EXHIBIT 13.1
[Title Page]
1999 Annual Report
SAKS
INCORPORATED
Fashioning the Future
[Table of Contents]
2 Financial Highlights
3 Letter to Our Shareholders
17 Five-Year Financial Summary
18 Management's Discussion and Analysis
27 Consolidated Financial Statements
31 Notes to Consolidated Financial Statements
59 Report of Independent Accountants
59 Report of Management
60 Market Information
61 Directors and Certain Officers
63 Store Locations
64 Shareholder Information
65 Corporate Information
1
Fashioning the Future
Saks Incorporated is one of the country's premier retail
enterprises, operating 359 stores in 39 states, with over $6.4
billion in annual revenues and nearly 60,000 associates. The
Company operates 61 Saks Fifth Avenue stores, 43 Parisian
specialty department stores, 209 traditional department stores
and 46 Off 5th outlet stores. The Company made substantial
progress on its key strategic initiatives in 1999 and enters 2000
with a strategy intensely focused on improving its operations and
shareholder value.
2
FINANCIAL HIGHLIGHTS
SAKS
INCORPORATED
financial highlights
Fiscal Year Ended
- -----------------------------------------------------------------------------------------
(in thousands, except January 29, January 30, January 31,
per share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------
Net Sales $6,423,819 $5,955,242 $5,508,728
Income before non-routine items $230,132 $153,525 $166,222
Diluted earnings per common
share before non-routine items $1.58 $1.05 $1.17
Income before extraordinary items $198,904 $24,985 $416,237
Diluted earnings per common share
before extraordinary items $1.36 $0.17 $2.86
Diluted weighted average common share 146,056 146,383 149,085
Total assets $5,098,952 $5,188,981 $4,270,253
Shareholders' equity $2,208,343 $2,007,575 $1,944,529
Note: Non-routine items include extraordinary items, gains or
losses from long-lived assets, merger and integration charges,
year 2000 expenses, ESOP expenses and the 1997 recognition of a
$294,846 deferred tax asset.
3
LETTER TO OUR SHAREHOLDERS
moving the program ahead
1999 was a transition year in which we failed to achieve our
planned earnings growth but one during which we made substantial
progress on a number of strategic initiatives including:
* meeting our synergy and cost rationalization goals,
* reorganizing and strengthening the management team at Saks
Fifth Avenue,
* strengthening inventory management and controls at Saks
Fifth Avenue,
* streamlining the corporate organizational structure in the
traditional department store business,
* executing numerous systems conversions and enhancements,
* finalizing the planned consolidation of our southern
distribution facilities,
* continuing to intensify private brand merchandise in the
department stores and at Saks Fifth Avenue,
* strengthening vendor partnerships,
* developing the team and infrastructure for the roll-out of
saksfifthavenue.com,
* redesigning the prototype Saks Fifth Avenue store, reducing
future store fixed investment and
* establishing stringent return criteria for each of our
assets, resulting in the closings of certain unproductive
stores.
Even though we accomplished much, we did not achieve our plan for
earnings growth primarily due to a shortfall in sales in our
traditional department stores and merchandise margin performance
at Saks Fifth Avenue.
With this year of transition behind us, we believe that the
Company has laid the foundation for quality growth in our
operating performance. We have the strategies and the team in
place to generate a compound annual growth rate in operating
earnings over the next three years of 12% to 15%.
The drivers of this performance will be:
* average comparable store sales growth of 3% or greater per
year,
* average new square footage growth of approximately 1% to 3%
per year,
* improvement in gross margin rate,
* leverage on selling, general and administrative expenses and
* reduced interest expense through de-leveraging the balance
sheet.
During this time frame, we expect to generate a substantial
amount of free cash, which can be used to repurchase shares and
reduce debt.
We enter 2000 with a very focused strategy. Four key priorities
will improve operations and create value. Priorities for 2000
are to:
* generate strong comparable store sales growth in the
traditional department store business,
* improve the return on inventory investment and increase the
profitability of Saks Fifth Avenue,
* reduce corporate and home office overhead and
* effectively launch saksfifthavenue.com.
4
creating a brighter outlook
During 1999, performance in the traditional department stores was
disappointing. While we experienced consumer acceptance of a
number of our merchandising initiatives, this was not sufficient
to offset a general slowdown in the traditional department
store sector during the year.
We are committed to generating strong comparable store sales
growth in our traditional department store business through
merchandising, service and marketing initiatives.
5
Our merchandise assortments will reflect key item
intensification. Our product strategy will be increasingly
lifestyle-focused and will reflect merchandise from global,
national, specialty and proprietary branded sources. We will
assert our style authority and drive clarity in our offerings.
Merchandise will be distributed more efficiently by store through
enhanced planning processes.
We will make changes in our service model within our stores to
improve productivity and service quality. Our Company will make
physical alterations in certain stores to elevate the service
impression and speed transactions. We will reduce tasks and
change selling support activities pursuant to the recommendations
of our strategic planning process completed in 1999.
We will also heighten our focus on relationship marketing to our
most loyal customers. We continue to invest in the generation of
new proprietary credit card holders and will strengthen our
customer loyalty programs across our franchises. The growth of
these programs will facilitate an enhanced lifetime contribution
from these customers and add to the value of our customer base.
The department store industry has relied so heavily in recent
years on scale and technology benefits to drive its earnings
growth that we have often failed to adequately innovate and
experiment. While the department store format is a resilient
one, as demonstrated through many retail and economic cycles, we
must do a better job of creating compelling reasons for customers
to shop with us. As an industry, we have too much sameness in
our product and assortments. We are committed to recapturing the
imagination of the consumer through innovative product, an
enhanced service proposition and substantially differentiated
marketing.
The recent reorganization of our department store group was
designed to facilitate the execution of these strategies, and our
incentive compensation for department store management will be
based principally upon top-line growth.
6
building on brand power
Our solid sales performance in the Saks Fifth Avenue stores in
1999 was a reflection of strong customer response to well-
executed merchandising and marketing initiatives. However, our
gross margin performance was unsatisfactory due to markdowns in
excess of planned levels.
We began the year 2000 with comparable store inventory up very
modestly over last year's levels at Saks Fifth Avenue and the
processes, controls and management in place to execute to our
standards for improved inventory turnover and gross margin
contribution.
We have made meaningful progress in refining the inventory
assortments at Saks Fifth Avenue, which includes more closely
aligning the level of inventory investment with sales plans
within each segment of business, responding to increased demand
for elegant casual apparel offerings, increasing the breadth of
our proprietary brand offerings and distorting growth in higher
margin rate businesses. In addition, we have strengthened
alliances with core resources in order to develop and execute
profitable future business relationships. We will continue to
focus on each of these initiatives going forward.
7
Given the sales productivity and the brand power associated with
Saks Fifth Avenue, we believe that this part of our business has
the potential to generate substantially higher revenues and
merchandise margins than are being produced today.
8
reshaping strengths
9
We continue to realize the targeted cost reductions and synergies
related to each of our business combinations. Through the end of
1999, we achieved total synergies of approximately $115 million.
In July of last year, we completed the integration of the Saks
Fifth Avenue proprietary credit card administration, which was
previously handled by a third party, into our corporate
operation. This successful conversion represents one of our
largest sources of synergies related to the Saks Holdings
acquisition.
In mid-1999, we announced the planned 2001 consolidation of our
three southern distribution facilities currently serving the
Proffitt's, McRae's and Parisian stores into a new, state-of-the-
art facility to be located in Steele, Alabama. This streamlining
of our distribution systems will produce annual savings of
approximately $10 million beginning in 2001.
In February of this year, the Company announced its plans to
merge the merchandising, advertising/marketing and sales support
functions of the McRae's division into the Proffitt's home
offices and the Herberger's division into the Carson Pirie Scott
home offices. We also will close the Herberger's distribution
facility in St. Cloud, Minnesota and will transfer these
functions to the Carson Pirie Scott distribution center in
Rockford, Illinois. These consolidations will reduce total
operating expenses in excess of
$15 million annually, beginning in 2001.
The divisional consolidations are targeted at leveraging key
managers in the areas of merchandising, marketing and store
administration, creating a more efficient cost structure and
enhancing execution through streamlined decision making. We
believe this is the appropriate organizational structure that
will permit us to best operate our existing business and to
further position the Company to achieve our growth plans.
Over the past several years, our corporate staff has been highly
focused on merger and acquisition consolidation activities that
allowed us to recognize significant savings. As we enter 2000,
our corporate team will be focused on delivering productivity
gains and increased operating efficiencies from our core
businesses. These productivity gains, coupled with the effective
execution of the divisional consolidations, will permit us to
meaningfully reduce our administrative overhead.
10
SAKS
FIFTH
AVENUE
[copy of webpage]
11
bringing luxury on-line
We have a very focused strategy for value creation with Saks
Direct, principally through our launch of saksfifthavenue.com
scheduled for the summer of 2000. We have assembled a separate
management team with extensive experience in merchandising,
marketing and information technology to execute this initiative.
Research indicates that we own the dominant worldwide luxury
brand in retailing and that our target customer has a high
propensity to shop and spend on-line. We expect to capture a
meaningful share of the growing, underserved and fragmented on-
line luxury retail market. saksfifthavenue.com will leverage
existing Saks Fifth Avenue assets, including our brand equity,
valuable relationships with our vendors and customers, and
marketing resources.
In addition, our existing catalog fulfillment operations housed
in Aberdeen, Maryland are being upgraded to support the expanded
Direct business.
We believe that there are substantial growth opportunities
associated with saksfifthavenue.com and that this can be a
business with sales and profitability greater than that
contributed by our Saks Fifth Avenue New York store within five
years.
saksfifthavenue.com will offer a broad selection of Saks Fifth
Avenue merchandise as well as complementary new product
offerings, best-in-class service integrated with Saks Fifth
Avenue stores, a highly personalized, user-customizable shopping
experience and the opportunity for millions of on-line shoppers,
not proximate to a store location, to experience shopping at Saks
Fifth Avenue. At launch, we expect to offer more than 10,000
SKUs of premier luxury goods on our site and to expand that
number to nearly 100,000 by mid-2001.
The Saks Direct business will include our existing catalog
business (Folio and Bullock & Jones) as well as our E-commerce
initiatives. Because of the distinctions of our direct sales
channel and in order to avoid distracting management from the
operations of our core business, Saks Direct will operate
essentially as an independent unit.
Saks Direct will maintain its own staff in key areas such as
merchandising, marketing, information technology and order
fulfillment. Certain administrative services will be purchased
from other Saks Incorporated units on a fee-for-service basis.
Saks Direct will also remit a 5% royalty payment to Saks
Incorporated based on net sales for the use of certain brand
names.
12
locating new opportunities
During 1999, the Company added a total of 15 new stores
(including two replacement stores), expanded 7 stores and closed
5 underperforming units, representing net square footage growth
of approximately 3%, or about 1.0 million additional feet, to the
Company's store base.
For 2000, we have very modest growth plans for six new stores and
two Saks Fifth Avenue Men's Stores, representing a total of
approximately 520,000 square feet. We opened a new Saks Fifth
Avenue Men's Store in Portland, Oregon in March, a Saks Fifth
Avenue store in Highland Park, Illinois in April and Off 5th
stores in Olathe, Kansas and Nashville, Tennessee in March and
April, respectively.
A Saks Fifth Avenue store in Ft. Worth, Texas, a Parisian store
in Charleston, South Carolina and a Carson Pirie Scott store in
Schaumburg, Illinois -- as well as one more free-standing Saks
Fifth Avenue Men's Store in Chevy Chase, Maryland -- will open
later this year.
We are focusing on opening more stores in non-traditional
locations -- lifestyle centers -- apart from the regional mall.
We currently operate seven of these, have three more under devel-
opment and have plans to announce more. The design of these
stores and of the departments within the stores is constantly
evolving and is intended to modernize the impression and
experience of our customers.
Through the leadership of our corporate store planning team and
our increased scale, we have redesigned the prototype Saks Fifth
Avenue store and reduced the fixed investment associated with
square footage growth in these units by an average of 20%. Our
Dallas and Boca Raton stores opened in fall 1999 and our 2000
openings are examples of this new prototype design. These new
units have been met with outstanding customer acceptance.
Last fall, we announced a licensing agreement to open a 57,000
square foot Saks Fifth Avenue store in The Kingdom Centre,
located in Riyadh, Saudi Arabia in 2001. We are delighted to
prepare for the Company's first global expansion and will explore
the possibility of additional international units over time.
13
The Company closed four underperforming units in February and
March 2000 (two Younkers stores, one Boston Store and the San
Francisco Bullock & Jones store), representing approximately
500,000 square feet. We will continue to review our store
portfolio in the ordinary course of business to determine if
additional unit closings or conversions are appropriate. The
planned openings and closings will net no additional square
footage to the Company's store base in 2000.
14
investing in tomorrow
During 1999, the Board authorized a share repurchase of five
million shares, or about 3.5% of our common stock outstanding.
Through the end of March 2000 we purchased a total of 3.7 million
shares under this plan. The cash flow generation of our
enterprise and our recent stock price performance allowed us to
make a very attractive investment in our own Company.
The depressed valuation of our Company masks the very substantial
progress that was made in 1999. However, we understand that our
failure to increase earnings at our targeted level has severely
penalized us in the market. In addition, the department store
industry is trading at its lowest multiples of value in 15 years.
We clearly are disappointed in the stock price, but we believe
that executing the initiatives I have outlined should lead to a
more appropriate valuation for this Company.
15
1999 was a year of transition for our Company.
We have laid the foundation for quality operating earnings growth
of 12% to 15% over the next three years. While effectively
executing the integration of Saks Fifth Avenue into our
corporation and delivering the expected savings related to this
integration, we failed to deliver on the comparable store sales
growth plan in our department store business and to generate the
improved earnings contribution expected from Saks Fifth Avenue.
Those are the two principal reasons we failed to generate our
planned earnings growth in 1999.
I am confident we now have the strategies and team in place to
meet our objectives and regain our operating momentum in 2000.
Sincerely
/s/ R. Brad Martin
R. Brad Martin
Chairman of the Board and Chief Executive Officer
Saks Incorporated
This letter contains "forward-looking" information within the
definition of the Federal securities laws. For a discussion of
risk factors, refer to "Forward-Looking Information" contained in
Management's Discussion and Analysis appearing on page 18 of this
annual report.
16
[Blank page]
17
SAKS INCORPORATED & SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY
52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended Ended
(In thousands, except January 29, January 30, January 31, February 1, February 3,
per share amounts) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Consolidated Income Statement Data:
Net sales $6,423,819 $5,955,242 $5,508,728 $4,719,787 $4,240,585
Cost of sales 4,022,522 3,788,794 3,477,770 3,001,914 2,718,504
- -----------------------------------------------------------------------------------------------------------
Gross margin 2,401,297 2,166,448 2,030,958 1,717,873 1,522,081
Selling, general and
administrative expenses 1,355,295 1,329,250 1,201,023 1,057,144 961,407
Other operating expenses 535,670 498,733 444,276 367,247 330,634
(Gains) losses from long-
lived assets 12,547 61,785 (134) 1,406 (36,058)
Merger and integration
charges 35,660 111,307 36,524 16,929 64,237
Year 2000 expenses 5,917 10,437 6,590
ESOP expenses 9,513 3,910 2,931
Expenses related to attempted
Younkers takeover 10,017
- -----------------------------------------------------------------------------------------------------------
Operating income 456,208 154,936 333,166 271,237 188,913
Interest expense (138,968) (110,971) (113,685) (114,881) (141,725)
Other income (expense), net 140 22,201 2,330 (11,780) 4,051
- -----------------------------------------------------------------------------------------------------------
Income before provision
(benefit) for income
taxes and extraordinary
items 317,380 66,166 221,811 144,576 51,239
Provision (benefit) for
income taxes 118,476 41,181 (194,426) 50,998 48,914
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary
items 198,904 24,985 416,237 93,578 2,325
Extraordinary loss on early
extinguishment of debt,
net of taxes (9,261) (25,881) (11,323) (12,746) (8,051)
- -----------------------------------------------------------------------------------------------------------
Net income $189,643 $(896) $404,914 $80,832 $(5,726)
===========================================================================================================
Basic earnings per common share:
Before extraordinary items $1.38 $0.17 $3.03 $0.72 $0.00
After extraordinary items $1.32 $(0.01) $2.94 $0.62 $(0.07)
Diluted earnings per common share:
Before extraordinary items $1.36 $0.17 $2.86 $0.70 $0.00
After extraordinary items $1.30 $(0.01) $2.79 $0.60 $(0.07)
Weighted average common shares:
Basic 144,174 142,856 137,588 125,056 111,974
Diluted 146,056 146,383 149,085 132,583 113,309
Consolidated Balance Sheet Data:
Working capital $1,110,796 $887,875 $1,096,359 $951,752 $710,468
Total assets $5,098,952 $5,188,981 $4,270,253 $3,630,276 $2,899,565
Long-term debt, less
current portion $1,966,802 $2,110,395 $1,093,806 $863,475 $1,256,349
Subordinated debt $----- $4,252 $286,964 $501,767 $150,505
Shareholders' equity $2,208,343 $2,007,575 $1,944,529 $1,397,934 $691,059
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
Saks Incorporated (hereinafter the "Company") is a national
retailer currently operating 359 premier and traditional
department stores under the following names: Saks Fifth Avenue
(61 stores), Proffitt's (31 stores), McRae's (30 stores),
Younkers (51 stores), Parisian (43 stores), Herberger's (40
stores), Carson Pirie Scott ("Carson's") (32 stores), Bergner's
(14 stores), Boston Store (11 stores), and Off 5th (46 stores).
The Company also operates Saks Direct, which includes the Folio
and Bullock & Jones catalogs.
The Company has experienced significant growth since 1994,
principally through a series of acquisitions. The Company's major
acquisitions are outlined below:
Number of Accounting
Name Headquarters Stores Acquired Locations Date Acquired Treatment
- ----------------------------------------------------------------------------------------------------
McRae's Jackson, MS 31 Southeast March 31, 1994 Purchase
Younkers Des Moines, IA 50 Midwest February 3, 1996 Pooling
Parisian Birmingham, AL 40 Southeast/Midwest October 11, 1996 Purchase
Herberger's St. Cloud, MN 37 Midwest February 1, 1997 Pooling
Carson Pirie Scott, Milwaukee, WI 55 Midwest January 31, 1998 Pooling
Boston Store,
and Bergner's
Saks Fifth Avenue New York, NY 95 National September 17, 1998 Pooling
and Off 5th ("SFA")
Additionally, the Company has grown through the construction of
new units as well as through the acquisition of store locations
such as the purchase of 15 former Mercantile stores from
Dillard's in late 1998.
Merchandising, sales promotion and certain store operating
support functions are conducted in multiple locations. Certain
back office administrative support functions for the Company,
such as accounting, credit administration, store planning and
information technology, are centralized.
19
Income statement information for each year presented has been
restated to include the financial results of operations of all
acquisitions which the Company accounted for under the pooling of
interests method of accounting as if the acquired entity and the
Company had operated as one since inception. The operations of
acquisitions which were accounted for using the purchase method
of accounting have been included in the income statements
subsequent to their respective purchase dates. The following
table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of income, expressed as
percentages of net sales (numbers may not total due to rounding):
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
January 29, January 30, January 31,
2000 ("1999") 1999 ("1998") 1998 ("1997")
- -------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.6 63.6 63.1
- -------------------------------------------------------------------------------------------------
Gross margin 37.4 36.4 36.9
Selling, general and
administrative expenses 21.1 22.3 21.8
Other operating expenses 8.3 8.4 8.1
(Gains) losses from long-lived
assets 0.2 1.0 0.0
Merger and integration charges 0.6 1.9 0.7
Year 2000 expenses 0.1 0.2 0.1
ESOP expenses -- -- 0.2
- -------------------------------------------------------------------------------------------------
Operating income 7.1 2.6 6.0
Interest expense (2.2) (1.9) (2.1)
Other income (expense), net 0.0 0.4 0.0
- -------------------------------------------------------------------------------------------------
Income before provision (benefit)
for income taxes and extra-
ordinary items 4.9 1.1 4.0
Provision (benefit) for income taxes 1.8 0.7 (3.5)
- -------------------------------------------------------------------------------------------------
Income before extraordinary items 3.1 0.4 7.6
Extraordinary loss on early
extinguishment of debt, net
of taxes (0.1) (0.4) (0.2)
- -------------------------------------------------------------------------------------------------
Net income 3.0% 0.0% 7.4%
=================================================================================================
Net Sales
Sales, as previously reported in prior years, have been restated
to exclude sales from leased departments and other sales with no
effect on previously reported gross margin, operating income, net
income, shareholders' equity or cash flows. Restated sales
amounts represent only owned department sales and leased
department commissions. Net sales increased by 7.9%, 8.1% and
16.7% in 1999, 1998 and 1997, respectively. The 1999 increase was
primarily due to a comparable store sales increase of 2.6% and
incremental revenues generated from new store additions and the
15 former Mercantile stores. The 1998 increase was due to a
comparable store sales increase of 3.4% and new store additions
during 1998 including the third and fourth quarter sales from
the 15 former Mercantile stores. The 1997 increase was primarily
due to a comparable store sales increase of 5.0% and new store
additions during 1997, combined with the full year inclusion of
Parisian which was acquired in October 1996.
20
Gross Margins
Gross margins were 37.4%, 36.4% and 36.9% of net sales in 1999,
1998 and 1997, respectively. The Company's cost of sales includes
certain buying and distribution costs.
The increase in gross margin percent from 1998 to 1999 was
primarily due to fewer markdowns taken in 1999 compared to those
taken in 1998 related to aged and excessive quantities of
inventory at SFA, recognized contemporaneously with the SFA
acquisition. The reduced markdown activity was partially offset
by a disproportionate amount of sales in the last two weeks of
December 1999 and during January 2000, when the promotional and
clearance activity was at its highest. The negative effect of the
SFA markdowns taken in 1998 was partially offset by realized cost
reductions resulting from enhanced buying power with core
vendors, resulting in a slight decrease in margin from 1997 to
1998.
Management believes the merchandising operations of the business
can be further enhanced through more effective controls and
disciplines, through further intensification of its private brand
program in both the SFA and department stores, and through
distorting growth in higher margin rate businesses. While the
Company anticipates that it will continue to emphasize premier
national brands and exclusive designer labels in its stores,
management's goal is to meaningfully increase the private brand
business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were 21.1%,
22.3% and 21.8% of net sales in 1999, 1998 and 1997,
respectively. The decrease in 1999 to 21.1% from 22.3% in 1998
was primarily due to the absence in 1999 of charges related to
SFA self insurance liabilities, real estate realignments and
store closings, and conformity of delinquent accounts policies
of SFA's proprietary credit card receivables to those of the
Company, recognized in 1998 contemporaneously with the SFA
acquisition. In addition, the Company realized synergies in 1999
which were partially offset by lower gains on the sale of
proprietary credit card receivables. The increase in the SG&A
percentage from 1997 to 1998 was primarily due to the
aforementioned SFA charges recognized contemporaneously with the
SFA acquisition.
Management identified synergies in conjunction with the Younkers,
Parisian, Herberger's, Carson's and SFA business combinations.
The implementation of these synergies reduced operating expenses
by a total of approximately $20.0 million in 1997, $51.0 million
in 1998, and $115.0 million in 1999. Cost reductions were
achieved through the elimination of duplicate corporate expenses,
economies of scale, implementation of best practices, and
consolidation of certain administrative support functions.
Finance charge income and securitization gains derived from the
Company's proprietary credit cards are included as a component
of SG&A. Gross finance charge income (before allocation of
finance charges to the third party purchasers of accounts
receivable; see "Liquidity"), was $266.4 million, $261.5 million,
and $213.5 million in 1999, 1998 and 1997, respectively. The
increase since 1997 is due primarily to gains from the
securitizations, the increase in sales, the increase in the
number of proprietary accounts, and changes in certain credit
card terms. The allocation of finance charges to the third party
purchasers of accounts receivable totaled approximately $65.2
million in 1999, $66.9 million in 1998, and $47.3 million in
1997. Utilization of the Company's accounts receivable
securitization programs increased each year presented (see
"Liquidity") commensurate with the Company's growth in
proprietary credit card sales and the securitization of Carson's
accounts receivable beginning in February 1998.
Other Operating Expenses
Other operating expenses were 8.3%, 8.4% and 8.1% of net sales in
1999, 1998 and 1997, respectively. The increase in 1999 and 1998
over 1997 was primarily due to the additional amortization
associated with the goodwill and intangibles recorded with the
1998 purchases of Brody Brothers Dry Goods Company, Inc.
("Brody's"), Bullock & Jones (a direct mail business and one
retail store) and the 15 former Mercantile stores from Dillard's.
In addition to the incremental goodwill and intangibles
amortization, the 1998 rate was negatively affected by
incremental depreciation expense and rental expense from 20 new
stores opened and acquired in the third and fourth quarters of
1998.
21
(Gains) Losses from Long-Lived Assets
Losses from long-lived assets in 1999 and 1998 of $12.5 and $61.8
million, respectively, were principally comprised of the write-
off of the carrying amounts of relocated or closed stores, costs
associated with terminating certain new store projects which did
not meet the Company's investment return criteria and impairment
charges related to abandoned or under-performing store locations.
The 1998 charges were higher than the 1999 charges primarily as a
result of the Company's review of the SFA real estate portfolio
subsequent to the SFA merger.
Merger and Integration Charges
In connection with the Company's mergers with SFA, Carson's,
Herberger's and Younkers and the acquisition of Parisian and the
15 former Mercantile stores, the Company incurred certain costs
to effect the transactions and other costs to integrate and
combine the operations of the companies.
For 1999, these costs totaled $35.7 million, or 0.6% of net
sales. The 1999 charges were primarily comprised of (1)
integration costs of which $27.4 million related to systems
conversions, (2) $11.5 million related to severance and other
benefits, and (3) a reduction in the 1998 estimated charges of
$4.3 million.
For 1998, merger and integration costs totaled $111.3 million, or
1.9% of net sales. The 1998 costs were comprised of (1) $44.8
million of SFA merger transaction costs related principally to
investment banking, legal and accounting fees, transfer taxes and
other direct merger costs; (2) $42.4 million of integration
charges associated with the SFA merger related principally to
such items as severance, the consolidation of administrative
operations and the write-off of redundant information technology
systems and certain development projects; and (3) $24.1 million
of continuing integration costs related to mergers and
acquisitions from the prior two years, including the acquisition
of the 15 former Mercantile stores in the third and fourth fiscal
quarters of 1998.
For 1997, merger and integration costs totaled $36.5 million, or
0.7% of net sales. The 1997 charges were comprised of (1) $13.8
million of Carson's merger transaction costs related principally
to investment banking, legal and accounting fees and other direct
merger costs; (2) $17.3 million of integration charges associated
with the Carson's merger related principally to such items as
severance, the consolidation of administrative operations, and
the write-off of duplicate assets; and (3) $12.4 million of
continuing integration costs related to mergers and acquisitions
from the prior two years offset by a $7.0 million decrease in the
estimated costs to exit a SFA distribution facility.
Year 2000 Expenses
The Company incurred costs of $5.9, $10.4 and $6.6 million in
1999, 1998 and 1997, respectively, related to the required system
upgrades, replacements and modifications to prepare for the year
2000 to prevent systems failure or business interruption. The
Company also incurred costs to ensure compliance among suppliers
and other third parties with which the Company conducts business
transactions. The Company emphasized compliance on its critical
business systems and developed the proper contingency plans for
the year 2000 in the event of systems failure.
The Company experienced no system delays or interruptions on or
after January 1, 2000 that related to non-compliance of systems
within the Company or any of its suppliers or other third
parties. Furthermore, the Company does not anticipate any non-
compliance issues in the future that would result in a
significant cost to the Company or delay to the business.
ESOP Expenses
Herberger's had an Employee Stock Ownership Plan ("ESOP") which
was terminated on December 31, 1997. Charges related to the ESOP
totaled $9.5 million, or 0.2% of net sales, in 1997. Of this
total, $7.9 million related to the termination of the plan.
22
Interest Expense
Total interest expense was $139.0 million, $111.0 million and
$113.7 million in 1999, 1998 and 1997, respectively. Interest
expense as a percentage of net sales was 2.2%, 1.9% and 2.1% for
1999, 1998 and 1997, respectively. The increase in interest
expense in 1999 compared to 1998 was due to (1) higher average
levels of borrowing throughout the year due to debt increases
required to fund the acquisition of the 15 former Mercantile
stores, capital expenditures and working capital and (2) higher
average borrowing rates due to more long-term fixed rate debt
versus short-term variable rate debt. The decrease in interest
expense in 1998 compared to 1997 was primarily the result of (1)
exchanging high interest rate debt of SFA (REMIC certificates,
SFA revolver) with lower interest rate debt of the Company; (2)
replacing the Carson's accounts receivable debt facility with the
Company's accounts receivable securitization program; and (3)
lower interest rates on the Company's revolving credit
facilities. These decreases in interest expense were offset by
increased borrowing costs associated with the third and fourth
quarter acquisition of the 15 former Mercantile stores, increased
capital and inventory investments throughout 1998 and the
Company's election to issue long-term fixed rate securities in
the public debt markets with the proceeds utilized to pay down
outstanding borrowings under the revolving credit facility which
was being assessed interest at short-term floating interest
rates.
Other Income (Expense), Net
In 1998, the Company recorded other income of $22.2 million, or
0.4% of net sales, which was principally comprised of $42.5
million for the favorable settlement of pending litigation
between Carson's and Bank One, Wisconsin related to Carson's 1991
Chapter 11 bankruptcy filing, offset by charges of $17.4 million
related to the termination of certain interest rate hedging
agreements.
Income Taxes
In 1999, 1998 and 1997, the effective income tax rates differ
from the statutory tax rates principally due to non-deductible
goodwill amortization, ESOP charges and merger related costs. In
1997, the Company recognized a $294.8 million deferred income tax
benefit in the fourth quarter. The benefit reflects the
elimination of the valuation allowance relating to the tax
benefit of SFA's net operating loss carryforwards. The
realization of this income tax benefit also enabled SFA to reduce
goodwill by $34.5 million due to SFA recording certain assets and
liabilities at their date of acquisition for financial reporting
purposes which were not recognized for income tax purposes.
Income Before Extraordinary Items
Income before extraordinary loss on early extinguishment of debt
was $198.9 million in 1999, or 3.1% of net sales, $25.0 million
in 1998, or 0.4% of net sales, and $416.2 million in 1997, or
7.6% of net sales.
Extraordinary Items
In 1999, the Company prepaid the remaining $236.0 million in SFA
REMIC certificates, which resulted in an extraordinary loss of
approximately $9.3 million, net of taxes.
In 1998, primarily as a result of the SFA merger, the Company
completed various balance sheet restructuring transactions that
were designed to enhance liquidity, strengthen the Company's
balance sheet and position the Company for future growth. These
transactions included (1) the repurchase of the Company's $125.0
million, 8.125% senior notes, due 2004; (2) the replacement of
the $600.0 million revolving credit facility with a $750.0
million five-year revolving credit facility and a $750.0 million
364 day revolving credit facility that included a four-year term-
out option; (3) the repurchase of approximately $272.0 million of
the SFA 5.50% convertible subordinated notes; (4) the repayment
and subsequent cancellation of the SFA revolving credit facility
and some other property leases; and (5) the repurchase of the
$65.0 million of SFA REMIC certificates. As a result of these
five transactions, the Company incurred an extraordinary loss on
early extinguishment of debt of $25.9 million, net of taxes. The
Company replaced the majority of this cancelled debt with fixed
term senior notes (see "Liquidity and Capital Resources" for
discussion of debt issued in 1998).
23
During 1997, the Company made certain modifications to its
capital structure, including retiring approximately $114.0
million of 9.875% Parisian Senior Subordinated Notes due 2003,
prepaying approximately $15.0 million of 11.0% Junior
Subordinated Notes, prepaying certain mortgages and replacing the
Company's existing revolving credit and working capital
facilities with a new revolving credit facility. As a result of
this early extinguishment of debt, certain costs were written off
resulting in a loss of $11.3 million, net of taxes.
Inflation and Deflation
Inflation and deflation affect the costs incurred by the Company
in its purchase of merchandise and in certain components of its
SG&A expenses. The Company attempts to offset the effects of
inflation through price increases and control of expenses,
although the Company's ability to increase prices is limited by
competitive factors in its markets. The Company attempts to
offset the effects of merchandise deflation through control of
expenses.
Seasonality
The Company's business, like that of most retailers, is subject
to seasonal influences, with a significant portion of net sales
and net income realized during the fall season, which includes
the Christmas selling season. In light of these patterns, SG&A
expenses are typically higher as a percentage of net sales during
the first three quarters of each year, and working capital needs
are greater in the last two quarters of each year. The fall
season increases in working capital needs have typically been
financed with internally generated funds, the sale of interests
in accounts receivable and borrowings under the Company's
revolving credit facilities. Generally, more than 30% of the
Company's net sales and over 50% of net income are generated
during the fourth quarter.
Liquidity and Capital Resources
CASH FLOW
The Company's primary needs for liquidity are to acquire,
renovate or construct new stores and to provide working capital
for new and existing stores. The Company anticipates that cash
generated from operating activities, ongoing sales of receivables
under the securitization programs, and additional borrowings
will be sufficient to meet its financial commitments and to
capitalize on opportunities for future new store growth.
Cash provided by operating activities was $209.7 million in 1999,
$522.9 million in 1998 and $209.3 million in 1997. Cash provided
by operating activities principally represented income before
depreciation and amortization charges, the non-cash portion of
extra-ordinary losses and losses from long-lived assets and
changes in working capital. The increase from 1997 to 1998 and
decrease from 1998 to 1999 was primarily related to the sale of
the Carson's receivables in February 1998 into the Company's
accounts receivable securitization facility.
Cash used in investing activities was $407.8 million in 1999,
$943.7 million in 1998 and $319.0 million in 1997. Cash used in
investing activities principally consists of business
acquisitions, construction of new stores and the renovation and
expansion of existing stores. The increase in 1998 was primarily
due to the acquisition of former Mercantile stores from Dillard's
in October and December 1998.
Cash provided by financing activities for 1999, 1998 and 1997
totaled $184.9 million, $402.6 million and $83.6 million,
respectively. The increase from 1997 to 1998 and decrease from
1998 to 1999 was principally comprised of the 1998 issuance of
$1.1 billion in senior notes and an increase in the Company's
revolving credit facilities balance to fund (1) the 1998
acquisition of the 15 former Mercantile stores; (2) the 1998
repayment of the Carson's $125.0 million receivables facility;
(3) the 1998 repayment of the Company's $125.0 million, 8.125%
senior notes; (4) the repayment of $114.0 million of SFA
convertible debentures; and (5) the repayment of $236.0 million
of REMIC certificates (see "Capital Structure" discussion below).
The availability of net operating loss carryforwards and other
tax benefits generated in prior years by SFA and Carson's will
enable the Company to reduce its cash requirements for income tax
payments in the next several years.
24
NATIONAL BANK OF THE GREAT LAKES
On January 31, 1998, in connection with the Company's acquisition
of Carson's, the Company acquired National Bank of the Great
Lakes (the "Bank"), which is a wholly owned subsidiary of the
Company. Immediately after this acquisition, the Company
contributed all of its proprietary credit card accounts and
account balances to the Bank. As a result, the Bank became the
sole owner of the Company's proprietary credit card accounts
maintained for customers of the Company and also sells 100% of
the accounts receivable generated by these accounts to the
Company's special purpose subsidiaries.
Effective September 1998, all of the Company's proprietary credit
cards are issued by the Bank. The Bank has the ability to assess
uniform finance charges (including late fees) for all of the
Bank's credit card customers.
ACCOUNTS RECEIVABLE SECURITIZATION
All accounts receivable generated by the Company's proprietary
credit cards are sold to wholly owned special purpose
subsidiaries of the Company. The special purpose subsidiaries
transfer the receivables, with limited recourse, to either a
credit card related trust or a bank conduit facility in exchange
for cash and subordinated certificates representing undivided
interests in the pool of receivables. These facilities
subsequently issue certificates of beneficial interest, also
representing undivided interests in the pool of receivables, to
investors. At January 29, 2000, the funding capacity consisted of
approximately $1.3 billion of which $897.2 million were fixed
rate certificates and $400.0 million were variable rate
certificates.
CAPITAL STRUCTURE
As of January 29, 2000, the Company's total debt outstanding
consisted of $159.0 million outstanding on its revolving credit
facilities, $155.1 million outstanding under various capital
leases, $10.5 million of mortgage debt and $1.65 billion in
senior notes with maturities ranging from 2004 to 2019. Total
indebtedness of $1,974.6 million represented a debt to total
capitalization percentage of 47.2% and a decrease of $151.3
million from total debt outstanding in 1998. After adjusting 1998
debt for the REMIC repurchase transaction, total long-term debt
increased $199.9 million. This increase of $199.9 million was
used primarily to fund capital expenditures related to new
stores, renovations and expansions. During 1999, the Company
issued $200 million in 7.375% senior notes that mature in 2019
and $350 million in 7.0% senior notes that mature in 2004.
Proceeds of both were used to refinance borrowings under the
Company's revolving credit facilities.
As of January 30, 1999, the Company's debt consisted of $608.0
million outstanding on its revolving credit facilities, $160.7
million of capital leases, $235.8 million of REMIC certificates,
$17.1 million of mortgage debt and $1.1 billion in senior notes.
On February 10, 1999, the Company prepaid all outstanding REMIC
certificates. The prepayment terms of the REMIC certificates
required the Company to fund an escrow account with $363.8
million on January 29, 1999. The escrow funds exceeded the amount
required to extinguish the debt, including prepayment premiums
and accrued interest, by $115.0 million. This amount represented
the $95.0 million face amount of certificates previously
repurchased by the Company and related prepayment premiums and
accrued interest, and was therefore returned to the Company and
used to reduce amounts outstanding under the revolving credit
facility.
During 1998, primarily resulting from the SFA merger and the
acquisition of the stores from Dillard's, the Company implemented
a comprehensive capital restructure program designed to reduce
the Company's level of secured indebtedness, create a more
appropriate fixed to floating interest rate balance, lengthen the
duration of debt capital and increase overall liquidity. The
restructuring process included numerous capital transactions
throughout 1998. In September 1998, the Company completed a
tender offer for the $125.0 million, 8.125% senior notes,
repurchased $65.0 million of the SFA REMIC certificates and
replaced its $600.0 million revolving credit facility with two
$750.0 million revolving credit facilities, with 364 days and
five-year terms. In connection with the revolving credit facility
restructuring, the Company terminated and repaid the SFA credit
facility and the SFA real estate operating lease agreement. In
November 1998, the Company issued $850.0 million in senior notes,
which were comprised of $500.0 million, 8.25% notes, due 2008,
and $350.0 million, 7.25% notes, due 2004, and repurchased $267.7
million of SFA's convertible subordinated notes, due 2006. In
December 1998, the Company issued $250.0 million, 7.50% notes,
due 2010.
25
CAPITAL NEEDS
The Company estimates capital expenditures for 2000 will
approximate $325 million, primarily for the construction of new
store openings in 2000, initial construction work on stores
expected to open in 2001, several store expansions and
renovations, construction of the Company's new southern
distribution facility, enhancements to management information
systems and regular maintenance capital expenditures.
The Company anticipates its capital expenditures and working
capital requirements relating to planned new and existing stores
will be funded through cash provided by operations, ongoing sales
of receivables under the securitization programs and additional
borrowings. The Company expects to generate adequate cash flows
from operating activities to sustain current levels of
operations. The Company maintains favorable banking relations and
anticipates that the necessary credit agreements will be extended
or new agreements will be entered into in order to provide future
borrowing requirements as needed. The Company also believes it
has access to a variety of capital markets.
SHARE REPURCHASE PROGRAM
In August 1999, the Company authorized a share repurchase plan of
up to five million shares. Through January 29, 2000, the Company
had repurchased 2,004 shares for an aggregate amount of $33.3
million. Through March 31, 2000, the Company had purchased an
additional 1,711 shares for an aggregate amount of $20.5 million.
The Company anticipates completing the program during fiscal
2000.
DISTRIBUTION FACILITIES AND DIVISIONAL CONSOLIDATION
In June 1999, the Company announced the consolidation of its
three southern distribution facilities currently serving the
Proffitt's, McRae's and Parisian stores into a new state-of-the-
art facility to be located in Steele, Alabama. This facility is
expected to cost approximately $30 million and should be
completed by fall of 2000 and fully operational by mid-year 2001.
Subsequent to year end, the Company announced plans to merge the
merchandising, advertising, marketing and sales support functions
of its McRae's division into the Proffitt's division and its
Herberger's division into the Carson division. Charges relating
to these consolidations will include severance, relocation,
system conversions and property write-offs and are expected to
total approximately $10 million after tax in 2000, the majority
of which will be a cash charge.
Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The objective of this statement is to
provide users of financial statements information about the
different types of business activities in which a company engages
and the different economic environments in which it operates. The
statement provides companies the opportunity to aggregate two or
more operating segments into a single operating segment if the
segments have similar characteristics. In applying SFAS No. 131,
the Company identified three reportable segments, which are as
follows: department stores, furniture and direct business. The
department store segment includes all department stores which the
Company operates as well as the Company's proprietary credit card
operation. The Company's proprietary credit card operation is
considered an integral component of the department store segment,
as its primary purpose is to support and enhance this segment's
retail operations. The Company's furniture segment includes the
Company's five free-standing furniture stores as well as
furniture departments within existing department stores. The
direct business includes the Company's direct marketing catalogs
of Folio and Bullock & Jones and all electronic commerce business
in connection with the development of the Company's new retail
website, saksfifthavenue.com. The combined operations of the
furniture and direct business segments represent less than three
percent of the Company's total revenues, assets and operating
profit. As a consequence, the results of operations of these two
segments are not segregated, and thus the three identified
segments are combined within the consolidated financial
statements of the Company. The Company anticipates that the
direct business will become a more significant segment when the
Company launches the saksfifthavenue.com website and will be
disclosed separately from department stores in Fiscal 2000.
26
New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which amended the
effective date provisions of SFAS No. 133. The new statement
defers application of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Thus, SFAS No. 133
will be effective for the Company in the first quarter of fiscal
year 2001, and the Company is in the process of ascertaining the
effect this new standard will have on its financial statements.
Forward-Looking Information
Certain information presented in this report addresses future
results or expectations and is considered "forward-looking"
information within the definition of the Federal securities laws.
Forward-looking statements can be identified through the use of
words such as "may," "will," "intend," "plan," "project,"
"expect," "anticipate," "should," "would," "believe," "estimate,"
"contemplate," "possible," and "point." The forward-looking
information is premised on many factors. Actual consolidated
results might differ materially from projected forward-looking
information if there are any material changes in management's
assumptions.
The forward-looking information and statements are based on a
series of projections and estimates and involve certain risks
and uncertainties. Potential risks and uncertainties include such
factors as: the level of consumer spending for apparel and other
merchandise carried by the Company and its ability to respond
quickly to consumer trends; adequate and stable sources of
merchandise; the competitive pricing environment within the
department and specialty store industries as well as other retail
channels; favorable customer response to planned changes in
customer service formats; the effectiveness of planned
advertising, marketing and promotional campaigns; favorable
customer response to increased relationship marketing efforts and
the Company's proprietary credit card loyalty programs;
appropriate inventory management; effective and timely execution
of home office consolidations; reduction of corporate overhead;
effective operations of the Company's national bank's credit card
operations; changes in interest rates; and a successful launch of
saksfifthavenue.com. For additional information regarding these
and other risk factors, please refer to the Company's public
filings with the Securities and Exchange Commission which may be
accessed via EDGAR through the Internet at www.sec.gov.
Management undertakes no obligation to correct or update any
forward-looking statements, whether as a result of new
information, future events or otherwise. Readers are advised,
however, to consult any further disclosures management makes on
related subjects in its reports filed with the SEC and in its
press releases.
27
SAKS INCORPORATED & SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME
Year Ended
- ----------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
(In thousands, except per share amounts) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Net Sales $6,423,819 $5,955,242 $5,508,728
Cost of sales 4,022,522 3,788,794 3,477,770
- ----------------------------------------------------------------------------------------------------
Gross margin 2,401,297 2,166,448 2,030,958
Selling, general and administrative
expenses 1,355,295 1,329,250 1,201,023
Other operating expenses
Property and equipment rentals 187,829 181,966 157,018
Depreciation and amortization 178,775 155,361 136,119
Taxes other than income taxes 155,724 150,839 134,121
Store pre-opening costs 13,342 10,567 17,018
(Gains) losses from long-lived assets 12,547 61,785 (134)
Merger and integration charges 35,660 111,307 36,524
Year 2000 expenses 5,917 10,437 6,590
ESOP expenses --- --- 9,513
- ----------------------------------------------------------------------------------------------------
Operating Income 456,208 154,936 333,166
Interest expense (138,968) (110,971) (113,685)
Other income (expense), net 140 22,201 2,330
- ----------------------------------------------------------------------------------------------------
Income before Provision (Benefit) for Income
Taxes and Extraordinary Items 317,380 66,166 221,811
Provision (benefit) for income taxes 118,476 41,181 (194,426)
- ----------------------------------------------------------------------------------------------------
Income before Extraordinary Items 198,904 24,985 416,237
Extraordinary loss on early extinguishment
of debt, net of taxes (9,261) (25,881) (11,323)
- ----------------------------------------------------------------------------------------------------
Net Income $189,643 $(896) $404,914
====================================================================================================
Earnings per common share:
Basic earnings per common share before
extraordinary loss $1.38 $0.17 $3.03
Extraordinary loss (0.06) (0.18) (0.09)
- ----------------------------------------------------------------------------------------------------
Basic earnings per common share $1.32 $(0.01) $2.94
====================================================================================================
Diluted earnings per common share
before extraordinary loss $1.36 $0.17 $2.86
Extraordinary loss (0.06) (0.18) (0.07)
- ----------------------------------------------------------------------------------------------------
Diluted earnings per common share $1.30 $(0.01) $2.79
====================================================================================================
Weighted average common shares
Basic 144,174 142,856 137,588
Diluted 146,056 146,383 149,085
The accompanying notes are an integral part of these consolidated
financial statements.
28
SAKS INCORPORATED & SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
January 29, January 30,
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $19,560 $32,752
Retained interest in accounts receivable 202,134 159,596
Merchandise inventories 1,487,783 1,390,279
Other current assets 122,983 126,329
Deferred income taxes 62,198 83,958
- ------------------------------------------------------------------------------------------
Total Current Assets 1,894,658 1,792,914
Property and Equipment, net of depreciation 2,350,543 2,111,965
Goodwill and Intangibles, net of amortization 578,001 592,887
Deferred Income Taxes 213,204 249,816
Cash Placed in Escrow for Debt Redemption --- 363,753
Other Assets 62,546 77,646
- ------------------------------------------------------------------------------------------
Total Assets $5,098,952 $5,188,981
==========================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $235,967 $360,388
Accrued expenses 436,478 411,505
Accrued compensation and related items 57,259 78,009
Sales taxes payable 46,387 39,614
Current portion of long-term debt 7,771 15,523
- ------------------------------------------------------------------------------------------
Total Current Liabilities 783,862 905,039
Long-Term Debt 1,966,802 2,110,395
Other Long-Term Liabilities 139,945 165,972
Commitments and Contingencies
Shareholders' Equity
Common stock 14,281 14,401
Additional paid-in capital 2,103,001 2,099,243
Accumulated other comprehensive loss --- (7,487)
Retained earnings (accumulated deficit) 91,061 (98,582)
- ------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,208,343 2,007,575
- ------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $5,098,952 $5,188,981
==========================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
29
SAKS INCORPORATED & SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained
Additional Earnings Total
Common Paid-in (Accumulated Shareholders'
(In thousands) Stock Capital Deficit) Other Equity
- --------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 $10,776 $1,899,703 $(502,600) $(9,945) $1,397,934
Net income 404,914 404,914
Issuance of common stock 144 24,839 24,983
Income tax benefits related to
exercised stock options 7,319 7,319
Decrease in tax valuation allowance 16,000 16,000
Stock compensation 9 1,451 167 1,627
Purchases and retirements of stock (53) (13,043) (13,096)
Conversion of 4.75% subordinated
debentures 202 86,082 86,284
2-for-1 split 3,070 (3,070) ---
Termination of ESOP 8,786 9,778 18,564
- ----------------------------------------------------------------------------------------------------
Balance at January 31, 1998 14,148 2,028,067 (97,686) --- 1,944,529
Net loss (896) (896)
Change in minimum pension liability (7,487) (7,487)
- ----------------------------------------------------------------------------------------------------
Comprehensive Income (8,383)
- ----------------------------------------------------------------------------------------------------
Issuance of common stock 228 37,481 37,709
Income tax benefits related to
exercised stock options 16,444 16,444
Decrease in tax valuation allowance 16,000 16,000
Stock compensation 27 1,723 1,750
Purchases and retirements of stock (2) (472) (474)
- ----------------------------------------------------------------------------------------------------
Balance at January 30, 1999 14,401 2,099,243 (98,582) (7,487) 2,007,575
Net income 189,643 189,643
Change in minimum pension liability 7,487 7,487
- ----------------------------------------------------------------------------------------------------
Comprehensive Income 197,130
- ----------------------------------------------------------------------------------------------------
Issuance of common stock 44 10,166 10,210
Income tax benefits related to
exercised stock options 4,942 4,942
Decrease in tax valuation allowance 16,000 16,000
Stock compensation 36 5,766 5,802
Purchases and retirements of stock (200) (33,116) (33,316)
- ----------------------------------------------------------------------------------------------------
Balance at January 29, 2000 $14,281 $2,103,001 $91,061 $--- $2,208,343
====================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
30
SAKS INCORPORATED & SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year Ended
- ---------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $189,643 $(896) $404,914
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary loss on extinguishment
of debt 7,310 14,599 8,356
Depreciation and amortization 178,775 155,361 136,119
Recognition of NOL carryforwards --- --- (294,846)
Deferred income taxes 69,595 14,926 32,851
(Gains) losses on long-lived assets
and merger and integration items 12,547 79,617 (134)
ESOP expenses --- --- 8,786
Restructuring items --- --- (800)
Changes in operating assets and liabilities:
Retained interest in accounts
receivable (42,538) 293,948 (18,327)
Merchandise inventories (101,848) (127,203) (175,912)
Other current assets 3,346 (8,112) 27,704
Accounts payable and accrued
liabilities (108,395) 97,302 99,352
Other operating assets and
liabilities 1,313 3,397 (18,758)
- --------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 209,748 522,939 209,305
- --------------------------------------------------------------------------------------------------
Investing Activities
Purchases of property and equipment (430,348) (421,062) (346,876)
Proceeds from sale of assets 22,514 2,500 27,851
Acquisitions of Mercantile stores,
Brody's and Bullock & Jones --- (525,117) ---
- --------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (407,834) (943,679) (319,025)
- --------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from long-term borrowings 550,000 1,100,000 175,546
Payment of REMIC certificates (235,841) --- ---
Payments on long-term debt and capital
lease obligations (16,504) (506,960) (258,802)
Change in cash placed in escrow for
debt redemption 363,753 (363,753) ---
Net borrowings (repayments) under
credit and receivables facilities (449,000) 136,250 148,142
Proceeds from issuance of stock 5,802 37,565 23,185
Purchases and retirements of common
stock (33,316) (474) (13,096)
ESOP loan repayment --- --- 9,778
Payments to shareholders --- --- (1,124)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Financing
Activities 184,894 402,628 83,629
- ---------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (13,192) (18,112) (26,091)
Cash and Cash Equivalents at Beginning
of Year 32,752 50,864 76,955
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $19,560 $32,752 $50,864
===================================================================================================
Non-cash investing and financing activities are further described
in the accompanying notes.
The accompanying notes are an integral part of these consolidated
financial statements.
31
SAKS INCORPORATED & SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
Note.1.
Organization
Saks Incorporated (the "Company") is a national retailer
operating department stores under the following names: Saks Fifth
Avenue, Proffitt's, McRae's, Younkers, Parisian, Herberger's,
Carson Pirie Scott ("Carson's"), Bergner's, Boston Store and Off
5th. The Company also operates Saks Direct, which includes the
Folio and Bullock & Jones catalogs.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets, 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. Actual results could differ from these estimates.
In order to maintain consistency and comparability between
periods presented, certain amounts have been reclassified from
the previously reported financial statements to conform with the
financial statement presentation of the current period. These
reclassifications have no effect on previously reported net
income, shareholders' equity or cash flows.
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated. These
consolidated financial statements have been restated to include
the financial position and results of operations of all
acquisitions that the Company accounted for under the pooling of
interests method of accounting as if the acquired entity and the
Company had operated as one entity since inception. For
acquisitions accounted for under the purchase method of
accounting, the consolidated financial statements include the
financial position and results of operations subsequent to their
respective purchase dates. See Note 3, Mergers and Acquisitions,
for further discussion of business combination transactions.
Note.2.
Summary of Significant Accounting Policies
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January
31. Fiscal years 1999, 1998, and 1997 contain 52 weeks and ended
on January 29, 2000, January 30, 1999 and January 31, 1998,
respectively.
NET SALES
Net sales include sales of merchandise and services, net of
returns and exclusive of sales tax. Sales, as previously reported
in prior years, have been restated to exclude leased departments
and other sales with no impact on previously reported gross
margin, operating income, net income, shareholders' equity or
cash flows. Restated sales amounts represent only owned
department sales and leased department commissions. Sales of
leased departments were $244,806 in 1999, $259,615 in 1998 and
$255,425 in 1997. Revenues from leased departments were $36,665,
$38,348 and $37,806 in 1999, 1998 and 1997, respectively, and are
included in net sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits with banks and
financial institutions that have maturities, when purchased, of
three months or less. Cash equivalents are stated at cost, which
approximates fair value. On February 10, 1999, the Company
prepaid the remaining $236,000 of SFA real estate indebtedness
("REMIC certificates") for which the Company funded $363,753 into
an escrow account on January 29, 1999. The escrow funds are
classified as cash placed in escrow for debt redemption on the
consolidated balance sheet. The amount funded to the escrow
account differs from the amount prepaid due to the requirement
to fund REMIC certificates owned by outside parties as well as
approximately $95,000 of REMIC certificates owned by the Company,
prepayment premiums and accrued interest. When the escrow account
was relieved on February 10, 1999 with the prepayment of the
REMIC certificates, approximately $95,000 was refunded to the
Company and the remaining funds satisfied accrued interest and
the prepayment premiums.
32
RETAINED INTEREST IN ACCOUNTS RECEIVABLE
The Company's credit card bank, National Bank of the Great Lakes,
provides credit to and performs ongoing credit evaluations of its
customers. Concentration of credit risk is limited because of the
large number of customers and their dispersion throughout the
United States and other countries.
The Company's credit card bank sells its credit card receivables
to wholly owned special purpose subsidiaries of the Company.
Gains or losses on the sale of the receivables depend in part on
the previous carrying amount of retained interests allocated in
proportion to their fair values. The Company estimates fair value
based on the present value of future cash flows expected under
management's best estimates of assumptions including finance
charge income, credit losses, payment rates and discount rates
commensurate with the risks involved. Due to the short-term
nature of the proprietary credit card portfolio, the carrying
value of the Company's retained interest approximates fair
value. The Company retains the servicing rights to all
receivables sold to the special purpose subsidiaries and trusts.
MERCHANDISE INVENTORIES
At January 29, 2000, merchandise inventories are stated at the
lower of cost or market (retail last-in, first-out ["LIFO"] for
all inventories except direct mail inventories which are
presented under the FIFO cost method) and include freight and
certain buying and distribution costs. At January 30, 1999,
merchandise inventories were stated at the lower of cost or
market (retail LIFO for non-SFA inventories and retail FIFO for
SFA inventories). The change in method of accounting for SFA
inventories had no effect on 1999 net income. At January 29, 2000
and January 30, 1999, the LIFO value of inventories exceeded
market value, and as a result inventory was stated at the lower
market amount. At January 29, 2000 and January 30, 1999, non-LIFO
inventories were $27,893 and $554,678, respectively.
Consignment merchandise on hand of $87,384 and $105,536 at
January 29, 2000 and January 30, 1999, respectively, is not
reflected in the consolidated balance sheets.
ADVERTISING
Direct response advertising relates primarily to the production
and distribution of the Company's catalogs and is amortized over
the estimated life of the catalog. Direct response advertising
amounts included in other current assets in the consolidated
balance sheets at January 29, 2000 and January 30, 1999 were
$15,403 and $5,451, respectively. All other advertising and sales
promotion costs are expensed in the period incurred. Advertising
expenses were $212,045, $190,143 and $192,154 in 1999, 1998 and
1997, respectively.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed when incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. For financial
reporting purposes, depreciation is computed principally using
the straight-line method over the estimated useful lives of the
assets. Buildings and improvements primarily are depreciated over
20 to 40 years while fixtures and equipment primarily are
depreciated over 5 to 15 years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or
their related lease terms. Gains or losses on the sale of assets
are recorded at disposal. Costs incurred for the development of
internal computer software are capitalized and amortized using
the straight-line method over 3 to 7 years. Costs incurred in the
discovery and post-implementation stages of obtaining internal
computer software are expensed as incurred except when
capitalization is required. Costs incurred for the Year 2000
assessment and resulting software modifications were expensed as
incurred. The carrying value of property and equipment is
periodically reviewed and adjusted by the Company whenever events
or changes in circumstances indicate that the estimated fair
value is less than the carrying amount.
33
GOODWILL AND INTANGIBLES
The Company has allocated the purchase price of purchase
transactions first to identifiable tangible assets and
liabilities based on estimates of their fair value, with the
remainder allocated to intangible assets and goodwill.
Amortization of goodwill and intangibles is provided on a
straight-line basis over the respective lives of the various
intangible assets ranging from 5 to 40 years. In 1998, the
Company completed three purchase transactions with resulting
goodwill and intangibles additions. The Company's purchases of
Brody Brothers Dry Goods (six department stores in North
Carolina), Bullock & Jones and 15 former Mercantile store
locations from Dillard's resulted in 1998 goodwill and intangible
additions of approximately $270,000. In 1997, the Company
recorded a net reduction of goodwill of $34,525 due to the
recognition of the tax benefit generated from differences for
financial statement purposes and income tax regulations in the
recording of various assets and liabilities at acquisition. The
Company recognized amortization expense of $17,593, $11,601 and
$10,064 in 1999, 1998 and 1997, respectively. As of January 29,
2000 and January 30, 1999, the accumulated amortization of
goodwill and intangible assets was $56,663 and $39,070,
respectively.
At each balance sheet date or as changes in circumstances arise,
the Company evaluates the recoverability of goodwill and
intangible assets based upon utilization of the assets and
expectations of related cash flows. Based upon its most recent
analysis, the Company believes that no impairment of remaining
goodwill and intangibles exists at January 29, 2000. In 1999,
the Company recorded charges of $6,000, related to dispositions
and impairments of goodwill and intangibles which are included
in (gains) losses from long-lived assets in the statement of
income.
DERIVATIVES POLICY
The Company uses financial derivatives only to manage risk in
conjunction with specific business transactions.
The Company participates in interest rate cap agreements to limit
its exposure to adverse movements in interest rates related to
planned debt issuances and floating rate debt costs associated
with its various financing activities and accounts receivable
securitization. In March 2000, the Company terminated these
agreements. Additionally, the Company has entered into interest
rate swap agreements to convert a portion of its fixed rate
senior notes to variable rate debt. The financial institutions
associated with these agreements are considered to be major,
well-known institutions. In 1998, and as a result of the merger
with SFA, the Company terminated two interest rate agreements. As
a result of terminating these two agreements, the Company
recorded charges of $17,400 in 1998, which are included in other
income (expense) in the consolidated statements of income.
STOCK-BASED COMPENSATION AND EMPLOYEE STOCK OWNERSHIP PLANS
The Company records compensation expense for all stock-based
compensation plans using the intrinsic value method. Compensation
expense, if any, is measured as the excess of the market price of
the stock over the exercise price of the option on the
measurement date. Pro forma disclosures of net income and
earnings per share are presented in Note 11, as if the fair value
method had been applied.
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
EARNINGS PER SHARE
Basic earnings per share ("EPS") have been computed based on the
weighted average number of common shares outstanding.
The Company's 4.75% and 5.50% convertible subordinated debentures
were considered in diluted earnings per share, when dilutive. In
the fourth quarter of 1998, the Company repurchased with cash
approximately $272,000 of SFA's 5.50% convertible subordinated
notes and during 1997, the Company converted $86,250 of the 4.75%
convertible subordinated debentures into 4,040 shares of common
stock.
34
The convertible subordinated debentures in 1997 have been
included in the weighted average number of shares outstanding
subsequent to the date of conversion for computing basic earnings
per share.
1999
- ---------------------------------------------------------------------------
Per
Share
Income Shares Amount
- ---------------------------------------------------------------------------
Basic EPS
Income before
extraordinary loss $198,904 144,174 $1.38
Effect of Dilutive Securities
Stock options 1,882
- ---------------------------------------------------------------------------
Diluted EPS
Income before
extraordinary loss $198,904 146,056 $1.36
===========================================================================
1998
- ---------------------------------------------------------------------------
Per
Share
Income Shares Amount
- ---------------------------------------------------------------------------
Basic EPS
Income before
extraordinary loss $24,985 142,856 $0.17
Effect of Dilutive Securities
Stock options 3,527
- ---------------------------------------------------------------------------
Diluted EPS
Income before
extraordinary loss $24,985 146,383 $0.17
===========================================================================
1997
- ---------------------------------------------------------------------------
Per
Share
Income Shares Amount
- ---------------------------------------------------------------------------
Basic EPS
Income before
extraordinary loss $416,237 137,588 $3.03
Effect of Dilutive Securities
Stock options 3,438
Convertible subordinated
notes/debentures 10,664 8,059
- ---------------------------------------------------------------------------
Diluted EPS
Income before
extraordinary loss $426,901 149,085 $2.86
===========================================================================
SEGMENT REPORTING
The Company has identified three reportable segments of business
activity, which are as follows: department stores, furniture and
the direct response business. The department store segment
includes all department stores which the Company operates as well
as the Company's proprietary credit card operation. The Company's
proprietary credit card operation is considered an integral
component of the department store segment, as its primary purpose
is to support and enhance this segment's retail operations. The
Company's furniture segment includes the Company's five free-
standing furniture stores as well as furniture departments within
existing department stores. The direct response business includes
the Company's direct marketing catalogs of Folio and Bullock &
Jones and all electronic commerce business in connection with the
development of the Company's new retail website,
saksfifthavenue.com. The combined operations of the furniture and
direct response business segments represent less than three
percent of the Company's total revenues, assets and operating
profit. As a consequence, the results of operations of these two
segments are not segregated, and thus three identified segments
are combined within the consolidated financial statements of the
Company.
COMPREHENSIVE INCOME
Components of the Company's comprehensive income for 1999 include
net income of $189,643 and the adjustment to relieve the minimum
pension liability adjustment of $7,487, net of taxes. Components
of the Company's comprehensive income for 1998 include the net
loss of $896 and a minimum pension liability adjustment of
$7,487, net of taxes, as presented in the consolidated statements
of shareholders' equity. The Company had no components of
comprehensive income in 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which deferred the
effective date provisions of SFAS No. 133 for the Company to the
first quarter of 2001. The Company is in the process of
ascertaining the effect that this new standard will have on its
financial statements.
35
Note.3.
Mergers and Acquisitions
The Company has experienced significant growth since 1994,
primarily through a series of acquisitions. The Company's
significant acquisitions are outlined below:
Date Accounting Shares Purchase
Acquired Company Acquired Treatment Issued Price
- -----------------------------------------------------------------------------------------------
McRae's March 31, 1994 Purchase 872 $ 256,000
Younkers February 3, 1996 Pooling 17,632
Parisian October 11, 1996 Purchase 5,894 $ 517,000
Herberger's February 1, 1997 Pooling 8,000
Carson Pirie Scott January 31, 1998 Pooling 27,565
Saks Holdings September 17, 1998 Pooling 52,500
Additionally, the Company acquired 15 former Mercantile stores,
including inventories and proprietary credit card accounts and
receivables, from Dillard's in the third and fourth quarters of
1998 for the aggregate purchase price of $482,000.
Note.4.
Accounts Receivable Securitizations
National Bank of the Great Lakes ("the Bank"), a wholly owned
credit card bank, issues all proprietary credit cards to the
Company's customers and makes all credit card loans. The Company
and the Bank have entered into agreements to securitize a
majority of the credit card receivables, which the Bank sells to
the Company's special purpose subsidiaries. The securitization of
receivables involves the continual transfer of receivables with
limited recourse from the Company's wholly owned special purpose
subsidiaries to either a credit card related trust or a bank
conduit facility in exchange for cash and subordinated
certificates representing undivided interests in the pool of
receivables. These facilities subsequently issue certificates of
beneficial interest, also representing undivided interests in the
pool of receivables, to investors. The third party interest in
the credit card related trusts was $1,167,975 and $1,159,136 at
January 29, 2000 and January 30, 1999, respectively.
The Company has the ability to issue securities in fixed or
variable denominations with fixed or variable implicit discount
rates. At January 29, 2000, the Company had available the
following funding sources:
Amount Outstanding Average Implicit Funding
Funding Capacity January 29, 2000 Discount Rate Basis Expiration Date
- ------------------------------------------------------------------------------------------------
Fixed at $75,000 $75,000 6.45% June 2000
Fixed at $421,500 421,500 6.25% June 2001,
August 2002
Fixed at $400,675 400,675 Variable LIBOR June 2001,
July 2002,
August 2002
Variable up to $300,000 206,950 Variable CP June 2000
Variable up to $100,000 63,850 Variable CP June 2000
- ------------------------------------------------------------------------------------------------
$1,167,975
================================================================================================
At January 29, 2000 and January 30, 1999, the weighted average
variable rates for the commercial paper based facilities were
6.30% and 5.10%, respectively. The various agreements contain
covenants requiring the maintenance of certain financial ratios
and receivables portfolio performance measures. While the Company
has no obligations to reimburse the trust or investors for
credit losses, the Company is obligated to repurchase receivables
related to customer credits such as merchandise returns and
other receivables defects.
36
Finance charges earned by the certificate investors were $65,156,
$66,930 and $47,311 for 1999, 1998 and 1997, respectively. Net
finance charge income included in selling, general and
administrative expenses in the consolidated statements of income
totaled $201,214 in 1999, $194,590 in 1998 and $166,221 in 1997.
Gains on sales of accounts receivable included within net finance
charge income were $19,500, $36,400 and $15,000 in 1999, 1998 and
1997 respectively.
Note.5.
Property and Equipment
A summary of property and equipment is as follows:
January 29, January 30,
2000 1999
- -----------------------------------------------------------------------
Land and land improvements $286,678 $286,193
Buildings 1,167,946 1,137,562
Leasehold improvements 327,371 187,259
Fixtures and equipment 1,163,135 1,020,443
Construction in progress 169,392 162,296
- -----------------------------------------------------------------------
3,114,522 2,793,753
Accumulated depreciation (763,979) (697,288)
- -----------------------------------------------------------------------
2,350,543 2,096,465
Property held for sale, net of
accumulated depreciation --- 15,500
- -----------------------------------------------------------------------
$2,350,543 $2,111,965
=======================================================================
At each balance sheet date and as changes in circumstances arise,
the Company evaluates the recoverability of its property and
equipment based upon the utilization of the assets and expected
future cash flows. For 1999, the Company recognized a $4,800
impairment charge that is included in (gains) losses from long-
lived assets in the accompanying income statements. In 1998,
primarily as a result of the merger with SFA, the Company
reviewed the carrying value of several store locations not
meeting the Company's minimum investment return criteria, closed
and relocated stores and unused corporate office space and
terminated planned store projects. This process resulted in an
impairment charge comprised of: store closings/relocations,
$28,900; termination of new store projects, $12,600; non-cash
flow generating store locations, $12,700; other miscellaneous
assets, $1,800; and accrued closure costs of $6,000.
Approximately $42,000 of this aggregate $62,000 charge was
recognized in the fourth quarter of 1998. Based upon its most
recent analysis, the Company believes that no additional
impairment of property and equipment exists at January 29, 2000.
As a part of the Company's merger with SFA, the Company commenced
a process to determine the ongoing utility and value of its
existing information technology systems hardware and software.
The valuation process included performing an inventory of the
Company's in-process development projects and significant
operating systems and hardware and determining the future use of
the identified projects and systems. As a result, the Company
wrote down its investment in capitalized information technology
systems software and hardware by $23,000 in 1998. This charge,
which is included in merger and integration charges in the
consolidated statement of income, primarily represented the
termination of SFA software development projects that were in
process before SFA's merger with the Company.
37
Note.6.
Income Taxes
The components of income tax provision (benefit) are as follows:
1999 1998 1997
- ----------------------------------------------------------------------
Current:
Federal $42,278 $8,574 $51,562
State 678 1,134 8,845
- ----------------------------------------------------------------------
42,956 9,708 60,407
Deferred:
Federal 61,035 14,724 (239,397)
State 8,560 202 (22,598)
- ----------------------------------------------------------------------
69,595 14,926 (261,995)
- ----------------------------------------------------------------------
Total provision (benefit) $112,551 $24,634 $(201,588)
======================================================================
The tax effect for extraordinary losses on early extinguishment
of debt was a benefit of $5,925, $16,547 and $7,162 for 1999,
1998 and 1997, respectively.
Components of the net deferred tax asset or liability recognized
in the consolidated balance sheets are as follows:
January 29, January 30,
2000 1999
- -------------------------------------------------------------------------
Current:
Deferred tax assets:
Accrued expenses $56,199 $56,844
AMT credit 2,695 800
NOL carryforwards 32,999 32,999
Valuation allowance (6,155) (6,155)
- -------------------------------------------------------------------------
85,738 84,488
Deferred tax liabilities:
Trade accounts receivable (11,015) ---
Inventory (11,938) ---
Other (587) (530)
- -------------------------------------------------------------------------
(23,540) (530)
- -------------------------------------------------------------------------
Net current deferred tax asset $62,198 $83,958
=========================================================================
Non-current:
Deferred tax assets:
Capital leases $20,588 $20,567
Other long-term liabilities 43,687 47,133
NOL carryforwards 281,643 294,906
Valuation allowance (9,251) (25,251)
- -------------------------------------------------------------------------
336,667 337,355
Deferred tax liabilities:
Property and equipment (91,754) (59,652)
Other assets (31,709) (27,887)
- -------------------------------------------------------------------------
(123,463) (87,539)
- -------------------------------------------------------------------------
Net non-current deferred tax asset $213,204 $249,816
=========================================================================
38
At January 29, 2000, the Company had $806,774 in federal and
state tax net operating loss carryforwards related to losses
incurred by SFA and Carson's. The carryforwards will expire
between 2006 and 2018. The future utilization of these
carryforwards is restricted under federal income tax change-in-
ownership rules.
The continued improvement in SFA's operating income in fiscal
1997, as well as estimates of SFA's future profitability, enabled
the Company to recognize a $294,846 deferred tax asset in the
fourth quarter of 1997. The benefit reflects the elimination of
the valuation allowance relating to the tax benefit of SFA's net
operating loss carryforwards. The realization of this tax benefit
also enabled SFA to reduce goodwill by $34,525 due to SFA
recording certain assets and liabilities at their date of
acquisition for financial reporting purposes which were not
recognized for income tax purposes.
The valuation allowance attributable to Carson's losses and tax
basis differences was reduced by $16,000 for each of the years
1999, 1998 and 1997, based on management's reassessment of the
realizability of the related deferred tax asset in future years.
The tax benefit resulting from the reduction in the valuation
allowance is credited directly to shareholders' equity.
The Company believes it is more likely than not that the benefit
of the net deferred tax assets will be realized.
Income tax expense varies from the amount computed by applying
the statutory federal income tax rate to income before taxes. The
reasons for this difference are as follows:
1999 1998 1997
- --------------------------------------------------------------------
Expected income taxes at 35% $105,768 $8,308 $71,164
State income taxes, net of
federal benefit 6,100 857 7,015
Nondeductible merger related
costs (1,837) 14,887 7,004
Amortization of goodwill 3,656 3,100 3,475
Favorable settlement of tax
examination --- (3,000) ---
Recognition of NOL carryforward --- --- (294,846)
Non-deductible ESOP expenses --- --- 4,415
Other items, net (1,136) 482 185
- --------------------------------------------------------------------
Provision (benefit) for income
taxes $112,551 $24,634 $(201,588)
The Company received net tax refunds of $14,007 in 1999 and made
income tax payments, net of refunds received, of $19,852 and
$12,664 during 1998 and 1997, respectively.
Note.7.
Long-Term Debt
A summary of long-term debt is as follows:
January 29, January 30,
2000 1999
- -----------------------------------------------------------------
Revolving credit agreements $159,000 $608,000
Notes 8.25%, maturing 2008 500,000 500,000
Notes 7.50%, maturing 2010 250,000 250,000
Notes 7.25%, maturing 2004 350,000 350,000
Notes 7.00%, maturing 2004 350,000 ---
Notes 7.375% maturing 2019 200,000 ---
SFA real estate financing
-- REMIC certificates --- 235,841
Real estate notes, mortgage notes
and industrial revenue bonds 10,523 17,144
Capital lease obligations 155,050 160,681
- -----------------------------------------------------------------
1,974,573 2,121,666
Current portion (7,771) (11,271)
- -----------------------------------------------------------------
$1,966,802 $2,110,395
=================================================================
39
REVOLVING CREDIT FACILITIES
In conjunction with the Carson's and SFA mergers, the Company
replaced its revolving credit agreement with new variable rate
revolving credit facilities. Previously unamortized debt issuance
costs associated with the replaced revolvers were written off and
reflected in the extraordinary loss on early extinguishment of
debt in 1998. At January 29, 2000, the Company maintains a
$750,000 revolving credit facility which expires in September
2003 and a $250,000 364 day revolving credit facility that
includes a four-year term-out option exercisable in August 2000.
At January 29, 2000, $833,966 was available to borrow under its
existing credit facilities. Of the available amount, $583,966
expires in 2003 and $250,000 expires in August 2000. Interest on
the two facilities remained variable at January 29, 2000 and the
weighted average interest rate at January 29, 2000 was 6.1%.
SENIOR NOTES
In 1999, the Company sold $350,000 of uncollateralized 7.0% notes
which mature in 2004 and $200,000 of uncollateralized 7.375%
notes which mature in 2019. The net proceeds of the notes were
used to reduce outstanding amounts on the Company's revolving
credit facilities, which had been used to fund the purchase of
the 15 former Mercantile stores and the repurchase of SFA
convertible debentures.
In connection with the 1998 SFA merger, the Company completed a
tender offer for the $125,000, 8.125% notes resulting in an
extraordinary charge on early extinguishment of debt of $11,625
and sold $1,100,000 of uncollateralized notes with interest rates
ranging from 7.25% to 8.25% and maturities ranging from 2004 to
2010.
REAL ESTATE FINANCING
In May 1995, SFA, through a subsidiary trust, completed a real
estate financing aggregating $335,000 through the issuance of
mortgage loans collateralized by intercompany leases. Mortgage
certificates in the principal amount of $175,000 bore interest at
variable rates based on three-month LIBOR, payable quarterly. The
remaining $160,000 in certificates, which were subordinated to
the other certificates, bore interest at annual fixed rates
ranging from 8.98% to 12.36%, payable semi-annually.
The Company repurchased approximately $95,000 of its outstanding
REMIC certificates and recorded extraordinary charges of $3,352
and $8,174 in 1997 and 1998, respectively, associated with the
repurchase premium and accelerated write-off of deferred
financing costs related to these repurchases. In the first
quarter of fiscal 1999, the Company prepaid the remaining
$235,841 in outstanding REMIC certificates and reflected an
extraordinary charge of $9,261 associated with the prepayment
premium and accelerated write-off of deferred financing costs
related to this prepayment.
SUBORDINATED DEBT
In September 1996, SFA issued $276,000 aggregate principal amount
of 5.50% convertible debentures for net cash proceeds, after
offering expenses and financing costs, of $267,500. During the
fourth quarter of 1998, the Company repurchased $271,748 of the
5.50% convertible subordinated notes and redeemed the remaining
$4,252 of notes in 1999, which was reflected in the current
portion of long-term debt at January 30, 1999. During 1998, the
Company recorded an extraordinary loss of $6,175 relating to the
accelerated write-off of deferred financing costs related to the
prepayments.
In October 1997, the Company converted its 4.75% convertible
debentures into 4,040 shares of the Company's common stock. As a
result of this conversion, certain deferred debt issuance costs
aggregating $600 were written off as an extraordinary item.
Effective with the Parisian acquisition, the Company assumed
$125,000 of existing Parisian subordinated notes. In 1997, the
Company purchased approximately 90% of these notes which resulted
in an extraordinary loss from the extinguishment of debt of
approximately $7,900. In July 1998, the remaining outstanding
notes were repurchased.
40
MATURITIES
At January 29, 2000, maturities of long-term debt for the next
five years and thereafter, giving consideration to lenders' call
privileges are as follows:
Year Maturities
- -----------------------------------------------------------------
2000 $7,771
2001 5,870
2002 5,231
2003 164,310
2004 711,684
Thereafter 1,079,707
- -----------------------------------------------------------------
$1,974,573
=================================================================
The Company made interest payments, net of capitalized interest,
of $143,701, $93,999 and $97,745 during 1999, 1998 and 1997,
respectively.
Note.8.
Leases
The Company leases certain land and buildings under various non-
cancelable capital and operating leases. The leases generally
provide for contingent rentals based upon sales in excess of
stated amounts and require the Company to pay real estate taxes,
insurance and occupancy costs. Generally, the leases have primary
terms ranging from 20 to 30 years and include renewal options
ranging from 5 to 20 years.
At January 29, 2000, future minimum rental commitments under
capital leases and non-cancelable operating leases consisted of
the following:
Year Operating Leases Capital Leases
-----------------------------------------------------------------
2000 $111,411 $24,973
2001 109,826 23,428
2002 108,368 22,731
2003 106,486 22,533
2004 102,248 22,653
Thereafter 860,303 315,474
-----------------------------------------------------------------
$1,398,642 $431,792
=================================================================
Amounts representing interest (276,742)
-----------------------------------------------------------------
Capital lease obligations $155,050
=================================================================
Total rental expense for operating leases was $187,829, $181,966
and $157,018 during 1999, 1998 and 1997, respectively, including
contingent rents of approximately $20,983, $22,806 and $20,733,
respectively.
41
Note.9.
Employee Benefit Plans
EMPLOYEE SAVINGS PLANS
The Company sponsors various qualified savings plans that cover
substantially all full-time employees. Company contributions
charged to expense under these plans, or similar predecessor
plans, for 1999, 1998 and 1997 were $9,536, $8,667 and $6,509,
respectively.
DEFINED BENEFIT PLANS
The Company sponsors two noncontributory defined benefit pension
plans for substantially all employees of Carson's and SFA.
Benefits are principally based upon years of service and
compensation prior to retirement. The Company generally funds
pension costs currently, subject to regulatory funding
limitations. In 1998, the SFA defined benefit plan was amended
and converted to a cash balance plan.
The components of net periodic pension expense are as follows:
1999 1998 1997
- -----------------------------------------------------------------------
Net periodic pension expense:
Service cost $11,584 $10,401 $10,652
Interest cost 19,318 18,989 17,839
Expected return on plan assets (21,393) (20,707) (18,699)
Net amortization and deferral
of prior service costs 293 90 (61)
- -----------------------------------------------------------------------
Net pension expense $9,802 $8,773 $9,731
=======================================================================
42
January 29, January 30,
2000 1999
- --------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $296,577 $265,753
Service cost 11,584 10,401
Interest cost 19,318 18,989
Plan amendment 219 2,228
Actuarial (gain) loss (28,877) 17,025
Benefits paid (27,523) (17,819)
- --------------------------------------------------------------------------------------------------
Benefit obligation at end of year $271,298 $296,577
==================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $239,737 $230,422
Actual return on plan assets 36,172 11,992
Employer contributions 6,897 15,142
Benefits paid (27,523) (17,819)
- --------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $255,283 $239,737
==================================================================================================
Pension plans' funding status:
Accumulated benefit obligation $(252,209) $(282,041)
Effect of projected salary increases (19,089) (14,536)
- --------------------------------------------------------------------------------------------------
Projected benefit obligation (271,298) (296,577)
Fair value of plan assets 255,283 239,737
- --------------------------------------------------------------------------------------------------
Funded status (16,015) (56,840)
Unrecognized actuarial (gain) loss (27,519) 17,843
Unrecognized prior service cost 2,059 1,955
Contributions subsequent to measurement date 2,073 4,549
- --------------------------------------------------------------------------------------------------
Accrued pension cost classified in other liabilities $(39,402) $(32,493)
==================================================================================================
Amounts recognized in the consolidated balance sheet:
Accrued benefit liability $(39,683) $(46,890)
Intangible asset 281 2,123
Additional minimum pension liability (reflected in
equity net of tax) --- 12,274
- --------------------------------------------------------------------------------------------------
Net amount recognized $(39,402) $(32,493)
==================================================================================================
Assumptions:
Discount rate 8.00% 7.00%
Expected long-term rate of return on assets 9.50% 9.50%
Average assumed rate of compensation increase 3.66% 3.66%
Measurement date 11/1/99 11/1/98
43
RETIREE HEALTH CARE PLANS
The Company provides health care benefits for certain groups of
employees who retired before 1997. The plans were contributory
with the Company providing a frozen annual credit of varying
amounts based on years of service. The net annual expense and
liabilities for the unfunded plans reflected in the Company's
consolidated balance sheets are as follows:
January 29, January 30,
2000 1999
- --------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $9,403 $10,530
Interest cost 625 749
Actuarial gain (566) (1,186)
Benefits paid (583) (690)
- --------------------------------------------------------------------------------------------------
Benefit obligation at end of year $8,879 $9,403
==================================================================================================
Plan funding status:
Accumulated post-retirement benefit obligation $(8,879) $(9,403)
Fair value of plan assets --- ---
- --------------------------------------------------------------------------------------------------
Funded status (8,879) (9,403)
Unrecognized actuarial gain (4,887) (4,644)
Contributions subsequent to measurement date 62 181
- --------------------------------------------------------------------------------------------------
Accrued pension cost classified in other liabilities $(13,704) $(13,866)
==================================================================================================
Sensitivity analysis:
Effect of a 1.0% increase in health care cost trend
assumption on total service cost and interest cost
components $37 $37
Effect on benefit obligation $536 $526
Effect of a 1.0% decrease in health care cost trend
assumption on total service cost and interest cost
components $(33) $(33)
Effect on benefit obligation $(484) $(473)
Assumptions:
Discount rate 8.00% 7.00%
Pre-Medicare medical inflation 7.00% 7.00%
Post-Medicare medical inflation 7.00% 6.25%
Ultimate medical inflation (2001) 5.25% 5.00%
Measurement date 11/1/99 11/1/98
44
Note.10.
Shareholders' Equity
PREFERRED STOCK
The Company has 10,000 shares of $10 par value Series A Preferred
Stock authorized and no shares issued and outstanding at January
29, 2000 or January 30, 1999.
COMMON STOCK
The Company has 500,000 shares of $0.10 par value common shares
authorized of which 143,043 and 144,272 shares were issued and
outstanding at January 29, 2000 and January 30, 1999,
respectively.
In July 1999, the Company authorized a share repurchase program
for up to five million shares. At January 29, 2000, the Company
had repurchased 2,004 shares under the program for an aggregate
amount of $33,316.
In August 1997, the Company's Board of Directors approved a 2-
for-1 stock split of the outstanding shares of the Company's
common stock. The split was effected in the form of a stock
dividend; each shareholder received one additional share for each
outstanding share of common stock held of record as of the close
of business on October 15, 1997. The per share amounts presented
in the Company's consolidated financial statements are reflective
of the 2-for-1 stock split.
Each outstanding share of common stock has one preferred stock
purchase right attached. The rights (which were revised in March
1998) generally become exercisable ten days after an outside
party acquires, or makes an offer for, 20% or more of the common
stock. Each right entitles its holder to buy 1/200 share of
Series C Junior Preferred Stock at an exercise price of $278 per
1/100 of a share, subject to adjustment in certain cases. The
rights expire in March 2008. Once exercisable, if the Company is
involved in a merger or other business combination or an outside
party acquires 20% or more of the common stock, each right will
be modified to entitle its holder (other than the acquirer) to
purchase common stock of the acquiring company or, in certain
circumstances, common stock having a market value of twice the
exercise price of the right.
OTHER
Previously, Herberger's was required to repurchase shares from
inactive participants of its ESOP at fair value. Treasury stock
transactions were accounted for under the cost method with gains
or losses on transactions credited or charged to additional
paid-in capital. No shares were purchased in 1999 and 1998 and 3
shares were purchased in 1997. In connection with the rescission
of the put option on the ESOP shares (see Note 11), the Company
retired all 13,794 shares of the Company's common stock held in
Treasury.
45
Note.11.
Employee Stock Plans
ESOP
Herberger's sponsored an employee stock ownership plan for the
benefit of its employees. During 1997, the ESOP was terminated.
As a result, the Company received approximately $10,000 in cash
representing payment of a $9,000 note receivable from the ESOP.
All previously unallocated common shares of the Company held by
the ESOP were allocated to the ESOP participants, resulting in a
primarily non-cash charge of $7,900.
STOCK OPTIONS AND GRANTS
The Company utilizes the intrinsic value method of accounting for
stock option grants. As the option exercise price is generally
equal to fair value of the common shares at the date of the
option grant, no compensation cost is recognized. Had
compensation cost for the Company's stock-based compensation
plans been determined under the fair value method, using the
Black-Scholes option-pricing model, the Company's net income and
earnings per share would have been reduced to the pro forma
amounts indicated below.
1999
- --------------------------------------------------------------------------
As Reported Pro Forma
- --------------------------------------------------------------------------
Net income $189,643 $169,804
Basic earnings per common share $1.32 $1.18
Diluted earnings per common share $1.30 $1.16
1998
- --------------------------------------------------------------------------
As Reported Pro Forma
- --------------------------------------------------------------------------
Net income (loss) $(896) $(21,127)
Basic earnings (loss) per common share $(0.01) $(0.15)
Diluted earnings (loss) per common share $(0.01) $(0.14)
1997
- --------------------------------------------------------------------------
As Reported Pro Forma
- --------------------------------------------------------------------------
Net income $404,914 $395,237
Basic earnings per common share $2.94 $2.87
Diluted earnings per common share $2.79 $2.72
The four assumptions for determining compensation costs under the
fair value method include (1) a risk-free interest rate based on
zero-coupon government issues on each grant date with the
maturity equal to the expected term of the option (5.84%, 5.22%
and 6.22% for 1999, 1998 and 1997, respectively), (2) an expected
term of five years, (3) an expected volatility of 46.2%, 32.7%
and 39.7% for 1999, 1998 and 1997, respectively, and (4) no
expected dividend yield.
The Company maintains stock option plans for the granting of
options, stock appreciation rights and restricted shares to
officers, employees and directors. At January 29, 2000 and
January 30, 1999 the Company had available for grant 9,554 and
7,353 shares of common stock, respectively. Options granted
generally vest over a four-year period after issue and have an
exercise term of ten years from the grant date. Restricted shares
generally vest three to ten years after grant date with
accelerated vesting at the discretion of the Company's Board of
Directors if the Company meets certain performance objectives.
A summary of the stock option plans for 1999, 1998 and 1997 is
presented below:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
- -
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------
- -
Outstanding at beginning
of year 10,518 $21.63 9,567 $18.17 8,780 $14.07
Granted 2,549 24.13 4,111 25.78 3,519 25.90
Exercised (353) 16.30 (2,568) 14.06 (2,027) 11.37
Forfeited (822) 27.54 (592) 27.41 (705) 25.27
- ------------------------------------------------------------------------------------------------------------
Outstanding at end of
year 11,892 $21.92 10,518 $21.63 9,567 $18.17
Options exercisable at
year end 5,191 $18.94 4,885 $16.89 5,929 $13.88
- ------------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted during
the year $13.60 $9.83 $10.80
============================================================================================================
46
The following table summarizes information about stock options
outstanding at January 29, 2000:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
January 29, Contractual Exercise January 29, Exercise
Range of Exercise Prices 2000 Life (Years) Price 2000 Price
- ----------------------------------------------------------------------------------------------------
$3.75 to $5.63 88 1 $4.68 88 $4.68
$5.64 to $8.45 273 4 5.89 273 5.89
$8.46 to $12.69 1,503 4 11.59 1,465 11.57
$12.70 to $18.69 1,422 8 16.02 635 16.53
$18.70 to $28.05 6,455 8 22.99 1,696 20.91
$28.06 to $42.09 2,086 8 32.10 998 31.76
$42.10 to $48.78 65 7 47.54 36 47.10
- ----------------------------------------------------------------------------------------------------
11,892 $21.92 5,191 $18.94
====================================================================================================
The Company also granted restricted stock awards of 84, 383 and
176 shares to certain employees in 1999, 1998 and 1997,
respectively. The fair value of these awards on the dates of
grants was $1,891, $7,284 and $4,600 for 1999, 1998 and 1997,
respectively. During 1999, 1998 and 1997, compensation cost of
$7,736, $2,870 and $5,700, respectively, has been recognized in
connection with these awards.
STOCK PURCHASE PLAN
The stock purchase plan (the "Plan") provides that an aggregate
of 700 shares of the Company's common stock is available for
purchase. Under the Plan, an eligible employee may elect to
participate by authorizing limited payroll deductions to be
applied toward the purchase of common stock at a 15.0% discount
to market value. Under the Plan, 228, 73 and 62 shares of the
Company's common stock were purchased by employees in 1999, 1998
and 1997 respectively. At January 29, 2000, the Plan has
available for future offerings 282 shares.
Note.12.
Commitments and Contingencies
Carson's and its subsidiaries emerged from Chapter 11 bankruptcy
in 1993. The Company recognized $200, $1,350 and $680 in 1999,
1998 and 1997, respectively, to reflect the favorable resolution
of claims. Management believes Carson's has adequately provided
for the resolution of all bankruptcy claims and other matters
related to the Plan of Reorganization remaining at January 29,
2000. In 1998, pending litigation between Carson's and Bank One,
Wisconsin, related to the Chapter 11 bankruptcy filing, was
settled resulting in the Company receiving a settlement payment
of $42,500, which is included in other income (expense) in the
1998 consolidated statement of operations.
The Company is involved in several legal proceedings arising from
its normal business activities, and accruals for such claims
have been established where appropriate. Management believes that
none of these legal proceedings will have a material adverse
effect on the Company's consolidated financial condition, results
of operations or liquidity.
47
Note.13.
Fair Values of Financial Instruments
The Company has entered into three interest rate cap agreements
to reduce the effect of increases in interest rates on real
estate financing and the accounts receivable securitization. At
January 29, 2000, these interest rate cap agreements remain
outstanding while the debt and accounts receivable securitization
have been replaced. One interest rate cap agreement serves to cap
$18,300 at 8.25% through December 2000. The other two interest
rate cap agreements serve to cap $175,000 at 9.70% through May
2002. These two interest rate cap agreements were terminated in
March 2000. The combined fair value of these interest rate cap
agreements at January 29, 2000 was $132.
The Company also had two interest rate swap agreements
outstanding at January 29, 2000 which have a notional amount of
$350,000 related to the July 1999 issuance of the 7.0% senior
notes. The agreements swap the fixed 7.0% rate for a variable
rate at the three month LIBOR rate plus 71 basis points, 6.75% at
January 29, 2000 and mature in 2004. The combined fair value of
the Company's interest rate swap agreements represent a liability
of $13,692 as of January 29, 2000.
The fair values of the Company's cash and cash equivalents,
retained interest in accounts receivable and accounts payable
approximate their carrying amounts reported in the consolidated
balance sheets, due to the immediate or short-term maturity of
these instruments. For variable rate notes that reprice
frequently, such as the revolving credit facilities, fair value
approximates carrying value. The fair value of fixed rate real
estate and mortgage notes is estimated using discounted cash flow
analyses with interest rates currently offered for loans with
similar terms and credit risk, and as of January 29, 2000 and
January 30, 1999 the fair value of these notes approximated the
carrying value. The fair value of publicly-held REMIC
certificates, notes and subordinated debentures is based on
quoted market prices.
The fair values of the Company's financial instruments other than
the instruments considered short-term in nature at January 29,
2000 and January 30, 1999 were as follows:
Carrying Amount Estimated Fair Value
- -----------------------------------------------------------------
January 29, 2000
7.375% senior notes $200,000 $176,390
8.25% senior notes $500,000 $486,270
7.25% senior notes $350,000 $332,745
7.50% senior notes $250,000 $226,748
7.00% senior notes $350,000 $330,725
January 30, 1999
REMIC certificates $235,841 $238,841
8.25% senior notes $500,000 $547,095
7.25% senior notes $350,000 $359,195
7.50% senior notes $250,000 $259,768
5.50% convertible debentures $4,252 $4,243
The fair values of the long-term debt interest rate swap
agreements and interest rate cap agreements were estimated based
on quotes obtained from financial institutions for those or
similar instruments or on the basis of quoted market prices.
48
Note.14.
Merger and Integration Charges
Merger and integration charges incurred in 1999, 1998 and 1997
(before income taxes) were as follows:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Merger transaction costs, principally
investment banking, legal and other direct
merger costs $981 $44,848 $13,800
Severance and related benefits 11,517 23,568 17,024
Conversion and consolidation of systems and
administrative operations 27,412 19,891 2,600
Abandonment and write-down of information technology
software, hardware and other assets --- 23,000 6,200
Termination of merchandise purchasing agreements --- --- 3,900
Revisions to prior year estimates (4,250) --- (7,000)
- ---------------------------------------------------------------------------------------------------
$35,660 $111,307 $36,524
===================================================================================================
A reconciliation of the aforementioned charges to the amounts of
merger and integration costs remaining unpaid at the applicable
balance sheet date is as follows:
January 29, January 30,
2000 1999
- -------------------------------------------------------------------------
Amounts unpaid at beginning of year $31,951 $25,994
Merger and integration charges 35,660 111,307
Amounts paid (51,180) (76,728)
Amounts representing non-cash charges (2,855) (28,622)
- -------------------------------------------------------------------------
Amounts unpaid at end of year $13,576 $31,951
=========================================================================
The components of the aforementioned amounts unpaid are as
follows:
January 29, January 30,
2000 1999
- --------------------------------------------------------------------------
Direct merger costs $5,558 $17,530
Severance 6,874 6,638
Contractual obligations to be paid
within one year of merger --- 5,900
Contractual obligations with extended
payment terms (such as rents for
abandoned leases and payments on
abandoned contracts) 248 348
Other 896 1,535
- --------------------------------------------------------------------------
Totals $13,576 $31,951
==========================================================================
49
Note.15.
Quarterly Financial Information (Unaudited)
Summarized quarterly financial information, including sales
restatement data, is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
Fiscal year ended January 29, 2000
Total sales, as reported $1,544,521 $1,426,535 $1,599,171 $2,131,987
Leased department and other sales
(net of commissions) (83,694) (48,049) (51,695) (94,957)
- --------------------------------------------------------------------------------------------------
Total sales, as restated 1,460,827 1,378,486 1,547,476 2,037,030
Gross margin 550,128 513,926 586,810 750,433
Income before extraordinary items 33,735 18,819 25,900 120,450
Net income 24,474 18,819 25,900 120,450
Basic earnings per common share:
Before extraordinary items $0.23 $0.13 $0.18 $0.84
After extraordinary items $0.17 $0.13 $0.18 $0.84
Diluted earnings per common share:
Before extraordinary items $0.23 $0.13 $0.18 $0.84
After extraordinary items $0.17 $0.13 $0.18 $0.84
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------
Fiscal year ended January 30, 1999
Total sales, as reported $1,412,602 $1,283,744 $1,472,817 $2,050,730
Leased department and other sales
(net of commissions) (79,212) (46,897) (50,834) (87,708)
- ---------------------------------------------------------------------------------------------------
Total sales, as restated 1,333,390 1,236,847 1,421,983 1,963,022
Gross margin 490,032 444,894 484,048 707,452
Income (loss) before extraordinary
items 28,124 2,982 (106,154) 100,033
Net income (loss) 28,124 2,648 (127,710) 96,042
Basic earnings per common share:
Before extraordinary items $0.20 $0.02 $(0.74) $0.70
After extraordinary items $0.20 $0.02 $(0.89) $0.67
Diluted earnings per common share:
Before extraordinary items $0.19 $0.02 $(0.74) $0.68
After extraordinary items $0.19 $0.02 $(0.89) $0.65
50
Note.16.
Condensed Consolidating Financial Information
The following tables present condensed consolidating financial
information for 1999, 1998 and 1997 for (1) Saks Incorporated;
(2) on a combined basis, the guarantors of Saks Incorporated
Senior Notes (which are all of the wholly owned subsidiaries of
Saks Incorporated except for special purpose subsidiaries, REMIC
subsidiaries and trusts, and the Bank); and (3) on a combined
basis, the Company's special purpose subsidiaries, REMIC
subsidiaries and trusts, and the Bank, which collectively
represent the only non-guarantor subsidiaries of the Senior
Notes. Effective January 29, 2000, the REMIC subsidiaries and
trusts were dissolved leaving the special purpose subsidiaries
and the Bank as the only non-guarantor subsidiaries at January
29, 2000. The operations of the REMIC entities, however, are
included in the 1999 results of operations. The condensed
consolidating financial statements presented for 1999, 1998 and
1997 reflect the respective legal entity compositions at the
respective dates. Separate financial statements of the guarantor
subsidiaries are not presented because the guarantors are
jointly, severally and unconditionally liable under the
guarantees, and the Company believes the condensed consolidating
financial statements are more meaningful in understanding the
financial position of the guarantor subsidiaries. Borrowings and
the related interest expense under the Company's revolving credit
facility are allocated to Saks Incorporated and the guaranty
subsidiaries under an informal lending arrangement. There are
also management and royalty fee arrangements among Saks
Incorporated and the subsidiaries. At January 29, 2000, Saks
Incorporated was comprised of a majority of the Company's long-
term debt and the operations of a small group of corporate
employees.
51
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
(for Year Ended January 29, 2000)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Net Sales $6,423,819 $6,423,819
Cost of sales 4,022,522 4,022,522
- ----------------------------------------------------------------------------------------------------
Gross Margin 2,401,297 2,401,297
Selling, general and
administrative expenses $9,752 1,454,498 $92,259 $(201,214) 1,355,295
Other operating expenses 1,605 561,851 (41,128) 522,328
Store pre-opening costs 13,342 13,342
Merger and integration charges 35,660 35,660
Losses from long-lived assets 12,547 12,547
Year 2000 expenses 5,917 5,917
- ----------------------------------------------------------------------------------------------------
Operating Income (Loss) (11,357) 317,482 (51,131) 201,214 456,208
Other income (expense)
Finance charge income, net 201,214 (201,214)
Intercompany exchange fees (36,712) 36,712
Intercompany servicer fees 41,076 (41,076)
Equity in earnings of
subsidiaries 278,964 25,581 (304,545)
Interest expense, net (130,422) (8,546) (138,968)
Other income (expense),
net 140 140
- ----------------------------------------------------------------------------------------------------
Income before Provision for
Income Taxes and Extra-
ordinary Items 137,185 339,021 145,719 (304,545) 317,380
Provision (benefit) for
income taxes (52,458) 117,310 53,624 118,476
- ----------------------------------------------------------------------------------------------------
Income before Extraordinary
Items 189,643 221,711 92,095 (304,545) 198,904
Extraordinary items, net
of taxes (9,261) (9,261)
- ----------------------------------------------------------------------------------------------------
Net Income (Loss) $189,643 $221,711 $82,834 $(304,545) $189,643
====================================================================================================
52
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
BALANCE SHEETS
(As of January 29, 2000)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $(3,049) $22,609 $19,560
Retained interest in
accounts receivable 202,134 202,134
Merchandise inventories 1,487,783 1,487,783
Deferred income taxes 67,238 (5,040) 62,198
Intercompany borrowings $27,659 23,883 7,636 $(59,178)
Other current assets 122,941 42 122,983
- ----------------------------------------------------------------------------------------------------
Total Current Assets 27,659 1,698,796 227,381 (59,178) 1,894,658
Property and Equipment, Net 2,350,543 2,350,543
Goodwill and Intangibles, Net 578,001 578,001
Other Assets 56,657 5,889 62,546
Deferred Income Taxes 213,204 213,204
Investment in and Advances
to Subsidiaries 4,023,830 93,042 (4,116,872)
- ----------------------------------------------------------------------------------------------------
Total Assets $4,051,489 $4,990,243 $233,270 $(4,176,050) $5,098,952
====================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $235,967 $235,967
Accrued expenses and other
current liabilities $22,769 512,130 $5,225 540,124
Intercompany borrowings 7,636 51,542 $(59,178)
Current portion of
long-term debt 7,771 7,771
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities 22,769 763,504 56,767 (59,178) 783,862
Long-Term debt 1,809,000 157,802 1,966,802
Other Long-Term Liabilities 11,377 128,568 139,945
Investment by and Advances
from Parent 3,940,369 176,503 (4,116,872)
Shareholders' Equity 2,208,343 2,208,343
- ----------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $4,051,489 $4,990,243 $233,270 $(4,176,050) $5,098,952
====================================================================================================
53
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
(for Year Ended January 29, 2000)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net income $189,643 $221,711 $82,834 $(304,545) $189,643
Adjustments to reconcile
net income to net cash
provided by (used) in
operating activities:
Equity in earnings of
subsidiaries (278,964) (25,581) 304,545
Extraordinary loss on early
extinguishment of debt 7,310 7,310
Depreciation and amortization 164,835 13,940 178,775
Deferred income taxes 72,707 (3,112) 69,595
Losses from long-lived assets 12,547 12,547
Changes in operating assets
and liabilities, net (185,867) (62,255) (248,122)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Operating Activities (89,321) 260,352 38,717 209,748
Investing Activities
Purchases of property
and equipment (369,496) (60,852) (430,348)
Proceeds from the sale
of assets 22,514 22,514
- ----------------------------------------------------------------------------------------------------
Net Cash Used in
Investing Activities (346,982) (60,852) (407,834)
Financing Activities
Inter-company borrowings (4,531) (236,917) 241,448
Proceeds from long-term
borrowings 550,000 550,000
Payments on long-term debt (16,504) (16,504)
Net repayments under credit
and receivables
facilities (449,000) (449,000)
Repurchase and retirement
of common stock (33,316) (33,316)
Release of cash held in
escrow for debt redemption 363,753 363,753
Payment of REMICs (235,841) (235,841)
Proceeds from issuance of
stock 5,802 5,802
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by
Financing Activities 68,955 110,332 5,607 184,894
Increase (Decrease) in Cash and
Cash Equivalents (20,366) 23,702 (16,528) (13,192)
Cash and Cash Equivalents
at Beginning of Period 20,366 (26,751) 39,137 32,752
- ----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
at End of Period $0 $(3,049) $22,609 $19,560
====================================================================================================
54
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
(for the Year Ended January 30, 1999)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Net Sales $800,592 $5,154,650 $5,955,242
Cost of sales 494,355 3,294,439 3,788,794
- ----------------------------------------------------------------------------------------------------
Gross Margin 306,237 1,860,211 2,166,448
Selling, general and
administrative expenses 155,531 1,279,332 $88,977 $(194,590) 1,329,250
Other operating expenses 59,597 469,700 (41,131) 488,166
Store pre-opening costs 1,448 9,119 10,567
Merger and integration charges 31,952 79,355 111,307
Losses from long-lived assets 331 41,005 20,449 61,785
Year 2000 expenses 884 9,553 10,437
- ----------------------------------------------------------------------------------------------------
Operating Income (Loss) 56,494 (27,853) (68,295) 194,590 154,936
Other income (expense)
Finance charge income, net 194,590 (194,590)
Intercompany exchange fees (7,000) (19,909) 26,909
Intercompany servicer fees 30,412 (30,412)
Equity in earnings of
subsidiaries 14,321 19,775 (34,096)
Interest expense, net (18,466) (64,983) (27,522) (110,971)
Other income (expense),
net (11,536) 33,737 22,201
- ----------------------------------------------------------------------------------------------------
Income (Loss) before Provision
(Benefit) for Income Taxes
and Extraordinary Items 33,813 (28,821) 95,270 (34,096) 66,166
Provision (benefit) for income
taxes 22,724 (15,389) 33,846 41,181
- ----------------------------------------------------------------------------------------------------
Income (Loss) before
Extraordinary Items 11,089 (13,432) 61,424 (34,096) 24,985
Extraordinary items, net
of taxes (11,985) (6,994) (6,902) (25,881)
- ----------------------------------------------------------------------------------------------------
Net Income (Loss) $(896) $(20,426) $54,522 $(34,096) $(896)
====================================================================================================
55
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
BALANCE SHEETS
(As of January 30, 1999)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $20,366 $(26,751) $39,137 $32,752
Retained interest in
accounts receivable 54 220 159,322 159,596
Merchandise inventories 221,585 1,168,694 1,390,279
Deferred income taxes (3,217) 87,175 83,958
Intercompany borrowings 11,070 $(11,070)
Other current assets 19,471 106,713 145 126,329
- ----------------------------------------------------------------------------------------------------
Total Current Assets 269,329 1,336,051 198,604 (11,070) 1,792,914
Property and Equipment, Net 342,355 1,264,176 505,434 2,111,965
Goodwill and Intangibles,
Net 125,717 467,170 592,887
Other Assets 1,196 55,592 20,858 77,646
Deferred Income Taxes 249,816 249,816
Cash Placed in Escrow for
Debt Redemption 363,753 363,753
Investment in and Advances
to Subsidiaries 3,112,552 1,350,621 (4,463,173)
- ----------------------------------------------------------------------------------------------------
Total Assets $3,851,149 $5,087,179 $724,896 $(4,474,243) $5,188,981
====================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable $48,768 $311,620 $360,388
Accrued expenses and other
current liabilities 39,118 452,000 $38,010 529,128
Intercompany borrowings 11,070 $(11,070)
Current portion of long-
term debt 452 15,071 15,523
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities 88,338 778,691 49,080 (11,070) 905,039
Long-Term Debt 1,709,093 165,461 235,841 2,110,395
Deferred Income Taxes 18,893 (27,045) 8,152
Other Long-Term Liabilities 27,250 136,992 1,730 165,972
Investment by and Advances
from Parent 4,033,080 430,093 (4,463,173)
Shareholders' Equity 2,007,575 2,007,575
- ----------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $3,851,149 $5,087,179 $724,896 $(4,474,243) $5,188,981
====================================================================================================
56
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
(for the Year Ended January 30, 1999)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $(896) $(20,426) $54,522 $(34,096) $(896)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Equity in earnings of
subsidiaries (14,321) (19,775) 34,096
Depreciation and
amortization 15,263 126,159 13,939 155,361
Deferred income taxes 20,224 (19,897) 14,599 14,926
Extraordinary loss on
extinguishment of debt 14,599 14,599
Losses from long-lived
assets and merger and
integration items 59,086 20,531 79,617
Changes in operating assets
and liabilities, net (15,373) 514 274,191 259,332
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 4,897 140,260 377,782 522,939
Investing Activities
Purchases of property
and equipment (48,277) (327,785) (45,000) (421,062)
Proceeds from sale of
assets 2,500 2,500
Acquisition of Dillard's
stores, Brody's and
Bullock & Jones (248,196) (276,921) (525,117)
- ----------------------------------------------------------------------------------------------------
Net Cash Used in Investing
Activities (293,973) (604,706) (45,000) (943,679)
Financing Activities
Intercompany borrowings (1,212,694) 1,375,413 (162,719)
Proceeds from long-term
borrowings 1,100,000 1,100,000
Payments on long-term debt (10,320) (450,661) (45,979) (506,960)
Net borrowings under credit
and receivables
facilities 398,000 (136,750) (125,000) 136,250
Cash placed in escrow for
debt redemption (363,753) (363,753)
Proceeds from issuance of
stock 19,525 18,040 37,565
Repurchase and retirement
of common stock (474) (474)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities 294,037 442,289 (333,698) 402,628
Increase (Decrease) in Cash
and Cash Equivalents 4,961 (22,157) (916) (18,112)
Cash and Cash Equivalents
at Beginning of Period 15,405 (4,594) 40,053 50,864
- ----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
at End of Period $20,366 $(26,751) $39,137 $32,752
====================================================================================================
57
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
(for the Year Ended January 31, 1998)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Net Sales $746,896 $4,761,832 $5,508,728
Cost of sales 480,435 2,997,335 3,477,770
- ----------------------------------------------------------------------------------------------------
Gross Margin 266,461 1,764,497 2,030,958
Selling, general and
administrative expenses 156,787 1,147,735 $62,722 $(166,221) 1,201,023
Other operating expenses 56,343 405,979 (35,064) 427,258
Store pre-opening costs 412 16,606 17,018
Merger and integration charges 11,500 25,024 36,524
(Gains) from long-lived assets (8) (126) (134)
Year 2000 expenses 357 6,233 6,590
ESOP expenses 9,513 9,513
- ----------------------------------------------------------------------------------------------------
Operating Income (Loss) 41,070 153,533 (27,658) 166,221 333,166
Other income (expense)
Finance charge income, net 166,221 (166,221)
Intercompany exchange fees (4,627) (20,503) 25,130
Intercompany servicer fees 13,372 (13,372)
Equity in earnings of
subsidiaries 397,357 58,804 (456,161)
Interest expense, net (10,612) (59,373) (43,700) (113,685)
Other income (expense),
net (178) 2,279 229 2,330
- ----------------------------------------------------------------------------------------------------
Income before Provision for
Income Taxes and Extra-
ordinary Items 423,010 148,112 106,850 (456,161) 221,811
Provision (benefit) for
income taxes 14,753 (242,283) 33,104 (194,426)
- ----------------------------------------------------------------------------------------------------
Income before Extraordinary
Items 408,257 390,395 73,746 (456,161) 416,237
Extraordinary items, net
of taxes (3,343) (6,424) (1,556) (11,323)
- ----------------------------------------------------------------------------------------------------
Net Income $404,914 $383,971 $72,190 $(456,161) $404,914
====================================================================================================
58
SAKS INCORPORATED & SUBSIDIARIES CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
(for the Year Ended January 31, 1998)
Saks Guarantor Non-Guarantor
(Dollars In Thousands) Incorporated Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net income $404,914 $383,971 $72,190 $(456,161) $404,914
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in earnings of
subsidiaries (397,357) (58,804) 456,161
Depreciation and
amortization 12,874 103,240 20,005 136,119
Deferred income taxes 222 34,198 (1,569) 32,851
Recognition of NOL carry-
forwards (294,846) (294,846)
Extraordinary loss on
extinguishment of debt 1,425 5,375 1,556 8,356
(Gains) from long-lived
assets (8) (126) (134)
ESOP expenses 8,786 8,786
Restructuring items (800) (800)
Changes in operating assets
and liabilities, net 52,575 (123,494) (15,022) (85,941)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 74,645 57,500 77,160 209,305
Investing Activities
Purchases of property and
equipment (13,349) (253,807) (79,720) (346,876)
Proceeds from sale of
assets 23,221 4,630 27,851
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Investing Activities 9,872 (249,177) (79,720) (319,025)
Financing Activities
Intercompany borrowings (226,093) 184,610 41,483
Proceeds from long-term
borrowings 175,546 175,546
Payments on long-term debt (32,720) (196,082) (30,000) (258,802)
Net borrowings under credit
and receivables facilities 136,750 11,392 148,142
Proceeds from issuance of
stock 15,762 7,423 23,185
Repurchase and retirement
of common stock (13,096) (13,096)
ESOP loan repayment 9,778 9,778
Payments to shareholders (1,124) (1,124)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities (80,601) 141,355 22,875 83,629
Increase (Decrease) in Cash
and Cash Equivalents 3,916 (50,322) 20,315 (26,091)
Cash and Cash Equivalents
at Beginning of Period 11,489 45,728 19,738 76,955
- ----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
at End of Period $15,405 $(4,594) $40,053 $50,864
====================================================================================================
59
REPORTS
Report of Independent Accountants
To the Board of Directors and Shareholders
Saks Incorporated
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, changes in
shareholders' equity and cash flows present fairly, in all
material respects, the financial position of Saks Incorporated
and Subsidiaries as of January 29, 2000 and January 30, 1999, and
the results of their operations and their cash flows for each of
the three years in the period ending January 29, 2000, in
conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
March 14, 2000
Report of Management
The accompanying consolidated financial statements, including the
notes thereto, and the other financial information presented in
the Annual Report have been prepared by management. The financial
statements have been prepared in accordance with generally
accepted accounting principles and include amounts that are based
upon our best estimates and judgments. Management is responsible
for the consolidated financial statements, as well as the other
financial information in this Annual Report.
The Company maintains an effective system of internal accounting
control. We believe that this system provides reasonable
assurance that transactions are executed in accordance with
management authorization and that they are appropriately recorded
in order to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
adequately safeguard, verify and maintain accountability of
assets. Reasonable assurance is based on the recognition that the
cost of a system of internal control should not exceed the
benefits derived.
The consolidated financial statements and related notes have
been audited by independent certified public accountants.
Management has made available to them all of the Company's
financial records and related data and believes all
representations made to them during their audits were valid and
appropriate. Their report provides an independent opinion upon
the fairness of the financial statements.
The Audit Committee of the Board of Directors is composed of four
independent Directors. The Committee is responsible for
recommending the independent certified public accounting firm to
be retained for the coming year, subject to shareholder approval.
The Audit Committee meets periodically with the independent
auditors, as well as with management, to review accounting,
auditing, internal accounting control and financial reporting
matters. The independent auditors have unrestricted access to the
Audit Committee.
/s/ R. Brad Martin /s/ Douglas E. Coltharp
R. Brad Martin Douglas E. Coltharp
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
60
MARKET INFORMATION
Effective September 18, 1998, the Company changed its corporate
name from Proffitt's, Inc. to Saks Incorporated and its New York
Stock Exchange Symbol from PFT to SKS. As of March 15, 2000,
there were approximately 2,600 shareholders of record. The prices
in the table below represent the high and low sales prices for
the stock as reported by the New York Stock Exchange.
The Company presently follows the policy of retaining earnings to
provide funds for the operation and expansion of the business and
has no present intention to declare cash dividends in the
foreseeable future. Future dividends, if any, will be determined
by the Board of Directors of the Company in light of
circumstances then existing, including the earnings of the
Company, its financial requirements and general business
conditions. The Company declared no dividends to common
shareholders in either 1999 or 1998.
Fiscal Year Ended
- -----------------------------------------------------------------
January 29, 2000 January 30, 1999
Price Range Price Range
- -----------------------------------------------------------------
Quarter High Low High Low
- -----------------------------------------------------------------
First $ 39.50 $ 23.13 $ 40.75 $ 29.38
Second $ 30.69 $ 22.56 $ 44.44 $ 29.00
Third $ 24.75 $ 14.63 $ 34.50 $ 16.38
Fourth $ 18.88 $ 13.69 $ 36.94 $ 22.13
61
DIRECTORS AND CERTAIN OFFICERS
Board of Directors
R. Brad Martin
Chairman of the Board and
Chief Executive Officer of
Saks Incorporated
Ronald de Waal
Vice Chairman of the Board;
Chairman of We International, B.V.
Bernard E. Bernstein
Partner in the law firm of
Bernstein, Stair & McAdams LLP
Stanton J. Bluestone
Retired Chairman and
Chief Executive Officer of
Carson Pirie Scott & Co.
John W. Burden
Retail Consultant;
Retired Chairman and CEO of
Federated Department Stores
and Allied Stores Corporation
Edmond D. Cicala
President of Edmond Enterprises, Inc.;
Retired Chairman of the
Goldsmith's Division of Federated
Department Stores
James A. Coggin
President and Chief Administrative
Officer of Saks Incorporated
Julius W. Erving
President of The Erving Group;
Executive Vice President of the
Orlando Magic
Michael S. Gross
Vice President of Apollo Capital
Management, L.P.
Donald E. Hess
Chairman Emeritus of Parisian;
Chief Executive Officer of
Southwood Partners
G. David Hurd
Emeritus Chairman and retired
Chief Executive Officer of
Principal Financial Group
Philip B. Miller
Chairman of Saks Fifth Avenue
Robert M. Mosco
President of Merchandising and
Chief Operating Officer of
Saks Incorporated
C. Warren Neel
Dean of the College of Business
at the University of Tennessee
Charles J. Philippin
Member of the Management
Committee of Investcorp
Stephen I. Sadove
President Bristol-Myers Squibb Co.
Worldwide Beauty Care and
Nutritionals
Marguerite W. Sallee
Chairman and Chief Executive Officer
of Frontline Group, Inc.
Gerald Tsai, Jr.
Private Investor
Certain Corporate Officers
R. Brad Martin
Chairman of the Board and
Chief Executive Officer
James A. Coggin
President and Chief
Administrative Officer
Robert M. Mosco
President of Merchandising and
Chief Operating Officer
Douglas E. Coltharp
Executive Vice President and
Chief Financial Officer
Brian J. Martin
Executive Vice President of Law
and General Counsel
Store Officers
Toni E. BrowNing
President and Chief Executive
Officer of Proffitt's
ANTHONY J. BUCCINA
President of Carson Pirie Scott
Christina Johnson
President and Chief Executive Officer
of Saks Fifth Avenue
Max W. Jones
President and Chief Executive
Officer of Herberger's
Frank E. Kulp, III
President and Chief Executive
Officer of Younkers
Michael R. MacDonald
President of the Northern Department
Stores Group and Chairman and Chief
Executive Officer of Carson Pirie Scott
Philip B. Miller
Chairman of Saks Fifth Avenue
W. Travis Saucer
President and Chief Executive
Officer of Parisian
62
positioning for growth
63
STORE LOCATIONS
Saks Fifth Avenue Stores
ARIZONA
Phoenix
CALIFORNIA
Beverly Hills
Carmel
Costa Mesa
La Jolla
Mission Viejo
Palm Desert
Palm Springs
Palos Verdes
Pasadena
San Diego
San Francisco
Santa Barbara
COLORADO
Denver
CONNECTICUT
Greenwich
Stamford
FLORIDA
Bal Harbor
Boca Raton
Ft. Lauderdale
Ft. Myers
Naples
Orlando
Palm Beach
Palm Beach Gardens
Sarasota
South Miami
Tampa
GEORGIA
Atlanta
ILLINOIS
Chicago
Highland Park
Oakbrook
Old Orchard
LOUISIANA
New Orleans
MARYLAND
Chevy Chase
MASSACHUSETTS
Boston
MICHIGAN
Dearborn
Troy
MINNESOTA
Minneapolis
MISSOURI
Frontenac
Kansas City
NEVADA
Las Vegas
NEW JERSEY
Hackensack
Short Hills
NEW YORK
Garden City
Huntington
New York City
Southampton
White Plains
OHIO
Beachwood
Cincinnati
OKLAHOMA
Tulsa
OREGON
Portland
PENNSYLVANIA
Bala Cynwyd
Pittsburgh
SOUTH CAROLINA
Charleston
Hilton Head
TEXAS
Austin
Dallas
Houston
San Antonio
VIRGINIA
McLean
Parisian Stores
ALABAMA
Birmingham (5)
Decatur
Dothan
Florence
Huntsville (2)
Mobile
Montgomery (2)
Tuscaloosa
FLORIDA
Jacksonville
Orlando (4)
Pensacola
Tallahassee
GEORGIA
Atlanta (6)
Columbus
Macon
Savannah
INDIANA
Indianapolis (2)
LOUISIANA
Baton Rouge
Lafayette
MICHIGAN
Livonia
MISSISSIPPI
Tupelo
OHIO
Cincinnati
Dayton
SOUTH CAROLINA
Columbia (2)
TENNESSEE
Chattanooga
Knoxville
Nashville
Proffitt's Stores
GEORGIA
Dalton
Rome
KENTUCKY
Ashland
Elizabethtown
NORTH CAROLINA
Asheville
Goldsboro
Greenville
Kinston
Rocky Mount
SOUTH CAROLINA
Greenville
Spartanburg
TENNESSEE
Athens
Chattanooga (2)
Cleveland
Greeneville
Johnson City
Kingsport
Knoxville (2)
Maryville
Morristown
Nashville (5)
Oak Ridge
VIRGINIA
Bristol
WEST VIRGINIA
Morgantown
Parkersburg
Mcrae's stores
ALABAMA
Birmingham (4)
Dothan
Gadsden
Huntsville (2)
Mobile
Selma
Tuscaloosa
FLORIDA
Mary Esther
Pensacola
LOUISIANA
Baton Rouge (2)
Monroe
MISSISSIPPI
Biloxi
Columbus
Gautier
Greenville
Hattiesburg
Jackson (3)
Laurel
McComb
Meridian
Natchez
Tupelo
Vicksburg
Younkers Stores
ILLINOIS
Moline
IOWA
Ames
Bettendorf
Cedar Falls
Cedar Rapids (2)
Coralville
Davenport
Des Moines (4)
Dubuque
Fort Dodge
Iowa City
Marshalltown
Mason City
Sioux City (2)
Waterloo
West Burlington
MICHIGAN
Bay City
Grandville
Holland
Marquette
Port Huron
Traverse City
MINNESOTA
Austin
Duluth
NEBRASKA
Grand Island
Lincoln
Omaha (3)
SOUTH DAKOTA
Sioux Falls
WISCONSIN
Appleton (2)
Eau Claire
Fond du Lac
Green Bay
Madison (2)
Manitowoc
Marinette
Marshfield
Racine
Sheboygan
Sturgeon Bay
Superior
Wausau
Wisconsin Rapids
Herberger's Stores
COLORADO
Grand Junction
IOWA
Ottumwa
MINNESOTA
Albert Lea
Alexandria
Bemidji
Bloomington
Brainerd
Fergus Falls
Mankato
Minneapolis
Moorhead
New Ulm
Roseville
St. Cloud
St. Paul
Stillwater
Virginia
Willmar
MONTANA
Billings
Butte
Great Falls
Havre
Kalispell
Missoula
NEBRASKA
Hastings
Kearney
Norfolk
North Platte
Scottsbluff
NORTH DAKOTA
Bismarck
Dickinson
Fargo
Minot
SOUTH DAKOTA
Aberdeen
Rapid City
Watertown
WISCONSIN
Beaver Dam
LaCrosse
Rice Lake
WYOMING
Rock Springs
Carson Pirie Scott Stores
ILLINOIS
Aurora (2)
Bloomingdale
Bourbonnais
Calumet City
Chicago (3)
Chicago Ridge
Dundee
Evergreen Park
Hammond
Joliet
Lincolnwood
Lombard (2)
Matteson
Mount Prospect
Naperville (2)
Norridge
North Riverside
Orland Park
Schaumburg
St. Charles
Vernon Hills
Waukegan
Wilmette (2)
INDIANA
Merrillville
Michigan City
MINNESOTA
Rochester
Boston Stores
Wisconsin
Brookfield (2)
Janesville
Madison (2)
Milwaukee (5)
Racine
Bergner's Stores
ILLINOIS
Bloomington
Champaign
Forsyth
Galesburg
Machesney Park
Pekin
Peoria
Peru
Quincy
Rockford (2)
Springfield
Sterling
Urbana
Off 5th Stores
ARIZONA
Tempe
Tucson
CALIFORNIA
Anaheim
Cabazon
Camarillo
Folsom
Milpitas
Ontario
Petaluma
San Diego
COLORADO
Castle Rock
CONNECTICUT
Clinton
FLORIDA
Ellenton
Orlando
Sunrise
GEORGIA
Dawsonville
HAWAII
Waipahu
ILLINOIS
Gurnee
Schaumburg
KANSAS
Olathe
MASSACHUSETTS
Worcester
Wrentham
MICHIGAN
Auburn
Dearborn
MINNESOTA
Minneapolis
NEVADA
Las Vegas
NEW JERSEY
Elizabeth
Paramus
NEW YORK
Central Valley
Niagara Falls
Riverhead
Westbury
NORTH CAROLINA
Concord
Morrisville
OHIO
Aurora
PENNSYLVANIA
Grove City
Philadelphia
SOUTH CAROLINA
Myrtle Beach
TENNESSEE
Nashville (2)
TEXAS
Grapevine
Katy
San Marcos
Stafford
VIRGINIA
Leesburg
Woodbridge
64
SHAREHOLDER INFORMATION
Sales Release Dates for 2000
Sales Period Release Date
February 2000 3/2/00
March 2000 4/6/00
April 2000 5/4/00
May 2000 6/1/00
June 2000 7/6/00
July 2000 8/3/00
August 2000 8/31/00
September 2000 10/5/00
October 2000 11/2/00
November 2000 11/30/00
December 2000 1/4/01
January 2001 2/8/01
Earnings Release Dates for 2000
Quarter Release Date
First 5/16/00
Second 8/15/00
Third 11/14/00
Fourth To be announced
Annual Meeting
The Annual Meeting of Shareholders of Saks Incorporated will be
held at 8:30 a.m. local time, June 21, 2000, at The Dixon
Gallery and Gardens, 4339 Park Avenue, Memphis, Tennessee 38117.
Shareholders are cordially invited to attend.
Inquiries Regarding Your Stock Holdings
Registered shareholders (shares held by you in your name) should
address communications regarding address changes, lost
certificates and other administrative matters to the Company's
Transfer Agent and Registrar:
Union Planters Bank, NA
7650 Magna Drive
Belleville, Illinois 62223
(618) 239-4451 (telephone)
(618) 239-4750 ext. 4451 (facsimile)
In all correspondence or telephone inquiries, please mention Saks
Incorporated, your name as printed on your stock certificate,
your Social Security number, your address and your phone number.
Beneficial shareholders (shares held by you in the name of your
broker or other nominee) should direct communications on all
administrative matters to your nominee owner.
Financial and Other Information
Copies of financial documents and other company information such
as Saks Incorporated's Form 10-K and 10-Q reports as filed with
the SEC are available free of charge by contacting:
Investor Relations
Saks Incorporated
P.O. Box 9388
Alcoa, Tennessee 37701
(865) 981-9541
Security analysts, portfolio managers, representatives of
financial institutions and other individuals with questions
regarding Saks Incorporated are invited to contact:
Julia Bentley
Senior Vice President of Investor
Relations and Communications
P.O. Box 9388
Alcoa, Tennessee 37701
(865) 981-6243 (telephone)
(865) 981-6325 (facsimile)
julia_bentley@saksinc.com (e-mail)
Financial results, corporate news and other Company information
are available on Saks Incorporated's web site:
http://www.saksincorporated.com.
Corporate Headquarters
750 Lakeshore Parkway
Birmingham, Alabama 35211
(205) 940-4000
Saks Fifth Avenue Headquarters
12 East 49th Street
New York, New York 10017
(212) 940-4048
Parisian Headquarters
750 Lakeshore Parkway
Birmingham, Alabama 35211
(205) 940-4000
Proffitt's Headquarters
115 North Calderwood Street
Alcoa, Tennessee 37701
(865) 983-7000
McRae's Headquarters
3455 Highway 80 West
Jackson, Mississippi 39209
(601) 968-4400
Younkers Headquarters
701 Walnut Street
Des Moines, Iowa 50397
(515) 244-1112
Herberger's Headquarters
600 Mall Germain
St. Cloud, Minnesota 56301
(320) 251-5351
Carson Pirie Scott, Boston Store
and Bergner's Headquarters
331 West Wisconsin Avenue
Milwaukee, Wisconsin 53203
(414) 347-4141
Independent Accountants
PricewaterhouseCoopers LLP
Birmingham, Alabama
2000 Saks Incorporated
[Back cover page]
SAKS
INCORPORATED