1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
JANUARY 30, 1999 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
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
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
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
------------------------
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 208,576,562 shares of the Company's Common Stock outstanding as
of April 2, 1999, 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 1, 1999, was approximately
$8,225,700,000.
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 21, 1999 (the
"Annual Meeting"), are incorporated by reference in Part III hereof.
2
Unless the context requires otherwise, (i) references 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 "1998," "1997," "1996," "1995" and "1994" are references to the
Company's fiscal years ended January 30, 1999, January 31, 1998, February 1,
1997, February 3, 1996 and January 28, 1995, 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 over 400 department stores in 33
states as of January 30, 1999. The Company operates its department stores under
the names "Bloomingdale's," "The Bon Marche," "Burdines," "Goldsmith's,"
"Lazarus," "Macy's," "Rich's" and "Stern's." 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 direct mail catalog businesses under the names
"Bloomingdale's By Mail" and "Macy's By Mail" and an electronic commerce
business which provides goods and services online under the name "macys.com." In
general, the Company conducts its business through subsidiaries.
The Company provides various support functions to its retail operating
divisions on an integrated, company-wide basis.
- The Company's financial and credit services subsidiary, FACS Group, Inc.
("FACS"), supports the proprietary credit programs of the Company's
retail operating divisions in respect of all proprietary credit card
accounts owned by the Company except support relating to statement
mailing and payment
1
3
processing, which is provided by GE Capital Consumer Card Co. ("GE
Bank"). GE Bank owns all of the "Macy's" credit card accounts originated
prior to the Merger and an allocated portion of the "Macy's" credit card
accounts originated subsequent to the Merger. In addition, FACS provides
payroll and benefits services to the Company's retail operating and
service divisions.
- The Company's data processing subsidiary, Federated Systems Group, Inc.
("FSG"), 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.
- Federated Merchandising Group, a division of the Company, helps the
Company to centrally develop and execute consistent merchandise
strategies while retaining the ability to tailor merchandise assortments
and 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, a division of a subsidiary of the Company, provides
warehousing and merchandise distribution services for the Company's
retail operating divisions.
- A specialized staff maintained in the Company's corporate offices
provides services for all divisions of the Company in such areas as store
design and construction, accounting, legal, real estate, insurance and
supply purchasing, as well as various other corporate office functions.
FACS, FSG and certain departments in the Company's corporate offices also offer
their services to unrelated third parties.
The Company and its predecessors have been operating department stores
since 1820. Federated was organized as a Delaware corporation in 1920. 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.
On March 18, 1999, the Company acquired Fingerhut Companies, Inc.
("Fingerhut"). Fingerhut is a leading database marketing company that sells a
broad range of products and services through catalogs, direct marketing and the
Internet. In addition to the core Fingerhut catalog business, Fingerhut also
owns: (i) Figi's, a food and gift catalog business; (ii) Arizona Mail Order and
Bedford Fair, both apparel catalog businesses; and (iii) Popular Club, a
membership-based general merchandise catalog business. Fingerhut also offers a
broad range of business services to third parties, including telemarketing,
direct marketing, information management, warehousing, product fulfillment and
distribution, order and returns processing and customer service, and has
investments in several providers of Internet-based merchandise and services.
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 30, 1999, the Company had approximately 118,800
regular full-time and part-time employees. Because of the seasonal nature of the
retail business, the number of employees peaks in
2
4
the Christmas season. Approximately 10% of the Company's employees as of January
30, 1999 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 1998.
The Company has no long-term purchase commitments or arrangements with any of
its suppliers, and believes that it is not dependent on any one supplier. The
Company considers its relations with its suppliers to be satisfactory.
Competition. The retailing industry, in general, and the department store
business, in particular, are intensely competitive. Generally, the Company's
stores are in competition not only with other department stores in the
geographic areas in which they operate but also with numerous other types of
retail outlets, including specialty stores, general merchandise stores,
off-price and discount stores, new and established forms of home shopping
(including mail order catalogs, television and Internet services) and
manufacturers' outlets.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers of the Company:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
James M. Zimmerman..................... 55 Chairman of the Board and Chief Executive Officer;
Director
Terry J. Lundgren...................... 46 President and Chief Merchandising Officer; Director
Ronald W. Tysoe........................ 46 Vice Chairman, Finance and Real Estate; Director
Thomas G. Cody......................... 57 Executive Vice President, Legal and Human Resources
Dennis J. Broderick.................... 50 Senior Vice President, General Counsel and Secretary
Karen M. Hoguet........................ 42 Senior Vice President, Chief Financial Officer and
Treasurer
Joel A. Belsky......................... 45 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.
Ronald W. Tysoe has been Vice Chairman, Finance and Real Estate 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.
3
5
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 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 30, 1999, the Company operated
401 department stores in 33 states, comprising a total of 82,319,000 square
feet. Of such department stores, 193 were entirely or mostly owned and 208
stores were entirely or mostly leased. The Company's interests in approximately
2% of its owned stores are subject to security interests in favor of certain
third-party creditors 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 1998 and 1997 the high and low sales prices per share of Common
Stock as reported on the NYSE Composite Tape:
1998 1997
---------------- ----------------
LOW HIGH LOW HIGH
------ ------ ------ ------
1st Quarter......................... 42.750 53.000 31.625 38.250
2nd Quarter......................... 49.813 56.188 34.625 44.125
3rd Quarter......................... 32.813 53.313 39.313 45.438
4th Quarter......................... 35.938 46.375 39.688 48.875
The Company has not paid any dividends on its Common Stock during its two
most recent fiscal years, and does not anticipate paying any dividends on the
Common Stock in the foreseeable future.
4
6
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 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(MILLIONS, EXCEPT PER SHARE DATA)
Consolidated Statement of Income Data:
Net sales, including leased department
sales..................................... $15,833 $15,668 $15,229 $15,049 $ 8,316
------- ------- ------- ------- -------
Cost of sales............................... 9,616 9,581 9,354 9,410 5,146
Selling, general and administrative
expenses.................................. 4,762 4,746 4,982 4,976 2,620
------- ------- ------- ------- -------
Operating income............................ 1,455 1,341 893 663 550
Interest expense............................ (304) (418) (499) (508) (262)
Interest income............................. 12 35 47 47 43
------- ------- ------- ------- -------
Income before income taxes and extraordinary
items..................................... 1,163 958 441 202 331
Federal, state and local income tax
expense................................... (478) (383) (175) (127) (143)
------- ------- ------- ------- -------
Income before extraordinary items........... 685 575 266 75 188
Extraordinary items (a)..................... (23) (39) - - -
------- ------- ------- ------- -------
Net income.................................. $ 662 $ 536 $ 266 $ 75 $ 188
======= ======= ======= ======= =======
Basic earnings per share:
Income before extraordinary items........... $ 3.27 $ 2.74 $ 1.28 $ .39 $ 1.41
Net income.................................. 3.16 2.56 1.28 .39 1.41
Diluted earnings per share:
Income before extraordinary items........... $ 3.06 $ 2.58 $ 1.24 $ .39 $ 1.40
Net income.................................. 2.96 2.41 1.24 .39 1.40
Average number of shares outstanding.......... 209.1 209.2 207.5 191.5 132.9
Depreciation and amortization................. $ 624 $ 590 $ 533 $ 497 $ 286
Capital expenditures.......................... $ 695 $ 696 $ 846 $ 699 $ 398
Balance Sheet Data (at year end):
Cash........................................ $ 307 $ 142 $ 149 $ 173 $ 206
Working capital............................. 2,904 3,134 2,831 3,262 2,376
Total assets................................ 13,464 13,738 14,264 14,295 12,277
Short-term debt............................. 524 556 1,095 733 463
Long-term debt.............................. 3,057 3,919 4,606 5,632 4,529
Shareholders' equity........................ 5,709 5,256 4,669 4,274 3,640
- ---------------
(a) The extraordinary items for 1998 and 1997 were after-tax expenses associated
with debt prepayments.
5
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Comparison of the 52 Weeks Ended January 30, 1999 and January 31, 1998. Net
sales for 1998 were $15,833 million compared to $15,668 million for 1997, an
increase of 1.1%. Excluding sales of the specialty stores division that was sold
in July 1998, sales increased 1.8% over last year. On a comparable store basis,
net sales for 1998 increased 2.2% compared to 1997.
Cost of sales was 60.7% of net sales for 1998, compared to 61.1% for 1997.
The 0.4% improvement in the cost of sales rate reflects positive customer
response to the merchandise assortments in the stores during the second and
fourth quarters, attributed partially to an improved merchandise receipt flow.
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 30.1% of net sales for
1998, compared to 30.3% for 1997. Selling, general and administrative expenses
include finance charge income and expenses for doubtful customer accounts
receivable. Finance charge income was $345 million for 1998, down from $391
million in 1997, primarily due to lower average accounts receivable balances as
a result of accelerated payments. Amounts charged to expense for doubtful
accounts receivable were $112 million for 1998, compared to $167 million in
1997. The decrease primarily reflects a reduction in the amount of uncollectible
balances written off in 1998, also a result of lower average accounts receivable
balances and accelerated payments.
Net interest expense was $292 million for 1998, compared to $383 million
for 1997. The lower interest expense for 1998 is principally due to lower levels
of borrowings and lower interest rates resulting from refinancings completed in
1998 and 1997.
The Company's effective tax rate of 41.1% for 1998 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 and from other non-deductible items.
The extraordinary items of $23 million and $39 million for 1998 and 1997,
respectively, represent after-tax expenses associated with debt prepayments.
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 infrequent 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 infrequent costs related to the integration
and consolidation of acquired and pre-existing businesses. Excluding these
infrequent costs, 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 these infrequent costs for 1996) was
lower
6
8
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
1997.
The Company's effective income tax rate of 40.0% 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.
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 1998 was $1,690 million, an
increase of $117 million from the net cash provided by operating activities in
1997 of $1,573 million. The major factor contributing to this improvement was
stronger operating results.
Net cash used in investing activities was $445 million in 1998, with the
final $200 million installment of a note receivable held by the Company being
received on May 4, 1998, purchases of property and equipment totaling $695
million and dispositions of property and equipment totaling $50 million. During
1998, the Company opened five new department stores and closed four. On August
1, 1998, the Company completed the sale of its specialty stores division to a
group including the division's management. The sale did not have a material
impact on the Company's financial position or results of operations.
Net cash used by the Company for all financing activities was $1,080
million in 1998 compared to $1,262 million in 1997. In 1998, the Company issued
$300 million of 7.0% Senior Debentures due 2028 and $350 million of 6 1/8% Term
Enhanced ReMarketable Securities due 2011, puttable to the Company in 2001. Also
during the year, the Company renewed a portion of the bank credit agreement
which provides a $500 million unsecured revolving credit facility with a
termination date of July 26, 1999. As of January 30, 1999, the Company had $27
million of standby letters of credit and $42 million of trade letters of credit
outstanding under this agreement. During 1998, the Company repaid borrowings
totaling $1,229 million. The major components of debt repaid included $340
million of its 10% Senior Notes due 2001, the remaining $176 million of
borrowings under a note monetization facility, $294 million of short-term debt
refinanced at the end of 1997 and $375 million of receivables backed financings.
During 1998, the Board of Directors approved a stock repurchase program
that authorizes the Company to purchase up to $1 billion of its common stock
through January 29, 2000. Through January 30, 1999,
7
9
12.8 million shares of common stock at an approximate cost of $591 million had
been acquired under the repurchase program.
In 1998, the $350 million aggregate principal amount of the Company's 5.0%
Convertible Subordinated Notes due 2003 was converted into 10.2 million shares
of common stock.
On March 18, 1999, the Company acquired Fingerhut Companies, Inc.
("Fingerhut") for a purchase price of $1,700 million, including $297 million of
Fingerhut indebtedness. The Company funded the Fingerhut acquisition through a
combination of cash on hand and short-term borrowings. On March 24, 1999, the
Company issued $350 million of 6.3% Senior Notes due 2009 and $400 million of
6.9% Senior Debentures due 2029 and used the proceeds thereof to repay a portion
of such short-term borrowings. The Fingerhut acquisition will be accounted for
as a purchase.
The Company intends to open three new department stores in 1999 and its
budgeted capital expenditures are approximately $2,800 million for the 1999 to
2001 period. Management presently anticipates funding such expenditures from
operations.
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 and other complementary 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.
YEAR 2000
The Company relies on computer-based technology and utilizes a variety of
third-party hardware and proprietary and third-party software. The Company's
retail functions, such as merchandise procurement and distribution, inventory
control, point-of-sale information systems and proprietary credit card account
servicing, generally use proprietary software, with third-party software being
used more extensively for administrative functions, such as accounting and human
resource management. In addition to such information technology ("IT") systems,
the Company's operations rely on various non-IT equipment and systems that
contain embedded computer technology, such as elevators, escalators and energy
management systems. Third parties with whom the Company has commercial
relationships, including vendors of merchandise for resale by the Company and of
products and services used by the Company in its operations (such as banking and
financial services, data processing services, telecommunications services and
utilities), are also highly reliant on computer-based technology.
In February 1996, the Company commenced an assessment of the potential
effects of the Year 2000 issue on the Company's business, financial condition
and results of operations. In conjunction with such assessment, the Company
developed and commenced the implementation of the compliance program described
below.
8
10
THE COMPANY'S YEAR 2000 COMPLIANCE PROGRAM
Proprietary IT Systems. Pursuant to the Company's Year 2000 compliance
program, the Company has undertaken an examination of the Company's proprietary
IT systems. All such systems that have been identified as relating to a critical
function and as not being Year 2000 compliant have been or are being remediated
or replaced. The Company believes that the remediation of its proprietary IT
systems is substantially complete, and nearly all of the proprietary IT systems
that have been remediated have been installed and placed into production. The
Company commenced testing of such remediated systems for Year 2000 compliance in
August 1998 and has completed a comprehensive, integrated test of all of its
main-frame and mid-range IT systems (including third-party and proprietary
hardware, software, network components and interfaces). The Company is presently
conducting varying levels of follow-up testing of selected systems.
Third-Party IT Systems. The strategy instituted by the Company to identify
and address Year 2000 issues affecting third-party IT systems used by the
Company includes contacting all third-party providers of computer hardware and
software to secure appropriate representations to the effect that such hardware
or software is or will timely be Year 2000 compliant. The Company has received
Year 2000 compliant versions of almost all third-party software and is currently
engaged in testing those third-party software programs that have been identified
as being critical to the Company's operations. The Company is also developing
contingency plans as to third-party hardware and software used by the Company in
respect of which the Company has not received adequate compliance assurances to
date.
Non-IT Systems. The Company has undertaken a review of its non-IT systems
and is in the process of implementing a remediation program in respect of those
systems that are within the control of the Company. The Company expects to
complete this remediation effort by April 30, 1999. In addition, the Company's
centralized real estate department has communicated to the developers, landlords
and property managers of substantially all of the Company's properties the
Company's expectation that the systems utilized in the management and operation
of such properties that are not within the Company's control are or will timely
be Year 2000 compliant. As a further step, the Company plans to engage in
written or oral communications with its key developers, landlords and property
managers in order to assess the Year 2000 readiness of their respective
operations.
Non-IT Vendors and Suppliers. The Company procures its merchandise for
resale and supplies for operational purposes from a vast network of vendors
located both within and outside the United States, and is not dependent on any
one vendor for more than 5% of its merchandise purchases. The Company procures
its private label merchandise, which constitutes approximately 15% of the
Company's total sales, principally from manufacturers located outside the United
States. All of the Company's vendors have been notified in writing of the
Company's expectation that the systems and operations of such vendors will be
Year 2000 compliant before January 31, 1999. As a part of its contingency
planning effort, the Company has commenced making inquiries as to the Year 2000
readiness of selected key vendors and private label manufacturers in order to
identify any significant exposures that may exist and establish alternate
sources or strategies where necessary. As of January 30, 1999, approximately 90%
of the selected key vendors contacted had provided to the Company written or
oral assurances that they are in the process of implementing compliance programs
that are intended to address the Year 2000 issues affecting their respective
operations.
Contingency Planning. The Company's Year 2000 compliance program is
directed primarily towards ensuring that the Company will be able to continue to
perform three critical functions: (i) effect sales, (ii) order and receive
merchandise, and (iii) pay its employees. The Company is currently gathering
data in an effort to assess the potential effects on these mission critical
functions of a failure of the Company's Year
9
11
2000 compliance program to be fully effective and, to the extent deemed
appropriate, to develop a contingency plan to address such effects. The Company
expects to complete its contingency plan by July 31, 1999.
Costs. The Company has incurred to date approximately $26 million of costs
to implement its Year 2000 compliance program and presently expects to incur
approximately $46 million of costs in the aggregate, of which approximately 25%
represents capitalized expenditures for hardware purchases. All of the Company's
Year 2000 compliance costs have been or are expected to be funded from operating
cash flows. The Company's Year 2000 compliance budget does not include material
amounts for hardware replacement because the Company has historically employed a
strategy to continually upgrade its main-frame and mid-range computer systems
and to install state of the art point-of-sale systems with respect to both
pre-existing operations and in conjunction with the acquisitions and mergers
effected by the Company in recent years. Consequently, the Company's Year 2000
budget has not required the diversion of funds from or the postponement of the
implementation of other planned IT projects.
Risks. The novelty and complexity of the issues presented and the proposed
solutions therefor and the Company's dependence on the technical skills of
employees and independent contractors and on the representations and
preparedness of third parties are among the factors that could cause the
Company's Year 2000 compliance efforts to be less than fully effective.
Moreover, Year 2000 issues present a number of risks that are beyond the
Company's reasonable control, such as the failure of utility companies to
deliver electricity, the failure of telecommunications companies to provide
voice and data services, the failure of financial institutions to process
transactions and transfer funds, the failure of vendors to deliver merchandise
or perform services required by the Company and the collateral effects on the
Company of the effects of Year 2000 issues on the economy in general or on the
Company's business partners and customers in particular. Although the Company
believes that its Year 2000 compliance program is designed to appropriately
identify and address those Year 2000 issues that are subject to the Company's
reasonable control, there can be no assurance that the Company's efforts in this
regard will be fully effective or that Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
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 7 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 its exposure to interest rate movements and reduce
borrowing costs. See Notes 7 and 14 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
30, 1999, 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.
10
12
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 30, 1999, January 31, 1998 and February 1, 1997... F-4
Consolidated Balance Sheets at January 30, 1999 and January
31, 1998.................................................. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the 52 weeks ended January 30, 1999, January 31, 1998
and February 1, 1997...................................... F-6
Consolidated Statements of Cash Flows for the 52 weeks ended
January 30, 1999, January 31, 1998 and February 1, 1997... F-7
Notes to Consolidated Financial Statements.................. F-8
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.
11
13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS:
The list of financial statements required by this item is set forth in
"Item 8 Consolidated Financial Statements and Supplementary Data" and is
incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are inapplicable, not required, or
the information is included elsewhere in the Consolidated Financial Statements
or the notes thereto.
3. EXHIBITS:
The following exhibits are filed herewith or incorporated by reference as
indicated below.
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
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 Exhibit 3.1.1 to the 1994 Form 10-K
Junior Participating Preferred Stock
3.2 By-Laws Exhibit 3.2 to the 1994 Form 10-K
4.1 Certificate of Incorporation See Exhibit 3.1
4.2 By-Laws See Exhibit 3.2
4.3 Rights Agreement, dated as of 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
(successor to The First National Bank of
Boston), as Trustee
12
14
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
4.4.2 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
(successor to The First National Bank of
Boston), as Trustee
4.4.3 Seventh Supplemental Indenture, dated as of Exhibit 4.2 to the Company's Quarterly Report
May 22, 1996, between the Company and State on Form 10-Q for the period ended May 4, 1996
Street Bank and Trust Company (successor to (the "May 1996 Form 10-Q")
The First National Bank of Boston), as
Trustee
4.4.4 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
4.4.5 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
4.5.2 Second Supplemental Indenture, dated as of Exhibit 2 to the Company's Current Report on
August 26, 1998, between the Company and Form 8-K dated as of August 25, 1998
Citibank, N.A., as Trustee
4.6 Amended and Restated Series B Warrant Exhibit 4.6 to the Company's Annual Report on
Agreement Form 10-K for the fiscal year ended January
31, 1998 (the "1997 Form 10-K")
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
13
15
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
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
Administrative Agent, BankBoston, N.A., as
Syndication Agent, and the Bank of America,
National Trust & Savings Association, as
Documentation Agent
10.1.1 Amended and Restated Credit Agreement, dated Exhibit 10.1 to the Company's Quarterly
as of June 29, 1998, by and among the Report on Form 10-Q for the period ended
Company, the Initial Lenders named therein, August 1, 1998 (the "August 1998 Form 10-Q")
Citibank, N.A., as Administrative Agent and
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, BankBoston, N.A., as
Syndication Agent, and the Bank of America,
National Trust & Savings Association, as
Documentation Agent
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
Administrative Agent, BankBoston, N.A., as
Syndication Agent, and the Bank of America,
National Trust & Savings Association, as
Documentation Agent
10.2.1 Letter Amendment to the Five-Year Credit Exhibit 10.2 to the August 1998 Form 10-Q
Agreement, dated as of June 29, 1998, by and
among the Company, the Initial Lenders named
therein, Citibank, N.A., as Administrative
Agent and Paying Agent, The Chase Manhattan
Bank, as Administrative 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")
14
16
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
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 Exhibit 10.3.2 to the 1997 Form 10-K
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 Report on Form 10-K (File No. 1-10951) for
Agreement 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
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 Agreement
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 1996 Form 10-K
to the Pooling and Servicing Agreement
15
17
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.5.8 Eighth Amendment, dated as of March 3, 1997, Exhibit 10.6.8 to the 1996 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")
10.5.10 Tenth Amendment, dated as of August 3, 1998, Exhibit 10.1 to the Company's Quarterly
to the Pooling and Servicing Agreement Report on Form 10-Q for the period ended
October 31, 1998 (the "October 1998 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 Exhibit 4.7 to Prime's Form 8-A
December 15, 1992, to the Pooling and
Servicing Agreement
10.7.1 First Amendment to Series 1992-2 Exhibit 10.3 to the November 1997 Form 10-Q
Supplement, dated as of August 28, 1997,
to the Pooling and Servicing Agreement
10.8 Series 1992-3 Supplement, dated as of January Exhibit 4.8 to Prime's Current Report on Form
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 Statement
27, 1995, to the Pooling and Servicing on Form S-1, filed July 14, 1995, as amended
Agreement
10.9.1 First Amendment to Series 1995-1 Exhibit 10.4 to the November 1997 Form 10-Q
Supplement, 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
10.10.1 First Amendment to Series 1996-1 Exhibit 10.5 to the November 1997 Form 10-Q
Supplement, 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
16
18
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
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 1996 Form 10-K
to the Receivables Purchase Agreement
10.11.7 Seventh Amendment, dated as of August 26, Exhibit 10.13.7 to the 1996 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 1996 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 1996 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
10.12 Depository Agreement, dated as of December Exhibit 10.15 to Company's Annual Report on
31, 1992, among Deerfield Funding Form 10-K (File No. 1-10951) for the fiscal
Corporation, now known as Seven Hills Funding year ended January 30, 1993 ("1992 Form
Corporation ("Seven Hills"), the Company, and 10-K")
The Chase Manhattan 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
17
19
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
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, The Chase Manhattan 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 1996 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 1996 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 1996 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 1996 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 January Exhibit 10.23 to the 1996 Form 10-K
22, 1997, to the Prime II Pooling and
Servicing Agreement
10.22 Commercial Paper Dealer Agreement, dated as Exhibit 10.24 to the 1996 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 1996 Form 10-K
Agreement, dated as of January 30, 1997,
between Citibank, N.A. and the Company
18
20
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
10.24 Commercial Paper Dealer Agreement, dated as Exhibit 10.26 to the 1996 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
Servicer, 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 Agreement, Exhibit 10.6 to the August 1996 Form 10-Q
dated as of June 4, 1996, among GE Capital
and GE Bank **
19
21
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 Exhibit 10.37 to the 1997 Form 10-K
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 March 10, Exhibit 10.44 to the 1996 Form 10-K
1997, between James M. Zimmerman and the
Company *
10.42 Employment Agreement, dated as of May 16, Exhibit 10.43 to the 1997 Form 10-K
1997, between Terry J. Lundgren and the
Company *
10.43 Form of Employment Agreement for Executives Exhibit 10.31 to 1993 Form 10-K
and Key Employees *
10.44 Form of Severance Agreement (for Executives
and Key Employees other than the Executive
Officers)
10.45 Form of Second Amended and Restated Severance
Agreement (for the Executive Officers)
10.46 Supplementary Executive Retirement Plan, as Exhibit 10.46 to the 1996 Form 10-K
amended and restated as of January 1, 1997 *
10.47 Executive Deferred Compensation Plan, as Exhibit 10.47 to the 1996 Form 10-K
amended *
10.48 Profit Sharing 401(k) Investment Plan Exhibit 10.48 to the 1996 Form 10-K
(amending and restating the Retirement Income
and Thrift Incentive Plan) effective as of
April 1, 1997 *
10.49 Cash Account Pension Plan (amending and Exhibit 10.49 to the 1996 Form 10-K
restating the Company Pension Plan)
effective as of January 1, 1997 *
21 Subsidiaries
20
22
EXHIBIT NUMBER DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
- -------------- ----------- -------------------------------------
22 Consent of KPMG 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.
(b) Reports on Form 8-K. Current report on Form 8-K, dated December 3,
1998, reporting matters under items 5 and 7 thereof.
21
23
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 21, 1999
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 21, 1999.
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, Finance and Real Estate 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
22
24
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 30, 1999, January 31, 1998 and February 1, 1997... F-4
Consolidated Balance Sheets at January 30, 1999 and January
31, 1998.................................................. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the 52 weeks ended January 30, 1999, January 31, 1998
and February 1, 1997...................................... F-6
Consolidated Statements of Cash Flows for the 52 weeks ended
January 30, 1999, January 31, 1998 and February 1, 1997... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
25
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 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
26
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 30, 1999 and January 31,
1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the fifty-two week periods ended January
30, 1999, January 31, 1998 and February 1, 1997. 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 30, 1999 and January 31,
1998, and the results of their operations and their cash flows for the fifty-two
week periods ended January 30, 1999, January 31, 1998 and February 1, 1997, in
conformity with generally accepted accounting principles.
KPMG LLP
Cincinnati, Ohio
March 2, 1999
F-3
27
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
Net sales, including leased department sales............... $15,833 $15,668 $15,229
------- ------- -------
Cost of sales.............................................. 9,616 9,581 9,354
Selling, general and administrative expenses............... 4,762 4,746 4,982
------- ------- -------
Operating income........................................... 1,455 1,341 893
Interest expense........................................... (304) (418) (499)
Interest income............................................ 12 35 47
------- ------- -------
Income before income taxes and extraordinary items......... 1,163 958 441
Federal, state and local income tax expense................ (478) (383) (175)
------- ------- -------
Income before extraordinary items.......................... 685 575 266
Extraordinary items........................................ (23) (39) -
------- ------- -------
Net income................................................. $ 662 $ 536 $ 266
======= ======= =======
Basic earnings per share:
Income before extraordinary items........................ $ 3.27 $ 2.74 $ 1.28
Extraordinary items...................................... (.11) (.18) -
------- ------- -------
Net income............................................... $ 3.16 $ 2.56 $ 1.28
======= ======= =======
Diluted earnings per share:
Income before extraordinary items........................ $ 3.06 $ 2.58 $ 1.24
Extraordinary items...................................... (.10) (.17) -
------- ------- -------
Net income............................................... $ 2.96 $ 2.41 $ 1.24
======= ======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
28
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998
---------------- -----------------
ASSETS
Current Assets:
Cash...................................................... $ 307 $ 142
Accounts receivable....................................... 2,209 2,640
Merchandise inventories................................... 3,259 3,239
Supplies and prepaid expenses............................. 117 115
Deferred income tax assets................................ 80 58
------- -------
Total Current Assets.............................. 5,972 6,194
Property and Equipment - net................................ 6,572 6,520
Intangible Assets - net..................................... 631 690
Other Assets................................................ 289 334
------- -------
Total Assets...................................... $13,464 $13,738
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt........................................... $ 524 $ 556
Accounts payable and accrued liabilities.................. 2,446 2,416
Income taxes.............................................. 98 88
------- -------
Total Current Liabilities......................... 3,068 3,060
Long-Term Debt.............................................. 3,057 3,919
Deferred Income Taxes....................................... 1,060 939
Other Liabilities........................................... 570 564
Shareholders' Equity........................................ 5,709 5,256
------- -------
Total Liabilities and Shareholders' Equity........ $13,464 $13,738
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
29
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL UNEARNED OTHER TOTAL
COMMON PAID-IN ACCUMULATED TREASURY RESTRICTED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EQUITY STOCK STOCK INCOME EQUITY
------ ---------- ----------- -------- ---------- ------------- -------------
BALANCE AT FEBRUARY 3, 1996....... $2 $4,269 $ 568 $(562) $(3) $ - $4,274
Net Income........................ 266 266
------
Total comprehensive income........ 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
Minimum pension liability
adjustment, net of income tax
effect.......................... (3) (3)
------
Total comprehensive income........ 533
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
-- ------ ------ ----- --- ---- ------
BALANCE AT JANUARY 31, 1998....... 2 4,461 1,370 (572) (2) (3) 5,256
Net Income........................ 662 662
Minimum pension liability
adjustment, net of income tax
effect.......................... (7) (7)
------
Total comprehensive income........ 655
Stock repurchases................. (591) (591)
Stock issued under stock plans.... 36 (6) 30
Deferred compensation plan
distributions................... 1 1
Restricted stock plan
amortization.................... 1 1
Income tax benefit related to
stock plan activity............. 13 13
Stock issued in conversion of
subordinated notes.............. (104) 448 344
-- ------ ------ ----- --- ---- ------
BALANCE AT JANUARY 30, 1999....... $2 $4,406 $2,032 $(720) $(1) $(10) $5,709
== ====== ====== ===== === ==== ======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
30
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income............................................. $ 662 $ 536 $ 266
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment....................................... 596 563 504
Amortization of intangible assets.................. 27 27 27
Amortization of financing costs.................... 7 20 27
Amortization of unearned restricted stock.......... 1 - 2
Loss on early extinguishment of debt............... 23 39 -
Changes in assets and liabilities:
Decrease in accounts receivable................. 235 194 223
(Increase) decrease in merchandise
inventories................................... (20) 7 (151)
(Increase) decrease in supplies and prepaid
expenses...................................... (2) (5) 67
(Increase) decrease in other assets not
separately identified......................... 31 (7) (12)
Increase (decrease) in accounts payable and
accrued liabilities not separately
identified.................................... 6 (36) 177
Increase in current income taxes................ 25 103 2
Increase in deferred income taxes............... 103 138 84
Increase (decrease) in other liabilities not
separately identified......................... (4) (6) 4
------- ------- -------
Net cash provided by operating activities..... 1,690 1,573 1,220
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment..................... (695) (696) (846)
Disposition of property and equipment.................. 50 178 196
Collection of note receivable.......................... 200 200 -
------- ------- -------
Net cash used by investing activities......... (445) (318) (650)
------- ------- -------
Cash flows from financing activities:
Debt issued............................................ 650 763 689
Financing costs........................................ - (7) (11)
Debt repaid............................................ (1,229) (2,027) (1,335)
Increase (decrease) in outstanding checks.............. 47 (45) (65)
Acquisition of treasury stock.......................... (594) (2) (1)
Issuance of common stock............................... 46 56 129
------- ------- -------
Net cash used by financing activities......... (1,080) (1,262) (594)
------- ------- -------
Net increase (decrease) in cash.......................... 165 (7) (24)
Cash beginning of period................................. 142 149 173
------- ------- -------
Cash end of period....................................... $ 307 $ 142 $ 149
======= ======= =======
Supplemental cash flow information:
Interest paid.......................................... $ 306 $ 412 $ 465
Interest received...................................... 15 38 46
Income taxes paid (net of refunds received)............ 304 121 21
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7
31
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federated Department Stores, Inc. (the "Company") is a retail organization
operating department stores 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 6). 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 $739 million, $680 million and $618 million for the 52
weeks ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively.
Financing costs are amortized over the life of the related debt.
F-8
32
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 12).
Earnings per share are computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share" (see Note 15).
Effective February 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The adoption of these
statements did not impact the Company's consolidated financial position, results
of operation or cash flows and, where applicable, are limited to the form and
content of their disclosures.
Certain reclassifications were made to prior years' amounts to conform with
the classifications of such amounts for the most recent year.
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activity" which is
effective for fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires recognition of all derivatives as either assets
or liabilities on the balance sheet using fair value measurement. The accounting
for changes in the fair value of derivatives depends on the intended use of the
derivatives and the resulting hedging designation, if any. The Company is
currently reviewing the impact of this statement; however, based on the
Company's minimal use of derivatives, management does not anticipate that its
adoption will have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
2. EXTRAORDINARY ITEMS
The extraordinary item for the 52 weeks ended January 30, 1999 represents
costs of $23 million, net of income tax benefit of $15 million, associated with
the completion of a tender offer pursuant to which the Company purchased and
retired approximately $340 million aggregate principal amount of its 10% Senior
Notes due 2001.
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
F-9
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Company's mortgage loan facility, secured promissory note, certain other
mortgages and previous bank credit facility, all of which were retired and
terminated.
3. ACCOUNTS RECEIVABLE
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(MILLIONS)
Due from customers.......................................... $2,099 $2,322
Less allowance for doubtful accounts........................ 77 100
------ ------
2,022 2,222
Other receivables........................................... 187 418
------ ------
Net receivables............................................. $2,209 $2,640
====== ======
Sales through the Company's credit plans were $4,028 million, $4,002
million and $4,191 million for the 52 weeks ended January 30, 1999, January 31,
1998 and February 1, 1997, respectively. The credit plans relating to certain
operations of the Company are owned by a third party. Other receivables at
January 31, 1998 includes $200 million of a note relating to the sale of certain
divisions in 1988.
Finance charge income amounted to $345 million, $391 million and $430
million for the 52 weeks ended January 30, 1999, January 31, 1998 and February
1, 1997, respectively.
Changes in allowance for doubtful accounts are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------- -----------------
(MILLIONS)
Balance, beginning of year.......... $ 100 $ 96 $ 83
Charged to costs and expenses....... 112 167 172
Net uncollectible balances written
off............................... (135) (163) (159)
----- ----- -----
Balance, end of year................ $ 77 $ 100 $ 96
===== ===== =====
4. INVENTORIES
Merchandise inventories were $3,259 million at January 30, 1999, compared
to $3,239 million at January 31, 1998. 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 30, 1999, January 31, 1998 or
February 1, 1997.
F-10
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. PROPERTIES AND LEASES
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(MILLIONS)
Land........................................................ $1,018 $1,019
Buildings on owned land..................................... 2,399 2,314
Buildings on leased land and leasehold improvements......... 1,552 1,552
Store fixtures and equipment................................ 3,713 3,305
Leased properties under capitalized leases.................. 73 76
------ ------
8,755 8,266
Less accumulated depreciation and amortization.............. 2,183 1,746
------ ------
$6,572 $6,520
====== ======
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 30, 1999,
for noncancellable leases are:
CAPITALIZED OPERATING
LEASES LEASES TOTAL
----------- ---------- ------
(MILLIONS)
Fiscal year:
1999.............................................. $13 $ 145 $ 158
2000.............................................. 12 143 155
2001.............................................. 12 136 148
2002.............................................. 10 125 135
2003.............................................. 9 114 123
After 2003........................................ 64 921 985
--- ------ ------
Total minimum lease payments........................ 120 $1,584 $1,704
====== ======
Less amount representing interest................... 54
---
Present value of net minimum capitalized lease
payments.......................................... $66
===
Capitalized leases are included in the Consolidated Balance Sheets as
property and equipment while the related obligation is included in short-term
($6 million) and long-term ($60 million) debt. Amortization of assets subject to
capitalized leases is included in depreciation and amortization expense. Total
minimum lease
F-11
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
payments shown above have not been reduced by minimum sublease rentals of
approximately $6 million on capitalized leases and $12 million on operating
leases.
Rental expense consists of:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(MILLIONS)
Real estate (excluding executory costs)
Capitalized leases -
Contingent rentals....................... $ 3 $ 4 $ 4
Operating leases -
Minimum rentals.......................... 144 149 151
Contingent rentals....................... 21 23 21
---- ---- ----
168 176 176
---- ---- ----
Less income from subleases -
Capitalized leases....................... 1 1 1
Operating leases......................... 3 3 3
---- ---- ----
4 4 4
---- ---- ----
$164 $172 $172
==== ==== ====
Personal property - Operating leases.......... $ 22 $ 37 $ 60
==== ==== ====
6. INTANGIBLE ASSETS
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(MILLIONS)
Reorganization value in excess of amount allocable to
identifiable assets................................ $100 $100
Excess of cost over net assets acquired.............. 262 294
Tradenames........................................... 458 458
---- ----
820 852
Less accumulated amortization........................ 189 162
---- ----
Intangible assets - net.............................. $631 $690
==== ====
Intangible assets are being amortized on a straight-line basis over 20
years, except for tradenames which are being amortized over 40 years. The
Company recorded $32 million of tax benefits as a reduction to excess of cost
over net assets acquired during the 52 weeks ended January 30, 1999 (see Note
9).
F-12
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. FINANCING
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(MILLIONS)
Short-term debt:
Receivables backed financings......................... $ 490 $ 375
Current portion of long-term debt..................... 34 5
Note monetization facility............................ - 176
------ ------
Total short-term debt......................... $ 524 $ 556
====== ======
Long-term debt:
Receivables backed financings......................... $ 836 $1,326
8.5% Senior notes due 2003............................ 450 450
8.125% Senior notes due 2002.......................... 400 400
6.125% Term Enhanced ReMarketable Securities due
2011............................................... 350 -
7.45% Senior debentures due 2017...................... 300 300
7.0% Senior debentures due 2028....................... 300 294
6.79% Senior debentures due 2027...................... 250 250
10.0% Senior notes due 2001........................... 110 450
Capital lease obligations and mortgages............... 61 99
5.0% Convertible subordinated notes due 2003.......... - 350
------ ------
Total long-term debt.......................... $3,057 $3,919
====== ======
Interest expense was as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------- ----------------
(MILLIONS)
Interest on debt........................ $293 $392 $464
Amortization of financing costs......... 7 20 27
Interest on capitalized leases.......... 7 8 9
---- ---- ----
Subtotal.............................. 307 420 500
Less interest capitalized on
construction.......................... (3) (2) (1)
---- ---- ----
$304 $418 $499
==== ==== ====
F-13
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:
2000...................................................... $ -
2001...................................................... 699
2002...................................................... 998
2003...................................................... 450
2004...................................................... 250
After 2004................................................ 600
On February 6, 1998, the Company issued $300 million of 7.0% Senior
Debentures due 2028. On August 26, 1998, the Company issued $350 million of
6 1/8% Term Enhanced ReMarketable Securities (TERMS) due in 2011, puttable to
the Company in 2001. Also during the 52 weeks ended January 30, 1999, the
Company renewed a portion of the bank credit agreement which provides a $500
million unsecured revolving credit facility with a termination date of July 26,
1999. As of January 30, 1999, the Company had $27 million of standby letters of
credit and $42 million of trade letters of credit outstanding under this
agreement.
During the 52 weeks ended January 30, 1999, the Company repaid borrowings
totaling $1,229 million. The major components of debt repaid included $340
million of its 10% Senior Notes due 2001, the remaining $176 million of
borrowings under a note monetization facility, $294 million of short-term debt
refinanced at the end of 1997 and $375 million of receivables backed financings.
Also, during the 52 weeks ended January 30, 1999, the $350 million aggregate
principal amount of the Company's 5.0% Convertible Subordinated Notes due 2003
was converted into 10.2 million shares of common stock.
The following summarizes certain components of the Company's debt:
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.
As of January 30, 1999, there were no revolving credit loans outstanding
under the Revolving Loan Facilities. However, there were $69 million of letters
of credit outstanding under the Revolving Loan Facilities at January 30, 1999.
As of January 31, 1998, there were $150 million of revolving credit loans
outstanding under the Revolving Loan Facilities which, as a result of a
refinancing, was classified as long term debt. Additionally, there were $112
million of letters of credit outstanding under the Revolving Loan Facilities at
January 31, 1998. Revolving loans under the Revolving Loan Facilities bear
interest based on published rates. As of January 31, 1998, the average rate per
annum was 5.78%.
F-14
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMERCIAL PAPER
On January 30, 1997, the Company established a $400 million program
(subsequently increased to $2,000 million) for the issuance from time to time of
unsecured commercial paper. The issuance of commercial paper under the program
will have the effect, while such commercial paper is outstanding, of reducing
the Company's borrowing capacity under the Revolving Loan Facilities by an
amount equal to the principal amount of such commercial paper. As of January 30,
1999, there was no such commercial paper outstanding. As of January 31, 1998,
there was $144 million of such commercial paper outstanding which, as a result
of a refinancing, was classified as long-term debt.
RECEIVABLES BACKED FINANCINGS
Receivables backed financings classified as short-term debt consist of the
current portion of amounts due under certain receivables backed certificates
issued by a subsidiary of the Company together with receivables backed
commercial paper issued by a subsidiary of the Company (of which none and $375
million were outstanding as of January 30, 1999 and January 31, 1998,
respectively). 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
6.90% per annum and mature between May 1, 2001 and September 15, 2002.
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.
TERMS
The TERMS are unsecured obligations of the Company. The final maturity is
scheduled to occur on September 1, 2011 ("Final Maturity"), but may be adjusted
during the remarketing process. The TERMS will bear interest at the rate of
6 1/8% per annum to September 1, 2001 ("Investor Maturity Date"). The interest
rate to Final Maturity will be determined during the remarketing process and
will be equal to the sum of 5.64% per annum plus the Company's then current
credit spread for similar debt instruments. At the Investor Maturity Date, the
remarketing dealer may purchase the TERMS from the investors, at face value, and
remarket the securities to new investors or the remarketing dealer may give
notice to the Company that such securities shall be tendered to the Company and
retired.
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 $375 million) of
non-proprietary credit card receivables arising under accounts owned by the
Company. At January 30, 1999 and January 31, 1998, $340 million and $243
million, respectively, of borrowings were outstanding under this arrangement.
F-15
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
(MILLIONS)
Merchandise and expense accounts payable.................... $1,630 $1,587
Liabilities to customers.................................... 220 173
Taxes other than income taxes............................... 116 116
Accrued wages and vacation.................................. 91 86
Accrued interest............................................ 45 51
Other....................................................... 344 403
------ ------
$2,446 $2,416
====== ======
9. TAXES
Income tax expense is as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
-------------------------- -------------------------- --------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ----- ------- -------- -----
(MILLIONS)
Federal................ $405 $(19) $386 $319 $ (1) $318 $176 $(31) $145
State and local........ 96 (4) 92 66 (1) 65 36 (6) 30
---- ---- ---- ---- ---- ---- ---- ---- ----
$501 $(23) $478 $385 $ (2) $383 $212 $(37) $175
==== ==== ==== ==== ==== ==== ==== ==== ====
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 30, 1999, January 31, 1998 and February 1, 1997, to income before income
taxes and extraordinary items. The reasons for this difference and their tax
effects are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(MILLIONS)
Expected tax.......................... $407 $335 $154
State and local income taxes, net of
federal income tax expense.......... 60 43 20
Permanent difference arising from
amortization of intangible assets... 9 9 9
Other................................. 2 (4) (8)
---- ---- ----
$478 $383 $175
==== ==== ====
F-16
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 30, JANUARY 31,
1999 1998
----------- ------------
(MILLIONS)
Deferred tax assets:
Operating loss carryforwards.............................. $ 115 $ 174
Accrued liabilities accounted for on a cash basis for tax
purposes............................................... 172 175
Postretirement benefits other than pensions............... 165 171
Allowance for doubtful accounts........................... 30 40
Capitalized lease debt.................................... 29 31
Alternative minimum tax credit carryforwards.............. 16 53
Other..................................................... 133 132
------- -------
Total gross deferred tax assets........................ 660 776
------- -------
Deferred tax liabilities:
Excess of book basis over tax basis of property and
equipment.............................................. (1,355) (1,345)
Merchandise inventories................................... (125) (122)
Prepaid pension expense................................... (64) (68)
Other..................................................... (96) (122)
------- -------
Total gross deferred tax liabilities................... (1,640) (1,657)
------- -------
Net deferred tax liability............................. $ (980) $ (881)
======= =======
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 ("NOLs") to subsequent taxable income of the
acquired enterprise in a consolidated tax return for the combined enterprise. As
of January 30, 1999, the Company estimated that NOLs, which are available to
offset future taxable income of acquired enterprises through 2009, were
approximately $324 million. During the year ended January 30, 1999, the Company
recorded an additional $32 million of tax benefits related to an acquired
enterprise's NOLs and reduced the excess of cost over net assets acquired
accordingly. As of January 30, 1999, the Company also had alternative minimum
tax credit carryforwards of $16 million, which are available to reduce future
income taxes, if any, over an indefinite period.
10. 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 30, 1999, January 31, 1998 and
F-17
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
February 1, 1997, net retirement expense for these plans totaled $30 million,
$35 million and $29 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 6.75% as of December 31,
1998 and 7.25% as of December 31, 1997. The assumed weighted average rate of
increase in future compensation levels under such plans was 5.0% as of December
31, 1998 and December 31, 1997. The long-term rate of return on assets (Pension
Plan only) was 9.75% as of December 31, 1998 and December 31, 1997.
PENSION PLAN
The following provides a reconciliation of benefit obligations, plan assets
and funded status of the Pension Plan as of December 31, 1998 and 1997:
1998 1997
------ ------
(MILLIONS)
Change in projected benefit obligation
Projected benefit obligation, beginning of year........ $1,403 $1,281
Service cost........................................... 29 30
Interest cost.......................................... 97 99
Actuarial loss......................................... 58 119
Benefits paid.......................................... (127) (126)
------ ------
Projected benefit obligation, end of year.............. $1,460 $1,403
Changes in plan assets (primarily stocks, bonds and U.S.
government securities)
Fair value of plan assets, beginning of year........... $1,590 $1,469
Actual return on plan assets........................... 201 247
Benefits paid.......................................... (127) (126)
------ ------
Fair value of plan assets, end of year................. $1,664 $1,590
------ ------
Funded status.......................................... $ 204 $ 187
Unrecognized net gain.................................. (28) (21)
Unrecognized prior service cost........................ 3 3
------ ------
Prepaid pension expense................................ $ 179 $ 169
====== ======
F-18
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net pension costs for the Company's Pension Plan included the following
actuarially determined components:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(MILLIONS)
Service cost.......................... $ 29 $ 30 $ 36
Interest cost......................... 97 99 94
Expected return on assets............. (137) (132) (126)
Amortization of prior service cost.... 1 - -
Recognition of net actuarial loss..... - - 7
Cost of special termination
benefits............................ - 9 -
----- ----- -----
Net pension expense (credit)........ $ (10) $ 6 $ 11
===== ===== =====
In connection with a program to modify certain health care benefits for
future retirees at one division, during the 52 weeks ended January 31, 1998, the
Company incurred $9 million of special termination benefits to eligible
employees who elected to retire within a specified time period.
As permitted under SFAS No. 87, "Employers' Accounting for Pensions," the
amortization of any prior service cost is determined using a straight-line
amortization of the cost over the average remaining service period of employees
expected to receive benefits under the Pension Plan.
The Company's policy is to fund the Pension Plan at or above the minimum
required by law. For the 1998 and 1997 plan years, the Pension Plan was
considered to be fully funded and no funding contributions were required or
made. Plan assets are held by independent trustees.
F-19
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUPPLEMENTARY RETIREMENT PLAN
The following provides a reconciliation of benefit obligations, plan assets
and funded status of the supplementary retirement plan as of December 31, 1998
and 1997:
1998 1997
----- -----
(MILLIONS)
Change in projected benefit obligation
Projected benefit obligation, beginning of year........... $ 94 $ 75
Service cost.............................................. 4 2
Interest cost............................................. 8 5
Plan amendments........................................... - 3
Actuarial loss............................................ 36 16
Benefits paid............................................. (10) (7)
----- -----
Projected benefit obligation, end of year................. $ 132 $ 94
Change in plan assets
Fair value of plan assets, beginning of year.............. $ - $ -
Company contributions..................................... 10 7
Benefits paid............................................. (10) (7)
----- -----
Fair value of plan assets, end of year.................... $ - $ -
----- -----
Funded status............................................. $(132) $ (94)
Unrecognized net loss..................................... 49 9
Unrecognized prior service cost........................... 6 7
----- -----
Accrued benefit cost...................................... $ (77) $ (78)
===== =====
Amounts recognized in the statement of financial position
Accrued benefit cost...................................... (99) (89)
Intangible asset.......................................... 5 7
Accumulated other comprehensive income.................... 17 4
----- -----
Net amount recognized....................................... $ (77) $ (78)
===== =====
The accumulated benefit obligation for the supplementary retirement plan
was $99 million and $89 million as of December 31, 1998 and December 31, 1997,
respectively.
F-20
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net pension costs for the supplementary retirement plan included the
following actuarially determined components:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(MILLIONS)
Service cost.......................... $ 4 $ 2 $ 2
Interest cost......................... 8 5 5
Amortization of prior service cost.... 1 2 1
Recognition of net actuarial loss..... 3 - -
--- --- ---
Net pension expense................. $16 $ 9 $ 8
=== === ===
As permitted under SFAS No. 87, "Employers' Accounting for Pensions," the
amortization of any prior service cost is determined using a straight-line
amortization of the cost over the average remaining service period of employees
expected to receive benefits under the Plan.
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 contribution is 33 1/3% of an employee's eligible savings.
Expense for the Savings Plan amounted to $24 million for the 52 weeks ended
January 30, 1999, $20 million for the 52 weeks ended January 31, 1998 and $10
million for the 52 weeks ended February 1, 1997.
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 30, 1999, January 31, 1998, and February 1,
1997, the liability under the plan, which is reflected in other liabilities, was
$21 million, $17 million, and $12 million, respectively. Expense for the 52
weeks ended January 30, 1999, 52 weeks ended January 31, 1998, and 52 weeks
ended February 1, 1997, was immaterial.
11. 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.
F-21
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations, plan assets
and funded status of the postretirement obligations as of December 31, 1998 and
1997:
1998 1997
----- -----
(MILLIONS)
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation, beginning
of year................................................ $ 325 $ 364
Service cost.............................................. 2 2
Interest cost............................................. 22 23
Plan amendments........................................... (2) (23)
Actuarial (gain) loss..................................... 12 (16)
Curtailment loss.......................................... - 1
Loss due to special termination benefits.................. - 1
Benefits paid............................................. (27) (27)
----- -----
Accumulated postretirement benefit obligation, end of
year................................................... $ 332 $ 325
Change in plan assets
Fair value of plan assets, beginning of year.............. $ - $ -
Company contributions..................................... 27 27
Benefits paid............................................. (27) (27)
----- -----
Fair value of plan assets, end of year.................... $ - $ -
----- -----
Funded status............................................. $(332) $(325)
Unrecognized net gain..................................... (50) (73)
Unrecognized prior service cost........................... (30) (31)
----- -----
Accrued benefit cost...................................... $(412) $(429)
===== =====
Net postretirement benefit expense included the following actuarially
determined components:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(MILLIONS)
Service cost.......................... $ 2 $ 2 $ 5
Interest cost......................... 23 23 27
Amortization of prior service cost.... (5) (4) (2)
Recognition of net actuarial gain..... (9) (11) (4)
Reduction for special termination
benefits............................ - (3) -
---- ---- ----
Net postretirement benefit
expense.......................... $ 11 $ 7 $ 26
==== ==== ====
The discount rate used in determining the actuarial present value of
unfunded postretirement benefit obligations was 6.75% as of December 31, 1998
and 7.25% as of December 31, 1997.
F-22
46
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 7.5% to 9.5% in the first
year, and to decrease gradually for each such component to range from 4.5% to
5.5% by 2003 and to remain at those levels 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,
1998 by $14 million and the net periodic postretirement benefit expense for 1998
by $1 million. Alternatively, decreasing such assumed growth rates by one
percentage point would decrease the present value of unfunded postretirement
benefit obligations as of December 31, 1998 by $13 million and the net periodic
postretirement benefit expense for 1998 by $1 million.
As permitted under SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," the amortization of any prior service cost is
determined using a straight-line amortization of the cost over the average
remaining service period of employees expected to receive benefits under the
Plan.
12. 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.
F-23
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Stock option transactions are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- ------- --------
(SHARES IN THOUSANDS)
Outstanding, beginning of year...... 10,825.3 $28.78 9,140.2 $24.65 7,415.7 $20.48
Granted............................. 4,592.2 52.49 4,133.7 34.49 3,057.8 33.14
Canceled............................ (677.5) 35.54 (630.0) 29.51 (403.9) 23.95
Exercised........................... (1,079.2) 24.96 (1,818.6) 20.80 (929.4) 19.60
-------- ------ -------- ------ ------- ------
Outstanding, end of year............ 13,660.8 $36.72 10,825.3 $28.78 9,140.2 $24.65
======== ====== ======== ====== ======= ======
Exercisable, end of year............ 4,590.8 $25.34 3,315.0 $22.56 3,136.8 $20.33
======== ====== ======== ====== ======= ======
Weighted average fair value of
options granted during the year... $20.67 $14.26 $13.04
====== ====== ======
The following summarizes information about stock options, which remain
outstanding as of January 30, 1999:
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)
$11.63 - 25.00 3,418.8 5.4 years $20.87 2,946.2 $20.60
25.01 - 40.00 5,811.6 7.8 years 33.96 1,629.7 33.72
40.01 - 79.44 4,430.4 9.2 years 52.57 14.9 46.02
As of January 30, 1999, 6.9 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. No
shares of Common Stock were granted in the form of restricted stock during the
52 weeks ended January 30, 1999 or February 1, 1997. 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.
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
F-24
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(MILLIONS, EXCEPT PER SHARE DATA)
Net income As Reported......... $ 662 $ 536 $ 266
Pro forma........... 637 521 258
Basic earnings per share As Reported......... 3.16 2.56 1.28
Pro forma........... 3.04 2.49 1.24
Diluted earnings per share As Reported......... 2.96 2.41 1.24
Pro forma........... 2.85 2.34 1.21
The fair value of each option grant 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 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
Dividend yield....................................... - - -
Expected volatility.................................. 30.6% 29.7% 25.2%
Risk-free interest rate.............................. 5.7% 6.8% 6.1%
Expected life........................................ 6 years 6 years 6 years
13. SHAREHOLDERS' EQUITY
The authorized shares of the Company consist of 125.0 million shares of
preferred stock ("Preferred Stock"), par value of $.01 per share, with no shares
issued, and 500.0 million shares of Common Stock, par value of $.01 per share,
with 242.2 million shares of Common Stock issued and 208.5 million shares of
Common Stock outstanding at January 30, 1999 and 239.9 million shares of Common
Stock issued and 209.9 million shares of Common Stock outstanding at January 31,
1998 (with shares held in the Company's treasury or by subsidiaries of the
Company being treated as issued, but not outstanding).
During 1998, the Board of Directors approved a stock repurchase program
that authorizes the Company to purchase up to $1 billion of its common stock
through January 29, 2000. Through January 30, 1999, 12.8 million shares of
common stock at an aggregate cost of $591 million had been acquired under the
repurchase program.
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.
F-25
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 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 (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
TREASURY STOCK
Treasury stock contains shares repurchased under the stock repurchase
program, shares issued to wholly owned subsidiaries of the Company in connection
with an acquisition, 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.
F-26
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Changes in the number of shares held in the treasury are as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(THOUSANDS)
Balance, beginning of year..... 159.3 84.8 40.8
Additions:
Repurchase program........... 12,810.1 - -
Restricted stock............. 51.6 70.0 41.9
Deferred compensation plan... 4.1 4.5 2.1
Distributions:
Issued in conversion of
subordinated notes........ (9,205.7) - -
-------- ----- ----
Balance, end of year........... 3,819.4 159.3 84.8
======== ===== ====
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 plans.
Under the deferred compensation plans, 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 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ---------------- ----------------
(THOUSANDS)
Balance, beginning of year..... 378.7 283.5 213.9
Additions...................... 80.0 123.7 90.6
Distributions.................. (24.2) (28.5) (21.0)
----- ----- -----
Balance, end of year........... 434.5 378.7 283.5
===== ===== =====
14. 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.
F-27
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
or receive to terminate the agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of the swap
counterparties.
The estimated fair values of certain financial instruments of the Company
are as follows:
JANUARY 30, 1999 JANUARY 31, 1998
--------------------------------- ------------------------------
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- -------- ------ -------- -------- ------
(MILLIONS)
Long-term debt.................. $2,997 $2,996 $3,207 $3,854 $3,853 $4,179
Interest rate cap agreements.... 789 - - 827 - -
Interest rate swap agreements... - - - 376 - (2)
The interest rate cap agreements in effect at January 30, 1999 and January
31, 1998 are used to hedge interest rate risk related to variable rate
indebtedness under the Company's Receivables Backed Financings. 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 in effect at January 31, 1998 were used,
in effect, to fix the interest on a portion of the debt outstanding under the
Note Monetization and 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.
F-28
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per
share based on income before extraordinary items is as follows:
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
----------------------- ----------------------- -----------------------
SHARES INCOME SHARES INCOME SHARES INCOME
------ ------ ------ ------ ------ ------
(MILLIONS, EXCEPT PER SHARE DATA)
Income before extraordinary
items and average number of
shares outstanding........... 209.1 $685 209.2 $575 207.5 $266
Shares to be issued under
deferred compensation
plans........................ .4 .3 .2
Shares to be issued to IRS..... .1
----- ---- ----- ---- ----- ----
209.5 $685 209.5 $575 207.8 $266
Basic earnings per
share................... $3.27 $2.74 $1.28
===== ===== =====
Effect of dilutive securities:
Warrants..................... 7.4 5.4 2.8
Stock options................ 2.2 2.0 1.6
Convertible notes............ 6.8 7 10.2 10 10.2 11
----- ---- ----- ---- ----- ----
225.9 $692 227.1 $585 222.4 $277
Diluted earnings per
share................... $3.06 $2.58 $1.24
===== ===== =====
In addition to the warrants and stock options reflected in the foregoing
table, warrants and stock options to purchase 4.7 million, 0.2 million and 3.7
million shares of common stock at prices ranging from $33.13 to $79.44 per share
were outstanding at January 30, 1999, January 31, 1998 and February 1, 1997,
respectively, but were not included in the computation of diluted earnings per
share because the exercise price thereof exceeded the average market price and
would have been antidilutive.
F-29
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16. QUARTERLY RESULTS (UNAUDITED)
Unaudited quarterly results for the 52 weeks ended January 30, 1999 and
January 31, 1998, were as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE DATA)
52 Weeks Ended January 30, 1999:
Net sales............................................ $3,456 $3,523 $3,647 $5,207
Operating income..................................... 181 267 257 750
Income before extraordinary item..................... 60 107 110 408
Net income........................................... 60 107 87 408
Basic earnings per share:
Income before extraordinary item.................. .29 .51 .53 1.95
Net income........................................ .29 .51 .42 1.95
Diluted earnings per share:
Income before extraordinary item.................. .27 .47 .50 1.88
Net income........................................ .27 .47 .40 1.88
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
17. SUBSEQUENT EVENT (UNAUDITED)
On March 18, 1999, the Company acquired Fingerhut Companies, Inc.
("Fingerhut") for a purchase price of $1,700 million, including $297 million of
Fingerhut indebtedness. Fingerhut is a database marketing company that sells a
broad range of products and services directly to consumers via catalogs, direct
marketing and the Internet, with 1998 annual sales in excess of $1,500 million.
The Company funded the Fingerhut acquisition through a combination of cash on
hand and short-term borrowings. On March 24, 1999, the Company issued $350
million of 6.3% Senior Notes due 2009 and $400 million of 6.9% Senior Debentures
due 2029 and used the proceeds thereof to repay a portion of such short-term
borrowings. The Fingerhut acquisition will be accounted for as a purchase.
F-30