EXHIBIT 13.1
FIVE-YEAR FINANCIAL SUMMARY
Proffitt's, Inc. and Subsidiaries
(In thousands, except per share amounts)
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY JANUARY JANUARY FEBRUARY FEBRUARY
28, 1995 29, 1994 30, 1993 1, 1992 2, 1991
CONSOLIDATED INCOME STATEMENT DATA:
Net sales, including
leased departments $617,363 $200,884 $128,262 $104,873 $98,767
Costs and expenses:
Cost of sales 400,605 129,679 78,225 64,673 60,878
Selling, general,
and administrative
expenses (including
store pre-opening
expenses) 145,560 49,851 31,834 27,539 26,213
Other operating expenses 43,711 15,754 8,793 7,303 7,109
Operating income 27,487 5,600 9,410 5,358 4,567
Other income (expense):
Finance charge income,
net of allocation to
purchaser of accounts
receivable 13,653 5,964 4,457 4,030 4,005
Interest expense (15,655) (2,976) (2,881) (4,616) (5,404)
Other income (expense),
net 1,109 805 (109) 92 194
Income before provision
for income taxes and
cumulative effect of
changes in accounting
methods 26,594 9,393 10,877 4,864 3,362
Provision for income taxes 10,466 3,663 4,130 1,851 1,297
Income before cumulative
effect of changes in
accounting methods 16,128 5,730 6,747 3,013 2,065
Cumulative effect of changes
in accounting methods
(net of tax) 333
Net income $16,128 $6,063 $6,747 $3,013 $2,065
Earnings per common share
before cumulative effect
of changes in accounting
methods $1.46 $.62 $1.02 $.78 $.55
Earnings per common share $1.46 $.66 $1.02 $.78 $.55
Weighted average number of
common shares outstanding 9,912 9,236 6,591 3,858 3,787
JANUARY JANUARY JANUARY FEBRUARY FEBRUARY
28, 1995 29, 1994 30, 1993 1, 1992 2, 1991
CONSOLIDATED BALANCE SHEET DATA:
Trade accounts receivable,
less allowance for
doubtful accounts $2,701 $38,652 $33,556 $22,713 $22,617
Working capital $103,139 $121,357 $48,538 $47,019 $34,621
Total assets $540,055 $259,881 $133,502 $97,941 $88,657
Senior long-term debt,
less current portion $114,102 $24,968 $43,086 $27,215 $49,068
Subordinated debt $100,269 $86,250
Shareholders' equity $180,676 $124,043 $61,627 $54,467 $22,204
MANAGEMENT'S DISCUSSION AND ANALYSIS
Proffitt's, Inc. is a leading regional specialty department store
chain offering moderate to better brand name fashion apparel,
accessories, cosmetics, and decorative home furnishings. The
Company's stores are primarily anchor stores in leading regional
malls.
On March 31, 1994, Proffitt's, Inc. acquired all of the outstanding
common stock of Macco Investments, Inc., a holding company for
McRae's, Inc., a retail department store chain headquartered in
Jackson, Mississippi. Proffitt's, Inc. currently operates its
Proffitt's Division with 25 department stores located in Tennessee,
Virginia, North Carolina, Georgia, and Kentucky and its McRae's
Division with 28 department stores and one home furnishings
specialty store located in Mississippi, Alabama, Louisiana, and
Florida.
In 1992 and 1993, Proffitt's, Inc. acquired 18 store locations from
the Hess Department Store Company. These stores were renovated and
opened as Proffitt's stores throughout 1992 and 1993.
Income statement information for the year ended January 28, 1995
includes operations from the Proffitt's Division for the entire
year and operations from the McRae's Division after March 31, 1994.
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:
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 64.9 64.6 61.0
Selling, general, and
administrative expenses 23.6 22.3 24.7
Store pre-opening expenses 2.5 0.1
Other operating expenses:
Property and equipment
rentals 1.9 2.3 1.9
Depreciation and
amortization 3.0 3.1 2.6
Taxes other than income
taxes 2.2 2.4 2.3
Operating income 4.4 2.8 7.4
Other income (expense):
Finance charge income, net
of allocation to purchaser
of accounts receivable 2.2 3.0 3.5
Interest expense (2.5) (1.5) (2.3)
Other income (expense), net 0.2 0.4 (0.1)
Income before provision
for income taxes and
cumulative effect of
changes in accounting
methods 4.3 4.7 8.5
Provision for income taxes 1.7 1.8 3.2
Income before cumulative
effect of changes in
accounting methods 2.6 2.9 5.3
Cumulative effect of changes
in accounting methods
(net of tax) 0.1
Net income 2.6% 3.0% 5.3%
NET SALES
Total Company net sales increased by 207%, 57%, and 22% in 1994,
1993, and 1992, respectively. The 1994 sales increase was due to
revenues of $379.1 million generated from the McRae's Division
acquired in March 1994, along with a comparable store sales
increase of 3% and volume generated from new stores opened in 1993
not reflected in the comparable stores sales gain. The 1993
increase was attributable to a comparable store net sales increase
of 14% combined with the opening of eleven stores and renovation
and expansion of five other stores during the year.
Net Sales
1994 $617.40 million
1993 $200.9 million
1992 $128.3 million
1991 $104.9 million
1990 $98.8 million
GROSS MARGINS
Gross margins were 35.1%, 35.4%, and 39.0% in 1994, 1993, and 1992,
respectively. Effective January 31, 1993, the Company changed its
method of accounting for inventory to a full-cost method which
includes certain purchasing and distribution costs. Those costs
related to obtaining merchandise and preparing it for sale were
classified in selling, general, and administrative expenses in 1992
but were classified as cost of sales in 1994 and 1993, thereby
lowering the 1994 and 1993 gross margin percent by 2.3% and 1.7%,
respectively. Without this change, gross margin percent would have
been 37.4% in 1994 and 37.1% in 1993. The decrease in gross margin
percent from 39.0% in 1992 to 37.1% in 1993 and 37.4% in 1994
(before reflecting the change in accounting method) was primarily
a result of excessive markdowns taken in fall 1993 and spring 1994
resulting from overstocking of new store locations in 1993 and
weakness in women's apparel sales in 1993 and 1994.
At January 28, 1995, management believes the Company's inventories
were well balanced and appropriately assorted and therefore
anticipates gross margins will continue to improve in 1995.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
The change in accounting method relating to inventory costing (see
"Gross Margins") decreased selling, general, and administrative
expenses by 2.4% of sales in 1994 and by 2.1% of sales in 1993.
Without this change, selling, general, and administrative expenses
would have been 26.0% of sales in 1994 and 24.4% of sales in 1993
compared to 24.7% in 1992. The increase as a percentage of net
sales in 1994 primarily was due to the acquisition of McRae's and
additional overhead and other expenses required to operate the
expanded store base. The decline as a percentage of net sales in
1993 from the 1992 level primarily resulted from increased
economies of scale and the successful implementation of a
Company-wide program to control operating expenses.
The Company is consolidating certain administrative support areas
for the Proffitt's and McRae's Divisions (accounting, credit, and
management information systems) during spring 1995. The Company
anticipates further leverage of selling, general, and
administrative expenses in 1995 due to these consolidations,
increased sales volume, and continued expense control efforts.
STORE PRE-OPENING EXPENSES
The Company opened eleven new stores in 1993 and incurred
significant store pre-opening expenses. Store pre-opening expenses
totaled $5.0 million in 1993 and were immaterial in 1992 and 1994.
Effective January 31, 1993, the Company changed its method of
accounting for pre-opening costs to expensing such costs when
incurred. Previously, pre-opening costs were deferred and
amortized over the twelve months immediately following the store
openings.
OTHER OPERATING EXPENSES
Other operating expenses were 7.1% of net sales in 1994, compared
to 7.8% in 1993 and 6.8% in 1992. The percent decline in 1994 over
1993 resulted from leverage of these expenses over a larger sales
base, primarily due to the addition of the McRae's stores. The
increase in 1993 over prior year levels was primarily attributable
to additional depreciation and building rent expense related to new
stores placed in service throughout 1993 and 1992.
FINANCE CHARGE INCOME
Finance charge income was 2.2% of net sales in 1994 compared with
3.0% in 1993 and 3.5% in 1992. The decline from 1993 to 1994 was
due to the allocation to the third party purchaser of accounts
receivable (see "Liquidity") of finance charges of approximately
$5.6 million, or 0.9% of sales for the year. There was no such
allocation in prior years. For 1994, gross finance charge income
(before allocation to third party) was essentially level with the
prior year as a percent of sales. The decrease in 1993 from the
1992 level as a percent of sales was primarily due to increased
customer usage of third party charge cards and to the
underdeveloped customer charge account bases of the Company's
proprietary charge cards in new markets.
INTEREST EXPENSE
Interest expense as a percentage of net sales was 2.5% for 1994,
1.5% for 1993, and 2.3% for 1992. Total interest expense was $15.7
million, $3.0 million, and $2.9 million in 1994, 1993, and 1992,
respectively. The significant increase in interest expense in 1994
over prior year levels was attributable to higher borrowings
associated with the purchase and operation of new stores in 1993
and the acquisition of McRae's in 1994.
INCOME TAXES
During 1994, 1993, and 1992, effective income tax rates were 39.4%,
39.0%, and 38.0%, respectively.
NET INCOME
Net income was $16.1 million in 1994, $6.1 million in 1993, and
$6.7 million in 1992, which represents 2.6%, 3.0%, and 5.3% of net
sales, respectively. Net income in 1994 rose over 1993 and 1992
levels due to additional sales and gross margin dollars primarily
generated from the McRae's Division and having a complete year of
operations from the new stores opened during 1993. As a percent of
sales, net income was lower in 1994 and 1993 from 1992 due to gross
margin and expense factors previously discussed.
Net Income
1994 $16.128 million
1993 $6.063 million
1992 $6.747 million
1991 $3.013 million
1990 $2.065 million
INFLATION
Inflation affects the costs incurred by the Company in its purchase
of merchandise and in certain components of its selling, general,
and administrative 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.
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 fourth quarter of each year, which
includes the Christmas selling season. In light of this pattern,
selling, general, and administrative 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
quarter of each year. The fourth quarter increases in working
capital needs have typically been financed with internally
generated funds and borrowings under the Company's revolving credit
facility. Generally, more than 30% of the Company's net sales and
over 50% of net income are generated during the fourth quarter.
LIQUIDITY
The Company's primary needs for liquidity are to acquire, renovate,
or construct stores, to provide working capital for new and
existing stores, and to repay borrowings.
Net cash provided by operating activities was $111.3 million in
1994; net cash used in operating activities was $39.8 million and
$1.3 million in 1993 and 1992, respectively. The net cash provided
in 1994 was primarily due to the Company's profitable operations,
the sale of ownership interests in the Company's accounts
receivable (see below), and a reduction in inventory levels in the
Company's existing store base over the prior year. The cash used
in 1993 was primarily related to the building of inventories and
trade receivables for newly opened stores.
Net cash used in investing activities for 1994 totaled $210.3
million, of which $184.1 million was for the purchase of Macco
Investments, Inc. and $24.5 million was related to store renovation
and construction, management information systems enhancements, and
other capital expenditures. Net cash used in investing activities
for 1993 and 1992 totaled $62.6 million and $30.7 million,
respectively, and was primarily for purchases of property and
equipment and renovations related to the Hess locations.
Net cash provided by financing activities for 1994 totaled $85.0
million which was primarily a result of proceeds from long-term
borrowings and the issuance of a $30 million convertible preferred
security (see below) netted against debt and capital lease payments
of $29.2 million. Net cash provided by financing activities for
1993 totaled $117.0 million which was primarily from the proceeds
of the $86.3 million subordinated debentures (discussed below),
other long-term borrowings, and the $50.2 million public stock
offering (discussed below) netted against debt repayments. Net
cash provided by financing activities for 1992 totaled $23.1
million which was primarily from the net proceeds of long-term
borrowings.
In February and March 1993, the Company sold 2.4 million shares of
Common Stock to the public. Net proceeds to the Company were
approximately $50.2 million after deduction of the underwriting
discount and offering expenses. In October and November 1993, the
Company issued 4.75% convertible subordinated debentures due in
2003. Net proceeds to the Company were approximately $83.5 million
after deduction of the underwriting discount and offering expenses.
On March 31, 1994, Proffitt's, Inc. acquired all of the outstanding
common stock of Macco Investments, Inc., a holding company for
McRae's, Inc., a retail department store chain with 28 stores
headquartered in Jackson, Mississippi. Additionally, the Company
purchased four regional mall stores owned by McRae family
partnerships, which were leased to McRae's.
The consideration paid for the purchase of the McRae's shares
consisted of $176 million in cash and $34 million in non-cash
consideration, comprised primarily of $17.5 million of 7.5% junior
subordinated debentures and equity-related securities. The Company
also assumed $96 million in existing accounts receivable financing,
long-term debt, and capital leases. The purchase price for the
four stores owned by the McRae family partnerships totaled $18
million.
The financing of the transaction and the combined business included
a $175 million facility with a financial institution for the sale
of ownership interests in accounts receivable ("Accounts Receivable
Facility"), a $125 million revolving credit facility with several
banks ("Revolver"), and $20 million of mortgage financing on
certain Proffitt's and McRae's properties. The Accounts Receivable
Facility requires that a portion of finance charges earned be
allocated to the purchaser of the ownership interests in the
accounts receivable, sufficient to cover the yield on commercial
paper utilized by the purchaser to finance the transaction, plus
fees and expenses. The Revolver provides various borrowing
options, including prime rate and LIBOR-based rates.
Book Value Per Common Share
1994 $15.23 million
1993 $13.35 million
1992 $9.48 million
1991 $8.45 million
1990 $5.86 million
Several of the Company's financing agreements limit the Company's
additional borrowing and capital lease obligations and require the
maintenance of, among other things, various financial ratios and
minimum levels of net worth. The agreements also restrict capital
expenditures and purchases of Common Stock.
To further strengthen the balance sheet of the combined Company,
concurrent with the closing of the acquisition, Proffitt's, Inc.
issued a privately placed, $30 million, 6.5% convertible preferred
security.
As of March 15, 1995, the interest rate on the $175 million
Accounts Receivable Facility was 6.7%. As of March 15, 1995,
$125.1 million was drawn on the Accounts Receivable Facility. The
maximum drawn on the Accounts Receivable Facility during 1994
totaled $143.9 million. Amounts drawn on the Accounts Receivable
Facility are limited to between 94% and 96% of total accounts
receivable.
As of March 15, 1995, the interest rate on the $125 million
Revolver was 7.4%. Borrowings on the Revolver are limited to 50%
of merchandise inventories. As of March 15, 1995, the Company had
borrowings totaling $58.8 million outstanding under the Revolver
and unused availability of $29.5 million. The maximum amount
outstanding under the Revolver during 1994 was $87.4 million. At
that time, the Company had unused availability on the Revolver of
$37.6 million.
At January 28, 1995, total debt was 57% of total capitalization.
Excluding the subordinated debentures, which the Company considers
permanent capital, senior debt was 33% of total capitalization.
The Company estimates total capital expenditures for the combined
organization in 1995 will be approximately $25 million, primarily
for the relocation of one store, the renovation of several other
stores, and enhancements in point-of-sale equipment and management
information systems.
On March 7, 1995, the Company acquired the majority interest
(50.1%) of Parks-Belk Company ("Parks-Belk"), the owner and
operator of four department stores in northeast Tennessee.
Specific terms of the transaction were not disclosed, but
consideration was paid in Proffitt's Common Stock and cash and was
less than $10 million. The Company currently is negotiating to
purchase the remaining stock of Parks-Belk. The Company estimates
capital expenditures for renovations to these store locations will
be immaterial.
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, borrowings, and
cash reserves. 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
the necessary credit agreements will be extended or new agreements
will be entered into in order to provide future borrowing
requirements as needed.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that will have a
significant impact on the Company's financial statements.
Shareholder's Equity
1994 $180.5 million
1993 $124.0 million
1992 $61.6 million
1991 $54.5 million
1990 $22.2 million
MARKET INFORMATION
The Company's Common Stock trades on the NASDAQ Stock Market under
the symbol PRFT. As of March 15, 1995, there were approximately
630 shareholders of record. Below is a summary of the high and low
bid quotations for the Company's Common Stock for each quarterly
period for the prior two years. The source of these quotations is
the Monthly Statistical Report of the National Association of
Securities Dealers, Inc. These quotations represent inter-dealer
prices for actual transactions, without adjustment for retail
markup, markdown, or commission.
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 1994 or
1993.
FISCAL YEAR ENDED
JANUARY 28, 1995 JANUARY 29, 1994
PRICE RANGE PRICE RANGE
QUARTER HIGH LOW HIGH LOW
First 25 3/4 16 1/2 26 1/2 21 1/2
Second 19 3/4 14 3/4 27 1/4 21 3/4
Third 21 3/4 14 3/4 36 3/4 23 1/2
Fourth 25 1/4 17 3/4 35 1/2 18 1/4
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Proffitt's, Inc.
We have audited the accompanying consolidated balance sheets of
Proffitt's, Inc. and subsidiaries as of January 28, 1995 and
January 29, 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three
years in the period ended January 28, 1995. 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 in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Proffitt's, Inc. and subsidiaries at January 28, 1995
and January 29, 1994 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended January 28, 1995, in conformity with generally
accepted accounting principles.
As described in Note M to the financial statements, the Company
changed its method of costing inventory, accounting for store pre-
opening expenses and accounting for income taxes in the year ended
January 29, 1994 and changed its method of valuing inventory in the
year ended January 28, 1995.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
March 17, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Proffitt's,
Inc. has been incorporated by reference in this Form 10-K from page
26 of the 1994 Annual Report to Shareholders of Proffitt's, Inc.
In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in
Item 14(a)2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
March 17, 1995
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Proffitt's, Inc. and Subsidiaries
YEAR ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
NET SALES $617,363 $200,884 $128,262
COSTS AND EXPENSES
Cost of sales 400,605 129,679 78,225
Selling, general, and
administrative expenses 145,560 44,871 31,728
Store pre-opening expenses 4,980 106
Other operating expenses:
Property and equipment
rentals 11,616 4,638 2,480
Depreciation and
amortization 18,397 6,290 3,401
Taxes other than income
taxes 13,698 4,826 2,912
OPERATING INCOME 27,487 5,600 9,410
OTHER INCOME (EXPENSE)
Finance charge income -
Note C 13,653 5,964 4,457
Interest expense (15,655) (2,976) (2,881)
Other income (expense), net 1,109 805 (109)
INCOME BEFORE PROVISION
FOR INCOME TAXES AND
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
METHODS 26,594 9,393 10,877
Provision for income taxes 10,466 3,663 4,130
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGES IN
ACCOUNTING METHODS 16,128 5,730 6,747
Cumulative effect of changes
in accounting methods (net
of tax) - Note M:
Inventory costing 702
Store pre-opening (369)
NET INCOME 16,128 6,063 6,747
Preferred stock dividends 1,694
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 14,434 $ 6,063 $ 6,747
Earnings per common share
before cumulative effect
of changes in accounting
methods $ 1.46 $ 0.62 $ 1.02
Cumulative effect of changes
in accounting methods:
Inventory costing .08
Store pre-opening (.04)
Earnings per common share -
Note A $ 1.46 $ 0.66 $ 1.02
Weighted average common shares 9,912 9,236 6,591
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Proffitt's, Inc. and Subsidiaries
JANUARY 28, JANUARY 29,
1995 1994
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,133 $ 15,200
Trade accounts receivable, less
allowance for doubtful accounts
of $2,411 in 1994 and $1,195 in
1993 - Note C 2,701 38,652
Accounts receivable - other 7,648 7,278
Merchandise inventory 162,080 73,102
Prepaid supplies and expenses 5,827 1,534
Refundable income taxes 2,429
Deferred income tax asset - Note D 171 1,591
TOTAL CURRENT ASSETS 179,560 139,786
PROPERTY & EQUIPMENT, net of
depreciation - Notes B, E, and F 300,285 115,706
GOODWILL, net of amortization - Note B 44,624
OTHER ASSETS
Note receivable from related
party - Note I 500 500
Other assets 15,086 3,889
TOTAL ASSETS $540,055 $259,881
JANUARY 28, JANUARY 29,
1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 34,587 $ 6,963
Accrued expenses 21,436 6,468
Accrued compensation and related
items 4,980 1,641
Income taxes payable - Note D 149
Current portion of long-term debt
and capital lease obligations -
Notes F and G 15,269 3,357
TOTAL CURRENT LIABILITIES 76,421 18,429
REAL ESTATE AND MORTGAGE NOTES - Note F 64,726 20,968
NOTES PAYABLE - Note F 47,621 4,000
NOTES PAYABLE TO RELATED PARTY - Note I 1,755
CAPITAL LEASE OBLIGATIONS - Note G 11,319
DEFERRED INCOME TAXES - Note D 54,830 6,191
OTHER LONG-TERM LIABILITIES 2,438
SUBORDINATED DEBENTURES - Note H 98,632 86,250
SUBORDINATED DEBENTURES TO RELATED
PARTY - Note H 1,637
COMMITMENTS - Note G
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value,
10,000 total shares authorized:
Series A - 600 shares authorized,
issued, and outstanding, $50 per
share liquidation preference 28,850
Series B - 33 shares authorized,
no shares issued
Common Stock, $.10 par value, 100,000
shares authorized, 9,971 and 9,293
shares issued and outstanding at
January 28, 1995 and January 29,
1994, respectively 997 929
Additional paid-in capital 113,996 100,715
Retained earnings 36,833 22,399
TOTAL SHAREHOLDERS' EQUITY 180,676 124,043
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $540,055 $259,881
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of dollars)
Proffitt's, Inc. and Subsidiaries
PREFERRED STOCK
SERIES A SERIES B
Balance at February 1, 1992 $ - $ -
Net income
Issuance of Common Stock
Balance at January 30, 1993
Net income
Issuance of Common Stock
Income tax benefits related
to exercised stock options
Balance at January 29, 1994
Net income
Issuance of shares - Note B 28,850 3,296
Conversion of Series B
Preferred Stock (3,296)
Preferred dividends
Balance at January 28, 1995 $28,850 $ -
(TABLE CONTINUED)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
Balance at February 1, 1992 $644 $ 44,234 $ 9,589 $ 54,467
Net income 6,747 6,747
Issuance of Common Stock 6 407 413
Balance at January 30, 1993 650 44,641 16,336 61,627
Net income 6,063 6,063
Issuance of Common Stock 279 55,611 55,890
Income tax benefits related
to exercised stock options 463 463
Balance at January 29, 1994 929 100,715 22,399 124,043
Net income 16,128 16,128
Issuance of shares - Note B 52 10,001 42,199
Conversion of Series B
Preferred Stock 16 3,280
Preferred dividends (1,694) (1,694)
Balance at January 28, 1995 $997 $113,996 $36,833 $180,676
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Proffitt's, Inc. and Subsidiaries
YEAR ENDED
JANUARY JANUARY JANUARY
28, 1995 29, 1994 30, 1993
OPERATING ACTIVITIES
Net income $ 16,128 $ 6,063 $ 6,747
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Cumulative effect of changes in
accounting methods, before
income taxes (547)
Depreciation and amortization 19,102 6,556 3,510
Deferred income taxes 3,850 1,652 230
Other 289 490 520
Changes in operating assets and
liabilities:
Trade accounts receivable 65,577 (10,134) (5,805)
Merchandise inventory 15,230 (36,407) (10,473)
Prepaid expenses and other
current assets 1,356 (4,952) (982)
Other assets (146) (43)
Accounts payable, accrued
expenses, and income taxes
payable (10,223) (2,332) 5,017
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES 111,309 (39,757) (1,279)
INVESTING ACTIVITIES
Purchases of property and equipment, net (24,505) (64,095) (24,735)
Expenditure for acquired receivables (10,857)
Collections of acquired receivables 5,038 5,819
Acquisition of Macco Investments, Inc. (184,067)
Other (1,761) (3,541) (921)
NET CASH USED IN INVESTING
ACTIVITIES (210,333) (62,598) (30,694)
FINANCING ACTIVITIES
Issuance of convertible subordinated
debentures 86,250
Payments of deferred financing fees (2,895) (229)
Proceeds from long-term borrowings 85,679 63,395 25,053
Payments on long-term debt and
capital lease obligations (29,244) (80,596) (2,111)
Proceeds from issuance of stock 29,410 50,862 356
Dividends paid to preferred shareholders (888)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 84,957 117,016 23,069
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (14,067) 14,661 (8,904)
Cash and cash equivalents at beginning
of year 15,200 539 9,443
Cash and cash equivalents at end of year $ 1,133 $ 15,200 $ 539
Noncash investing and financing activities are described in Notes
B, D, and F.
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Proffitt's, Inc. and Subsidiaries
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
At January 28, 1995, the Company operated twenty-five Proffitt's
specialty retail department stores located in Tennessee, Georgia,
North Carolina, Kentucky, and Virginia; twenty-eight McRae's
specialty department stores located in Mississippi, Alabama,
Florida, and Louisiana; and one specialty home store. The
Company's fiscal year ends on the Saturday nearest January 31 and
consisted of 52 weeks for the years ended January 28, 1995, January
29, 1994, and January 30, 1993.
CONSOLIDATION
The financial statements include the accounts of the Company and
its wholly-owned subsidiaries. On March 31, 1994, the Company
acquired Macco Investments, Inc., the parent company of McRae's,
Inc. (collectively McRae's). The operations of McRae's and its
subsidiaries are included after March 31, 1994 (see Note B).
REVENUES
Retail sales are recorded on the accrual basis, and profits on
installment sales are recognized in full when the sales are
recorded. Sales are net of returns.
TRADE ACCOUNTS RECEIVABLE
Trade accounts consist of revolving charge accounts with terms
which, in some cases, provide for payments exceeding one year. In
accordance with usual industry practice, such receivables are
included in current assets. Finance charge income is accrued
monthly as a percentage of uncollected customer account balances.
Beginning in April 1994, a portion of finance charge income is
earned by a financial institution in connection with the sale of
interests in accounts receivable (see Note C).
INVENTORIES
Inventories are valued at the lower of cost or market as determined
by the retail inventory method applied on the last-in, first-out
(LIFO) method for approximately 76% of the inventories at January
28, 1995 and on the first-in, first-out (FIFO) method for the
balance. Prior to the fiscal year ended January 28, 1995, the
Company used the FIFO method for all inventories. As of January
28, 1995, the carrying value of inventory approximated its current
replacement costs.
Prior to January 31, 1993, inventory costs consisted only of
"direct costs," principally invoice cost plus freight. Effective
January 31, 1993, the Company adopted the "full cost" method.
Under the full cost method, inventory costs include the direct
costs plus certain purchasing and distribution costs. The impact
of this change is further discussed in Note M.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method for financial reporting
purposes over the estimated useful lives of the assets, which are
45 years for buildings and range from 4 to 20 years for fixtures,
leasehold improvements, and equipment.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
LEASED DEPARTMENT SALES
The Company includes leased department sales as part of net sales.
Leased department sales were $21,775, $3,308, and $2,562 for the
years ended January 28, 1995, January 29, 1994, and January 30,
1993, respectively.
STORE PRE-OPENING EXPENSES
Prior to January 31, 1993, new store pre-opening costs were
deferred and amortized over the 12 months immediately following the
individual store openings. Effective January 31, 1993, the Company
changed its method to expense such costs when incurred. The impact
of this change is further discussed in Note M.
INCOME TAXES
Prior to January 31, 1993, deferred income taxes were provided
under the "deferred method" to reflect the tax consequences of
timing differences between amounts reported for financial
accounting purposes and income tax purposes. Effective January 31,
1993, the Company adopted the "asset and liability method" which
recognizes deferred tax assets and liabilities for the differences
between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. The impact
of this change is further discussed in Note M.
EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the weighted
average number of common shares outstanding, including common stock
equivalents, after recognition of preferred stock dividends of
$1,694 for the year ended January 28, 1995. There were no
preferred dividends in prior years. The weighted average number of
common shares outstanding was 9,912 for the year ended January 28,
1995, 9,236 for the year ended January 29, 1994, and 6,591 for the
year ended January 30, 1993.
The Company's 4.75% convertible subordinated debentures issued in
October 1993 and 7.5% junior subordinated debentures issued in
March 1994 are not common stock equivalents, and therefore, shares
issuable upon their conversion are included only in the computation
of fully diluted earnings per share. The difference between
primary and fully diluted earnings per share was not significant in
any year.
GOODWILL
In connection with the March 31, 1994 acquisition of McRae's, the
Company has classified as goodwill the cost in excess of fair value
of the net assets acquired. Goodwill is being amortized on a
straight-line method over 40 years, and the Company recognized
amortization charges of $949 during 1994. At each balance sheet
date, the Company evaluates the realizability of goodwill based
upon expectations of nondiscounted cash flows and operating income.
Based upon its most recent analysis, the Company believes that no
material impairment of goodwill exists at January 28, 1995.
NOTE B - ACQUISITION
On March 31, 1994, the Company acquired all of the common stock of
Macco Investments, Inc. (Macco), a privately held corporation and
the parent company of McRae's, Inc. (McRae's). The total
acquisition price of approximately $212 million consisted of a cash
payment of $176 million and the issuance of (i) 436 shares of
Proffitt's, Inc. Common Stock, (ii) the Company's 7.5% Junior
Subordinated Debentures due March 31, 2004 in an aggregate face
amount equal to $17.5 million, (iii) 33 shares of Series B
Cumulative Junior Perpetual Preferred Stock, (iv) the Company's
promissory notes to certain of the Macco shareholders for $2
million, and (v) transaction costs of approximately $6 million. In
addition and in connection with the acquisition, the Company
purchased four regional mall stores owned by McRae family
partnerships and leased to McRae's for $18.5 million.
McRae's was a privately-owned regional specialty department store
company, offering moderate to upper-moderate brand name and private
label fashion apparel, shoes, accessories, cosmetics, and home
furnishings. McRae's operates 28 department stores in Mississippi,
Alabama, Louisiana, and Florida. The Company now operates two
divisions: the Proffitt's Stores Division and the McRae's Stores
Division.
The financing of the acquisition included a $175 million accounts
receivable financing program through a financial institution; a
$125 million bank revolving credit facility; $20 million of
mortgage financing on certain Proffitt's and McRae's properties;
and a private sale of $30 million Series A Cumulative Convertible
Exchangeable Preferred Stock.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition had occurred at the
beginning of the years presented and do not purport to be
indicative of what would have occurred had the acquisition been
made as of these dates or of results which may occur in the future.
Pro forma:
(Unaudited)
YEAR ENDED
JANUARY 28, JANUARY 29,
1995 1994
Net sales $680,405 $619,665
Income before cumulative effect
of changes in accounting methods $ 17,909 $ 20,214
Net income $ 17,909 $ 20,547
Earnings per common share before
cumulative effect of changes in
accounting methods $ 1.60 $ 1.86
Earnings per common share $ 1.60 $ 1.90
The allocation of the purchase price was as follows:
Working capital $ 68,396
Property and equipment 176,907
Goodwill 45,574
Other assets 10,409
Long-term debt (32,877)
Capital lease obligations (11,695)
Deferred income taxes (42,432)
Other long-term liabilities (2,484)
$ 211,798
NOTE C - SALE OF ACCOUNTS RECEIVABLE
On April 1, 1994, the Company sold an ownership interest in its
accounts receivable. The Company recognized no gain or loss on
this transaction. Under the agreement with the purchaser, which
expires March 1996, the purchaser's share of collections on
accounts may be remitted to the purchaser, or the Company, at its
option, may substitute newly created receivables and retain the
collections. The Company may obtain additional proceeds by
increasing the ownership interest transferred to the purchaser, or
reduce the purchaser's interest by remitting a portion of the
collections to the purchaser. The ownership interest which may be
transferred to the purchaser is limited to $175 million and is
further restricted on the basis of the level of eligible
receivables and a minimum ownership interest to be maintained by
the Company. The Company sold $333,473 of its accounts receivable
during 1994, and the ownership interest transferred to the
purchaser, which is reflected as a reduction of accounts
receivable, was $138,740 at January 28, 1995.
Finance charges to the Company's customers on the purchaser's
portion of receivables are used to cover the purchaser's borrowing
costs (the yield on commercial paper issued by the purchaser), fees
related to the level of the purchaser's investment, and related
expenses, including fees paid to the Company to service the
receivables. The balance of finance charges is retained by the
Company. Finance charges retained by the purchaser were $5,567 in
1994.
The Company is contingently liable for the collection of the
receivables sold. Management believes that the allowance for
doubtful accounts of $2,411 at January 28, 1995 is adequate for
losses under this recourse provision. The agreement contains
certain covenants requiring the maintenance of various financial
ratios. If these covenants are not met or if an event of default
was to occur, the purchaser could be entitled to terminate the
agreement.
NOTE D - INCOME TAXES
The components of income tax expense were as follows:
YEAR ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
Current:
Federal $ 5,109 $ 1,964 $ 3,281
State 1,507 260 619
6,616 2,224 3,900
Deferred:
Federal 3,348 1,375 216
State 502 277 14
3,850 1,652 230
$ 10,466 $ 3,876 $ 4,130
The primary sources of significant timing differences for 1992
which gave rise to deferred taxes included depreciation expense,
inventory capitalization, deferred costs, and bad debts.
Components of the net deferred tax asset or liability recognized in
the consolidated balance sheets as of January 28, 1995 and January
29, 1994 were as follows:
JANUARY 28, JANUARY 29,
1995 1994
Current:
Deferred tax assets:
Allowance for doubtful accounts $ 809 $ 326
Other current assets 99
Tax credits 423 412
Accrued expenses 1,250 853
2,581 1,591
Deferred tax liabilities:
Inventory (2,410)
Net deferred tax asset $ 171 $ 1,591
Noncurrent:
Deferred tax assets:
Capital leases $ 837
Other long-term liabilities 951
1,788
Deferred tax liabilities:
Property and equipment (49,855) $ (6,134)
Other assets (5,406) (57)
Junior subordinated debentures (1,357)
(56,618) (6,191)
Net deferred tax liability $(54,830) $ (6,191)
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 were as follows:
YEAR ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
Statutory rate 35.0% 34.0% 34.0%
State income taxes, net
of federal benefit 3.0 4.0 4.0
Other items, net 1.4 1.0
Effective rate 39.4% 39.0% 38.0%
During the year ended January 29, 1994, certain incentive and
nonqualified stock options (for income tax purposes) were
exercised. The difference between the purchase price of the stock
established at the date of grant and the fair value at date of
exercise was deducted as compensation for income tax purposes
without a corresponding expense recorded for financial reporting
purposes. The tax benefit of $463 relating to such was credited to
additional paid-in capital. There were no material amounts of such
options exercised during the years ended January 28, 1995 and
January 30, 1993.
The Company made income tax payments, net of refunds received, of
$9,764, $5,870, and $3,292 during the years ended January 28, 1995,
January 29, 1994, and January 30, 1993, respectively.
NOTE E - PROPERTY AND EQUIPMENT
A summary of property and equipment at January 28, 1995 and January
29, 1994 was as follows:
JANUARY 28, JANUARY 29,
1995 1994
Land and land improvements $ 38,848 $ 7,358
Buildings 123,319 43,547
Leasehold improvements 40,786 22,333
Fixtures and equipment 128,898 66,447
Construction in progress 9,265
341,116 139,685
Accumulated depreciation (40,831) (23,979)
$300,285 $115,706
NOTE F - SENIOR LONG-TERM DEBT
A summary of senior long-term debt at January 28, 1995 and January
29, 1994 was as follows:
JANUARY 28, JANUARY 29,
1995 1994
Real estate and mortgage notes,
interest ranging from 3.75% to
10.375%, maturing 1995 to 2008,
collateralized by property and
equipment with a carrying amount
of approximately $110,977 at
January 28, 1995 $ 73,791 $ 22,825
Subordinated notes payable to
individuals, interest at 12.00%,
maturing 1997, callable by the
holders with written notice six
months prior to payment date 5,266
Notes payable, interest ranging from
10.36% to 13.00%, maturing 1995 to 1998 4,888 5,500
Revolving credit agreement, interest
at 7.01% at January 28, 1995 45,000
128,945 28,325
Current portion (14,843) (3,357)
$114,102 $ 24,968
Real estate and mortgage notes include a note payable of $1,803 at
January 28, 1995, which is subject to call at any time after
February 1, 1997. Also, included are notes payable of $3,288 at
January 28, 1995, which are subject to call (with six months
notification) at any time after November 3, 1996.
In conjunction with a real estate mortgage note having a balance of
$7,650 at January 28, 1995, the Company entered into an interest
rate swap agreement for the management of interest rate exposure.
The differential to be paid or received is included in interest
expense. The agreement swaps the variable rate for a fixed rate of
5.7%. This agreement extends to June 30, 2003. The Company
continually monitors its position and the credit rating of the
interest rate swap counterparty. While the Company may be exposed
to credit losses in the event of nonperformance by the
counterparty, it does not anticipate such losses.
At January 28, 1995, the Company owed $45 million under a revolving
credit agreement (Revolver) with banks. Borrowings under the
Revolver are limited to 50% of merchandise inventories up to a
maximum borrowing of $125 million, and interest rate options are
based on the LIBOR rate and prime rate. The agreement expires in
1997 and subject to mutual agreement, can be extended for up to two
additional periods of one year each. In addition to certain
general requirements, the credit agreement requires the Company to
meet specific covenants related to current ratio, fixed charges,
funded debt, capitalization, and tangible net worth. Certain other
note agreements also impose restrictions and financial maintenance
requirements.
Maturities of long-term debt for the next five years, giving
consideration to lenders' call privileges, are as follows:
FISCAL YEAR END
1996 $ 14,843
1997 14,667
1998 57,600
1999 4,602
2000 21,434
The Company made interest payments of $13,090, $2,743, and $2,842
during the years ended January 28, 1995, January 29, 1994, and
January 30, 1993, respectively. Capitalized interest was $303 and
$787 for the years ended January 28, 1995 and January 29, 1994,
respectively. No material amount of interest was capitalized for
the year ended January 30, 1993.
NOTE G - LEASES
The Company is committed under long-term leases primarily for the
rentals of certain retail stores. The leases generally provide for
minimum annual rentals (including executory costs such as real
estate taxes and insurance) and contingent rentals based on a
percentage of sales in excess of stated amounts. Generally, the
leases have primary terms ranging from 20 to 30 years and include
renewal options ranging from 5 to 15 years.
At January 28, 1995, minimum rental commitments under capital
leases and operating leases with terms in excess of one year are as
follows:
FISCAL YEAR END CAPITAL LEASES OPERATING LEASES
1996 $ 2,179 $ 7,267
1997 2,179 7,006
1998 2,179 6,861
1999 2,179 6,472
2000 2,165 6,080
Thereafter 21,219 41,226
Total minimum rental commitments 32,100 $ 74,912
Estimated insurance, taxes,
maintenance, and utilities (7,863)
Net minimum rental commitments 24,237
Imputed interest (rates ranging
from 8.00% to 17.80%) (12,492)
Present value of net minimum
rental commitments 11,745
Less current installments of
capital lease obligations (426)
Capital lease obligations,
excluding current installments $ 11,319
Contingent rentals on capital leases were $213 in 1994.
Total rental expense for operating leases was as follows:
YEAR ENDED
JANUARY 28, JANUARY 29, JANUARY 30,
1995 1994 1993
Buildings:
Minimum rentals $ 8,549 $ 3,570 $ 1,684
Contingent rentals 2,244 953 721
Equipment 823 115 75
$11,616 $ 4,638 $ 2,480
NOTE H - SUBORDINATED DEBENTURES
In October 1993, the Company issued $86,250 of 4.75% convertible
subordinated debentures, due November 1, 2003, with interest due
semi-annually. The debentures are convertible into the Company's
Common Stock at any time prior to maturity, unless previously
redeemed, at a conversion price of $42.70 per share. The
debentures are redeemable for cash at any time on or after November
15, 1996, at the option of the Company at specified redemption
prices.
In March 1994, the Company issued 7.50% junior subordinated
debentures with a face value of $17,500. The debentures were
discounted to reflect their fair value and have an accreted
carrying value of $14,019 at January 28, 1995. A Director of the
Company owns $1,637 of these debentures.
During the year ended January 29, 1994, a $5,000 convertible
subordinated debenture was converted into Common Stock at a
conversion price of $16 per share.
NOTE I - RELATED PARTY TRANSACTIONS
In February 1989, the Company entered into an agreement with the
Chairman of the Board and Chief Executive Officer for an unsecured
$500 interest-free loan due January 31, 1999. The loan was made as
a supplement to this individual's base compensation, and interest
was imputed on this loan at 5.54% for 1994.
The Company is obligated under 6.50% second mortgage real estate
notes to a Director of the Company in the amount of $1,755.
NOTE J - STOCK OPTIONS
The Company's 1987 Stock Option Plan, as amended, provided for the
granting of options of Common Stock not to exceed 490 shares to
officers, key employees, and Directors. No additional options are
to be granted under the 1987 Plan. On March 1, 1994, the Company's
Board of Directors adopted the Proffitt's, Inc. 1994 Long-Term
Incentive Plan pursuant to which stock options, stock appreciation
rights, restricted shares of Common Stock, and performance units
may be awarded to officers, key employees, and Directors. This
Plan has available for grant 1,200 shares of Common Stock of the
Company.
Stock option activity was as follows:
SHARES STOCK OPTION PRICE RANGE
Balance at February 1, 1992 295 $ 5.250 $ 8.125
Granted 78 12.000
Exercised (53) 5.250 12.000
Balance at January 30, 1993 320 5.250 12.000
Granted 199 23.625 28.500
Exercised (81) 5.250 12.000
Balance at January 29, 1994 438 5.250 28.500
Granted 660 18.250 24.500
Exercised (70) 5.250 23.625
Cancelled (9) 12.000 23.625
Balance at January 28, 1995 1,019 5.250 28.500
At January 28, 1995, incentive stock options and nonqualified stock
options for 380 shares were exercisable.
NOTE K - STOCK TRANSACTIONS
In February and March 1993, the Company sold 2,395 shares of Common
Stock at $22.25 per share in a public offering. Net proceeds to
the Company were approximately $50.2 million after the underwriting
discount and offering expenses.
On March 31, 1994, the Company issued 600 shares of Series A
Cumulative Convertible Exchangeable Preferred Stock in a private
offering. Net proceeds to the Company were approximately $28.5
million after offering expenses. Dividends are cumulative and are
paid in March and September at $3.25 per annum per share (6.50%).
The Preferred Stock is convertible into Common Stock at a price of
$21.10 per share and has a liquidation preference of $50 per share.
The Company may redeem the stock, in whole or in part, at $52.50
per share after two years based on certain conditions, and in any
event after four years. The stock is exchangeable at the Company's
option in whole on any dividend payment date on the basis of $50 of
6.50% Exchange Debentures for each share. The stock gains voting
rights when three semi-annual dividends are in arrears, and at that
time, the shareholder may appoint one representative to the
Company's Board of Directors.
NOTE L - ASSET PURCHASES
From October 1992 to July 1993, the Company purchased certain real
and personal property and assumed certain operating leases of
eighteen store locations from Hess's Department Stores, Inc. (Hess)
and Crown American Corporation. The acquired locations were in
Tennessee, Virginia, Kentucky, and Georgia. The total purchase
price for the acquired property was approximately $24 million which
was financed through the Company's revolving credit facility. The
Company did not acquire the merchandise inventories of the
locations. These stores were renovated and placed in service as
Proffitt's stores between November 1992 and November 1993.
Also, in October 1992, in a related but separate transaction, the
Company purchased from Citicorp Retail Services, Inc. a portion of
the trade accounts receivable generated by the proprietary credit
card program of Hess for the trade areas related to the property
purchased. The total purchase price for the trade accounts
receivable was $10.9 million which was financed through the
Company's revolving credit facility.
NOTE M - CHANGES IN ACCOUNTING METHODS
Effective January 31, 1993, the Company changed its method of
accounting for inventory to include certain purchasing and
distribution costs. Previously, these costs were charged to
expense in the period incurred rather than in the period in which
the merchandise was sold. The Company believes this new method is
preferable because it provides a better matching of the full cost
of obtaining merchandise and preparing it for sale with the related
revenues. The cumulative effect of this change for periods prior
to January 31, 1993 of $702 (net of income taxes of $449) is shown
separately in the consolidated statement of income. The effect of
this change on the fiscal year ended January 29, 1994 was to
increase net income before the cumulative effect by $461, or $.05
per common share.
Effective January 31, 1993, the Company also changed its method of
accounting for store pre-opening costs to expensing such costs when
incurred. Previously, these costs were amortized over the 12
months immediately following the individual store openings. The
Company believes this new method is preferable because it is more
conservative and is more prevalent in the industry. The cumulative
effect of this change for periods prior to January 31, 1993 of $369
(net of income taxes of $236) is shown separately in the
consolidated statement of income. The effect of this change on the
fiscal year ended January 29, 1994 was to decrease net income
before cumulative effect by $1,665, or $.18 per common share.
In 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 109, Accounting for Income
Taxes, which requires a change from the deferred method to the
asset and liability method of accounting for income taxes. The
Company adopted the new accounting standard effective January 31,
1993. Adoption of the new standard had no effect on the Company's
financial position or results of operations. There would have been
no impact on 1992 had the standard been applied retroactively.
The pro forma net income and earnings per common share, if the
accounting changes for inventories and store pre-opening costs had
been retroactively applied, were as follows:
YEAR ENDED
JANUARY 30,
1993
Pro forma:
Net income $ 6,538
Earnings per common share $ .99
Historical:
Net income $ 6,747
Earnings per common share $ 1.02
Effective January 30, 1994, the Company changed its method of
accounting for inventory to the last-in, first-out (LIFO) method
for approximately 76% of its inventories. Previously, all
inventories were valued using the first-in, first-out (FIFO)
method. The Company believes this new method is preferable because
it more accurately matches costs with revenues and is more
prevalent in the industry. At January 28, 1995, inventories costed
under LIFO approximated FIFO. The cumulative effect of this change
is not presented because it is not determinable.
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument:
The fair values of cash and cash equivalents, accounts receivable,
and short-term debt approximates cost due to the immediate or
short-term maturity of these instruments.
For variable rate notes that reprice frequently, fair value
approximates carrying value. The fair values of fixed rate notes
are estimated using discounted cash flow analyses with interest
rates currently offered for loans with similar terms and credit
risk.
The fair values of convertible subordinated debentures are based on
quoted market prices. For junior subordinated debentures, the fair
values are estimated using discounted cash flow analyses with
interest rates currently offered for financial instruments with
similar terms and credit risk.
The fair value of the Preferred Stock, which was issued in a
private placement, is estimated at carrying value as such stock is
not traded in the open market and a market price is not readily
available.
The fair values of the Company's aforementioned financial
instruments at January 28, 1995 were as follows:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Cash and cash equivalents $ 1,133 $ 1,133
Accounts receivable 2,701 2,701
Fixed rate notes payable 10,154 10,723
Variable rate notes payable 45,000 45,000
Fixed rate real estate and mortgage notes 41,781 41,369
Variable rate real estate and mortgage
notes 32,010 32,010
Convertible subordinated debentures 86,250 65,119
Junior subordinated debentures 14,019 14,019
Convertible exchangeable Preferred Stock 28,850 28,850
NOTE O - SUBSEQUENT EVENT
On March 7, 1995, the Company acquired a majority interest (50.1%)
of Parks-Belk Company, the owner and operator of four department
stores in northeast Tennessee. Specific terms of the transaction
were not disclosed, but consideration was paid in Proffitt's, Inc.
Common Stock and cash and was less than $10 million. The Company
is negotiating to purchase the remaining interest.
REPORTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Proffitt's, Inc.
We have audited the accompanying consolidated balance sheets of
Proffitt's, Inc. and subsidiaries as of January 28, 1995 and
January 29, 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three
years in the period ended January 28, 1995. 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 in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Proffitt's, Inc. and subsidiaries at January 28, 1995
and January 29, 1994 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended January 28, 1995, in conformity with generally
accepted accounting principles.
As described in Note M to the financial statements, the Company
changed its method of costing inventory, accounting for store
pre-opening expenses and accounting for income taxes in the year
ended January 29, 1994 and changed its method of valuing inventory
in the year ended January 28, 1995.
Knoxville, Tennessee
March 17, 1995
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 judgements. 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 reports
provide an independent opinion upon the fairness of the financial
statements.
The Audit Committee of the Board of Directors is composed of three
outside 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/ James E. Glasscock
R. Brad Martin James E. Glasscock
Chairman of the Board and Executive Vice President, Chief
Chief Executive Officer Financial Officer, and Treasurer