================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 29, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO _______________________
COMMISSION FILE NUMBER 1-8765
BROADWAY STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-0457907
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3880 NORTH MISSION ROAD
LOS ANGELES, CALIFORNIA 90031
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(213) 227-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
Indicated by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes X . No___.
---
As of September 5, 1995, approximately 46,052,274 shares of the registrant's
common stock were outstanding.
================================================================================
BROADWAY STORES, INC.
FORM 10-Q INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
Management's Discussion and Analysis of Financial Condition and Results of Operations... 1
Consolidated Statement of Earnings...................................................... 4
Consolidated Balance Sheet.............................................................. 5
Consolidated Statement of Cash Flows.................................................... 6
Notes to Consolidated Financial Statements.............................................. 7
PART II. OTHER INFORMATION.............................................................. 8
SIGNATURES............................................................................... 11
BROADWAY STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The discussion of results of operations that follows is based upon the
Company's consolidated financial statements set forth on pages 4 to 7. The
discussion of liquidity and capital resources is based upon the Company's
current financial position.
RECENT DEVELOPMENTS
As discussed in Item 5 of this report, the Company has entered into
agreements providing for the acquisition of the Company by Federated
Department Stores, Inc. ("Federated") in exchange for approximately 12.7
million shares of Federated's common stock, certain amendments to the
Company's working capital facility, and certain other matters.
RESULTS OF OPERATIONS
Sales for the current quarter and year-to-date period ended July 29, 1995
were $460.6 million and $884.6 million compared to $457.0 million and $888.1
million in the comparable prior year periods. Disappointing sales results
continue to reflect difficulties in the California economy and weak demand in
the women's apparel business. Excluding sales of stores which were temporarily
closed in 1994 as a result of the Northridge earthquake, sales, on a same
store basis, decreased 1.2% and 4.0% for the current quarter and year-to-date
periods.
The Company reported losses before interest and taxes of $6.1 million and
$18.2 million in the current quarter and year-to-date periods compared to
earnings before interest and taxes of $10.6 million and $15.1 million in the
comparable prior year periods. Net losses increased to $37.4 million and
$80.7 million, or losses of $0.80 and $1.72 per share, in the current quarter
and year-to-date periods compared to losses of $12.9 million and $30.9
million, or losses of $0.28 and $0.66 per share, in the comparable prior year
periods. The current year results reflect the impact of the continuing
promotional environment on gross margin and selling expenses together with
increases in interest costs.
Cost of goods sold including occupancy and buying costs was $351.8
million, 76.4% of sales and $676.6 million, 76.5% of sales in the current
quarter and year-to-date periods compared to $338.3 million, 74.0% of sales,
and $657.7 million, 74.1% of sales in the comparable prior year periods. The
deterioration reflects an increase in the level of markdowns taken and the
impact of higher depreciation and increased other occupancy costs.
Selling, general and administrative expenses were $138.6 million, 30.1%
of sales and $274.5 million, 31.0% of sales in the current quarter and year-
to-date periods compared to $130.5 million, 28.6% of sales and $260.2 million,
29.3% of sales in the comparable prior year periods. The expense increase
relates largely to higher sales promotion costs incurred in the current year.
Finance charge revenue increased to $23.7 million, 5.1% of sales and
$48.3 million, 5.5% of sales in the current quarter and year-to-date periods,
from $22.4 million, 4.9% of sales, and $44.9
1
million, 5.1% of sales in the comparable prior year periods. The current year
improvements continue to reflect the positive impact of the fall 1993 payment
terms changes which reduced the minimum monthly payment requirements on the
Company's short term revolving charge accounts. The improvements in credit
revenue significantly outweighed the related increases in bad debt costs
experienced on higher customer receivables balances outstanding.
Interest expense increased $7.9 million and $16.5 million to $31.4
million and $62.5 million in the current quarter and year-to-date periods
compared to interest expense of $23.5 million and $46.0 million in the
comparable prior year periods. The increase was due to both higher average
borrowings and increased average interest rates.
Limitations on the Company's ability to record income tax benefits for
net operating loss carry forwards for financial statement purposes resulted in
no income tax benefit being recognized in the current and prior year periods.
Due to the seasonal nature of the retail business wherein a significant
portion of sales for the year are generated in the fourth quarter, the Company
follows the practice of allocating certain fixed buying and occupancy costs
among quarters within the fiscal year to match these costs with the associated
seasonal sales revenue. Operating results, on a pre-tax basis, reflect the
reallocation of such buying and occupancy costs, resulting in benefits of $6.5
million and $11.5 million being reflected in the operating results for the
current quarter and year-to-date periods compared to $5.9 million and $12.8
million in the comparable prior year periods.
The seasonal nature of the retail business also results in a significant
portion of the earnings from operations for the year being generated in the
fourth quarter. Interim operating results are thus not necessarily indicative
of earnings from operations that will be realized for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Item 5 of this report, the Company has entered into
agreements providing for the acquisition of the Company by Federated, certain
amendments to the Company's working capital facility and certain other matters,
all of which will potentially impact the Company's liquidity and capital
resources. The decision by the Company's Board of Directors to approve the
merger considered a number of material factors including the Company's historic
and prospective liquidity and financial condition. Among other factors, the
Company's Board of Directors considered the significant risk that, in light of
limitations on the Company's working capital financing and the general weakness
in its operating results, significant vendors might refuse to ship merchandise
for the Fall and Christmas seasons and that the Company might have no recourse
to obtain additional working capital financing other than in the context of
reorganization proceedings under the United States Bankruptcy Code ("Chapter 11
Proceedings"). In addition, the Company's Board of Directors considered the
significant additional amounts of capital that will be required to upgrade and
remodel the Company stores so as to maintain their position in an increasingly
competitive retail environment and the significant constraints that the
Company's high leverage imposes on its ability to raise such funds as an
independent concern or in Chapter 11 Proceedings. Alternatives to the Merger,
considered by the Company's Board of Directors, included, among others, the
Company remaining an independent entity and seeking to reduce its high leverage
through Chapter 11 Proceedings or through selected asset sales and the risks
associated with such alternatives and the likelihood that no other alternative
would provide greater value for Company stockholders than the Merger, and that
Chapter 11 Proceedings, in particular, might result in considerably less value
for Company stockholders.
2
The Company's current working capital financing requirements are provided
by a Working Capital Facility and Receivables Facility which mature in October,
1996, except that the Working Capital Facility commitment will mature February
29, 1996, if the Merger with Federated shall not have become effective on or
prior to such date. Subject to collateral limitations, the facilities, as
currently amended, provide for up to $250.0 million in working capital financing
and up to $575.0 million to finance the Company's proprietary credit card
receivables portfolio. In conjunction with the August 17, 1995 amendments to the
Working Capital Facility, the minimum inventory balance requirements were
relaxed and all other financial covenants, except for the limitation on capital
expenditures, were eliminated.
As of July 29, 1995, $51.7 million in advances and $60.0 million in letters
of credit were outstanding under the Working Capital Facility and $503.6 million
of borrowings, the maximum available, were outstanding under the Receivables
Facility. An additional $64.0 million of receivables were financed through
subordinated asset backed notes which mature in 1999.
3
BROADWAY STORES, INC.
Consolidated Statement of Earnings
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- -----------------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
--------- --------- --------- ---------
Sales $460,639 $457,030 $884,550 $888,107
Finance charge revenue 23,691 22,388 48,285 44,925
Cost of goods sold, including
occupancy and buying costs 351,797 338,288 676,550 657,654
Selling, general, and
administrative expenses 138,617 130,549 274,532 260,244
-------- -------- -------- --------
Earnings (loss) from operations
before interest expense and
income taxes (6,084) 10,581 (18,247) 15,134
Interest expense, net 31,364 23,516 62,499 46,029
-------- -------- -------- --------
Pretax loss (37,448) (12,935) (80,746) (30,895)
Income taxes 0 0 0 0
-------- -------- -------- --------
Net loss $(37,448) $(12,935) $(80,746) $(30,895)
======== ======== ======== ========
Loss per common share $ (0.80) $ (0.28) $ (1.72) $ (0.66)
======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
4
BROADWAY STORES, INC.
Consolidated Balance Sheet
(In thousands)
(Unaudited)
July 29, January 28, July 30,
1995 1995 1994
---------- ---------- ----------
ASSETS
Current assets
Cash $ 15,901 $ 18,318 $ 15,575
Accounts receivable, net 559,939 664,825 569,931
Merchandise inventories 390,825 504,522 415,443
Other current assets 25,418 11,613 27,640
---------- ---------- ----------
992,083 1,199,278 1,028,589
Property and equipment, net 885,002 888,258 816,947
Other assets 34,521 39,540 35,572
---------- ---------- ----------
$1,911,606 $2,127,076 $1,881,108
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 51,676 $ 11,740 $
Current installments 6,750 6,750 3,460
Accounts payable 107,295 175,622 128,997
Accrued expenses 113,029 141,027 125,525
Current income taxes 824 1,002 977
---------- ---------- ----------
279,574 336,141 258,959
Receivables based financing 503,584 573,138 392,143
Other secured long-term debt 521,384 522,517 523,517
Convertible subordinated notes 143,750 143,750 143,750
Capital lease obligations 39,930 41,524 43,199
Other liabilities 103,121 109,504 121,227
Deferred income taxes 14,850 14,850 14,850
Shareholders' equity
Preferred stock, $.01 par value 8 9 9
Common stock, $.01 par value 470 469 469
Other paid-in capital 502,545 502,038 501,425
Accumulated deficit (197,610) (116,864) (118,440)
---------- ---------- ----------
305,413 385,652 383,463
---------- ---------- ----------
$1,911,606 $2,127,076 $1,881,108
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
5
BROADWAY STORES, INC.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
--------- --------- --------- ---------
Operating activities
Loss from operations $(37,448) $(12,935) $(80,746) $(30,895)
Adjustments to reconcile
loss from operations
to net operating cash flows
Depreciation and amortization 12,703 10,192 25,339 20,201
Changes in operating assets and liabilities
Customer receivables, net 15,528 4,438 71,718 39,048
Merchandise inventories 44,618 (9,935) 113,697 12,188
Accounts payable and accrued expenses 12,554 (4,139) (96,325) (49,166)
Other, net 7,453 (28,273) 11,158 (31,239)
-------- -------- -------- --------
Net cash provided (used)
by operating activities 55,408 (40,652) 44,841 (39,863)
-------- -------- -------- --------
Investing activities
Purchases of property and equipment (6,988) (14,387) (15,420) (21,741)
-------- -------- -------- --------
Financing activities
Net change in financing under
receivables based facility (11,859) 52,582 (69,554) 59,961
Net change in financing under
working capital facility (37,076) 39,936
Retirements of long-term debt and
capital lease obligations (1,531) (808) (2,727) (1,615)
Issuances of common stock 507 426 507 641
-------- -------- -------- --------
Net cash provided (used)
by financing activities (49,959) 52,200 (31,838) 58,987
-------- -------- -------- --------
Net decrease in cash (1,539) (2,839) (2,417) (2,617)
Cash at the beginning of the period 17,440 18,414 18,318 18,192
-------- -------- -------- --------
Cash at the end of the period $ 15,901 $ 15,575 $ 15,901 $ 15,575
======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
6
BROADWAY STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF REPORTING
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q of the Securities and Exchange Commission
and should be read in the context of the Summary of Significant Accounting
Policies and Financial Review contained in the Company's Annual Report on Form
10-K for the fifty-two week period ended January 28, 1995. In the opinion of
the Company's management, these statements contain all adjustments, all of
which are of a normal recurring nature, necessary for the amounts shown to be
fairly stated as of July 29, 1995 and July 30, 1994 and for the thirteen and
twenty-six week periods then ended. The Balance Sheet as of January 28, 1995
is as included in the Company's Form 10-K report for the year ended January
28, 1995.
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share are computed on the basis of the weighted average
number of shares outstanding during the period, including dilutive stock
options and all 35.0 million shares of Common Stock expected to be issued in
accordance with the plan of reorganization (the "POR") approved in connection
with the Company's emergence from bankruptcy on October 8, 1992 (the
"Emergence Date"). As of July 29, 1995, 1.0 million shares of common stock
remained reserved for issuance in accordance with the POR.
INVENTORIES
The last-in, first-out ("LIFO") method of accounting resulted in charges
to cost of goods sold of $1.0 million and $2.0 million for the thirteen and
twenty-six week periods ended July 29, 1995, and $.5 million and $1.0 million
in the comparative prior year periods. If all inventories had been valued on
a first-in, first-out basis, they would have been lower by $12.3 million,
$14.3 million and $9.8 million at July 29, 1995, January 28, 1995 and July 30,
1994 respectively.
7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material change has occurred in the litigation described in "Item 3:
Legal Proceedings" on pages 16 and 17 of the Company's Form 10-K for the year
ended January 28, 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 16, 1995,
the following proposals, detailed in the May 10, 1995 Notice of Annual Meeting
and Proxy Statement, were voted on and approved as follows:
1. The election of directors to serve for a term of one year until the
next Annual Meeting of Stockholders and until their respective
successors have been duly elected and qualified.
Name For Withheld
---- --- --------
Walter T. Dec 40,050,344 168,825
David L. Dworkin 40,040,707 178,462
Dr. L.F. Estrada 40,051,250 167,919
Sidney R. Petersen 40,050,586 168,583
Terry Savage 40,051,330 167,839
David M. Schulte 40,049,551 169,618
Sanford Shkolnik 40,048,436 170,733
Dr. R.M. Solow 40,051,385 167,784
James D. Woods 39,949,912 269,257
Samuel Zell 40,047,135 172,034
2. The ratification of the appointment of Price Waterhouse LLP as the
Company's independent accountants for the Company's 1995 fiscal year.
For Against Abstain
--- ------- -------
40,093,050 86,264 39,855
ITEM 5. OTHER INFORMATION
On August 14, 1995, the Company, Federated Department Stores, Inc.
("Federated"), and a wholly owned subsidiary of Federated ("Newco"), entered
into an agreement (the "Merger Agreement") pursuant to which, on the terms and
subject to the conditions set forth therein, Newco will be merged with and into
the Company (the "Merger"), and the Company will thereby become a subsidiary of
Federated. At the effective time of the Merger, among other things, each
outstanding share of Company common stock will be converted into 0.27 shares of
Federated's common stock. In connection with the Merger Agreement, Federated and
Zell/Chilmark Fund, L.P. ("Zell/Chilmark") entered into an agreement (the "Stock
Agreement"), pursuant to which, among other things, Zell/Chilmark agreed to vote
the approximately 54% of the outstanding shares of Company common stock owned by
it in favor of the adoption of the Merger Agreement and granted to Federated an
option to purchase such shares for consideration consisting of 0.27 shares of
Federated's common stock for each such share of Company common stock. In
addition, the Company and General Electric Capital Corporation ("GE Capital")
entered into an amendment (the "Working Capital Amendment") to the Company's
working capital credit facility (the "Working Capital Facility") pursuant to
which the size of the Working Capital Facility was increased to $250.0 million
from $225.0 million, and the percentage of the value of "Eligible Inventory"
that constitutes the "Borrowing Base" under the Working Capital Facility was
increased to 55% from
8
50%. In addition, the minimum inventory balance requirements under the Working
Capital Facility were relaxed and various financial covenants previously
contained therein were eliminated. In connection with the Working Capital
Amendment, the Company paid fees aggregating $1.125 million to GE Capital and
will reimburse GE Capital for its expenses incurred in connection therewith, and
GE Capital consented to the transactions contemplated by the Merger Agreement
and the Stock Agreement. In addition, the Company, Federated, and Bank of
America National Trust and Savings Association ("Bank of America") entered into
a letter agreement (the "Bank of America Agreement") relating to certain
mortgage indebtedness of the Company (the "Bank of America Loan") pursuant to
which Bank of America, on behalf of itself and certain lenders under the Bank of
America Loan, consented to the consummation of the Merger. Such consent is
conditioned upon the Company entering into an amendment to the Bank of America
Loan providing for recourse against the Company for repayment of its obligations
thereunder, with the effectiveness of such amendment to be conditioned upon the
consummation of the Merger.
The consummation of the foregoing transactions is subject to the
satisfaction or waiver of various conditions, as to which there can be no
assurance. The Merger Agreement, the Stock Agreement, the Working Capital
Amendment and the Bank of America Agreement are filed herewith as Exhibits 10.1,
10.2, 10.3 and 10.4, respectively, and are incorporated herein by this
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Agreement and Plan of Merger, dated as of August 14, 1995,
among Broadway Stores, Inc., Federated Department Stores,
Inc., and Newco (incorporated by reference to Exhibit 2.1 to
the Federated Department Stores, Inc. Registration Statement
on Form S-4, Registration No. 33-62077).
10.2 Stock Agreement, dated as of August 14, 1995, between
Federated Department Stores, Inc. and Zell/Chilmark
(incorporated by reference to the Federated Department
Stores, Inc. Schedule 13D, dated August 14, 1995, relating to
the common stock of Broadway Stores, Inc.).
10.3 Tenth Amendment to Credit Agreement, dated as of August 17,
1995, among Broadway Stores, Inc., a Delaware Corporation
previously known as Carter Hawley Hale Stores, Inc., the
financial institutions parties thereto and General Electric
Capital Corporation, a New York Corporation, as agent for the
Lenders (incorporated by reference to Exhibit 4.1 to the
Broadway Stores, Inc. current report on Form 8-K dated August
14, 1995, as amended on Form 8-K/A dated August 14, 1995).
10.4* Letter agreement, dated August 13, 1995, among Broadway
Department Stores, Inc., Federated Department Stores, Inc.
and Bank of America National Trust and Savings Association.
11.1* Computation of Earnings Per Share.
27.1* Financial Data Schedule.
*Exhibit filed with this Form 10-Q.
9
(b) Reports on Form 8-K:
June 29, 1995 Filing of Ninth Amendment to Credit Agreement,
dated as of June 28, 1995, among Broadway
Stores, Inc., a Delaware Corporation previously
known as Carter Hawley Hale Stores, Inc., the
financial institutions parties thereto and
General Electric Capital Corporation, a New York
Corporation, as agent for the Lenders.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROADWAY STORES, INC.
Date September 8, 1995 /s/ J.C. HAECKEL
----------------- -----------------------------------------
J.C. Haeckel, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date September 8, 1995 /s/ J.D. DAVIES
----------------- -----------------------------------------
J.D. Davies, Vice President, Accounting
(Principal Accounting Officer)
11