ 167
Basic earnings per share $1.07 $ .80
Effect of dilutive securities:
Warrants 7.3 8.5
Stock options 2.5 2.7
Convertible notes - - 10.2 5
219.2 $ 224 232.0 $ 172
Diluted earnings per share $1.02 $ .74
In addition to the warrants and stock options reflected in
the foregoing tables, warrants and stock options to purchase
.8 million and .6 million shares of common stock at prices
ranging from $52.94 to $79.44 per share were outstanding at
July 31, 1999 and August 1, 1998, respectively, but were not
included in the computation of diluted earnings per share
because the exercise price thereof exceeded the average
market price and would have been antidilutive.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company acquired Fingerhut on March 18, 1999. The
acquisition is being accounted for under the purchase method
of accounting and, accordingly, the Company's results of
operations do not include any revenues or expenses related to
the acquisition prior to the closing date. The results of
operations of Fingerhut have been grouped with the Company's
Bloomingdale's By Mail, Macy's By Mail and macys.com
operations and certain other direct marketing activities as
the direct-to-customer segment.
For purposes of the following discussion, all references to
"second quarter of 1999" and "second quarter of 1998" are to
the Company's 13-week fiscal periods ended July 31, 1999 and
August 1, 1998, respectively, and all references to "1999" and
"1998" are to the Company's 26-week fiscal periods ended July
31, 1999 and August 1, 1998, respectively.
Results of Operations
Comparison of the 13 Weeks Ended July 31, 1999 and August 1,
1998
Net sales for the second quarter of 1999 totaled $4,111
million, compared to net sales of $3,523 million for the
second quarter of 1998, an increase of 16.7%. Net sales for
department stores for the second quarter of 1999 were $3,674
million compared to $3,523 million for the second quarter of
1998, an increase of 4.2%. On a comparable store basis (sales
from stores opened prior to February 1, 1998), net sales for
the second quarter of 1999 increased 5.9% compared to the
second quarter of 1998. Net sales for the direct-to-customer
segment were $437 million for the second quarter of 1999.
Cost of sales was 58.6% of net sales for the second quarter of
1999, compared to 59.6% for the second quarter of 1998. Cost
of sales as a percent of net sales for department stores
improved 0.3% in the second quarter of 1999 compared to the
same period a year ago, benefiting from the continued
favorable economic environment. The lower cost of sales from
the direct-to-customer segment in the second quarter of 1999,
compared to cost of sales for department stores, along with
the improvement in the cost of sales rate for department
stores contributed to the overall 1.0% decrease in the cost of
sales rate. Cost of sales was not impacted by the valuation
of department store merchandise inventory on the last-in,
first-out basis in the second quarter of 1999 or in the second
quarter of 1998.
Selling, general and administrative ("SG&A") expenses were
33.7% of net sales for the second quarter of 1999 compared to
32.8% for the second quarter of 1998. Department store SG&A
expenses improved 2.0% as a percent of department store net
sales, reflecting the impact of higher sales with flat
nonpayroll expenses and lower bad debt expense, which was
partially offset by reduced finance charge income resulting
from lower average receivable balances. The higher SG&A
expense rate for the direct-to-customer segment, including
recently launched businesses, and higher amortization expense
due to the Fingerhut acquisition combined to offset the strong
department store performance and produce a 0.9% increase in
the SG&A expense rate compared to the second quarter of 1998.
Net interest expense was $85 million for the second quarter of
1999, compared to $74 million for the second quarter of 1998.
The higher interest expense for the second quarter of 1999 is
due mainly to the increased outstanding debt resulting from
the Fingerhut acquisition.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The Company's effective income tax rate of 41.3% for the
second quarter of 1999 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 and from other non-
deductible items.
Comparison of the 26 Weeks Ended July 31, 1999 and August 1,
1998
Net sales for 1999 totaled $7,818 million, compared to net
sales of $6,979 million for 1998, an increase of 12.0%. Net
sales for department stores for 1999 were $7,218 million
compared to $6,979 million for 1998, an increase of 3.4%. On
a comparable store basis (sales from stores opened prior to
February 1, 1998), net sales for 1999 increased 5.0% compared
to 1998. Net sales for the direct-to-customer segment were
$600 million for 1999.
Cost of sales was 59.8% of net sales for 1999, compared to
60.3% for 1998. Cost of sales as a percent of net sales for
department stores in 1999 was relatively flat compared to
1998. The lower cost of sales from the direct-to-customer
segment in 1999, compared to cost of sales for department
stores, contributed to the 0.5% improvement in the cost of
sales rate. Cost of sales was not impacted by the valuation
of department store merchandise inventory on the last-in,
first-out basis in 1999 or in 1998.
SG&A expenses were 33.3% of net sales for 1999 and 1998.
Department store SG&A expenses improved 2.0% as a percent of
department store net sales, reflecting the impact of higher
sales with flat nonpayroll expenses and lower bad debt
expense, which was partially offset by reduced finance charge
income resulting from lower average receivable balances. The
higher SG&A expense rate for the direct-to-customer segment,
including recently launched businesses, and higher
amortization expense due to the Fingerhut acquisition combined
to offset the strong department store performance.
Net interest expense was $160 million for 1999, compared to
$151 million for 1998. The higher interest expense for 1999
is due mainly to the increased outstanding debt resulting from
the Fingerhut acquisition.
The Company's effective income tax rate of 41.6% for 1999
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 and from other non-deductible items.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
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 1999 was $487
million, a decrease of $213 million compared to the $700
million provided in 1998. The improved operating results were
more than offset by smaller reductions in customer accounts
receivable, mainly as a result of higher credit sales, and
greater increases in merchandise inventories principally due
to seasonal fluctuations of Fingerhut inventories.
Net cash used by investing activities was $1,827 million for
1999, including the purchase of Fingerhut. Investing
activities for 1999 also included purchases of property and
equipment totaling $241 million and $49 million invested in
affiliated companies. During 1999, the Company opened two new
department stores and plans to open two additional department
stores and two new furniture galleries during the remainder of
1999.
Net cash provided by the Company from all financing activities
was $1,390 million for 1999. The Company funded the
acquisition of Fingerhut through a combination of cash on hand
and short-term borrowings. During March of 1999, the Company
issued $350 million of 6.3% Senior Notes due 2009 and $400
million of 6.9% Senior Debentures due 2029, the proceeds of
which were used to refinance a portion of the short-term
borrowings used by the Company to acquire Fingerhut.
In July 1999, the Company took certain actions which required
the consolidation of the Fingerhut Master Trust for financial
reporting purposes. The principle assets and liabilities of
the Fingerhut Master Trust, which were not included in the
Company's Consolidated Financial Statements prior to July 31,
1999, consisted of accounts receivable transferred from
Fingerhut in transactions treated as sales under Statement of
Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and the related debt issued
by the Trust. 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 31, 1999. At July 31,
1999, these actions increased net assets by $1,132 million,
short-term debt by $232 million and long-term debt by $900
million.
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.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Management of the Company believes that, with respect to its
current operations, cash on hand and funds from operations,
together with its credit facilities, will be sufficient to
cover its reasonably foreseeable working capital, capital
expenditure and debt service requirements. Acquisition
transactions, if any, are expected to be financed through a
combination of cash on hand and from operations and the
possible issuance from time to time of long-term debt or other
securities. Depending upon conditions in the capital markets
and other factors, the Company will from time to time consider
the issuance of debt or other securities, or other possible
capital markets transactions, the proceeds of which could be
used to refinance current indebtedness or for other corporate
purposes.
Year 2000
The Company relies on computer-based technology and utilizes
a variety of third-party hardware and proprietary and third-party
software. The Company's retail functions, such as merchandise
procurement and distribution, inventory control, point-of-sale
information systems and proprietary credit card account servicing,
generally use proprietary software, with third-party software
being used more extensively for administrative functions,
such as accounting and human resource management. In
addition to such information technology ("IT") systems, the
Company's operations rely on various non-IT equipment and
systems that contain embedded computer technology, such as
elevators, escalators and energy management systems. Third
parties with whom the Company has commercial relationships,
including vendors of merchandise for resale by the Company and
of products and services used by the Company in its operations
(such as banking and financial services, data processing
services, telecommunications services and utilities), are also
highly reliant on computer-based technology.
In February 1996, the Company commenced an assessment of the
potential effects of the Year 2000 issue on the Company's
business, financial condition and results of operations. In
conjunction with such assessment, the Company developed and
commenced the implementation of the compliance program
described below.
As discussed separately under the caption "Fingerhut" below,
Fingerhut undertook a similar program prior to being
acquired by the Company.
The Company's Year 2000 Compliance Program
Proprietary IT Systems. Pursuant to the Company's Year 2000
compliance program, the Company has undertaken an examination
of the Company's proprietary IT systems. All such systems
that have been identified as relating to a critical function
and as not being Year 2000 compliant have been substantially
remediated or replaced. The Company believes that the
remediation of its proprietary IT systems is substantially
complete, and nearly all of the proprietary IT systems that
have been remediated have been installed and placed into
production. The Company commenced testing of such remediated
systems for Year 2000 compliance in August 1998 and has
completed a comprehensive, integrated test of all of its main-
frame and mid-range IT systems (including third-party and
proprietary hardware, software, network components and
interfaces) and has substantially completed varying levels of
follow-up testing of selected systems.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Third-Party IT Systems. The strategy instituted by the
Company to identify and address Year 2000 issues affecting
third-party IT systems used by the Company includes contacting
all third-party providers of computer hardware and software to
secure appropriate representations to the effect that such
hardware or software is or will timely be Year 2000 compliant.
The Company has received Year 2000 compliant versions of
almost all third-party software and has substantially
completed testing of those third-party software programs that
have been identified as being critical to the Company's
operations.
Non-IT Systems. The Company has undertaken a review of its
non-IT systems and has substantially completed the remediation
of those systems that are within the Company's control. In
addition, the Company's centralized real estate department has
communicated to the developers, landlords and property
managers of all of the Company's properties the Company's
expectation that the systems utilized in the management and
operation of such properties that are not within the Company's
control are or will timely be Year 2000 compliant. As a
further step, the Company has engaged in written or oral
communications with its key developers, landlords and property
managers in order to assess the Year 2000 readiness of such
systems. These communications have not revealed to the
Company any information that has caused the Company to believe
that such systems will fail to timely be Year 2000 compliant
in any respect that is material to the Company's business,
financial condition or results of operations.
Non-IT Vendors and Suppliers. The Company procures its
merchandise for resale and supplies for operational purposes
from a vast network of vendors located both within and outside
the United States, and is not dependent on any one vendor for
more than 5% of its merchandise purchases. The Company
procures its private label merchandise, which constitutes
approximately 15% of the Company's total sales, principally
from manufacturers located outside the United States. All of
the Company's vendors have been notified in writing of the
Company's expectation that the systems and operations of such
vendors will timely be Year 2000 compliant. As a further
step, the Company has engaged in written or oral
communications with selected key vendors in order to assess
the Year 2000 readiness of their respective operations. These
communications have not revealed to the Company any
information that has caused the Company to believe that the
operations of such vendors will fail to timely be Year 2000
compliant in any respect that is material to the Company's
business, financial condition or results of operations.
Contingency Planning. The Company's Year 2000 compliance
program is directed primarily towards ensuring that the
Company will be able to continue to perform three critical
functions: (i) effect sales, (ii) order and receive
merchandise, and (iii) pay its employees. The Company has
substantially completed the development of a contingency plan
intended to address, to the extent within the Company's
reasonable control, the potential effects on these mission
critical functions of a failure of the Company's Year 2000
compliance program to be fully effective. The Company has
designed its contingency plan as an extension of its current
business recovery plan, which prescribes the measures to be
taken upon the occurrence of a variety of contingencies. In
addition to relying on the fundamental
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
principles of recovery contained in the Company's business
recovery plan, the Company's Year 2000 contingency plan
focuses on assuring that key personnel - including managerial,
technical, maintenance, security and other personnel employed
at its stores and in its IT and logistics support functions -
will be available to identify and seek to rectify as promptly
as possible any disruptions that may result from the date
change on January 1, 2000. The Company's contingency plan
also provides for assuring its ability to pay its employees by
preprinting payroll checks covering a few pay periods
following December 31, 1999 and utilizing electronic time
clock data or historical data in the event it is unable to
access current payroll data. The Company currently is engaged
in disseminating its contingency plan Company-wide and taking
appropriate steps to ensure the proper execution of such plan
if necessary.
Fingerhut. Fingerhut implemented a program to address the
effects of the Year 2000 issue prior to being acquired by the
Company. The actions contemplated by Fingerhut's Year 2000
compliance program, including contingency planning, have been
substantially completed and substantially all of the costs
Fingerhut expected to incur have been incurred. The foregoing
discussion of the Company's Year 2000 compliance program does
not address Fingerhut's systems or vendors or any aspect of
Fingerhut's Year 2000 compliance program. However, the
discussion below of risks associated with the Year 2000 issue
apply equally to the Company and Fingerhut and their
respective Year 2000 compliance programs.
Costs. The Company (excluding Fingerhut) has incurred to
date approximately $33 million of costs to implement its Year
2000 compliance program, of which approximately 20%
represents capitalized expenditures for hardware purchases.
The Company does not expect that future expenditures relating
to its Year 2000 compliance program will be material. All of
the Company's Year 2000 compliance costs have been or are
expected to be funded from operating cash flows. The
Company's Year 2000 compliance budget does not include
material amounts for hardware replacement because the Company
has historically employed a strategy to continually upgrade
its main-frame and mid-range computer systems and to install
state of the art point-of-sale systems with respect to both
pre-existing operations and in conjunction with the
acquisitions and mergers effected by the Company in recent
years. Consequently, the Company's Year 2000 budget has not
required the diversion of funds from or the postponement of
the implementation of other planned IT projects.
Risks. The novelty and complexity of the issues presented
and the proposed solutions therefor and the Company's
dependence on the technical skills of employees and
independent contractors and on the representations and
preparedness of third parties are among the factors that could
cause the Company's Year 2000 compliance efforts to be less
than fully effective. Moreover, Year 2000 issues present a
number of risks that are beyond the Company's reasonable
control, such as the failure of utility companies to deliver
electricity, the failure of telecommunications companies to
provide voice and data services, the failure of financial
institutions to process transactions and transfer funds, the
failure of vendors to deliver merchandise or perform services
required by the Company and the collateral effects on the
Company of the effects of Year 2000 issues on the economy in
general or on the Company's business partners and customers in
particular. Although the Company believes that its Year 2000
compliance program, including its contingency plan, are
designed to appropriately identify and address those Year 2000
issues that are subject to the Company's reasonable control,
there can be no assurance that the Company's efforts in this
regard will be fully effective or that Year 2000 issues will
not have a material adverse effect on the Company's business,
financial condition or results of operations.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Item 5. Other 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," "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
(i) risks and uncertainties relating to the possible
invalidity of the underlying beliefs and assumptions,
(ii) possible changes or developments in social,
economic, business, industry, market, legal and
regulatory circumstances and conditions, and (iii)
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. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Second Amended and Restated Credit Agreement,
dated as of July 26, 1999, by and among the
Company, the Initial Lenders named therein,
Citibank, N.A., as Administrative Agent and Paying
Agent, The Chase Manhattan Bank, as Administrative
Agent, BankBoston, N.A., as Syndication Agent, and
The Bank of America, National Trust & Savings
Association, as Documentation Agent.
10.2 Second Amendment to the Series 1998-3 Supplement,
dated as of July 29, 1999, by and among Fingerhut
Receivables, Inc., as Transferor, Axsys National
Bank (formerly Fingerhut National Bank), as
Servicer, and The Bank of New York (Delaware), as
Trustee.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC. (Company)
10.3 Security Purchase Agreement, dated as of July 30,
1998, by and among Fingerhut Receivables, Inc.
(the "Transferor"), Kitty Hawk Funding Corporation
("Kitty Hawk"), Falcon Asset Securitization
Corporation ("Falcon"), Four Winds Funding
Corporation ("Four Winds" and, collectively with
Kitty Hawk and Falcon, the "Conduit Purchasers"),
Bank of America, N.A. ("BofA" or the
"Administrative Agent"), The First National Bank
of Chicago ("First Chicago"), Norddeutsche
Landesbank Girozentrale, New York Branch and/or
Cayman Island Branch ("Norddeutsche"), and
Commerzbank Aktiengesellschaft, Chicago Branch
("Commerzbank" and collectively with BofA, First
Chicago and Norddeutsche, the "Alternate
Purchasers" and collectively with BofA and First
Chicago, the "Managing Agents").
10.4 First Amendment Agreement to Fingerhut
Receivables, Inc. Security Purchase Agreement,
dated as of July 29, 1999, by and among Fingerhut
Receivables, Inc., Kitty Hawk, Falcon, Four Winds,
the Conduit Purchasers, the Alternate Purchasers
and the Managing Agents.
10.5 Series 1999-1 Variable Funding Supplement, dated
as of July 6, 1999, to the Pooling and Servicing
Agreement by and among Prime II Receivables
Corporation, as Transferor, FDS National Bank, as
Servicer, and The Chase Manhattan Bank, as
Trustee.
10.6 Class A Certificate Purchase Agreement, dated as
of July 6, 1999, by and among Prime II Receivables
Corporation, as Transferor, FDS National Bank, as
Servicer, The Class A Purchasers, and PNC Bank,
National Association, as Agent and Administrative
Agent.
10.7 First Amendment to Class A Certificate Purchase
Agreement, dated as of August 3, 1999, by and
among Prime II Receivables Corporation, as
Transferor, FDS National Bank, as Servicer, The
Class A Purchasers, and PNC Bank, National
Association, as Agent and Administrative Agent.
10.8 Class B Certificate Purchase Agreement, dated as
of July 6, 1999, by and among Prime II Receivables
Corporation, as Transferor, FDS National Bank, as
Servicer, The Class A Purchasers, and PNC Bank,
National Association, as Agent and Administrative
Agent.
10.9 First Amendment to Class B Certificate Purchase
Agreement, dated as of August 3, 1999, by and
among Prime II Receivables Corporation, as
Transferor, FDS National Bank, as Servicer, The
Class A Purchasers, and PNC Bank, National
Association, as Agent and Administrative Agent.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC. (Company)
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter
ended July 31, 1999.
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 September 14, 1999 /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)