INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
R. H. Macy & Co., Inc. (Debtor-in-Possession)
We have audited the accompanying consolidated statements of financial condition
of R. H. Macy & Co., Inc. (Debtor-in-Possession) and consolidated subsidiaries
as of July 30, 1994 and July 31, 1993, and the related consolidated statements
of operations, cash flows and changes in deficiency in net assets for each of
the three years in the period ended July 30, 1994. Our audits also included the
accompanying financial statement schedules. These consolidated financial
statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of R. H. Macy & Co., Inc.
(Debtor-in-Possession) and consolidated subsidiaries as of July 30, 1994 and
July 31, 1993, and the results of their operations and their cash flows for each
of the three years in the period ended July 30, 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 1 of notes to consolidated financial statements, the
Company and certain of its subsidiaries have filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such consolidated financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any additional changes that
may be made in its business. The outcome of these matters is not presently
determinable.
The accompanying consolidated financial statements have been prepared assuming
that the Company and its subsidiaries will continue as a going concern. The
results of operations for each of the three years in the period ended July 30,
1994 together with the uncertainties relating to the confirmation of the joint
plan of reorganization and the consummation of the related merger agreement,
among other matters, raise substantial doubt about the Company's ability to
continue as a going concern. Management's discussion of these matters is set
forth in Notes 1 and 2 of notes to consolidated financial statements. The
consolidated financial statements do not include adjustments that might result
from the outcome of the uncertainties referred to herein and in the preceding
paragraph.
As discussed in Notes 18 and 19 of notes to consolidated financial statements,
the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions effective August 1, 1993 to conform
with Statements of Financial Accounting Standard Nos. 109 and 106.
DELOITTE & TOUCHE LLP
New York, New York
September 19, 1994
(September 28, 29 and 30, 1994
as to the last paragraphs of
Notes 18, 2 and 20, respectively)
1
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JULY 30, JULY 31,
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)
ASSETS
Current Assets:
Cash and cash equivalents (Note 3).......................................... $ 112,677 $ 41,533
Restricted cash (Note 3).................................................... 44,393 34,915
Other receivables........................................................... 122,641 119,670
Merchandise inventories (Notes 3 and 4)..................................... 1,244,253 1,279,744
Prepaid expenses............................................................ 62,270 68,512
----------- -----------
Total Current Assets.................................................... 1,586,234 1,544,374
----------- -----------
Other Assets:
Investment in joint venture at equity....................................... 23,347 17,197
Other assets (Notes 3 and 5)................................................ 75,971 103,091
----------- -----------
99,318 120,288
----------- -----------
Property and Equipment (Notes 3, 8, 9 and 20):
Land........................................................................ 404,311 417,072
Building and improvements on owned properties............................... 1,465,212 1,521,521
Building and improvements on leased properties.............................. 633,022 463,602
Fixtures and equipment...................................................... 866,154 922,579
Construction in progress.................................................... 123,758 99,267
Capitalized leases.......................................................... 111,145 82,515
Leasehold values............................................................ 20,939 19,210
----------- -----------
3,624,541 3,525,766
Accumulated depreciation and amortization................................... 1,166,307 1,089,939
----------- -----------
2,458,234 2,435,827
----------- -----------
$ 4,143,786 $ 4,100,489
----------- -----------
----------- -----------
LIABILITIES AND DEFICIENCY IN NET ASSETS
Current Liabilities:
Accounts payable and accrued liabilities (Note 6)........................... $ 841,167 $ 874,492
Short-term borrowings (Note 7).............................................. -- 62,698
Current income taxes (Note 18).............................................. 510 402
Current portion of obligations under capitalized leases (Note 20)........... 15,222 13,891
----------- -----------
Total Current Liabilities............................................... 856,899 951,483
----------- -----------
Deferred Taxes (Note 18)..................................................... 18,720 --
Other Long-Term Liabilities.................................................. 128,435 117,265
Obligations Under Capitalized Leases (Note 20)............................... 44,240 27,829
Obligations Subject to Settlement Under Reorganization Proceedings (Note
8).......................................................................... 5,639,810 5,568,603
Preferred Stock (Note 10):
par value $1.00 per share, authorized 25,000,000 shares, Series I, II and
III cumulative, 8%:
Series I, 9,000,000 shares designated, 7,494,465 shares outstanding in
1994 and 1993, aggregate liquidation preference $296,900,000,
redeemable.............................................................. -- --
Series II, 1,000,000 shares designated, 211,506 shares outstanding in 1994
and 1993, aggregate liquidation preference $33,640,000, redeemable...... -- --
Series III, 7,000,000 shares designated, 5,298,330 shares outstanding in
1994 and 1993, aggregate liquidation preference $168,540,000,
redeemable.............................................................. -- --
Deficiency in Net Assets:
Common stock, par value $1.00 per share, 40,000,000 authorized, 1,750,000
issued in 1994 and 1993 (Notes 11 and 12)................................. 1,750 1,750
Deficit..................................................................... (2,544,735) (2,565,108)
Less: Treasury Stock, at cost, 133,300 shares in 1994 and 1993.............. (1,333) (1,333)
----------- -----------
Deficiency in Net Assets.................................................. (2,544,318) (2,564,691)
----------- -----------
$ 4,143,786 $ 4,100,489
----------- -----------
----------- -----------
See notes to consolidated financial statements.
2
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
--------------------------------------------------------------------------
JULY 30, 1994 JULY 31, 1993 AUGUST 1, 1992
---------------------- ---------------------- ----------------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
PERCENT PERCENT PERCENT
AMOUNT OF SALES AMOUNT OF SALES AMOUNT OF SALES
----------- -------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Net retail sales (including
licensed departments) (Note 13)... $ 6,163,346 100.0% $ 6,299,982 100.0% $ 6,448,885 100.0%
Less:
Cost of goods sold, including
occupancy and buying costs...... 4,378,315 71.0 4,461,945 70.8 4,753,627 73.7
Selling, general and
administrative expenses......... 1,759,205 28.6 1,909,648 30.3 2,025,294 31.4
Unusual items--net (Note 16)...... 19,500 0.3 20,255 0.3 314,926 4.9
----------- -------- ----------- -------- ----------- --------
Income/(loss) from operations
before interest expense,
earthquake loss and reorganization
items............................. 6,326 0.1 (91,866) (1.4) (644,962) (10.0)
Interest expense--net (Contractual
interest of $475,083 in 1994,
$439,894 in 1993 and $443,665 in
1992) (Note 14)................. 198,600 3.2 236,376 3.8 344,223 5.3
Earthquake loss (Note 15).......... 15,000 0.2 -- -- -- --
----------- -------- ----------- -------- ----------- --------
Loss before reorganization
items--net........................ (207,274) (3.3) (328,242) (5.2) (989,185) (15.4)
Reorganization items--net (Note
17)............................. (38,682) (0.6) 214,659 3.4 261,122 4.0
----------- -------- ----------- -------- ----------- --------
Loss before income taxes/(benefit)
and cumulative effect of an
accounting change................. (168,592) (2.7) (542,901) (8.6) (1,250,307) (19.4)
Income taxes/(benefit) (Note
18)............................. (3,625) -- 1,000 -- 1,000 --
----------- -------- ----------- -------- ----------- --------
Net loss before cumulative effect
of an accounting change........... (164,967) (2.7) (543,901) (8.6) (1,251,307) (19.4)
Cumulative effect of an accounting
change (Note 18)................ 185,340 3.0 -- -- -- --
----------- -------- ----------- -------- ----------- --------
Net earnings/(loss)................ $ 20,373 0.3% $ (543,901) (8.6)% $(1,251,307) (19.4)%
----------- -------- ----------- -------- ----------- --------
----------- -------- ----------- -------- ----------- --------
Primary earnings/(loss) per share
of common stock: (Note 3)
Net loss before cumulative effect
of an accounting change......... $ (102.02) $ (336.36) $ (782.13)
Cumulative effect of an accounting
change.......................... 114.62 -- --
----------- ----------- -----------
Primary earnings/(loss) per
share of common stock......... $ 12.60 $ (336.36) $ (782.13)
----------- ----------- -----------
----------- ----------- -----------
Fully diluted earnings per share of
common stock: (Note 3)
Net loss before cumulative effect
of an accounting change......... $ (11.28)
Cumulative effect of an accounting
change.......................... 12.68
-----------
Fully diluted earnings per share
of common stock............... $ 1.40
-----------
-----------
See notes to consolidated financial statements.
3
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
----------------------------------------------
JULY 30, 1994 JULY 31, 1993 AUGUST 1, 1992
------------- ------------- --------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings/(loss)......................................... $ 20,373 $(543,901) $ (1,251,307)
Adjustments to reconcile net earnings/(loss) to
net cash provided by/(used for) operating activities:
Depreciation and amortization........................... 306,717 287,195 288,757
Interest accrued on pre-petition debt and termination
compensation asserted to be due under interest rate
protection agreements.................................. 65,238 285,974 154,728
Reorganization items--net............................... 29,475 35,263 117,834
Earthquake loss......................................... 15,000 -- --
Non-cash interest....................................... 29,406 21,722 41,339
Loss/(gain) on disposal of property..................... 289 (13,286) --
Accrued postretirement benefits......................... 20,534 -- --
Cumulative effect of an accounting change............... (185,340) -- --
Write-off of excess of cost over fair value of net
assets acquired........................................ -- -- 241,452
Deferred taxes.......................................... (5,248) -- --
Other................................................... (550) -- 5,748
Change in current assets and liabilities:
Restricted cash......................................... (9,478) (1,285) (33,630)
Other receivables....................................... 18,651 1,520 3,494
Merchandise inventories................................. 9,928 (69,206) 242,208
Prepaid expenses........................................ 4,142 (3,906) 6,674
Accounts payable and accrued liabilities................ (71,293) (50,549) 616,673
Income taxes............................................ 108 (4) 406
Increase in working capital and other liabilities due to
reorganization activities............................... (8,620) (27,421) (914,853)
Decrease/(increase) in other assets....................... 2,655 25,651 (21,392)
Increase/(decrease) in other liabilities and deferred
taxes................................................... (3,552) 16,736 83,032
Other, net................................................ (231) (11) 2,000
------------- ------------- --------------
Net cash provided by/(used for) operating activities........ 238,204 (35,508) (416,837)
------------- ------------- --------------
INVESTING ACTIVITIES:
Additions to property and equipment......................... (143,070) (113,913) (246,219)
Insurance proceeds from earthquake damage................... 73,000 -- --
Proceeds from disposition of assets......................... 2,580 14,299 --
------------- ------------- --------------
Net cash used for investing activities...................... (67,490) (99,614) (246,219)
------------- ------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................... -- -- 9,100
Proceeds from/(repayment of) short-term borrowings.......... (65,900) 65,900 (125,495)
Repurchase of treasury shares............................... -- -- (175)
Repayments of secured debt included in obligations
subject to settlement under reorganization proceedings.... (9,511) -- --
Repayments of long-term debt and
obligations under capitalized leases...................... (19,323) (11,826) (50,871)
Deferral of debt due to reorganization activities........... -- -- (3,627,579)
Decrease in preferred stock due to reorganization
activities................................................ -- -- (637,315)
Cost of debtor-in-possession financing and short-term
borrowings................................................ (4,836) -- (15,000)
Other....................................................... -- -- 1,275
------------- ------------- --------------
Net cash provided by/(used for) financing activities........ (99,570) 54,074 (4,446,060)
------------- ------------- --------------
CASH FLOW EFFECT OF REORGANIZATION ACTIVITIES:
Increase in obligations subject to settlement under
reorganization proceedings................................ -- -- 5,179,747
------------- ------------- --------------
Net cash flow effect of reorganization activities........... -- -- 5,179,747
------------- ------------- --------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS............. 71,144 (81,048) 70,631
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 41,533 122,581 51,950
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 112,677 $ 41,533 $ 122,581
------------- ------------- --------------
------------- ------------- --------------
See notes to consolidated financial statements.
4
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL INFORMATION
Amounts in these statements of cash flows are presented on a cash basis and
may differ from those shown in other sections of this report.
Interest paid (excluding interest capitalized during construction) was
$16,196,000, $12,428,000 and $199,022,000 in 1994, 1993 and 1992. Income taxes
paid and tax refunds received were as follows:
1994 1993 1992
---------- ----------- -----------
Income taxes paid.................... $1,648,000 $ 1,121,000 $ 1,127,000
Income tax refunds received.......... (132,000) (117,000) (3,466,000)
---------- ----------- -----------
Net income tax payments/(refunds).... $1,516,000 $ 1,004,000 $(2,339,000)
---------- ----------- -----------
Preferred Stock increased by $19,649,000 in 1992 through a related charge to
the deficiency in net assets.
Additions to property and equipment of $32,793,000, $21,850,000 and
$29,993,000 were recorded in 1994, 1993 and 1992 by incurring obligations under
capitalized leases. Property held for sale at estimated net realizable value of
$19,500,000 was reclassified to Other Receivables in fiscal 1994.
On August 1, 1993 Macy's adopted Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes ("FASB 109"). FASB 109 requires a
remeasurement of certain assets and liabilities. Property and equipment and
other certain assets were increased by $191,132,000 and $18,176,000,
respectively. A deferred tax liability and a Cumulative Effect of an Accounting
Change was recorded as the corresponding amount.
In 1993, Macy's assumed approximately $24,451,000 of capitalized leases
which were reclassified from the caption Obligations Subject to Settlement Under
Reorganization Proceedings to the caption Obligations Under Capitalized Leases.
In 1993, secured debt included in the caption Obligations Subject to
Settlement Under Reorganization Proceedings was reduced by $5,969,000 due to
third party assumption of such debt. A corresponding rent receivable was
reduced.
5
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY IN NET ASSETS
COMMON SHARES TREASURY SHARES
-------------------- -------------------
NUMBER DOLLARS DEFICIT NUMBER DOLLARS
--------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
Balance, August 3, 1991................. 1,750,000 $ 1,750 $ (750,251) (115,800) $(1,158)
Net loss.............................. (1,251,307)
Preferred dividends................... (19,305)
Accretion of redeemable
preferred stock..................... (344)
Treasury shares acquired.............. (17,500) (175)
--------- ------- ----------- -------- -------
Balance, August 1, 1992................. 1,750,000 1,750 (2,021,207) (133,300) (1,333)
Net loss.............................. (543,901)
--------- ------- ----------- -------- -------
Balance, July 31, 1993.................. 1,750,000 1,750 (2,565,108) (133,300) (1,333)
Net earnings.......................... 20,373
--------- ------- ----------- -------- -------
Balance, July 30, 1994.................. 1,750,000 $ 1,750 $(2,544,735) (133,300) $(1,333)
--------- ------- ----------- -------- -------
--------- ------- ----------- -------- -------
See notes to consolidated financial statements.
6
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CHAPTER 11 PROCEEDINGS
On January 27, 1992, R. H. Macy & Co., Inc. ("Macy's"), together with nine
of its subsidiaries, filed voluntary petitions for reorganization under Chapter
11 ("Chapter 11"), title 11 of the United States Code, as amended (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). On January 31, 1992,
seventy-eight additional subsidiaries each commenced a Chapter 11 case in the
Bankruptcy Court. Macy's and its subsidiaries that filed a Chapter 11 case in
Bankruptcy Court are herein defined collectively as the "Macy's Debtors" and are
currently operating their respective businesses as debtors-in-possession. Two
statutory creditor committees have been appointed. The cases of Macy's
subsidiaries that filed such petitions are jointly administered with the case of
Macy's for procedural purposes only.
The consolidated financial statements of Macy's have been prepared in
accordance with generally accepted accounting principles applicable to a going
concern, which assumes continuity of operations in the ordinary course of
business. As a result of the Chapter 11 cases and circumstances relating to this
event, including Macy's leveraged debt structure, recurring losses, and economic
conditions, the realization of assets and liquidation of liabilities are subject
to significant uncertainty. Additionally, the amounts reported in the
consolidated statement of financial condition at July 30, 1994 could materially
change in the future because of the plan of reorganization, since such reported
amounts do not give effect to adjustments to the carrying value of the
underlying assets or amounts of liabilities that may ultimately result.
Generally, actions to enforce or otherwise effect the payment of
pre-petition liabilities are stayed while the Macy's Debtors are under the
protection of the Bankruptcy Code. These liabilities will be resolved as part of
the reorganization proceedings. Additional liabilities subject to similar
resolution may arise as a result of claims filed by parties related to the
rejection of any executory contracts, including unexpired leases, and from the
Bankruptcy Court's allowance for contingent and other disputed claims (see Note
8).
Substantially all of Macy's pre-petition short and long-term debt at July
30, 1994 is in default of the terms of the applicable loan agreements and is
subject to settlement under the reorganization process. For financial reporting
purposes, these liabilities (which are dependent upon the outcome of the Chapter
11 process) have been segregated and reclassified as Obligations Subject to
Settlement Under Reorganization Proceedings. Payment of certain pre-petition
liabilities that have been approved for payment by the Bankruptcy Court or were
pending approval have been included in the appropriate liability captions.
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.
On July 14, 1994, the respective Boards of Directors of Macy's and Federated
Department Stores, Inc. ("Federated") announced that they had reached an
agreement in principle on a merger which would be effected as part of a joint
plan of reorganization of the Macy's Debtors. (Federated's wholly-owned
subsidiary, Federated Noteholding Corporation ("FNC"), is one of the largest
secured creditors of the Macy's Debtors.) On July 29, 1994, the Macy's Debtors
and Federated (collectively, the "Plan Proponents") filed a Joint Plan of
Reorganization of R. H. Macy & Co., Inc. and Certain of its Subsidiaries in the
Bankruptcy Court, and, on August 31, 1994, the Plan Proponents filed an Amended
Joint Plan of Reorganization of R. H. Macy & Co., Inc. and Certain of its
Subsidiaries in the Bankruptcy Court (as so amended, the "Plan"). In addition,
Macy's and Federated executed and delivered an Agreement and Plan of Merger,
dated as of August 16, 1994 (the "Merger Agreement"),
7
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
providing for the merger of Federated with and into Macy's (the "Merger"), with
Macy's being the surviving corporation (the "Combined Company") and being
renamed "Federated Department Stores, Inc." upon the consummation of the Merger.
The execution and delivery of the Merger Agreement and certain provisions
thereof were approved by the Bankruptcy Court on September 8, 1994.
A principal element of the Plan is the Merger. Macy's and Federated
presently intend to seek to cause the effective time of the Merger (the
"Effective Time of the Merger"), the date on which the Plan becomes effective
(the "Effective Date of the Plan") and substantial consummation of the Plan to
occur in December 1994. The Effective Time of the Merger and the Effective Date
of the Plan will occur simultaneously. After consummation of the Merger, the
Combined Company will operate the existing businesses of Macy's and Federated.
The directors and officers of Federated immediately before the Merger will be
directors and officers of the Combined Company immediately after the Merger.
Consistent with the structure of the Merger Agreement, the transaction is to be
accounted for as a reverse acquisition in which Federated is the acquirer for
accounting purposes.
In addition to the Merger, the Plan provides for, among other things: (i)
the cancellation of all existing capital stock and other equity interests of
Macy's without payment of any consideration thereof; (ii) the cancellation of
certain indebtedness and the discharge of related claims against the Macy's
Debtors in exchange for cash, new indebtedness of the Combined Company and
certain of its subsidiaries, or new equity interests of the Combined Company;
(iii) the discharge of other prepetition claims against the Macy's Debtors; (iv)
the settlement of certain contingent claims and releases of certain claims of
the Macy's Debtors and other persons or entities; (v) the assumption, assumption
and assignment, or rejection of each executory contract and unexpired lease to
which any Macy's Debtor is a party; and (vi) the ability to enter into certain
restructuring transactions which will be designed to, among other things,
transfer to the Combined Company various centralized support functions. The Plan
provides for (a) the distribution of cash to third parties other than Federated
and its subsidiaries ("Third Parties") of approximately $.4 billion, (b) the
issuance, reinstatement, or assumption of indebtedness to Third Parties of
approximately $1.9 billion, and (c) the issuance to Third Parties of common
stock, par value $0.01 per share, of the Combined Company ("New Combined Company
Common Stock") and warrants to purchase shares of New Combined Company Common
Stock ("New Warrants") with an assumed aggregate value, solely for purposes of
developing the Plan, of approximately $1.2 billion. There can be no assurance,
however, that the New Combined Company Common Stock will have the value assumed
for purposes of developing the Plan. The assumed value of the New Combined
Company Common Stock and the New Warrants does not purport to represent an
estimate of the actual market value of the New Combined Company Common Stock or
the value of the New Warrants and is unaudited.
The Plan provides that the Combined Company, at its sole option, may: (i)
increase the amount of cash to be distributed to certain holders of claims
against the Macy's Debtors and make corresponding reductions in the respective
amounts of new debt securities or New Combined Company Common Stock to be
distributed to such claimholders, or (ii) increase the aggregate principal
amount of certain unsecured notes to be distributed pursuant to the Plan, in
exchange for a corresponding reduction in the aggregate principal amount of
certain other unsecured notes, so long as doing so would not cause the aggregate
principal amount of either series of such notes to be less than a certain
amount. In this regard, Federated has advised Macy's that it is seeking to
arrange $2.8 billion in bank credit facilities for the
8
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
Combined Company (the "New Bank Facilities"), approximately $1.7 billion of the
net proceeds of which Federated has advised Macy's it intends to apply to effect
the foregoing transactions and certain other refinancing transactions involving
other aspects of Federated's business. The consummation of the Merger Agreement
and the other transactions contemplated by the Plan are not, however,
conditioned upon the New Bank Facilities being available to the Combined
Company.
Elements of the Plan with respect to certain creditor groups are as follows:
TYPE OF CLAIM PROPOSED CONSIDERATION
--------------------------------------------- ---------------------------------------------
Secured and unsecured claims of The Prudential will receive (i) approximately $6
Prudential Insurance Company of America million in cash and (ii) approximately $551
("Prudential") and FNC under the Prudential million aggregate principal amount of new
Financing and certain other mortgage loans secured mortgage notes
FNC will receive (i) approximately $6 million
in cash and (ii) New Combined Company Common
Stock with an assumed value of approximately
$551 million
Secured and unsecured claims of Macy's (i) approximately $24 million in cash, (ii)
"Working Capital Bank Group" lenders under approximately $495 million aggregate
Pre-Petition Bank Credit Arrangements principal amount of indebtedness, and (iii)
New Combined Company Common Stock with an
assumed value of approximately $379 million
Secured and unsecured claims of financial (i) approximately $14 million in cash, (ii)
institutions under the "Swiss Financing" approximately $321 million aggregate
principal amount of indebtedness, and (iii)
New Combined Company Common Stock with an
assumed value of approximately $247 million
Secured and unsecured claims under the "Ten (i) approximately $119 million principal
Store Financing" amount of indebtedness, and (ii) New Combined
Company Common Stock with an assumed value of
approximately $91 million
Liquidated damages claims of "Swiss (i) approximately $1 million in cash, (ii)
Financing" Swap Breakage Claim approximately $28 million aggregate principal
amount of indebtedness, and (iii) New
Combined Company Common Stock with an assumed
value of approximately $21 million
Secured and unsecured claims under the Approximately $54 million aggregate principal
"Warehouse Financing" amount of new secured mortgage notes
Unsecured claims under or evidenced by Senior Pro rata shares of (i) approximately $35
Subordinated Debentures* million in cash, (ii) New Combined Company
Common Stock with an assumed value of
approximately $172 million, and (iii) New
Warrants with an assumed value of
approximately $80 million
9
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
TYPE OF CLAIM PROPOSED CONSIDERATION
--------------------------------------------- ---------------------------------------------
Unsecured claims under or evidenced by Pro rata shares of (i) New Combined Company
Subordinated Debentures, due 2001* Common Stock with an assumed value of
approximately $110 million and (ii) New
Warrants with an assumed value of
approximately $59 million
Unsecured claims under or evidenced by Junior Pro rata shares of New Combined Company
Subordinated Discount Debentures* Common Stock with an assumed value of
approximately $77 million
General unsecured claims (generally includes (i) cash equal to 25.0% of the allowed amount
trade and vendor payables, litigation of the claim and (ii) a pro rata share of New
claims, and claims arising from the Combined Company Common Stock with an assumed
rejection of contracts and leases, but value of approximately $50 million based on
excludes the convenience class of unsecured the aggregate amount of claims ultimately
claims of $1,000 or less) allowed in the classes of claims included in
this class
General unsecured claims of $1,000 or less Cash equal to the allowed amount of the claim
(generally includes claims of the type
described immediately above that are either
$1,000 or less individually or that the
holder of such claims elects to reduce to
$1,000 in the aggregate)
Common and preferred stock and options To be canceled without any distributions
For a description of certain creditors and pre-petition financing
arrangements, see Notes 8 and 9.
* The Proposed Consideration column includes an amount for debentures held by
Macy's Financial, Inc., a wholly-owned subsidiary of Macy's.
The Plan will not become effective unless it is first confirmed by the
Bankruptcy Court. Furthermore, there are a number of procedural and substantive
requirements to such effectiveness under the Bankruptcy Code, and certain other
conditions set forth in the Plan, which are described below, that must be
satisfied for the Plan to be confirmed. Among others, the Plan becoming
effective is conditioned upon the satisfaction or waiver of the following
conditions: (i) the aggregate amounts of specified categories of claims against
the Macy's Debtors, including certain cash payment claims, having been estimated
or determined by Bankruptcy Court orders (to the extent the Bankruptcy Court has
jurisdiction) that are not subject to any stay in amounts that do not exceed the
Macy's Debtors' estimated aggregate amounts for each such category of claims
used in connection with the development of the Plan (which condition has been
waived by Federated); (ii) the order of the Bankruptcy Court confirming the Plan
(the "Confirmation Order") being reasonably acceptable in form and substance to
each of Federated and Macy's; (iii) the date of the confirmation of the Plan
(the "Confirmation Date") having occurred no later than January 31, 1995; and
(iv) the New Combined Company Common Stock being authorized for listing on the
New York Stock Exchange, Inc. (the "NYSE") upon official notice of issuance or
accepted for quotation through the National Association of Securities Dealers
Automated Quotation System-National Market System ("NASDAQ"). Additionally,
there are certain other
10
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
conditions that must be satisfied for the Plan to be confirmed. There can be no
assurance that these conditions will be satisfied.
The obligations of Federated and Macy's to consummate the Merger are
conditioned upon, among other things: (i) the absence of any pending injunction,
order, or decree of any governmental authority restraining the Merger of the
consummation of the transactions contemplated by the Plan; (ii) the absence of
any law promulgated or enacted restraining the Merger or the transactions
contemplated by the Plan; (iii) all consents and approvals of any governmental
authority to the Merger having been obtained and remaining in effect at the
Effective Time of the Merger, other than any that if not obtained would not have
a material adverse effect on the business, financial condition, or results of
operations of the Combined Company and its subsidiaries, or any antitrust
authorizations not obtained as a result of Federated's failure to divest, hold
separate, or take other action (or its failure to agree to do any thereof) with
respect to its or the Combined Company's assets to the extent required by the
Merger Agreement; (iv) all other consents, approvals, and authorizations
required to be obtained by either party having been obtained and remaining in
effect at the Effective Time of the Merger, other than any that, if not
obtained, would not have a material adverse effect on the business, financial
condition, or results of operations of the Combined Company and its
subsidiaries, or any consents and approvals of Federated's institutional
lenders; (v) the adoption by Federated's stockholders of the Merger Agreement;
(vi) a registration statement under the Securities Act of 1933, as amended for
the shares of New Combined Company Common Stock to be issuable in connection
with the Merger having been declared effective by the Securities and Exchange
Commission and not subject to any stop order or proceeding seeking the same;
(vii) the shares of the New Combined Company Common Stock having been authorized
for listing on the NYSE upon official notice of issuance or accepted for
quotation through the NASDAQ; and (viii) the Bankruptcy Court having entered an
order confirming the Plan, at least 10 days having passed since entry of such
order and it not having been subject to any stay, and all conditions to the
Effective Date of the Plan having been satisfied or duly waived.
Federated's obligations under the Merger Agreement are further subject to
satisfaction or written waiver at or prior to the Effective Time of the Merger
of the following conditions: (i) Macy's having performed in all material
respects the covenants and agreements contained in the Merger Agreement required
to be performed by it; (ii) all representations and warranties made by Macy's in
the Merger Agreement being true and correct in all material respects; (iii) no
material adverse change having occurred in the per share price of the Federated
Common Stock following the adoption of the Merger Agreement by Federated's
stockholders; (iv) all of the consents to the Merger of Federated's
institutional lenders having been obtained by August 31, 1994 (which condition
has been waived); and (v) since the date of the Merger Agreement no material
adverse change having occurred in the business, financial condition, or results
of operations of Macy's and its subsidiaries, taken as a whole.
Macy's obligations under the Merger Agreement are further subject to the
satisfaction or written waiver at or prior to the Effective Time of the Merger
of the following conditions: (i) Federated having performed in all material
respects the covenants and agreements contained in the Merger Agreement required
to be performed by it; (ii) all representations and warranties made be Federated
in the Merger Agreement being true and correct in all material respects; (iii)
since the date of the Merger Agreement, no material adverse change having
occurred in the business, financial condition, or results of operations of
Federated and its subsidiaries, taken as whole.
11
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PROPOSED JOINT PLAN OF REORGANIZATION: MERGER WITH FEDERATED DEPARTMENT
STORES, INC.-- (CONTINUED)
In addition, the Merger Agreement may be terminated prior to the Effective
Time of the Merger under certain circumstances. If the Merger Agreement is
terminated because either party refuses to consummate the Merger in breach of
the Merger Agreement, then the breaching party will be obligated to pay to the
nonbreaching party (provided that it is not also in material breach), within
five business days of the effective date of such termination, a cash fee of
$80.0 million, which is in addition to any other rights, remedies, or damages
the nonbreaching party may have. If the Merger Agreement is terminated because
Macy's has accepted a competing offer, then Macy's will be obligated to pay
Federated, within five business days of the effective date of such termination,
a cash fee of $80.0 million as liquidated damages in lieu of any other payments.
If the Merger Agreement is terminated under certain other specified
circumstances involving the failure of the creditors of the Macy's Debtors to
accept the Plan and the consummation by Macy's of a transaction with a party
that has made a competing offer outstanding prior to such termination, Macy's
will be required to pay to Federated, within five business days of such
consummation, a cash fee of $80.0 million as liquidated damages in lieu of any
other payments, except that no such fee will be payable if Federated's
stockholders have failed to adopt the Merger Agreement or, if at the time of the
termination of the Merger Agreement, Federated is in material breach of the
Merger Agreement.
At the conclusion of a hearing held on September 29, 1994 to consider
approval of the Disclosure Statement required pursuant to the Bankruptcy Code,
the Bankruptcy Court ruled that, subject to certain modifications that are to be
made to the Disclosure Statement, an order would be signed approving the
statement.
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
On July 15, 1986, the registrant and certain of its subsidiaries acquired R.
H. Macy & Co., Inc., a New York corporation ("Former Macy's"), in a leveraged
buyout (the "Acquisition") through a merger of Macy Merger Corp. ("Merger
Corp."), a direct and indirect subsidiary of Macy's, with and into Former
Macy's. Macy's and certain of its subsidiaries, including Merger Corp., were
formed to effect the Acquisition. Macy's is owned by a group of current and
former management employees and other investors.
On May 3, 1988, Macy's acquired the I. Magnin and Bullock's/Bullocks
Wilshire divisions (the "New Divisions") of Federated. On that date, but prior
to the acquisition by Macy's, Federated transferred the assets of the New
Divisions to Bullock's Inc., Bullocks-Wilshire, Inc., Bullock's Specialty
Stores, Inc., and I. Magnin, Inc. These subsidiaries then became wholly-owned
subsidiaries of Macy's.
PRINCIPLES OF CONSOLIDATION
The accounts of all majority-owned subsidiaries are included in the
consolidated financial statements and all intercompany balances and transactions
are eliminated.
CASH AND CASH EQUIVALENTS
Macy's considers all short-term investments with an original or purchased
maturity of three months or less as cash equivalents.
12
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RESTRICTED CASH
Macy's has classified as restricted, certain cash and cash equivalents that
are not fully available for use in operations. These cash and cash equivalents
are primarily related to the Chapter 11 proceedings.
MERCHANDISE INVENTORIES
The value of merchandise inventories is determined by the lower of LIFO
(last-in, first-out) cost using the retail inventory method or market for about
75% of the total inventory, and the lower of FIFO (first-in, first-out) cost
using the retail inventory method or market for the balance of the inventory,
principally women's ready-to-wear and electronics.
Macy's includes in inventory the capitalization of certain indirect
purchasing, merchandise handling, and inventory storage costs to better match
sales with these related costs.
PRE-OPENING EXPENSES
Costs of opening new stores are expensed as incurred.
INCOME TAXES
Effective August 1, 1993, Macy's adopted Statement of Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("FASB 109").
Previously, income taxes were accounted for in accordance with Accounting
Principles Board Opinion No. 11. Under the asset and liability method prescribed
by FASB 109, deferred income taxes are provided for the tax effects of temporary
differences between the financial reporting bases and the tax bases of assets
and liabilities and are measured based upon currently enacted tax laws or rates.
The cumulative effect of adopting FASB 109 at August 1, 1993 resulted in an
increase to net income of $185,340,000 (see Note 18).
INTANGIBLE ASSETS
Intangible assets, which are included in other assets, are amortized on a
straight-line basis over the lives of the assets as follows:
YEARS
-----
Customer lists.............................................. 4-8
Macy's product development.................................. 20
PROPERTY AND EQUIPMENT
Depreciation is computed on a straight-line basis over the shorter of
estimated useful lives or lease terms. Capitalized leases and leasehold values
are amortized over the respective lease terms.
DEFERRED DEBT EXPENSE
Deferred debt expense is amortized over the life of the related debt.
EARNINGS/(LOSS) PER SHARE OF COMMON STOCK
Earnings/(loss) per share of common stock attributable to common
stockholders (after dividends and accretion on the Convertible Preferred Stock
(redeemable)) is computed based upon the weighted average number of shares
outstanding during the period. Fully diluted income per share is computed by
dividing net income by the weighted average number of shares outstanding during
the period assuming
13
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
the conversion of Convertible Preferred Stock (redeemable) into Common Stock.
Such assumed conversion was antidilutive in fiscal years 1993 and 1992.
SINGLE BUSINESS SEGMENT
Macy's operates a retail department store business through 122 department
stores in three regional store groups and operates certain specialty and
close-out center stores. Because of the similarity of the nature of its
merchandise business, Macy's considers itself to be a single business segment.
OTHER POSTRETIREMENT BENEFITS
Statement of Financial Accounting Standards Board Statement No. 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions" ("FASB
106"), was adopted on August 1, 1993. This statement requires that employers
record the expected cost of postretirement benefits other than pensions during
the employees' active years of service. As of August 1, 1993, the accumulated
postretirement obligation was approximately $204,000,000. The registrant is
recording this obligation through amortization over a 20-year period. The
incremental non-cash expense associated with the adoption of FASB 106 for the
year ended July 30, 1994 was $20,681,000, including the amortization of the
accumulated postretirement obligation of $10,195,000 (see Note 19).
CHANGE IN FISCAL YEAR
Macy's changed its fiscal year end from the Saturday closest to July 31 to
the Saturday closest to January 31 effective for the year beginning July 31,
1994.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform with classifications used in the current year.
4. MERCHANDISE INVENTORIES
If inventories had been valued at the lower of FIFO cost or market,
inventories would have increased by $119,235,000 and $102,563,000 at July 30,
1994 and July 31, 1993, respectively.
5. INTANGIBLE ASSETS
Intangible assets are included in other assets as follows:
JULY 30, JULY 31,
1994 1993
----------- ------------
Customer lists................................. $11,295,000 $135,409,000
Macy's product development..................... 43,928,000 38,223,000
----------- ------------
55,223,000 173,632,000
Less: accumulated amortization................. 25,812,000 130,449,000
----------- ------------
$29,411,000 $ 43,183,000
----------- ------------
----------- ------------
Fully amortized intangible assets were offset against the related
accumulated amortization.
14
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JULY 30, JULY 31,
1994 1993
------------ ------------
Merchandise, expenses, and construction
accounts payable.............................. $657,410,000 $686,677,000
Accrued interest.............................. 399,000 606,000
Accrued taxes, other than income taxes........ 74,944,000 81,851,000
Accrued wages................................. 20,667,000 26,049,000
Customers' deposits and miscellaneous......... 87,747,000 79,309,000
------------ ------------
$841,167,000 $874,492,000
------------ ------------
------------ ------------
7. SHORT-TERM BORROWINGS
POST-PETITION FINANCING (SEE ALSO NOTE 9)
Pursuant to orders of the Bankruptcy Court entered on January 29, 1992 and
February 13, 1992, the registrant obtained a debtor-in-possession financing
arrangement under a Revolving Credit and Guaranty Agreement dated as of January
27, 1992 (as subsequently amended through March 31, 1993, the "Post-Petition
Credit Agreement"), among Macy's, as Borrower, each of the other Macy's Debtors,
as guarantors, Chemical Bank, as administrative agent, and Bankers Trust
Company, as co-agent, and other financial institutions to become parties
thereto. The Post-Petition Credit Agreement established a working capital
facility consisting of revolving credit loans and letters of credit in the
aggregate maximum amount of $600,000,000, inclusive of a sub-limit of
$250,000,000 for standby and documentary letters of credit of which no more than
$30,000,000 could be used for standby letters of credit. The Post-Petition
Credit Agreement was scheduled to terminate pursuant to its original terms upon
the earlier of (i) February 28, 1994 or (ii) substantial consummation of a plan
of reorganization of Macy's or certain of its subsidiaries. Borrowings under the
working capital facility may be used to fund working capital, inventory
purchases, capital expenditures, and for other general corporate purposes of the
Macy's Debtors. The Post-Petition Credit Agreement includes restrictions on
capital expenditures and certain other payments, as well as covenants relating
to EBITDA (earnings before interest, taxes, depreciation, and amortization as
defined within the Post-Petition Credit Agreement).
On August 12, 1993 the Post-Petition Credit Agreement was amended and
restated on similar terms pursuant to an Amended and Restated Credit and
Guaranty Agreement, among Macy's, as Borrower, the Macy's Debtors, as
guarantors, Chemical Bank, as administrative agent, Bankers Trust Company, as
co-agent, and other financial institutions party thereto (the "Amended and
Restated Post-Petition Credit Agreement"), which agreement was approved by a
Bankruptcy Court order dated September 8, 1993. Under the Amended and Restated
Post-Petition Credit Agreement, Macy's working capital facility (the "Working
Capital Facility") consisting of revolving credit loans and letters of credit
was reduced from a maximum of $600,000,000 to $550,000,000, inclusive of a
sublimit of $250,000,000 for standby and documentary letters of credit of which
no more than $30,000,000 may be used for standby letters of credit. In August
1994, Macy's voluntarily reduced the Working Capital Facility to $450,000,000
reflecting its reduced borrowing requirements thereunder. The Amended and
Restated Post-Petition Credit Agreement terminates upon the earlier of (i)
August 1, 1995 or (ii) the substantial consummation of a plan of reorganization
of Macy's or certain of its subsidiaries.
Claims in respect of indebtedness incurred by the Macy's Debtors under the
Amended and Restated Post-Petition Credit Agreement are afforded superpriority
administrative expense claim status pursuant to applicable provisions of the
Bankruptcy Code.
15
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHORT-TERM BORROWINGS--(CONTINUED)
The Amended and Restated Post-Petition Credit Agreement provides that
advances made under the Working Capital Facility will bear interest at a rate of
1.5% per annum in excess of Chemical Bank's Alternative Base Rate ("ABR") (which
was 7.25% at July 30, 1994), or at Macy's option, at a rate of 2.5% per annum in
excess of the reserve adjusted London Interbank Offered Rate ("LIBOR") for
interest periods of one, three, or six months (which was 4.50%, 4.875%, or
5.3125%, respectively, at July 30, 1994). Interest on ABR loans and three and
six month LIBOR loans are payable quarterly and interest on one month LIBOR
loans is payable at maturity.
Under the Amended and Restated Post-Petition Credit Agreement, Macy's is
obligated to pay a commitment fee of 1/2 of 1% per annum on the unused portion
of the Working Capital Facility, a letter of credit fee, and certain other fees.
There were no outstanding revolving credit borrowings and $118,775,000 of
letters of credit outstanding under the Working Capital Facility at July 30,
1994. Unamortized deferred debt expense of $2,437,000 was included in the
caption "Other Assets" at July 30, 1994. At July 31, 1993 outstanding revolving
credit borrowings and letters of credit under the Working Capital Facility were
$65,900,000 and $116,905,000, respectively (excluding unamortized deferred debt
expense of $3,202,000).
8. OBLIGATIONS SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS
Obligations of the Macy's Debtors that are expected to be settled as part of
a plan of reorganization are separately classified in the Consolidated
Statements of Financial Condition as of July 30, 1994 and are as follows:
Accounts payable and accrued liabilities................... $ 701,650,000
Accrued interest on long-term debt......................... 480,541,000
Secured debt (Note 9)...................................... 2,318,931,000
Unsecured debt (Note 9).................................... 1,265,611,000
Obligations under capitalized leases (Note 20)............. 11,032,000
Convertible Preferred Stock (redeemable) (Note 10)......... 637,315,000
Other liabilities.......................................... 224,730,000
--------------
$5,639,810,000
--------------
--------------
Obligations Subject to Settlement Under Reorganization Proceedings include
substantially all of Macy's pre-petition short and long-term debt. As discussed
in Note 1, payments of these obligations are stayed while the Macy's Debtors
continue to operate as debtors-in-possession.
The increase in Obligations Subject to Settlement Under Reorganization
Proceedings from July 31, 1993 to July 30, 1994 was primarily due to the accrual
of interest expense on certain pre-petition secured debt.
Generally, interest on pre-petition debt does not accrue after the
commencement of the Chapter 11 case. If the debts are secured by property with a
fair market value that is greater than the amount of the debt, interest may
accrue up to the value of the collateral. Through substantially all of fiscal
1994, Macy's accrued interest on its secured debt pending obtaining an estimate
of the fair market value of the property securing such debt. Following
negotiations with representatives of the various secured lenders and the
development of the Plan in July, Macy's revised its estimates for the
post-petition accrued interest that would be paid for fiscal 1994 and prior
years upon confirmation of the Plan resulting in the secured debt plus
post-petition interest through July 30, 1994 equaling the estimated
16
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. OBLIGATIONS SUBJECT TO SETTLEMENT UNDER REORGANIZATION
PROCEEDINGS--(CONTINUED)
amount due for such debt and interest as of such date under the Plan.
Accordingly, post-petition interest of $61,250,000 (contractual interest) with
respect to fiscal 1994 and $57,460,000 with respect to prior years and relating
to the Swiss Financing, the Ten Store Financing, and the Warehouse Financing
(see Note 9) was reversed through reductions in interest expense and
reorganization items, respectively. Interest expense on certain other
pre-petition secured debt continues to be accrued but remains subject to
settlement. Such accrual of interest on secured indebtedness is being recorded
at the interest rates applicable under the respective loan agreements without
regard to default and penalty provisions contained therein (see Note 14).
Macy's has ceased accruing interest expense on its unsecured debt.
Contractual interest not recorded on such unsecured debt aggregated
$215,233,000, $203,518,000, and $99,442,000 for the fiscal years ended July 30,
1994, July 31, 1993, and August 1, 1992.
Numerous claims have been asserted in respect of various pre-petition
obligations, which claims individually or in the aggregate may be material and
may not currently be reflected as obligations subject to settlement. The last
day on which these claims could be filed against the Macy's Debtors, with
certain exceptions, was December 15, 1992, and over 17,000 claims aggregating an
amount substantially in excess of the amounts reported in the Consolidated
Statements of Financial Condition under the caption Obligations Subject to
Settlement Under Reorganization Proceedings were filed by such date. Based on
reviews through July 30, 1994, Macy's believes that a number of these claims are
duplicative of and/or supersede claims previously asserted. In addition, claims
have been filed which do not state a specific claim amount or as to which a
specific claim amount is not readily determinable. Pursuant to Bankruptcy Court
orders entered in 1993 and 1994, certain exact duplicate claims and late claims
were expunged. Claims will continue to be reviewed and analyzed by Macy's as
part of the claims reconciliation process and objections filed as required. As
this review process continues, the aggregate amount included in the estimate of
pre-petition date obligations subject to settlement may increase or otherwise be
adjusted to reflect the ongoing analyses of claims filed and the aggregate
amounts which may be allowed in respect thereof. Macy's has received claims
relating to termination of various interest rate protection agreements on
pre-petition liabilities aggregating approximately $138,000,000. Provisions for
$54,115,000 and $83,695,000 were recorded in fiscal 1992 and 1993 and have been
included in Obligations Subject to Settlement Under Reorganization Proceedings.
In 1994, $33,695,000 of the 1993 provision was reversed based on the comparison
of such provision and the amount included in the Plan. This reversal was
included as a reduction of Reorganization Items--net in the Consolidated
Statements of Operations for fiscal year 1994.
Commencing on the Chapter 11 filing date, Macy's ceased accruing dividends
on its Convertible Preferred Stock (redeemable) and has included the Convertible
Preferred Stock (redeemable) and the cumulative accrued but unpaid dividends
prior to the filing date on such stock in Obligations Subject to Settlement
Under Reorganization Proceedings. Under applicable bankruptcy law, the holders
of the Convertible Preferred Stock of the registrant are not considered
creditors.
The unsecured debt amount included in Obligations Subject to Settlement
Under Reorganization Proceedings does not include $5,000,000 of 14 1/2% Senior
Subordinated Debentures, $241,931,000 of 14 1/2% Subordinated Debentures, and
$187,769,000 of 16 1/2% Junior Subordinated Discount Debentures purchased in
fiscal 1991 by Macy Financial, Inc. ("MFI"), a wholly-owned subsidiary of Macy's
and also a debtor-in-possession. The capital stock of MFI, as well as such
debentures, were pledged to the pre-petition banks under the pre-petition Macy
Bank Agreement (see Note 9).
17
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS
The financing arrangements consist of the following:
AS OF JULY 30, 1994 AS OF JULY 31, 1993
-------------------------------------------- --------------------------------------------
LESS LESS
UNAMORTIZED UNAMORTIZED
DEFERRED NET DEFERRED NET
CARRYING VALUE DEBT EXPENSE CARRYING VALUE CARRYING VALUE DEBT EXPENSE CARRYING VALUE
-------------- ------------ -------------- -------------- ------------ --------------
Post-Petition Financing
Working Capital Facility (Note 7).... $ -- $ -- $ -- $ 65,900,000 $ 3,202,000 $ 62,698,000
-------------- ------------ -------------- -------------- ------------ --------------
-------------- ------------ -------------- -------------- ------------ --------------
Pre-Petition Financings
Secured Debt:
Macy Revolving Credit Facility...... $ 128,358,000 $ -- $ 128,358,000 $ 128,358,000 $ 3,011,000 $ 125,347,000
Prudential Financing................ 802,161,000 16,891,000 785,270,000 811,672,000 20,371,000 791,301,000
Swiss Financing..................... 553,750,000 9,830,000 543,920,000 553,750,000 12,288,000 541,462,000
Ten Store Financing................. 180,761,000 1,683,000 179,078,000 180,761,000 2,201,000 178,560,000
Warehouse Financing................. 53,200,000 1,363,000 51,837,000 53,200,000 1,497,000 51,703,000
Six-Year Term Loan.................. 170,000,000 -- 170,000,000 170,000,000 -- 170,000,000
Purchase Note....................... 401,408,000 -- 401,408,000 401,408,000 858,000 400,550,000
Mortgage Notes...................... 62,190,000 70,000 62,120,000 62,350,000 98,000 62,252,000
Less imputed interest as a result
of the Acquisition.............. (3,060,000) -- (3,060,000) (3,292,000) -- (3,292,000)
-------------- ------------ -------------- -------------- ------------ --------------
Total Pre-Petition Secured
Debt.......................... 2,348,768,000 29,837,000 2,318,931,000 2,358,207,000 40,324,000 2,317,883,000
-------------- ------------ -------------- -------------- ------------ --------------
Unsecured Debt:
Senior Subordinated Debentures...... 379,000,000 -- 379,000,000 379,000,000 -- 379,000,000
Subordinated Debentures............. 383,434,000 -- 383,434,000 383,434,000 -- 383,434,000
Junior Subordinated Discount
Debentures........................ 503,177,000 -- 503,177,000 503,177,000 -- 503,177,000
-------------- ------------ -------------- -------------- ------------ --------------
Total Pre-Petition Unsecured
Debt.......................... 1,265,611,000 -- 1,265,611,000 1,265,611,000 -- 1,265,611,000
-------------- ------------ -------------- -------------- ------------ --------------
$3,614,379,000 $29,837,000 $3,584,542,000 $3,623,818,000 $40,324,000 $3,583,494,000
-------------- ------------ -------------- -------------- ------------ --------------
-------------- ------------ -------------- -------------- ------------ --------------
Prior to the commencement of the Chapter 11 cases, Macy's entered into the
following financing arrangements. The descriptions of the following financing
arrangements are based on the original contractual terms and maturities. As a
result of the commencement of the Chapter 11 cases, Macy's is in default of
these financing arrangements and the obligations in respect thereof remain
subject to settlement. (See Note 1).
PRE-PETITION BANK CREDIT ARRANGEMENTS
Prior to the commencement of the Chapter 11 cases, Macy's was party to a
Bank Credit Agreement which was originally dated as of July 10, 1986 and was
amended and restated as of April 27, 1988 (as subsequently amended the "Macy
Bank Agreement"). The Macy Bank Agreement established a Macy's revolving working
capital line of credit ("Macy Revolving Credit Facility"), a six-year term loan,
and an Acquisition Letter of Credit.
MACY REVOLVING CREDIT FACILITY
The Macy Revolving Credit Facility provided a six-year revolving working
capital line of credit subject to certain sublimits, not to exceed $587,700,000.
Borrowings as of July 30, 1994 and July 31, 1993 were $128,358,000 (excluding
unamortized deferred debt expense of $3,011,000 as of July 31,
18
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
1993), and are included in Obligations Subject to Settlement Under
Reorganization Proceedings. The Macy Revolving Credit Facility was a six-year
facility and would have terminated in April 1994. The Macy Revolving Credit
Facility bears interest at a rate per annum equal to 1.25% plus the Base Rate (a
floating rate of interest publicly announced by Chemical Bank, or, at Macy's
option, 2.25% plus the Eurodollar Rate (as defined in the Macy Bank Agreement,
which definition gives weight to the Eurodollar Reserve Percentage as therein
defined). Interest is computed on the basis of a year of 360 days and is payable
monthly in arrears for Base Rate borrowings and at the end of an Interest Period
(as defined in the Macy Bank Agreement) for Eurodollar Rate borrowings. The
facility was secured by the capital stock of certain of Macy's U.S.
subsidiaries, certain receivables, certain tangible personal property (other
than inventory) and general intangibles, junior liens on certain Macy's stores,
and substantially all of Macy's other real property.
SENIOR REAL ESTATE DEBT
Senior real estate debt includes the following:
a) Prudential Financing
In 1986, Macy's and various subsidiaries of Macy's received $800,000,000 of
mortgage financing provided by The Prudential Insurance Company of America
("Prudential Financing"). These loans are, by their terms, nonrecourse
participating loans secured by the first or second mortgages on 68 of Macy's
department stores; however, under the Bankruptcy Code, by virtue of Macy's
Chapter 11 cases, these loans may have become recourse loans. Each of the loans
has a term of 15 years and bears interest at a 12% rate (the "Note Rate"). The
lender receives semi-annual cash payments equal to the greater of (i) 9% per
annum of the loan balance (including accrued interest) for the first three
years, stepping up 1% each year thereafter until such rate becomes 12% (in the
sixth year), and thereafter remaining at 12% until maturity, or (ii) a
percentage in the range of 1.33% to 1.37% of each of the four regional store
group subsidiaries' (as of the date of the Acquisition) annual gross retail
sales (such greater amount being referred to as the "Pay Rate"). The dollar
amount of any excess of the Note Rate over the Pay Rate will be added to the
loan balance and will bear interest at the Note Rate (an "Accrual"). In the
event that the Pay Rate exceeds the Note Rate, the Pay Rate is capped at 13% of
the loan balance (including accrued interest) on a divisional basis (i.e.,
regional store group subsidiaries). To the extent the Pay Rate exceeds the Note
Rate, such excess may be utilized to pay down the Accrual balance with any
further excess being paid as additional interest. At maturity, the lender was
scheduled to receive additional interest based on a percentage of the increase
in real estate value (determined on the basis of retail sales) of the applicable
store securing such debt. The accrual of additional interest was recorded and
compounded annually as noncash interest until July 1991 (see Note 14).
On December 31, 1993, FNC acquired from the Prudential Insurance Company of
America ("Prudential") 50% of certain claims of Prudential against the Macy's
Debtors arising under the Prudential Financing in the original principal amount
of $800 million and certain other mortgage loans in the aggregate original
principal amount of approximately $21 million (such amount is included in
Mortgage Notes) (collectively, the "Prudential Claims").
19
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
During fiscal 1994, Macy's repaid $9,511,000 of the outstanding balance of
the Prudential Financing from the proceeds of two stores closed and sold
subsequent to the commencement of the Chapter 11 cases.
b) Swiss Financing
In 1988 and 1989, various subsidiaries of Macy's received approximately
$565,000,000 of mortgage financing provided by Swiss Bank Corporation and
certain other financial institutions ("Swiss Financing"). These loans are
secured by certain real estate owned by such subsidiaries and bear interest at
an overall interest rate cost of approximately 10.4%. The repayment of the
outstanding principal is due in June 1998.
c) Ten Store Financing
In 1987, various subsidiaries of Macy's received $180,000,000 of proceeds
from nonrecourse indebtedness secured by ten stores (the "Ten Store Financing")
through the issuance of commercial paper by Macy Special Real Estate Capital
Corp. ("Special Real Estate"), a wholly-owned special purpose subsidiary of
Macy's. The assets of Special Real Estate will only be available to Macy's after
Special Real Estate's obligations to its creditors have been satisfied.
Citibank, N.A. issued a letter of credit in support of the commercial paper. The
registrant used $55,000,000 of the proceeds to make a prepayment on the amount
then outstanding under its former six-year term loan and repurchased certain
subordinated indebtedness at an aggregate purchase price of approximately
$45,000,000. Macy's entered into fixed rate protection agreements in respect of
this indebtedness, the effect of which, together with a related option, provides
Macy's with an overall interest rate cost of approximately 10% per annum. The
payment of the outstanding principal amount is due in May 1997.
As a result of the commencement of the Chapter 11 cases, Special Real Estate
ceased issuing commercial paper. Pursuant to a credit support arrangement
entered into in 1987, the outstanding commercial paper was retired through the
proceeds of the repurchase by an affiliate of Citibank, N.A. of a participation
held by Special Real Estate in the loans evidencing the Ten Store Financing.
Additionally, the fixed rate protection agreements were terminated.
d) Warehouse Financing
Concurrently with the sale of accounts and receivables to General Electric
Capital Corp. ("GE Capital"), GE Capital made a 15-year loan to three
subsidiaries of Macy's in an aggregate principal amount of $44,100,000. This
loan bore interest until October 15, 1991 at an annual rate of 10.5%. Commencing
June 10, 1992, this loan amortizes ratably over its remaining 14 years. On
October 15, 1991, an additional loan of $9,100,000 was made and the annual
interest rate changed to 10.44% on the aggregate principal outstanding of
$53,200,000. These loans are secured by certain real estate owned by the
borrowers and generally are non-recourse except with respect to payment of
interest and certain environmental matters, which recourse obligations have been
guaranteed by Macy's.
SIX-YEAR TERM LOAN
The six-year term loan bears interest at a rate per annum equal to 1.25%
plus the Base Rate or, at Macy's option, 2.25% plus the Eurodollar Rate. Such
interest is computed on the basis of a year of 360
20
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
days and is payable monthly in arrears for Base Rate borrowings and at the end
of an Interest Period (as defined in the Macy Bank Agreement) for Eurodollar
Rate borrowings, and is subject to reduction based on terms and conditions set
forth in the Macy Bank Agreement. The principal was payable in semi-annual
installments.
The six-year term loan is secured by the capital stock of certain of Macy's
U.S. subsidiaries, certain receivables, certain tangible personal property
(other than inventory) and general intangibles, junior liens on certain Macy's
stores, and substantially all of Macy's other real property.
The Macy Bank Agreement gave the banks the option under certain
circumstances to require the termination of Macy's overfunded pension plan upon
an event of default in respect of specific operating ratios and cash flow
coverage requirements. As a result of the Chapter 11 filings, Macy's is in
default of the Macy Bank Agreement and the banks' remedies under these
agreements are stayed.
PURCHASE NOTE
As part of the consideration paid for the acquisition of the New Divisions,
Macy's issued a $400,000,000 Note to Federated which was assigned to a third
party. The Note was due and payable in three equal installments beginning May 3,
1997. The Note bore interest at a rate per annum equal to the three month LIBOR
Rate plus .5% or at the Alternative LIBOR Rate (both defined in the Note).
Interest is computed on the basis of a year of 360 days and is payable quarterly
in arrears. As part of the Macy Bank Agreement, an Acquisition Letter of Credit
was issued in support of the Note for a period of six years. Additionally,
Macy's entered into fixed rate protection agreements in respect of the
indebtedness under the Note, the effect of which, together with the cost of the
Letter of Credit, would provide Macy's with an annual overall interest rate cost
of 12.65%.
As a result of the commencement of the Chapter 11 cases, the Acquisition
Letter of Credit was drawn for the beneficiary thereof in the amount of
$400,000,000 plus accrued interest in satisfaction of the Purchase Note.
Pursuant to the terms of the Macy Bank Agreement, Macy's is obligated to
reimburse the lenders who funded the Acquisition Letters of Credit.
Additionally, the fixed rate protection agreements were terminated as a result
of the commencement of the Chapter 11 case.
At July 30, 1994, Macy's is currently recording interest at an annual rate
of 7.25% on the obligations under the Macy Bank Agreement.
SENIOR SUBORDINATED DEBENTURES
The senior subordinated debentures bore interest at 14.5% per annum, payable
semi-annually, and mature on October 15, 1998. Such debentures are redeemable at
Macy's option on or after October 15, 1991, initially at 107.5% of their
principal amount, declining to 100% on or after October 15, 1996, and will be
entitled to the benefit of a sinking fund beginning October 15, 1994, in annual
installments of $80,000,000, calculated to retire 80% of their principal amount
prior to maturity.
In 1991, Macy's or a subsidiary repurchased $5,000,000 principal amount of
senior subordinated debentures from a portion of the proceeds received in the
issuance of additional Convertible Preferred Stock. In 1988, Macy's repurchased
$16,000,000 principal amount of senior subordinated debentures from a portion of
the proceeds of the Ten Store Financing.
21
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
As a result of the commencement of the Chapter 11 cases, Macy's has ceased
accruing interest expense on its unsecured debt. Therefore, interest expense on
the senior subordinated debentures has not been accrued after January 27, 1992.
SUBORDINATED DEBENTURES
The subordinated debentures bore interest at 14.5% per annum, payable
semi-annually, and mature on November 15, 2001. Such debentures are redeemable
at Macy's option on or after November 15, 1991, initially at 105% of their
principal amount, declining to 100% on or after November 15, 1993, and will be
entitled to the benefits of a sinking fund in annual installments of
$130,000,000 beginning November 15, 1997, calculated to retire 80% of their
principal amount prior to maturity.
In 1991, Macy's or a subsidiary repurchased $247,431,000 principal amount of
subordinated debentures from a portion of the proceeds received in the issuance
of additional Convertible Preferred Stock. In 1988, Macy's repurchased
$19,135,000 principal amount of subordinated debentures from a portion of the
proceeds of the Ten Store Financing.
As a result of the commencement of the Chapter 11 cases, Macy's has ceased
accruing interest expense on its unsecured debt. Therefore, interest expense on
the subordinated debentures has not been accrued after January 27, 1992.
JUNIOR SUBORDINATED DISCOUNT DEBENTURES
Macy's issued $910,150,000 principal amount of junior subordinated discount
debentures maturing on November 15, 2006 for proceeds of $300,003,000. Such
debentures bear no interest for the first seven years and bear interest at 16.5%
payable semi-annually commencing November 15, 1993. The discount rate for these
debentures has been assumed to provide a yield to maturity of approximately
16.5% on a semi-annual basis. Such debentures are entitled to the benefits of a
sinking fund beginning November 15, 2002, in annual installments of
$182,030,000, calculated to retire 80% of the issue prior to maturity. These
debentures are redeemable at Macy's option at any time at 100% of their
principal amount.
In 1991, Macy's or a subsidiary repurchased $253,822,000 face amount
($170,814,000 accreted value) of junior subordinated discount debentures from a
portion of the proceeds received in the issuance of additional Convertible
Preferred Stock. In 1988, Macy's repurchased $21,900,000 face amount of junior
subordinated discount debentures from a portion of the proceeds of the Ten Store
Financing.
As a result of the commencement of the Chapter 11 cases, Macy's has ceased
accruing interest expense on its unsecured debt. Therefore, interest expense on
the junior subordinated discount debentures has not been accrued after January
27, 1992.
MORTGAGE NOTES
The average rate of interest approximated 8.6% and 8.8% (ranging from 4.7%
to 12.0%) for 1994 and 1993.
22
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCING ARRANGEMENTS--(CONTINUED)
The net book value of the property subject to mortgages amounted to
approximately $2,102,390,000 at July 30, 1994. Such net book value may not
reflect the fair market value of such property.
* * *
Substantially all assets, other than cash and inventory, are pledged as
collateral at July 30, 1994.
INTEREST RATE PROTECTION ARRANGEMENTS
Prior to the Petition Dates, Macy's had entered into interest rate swap and
cap arrangements in the management of interest rate exposure. In 1992, the
differential to be paid or received was accrued as an interest rate charge and
was recognized as an adjustment to interest expense. All interest rate
protection arrangements were terminated at the commencement of the Chapter 11
cases as a result of the default provisions under the loan arrangements.
10. PREFERRED STOCK
Macy's certificate of incorporation provides for 25 million authorized
shares of Preferred Stock, par value $1.00 per share, of which nine million
shares constitutes Convertible Participating Preferred Stock (redeemable)
("Series I Preferred Stock"), one million shares constitutes Convertible
Participating Preferred Stock Series II (redeemable) ("Series II Preferred
Stock"), and seven million shares constitutes Convertible Participating
Preferred Stock Series III (redeemable) ("Series III Preferred Stock"). (Series
I Preferred Stock, Series II Preferred Stock, and Series III Preferred Stock are
collectively referred to in these notes as "Preferred Stock" and in the
consolidated financial statements as "Preferred Stock").
The certificate of incorporation authorizes the Board of Directors to fix
the conditions and terms of shares of Preferred Stock prior to their issuance.
On July 15, 1986, Macy's sold 7,494,465 shares of Series I Preferred Stock with
a Base Liquidation Preference of $39.62 per share. Between August 1990 and
February 1991, Macy's sold 211,506 shares of Series II Preferred Stock with a
Base Liquidation Preference of $159.05 per share and, between December 1990 and
April 1991, 5,298,330 shares of Series III Preferred Stock with a Base
Liquidation Preference of $31.81 per share. All sales of Preferred Stock have
been made in private placements.
The right to convert Preferred Stock at the option of the holder into Common
Stock on a one-to-one basis began on July 15, 1988 and ended for the Series I
Preferred Stock and Series II Preferred Stock on July 15, 1993; such conversion
right with respect to the Series III Preferred Stock continues until December
18, 1997. No preferred shares have been converted into Common Stock. The
Preferred Stock is redeemable at the option of Macy's after the end of
applicable optional conversion period ("Conversion Expiration Date") at various
percentages of the Base Liquidation Preference of the particular series until
mandatory redemption on the thirteenth anniversary of the Conversion Expiration
Date.
23
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. PREFERRED STOCK--(CONTINUED)
The difference between the carrying value of certain of the Preferred Stock
Series I at date of issue and the mandatory redemption value was recorded
through periodic accretions using the interest method until the commencement of
the Chapter 11 case. The related charge flowed through the deficiency in net
assets.
Except for special class voting rights of the Preferred Stock, each share of
Preferred Stock entitles the holder thereof to one vote on all matters
whatsoever which may be the subject of proper action by stockholders of Macy's
together with the holders of Common Stock voting as a single class, subject to
the terms of the Non-Management Stockholders' Agreement dated as of July 15,
1986, as amended, and of the Voting Trust Agreement dated as of July 15, 1986 in
respect of certain Common Stock.
Cumulative quarterly dividends (the "Preferred Dividend") were provided for
at an annual dividend rate of 8% of the Base Liquidation Preference for the
particular series involved, as and when declared by the Board of Directors; and
also, a dividend (the "Participating Dividend"), participating pari passu with
the Common Stock in the payment of Common Stock dividends in an amount equal to
the product of (i) 25% multiplied by a fraction, the numerator of which is the
number of shares of Preferred Stock then outstanding and the denominator of
which is the number of shares of Preferred Stock outstanding at July 15, 1986,
multiplied by (ii) the aggregate amount declared available for dividends on the
Common Stock and Preferred Stock after payment of the Preferred Dividend. It is
provided that Macy's may not pay dividends to the Common stockholders, unless
all accrued Preferred Dividends have been paid or declared and provided for.
Any unpaid accrued Preferred and Participating Dividends are forfeitable
upon conversion of Preferred Stock. The holders of Preferred Stock are subject
to a Non-Management Stockholders' Agreement dated as of July 15, 1986, as
amended, which affects the exercise of various rights, including the voting and
transferability of Preferred Stock and the Common Stock into which such
Preferred Stock is convertible.
Commencing on the Chapter 11 filing date, Macy's ceased accruing dividends
on its Preferred Stock (redeemable) and has included the Preferred Stock
(redeemable) and the cumulative accrued but unpaid dividends prior to the filing
date on such stock in Obligations Subject to Settlement Under Reorganization
Proceedings. For purposes of the Bankruptcy Code, the holders of the Preferred
Stock of Macy's are not considered creditors. The Plan provides for cancellation
of all existing capital stock and other equity interests of Macy's without
payment of any consideration therefor.
11. COMMON STOCK
On July 15, 1986, Macy's sold 1,750,000 shares of its Common Stock for
either cash and/or the exchange of common shares of Former Macy's. In connection
with their purchase of Common Stock, each purchaser of Common Stock entered into
a Common Stock Subscription Agreement or a like agreement which contained
certain transfer restrictions until the end of such agreements on July 15, 1996
or earlier under certain circumstances and, also, provisions regarding such
stockholder's rights and/or obligations to sell the Common Stock back to Macy's
or its designee upon termination of such stockholder's employment with Macy's or
its affiliates (until July 15, 1993, generally in the Common Stock Subscription
Agreements and until July 15, 1996 in "Stock Purchase, Agency and Restriction
24
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMON STOCK--(CONTINUED)
Agreements"). The holders of such Common Stock also entered into a Voting Trust
Agreement dated as of July 15, 1986 pursuant to which a ten-year voting trust
was established.
Dividends on Common Stock are provided for, as and when declared by the
Board of Directors subject to the payment of the Preferred Dividends (see Note
10) and the restrictions as to the payment of dividends included in certain of
the debt agreements. No dividends have been declared on Macy's Common Stock.
The Plan provides for cancellation of all existing capital stock and other
equity interests of Macy's without any payment of consideration therefor.
12. 1987 KEY EXECUTIVE STOCK INCENTIVE PROGRAM
On June 15, 1987, the Board of Directors approved the 1987 Key Executive
Stock Incentive Program (the "1987 Program"). In view of Macy's Chapter 11 case,
the 1987 Program, which is described below, has become inactive. The 1987
Program consists of (i) the 1987 Participation Stock Option Plan, which provides
for the grant of stock options not intended to qualify as incentive stock
options under the Internal Revenue Code of 1986, as amended ("PSOs"), and (ii)
the 1987 Stock Award Plan, which provides for awards of Common Stock ("Awards").
PSOs, unless determined otherwise, are exercisable in certain specified
installments and for a period of seven years; the exercise price of each share
granted under a PSO is determined at the date of grant. Awards may or may not be
subject to certain terms, conditions, and restrictions and/or a purchase price.
The maximum number of shares of Common Stock subject to the 1987 Program is the
number of Reserved Management Shares (i.e., 92,105 unissued shares) plus such
shares as shall be acquired by Macy's from employees or former employees or
their permitted transferees pursuant to rights or obligations of Macy's under
Common Stock subscription agreements or like agreements. The 1987 Program is
designed to subject all Common Stock issued under its Plans (a) to the rights
and restrictions on the Common Stock of Macy's currently operative as to
holdings of existing Management Investors in July 1986 and (b) to the required
inclusion of all Common Stock under the Voting Trust Agreement.
For the years ended July 30, 1994 and July 31, 1993, the number of shares
subject to options that were outstanding were 187,525. Stock options were held
by 196 individuals at July 30, 1994. The exercise price for all shares under
option is $20 per share. The Plan provides for cancellation of all existing
capital stock and other equity interests of Macy's without payment of any
consideration therefor.
13. NET RETAIL SALES
Net retail sales include sales from licensed departments of $65,136,000,
$67,004,000, and $83,038,000 for fiscal years 1994, 1993, and 1992,
respectively.
25
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. INTEREST EXPENSE--NET
FOR THE FISCAL YEARS ENDED
------------------------------------------------
JULY 30, 1994 JULY 31, 1993 AUGUST 1, 1992
------------- ------------- --------------
Cash interest expense:*
DIP Facility interest......................... $ 7,826,000 $ 8,086,000 $ 2,346,000
Mortgage interest............................. 5,328,000 5,495,000 6,767,000
Imputed interest on capitalized leases........ 6,904,000 4,225,000 3,715,000
Macy Revolving Credit Facility................ 9,734,000 9,409,000 19,443,000
Six-year Term Loan............................ 12,893,000 12,462,000 14,221,000
Senior Subordinated Debentures................ -- -- 26,996,000
Subordinated Debentures....................... -- -- 27,641,000
Senior Real Estate Debt....................... 97,517,000 146,862,000 178,986,000
Purchase Note................................. 30,442,000 29,094,000 32,465,000
Other interest expense........................ 1,648,000 2,447,000 991,000
------------- ------------- --------------
Total cash interest....................... 172,292,000 218,080,000 313,571,000
------------- ------------- --------------
Non-cash interest expense:
Amortization of the discount on the Junior
Subordinated Discount Debentures............ -- -- 37,710,000
Additional Interest on Senior Real Estate
Debt-- participating loans**................ -- (26,212,000) (39,448,000)
Interest expense associated with deferred
liabilities................................. 141,000 132,000 268,000
Interest on taxes due......................... 12,500,000 27,578,000 23,500,000
Amortization of deferred debt expense......... 16,533,000 19,862,000 18,583,000
Other......................................... 232,000 362,000 726,000
------------- ------------- --------------
Total non-cash interest................... 29,406,000 21,722,000 41,339,000
------------- ------------- --------------
Total Interest Expense.......................... 201,698,000 239,802,000 354,910,000
------------- ------------- --------------
Less:
Interest income............................... 201,000 462,000 969,000
Interest expense capitalized during
construction................................ 2,897,000 2,964,000 9,718,000
------------- ------------- --------------
Interest Expense--Net........................... $ 198,600,000 $ 236,376,000 $ 344,223,000
------------- ------------- --------------
------------- ------------- --------------
------------
* Interest accrued but not paid on pre-petition indebtedness is considered cash
interest expense.
** Includes reversal of prior years' expense of $26,212,000 and $52,884,000 in
1993 and 1992, respectively.
15. EARTHQUAKE LOSS
On January 17, 1994, a major earthquake struck the Los Angeles, California
area. Several of the Bullock's and I. Magnin stores that operate in this area
experienced property damage, merchandise loss, and business interruption. The
Bullock's Sherman Oaks and Northridge stores sustained extensive damage. The
Sherman Oaks store is expected to be in complete operation by October 1994 while
the Northridge store is expected to reopen in late 1995. The $15,000,000 loss
recorded reflects the estimated damage and costs related to the earthquake in
excess of insurance coverage. Insurance
26
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. EARTHQUAKE LOSS--(CONTINUED)
proceeds of $73,000,000 were applied against merchandise loss, property damage,
business interruption, and other related costs.
16. UNUSUAL ITEMS--NET
The unusual items--net in 1994 included (a) the costs incurred for
organizational realignments ($8,292,000) and (b) the costs incurred for business
restructuring ($11,208,000). The organizational realignment costs related to the
consolidation of various departments and the streamlining of operations. The
business restructuring costs related to the elimination of the sale of certain
types of merchandise as well as the closing of certain furniture stores.
The unusual items--net in 1993 included (a) the costs incurred for
organizational realignments ($19,768,000), (b) the costs incurred for business
restructuring ($9,597,000) offset by (c) a gain related to the sale of the
registrant's aircraft ($9,110,000). The organizational realignment costs related
to the consolidation of various departments and the streamlining of operations.
The business restructuring costs relate to the elimination of the sale of
certain types of merchandise in various geographic locations. These expenses
include severance and other incremental expenses net of disposition proceeds and
are part of the key business initiatives undertaken by Macy's beginning in
fiscal 1992.
The unusual items--net in 1992 included (a) the write-off of remaining
excess of cost over fair value of the net assets acquired during the 1986
acquisition of Former Macy's and the 1988 acquisition for the New Divisions of
Federated ($241,452,000), (b) costs incurred for Macy's East-West organizational
realignment ($40,000,000), and (c) costs incurred in the one-time liquidation of
certain aged inventory in temporary inventory liquidation facilities
($30,000,000). This one-time liquidation resulted from Macy's modification of
inventory management policy for the department stores which led to the
establishment of its inventory close-out operation, Macy's Close-Out.
As a result of Macy's operating performance, its overall decline in
financial condition, economic conditions, and an assessment of the prospects for
specific stores, it appeared in fiscal 1992 that future sales, earnings, and
cash flow amounts did not substantiate Macy's continuing to carry the remaining
excess of cost over fair value of the net assets acquired on its consolidated
statements of financial condition. Accordingly, Macy's wrote off the remaining
balance in fiscal 1992.
In February 1992, Macy's created two larger regional department store
groups, Macy's East and Macy's West, which are comprised of certain operating
subsidiaries. Macy's East consists of the Macy's Northeast, Inc. stores as well
as the stores of Macy's South Inc. located in Alabama, Florida, Georgia,
Louisiana, and South Carolina. Macy's West consists of the Macy's California,
Inc. and Bullock's, Inc. stores as well as the stores of Macy's South, Inc.
located in Texas. I. Magnin, Inc. was not affected by the realignment.
27
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. REORGANIZATION ITEMS--NET
The reorganization items--net occurring as a result of the Chapter 11
proceedings have been segregated from operations for the fiscal years ended July
30, 1994, July 31, 1993, and August 1, 1992. The major components of the
reorganization items--net are:
FOR THE FISCAL FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 30,1994 JULY 31,1993 AUGUST 1, 1992
-------------- -------------- --------------
Reversal of post-petition interest expense
accruals on pre-petition secured debt (See Note
8)............................................. $ (57,460,000) -- --
Estimated expense/(reversal) of expense
associated with swap breakage claims on certain
asserted agreements (See Note 8)............... (33,695,000) 83,695,000 54,115,000
Professional fees and other expenses directly
related to the bankruptcy...................... 22,716,000 21,538,000 14,388,000
Retention costs.................................. 4,137,000 12,000,000 --
Estimated costs associated with the closing of
certain stores and support facilities and
estimated costs relating to additional vendor
claims (1992).................................. 29,475,000 76,100,000 168,494,000
Restructuring costs.............................. -- 21,500,000 --
Write-off of deferred debt expense related to
unsecured long-term debt....................... -- -- 16,307,000
Write-off of Preferred Stock issuance costs...... -- -- 8,280,000
Other............................................ -- 2,150,000 2,274,000
-------------- -------------- --------------
(34,827,000) 216,983,000 263,858,000
Less: Interest earned on accumulated cash
resulting from the Chapter 11 proceedings...... 3,855,000 2,324,000 2,736,000
-------------- -------------- --------------
$ (38,682,000) $ 214,659,000 $ 261,122,000
-------------- -------------- --------------
-------------- -------------- --------------
The estimated costs associated with the closing of certain stores includes
the write-off of remaining book value of assets, the related inventory
liquidation costs, severance costs, post-closing store expenses, and other
incremental expenses net of the estimated disposition proceeds.
18. INCOME TAXES
The provision for income taxes includes the following amounts:
FISCAL 1994 FISCAL 1993 FISCAL 1992
------------ ----------- -----------
Deferred federal income tax benefit.................. $ (1,628,000) $ -- $ --
State and local taxes................................ (1,997,000) 1,000,000 1,000,000
------------ ----------- -----------
Total provision for income taxes/(benefit)..... $ (3,625,000) $ 1,000,000 $ 1,000,000
------------ ----------- -----------
------------ ----------- -----------
28
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. INCOME TAXES--(CONTINUED)
The reconciliation of taxes on income at the federal statutory rate to the
actual amounts provided is as follows:
FISCAL 1994
------------
Tax benefit computed at the Federal statutory
rates................................................ $(59,007,000)
Adjustment due to:
Limitation on the utilization of tax benefits...... 50,392,000
Professional fees and other expenses directly
related to the bankruptcy........................ 6,987,000
------------
Federal tax benefit.................................. $ (1,628,000)
------------
------------
The Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("FASB 109") was adopted as of August 1, 1993. FASB 109 requires,
in the year of adoption, an adjustment of certain assets and liabilities that
resulted from certain business combinations such as the 1986 Acquisition. The
adoption of FASB 109 resulted in a favorable cumulative effect income adjustment
of $185,340,000. This statement requires that a deferred tax liability be
recognized for the tax effects of taxable temporary differences and deferred tax
assets for the tax effects of deductible temporary differences, tax credit
carryforwards, and operating loss carryforwards. Tax expense in fiscal 1994 was
calculated in accordance with FASB 109.
Under prior accounting rules, an income tax benefit cannot be recognized for
the losses incurred in 1993 and 1992 because the benefit is not expected to be
recovered as an income tax refund or savings currently or in the near future.
At July 30, 1994, Macy's had an estimated net operating loss carryover of
$1,617,000,000 for Federal income tax purposes which includes approximately
$636,904,000 of post-petition interest expense not reflected in the accompanying
consolidated financial statements. The loss carryover will be available to
offset future taxable income through 2009. There is no expiration date on
approximately
29
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. INCOME TAXES--(CONTINUED)
$12,000,000 of the tax credit carryforwards. The tax effect of significant items
comprising Macy's net deferred tax liability as of July 30, 1994 are as follows:
Operating loss carryforwards........................................ $ 565,977,000
Accrued liabilities................................................. 117,601,000
Tax credit carryforwards............................................ 12,290,000
Capital leases...................................................... 24,974,000
Other............................................................... 43,481,000
-------------
Subtotal........................................................ 764,323,000
-------------
Property and equipment differences between book and tax............. (418,250,000)
Unrecorded post-petition interest................................... (222,916,000)
Inventory........................................................... (20,790,000)
Intangibles......................................................... (10,068,000)
Other............................................................... (32,086,000)
-------------
Subtotal........................................................ (704,110,000)
-------------
Deferred tax asset.................................................. 60,213,000
Valuation allowance................................................. (78,933,000)
-------------
Deferred tax liability.............................................. $ 18,720,000*
-------------
-------------
------------
* Relates to state jurisdictions which have limitations on the utilization of
net operating loss carryforwards.
In 1993, Macy's announced that it reached an agreement with the Internal
Revenue Service ("IRS") regarding federal income taxes arising from its audit of
fiscal years 1984 through 1991; fiscal years 1992 and 1993 are currently being
examined by the IRS. The IRS will have a priority claim for federal income tax
of approximately $219 million inclusive of interest. Macy's estimates that its
actual liability will be approximately $151 million due to the availability and
carryback of certain net operating losses from fiscal year 1992. All appropriate
amounts for the agreed-upon settlement with the IRS, including interest, and the
related estimated state and local tax impact have been provided for and have
been included with Other Liabilities in the caption Obligations Subject to
Settlement Under Reorganization Proceedings.
On September 28, 1994, the California Franchise Tax Board approved a
settlement of approximately $17 million plus interest beginning on July 29, 1994
relating to the fiscal years 1976 through 1991. Such refund will be recorded as
income in the first quarter of fiscal year 1995, will be offset against other
amounts due to California, and will result in a net refund of approximately $4
million. The $17 million settlement has not been reflected in the consolidated
financial statements as of July 30, 1994.
19. EMPLOYEE BENEFIT PLANS
PENSION PLANS
Macy's has a noncontributory pension plan which covers substantially all
employees or employee groups meeting specified eligibility requirements. The
benefits are based on years of service and/or
30
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. EMPLOYEE BENEFIT PLANS--(CONTINUED)
compensation in the five highest of the participant's last ten full years of
employment. In general, with minor exceptions, Macy's funding policy has been to
contribute annually the maximum contribution permitted for the plan under the
full funding limitation of the Employee Retirement Income Security Act of 1974.
The following tables summarize the plan's funded status as of July 30, 1994
and July 31, 1993 and the components of pension expense for the fiscal years
1994, 1993, and 1992:
JULY 30, JULY 31,
FUNDED STATUS 1994 1993
-------------------------------------- ------------ ------------
Actuarial present value of:
Vested benefit obligation........... $254,668,000 $239,619,000
------------ ------------
Accumulated benefit obligation...... 259,641,000 245,991,000
------------ ------------
Projected benefit obligation........ 340,522,000 322,551,000
------------ ------------
Plan assets at fair value*............ 367,690,000 363,645,000
------------ ------------
Plan assets in excess of projected
obligation.......................... 27,168,000 41,094,000
------------ ------------
Unrecognized asset.................... (67,707,000) (76,171,000)
------------ ------------
Unrecognized loss..................... 52,158,000 48,170,000
------------ ------------
Unrecognized prior service cost....... 1,162,000 1,306,000
------------ ------------
Prepaid pension costs................. $ 12,781,000 $ 14,399,000
------------ ------------
------------ ------------
------------
* Plan assets consist primarily of fixed income securities and listed stocks.
COMPONENTS OF PENSION EXPENSE 1994 1993 1992
------------------------------------------------- ------------ ------------ ------------
Service Cost..................................... $ 16,871,000 $ 16,358,000 $ 15,254,000
Interest......................................... 24,557,000 25,012,000 22,550,000
Actual return on assets.......................... (31,868,000) (17,853,000) (24,957,000)
Amortization of unrecognized net asset........... (8,463,000) (8,463,000) (8,463,000)
Amortization of unrecognized prior service
cost........................................... 141,000 145,000 153,000
Asset (loss) deferred............................ 379,000 (13,906,000) (6,119,000)
Amortization of overfunding in pension plan
recorded in connection with the Acquisition.... 5,000,000 5,000,000 5,000,000
------------ ------------ ------------
Pension expense.................................. $ 6,617,000 $ 6,293,000 $ 3,418,000
------------ ------------ ------------
------------ ------------ ------------
ACTUARIAL ASSUMPTION 1994 1993 1992
----------------------------------------------------------------- ---- ---- ----
Rates of increase in compensation levels......................... 6% 6% 7%
Discount rate.................................................... 8% 8% 9%
Expected long-term rate of return on plan assets................. 9% 9% 9%
During 1993 and 1992, Macy's incurred a pension curtailment due to a
reduction in the number of employees relating to the consolidation of certain
operations and the closing of certain stores. The result was a curtailment gain
of approximately $1,394,000 in 1993 and $3,500,000 in 1992.
Also see Note 9, Six-Year Term Loan, for additional information regarding
the plan's overfunded status.
31
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. EMPLOYEE BENEFIT PLANS--(CONTINUED)
SAVINGS AND PROFIT-SHARING PLANS
Macy's also has a savings plan and a terminated profit-sharing plan. The
savings plan fund consists of voluntary employee contributions, matching company
contributions, and all related earnings. The savings plan expense was
$4,827,000, $3,688,000, and $3,992,000 in 1994, 1993, and 1992. The balance in
the savings plan fund at July 30, 1994 was $207,407,000. The balance in the
profit-sharing fund at July 30, 1994 was $17,299,000. No contributions have been
made to the profit-sharing fund since 1976.
POSTRETIREMENT BENEFITS
The Financial Accounting Standards Board Statement No. 106 entitled
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FASB
106") was adopted on August 1, 1993. This statement requires that employers
record the expected cost of postretirement benefits other than pensions during
the employees active years of service. Macy's provides medical and life
insurance benefits under various plans to certain retirees on a
contributory/non-contributory basis.
As of August 1, 1993, the accumulated postretirement obligation was
approximately $204,000,000. Macy's is recording this obligation through
amortization of the accumulated postretirement benefit obligation over a 20 year
period.
The following table sets forth the plans' status at July 30, 1994.
Accumulated Postretirement Benefit Obligations:
Active--Ineligible................................................. $ 88,950,000
Active--Eligible................................................... 8,920,000
Inactive........................................................... 124,727,000
------------
222,597,000
Plan assets at fair value............................................ --
------------
Accumulated postretirement benefit obligation in excess of plan
assets............................................................. 222,597,000
Less:
Unrecognized transition obligation................................. 193,705,000
Unrecognized loss.................................................. 8,211,000
------------
Accrued Postretirement Benefit Cost.................................. $ 20,681,000
------------
------------
Net periodic postretirement benefit cost for fiscal 1994 included the
following components.
Service Cost.......................................................... $ 6,081,000
Interest Cost......................................................... 15,834,000
Amortizations of transition obligation over 20 years.................. 10,195,000
-----------
$32,110,000
-----------
-----------
For measurement purposes, a range of 11.5%-19.0% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 1994; the
rate was assumed to decrease gradually to 6.0% for 2005 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point would increase the accumulated
postretirement benefit obligation as of July 30, 1994 by $19,252,000 and
increase the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $3,209,000.
32
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The weighted average discount rate used in determining the accumulated
postretirement benefit obligations was 8.0% and the salary increase rate is age
weighted on starting at age 20 at 8.0% decreasing to 4.5% at age 64.
The amounts included as an expense for postretirement benefits under the
previous accounting method were approximately $20,000,000 lower in fiscal years
1993 and 1992.
In November 1992, the FASB issued Statement No. 112 entitled "Employers'
Accounting for Post Employment Benefits" ("FASB 112"). This statement requires
Macy's to recognize, during the employees active years of service, an obligation
for post employment benefits provided to former or inactive employees after
employment but before retirement. Macy's will adopt FASB 112 as of July 31, 1994
(fiscal year 1995) by recording a cumulative effect of a change in accounting.
The cumulative effect (non-cash) of this charge is estimated to be $11,000,000.
20. COMMITMENTS
a) Leases
Macy's and its subsidiaries lease land and/or buildings, warehouses, and
distribution facilities, and fixtures and store equipment for certain of their
retail stores. The leases generally provide for the payment of real estate taxes
and other related expenses and, in certain instances, increased rentals based on
percentages of sales. The leases provide for option renewal periods, and some
contain purchase options.
Capitalized leases included in property and equipment consist of:
JULY 30, JULY 31,
1994 1993
------------ -----------
Property and equipment.......................................... $111,145,000 $82,515,000
Accumulated depreciation........................................ 42,394,000 29,397,000
------------ -----------
$ 68,751,000 $53,118,000
------------ -----------
------------ -----------
Future minimum lease payments and sublease rental receipts due under
noncancelable leases as of July 30, 1994 are as follows:
SUBLEASES RELATED
PRIMARILY TO
CAPITALIZED
FISCAL YEAR OPERATING LEASES CAPITALIZED LEASES LEASES
------------------------------------------ ---------------- ------------------ -----------------
1995.................................... $ 53,346,000 $ 26,021,000 939,000
1996.................................... 52,655,000 19,085,000 939,000
1997.................................... 49,579,000 16,979,000 939,000
1998.................................... 48,588,000 7,403,000 939,000
1999.................................... 46,214,000 2,635,000 939,000
2000 and thereafter..................... 365,574,000 30,383,000 4,425,000
---------------- ------------------ -----------------
$615,956,000 102,506,000 $ 9,120,000
---------------- -----------------
---------------- -----------------
Less imputed interest................... 32,012,000
------------------
Obligations under capitalized leases.... $ 70,494,000*
------------------
------------------
------------
* Includes $11,032,000 recorded in the caption Obligations Subject to Settlement
Under Reorganization Proceedings.
33
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS--(CONTINUED)
Rent expense consists of the following:
FISCAL 1994 FISCAL 1993 FISCAL 1992
----------- ----------- ------------
Minimum rentals:
Equipment leases................................. $ 7,943,000 $10,492,000 $ 18,839,000
Premise lease.................................... 47,524,000 43,208,000 47,492,000
Contingent rentals*................................ 43,498,000 39,852,000 34,292,000
----------- ----------- ------------
$98,965,000 $93,552,000 $100,623,000
----------- ----------- ------------
----------- ----------- ------------
------------
* Including $3,858,000, $4,003,000, and $4,749,000 in fiscal years 1994, 1993,
and 1992, respectively, applicable to capitalized leases.
b) Data Processing and Information Services Arrangement
Macy's has entered an agreement with the Federated Systems Group ("FSG"),
formerly SABRE Group, a division of Federated, pursuant to which FSG will
provide certain data processing and information services to Macy's. The Base
Price (as defined) for the year that began September 1, 1992, was $59,600,000.
The agreement provides for additional Supplemental Fees (as defined) for
services in excess of the services included in the Base Price. The Base Price
and Supplemental Fees are calculated on the basis of FSG's costs plus a return
that covers profit and FSG's development investment. The agreement may be
terminated by Macy's, at Macy's election, at intervals from and after September
1, 1997. The amount billed to Macy's was $63,435,000, $61,693,000, and
$37,375,000 in fiscal years 1994, 1993, and 1992, respectively.
(c) Employment Arrangements
Macy's has individual employment arrangements with the Chief Executive
Officer, President, and the Chairman of Macy's West which contain terms of
employment for 3 years for one officer and 5 years for two officers.
Additionally, these arrangements provide salary, bonus, benefits, and provisions
for termination and severance under certain circumstances.
Macy's also has three-year employment arrangements with 116 executives in
order to assure the organization of the continued services of such executives.
Commitments for compensation under these agreements, exclusive of benefits
provided therein, over the periods that are covered by the agreements (generally
three years) totaled approximately $96,000,000. These arrangements provide for
the executives to receive a base salary, bonus, and other certain benefits as
well as provisions for severance in the event of termination as defined.
Macy's also entered into a revised arrangement in May 1993 with a former
officer, who is also a current director. This arrangement provides for services
to be rendered to Macy's through July 31, 1995 and contains applicable terms for
salary, current benefits, and post-employment and post-retirement benefits.
The commitment for future salaries and an estimate for bonuses under these
employment arrangements aggregated approximately $125,000,000 at July 30, 1994.
In August 1994, Macy's and Federated agreed that Macy's may enter into
severance, termination, or retention agreements or arrangements ("Program
Agreements") with any of Macy's "Corporate
34
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS--(CONTINUED)
Office" employees, including those with three-year employment arrangements (as
described above), provided that the cumulative amount of all payments and
healthcare benefit accruals under Program Agreements would not exceed
$32,000,000. The $32,000,000 maximum excludes any payments as may be due to the
Chief Executive Officer and the President.
On September 30, 1994, a $14,000,000 lump sum payment was made to the
President of Macy's upon the termination of his employment. However, if the
Merger is not effected, the lump sum payment will be returned to Macy's and the
President will return to full-time employment under the terms of his employment
arrangement. In addition, as of September 30, 1994, $7,000,000 has been paid
under the Program Agreements referred to above, reducing the commitment under
employment agreements by a total of $21,000,000.
21. RELATED PARTY TRANSACTIONS
Macy's has transactions with certain related parties. They are as follows:
a) GE Capital owns 19.2% of Macy's outstanding preferred stock.
Macy's and its subsidiaries purchased supplies and entered into transactions
relating to radio and television advertising in the net amount of
approximately $2,315,000, $3,306,000, and $6,457,000 from affiliates of GE
Capital in fiscal years 1994, 1993, and 1992, respectively.
Macy's has an arrangement with GE Capital (from May 1991) or an affiliate in
which GE Capital makes remittances to the Macy Operating Companies net of a
discount in respect of purchases effected by Macy's customers using credit
cards bearing tradenames used by Macy's. The net discount was $23,195,000,
$27,704,000, and $20,536,000 in fiscal years 1994, 1993, and 1992,
respectively.
The Macy Operating Companies have secured loans from GE Capital in the
aggregate amount of $53,200,000 at an annual interest rate of 10.44% (See
Note 9--Warehouse Financing).
b) Loews Corporation owns approximately 17.7% of Macy's outstanding
preferred stock.
Macy's and its subsidiaries purchased merchandise, entered into transactions
relating to radio and television and television advertising, obtained hotel
and related services, and purchased insurance from affiliates of Loews
Corporation. The approximate total amount expenses was $5,100,000,
$5,607,000, and $6,781,000 in fiscal years 1994, 1993, and 1992,
respectively.
35
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. QUARTERLY INFORMATION (UNAUDITED)
AUGUST NOVEMBER FEBRUARY MAY FISCAL
TO OCTOBER TO JANUARY TO APRIL TO JULY YEAR
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
52 weeks ended July 30,1994
Net retail sales............... $1,438,987 $1,997,244 $1,339,327 $1,387,788 $6,163,346
Cost of goods sold, including
occupancy and buying costs... 1,011,971 1,377,325 956,489 1,032,530 4,378,315
Unusual items--net............. -- -- -- 19,500 19,500
Earthquake loss................ -- -- 35,000 (20,000) 15,000
Reorganization items--net...... 8,068 11,585 6,049 (64,384) (38,682)
Cumulative effect of an
accounting change............ 185,340 -- -- -- 185,340
Net earnings/(loss)............ 67,418 60,453 (157,301) 49,803 20,373
Primary earnings/(loss) per
share*....................... 41.69 37.39 (97.28) 30.80 12.60
Fully diluted income per
share*....................... 4.61 4.13 -- 3.41 1.40
52 weeks ended July 31,1993
Net retail sales............... $1,482,637 $2,037,250 $1,336,672 $1,443,423 $6,299,982
Cost of goods sold, including
occupancy and buying costs... 1,037,988 1,426,338 950,894 1,046,725 4,461,945
Unusual items--net............. (9,110) -- -- 29,365 20,255
Reorganization items--net...... 8,422 13,407 109,692 83,138 214,659
Net earnings/(loss)............ (135,863) 8,909 (227,954) (188,993) (543,901)
Primary earnings/(loss) per
share*....................... (84.02) 5.51 (140.97) (116.88) (336.36)
Fully diluted income per
share*....................... -- 0.61 -- --
52 weeks ended August 1, 1992
Net retail sales............. $1,601,271 $2,055,875 $1,304,899 $1,486,840 $6,448,885
Cost of goods sold, including
occupancy and buying costs... 1,076,072 1,680,002 919,803 1,077,750 4,753,627
Unusual items.................. 30,000 284,926 -- -- 314,926
Reorganization items........... -- 102,861 90,720 67,541 261,122
Net loss....................... (155,356) (671,575) (225,866) (198,510) (1,251,307)
Net loss per share*............ (101.29) (417.57) (139.68) (122.79) (782.13)
------------
* Each period is computed separately.
23. SUPPLEMENTARY DATA
The following disclosure of the estimated fair value of financial
instruments and related disclosure is made in accordance with the Financial
Accounting Standards Board Statement No. 107 entitled "Disclosure about Fair
Value of Financial Instruments." The statement requires all entities to disclose
the fair value of financial instruments, both assets and liabilities, recognized
and not recognized in the consolidated statements of financial condition, for
which it is practicable to estimate fair value.
36
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. SUPPLEMENTARY DATA--(CONTINUED)
The uncertainties related to the outcome of the Chapter 11 proceedings and
resulting effect upon the ultimate value of assets and liabilities add
significantly to the uncertain nature of any estimate of fair value.
The following methods and assumptions were used where it is practicable to
estimate fair value:
(i) Cash and cash equivalents, restricted cash, current receivables,
accounts payable, accrued liabilities, and short-term borrowings are
all short-term in nature and their carrying amounts approximate fair
value.
(ii) Notes 1 and 2 discuss the uncertainties of the Chapter 11 proceedings
and the Plan which significantly effect the estimated fair value of
financial instruments included in Obligations Subject to Settlement
Under Reorganization Proceedings. Settlement of these obligations and
any related interest is subject to various approvals (See Note 2) by
the Bankruptcy Court and other contingencies and other parties of
interest and was not fair valued at July 31, 1993. Distributions to
creditors of the Macy's Debtors under the Plan have an aggregate
estimated assumed value of approximately $4.1 billion. Therefore, the
amount utilized as fair value at July 30, 1994 for Obligations Subject
to Settlement Under Reorganization Proceedings is based on this assumed
value.
(iii) The estimated fair value of Macy's unsecured debt which includes the
14 1/2% Senior Subordinated Debentures, the 14 1/2% Subordinated
Debentures, and the 16 1/2% Junior Discount Debentures is based on
quoted market prices at July 31, 1993 for those issues that are traded
over the counter, and estimates provided by brokers for other issues.
However, quoted market prices and broker estimates inherently include
judgments concerning the outcome of the Chapter 11 proceedings, and do
not represent Macy's opinion as to the amounts that will be received
in respect thereof.
ESTIMATED FAIR VALUE
(IN 000'S)
JULY 30, 1994 JULY 31, 1993
------------------------ ----------------------
CARRYING CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
---------- ---------- ---------- --------
Cash and cash equivalents, restricted cash
and current receivables................... $ 279,711 $ 279,711 $ 196,118 $196,118
Accounts payable, accrued liabilities,
short-term borrowings, and income taxes
payable................................... 841,677 841,677 937,592 937,592
Obligations Subject to Settlement Under
Reorganization Proceedings................ 5,639,810 4,100,000 5,568,603 N/A
Unsecured Debt included in Obligations
Subject to Settlement Under Reorganization
Proceedings:
14 1/2% Senior Subordinated Debentures...... 379,000 284,400 379,000 135,019
14 1/2% Subordinated Debentures............. 383,434 131,000 383,434 59,432
14 1/2% Junior Subordinated Discount
Debentures................................ 634,428* 66,700 634,428* 45,996
------------
* Face Amount ($503,177,000 accreted value at July 30, 1994 and July 31, 1993)
37
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED
PARTIES AND UNDERWRITERS, PROMOTERS, AND
EMPLOYEES OTHER THAN RELATED PARTIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
---------------------------- -------- -------- -------- -------- ------------- --------
BALANCE
AT BALANCE
BEGINNING AT END
INTEREST OF DEDUCTIONS OF
NAME OF DEBTOR RATE DUE DATE PERIOD ADDITIONS (COLLECTIONS) PERIOD
---------------------------- -------- -------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
52 Weeks ended July 30, 1994
John Kent Anderson(A)...... -- 12/24/01 $265 $-- $-- $265
Sheila Arnold(A)........... -- 12/03/06 300 -- 33 267
Rudolph Borneo(A).......... -- 08/22/99 250 200 -- 450
Charles Chinni(A).......... -- 03/01/04 270 400 270(E) 400
David Coonfield(A)......... -- 08/03/02 150 -- 150(F) --
Emily Denning(A)........... -- 11/08/06 109 -- -- 109
Burnett Donoho(A).......... -- 04/15/08 600 -- -- 600
Donald Eugene(A)........... -- (H) 585 -- -- 585
Paul M. Fitzpatrick(A)..... -- 03/02/99 235 -- -- 235
Joy Frommer(A)............. -- 08/31/96 125 -- -- 125
John Gorham(A)............. -- 10/31/01 245 -- -- 245
Kent Keish(A).............. -- 12/11/01 250 -- -- 250
James Kenney(A)............ -- (G) -- 400 400(G) --
Richard Leto(A)............ -- 12/21/03 -- 100 -- 100
Tim Lupfer(A).............. -- 08/04/03 -- 150 -- 150
Michael Montanino(A)....... -- 10/31/98 200 -- -- 200
William Moll(A)............ -- 01/11/04 -- 150 -- 150
Max Roberts(A)............. -- 03/01/07 200 -- -- 200
Mary Lou Rogers(A)......... -- 12/01/03 -- 150 -- 150
Terry Schaefer(A).......... -- 05/24/04 -- 200 -- 200
Tom Shull(A)............... -- (G) 400 -- 400(G) --
Felix Smith(A)............. -- 07/31/97 275 -- -- 275
Michael Steinberg(A)....... -- 07/31/96 -- 400 -- 400
David Suliteanu(A)......... -- 09/09/01 250 -- -- 250
Myron E. Ullman,
III(A)(B)................... -- 12/18/95 600 -- 500(G) 100
Michael Wirkkala(A)........ -- 12/11/01 125 -- -- 125
52 weeks ended July 31, 1993
John Kent Anderson(A)...... -- 12/24/01 $265 $-- $-- $265
Sheila Arnold(A)........... -- 03/31/96 300 -- -- 300
Rudolph Borneo(A).......... -- 08/22/99 250 -- -- 250
Rose Marie Bravo(D)(A)..... -- 07/21/99 300 -- 300 --
Charles Chinni(A).......... -- 03/01/04 270 -- -- 270
David Coonfield(A)......... -- 08/03/02 -- 150 -- 150
Emily Denning(A)........... -- 11/08/06 109 -- -- 109
Burnett Donoho(A).......... -- 04/15/08 -- 600 -- 600
Donald Eugene(A)........... -- (H) 585 -- -- 585
Paul M. Fitzpatrick(A)..... -- 03/02/99 235 -- -- 235
Joy Frommer(A)............. -- 08/31/96 125 -- -- 125
John Gorham(A)............. -- 10/31/01 245 -- -- 245
Gary Guthrie(A)............ -- 10/24/01 189 -- 94 95
David Herman(A)............ -- 10/28/01 155 -- 73 82
Kent Keish(A).............. -- 12/11/01 250 -- -- 250
Michael Montanino(A)....... -- 10/31/98 200 -- -- 200
Max Roberts(A)............. -- 03/01/07 200 -- -- 200
Tom Shull(A)............... -- (G) -- 400 -- 400
Felix Smith(A)............. -- 07/31/97 350 -- 75 275
David Suliteanu(A)......... -- 09/09/01 250 -- -- 250
Myron E. Ullman,
III(A)(B)................... -- 11/01/18 600 -- -- 600
Michael Wirkkala(A)........ -- 12/11/01 125 -- -- 125
38
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED
PARTIES AND UNDERWRITERS, PROMOTERS, AND
EMPLOYEES OTHER THAN RELATED PARTIES--(CONTINUED)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
---------------------------- -------- -------- -------- -------- ------------- --------
BALANCE
AT BALANCE
BEGINNING AT END
INTEREST OF DEDUCTIONS OF
NAME OF DEBTOR RATE DUE DATE PERIOD ADDITIONS (COLLECTIONS) PERIOD
---------------------------- -------- -------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
52 Weeks ended August 1,
1992
John Kent Anderson(A)...... -- 12/24/01 $-- $265 $-- $265
Sheila Arnold(A)........... -- 03/31/96 -- 300 -- 300
Rudolph Boreno(A).......... -- 08/22/99 250 -- -- 250
Rose Marie Bravo(A)........ -- 07/21/99 300 -- -- 300
Charles Chinni(A).......... -- 03/01/04 270 -- -- 270
Emily Denning(A)........... -- 11/08/06 -- 109 -- 109
Donald Eugene(A)........... -- (H) -- 585 -- 585
Paul M. Fitzpatrick(A)..... -- 03/02/99 235 -- -- 235
Joy Frommer(A)............. -- 08/31/96 -- 125 -- 125
John Gorham(A)............. -- 10/31/01 -- 245 -- 245
Gary Guthrie(A)............ -- 10/24/01 -- 189 -- 189
David Herman(A)............ -- 10/28/01 -- 155 -- 155
Kent Keish(A).............. -- 12/11/01 -- 250 -- 250
Michael Montanino(A)....... -- 10/31/98 200 -- -- 200
Max Roberts(A)............. -- 03/01/07 -- 200 -- 200
Jeffery Rusinow(C)(A)...... -- 06/15/98 200 -- 200(C) 0
Felix Smith(A)............. -- 07/31/97 -- 350 -- 350
David Suliteanu(A)......... -- 09/09/01 -- 250 -- 250
Myron E. Ullman,
III(A)(B)................... -- 11/01/18 600 -- -- 600
Michael Wirkkala(A)........ -- 12/11/01 -- 125 -- 125
------------
NOTES:
(A) The listed loans were made in connection with certain housing and/or
relocation activities.
(B) Mr. Ullman's additional loan relates to his designation as purchaser of
certain shares of Macy Common Stock and bears interest at a rate of 8.25%
per annum. This loan is due on the earlier of December 18, 1995 or the date
on which employment shall cease or terminate for any reason.
(C) Loan was fully paid on August 27, 1991.
(D) Loan was fully paid on January 4, 1993.
(E) Mr. Chinni's loan for $270,000 was fully satisfied in fiscal 1994. The
$400,000 additional loan is due by March 1, 2004.
(F) Loan was fully paid on September 14, 1993.
(G) Loan was forgiven in July 1994.
(H) Mr. Eugene's loan will be repaid from the proceeds of the sale of his
residence, which is currently being marketed.
39
SCHEDULE V
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE V--PROPERTY AND EQUIPMENT
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------------------------------------- ---------- --------- ----------- ------------- ----------
BALANCE AT OTHER CHANGES BALANCE AT
BEGINNING ADDITIONS ADD (DEDUCT) END
CLASSIFICATION OF PERIOD AT COST RETIREMENTS DESCRIBE OF PERIOD
------------------------------------------- ---------- --------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
52 weeks ended July 30, 1994:
Land...................................... $ 417,072 $ -- $ (12,761)(3) $ -- $ 404,311
Buildings and improvements on owned
properties.............................. 1,521,521 6,806(1) (5,909)(2) 18(4) 1,465,212
(57,224)(3)
Buildings and improvements on leased
properties.............................. 463,602 9,564(1) (837)(2) 17(4) 633,022
(11,491)(3) 172,167(5)
Fixtures and equipment.................... 922,579 92,569(1) (140,755)(2) 9,389(4) 866,154
(34,864)(3) 17,236(5)
Construction in progress.................. 99,267 143,070)(1) (216)(3) (9,424)(4) 123,758
(108,939
Capitalized leases........................ 82,515 32,793 (3,559)(2) -- 111,145
(604)(3)
Leasehold values.......................... 19,210 -- -- 1,729(5) 20,939
---------- --------- ----------- ------------- ----------
$3,525,766 $ 175,863 $(268,220) $ 191,132 $3,624,541
---------- --------- ----------- ------------- ----------
---------- --------- ----------- ------------- ----------
52 weeks ended July 31, 1993:
Land...................................... $ 419,399 $ 346(1) $ (2,673)(3) $ -- $ 417,072
Buildings and improvements on owned
properties.............................. 1,519,722 11,107(1) (6,601)(2) (1,210)(4) 1,521,521
(1,497)(3)
Buildings and improvements on leased
properties.............................. 449,656 76,151(1) (6,859)(2) 2,780(4) 463,602
(58,126)(3)
Fixtures and equipment.................... 916,249 109,318(1) (93,629)(2) 8,995(4) 922,579
(18,354)(3)
Construction in progress.................. 195,257 113,913)(1) (2,416)(3) (10,565)(4) 99,267
(196,922
Capitalized leases........................ 63,704 21,850 (171)(2) -- 82,515
(2,868)(3)
Leasehold values.......................... 22,067 -- (2,857) -- 19,210
---------- --------- ----------- ------------- ----------
$3,586,054 $ 135,763 $(196,051) $ 0 $3,525,766
---------- --------- ----------- ------------- ----------
---------- --------- ----------- ------------- ----------
53 weeks ended August 1, 1992:
Land...................................... $ 428,937 $ 164(1) $ (9,685)(3) $ (17)(4) $ 419,399
Buildings and improvements on owned
properties.............................. 1,572,326 14,191(1) (4,711)(2) (4,667)(4) 1,519,722
(57,417)(3)
Buildings and improvements on leased
properties.............................. 421,979 25,519(1) (2,327)(2) 42,937(4) 449,656
(38,452)(3)
Fixtures and equipment.................... 886,029 162,346(1) (62,416)(2) (42,759)(4) 916,249
(26,951)(3)
Construction in progress.................. 146,752 246,219 -- 4,506(4) 195,257
(202,220)(1)
Capitalized leases........................ 34,903 29,993 (1,192)(3) -- 63,704
Leasehold values.......................... 24,083 -- (2,016)(3) -- 22,067
---------- --------- ----------- ------------- ----------
$3,515,009 $ 276,212 $(205,167) $ 0 $3,586,054
---------- --------- ----------- ------------- ----------
---------- --------- ----------- ------------- ----------
See notes to Schedule V--Property and Equipment
40
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO SCHEDULE V--PROPERTY AND EQUIPMENT
NOTES:
(1) Completed projects transferred to appropriate property and equipment
captions.
(2) Fully depreciated assets.
(3) Assets sold or scrapped, including assets in stores closed in the three
fiscal years and write-offs due to earthquake damage and lease cancellations
in 1994.
(4) Transfers between fixed asset captions.
(5) Property and equipment was increased due to the remeasurement of assets
required upon adoption of FASB 109, "Accounting for Income Taxes." (See Note
18 of Notes to Consolidated Financial Statements.)
(6) Depreciation is computed on a straight-line method using the following rates
on an annual basis:
(a) Buildings on owned properties:
Main store buildings............................................... 2% to 2.5%
Main warehouses.................................................... 2% to 5%
Building equipment................................................. 5%
Site improvements.................................................. 10%
(b) Buildings, building improvements, and equipment on leased properties and
leasehold values:
Amortized over terms of lease, or at the rates stated in (a) above if those
rates result in amortization over a shorter period.
(c) Capitalized leases, recorded in accordance with the provisions of
Statement of Financial Accounting Standards No. 13, are amortized over
the respective lease terms.
(d) Store fixtures and equipment--primarily 10% to 33-1/3%.
41
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------------------------------- ---------- ---------- ----------- ------------- ----------
ADDITIONS
BALANCE AT CHARGED TO OTHER CHANGES BALANCE AT
BEGINNING COSTS AND ADD (DEDUCT) END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE PERIOD
-------------------------------- ---------- ---------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
52 weeks ended July 30, 1994:
Buildings and improvements on
owned properties............ $ 455,626 $ 69,279 $ (21,755)(1) $ 497,241
(5,909)(2)
Buildings and improvements on
leased properties........... 108,826 38,432 (341)(1) $ 10(3) 146,090
(837)(2)
Fixtures and equipment........ 489,224 146,410 (18,236)(1) (3,921)(3) 472,722
(140,755)(2)
Capitalized leases............ 29,397 13,001 (356)(1) 3,911(3) 42,394
(3,559)(2)
Leasehold values.............. 6,866 1,126 (132)(1) 7,860
---------- ---------- ----------- ------------- ----------
$1,089,939 $268,248 $ (191,880) $ 0 $1,166,307
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
52 weeks ended July 31, 1993:
Buildings and improvements on
owned properties............ $ 393,769 $ 70,181 $ (389)(1) $ (1,334)(3) $455,626
(6,601)(2)
Buildings and improvements on
leased properties........... 106,825 25,827 (16,559)(1) (408)(3) 108,826
(6,859)(2)
Fixtures and equipment........ 446,345 141,917 (7,151)(1) 1,742(3) 489,224
(93,629)(2)
Capitalized leases............ 18,835 11,482 (749)(1) 29,397
(171)
Leasehold values.............. $ 6,620 1,103 (857)(1) -- 6,866
---------- ---------- ----------- ------------- ----------
972,394 $250,510 $ (132,965) $ 0 $1,089,939
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
53 weeks ended August 1, 1992:
Buildings and improvements on
owned properties............ $ 342,255 $ 71,859 $ (16,424)(1) $ 790(3) $ 393,769
(4,711)(2)
Buildings and improvements on
leased properties........... 80,173 25,143 (6,049)(1) 9,885(3) 106,825
(2,327)(2)
Fixtures and equipment........ 395,788 139,383 (15,735)(1) (10,675)(3) 446,345
(62,416)(2)
Capitalized leases............ 11,490 7,924 (579)(1) -- 18,835
Leasehold values.............. 6,020 1,154 (554)(1) -- 6,620
---------- ---------- ----------- ------------- ----------
$ 835,726 $245,463 $ (108,795) $ 0 $ 972,394
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
------------
NOTES:
(1) Assets sold or scrapped including assets in stores closed in the three
fiscal years and write-offs due to earthquake damage and lease cancellations
in 1994.
(2) Fully depreciated assets.
(3) Transfer between reserve captions.
42
SCHEDULE IX
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------------------------------------- ---------- -------- ----------- ----------- -----------
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE SHORT-TERM END OF INTEREST DURING THE DURING THE RATE DURING
BORROWINGS PERIOD RATE PERIOD PERIOD THE PERIOD
-------------------------------------- ---------- -------- ----------- ----------- -----------
(1) (2)
52 weeks ended July 30, 1994:
Debtor-in-Possession Facility(3).... $ -- -- $ 306,300 $62,654 6.00%
Macy Revolving Credit Facility(4)... $ -- -- $ -- $-- --
52 weeks ended July 31, 1993:
Debtor-in-Possession Facility(3).... $ 65,900 6.67% $ 290,000 $58,563 6.57%
Macy Revolving Credit Facility(4)... $ -- -- $ -- $-- --
52 weeks ended August 1, 1992:
Debtor-in-Possession Facility(3).... $ -- -- $ -- $-- --
Macy Revolving Credit Facility(4)... $ -- -- $ -- $-- --
------------
NOTES:
(1) Average amount outstanding during the period is computed by dividing the
total of weekly outstanding principal balances by the weeks during the
period.
(2) Weighted average interest rate during the period is computed by dividing the
actual short-term interest expense by the average short-term debt
outstanding during the period.
(3) The Post-Petition Credit Agreement dated as of January 27, 1992 was amended
and restated on August 12, 1993. The agreement provides a working capital
facility, subject to certain sublimits, not to exceed $550,000,000 (amended
from $600,000,000). On August 26, 1994, the maximum working capital facility
was reduced at Macy's option by $100,000,000 to $450,000,000. The Amended
and Restated Post-Petition Credit Agreement terminates upon the earlier of
(1) August 1, 1995 or (2) the substantial consummation of a plan of
reorganization of Macy's or certain of its subsidiaries. Macy's pays
interest at a rate per annum equal to 1.5% plus the alternative Base Rate or
at Macy's option, at a rate of 2.5% per annum in excess of the reserve
adjusted London Interbank Offered Rate.
(4) The original Macy Bank Agreement dated as of July 10, 1986 was amended and
restated as of April 27, 1988. The Macy Revolving Credit Facility reflects
the terms of the amended and restated Macy Bank Agreement which provided for
a six-year revolving working capital line of credit, subject to certain
sublimits, not to exceed $587,700,000. Macy's paid the banks interest on the
average daily principal amount outstanding under the revolving credit
agreement at a rate per annum equal to 1.25% plus the Base Rate or, at
Macy's option, 2.25% plus the Eurodollar Rate. Macy's is in default of the
Macy Bank Agreement as a result of its Chapter 11 cases. Therefore the
amount outstanding under the revolving credit agreement is included in
Obligations Subject to Settlement Under Reorganization Proceedings.
43
R.H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
COLUMN B
--------------------------------
CHARGED TO COSTS AND EXPENSES
--------------------------------
YEAR ENDED
--------------------------------
COLUMN A AUGUST
------------------------------------------------------------ JULY 30, JULY 31, 1,
ITEM 1994 1993 1992
------------------------------------------------------------ -------- -------- --------
(52 (52 (52
WEEKS) WEEKS) WEEKS)
Depreciation of property and equipment...................... $268,248 $250,510 $245,463
-------- -------- --------
-------- -------- --------
Taxes, other than payroll and income taxes(1)............... $ 60,429 $ 61,556 $ 63,744
-------- -------- --------
-------- -------- --------
Rents....................................................... $ 98,965 $ 93,552 $100,623
-------- -------- --------
-------- -------- --------
Advertising costs........................................... $385,155 $417,029 $455,725
-------- -------- --------
-------- -------- --------
------------
NOTES:
(1) Processing taxes, liquor taxes, and import duties have all been charged to
cost of sales. They are not included herein because they are considered to
be part of the initial purchase cost of merchandise; a segregation of such
taxes is not practicable.
(2) No other required information has been presented since the amounts do not
exceed 1% of total sales as reported in the related consolidated statement
of operations.
44
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED
------------------------------------
OCTOBER 29, 1994 OCTOBER 30, 1993
---------------- ----------------
(13 WEEKS)
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE)
Net retail sales (including licensed departments)
(Note 9)......................................... $1,480,007 $1,438,987
Less:
Cost of goods sold, including occupancy and buying
costs............................................ 1,045,834 1,011,971
Selling, general, and administrative expenses...... 445,251 472,115
Unusual item (Note 4).............................. 80,000 --
---------------- ----------------
Loss from operations before interest expense and
reorganization items............................. (91,078) (45,099)
Interest expense--net (contractual interest of
$123,627 in fiscal 1995 and $121,762 in fiscal
1994) (Note 3)................................... 52,064 67,953
---------------- ----------------
Loss before reorganization items................... (143,142) (113,052)
Reorganization items--net (Note 5)................. 6,740 8,068
---------------- ----------------
Loss before income tax benefit and cumulative
effect of accounting changes..................... (149,882) (121,120)
Income tax benefit (Note 7)........................ (30,449) (3,198)
Loss before cumulative effect of accounting
changes.......................................... (119,433) (117,922)
---------------- ----------------
Cumulative effect of accounting changes--net (Notes
7 and 8)......................................... (10,657) 185,340
Net earnings/(loss)................................ $ (130,090) $ 67,418
---------------- ----------------
---------------- ----------------
Primary earnings/(loss) per share of common stock
(Note 10):
Loss before cumulative effect of accounting
changes.......................................... $ (73.86) $ (72.93)
Cumulative effect of accounting chances--net....... (6.59) 114.62
---------------- ----------------
Net earnings/(loss)................................ $ (80.45) $ 41.69
---------------- ----------------
---------------- ----------------
Fully diluted earnings per share (Note 10):
Loss before cumulative effect of accounting
changes.......................................... $ (8.07)
Cumulative effect of accounting changes--net....... 12.68
----------------
Net earnings/(loss)................................ $ 4.61
----------------
----------------
See Notes to Condensed Consolidated Financial Statements.
45
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
OCTOBER 29, OCTOBER 30, JULY 30,
1994 1993 1994
------------ ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 34,529 $ 43,240 $ 112,677
Restricted cash............................... 54,870 38,868 44,393
Merchandise inventories (Note 6).............. 1,524,576 1,574,601 1,244,253
Other current assets.......................... 192,083 201,686 184,911
------------ ------------ ------------
Total Current Assets........................ 1,806,058 1,858,395 1,586,234
Other Assets.................................... 85,908 125,905 99,318
Property and Equipment (including capitalized
leases), at cost, less accumulated
depreciation of $1,214,096, $1,119,371 and
$1,166,307.................................... 2,419,036 2,583,200 2,458,234
------------ ------------ ------------
$ 4,311,002 $ 4,567,500 $ 4,143,786
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND DEFICIENCY IN NET ASSETS
Current Liabilities:
Short-term borrowings--net (Note 3)........... $ 133,072 $ 244,362 $ --
Accounts payable and accrued liabilities (Note
3).......................................... 969,668 1,001,458 841,167
Current income taxes (Note 7)................. 589 179 510
Current portion of obligations under
capitalized leases (Note 2)................. 14,529 13,274 15,222
------------ ------------ ------------
Total Current Liabilities................... 1,117,858 1,259,273 856,899
Deferred Taxes (Note 7)......................... 2,484 20,520 18,720
Other Long-Term Liabilities (Note 3)............ 145,214 125,048 128,435
Obligations Under Capitalized Leases (Note 3)... 40,884 25,042 44,240
Obligations Subject to Settlement Under
Reorganization Proceedings (Note 3)........... 5,678,970 5,634,890 5,639,810
Deficiency in Net Assets:
Common stock.................................. 1,750 1,750 1,750
Deficit....................................... (2,674,825) (2,497,690) (2,544,735)
Less:
Treasury shares, at cost.................... (1,333) (1,333) (1,333)
------------ ------------ ------------
Deficiency in Net Assets.................. (2,674,408) (2,497,273) (2,544,318)
------------ ------------ ------------
$ 4,311,002 $ 4,567,500 $ 4,143,786
------------ ------------ ------------
------------ ------------ ------------
See Notes to Condensed Consolidated Financial Statements.
46
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE QUARTER ENDED
--------------------------
OCTOBER 29, OCTOBER 30,
1994 1993
----------- -----------
(13 WEEKS)
(DOLLARS IN THOUSANDS)
Operating Activities:
Net earnings/(loss)........................................ $(130,090) $ 67,418
Adjustments to reconcile net earnings/(loss) to net cash
used for operating activities:
Items not requiring the outlay of cash:
Depreciation and amortization........................ 71,962 75,491
Interest accrued on pre-petition secured debt........ 41,175 53,191
Non-cash interest.................................... 7,417 10,337
Accrued postretirement benefits...................... 6,507 6,500
Cumulative effect of accounting changes--net......... 10,657 (185,340)
Deferred taxes....................................... (15,893) --
Increase in working capital (excluding cash and cash
equivalents and current portion of debt instruments) (169,392) (185,571)
Decrease/(increase) in working capital due to
reorganization proceedings......................... (7,701) 6,186
Other................................................ 7,473 556
----------- -----------
Net cash used for operating activities............... (177,885) (151,232)
----------- -----------
Investing Activities:
Additions to property and equipment.................. (30,099) (22,039)
----------- -----------
Net cash used for investing activities............... (30,099) (22,039)
----------- -----------
Financing Activities:
Reduction in obligations under capitalized leases.... (5,064) (4,486)
Increase in short-term borrowings.................... 134,900 184,300
Cost of short-term borrowings........................ -- (4,836)
----------- -----------
Net cash provided by financing activities............ 129,836 174,978
----------- -----------
Increase/(Decrease) In Cash and Cash Equivalents....... (78,148) 1,707
Cash and Cash Equivalents, Beginning of Period......... 112,677 41,533
----------- -----------
Cash and Cash Equivalents, End of Period............... $ 34,529 $ 43,240
----------- -----------
----------- -----------
SUPPLEMENTAL INFORMATION
Amounts in this statement of cash flows are presented on a cash basis and
may differ from those in other sections of this report.
Interest amounts paid (excluding interest expense capitalized during
construction) for the quarters ended October 29, 1994 and October 30, 1993 were
$2,818,000 and $4,549,000, respectively.
Income taxes paid net of tax refunds received for the quarters ended October
29, 1994 and October 30, 1993 were $170,000 and $450,000, respectively.
See Notes to Condensed Consolidated Financial Statements.
47
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
1. The accompanying Notes to Condensed Consolidated Financial Statements
should be read in conjunction with the Notes to Consolidated Financial
Statements included in the annual report on Form 10-K for the fiscal year ended
July 30, 1994 for R.H. Macy & Co., Inc. ("Macy's") and its consolidated
subsidiaries filed with the Commission. In the opinion of management, all
adjustments necessary for a fair presentation of the results of operations for
the interim period have been included. Because of the seasonal nature of the
business, results for the interim period are not necessarily indicative of a
full year's operations.
2. On July 14, 1994, the respective Boards of Directors of Macy's and
Federated Department Stores, Inc. ("Federated") announced that they had reached
an agreement in principle on a merger which would be effected as part of a joint
plan of reorganization of Macy's and all subsidiaries that filed a Chapter 11
case ("Macy Debtors") in the United States Bankruptcy Court for the Southern
District of New York ("Bankruptcy Court"). (Federated's wholly-owned subsidiary,
Federated Noteholding Corporation ("FNC"), is one of the largest secured
creditors of the Macy Debtors.) On October 21, 1994, the Macy Debtors and
Federated (collectively, the "Plan Proponents") filed a Second Amended Joint
Plan of Reorganization of R.H. Macy & Co., Inc. and Certain of its Subsidiaries
in the Bankruptcy Court, having previously filed versions thereof with the
Bankruptcy Court on July 29, 1994 and August 31, 1994, respectively. The Second
Amended Joint Plan was further modified on December 7, 1994 (as modified, the
"Plan") and confirmed by order of the Bankruptcy Court entered on December 8,
1994. In addition, Macy's and Federated executed and delivered an Agreement and
Plan of Merger, dated as of August 16, 1994 (the "Merger Agreement"), providing
for the merger of Federated with and into Macy's (the "Merger"), with Macy's
being the surviving corporation (the "Combined Company") and being renamed
"Federated Department Stores, Inc." upon the consummation of the Merger. The
execution and delivery of the Merger Agreement and certain provisions thereof
were approved by the Bankruptcy Court on September 8, 1994.
A principal element of the Plan is the Merger. Macy's and Federated
presently intend to seek to cause the effective time of the Merger (the
"Effective Time of the Merger"), the date on which the Plan becomes effective
(the "Effective Date of the Plan") and substantial consummation of the Plan to
occur in December 1994. The Effective Time of the Merger and the Effective Date
of the Plan will occur simultaneously. After consummation of the Merger, the
Combined Company will operate the existing businesses of Macy's and Federated.
Consistent with the structure of the Merger Agreement, the transaction is to be
accounted for as a reverse acquisition in which Federated is the acquirer for
accounting purposes.
In addition to the Merger, the Plan provides for, among other things: (i)
the cancellation of all existing capital stock and other equity interests of
Macy's without payment of any consideration thereof; (ii) the cancellation of
certain indebtedness (including Macy's three issues of subordinated debentures
and other unsecured indebtedness) and the discharge of related claims against
the Macy Debtors in exchange for cash, new indebtedness of the Combined Company
and certain of its subsidiaries, or new equity interests of the Combined
Company; (iii) the discharge of other prepetition claims against the Macy
Debtors; (iv) the settlement of certain contingent claims and releases of
certain claims of the Macy Debtors and other persons or entities; and (v) the
48
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
assumption, assumption and assignment, or rejection of each executory contract
and unexpired lease to which any Macy Debtor is a party. The Plan provides for
(a) the distribution of cash to unaffiliated third parties in an estimated
aggregate amount of approximately $0.4 billion, (b) the issuance, reinstatement,
or assumption of indebtedness to unaffiliated third parties in an estimated
aggregate amount of approximately $1.9 billion, and (c) the issuance to
unaffiliated third parties of common stock, par value $0.01 per share, of the
Combined Company ("New Combined Company Common Stock") and warrants to purchase
shares of New Combined Company Common Stock ("New Warrants") with an assumed
aggregate value, solely for purposes of developing the Plan, of approximately
$1.2 billion. There can be no assurance, however, that the New Combined Company
Common Stock will have the value assumed for purposes of developing the Plan.
The assumed value of the New Combined Company Common Stock and the New Warrants
is the value assumed and contained in the Plan and does not purport to represent
an estimate of the actual market value of the New Combined Company Common Stock
or the value of the New Warrants.
There are a number of procedural and substantive requirements to the Plan
becoming effective under the Bankruptcy Code and certain conditions to such
effectiveness set forth in the Plan. Among others, the Plan becoming effective
is conditioned upon the satisfaction or waiver of the following conditions: (i)
the aggregate amounts of specified categories of claims against the Macy
Debtors, including certain cash payment claims, having been estimated or
determined by Bankruptcy Court orders (to the extent the Bankruptcy Court has
jurisdiction) that are not subject to any stay in amounts that do not exceed the
Macy Debtors' estimated aggregate amounts for each such category of claims used
in connection with the development of the Plan (which condition has been waived
by Federated); (ii) the order of the Bankruptcy Court confirming the Plan (the
"Confirmation Order") being reasonably acceptable in form and substance to each
of Federated and Macy's, which order was signed and entered by the Bankruptcy
Court on December 8, 1994; and (iii) the New Combined Company Common Stock being
authorized for listing on the New York Stock Exchange, Inc. (the "NYSE") upon
official notice of issuance. Additionally, there are certain conditions that
must be satisfied for the Plan to become effective. There can be no assurance
that these conditions will be satisfied.
The obligations of Federated and Macy's to consummate the Merger are
conditioned upon, among other things: (i) the absence of any pending injunction,
order, or decree of any governmental authority restraining the Merger or the
consummation of the transactions contemplated by the Plan; (ii) the absence of
any law promulgated or enacted restraining the Merger or the transactions
contemplated by the Plan; (iii) all consents and approvals of any governmental
authority to the Merger having been obtained and remaining in effect at the
Effective Time of the Merger, other than any that, if not obtained, would not
have a material adverse effect on the business, financial condition, or results
of operations of the Combined Company and its subsidiaries, taken as a whole, or
any antitrust authorizations not obtained as a result of Federated's failure to
divest, hold, separate, or take other action (or its failure to agree to do any
thereof) with respect to its or the Combined Company's assets to the extent
required by the Merger Agreement; (iv) all other consents, approvals, and
authorizations required to be obtained by either party having been obtained and
remaining in effect at the Effective Time of the Merger, other than any that, if
not obtained, would not have a material adverse effect on the business,
financial condition, or results of
49
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
operations of the Combined Company and its subsidiaries, taken as a whole, or
any consents and approvals of Federated's institutional lenders; (v) the
adoption by Federated's stockholders of the Merger Agreement (which occurred on
November 29, 1994); (vi) a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), for the shares of New Combined Company
Stock to be issuable in connection with the Merger having been declared
effective by the Securities and Exchange Commission (which occurred on October
21, 1994) and not subject to any stop order or proceedings seeking the same;
(vii) the shares of the New Combined Company Common Stock having been authorized
for listing on the NYSE upon official notice; and (viii) the Bankruptcy Court
having entered the Confirmation Order (which occurred on December 8, 1994), at
least 10 days having passed since entry of such order and it not having been
subject to any stay, and all conditions to the Effective Date of the Plan having
been satisfied or duly waived.
Accordingly, notwithstanding confirmation of the Plan by the Bankruptcy
Court, the Plan and Merger remain subject to certain other conditions, some of
which are beyond Macy's's control.
3. On January 27, 1992, Macy's, together with nine of its subsidiaries,
filed voluntary petitions for reorganization under chapter 11 ("Chapter 11"),
title II of the United States Code, as amended (the "Bankruptcy Code") in the
Bankruptcy Court. On January 31, 1992, seventy-eight additional subsidiaries
each commenced a Chapter 11 case in the Bankruptcy Court. The Macy Debtors are
currently operating their respective businesses as debtors-in-possession. Two
statutory creditor committees have been appointed. The cases of Macy's's
subsidiaries that filed such petitions are being jointly administered with the
case of Macy's for procedural purposes only.
The Condensed Consolidated Financial Statements of Macy's have been prepared
in accordance with generally accepted accounting principles applicable to a
going concern, which assumes continuity of operations in the ordinary course of
business. Additionally, the amounts reported on the Condensed Consolidated
Statement of Financial Condition could materially change in the future because
of the Plan, since such reported amounts do not give effect to adjustments to
the carrying value of the underlying assets or amounts of liabilities that may
ultimately result. As a result of the Chapter 11 cases and circumstances
relating to this event, including Macy's leveraged debt structure, and operating
losses and economic conditions, such realization of assets and liquidation of
liabilities are subject to significant uncertainty.
Generally, actions to enforce or otherwise effect the payment of
pre-petition liabilities are stayed while the Macy Debtors are under the
protection of the Bankruptcy Code. These liabilities are being resolved as part
of the reorganization proceedings. Additional liabilities subject to similar
resolution may arise as a result of claims filed by parties related to the
rejection of any executory contracts, including unexpired leases, and from the
Bankruptcy Court's allowance for contingent and other disputed claims.
On February 13, 1992, the Bankruptcy Court entered a final order approving a
debtor-in-possession financing arrangement under a Revolving Credit and Guaranty
Agreement, dated as of January 27, 1992 (which, as amended, through March 31,
1993, is referred to herein as the "Post-Petition Credit Agreement"), among
Macy's, as Borrower, each of the other Macy Debtors, as guarantors, Chemical
Bank, as administrative agent, Bankers Trust Company, as co-agent, and
50
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
other financial institutions parties thereto that established a working capital
facility consisting of revolving credit loans and letters of credit.
On August 12, 1993, the Post-Petition Credit Agreement was amended and
restated on similar terms, as approved by a Bankruptcy Court order dated
September 8, 1993, pursuant to an Amended and Restated Credit and Guaranty
Agreement, among Macy's, as Borrower, each of the other Macy Debtors, as
guarantors, Chemical Bank, as administrative agent, Bankers Trust Company, as
co-agent, and the other financial institutions party thereto (as subsequently
amended, the "Amended and Restated Post-Petition Credit Agreement"). Under the
Amended and Restated Post-Petition Credit Agreement, the working capital
facility (the "Working Capital Facility"), consisting of revolving credit loans
and letters of credit, is in the aggregate maximum amount of $550,000,000. On
August 26, 1994, the maximum working capital facility was reduced at Macy's
option by $100,000,000 to $450,000,000 and on October 28, 1994, the maximum
working capital facility was further reduced at Macy's option by $50,000,000 to
$400,000,000 due to lower projected borrowing requirements. The Working Capital
Facility may be used to fund working capital, inventory purchases, capital
expenditures, and for other general corporate purposes of the Macy Debtors.
Borrowings under the Amended and Restated Post-Petition Credit Agreement are
conditioned upon, among other things, satisfaction of certain Borrowing Base (as
defined therein) requirements, and compliance with restrictions on capital
expenditures and certain other payments, as well as covenants relating to EBITDA
(earnings before interest, taxes, depreciation and amortization as defined in
the Amended and Restated Post-Petition Credit Agreement). The Amended and
Restated Post-Petition Credit Agreement terminates upon the earlier of (i)
August 1, 1995 or (ii) the substantial consummation of a plan of reorganization
of the Company or certain of its subsidiaries.
Claims in respect of indebtedness incurred by the Macy Debtors under the
Amended and Restated Post-Petition Credit Agreement are afforded superpriority
administrative expense claim status pursuant to applicable provisions of the
Bankruptcy Code.
Substantially all of Macy's pre-petition short and long-term debt at October
29, 1994 is in default of the terms of the applicable loan agreements and is
subject to settlement under the reorganization process. For financial reporting
purposes, these liabilities, which are being resolved as part of the Chapter 11
process, have been segregated and reclassified as "Obligations Subject to
Settlement Under Reorganization Proceedings." Payment of certain pre-petition
liabilities that were approved for payment by the Bankruptcy Court or are
pending approval have been included in the appropriate liability captions.
51
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
The estimated obligations at October 29, 1994 that are subject to settlement
as part of a plan of reorganization are listed below.
Accounts payable and accrued liabilities.................. $ 705,073,000
Accrued interest on long-term debt........................ 521,716,000
Secured debt.............................................. 2,320,632,000
Unsecured debt............................................ 1,265,611,000
Obligations under capitalized leases...................... 10,017,000
Other long-term liabilities............................... 218,606,000
Convertible preferred stock (redeemable).................. 637,315,000
--------------
$5,678,970,000
--------------
--------------
Generally, interest on pre-petition debt does not accrue after the
commencement of the Chapter 11 case. If the debts are secured by property with a
value that is greater than the amount of the debt, interest may accrue up to the
value of the collateral. Macy's was accruing interest on secured debt pending
obtaining an estimate of the fair market value of the property securing such
debt. Following negotiations with representatives of the various secured lenders
and the development of the Plan in fiscal 1994, Macy's revised estimates for the
post-petition accrued interest that would be paid upon confirmation of the Plan.
Accordingly, the accrual of interest expense on certain secured debt instruments
ceased. Interest expense on certain other pre-petition secured debt continues to
be accrued but remains subject to settlement. Such accrual of interest on
secured indebtedness is being recorded at the interest rates applicable under
the respective loan agreements without regard to default and penalty provisions
contained therein. Macy's has ceased accruing interest expense on unsecured
debt. Contractual interest not recorded on such unsecured debt aggregated
$53,809,000 in each of the fiscal quarters ended October 29, 1994 and October
30, 1993. Contractual interest not recorded on secured debt aggregated
$17,754,000 for the quarter ended October 29, 1994.
Numerous claims have been asserted in respect of various pre-petition
obligations, which claims individually or in the aggregate may be material and
may not currently be reflected as obligations subject to settlement. The last
day on which these claims may be filed against the Macy Debtors, with certain
exceptions, was December 15, 1992, and over 17,000 claims aggregating an amount
substantially in excess of the amounts reported in the Condensed Consolidated
Statement of Financial Condition under the caption "Obligations Subject to
Settlement Under Reorganization Proceedings" have been filed as of November 26,
1994. Based on an ongoing review and reconciliation of claims, Macy's believes
that a number of these claims are duplicative of an/or supersede claims
previously asserted. In addition, claims have been filed which do not state a
specific claim amount or as to which a specific claim amount is not readily
determinable. Pursuant to Bankruptcy Court orders entered in 1993, certain exact
duplicate claims and duplicate bondholder claims were expunged. In March 1994,
the Bankruptcy Court ordered the expunging and disallowing of certain proofs of
claims which had been filed after the December 15, 1992 bar date. Claims will
continue to be reviewed and analyzed by Macy's as part of the claims
reconciliation process and objections filed as required. As this review process
continues, the aggregate amount
52
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
included in the estimate of petition date obligations subject to settlement may
increase or otherwise be adjusted to reflect the ongoing analyses of claims
filed and the aggregate amounts which may be allowed in respect thereof. Macy's,
at this time, cannot make a prediction as to the aggregate amount of claims
allowed or the ultimate treatment of such allowed claims under a plan of
reorganization.
Commencing on the Chapter 11 filing date, Macy's ceased accruing dividends
on its Convertible Preferred Stock (redeemable) (referred to in these Condensed
Consolidated Financial Statements as "Preferred Stock") and has included the
Preferred Stock and the cumulative accrued but unpaid dividends prior to the
filing date on such stock on "Obligations Subject to Settlement Under
Reorganization Proceedings". Under applicable bankruptcy law, the holders of the
Preferred Stock of Macy's are not considered creditors. Under the Plan, all
common and Preferred Stock of Macy's will be cancelled and no distributions will
be made on account of such equity interests.
4. In October 1994, Macy's recorded an unusual charge of $80,000,000
relating to a portion of the severance and related costs resulting from the
proposed Merger (see Note 2). These severance and other costs are primarily
related to the terminations associated with the elimination of Macy's corporate
offices (including the positions of chief executive officer and chief operating
officer) and certain store group executives.
5. The reorganization items--net occurring as a result of the Chapter 11
proceedings have been segregated from operations. The major components of the
reorganization items--net are:
FOR THE QUARTER ENDED
--------------------------------
OCTOBER 29, OCTOBER 30,
1994 1993
-------------- --------------
Professional fees and other expenses directly
related to the bankruptcy................... $ 7,961,000 $8,534,000
Less: Interest earned on accumulated cash
resulting from the Chapter 11 proceedings... (1,221,000) (466,000)
-------------- --------------
$ 6,740,000 $8,068,000
-------------- --------------
-------------- --------------
6. The value of merchandise inventories is determined by the lower of LIFO
(last-in, first-out) cost using the retail inventory method or market for about
75% of the total inventory, and the lower of the FIFO (first-in, first-out) cost
using the retail inventory method or market for the balance of the inventory. If
inventories had been valued at the lower of FIFO cost or market, inventories
would have increased by $121,735,000, $107,563,000 and $119,235,000 at October
29, 1994, October 30, 1993 and July 30, 1994, respectively.
7. The Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" ("FASB 109") was adopted as of August 1, 1993. FASB 109
requires, in the year of adoption, an adjustment of certain assets and
liabilities that resulted from certain business combinations, such as the 1986
Acquisition. This statement requires that a deferred tax liability be recognized
for the tax effects of taxable temporary differences and deferred tax assets for
the tax
53
R. H. MACY & CO., INC.
(DEBTOR-IN-POSSESSION)
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERS ENDED OCTOBER 29, 1994 (13 WEEKS) AND
OCTOBER 30, 1993 (13 WEEKS)
(UNAUDITED)
effects of deductible temporary differences, tax credit carryforwards and
operating loss carryforwards. The adoption of FASB 109 resulted in a favorable
cumulative effect adjustment of $185,340,000. Income tax benefit for the
quarters ended October 29, 1994 and October 30, 1993 was calculated in
accordance with FASB 109.
At October 29, 1994, Macy's had a deferred tax asset of $286,742,000
representing primarily a federal income tax benefit offset by a valuation
allowance of like amount.
In September 1994, the California Franchise Tax Board approved a settlement
of approximately $17 million relating to fiscal years 1976 through 1991 which
resulted in net benefit of $14.8 million. Such benefit was recorded in the
quarter ended October 29, 1994.
On November 9, 1994, Macy's entered into a closing agreement with the
Internal Revenue Service which fixed the net operating loss carryover for
federal tax purposes at $815,146,000 through fiscal year 1993. Such closing
agreement resulted in a state tax benefit of approximately $11,200,000. Macy's
estimates that the federal net operating loss carryover will increase by
$232,000,000 for fiscal year 1994 results (with the aggregate net operating loss
carryover at July 30, 1994 of $1,047,146,000). The loss carryover will be
available to offset future taxable income through the year 2009. The ability of
the Combined Company to utilize such loss carryover is dependent upon a number
of factors. There is no expiration date on approximately $12,000,000 of the tax
credit carryforwards.
8. The Financial Accounting Standards Board No. 112, "Accounting for Post
Employment Benefits" (FASB 112"), was adopted as of July 31, 1994. FASB 112
requires Macy's to recognize, during the employees active years of service, an
obligation for post employment benefits provided to former or active employees,
after employment but before retirement. The adoption of FASB 112 resulted in an
unfavorable cumulative effect adjustment (non-cash) of $10,657,000 net of taxes.
9. Net retail sales included sales from licensed departments of $18,877,000
and $15,159,000 for the quarters ended October 29, 1994 and October 30, 1993.
10. Primary earnings/(loss) per share of common stock attributable to common
stockholders was computed based upon the weighted average number of shares
outstanding during the period. Fully diluted earnings per share of common stock
assumed the conversion of Preferred Stock. The effect of the assumed conversion
of the Preferred Stock on the amounts per share for the quarter ended October
29, 1994 is antidilutive and therefore only primary earnings/(loss) per share of
common stock is presented.
11. In November 1994, Macy's and Federated announced plans to discontinue
operations of the I. Magnin retail store group. Four or more I. Magnin locations
are expected to be converted to Macy's or Bullock's stores. Options for the
remaining locations will be explored. The costs associated with the
discontinuation of the I. Magnin operations have not been estimated at this
time.
12. Certain reclassifications have been made to the October 30, 1993
condensed consolidated financial statements to conform with classifications used
at October 29, 1994.
54