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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
FEBRUARY 3, 1996 1-13536
FEDERATED DEPARTMENT STORES, INC.
151 WEST 34TH STREET
NEW YORK, NEW YORK 10001
(212) 695-4400
AND
7 WEST SEVENTH STREET
CINCINNATI, OHIO 45202
(513) 579-7000
INCORPORATED IN DELAWARE I.R.S. NO. 13-3324058
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred
Stock New York Stock Exchange
Series C Warrants New York Stock Exchange
Series D Warrants New York Stock Exchange
8.125% Senior Notes due 2002 New York Stock Exchange
5% Convertible Notes due 2003 New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Registrant has filed all reports required to be filed by Section 12, 13, or
15(d) of the Act during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein and will not be contained, to the best of registrant's
knowledge, in a definitive proxy statement incorporated by reference in Part III
of this Form 10-K.
There were 207,459,137 million shares of the Company's Common Stock
outstanding as of April 6, 1996, excluding shares held in the treasury of the
Company or by subsidiaries of the Company. The aggregate market value of the
shares of such Common Stock, excluding shares held in the treasury of the
Company or by subsidiaries of the Company, based upon the last sale price as
reported on the New York Stock Exchange Composite Tape on April 4, 1996, was
approximately $6,483,100,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to Registrant's Annual
Meeting of Stockholders to be held on May 17, 1996 (the "Proxy Statement"), are
incorporated by reference in Part III hereof.
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Unless the context otherwise requires, (i) references herein to the
"Company" are, for all periods prior to December 19, 1994 (the "Merger Date"),
references to Federated Department Stores, Inc. ("Federated") and its
subsidiaries and their respective predecessors, and, for all periods following
the merger (the "Merger") of Federated and R.H. Macy & Co., Inc. ("Macy's") on
the Merger Date, references to the surviving corporation in the Merger and its
subsidiaries, and (ii) references to "1995", "1994", "1993", "1992" and "1991"
are references to the Company's fiscal years ended February 3, 1996, January 28,
1995, January 29, 1994, January 30, 1993 and February 1, 1992, respectively.
ITEM 1. BUSINESS.
General. The Company is one of the leading operators of full-line
department stores in the United States, with 412 department stores in 33 states
as of February 3, 1996. The Company's department stores sell a wide range of
merchandise, including men's, women's and children's apparel and accessories,
cosmetics, home furnishings and other consumer goods, and are diversified by
size of store, merchandising character and character of community served. The
Company's department stores are located at urban or suburban sites, principally
in densely populated areas across the United States. The Company also operates
more than 150 specialty stores under the names "Aeropostale" and "Charter Club",
and a mail order catalog business under the name "Bloomingdale's By Mail".
The Company acquired Broadway Stores, Inc. ("Broadway") on October 11, 1995
(the "Broadway Merger Date")and the Company is continuing the integration of
Broadway's businesses with the business of the Company's other subsidiaries. The
results of operations of Broadway have been included in the Company's results of
operations since July 29, 1995. The Company anticipates that a number of the
stores acquired in its acquisition of Broadway will be disposed of and that
Broadway's retained department stores will be converted to other nameplates of
the Company. As of the date of this report, the Company has sold eight of these
stores, has identified certain additional stores to be sold, and has yet to make
a determination with respect to certain other stores.
The following table sets forth certain information with respect to each of
the Company's retail operating divisions:
FEBRUARY 3, 1996 JANUARY 28, 1995
------------------------- -------------------------
GROSS GROSS
NUMBER OF SQUARE NUMBER OF SQUARE
STORES FEET(A) STORES FEET(A)
--------- ----------- --------- -----------
(THOUSANDS) (THOUSANDS)
Bloomingdale's........................ 17 4,689 16 4,439
The Bon Marche........................ 41 4,960 40 4,892
Broadway.............................. 57 10,068 -- --
Burdines.............................. 47 7,884 46 7,648
Macy's East (b)....................... 89 23,355 98 26,161
Macy's West........................... 59 12,450 57 11,845
Rich's/Lazarus/Goldsmith's............ 75 14,672 76 15,203
Stern's............................... 27 5,425 22 3,946
Macy's Specialty...................... 153 555 122 420
Macy's Close-Out (c).................. -- -- 14 704
--- ------ --- ------
Total.......................... 565 84,058 491 75,258
=== ====== === ======
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(a) Reflects total square footage of store locations, including office, storage,
service and other support space that is not dedicated to direct merchandise
sales, but excluding warehouses and distribution terminals not located at
store sites.
(b) During 1995, six stores were converted to Stern's and one store was
converted to Bloomingdale's.
(c) The Company closed all of its Macy's Close-Out stores during 1995.
In general, each of the Company's retail operating divisions is a separate
subsidiary of the Company. However, (i) the Macy's West division comprises two
separate subsidiaries of the Company and, following its consolidation with the
Broadway division, will comprise three separate subsidiaries of the Company, and
(ii) the Rich's/Lazarus/Goldsmith's division comprises three separate
subsidiaries of the Company.
The Company provides electronic data processing and other support functions
to its retail operating divisions on an integrated, Company-wide basis. In
addition, the Company's financial and credit services subsidiary, FACS Group,
Inc. ("FACS"), which is based near Cincinnati, Ohio, establishes and monitors
credit policies on a Company-wide basis. FACS provides proprietary credit
services, including statement processing and mailing, credit authorizations, new
account development and processing, and customer service and collections, to
each of the retail operating divisions that were divisions of Federated prior to
the Merger as well as the subsequently acquired Broadway division. GE Capital
Consumer Card Co. ("GE Credit"), which in 1991 purchased all of the consumer
credit card accounts originated by the retail operating divisions of Macy's,
continues to provide credit services to the retail operating divisions that were
divisions of Macy's prior to the Merger. The Company and GE Credit are currently
engaged in negotiations with respect to possible modifications to the
contractual arrangements previously entered into between Macy's and GE Credit
with respect to such services. The Company's data processing subsidiary,
Federated Systems Group, Inc. ("FSG"), which is based near Atlanta, Georgia,
provides operational electronic data processing and management information
services to each of the Company's retail operating divisions. In addition, a
specialized staff maintained in the Company's corporate offices in Cincinnati
provides services for all divisions in such areas as store design and
construction, accounting, real estate, insurance and supply purchasing, as well
as various other corporate office functions. FACS, FSG, a specialized service
subsidiary and certain departments in the Company's corporate offices offer
their services to unrelated third parties as well. Federated Merchandising, a
division of the Company based in New York City, coordinates the team buying
process which enables the Company to centrally develop and execute consistent
Company-wide merchandise strategies while retaining the ability to tailor
merchandise assortments and merchandising strategies to the particular character
and customer base of the Company's various department store franchises.
Federated Product Development, a division of the Company based in New York City,
is responsible for the private label development of the Company's retail
operating divisions except for Bloomingdale's (which has its own private label
program) and Stern's (which sources its private label merchandise through
Associated Merchandising Corporation).
The Company and its predecessors have been operating department stores
since 1830. Federated was organized as a Delaware corporation in 1929. On
February 4, 1992, Allied Stores Corporation ("Allied") was merged into
Federated. On May 26, 1994, Federated acquired Joseph Horne Co., Inc. pursuant
to a subsidiary merger. On December 19, 1994, Federated acquired Macy's pursuant
to the Merger. On October 11, 1995, the Company acquired Broadway pursuant to a
subsidiary merger, with the results of operations of Broadway being included in
the Company's results of operations since July 29, 1995.
Federated, Allied and substantially all of their respective subsidiaries
(collectively, the "Federated/Allied Companies") were reorganized under chapter
11 of the United States Bankruptcy Code pursuant to a plan of reorganization
(the "Federated POR") which became effective on February 4, 1992. Macy's and
substantially
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all of its subsidiaries (the "Macy's Debtors") were reorganized under chapter 11
of the United States Bankruptcy Code pursuant to a plan of reorganization (the
"Macy's POR") which became effective on December 19, 1994. Broadway was
reorganized under chapter 11 of the United States Bankruptcy Code pursuant to a
plan of reorganization (the "Broadway POR") which became effective on October 8,
1992. For additional information regarding the respective reorganization
proceedings of the Federated/Allied Companies, the Macy's Debtors and Broadway,
see Item 3 "Legal Proceedings."
The Company's executive offices are located at 151 West 34th Street, New
York, New York 10001, telephone number: (212) 695-4400 and at 7 West Seventh
Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000.
Employees. As of February 3, 1996, the Company had approximately 119,100
regular full-time and part-time employees. Because of the seasonal nature of the
retail business, the number of employees peaks in the Christmas season.
Approximately 10% of the Company's employees as of February 3, 1996 were
represented by unions. Management considers its relations with employees to be
satisfactory.
Seasonality. The department store business is seasonal in nature with a
high proportion of sales and operating income generated in the months of
November and December. Working capital requirements fluctuate during the year,
increasing somewhat in mid-Summer in anticipation of the Fall merchandising
season and increasing substantially prior to the Christmas season when the
Company must carry significantly higher inventory levels.
Purchasing. The Company purchases merchandise from many suppliers, no one
of which accounted for more than 5% of the Company's net purchases during 1995.
The Company has no long-term purchase commitments or arrangements with any of
its suppliers, and believes that it is not dependent on any one supplier. The
Company considers its relations with its suppliers to be satisfactory.
Competition. The retailing industry, in general, and the department store
business, in particular, are intensely competitive. Generally, the Company's
stores are in competition not only with other department stores in the
geographic areas in which they operate but also with numerous other types of
retail outlets, including specialty stores, general merchandise stores,
off-price and discount stores, new and established forms of home shopping
(including mail order catalogs, television and computer services) and
manufacturers' outlets.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers of the Company:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Allen I. Questrom........ 56 Chairman of the Board and Chief Executive Officer;
Director
James M. Zimmerman....... 52 President and Chief Operating Officer; Director
Ronald W. Tysoe.......... 43 Vice Chairman of the Board and Chief Financial
Officer; Director
Thomas G. Cody........... 54 Executive Vice President - Legal and Human Resources
Dennis J. Broderick...... 47 Senior Vice President, General Counsel and Secretary
John E. Brown............ 56 Senior Vice President and Controller
Karen M. Hoguet.......... 39 Senior Vice President - Planning and Treasurer
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Allen I. Questrom has been Chairman of the Board and Chief Executive
Officer of the Company since February 1990; prior thereto, he was President and
Chief Executive Officer of the Neiman-Marcus division of the Neiman-Marcus
Group, Inc. from September 1988 to February 1990.
James M. Zimmerman has been President and Chief Operating Officer of the
Company since May 1988.
Ronald W. Tysoe has been Vice Chairman and Chief Financial Officer of the
Company since April 1990; prior thereto, he was President and Treasurer of
Federated Stores, Inc. ("FSI"), the former indirect parent of Federated, from
1987 to 1992, and Chief Financial Officer of FSI from April 1990 to February
1992.
Thomas G. Cody has been Executive Vice President - Legal and Human
Resources of the Company since May 1988.
Dennis J. Broderick has been Secretary of the Company since July 1993 and
Senior Vice President and General Counsel of the Company since January 1990;
prior thereto, he served as Vice President and General Counsel of Allied and
General Counsel of the Company since May 1988 and Vice President of the Company
since February 1987.
John E. Brown has been Senior Vice President of the Company since September
1988 and Controller of the Company since January 1992.
Karen M. Hoguet has been Senior Vice President - Planning of the Company
since April 1991 and Treasurer of the Company since January 1992; prior thereto,
she served as Vice President of the Company and Allied since December 1988.
ITEM 2. PROPERTIES.
The properties of the Company consist primarily of stores and related
retail facilities, including warehouses and distribution centers. The Company
also owns or leases other properties, including corporate office space in New
York and Cincinnati and other facilities at which centralized operational
support functions are conducted. As of February 3, 1996, the Company operated
412 department stores, of which 205 stores were entirely or mostly owned and 207
stores were entirely or mostly leased. The Company's interests in approximately
29% of its owned stores and approximately 5% of its leased stores are subject to
security interests in favor of certain third-party creditors. See Note 10 to the
Consolidated Financial Statements. Pursuant to various shopping center
agreements, the Company is obligated to operate certain stores within the
centers for periods of up to 20 years. Some of these agreements require that the
stores be operated under a particular name.
See "Item 1. Business" for information regarding the number of stores and
total gross square feet (in thousands) of store space, operated by the Company
as of the end of each of the last two fiscal years. Such information is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
The Federated POR was confirmed by the United States Bankruptcy Court for
the Southern District of Ohio, Western Division (the "Ohio Bankruptcy Court"),
on January 10, 1992. Notwithstanding the confirmation and effectiveness of the
Federated POR, the Ohio Bankruptcy Court continues to have jurisdiction to
resolve disputed prepetition claims against the Federated/Allied Companies; to
resolve matters related to the assumption, assumption and assignment, or
rejection of executory contracts pursuant to the Federated POR; and to resolve
other matters that may arise in connection with or relate to the Federated
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POR. The Company believes that it has adequately provided for the resolution of
all bankruptcy claims and other matters related to the Federated POR remaining
at February 3, 1996.
The Macy's POR was confirmed by the United States Bankruptcy Court for the
Southern District of New York (the "New York Bankruptcy Court") on December 8,
1994. Notwithstanding the confirmation and effectiveness of the Macy's POR, the
New York Bankruptcy Court continues to have jurisdiction to resolve disputed
prepetition claims against the Macy's Debtors; to resolve matters related to the
assumption, assumption and assignment, or rejection of executory contracts
pursuant to the Macy's POR; and to resolve other matters that may arise in
connection with or relate to the Macy's POR. Except as described below,
provision was made under the Macy's POR in respect of all prepetition
liabilities of the Macy's Debtors.
Certain claims or portions thereof (the "Cash Payment Claims") against the
Macy's Debtors, which, to the extent allowed by the New York Bankruptcy Court
have been or will be paid in cash pursuant to the Macy's POR, currently are
disputed by the Company. The aggregate amount of disputed Cash Payment Claims
ultimately allowed by the New York Bankruptcy Court may be more or less than the
estimated allowed amount thereof developed for purposes of formulating the
Macy's POR. As of March 15, 1996, the aggregate face amount of disputed Cash
Payment Claims was approximately $293.6 million, while the estimated allowed
amount thereof developed for purposes of formulating the Macy's POR was
approximately $217.8 million. Although there can be no assurance with respect
thereto, the Company believes that the aggregate allowed amount of disputed Cash
Payment Claims will not exceed the estimated amount thereof.
The Broadway POR was confirmed by the United States Bankruptcy Court for
the Central District of California (the "California Bankruptcy Court") on
October 8, 1992. Notwithstanding the confirmation and effectiveness of the
Broadway POR, the California Bankruptcy Court continues to have jurisdiction to
resolve disputed prepetition claims against Broadway; to resolve matters related
to the assumption, assumption and assignment, or rejection of executory
contracts pursuant to the Broadway POR; and to resolve other matters that may
arise in connection with or relate to the Broadway POR. The Company believes
that it has adequately provided for the resolution of all bankruptcy claims and
other matters related to the Broadway POR remaining at February 3, 1996.
In connection with the Federated POR and the reorganization proceedings of
FSI, the Internal Revenue Service (the "IRS") audited the tax returns of FSI and
the Federated/Allied Companies for tax years 1984 through 1989 and asserted
certain claims against the Federated/Allied Companies and other members of the
FSI consolidated tax group. All of the issues raised by the IRS audit have been
resolved except for an issue involving the deductibility of approximately $176.3
million of so-called "break-up fees." This issue was resolved in favor of the
Federated/Allied Companies by the Ohio Bankruptcy Court, the decision of which
was affirmed by the United States District Court for the Southern District of
Ohio. Thereafter, the IRS filed an appeal of such decision in the United States
Court of Appeals for the Sixth Circuit, where such appeal is currently pending.
Although there can be no assurance with respect thereto, the Company does not
expect that the ultimate resolution of this issue will have a material adverse
effect on the Company's financial position or results of operations.
On January 5, 1996, the Company reached a settlement with the IRS with
respect to certain disputes relating to certain deductions claimed and certain
loss carryforwards utilized by Federated and its predecessors. See Note 12 to
the Consolidated Financial Statements.
The office of the Attorney General of the State of California has advised
the Company that it is reviewing the competitive effects of the Company's
acquisition of Broadway. The Company is cooperating with the Office of the
Attorney General in the review. There can be no assurance as to the outcome of
the review.
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The Company and its subsidiaries are also involved in various proceedings
that are incidental to the normal course of their businesses. The Company does
not expect that any of such proceedings will have a material adverse effect on
the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the trading symbol "FD." The following table sets forth for each fiscal
quarter during 1995 and 1994 the high and low sales prices per share of Common
Stock as reported on the NYSE Composite Tape:
1995 1994
------------------ ------------------
LOW HIGH LOW HIGH
------- ------- ------- -------
1st Quarter............................. 18.500 23.125 20.750 25.250
2nd Quarter............................. 20.875 28.125 19.000 22.750
3rd Quarter............................. 24.500 30.125 18.750 23.625
4th Quarter............................. 25.000 29.750 17.875 20.875
The Company has not paid any dividends on its Common Stock during its two
most recent fiscal years, and does not anticipate paying any dividends on the
Common Stock in the foreseeable future. In addition, the covenants in certain
debt instruments to which the Company is a party restrict the ability of the
Company to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Consolidated Financial Statements and the notes thereto and the other
information contained elsewhere in this report.
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Operations
Data (a):
Net sales, including leased
department sales................... $15,048,513 $ 8,315,877 $7,229,406 $7,079,941 $ 6,932,323
----------- ----------- ---------- ---------- -----------
Cost of sales........................ 9,317,784 5,131,363 4,373,941 4,229,396 4,202,223
Selling, general and administrative
expenses........................... 4,748,331 2,549,122 2,323,546 2,420,684 2,463,128
Business integration and
consolidation expenses............. 293,930 85,867 -- -- --
Charitable contribution to Federated
Department Stores Foundation....... 25,581 -- -- -- --
----------- ----------- ---------- ---------- -----------
Operating income..................... 662,887 549,525 531,919 429,861 266,972
Interest expense (b)................. (508,132) (262,115) (213,544) (258,211) (504,257)
Interest income...................... 47,104 43,874 49,405 60,357 67,260
----------- ----------- ---------- ---------- -----------
Income (loss) before reorganization
items, income taxes, extraordinary
items and cumulative effect of
change in accounting principle..... 201,859 331,284 367,780 232,007 (170,025)
Reorganization items (c)............. -- -- -- -- (1,679,936)
Federal, state and local income tax
(expense) benefit.................. (127,306) (143,668) (170,987) (99,299) 613,989
Extraordinary items (d).............. -- -- (3,545) (19,699) 2,165,515
Cumulative effect of change in
accounting principle (e)........... -- -- -- -- (93,151)
----------- ----------- ---------- ---------- -----------
Net income......................... $ 74,553 $ 187,616 $ 193,248 $ 113,009 $ 836,392
=========== =========== ========== ========== ===========
Earnings per Share of Common Stock (f):
Income before extraordinary items.... $ .39 $ 1.41 $ 1.56 $ 1.19 $ --
Net income........................... .39 1.41 1.53 1.01 --
Average number of shares outstanding
(f).................................. 191,503 132,862 126,293 111,350 --
Depreciation and amortization.......... $ 496,911 $ 285,861 $ 229,781 $ 230,124 $ 260,884
Capital expenditures................... $ 699,306 $ 397,664 $ 312,960 $ 207,931 $ 201,631
Balance Sheet Data (at year end):
Cash................................. $ 172,518 $ 206,490 $ 222,428 $ 566,984 $ 1,002,482
Working capital...................... 3,262,296 2,375,654 1,967,569 2,227,336 1,923,812
Total assets......................... 14,295,050 12,276,990 7,419,427 7,019,770 7,501,145
Short-term debt...................... 733,115 463,042 10,099 12,944 771,605
Long-term debt....................... 5,632,232 4,529,220 2,786,724 2,809,757 3,176,687
Shareholders' equity................. 4,273,686 3,639,610 2,278,244 2,074,980 1,454,132
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(a) As a result of the Company's emergence from bankruptcy and its adoption of
fresh-start reporting as of February 1, 1992, the Company's Consolidated
Statements of Operations for periods after February 1, 1992 are not
comparable to
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the Consolidated Statement of Operations for the period ended February 1,
1992 and therefore are separated by a black line.
b) Excludes interest on unsecured prepetition indebtedness of $301,576,000 for
1991.
c) Reflects the net expense incurred in connection with the Chapter 11
reorganization of the Federated/Allied Companies.
d) The extraordinary item for 1993 is described in Note 4 to the Consolidated
Financial Statements. The extraordinary items for 1992 were after-tax
expenses associated with debt prepayments. The extraordinary item for 1991
was a gain resulting from the discharge of prepetition claims pursuant to the
Federated POR.
e) Reflects the cumulative effect of the adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits other than Pensions," as of February
1, 1992.
f) Per share and share data are not presented for the period during which there
were no publicly held shares of common stock of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company acquired Macy's on December 19, 1994 and effected other
acquisitions (and dispositions) during its 1994 fiscal year. Additionally, in
its 1995 fiscal year, the Company acquired Broadway and recorded the acquisition
as of July 29, 1995. Under the purchase method of accounting, the assets,
liabilities and results of operations associated with such acquired businesses
have been included in the Company's financial position and results of operations
since the respective dates of acquisition. Accordingly, the financial position
and results of operations of the Company presented and discussed herein are
generally not directly comparable between the periods presented. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and the notes thereto contained elsewhere in this report.
RESULTS OF OPERATIONS
Comparison of the 53 Weeks Ended February 3, 1996 and the 52 Weeks Ended
January 28, 1995. Net sales for 1995 were $15,048.5 million compared to $8,315.9
million for 1994, an increase of 81.0%. Including sales of the Macy's stores
that were open throughout both periods being compared, and adjusting for the
impact of the 53rd week in 1995, comparable store sales increased 2.7% in 1995.
Net sales for 1995 includes $1,050.3 million of Broadway sales.
Cost of sales was 61.9% of net sales for 1995, compared to 61.7% for 1994.
Cost of sales was negatively impacted by markdowns at stores added through the
Broadway acquisition. Excluding these stores, cost of sales would have been
61.3% of net sales in 1995. The valuation of merchandise inventory on the
last-in, first-out basis did not impact cost of sales in 1995 and resulted in a
credit of $11.3 million to cost of sales in 1994.
Selling, general and administrative expenses were 31.6% of net sales for
1995, compared to 30.7% for 1994. Because the credit card programs relating to
Macy's are owned by a third party, revenue from credit operations decreased as a
percentage of sales. Because selling, general and administrative expenses are
reported net of revenue from credit operations, such decrease was the major
factor contributing to the increase in the selling, general and administrative
expense rate and more than offset the Company's improved expense control. In
addition, operating expenses were reduced by $23.8 million in 1994 as a result
of an adjustment for the favorable settlement of bankruptcy claims.
Business integration and consolidation expenses for 1995 consisted of
$208.9 million associated with the integration of Macy's into the Company, $36.9
million related to the consolidation of the Company's Rich's/Goldsmith's and
Lazarus divisions and $48.1 million related to the integration of Broadway into
the
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Company. The Company expects to incur in fiscal 1996 approximately $300.0
million of additional business integration and consolidation expenses,
principally as a result of the Broadway acquisition.
Business integration and consolidation expenses for 1994 consisted of $27.0
million associated with the integration of 10 former Horne's stores into the
Company, $45.8 million associated with the integration of Macy's into the
Company and $13.1 million of severance charges related to the consolidation of
the Company's Rich's/Goldsmith's and Lazarus divisions.
Net interest expense was $461.0 million for 1995, compared to $218.2
million for 1994. The higher interest expense in 1995 is principally due to the
higher levels of borrowings resulting from the Macy's and Broadway acquisitions.
Cash interest payments, net of interest received, were $398.0 million for 1995
compared to $166.8 million for 1994.
The Company's effective income tax rate of 63.1% for 1995 differs from the
federal income tax statutory rate of 35.0% principally because of permanent
differences arising from the non-deductibility of approximately $65.0 million of
losses of Broadway and the amortization of intangible assets, and the effect of
state and local income taxes.
Management believes that the turnaround of existing deferred tax
liabilities and tax planning strategies will generate sufficient taxable income
in future periods such that it is more likely than not that the gross deferred
tax assets at the end of 1995 will be realized. Management evaluates the
realizability of deferred tax assets quarterly.
Comparison of the 52 Weeks Ended January 28, 1995 and January 29, 1994. Net
sales for 1994 were $8,315.9 million, compared to $7,229.4 million for 1993, an
increase of 15.0%. During 1994, the Company added 142 department stores and more
than 135 specialty and clearance stores and closed six department stores. Of the
142 department stores added, 121 were added as a result of the acquisition of
Macy's, and 10 were added as a result of the acquisition of Horne's. All of the
specialty and clearance stores were added through the Macy's acquisition. On a
comparable store basis, net sales increased 3.1%.
Cost of sales was 61.7% of net sales for 1994, compared to 60.5% for 1993.
The increase reflected the impact of higher levels of markdowns taken to offer
more value to customers consistent with the competitive environment and to keep
in-store inventories fresh and fashion-current. Cost of sales included a credit
of $11.3 million in 1994, compared to a charge of $2.8 million in 1993,
resulting from the valuation of merchandise inventory on the last-in, first-out
basis.
Selling, general and administrative expenses were 30.7% of net sales for
1994, compared to 32.1% for 1993. The decrease reflected the continued emphasis
on controlling expenses, enhanced efficiencies and productivity resulting from
the Company's on-going investments in retail technology, and increased revenue
from credit operations resulting from higher accounts receivable balances in
1994. In addition, operating expenses were reduced by $23.8 million in 1994 and
$24.0 million in 1993 as a result of adjustments for the favorable settlement of
disputed bankruptcy claims.
Business integration and consolidation expenses for 1994 consisted of $27.0
million associated with the integration of 10 former Horne's stores into the
Company, $45.8 million associated with the integration of Macy's into the
Company and $13.1 million of severance charges related to the consolidation of
the Company's Rich's/Goldsmith's and Lazarus divisions.
Net interest expense was $218.2 million for 1994, compared to $164.1
million for 1993. The higher interest expense in 1994 was principally due to the
higher levels of borrowings incurred in connection with the
9
11
acquisition of Macy's, including the issuance of a $340.0 million promissory
note on December 31, 1993 to fund the Company's initial investment in Macy's.
Cash interest payments, net of interest received, were $166.8 million for 1994
compared to $136.6 million for 1993.
The Company's effective income tax rate of 43.4% for 1994 differed from the
federal income tax statutory rate of 35.0% principally because of state and
local income taxes and permanent differences arising from the amortization of
intangible assets.
The extraordinary item of $3.5 million in 1993 related to the after-tax
expenses associated with debt prepayments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash from
operations and certain available credit facilities.
Net cash provided by operating activities in 1995 was $294.5 million, an
increase of $133.0 million from the net cash provided by operating activities in
1994 of $161.5 million. The primary factors which contributed to this increase
were lower increases in accounts receivable balances and higher operating income
partially offset by increased merchandise inventories (as compared to a decrease
in 1994) and increased payments of non-merchandise accounts payable. The higher
accounts receivable balances in 1994 were generated by increases in proprietary
credit sales and a Company policy change to lower its minimum monthly payment
requirement. The increased operating income reflects the impact of the Macy's
acquisition. The increased payments of non-merchandise accounts payable reflect
the payment of Macy's merger-related liabilities.
The Company is a party to a bank credit facility providing for up to $800.0
million of term borrowings and up to $2,000.0 million of revolving credit
borrowings (including a $500.0 million letter of credit subfacility). The
Company also has in effect a facility to finance its customer accounts
receivable which provides for, among other things, the issuance from time to
time of up to $375.0 million of receivables backed commercial paper. As of
February 3, 1996, the Company had $800.0 million of term borrowings, $840.0
million of revolving credit borrowings, $86.5 million of standby letters of
credit and $116.2 million of trade letters of credit outstanding under its bank
credit facility and $117.0 million of commercial paper borrowings outstanding
under its receivables backed commercial paper facility. In addition, there was
$386.5 million of commercial paper borrowings outstanding under a Broadway
receivables backed commercial paper facility which will expire in 1996.
Net cash provided by the Company for all financing activities was $304.8
million in 1995 compared to $776.1 million in 1994. During 1995, the Company
incurred debt totaling $1,347.1 million and repaid debt totaling $1,020.1
million. Debt incurred consisted of $597.1 million of receivables backed
certificates, $400.0 million of 8.125% Senior Notes due 2002 and $350.0 million
of 5.0% Convertible Subordinated Notes due 2003. The major components of debt
repaid were $307.4 million of Senior Convertible Discount Notes due 2004, $347.7
million of short-term debt ($104.8 million under Broadway's working capital and
receivables financing facilities and $242.9 million under the Company's bank
credit facility and commercial paper facility), $101.5 million of the Company's
subsidiary trade obligations and $142.0 million of Broadway's 6.25% Convertible
Senior Subordinated Notes Due 2000.
Net cash used in investing activities was $633.2 million in 1995 compared
to $953.5 million in 1994. In 1995, capital expenditures for property and
equipment were $696.5 million, and the Company added $16.3 million in cash as a
result of the acquisition of Broadway. The total purchase price for Broadway,
10
12
consisting solely of non-cash items, was $1,620.0 million. In 1994, $575.4
million of cash was invested in connection with acquisitions of Macy's and
Horne's and $386.8 million was invested in property and equipment. The total
purchase prices, including noncash items, for the acquisitions of Macy's and
Horne's were $3,815.9 million and $116.0 million, respectively.
The Company's budgeted capital expenditures are approximately $2,300.0
million for the 1996 to 1998 period. Management presently anticipates funding
such expenditures from operations. However, depending upon conditions in the
capital and other financial markets and other factors, the Company may from time
to time consider the issuance of debt or other securities, the proceeds of which
could be used to fund capital expenditures or for other corporate purposes.
Management believes the department store business will continue to
consolidate. Accordingly, the Company intends from time to time to consider
additional acquisitions of department store assets and companies.
Management of the Company believes that, with respect to its current
operations, cash on hand and funds from operations, together with its credit
facilities, will be sufficient to cover its reasonably foreseeable working
capital, capital expenditure and debt service requirements. Acquisition
transactions, if any, are expected to be financed through a combination of cash
on hand and from operations and the possible issuance from time to time of
long-term debt or other securities. Depending upon conditions in the capital
markets and other factors, the Company will from time to time consider other
possible capital markets transactions, including the refinancing of
indebtedness.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information called for by this item is set forth in the Company's
Consolidated Financial Statements and supplementary data contained in this
report and is incorporated herein by this reference. Specific financial
statements and supplementary data can be found at the pages listed in the
following index.
PAGE
INDEX NUMBER
- ----------------------------------------------------------------------------------- --------
Management's Report................................................................ F-2
Independent Auditors' Report....................................................... F-3
Consolidated Statements of Income for the 53 weeks ended February 3, 1996 and the
52 weeks ended January 28, 1995 and January 29, 1994............................. F-4
Consolidated Balance Sheets at February 3, 1996 and January 28, 1995............... F-5
Consolidated Statements of Cash Flows for the 53 weeks ended February 3, 1996 and
the 52 weeks ended January 28, 1995 and January 29, 1994......................... F-6
Notes to Consolidated Financial Statements......................................... F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
11
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information called for by this item is set forth under Item 1 "Election of
Directors" and "Compliance with Section 16(a) of the Securities and Exchange Act
of 1934" in the Proxy Statement, and in Item 1A "Executive Officers of the
Registrant," and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by this item is set forth under "Executive
Compensation" and "Compensation Committee Report on Executive Compensation" in
the Proxy Statement and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by this item is set forth under "Stock Ownership" in
the Proxy Statement and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by this item is set forth under "Compensation
Committee Interlocks and Insider Participation" and under "Certain Relationships
and Related Transactions" in the Proxy Statement and incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS:
The list of financial statements required by this item is set forth in Item
8 "Consolidated Financial Statements and Supplementary Data" and is incorporated
herein by reference.
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are inapplicable, not required, or
the information is included elsewhere in the Consolidated Financial Statements
or the notes thereto.
3. EXHIBITS:
The following exhibits are filed herewith or incorporated by reference as
indicated below.
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
2.1 Agreement and Plan of Merger, dated Exhibit 2.1 to the Registration
as of August 16, 1994, between Macy's Statement on Form S-4 (Registration
and the Company No. 33-85480) filed on October 21,
1994 (the "1994 S-4 Registration
Statement")
12
14
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
2.2 Second Amended Joint Plan of Exhibit 2.2 to the 1994 S-4
Reorganization of Macy's and Certain Registration Statement
of Its Subsidiaries
2.2.1 Modifications to the Second Amended Exhibit 2.1.1 to the Current Report
Joint Plan of Reorganization of on Form 8-K (File No. 1-13536) filed
Macy's and Certain of Its on January 3, 1995 (the "1995 Form
Subsidiaries 8-K")
2.3 Findings of Fact, Conclusions of Law Exhibit 2.1.2 of the 1995 Form 8-K
and Order Confirming Second Amended
Joint Plan of Reorganization of
Macy's and Certain of Its
Subsidiaries, as Modified
2.4 Agreement and Plan of Merger, dated Exhibit 2.1 to the Registration
as of August 14, 1995, among Statement on Form S-4 (Registration
Broadway, the Company, and Newco No. 33-62077) filed on September 8,
1995 (the "1995 S-4 Registration
Statement")
2.5 Stock Agreement, dated as of August Exhibit to Schedule 13D, dated August
14, 1995, between the Company and 14, 1995, relating to the common
Zell/Chilmark stock of Broadway
2.6 Purchase Agreement, dated as of Au- Exhibit 10.3 to the Quarterly Report
gust 14, 1995, among Prudential on Form 10-Q for the period ended
Insurance Company of America July 29, 1995
("Prudential"), the Company, and
Federated Noteholding Corporation II
("FNC II")
2.6.1 Note Amendment Agreement, dated as of Exhibit 10.1 to the Quarterly Report
November 1, 1995, among Prudential, on Form 10-Q for the period ended
FNC II and the Company October 28, 1995 (the "October 1995
Form 10-Q")
3.1 Certificate of Incorporation Exhibit 3.1 to the Annual Report on
Form 10-K for the fiscal year ended
January 28, 1995 (the "1994 Form
10-K")
3.1.1 Certificate of Designations of Series Exhibit 3.1.1 to the 1994 Form 10-K
A Junior Participating Preferred
Stock
3.2 By-Laws Exhibit 3.2 to the 1994 Form 10-K
4.1 Certificate of Incorporation See Exhibit 3.1
4.2 By-Laws See Exhibit 3.2
4.3 Rights Agreement, dated as of Decem- Exhibit 4.3 to the 1994 Form 10-K
ber 15, 1994, between the Company and
the Bank of New York, as rights agent
4.4 Indenture, dated as of December 15, Exhibit 4.1 to the Registration
1994, between the Company and State Statement on Form S-3 (Registration
Street Bank and Trust Company No. 33-88328) filed on January 9,
(successor to The First National Bank 1995 (the "S-3 Registration
of Boston), as Trustee Statement")
13
15
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
4.4.1 Third Supplemental Indenture, dated Exhibit 4.4.1 to the 1994 Form 10-K
as of January 23, 1995, between the
Company and State Street Bank and
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.4.2 Fourth Supplemental Indenture, dated Exhibit 4.2 to the Company's
as of September 27, 1995, between the Registration Statement on Form 8-A,
Company and State Street Bank and dated November 29, 1995
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.4.3 Fifth Supplemental Indenture, dated Exhibit 2 to the Company's
as of October 6, 1995, between the Registration Statement on Form 8-A,
Company and State Street Bank and dated October 4, 1995
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.4.4 Sixth Supplemental Indenture, dated
as of February 1, 1996, between the
Company and State Street Bank and
Trust Company (successor to The First
National Bank of Boston), as Trustee
4.5 Series C Warrant Agreement Exhibit 4.6 to the 1994 Form 10-K
4.6 Series D Warrant Agreement Exhibit 4.7 to the 1994 Form 10-K
4.7 Warrant Agreement Exhibit 4.1 to Broadway's Annual
Report on Form 10-K (File No. 1-8765)
for the fiscal year ended January 30,
1993 (the "Broadway 1992 Form 10-K")
4.7.1 Letter Agreement, dated October 11, Exhibit 4.5.1 to the October 1995
1995, between Broadway and The Bank Form 10-Q
of New York
4.8 Series B Warrant Agreement Exhibit 10.7 to the Registration
Statement on Form 10 (File No.
1-10951), filed November 27, 1991, as
amended (the "Form 10")
4.9 Series E Warrant Agreement
10.1 Credit Agreement, dated as of Decem- Exhibit 10.3 to the 1994 Form 10-K
ber 19, 1994, among the Company, Ci-
tibank, N.A., Chemical Bank, Citicorp
Securities, Inc., Chemical
Securities, Inc. and the initial
lenders named therein (the "Working
Capital Credit Agreement")
10.1.1 Amendment #2 and Waiver, dated as of Exhibit 10.5 to the October 1995 Form
August 30, 1995, to the Working 10-Q
Capital Credit Agreement
14
16
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.2 Loan Agreement, dated as of December Exhibit 10.12 to Allied's Annual
30, 1987 (the "Prudential Loan Agree- Report on Form 10-K (File No. 1-970)
ment"), among Prudential, Allied for the fiscal year ended January 2,
Stores Corporation ("Allied"), and 1988
certain subsidiaries of Allied named
therein
10.2.1 Amendment No. 1, dated as of Decem- Exhibit 10.9.1 to Form 10
ber 29, 1988, to the Prudential Loan
Agreement
10.2.2 Amendment No. 2, dated as of Novem- Exhibit 10.9.2 to Form 10
ber 17, 1989, to the Prudential Loan
Agreement
10.2.3 Amendment No. 3, dated as of February Exhibit 10.9.3 to Form 10
5, 1992, to the Prudential Loan
Agreement
10.3 Loan Agreement, dated as of May 26, Exhibit 10.47 to the 1994 S-4
1994 (the "Lazarus PA Mortgage Term Registration Statement
Loan"), among Lazarus PA (formerly
Joseph Horne Co., Inc.), the banks
listed thereon, and PNC Bank, Ohio,
National Association, as Agent
("PNC")
10.3.1 First Amendment to the Lazarus PA Exhibit 10.6 to the October 1995 Form
Mortgage Term Loan 10-Q
10.4 Guaranty Agreement, dated as of May Exhibit 10.48 to the 1994 S-4
26, 1994, made by the Company in Registration Statement
favor of the banks listed on the
Lazarus PA Mortgage Term Loan and PNC
10.4.1 Amendment #1 to Guaranty Agreement, Exhibit 10.7.1 to the 1994 Form 10-K
dated as of February 28, 1995, made
by the Company in favor of the banks
listed on the Lazarus PA Mortgage
Term Loan and PNC
10.5 Amended and Restated Term Loan Agree- Exhibit 4.23 to the Broadway's Annual
ment, dated as of October 8, 1992, by Report on Form 10-K (File No. 1-8765)
and among the Banks party thereto, for the fiscal year ended January 30,
Bank of America National Trust and 1993, as amended (the "Broadway 1992
Savings Association as Agent for 10-K")
Banks and Carter Hawley Hale Stores,
Inc.
10.5.1 Master Capitalized Interest Note, Exhibit 4.24 to the Broadway 1992
dated as of October 8, 1992, in favor 10-K
of Bank of America National Trust and
Savings Association as Agent for
certain banks in the amount of
$10,750,830.46
15
17
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.5.2 Master Principal Note, dated as of Exhibit 4.25 to the Broadway 1992
October 8, 1992, in favor of Bank of 10-K
America National Trust and Savings
Association as Agent for Certain
banks in the amount of $89,662,770.00
10.5.3 First Amendment to Amended and Re- Exhibit 10.2.3 to the October 1995
stated Term Loan Agreement, dated as Form 10-Q
of October 11, 1995, by and among
Broadway, the Banks party thereto and
Bank of America National Trust and
Savings Association, as Agent for
Banks
10.5.4 Second Amendment to Amended and Re-
stated Term Loan Agreement, dated as
of December 1, 1995, by and among
Broadway, the Banks party thereto and
Bank of America National Trust and
Savings Association, as Agent for
Banks
10.6 Amended and Restated Pooling and Ser- Exhibit 4.10 to Prime's Current
vicing Agreement, dated as of Decem- Report on Form 8-K (File No. 0-2118),
ber 15, 1992 (the "Pooling and dated March 29, 1993
Servicing Agreement"), among the
Company, Prime Receivables
Corporation ("Prime") and Chemical
Bank, as Trustee
10.6.1 First Amendment, dated as of December Exhibit 10.10.1 to the Company's
1, 1993, to the Pooling and Servicing Annual Report on Form 10-K (File No.
Agreement 1-10951) for the fiscal year ended
January 29, 1994 (the "1993 Form
10-K")
10.6.2 Second Amendment, dated as of Exhibit 10.10.2 to the 1993 Form 10-K
February 28, 1994, to the Pooling and
Servicing Agreement
10.6.3 Third Amendment, dated as of May 31, Exhibit 10.8.3 to the 1994 Form 10-K
1994, to the Pooling and Serving
Agreement
10.6.4 Fourth Amendment, dated as of January
18, 1995, to the Pooling and Service
Agreement
10.6.5 Fifth Amendment, dated as of April
30, 1995, to the Pooling and Service
Agreement
10.6.6 Sixth Amendment, dated as of July 27,
1995, to the Pooling and Service
Agreement
16
18
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.7 Assumption Agreement under the Exhibit 10.10.3 to the 1993 Form 10-K
Pooling and Servicing Agreement,
dated as of September 15, 1993
10.8 Series 1992-1 Supplement, dated as of Exhibit 4.6 to Prime's Registration
December 15, 1992, to the Pooling and Statement on Form 8-A, filed January
Servicing Agreement 22, 1993, as amended ("Prime's Form
8-A")
10.9 Series 1992-2 Supplement, dated as of Exhibit 4.7 to Prime's Form 8-A
December 15, 1992, to the Pooling and
Servicing Agreement
10.10 Series 1992-3 Supplement, dated as of Exhibit 4.8 to Prime's Current Report
January 5, 1993, to the Pooling and on Form 8-K (File No. 0-2118), dated
Servicing Agreement January 29, 1993
10.11 Series 1995-1 Supplement, dated as of Exhibit 4.7 to Prime's Registration
July 27, 1995, to the Pooling and Statement on Form S-1, filed July 14,
Servicing Agreement 1995, as amended
10.12 Receivables Purchase Agreement, dated Exhibit 10.2 to Prime's Form 8-A
as of December 15, 1992 (the
"Receivables Purchase Agreement"),
among Abraham & Straus, Inc.,
Bloomingdale's, Inc., Burdines, Inc.,
Jordan Marsh Stores Corporation,
Lazarus, Inc., Rich's Department
Stores, Inc., Stern's Department
Stores, Inc., The Bon, Inc., and
Prime
10.12.1 First Amendment, dated as of June 23, Exhibit 10.14.1 to 1993 Form 10-K
1993, to the Receivables Purchase
Agreement
10.12.2 Second Amendment, dated as of Decem- Exhibit 10.14.2 to 1993 Form 10-K
ber 1, 1993, to the Receivables
Purchase Agreement
10.12.3 Third Amendment, dated as of February Exhibit 10.14.3 to 1993 Form 10-K
28, 1994, to the Receivables Purchase
Agreement
10.12.4 Fourth Amendment, dated as of May 31, Exhibit 10.13.4 to the 1994 Form 10-K
1994, to the Receivables Purchase
Agreement
10.12.5 Fifth Amendment, dated as of April
30, 1995, to the Receivables Purchase
Agreement
10.12.6 First Supplement, dated as of Exhibit 10.14.4 to 1993 Form 10-K
September 15, 1993, to the
Receivables Purchase Agreement
17
19
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.12.7 Second Supplement, dated as of May
31, 1994, to the Receivables Purchase
Agreement
10.13 Depository Agreement, dated as of Exhibit 10.15 to Company's Annual
December 31, 1992, among Deerfield Report on Form 10-K (File No.
Funding Corporation, now known as 1-10951) for the fiscal year ended
Seven Hills Funding Corporation January 30, 1993 ("1992 Form 10-K")
("Seven Hills"), the Company, and
Chemical Bank, as Depository
10.14 Liquidity Agreement, dated as of Exhibit 10.16 to 1992 Form 10-K
December 31, 1992, among Seven Hills,
the Company, the financial
institutions named therein, and
Credit Suisse, New York Branch, as
Liquidity Agent
10.15 Pledge and Security Agreement, dated Exhibit 10.17 to 1992 Form 10-K
as of December 31, 1992, among Seven
Hills, the Company, Chemical Bank, as
Depository and Collateral Agent, and
the Liquidity Agent
10.16 Commercial Paper Dealer Agreement, Exhibit 10.18 to 1992 Form 10-K
dated as of December 31, 1992, among
Seven Hills, the Company, and Goldman
Sachs Money Markets, L.P.
10.17 Commercial Paper Dealer Agreement, Exhibit 10.19 to 1992 Form 10-K
dated as of December 31, 1992, among
Seven Hills, the Company, and
Shearson Lehman Brothers, Inc.
10.18 Tax Sharing Agreement Exhibit 10.10 to Form 10
10.19 Ralphs Tax Indemnification Agreement Exhibit 10.1 to Form 10
10.20 Account Purchase Agreement dated as Exhibit 19.2 to Macy's Quarterly
of May 10, 1991 by and among Monogram Report on Form 10-Q for the fiscal
Bank, USA, Macy's, Macy Credit Corpo- quarter ended May 4, 1991 (File No.
ration ("Macy Credit"), Macy Funding, 33-6192), as amended under cover of
Macy's California, Inc. ("MCAL"), Form 8, dated October 3, 1991
Macy's Northeast, Inc. ("MNE"), ("Macy's May 1991 Form 10-Q")
Macy's South, Inc., Bullock's Inc.,
I. Magnin, Inc., Master Servicer, and
Macy Specialty Stores, Inc.**
18
20
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.21 Commercial Accounts Agreement dated Exhibit 19.3 to Macy's May 1991 Form
as of May 10, 1991 ("Commercial 10-Q
Accounts Agreement") by and among
General Electric Capital Corporation
("GECC"), Macy's, Macy Credit, Macy
Funding, MCAL, MNE, Macy's South,
Inc., Bullock's Inc., I. Magnin,
Inc., Master Servicer, and Macy
Specialty Stores, Inc.**
10.22 Credit Card Program Agreement dated Exhibit 19.4 to Macy's May 1991 Form
as of May 10, 1991 ("Credit Card 10-Q
Program Agreement") by and among
Monogram Bank, USA ("Monogram"),
Macy's, MCAL, MNE, Macy's South,
Inc., Bullock's, Inc., I. Magnin,
Inc., and Macy Specialty Stores,
Inc.**
10.22.1 Amendment, dated January 27, 1992, to Exhibit 19.6 to Macy's Quarterly
Credit Card Program Agreement and Report on Form 10-Q (File No.
Commercial Accounts Agreement between 33-6192) for the fiscal quarter ended
Monogram and GECC and Macy's and February 1, 1992
certain subsidiaries
10.22.2 Amendment Agreement, dated as of Au-
gust 6, 1995, among the Company, GE
Capital Consumer Card Co. ("GE
Bank"), FDS National Bank and the
other parties listed on the signature
page thereto***
10.22.3 Program Agreement Amendment, dated as
of February 3, 1996, among the
Company, GE Bank, FDS National Bank
and the other parties listed on the
signature pages thereto***
10.23 Interim Agreement, dated as of August
6, 1995, between the Company and
General Electric Capital Corporation
("GE Capital")***
10.24 Interim Agreement II, dated as of
February 3, 1996, between the Company
and GE Capital***
10.25 Letter, dated January 27, 1992 Exhibit 19.2 to Macy's Quarterly
("Waiver Letter"), from Monogram Report on Form 10-Q (File No.
accepted and agreed to by Macy's and 33-6192) for the fiscal quarter ended
certain of its subsidiaries and, as October 31, 1992 ("Macy's October
to Sections 4 and 12 of the Waiver 1992 Form 10-Q")
Letter, by GECC
19
21
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.26 Stipulation among Monogram, GECC, Exhibit 19.3 to Macy's October 1992
Macy's and Certain of Its Form 10-Q
Subsidiaries, the Official Unsecured
Bondholders' Committee, and the
Official Unsecured Creditors'
Committee and related Order of the
Bankruptcy Court, dated November 24,
1992
10.27 Transfer Agreement, dated as of May Exhibit 19.4 to Macy Credit's
10, 1991, by and among Macy Credit, Quarterly Report on Form 10-Q for the
MCAL, MNE, Macy's South, Inc., fiscal quarter ended May 4, 1992
Bullock's, Inc., and I. Magnin, Inc.
10.28 Letter Agreement, dated September 25, Exhibit 10.63 to Macy's 1991 Form
1991, among Monogram, Macy's, MCAL, 10-K
MNE, Macy's South Inc., Bullock's
Inc., I. Magnin, Inc., and Macy
Specialty Stores, Inc.
10.29 Receivables-Backed Credit Agreement Exhibit 10.1 to the Broadway 1992
among CHH Receivables, Inc., Blue 10-K
Hawk Funding Corporation and General
Electric Capital Corporation, as
Agent
10.29.1 Amendment No. 1 to Receivables-Backed Exhibit 4.1 to Broadway's Current
Credit Agreement, dated as of Septem- Report on Form 8-K filed September
ber 28, 1993, among CHH Receivables, 13, 1994
Inc., Blue Hawk Funding Corporation
and General Electric Capital
Corporation, as Agent
10.29.2 Amendment No. 2 to Receivables-Backed Exhibit 4.2 to Broadway's Current
Credit Agreement, dated as of Septem- Report on Form 8-K filed September
ber 13, 1994, among Broadway Receiv- 13, 1994
ables, Inc., Blue Hawk Funding
Corporation and General Electric
Capital Corporation
10.29.3 Assignment and Security Agreement Exhibit 10.2 to the Broadway 1992
among CHH Receivables Inc., Blue Hawk 10-K
Funding Corporation, Cash Collateral
Bank and General Electric Capital
Corporation, as Agent, Letter of
Credit Agent, Liquidity Agent and
Collateral Agent
10.29.4 Amended and Restated Assignment and Exhibit 4.3 to Broadway's Current
Security Agreement, dated as of Report of Form 8-K filed September
September 13, 1994, among Broadway 13, 1994
Receivables, Inc. and Blue Hawk
Funding Corporation
20
22
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.29.5 Receivables Purchase Agreement among Exhibit 10.3 to the Broadway 1992
Carter Hawley Hale Stores, Inc. and 10-K
CHH Receivables, Inc.
10.29.6 Amendment No. 1 to Receivables Exhibit 4.4 to Broadway's Form 8-K
Purchase Agreement, dated as of filed September 13, 1994
September 13, 1994, by and between
Broadway Receivables, Inc. and
Broadway Stores, Inc.
10.29.7 Promissory Note made by CHH Receiv- Exhibit 10.4 to the Broadway 1992
ables, Inc. in favor of Blue Hawk 10-K
Funding Corporation
10.29.8 Letter of Credit Reimbursement Agree- Exhibit 10.5 to the Broadway 1992
ment among CHH Receivables, Inc. in 10-K
favor of Blue Hawk Funding
Corporation
10.29.9 First Amendment, dated as of Septem- Exhibit 4.6 to Broadway's Current
ber 13, 1994, to the Letter of Credit Report on Form 8-K filed September
Reimbursement Agreement, dated as of 13, 1994
October 8, 1992 among Broadway
Receivables, Inc., Blue Hawk Funding
Corporation, the financial
institutions party thereto and
General Electric Capital Corporation
10.29.10 Subordinated Retailer Security Exhibit 10.6 to the Broadway 1992
Agreement made by Carter Hawley Hale 10-K
Stores, Inc. in favor of CHH
Receivables, Inc.
10.30 1992 Executive Equity Incentive Plan* Exhibit 10.12 to Form 10
10.31 1995 Executive Equity Incentive Plan* Exhibit 10.65 to the 1994 S-4
Registration
10.32 Statement 1992 Incentive Bonus Plan* Exhibit 10.12 to Form 10
10.33 Form of Severance Agreement* Exhibit 10.33 to the 1994 Form 10-K
10.34 Form of Indemnification Agreement* Exhibit 10.14 to Form 10
10.35 Master Severance Plan for Key Employ- Exhibit 10.1.5 to the Company's
ees* Annual Report on Form 10-K (File No.
33-6192) for the fiscal year ended
February 3, 1990 ("1989 Form 10-K")
10.36 Performance Bonus Plan for Key Exhibit 10.1.6 to 1989 Form 10-K
Employees*
10.37 Senior Executive Medical Plan* Exhibit 10.1.7 to 1989 Form 10-K
10.38 Employment Agreement, dated as of Exhibit 10.59 to the 1994 S-4
June 24, 1994, between Allen I. Registration Statement
Questrom and the Company*
10.39 Form of Employment Agreement for Exhibit 10.31 to 1993 Form 10-K
Executives and Key Employees*
21
23
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- --------------- ------------------------------------- -------------------------------------
10.40 Supplementary Executive Retirement Exhibit 10.32 to 1993 Form 10-K
Plan, as Amended*
10.41 Executive Deferred Compensation Plan Exhibit 4.1 to the Registration
(adopted October 29, 1993)* Statement on Form S-8 (Registration
No. 33-50831), filed October 29, 1993
10.42 First Amendment to the Executive De- Exhibit 10.2 to the Quarterly Report
ferred Compensation Plan* on Form 10-Q (File No. 33-6192) for
the fiscal quarter ended October 29,
1994 (the "October 1994 Form 10-Q")
10.43 Retirement Income and Thrift Exhibit 4.1 to the Registration
Incentive Plan (as amended and Statement on Form S-8 (Registration
restated effective as of January 1, No. 33-59107), filed January 14, 1994
1987 and containing all amendments
through December 31, 1993)*
10.44 Amendment to Retirement Income and Exhibit 3.1 to the October 1994 Form
Thrift Incentive Plan* 10-Q
11 Statement Regarding Computation of
Earnings
21 Subsidiaries
23 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney
27 Financial Data Schedule
- ---------------
*Constitutes a compensatory plan or arrangement.
**Confidential portions of this Exhibit were omitted and filed separately with
the SEC pursuant to Rule 24b-2 under the Exchange Act.
***Confidential portions of this Exhibit have been omitted and filed separately
with the SEC pursuant to Rule 24b-2 under the Exchange Act.
22
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FEDERATED DEPARTMENT STORES, INC.
By /s/ Dennis J. Broderick
------------------------------
Dennis J. Broderick
Senior Vice President, General
Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON APRIL 17, 1996.
SIGNATURE TITLE
- ---------------------------------------- ---------------------------------------------------
* Chairman of the Board and Chief Executive Officer
- ---------------------------------------- (principal executive officer) and Director
Allen I. Questrom
* Vice Chairman and Chief Financial Officer
- ---------------------------------------- (principal financial officer) and Director
Ronald W. Tysoe
* Senior Vice President and Controller (principal
- ---------------------------------------- accounting officer)
John E. Brown
* Director
- ----------------------------------------
Robert A. Charpie
* Director
- ----------------------------------------
Lyle Everingham
* Director
- ----------------------------------------
Meyer Feldberg
* Director
- ----------------------------------------
Earl G. Graves, Sr.
* Director
- ----------------------------------------
George V. Grune
* Director
- ----------------------------------------
Gertrude G. Michelson
* Director
- ----------------------------------------
Joseph Neubauer
* Director
- ----------------------------------------
Laurence A. Tisch
* Director
- ----------------------------------------
Paul W. Van Orden
* Director
- ----------------------------------------
Karl M. von der Heyden
* Director
- ----------------------------------------
Marna C. Whittington
* Director
- ----------------------------------------
James M. Zimmerman
*The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and directors and filed herewith.
By /s/ Dennis J. Broderick
-----------------------------
Dennis J. Broderick
Attorney-in-Fact
Date: April 17, 1996
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Management's Report................................................ F-2
Independent Auditors' Report....................................... F-3
Consolidated Statements of Income for the 53 weeks ended February
3, 1996 and the 52 weeks ended January 28, 1995 and January 29,
1994............................................................. F-4
Consolidated Balance Sheets at February 3, 1996 and January 28,
1995............................................................. F-5
Consolidated Statements of Cash Flows for the 53 weeks ended
February 3, 1996 and the 52 weeks ended January 28, 1995 and
January 29, 1994................................................. F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
26
MANAGEMENT'S REPORT
To the Shareholders of
Federated Department Stores, Inc.:
The integrity and consistency of the consolidated financial statements of
Federated Department Stores, Inc. and subsidiaries, which were prepared in
accordance with generally accepted accounting principles, are the responsibility
of management and properly include some amounts that are based upon estimates
and judgments.
The Company maintains a system of internal accounting controls, which is
supported by a program of internal audits with appropriate management follow-up
action, to provide reasonable assurance, at appropriate cost, that the Company's
assets are protected and transactions are properly recorded. Additionally, the
integrity of the financial accounting system is based on careful selection and
training of qualified personnel, organizational arrangements which provide for
appropriate division of responsibilities and communication of established
written policies and procedures.
The consolidated financial statements of the Company have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. Their report
expresses their opinion as to the fair presentation, in all material respects,
of the financial statements and is based upon their independent audit conducted
in accordance with generally accepted auditing standards.
The Audit Review Committee, composed solely of outside directors, meets
periodically with the independent certified public accountants, the internal
auditors and representatives of management to discuss auditing and financial
reporting matters. In addition, the independent certified public accountants and
the Company's internal auditors meet periodically with the Audit Review
Committee without management representatives present and have free access to the
Audit Review Committee at any time. The Audit Review Committee is responsible
for recommending to the Board of Directors the engagement of the independent
certified public accountants, which is subject to shareholder approval, and the
general oversight review of management's discharge of its responsibilities with
respect to the matters referred to above.
Allen I. Questrom
Chairman and Chief Executive Officer
James M. Zimmerman
President and Chief Operating Officer
Ronald W. Tysoe
Vice Chairman and Chief Financial Officer
John E. Brown
Senior Vice President and Controller
F-2
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Federated Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Federated
Department Stores, Inc. and subsidiaries (the "Company") as of February 3, 1996
and January 28, 1995, and the related consolidated statements of income and cash
flows for the fifty-three week period ended February 3, 1996 and the fifty-two
week periods ended January 28, 1995 and January 29, 1994. These consolidated
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Federated
Department Stores, Inc. and subsidiaries as of February 3, 1996 and January 28,
1995, and the results of their operations and their cash flows for the
fifty-three week period ended February 3, 1996 and the fifty-two week periods
ended January 28, 1995 and January 29, 1994, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Cincinnati, Ohio
March 5, 1996
F-3
28
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
------------ ------------ ------------
Net Sales, including leased department sales..... $15,048,513 $8,315,877 $7,229,406
------------ ------------ ------------
Cost of sales.................................... 9,317,784 5,131,363 4,373,941
Selling, general and administrative expenses..... 4,748,331 2,549,122 2,323,546
Business integration and consolidation
expenses....................................... 293,930 85,867 --
Charitable contribution to Federated Department
Stores Foundation.............................. 25,581 --
------------ ------------ ------------
Operating Income................................. 662,887 549,525 531,919
Interest expense................................. (508,132) (262,115) (213,544)
Interest income.................................. 47,104 43,874 49,405
------------ ------------ ------------
Income Before Income Taxes and Extraordinary
Item........................................... 201,859 331,284 367,780
Federal, state and local income tax expense...... (127,306) (143,668) (170,987)
------------ ------------ ------------
Income Before Extraordinary Item................. 74,553 187,616 196,793
Extraordinary item............................... -- -- (3,545)
------------ ------------ ------------
Net Income....................................... $ 74,553 $ 187,616 $ 193,248
============ ============ ============
Earnings per Share:
Income before extraordinary item............... $ .39 $ 1.41 $ 1.56
Extraordinary item............................. -- -- (.03)
------------ ------------ ------------
Net Income.................................. $ .39 $ 1.41 $ 1.53
============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
29
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEBRUARY 3, JANUARY 28,
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash.......................................................... $ 172,518 $ 206,490
Accounts receivable........................................... 2,842,077 2,265,651
Merchandise inventories....................................... 3,094,848 2,380,621
Supplies and prepaid expenses................................. 176,411 99,559
Deferred income tax assets.................................... 74,511 135,405
----------- -----------
Total Current Assets.................................. 6,360,365 5,087,726
Property and Equipment -- net................................... 6,305,167 5,349,912
Intangible Assets -- net........................................ 744,689 1,006,547
Notes Receivable................................................ 415,066 408,134
Other Assets.................................................... 469,763 424,671
----------- -----------
Total Assets.......................................... $14,295,050 $12,276,990
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................... $ 733,115 $ 463,042
Accounts payable and accrued liabilities...................... 2,358,543 2,183,711
Income taxes.................................................. 6,411 65,319
----------- -----------
Total Current Liabilities............................. 3,098,069 2,712,072
Long-Term Debt.................................................. 5,632,232 4,529,220
Deferred Income Taxes........................................... 732,936 890,729
Other Liabilities............................................... 558,127 505,359
Shareholders' Equity............................................ 4,273,686 3,639,610
----------- -----------
Total Liabilities and Shareholders' Equity............ $14,295,050 $12,276,990
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
30
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
--------------- --------------- ---------------
Cash flows from operating activities:
Net income........................................................... $ 74,553 $ 187,616 $ 193,248
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment.......... 444,830 260,485 207,914
Amortization of intangible assets................................ 47,451 22,662 18,762
Amortization of financing costs.................................. 21,702 11,468 10,163
Amortization of original issue discount.......................... 1,202 29,435 16,846
Amortization of unearned restricted stock........................ 4,630 2,714 3,105
Loss on early extinguishment of debt............................. -- -- 3,545
Changes in assets and liabilities, net of effects of acquisition
of companies:
Increase in accounts receivable................................ (21,098) (310,934) (215,101)
(Increase) decrease in merchandise inventories ................ (361,991) 28,620 (31,910)
(Increase) decrease in supplies and prepaid expenses........... (67,745) 2,450 (6,592)
Decrease in other assets not separately identified............. 61,483 2,697 20,229
Increase (decrease) in accounts payable and accrued liabilities
not separately identified.................................... (83,220) (124,662) 70,679
Increase (decrease) in current income taxes.................... (45,437) 61,149 65,990
Increase (decrease) in deferred income taxes................... 192,079 (12,057) 54,917
Increase (decrease) in other liabilities not separately
identified................................................... 26,068 (184) (1,291)
----------- ----------- ---------
Net cash provided by operating activities.................. 294,507 161,459 410,504
----------- ----------- ---------
Cash flows from investing activities:
Acquisition of companies net of cash acquired........................ 16,262 (575,408) (109,325)
Purchase of property and equipment................................... (696,488) (386,847) (309,536)
Disposition of property and equipment................................ 46,992 8,723 1,097
Decrease in notes receivable......................................... -- -- 12,636
----------- ----------- ---------
Net cash used by investing activities...................... (633,234) (953,532) (405,128)
----------- ----------- ---------
Cash flows from financing activities:
Debt issued.......................................................... 1,347,106 2,526,861 --
Financing costs...................................................... (27,236) (66,602) (633)
Debt repaid.......................................................... (1,020,117) (1,594,136) (391,986)
Increase (decrease) in outstanding checks............................ (9,647) (95,010) 35,776
Acquisition of treasury stock........................................ (1,006) (354) (179)
Issuance of common stock............................................. 15,655 5,376 7,090
----------- ----------- ---------
Net cash provided (used) by financing activities........... 304,755 776,135 (349,932)
----------- ----------- ---------
Net decrease in cash................................................... (33,972) (15,938) (344,556)
Cash beginning of period............................................... 206,490 222,428 566,984
----------- ----------- ---------
Cash end of period..................................................... $ 172,518 $ 206,490 $ 222,428
=========== =========== =========
Supplemental cash flow information:
Interest paid........................................................ $ 444,398 $ 211,457 $ 186,658
Interest received.................................................... 46,445 44,675 50,019
Income taxes paid (net of refunds received).......................... 35,103 93,647 49,588
Schedule of noncash investing and financing activities:
Capital lease obligations for new store fixtures ................ 2,818 10,817 3,424
Common stock issued for the Executive Deferred Compensation
Plan........................................................... 2,501 2,070 686
Debt and merger related liabilities issued, reinstated or assumed
in acquisition................................................. 1,267,074 1,414,969 340,000
Equity issued in acquisition..................................... 352,902 1,166,014 --
Debt and equity issued for purchase of debt...................... 429,665 -- --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
31
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federated Department Stores, Inc. (the "Company") is a retail organization
operating department stores selling a wide range of merchandise, including
women's, men's and children's apparel, cosmetics, home furnishings and other
consumer goods.
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates and assumptions are subject to inherent
uncertainties, which may result in actual amounts differing from reported
amounts.
Cash includes cash and liquid investments with original maturities of three
months or less.
Installments of deferred payment accounts receivable maturing after one
year are included in current assets in accordance with industry practice. Such
accounts are accepted on customary revolving credit terms and offer the customer
the option of paying the entire balance on a 25-day basis without incurring
finance charges. Alternatively, customers may make scheduled minimum payments
and incur competitive finance charges. Minimum payments vary from 4.2% to 100.0%
of the account balance, depending on the size of the balance. Profits on
installment sales are included in income when the sales are made. Finance charge
income is included as a reduction of selling, general and administrative
expenses.
Substantially all merchandise inventories are valued by the retail method
and stated on the LIFO (last-in, first-out) basis, which is generally lower than
market.
Depreciation and amortization are provided primarily on a straight-line
basis over the shorter of estimated asset lives or related lease terms.
Estimated asset lives range from 15 to 50 years for buildings and building
equipment and 3 to 15 years for store fixtures and equipment. Real estate taxes
and interest on construction in progress and land under development are
capitalized. Amounts capitalized are amortized over the estimated lives of the
related depreciable assets.
Intangible assets are amortized on a straight-line basis over their
estimated lives (see Note 8). The carrying value of intangible assets is
periodically reviewed by the Company and impairments are recognized when the
present value of the expected future operating cash flows derived from such
intangible assets is less than their carrying value.
Advertising and promotional costs, which are generally expensed as
incurred, amounted to $633.2 million for the 53 weeks ended February 3, 1996 and
$347.5 million and $298.8 million for the 52 weeks ended January 28, 1995 and
January 29, 1994, respectively.
Financing costs are amortized over the life of the related debt.
F-7
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method prescribed in SFAS No. 109, deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and net
operating loss and tax credit carryforwards. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits other than
Pensions" ("SFAS No. 106"), which requires that the cost of these benefits be
recognized in the financial statements over an employee's term of service with
the Company.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The impact of such adoption was not
material.
Earnings per share are computed on the basis of daily average number of
shares outstanding during the year. Any dilution from the potential issuance of
shares under warrant agreements or stock option plans would be less than 3.0%.
Fully diluted earnings per share include the effect of the potential issuance of
shares under warrant agreements or stock option plans as well as for convertible
debt and, unless disclosed, any such dilution would be less than 3.0%.
Certain reclassifications were made to prior years' amounts to conform with
the classifications of such amounts for the most recent year.
2. ACQUISITION OF COMPANIES
The Company completed its acquisition of Broadway Stores, Inc. ("Broadway")
pursuant to an Agreement and Plan of Merger dated August 14, 1995. The total
purchase price of the Broadway acquisition was approximately $1,620.0 million,
consisting of (i) 12.6 million shares of common stock and options to purchase an
additional 1.5 million shares of common stock valued at $352.9 million and (ii)
$1,267.1 million of Broadway debt. In addition, a wholly owned subsidiary of the
Company purchased $422.3 million of mortgage indebtedness of Broadway for 6.8
million shares of common stock of the Company and a $242.3 million promissory
note.
The Broadway acquisition was accounted for under the purchase method and,
accordingly, the results of operations of Broadway have been included in the
Company's results of operations since July 29, 1995 and the purchase price has
been allocated to Broadway's assets and liabilities based on their estimated
fair values as of that date. As of February 3, 1996, the related excess of cost
over net assets acquired is approximately $191.4 million (see Note 8).
On December 19, 1994, the Company acquired R. H. Macy & Co., Inc.
("Macy's") pursuant to a Plan of Reorganization (the "Macy's POR") of Macy's and
substantially all of its subsidiaries (collectively, the
F-8
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"Macy's Debtors"). Pursuant to the Macy's POR, among other transactions, Macy's
merged with the Company, which became responsible for making distributions of
cash and debt and equity securities pursuant to the Macy's POR. The total
purchase price of the Macy's acquisition was approximately $3,815.9 million and
consisted of the following:
(MILLIONS)
Cash payments and transaction costs................. $ 830.4
Assumption of merger-related liabilities............ 192.5
Issuance, reinstatement or assumption of debt....... 1,182.4
Issuance of 55.6 million shares of common stock..... 1,047.6
Issuance of warrants to purchase 18.0 million shares
of common stock................................... 118.4
Net cost of the initial investment.................. 444.6
--------
$3,815.9
========
The Macy's acquisition was accounted for under the purchase method and,
accordingly, the results of operations of Macy's have been included in the
Company's results of operations since the date of acquisition and the purchase
price has been allocated to Macy's assets and liabilities based on their
estimated fair values at the date of acquisition. Including certain adjustments
recorded in the 53 weeks ended February 3, 1996 to the assets and liabilities
acquired, the related excess of cost over net assets acquired was adjusted to
$102.7 million at February 3, 1996 (see Note 8).
The following unaudited pro forma condensed statements of operations give
effect to the Broadway and Macy's acquisitions and related financing
transactions as if such transactions had occurred at the beginning of each
period presented.
53 WEEKS 52 WEEKS
ENDED ENDED
FEBRUARY 3, JANUARY 28,
1996 1995
------------ ------------
(MILLIONS, EXCEPT PER SHARE DATA)
Net sales........................................ $ 15,933.1 $ 16,033.9
Net income....................................... 24.3 71.7
Earnings per share............................... .12 .36
The foregoing unaudited pro forma condensed statements of operations give
effect to, among other pro forma adjustments, the following:
(i) Interest expense on debt incurred to finance the acquisitions, the reversal
of certain of Macy's and Broadway's historical interest expenses and the
reversal of the Company's historical interest expense on certain
indebtedness redeemed in connection with the acquisitions;
(ii) Amortization of deferred debt expense related to debt incurred to finance
the acquisitions;
(iii) Amortization, over 20 years, of the excess of cost over net assets
acquired, and amortization, over 40 years, of tradenames acquired;
(iv) Depreciation and amortization adjustments related to the fair market value
of assets acquired;
F-9
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(v) Adjustments to income tax expense related to the above; and
(vi) Adjustments for shares issued.
The foregoing unaudited pro forma information is provided for illustrative
purposes only and does not purport to be indicative of results that actually
would have been achieved had the acquisitions been consummated on the first day
of the periods presented or of future results.
On May 26, 1994, the Company purchased Joseph Horne Co., Inc. ("Horne's"),
a department store retailer operating ten stores in Pittsburgh and Erie,
Pennsylvania for approximately $116.0 million, including the assumption of $40.0
million of mortgage debt and transaction costs. The acquisition was accounted
for under the purchase method of accounting and the purchase price approximated
the estimated fair value of the assets and liabilities acquired. Results of
operations for the stores acquired are included in the Consolidated Financial
Statements from the date of acquisition. Pro forma financial results have not
been presented for this acquisition since it did not significantly affect the
results of operations of the Company.
3. BUSINESS INTEGRATION AND CONSOLIDATION EXPENSES
Business integration and consolidation expenses represent the costs
associated with the integration of the Horne's, Macy's and Broadway businesses
with the Company's other businesses and the consolidation of the operations of
certain of the Company's retail operating divisions.
During the 53 weeks ended February 3, 1996, the Company recorded $293.9
million of business integration and consolidation expenses associated with the
integration of Macy's and Broadway into the Company ($208.9 million and $48.1
million, respectively) and the consolidation of the Company's Rich's/Goldsmith's
and Lazarus divisions ($36.9 million). The primary components of the Macy's
integration expenses were $69.1 million of inventory valuation adjustments to
merchandise in lines of business which the Company, subsequent to the
acquisition, eliminated or replaced, $31.1 million of costs to close and sell
certain stores and to convert a number of stores to other nameplates, $30.8
million of severance costs and $77.9 million of other costs and expenses
associated with integrating Macy's into the Company. The major components of the
Broadway integration expenses were $23.3 million of costs to close certain
stores, $8.7 million of costs to refinance certain indebtedness and $16.1
million of other costs and expenses associated with integrating Broadway into
the Company. Of the $36.9 million of expenses associated with the divisional
consolidation referred to above, $22.5 million relates to inventory valuation
adjustments to merchandise of the affected divisions in lines of business which
were eliminated or replaced as a result of the consolidation.
The Company recorded a $45.8 million charge in the 52 weeks ended January
28, 1995 for the integration of Macy's into the Company, including the
consolidation of the Macy's East division with the Company's Abraham &
Straus/Jordan Marsh division and the consolidation of central merchandising
divisions. The major components of the charge include $13.0 million in severance
expenses for Abraham & Straus/Jordan Marsh employees, $12.3 million in penalties
associated with terminating certain merchandise purchasing agreements and $14.1
million of losses incurred on stores closed and property writedowns related to
stores sold as a result of the Macy's acquisition.
The Company recorded a $27.0 million charge in the 52 weeks ended January
28, 1995 for the integration of the ten Horne's department stores and related
facilities and merchandising and operating functions into the
F-10
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Company. The $27.0 million charge includes $12.1 million for the costs of
operating the Horne's central office during a transitional period and the
incremental costs associated with converting the Horne's stores to Lazarus
stores (including advertising, credit card issuance and promotion, data
processing conversion and other name change expenses). The remainder of the
charge relates to inventory valuation adjustments of Horne's merchandise in
lines which the Company, subsequent to the acquisition, eliminated or replaced
with Lazarus merchandise lines.
Finally, as a result of the consolidation of the Company's
Rich's/Goldsmith's and Lazarus divisions, which was announced on January 20,
1995, a $13.1 million charge was recorded for severance related to the
elimination of duplicative positions.
4. EXTRAORDINARY ITEM
The extraordinary item for the 52 weeks ended January 29, 1994 represents
costs of $3.5 million, net of income tax benefit of $2.3 million, associated
with the prepayment of the entire $355.0 million outstanding principal amount of
the Company's Series B Secured Notes.
5. ACCOUNTS RECEIVABLE
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
(MILLIONS)
Due from customers......................................... $ 2,698.8 $ 2,087.9
Less allowance for doubtful accounts....................... 83.5 44.9
-------- --------
2,615.3 2,043.0
Other receivables.......................................... 226.8 222.7
-------- --------
Net receivables............................................ $ 2,842.1 $ 2,265.7
======== ========
Sales through the Company's credit plans were $4,323.8 million for the 53
weeks ended February 3, 1996 and $3,916.9 million and $3,743.1 million for the
52 weeks ended January 28, 1995 and January 29, 1994, respectively. The credit
plans relating to operations of the Company that were previously conducted
through divisions of Macy's are owned by a third party.
F-11
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Finance charge income amounted to $405.2 million for the 53 weeks ended
February 3, 1996 and $320.3 million and $243.6 million for the 52 weeks ended
January 28, 1995 and January 29, 1994, respectively. Changes in allowance for
doubtful accounts are as follows:
53 WEEKS ENDED
FEBRUARY 3, 52 WEEKS ENDED 52 WEEKS ENDED
1996 JANUARY 28, 1995 JANUARY 29, 1994
--------------- ---------------- ----------------
(MILLIONS)
Balance, beginning of year............ $ 44.9 $ 36.9 $ 45.3
Charged to costs and expenses......... 126.9 66.5 50.3
Acquired.............................. 16.8 -- --
Net uncollectible balances written
off................................. (105.1) (58.5) (58.7)
------- ------ ------
Balance, end of year.................. $ 83.5 $ 44.9 $ 36.9
======= ====== ======
6. INVENTORIES
Merchandise inventories were $3,094.8 million at February 3, 1996, compared
to $2,380.6 million at January 28, 1995. At these dates, the cost of inventories
using the LIFO method approximates the cost of such inventories using the
first-in, first-out method. The application of the LIFO method did not impact
the 53 weeks ended February 3, 1996, resulted in a pre-tax credit of $11.3
million for the 52 weeks ended January 28, 1995 and a pre-tax charge of $2.8
million for the 52 weeks ended January 29, 1994.
7. PROPERTIES AND LEASES
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
(MILLIONS)
Land....................................................... $ 1,045.3 $ 888.6
Buildings on owned land.................................... 2,394.4 2,162.2
Buildings on leased land and leasehold improvements........ 1,389.0 1,055.7
Store fixtures and equipment............................... 2,352.1 1,765.9
Property not used in operations............................ 11.3 6.5
Leased properties under capitalized leases................. 80.6 62.6
-------- --------
7,272.7 5,941.5
Less accumulated depreciation and amortization............. 967.5 591.6
-------- --------
$ 6,305.2 $ 5,349.9
======== ========
In connection with various shopping center agreements, the Company is
obligated to operate certain stores within the centers for periods of up to 20
years. Some of these agreements require that the stores be operated under a
particular name.
The Company leases a portion of the real estate and personal property used
in its operations. Most leases require the Company to pay real estate taxes,
maintenance and other executory costs; some also require additional payments
based on percentages of sales and some contain purchase options.
F-12
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Minimum rental commitments (excluding executory costs) at February 3, 1996,
for noncancellable leases are:
CAPITAL OPERATING
LEASES LEASES TOTAL
----------- ----------- -----------
(MILLIONS)
Fiscal year:
1996........................................... $ 14.3 $ 189.1 $ 203.4
1997........................................... 14.3 172.1 186.4
1998........................................... 13.8 148.3 162.1
1999........................................... 13.3 138.5 151.8
2000........................................... 13.1 132.8 145.9
After 2000..................................... 99.2 1,281.8 1,381.0
----------- ----------- -----------
Total minimum lease payments..................... 168.0 $ 2,062.6 $ 2,230.6
========== ==========
Less amount representing interest................ 81.4
-----------
Present value of net minimum capital lease
payments....................................... $ 86.6
==========
Capitalized leases are included in the Consolidated Balance Sheets as
property and equipment while the related obligation is included in short-term
($5.5 million) and long-term ($81.1 million) debt. Amortization of assets
subject to capitalized leases is included in depreciation and amortization
expense. Total minimum lease payments shown above have not been reduced by
minimum sublease rentals of approximately $10.0 million on capital leases and
$25.0 million on operating leases.
Rental expense consists of:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Real estate (excluding executory
costs)
Capital leases --
Contingent rentals.............. $ 4.4 $ 3.3 $ 3.4
Operating leases --
Minimum rentals................. 137.4 78.9 68.5
Contingent rentals.............. 19.6 10.4 8.7
------ ------ ------
161.4 92.6 80.6
------ ------ ------
Less income from subleases --
Capital leases.................. 0.7 0.6 0.8
Operating leases................ 1.7 0.9 1.2
------ ------ ------
2.4 1.5 2.0
------ ------ ------
$159.0 $ 91.1 $ 78.6
====== ====== ======
Personal property --
Operating leases................... $ 63.5 $ 37.4 $ 38.1
====== ====== ======
F-13
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. INTANGIBLE ASSETS
FEBRUARY 3, JANUARY 28,
1996 1995
----------- ------------
(MILLIONS)
Reorganization value in excess of amount allocable to
identifiable assets...................................... $ 100.2 $ 300.2
Excess of cost over net assets acquired.................... 294.1 308.5
Tradenames................................................. 458.0 458.0
------ --------
852.3 1,066.7
Less accumulated amortization.............................. 107.6 60.2
------ --------
Intangible assets -- net................................... $ 744.7 $1,006.5
====== ========
Intangible assets are being amortized on a straight-line basis over 20
years, except for tradenames which are being amortized over 40 years. The
Company recorded $200.0 million and $75.0 million of tax benefits as reductions
of reorganization value in excess of amounts allocable to identifiable assets
during the 53 weeks ended February 3, 1996 and the 52 weeks ended January 28,
1995, respectively (see Note 12).
9. NOTES RECEIVABLE
FEBRUARY 3, JANUARY 28,
1996 1995
----------- ------------
(MILLIONS)
9.5% note relating to the sale of certain divisions in 1988
and maturing in two equal installments on May 3, 1997 and
May 3, 1998.............................................. $ 400.0 $400.0
Other...................................................... 15.1 8.1
------ ------
$ 415.1 $408.1
====== ======
The $400.0 million note, which is supported by a letter of credit, was
transferred to a grantor trust which borrowed $352.0 million under a note
monetization facility and transferred such proceeds to the Company (see Note
10).
F-14
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. FINANCING
FEBRUARY 3, JANUARY 28,
1996 1995
----------- ------------
(MILLIONS)
Short-term debt:
Broadway receivables based financing..................... $ 450.5 $ --
Receivables backed commercial paper...................... 117.0 274.9
Bank credit facility..................................... 100.0 25.0
Current portion of long-term debt........................ 65.6 163.1
-------- --------
Total short-term debt............................ $ 733.1 $ 463.0
======== ========
Long-term debt:
Bank credit facility..................................... $ 1,540.0 $1,700.0
Receivables backed certificates.......................... 1,654.3 1,056.8
Mortgages................................................ 455.7 418.5
10.0% Senior notes due 2001.............................. 450.0 450.0
8.125% Senior notes due 2002............................. 400.0 --
Senior convertible discount notes........................ -- 306.6
Note monetization facility............................... 352.0 352.0
Convertible subordinated notes........................... 350.0 --
Secured promissory note.................................. 242.3 --
Tax notes................................................ 106.8 177.4
Capitalized leases....................................... 81.1 67.5
Other.................................................... -- 0.4
-------- --------
Total long-term debt............................. $ 5,632.2 $4,529.2
======== ========
Interest and financing costs were as follows:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Interest on debt..................... $478.2 $244.9 $197.5
Amortization of financing costs...... 21.7 11.5 10.2
Interest on capitalized leases....... 9.1 6.2 6.0
------ ------ ------
Subtotal................... 509.0 262.6 213.7
Less:
Interest capitalized on
construction....................... (0.9) (0.5) (0.2)
Interest income...................... (47.1) (43.9) (49.4)
------ ------ ------
$461.0 $218.2 $164.1
====== ====== ======
F-15
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Future maturities of long-term debt, other than capitalized leases and
including unamortized original issue discount of $1.7 million, are shown below:
(MILLIONS)
Fiscal year:
1997........................................... $ 890.0
1998........................................... 472.9
1999........................................... 934.1
2000........................................... 1,156.3
2001........................................... 467.7
After 2001..................................... 1,631.8
The Company assumed $1,267.1 million of debt in the acquisition of
Broadway. On October 11, 1995, in connection with the acquisition of Broadway, a
wholly owned subsidiary of the Company ("FNC II") purchased $422.3 million of
mortgage indebtedness of Broadway for 6.8 million shares of common stock of the
Company and a $242.3 million Secured Promissory Note.
On September 27, 1995, the Company issued $350.0 million of 5.0%
Convertible Subordinated Notes and thereafter utilized a portion of the proceeds
thereof to fund the repurchase of $142.0 million of the 6.25% Convertible Senior
Subordinated Notes assumed in the Broadway acquisition.
On October 3, 1995, the Company issued $400.0 million of 8.125% Senior
Notes and utilized $307.4 million of the proceeds thereof to prepay the entire
outstanding principal amount of the Company's Senior Convertible Discount Notes
due 2004.
The following summarizes certain provisions of the Company's debt:
BANK CREDIT FACILITY
The Bank Credit Facility consists of a $2,000.0 million revolving credit
facility (the "Revolving Loan Facility") and an $800.0 million term loan
facility (the "Term Loan Facility").
The Revolving Loan Facility provides for revolving credit loans ("Revolving
Loans" and, together with the loans under the Term Loan Facility, the "Loans")
of up to $2,000.0 million, of which an aggregate of $1,100.0 million is
available for seasonal working capital purposes (including a letter of credit
subfacility). For 30 consecutive calendar days during the period from December 1
to March 1, commencing December 1, 1995, total borrowings plus the aggregate
stated amounts of stand-by letters of credit under the Revolving Loan Facility
may not exceed $1,000.0 million ($1,350.0 million in the case of the period from
December 1, 1995 to March 1, 1996). The Company's ability to effect borrowings
under the Revolving Loan Facility is not subject to any borrowing base
requirements or limitations. The Revolving Loan Facility matures on March 31,
2000, with the Revolving Loans then outstanding to be repaid in full on such
date.
The Term Loan Facility matures on January 29, 2000 and does not require any
amortization of principal prior to May 4, 1996. Commencing on May 4, 1996, the
Company is required to make quarterly amortization payments totaling, on an
annual basis: $100.0 million in the first year thereafter; $150.0 million in the
second year thereafter; $200.0 million in the third year thereafter; and $350.0
million in the fourth year thereafter.
F-16
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company is permitted by the terms of the Credit Agreement to make voluntary
prepayments of amounts outstanding under the Term Loan Facility at any time
without penalty or premium. Until such time as the Company has obtained an
investment grade rating with respect to its long-term senior unsecured debt,
repayments of certain amounts outstanding under the Term Loan Facility are
required upon the occurrence of certain events.
Loans under the Bank Credit Facility (other than "competitive bid loans,"
if any) bear interest at a rate equal to, at the Company's option, (i) the
administrative agent's Base Rate (as defined in the bank credit agreement) in
effect from time to time or (ii) the administrative agent's Eurodollar rate
(adjusted for reserves) plus 1.0% subject to adjustment based on the Company's
long-term debt rating and interest coverage ratio. The Company is able to borrow
up to $1,000.0 million under the Revolving Loan Facility in competitive bid
loans at either fixed rates or Eurodollar-based rates as bid by the lenders in
the Revolving Loan Facility. The Company pays a commitment fee of 0.25% per
annum, subject to adjustment, on the unused portion of the Revolving Loan
Facility.
The Company has purchased interest rate caps covering an aggregate notional
amount of $1,400.0 million for a period of three years from December 15, 1994.
Pursuant to such caps, the Eurodollar rate with reference to which interest on
$500.0 million of the Company's variable rate indebtedness is determined is
effectively limited to a maximum rate of 8% per annum throughout such three-year
period and the Eurodollar rate with reference to which interest on $900.0
million of the Company's variable rate indebtedness is determined is effectively
limited to a maximum rate of 7% per annum in the first year of such three-year
period, 8% per annum in the second year of such three-year period and 9% per
annum thereafter. The Company has also entered into interest rate swap
agreements covering an aggregate notional amount of $300.0 million. The
Eurodollar rate with reference to which interest on the Company's variable rate
indebtedness is determined is effectively converted to a fixed rate of 5.3275%
on $100.0 million of borrowings from January 9, 1996 to January 9, 1998, 5.2625%
on $100.0 million of borrowings from January 23, 1996 to January 25, 1999 and
5.225% on $100.0 million of borrowings from January 18, 1996 to January 18,
1998.
RECEIVABLES BACKED CERTIFICATES
On December 15, 1992, Prime Receivables Corporation, a wholly owned
subsidiary of the Company ("Prime"), issued $981.0 million ($979.1 million
discounted amount) of asset-backed certificates in four separate classes to
finance its purchases of revolving consumer credit card receivables generated by
the Company's department store operations (other than operations previously
conducted by divisions of Macy's). The four classes of certificates are: (i)
$450.0 million in aggregate principal amount of 7.05% Class A-1 Asset-Backed
Certificates, Series 1992-1 due December 15, 1997; (ii) $450.0 million in
aggregate principal amount of 7.45% Class A-2 Asset-Backed Certificates, Series
1992-2 due December 15, 1999; (iii) $40.5 million in aggregate principal amount
of 7.55% Class B-1 Asset-Backed Certificates, Series 1992-1 due January 15,
1998; and (iv) $40.5 million in aggregate principal amount of 7.95% Class B-2
Asset-Backed Certificates, Series 1992-2 due January 18, 2000. On January 20,
1995 Prime entered into an agreement pursuant to which it effectively sold an
additional $77.0 million of asset-backed certificates to a third party, with
such certificates bearing interest at the purchaser's commercial paper rate plus
0.9% and maturing as to $38.5 million in 1998 and $38.5 million in 2000. The
$77.0 million of certificates are subject to interest rate caps intended to
effectively limit the rate of interest thereon to 11.0% per annum. On July 27,
1995, Prime issued an additional
F-17
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$598.0 million of asset-backed certificates in two separate classes. The two
classes are: (i) $546.0 million in aggregate principal amount of 6.75% Class A
Asset-Backed Certificates, Series 1995-1 due August 15, 2002 and (ii) $52.0
million in aggregate principal amount of 6.90% Class B Asset-Backed
Certificates, Series 1995-1 due September 15, 2002. All of the foregoing
certificates represent undivided interests in the assets of a master trust
originated by Prime.
RECEIVABLES BACKED COMMERCIAL PAPER
On January 5, 1993, an indirect wholly owned special purpose financing
subsidiary of the Company entered into a liquidity facility with a syndicate of
banks providing for the issuance of up to $375.0 million of receivables backed
commercial paper. Borrowings under the liquidity facility are secured by an
interest in the master trust originated by Prime and are subject to interest
rate caps effectively limiting the rate of interest thereon to 10% per annum. As
of February 3, 1996 and January 28, 1995 there was $117.0 million and $274.9
million of such commercial paper outstanding, respectively.
BROADWAY RECEIVABLES BASED FINANCING
Broadway Receivables Inc. , a wholly owned subsidiary of the Company
("BRI"), is a party to a credit facility providing for up to $575.0 million in
receivables based financing. The Broadway receivables facility provides for an
unaffiliated limited purpose corporation to advance funds to BRI and to fund
these advances through the issuance of commercial paper. Outstanding borrowings
under the facility, which are secured by Broadway's customer receivables, accrue
interest at the A-1/P-1 commercial paper rate plus 1.08%. At February 3, 1996,
there was $386.5 million of such borrowings outstanding.
In September 1994, BRI obtained an additional $64.0 million in receivables
based financing through the issuance of subordinated asset backed notes (the
"Asset Backed Notes"). The Asset Backed Notes were issued in two classes: $38.0
million of 7.55% Class A notes due in 1999 and $26.0 million of 11.0% Class B
notes due 1999. The Asset Backed Notes are redeemable at BRI's option, in whole
or in part, on each interest payment date on or after October 15, 1994 and on
October 8, 1996 at a redemption price combining principal, accrued interest,
unpaid interest, and a make-whole premium. In March 1996, BRI gave notice for
redemption of the Asset Backed Notes effective April 15, 1996.
Subject to such earlier termination as may be agreed upon by the parties,
the Broadway receivables facility will expire on October 8, 1996. It is
anticipated that, in connection with such termination or expiration, the
customer receivables that provided security for the Broadway receivables
facility and the Asset Backed Notes will be purchased by Prime.
10.0% SENIOR NOTES DUE 2001
The 10% Senior Notes due 2001 were issued by the Company on January 27,
1995. The Senior Notes are unsecured obligations of the Company which mature on
February 15, 2001 and bear interest at 10% per annum from January 27, 1995,
payable semiannually on February 15 and August 15 of each year. The Senior Notes
are not redeemable at the option of the Company prior to maturity and are not
subject to a sinking fund.
F-18
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8.125% SENIOR NOTES DUE 2002
The 8.125% Senior Notes due 2002 were issued by the Company on October 3,
1995. The Senior Notes are unsecured obligations of the Company which mature on
October 15, 2002 and bear interest at 8.125% per annum from October 6, 1995,
payable semiannually on October 15 and April 15 of each year, commencing on
April 15, 1996. The Senior Notes are not redeemable at the option of the Company
prior to maturity and are not subject to a sinking fund.
MORTGAGES
Certain of the Company's real estate subsidiaries are parties to a mortgage
loan facility providing for secured borrowings. Borrowings under the facility
will mature in 2002 and bear interest at 9.99% per annum. Borrowings under the
facility are secured by liens on certain real property. As of February 3, 1996
and January 28, 1995, there was $345.1 million outstanding under the mortgage
loan facility.
In addition to the mortgage indebtedness described above, the Company and
certain of its subsidiaries are obligated under certain other mortgage notes,
which are secured by liens on certain real property of the Company's
subsidiaries. The aggregate principal amount of such mortgage notes was $118.8
million ($8.2 million included in short-term debt) as of February 3, 1996 and
$76.2 million ($2.8 million included in short-term debt) as of January 28, 1995.
CONVERTIBLE SUBORDINATED NOTES
On September 27, 1995, the Company issued Convertible Subordinated Notes
which are unsecured obligations of the Company and are subordinate to all
existing and future Senior Debt of the Company and all indebtedness and other
liabilities of the Company's subsidiaries. The Convertible Subordinated Notes
mature on October 1, 2003 and bear interest at the rate of 5% per annum from
September 27, 1995, payable in arrears on October 1 and April 1 of each year,
commencing April 1, 1996.
At any time prior to maturity, unless previously redeemed or repurchased,
each holder of Convertible Subordinated Notes will have the right to convert the
principal of such holder's Convertible Subordinated Notes into fully-paid and
non-assessable shares of Common Stock at the rate of 29.2547 shares of Common
Stock for each $1,000 stated principal amount of Convertible Subordinated Notes,
provided that such conversion rate will be appropriately adjusted in order to
prevent dilution of such conversion right in the event of certain changes in or
events affecting the Common Stock and certain consolidations, mergers, sales,
leases, transfers, or other dispositions to which the Company is a party. In
addition, the Convertible Subordinated Notes will be redeemable at the Company's
option, in whole or in part, at anytime on or after October 1, 1998, at the
redemption prices plus accrued interest to the date of redemption. The
Convertible Subordinated Notes are not subject to a sinking fund.
SECURED PROMISSORY NOTE
The Secured Promissory Note matures in October 2000 and is secured by liens
on certain real property and stock of FNC II. The Secured Promissory Note bears
interest at a variable rate equal to LIBOR plus 1.25%. The Secured Promissory
Note provides that, at a time to be specified by the Company during the first
F-19
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
six months of the term thereof, the interest rate thereunder will be fixed at a
rate equal to the applicable Treasury rate plus 1.75%.
TAX NOTES
The Tax Notes represent agreements with taxing authorities with respect to
claims to be paid over varying periods of time up to 6 years, with unpaid
balances bearing interest at rates ranging from 8.0% to 9.35% per annum.
NOTE MONETIZATION FACILITY
On May 3, 1988, the Company sold certain divisions for consideration which
included a $400.0 million promissory note. The Company subsequently transferred
the note to a grantor trust of which it is the beneficiary. The trust borrowed
$352.0 million under a note monetization facility, using the note as collateral,
and distributed the proceeds of such borrowing to the Company. The borrowing
under the note monetization facility matures in two equal installments on May 3,
1997 and 1998, and bears interest at a variable interest rate based on LIBOR,
subject to certain adjustments. An interest rate swap agreement was entered into
for the note monetization facility which, in effect, converted the variable
interest rate to a fixed rate of 10.344%. The Company is not an obligor on the
borrowing under the note monetization facility or the interest rate swap
agreement, and the lender's recourse thereunder is limited to the trust's assets
and the Company's interest in the trust.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
(MILLIONS)
Merchandise and expense accounts payable........ $ 1,592.7 $ 1,299.2
Business integration and consolidation
expenses...................................... 13.0 57.8
Merger related liabilities...................... 64.4 173.1
Taxes other than income taxes................... 94.6 123.3
Accrued wages and vacation...................... 81.4 81.2
Accrued interest................................ 64.3 29.3
Other........................................... 448.1 419.8
-------- --------
$ 2,358.5 $ 2,183.7
======== ========
Included in Other at February 3, 1996 is $22.5 million of accrued severance
in connection with the Broadway acquisition related to approximately 2,000
employees. Included in the liability for business integration and consolidation
expenses at January 28, 1995 is $26.1 million of accrued severance related to
approximately 750 employees of the Abraham & Straus/Jordan Marsh,
Rich's/Goldsmith's and Lazarus divisions (see Note 3), all of which was paid out
prior to February 3, 1996.
F-20
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12. TAXES
Total income taxes were allocated as follows:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Income from operations.............. $127.3 $143.7 $171.0
Extraordinary items................. -- -- (2.3)
------ ------ ------
Total income taxes.................. $127.3 $143.7 $168.7
====== ====== ======
Income tax expense attributable to income from operations is as follows:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
--------------------------- --------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------ ------- -------- ------
(MILLIONS)
Federal............... $ 91.1 $ 13.5 $104.6 $ 82.0 $ 31.4 $113.4 $127.9 $ 10.4 $138.3
State and local....... 19.5 3.2 22.7 21.2 9.1 30.3 33.6 (0.9) 32.7
------ ----- ------ ------ ----- ------ ----- ----- ------
$110.6 $ 16.7 $127.3 $103.2 $ 40.5 $143.7 $161.5 $ 9.5 $171.0
====== ===== ====== ====== ===== ====== ===== ===== ======
The income tax expense attributable to income from operations reported
differs from the expected tax computed by applying the federal income tax
statutory rate of 35% for the 53 weeks ended February 3, 1996 and the 52 weeks
ended January 28, 1995 and January 29, 1994 to income before income taxes and
extraordinary items. The reasons for this difference and their tax effects are
as follows:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Expected tax.............................. $ 70.7 $115.9 $128.7
State and local income taxes, net of
federal income tax expense.............. 14.7 19.7 21.2
Permanent difference arising from
amortization of intangible assets....... 16.6 7.9 6.6
Permanent difference resulting from
Broadway acquisition.................... 22.7 -- --
Effect of federal tax rate change on
deferred income taxes................... -- -- 14.2
Other..................................... 2.6 0.2 0.3
------ ------ ------
$127.3 $143.7 $171.0
====== ====== ======
F-21
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
FEBRUARY 3, JANUARY 28,
1996 1995
------------ -----------
(MILLIONS)
Deferred tax assets:
Operating loss carryforwards............... $ 417.0 $ 378.3
Accrued liabilities accounted for on a cash
basis for tax purposes................... 160.4 174.6
Postretirement benefits other than
pensions................................. 179.5 180.8
Capital lease debt......................... 34.6 28.6
Allowance for doubtful accounts............ 31.7 18.1
Alternative minimum tax credit
carryforwards............................ 48.9 37.3
Other...................................... 133.8 77.7
--------- ---------
Total gross deferred tax assets....... 1,005.9 895.4
Less valuation allowance.............. -- (114.7)
--------- ---------
Net deferred tax assets............... 1,005.9 780.7
--------- ---------
Deferred tax liabilities:
Excess of book basis over tax basis of
property and equipment................... (1,335.7) (1,119.2)
Prepaid pension expense.................... (71.8) (76.7)
Deferred gain from sale of divisions....... (81.6) (81.6)
Merchandise inventories.................... (131.6) (98.6)
Effects of reorganization transactions..... (18.2) (136.4)
Other...................................... (25.6) (23.5)
--------- ---------
Total gross deferred tax
liabilities......................... (1,664.5) (1,536.0)
--------- ---------
Net deferred tax liability............ $ (658.6) $ (755.3)
========= =========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and tax planning strategies in
making this assessment. Because tax law limits the use of an acquired
enterprise's net operating loss carryforwards to subsequent taxable income of
the acquired enterprise in a consolidated tax return for the combined
enterprise, management had recorded a valuation allowance of $114.7 million to
reflect the estimated amount of deferred tax assets related to Macy's net
operating loss carryforwards (the "Macy's NOLs") which may not be realized.
During the year ended February 3, 1996, the Company determined that the
valuation allowance related to the Macy's NOLs was not required and the excess
of cost over net assets acquired was adjusted accordingly.
F-22
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of February 3, 1996, the Company estimated that the Macy's NOL's, which
are available to offset future taxable income of Macy's through 2008, were
approximately $777.8 million and that Broadway's net operating loss
carryforwards, which are available to offset future taxable income of Broadway
through 2009, were approximately $302.6 million. The Company also had
alternative minimum tax credit carryforwards of $48.9 million which are
available to reduce future income taxes, if any, over an indefinite period.
In connection with the joint plan of reorganization ("POR") of Federated
Stores, Inc. ("FSI"), the former parent of the Company and certain of its
subsidiaries, the FSI consolidated tax group (which, with respect to periods
prior to February 4, 1992, included the Company and such subsidiaries) triggered
certain gains (the "Gains") estimated at approximately $1,800.0 million. The
Company believed that net operating and capital losses ("NOLs") sufficient to
offset the Gains were available at the time the Gains were triggered and,
accordingly, that the Company would have no regular federal income tax liability
in respect thereof and that it had adequately provided for its estimated
alternative minimum tax liability. During the year ended January 28, 1995, the
Company recorded $75.0 million of tax benefits related to NOLs generated prior
to February 4, 1992 and reduced reorganization value in excess of amounts
allocable to identifiable assets accordingly. The remaining issues related to
the Gains and the POR were resolved on January 5, 1996 and the Company recorded
$200.0 million of tax benefits related to such NOLs as a reduction of
reorganization value in excess of amounts allocable to identifiable assets.
In connection with their respective reorganization proceedings, the
Internal Revenue Service ("IRS") audited the tax returns of the Company and
certain of its subsidiaries and the FSI consolidated tax group for tax years
1984 through 1989 and asserted certain claims against the Company and such
subsidiaries and other members of the FSI consolidated tax group. All of the
issues raised by the IRS audit have been resolved except for an issue involving
the deductibility of approximately $176.3 million of so-called "break-up fees."
This issue was resolved in favor of the Company by the Bankruptcy Court for the
Southern District of Ohio, the decision of which was affirmed by the United
States District Court for the Southern District of Ohio. Thereafter, the IRS
filed an appeal of such decision in the United States Court of Appeals for the
Sixth Circuit, where such appeal is currently pending. Although there can be no
assurance with respect thereto, management does not expect that the ultimate
resolution of this issue will have a material adverse effect on the Company's
financial position or results of operations.
13. RETIREMENT PLANS
The Company has defined benefit plans ("Pension Plans") and defined
contribution plans ("Savings Plans") which cover substantially all employees who
work 1,000 hours or more in a year. In addition, the Company has defined benefit
supplementary retirement plans which include benefits, for certain employees, in
excess of qualified plan limitations. For the 53 weeks ended February 3, 1996,
the 52 weeks ended January 28, 1995 and the 52 weeks ended January 29, 1994, net
retirement expense for these plans totaled $21.8 million, $3.0 million and $2.7
million, respectively.
Measurements of plan assets and obligations for the Pension Plans and the
defined benefit supplementary retirement plans are calculated as of December 31
of each year. In addition, for such plans, the discount rates used to determine
the actuarial present value of projected benefit obligations was 7.25% as of
December 31, 1995 and ranged from 8.0% to 8.5% as of December 31, 1994. The
assumed rate of increase in future
F-23
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
compensation levels was 5.0% as of December 31, 1995 and ranged from 5.0% to
6.0% as of December 31, 1994. The long-term rate of return on assets (Pension
Plans only) was 9.75% as of December 31, 1995 and ranged from 9.0% to 9.75% as
of December 31, 1994.
PENSION PLANS
Net pension expense (income) for the Company's Pension Plans included the
following actuarially determined components:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Service cost....................... $ 31.3 $ 19.9 $ 17.5
Interest cost...................... 82.6 39.9 39.0
Actual return on assets............ (243.2) 5.1 (94.1)
Net amortization and deferrals..... 134.5 (73.7) 24.9
Cost of special termination
benefits......................... -- -- 7.8
-------- ------ ------
$ 5.2 $ (8.8) $ (4.9)
======== ====== ======
The following table sets forth the projected actuarial present value of
benefit obligations and funded status at December 31, 1995 and 1994, for the
Pension Plans:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(MILLIONS)
Net accumulated benefit obligations, including
vested benefits of $1,213.2 million and $839.7
million, respectively.......................... $1,244.5 $ 857.6
Projected compensation increases................. 97.8 137.6
-------- --------
Projected benefit obligations.................... 1,342.3 995.2
-------- --------
Plan assets (primarily stocks, bonds and U.S.
government securities)......................... 1,363.4 1,075.3
Unrecognized loss................................ 162.9 127.6
Unrecognized prior service cost.................. 1.9 1.9
Unrecognized net asset........................... 0.9 --
-------- --------
1,529.1 1,204.8
-------- --------
Prepaid pension expense.......................... $ 186.8 $ 209.6
======== ========
The Company's policy is to fund the Pension Plans at or above the minimum
required by law. At December 31, 1995 and 1994, the Company had met the full
funding limitation. Plan assets are held by independent trustees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- --------------------------------------------------------------------------------
One of the Company's Pension Plans was amended effective January 1, 1996 to
reflect then current salary levels. This amendment resulted in an increase of
$3.0 million in the accumulated benefit obligation, which will be recognized
over an amortization period of 8.3 years.
SUPPLEMENTARY RETIREMENT PLANS
Net pension expense for the supplementary retirement plans included the
following actuarially determined components:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Service cost....................... $ 1.6 $ 0.8 $ 0.3
Prior service cost................. 1.1 -- --
Interest cost on projected benefit
obligations...................... 3.0 1.7 1.2
Net amortization and deferral...... 0.7 1.0 (0.3)
------ ------ ------
$ 6.4 $ 3.5 $ 1.2
====== ====== ======
The following table sets forth the projected actuarial present value of
unfunded benefit obligations at December 31, 1995 and 1994, for the
supplementary retirement plans:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(MILLIONS)
Accumulated benefit obligations, including vested
benefits of $68.4 million and $20.7 million,
respectively................................... $ 69.9 $ 21.1
Projected compensation increases................. 16.1 19.7
------ ------
Projected benefit obligations.................... 86.0 40.8
Unrecognized gain (loss)......................... (6.2) 4.4
Unrecognized prior service cost.................. (6.5) (7.6)
------ ------
Accrued supplementary retirement obligation...... $ 73.3 $ 37.6
====== ======
SAVINGS PLANS
The Savings Plans include a voluntary savings feature for eligible
employees. For one plan, the Company's contribution is based on the Company's
annual earnings and the minimum Company contribution is 20% of an employee's
eligible savings. For the other plans, the Company's contribution is based on a
percentage of employee savings. Savings expense amounted to $10.2 million for
the 53 weeks ended February 3, 1996, $8.3 million for the 52 weeks ended January
28, 1995 and $6.4 million for the 52 weeks ended January 29, 1994.
F-25
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- --------------------------------------------------------------------------------
DEFERRED COMPENSATION PLAN
The Company has a deferred compensation plan wherein eligible executives
may elect to defer a portion of their compensation each year as either stock
credits or cash credits. The Company transfers shares to a trust to cover the
number it estimates will be needed for distribution on account of stock credits
currently outstanding. At February 3, 1996, January 28, 1995 and January 29,
1994, the liability under the plan which is reflected in other liabilities is
$7.5 million, $3.9 million and $1.1 million, respectively. Expense for the 53
weeks ended February 3, 1996, the 52 weeks ended January 28, 1995 and the 52
weeks ended January 29, 1994 was immaterial.
14. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to pension and other supplemental benefits, certain retired
employees are currently provided with specified health care and life insurance
benefits. Eligibility requirements for such benefits vary by division and
subsidiary, but generally state that benefits are available to employees who
retire after a certain age with specified years of service. Certain employees
are either ineligible for such benefits or are subject to having such benefits
modified or terminated.
Net postretirement benefit expense included the following actuarially
determined components:
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Service cost....................... $ 5.5 $ 0.7 $ 1.0
Interest cost...................... 28.9 9.1 9.7
Net amortization and deferral...... (6.8) (5.8) (5.8)
------- ------ ------
$ 27.6 $ 4.0 $ 4.9
====== ====== ======
The measurement of the postretirement benefit obligations is calculated as
of December 31. The following table sets forth the projected actuarial present
value of unfunded postretirement benefit obligations at December 31, 1995 and
1994:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
(MILLIONS)
Accumulated postretirement benefit obligation:
Retirees......................................... $292.7 $246.6
Fully eligible active plan participants.......... 47.1 48.9
Other active plan participants................... 56.3 89.6
------ ------
Accumulated postretirement benefit obligation.... 396.1 385.1
Unrecognized net gain............................ 35.5 44.4
Unrecognized prior service cost.................. 18.6 20.7
------ ------
Accrued postretirement benefit obligation........ $450.2 $450.2
====== ======
F-26
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- --------------------------------------------------------------------------------
The discount rate used in determining the actuarial present value of
unfunded postretirement benefit obligations was 7.25% as of December 31, 1995
and ranged from 8.0% to 8.5% as of December 31, 1994.
The future benefits provided by the Company for certain employees are based
on a fixed amount per year of service, and the accumulated postretirement
benefit obligation is not affected by increases in health care costs. However,
the future medical benefits provided by the Company for certain other employees
are affected by increases in health care costs. For purposes of determining the
present values of unfunded postretirement benefit obligations, the annual growth
rate in the per capita cost of various components of such medical benefit
obligations was assumed to range from 6.0% to 18.0% in the first year, and to
decrease gradually for each such component to 6.0% in the twelfth year and to
remain at that level thereafter. The foregoing growth rate assumption has a
significant effect on such determination. To illustrate, increasing such assumed
growth rates by one percentage point would increase the present value of
unfunded postretirement benefit obligation as of December 31, 1995 by $26.5
million.
15. EQUITY PLAN
The Company has implemented an equity plan intended to provide an equity
interest in the Company to key management personnel and thereby provide
additional incentives for such persons to devote themselves to the maximum
extent practicable to the businesses of the Company and its subsidiaries. The
equity plan is administered by the Compensation Committee of the Board of
Directors (the "Compensation Committee"). The Compensation Committee is
authorized to grant options, stock appreciation rights and restricted stock to
officers and key employees of the Company and its subsidiaries. The equity plan
also provides for the award of options to non-employee directors.
Stock option transactions are as follows:
53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995
------------------------- -------------------------
(SHARES IN THOUSANDS) SHARES GRANT PRICE SHARES GRANT PRICE
------- -------------- ------- --------------
Outstanding, beginning of year............ 6,151.5 $11.625-25.000 3,038.5 $11.625-25.000
Granted................................... 2,291.1 19.000-28.500 3,597.4 18.625-23.625
Canceled.................................. (435.6) 16.000-23.625 (218.2) 11.625-23.625
Exercised................................. (591.3) 15.625-23.625 (266.2) 11.625-20.875
------- -------------- ------- --------------
Outstanding, end of year.................. 7,415.7 $11.625-28.500 6,151.5 $11.625-25.000
======= ============== ======= ==============
Exercisable, end of year.................. 2,750.2 $11.625-25.000 1,904.1 $11.625-25.000
======= ============== ======= ==============
As of February 3, 1996, 9,984,600 shares of Common Stock were available for
additional grants pursuant to the Company's equity plan, of which 204,900 shares
were available for grant in the form of restricted stock. In the year ended
February 3, 1996, no shares of Common Stock were granted in the form of
restricted stock.
16. SHAREHOLDERS' EQUITY
The authorized shares of the Company consist of 125.0 million shares of
preferred stock ("Preferred Stock"), par value of $.01 per share, with no shares
issued, and 500.0 million shares of Common Stock, par value of $.01 per share,
with 232.4 million shares of Common Stock issued and 202.7 million shares of
F-27
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Common Stock outstanding at February 3, 1996, 212.2 million shares of Common
Stock issued and 182.6 million shares outstanding at January 28, 1995 and 126.3
million shares of Common Stock issued and outstanding at January 29, 1994 (with
shares held in the Company's treasury or by subsidiaries of the Company being
treated as issued, but not outstanding).
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Subject to
preferential rights that may be applicable to any Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. However, it
is not presently anticipated that dividends will be paid on Common Stock in the
foreseeable future and certain of the debt instruments to which the Company is a
party restrict the payment of dividends.
PREFERRED SHARE PURCHASE RIGHTS
Each share of Common Stock is accompanied by one right (a "Right") issued
pursuant to the Share Purchase Rights Agreement between the Company and The Bank
of New York, as Rights Agent. Each Right entitles the registered holder thereof
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share (the "Series A Preferred
Shares"), of the Company at a price (the "Purchase Price") of $62.50 per one
one-hundredth of a Series A Preferred Share (subject to adjustment).
In general, the Rights will not become exercisable or transferable apart
from the shares of Common Stock with which they were issued unless a person or
group of affiliated or associated persons becomes the beneficial owner of, or
commences a tender offer that would result in beneficial ownership of, 20% or
more of the outstanding shares of Common Stock (any such person or group of
persons being referred to as an "Acquiring Person"). Thereafter, under certain
circumstances, each Right (other than any Rights that are or were beneficially
owned by an Acquiring Person, which Rights will be void) could become
exercisable to purchase at the Purchase Price a number of shares of Common Stock
having a market value equal to two times the Purchase Price. The Rights will
expire on February 4, 2002, unless earlier redeemed by the Company at a
redemption price of $.03 per Right (subject to adjustment).
FUTURE STOCK ISSUANCES
The Company is authorized to issue 10.2 million shares of Common Stock
(subject to adjustment) upon the conversion of the Convertible Subordinated
Notes, 1.0 million shares of Common Stock (subject to adjustment) upon the
exercise of the Company's Series B Warrants, 9.0 million shares of Common Stock
(subject to adjustment) upon the exercise of the Company's Series C Warrants,
9.0 million shares of Common Stock (subject to adjustment) upon the exercise of
the Company's Series D Warrants and 0.2
F-28
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
million shares of Common Stock (subject to adjustment) upon the exercise of the
Company's Series E Warrants. The warrants have the following terms:
SHARES PER EXERCISE EXPIRATION
WARRANT PRICE DATE
---------- ---------- ----------
Series B...................... 1.047 $35.00 2/15/00
Series C...................... 1.000 25.93 12/19/99
Series D...................... 1.000 29.92 12/19/01
Series E...................... 0.270 17.00 10/08/99
In February 1996, the Company issued 4.1 million shares of Common Stock and
received $99.0 million in proceeds from the exercise of the Company's Series A
Warrants, which expired on February 15, 1996.
In addition to the stock options described in Note 15, the Company issued
options to purchase 1.5 million shares of Common Stock at prices ranging from
$14.81 to $51.85 in connection with the acquisition of Broadway (of which
options to purchase 1.3 million shares of Common Stock remained outstanding as
of February 3, 1996).
F-29
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shareholders' Equity consists of the following:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 29, 1994
---------------- ---------------- ----------------
(MILLIONS)
Preferred stock......................... $ -- $ -- $ --
-------- -------- --------
Common stock:
Balance, beginning of year......... $ 2.1 $ 1.3 $ 1.3
Issuance of common stock........... 0.2 0.8 --
-------- -------- --------
Balance, end of year............... 2.3 2.1 1.3
-------- -------- --------
Additional paid-in capital:
Balance, beginning of year......... 3,711.3 1,975.7 1,968.0
Issuance of common stock........... 557.1 1,617.7 7.7
Issuance of warrants............... -- 118.4 --
Cancellation of treasury stock..... -- (0.5) --
-------- -------- --------
Balance, end of year............... 4,268.4 3,711.3 1,975.7
-------- -------- --------
Unearned restricted stock:
Balance, beginning of year......... (8.5) (4.1) (7.3)
Cancellation (issuance) of common
stock............................ 0.7 (7.1) 0.1
Amortization....................... 4.6 2.7 3.1
-------- -------- --------
Balance, end of year............... (3.2) (8.5) (4.1)
-------- -------- --------
Treasury stock:
Balance, beginning of year......... (559.1) (0.9)
Additions.......................... (3.1) (558.7) (0.9)
Cancellations...................... -- 0.5 --
-------- -------- --------
Balance, end of year............... (562.2) (559.1) (0.9)
-------- -------- --------
Accumulated equity:
Balance, beginning of year......... 493.8 306.2 113.0
Net income......................... 74.6 187.6 193.2
-------- -------- --------
Balance, end of year............... 568.4 493.8 306.2
-------- -------- --------
Total shareholders' equity.............. $4,273.7 $3,639.6 $2,278.2
======== ======== ========
F-30
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Changes in the number of shares held in the treasury are as follows:
53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 3, 1996 JANUARY 28, 1995
---------------- ----------------
(THOUSANDS)
Balance, beginning of year.......... 29,604.7 40.6
Additions:
Acquisition of Macy's.......... -- 29,474.2
Restricted stock............... 40.8 15.7
Deferred compensation plan..... 83.4 98.4
Cancellations....................... -- (24.2)
-------- --------
Balance, end of year................ 29,728.9 29,604.7
======== ========
In connection with the acquisition of Macy's, 29.5 million shares were
issued to wholly owned subsidiaries of the Company and are reflected as treasury
shares in the Consolidated Financial Statements. Additions to treasury stock for
restricted stock represent shares accepted in lieu of cash to cover employee tax
liability upon lapse of restrictions. Under the deferred compensation plan,
shares are maintained in a trust to cover the number estimated to be needed for
distribution on account of stock credits currently outstanding.
17. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and short-term investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
Accounts receivable
The carrying amount approximates fair value because of the short average
maturity of the instruments, and bad debt expense can be reasonably estimated
and has been reserved for against the receivable balance.
Notes receivable
The fair value of notes receivable is estimated using discounted cash flow
analysis, based on estimated market discount rates.
Other assets
Other assets primarily represent investments in joint ventures accounted
for on the equity basis. The fair value of such investments approximates the
carrying value based on recent appraisals.
As of January 28, 1995, other assets also included the Company's ownership
of approximately 6.58% of the common stock of Ralph's Grocery Company
("Ralph's"), the fair value of which was estimated as of such
F-31
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
date based on the terms of the pending sale thereof. The Company sold this
long-term investment during 1995.
Long-term debt
The fair values of the Company's long-term debt are estimated based on the
quoted market prices for publicly traded debt or by using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Interest rate cap agreements
The fair values of the interest rate cap agreements are estimated based on
current settlement prices of comparable contracts obtained from dealer quotes.
Interest rate swap agreements
The fair values of the interest rate swap agreements are obtained from
dealer quotes. The values represent the estimated amount the Company would pay
to terminate the agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap counterparties. The
interest rate swap agreements pertain to the note monetization and working
capital facilities and, although currently in net payable positions, management
intends to hold these agreements to their maturity dates.
The estimated fair values of the Company's financial instruments are as
follows:
FEBRUARY 3, 1996 JANUARY 28, 1995
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- ---------- --------------- ----------
(MILLIONS)
Cash and short-term investments..... $ 172.5 $ 172.5 $ 206.5 $ 206.5
Notes receivable.................... 415.1 422.3 408.1 406.1
Other assets........................ 30.4 30.4 43.0 52.4
Long-term debt...................... 5,551.1 5,747.3 4,499.7 4,518.5
Interest rate cap agreements........ 15.8 0.8 24.0 19.5
Interest rate swap agreement........ -- (30.9) -- (20.5)
F-32
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- --------------------------------------------------------------------------------
The estimated fair values and related unrecognized loss of the Company's
interest rate cap and swap agreements are as follows:
FEBRUARY 3, 1996 JANUARY 28, 1995
----------------------------------- -----------------------------------
NOTIONAL CARRYING FAIR UNRECOGNIZED CARRYING FAIR UNRECOGNIZED
AMOUNT RATE TERM VALUE VALUE GAIN (LOSS) VALUE VALUE GAIN (LOSS)
- -------- ------- --------------------- -------- ----- ------------ -------- ----- ------------
(MILLIONS)
Interest Rate Caps:
$ 500.0 8% 12/15/94 to 12/15/97 $ 4.7 0.1 (4.6) $ 7.3 $6.1 $ (2.1)
$ 900.0 7% 12/15/94 to 12/15/95
8% 12/15/95 to 12/15/96
9% 12/15/96 to 12/15/97 7.8 0.1 (7.7) $ 11.9 $10.3 $ (1.6)
$ 375.0 10% 02/03/95 to 01/03/01 3.0 0.4 (2.6) 4.5 2.7 (1.8)
$ 38.5 11% 01/20/95 to 03/15/98 0.1 0.1 -- 0.1 0.1 --
$ 38.5 11% 01/20/95 to 03/15/00 0.2 0.1 (0.1) 0.2 0.3 0.1
Interest Rate Swaps:
$ 352.0 9.944% $176.0 to 5/3/97 and
$176.0 to 5/3/98 -- (29.9) (29.9) -- (20.5) (20.5)
$ 100.0 5.3275% 1/9/96 to 1/9/98 -- (0.5) (0.5) -- -- --
$ 100.0 5.2625% 1/23/96 to 1/25/99 -- (0.2) (0.2) -- -- --
$ 100.0 5.225% 1/18/96 to 1/18/98 -- (0.3) (0.3) -- -- --
The interest rate cap agreements in effect at February 3, 1996 are used to
hedge interest rate risk related to variable rate indebtedness under the
Company's bank credit facility and receivables backed commercial paper program
and certain asset-backed certificates. These interest rate cap agreements are
recorded at cost and are amortized on a straight-line basis over the life of the
cap.
The interest rate swap agreements described in the foregoing table relate
to the note monetization and bank credit facilities. The note monetization
facility bears interest based on LIBOR, subject to certain adjustments. The
interest rate swap agreement for the note monetization facility converts this
variable rate debt (LIBOR plus 0.40%) to a fixed rate of 10.344% (9.944% fixed
rate plus 0.40%). The trust that is the borrower under the note monetization
facility receives fixed-rate interest on the promissory note constituting such
trust's principal asset. The other interest rate swap agreements are used to, in
effect, fix the interest on a portion of the debt outstanding under the bank
credit facilities.
Commitments to extend credit under revolving agreements relate primarily to
the aggregate unused credit limits and unused lines of credit for the Company's
credit plans. These commitments generally can be terminated at the option of the
Company. It is unlikely the total commitment amount will represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments in what
it believes to be high credit quality financial instruments. Credit risk with
respect to trade receivables is concentrated in the geographic regions in which
the Company operates stores. Such concentra-
F-33
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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- --------------------------------------------------------------------------------
tions, however, are considered to be limited due to the Company's large number
of customers and their dispersion across many regions.
18. QUARTERLY RESULTS (UNAUDITED)
Unaudited quarterly results for the 53 weeks ended February 3, 1996 and the
52 weeks ended January 28, 1995, were as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA)
53 Weeks Ended February 3, 1996:
Net sales.................................. $2,988.0 $3,047.2 $3,748.4 $5,264.9
Operating income........................... 10.8 1.8 105.0 545.3
Net income (loss).......................... $ (57.0) $ (66.9) $ (46.4) $ 244.9
Earnings (Loss) per share.................. $ (.31) $ (.37) $ (.24) $ 1.21
Fully diluted earnings (loss) per share.... (.31) (.36) (.23) 1.15
52 Weeks Ended January 28, 1995:
Net sales.................................. $1,653.6 $1,596.1 $1,926.8 $3,139.4
Operating income........................... 103.4 59.0 129.3 257.8
Net income................................. $ 32.2 $ 3.8 $ 44.3 $ 107.3
Earnings per share......................... $ .25 $ .03 $ .35 $ .71
Fully diluted earnings per share........... .25 .03 .35 .68
19. LEGAL PROCEEDINGS
The Macy's POR was confirmed by the United States Bankruptcy Court for the
Southern District of New York (the "New York Bankruptcy Court") on December 8,
1994. Notwithstanding the confirmation and effectiveness of the Macy's POR, the
New York Bankruptcy Court continues to have jurisdiction to, among other things,
resolve disputed prepetition claims against the Macy's Debtors, resolve matters
related to the assumption, assumption and assignment, or rejection of executory
contracts pursuant to the Macy's POR, and to resolve other matters that may
arise in connection with or relate to the Macy's POR. Except as described below,
provision was made under the Macy's POR in respect of all prepetition
liabilities of the Macy's Debtors.
Certain claims or portions thereof (collectively, the "Cash Payment
Claims") against the Macy's Debtors, which, to the extent allowed by the New
York Bankruptcy Court, will be paid in cash pursuant to the Macy's POR are
currently disputed by the Company. The aggregate amount of disputed Cash Payment
Claims ultimately allowed by the New York Bankruptcy Court may be more or less
than the estimated allowed amount thereof. The aggregate face amount of disputed
Cash Payment Claims was approximately $293.6 million, while the estimated
allowed amount thereof was approximately $217.8 million. Although there can be
no assurance with respect thereto, management believes that the actual allowed
amount of disputed Cash Payment Claims will not exceed the estimated allowed
amount thereof.
The Company and its subsidiaries are also involved in various legal
proceedings incidental to the normal course of their business. Management does
not expect that any of such proceedings will have a material adverse effect on
the Company's results of operations and financial position.
F-34