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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
JANUARY 31, 1998
COMMISSION FILE NUMBER
1-13536
FEDERATED DEPARTMENT STORES, INC.
151 WEST 34TH STREET
NEW YORK, NEW YORK 10001
(212) 494-1602
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
10% Senior Notes due 2001 New York Stock Exchange
8.125% Senior Notes due 2002 New York Stock Exchange
5% Convertible Notes due 2003 New York Stock Exchange
8.5% Senior Notes due 2003 New York Stock Exchange
7.45% Senior Debentures due 2017 New York Stock Exchange
6.79% Senior Debentures due 2027 New York Stock Exchange
7% Senior Debentures due 2028 New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
The Company 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.
There were 210,605,161 shares of the Company's Common Stock outstanding as
of April 3, 1998, 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 3, 1998, was approximately
$10,938,300,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Proxy Statement") relating
to the Company's Annual Meeting of Stockholders to be held on May 15, 1998 (the
"Annual Meeting"), 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 "1997," "1996," "1995," "1994" and "1993"
are references to the Company's fiscal years ended January 31, 1998, February 1,
1997, February 3, 1996, January 28, 1995 and January 29, 1994, respectively.
This report and other reports, statements and information previously or
subsequently filed by the Company with the Securities and Exchange Commission
(the "SEC") contain or may contain forward-looking statements. Such statements
are based upon the beliefs and assumptions of, and on information available to,
the management of the Company at the time such statements are made. The
following are or may constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995: (i) statements preceded
by, followed by or that include the words "may," "will," "could," "should,"
"believe," "expect," "future," "potential," "anticipate," "intend," "plan,"
"estimate" or "continue" or the negative or other variations thereof and (ii)
statements regarding matters that are not historical facts. Such forward-looking
statements are subject to various risks and uncertainties, including (i) risks
and uncertainties relating to the possible invalidity of the underlying beliefs
and assumptions, (ii) possible changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances and conditions,
and (iii) actions taken or omitted to be taken by third parties, including
customers, suppliers, business partners, competitors and legislative,
regulatory, judicial and other governmental authorities and officials. In
addition to any risks and uncertainties specifically identified in the text
surrounding such forward-looking statements, the statements in the immediately
preceding sentence and the statements under captions such as "Risk Factors" and
"Special Considerations" in reports, statements and information filed by the
Company with the SEC from time to time constitute cautionary statements
identifying important factors that could cause actual amounts, results, events
and circumstances to differ materially from those reflected in such
forward-looking statements.
ITEM 1. BUSINESS.
General. The Company is one of the leading operators of full-line
department stores in the United States, with 400 department stores in 33 states
as of January 31, 1998. 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
162 specialty stores under the names "Aeropostale" and "Charter Club," and a
mail order catalog business under the name "Bloomingdale's By Mail." The Company
recently announced plans to commence the operation of a mail order catalog
business under the name "Macy's By Mail." In general, the Company conducts its
business through subsidiaries.
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, provides proprietary credit
services, including credit authorizations, new account development, processing,
customer service and collection services in respect of proprietary credit card
accounts, including "Macy's" credit card accounts, owned by the Company through
its national bank. GE Capital Consumer Card Co. ("GE Bank"), which purchased all
of the "Macy's" credit card accounts owned by Macy's prior to the Merger (and
with which the Company has an agreement regarding the allocation of the
ownership of "Macy's" credit card accounts originated subsequent to the Merger)
provides
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statement and payment processing services in respect of all proprietary credit
card accounts owned by the Company and collection services in respect of the GE
Bank-owned "Macy's" credit card accounts. The Company's data processing
subsidiary, Federated Systems Group, Inc. ("FSG"), which is based near Atlanta,
Georgia, provides (directly and pursuant to outsourcing arrangements with third
parties) operational electronic data processing and management information
services to each of the Company's retail operating and service 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
Group, a division of the Company based in New York City, helps the Company to
centrally develop and execute consistent 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 Merchandising Group is also responsible for the
private label development of the Company's retail operating divisions except for
Bloomingdale's and Stern's, which source some of their private label merchandise
through Associated Merchandising Corporation. Bloomingdale's also has its own
private label program. Federated Logistics, based in Secaucus, New Jersey and a
division of Federated Corporate Services, Inc., a subsidiary of the Company,
provides warehousing and merchandise distribution services for the Company's
retail operating divisions.
The Company and its predecessors have been operating department stores
since 1830. Federated was organized as a Delaware corporation in 1929. 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 Stores, Inc. ("Broadway")
pursuant to a subsidiary merger.
The Company's executive offices are located at 151 West 34th Street, New
York, New York 10001, telephone number: (212) 494-1602 and at 7 West Seventh
Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000.
Employees. As of January 31, 1998, the Company had approximately 114,700
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 January 31, 1998 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 1997.
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
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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.
Year 2000 Compliance. Many existing computer programs utilized globally
use only two digits to identify a year in the date field. These programs, if not
corrected, could fail or create erroneous results by or at the Year 2000. This
"Year 2000" issue is believed to affect virtually all companies and
organizations, including the Company.
The Company is reliant on computer-based technology and utilizes a variety
of proprietary and third party applications. The Company's retail functions,
such as merchandise procurement and distribution, inventory control and
point-of-sale transactions, generally use proprietary applications, with
third-party applications being used more extensively for administrative
functions, such as accounting and human resource management.
Beginning in February 1996, the Company undertook an assessment of the
effect of the Year 2000 issue on the Company's operations. Shortly thereafter,
the "Year 2000 Federated Project Office" was established and charged with
identifying and evaluating Year 2000-related compliance issues, proposing
solutions, estimating the cost of the implementation thereof, and communicating
its determinations to the Company's senior management and Board of Directors.
The Project Office, which is composed of the Company's Controller, the
Chief Financial Officer of each retail and service subsidiary, FSG's Executive
Committee, representatives of the Law and Audit Departments and a Project
Manager, has developed a compliance program, and a Project Team has been
established for the Company and each of its retail and service subsidiaries.
Each Project Team is responsible for overseeing, under FSG's guidance, the
implementation of such compliance program within its organization, including
ensuring the compliance of software and other date sensitive products purchased
for use or resale.
Pursuant to the Company's Year 2000 compliance program, FSG has examined
the Company's proprietary software applications. All such applications that
relate to a critical retail function and are not Year 2000 compliant are being
converted or replaced. In addition, a strategy has been instituted to identify
and address Year 2000 issues affecting third-party software applications. That
process includes contacting all third-party providers to secure appropriate
representations to the effect that Year 2000 issues associated with the software
provided by them to the Company have been or will be timely addressed.
Contingency plans have been developed as to material third-party software
applications used by the Company in respect of which the Company does not
receive adequate compliance assurances by August 1998.
Barring unforeseen events, the Company anticipates substantially completing
corrective measures as to its proprietary software applications and completing a
comprehensive, integrated test of all of its main-frame and mid-range computer
systems (hardware, software, network components, interfaces and third-party
software applications) by January 31, 1999. The Company anticipates that a
subsequent test would be instituted to deal with third-party software
applications, if any, that are expected to first achieve compliance after
January 31, 1999.
To date, the Company's Year 2000 compliance program is on schedule and on
budget. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" for information regarding the accounting treatment of
the estimated costs of the Company's Year 2000 compliance program. Such
information is incorporated herein by reference.
Notwithstanding that the Company has been proceeding diligently with the
implementation of its own compliance program, including aspects thereof directed
to ascertaining Year 2000 compliance by third parties, there can be no assurance
that the Company's operations will not experience disruptions due to the failure
of third
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parties (including software, data processing, and other vendors) with which the
Company has commercial relationships to become fully Year 2000 compliant in a
timely manner.
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
---- --- -------------------------
54 Chairman of the Board and Chief Executive Officer;
James M. Zimmerman..................... Director
Terry J. Lundgren...................... 45 President and Chief Merchandising Officer; Director
Ronald W. Tysoe........................ 45 Vice Chairman of the Board and Director
Thomas G. Cody......................... 56 Executive Vice President - Legal and Human Resources
Dennis J. Broderick.................... 49 Senior Vice President, General Counsel and Secretary
41 Senior Vice President, Chief Financial Officer and
Karen M. Hoguet........................ Treasurer
Joel A. Belsky......................... 44 Vice President and Controller
James M. Zimmerman has been Chairman of the Board and Chief Executive
Officer of the Company since May 1997; prior thereto he served as the President
and Chief Operating Officer of the Company since May 1988.
Terry J. Lundgren has been President and Chief Merchandising Officer of the
Company since May 1997 and served as the Chairman of the Company's Federated
Merchandising Group division from February 1994 until February 19, 1998. Prior
thereto, he was Chairman and Chief Executive Officer of the Neiman Marcus Group,
Inc., since February 1990.
Ronald W. Tysoe has been Vice Chairman of the Company since April 1990 and
served as Chief Financial Officer of the Company from April 1990 until October
31, 1997.
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.
Karen M. Hoguet has been Senior Vice President - Planning of the Company
since April 1991, Treasurer of the Company since January 1992, and Chief
Financial Officer of the Company since October 31, 1997.
Joel A. Belsky has been Vice President and Controller of the Company since
October 1996. Prior thereto, he served as Divisional Vice President and Deputy
Controller of the Company since March 1993.
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 January 31, 1998, the Company operated
400 department stores in 33 states, comprising a total of 81,016,000 square
feet. Of such department stores, 196 were entirely or mostly owned and 204
stores were entirely or mostly leased. The Company's interests in approximately
3% of its owned stores are subject to security interests in favor of certain
third-party creditors. As of January 31, 1998, the Company operated 162
specialty stores in 22 states and the District of Columbia, comprising a total
of 600,000 square feet. All such specialty stores are leased.
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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.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are 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 1997 and 1996 the high and low sales prices per share of Common
Stock as reported on the NYSE Composite Tape:
1997 1996
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LOW HIGH LOW HIGH
------ ------ ------ ------
1st Quarter............................. 31.625 38.250 26.125 34.750
2nd Quarter............................. 34.625 44.125 29.375 36.625
3rd Quarter............................. 39.313 45.438 31.125 36.125
4th Quarter............................. 39.688 48.875 30.000 37.000
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.
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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.
52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(MILLIONS, EXCEPT PER SHARE DATA)
Consolidated Statement of Income Data:
Net sales, including leased department
sales..................................... $15,668 $15,229 $15,049 $ 8,316 $7,229
------- ------- ------- ------- ------
Cost of sales:
Recurring................................. 9,581 9,289 9,318 5,131 4,374
Inventory valuation adjustments related to
consolidation........................... - 65 92 15 -
------- ------- ------- ------- ------
Total cost of sales......................... 9,581 9,354 9,410 5,146 4,374
Selling, general and administrative
expenses:
Recurring................................. 4,746 4,739 4,748 2,549 2,323
Business integration and consolidation
expenses................................ 243 202 71 -
Charitable contribution to Federated
Department Stores Foundation............ - - 26 - -
------- ------- ------- ------- ------
Total selling, general and administrative
expenses.................................. 4,746 4,982 4,976 2,620 2,323
Operating income............................ 1,341 893 663 550 532
Interest expense............................ (418) (499) (508) (262) (213)
Interest income............................. 35 47 47 43 49
------- ------- ------- ------- ------
Income before income taxes and extraordinary
items..................................... 958 441 202 331 368
Federal, state and local income tax
expense................................... (383) (175) (127) (143) (171)
Extraordinary items (a)..................... (39) - - - (4)
------- ------- ------- ------- ------
Net income.................................. $ 536 $ 266 $ 75 $ 188 $ 193
======= ======= ======= ======= ======
Basic earnings per share:
Income before extraordinary items........... $ 2.74 $ 1.28 $ .39 $ 1.41 $ 1.56
Net income.................................. 2.56 1.28 .39 1.41 1.53
Diluted earnings per share:
Income before extraordinary items........... $ 2.58 $ 1.24 $ .39 $ 1.40 $ 1.53
Net income.................................. 2.41 1.24 .39 1.40 1.50
Average number of shares outstanding.......... 209.2 207.5 191.5 132.9 126.3
Depreciation and amortization................. $ 590 $ 533 $ 497 $ 286 $ 230
Capital expenditures.......................... $ 696 $ 846 $ 699 $ 398 $ 313
Balance Sheet Data (at year end):
Cash........................................ $ 142 $ 149 $ 173 $ 206 $ 222
Working capital............................. 3,134 2,831 3,262 2,376 1,968
Total assets................................ 13,738 14,264 14,295 12,277 7,419
Short-term debt............................. 556 1,095 733 463 10
Long-term debt.............................. 3,919 4,606 5,632 4,529 2,787
Shareholders' equity........................ 5,256 4,669 4,274 3,640 2,278
- ---------------
(a) The extraordinary items for 1997 and 1993 were after-tax expenses associated
with debt prepayments.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the 52 Weeks Ended January 31, 1998 and February 1,
1997. Net sales for 1997 were $15,668 million compared to $15,229 million for
1996, an increase of 2.9%. On a comparable store basis, net sales for 1997
increased 2.7% compared to 1996.
Cost of sales was 61.1% of net sales for 1997, compared to 61.4% for 1996.
Cost of sales for 1996 included $65 million of one-time inventory valuation
adjustments related to merchandise in lines of business that were eliminated or
replaced in connection with the consolidation of Broadway's merchandise
inventories with the Company's merchandise inventories. Excluding these
inventory valuation adjustments from 1996, cost of sales would have been 61.0%
of net sales, with the 0.1% increase in 1997 being primarily due to higher
merchandise markdowns associated with the elimination of certain consumer
electronics lines of business. The valuation of merchandise inventory on the
last-in, first-out basis did not impact cost of sales in either year.
Selling, general and administrative expenses were 30.3% of net sales for
1997, compared to 32.7% for 1996. Selling, general and administrative expenses
for 1996 included $243 million of one-time costs related to the integration and
consolidation of acquired and pre-existing businesses as business integration
and consolidation expenses ("BICE"). Excluding BICE, selling, general and
administrative expenses would have been 31.1% of net sales for 1996. The major
factor contributing to the 0.8% improvement in expense rate (excluding BICE for
1996) was lower distribution-related expenses resulting from restructuring and
technological improvements in the merchandise distribution process.
Selling, general and administrative expenses in 1997 reflect reduced
finance charge income and lower expenses for doubtful customer accounts
receivable. Finance charge income was $391 million for 1997, a decrease of $39
million compared to $430 million in 1996, primarily due to lower average
accounts receivable balances. Amounts charged to expense for doubtful accounts
receivable were $167 million for 1997, compared to $172 million for 1996. The
decrease primarily reflects the lower levels of proprietary credit sales in 1997
compared to 1996.
Net interest expense was $383 million for 1997, compared to $452 million
for 1996. The lower interest expense for 1997 is due to lower levels of
borrowings and lower interest rates resulting from refinancings completed in
July 1997.
The Company's effective income tax rate of 40% for 1997 differs from the
federal income tax statutory rate of 35.0% principally because of the effect of
state and local income taxes and permanent differences arising from the
amortization of intangible assets.
The extraordinary item of $39 million for 1997 represents the after-tax
expenses associated with debt prepayments.
Comparison of the 52 Weeks Ended February 1, 1997 and the 53 Weeks Ended
February 3, 1996. Net sales for 1996 were $15,229 million compared to $15,049
million for 1995, an increase of 1.2%. On a comparable store basis, net sales
for 1996 increased 3.1 percent compared to the first 52 weeks of 1995. Net sales
for 1996 were somewhat negatively impacted by the Company's efforts to gradually
reduce the degree to which it utilizes promotional selling practices with
respect to home-related merchandise.
Cost of sales was 61.4% of net sales for 1996, compared to 62.5% for 1995.
Cost of sales included one-time inventory valuation adjustments related to
merchandise in lines of business that were eliminated or replaced in connection
with the consolidation of merchandise inventories for acquired and pre-existing
businesses. In 1996,
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cost of sales included $65 million of inventory valuation adjustments in
connection with the integration of Broadway into the Company. In 1995, cost of
sales included $69 million of inventory valuation adjustments in connection with
the integration of Macy's into the Company and $23 million of inventory
valuation adjustments in connection with the consolidation of the Company's
Rich's/Goldsmith's and Lazarus divisions. Also, in 1995, cost of sales was
negatively impacted by greater markdowns at stores operated as Broadway
locations. Excluding these stores in 1995 and the inventory valuation
adjustments discussed above, cost of sales would have been 61.0% of net sales
for 1996, compared to 61.3% for 1995. The lower level of promotional activity
for home-related merchandise and increased sales of higher margin private label
merchandise contributed to the improvement for 1996. The valuation of
merchandise inventory on the last-in, first-out basis did not impact cost of
sales in either year.
Selling, general and administrative expenses were 32.7% of net sales for
1996, compared to 33.1% for 1995. Selling, general and administrative expenses
included one-time costs related to the integration and consolidation of acquired
and pre-existing businesses under the caption BICE. In 1996, selling, general
and administrative expenses included, under the caption BICE, $168 million of
costs associated with the integration of Broadway into the Company, $34 million
of costs related to the integration of Macy's into the Company and $41 million
of costs related to other support operation restructurings, primarily the
centralization of the Company's merchandise distribution function. In 1995,
selling, general and administrative expenses included, under the caption BICE,
$140 million of costs associated with the integration of Macy's into the
Company, $48 million of costs associated with the integration of Broadway into
the Company and $14 million of costs related to the consolidation of the
Company's Rich's/Goldsmith's and Lazarus divisions, and also included a $26
million charitable contribution to Federated Department Stores Foundation.
Excluding these items for both 1996 and 1995, selling, general and
administrative expenses would have been 31.1% of net sales for 1996, compared to
31.6% for 1995. The improvement for 1996 primarily reflected the operating
efficiencies resulting from the integration of Macy's into the Company in fiscal
1995 and other support operation restructurings (primarily merchandise
distribution).
Selling, general and administrative expenses in 1996 reflected higher
expenses for doubtful customer accounts receivable, partially offset by higher
finance charge revenues. Amounts charged to expense for doubtful accounts
receivable were $172 million for 1996, compared to $127 million for 1995. The
increase reflected higher average accounts receivable balances, the
consolidation of certain credit card nameplates, the effects of closing stores
in certain markets and general economic conditions in the geographic areas in
which the Company operated. Partially offsetting the increase in amounts charged
to expense for doubtful accounts, finance charge income grew to $430 million in
1996, compared to $405 million in 1995, primarily due to higher average accounts
receivable balances.
Net interest expense was $452 million for 1996, compared to $461 million
for 1995. The lower interest expense for 1996 was principally due to lower
levels of borrowings.
The Company's effective income tax rate of 39.8% for 1996 differed from the
federal income tax statutory rate of 35.0% principally because of the effect of
state and local income taxes and permanent differences arising from the
amortization of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash from operations, cash
on hand and certain available credit facilities.
Net cash provided by operating activities in 1997 was $1,573 million, an
increase of $353 million from the net cash provided by operating activities in
1996 of $1,220 million. In addition to improved operating results, the
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primary factors which contributed to this improvement were a decrease in
merchandise inventories in 1997 compared to an increase in 1996 and larger
increases in current and deferred income taxes in 1997, partially offset by a
decrease in accounts payable and accrued liabilities compared to an increase in
1996.
On July 28, 1997, the Company entered into new bank credit agreements which
provide for unsecured revolving credit loans of up to $1,500 million under a
five year facility (including a letter of credit sub-facility) and up to $500
million under a 364-day facility. The Company also has a commercial paper
program under which it may issue up to $400 million of senior unsecured
commercial paper. As of January 31, 1998, the Company had $150 million of
revolving credit borrowings, $144 million of commercial paper borrowings, $49
million of standby letters of credit and $63 million of trade letters of credit
outstanding. As a result of the issuance on February 6, 1998 of $300 million of
7.0% Senior Debentures due 2028, the $294 million of revolving credit and
commercial paper borrowings were classified as long-term debt as of January 31,
1998.
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 million of receivables backed commercial paper. As of January
31, 1998, the Company had $375 million of commercial paper borrowings
outstanding under its receivables backed commercial paper facility.
Net cash used in investing activities was $318 million in 1997 compared to
$650 million in 1996. In 1997, capital expenditures for property and equipment
were $696 million and dispositions of property and equipment totaled $178
million. During 1997, the Company opened six new department stores and two new
furniture galleries and closed nineteen stores. On May 5, 1997, a $200 million
installment of a note receivable held by the Company was received.
Net cash used by the Company for all financing activities was $1,262
million in 1997 compared to $594 million in 1996. During 1997, the Company
incurred debt totaling $763 million and repaid debt totaling $2,027 million.
Debt incurred consisted of $300 million of 7.45% Senior Debentures due 2017,
$250 million of 6.79% Senior Debentures due 2027 and $213 million of net
incremental borrowings under the Company's revolving credit and commercial paper
facilities. The major components of debt repaid, with proceeds of the financings
described above, proceeds of the $200 million installment of a note receivable
described above and other funds, included $568 million of the Company's
receivables backed certificates, $516 million of outstanding term borrowings
under its previous bank credit facility, the entire $345 million of outstanding
borrowings under its mortgage loan facility, the entire $221 million of
borrowings outstanding under its secured promissory note and $176 million of
borrowings outstanding under its note monetization facility. On January 22,
1997, the Company entered into an arrangement providing for off balance sheet
financing of up to $200 million (subsequently increased to $300 million) of
non-proprietary credit card receivables arising under accounts owned by the
Company. At January 31, 1998, $243 million of borrowings were outstanding under
this arrangement.
The Company intends to open three new department stores in 1998 and its
budgeted capital expenditures are approximately $2,300 million for the 1998 to
2000 period. Management presently anticipates funding such expenditures from
operations.
As disclosed in "Item 1. Business," the Company has undertaken a program to
address Year 2000 issues. To date, the Company's Year 2000 compliance program,
the costs of which are being expensed as incurred, is on schedule and on budget.
Although there can be no assurance with respect thereto, the Company does not
expect that Year 2000 issues (including the cost of the Company's compliance
program as currently estimated), will have a material adverse effect on the
Company's financial position or results of operation.
9
11
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 the
issuance of debt or other securities, or other possible capital markets
transactions, the proceeds of which could be used to refinance current
indebtedness or for other corporate purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates which
may adversely affect its financial position, results of operations and cash
flows. In seeking to minimize the risks from interest rate fluctuations, the
Company manages exposures through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowing activities, which are described in Note 9 to the Consolidated
Financial Statements. The majority of the Company's borrowings are under fixed
rate instruments. However, the Company uses interest rate swaps and interest
rate caps to help manage the Company's exposure to interest rate movements and
reduce borrowing costs. See Notes 9 and 16 to the Consolidated Financial
Statements, which are incorporated herein by reference.
Based on the Company's market risk sensitive instruments (including
variable rate debt and derivative financial instruments) outstanding at January
31, 1998, the Company has determined that there was no material market risk
exposure to the Company's consolidated financial position, results of operations
or cash flows as of such date.
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.
INDEX
PAGE
----
Management's Report......................................... F-2
Independent Auditors' Report................................ F-3
Consolidated Statements of Income for the 52 weeks ended
January 31, 1998 and February 1, 1997 and the 53 weeks
ended February 3, 1996.................................... F-4
Consolidated Balance Sheets at January 31, 1998 and February
1, 1997................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the 52 weeks ended January 31, 1998 and February 1,
1997 and the 53 weeks ended February 3, 1996.............. F-6
Consolidated Statements of Cash Flows for the 52 weeks ended
January 31, 1998 and February 1, 1997 and the 53 weeks
ended February 3, 1996.................................... F-7
Notes to Consolidated Financial Statements.................. F-8
10
12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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.
11
13
3. EXHIBITS:
The following exhibits are filed herewith or incorporated by reference as
indicated below.
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
3.1 Certificate of Incorporation Exhibit 3.1 to the Company's 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 A Jun- Exhibit 3.1.1 to the 1994 Form 10-K
ior 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 December 15, Exhibit 4.3 to the 1994 Form 10-K
1994, between the Company and the Bank of New
York, as rights agent
4.4 Indenture, dated as of December 15, 1994, Exhibit 4.1 to the Company's Registration
between the Company and State Street Bank and Statement on Form S-3 (Registration No.
Trust Company (successor to The First 33-88328) filed on January 9, 1995 (the "S-3
National Bank of Boston), as Trustee Registration Statement")
4.4.1 Third Supplemental Indenture, dated as of Exhibit 4.4.1 to the 1994 Form 10-K
January 23, 1995, between the Company and
State Street Bank and Trust Company (suc-
cessor to The First National Bank of Bos-
ton), as Trustee
4.4.2 Fourth Supplemental Indenture, dated as of Exhibit 4.2 to the Company's Registration
September 27, 1995, between the Company and Statement on Form 8-A, dated November 29,
State Street Bank and Trust Company 1995
(successor to The First National Bank of
Boston), as Trustee
4.4.3 Fifth Supplemental Indenture, dated as of Exhibit 2 to the Company's Registration
October 6, 1995, between the Company and Statement on Form 8-A, dated October 4, 1995
State Street Bank and Trust Company (suc-
cessor to The First National Bank of Bos-
ton), as Trustee
4.4.4 Sixth Supplemental Indenture, dated as of Exhibit 4.4.4 to the Company's Annual Re-
February 1, 1996, between the Company and port on Form 10-K for the fiscal year ended
State Street Bank and Trust Company (suc- February 3, 1996 (the "1995 Form 10-K")
cessor to The First National Bank of Bos-
ton), as Trustee
4.4.5 Seventh Supplemental Indenture, dated as of Exhibit 4.2 to the Company's Quarterly Re-
May 22, 1996, between the Company and State port on Form 10-Q for the period ended May 4,
Street Bank and Trust Company (successor to 1996 (the "May 1996 Form 10-Q")
The First National Bank of Boston), as
Trustee
12
14
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
4.4.6 Eighth Supplemental Indenture, dated as of Exhibit 2 to the Company's Current Report on
July 14, 1997, between the Company and State Form 8-K dated as of July 15, 1997 (the "July
Street Bank and Trust Company (successor to 1997 Form 8-K")
The First National Bank of Boston), as
Trustee
4.4.7 Ninth Supplemental Indenture, dated as of Exhibit 3 to the July 1997 Form 8-K
July 14, 1997, between the Company and State
Street Bank and Trust Company (successor to
The First National Bank of Boston), as
Trustee
4.5 Indenture, dated as of September 10, 1997, Exhibit 4.4 to the Company's Amendment Number
between the Company and Citibank, N.A., as 1 to Form S-3 dated as of September 11, 1997
Trustee
4.5.1 First Supplemental Indenture, dated as of Exhibit 2 to the Company's Current Report on
February 6, 1998, between the Company and Form 8-K dated as of February 6, 1998
Citibank, N.A., as Trustee
4.6 Amended and Restated Series B Warrant
Agreement
4.7 Series C Warrant Agreement Exhibit 4.6 to the 1994 Form 10-K
4.8 Series D Warrant Agreement Exhibit 4.7 to the 1994 Form 10-K
4.9 Series E Warrant Agreement Exhibit 4.9 to the 1995 Form 10-K
4.10 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")
4.10.1 Letter Agreement, dated October 11, 1995, Exhibit 4.5.1 to the October 1995 Form 10-Q
between Broadway and The Bank of New York
10.1 364-Day Credit Agreement, dated as of July Exhibit 10.1 to the Company's Quarterly
28, 1997 by and among the Company, the Report on Form 10-Q for the period ended
Initial Lenders named therein, Citibank, August 2, 1997 (the "August 1997 Form 10-Q")
N.A., as Administrative Agent and Paying
Agent, The Chase Manhattan Bank, as Ad-
ministrative Agent, BankBoston, N.A., as
Syndication Agent, and the Bank of America,
National Trust & Savings Association, as
Documentation Agent
13
15
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.2 Five-Year Credit Agreement, dated as of July Exhibit 10.2 to the August 1997 Form 10-Q
28, 1997, by and among the Company, the
Initial Lenders named therein, Citibank,
N.A., as Administrative Agent and Paying
Agent, The Chase Manhattan Bank, as Ad-
ministrative Agent, BankBoston, N.A., as
Syndication Agent, and the Bank of America,
National Trust & Savings Association, as
Documentation Agent
10.3 Loan Agreement, dated as of May 26, 1994 (the Exhibit 10.47 to the 1994 S-4 Registration
"Lazarus PA Mortgage Term Loan"), among Statement
Lazarus PA, Inc. (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 Mortgage Exhibit 10.6 to the October 1995 Form 10-Q
Term Loan dated as of December 6, 1995
10.3.2 Second Amendment to the Lazarus PA Mortgage
Term Loan dated as of July 28, 1997
10.4 Guaranty Agreement, dated as of May 26, 1994, Exhibit 10.48 to the 1994 S-4 Registration
made by the Company in favor of the banks Statement
listed on the Lazarus PA Mortgage Term Loan
and PNC
10.4.1 Amendment #1 to Guaranty Agreement, dated as Exhibit 10.7.1 to the 1994 Form 10-K
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 Pooling and Servicing Exhibit 4.10 to Prime's Current Report on
Agreement, dated as of December 15, 1992 (the Form 8-K (File No. 0-2118), dated March 29,
"Pooling and Servicing Agreement"), among the 1993
Company, Prime Receivables Corporation
("Prime") and The Chase Manhattan Bank,
successor to Chemical Bank, as Trustee
10.5.1 First Amendment, dated as of December 1, Exhibit 10.10.1 to the Company's Annual
1993, to the Pooling and Servicing Agree- Report on Form 10-K (File No. 1-10951) for
ment the fiscal year ended January 29, 1994 (the
"1993 Form 10-K")
10.5.2 Second Amendment, dated as of February 28, Exhibit 10.10.2 to the 1993 Form 10-K
1994, to the Pooling and Servicing Agreement
14
16
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.5.3 Third Amendment, dated as of May 31, 1994, to Exhibit 10.8.3 to the 1994 Form 10-K
the Pooling and Servicing Agreement
10.5.4 Fourth Amendment, dated as of January 18, Exhibit 10.6.4 to the 1995 Form 10-K
1995, to the Pooling and Servicing Agree-
ment
10.5.5 Fifth Amendment, dated as of April 30, 1995, Exhibit 10.6.5 to the 1995 Form 10-K
to the Pooling and Servicing Agreement
10.5.6 Sixth Amendment, dated as of July 27, 1995, Exhibit 10.6.6 to the 1995 Form 10-K
to the Pooling and Servicing Agreement
10.5.7 Seventh Amendment, dated as of May 14, 1996, Exhibit 10.6.7 to the 1997 Form 10-K
to the Pooling and Servicing Agreement
10.5.8 Eighth Amendment, dated as of March 3, 1997, Exhibit 10.6.8 to the 1997 Form 10-K
to the Pooling and Servicing Agreement
10.5.9 Ninth Amendment, dated as of August 28, 1997, Exhibit 10.1 to the Company's Quarterly
to the Pooling and Servicing Agreement Report on Form 10-Q for the period ended
November 1, 1997 (the "November 1997 Form
10-Q")
10.6 Assumption Agreement under the Pooling and Exhibit 10.10.3 to the 1993 Form 10-K
Servicing Agreement, dated as of September
15, 1993
10.7 Series 1992-2 Supplement, dated as of De- Exhibit 4.7 to Prime's Form 8-A
cember 15, 1992, to the Pooling and Servic-
ing Agreement
10.7.1 First Amendment to Series 1992-2 Supple- Exhibit 10.3 to the November 1997 Form 10-Q
ment, dated as of August 28, 1997, to the
Pooling and Servicing Agreement
10.8 Series 1992-3 Supplement, dated as of Janu- Exhibit 4.8 to Prime's Current Report on Form
ary 5, 1993, to the Pooling and Servicing 8-K (File No. 0-2118), dated January 29, 1993
Agreement
10.9 Series 1995-1 Supplement, dated as of July Exhibit 4.7 to Prime's Registration State-
27, 1995, to the Pooling and Servicing ment on Form S-1, filed July 14, 1995, as
Agreement amended.
10.9.1 First Amendment to Series 1995-1 Supple- Exhibit 10.4 to the November 1997 Form 10-Q
ment, dated as of August 28, 1997, to the
Pooling and Servicing Agreement
10.10 Series 1996-1 Supplement, dated as of May 14, Exhibit 4 to the May 1996 Prime 8-K
1996, to the Pooling and Servicing Agreement
15
17
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.10.1 First Amendment to Series 1996-1 Supple- Exhibit 10.5 to the November 1997 Form 10-Q
ment, dated as of August 28, 1997, to the
Pooling and Servicing Agreement
10.11 Receivables Purchase Agreement, dated as of Exhibit 10.2 to Prime's Form 8-A
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
10.11.1 First Amendment, dated as of June 23, 1993, Exhibit 10.14.1 to 1993 Form 10-K
to the Receivables Purchase Agreement
10.11.2 Second Amendment, dated as of December 1, Exhibit 10.14.2 to 1993 Form 10-K
1993, to the Receivables Purchase Agreement
10.11.3 Third Amendment, dated as of February 28, Exhibit 10.14.3 to 1993 Form 10-K
1994, to the Receivables Purchase Agreement
10.11.4 Fourth Amendment, dated as of May 31, 1994, Exhibit 10.13.4 to the 1994 Form 10-K
to the Receivables Purchase Agreement
10.11.5 Fifth Amendment, dated as of April 30, 1995, Exhibit 10.12.5 to the 1995 Form 10-K
to the Receivables Purchase Agreement
10.11.6 Sixth Amendment, dated as of August 26, 1995, Exhibit 10.13.6 to the 1997 Form 10-K
to the Receivables Purchase Agreement
10.11.7 Seventh Amendment, dated as of August 26, Exhibit 10.13.7 to the 1997 Form 10-K
1995, to the Receivables Purchase Agreement
10.11.8 Eighth Amendment, dated as of May 14, 1996, Exhibit 10.13.8 to the 1997 Form 10-K
to the Receivables Purchase Agreement
10.11.9 Ninth Amendment, dated as of March 3, 1997, Exhibit 10.13.9 to the 1997 Form 10-K
to the Receivables Purchase Agreement.
10.11.10 First Supplement, dated as of September 15, Exhibit 10.14.4 to 1993 Form 10-K
1993, to the Receivables Purchase Agreement
10.11.11 Second Supplement, dated as of May 31, 1994, Exhibit 10.12.7 to the 1995 Form 10-K
to the Receivables Purchase Agreement
16
18
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.12 Depository Agreement, dated as of December Exhibit 10.15 to Company's Annual Report on
31, 1992, among Deerfield Funding Cor- Form 10-K (File No. 1-10951) for the fiscal
poration, now known as Seven Hills Funding year ended January 30, 1993 ("1992 Form
Corporation ("Seven Hills"), the Company, and 10-K")
Chase Bank, as Depository
10.13 Liquidity Agreement, dated as of December 31, Exhibit 10.16 to 1992 Form 10-K
1992, among Seven Hills, the Company, the
financial institutions named therein, and
Credit Suisse, New York Branch, as Liquidity
Agent
10.14 Pledge and Security Agreement, dated as of Exhibit 10.17 to 1992 Form 10-K
December 31, 1992, among Seven Hills, the
Company, Chase Bank, as Depository and
Collateral Agent, and the Liquidity Agent
10.15 Commercial Paper Dealer Agreement, dated as Exhibit 10.18 to 1992 Form 10-K
of December 31, 1992, among Seven Hills, the
Company, and Goldman Sachs Money Markets,
L.P.
10.16 Commercial Paper Dealer Agreement, dated as Exhibit 10.19 to 1992 Form 10-K
of December 31, 1992, among Seven Hills, the
Company, and Shearson Lehman Brothers, Inc.
10.17 Receivables Purchase Agreement, dated as of Exhibit 10.19 to the 1997 Form 10-K
January 22, 1997, among FDS National Bank and
Prime II Receivables Corporation ("Prime II")
10.18 Class A Certificate Purchase Agreement, dated Exhibit 10.20 to the 1997 Form 10-K
as of January 22, 1997, among Prime II, FDS
National Bank, The Class A Purchasers Parties
thereto and Credit Suisse First Boston, New
York Branch, as Agent
10.19 Class B Certificate Purchase Agreement, dated Exhibit 10.21 to the 1997 Form 10-K
as of January 22, 1997, among Prime II, FDS
National Bank, The Class B Purchasers Parties
thereto and Credit Suisse First Boston, New
York Branch, as Agent
10.20 Pooling and Servicing Agreement, dated as of Exhibit 10.22 to the 1997 Form 10-K
January 22, 1997, (the "Prime II Pooling and
Servicing Agreement") among Prime II, FDS
National Bank and The Chase Manhattan Bank,
as Trustee
10.21 Series 1997-1 Supplement, dated as of Janu- Exhibit 10.23 to the 1997 Form 10-K
ary 22, 1997, to the Prime II Pooling and
Servicing Agreement
17
19
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.22 Commercial Paper Dealer Agreement, dated as Exhibit 10.24 to the 1997 Form 10-K
of January 30, 1997, between the Company and
Citicorp Securities, Inc.
10.23 Commercial Paper Issuing and Paying Agent Exhibit 10.25 to the 1997 Form 10-K
Agreement, dated as of January 30, 1997,
between Citibank, N.A. and the Company
10.24 Commercial Paper Dealer Agreement, dated as Exhibit 10.26 to the 1997 Form 10-K
of January 30, 1997, between the Company and
Lehman Brothers, Inc
10.25 Tax Sharing Agreement Exhibit 10.10 to Form 10
10.26 Ralphs Tax Indemnification Agreement Exhibit 10.1 to Form 10
10.27 Account Purchase Agreement dated as of May Exhibit 19.2 to Macy's Quarterly Report on
10, 1991, by and among Monogram Bank, USA, Form 10-Q for the fiscal quarter ended May 4,
Macy's, Macy Credit Corporation, Macy 1991 (File No. 33-6192), as amended under
Funding, Macy's California, Inc., Macy's cover of Form 8, dated October 3, 1991
Northeast, Inc., Macy's South, Inc., ("Macy's May 1991 Form 10-Q")
Bullock's Inc., I. Magnin, Inc., Master Ser-
vicer, and Macy Specialty Stores, Inc. **
10.28 Amended and Restated Credit Card Program Exhibit 10.1 to the Company's Quarterly
Agreement, dated as of June 4, 1996, among GE Report on Form 10-Q for the period ended
Capital Consumer Card Co. ("GE Bank"), FDS August 3, 1996 (the "August 1996 Form 10-Q")
National Bank, Macy's East, Inc., Macy's
West, Inc., Bullock's, Inc., Broadway Stores,
Inc., FACS Group, Inc., and MSS-Delaware,
Inc. **
10.29 Amended and Restated Trade Name and Service Exhibit 10.2 to the August 1996 Form 10-Q
Mark License Agreement, dated as of June 4,
1996, among the Company, GE Bank and General
Electric Capital Corporation ("GE Capital")
10.30 FACS Credit Services and License Agreement, Exhibit 10.3 to the August 1996 Form 10-Q
dated as of June 4, 1996, by and among GE
Bank, GE Capital and FACS Group, Inc. **
10.31 FDS Guaranty, dated as of June 4, 1996 Exhibit 10.4 to the August 1996 Form 10-Q
10.32 GE Capital Credit Services and License Exhibit 10.5 to the August 1996 Form 10-Q
Agreement, dated as of June 4, 1996, among GE
Capital, FDS National Bank, the Company and
FACS Group, Inc. **
10.33 GE Capital/GE Bank Credit Services Agree- Exhibit 10.6 to the August 1996 Form 10-Q
ment, dated as of June 4, 1996, among GE
Capital and GE Bank **
18
20
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.34 Amended and Restated Commercial Accounts Exhibit 10.7 to the August 1996 Form 10-Q
Agreement, dated as of June 4, 1996, among GE
Capital, the Company, FDS National Bank,
Macy's East, Inc., Macy's West, Inc.,
Bullock's, Inc., Broadway Stores, Inc., FACS
Group, Inc. and MSS-Delaware, Inc.**
10.35 1992 Executive Equity Incentive Plan * Exhibit 10.12 to Form 10
10.36 1995 Executive Equity Incentive Plan, as Exhibit 10.1 to the Company's Quarterly
amended and restated as of May 16, 1997* Report on Form 10-Q for the period ended May
3, 1997
10.37 1992 Incentive Bonus Plan, as amended and
restated as of December 12, 1997 *
10.38 Form of Severance Agreement * Exhibit 10.33 to the 1994 Form 10-K
10.39 Form of Indemnification Agreement * Exhibit 10.14 to Form 10
10.40 Senior Executive Medical Plan * Exhibit 10.1.7 to 1989 Form 10-K
10.41 Employment Agreement, dated as of June 24, Exhibit 10.59 to the 1994 S-4 Registration
1994, between Allen I. Questrom and the Statement
Company *
10.42 Employment Agreement, dated as of March 10, Exhibit 10.44 to the 1997 Form 10-K
1997, between James M. Zimmerman and the
Company *
10.43 Employment Agreement, dated as of May 16,
1997, between Terry J. Lundgren and the
Company *
10.44 Form of Employment Agreement for Executives Exhibit 10.31 to 1993 Form 10-K
and Key Employees *
10.45 Supplementary Executive Retirement Plan, as Exhibit 10.46 to the 1997 Form 10-K*
amended and restated as of January 1, 1997
10.46 Executive Deferred Compensation Plan, as Exhibit 10.47 to the 1997 Form 10-K
amended*
10.47 Profit Sharing 401(k) Investment Plan Exhibit 10.48 to the 1997 Form 10-K
(amending and restating the Retirement In-
come and Thrift Incentive Plan) effective as
of April 1, 1997 *
10.48 Cash Account Pension Plan (amending and Exhibit 10.49 to the 1997 Form 10-K
restating The Federated Pension Plan) effec-
tive as of January 1, 1997*
19
21
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
21 Subsidiaries
22 Consent of KPMG Peat Marwick LLP
23 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.
20
22
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
Date: April 16, 1998
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 16, 1998.
SIGNATURE TITLE
--------- -----
* Chairman of the Board and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer) and Director
James M. Zimmerman
* President and Chief Merchandising Officer and
- ----------------------------------------------------- Director
Terry J. Lundgren
* Vice Chairman and Director
- -----------------------------------------------------
Ronald W. Tysoe
* Senior Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer
Karen M. Hoguet
* Vice President and Controller (principal accounting
- ----------------------------------------------------- officer)
Joel A. Belsky
* Director
- -----------------------------------------------------
Meyer Feldberg
* Director
- -----------------------------------------------------
Earl G. Graves, Sr.
* Director
- -----------------------------------------------------
George V. Grune
* Director
- -----------------------------------------------------
Sara Levinson
* Director
- -----------------------------------------------------
Joseph Neubauer
* Director
- -----------------------------------------------------
Joseph A. Pichler
* Director
- -----------------------------------------------------
Karl M. von der Heyden
* Director
- -----------------------------------------------------
Craig E. Weatherup
* Director
- -----------------------------------------------------
Marna C. Whittington
* 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
21
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Management's Report......................................... F-2
Independent Auditors' Report................................ F-3
Consolidated Statements of Income for the 52 weeks ended
January 31, 1998 and February 1, 1997 and the 53 weeks
ended February 3, 1996.................................... F-4
Consolidated Balance Sheets at January 31, 1998 and February
1, 1997................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the 52 weeks ended January 31, 1998 and February 1,
1997 and the 53 weeks ended February 3, 1996.............. F-6
Consolidated Statements of Cash Flows for the 52 weeks ended
January 31, 1998 and February 1, 1997 and the 53 weeks
ended February 3, 1996.................................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
24
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 audits 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.
James M. Zimmerman
Chairman and Chief Executive Officer
Karen M. Hoguet
Senior Vice President, Chief Financial Officer and Treasurer
Joel A. Belsky
Vice President and Controller
F-2
25
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 as of January 31, 1998 and February 1,
1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the fifty-two week periods ended January
31, 1998 and February 1, 1997 and the fifty-three week period ended February 3,
1996. 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 January 31, 1998 and February 1,
1997, and the results of their operations and their cash flows for the fifty-two
week periods ended January 31, 1998 and February 1, 1997 and the fifty-three
week period ended February 3, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Cincinnati, Ohio
March 3, 1998
F-3
26
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS, EXCEPT PER SHARE DATA)
================================================================================
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
Net sales, including leased department sales............... $15,668 $15,229 $15,049
------- ------- -------
Cost of sales:
Recurring................................................ 9,581 9,289 9,318
Inventory valuation adjustments related to
consolidation......................................... - 65 92
------- ------- -------
Total cost of sales........................................ 9,581 9,354 9,410
Selling, general and administrative expenses:
Recurring................................................ 4,746 4,739 4,748
Business integration and consolidation expenses.......... - 243 202
Charitable contribution to Federated Department Stores
Foundation............................................ - - 26
------- ------- -------
Total selling, general and administrative expenses......... 4,746 4,982 4,976
------- ------- -------
Operating income........................................... 1,341 893 663
Interest expense........................................... (418) (499) (508)
Interest income............................................ 35 47 47
------- ------- -------
Income before income taxes and extraordinary item.......... 958 441 202
Federal, state and local income tax expense................ (383) (175) (127)
------- ------- -------
Income before extraordinary item........................... 575 266 75
Extraordinary item......................................... (39) - -
------- ------- -------
Net income................................................. $ 536 $ 266 $ 75
======= ======= =======
Basic earnings per share:
Income before extraordinary item......................... $ 2.74 $ 1.28 $ .39
Extraordinary item....................................... (.18) - -
------- ------- -------
Net income............................................... $ 2.56 $ 1.28 $ .39
======= ======= =======
Diluted earnings per share:
Income before extraordinary item......................... $ 2.58 $ 1.24 $ .39
Extraordinary item....................................... (.17) - -
------- ------- -------
Net income............................................... $ 2.41 $ 1.24 $ .39
======= ======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
27
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS)
================================================================================
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------
ASSETS
Current Assets:
Cash...................................................... $ 142 $ 149
Accounts receivable....................................... 2,640 2,834
Merchandise inventories................................... 3,239 3,246
Supplies and prepaid expenses............................. 115 110
Deferred income tax assets................................ 58 88
------- -------
Total Current Assets.............................. 6,194 6,427
Property and Equipment - net................................ 6,520 6,525
Intangible Assets - net..................................... 690 717
Other Assets................................................ 334 595
------- -------
Total Assets...................................... $13,738 $14,264
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt........................................... $ 556 $ 1,095
Accounts payable and accrued liabilities.................. 2,416 2,492
Income taxes.............................................. 88 9
------- -------
Total Current Liabilities......................... 3,060 3,596
Long-Term Debt.............................................. 3,919 4,606
Deferred Income Taxes....................................... 939 831
Other Liabilities........................................... 564 562
Shareholders' Equity........................................ 5,256 4,669
------- -------
Total Liabilities and Shareholders' Equity........ $13,738 $14,264
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
28
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(MILLIONS)
================================================================================
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
STOCK CAPITAL EQUITY STOCK OTHER EQUITY
------ ---------- ----------- -------- ----- -------------
BALANCE AT JANUARY 28, 1995....... $2 $3,712 $ 493 $(559) $(8) $3,640
Net income........................ 75 75
Stock issued under stock plans.... 15 (3) 12
Restricted stock plan
amortization.................... 5 5
Income tax benefit related to
stock
plan activity................... 2 2
Stock issued in acquisition and
other........................... 540 540
-- ------ ------ ----- --- ------
BALANCE AT FEBRUARY 3, 1996....... 2 4,269 568 (562) (3) 4,274
Net income........................ 266 266
Stock issued under stock plans.... 125 (4) 121
Restricted stock plan
amortization.................... 2 2
Income tax benefit related to
stock
plan activity................... 6 6
-- ------ ------ ----- --- ------
BALANCE AT FEBRUARY 1, 1997....... 2 4,400 834 (566) (1) 4,669
Net income........................ 536 536
Stock issued under stock plans.... 46 (7) (1) 38
Deferred compensation plan
distributions................... 1 1
Income tax benefit related to
stock
plan activity................... 15 15
Minimum pension liability
adjustment...................... (3) (3)
-- ------ ------ ----- --- ------
BALANCE AT JANUARY 31, 1998....... $2 $4,461 $1,370 $(572) $(5) $5,256
== ====== ====== ===== === ======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
29
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS)
================================================================================
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income................................................ $ 536 $ 266 $ 75
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment........................................... 563 504 445
Amortization of intangible assets..................... 27 27 47
Amortization of financing costs....................... 20 27 22
Amortization of unearned restricted stock............. - 2 5
Loss on early extinguishment of debt.................. 39 - -
Changes in assets and liabilities, net of effects of
acquisition:
(Increase) decrease in accounts receivable.......... 194 223 (21)
(Increase) decrease in merchandise inventories...... 7 (151) (362)
(Increase) decrease in supplies and prepaid
expenses.......................................... (5) 67 (68)
(Increase) decrease in other assets not separately
identified........................................ (7) (12) 61
Increase (decrease) in accounts payable and accrued
liabilities not separately identified............. (36) 177 (83)
Increase (decrease) in current income taxes......... 103 2 (45)
Increase in deferred income taxes................... 138 84 192
Increase (decrease) in other liabilities not
separately identified............................. (6) 4 27
------- ------- -------
Net cash provided by operating activities......... 1,573 1,220 295
------- ------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired......................... - - 16
Purchase of property and equipment........................ (696) (846) (696)
Disposition of property and equipment..................... 178 196 47
Collection of note receivable............................. 200 - -
------- ------- -------
Net cash used by investing activities............. (318) (650) (633)
------- ------- -------
Cash flows from financing activities:
Debt issued............................................... 763 689 1,347
Financing costs........................................... (7) (11) (27)
Debt repaid............................................... (2,027) (1,335) (1,020)
Decrease in outstanding checks............................ (45) (65) (10)
Acquisition of treasury stock............................. (2) (1) (1)
Issuance of common stock.................................. 56 129 16
------- ------- -------
Net cash provided (used) by financing
activities...................................... (1,262) (594) 305
------- ------- -------
Net decrease in cash........................................ (7) (24) (33)
Cash beginning of period.................................... 149 173 206
------- ------- -------
Cash end of period.......................................... $ 142 $ 149 $ 173
======= ======= =======
Supplemental cash flow information:
Interest paid............................................. $ 412 $ 465 $ 444
Interest received......................................... 38 46 46
Income taxes paid (net of refunds received)............... 121 21 35
Schedule of noncash investing and financing activities:
Debt and merger related liabilities issued, reinstated
or
assumed in acquisition................................ - - 1,267
Equity issued in acquisition............................ - - 353
Debt and equity issued for purchase of debt............. - - 430
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7
30
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 that sell 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 2.5% 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 treated 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. The carrying value of property and equipment is
periodically reviewed and adjusted appropriately by the Company whenever events
or changes in circumstances indicate that the estimated fair value is less than
the carrying amount.
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 $680 million and $618 million for the 52 weeks ended
January 31, 1998 and February 1, 1997, respectively, and $633 million for the 53
weeks ended February 3, 1996.
Financing costs are amortized over the life of the related debt.
F-8
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Income taxes are accounted for under the asset and liability method.
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. 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 cost of postretirement benefits other than pensions is recognized in
the financial statements over an employee's term of service with the Company.
The Company accounts for its stock-based employee compensation plan in
accordance with Accounting Principles Board Opinion No. 25 and related
interpretations (see Note 14).
Earnings per share are computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share" (see Note 17).
Certain reclassifications were made to prior years' amounts to conform with
the classifications of such amounts for the most recent year.
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components, and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting and disclosure standards for an
enterprise's operating segments. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
revises the disclosure requirements for pensions and other postretirement
benefit plans. All three statements are effective for fiscal years beginning
after December 15, 1997. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash flows,
and, where applicable, will be limited to the form and content of its
disclosures.
2. ACQUISITION
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 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 $353 million and (ii)
$1,267 million of Broadway debt. In addition, a wholly owned subsidiary of the
Company purchased $422 million of mortgage indebtedness of Broadway for 6.8
million shares of common stock of the Company and a $242 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 the estimated fair
value of these assets and liabilities as of that date.
F-9
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
3. INVENTORY VALUATION ADJUSTMENTS RELATED TO CONSOLIDATION AND BUSINESS
INTEGRATION AND CONSOLIDATION EXPENSES
In connection with the consolidation of merchandise inventories for
acquired and pre-existing businesses, the Company recorded one-time inventory
valuation adjustments related to merchandise in lines of business that were
eliminated or replaced as a separate component of cost of sales. For the 52
weeks ended February 1, 1997, the amount recorded related to the consolidation
of Broadway into the Company's Macy's West division. For the 53 weeks ended
February 3, 1996, $69 million related to 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 divisions and $23 million related to the
consolidation of the Company's Rich's/Goldsmith's and Lazarus divisions.
Additionally, the Company incurred certain one-time costs related to the
integration and consolidation of acquired and pre-existing businesses and
classified such costs as business integration and consolidation expenses as a
separate component of selling, general and administrative expenses.
During the 52 weeks ended February 1, 1997, the Company recorded $243
million of business integration and consolidation expenses, consisting of $168
million of costs associated with the integration of Broadway into the Company,
$34 million of costs related to the integration of Macy's into the Company and
$41 million of costs related to other support operation restructurings. The
major components of the Broadway integration expenses were $90 million of costs
associated with converting the Broadway stores to other nameplates of the
Company (including advertising, credit card issuance and promotion and other
name change expenses), $29 million of costs associated with operating Broadway
central office functions for a transitional period and $49 million of other
costs and expenses associated with the integration of Broadway into the Company,
including the disposition of properties. The costs associated with the
integration of Macy's into the Company primarily related to the administration
and integration of Company-wide policies and procedures and the elimination of
duplicative or non-continuing facilities. The costs associated with other
support operation restructurings primarily related to the closure and
disposition of warehouses and distribution centers in connection with the
centralization of the Company's merchandise distribution function.
During the 53 weeks ended February 3, 1996, the Company recorded $202
million of business integration and consolidation expenses associated with the
integration of Macy's and Broadway into the Company ($140 million and $48
million, respectively) and the consolidation of the Company's Rich's/Goldsmith's
and Lazarus divisions ($14 million). The primary components of the Macy's
integration expenses were $31 million of costs to close and sell certain stores,
$38 million of costs to convert a number of stores to other nameplates, $31
million of severance costs and $40 million of other costs and expenses
associated with integrating Macy's into the Company. The major components of the
Broadway integration expenses were $23 million of costs to close certain stores,
$9 million of costs to refinance certain indebtedness and $16 million of other
costs and expenses associated with integrating Broadway into the Company.
4. EXTRAORDINARY ITEM
The extraordinary item for the 52 weeks ended January 31, 1998 represents
costs of $39 million, net of income tax benefit of $25 million, associated with
the prepayment of all amounts outstanding under the Company's mortgage loan
facility, secured promissory note, certain other mortgages and previous bank
credit facility, all of which were retired and terminated.
F-10
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
5. ACCOUNTS RECEIVABLE
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(MILLIONS)
Due from customers.......................................... $2,322 $2,523
Less allowance for doubtful accounts........................ 100 96
------ ------
2,222 2,427
Other receivables........................................... 418 407
------ ------
Net receivables............................................. $2,640 $2,834
====== ======
Sales through the Company's credit plans were $4,002 million and $4,191
million for the 52 weeks ended January 31, 1998 and February 1, 1997,
respectively, and $4,324 million for the 53 weeks ended February 3, 1996. The
credit plans relating to certain operations of the Company, including operations
that were previously conducted through divisions of Macy's, are owned by a third
party. Other receivables includes the current portion of a $400 million 9.5%
note relating to the sale of certain divisions in 1988. The $400 million note,
which is supported by a letter of credit, was transferred to a grantor trust
which borrowed $352 million under a note monetization facility and transferred
such proceeds to the Company (see Note 9). The initial $200 million installment
of the note was received on May 5, 1997 and the remaining $200 million
installment matures on May 3, 1998.
Finance charge income amounted to $391 million and $430 million for the 52
weeks ended January 31, 1998 and February 1, 1997, respectively, and $405
million for the 53 weeks ended February 3, 1996.
Changes in allowance for doubtful accounts are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Balance, beginning of year............ $ 96 $ 83 $ 45
Charged to costs and expenses......... 167 172 127
Acquired.............................. - - 16
Net uncollectible balances written
off................................. (163) (159) (105)
----- ----- -----
Balance, end of year.................. $ 100 $ 96 $ 83
===== ===== =====
6. INVENTORIES
Merchandise inventories were $3,239 million at January 31, 1998, compared
to $3,246 million at February 1, 1997. At these dates, the cost of inventories
using the LIFO method approximated the cost of such inventories using the
first-in, first-out method. The application of the LIFO method did not impact
cost of sales for the 52 weeks ended January 31, 1998 and February 1, 1997 or
the 53 weeks ended February 3, 1996.
F-11
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
7. PROPERTIES AND LEASES
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(MILLIONS)
Land................................................. $1,019 $1,048
Buildings on owned land.............................. 2,314 2,307
Buildings on leased land and leasehold
improvements....................................... 1,552 1,547
Store fixtures and equipment......................... 3,305 2,917
Leased properties under capitalized leases........... 76 78
------ ------
8,266 7,897
Less accumulated depreciation and amortization....... 1,746 1,372
------ ------
$6,520 $6,525
====== ======
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.
Minimum rental commitments (excluding executory costs) at January 31, 1998,
for noncancellable leases are:
CAPITALIZED OPERATING
LEASES LEASES TOTAL
----------- --------- ------
(MILLIONS)
Fiscal year:
1998................................................ $ 13 $ 164 $ 177
1999................................................ 12 151 163
2000................................................ 12 145 157
2001................................................ 12 139 151
2002................................................ 10 130 140
After 2002.......................................... 73 1,010 1,083
---- ------ ------
Total minimum lease payments.......................... 132 $1,739 $1,871
====== ======
Less amount representing interest..................... 61
----
Present value of net minimum capitalized lease
payments............................................ $ 71
====
Capitalized leases are included in the Consolidated Balance Sheets as
property and equipment while the related obligation is included in short-term
($5 million) and long-term ($66 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 $7 million on capitalized leases and $19 million on
operating leases.
F-12
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Rental expense consists of:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Real estate (excluding executory
costs)
Capitalized leases -
Contingent rentals............... $ 4 $ 4 $ 4
Operating leases -
Minimum rentals.................. 149 151 137
Contingent rentals............... 23 21 20
---- ---- ----
176 176 161
---- ---- ----
Less income from subleases -
Capitalized leases............... 1 1 -
Operating leases................. 3 3 2
---- ---- ----
4 4 2
---- ---- ----
$172 $172 $159
==== ==== ====
Personal property - Operating
leases.............................. $ 37 $ 60 $ 64
==== ==== ====
8. INTANGIBLE ASSETS
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(MILLIONS)
Reorganization value in excess of amount allocable to
identifiable assets................................ $100 $100
Excess of cost over net assets acquired.............. 294 294
Tradenames........................................... 458 458
---- ----
852 852
Less accumulated amortization........................ 162 135
---- ----
Intangible assets - net.............................. $690 $717
==== ====
Intangible assets are being amortized on a straight-line basis over 20
years, except for tradenames which are being amortized over 40 years.
F-13
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
9. FINANCING
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(MILLIONS)
Short-term debt:
Receivables backed financings...................... $ 375 $ 675
Note monetization facility......................... 176 176
Bank credit facility............................... - 132
Current portion of long-term debt.................. 5 112
------ ------
Total short-term debt...................... $ 556 $1,095
====== ======
Long-term debt:
Receivables backed financings...................... $1,326 $1,365
10.0% Senior notes due 2001........................ 450 450
8.5% Senior notes due 2003......................... 450 450
8.125% Senior notes due 2002....................... 400 400
5.0% Convertible subordinated notes due 2003....... 350 350
7.45% Senior debentures due 2017................... 300 -
Short-term debt refinanced......................... 294 -
6.79% Senior debentures due 2027................... 250 -
Note monetization facility......................... - 176
Bank credit facility, mortgages and other.......... 99 1,415
------ ------
Total long-term debt....................... $3,919 $4,606
====== ======
Interest expense was as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Interest on debt...................... $392 $464 $478
Amortization of financing costs....... 20 27 22
Interest on capitalized leases........ 8 9 9
---- ---- ----
Subtotal............................ 420 500 509
Less:
Interest capitalized on
construction..................... (2) (1) (1)
---- ---- ----
$418 $499 $508
==== ==== ====
F-14
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Future maturities of long-term debt, other than capitalized leases and
including unamortized original issue discount of $1 million, are shown below:
(MILLIONS)
Fiscal year:
1999...................................................... $523
2000...................................................... -
2001...................................................... 689
2002...................................................... 998
2003...................................................... 800
After 2003................................................ 844
On July 14, 1997, the Company issued $300 million of 7.45% Senior
Debentures due 2017 and $250 million of 6.79% Senior Debentures due 2027 and, on
July 28, 1997, the Company entered into new bank credit agreements which
replaced its existing bank credit agreement.
During the 52 weeks ended January 31, 1998, with proceeds of the financings
described above, proceeds of the $200 million installment of a note receivable
and other funds, the Company repaid significant borrowings including $568
million of the Company's receivables backed certificates, $516 million of
outstanding term borrowings under its previous bank credit facility, the entire
$345 million of outstanding borrowings under its mortgage loan facility, the
entire $221 million of borrowings outstanding under its secured promissory note
and $176 million of borrowings outstanding under its note monetization facility.
On February 6, 1998, the Company issued $300 million of 7.0% Senior
Debentures due 2028. The proceeds were used to refinance short-term borrowings
which are classified as long-term debt as of January 31, 1998.
The following summarizes certain components of the Company's debt:
RECEIVABLES BACKED FINANCINGS
Receivables backed financings classified as short-term debt consist of
receivables backed commercial paper issued by a subsidiary of the Company (of
which $375 million and $146 million was outstanding as of January 31, 1998 and
February 1, 1997, respectively), together with the current portion of amounts
due under certain receivables backed certificates issued by a subsidiary of the
Company. Receivables backed financings classified as long-term debt consist of
receivables backed certificates issued by a subsidiary of the Company, which
certificates represent undivided interests in a master trust originated by such
subsidiary, bear interest at rates ranging from 6.70% to 7.95% per annum and
mature between December 15, 1999 and September 15, 2002.
BANK CREDIT AGREEMENTS
The Company and certain financial institutions are parties to (i) the
Five-Year Credit Agreement, pursuant to which such financial institutions have
provided the Company with a $1,500 million revolving loan facility (the "Five
Year Facility") and (ii) the 364-Day Credit Agreement, pursuant to which such
financial institutions have provided the Company with a $500 million revolving
loan facility (the "364-Day Facility" and, together with the Five-Year Facility,
the "Revolving Loan Facilities"). The Company's obligations under the Revolving
Loan Facilities are not secured or guaranteed.
F-15
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
As of January 31, 1998, there were $150 million of revolving credit loans
outstanding under the Five-Year Facility which, as a result of a refinancing,
has been classified as long term debt. Additionally, there were $112 million of
letters of credit outstanding under the Revolving Loan Facilities. Revolving
loans under the Revolving Loan Facilities bear interest based on published
rates. As of January 31, 1998, the average rate was 5.78% per annum.
COMMERCIAL PAPER
On January 30, 1997, the Company established a $400 million facility for
the issuance from time to time of unsecured commercial paper. The issuance of
commercial paper under the facility will have the effect, while such commercial
paper is outstanding, of reducing the Company's borrowing capacity under the
Five-Year Facility by an amount equal to the principal amount of such commercial
paper. As of January 31, 1998, there was $144 million of such commercial paper
outstanding which, as a result of a refinancing, has been classified as
long-term debt. As of February 1, 1997, no such commercial paper was
outstanding.
SENIOR NOTES AND DEBENTURES
The Senior Notes and the Senior Debentures are unsecured obligations of the
Company. The holders of the Senior Debentures due 2027 may elect to have such
debentures repaid on July 15, 2004 at 100% of the principal amount thereof,
together with accrued and unpaid interest to the date of repayment.
CONVERTIBLE SUBORDINATED NOTES
The Convertible Subordinated Notes are unsecured obligations of the Company
and are subordinated to all existing and future senior debt of the Company. The
Convertible Subordinated Notes are convertible into shares of Common Stock at
the rate of 29.2547 shares of Common Stock per $1,000 stated principal amount,
subject to adjustment in certain circumstances to prevent dilution. 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 specified
redemption prices plus accrued interest to the date of redemption.
NOTE MONETIZATION FACILITY
The note monetization facility represents debt of a grantor trust formed by
the Company, the final installment of which matures on May 3, 1998. Recourse
under such debt is limited to the trust's assets (consisting primarily of a $200
million receivable due on May 3, 1998) and the Company's interest in the trust.
OTHER FINANCING ARRANGEMENT
In addition to the financing arrangements discussed above, on January 22,
1997, the Company entered into an arrangement providing for off balance sheet
financing of up to $200 million (subsequently increased to $300 million) of
non-proprietary credit card receivables arising under accounts owned by the
Company. At January 31, 1998 and February 1, 1997, $243 million and $104 million
of borrowings were outstanding under this arrangement, respectively.
F-16
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(MILLIONS)
Merchandise and expense accounts payable.................... $1,587 $1,699
Liabilities to customers.................................... 173 111
Taxes other than income taxes............................... 116 119
Accrued wages and vacation.................................. 86 78
Accrued interest............................................ 51 62
Other....................................................... 403 423
------ ------
$2,416 $2,492
====== ======
11. TAXES
Income tax expense is as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
-------------------------- -------------------------- --------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ----- ------- -------- -----
(MILLIONS)
Federal................ $319 $(1) $318 $176 $(31) $145 $ 91 $13 $104
State and local........ 66 (1) 65 36 (6) 30 20 3 23
---- --- ---- ---- ---- ---- ---- --- ----
$385 $(2) $383 $212 $(37) $175 $111 $16 $127
==== === ==== ==== ==== ==== ==== === ====
The income tax expense reported differs from the expected tax computed by
applying the federal income tax statutory rate of 35% for the 52 weeks ended
January 31, 1998 and February 1, 1997, and the 53 weeks ended February 3, 1996
to income before income taxes and extraordinary item. The reasons for this
difference and their tax effects are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Expected tax.......................... $335 $154 $ 71
State and local income taxes, net of
federal income tax expense.......... 43 20 15
Permanent difference arising from
amortization of intangible assets... 9 9 16
Permanent difference resulting from
Broadway acquisition................ - - 23
Other................................. (4) (8) 2
---- ---- ----
$383 $175 $127
==== ==== ====
F-17
40
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:
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(MILLIONS)
Deferred tax assets:
Operating loss carryforwards.............................. $ 174 $ 328
Accrued liabilities accounted for on a cash basis for tax
purposes............................................... 175 189
Postretirement benefits other than pensions............... 171 179
Capitalized lease debt.................................... 31 31
Allowance for doubtful accounts........................... 40 38
Alternative minimum tax credit carryforwards.............. 63 53
Other..................................................... 122 148
------- -------
Total gross deferred tax assets........................ 776 966
------- -------
Deferred tax liabilities:
Excess of book basis over tax basis of property and
equipment.............................................. (1,345) (1,376)
Prepaid pension expense................................... (68) (68)
Deferred gain from sale of divisions...................... (41) (82)
Merchandise inventories................................... (122) (115)
Other..................................................... (81) (68)
------- -------
Total gross deferred tax liabilities................... (1,657) (1,709)
------- -------
Net deferred tax liability............................. $ (881) $ (743)
======= =======
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. 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. As of
January 31, 1998, the Company estimated that the Macy's net operating loss
carryforwards, which are available to offset future taxable income of the
acquired Macy's enterprise through 2008, were approximately $170 million and
that Broadway's net operating loss carryforwards, which are available to offset
future taxable income of the acquired Broadway enterprise through 2009, were
approximately $303 million. The Company also had alternative minimum tax credit
carryforwards of $63 million, which are available to reduce future income taxes,
if any, over an indefinite period.
12. RETIREMENT PLANS
The Company has a defined benefit plan ("Pension Plan") and a defined
contribution plan ("Savings Plan") which cover substantially all employees who
work 1,000 hours or more in a year. In addition, the Company has a defined
benefit supplementary retirement plan which includes benefits, for certain
employees, in excess of qualified plan limitations. For the 52 weeks ended
January 31, 1998 and February 1, 1997, and the 53 weeks
F-18
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
ended February 3, 1996, net retirement expense for these plans totaled $35
million, $29 million and $22 million, respectively.
Measurements of plan assets and obligations for the Pension Plan and the
defined benefit supplementary retirement plan are calculated as of December 31
of each year. The discount rates used to determine the actuarial present value
of projected benefit obligations under such plans were 7.25% as of December 31,
1997 and 7.75% as of December 31, 1996. The assumed average rate of increase in
future compensation levels under such plans was 5.0% as of December 31, 1997 and
December 31, 1996. The long-term rate of return on assets (Pension Plan only)
was 9.75% as of December 31, 1997 and December 31, 1996.
PENSION PLAN
Net pension expense for the Company's Pension Plan included the following
actuarially determined components:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Service cost.......................... $ 30 $ 36 $ 31
Interest cost......................... 99 94 83
Actual return on assets............... (247) (193) (243)
Net amortization and deferrals........ 115 74 134
Cost of special termination
benefits............................ 9 - -
----- ----- -----
$ 6 $ 11 $ 5
===== ===== =====
In connection with a program to modify certain health care benefits for
future retirees at one division, the Company incurred $9 million of special
termination benefits to eligible employees who elected to retire within a
specified time period.
The following table sets forth the projected actuarial present value of
benefit obligations and funded status at December 31, 1997 and 1996, for the
Pension Plan:
1997 1996
------ ------
(MILLIONS)
Net accumulated benefit obligations, including vested
benefits of $1,286 million and $1,164 million,
respectively.............................................. $1,304 $1,189
Projected compensation increases............................ 99 92
------ ------
Projected benefit obligations............................... 1,403 1,281
------ ------
Plan assets (primarily stocks, bonds and U.S. government
securities)............................................... 1,590 1,469
Unrecognized gain........................................... (21) (16)
Unrecognized prior service cost............................. 3 4
------ ------
1,572 1,457
------ ------
Prepaid pension expense..................................... $ 169 $ 176
====== ======
F-19
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
The Company's policy is to fund the Pension Plan at or above the minimum
required by law. For the 1997 and 1996 plan years, the Company was impacted by
the full funding limitation resulting in a zero contribution requirement for
both years. Plan assets are held by independent trustees.
SUPPLEMENTARY RETIREMENT PLAN
Net pension expense for the supplementary retirement plan included the
following actuarially determined components:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Service cost.......................... $ 2 $ 2 $ 2
Prior service cost.................... - - 1
Interest cost on projected benefit
obligations......................... 5 5 3
Net amortization and deferral......... 2 1 1
--- --- ---
$ 9 $ 8 $ 7
=== === ===
The following table sets forth the projected actuarial present value of
unfunded benefit obligations at December 31, 1997 and 1996, for the
supplementary retirement plan:
1997 1996
---- ----
(MILLIONS)
Accumulated benefit obligations, including vested benefits
of $87 million and $65 million, respectively.............. $89 $66
Projected compensation increases............................ 5 9
--- ---
Projected benefit obligations............................... 94 75
Unrecognized gain (loss).................................... (9) 6
Unrecognized prior service cost............................. (7) (5)
Minimum funding liability................................... 11 -
--- ---
Accrued supplementary retirement obligation................. $89 $76
=== ===
In order to recognize the required minimum liability at December 31, 1997
for the defined benefit supplementary retirement plan, the Company recorded an
additional pension accrual, an intangible asset to the extent of unrecognized
prior service cost and a reduction in shareholders' equity, net of applicable
income taxes.
SAVINGS PLAN
The Savings Plan includes a voluntary savings feature for eligible
employees. The Company's contribution is based on the Company's annual earnings
and the minimum Company contribution is 33 1/3% of an employee's eligible
savings. Expense for the Savings Plan amounted to $20 million for the 52 weeks
ended January 31, 1998, $10 million for the 52 weeks ended February 1, 1997, and
$10 million for the 53 weeks ended February 3, 1996.
F-20
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
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 January 31, 1998, February 1, 1997, and February 3,
1996, the liability under the plan, which is reflected in other liabilities, was
$17 million, $12 million, and $8 million, respectively. Expense for the 52 weeks
ended January 31, 1998, 52 weeks ended February 1, 1997, and the 53 weeks ended
February 3, 1996 was immaterial.
13. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to pension and other supplemental benefits, certain retired
employees currently are 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 eligible
employees who retire after a certain age with specified years of service.
Certain employees are subject to having such benefits modified or terminated.
Net postretirement benefit expense included the following actuarially
determined components:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS)
Service cost.......................... $ 2 $ 5 $ 6
Interest cost......................... 23 27 29
Net amortization and deferral......... (15) (6) (7)
Reduction for special termination
benefits............................ (3) - -
---- --- ---
$ 7 $26 $28
==== === ===
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, 1997 and
1996:
1997 1996
---- ----
(MILLIONS)
Accumulated postretirement benefit obligation:
Retirees.................................................... $278 $280
Fully eligible active plan participants..................... 26 39
Other active plan participants.............................. 21 45
---- ----
Accumulated postretirement benefit obligation............... 325 364
Unrecognized net gain....................................... 73 69
Unrecognized prior service cost............................. 31 16
---- ----
Accrued postretirement benefit obligation................... $429 $449
==== ====
The discount rate used in determining the actuarial present value of
unfunded postretirement benefit obligations was 7.25% as of December 31, 1997
and 7.75% as of December 31, 1996.
F-21
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
The future medical 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 5.5% to 10.0% in the first
year, and to decrease gradually for each such component to 5.5% by 2003 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, 1997 by $12
million and the net periodic postretirement benefit expense for 1997 by $1
million.
14. EQUITY PLAN
The Company has adopted 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:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
(SHARES IN THOUSANDS) -------- -------- ------- -------- ------- --------
Outstanding, beginning of year........... 9,140.2 $24.65 7,415.7 $20.48 6,151.5 $19.83
Granted.................................. 4,133.7 34.49 3,057.8 33.14 2,291.1 21.82
Canceled................................. (630.0) 29.51 (403.9) 23.95 (435.6) 20.74
Exercised................................ (1,818.6) 20.80 (929.4) 19.60 (591.3) 18.63
-------- ------ ------- ------ ------- ------
Outstanding, end of year................. 10,825.3 $28.78 9,140.2 $24.65 7,415.7 $20.48
======== ====== ======= ====== ======= ======
Exercisable, end of year................. 3,315.0 $22.56 3,136.8 $20.33 2,750.2 $19.41
======== ====== ======= ====== ======= ======
Weighted average fair value of options
granted during the year................ $14.26 $13.04 $ 9.89
====== ====== ======
As of January 31, 1998, 10.8 million shares of Common Stock were available
for additional grants pursuant to the Company's equity plan, of which 1.2
million shares were available for grant in the form of restricted stock. During
the 52 weeks ended January 31,1998, 30,000 shares of Common Stock were granted
in the form of restricted stock at a market value of $34.38 and fully vest after
3 years. No shares of Common Stock were granted in the form of restricted stock
during the 52 weeks ended February 1, 1997 or the 53 weeks ended February 3,
F-22
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
1996. Compensation expense is recorded for all restricted stock grants based on
the amortization of the fair market value at the time of grant of the restricted
stock over the period the restrictions lapse. There have been no grants of stock
appreciation rights under the equity plan.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for compensation cost under its equity plan. Had
compensation cost for the Company's equity plan been determined consistent with
Statement of Financial Accounting Standards No. 123 for options granted
subsequent to January 28, 1995, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(MILLIONS, EXCEPT PER SHARE DATA)
Net income As Reported................... $ 536 $ 266 $ 75
Pro forma..................... 521 258 72
Basic earnings As Reported................... 2.56 1.28 .39
per share Pro forma..................... 2.49 1.24 .37
Diluted earnings As Reported................... 2.41 1.24 .39
per share Pro forma..................... 2.34 1.21 .37
The fair value of each option grant subsequent to January 28, 1995 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used.
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
Dividend yield..................................... - - -
Expected volatility................................ 29.7% 25.2% 31.5%
Risk-free interest rate............................ 5.7% 6.1% 7.0%
Expected life...................................... 6 years 6 years 6 years
The following summarizes information about stock options granted subsequent
to January 28, 1995, which remain outstanding as of January 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
(THOUSANDS) (THOUSANDS)
$19.00 - 28.50 1,250.6 7 years.... $22.40 485.2 $22.40
33.13 - 34.63 2,604.5 8 years.... 33.14 519.8 33.14
34.38 - 45.13 3,944.1 9 years.... 34.49 - -
15. 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
F-23
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
of $.01 per share, with 239.9 million shares of Common Stock issued and 209.9
million shares of Common Stock outstanding at January 31, 1998 and 237.8 million
shares of Common Stock issued and 208.0 million shares of Common Stock
outstanding at February 1, 1997 (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.
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 million shares of Common Stock
F-24
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
(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 addition to the stock options described in Note 14, 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 300 thousand shares of Common Stock remained outstanding as
of January 31, 1998).
TREASURY STOCK
Treasury stock contains shares issued to wholly owned subsidiaries of the
Company in connection with the acquisition of Macy's, shares maintained in a
trust related to the deferred compensation plans and shares repurchased to cover
employee tax liabilities related to other stock plan activity.
Changes in the number of shares held in the treasury are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(THOUSANDS)
Balance, beginning of year................ 84.8 40.8 -
Additions:
Restricted stock........................ 70.0 41.9 40.8
Deferred compensation plan.............. 4.5 2.1 -
----- ---- ----
Balance, end of year...................... 159.3 84.8 40.8
===== ==== ====
Additions to treasury stock for restricted stock and the deferred
compensation plan represent shares accepted in lieu of cash to cover employee
tax liability upon lapse of restrictions for restricted stock and upon
distribution of common stock under the deferred compensation plan.
F-25
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
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. Changes in the number of shares held in the trust
are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
---------------- ---------------- ----------------
(THOUSANDS)
Balance, beginning of year............ 283.5 213.9 130.5
Additions............................. 123.7 90.6 88.0
Distributions......................... (28.5) (21.0) (4.6)
----- ----- -----
Balance, end of year.................. 378.7 283.5 213.9
===== ===== =====
16. 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 because the carrying amount reflects a
reasonable estimate of losses from doubtful accounts.
Long-term debt
The fair values of the Company's long-term debt, excluding capitalized
leases, 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.
F-26
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
The estimated fair values of certain financial instruments of the Company
are as follows:
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------------------- ----------------------------
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
-------- -------- ------ -------- -------- ------
(MILLIONS)
Long-term debt..................... $3,854 $3,853 $4,179 $4,534 $4,533 $4,703
Interest rate cap agreements....... 827 - - 1,852 8 -
Interest rate swap agreements...... 376 - (2) 752 - (8)
The interest rate cap agreements in effect at January 31, 1998 are used to
hedge interest rate risk related to variable rate indebtedness under the
Company's Revolving Loan Facilities and commercial paper programs. 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 relate to the note monetization and
Revolving Loan Facilities. The note monetization facility bears interest based
on LIBOR, subject to certain adjustments. The interest rate swap agreement for
the note monetization facility effectively 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, in effect, to fix the
interest on a portion of the debt outstanding under the Revolving Loan
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 that the total commitment amount will represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis.
Financial instruments that 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 concentrations, however, are considered to be
limited because of the Company's large number of customers and their dispersion
across many regions.
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50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
17. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per
share based on income before extraordinary item is as follows:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 1998 FEBRUARY 1, 1997 FEBRUARY 3, 1996
----------------------- ----------------------- ----------------------
SHARES INCOME SHARES INCOME SHARES INCOME
------ ------ ------ ------ ------ ------
(MILLIONS, EXCEPT PER SHARE DATA)
Income before extraordinary
item and average number of
shares outstanding.......... 209.2 $575 207.5 $266 191.5 $75
Shares to be issued to IRS.... .1 .1
Shares to be issued under
deferred compensation
plan........................ .3 .2 .2
------ ---- ------ ---- ------ ---
209.5 $575 207.8 $266 191.8 $75
Basic earnings per
share.................. $2.74 $1.28 $.39
===== ===== ====
Effect of dilutive securities:
Warrants.................... 5.4 2.8 .6
Stock options............... 2.0 1.6 .9
Convertible notes........... 10.2 10 10.2 11
------ ---- ------ ---- ------ ---
227.1 $585 222.4 $277 193.3 $75
Diluted earnings per
share.................. $2.58 $1.24 $.39
===== ===== ====
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51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
18. QUARTERLY RESULTS (UNAUDITED)
Unaudited quarterly results for the 52 weeks ended January 31, 1998 and
February 1, 1997, were as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE DATA)
52 Weeks Ended January 31, 1998:
Net sales............................................... $3,409 $3,453 $3,746 $5,060
Operating income........................................ 148 212 268 713
Income before extraordinary item........................ 24 67 105 379
Net income.............................................. 24 28 105 379
Basic earnings per share:
Income before extraordinary item..................... .12 .32 .50 1.80
Net income........................................... .12 .13 .50 1.80
Diluted earnings per share:
Income before extraordinary item..................... .11 .31 .47 1.66
Net income........................................... .11 .13 .47 1.66
52 Weeks Ended February 1, 1997:
Net sales............................................... $3,301 $3,284 $3,609 $5,035
Operating income........................................ 55 76 187 575
Net income (loss)....................................... (38) (27) 42 289
Basic earnings (loss) per share......................... (.18) (.13) .20 1.39
Diluted earnings (loss) per share....................... (.18) (.13) .20 1.31
F-29