Filed pursuant to Rule 424(b)(4)
Registration No. 333-11101
[LOGO]
$240,000,000
SAKS HOLDINGS, INC.
5 1/2% CONVERTIBLE SUBORDINATED NOTES
DUE SEPTEMBER 15, 2006
The Notes are convertible at any time prior to maturity, unless previously
redeemed or repurchased, into shares of Common Stock, par value $.01 per share
("Common Stock"), of Saks Holdings, Inc. at a conversion rate of 24.0601 shares
per each $1,000 principal amount of Notes (equivalent to a conversion price of
approximately $41.563 per share), subject to adjustment in certain
circumstances. On September 19, 1996, the last reported sale price of the Common
Stock, which is listed under the symbol "SKS" on the New York Stock Exchange,
was $33 1/4 per share.
Interest on the Notes is payable on March 15 and September 15 of each year,
commencing on March 15, 1997. The Notes are redeemable in whole or in part at
Saks Holdings' option at any time on or after September 15, 1999 at the
redemption prices set forth herein, plus accrued interest to the date of
redemption. See "Description of Notes--Optional Redemption". The Notes are not
entitled to any sinking fund. The Notes will mature on September 15, 2006.
In the event of a Change of Control (as defined herein), each holder of the
Notes may require Saks Holdings to repurchase its Notes, in whole or in part,
for cash or, at Saks Holdings' option, Common Stock (valued at 95% of the
average closing price for the five trading days immediately preceding and
including the third trading day prior to the repurchase date) at a repurchase
price of 100% of the principal amount of Notes to be repurchased, plus accrued
interest to the repurchase date. See "Description of Notes--Repurchase at Option
of Holders Upon a Change of Control".
The Notes are unsecured obligations subordinated in right of payment to all
existing and future Senior Indebtedness (as defined herein) of Saks Holdings and
are effectively subordinated in right of payment to all indebtedness and other
liabilities of its subsidiaries, including its wholly-owned subsidiary Saks &
Company. As of August 3, 1996, Saks Holdings had no outstanding Senior
Indebtedness (other than guarantees of subsidiary indebtedness). As of the same
date, on a pro forma basis after giving effect to the offering and the
application of the net proceeds therefrom and the prepayment of $35 million
aggregate principal amount of Saks existing subordinated debt, Saks Holdings'
subsidiaries had outstanding indebtedness and other liabilities of $750.8
million (excluding intercompany obligations). See "Description of
Notes--Subordination".
Saks Holdings is a holding company with no business operations of its own.
Saks Holdings' only material asset is the outstanding capital stock of Saks &
Company and Saks Holdings is therefore dependent upon payments, dividends and
distributions from Saks & Company in order to make payments of principal of and
interest on the Notes. The Notes are not guaranteed by Saks & Company. See
"Description of Notes--Subordination".
The Notes will be represented by a global note registered in the name of the
nominee of The Depository Trust Company ("DTC"), which will act as depositary.
Beneficial interests in the global note will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its direct and
indirect participants. Except as described herein, Notes in definitive form will
not be issued. The Notes will be issued in registered form in denominations of
$1,000 and integral multiples thereof. See "Description of Notes--Book-Entry".
Concurrently with the offering of the Notes hereby, certain selling
stockholders are offering 8,000,000 shares of Common Stock by a separate
prospectus. The consummation of the Notes offering and the Common Stock offering
are not conditioned upon each other.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISKS
RELEVANT TO AN INVESTMENT IN THE NOTES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2) SAKS HOLDINGS(1)(3)
------------------ ------------- --------------------
<S> <C> <C> <C>
Per Note........................... 100% 2.5% 97.5%
Total(4)........................... $240,000,000 $6,000,000 $234,000,000
</TABLE>
- ------------
(1) Plus accrued interest, if any, from September 25, 1996.
(2) Saks Holdings has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $1,600,000 payable by Saks Holdings.
(4) Saks Holdings has granted the Underwriters an option for 30 days to purchase
up to an additional $36 million principal amount of Notes at the initial
public offering price per Note, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to Saks
Holdings will be $276,000,000, $6,900,000 and $269,100,000, respectively.
See "Underwriting".
-------------------
Goldman, Sachs & Co. is acting as book running lead manager for the offering.
Goldman, Sachs & Co., CS First Boston Corporation, Morgan Stanley & Co.
Incorporated and Salomon Brothers Inc are acting as co-lead managers. The Notes
offered hereby are offered severally by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that the Notes will be ready for
delivery in book-entry form only through the facilities of DTC in New York, New
York on or about September 25, 1996 against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
CS FIRST BOSTON
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC
-------------------
The date of this Prospectus is September 19, 1996.
<PAGE>
[Photo of Saks' Fifth Avenue Store]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AND THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
DURING THE OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE NOTES AND THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM
RULE 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
- ------------------------
Front Gatefold
"More than a store Saks Fifth Avenue is a brand marked by..."
"A Landmark Foundation"
[Photo of Saks' Fifth Avenue Store]
"A Nation Wide Presence"
[United States Map Showing Saks' Store Locations]
"Worldwide Recognition"
[Photo of Saks' Fifth Avenue Store]
"Signature Style" "Legendary Service"
"A Well-Defined Image" "A Reputation for Quality"
"An Upscale Profile"
[Assorted Photos from Marketing Materials]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. As used in this Prospectus, "Saks
Holdings" refers to Saks Holdings, Inc. and "Saks" refers to Saks & Company, a
wholly-owned subsidiary of Saks Holdings, which does business as Saks Fifth
Avenue. The terms "fiscal year" and "fiscal" refer to Saks Holdings' fiscal
year, which is the 52- or 53-week period ending on the Saturday closest to
January 31 of the following calendar year (e.g., a reference to "fiscal 1995" is
a reference to the fiscal year ended February 3, 1996). Unless the context
otherwise requires, the information contained herein gives effect to a five-for-
one split of the Common Stock effected on April 26, 1996 in the form of a stock
dividend to all stockholders of record on April 26, 1996. In addition, unless
the context otherwise requires, the information contained in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting". In addition to the historical information contained herein,
certain statements in this Prospectus constitute "forward-looking statements"
under the Private Securities Litigation Reform Act (the "Reform Act") which
involve risks and uncertainties. Saks Holdings' actual results may differ
significantly from those discussed herein. Factors that might cause such a
difference include, but are not limited to, those discussed under the captions
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as those discussed elsewhere in this
Prospectus. See "Risk Factors-- Forward-Looking Statements".
THE COMPANY
GENERAL
Saks Fifth Avenue is recognized worldwide as a premier fashion retailer,
offering the finest quality and latest style in women's and men's apparel.
Supported by a strong commitment to personalized customer service, Saks
primarily sells better, bridge and designer apparel, shoes, accessories,
jewelry, cosmetics and fragrances for women and men, as well as gift merchandise
and children's apparel. Capitalizing on its 70-year history as a fashion
authenticator and the prominence of its landmark Fifth Avenue store in New York
City, Saks Fifth Avenue has developed one of the most recognized retailing
franchises in the world.
Saks is experiencing significant momentum in its financial performance,
reflecting the success of new business strategies developed and initially
implemented in 1994 and the significant investments in stores, inventories,
staff and systems made since 1990. Saks recorded net sales of $1.69 billion and
$868.2 million in fiscal 1995 and the six months ended August 3, 1996,
respectively, increases of 18.9% and 17.7% over fiscal 1994 and the six months
ended July 29, 1995, respectively. Comparable sales increased 10.6% and 12.4% in
fiscal 1995 and the six months ended August 3, 1996, respectively. Primarily due
to certain impairment and special charges and increased interest costs, Saks
Holdings' net loss in fiscal 1995 increased to $64.1 million from $10.6 million
in fiscal 1994. Saks Holdings' net loss decreased to $28.9 million for the six
months ended August 3, 1996 from $56.4 million for the six months ended July 29,
1995. The results for the six months ended July 29, 1995 include a special
charge of $8.9 million for the costs of integrating four former I. Magnin store
locations.
Saks' net sales are generated through three retail formats: 46 full-line and
resort stores; 23 Off 5th outlet stores; and Folio catalogs. The full-line and
resort store operations are conducted from an exceptional portfolio of mostly
owned stores in premier retail locations, including Fifth Avenue in New York
City, Wilshire Boulevard in Beverly Hills, Michigan Avenue in Chicago and Union
Square in San Francisco. Saks' rapidly growing Off 5th outlet store division
sells high quality, upscale
3
<PAGE>
branded fashion apparel at exceptional prices. Saks' Folio catalogs offer
fashionable women's apparel, accessories and home furnishings and gifts.
HISTORY
Saks Fifth Avenue was founded in 1867 and was incorporated in New York as
Saks & Company in 1902. Opened in New York City in September 1924 by Horace Saks
and Bernard Gimbel, the landmark Fifth Avenue store offered exclusive
merchandise from around the world. In 1973, Saks & Company was acquired by a
subsidiary of B.A.T. Industries PLC ("B.A.T.") through its acquisition of Gimbel
Bros., Inc. In July 1990, affiliates of Investcorp S.A. ("Investcorp") and a
group of international investors acquired Saks from B.A.T. (the "1990
Acquisition").
BUSINESS STRATEGY
After the 1990 Acquisition, Investcorp recruited a new executive management
team to correct recognized weaknesses and develop a new business strategy
designed to capitalize on the strength of the Saks franchise. By early 1994,
management had implemented several key initiatives and developed and began
implementing comprehensive, integrated merchandising, service and marketing
strategies to position its core retail business for future growth and to extend
the Saks franchise.
These initiatives and strategies resulted in improvements in Saks' financial
performance. From fiscal 1991 to fiscal 1995, Saks' net sales grew from $1.27
billion to $1.69 billion, a 32.9% increase. During this period gross margin as a
percentage of net sales increased from 27.3% to 30.7%, and selling, general and
administrative expenses as a percentage of net sales decreased from 30.5% to
26.0%. In addition, from fiscal 1991 to fiscal 1995, Saks' interest expense,
net, decreased from $126.2 million to $94.2 million and Saks' net loss decreased
from $180.5 million to $64.1 million. Operating income increased by $78.9
million from a loss of $42.8 million in fiscal 1991 to income of $36.1 million
in fiscal 1995. Operating income is net of management fees paid to Investcorp
International Inc. ("III") in both fiscal 1991 and fiscal 1995 and in fiscal
1995 is net of special charges of $36.4 million. Operating income excluding
these fees and the special charges increased by $120.3 million to $79.5 million
during this period. Management fees to III were discontinued in July 1996.
Management believes that Saks' current momentum, as reflected by its recent
results of operations and comparable sales performance relative to the industry,
is directly attributable to implementation of its strategies during fiscal 1994,
fiscal 1995 and fiscal 1996. Saks' comparable sales performance* is set forth
below:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
First quarter..................................... 4.1% 10.2% 13.3%
Second quarter.................................... 5.3 11.3 11.3
Third quarter..................................... 5.9 9.9 --
Fourth quarter.................................... 6.6 11.0 --
</TABLE>
- ------------
* Represents the percentage increase in (i) net sales of stores (excluding major
store expansions) open in both reporting periods for the portion of such
periods open and (ii) Folio net sales. In fiscal 1995 and fiscal 1996,
comparable sales excludes the impact of the 53rd week in fiscal 1995.
Management believes that the ongoing execution and implementation of these
strategies will continue to drive performance. A summary of these strategies is
set forth below.
4
<PAGE>
TOP CUSTOMER FOCUS
Based on extensive market research, Saks has identified certain top
customers who generate a significant share of Saks' sales. The large number of
customers who comprise this group change over time and are geographically
dispersed. Management believes that Saks can capture a substantially greater
share of apparel and related expenditures by these customers and has developed
and implemented customer affinity programs designed to capitalize on the
purchasing habits of top customers by increasing the frequency and productivity
of customer contact, increasing cross-selling activities and enhancing customer
loyalty. These programs include proactive customer clienteling programs, the
Saks First Program and the Fifth Avenue Club.
DIFFERENTIATED MERCHANDISE ASSORTMENTS
In 1994, Saks began to specifically target the merchandise categories that,
based on extensive research, were determined to be most important to its top
customers. Saks is developing dominant assortments in these key merchandise
categories by increasing inventory investments, upgrading the quality and
congruency of merchandise assortments and by adding important vendors and
brands. Saks' overall merchandising strategy is to offer congruent and balanced
assortments of differentiated, upscale limited-distribution merchandise.
STORE INTENSIFICATION
Management is improving the productivity of its store portfolio through a
comprehensive and integrated store intensification program. Saks initially
concentrated its efforts and resources on those stores that represented the
highest potential for increased sales and profit margins. Pursuant to this
strategy, from the beginning of fiscal 1993 to the end of fiscal 1995 Saks made
significant investments in 14 high potential stores, including $109 million in
gross capital expenditures, $43 million in increased inventory levels, $21
million in additional annual store payroll costs and $4 million in increased
annual localized marketing spending. As a result, net sales in these stores
increased 29.5% from $698 million in fiscal 1992 to $904 million in fiscal 1995.
Saks is expanding its store intensification program to additional stores in 1996
and 1997.
STORE EXPANSION
Saks continuously evaluates opportunities for profitable expansion of its
store base. Management believes that the current retail environment,
characterized by an accelerated pace of store rationalizations, downsizings and
bankruptcies, as well as the re-tenanting of major malls, offers many attractive
opportunities for Saks to continue to expand its store portfolio.
FULL-LINE STORES. Saks currently operates 40 full-line stores. Excluding
acquisitions, Saks plans to open three new full-line stores (including a store
in Orlando, Florida in 1996) and two replacement stores and to complete nine
remodels through fiscal 1998.
RESORT STORES. Saks broadens its reach to the affluent tourist and permanent
and seasonal residents of resort markets through its resort stores. Saks
currently operates six resort stores, including a store in Charleston, South
Carolina that was opened in August 1996. Saks plans to open four new 30,000 to
50,000 gross square foot resort stores through fiscal 1998.
MAIN STREET STORES. Saks is testing a 35,000 square foot main street store
format designed for the local shopping areas of affluent suburban markets. The
first main street store opened in Greenwich, Connecticut in September 1996.
ACQUISITIONS. Management believes that the current retail environment will
continue to offer selected opportunities to increase Saks' presence in important
markets. For example, Saks intensified its presence on the west coast and in the
southwest by acquiring four former I. Magnin stores in February 1995.
5
<PAGE>
Similarly, Saks intends to expand its presence in the demographically
attractive Texas market. In July 1996, Saks entered into an agreement with
Dayton Hudson Corporation and certain of its affiliates to acquire, subject to
certain conditions, three Marshall Field store locations in Texas which would
add 250,000 square feet of store space to Saks' presence in this market. Two of
these stores are intended to replace two smaller stores that Saks currently
operates in Houston and Dallas. Saks intends to spend approximately $100 million
in connection with the acquisition and renovation of these stores. There can be
no assurance that Saks will satisfy the conditions under the agreement and
acquire these store locations.
In addition, Saks has agreed with Japanese department store operator Isetan
Company Limited and its affiliate, Isetan of America, Inc. (collectively,
"Isetan"), which are creditors of Barneys Inc. and its affiliates (collectively,
"Barneys"), to begin exploring on a preliminary basis the financial feasibility
of co-sponsoring a plan of reorganization for Barneys, which filed for Chapter
11 bankruptcy protection in January 1996. Saks would only proceed with such a
plan if management concludes that Barneys represents an attractive investment
opportunity. There can be no assurance that Saks and Isetan will reach agreement
on the terms of a proposed plan of reorganization or that Saks and Isetan will
be successful in introducing any such plan in Barneys' bankruptcy case.
See "Business--Business Strategy--Store Expansion--Acquisitions".
FRANCHISE EXTENSION STRATEGIES
Management believes that the Saks Fifth Avenue franchise is extendable over
multiple formats and has developed the following specific growth strategies:
OFF 5TH. Through its Off 5th division, Saks extends its customer reach by
offering high quality, upscale branded fashion apparel in an outlet store
setting at 40% to 70% off original and comparable retail prices. Off 5th
provides attractive financial returns and an economically superior form of
inventory liquidation for Saks' retail stores. Saks currently operates 23 Off
5th stores and expects to open approximately 12 additional stores in the
remainder of fiscal 1996.
FOLIO. Saks extends its reach to direct response customers through its Folio
catalogs which offer fashionable women's apparel, accessories, home furnishings
and gifts and unique selections of Saks' private label merchandise. Folio mailed
29 million catalogs in fiscal 1995, an increase of 26% over fiscal 1994.
Management plans to increase Folio's sales through further development of its
customer list, increased circulation and the development of new catalogs,
including home and gift and outlet catalogs, both domestically and in
international markets.
CAPITAL EXPENDITURES
Saks is committed to expanding and improving its store portfolio. From the
beginning of fiscal 1993 to the end of fiscal 1995, Saks made capital
expenditures of approximately $148 million on new stores, remodels, replacements
and expansions and, excluding acquisitions, plans to make additional such
capital expenditures of approximately $270 million through fiscal 1998.
Management believes that cash generated from Saks' operations, funds available
under Saks' credit facility and funds available from lease financing and
developer contributions will be sufficient to satisfy Saks' cash requirements
over this period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Capital
Expenditures".
Saks Holdings is headquartered at 12 East 49th Street, New York, New York
10017, next to the flagship Saks Fifth Avenue store which occupies the entire
block on Fifth Avenue between 49th and 50th Streets in New York City, directly
across from Rockefeller Center. Its telephone number is (212) 940-4048. Saks is
a wholly-owned subsidiary of Saks Holdings.
6
<PAGE>
THE OFFERING
The following summary of certain terms of the Notes is not complete and is
qualified by all of the terms contained in the Notes and in the Indenture (as
defined). For a more detailed description of the terms of the Notes, see
"Description of Notes".
<TABLE>
<CAPTION>
<S> <C>
Securities Offered................. $240 million aggregate principal amount of 5 1/2%
Convertible Subordinated Notes due 2006 (the "Notes").
Saks Holdings has granted the Underwriters an option
for 30 days to purchase up to an additional $36
million principal amount of Notes at the initial
public offering price per Note, less the underwriting
discount, solely to cover over-allotments, if any.
Maturity Date...................... September 15, 2006 unless earlier redeemed or converted.
Interest Payment Dates............. Interest on the Notes is payable at the rate set forth
on the cover page hereof, semi-annually on each March 15
and September 15, commencing on March 15, 1997.
Conversion......................... The Notes are convertible at any time prior to maturity,
unless previously redeemed or repurchased, into shares
of Common Stock at a conversion rate of 24.0601 shares
per $1,000 principal amount of Notes (equivalent to a
conversion price of approximately $41.563 per share),
subject to adjustment in certain circumstances as
described herein. See "Description of
Notes--Conversion Rights".
Optional Redemption................ The Notes will be redeemable at Saks Holdings' option,
in whole or in part, at any time on or after September
15, 1999 at the redemption prices set forth herein,
plus accrued interest to the date of redemption. See
"Description of Notes--Optional Redemption".
Repurchase at Option of Holders
Upon a Change of Control........... In the event of a Change of Control (as defined herein),
each holder of Notes may require Saks Holdings to
repurchase its Notes, in whole or in part, for cash
or, at Saks Holdings' option, Common Stock (valued at
95% of the average of the closing prices for the five
trading days immediately preceding and including the
third trading day prior to the repurchase date) at a
repurchase price of 100% of the principal amount of
the Notes to be repurchased, plus accrued interest to
the repurchase date; provided that Saks Holdings may
repurchase Notes for cash only after repayment of all
outstanding indebtedness under Saks' credit facility.
See "Description of Notes--Repurchase at Option of
Holders upon a Change of Control".
Subordination...................... The Notes are subordinated in right of payment to all
existing and future Senior Indebtedness (as defined
herein) of Saks Holdings. As of August 3, 1996, Saks
Holdings had no Senior Indebtedness (other than
guarantees of subsidiary indebtedness). The Notes also
are effectively subordinated in right of payment to
all indebtedness and other liabilities of the
subsidiaries of Saks Holdings, including Saks. As of
August 3, 1996, on a pro forma basis after giving
effect to the offering and the application of the net
proceeds therefrom (including the Subordinated Debt
Prepayment (as defined below)), the amount of all
indebtedness and other liabilities of Saks Holdings'
subsidiaries would have been
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
$750.8 million (excluding intercompany obligations).
The Indenture will not restrict the incurrence of
Senior Indebtedness or other indebtedness by Saks
Holdings or any of its subsidiaries. See "Description
of Notes-- Subordination".
Saks Holdings is a holding company with no business
operations of its own. Saks Holdings' only material
asset is the outstanding capital stock of Saks and
Saks Holdings is therefore dependent upon payments,
dividends and distributions from Saks in order to make
payments of principal of and interest on the Notes.
The Notes are not guaranteed by Saks.
Use of proceeds.................... Saks Holdings intends to loan substantially all of the
estimated net proceeds of $232.4 million to Saks to
enable Saks to (i) prepay $138 million aggregate
principal amount of term loans outstanding under Saks'
credit facility, (ii) repay $35 million aggregate
principal amount outstanding under Saks' revolving
credit facility (which amount was used by Saks to
prepay $35 million aggregate principal amount of Saks'
existing subordinated indebtedness on September 16,
1996 (the "Subordinated Debt Prepayment")) and (iii)
use the balance for working capital and general
corporate purposes. Information contained in this
Prospectus that gives effect to the offering of the
Notes and the application of the net proceeds
therefrom also gives effect to the Subordinated Debt
Prepayment. See "Use of Proceeds".
Listing............................ The Notes will not be listed on any securities exchange
or quoted on Nasdaq. The Underwriters have advised Saks
Holdings that they intend to make a market in the
Notes. The Underwriters are not obligated to make a
market in the Notes, and any such market making may be
discontinued at any time at the sole discretion of the
Underwriters without notice.
Common Stock....................... The Common Stock is listed on the New York Stock
Exchange under the symbol "SKS".
</TABLE>
Concurrently with the offering of the Notes hereby, certain selling
stockholders of Saks Holdings are offering 8 million shares of Common Stock (up
to 9.2 million shares if the underwriters' over-allotment options are exercised)
by a separate prospectus (the "Secondary Offering"). Investcorp and its
affiliates are not participating in the Secondary Offering. The consummation of
the Notes offering and the Secondary Offering are not conditioned upon each
other.
RISK FACTORS
See "Risk Factors" beginning on page 12 for a description of certain risks
relevant to an investment in the Notes.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data presented below for each
of the five fiscal years in the period ended February 3, 1996 have been derived
from the audited Consolidated Financial Statements. The summary historical
financial data presented below for the six months ended July 29, 1995 and August
3, 1996 were derived from Saks Holdings' unaudited Condensed Consolidated
Financial Statements which contain all accruals and adjustments (consisting only
of normal recurring adjustments) which management considers necessary for a fair
presentation of the financial information for such periods. The results of
operations for the six months ended August 3, 1996 are not necessarily
indicative of the operating results that may be expected for the full fiscal
year. This financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements and Notes thereto, the unaudited Condensed
Consolidated Financial Statements and Notes thereto and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
--------------------
FISCAL FISCAL FISCAL FISCAL FISCAL JULY 29, AUGUST 3,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales......................... $1,269.4 $1,343.5 $1,395.5 $1,418.2 $1,686.8 $ 737.8 $ 868.2
Cost of sales, including buying
and occupancy.................... (922.7) (933.1) (975.4) (979.7) (1,168.7) (525.4) (621.1 )
-------- -------- -------- -------- -------- -------- ---------
Gross margin..................... 346.7 410.4 420.1 438.5 518.1 212.4 247.1
Selling, general and
administrative expenses.......... (387.5) (396.0) (394.8) (370.4) (438.6) (209.8) (229.5 )
Management fees (1)............... (2.0) (2.0) (2.0) (2.0) (7.0) (1.0) (1.0 )
Impairment and special charges
(2)............................... -- -- (177.7) -- (36.4) (8.9) --
-------- -------- -------- -------- -------- -------- ---------
Operating income (loss).......... (42.8) 12.4 (154.4) 66.1 36.1 (7.3) 16.6
Interest expense, net............. (126.2) (89.5) (73.8) (76.2) (94.2) (43.4) (42.2 )
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before income taxes
and extraordinary charge....... (169.0) (77.1) (228.2) (10.1) (58.1) (50.7) (25.6 )
Income taxes (3).................. -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before
extraordinary charge........... (169.0) (77.1) (228.2) (10.1) (58.1) (50.7) (25.6 )
Extraordinary charge (4).......... (11.5) (8.4) (27.6) (.5) (6.0) (5.7) (3.3 )
-------- -------- -------- -------- -------- -------- ---------
Net income (loss)................ $ (180.5) $ (85.5) $ (255.8) $ (10.6) $ (64.1) $ (56.4) $ (28.9 )
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) per share
before extraordinary charge.... $ (5.63) $ (1.93) $ (5.07) $ (.22) $ (1.29) $ (1.13) $ (.49 )
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Net income (loss) per share...... $ (6.02) $ (2.14) $ (5.68) $ (.24) $ (1.43) $ (1.25) $ (.55 )
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Weighted average number of shares
outstanding (000s)................ 30,000 40,015 45,030 45,010 44,955 44,955 52,311
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
AUGUST 3, 1996
-----------------------------
ACTUAL AS ADJUSTED (5)
-------- ---------------
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Inventories....................................................... $ 389.6 $ 389.6
Property and equipment............................................ 798.4 798.4
Total assets...................................................... 1,421.6 1,460.3
Total debt (6).................................................... 652.1 693.6
Stockholders' equity.............................................. 472.3 469.5
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
--------------------
FISCAL FISCAL FISCAL FISCAL FISCAL JULY 29, AUGUST 3,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT SALES PER SQUARE FOOT DATA)
OTHER DATA:
Change in comparable sales (7)...... (1.9%) 3.4% 1.7% 5.6% 10.6% 10.7% 12.4%
Retail sales per average square foot
(8):
Full-line and resort............... $ 251 $ 258 $ 264 $ 288 $ 311 $ 143 $ 156
Off 5th............................ $ 411 $ 452 $ 440 $ 362 $ 352 $ 171 $ 154
Gross margin rate................... 27.3% 30.5% 30.1% 30.9% 30.7% 28.8% 28.5%
Selling, general and administrative
expense rate....................... 30.5% 29.5% 28.3% 26.1% 26.0% 28.4% 26.4%
EBIT (9)............................ $(40.8) $ 14.4 $ 25.3 $ 68.1 $ 79.5 $ 2.6 $ 17.6
Depreciation and amortization....... $ 87.7 $ 89.0 $ 86.8 $ 68.0 $ 66.8 $ 32.7 $ 32.5
Capital expenditures................ $ 50.4 $ 67.5 $ 49.8 $ 71.7 $ 87.0 $ 35.6 $ 57.0
Deficiency of earnings to fixed
charges (10)........................ $169.7 $ 76.8 $227.5 $ 10.5 $ 58.6 $ 51.4 $ 25.8
Pro forma ratio of earnings to fixed
charges (11)........................ 1.32
Pro forma deficiency of earnings to
fixed charges (11)................. $ 13.0 $ 1.0
Number of stores:
Full-line and resort
--beginning of period............ 47 48 49 49 45 45 45
--opened......................... 1 1 -- 1 2 2 0
--closed......................... -- -- -- (5) (2) (1) 0
------ ------ ------ ------ ------ -------- ---------
--end of period.................. 48 49 49 45 45 46 45
------ ------ ------ ------ ------ -------- ---------
------ ------ ------ ------ ------ -------- ---------
Off 5th
--beginning of period............ 1 1 3 4 8 8 19
--opened......................... -- 2 1 4 11 1 3
------ ------ ------ ------ ------ -------- ---------
--end of period.................. 1 3 4 8 19 9 22
------ ------ ------ ------ ------ -------- ---------
------ ------ ------ ------ ------ -------- ---------
End of period gross square feet
(000s):
Full-line and resort............... 4,888 4,918 4,959 4,549 4,806 4,686 4,806
Off 5th............................ 26 83 114 227 456 239 504
CASH FLOW DATA (12):
Net cash provided by (used in)
operating activities............... $ 69.4 $(27.5) $ 15.6 $ 53.8 $ (6.1) $(18.5) $ (43.8)
Net cash provided by (used in)
investing activities............... $ 11.2 $ 42.6 $(30.3) $ (1.7) $(57.1) $(32.1) $ (48.3)
Net cash provided by (used in)
financing activities............... $(78.2) $(13.2) $ 15.1 $(47.9) $ 60.2 $ 48.7 $ 88.2
</TABLE>
- ------------
(1) Management fees represent amounts paid or payable to III, an affiliate of
Investcorp. Such fees relate to advisory services on matters that include
review of operating performance, treasury activities and other strategic
planning and real estate alternatives. Management fees to III were
discontinued in July 1996.
(2) Impairment and special charges represent costs associated with (i)
adjustments to long-lived assets, an early retirement program and store
closings and space reductions in fiscal 1993 and (ii) distribution center
exit costs, integration of former I. Magnin locations and write-off of
capitalized EDP software in fiscal 1995. See Note 3 to Consolidated
Financial Statements.
(3) At February 3, 1996 Saks had a net operating loss carryforward of $728
million which may be used to reduce taxes payable on future taxable income.
The carryforward begins to expire in 2005 if not used in full. See Note 9
to Consolidated Financial Statements.
(4) The extraordinary charge in each period relates to early extinguishment of
debt. See Note 5 to Consolidated Financial Statements and Note 2 to
unaudited Condensed Consolidated Financial Statements.
(5) Adjusted to give effect to (i) the sale of $240 million aggregate principal
amount of Notes and application of the net proceeds therefrom to repay
$232.4 million of debt (including the Subordinated Debt Prepayment) and
(ii) the write-off of $2.8 million of deferred financing costs resulting
from repayment of debt.
(6) Includes obligations under capital leases. See Note 10 to Consolidated
Financial Statements.
(7) Comparable sales represents (i) net sales of stores (excluding major store
expansions) open in both reporting periods for the portion of such period
open and (ii) Folio net sales. In fiscal 1995 and fiscal 1996, comparable
sales excludes the impact of the 53rd week in fiscal 1995.
10
<PAGE>
(8) Sales per average square foot in each period represent net sales for such
period divided by the average of total gross square feet of store
buildings. The number for fiscal 1994 excludes net sales and square feet
for stores identified in the store closing and downsizing program.
(9) EBIT represents earnings before interest expense, net, income taxes,
management fees, impairment and special charges and extraordinary charges.
Saks Holdings has included information concerning EBIT because management
believes that it is a widely used comparative measure for Saks Holdings'
peer group and that, net of depreciation and amortization, it is useful
information regarding a company's ability to service and incur debt. EBIT
should not be considered in isolation or as a substitute for net income,
cash flows, operating income or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity.
(10) For purposes of this computation, earnings consist of income (loss) from
operations before income taxes and extraordinary charges plus fixed charges
excluding capitalized interest and related amortization. Fixed charges
consist of interest expense, amortization of deferred financing costs and
the interest component of rent expense.
(11) Adjusted to give effect to (i) the sale of $240 million aggregate principal
amount of Notes and the sale of 18,062,500 shares of Common Stock in Saks
Holdings' initial public offering in May 1996 and the application of the
net proceeds therefrom to repay $629.4 million of debt (including the
Subordinated Debt Prepayment) and (ii) the write-off of $6.1 million of
deferred financing costs resulting from repayment of debt, as if each
transaction had taken place at the beginning of the period indicated.
(12) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources", the Consolidated Financial Statements and the
unaudited Condensed Consolidated Financial Statements included elsewhere in
this Prospectus.
11
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
risk factors relating to the offering and the business of Saks Holdings,
together with the information and financial data set forth elsewhere in this
Prospectus, prior to making an investment decision. Certain statements under
this caption constitute "forward-looking statements" under the Reform Act.
See "--Forward-Looking Statements".
RELIANCE ON FIFTH AVENUE STORE
Saks' flagship Fifth Avenue store in New York City accounted for
approximately 22% of consolidated net sales in fiscal 1995 and in the six months
ended August 3, 1996 and plays a significant role in marketing the Saks Fifth
Avenue name. The loss of, or any significant impairment to the operations of,
the Fifth Avenue store could have a material adverse effect on Saks' results of
operations and financial condition. See "Business--Full-Line and Resort Stores".
INDEBTEDNESS AND LIQUIDITY
Saks Holdings is a holding company with no business operations of its own.
Saks Holdings' only material asset is the outstanding capital stock of Saks.
Saks Holdings' ability to make payments of principal of and interest on the
Notes depends upon the future financial performance of Saks, including Saks'
earnings and cash flow from operations. See "Risk Factors--Subordination" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Saks Holdings' earnings were insufficient to cover fixed charges by
$169.7 million, $76.8 million, $227.5 million, $10.5 million and $58.6 million,
respectively, in fiscal 1991, 1992, 1993, 1994 and 1995 and $51.4 million and
$25.8 million, respectively, for the six months ended July 29, 1995 and August
3, 1996. There will be no sinking fund for the repayment of the Notes.
Saks had outstanding indebtedness of $652.1 million at August 3, 1996,
bearing interest at a weighted average rate of 8.8%. Any default by Saks with
respect to its outstanding indebtedness, or any inability on the part of Saks to
obtain necessary liquidity, would have a material adverse effect on Saks
Holdings' results of operations and financial condition. At August 3, 1996,
after giving effect to the consummation of the offering and the application of
the net proceeds therefrom (including the Subordinated Debt Prepayment) (after
deducting the underwriting discount and estimated expenses of the offering), the
consolidated indebtedness of Saks would have been approximately $693.6 million.
Such indebtedness would have had an average interest rate of 7.9% and Saks would
have had interest expense, net, of $27.5 million during the six months ended
August 3, 1996. Although the application of the net proceeds from the offering
will result in a permanent reduction of the principal amount of the term loans
outstanding under Saks' credit facility, it will not reduce amounts available to
Saks under its revolving credit facility. The revolving credit facility permits
Saks to borrow funds for working capital and capital expenditure purposes,
including store acquisitions. See "Use of Proceeds" and "Description of Certain
Indebtedness".
The level of consolidated indebtedness of Saks also could have important
consequences to the holders of Common Stock, including the following: (i) a
substantial portion of Saks' cash flow from operations must be dedicated to the
payment of principal of and interest on its indebtedness and will not be
available for other purposes; (ii) the ability of Saks to obtain financing in
the future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; and (iii) Saks' level of indebtedness may reduce its
flexibility to respond to changing business and economic conditions. See
"Description of Certain Indebtedness".
SUBORDINATION
The Notes are unsecured obligations subordinated in right of payment to all
existing and future Senior Indebtedness of Saks Holdings and effectively
subordinated in right of payment to all indebtedness and other liabilities of
Saks and Saks' subsidiaries. Neither the Indenture nor the
12
<PAGE>
Notes limit the ability of Saks Holdings, Saks or Saks' subsidiaries to incur
additional Senior Indebtedness or other indebtedness. As of August 3, 1996, Saks
Holdings had no outstanding indebtedness. As of the same date, on a pro forma
basis after giving effect to the offering and the application of the net
proceeds therefrom (including the Subordinated Debt Prepayment), Saks Holdings'
subsidiaries, including Saks, had outstanding indebtedness and other liabilities
of $750.8 million (excluding intercompany obligations). See "Description of
Notes--Subordination". The Indenture and the Notes do not contain any financial
covenants or similar restrictions respecting Saks Holdings or its subsidiaries
and, therefore, the holders of the Notes will have no protection (other than
rights upon Events of Default as described under the caption "Description of
Notes") from adverse changes in Saks Holdings' financial condition. Due to the
subordination of the Notes, in the event of insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of Saks Holdings or
upon a default in payment with respect to any indebtedness of Saks Holdings or
an event of default with respect to such indebtedness resulting from the
acceleration thereof, the assets of Saks Holdings will be available to pay the
amounts due on the Notes only after all Senior Indebtedness has been paid in
full.
Saks Holdings is a holding company with no business operations of its own.
Saks Holdings therefore is dependent upon payments, dividends and distributions
from Saks for funds to pay its obligations, including payment of principal of
and interest on the Notes. The Notes are not guaranteed by Saks. The ability of
Saks to make distributions to Saks Holdings is and will continue to be
restricted by, among other things, applicable provisions of state law and
contractual provisions. Saks' credit facility and existing subordinated debt
contain restrictions on Saks' ability to pay dividends or make other
distributions to Saks Holdings. Saks' credit facility and existing subordinated
debt provide that Saks may not declare any dividends or make any other payments
or distributions to Saks Holdings except for amounts necessary (i) to pay Saks
Holdings' expenses up to $4 million per fiscal year and (ii) to pay Saks
Holdings' taxes. The lenders who are party to Saks' credit facility also have
consented to the issuance of the Notes and certain payments by Saks to Saks
Holdings to permit Saks Holdings to fund payments of principal of and interest
on the Notes. See "Description of Certain Indebtedness--Credit Agreement" and
"Description of Certain Indebtedness--Subordinated Debt". Neither the Indenture
nor the Notes limit the ability of Saks to incur restrictions on Saks' ability
to declare dividends or make any other payments or distributions to Saks
Holdings in the future. The right of Saks Holdings to participate in the assets
of Saks upon liquidation of Saks (and therefore the ability of the holders of
the Notes to benefit indirectly from such assets) are generally subject to the
prior claims of creditors of Saks except to the extent that Saks Holdings is
recognized as a creditor of Saks, in which case Saks Holdings' claims would
still be subject to any security interests of other creditors of Saks.
Therefore, the Notes are effectively subordinated to creditors of Saks with
respect to the assets of Saks against which such creditors have claims.
NO DIVIDENDS
Saks Holdings currently does not intend to pay any cash dividends on the
Common Stock. Saks Holdings is a holding company with no business operations of
its own. Saks Holdings therefore is dependent upon payments, dividends and
distributions from Saks for funds to pay its expenses and to pay future cash
dividends or distributions, if any, to holders of the Common Stock. Saks
currently intends to retain any earnings for support of its working capital,
repayment of indebtedness, capital expenditures and general corporate purposes.
Saks has no current intention of paying dividends or making other distributions
to Saks Holdings in excess of amounts necessary to pay Saks Holdings' expenses
and taxes. Saks' credit facility and existing subordinated debt contain
restrictions on Saks' ability to pay dividends or make other distributions to
Saks Holdings. See "Risk Factors--Subordination", "Price Range of Common Stock
and Dividend Policy" and "Description of Certain Indebtedness--Credit Agreement"
and "Description of Certain Indebtedness--Subordinated Debt".
13
<PAGE>
RECENT LOSSES
Saks Holdings incurred net losses of $180.5 million, $85.5 million, $255.8
million, $10.6 million and $64.1 million, respectively, during the five year
period from fiscal 1991 through fiscal 1995. Saks Holdings incurred a net loss
of $28.9 million for the six months ended August 3, 1996. Saks Holdings also
incurred operating losses in fiscal 1991 and 1993. Saks' interest expense, net,
was $126.2 million in fiscal 1991, $89.5 million in fiscal 1992, $73.8 million
in fiscal 1993, $76.2 million in fiscal 1994, $94.2 million in fiscal 1995 and
$42.2 million for the six months ended August 3, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". There
can be no assurance that Saks will attain profitability or achieve continued
growth in operating performance.
RELOCATION OF DISTRIBUTION FACILITY
Saks plans to relocate its primary distribution center from Yonkers, New
York to a new facility in Aberdeen, Maryland, which is scheduled to open in
early 1997. The Aberdeen distribution center may be operated simultaneously with
the Yonkers distribution center for up to six months as the new facility is
brought on-line, after which time the Yonkers distribution center will be
closed. Any significant disruptions in inventory delivery, storage or
distribution during transition to the new facility could have a material adverse
effect on Saks' ability to receive inventory, deliver inventory to its stores or
locate and ship its Folio merchandise, which in turn could negatively affect
Saks' financial condition and results of operations. See "Business--Distribution
Facilities".
INTRODUCTION OF NEW MIS SYSTEM
Saks has made and continues to make substantial investments in information
systems designed to support its business strategy. Saks' capital expenditures on
information systems in fiscal 1993, fiscal 1994 and fiscal 1995 aggregated $21
million, and Saks plans additional capital expenditures of approximately $43
million through fiscal 1998 on such systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources". New information systems are scheduled to be implemented by early
1997. The new information systems will be operated simultaneously with Saks'
present information systems for up to six months as the new systems are brought
on-line, after which time use of the existing information systems will be
terminated. Any significant disruptions in the use of Saks' information systems
resulting from the transition to the new system could have an adverse effect on
Saks' ability to conduct its operations and may adversely affect financial
condition and results of operations. See "Business--Management Information
Systems" and "Business--Business Strategy".
CONTROL BY PRINCIPAL STOCKHOLDERS
Investcorp, its affiliates and others who frequently co-invest with
Investcorp may be deemed to be the beneficial owners of approximately 75.4% of
the outstanding shares of Common Stock (62.7% if the Secondary Offering is
consummated). Until such time, if ever, that there is a significant decrease in
the percentage of outstanding shares held by such stockholders, these
stockholders will be able to control Saks Holdings through their ability to
determine the outcome of votes of stockholders regarding, among other things,
election of directors and approval of significant transactions. In particular,
Investcorp, as the beneficial owner of 16.7% of the Common Stock of Saks
Holdings and with representatives on the board of directors of Saks Holdings,
may be able to exert influence over the operations of Saks Holdings and Saks. In
addition, executive officers and directors of Saks Holdings and Saks own an
aggregate of approximately 2,109,700 shares, or 3.3%, of Common Stock on a
fully-diluted basis, after giving effect to the exercise of all outstanding
options held by such officers and directors. See "Principal Stockholders".
14
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The recent growth and development of Saks has been largely dependent upon
the services of Philip Miller, Chairman of Saks, Brian Kendrick, Vice Chairman
of Saks, and Rose Marie Bravo, President of Saks. The loss of Mr. Miller's, Mr.
Kendrick's or Ms. Bravo's services could have a material adverse effect on Saks.
Neither Saks Holdings nor Saks maintains any key-man or similar insurance
policies. See "Management".
SENSITIVITY TO ECONOMIC CONDITIONS; CHANGING CONSUMER PREFERENCES
The retail apparel business is dependent upon the level of consumer
spending, which may be adversely affected by an economic downturn or a decline
in consumer confidence. An economic downturn, particularly in the Northeast and
other regions from which Saks derives a significant portion of its net sales,
could have a material adverse effect on Saks' results of operations and
financial condition. In addition, Saks' success depends in part upon its ability
to anticipate and respond to changing consumer preferences and fashion trends in
a timely manner. Although Saks attempts to stay abreast of emerging lifestyle
and consumer preferences affecting its merchandise, any sustained failure by
Saks to identify and respond to such trends would have a material adverse effect
on Saks' business, results of operations and financial condition.
SEASONALITY
The retail apparel industry is seasonal in nature, with a high proportion of
sales and operating income generated in November and December. During fiscal
1994 and fiscal 1995, the fourth quarter provided approximately 31% and 32%,
respectively, of Saks' net sales and the majority of its operating income. As a
result, Saks' operating results depend significantly on the holiday selling
season. Operating results usually are weakest in the second quarter of Saks'
fiscal year. Working capital requirements fluctuate during the year, increasing
substantially in October and November in anticipation of the holiday selling
season as significantly higher inventory levels are necessary. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality and Quarterly Fluctuations".
COMPETITION
All aspects of the retail industry, including attracting customers, securing
merchandise and locating appropriate retail sites, are highly competitive. Saks
competes for customers in this industry primarily with large specialty apparel
retailers, better department stores, national apparel chains, designer boutiques
and individual specialty apparel stores. Many of these competitors are larger
and have significantly greater financial resources than Saks. See
"Business--Competition".
EFFECT OF CERTAIN CHARTER, CHANGE OF CONTROL AND STATUTORY PROVISIONS
Saks Holdings' Board of Directors is authorized, subject to certain
limitations prescribed by law, to issue up to 10 million shares of preferred
stock in one or more classes or series and to fix the designations, powers,
preferences, rights, qualifications, limitations or restrictions, including
voting rights, of those shares without any further vote or action by
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of Saks
Holdings. Saks Holdings has no current plans to issue shares of preferred stock.
Saks' credit facility and subordinated indebtedness contain provisions that,
under certain circumstances, will cause such indebtedness to become due upon the
occurrence of a change of control of Saks. See "Description of Certain
Indebtedness--Credit Agreement" and "--Subordinated Debt". These provisions
could have the effect of making it more difficult for a third party to acquire
control of Saks Holdings. See "Description of Capital Stock--Preferred Stock".
15
<PAGE>
Saks Holdings is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. See "Description of
Capital Stock--Certain Provisions of Delaware Law".
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change of Control, each holder of Notes will have the right, at the
holder's option, to require Saks Holdings to repurchase all of or a portion of
such holder's Notes. If a Change of Control were to occur, there can be no
assurance that Saks Holdings would have sufficient funds to pay the repurchase
price for all Notes tendered by the Holders thereof. In addition, the Indenture
and the Notes provide that Saks Holdings may repurchase Notes for cash only
after repayment of all outstanding indebtedness under Saks' credit facility.
Saks Holdings also may elect to make such payment using shares of Common Stock.
In addition, Saks Holdings' repurchase of Notes as a result of the occurrence of
a Change of Control may be prohibited or limited by, or create an event of
default under, the terms of agreements related to borrowings which Saks Holdings
may enter into from time to time, including agreements relating to Senior
Indebtedness. See "Risk Factors-- Subordination" and "Description of
Notes--Repurchase at Option of Holders Upon a Change of Control".
ABSENCE OF PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF PRICE
Prior to the offering, there has been no public market for the Notes.
Certain of the Underwriters have advised Saks Holdings that they intend to make
a market in the Notes. The Underwriters are not obligated, however, to make a
market in the Notes and any such market making may be discontinued at any time
at the sole discretion of any such Underwriter without notice. There can be no
assurance that an active market for the Notes will develop or be sustained after
the offering or that the market price of the Notes will not decline. Various
factors such as changes in prevailing interest rates or changes in perceptions
of Saks Holdings' creditworthiness could cause the market price of the Notes to
fluctuate significantly. The trading price of the Notes also could be
significantly affected by the market price of the Common Stock, which could be
subject to wide fluctuations in response to a number of factors, including
quarterly variations of operating results, investor perceptions of Saks and
other retailers and general economic and market conditions. The Notes will not
be listed on any securities exchange or quoted on Nasdaq.
SUBSTANTIAL AMOUNT OF COMMON STOCK ELIGIBLE FOR FUTURE SALE
As of August 28, 1996, 63,037,464 shares of Common Stock were outstanding.
Pursuant to the Secondary Offering, certain stockholders who frequently
co-invest with Investcorp currently are offering for sale up to 9,200,000 shares
of Common Stock (including up to 1,200,000 shares to be sold pursuant to
over-allotment options). The 18,062,500 shares of Common Stock sold in Saks
Holdings' initial public offering in May 1996 are, and the shares sold in the
Secondary Offering will be, freely transferable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except for shares
acquired in the offerings by "affiliates" of Saks Holdings as that term is
defined in Rule 144 under the Securities Act. The remaining 35,774,964
outstanding shares of Common Stock are deemed to be "restricted securities" as
that term is defined in Rule 144, all of which are eligible for sale in the
public market in compliance with Rule 144.
Saks Holdings has agreed with the Underwriters that, during the period of 90
days from the date of this Prospectus, subject to certain exceptions, it will
not issue, sell, offer or agree to sell, grant any options for the sale of
(other than employee stock options) or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable for Common Stock, other than pursuant to the offering. In addition,
certain stockholders and the selling stockholders in the Secondary Offering have
agreed with the underwriters of the Secondary
16
<PAGE>
Offering that, subject to certain exceptions, they will not offer, pledge, sell,
transfer or otherwise dispose of the 34,269,567 shares of Common Stock owned by
them for a period of 180 days after the date of the prospectus relating to the
Secondary Offering. See "Underwriting". Further, in connection with the initial
public offering, certain other stockholders owning 1,497,038 shares of Common
Stock agreed with the underwriters of the initial public offering that, subject
to certain exceptions, they will not offer, pledge, sell, transfer or otherwise
dispose of such shares of Common Stock prior to November 17, 1996. At the
expiration of the lock-up periods described above, or earlier with the written
consent of the applicable underwriters, the holders of 53,086,502 shares of
Common Stock (assuming consummation of the Secondary Offering, including shares
to be sold thereby pursuant to over-allotment options) will have the right to
sell shares of Common Stock without regard to the volume or other limitations of
Rule 144 under the Securities Act.
Saks Holdings has filed a registration statement on Form S-8 under the
Securities Act to register the sale of the 6,209,045 shares of Common Stock
reserved for issuance under its Senior Management Stock Incentive Plan and 1996
Management Stock Incentive Plan. As a result, any shares issued upon exercise of
stock options granted under such plans will be available, subject to special
rules for affiliates, for resale in the public market, subject to applicable
lock-up arrangements. See "Management--Stock Incentive Plans".
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares of Common Stock for future
sale would have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock in the public market
following the offering, or the perception that such sales could occur, could
have an adverse effect on prevailing market prices for the Common Stock. See
"Shares Eligible for Future Sale" and "Underwriting".
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes", "anticipates",
"intends", "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of Saks Holdings, Saks
or the retail industry to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions, both nationally and in those areas in which Saks
operates; demographic changes; prospects for the retail industry; competition;
changes in business strategy or development plans; the loss of key personnel;
the availability of capital to fund the expansion of Saks' business; and other
factors referenced in this Prospectus, including, without limitation, under the
captions "Prospectus Summary", "Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business". Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. Saks Holdings disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
USE OF PROCEEDS
The net proceeds to Saks Holdings from the sale of the Notes offered hereby
(after deducting the underwriting discount and estimated expenses of the
offering) are estimated to be $232.4 million. Saks Holdings intends to loan
substantially all of the net proceeds to Saks to enable Saks to (i) prepay $138
million aggregate principal amount of term loans outstanding under Saks' credit
facility, (ii) repay $35 million aggregate principal amount outstanding under
Saks' revolving credit facility (which amount was used by Saks for the
Subordinated Debt Prepayment) and (iii) use the
17
<PAGE>
balance for working capital and general corporate purposes. Information
contained in this Prospectus that gives effect to the offering of the Notes and
the application of the net proceeds therefrom also gives effect to the
Subordinated Debt Prepayment. Although the application of the net proceeds will
result in a permanent reduction of the principal amount of the term loans, it
will not reduce amounts available to Saks under the revolving credit facility.
The revolving credit facility permits Saks to borrow funds for working capital
and capital expenditure purposes, including store acquisitions. Saks from time
to time may consider store acquisitions as part of its business strategy. Saks
currently does not have any understandings or agreements with respect to
potential acquisitions other than those discussed under the caption
"Business--Business Strategy--Store Expansion--Acquisitions". For information on
interest rates and terms of the credit facility and Saks' existing subordinated
debt, see "Description of Certain Indebtedness--Credit Agreement", "Description
of Certain Indebtedness--Subordinated Debt" and Note 5 to Consolidated Financial
Statements.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been traded on the New York Stock Exchange under the
symbol "SKS" following Saks Holdings' initial public offering on May 21, 1996.
The following table sets forth, for the periods indicated, the range of high and
low sales prices for the Common Stock as reported on the New York Stock
Exchange.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ------------------------------------------------------------- ---- ----
<S> <C> <C>
35 25
Second quarter (from May 22, 1996)........................... 7/8 1/2
36 32
Third quarter (through September 19, 1996)................... 3/8 1/8
</TABLE>
On September 19, 1996, the last reported sale price of the Common Stock was
$33 1/4 per share. At September 4, 1996, Saks Holdings had approximately 360
stockholders of record.
Saks Holdings currently does not intend to pay any cash dividends on the
Common Stock.
Saks Holdings is a holding company with no business operations of its own.
Saks Holdings therefore is dependent upon payments, dividends and distributions
from Saks for funds to pay dividends to stockholders of Saks Holdings. Saks
currently intends to retain any earnings for support of its working capital,
repayment of indebtedness, capital expenditures and other general corporate
purposes. Saks has no current intention of paying dividends or making other
distributions to Saks Holdings in excess of amounts necessary to pay Saks
Holdings' expenses up to $4 million per fiscal year, obligations under the Notes
and taxes. Saks' credit facility and existing subordinated debt contain
restrictions on Saks' ability to pay dividends or make payments or other
distributions to Saks Holdings. See "Risk Factors--No Dividends", "Description
of Certain Indebtedness--Credit Agreement" and "Description of Certain
Indebtedness--Subordinated Debt".
18
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of Saks
Holdings at August 3, 1996 and as adjusted as of such date to give effect to the
issuance and sale of the Notes offered hereby (after deducting the underwriting
discount and estimated expenses of the offering) and the application of the net
proceeds therefrom (including the Subordinated Debt Prepayment). This table
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto, the unaudited Condensed Consolidated Financial Statements and the
Notes thereto and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AUGUST 3, 1996
-------------------------
AS
ACTUAL ADJUSTED(1)
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current maturities)................... $ 17,317 $ 4,749
---------- -----------
Long-term debt
Senior credit facility (2)..................................... $ 150,950 $ 0
Subordinated debt (2).......................................... 50,000 15,000
REMIC certificates (2)......................................... 330,841 330,841
Obligations under capital leases (3)........................... 102,995 102,995
5 1/2% Convertible Subordinated Notes due 2006................. -- 240,000
---------- -----------
Total long-term debt......................................... $ 634,786 $ 688,836
---------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share; 10 million shares
authorized, no shares issued and outstanding..................... -- --
Common Stock, par value $.01 per share; 150 million shares
authorized, 63,049,315 issued and 63,034,489 shares
outstanding (4).................................................. 631 631
Additional paid-in capital (4)................................. 1,340,017 1,340,017
Accumulated deficit (5)........................................ (868,064) (870,859 )
Treasury stock, at cost (4).................................... (297) (297 )
---------- -----------
Total stockholders' equity................................... 472,287 469,492
---------- -----------
Total capitalization......................................... $1,124,390 $1,163,077
---------- -----------
---------- -----------
</TABLE>
- ------------
(1) As of September 19, 1996, the amount of indebtedness to be repaid with the
estimated net proceeds of the offering would be approximately $232.4
million.
(2) See Note 5 to Consolidated Financial Statements.
(3) See Note 10 to Consolidated Financial Statements.
(4) See Notes 6 and 15 to Consolidated Financial Statements.
(5) Reflects the write-off of $2.8 million of deferred financing costs resulting
from the repayment of the term loans under the credit facility with the net
proceeds of the offering.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
five fiscal years in the period ended February 3, 1996 have been derived from
the audited Consolidated Financial Statements. The selected historical financial
data presented below for the six months ended July 29, 1995 and August 3, 1996
were derived from Saks Holdings' unaudited Condensed Consolidated Financial
Statements which contain all accruals and adjustments (consisting only of normal
recurring adjustments) which management considers necessary for a fair
presentation of the financial information for such periods. The results of
operations for the six months ended August 3, 1996 are not necessarily
indicative of the operating results that may be expected for the full fiscal
year. The financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements and Notes thereto, the unaudited Condensed
Consolidated Financial Statements and Notes thereto and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
----------------------
FISCAL FISCAL FISCAL FISCAL FISCAL JULY 29, AUGUST 3,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- ----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $1,269.4 $1,343.5 $1,395.5 $1,418.2 $1,686.8 $ 737.8 $ 868.2
Cost of sales, including buying and
occupancy................................. (922.7) (933.1) (975.4) (979.7) (1,168.7) (525.4) (621.1)
-------- -------- -------- -------- -------- -------- ----------
Gross margin............................. 346.7 410.4 420.1 438.5 518.1 212.4 247.1
Selling, general and administrative
expenses.................................. (387.5) (396.0) (394.8) (370.4) (438.6) (209.8) (229.5)
Management fees (1)....................... (2.0) (2.0) (2.0) (2.0) (7.0) (1.0) (1.0)
Impairment and special charges (2)........ -- -- (177.7) -- (36.4) (8.9) --
-------- -------- -------- -------- -------- -------- ----------
Operating income (loss)................... (42.8) 12.4 (154.4) 66.1 36.1 (7.3) 16.6
Interest expense, net..................... (126.2) (89.5) (73.8) (76.2) (94.2) (43.4) (42.2)
-------- -------- -------- -------- -------- -------- ----------
Income (loss) before income taxes and
extraordinary charge...................... (169.0) (77.1) (228.2) (10.1) (58.1) (50.7) (25.6)
Income taxes (3).......................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ----------
Income (loss) before extraordinary
charge.................................... (169.0) (77.1) (228.2) (10.1) (58.1) (50.7) (25.6)
Extraordinary charge (4).................. (11.5) (8.4) (27.6) (.5) (6.0) (5.7) (3.3)
-------- -------- -------- -------- -------- -------- ----------
Net income (loss)........................ $ (180.5) $ (85.5) $ (255.8) $ (10.6) $ (64.1) $ (56.4) $ (28.9)
-------- -------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- -------- ----------
Net income (loss) per share before
extraordinary charge................... $ (5.63) $ (1.93) $ (5.07) $ (.22) $ (1.29) $ (1.13) $ (.49)
-------- -------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- -------- ----------
Net income (loss) per share............... $ (6.02) $ (2.14) $ (5.68) $ (.24) $ (1.43) $ (1.25) $ (.55)
-------- -------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- -------- ----------
Weighted average number of shares
outstanding (000s)....................... 30,000 40,015 45,030 45,010 44,955 44,955 52,311
-------- -------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 30, JANUARY 29, JANUARY 28 FEBRUARY 3, AUGUST 3,
1992 1993 1994 1995 1996 1996
----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
BALANCE SHEET DATA:
Inventories....................... $ 198.6 $ 236.1 $ 253.2 $ 271.9 $ 339.7 $ 389.6
Total assets...................... 2,541.7 1,471.0 1,305.9 1,289.2 1,366.2 1,421.6
Total debt (5).................... 1,146.0 861.7 891.5 874.4 975.9 652.1
Stockholders' equity.............. 197.1 411.4 159.1 147.2 83.2 472.3
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
---------------------
FISCAL FISCAL FISCAL FISCAL FISCAL JULY 29, AUGUST 3,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ -------- ---------
(DOLLARS IN MILLIONS, EXCEPT SALES PER
SQUARE FOOT DATA)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Change in comparable sales (6)................. (1.9%) 3.4% 1.7% 5.6% 10.6% 10.7% 12.4%
Retail sales per average square foot (7):
Full-line and resort.......................... $ 251 $ 258 $ 264 $ 288 $ 311 $ 143 $ 156
Off 5th....................................... $ 411 $ 452 $ 440 $ 362 $ 352 $ 171 $ 154
Gross margin rate.............................. 27.3% 30.5% 30.1% 30.9% 30.7% 28.8% 28.5%
Selling, general and administrative expense
rate........................................... 30.5% 29.5% 28.3% 26.1% 26.0% 28.4% 26.4%
EBIT (8)....................................... $(40.8) $ 14.4 $ 25.3 $ 68.1 $ 79.5 $ 2.6 $ 17.6
Depreciation and amortization.................. $ 87.7 $ 89.0 $ 86.8 $ 68.0 $ 66.8 $ 32.7 $ 32.5
Capital expenditures........................... $ 50.4 $ 67.5 $ 49.8 $ 71.7 $ 87.0 $ 35.6 $ 57.0
Deficiency of earnings to fixed charges (9).... $169.7 $ 76.8 $227.5 $ 10.5 $ 58.6 $ 51.4 $ 25.8
Pro forma ratio of earnings to fixed charges
(10)........................................... 1.32
Pro forma deficiency of earnings to fixed
charges (10)................................... $ 13.0 $ 1.0
Number of stores:
Full-line and resort
--beginning of period....................... 47 48 49 49 45 45 45
--opened.................................... 1 1 -- 1 2 2 0
--closed.................................... -- -- -- (5) (2) (1) 0
------ ------ ------ ------ ------ -------- ---------
--end of period............................. 48 49 49 45 45 46 45
------ ------ ------ ------ ------ -------- ---------
------ ------ ------ ------ ------ -------- ---------
Off 5th
--beginning of period....................... 1 1 3 4 8 8 19
--opened.................................... -- 2 1 4 11 1 3
------ ------ ------ ------ ------ -------- ---------
--end of period............................. 1 3 4 8 19 9 22
------ ------ ------ ------ ------ -------- ---------
------ ------ ------ ------ ------ -------- ---------
End of period gross square feet (000s):
Full-line and resort.......................... 4,888 4,918 4,791 4,549 4,806 4,686 4,806
Off 5th....................................... 26 83 114 227 456 239 504
CASH FLOW DATA (11):
Net cash provided by (used in) operating
activities..................................... $ 69.4 $(27.5) $ 15.6 $ 53.8 $ (6.1) $(18.5) $ (43.8)
Net cash provided by (used in) investing
activities..................................... $ 11.2 $ 42.6 $(30.3) $ (1.7) $(57.1) $(32.1) $ (48.3)
Net cash provided by (used in) financing
activities..................................... $(78.2) $(13.2) $ 15.1 $(47.9) $ 60.2 $ 48.7 $ 88.2
</TABLE>
- ------------
(1) Management fees represent amounts paid or payable to III. Such fees relate
to advisory services on matters that include review of operating
performance, treasury activities and other strategic planning and real
estate alternatives. Management fees to III were discontinued in July 1996.
(2) Impairment and special charges represent costs associated with (i)
adjustments to long-lived assets, an early retirement program and store
closings and space reductions in fiscal 1993 and (ii) distribution center
exit costs, integration of former I. Magnin locations and write-off of
capitalized EDP software in fiscal 1995. See Note 3 to Consolidated
Financial Statements.
(3) At February 3, 1996 Saks had a net operating loss carryforward of $728
million which may be used to reduce taxes payable on future taxable income.
The carryforward begins to expire in 2005 if not used in full. See Note 9
to Consolidated Financial Statements.
(4) The extraordinary charge in each period relates to early extinguishment of
debt. See Note 5 to Consolidated Financial Statements and Note 2 to
unaudited Condensed Consolidated Financial Statements.
(5) Includes obligations under capital leases. See Note 10 to Consolidated
Financial Statements.
(6) Comparable sales represents (i) net sales of stores (excluding major store
expansions) open in both reporting periods for the portion of such period
open and (ii) Folio net sales. In fiscal 1995 and fiscal 1996, comparable
sales excludes the impact of the 53rd week in fiscal 1995.
(7) Sales per average square foot in each period represents net sales for such
period divided by the average of total gross square feet of store
buildings. The number for the year ended January 28, 1995 excludes net
sales and square feet for stores identified in the store closing and
downsizing program.
(8) EBIT represents earnings before interest expense, net, income taxes,
management fees, impairment and special charges and extraordinary charges.
Saks Holdings has included information concerning EBIT because management
believes that it is a widely used comparative measure for Saks Holdings'
peer group and that, net of depreciation and amortization, it is useful
information regarding a company's ability to service and incur debt. EBIT
should not be considered in isolation or as a substitute for net income,
cash flows, operating income or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity.
(9) For purposes of this computation, earnings consist of income (loss) from
operations before income taxes and extraordinary charge plus fixed charges
excluding capitalized interest and related amortization. Fixed charges
consist of interest expense, amortization of deferred financing costs and
the interest component of rent expense.
(10) Adjusted to give effect to (i) the sale of $240 million aggregate principal
amount of Notes and the sale of 18,062,500 shares of Common Stock in Saks
Holdings' initial public offering in May 1996 and the application of the
net proceeds therefrom to repay $629.4 million of debt (including the
Subordinated Debt Prepayment) and (ii) the write-off of $6.1 million of
deferred financing costs resulting from repayment of debt, as if each
transaction had taken place at the beginning of the period indicated.
(11) For more information regarding cash flow data, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources" and the Consolidated Financial Statements and the
unaudited Condensed Consolidated Financial Statements included elsewhere in
this Prospectus.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act which involve risks and uncertainties. Saks
Holdings' actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed under the caption "Risk
Factors".
GENERAL
OVERVIEW
After the 1990 Acquisition, Investcorp recruited a new executive management
team to correct recognized weaknesses and develop a new business strategy
designed to capitalize on the strength of the Saks franchise. New management
began to implement several key initiatives, including: (i) rebuilding Saks'
senior corporate, merchandising and store management teams; (ii) creating a more
efficient cost structure; (iii) upgrading and differentiating merchandise
assortments; (iv) improving the quality of the store portfolio through
expansions and renovations and by closing underperforming stores; (v) investing
in incremental growth formats including the Off 5th outlet store and Folio
catalog businesses; and (vi) developing management information systems to
support these activities. By early 1994, management had implemented these
important initiatives and developed and began implementing comprehensive,
integrated merchandising, service and marketing strategies to position its core
retail business for future growth and extend the Saks franchise.
These initiatives and strategies resulted in improvements in Saks' financial
performance. From fiscal 1991 to fiscal 1995, Saks' net sales increased by
$417.4 million, or 32.9%, to $1,686.8 million from $1,269.4 million. During this
period gross margin increased from 27.3% to 30.7%, and selling, general and
administrative expenses as a percentage of net sales decreased from 30.5% to
26.0%. In addition, from fiscal 1991 to fiscal 1995, Saks' interest expense,
net, decreased from $126.2 million to $94.2 million and Saks' net loss decreased
from $180.5 million to $64.1 million. Operating income increased by $78.9
million from a loss of $42.8 million in fiscal 1991 to income of $36.1 million
in fiscal 1995. Operating income is net of management fees paid to III in both
fiscal 1991 and fiscal 1995 and in fiscal 1995 is net of special charges of
$36.4 million. Operating income excluding these fees and the special charges
increased by $120.3 million during this period to $79.5 million. Management fees
to III were discontinued in July 1996. These results were achieved in a retail
environment generally characterized by weak consumer spending and intensifying
competition. Management believes that Saks' current momentum, as demonstrated in
its recent results of operations and comparable sales performance, is directly
attributable to the implementation of these merchandising, service and marketing
strategies during fiscal 1994, fiscal 1995 and fiscal 1996. Saks' comparable
sales performance is set forth below.
CHANGE IN COMPARABLE SALES*
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
First quarter................................................. 4.1% 10.2% 13.3%
Second quarter................................................ 5.3 11.3 11.3
Third quarter................................................. 5.9 9.9 --
Fourth quarter................................................ 6.6 11.0 --
</TABLE>
- ------------
* Represents the percentage increase in (i) net sales of stores (excluding major
store expansions) open in both reporting periods for the portion of such
periods open, and (ii) Folio net sales. In fiscal 1995 and fiscal 1996,
comparable sales excludes the impact of the 53rd week in fiscal 1995.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial data
expressed as a percent of total net sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
FISCAL FISCAL FISCAL JULY 29, AUGUST 3,
1993(1) 1994(1) 1995(1) 1995 1996
------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including
buying and occupancy........ (69.9) (69.1) (69.3) (71.2) (71.5)
------- ------- ------- -------- ---------
Gross margin.............. 30.1 30.9 30.7 28.8 28.5
Selling, general and
administrative expenses....... (28.3) (26.1) (26.0) (28.4) (26.4)
Management fees............... (0.1) (0.1) (0.4) (0.1) (0.1)
Impairment and special
charges....................... (12.7) (0.0) (2.2) (1.2) --
------- ------- ------- -------- ---------
Operating income (loss)... (11.0) 4.7 2.1 (0.9) 2.0
Interest expense, net......... (5.3) (5.4) (5.6) (5.9) (4.9)
------- ------- ------- -------- ---------
Income (loss) from
operations before income
taxes and extraordinary
charge........................ (16.3) (0.7) (3.5) (6.8) (2.9)
Income taxes.................. 0.0 0.0 0.0 -- --
Extraordinary charge.......... (2.0) 0.0 (0.3) (0.8) (0.4)
------- ------- ------- -------- ---------
Net income (loss)......... (18.3)% (0.7)% (3.8)% (7.6)% (3.3)%
------- ------- ------- -------- ---------
------- ------- ------- -------- ---------
</TABLE>
- ------------
(1) Fiscal 1995 consisted of 53 weeks. Fiscal 1993 and fiscal 1994 each
consisted of 52 weeks.
SIX MONTHS ENDED AUGUST 3, 1996 COMPARED TO SIX MONTHS ENDED JULY 29, 1995
NET SALES. Net sales for the six months ended August 3, 1996 were $868.2
million, an increase of $130.4 million, or 17.7%, over net sales of $737.8
million for the six months ended July 29, 1995. Comparable sales increased 12.9%
from the fiscal 1995 period. Because fiscal 1995 included 53 weeks, the six
month periods in fiscal 1995 and 1996 are not comparable. Adjusting for the week
difference in the calendar, the increases in net sales and comparable sales were
16.9% and 12.4%, respectively. Full-line and resort store net sales increased
$86.6 million, or 13.0%, from $665.5 million for the six months ended July 29,
1995 to $752.1 million for the six months ended August 3, 1996. Comparable sales
for full-line and resort stores increased 12.0% from the comparable calendar
period in fiscal 1995. Off 5th store net sales for the six months ended August
3, 1996 increased $37.4 million, or 92.9%, from $40.2 million for the six months
ended July 29, 1995 to $77.6 million, primarily as a result of the opening of 14
new stores in the fall of 1995 and the spring of 1996. Comparable sales for Off
5th stores increased 12.3% from the comparable calendar period in fiscal 1995.
Folio catalog net sales for the six months ended August 3, 1996 increased by
$6.4 million, or 20.0%, from $32.1 million for the six months ended July 29,
1995 to $38.5 million.
COST OF SALES. Cost of sales includes the cost of merchandise and buying and
occupancy costs. Cost of sales increased $95.8 million, or 18.2%, during the six
months ended August 3, 1996 compared to the six months ended July 29, 1995. As a
percentage of net sales, cost of sales, including buying and occupancy costs,
was 71.5% for the six months ended August 3, 1996 compared to 71.2% for the six
months ended July 29, 1995. The increase in the cost of sales rate for the six
months ended August 3, 1996 was primarily due to the increased penetration of
lower margin Off 5th sales and an increase in the Folio cost of sales rate.
23
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $19.7 million, or 9.4%, to $230.5 million
for the six months ended August 3, 1996 from the comparable period in fiscal
1995, primarily due to higher sales volume related costs. As a percentage of net
sales, selling, general and administrative expenses were 26.4% for the six
months ended August 3, 1996 compared to 28.4% for the six months ended July 29,
1995. The improvement in the selling, general and administrative expense rate
resulted primarily from expense leverage associated with the sales growth.
MANAGEMENT FEES. Saks paid management fees of $1 million to III in the first
six months of both fiscal 1996 and fiscal 1995. Such fees relate to advisory
services on matters that include the review of operating performance, treasury
activities and other strategic planning and real estate alternatives. Management
fees to III were discontinued in July 1996.
SPECIAL CHARGES. Special charges of $8.9 million ($.20 per share) were
recorded for the six months ended July 29, 1995. These charges represent costs
associated with the integration of four former I. Magnin store locations.
OPERATING INCOME. Operating income was $16.6 million for the six months
ended August 3, 1996, an increase of $23.9 million from the six months ended
July 29, 1995. Excluding the special charges incurred in the six months ended
July 29, 1995, operating income increased by $15 million.
INTEREST EXPENSE. Interest expense decreased by 2.8% to $42.2 million for
the six months ended August 3, 1996 compared to the six months ended July 29,
1995, primarily due to reduced debt levels following Saks Holdings' initial
public offering.
INCOME TAXES. Saks Holdings anticipates that the income tax provision for
the full year will not be material, therefore no tax benefit or provision has
been reflected in the six month period ended August 3, 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES. Net sales for fiscal 1995 increased by $268.6 million, or 18.9%,
to $1,686.8 million from $1,418.2 million in fiscal 1994. Comparable sales
increased by 10.6%. Full-line and resort store net sales increased $193.7
million, or 14.9%, from $1,302.3 million to $1,496.0 million with significant
increases resulting from Saks' west coast intensification through the
acquisition of four former I. Magnin stores and its strategic focus on its top
customer segments, target merchandise categories and high-potential stores. All
of Saks' geographic regions experienced increased net sales. The net sales of
Off 5th outlet stores increased by $50.8 million, or 88.8%, from $57.2 million
to $108.0 million primarily as a result of the addition of 11 new stores. Folio
catalog net sales increased by $24.1 million, or 41.1%, from $58.7 million to
$82.8 million reflecting increased mailings, new catalog titles and an increase
in the average order in fiscal 1995 compared to fiscal 1994.
COST OF SALES. Cost of sales includes the cost of merchandise sold and
buying and occupancy costs. Cost of sales increased from $979.7 million, or
69.1% of net sales, in fiscal 1994 to $1,168.7 million, or 69.3% of net sales in
fiscal 1995. This increase as a percentage of net sales resulted from the
increased penetration of lower margin Off 5th sales, which increased the cost of
sales rate by .7%, partially offset by slightly higher retail and Folio gross
margins, which decreased the cost of sales rate by .2%, and improved leverage of
buying and occupancy costs, which decreased the cost of sales rate by .3%. The
change in mix of merchandise assortments featured in full-line and resort stores
did not have a significant impact on cost of sales. The inclusion of leased
department sales in net sales and the portion of such sales remitted to the
leased department operator in cost of sales increased the cost of sales rate by
.6% and .7% in fiscal 1994 and fiscal 1995, respectively.
24
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $370.4 million, or 26.1% of net sales, in
fiscal 1994 to $438.6 million, or 26.0% of net sales, in fiscal 1995. This
decrease as a percentage of net sales was achieved as a result of lower
depreciation and amortization and improved store expense leverage, which
decreased the selling, general and administrative expense rate by 1.7%, offset
in part by slightly lower finance charge income net of securitization costs and
higher bad debt charges, which increased the selling, general and administrative
expense rate by .6%, as well as investments in Saks' central organization
(management information systems, merchandising, training and communications and
planning) to better position Saks for future growth, which increased the
selling, general and administrative expense rate by 1.0%. Selling, general and
administrative expenses are net of gross finance charge income of $56.6 million
and $69.1 million in fiscal 1994 and fiscal 1995, respectively. Finance charge
income net of accounts receivable securitization costs was $34.4 million and
$37.1 million in fiscal 1994 and fiscal 1995, respectively.
MANAGEMENT FEES. Management fees paid to III, an affiliate of Investcorp,
increased from $2 million in fiscal 1994 to $7 million in fiscal 1995. This
increase reflected the payment of fees for additional advisory services relating
to strategic planning and real estate alternatives rendered in fiscal 1995.
Management fees to III were discontinued in July 1996.
IMPAIRMENT AND SPECIAL CHARGES. Impairment and special charges of $36.4
million were recorded in fiscal 1995. These charges consist of $19.0 million
relating to exit costs associated with the Yonkers distribution facility
(write-down to net realizable value, severance and occupancy costs following
exit), $8.9 million of costs to integrate four former I. Magnin store locations
and $8.5 million to write-down capitalized EDP software which became obsolete.
The anticipated costs of relocating distribution activities to the Aberdeen
distribution facility have not been accrued and are not expected to materially
impact future results. Additionally, Saks will receive incentive payments from
various government agencies which are expected to approximate these costs.
OPERATING INCOME. Operating income decreased to $36.1 million in fiscal 1995
from $66.1 million in fiscal 1994. This decrease was a result of the $5 million
increase in management fees and the $36.4 million of special charges discussed
above. Excluding these items, operating income increased to $77.5 million in
fiscal 1995, an increase of $11.4 million or 17.3%.
INTEREST EXPENSE. Interest expense increased by $18.0 million in fiscal 1995
to $94.2 million from $76.2 million in fiscal 1994. The increase resulted
primarily from a general increase in short-term interest rates and increased
costs associated with the refinancing in May 1995 of Euronotes with REMIC
certificates, as well as increased borrowing levels to support Saks' working
capital growth and capital expenditures.
FISCAL 1994 COMPARED TO FISCAL 1993
NET SALES. Net sales for fiscal 1994 were $1,418.2 million, an increase of
$22.6 million, or 1.6%, from net sales of $1,395.5 million in fiscal 1993.
Comparable sales increased 5.6%. Full-line and resort store net sales increased
by $2.7 million. This increase resulted from significant net sales gains at the
New York Fifth Avenue store and recently remodeled stores offset by the closure
of five stores and by weak net sales in the Florida markets. The net sales of
Off 5th stores increased by $14.3 million, or 33.3% from $42.9 million to $57.2
million, primarily as a result of opening four stores. Folio catalog net sales
increased by $6.7 million, or 13.0%, from $51.6 million to $58.3 million.
COST OF SALES. Cost of sales increased from $975.4 million, or 69.9% of net
sales, in fiscal 1993 to $979.7 million, or 69.1% of net sales, in fiscal 1994.
This decrease as a percentage of net sales was primarily due to lower net
markdowns, which decreased the cost of sales rate by .5%, and improved leverage
of buying and occupancy costs, which decreased the cost of sales rate by
25
<PAGE>
.5%, and occurred despite an increase in penetration of lower margin Off 5th
sales, which increased the cost of sales rate by .2%. The inclusion of leased
department sales in net sales and the portion of such sales remitted to the
leased department operator in cost of sales increased the cost of sales rate by
.6% and .6% in fiscal 1993 and fiscal 1994, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $394.8 million, or 28.3% of net sales, in
fiscal 1993 to $370.4 million, or 26.1% of net sales, in fiscal 1994. The
decrease as a percentage of net sales is primarily due to lower depreciation and
amortization in fiscal 1994 resulting from the impairment and special charges
recorded in fiscal 1993. Additionally, selling, general and administrative
expenses in fiscal 1994 versus fiscal 1993 were reduced by higher finance charge
income net of accounts receivable securitization costs and bad debt charges,
which decreased the selling, general and administrative expense rate by .5%. The
higher finance charge income resulted from higher receivable balances associated
with the change in payment terms on Saks' proprietary credit card program.
Selling, general and administrative expenses are net of gross finance charge
income of $45.8 million and $56.6 million in fiscal 1993 and fiscal 1994,
respectively. Finance charge income net of accounts receivable securitization
costs was $30.4 million and $34.4 million in fiscal 1993 and fiscal 1994,
respectively.
MANAGEMENT FEES. Saks paid management fees of $2 million to III in both
fiscal 1993 and fiscal 1994. Such fees relate to advisory services on matters
that include review of operating performance, treasury activities and other
strategic planning and real estate alternatives.
IMPAIRMENT AND SPECIAL CHARGES. Impairment and special charges of $177.7
million were recorded in fiscal 1993. These charges consist of $118.0 million to
reduce the carrying value of property and equipment, goodwill and intangible
assets, $40.2 million relating to store closings and downsizings (write-down of
property and equipment to net realizable value, lease related costs, inventory
liquidations and severance) and $19.5 million related to an early retirement
program.
OPERATING INCOME. Operating income increased to $66.1 million in fiscal 1994
from an operating loss of $154.4 million in fiscal 1993. This increase was
partially a result of the $177.7 million impairment and special charge recorded
in fiscal 1993. Excluding this charge, fiscal 1994 operating income increased by
$42.8 million, or 183.7%, from $23.3 million in fiscal 1993.
INTEREST EXPENSE. Interest expense for fiscal 1994 increased by $2.3 million
to $76.2 million from $73.8 million in fiscal 1993 due primarily to higher
interest rates on Saks' floating rate debt, which increase was partially offset
by the refinancing and repayment of certain high cost debt.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Saks' business is highly seasonal, with a substantial percentage of net
sales and operating income occurring in the fourth quarter, which includes the
holiday selling season. Saks incurred a net loss in the first three quarters of
both fiscal 1994 and fiscal 1995 and in the six months ended August 3, 1996.
Seasonality also affects Saks' working capital requirements and cash flow as
26
<PAGE>
inventories peak in October and November in anticipation of the holiday selling
season. The following table illustrates this seasonality:
<TABLE>
<CAPTION>
PERCENTAGE NET INCOME
NET SALES OF FULL YEAR (LOSS) (1)
------------- ------------ -------------
<S> <C> <C> <C>
(IN MILLIONS) (IN MILLIONS)
FISCAL 1995
First quarter..................................... $ 384.6 23% $ (16.6)
Second quarter.................................... 353.2 21 (39.8)
Third quarter..................................... 408.0 24 (35.3)
Fourth quarter.................................... 541.0 32 27.6
FISCAL 1994
First quarter..................................... $ 333.6 24% $ (9.3)
Second quarter.................................... 298.5 21 (26.3)
Third quarter..................................... 343.4 24 (5.4)
Fourth quarter.................................... 442.7 31 30.4
</TABLE>
- ------------
(1) Saks recorded special charges of $8.9 million and $27.5 million in the first
and third quarters, respectively, of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Saks' principal sources of liquidity are cash on hand, cash from operations,
borrowings under its credit facility and sale of its accounts receivable through
its securitization agreements.
In May 1996, Saks Holdings sold 18,062,500 shares of Common Stock pursuant
to an initial public offering. The net proceeds of $417.8 million from the
initial public offering were used primarily to prepay term loan borrowings under
Saks' credit facility and to repay outstanding balances on the revolving loan
portion of the credit facility.
Saks' net cash provided by (used in) operating activities was $15.6 million,
$53.8 million and $(6.1) million in fiscal 1993, fiscal 1994 and fiscal 1995,
respectively. The increase in cash flow from operating activities in fiscal 1994
is primarily due to increased operating income. The decrease in cash flow from
operating activities in fiscal 1995 is primarily due to Saks' investment in
additional inventory to drive its merchandise and west coast intensification
programs and reduced net income. Net cash used in operating activities was $43.8
million during the six months ended August 3, 1996 compared to $18.5 million in
the six months ended July 29, 1995. This increase was primarily attributable to
increased use of working capital in the 1996 period. The primary items affecting
working capital in the 1996 period were a decrease in accrued liabilities of
$25.9 million due to the timing of payments and the timing of redemptions
against the liability established for customer affinity programs and a net
increase in merchandise inventories of $22.3 million due to a seasonal increase
and an increase to support sales growth.
Saks' net cash used in investing activities was $30.3 million, $1.7 million
and $57.1 million in fiscal 1993, fiscal 1994 and fiscal 1995, respectively. The
decrease in fiscal 1994 is primarily due to the sale and leaseback of one of
Saks' store locations and the sale of subordinated certificates under Saks
accounts receivable securitization program. The increase in fiscal 1995 results
primarily from increased capital expenditures, net of construction allowances,
to fund the remodeling of former I. Magnin stores and the opening of 11 Off 5th
stores. In fiscal 1995, Saks engaged in fewer asset sales. Net cash used in
investing activities was $48.3 million during the six months ended August 3,
1996 compared to $32.1 million in the six months ended July 29, 1995. Capital
expenditures were $47.3 million, net of construction allowances, during the six
months ended
27
<PAGE>
August 3, 1996 and consisted principally of construction of new stores. Capital
expenditures, net of construction allowances in the six months ended July 29,
1995 were $35.4 million. Saks plans to open five new full-line and resort stores
and 13 Off 5th stores in the fall of 1996.
Saks' net cash (used in) provided by financing activities was $15.1 million,
$(47.9) million and $60.2 million in fiscal 1993, fiscal 1994 and fiscal 1995,
respectively. The decrease in fiscal 1994 resulted from repayments of debt. The
increase in fiscal 1995 is primarily due to increased term loan borrowings to
support the acquisition and remodeling of four former I. Magnin stores and
working capital growth. In addition, in fiscal 1995, Saks incurred greater
financing costs in connection with its increased borrowings under the credit
facility and the refinancing of its real estate borrowings.
Net cash provided from financings during the six months ended August 3, 1996
was $88.2 million compared to $48.7 million in the six months ended July 29,
1995. The 1996 amount reflects the proceeds from Saks Holdings' May 1996 initial
public offering, net of debt repayments. The 1995 amount reflects increased
borrowings used to acquire four former I. Magnin locations, net of financing
costs related to the refinancing of real estate borrowings.
FINANCING FACILITIES
Saks has a credit facility with a syndicate of banks and financial
institutions. See "Description of Certain Indebtedness--Credit Agreement". The
facility consists of a $322 million two-tiered revolving loan and a two-tiered
term loan. At August 3, 1996, there was approximately $25 million outstanding
under the Tranche A term loan and approximately $113 million outstanding under
the Tranche B term loan. Tranche A has scheduled repayments which began in 1993
and end in 1998 and Tranche B has scheduled repayments which begin in 1997 and
end in the year 2000. Saks intends to prepay the outstanding balance of the term
loans with the proceeds from the offering. At August 3, 1996, borrowing
availability under the revolving loan was $291 million. The credit facility
contains restrictive covenants which include, among others, limitations on
capital expenditures, limitations on indebtedness, and specified minimum levels
of consolidated net worth and minimum consolidated operating profit levels as
well as maintaining specified levels of interest coverage, all as defined in the
credit facility, and which restrict payment of dividends on capital stock.
Saks may borrow up to $20 million in aggregate principal amount of swingline
loans which bear interest at the Alternate Base Rate (as defined in the credit
facility) plus an applicable margin ranging from 0.0% to 1.0% depending on the
Interest Coverage Ratio (as defined in the credit facility). All other loans
under the credit facility bear interest at a rate equal to, at Saks' option, (a)
the Alternate Base Rate plus a percentage ranging from 0.0% to 1.5% depending on
the Interest Coverage Ratio or (b) the Eurodollar Rate (as defined in the credit
facility) plus a percentage ranging from 1.0% to 2.5% depending on the Interest
Coverage Ratio. Eurodollar Rate loans can have maturities of one-, two-, three-
or six-month periods. Interest is payable on these loans on the last day of the
applicable interest period, except for six-month period loans, which provide for
interest to be payable quarterly. Interest on Alternate Base Rate loans is
payable quarterly.
Saks and its lenders currently are reviewing Saks' revolving loan facility
and intend to modify the terms of the facility to reflect Saks' improved
creditworthiness.
RECEIVABLES SECURITIZATION
Saks also has an accounts receivable securitization program. The program
includes a $225 million floating rate Euronote series, a $413 million floating
rate medium term note series and a $121 million variable principal amount
series. The floating rate Euronote series matures in November 1996. The medium
term note series and the variable principal amount series mature in
28
<PAGE>
April 1999. See "Description of Certain Indebtedness" for a further description
of Saks' indebtedness.
DERIVATIVES ACTIVITY
Saks utilizes interest rate caps to manage its interest rate exposure. See
Note 11 to Consolidated Financial Statements. Saks' policy is to use financial
derivatives only to reduce risk in conjunction with specific business
transactions. In August 1996, Saks entered into $250 million notional amount of
fixed interest rate swap agreements to reduce its exposure to changes in
prevailing market interest rates.
LOSS CARRYFORWARDS
At February 3, 1996 Saks had a net operating loss carryforward of $728
million which is available to offset taxes otherwise payable on Saks' future
taxable income. The carryforwards begin to expire, unless used, in fiscal 2005.
Although the Secondary Offering may result in an "ownership change" (as defined
in Section 382 of the Internal Revenue Code of 1986, as amended) that limits the
amount of future taxable income that Saks may offset against pre-ownership
change losses in any year, Saks expects that any such limitation would not have
a material impact on Saks' utilization of operating loss carryforwards.
CAPITAL EXPENDITURES
Excluding acquisitions, Saks plans to make capital expenditures of
approximately $150 million in fiscal 1996 and to make additional capital
expenditures of approximately $225 million in fiscal 1997 and fiscal 1998. These
expenditures include amounts relating to its store intensification, store
expansion and franchise extension strategies, as well as operations including
MIS systems. Management believes that cash generated from Saks' operations,
funds available under Saks' credit facility and funds available from lease
financing and developer contributions will be sufficient to satisfy Saks' cash
requirements in each of the periods. Management believes that cash generated
from operations will be sufficient to fund expenses and working capital
requirements for its top customer focus and store intensification strategies, as
well as store operations.
In connection with the possible acquisition and renovation of three Marshall
Field store locations in Texas, Saks intends to spend approximately $100
million. See "Business--Business Strategy--Store Expansion--Acquisitions".
A new distribution center in Aberdeen, Maryland currently is under
construction and is expected to be completed in early 1997. Saks will receive
incentive payments from various government agencies which are expected to
approximate the costs of relocating its processing activities to the new
facility. Saks will occupy the facility pursuant to a lease, with the net
present value of future rental payments equal to approximately $23 million. Saks
expects to sell its Yonkers facility after exiting it in early 1997. Saks
recorded a charge in fiscal 1995 to reduce the carrying value of the Yonkers
facility to its net realizable value. If Saks or a purchaser is successful in
obtaining rezoning for the use of the property, a gain on sale could be
realized. Management is unable to determine if rezoning will occur.
EFFECTS OF INFLATION
Management does not believe inflation had a material impact on the financial
statements for the periods presented.
29
<PAGE>
BUSINESS
In addition to the historical information contained herein, certain
statement under this caption constitute "forward-looking statements" under the
Reform Act which involve risks and uncertainties. Saks Holdings' actual results
may differ significantly from those discussed herein. Factors that might cause
such a difference include, but are not limited to, those discussed under the
captions "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Prospectus.
GENERAL
OVERVIEW
Saks Fifth Avenue is recognized worldwide as a premier fashion retailer
offering the finest quality and latest style in women's and men's apparel.
Supported by a strong commitment to personalized customer service, Saks
primarily sells better, bridge and designer apparel, shoes, accessories,
jewelry, cosmetics and fragrances for women and men, as well as gift merchandise
and children's apparel. Capitalizing on its 70-year history as a fashion
authenticator and the prominence of its landmark Fifth Avenue store in New York
City, Saks Fifth Avenue has developed one of the most recognized retailing
franchises in the world.
Saks is experiencing significant momentum in its financial performance,
reflecting the success of new business strategies developed and initially
implemented in 1994 and the significant investments in stores, inventories,
staff and systems made since 1990. Saks recorded net sales of $1.69 billion and
$868.2 million in fiscal 1995 and the six months ended August 3, 1996,
respectively, increases of 18.9% and 17.7% over fiscal 1994 and the six months
ended July 29, 1995, respectively. Comparable sales increased 10.6% and 12.4% in
fiscal 1995 and the six months ended August 3, 1996, respectively. Primarily due
to certain impairment and special charges and increased interest costs, Saks
Holdings' net loss in fiscal 1995 increased to $64.1 million from $10.6 million
in fiscal 1994. Saks Holdings' net loss decreased to $28.9 million for the six
months ended August 3, 1996 from $56.4 million for the six months ended July 29,
1995. The results for the six months ended July 29, 1995 include a special
charge of $8.9 million for the costs of integrating four former I. Magnin store
locations.
Saks' net sales are generated through three retail formats: 46 full-line and
resort stores; 23 Off 5th outlet stores; and Folio catalogs. The full-line and
resort store operations are conducted from an exceptional portfolio of mostly
owned stores in premier retail locations, including Fifth Avenue in New York
City, Wilshire Boulevard in Beverly Hills, Michigan Avenue in Chicago and Union
Square in San Francisco. Saks' rapidly growing Off 5th outlet store division
sells high quality, upscale branded fashion apparel at exceptional prices. Saks'
Folio catalogs offer fashionable women's apparel, accessories and home
furnishings and gifts. The following table provides net sales and percent of
total sales information for each of these formats.
<TABLE>
<CAPTION>
FISCAL 1993 FISCAL 1994 FISCAL 1995
------------------ ------------------ ------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Full-line and resort stores.......... $1,231.2 88% $1,288.5 91% $1,486.0 88%
Off 5th outlet stores................ 42.9 3 57.2 4 108.0 6
Folio catalog........................ 51.6 4 58.3 4 82.8 5
Closed stores........................ 69.8 5 14.2 1 10.0 1
-------- ------- -------- ------- -------- -------
Total............................ $1,395.5 100% $1,418.2 100% $1,686.8 100%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
30
<PAGE>
HISTORY
Saks Fifth Avenue was founded in 1867 and was incorporated in New York as
Saks & Company in 1902. Opened in New York City in September 1924 by Horace Saks
and Bernard Gimbel, the landmark Fifth Avenue store offered exclusive
merchandise from around the world. In 1926, Adam Gimbel, son of Bernard, became
President of Saks and set out to create a Saks Fifth Avenue network of
high-fashion retail stores throughout the United States as a division of Gimbel
Bros. Inc. By the time Adam Gimbel retired in 1969, Saks & Company owned and
operated 28 stores in 16 states. In 1973, Saks & Company was acquired by B.A.T.
through its acquisition of Gimbel Bros., Inc. In July 1990, affiliates of
Investcorp and a group of international investors acquired Saks from B.A.T.
INDUSTRY
Industry sources indicate that the market for better, bridge and designer
apparel and other luxury goods is substantial. Saks is positioned to capitalize
on the following trends affecting this market:
DEMOGRAPHICS. The female population aged 45 to 54, which includes Saks' core
customers, is expected to be the fastest growing population segment over the
next five years. The population aged 45 to 54 has the highest average household
income among all demographic groups.
LUXURY GOODS. Management believes that certain luxury goods brands have
experienced substantial sales growth in the last few years. Because bridge and
designer merchandise, generally considered luxury goods, comprises a significant
portion of Saks' merchandise assortments, Saks is positioned to benefit from any
continuation of this trend.
RETAIL ENVIRONMENT. The current retail environment is characterized by (i)
the continuing consolidation of department store and national apparel chains,
(ii) a de-emphasis by department stores on bridge and designer merchandise,
(iii) bankruptcies and restructurings of several competing providers of upscale
merchandise and (iv) the re-tenanting of many major malls. Management believes
that this environment will present significant opportunities for acquisitions
and other market share gains.
BUSINESS STRATEGY
After the 1990 Acquisition, Investcorp recruited a new executive management
team to correct recognized weaknesses and develop a new business strategy
designed to capitalize on the strength of the Saks franchise. New management
began to implement several key initiatives, including: (i) rebuilding Saks'
senior corporate, merchandising and store management teams; (ii) creating a more
efficient cost structure; (iii) upgrading and differentiating merchandise
assortments; (iv) improving the quality of the store portfolio through
expansions and renovations and by closing underperforming stores; (v) investing
in incremental growth formats including the Off 5th outlet store and Folio
catalog businesses; and (vi) developing management information systems to
support these activities. By early 1994, management had implemented these
important initiatives and developed and began implementing comprehensive,
integrated merchandising, service and marketing strategies to position its core
retail business for future growth and to extend the Saks franchise.
These initiatives and strategies resulted in improvements in Saks' financial
performance. From fiscal 1991 to fiscal 1995, Saks' net sales grew from $1.27
billion to $1.69 billion, a 32.9% increase. During this period gross margin as a
percentage of net sales increased from 27.3% to 30.7%, and selling, general and
administrative expenses as a percentage of net sales decreased from 30.5% to
26.0%. In addition, from fiscal 1991 to fiscal 1995, Saks' interest expense,
net, decreased from $126.2 million to $94.2 million and Saks' net loss decreased
from $180.5 million to
31
<PAGE>
$64.1 million. Operating income increased by $78.9 million from a loss of $42.8
million in fiscal 1991 to income of $36.1 million in fiscal 1995. Operating
income is net of management fees paid to III in both fiscal 1991 and fiscal 1995
and in fiscal 1995 is net of special charges of $36.4 million. Operating income
excluding these fees and the special charges increased by $120.3 million to
$79.5 million during this period. Management fees to III were discontinued in
July 1996. Management believes that Saks' current momentum, as reflected by its
recent results of operations and comparable sales performance relative to the
industry, is directly attributable to the implementation of its strategies
during fiscal 1994, fiscal 1995 and fiscal 1996.
Saks' comparable sales performance* is set forth below:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
First quarter..................................... 4.1% 10.2% 13.3%
Second quarter.................................... 5.3 11.3 11.3
Third quarter..................................... 5.9 9.9 --
Fourth quarter.................................... 6.6 11.0 --
</TABLE>
- ------------
* Represents the percentage increase in (i) net sales of stores (excluding major
store expansions) open in both reporting periods for the portion of such
periods open and (ii) Folio net sales. In fiscal 1995 and fiscal 1996,
comparable sales excludes the impact of the 53rd week in fiscal 1995.
Management believes that the ongoing execution and implementation of these
strategies will continue to drive performance. A summary of these strategies is
set forth below.
TOP CUSTOMER FOCUS
Based on extensive market research, Saks has identified certain top
customers who generate a significant share of Saks' sales. The large number of
customers who comprise this group change over time and are geographically
dispersed. Management believes that Saks can capture a substantially greater
share of apparel and related expenditures by these customers and has developed
and implemented customer affinity programs designed to capitalize on the
purchasing habits of top customers by increasing the frequency and productivity
of customer contact, increasing cross-selling activities and enhancing customer
loyalty. These programs include proactive customer clienteling programs, the
Saks First Program and the Fifth Avenue Club.
DIFFERENTIATED MERCHANDISE ASSORTMENTS
In 1994, Saks began to specifically target the merchandise categories that,
based on extensive research, were determined to be most important to its top
customers. Saks is developing dominant assortments in these key merchandise
categories by increasing inventory investments, upgrading the quality and
congruency of merchandise assortments and by adding important vendors and
brands. Saks' overall merchandising strategy is to offer congruent and balanced
assortments of differentiated, upscale limited-distribution merchandise. Saks
achieves differentiation through disciplined merchandise purchasing, development
of high visibility vendor relationships, dominant designer assortments and
exclusive product offerings, Saks' private label apparel collections and the
continual editing of its merchandise to reflect the forefront of fashion. In
addition, Saks customizes its merchandise assortments at the store level to take
advantage of differences in store size, local competitive offerings, fashion
tastes, seasonality and lifestyles.
STORE INTENSIFICATION
Management is improving the productivity of its store portfolio through a
comprehensive and integrated store intensification program. Saks initially
concentrated its efforts and resources on those stores that represented the
highest potential for increased sales and profit margins.
32
<PAGE>
Pursuant to this strategy, from the beginning of fiscal 1993 to the end of
fiscal 1995, Saks made significant investments in 14 high potential stores,
including $109 million in gross capital expenditures, $43 million in increased
inventory levels, $21 million in additional annual store payroll costs and $4
million in increased annual localized marketing spending. As a result, net sales
in these stores increased 29.5% from $698 million in fiscal 1992 to $904 million
in fiscal 1995. Saks is expanding its store intensification program to
additional stores in 1996 and 1997.
STORE EXPANSION
Saks continuously evaluates opportunities for profitable expansion of its
store base. Management believes that the current retail environment,
characterized by an accelerated pace of store rationalizations, downsizings and
bankruptcies, as well as the re-tenanting of major malls, offers many attractive
opportunities for Saks to continue to expand its store portfolio.
FULL-LINE STORES. Saks currently operates 40 full-line stores. Excluding
acquisitions, Saks plans to open three new full-line stores (including a store
in Orlando, Florida in 1996) and two replacement stores, and to complete nine
remodels through fiscal 1998.
RESORT STORES. Saks broadens its reach to the affluent tourist and permanent
and seasonal residents of resort markets through its resort stores. Saks
currently operates six resort stores, including a store in Charleston, South
Carolina that was opened in August 1996. Saks plans to open four new 30,000 to
50,000 gross square foot resort stores through fiscal 1998.
MAIN STREET STORES. Saks is testing a 35,000 square foot main street store
format designed for the local shopping areas of affluent suburban markets. The
first main street store opened in Greenwich, Connecticut in September 1996.
ACQUISITIONS. Management believes that the current retail environment will
continue to offer selected opportunities to increase Saks' presence in important
markets. For example, Saks intensified its presence on the west coast and in the
southwest by acquiring four former I. Magnin stores in February 1995.
Similarly, Saks intends to expand its presence in the demographically
attractive Texas market. In July 1996, Saks entered into an agreement with
Dayton Hudson Corporation and certain of its affiliates to acquire, subject to
certain conditions, three Marshall Field store locations in Texas which would
add 250,000 square feet of store space to Saks' presence in this market. Two of
these stores are intended to replace two smaller stores that Saks currently
operates in Houston and Dallas. Saks intends to spend approximately $100 million
in connection with the acquisition and renovation of these stores. There can be
no assurance that Saks will satisfy the conditions under the agreement and
acquire these store locations. In addition, Saks is exploring other markets in
Texas.
In July 1996, Saks agreed with Japanese department store operator Isetan, a
creditor of Barneys, to begin exploring the financial feasibility of
co-sponsoring a plan of reorganization for Barneys, which filed for Chapter 11
bankruptcy protection in January 1996. The preliminary terms presently being
discussed would result in Saks obtaining control of Barneys and Isetan leasing
the Barneys store locations in Chicago, Beverly Hills and on Madison Avenue in
New York to the reorganized Barneys. However, Saks has only partially completed
its financial and business assessment of Barneys and is currently without access
to confidential information concerning Barneys. Saks would only proceed with
such a plan if management concludes that Barneys represents an attractive
investment opportunity. There can be no assurance that Saks and Isetan will
reach agreement on the terms of a proposed plan of reorganization. Even if Saks
and Isetan were to agree on the terms of such a plan, they could not file a plan
at this time without the support of Barneys, which currently retains the
exclusive right to file a plan of reorganization in its bankruptcy case. Barneys
has publicly opposed the cooperation between Saks and Isetan.
33
<PAGE>
FRANCHISE EXTENSION STRATEGIES
Management believes that the Saks Fifth Avenue franchise is extendible over
multiple formats and has developed the following specific growth strategies:
OFF 5TH. Through its Off 5th division, Saks extends its customer reach by
offering high quality, upscale branded fashion apparel in an outlet store
setting at 40% to 70% off original and comparable retail prices. Off 5th
provides attractive financial returns and an economically superior form of
inventory liquidation for Saks' retail stores. Saks currently operates 23 Off
5th stores and expects to open approximately 12 additional stores in the
remainder of fiscal 1996.
FOLIO. Saks extends its reach to direct response customers through its Folio
catalogs which offer fashionable women's apparel, accessories, home furnishings
and gifts and unique selections of Saks' private label merchandise. Folio mailed
29 million catalogs in fiscal 1995, an increase of 26% over fiscal 1994.
Management plans to increase Folio's sales through further development of its
customer list, increased circulation and the development of new catalogs,
including home and gift and outlet catalogs, both domestically and in
international markets.
INTERNATIONAL. Although Saks currently does not have significant sales
abroad, management believes that Saks' worldwide reputation and international
customer base offer attractive opportunities for future international growth.
Saks is exploring outreach programs in Japan, with selected catalog mailings and
the sale of Saks' private label merchandise to an established Japanese
department store, and in Latin America, through trunk shows and special events.
None of Saks' current intentions with respect to international expansion would
involve any material capital expenditures.
CAPITAL EXPENDITURES
Saks is committed to expanding and improving its store portfolio. From the
beginning of fiscal 1993 to the end of fiscal 1995 Saks made capital
expenditures of approximately $148 million on new stores, remodels, replacements
and expansions and, excluding acquisitions, plans to make additional such
capital expenditures of approximately $270 million through fiscal 1998.
Management believes that cash generated from Saks' operations, funds available
from Saks' credit facility and funds available from lease financing and
developer contributions will be sufficient to satisfy Saks' cash requirements
over this period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
FULL-LINE AND RESORT STORES
GENERAL
Saks operates a nationwide portfolio of 40 full-line stores and six resort
stores under the Saks Fifth Avenue name. The store portfolio includes premier
retail locations such as Fifth Avenue in New York City, Wilshire Boulevard in
Beverly Hills, Michigan Avenue in Chicago and Union Square in San Francisco. In
fiscal 1995, the percentage of total full-line and resort store net sales by
region were 41% in the Northeast, 20% in the Midwest, 15% in the Southeast and
24% in the West. Saks enjoys strong competitive positions in a number of the
most important retail markets in the United States, including New York City,
Florida and California.
34
<PAGE>
Unlike many of its competitors, Saks owns, rather than leases, a large
portion of its retail gross square footage, including its landmark Fifth Avenue
store. The following table sets forth certain information regarding Saks' real
estate portfolio at February 3, 1996.
PERCENT OF
TOTAL GROSS
SQUARE FOOTAGE
--------------
Own building and own land............................... 30%
Own building and lease land............................. 48
Lease building and lease land........................... 22
FULL-LINE STORES. Saks' 40 full-line stores are located in major markets in
the United States and range from 60,000 to 646,000 gross square feet. Since the
beginning of 1990, Saks has opened four new stores, replaced three stores,
expanded and remodeled 11 stores and closed four stores. Excluding acquisitions,
Saks plans to open three new full-line stores (including a store in Orlando,
Florida in 1996) and two replacement stores and to complete nine remodels
through fiscal 1998.
As part of a strategy to enhance its presence in California, in February
1995 Saks acquired four former I. Magnin store locations in Beverly Hills, San
Diego, Phoenix and Carmel. Saks converted three of these stores to its format
within two months, and the Beverly Hills store within six months, of
acquisition. This transaction resulted in additions to Saks' Beverly Hills and
Carmel stores, replacement of its Phoenix store and a new store in San Diego. In
addition to adding 234,000 gross square feet of store space, the I. Magnin
transaction permitted Saks to gain access to exclusive merchandise arrangements
previously unavailable to Saks in that part of the United States. Prior to the
acquisition, Saks had closed four underperforming stores located in non-
strategic areas of this market. Management believes that the current retail
environment will provide other opportunities for expansion through acquisition.
RESORT STORES. Saks' resort stores are located in markets characterized by
affluent vacationers and permanent and seasonal residents. The resort store
format allows Saks to capture sales from customers who are increasingly
migrating to resort areas during parts of the year. Saks' resort stores average
34,000 gross square feet. Since the 1990 Acquisition, Saks has opened two new
stores, expanded and remodeled two stores and closed one store. Saks currently
operates six resort stores including a store in Charleston, South Carolina that
was opened in August 1996. Saks plans to open four new resort stores through
fiscal 1998.
MAIN STREET STORES. Saks is testing a 35,000 square foot main street format
store designed for the local shopping areas of affluent suburban markets. The
first of these main street stores opened in Greenwich, Connecticut in September
1996. If successful, this format will be tested in similar communities.
CAPITAL INVESTMENT. Management has committed substantial capital to upgrade
the size and shopping environment of many of its stores. From the 1990
Acquisition through fiscal 1995, Saks spent in excess of $183 million on new
stores, remodels, replacements and expansions. These investments have yielded
strong financial returns. As a result of these investments, over 60% of Saks'
selling space is either new or remodeled since the 1990 Acquisition.
Management continually evaluates the performance of Saks' assets. During
fiscal 1993, through a strategic review of Saks' existing stores and asset base,
management developed a plan to close underperforming stores and redeploy their
assets. Accordingly, in fiscal 1994 Saks closed three full-line stores, one
resort store, its 17 specialty stores (2,000 to 4,000 square foot mall shops
operated under designer names) and Saks' service center in New York City. In
fiscal 1995 Saks closed its full-line store in Owings Mills, Maryland and
announced the relocation of its primary
35
<PAGE>
distribution center from Yonkers, New York to a new, state-of-the-art facility
in Aberdeen, Maryland. See "Distribution Facilities".
The evolution of Saks' full-line and resort store portfolio since fiscal
1991 is set forth below:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TOTAL STORES:
Beginning of period................................ 47 48 49 49 45
Closures........................................... 0 0 0 (5 ) (2 )
Openings........................................... 1 1 0 1 2
------ ------ ------ ------ ------
End of period...................................... 48 49 49 45 45
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL SQUARE FOOTAGE (in thousands):
Beginning of period................................ 4,813 4,888 4,918 4,959 4,549
Closures........................................... -- -- -- (523 ) (154 )
Openings........................................... 75 30 -- 106 272
Expansions......................................... -- -- 41 7 139
------ ------ ------ ------ ------
End of period...................................... 4,888 4,918 4,959 4,549 4,806
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
At August 29, 1996, Saks operates 46 full-line and resort stores.
Saks' store management is comprised of a general manager and an assistant
general manager of administration in charge of operations and human resources
and a manager of sales and service training. In larger stores, management is
augmented by one or more assistant general managers for merchandising, an
assistant general manager of operations and a human resources director. General
managers are accountable for sales training, service standards, customer
relationships, merchandising, operations and profitability of their stores. A
typical Saks store also has ten to 15 department managers, depending on the
store size, who have responsibility for customer development, sales associate
management, specific merchandise areas, and approximately five managers
overseeing support functions including shipping, receiving and security.
MERCHANDISING
Over its 70 year history, Saks Fifth Avenue has developed a reputation as a
leading fashion authenticator. Saks' position is strengthened by its
relationships with internationally acclaimed fashion design houses such as
Giorgio Armani, Bill Blass, Chanel, Escada, Salvatore Ferragamo, Gucci, Donna
Karan, Calvin Klein, Ralph Lauren, Judith Leiber, Prada, Oscar de la Renta, Jil
Sander, St. John, Yves St. Laurent, Ellen Tracy, Emanuel Ungaro and Ermenegildo
Zegna. These design houses establish trends and create product from which Saks
develops its merchandise mix. In turn, Saks enhances the image of these vendors
by presenting their merchandise in elegant shopping environments and, in many
cases, in-store shops. Management believes that Saks is a significant, if not
the largest, customer of many of these vendors. As a result, Saks is
advantageously positioned to obtain exclusive merchandise assortments, new
product introductions and financial incentives from these vendors.
36
<PAGE>
Saks' merchandise strategy is to offer congruent and balanced assortments of
differentiated, upscale merchandise. Saks offers a predominantly better, bridge
and designer assortment of fashionable apparel, shoes, accessories, cosmetics
and fragrances for women and men, as well as gift merchandise and children's
apparel. Within these merchandise categories, Saks focuses on vendors and
merchandise offerings that are distinctive and differentiated and that
contribute to profit growth. The following table sets forth the percentage of
retail sales by merchandise category for fiscal 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF
FISCAL 1995
MERCHANDISE CATEGORY RETAIL SALES
- ---------------------------------------------------------- -------------
<S> <C>
Women's designer apparel.................................. 14%
Women's sportswear........................................ 32
Men's apparel............................................. 16
Shoes, jewelry, handbags and other accessories............ 22
Fragrances and cosmetics.................................. 14
Other..................................................... 2
</TABLE>
Saks achieves differentiation through its focus on upscale merchandise, its
preferred vendor relationships which provide access to product that is sold
exclusively through Saks, Saks' private label collections, special size apparel
offerings and the continual editing of its merchandise to reflect the forefront
of fashion. Saks has exited lower price point and broadly distributed
merchandise categories where it cannot differentiate its assortments. In fiscal
1995, Saks no longer offered certain vendors' merchandise which, in fiscal 1992,
comprised net sales of $85 million.
Capitalizing on its status as a leading fashion authenticator, Saks has
created a private label business, with a differentiated product offering and
relatively lower price points, that allows it to serve a broader customer base
interested in fashion. Saks offers private label apparel in most merchandise
categories. Saks' merchandising staff, with the assistance of freelance
designers, creates exclusive designs and oversees production through contract
manufacturers. Saks' leading private labels are Saks Fifth Avenue Collections
(women's bridge sportswear), Real Clothes (casual/active sportswear for women),
The Works (career coordinates for women) and Saks Fifth Avenue Mens Collection
(sportswear and furnishings for men). Saks continually seeks opportunities to
expand its private label business. Recent additions include the Como Sport for
Cobra Golf line of golf apparel for men and women. Private label merchandise
comprised 8% of consolidated net sales in fiscal 1995.
In order to extend its customer base and to differentiate its merchandise,
Saks has devoted considerable efforts to the development of its special size
apparel categories: petites and, for the larger woman, "Salon Z". Saks has
invested in inventory and selling space, and has prompted a number of its
vendors to create designs for its Salon Z merchandise that are consistent with
Saks' strategy of offering distinctive, high quality fashion merchandise. These
special size categories comprised 5% of consolidated net sales in fiscal 1995.
Net sales of these categories in fiscal 1995 increased 24% from fiscal 1994.
Although Saks draws its customers from a broad group, women in the 40 to 55
year old age bracket comprise a core component of Saks' customer base. In 1994,
Saks began to specifically target the merchandise categories that, based on
extensive research, were determined to be most important to these top customers.
Saks is increasingly developing dominant assortments in these categories by
increasing inventory allocation, upgrading the quality and congruency of
merchandise and increasing the number of important vendors and brands.
In developing Saks' merchandise assortments, management monitors the
relationship between merchandise mix and profitability. Saks balances a complex
mix of merchandise at different price
37
<PAGE>
points and profitability levels, using appropriate quantities of designer
apparel to build image, create merchandise excitement and drive sales of higher
margin merchandise in order to increase profits.
Management believes that the success of Saks' resort stores is driven to a
significant degree by Saks' ability to tailor assortments to local climate,
preferences and social events. Similarly, Saks anticipates selling merchandise
assortments in its main street stores that are customized to local market
conditions.
To support its merchandising strategy, Saks has increased capital
expenditures, inventory and marketing support to improve merchandise assortments
and presentation and to increase customer awareness. In addition, Saks has
modified its training and incentive compensation programs to improve product
knowledge and selling efforts and cross-selling among merchandise categories.
At August 3, 1996, Saks employed approximately 280 people in its
merchandising and buying offices. Saks' largest supplier in fiscal 1995
accounted for less than 4% of total merchandise purchases. Saks believes that
the loss of any one of its vendors would not have a material adverse effect on
Saks' business.
MERCHANDISE PLANNING AND MONITORING
In 1995, Saks completed a comprehensive review of its merchandise planning
process. The review evaluated Saks' existing organization and processes as well
as retail industry best practices. Saks redesigned its planning process and
organization and established the framework of a store-level merchandise planning
process to drive sales and gross margin performance by store. The key elements
of the process include the development and maintenance of store profiles which
identify, among other things, important store characteristics such as customer
demographics, physical plant, competitive environment, seasonality and local
events. This information is used by the buying and planning organizations to
tailor merchandise assortments and flows by store.
The planning process involves the interactive development of total company
merchandise plans by department and merchandise groups as well as on a
store-by-store basis. The planning organization is structured to work as a
partnership with the merchandise buying organization with a ratio of one planner
for every two buyers. The merchants are focused on top-side merchandise issues
including merchandising guidelines, strategic vendor alliances, assortment
planning, shopping the market, negotiating with vendors and meeting financial
targets. The planners are focused on development of store specific congruent
merchandise assortments and meeting financial targets. The planners also
function as the "controllers" for buying responsibilities and monitor the
ongoing execution of the plan and open-to-buy on a by-store basis throughout the
season. This process includes semi-monthly review of results and forecasts with
senior merchants, store management and finance groups. Management believes that
the new planning process is essential to improving sales and gross margin and
Saks' productivity of its inventory investment.
CUSTOMER AFFINITY PROGRAMS
Management believes its strong customer service and marketing abilities,
supported by its sophisticated client data base, are key competitive advantages.
Saks is enhancing the quality of its customer service through improved
recruiting and training of sales associates, implementation of performance-based
compensation policies, increased accountability for performance of both sales
associates and managers, increased clienteling and data base marketing
activities and increased selling payroll.
38
<PAGE>
In keeping with its top customer focus, management developed several
programs designed to increase sales to its top customers. These initiatives have
resulted in increased average dollar amounts spent by these customers at Saks
each year and retention of such customers from year to year.
CUSTOMER CLIENTELING. Through its customer clienteling program, Saks' top
customers are identified for each store and individually assigned to sales
associates who have been trained in sophisticated sales, service and
relationship-building techniques. Saks currently is implementing The Link, its
state-of-the-art automated client book, to assist sales associates in their
clienteling efforts through better understanding of the purchasing behavior and
merchandise preferences of their customers. Management expects that this system
will enable sales associates to further personalize selling efforts and thereby
generate increased sales per customer.
SAKS FIRST PROGRAM. To foster customer loyalty and increase sales, in late
1994 Saks improved the benefits of its Saks First Program, an affinity program
directed to customers who charge in excess of $2,000 annually on their Saks
credit card. Saks First customers are rewarded with points convertible into Saks
gift certificates based on spending levels. Saks First customers also receive
fashion newsletters, invitations to one-of-a-kind special events, such as
fashion shows, movie premiers and celebrity dining, and advance notice of sale
events.
THE FIFTH AVENUE CLUB. Fifth Avenue Club membership offers participants
service-intensive private shopping environments within Saks' stores.
Historically, the Fifth Avenue Club has accounted for a significant portion of
Saks' full price designer sales. Based upon performance in selected markets,
management believes that the Fifth Avenue Club is underpenetrated in the
majority of its stores. In order to enhance the attractiveness of, and
participation in, the Fifth Avenue Club, management recently increased marketing
support to broaden customer awareness, improved the quality and quantity of club
staff, upgraded club facilities and heightened accountability on the part of
store general managers for the program.
MARKETING
Saks' marketing program supports its focus on top customers, target
merchandise groups and high potential stores while maintaining a high profile,
consistently visible image on both national and local levels. These programs are
designed to reinforce Saks' position as one of the world's premier fashion
retailers, to increase awareness of Saks' merchandise range and customer service
standards and to reaffirm Saks' cachet and reputation.
All marketing activities, including advertising, in-store special events and
window display, are developed and managed by Saks' in-house marketing and visual
departments on a centralized basis. Although Saks markets through a variety of
media, including direct mail, newspaper, public relations, magazines, radio and
television, customer outreach programs and other means, Saks focuses its efforts
on those media that effectively reaffirm Saks' position as a leading fashion
authenticator and efficiently reach Saks' top customer group. Saks actively
pursues vendor co-operative advertising, substantially increasing the
advertising resources available to Saks. Saks promotes its image as a fashion
leader primarily through regular advertisements in authoritative fashion and
life-style magazines, such as Vogue, W, Gourmet and Town and Country, store
events hosted by designers such as Calvin Klein, Isaac Mizrahi and Oscar de la
Renta, and sponsorship of fashion oriented charity events. Saks continually
evaluates and adjusts its marketing programs to efficiently drive sales.
OFF 5TH STORES
Through its Off 5th division, Saks extends its customer reach by offering
high quality branded fashion apparel in an outlet store setting at prices that
are 40% to 70% off original and comparable
39
<PAGE>
retail prices. Off 5th opened its first store in Franklin Mills, Pennsylvania in
1990 to provide a more efficient means of liquidating end-of-season merchandise
from Saks' retail stores. The concept gained immediate consumer acceptance due
to Off 5th's exceptional prices, high quality fashion merchandise and pleasant
shopping environment in combination with the Saks Fifth Avenue name. Based upon
this initial success, management continued to develop Off 5th's supporting
infrastructure, and Saks today operates 23 Off 5th stores in 15 states.
Off 5th occupies a unique market position with its multi-brand assortment of
exceptionally priced, high quality fashion merchandise, including better, bridge
and designer apparel. Management believes that Off 5th possesses the following
important competitive advantages: (i) access to end-of-season merchandise from
Saks' retail stores; (ii) Saks' strong vendor relationships that provide access
to high quality merchandise; (iii) vendor willingness to clear overstocks with,
and extend production runs for, Off 5th; and (iv) the broad aspirational appeal
to customers of the Saks Fifth Avenue brand name. In addition, Off 5th offers an
economically superior form of inventory liquidation for Saks' retail stores.
Off 5th's merchandise strategy is to offer women's and men's apparel
consistent with the level of quality and fashion found in Saks' retail stores.
In fiscal 1995, Off 5th purchased approximately 40% of its inventory from Saks
with the balance purchased directly from vendors. Management expects to purchase
a greater percentage of its merchandise directly from vendors as the number of
Off 5th stores increases.
Located primarily in outlet malls, Off 5th stores average approximately
23,000 square feet. Management believes that the stores maintain fixturing,
visual presentation and service standards superior to those generally associated
with outlet stores.
Off 5th generates attractive economic returns resulting from its relatively
high sales productivity, favorable lease economics (due to Off 5th's status as a
desirable anchor tenant), and low corporate overhead (as Off 5th shares in the
economies of scale of Saks' corporate and logistics structures). Management
plans to substantially increase its store base by opening new stores in selected
outlet malls and off-price centers throughout the United States. Saks expects to
open approximately 12 additional Off 5th stores in the remainder of fiscal 1996.
Information regarding Off 5th's historical growth is set forth below.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales (in millions)........................ $ 10.6 $ 27.9 $ 42.9 $ 57.2 $108.0
Net sales per average square foot.............. $ 411 $ 452 $ 440 $ 362 $ 352
Number of stores at period end................. 1 3 4 8 19
</TABLE>
FOLIO CATALOGS
Saks offers designer fashion brands and unique selections of Saks Fifth
Avenue private label merchandise to direct response customers through its Folio
catalogs. Folio enjoys a strong position in the relatively underserved catalog
market for upscale designer merchandise. Folio's merchandise is of a quality and
fashion consistent with that carried in Saks' retail stores, with an emphasis on
classic styling.
Folio began operations in 1972 when it mailed its first holiday catalog. For
the next 20 years, Folio operated as both a marketing vehicle for Saks' retail
stores and a direct response business. In 1993 management began to establish
Folio as an independent operating division with a catalog format and merchandise
offerings tailored to the direct response customer. In 1994, Folio recruited its
own merchandise and marketing staff. In 1995, Folio installed a new
state-of-the-art customized
40
<PAGE>
catalog management information system. Also in 1995, Folio successfully
introduced two new merchandise concepts, Folio Designs For The Home, a catalog
offering upscale home and gift merchandise, and Folio Outlet By Mail, an
off-price catalog marketing upscale branded fashion merchandise at a discount.
In addition, Folio initiated international mailings, primarily to Japan.
Folio has developed a highly productive customer list primarily derived from
Saks' retail stores customer data base and prior customer purchases from Folio.
In addition, Folio utilizes a variety of sources to acquire new names, including
list rentals and exchanges with other catalogs and credit card companies. Names
of the most active of Folio's customers are maintained in a 12-month buyer file
which lists those customers who have purchased from Folio in the past 12 months.
As of July 1996, Saks' 12-month buyer list included 335,000 names, an increase
of approximately 27% over July 1995.
Folio mailed a total of 23 catalogs with a total circulation of 29 million
in fiscal 1995. This compares to a total of 20 catalogs with a total circulation
of 23 million in fiscal 1994. Folio generated net sales in fiscal 1995 of $82.8
million, a 42% increase over fiscal 1994. Based upon the success of its
initiatives in fiscal 1995, management has added catalogs and increased the
circulation of its new titles and international mailings in fiscal 1996.
Orders for merchandise are received by telephone, fax and mail at Folio's
telemarketing and fulfillment facility located within Saks' Yonkers, New York
distribution center. Management expects the recent installation of a dedicated
catalog management information system for use by its telemarketing agents to
improve customer service and increase the productivity of its catalog
operations. Folio's telemarketing and fulfillment capabilities will be
transferred to Saks' new Aberdeen, Maryland facility upon the relocation of
Saks' Yonkers distribution center.
The economies of scale available to Folio through the use of Saks'
merchandising, corporate and logistics infrastructure contribute to Folio's
relatively strong profit margins. In turn, Folio facilitates the testing of new
products and markets, which Saks may then capitalize on through its retail
stores.
SAKS FIFTH AVENUE PROPRIETARY CREDIT CARD
Established over 40 years ago, Saks' proprietary credit card accounted for
approximately half of Saks' net sales in fiscal 1995. As of February 3, 1996,
Saks had approximately 1.4 million credit card customers that had made a
purchase within 24 months.
The proprietary credit card provides Saks with valuable customer information
and an excellent marketing and communications tool for its customers. During
fiscal 1995, Saks mailed approximately 500,000 statements per month to its
credit card holders. Saks is able to analyze its customer data by purchasing
patterns, including frequency, amount spent and merchandise category. Saks uses
this information to more effectively target merchandise information, special
events and promotions to its customers. Folio utilizes the Saks credit card
customer lists to develop new customers for its direct marketing mailings. The
Saks First Program also is linked directly to the credit card. In addition,
management believes that Saks' proprietary credit card promotes customer
affinity and loyalty because these customers on average generate greater sales
per transaction than the average customer.
Saks outsources its credit card operations to a third party, while
maintaining control over credit policy decisions and customer service standards.
Customers who apply for the Saks credit card are approved for credit based on a
satisfactory evaluation of a credit bureau report along with employment and bank
information.
41
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
Saks has made substantial investments in information systems designed to
support its strategies. Saks made capital expenditures of approximately $21
million on information systems in fiscal 1993 through fiscal 1995 and plans to
make additional capital expenditures of approximately $43 million on such
systems through fiscal 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
To increase sales and assist selling personnel, Saks has implemented an
industry-leading automated client book and a merchandise locator. The automated
client book enables sales associates throughout Saks to access from any POS
register a database of the purchasing preferences of their top customers. The
merchandise locator allows a sales associate to locate merchandise on a
real-time basis in any Saks store and arrange for that merchandise to be
promptly shipped to a customer. In addition, Saks' POS terminals utilize bar
code scanning technology to enhance customer service and inventory management.
In support of Saks' merchandising operations and new merchandise planning
processes, Saks continues to invest in further developing existing and new
systems. Saks' newest system is "Merchants Workbench", which provides detailed
information on merchandise sales by store utilizing a relational database and
client server technologies. Saks' inventory management is supported by quick
response electronic data interchange systems and by an automatic replenishment
system that utilizes actual sales, sales forecasts and seasonal selling profiles
down to the SKU level to replenish certain merchandise categories automatically,
resulting in improved assortments, in-stock position and sales. Saks has
implemented the automatic replenishment system in categories such as dress
shirts, hosiery, leather belts and accessories.
STORE PROPERTIES
The following table sets forth the location, mall name or street address,
year opened and gross square footage of each full-line, resort and Off 5th store
open as of August 29, 1996:
FULL-LINE STORES
<TABLE>
<CAPTION>
MALL NAME/ YEAR GROSS
STORE LOCATION STREET ADDRESS OPENED SQUARE FOOTAGE
- -------------------------------- ---------------------------------- ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
NEW YORK CITY
New York, NY................ 611 Fifth Avenue 1924 646
NORTHEAST REGION
Stamford, CT................ Stamford Town Center 1983 78
Boston, MA.................. Prudential Center 1971 110
Chevy Chase, MD............. 555 Wisconsin Avenue 1964 108
Hackensack, NJ.............. Riverside Square 1977 107
Short Hills, NJ............. Short Hills Mall 1994 106
Garden City, NY............. 1300 Franklin Avenue 1962 106
White Plains, NY............ Bloomingdale Road 1954 128
Bala Cynwyd, PA............. No. 2 Decker Square 1969 102
McLean, VA.................. The Galleria at Tyson's II 1988 120
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
MALL NAME/ YEAR GROSS
STORE LOCATION STREET ADDRESS OPENED SQUARE FOOTAGE
- -------------------------------- ---------------------------------- ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
SOUTHEAST REGION
Boca Raton, FL.............. Town Center 1986 75
Ft. Lauderdale, FL.......... Galleria Mall 1980 74
Bal Harbour, FL............. Bal Harbour Mall 1976 104
Miami, FL................... Dadeland Mall 1984 78
Palm Beach Gardens, FL...... The Gardens 1991 75
Atlanta, GA................. Phipps Plaza 1968 130
MIDWEST REGION
Chicago, IL................. 700 North Michigan, Chicago Place 1990 150
Oakbrook, IL................ Oakbrook Shopping Center 1981 90
Skokie, IL.................. Old Orchard Mall 1978 105
New Orleans, LA............. Canal Place 1983 75
Dearborn, MI................ Fairlane Town Center 1980 91
Troy, MI.................... Somerset Mall 1967 121
Minneapolis, MN............. Nicollett Mall 1989 120
Frontenac, MO............... Plaza Frontenac 1973 123
Kansas City, MO............. Country Club Plaza 1982 73
Beachwood, OH............... Beachwood Place 1978 102
Cincinnati, OH.............. Fifth and Race Streets 1984 76
Tulsa, OK................... Utica Square 1986 62
Pittsburgh, PA.............. 513 Smithfield Street 1977 86
WESTERN REGION
Phoenix, AZ................. Biltmore Fashion Park 1995 90
Beverly Hills, CA........... 9600/9634 Wilshire Blvd 1938/95 175/100
Costa Mesa, CA.............. South Coast Plaza 1979 105
San Diego, CA............... Fashion Valley 1995 80
San Francisco, CA........... Union Square 1981 136
Denver, CO.................. Cherry Creek Mall 1990 90
Las Vegas, NV............... The Fashion Show 1981 68
Portland, OR................ Pioneer Place 1990 60
Dallas, TX.................. Dallas Galleria 1982 117
Houston, TX................. Pavilion/Post Oak 1974 125
San Antonio, TX............. 650 North Star Mall 1985 84
</TABLE>
RESORT STORES
<TABLE>
<CAPTION>
MALL NAME/ YEAR GROSS
STORE LOCATION STREET ADDRESS OPENED SQUARE FOOTAGE
- -------------------------------- ---------------------------------- ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
NORTHEAST REGION
Southampton, NY............. 8-12 Main Street 1987 8
SOUTHEAST REGION
Naples, FL.................. Westside Shops Pelican Bay 1992 30
Palm Beach, FL.............. The Esplanade 1979 37
Charleston, SC.............. Majestic Square 1996 30
WESTERN REGION
Carmel-by-the-Sea, CA....... Carmel Plaza 1986/95 24/24
Palm Springs, CA............ Desert Fashion Plaza 1985 50
</TABLE>
43
<PAGE>
OFF 5TH STORES
<TABLE>
<CAPTION>
MALL NAME/ YEAR GROSS
STORE LOCATION STREET ADDRESS OPENED SQUARE FOOTAGE
- ------------------------------- --------------------------------- ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
NORTHEAST REGION
Clinton, CT................ Clinton Crossing Factory Outlets 1996 18
Danvers, MA................ Liberty Tree Mall 1996 19
Worcester, MA.............. Worcester Common Fashion Outlets 1994 29
Niagara Falls, NY.......... Factory Outlet Mall 1995 20
Franklin Mills Circle, Franklin Mills 1990 28
PA.............................
SOUTHEAST REGION
Orlando, FL................ International Designer Outlet 1994 22
Center
Sunrise, FL................ Sawgrass Mills 1992 46
Dawsonville, GA............ North Georgia Premium Outlets 1996 20
Raleigh, NC................ Triangle Factory Shops 1996 20
Myrtle Beach, SC........... Myrtle Beach Factory Stores 1995 15
Nashville, TN.............. Oaks Shopping Center 1995 25
Woodbridge, VA............. Potomac Mills 1992 28
MIDWEST REGION
Gurnee, IL................. Gurnee Mills 1993 29
Aurora, OH................. Aurora Farms 1995 15
Jeffersonville, OH......... Jeffersonville Outlet Mall 1994 15
WESTERN REGION
Phoenix, AZ................ Arizona Factory Stores 1995 16
Camarillo, CA.............. Camarillo Factory Stores 1995 16
Milpitas, CA............... The Great Mall of the Bay Area 1995 25
Petaluma, CA............... Petaluma Village Factory Outlet 1995 15
Honolulu, HI............... Waikele Center 1994 30
Hillsboro, TX.............. Southwest Outlet Center 1995 15
San Marcos, TX............. San Marcos Factory Shops 1995 22
Auburn, WA................. Supermall of the Great Northwest 1995 25
</TABLE>
DISTRIBUTION FACILITIES
Saks operates two distribution centers that service Saks' full-line, resort
and Off 5th stores, as well as Folio. Saks owns a 509,000 square foot
distribution center in Yonkers, New York that serves as Saks' primary
distribution facility and handles 85% of Saks' retail store distribution, all
Folio catalog telemarketing and fulfillment and Off 5th merchandise processing.
Saks also leases an 88,000 square foot distribution center in Ontario,
California that handles the balance of Saks' retail distribution. The
distribution centers employ state-of-the-art bar code scanning and tracing
technology, as well as integrated purchase-order tracking capabilities that
assist in merchandise planning. During fiscal 1995, the two distribution centers
processed approximately 15 million pieces of merchandise.
Saks recently announced plans to relocate the processing activity of its
Yonkers facility to a new, state-of-the-art facility in Aberdeen, Maryland. This
600,000 gross square foot facility, which will be leased by Saks, is expected to
open in early 1997. In order to ensure an effective transition, Saks will
operate both facilities for up to six months following the opening of the
Aberdeen facility, after which period the Yonkers facility will be closed. The
relocation is anticipated to result in lower processing costs as well as more
rapid delivery of merchandise to the sales floor to maximize full-price sales
and improve fulfillment rates for the Folio catalog division.
44
<PAGE>
Saks will receive incentive payments from various government agencies which
are expected to approximate the costs of relocating its processing activities to
the new facility. Saks will occupy the facility pursuant to a lease, with the
net present value of future rental payments equal to $23 million. Saks expects
to sell its Yonkers facility after exiting it in early 1997. Saks recorded a
charge in fiscal 1995 to reduce the carrying value of the Yonkers facility to
its net realizable value. If Saks or a purchaser is successful in obtaining
rezoning for the use of the property, a gain on sale could be realized.
Management is unable to determine if rezoning will occur.
In the area of logistics, Saks has implemented various programs designed to
improve processing productivity in order to speed the flow of merchandise from
vendors through Saks distribution facilities to the selling floor. These include
size and color marking and tracking, increased vendor pre-marking, a variety of
pre-distribution services, integrated universal product code (UPC)
identification methods, radio frequency (RF) scanning and electronic data
interchange (EDI) technologies. Saks uses contract carriage for approximately
73% of its merchandise. Saks uses air cargo for transcontinental merchandise
shipments, as well as for shipping to particular markets during peak demand
periods. When appropriate, Saks arranges for vendors to ship directly to stores.
COMPETITION
All aspects of the retail industry, including attracting customers, securing
merchandise and locating appropriate retail sites, are highly competitive. Saks
competes for customers in this industry with retailers in the following five
categories: large specialty apparel retailers; better department stores;
national specialty apparel chains; designer boutiques; and individual specialty
apparel stores. The type of individual competitor in each of these groups
differs from region to region and from store to store. Many of these competitors
are larger and have greater financial resources than Saks.
LARGE SPECIALTY APPAREL RETAILERS. These retailers usually operate stores in
key regional or national markets and primarily offer apparel, cosmetics and
accessory products. Main competitors in this category are Barneys, Bergdorf
Goodman, Brooks Brothers, Jacobson's, Lord & Taylor, Neiman Marcus and
Nordstrom. Store sizes vary widely.
BETTER DEPARTMENT STORES. This group is best categorized as offering a broad
merchandise assortment, including apparel and accessories, as well as, in some
cases, furniture, electronics and fine china, often in large stores of 200,000
selling square feet or more. This group includes stores operated by Dayton
Hudson Department Stores, Dillard Department Stores, Federated Department
Stores, The May Department Stores Company and Mercantile Stores.
NATIONAL SPECIALTY APPAREL CHAINS. This competitor group is characterized by
a large number of smaller stores nationwide, usually between 5,000 and 10,000
selling square feet, and a limited and focused merchandise assortment. This
group includes AnnTaylor, Banana Republic and Talbots.
DESIGNER BOUTIQUES. These stores are usually between 5,000 and 10,000
selling square feet and frequently are limited to major cities. Merchandise
offered by designer boutiques is highly focused and generally limited to the
product lines of one designer.
INDIVIDUAL SPECIALTY APPAREL STORES. These stores are comparable to designer
boutiques in size but carry product lines of more than one designer.
Off 5th competes with designer factory outlet stores, specialty outlet
stores and other off-price formats and the moderate department store sector.
Folio competes with diversified general merchandise catalogs, department store
catalogs and specialty catalogs.
45
<PAGE>
TRADEMARKS AND SERVICE MARKS
Saks owns its principal trademarks and service marks, including the "Saks
Fifth Avenue",
N89789DJ.G01,90,120,H
"SFA" and " " marks. Other important trademarks and service marks include "Off
5th", "Folio",
"Real Clothes", "The Works" and "The Fifth Avenue Club". Saks' trademarks and
service marks are registered in the United States Patent and Trademark Office.
The term of these registrations is generally ten years, and they are renewable
for additional ten year periods indefinitely, so long as the marks are still in
use at the time of renewal. Saks is not aware of any claims of infringement or
other challenges to its right to register or use its marks in the United States.
EMPLOYEES
At August 3, 1996, Saks employed approximately 870 people at its
headquarters and buying offices and 10,800 in its stores, two distribution
centers and data center. Saks' staffing requirements fluctuate during the year
as a result of the seasonality of the retail apparel industry, adding
approximately 1,200 to 1,500 more seasonal employees in the fourth quarter.
Approximately 100 of Saks' employees are covered by collective bargaining
agreements. Saks has never been subject to a strike and believes that its
relationship with its employees and the unions is good.
LITIGATION
Saks is a defendant in a suit pending in the Supreme Court of the State of
New York, County of New York, in which the plaintiff, a former Saks employee,
contends, among other things, that Saks was negligent in hiring a co-worker who
allegedly assaulted the plaintiff. The plaintiff is seeking $10 million in
damages. Saks has moved to dismiss the action. Saks believes that, subject to a
self-insured retention, the claim is covered by Saks' insurance. In connection
with the suit, Saks also is in litigation with one of its insurance providers
regarding the provider's duties and obligations under its insurance contract
with Saks. Saks does not believe that the resolution of these suits will have a
material adverse impact on its financial position or results of operations.
Saks also is from time to time involved in routine litigation incidental to
the conduct of its business. Management believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
financial position or results of operations.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of Saks Holdings. In March 1996, the executive
officers of Saks were given the same titles at Saks Holdings as they held at
Saks. Each director of Saks Holdings will hold office until the next annual
meeting of stockholders of Saks Holdings or until his or her successor has been
elected and qualified. Officers of Saks Holdings are elected by the Board of
Directors of Saks Holdings and serve at the discretion of such Board of
Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Philip B. Miller............... 57 Chairman and Chief Executive Officer and Director
Brian E. Kendrick.............. 42 Vice Chairman and Chief Operating Officer and
Director
Rose Marie Bravo............... 44 President and Director
Owen E. Dorsey................. 45 Executive Vice President
Richard F. Zannino............. 37 Executive Vice President and Chief Financial Officer
and Treasurer
Christina Johnson.............. 46 Executive Vice President
Mark E. Hood................... 44 Senior Vice President and Chief Accounting Officer
Joan F. Krey................... 51 Vice President and Secretary
Savio W. Tung.................. 44 Director
Jon P. Hedley.................. 35 Director
E. Garrett Bewkes III.......... 45 Director
Charles J. Philippin........... 45 Director
Stephen I. Sadove.............. 45 Director
Brian Ruder.................... 42 Director
</TABLE>
PHILIP B. MILLER became Chairman and Chief Executive Officer of Saks in June
1993. Mr. Miller joined Saks in August 1990 as Vice Chairman and became Chief
Operating Officer in 1992. Mr. Miller became Vice Chairman and a director of
Saks Holdings in August 1990 and a Vice President of Saks Holdings in January
1991. Mr. Miller formerly was Chairman and Chief Executive Officer of Marshall
Field's, joining that company in 1983 from Neiman Marcus, where he had been
President since 1977.
BRIAN E. KENDRICK became Vice Chairman of Saks in November 1994 and Chief
Operating Officer of Saks and Saks Holdings in August 1996. He joined Saks as
Senior Vice President and Chief Financial Officer in April 1991. Mr. Kendrick
became Vice President of Saks Holdings in April 1993 and a director of Saks
Holdings in February 1994. From 1981 to 1991 Mr. Kendrick was the Chief
Financial Officer of Maison Blanche/Goudchaux, Inc. in Baton Rouge, Louisiana.
In 1987 and 1988 he took a leave of absence to become the Chief Administrative
Officer for the State of Louisiana.
ROSE MARIE BRAVO became President of Saks in September 1992 and a director
of Saks in October 1992. Ms. Bravo became a Vice President and a director of
Saks Holdings in September and October of 1992, respectively. Ms. Bravo formerly
was the Chairman and Chief Executive Officer of I. Magnin, a specialty division
of the R.H. Macy Company, a position she held since 1987. In February 1992 R.H.
Macy & Co., I. Magnin's parent company, entered bankruptcy protection.
OWEN E. DORSEY became an Executive Vice President of Saks in November 1994.
In November 1993 Mr. Dorsey joined Saks as Senior Vice President, Human
Resources. Mr. Dorsey became a Vice President of Saks Holdings in January 1994.
Mr. Dorsey formerly was with the Ritz Carlton Hotel Company, where he held the
position of Vice President, Human Resources from 1988 to 1993.
47
<PAGE>
RICHARD F. ZANNINO became Executive Vice President, Chief Financial Officer
of Saks and Saks Holdings and Treasurer of Saks Holdings in August 1996. Mr.
Zannino served as Senior Vice President of Saks from May 1994 to July 1996. Mr.
Zannino joined Saks in January 1993 as Vice President and Treasurer. From March
1992 to November 1992, Mr. Zannino was Vice President of Finance for JWP Inc., a
multinational technical services company. In December 1993, JWP Inc. entered
bankruptcy protection. From 1986 to 1992 Mr. Zannino was with Peter Kiewit Sons,
Inc., a privately-held, multi-industry company in a finance and business
development role.
CHRISTINA JOHNSON became Executive Vice President of Saks and Saks Holdings
in August 1996. From 1992 to July 1996, Ms. Johnson served Saks as Senior Vice
President and Director of Stores in the Northeast Region. Ms. Johnson joined
Saks in 1991 from Marshall Field where she was Senior Vice President and General
Merchandise Manager.
MARK E. HOOD became Senior Vice President and Chief Accounting Officer of
Saks and Saks Holdings in August 1996. Mr. Hood joined Saks in June 1995 as Vice
President. From 1991 to June 1995, Mr. Hood served as Vice President and
Controller for Foley's Department Stores, a division of the May Department
Stores Company.
JOAN F. KREY became Vice President and Secretary of Saks Holdings in August
1996. Ms. Krey has served as General Counsel, Vice President and Secretary of
Saks since August 1985.
SAVIO W. TUNG became a director of Saks Holdings in April 1990. He has been
an executive of Investcorp, its predecessor or one or more of its wholly-owned
subsidiaries since September 1984. Mr. Tung is a director of Star Markets, Inc.
JON P. HEDLEY became a director of Saks and Saks Holdings in October 1995.
Mr. Hedley served as Secretary and Treasurer of Saks Holdings from September
1992 to August 1996. He has been an executive of Investcorp, its predecessor or
one or more of its wholly-owned subsidiaries since April 1990.
E. GARRETT BEWKES III became a director of Saks and Saks Holdings in June
1994. He is co-founder of GarMark Advisors, LLC. He was an executive of
Investcorp, its predecessor or one or more of its wholly-owned subsidiaries from
March 1994 to November 1995. Prior to joining Investcorp, Mr. Bewkes was Vice
Chairman and Co-head of the Investment Banking Department at Bear, Stearns & Co.
Inc. Mr. Bewkes also held the position of Senior Managing Director. He is a
director of The Bear Stearns Companies Inc.
CHARLES J. PHILIPPIN became a director of Saks and Saks Holdings in January
1995. He has been an executive of Investcorp, its predecessor or one or more of
its wholly-owned subsidiaries since October 1994. Prior to joining Investcorp,
Mr. Philippin was a partner with Coopers & Lybrand L.L.P. Mr. Philippin is a
director of Prime Service, Inc.
STEPHEN I. SADOVE became a director of Saks Holdings in August 1996. Since
1991, Mr. Sadove has served as President Worldwide of Clairol, Inc. Mr. Sadove
currently sits on the board of directors of Alpine Lace Brands, Inc.
BRIAN RUDER became a director of Saks Holdings in August 1996. Since 1995,
Mr. Ruder has served as President of Heinz U.S.A. Retail Products, a division of
H.J. Heinz Company. Mr. Ruder has held various executive positions at H.J. Heinz
or one of its operating divisions since 1988.
COMMITTEES OF THE BOARD OF DIRECTORS
In March 1996, Saks Holdings created a compensation committee, an audit
committee and a stock option and stock purchase plan committee. Messrs. Bewkes,
Tung, Philippin and Hedley were appointed to the compensation committee, Messr.
Bewkes was appointed to the audit committee and Messrs. Bewkes, Tung, Philippin
and Hedley were appointed to the stock option and stock
48
<PAGE>
purchase plan committee. In August 1996, Messrs. Sadove and Ruder were appointed
to the audit, compensation and stock option and stock purchase plan committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to March 1996, Saks Holdings did not have a compensation committee.
Messrs. Bewkes, Philippin, Hedley and Tung participated in deliberations
concerning compensation of executive officers of Saks during 1995. None of the
executive officers of Saks Holdings served on the Board of Directors or on the
compensation committee of any other entity, any of whose officers served either
on the Board of Directors or on the compensation committee of Saks Holdings.
NON-EMPLOYEE DIRECTORS COMPENSATION
Directors who are employees of Saks Holdings or executives of Investcorp
receive no separate compensation other than stock options for serving as
directors. Other directors receive an annual retainer of $22,000, stock options
and reimbursement of out-of-pocket expenses incurred in attending meetings of
the Board of Directors and any committees of the Board on which they serve, as
well as payments of $1,500 per meeting attended in person and $500 per
telephonic meeting.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Saks Holdings is a holding company which conducts all of its activities
through its operating subsidiary, Saks, and the subsidiaries of Saks. The
officers of Saks Holdings receive no compensation in their capacities as
officers of Saks Holdings. Accordingly, the following table sets forth
information concerning the annual and long-term compensation earned by Saks'
chief executive officer and each of the four other most highly compensated
executive officers of Saks whose annual salary and bonus during the fiscal years
presented exceeded $100,000 (the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION (2)(3)(4) ------------
------------------------- SECURITIES
NAME AND FISCAL ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY BONUS OPTIONS COMPENSATION (2)
- ------------------------ ------ ---------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Philip B. Miller........ 1995 $1,100,000 $360,000 0 $ 59,567(5)
Chairman and Chief
Executive Officer
Brian E. Kendrick....... 1995 666,667 225,000 0 8,347(6)
Vice Chairman and Chief
Operating Officer
Rose Marie Bravo........ 1995 666,667 225,000 0 18,515(7)
President
Owen E. Dorsey.......... 1995 357,500 40,000 0 113,009(8)
Executive Vice President
Richard F. Zannino...... 1995 290,000 90,000 39,110 6,845(9)
Executive Vice
President, Chief
Financial Officer and
Treasurer
</TABLE>
- ------------
(1) The principal position given for each of the Named Officers is as the date
of this Prospectus and does not necessarily reflect the position held during
fiscal 1995.
(2) The amounts indicated reflect compensation paid by Saks unless otherwise
specified.
(Footnotes continued on following page)
49
<PAGE>
(Footnotes continued from preceding page)
(3) Other annual compensation did not exceed $50,000 or 10% of the total salary
and bonus for any of the Named Officers.
(4) Does not include retirement benefits covered under Saks' Pension Plan and
Supplemental Plan. See the pension plan table and "Pension Plans".
(5) Reflects (i) the value of insurance premiums paid by Saks in the amounts of
$3,770, $3,359 and $9,940 with respect to supplementary medical benefits,
long-term disability benefits and term life insurance, respectively, for the
benefit of Mr. Miller, (ii) $2,498 of matching benefits paid by Saks under
the Retirement Savings Plan and (iii) $40,000 paid by Saks for
business-related clothing expenses.
(6) Reflects (i) the value of insurance premiums paid by Saks in the amounts of
$3,770 and $2,079 with respect to supplementary medical benefits and term
life insurance, respectively, for the benefit of Mr. Kendrick and (ii)
$2,498 of matching benefits paid by Saks under the Retirement Savings Plan.
(7) Reflects (i) the value of insurance premiums paid by Saks in the amounts of
$3,770 and $2,079 with respect to supplementary medical benefits and term
life insurance, respectively, for the benefit of Ms. Bravo, (ii) $2,498 of
matching benefits paid by Saks under the Retirement Savings Plan, (iii)
$2,067 paid by Saks with respect to relocation expenses and (iv) $10,168
paid by Saks for business related clothing discounts.
(8) Reflects (i) the value of insurance premiums paid by Saks in the amount of
$3,770 and $1,158 with respect to supplementary medical benefits and term
life insurance, respectively, for the benefit of Mr. Dorsey, (ii) $2,432 of
matching benefits paid by Saks under the Retirement Savings Plan and (iii)
$105,649 paid by Saks with respect to relocation expenses.
(9) Reflects (i) the value of insurance premiums paid by Saks in the amounts of
$3,770 and $940 with respect to supplementary medical benefits and term life
insurance, respectively, for the benefit of Mr. Zannino and (ii) $2,135 of
matching benefits paid by Saks under the Retirement Savings Plan.
The following table contains further information concerning the stock option
grants made to each of the Named Officers during fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
----------------------------------------------------- OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TO TERM (2)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION ---------------------
NAME GRANTED (1) FISCAL YEAR BASE PRICE DATE 5% 10%
- ------------------- ----------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Philip B. Miller... -- -- -- -- -- --
Brian E. Kendrick.. -- -- -- -- -- --
Rose Marie Bravo... -- -- -- -- -- --
Owen E. Dorsey..... -- -- -- -- -- --
Richard F.
Zannino............ 39,110 15.4% $ 20(3) 2005 $491,926 $1,246,625
</TABLE>
- ------------
(1) The option agreements provide that options have vested and will vest to the
extent of one-third of the options granted as of the date of Saks Holdings'
initial public offering, one-third on the first anniversary thereof and
one-third on the second anniversary thereof. In the event of an Approved
Sale (as defined in the option agreement), all options vest in their
entirety.
(2) These amounts are based on compounded annual rates of stock price
appreciation of 5% and 10% over the ten-year term of the options, are
mandated by the rules of the Securities and Exchange Commission and are not
indicative of expected stock price performance. Actual gains, if any, on
stock option exercises are dependent on future performance of the Common
Stock, overall market conditions, as well as the option holders' continued
employment throughout the vesting period. The amounts reflected in this
table may not necessarily be achieved or
(Footnotes continued on following page)
50
<PAGE>
(Footnotes continued from preceding page)
may be exceeded. The indicated amounts are net of the option exercise price
but before taxes that may be payable upon exercise.
(3) All stock options were granted with exercise prices equal to fair market
value, as determined by the Board of Directors, on the grant date. In
January 1996, the Board of Directors repriced the stock options from $20
(the price paid for shares at the time of the 1990 Acquisition and also in
connection with significant third party purchases of Common Stock in 1993,
which price per share was routinely used in connection with option grants
from the 1990 Acquisition through 1995) to $16 to reflect the estimated fair
market value of the Common Stock. Toward the end of 1995, management of Saks
Holdings decided to evaluate whether a $20 per share price reflected fair
market value and, therefore, whether options granted with a $20 per share
exercise price, which might have been higher than fair value, properly
incentivized management. Based on management's internal analysis, as well as
advice from third party advisors, Saks Holdings determined that as of the
end of fiscal 1995 the fair market value of the Common Stock was $16 per
share and authorized repricing the options at $16 per share.
The following table sets forth certain information regarding options to
purchase Common Stock held as of February 3, 1996 by each of the Named Officers.
None of such Named Officers exercised any options during fiscal 1995.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END (1)
---------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE (2) UNEXERCISABLE (2)
- ------------------------ ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Philip B. Miller........ -- 324,330 -- $ 0
Brian E. Kendrick....... -- 225,050 -- 0
Rose Marie Bravo........ -- 223,750 -- 0
Owen E. Dorsey.......... -- 35,700 -- 0
Richard F. Zannino...... -- 65,060 -- 0
</TABLE>
- ------------
(1) Calculated on the basis of $16 per share, the fair market value of the
Common Stock at February 3, 1996, as determined by the Board of Directors,
less the exercise price payable for such shares.
(2) On February 23, 1996 the exercise price with respect to the stock options
was reduced from $20 per share to $16 per share.
Saks maintains a pension plan (the "Pension Plan"), which covers
substantially all of the employees of Saks and its affiliates. Saks also
maintains a supplemental pension plan (the "Supplemental Plan") which covers
certain senior executives of Saks. See "Pension Plans". The following table sets
forth estimated annual benefits payable upon retirement with regard to the
Supplemental Plan.
<TABLE>
<CAPTION>
YEARS OF
SERVICE(1)
REMUNERATION(2) 15 20 25 30 35
- --------------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
25$0,000...... $ 75,000 $100,000 $125,000 $125,000 $125,000
300,000...... 90,000 120,000 150,000 150,000 150,000
400,000...... 130,000 160,000 200,000 200,000 200,000
500,000...... 150,000 200,000 250,000 250,000 250,000
750,000...... 225,000 300,000 375,000 375,000 375,000
1,000,000.... 300,000 400,000 500,000 500,000 500,000
1,320,000.... 396,000 528,000 660,000 660,000 660,000
</TABLE>
(Footnotes on following page)
51
<PAGE>
(Footnotes for preceding page)
- ------------
(1) Mr. Miller has an estimated 18 credited years of service (13 of which were
granted to him pursuant to his employment agreement). Mr. Kendrick has an
estimated five credited years of service. Ms. Bravo and Mr. Zannino each
have three years of credited service and Mr. Dorsey has two.
(2) The compensation covered by the Supplemental Plan includes base salary only,
and not bonus or other amounts. For each of the Named Officers, the current
compensation covered by the Supplemental Plan does not differ by more than
10% from the amount listed in the "Salary" column of the Summary
Compensation table. The amount of the supplemental pension to which a
participant is entitled is an annual amount computed in the form of single
life annuity equal to 2% of his or her Average Final Earnings multiplied by
his or her years of credited service up to a maximum of 25 years, reduced by
any amounts received due to the Pension Plan, primary Social Security
benefits or matching amounts under the Retirement Savings Plan. "Average
Final Earnings" for purposes of the Supplemental Plan is the average rate of
the participant's salary for the last 36 calendar months of his or her
credited service.
EMPLOYMENT AGREEMENTS
Saks has employment agreements with each of Mr. Miller, Mr. Kendrick, Ms.
Bravo and Mr. Dorsey. Each agreement requires the executive officer to devote
his or her full time and best efforts to Saks during the term of the agreement.
PHILIP B. MILLER. The employment agreement with Mr. Miller commenced in
March 1996 and continues until terminated by either party as provided therein.
The agreement provides for an annual salary of $1.2 million plus increases based
on the percentage increase, if any, in the Consumer Price Index, or by a greater
amount, at the discretion of the Board of Directors of Saks. In addition, the
agreement provides for the payment of an annual bonus as determined by the Board
of Directors of Saks.
If Saks terminates Mr. Miller's employment for any reason other than for
death, disability, retirement or cause, Mr. Miller shall be entitled to receive
an amount equal to three times his base salary then in effect ($3.6 million at
his current salary) and Standard Termination Amounts. Mr. Miller is entitled to
receive an identical amount if he voluntarily terminates his employment at any
time when he is not a member of the Boards of Directors of both Saks Holdings
and Saks. If Saks terminates Mr. Miller for "cause" (as defined in the
agreement) or if Mr. Miller voluntarily terminates his employment except as
described in the preceding sentence, Mr. Miller is entitled to receive Standard
Termination Amounts. "Standard Termination Amounts" consist of pro-rated earned
but unpaid salary, bonus, deferred compensation, certain expense allowances and
unpaid or unreimbursed benefits under applicable benefits plans and programs.
BRIAN E. KENDRICK, ROSE MARIE BRAVO AND OWEN E. DORSEY. Saks' employment
agreements with Mr. Kendrick, Ms. Bravo and Mr. Dorsey commenced in March 1996
and continue until terminated. The agreements provide for annual salaries of
$750,000, $750,000 and $360,000 respectively, and a bonus of up to 50% of Mr.
Kendrick's, Ms. Bravo's or Mr. Dorsey's salary, as applicable. The agreements
further provide for annual performance and salary reviews, and for participation
in all other bonus and benefit plans applicable to other similarly situated
officers.
If Saks terminates Mr. Kendrick's or Ms. Bravo's employment for any reason
other than for death, disability, retirement or cause, Mr. Kendrick or Ms.
Bravo, as applicable, is entitled to receive an amount equal to two times his or
her base salary then in effect ($1.5 million at their current salaries) and
Standard Termination Amounts. If Saks terminates Mr. Dorsey's employment for any
reason other than for death, disability, retirement or cause, Mr. Dorsey is
entitled to receive an amount in cash equal to his base salary then in effect,
Standard Termination Amounts and benefits for one year following termination. If
Saks terminates Mr. Kendrick's, Ms. Bravo's or Mr.
52
<PAGE>
Dorsey's employment for "cause" (as defined in each agreement) or if such
employee voluntarily terminates his or her employment, such employee shall be
entitled to receive Standard Termination Amounts.
All other officers are appointed by and serve at the discretion of the Board
of Directors of Saks.
STOCK INCENTIVE PLANS
In October 1990, Saks Holdings adopted a Senior Management Stock Incentive
Plan (the "Old Incentive Plan"), and in February 1996, Saks Holdings adopted a
1996 Management Stock Incentive Plan (the "New Incentive Plan", and together
with the Old Incentive Plan, the "Incentive Plans"), for members of senior
management and certain other officers and employees of Saks Holdings and of
Saks. As of August 28, 1996 there were options to purchase 26,720 shares of
Common Stock outstanding under the Old Incentive Plan, all of which vested upon
the closing of Saks Holdings initial public offering, and options to purchase
3,045,315 shares of Common Stock outstanding under the New Incentive Plan. The
vesting of options under the New Incentive Plan is described below. No
additional options will be granted under the Old Incentive Plan. The maximum
number of shares of Common Stock issuable pursuant to the Incentive Plans is
6,209,045, subject to adjustment to reflect stock splits, stock dividends and
similar stock transactions.
The Incentive Plans provide for the grant of options that qualify as
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code"), as well as options that do not qualify as ISOs
("Non-qualified Options") (collectively referred to as the "Options"), and also
provide for the grant of stock appreciation rights and for the sale or grant of
restricted stock. Options to purchase shares of Common Stock may extend for ten
years for ISOs and ten years and 30 days for Non-qualified Options from the date
of grant. Options may not be granted and restricted stock may not be sold or
granted after October 17, 2000. The granting of Options is conditioned upon
active employment with Saks Holdings, Saks or any of its direct or indirect
subsidiaries. In the event an employee ceases to be employed by Saks Holdings,
Saks or any of its direct or indirect subsidiaries, for any reason, Saks
Holdings may repurchase at fair market value, as determined annually by the
Board of Directors, any shares of Common Stock acquired by such employee
pursuant to the exercise of an Option granted under the Incentive Plans.
The Incentive Plans are administered by the stock option and stock purchase
plan committee (the "Incentive Plans Committee"), each member of which is
required to be "disinterested" within the meaning of Rule 16b-3 under the
Exchange Act. The Incentive Plans Committee has the authority to interpret the
Incentive Plans, to determine the terms and conditions of Options and other
grants under the Incentive Plans and to make all other determinations necessary
or advisable for the administration of the Incentive Plans. The Incentive Plans
Committee may determine the number of shares subject to grants or sales and the
terms thereof. The terms upon which options and stock appreciation rights are
granted and restricted stock is sold or granted are to be evidenced by a written
agreement executed by Saks Holdings and the relevant employee.
Saks Holdings has entered into individual Stock Option Agreements with
members of management with respect to 3,045,315 options outstanding under the
New Incentive Plan, pursuant to which each such employee's right to exercise
such Options has vested and will vest to the extent of one-third of the Options
granted as of the date of Saks Holdings' initial public offering, one-third on
the first anniversary thereof and one-third on the second anniversary thereof.
In the event of an Approved Sale (as defined in the agreement), all options vest
in their entirety. The Stock Option Agreements further provide for the
termination of the vested portions of any Options upon the tenth anniversary of
such Stock Option Agreement, and for acceleration of termination if the employee
ceases to be employed by Saks Holdings or a subsidiary.
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RETIREMENT SAVINGS PLAN (401(K))
In July 1990 Saks adopted a Retirement Savings Plan (the "Retirement Savings
Plan"), a savings and investment plan intended to be qualified under Section 401
of the Code. All employees of Saks and its affiliates (including officers and
directors who are employees) who are at least 21 years of age may participate in
the plan after one year of service with Saks or such affiliate. Participating
employees may make pre-tax and after-tax contributions, subject to limitations
under the Code, of a percentage (not to exceed 16%) of their total compensation,
and such amounts (and the earnings thereon) are fully vested at all times. Saks
makes matching contributions in an amount equal to one-fourth of the first 6% of
an employee's contribution. Any such matching contributions (and the investment
earnings thereon) will vest 25% after two years of service and an additional 25%
per year of service thereafter until fully vested after five years of service,
provided that such contributions become 100% vested upon the employee's death,
disability or retirement.
PENSION PLANS
Saks' Pension Plan covers substantially all of the employees of Saks and its
affiliates. Benefits are based primarily on years of service and the employees'
compensation, subject to limitations under the Code. The compensation covered by
the Pension Plan includes base salary only, and not bonus or other amounts.
Saks' policy is to fund the plan to satisfy the requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA"). Generally, an employee is
entitled upon retirement to annual payments for each year of service in the
amount of 1% of his or her covered compensation received for that year of
service. The estimated benefits payable upon retirement at normal retirement age
for each Named Officer as of February 3, 1996 is $21,869 (Mr. Miller), $44,369
(Mr. Kendrick), $35,903 (Ms. Bravo), $33,000 (Mr. Dorsey) and $46,910 (Mr.
Zannino).
Saks also maintains an unfunded supplemental retirement plan (the
"Supplemental Plan") covering the Chairman, Vice Chairman, President, Executive
Vice Presidents and Senior Vice Presidents of Saks (the "Covered Employees").
The Supplemental Plan is maintained primarily for the purpose of providing
deferred compensation for a select group of management and highly compensated
employees in accordance with the provisions of ERISA. The Covered Employees have
a nonforfeitable right to receive a supplemental pension upon five years of
service in the covered position. Generally, the amount of the supplemental
pension for a Covered Employee is an annual amount computed in the form of a
single life annuity equal to 2% of the Final Average Earnings (as defined in the
Supplemental Plan) multiplied by his or her years of service up to a maximum of
25 years, subject to deduction for Social Security benefits and for amounts
received from Saks or its affiliates under any other qualified or unqualified,
formal or informal plan, including the Pension Plan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of September 19, 1996, by (i) each person who
is known by Saks Holdings to own beneficially more than 5% of the outstanding
shares of the Common Stock; (ii) each director and Named Officer and (iii) all
executive officers and directors as a group. Unless otherwise indicated, to Saks
Holdings' knowledge each person has sole voting power and investment power with
respect to the shares attributed to them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------
NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT
- --------------------------------------------------------------------- ---------- -------
<S> <C> <C>
Investcorp (1)....................................................... 10,547,715 16.73%
SIPCO Limited (2).................................................... 10,533,715 16.71
His Royal Highness Prince Al Waleed Bin Talal Bin Abdulaziz (3)...... 4,450,000 7.06
Philip B. Miller (4)................................................. 351,048 *
Brian E. Kendrick (4)................................................ 143,763 *
Rose Marie Bravo (4)................................................. 157,273 *
Richard F. Zannino (4)............................................... 40,457 *
Owen E. Dorsey (4)................................................... 30,387 *
Savio W. Tung (5).................................................... 99,325 *
Jon P. Hedley (6).................................................... 45,000 *
E. Garrett Bewkes III................................................ -- --
Charles J. Philippin................................................. 15,000 *
Stephen I. Sadove.................................................... -- --
Brian Ruder.......................................................... -- --
All directors and executive officers as a group (14 people) (7)...... 931,798 1.46
</TABLE>
- ------------
* Less than 1%.
(1) Investcorp does not directly own any shares of Common Stock. Beneficial
ownership includes 5,334,070 shares owned by two indirect wholly-owned
subsidiaries of Investcorp. The remainder of the shares shown as
beneficially owned by Investcorp includes the shares owned by Saks Fifth
Avenue Holdings II Limited and Saks Fifth Avenue Investments II Limited,
and shares owned by certain other Cayman Islands corporations, none of
which is a beneficial owner of five percent or more of the Common Stock.
Investcorp may be deemed to share beneficial ownership of the shares of
Common Stock held by such entities because such entities or their
shareholders or principals have entered into revocable management services
or similar agreements with an affiliate of Investcorp pursuant to which
each such entity has granted such affiliate the authority to direct the
voting and disposition of the stock owned by such entity for so long as
such agreement is in effect. Saks Fifth Avenue Holdings II Limited and Saks
Fifth Avenue Investments II Limited intend to sell an aggregate of 837,970
shares of Common Stock in the Secondary Offering, which will decrease
Investcorp's beneficial ownership of the Common Stock of Saks Holdings to
15.4%. Investcorp is not directly or indirectly selling any shares of
Common Stock in the Secondary Offering. Investcorp is a Luxembourg
corporation, with its registered address at 37 rue Notre-Dame, Luxembourg.
(2) SIPCO Limited ("SIPCO") does not directly own any Common Stock. The number
of shares shown as owned by SIPCO consists of the shares Investcorp is
deemed to beneficially own. SIPCO may be deemed to control Investcorp
through its ownership of a majority of the stock of a company which
indirectly owns a majority of Investcorp's outstanding stock. SIPCO is a
Cayman Islands corporation with its address at P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands, British West Indies.
(Footnotes continued on following page)
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(Footnotes continued from preceding page)
(3) His Royal Highness Prince Al Waleed Bin Talal Bin Abdulaziz does not
directly own any Common Stock. The number of shares shown as owned by him
include all of the shares held by SFA Saudi Holdings Limited (which intends
to sell 1,051,811 shares (including up to 137,193 shares to be sold
pursuant to overallotment options) in the Secondary Offering), of which he
owns a majority of the outstanding stock. The business address of His Royal
Highness Prince Al Waleed Bin Talal Bin Abdulaziz is c/o Kingdom
Establishment Trading and Contracting, P.O. Box 8653, Riyadh 11492, Saudi
Arabia.
(4) Includes the following shares of Common Stock, purchasable within 60 days
of September 19, 1996, upon exercise of stock options by the following
individuals: Mr. Miller (211,404 shares), Mr. Kendrick (135,008 shares),
Ms. Bravo (134,023 shares), Mr. Zannino (39,156 shares) and Mr. Dorsey
(26,601 shares).
(5) Includes 50,000 shares that Mr. Tung has the right to acquire within 60
days of September 19, 1996.
(6) Includes 5,000 shares that Mr. Hedley has the right to acquire within 60
days of September 19, 1996.
(7) Includes an aggregate of 587,953 shares of Common Stock purchasable within
60 days of September 19, 1996 upon exercise of stock options.
A portion of the shares owned by the principal stockholders described above
may be available for resale in the public market without restriction or
registration under the Securities Act. See "Shares Eligible for Future Sale".
Except as described in footnote (3) above, none of the principal stockholders
listed in the table above will sell shares in the Secondary Offering.
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CERTAIN TRANSACTIONS
RELATED TRANSACTIONS
Saks incurred fees of $8 million payable to III, an affiliate of Investcorp,
for certain management, consulting and advisory services rendered in fiscal 1995
and the first half of fiscal 1996. Of these expenses, $7 million are reflected
in Saks' operating results for fiscal 1995 and $1 million is reflected in Saks'
operating results for the six months ended August 3, 1996. Fees of $2 million
also were paid to III in each of fiscal 1991, 1992, 1993 and 1994. Saks believes
that the terms of its management, advisory and consulting arrangements with III
were no less favorable to Saks than terms that may have been available from
independent third parties. Management fees to III were discontinued in July
1996. Saks expects that there will be no further remuneration for consulting
services between Saks or Saks Holdings and Investcorp or any of its affiliates.
Prior to April 3, 1996 Investcorp and its affiliates had an ownership
interest in and controlled a majority of the voting stock of Gucci Group N.V.
and its affiliates ("Gucci"), an Italian designer, manufacturer and distributor
of women's and men's luxury apparel and accessories. Investcorp affiliates
continue to represent a majority of the members of the Supervisory Board of
Gucci. In addition, Investcorp and its affiliates have an ownership interest in,
control a majority of the voting stock of, and have directors serving on the
board of directors of Ebel S.A. ("Ebel"), a Swiss manufacturer and distributor
of watches, and Chaumet International S.A. ("Chaumet"), a French retailer of
jewelry, gems and other luxury products. Saks distributes the products of Gucci,
Ebel and Chaumet through its stores. Saks believes that the terms of these
arrangements are on arms' length bases. Except for these arrangements, Saks has
no business relationships with Investcorp or any of its affiliates or related
parties.
Gucci designs and sells lines of women's and men's apparel that compete with
Saks' private label apparel business. Saks believes that competition with Gucci
is limited because Saks' private label merchandise generally is sold at
different price points and targets different market segments.
Although the agreement for management and advisory services expired in July
1996, Investcorp, as the beneficial owner of 16.7% of the Common Stock of Saks
Holdings and with representatives on the board of directors of Saks Holdings,
may be able to exert influence over the operations of Saks Holdings and Saks.
LOANS TO CERTAIN OFFICERS AND DIRECTORS
From time to time, Saks extends loans to certain officers and directors in
connection with stock purchase transactions.
In January 1992, Mr. Kendrick executed a note in favor of Saks in the
principal amount of $175,100. The note matures in January 1997, bears interest
at an annual rate of 8% and is secured by a pledge of Common Stock. In March
1996, Mr. Kendrick executed a note in favor of Saks in the principal amount of
$250,000, the proceeds of which were used to refinance an earlier note executed
by Mr. Kendrick. The note matures in March 1999, bears interest at an annual
rate of 8% and is secured by a pledge of Common Stock. At Saks' option, the
principal of, and accrued interest on, each of the notes described above becomes
immediately due upon the occurrence of certain events, including the termination
of Mr. Kendrick's employment by Saks for any reason.
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DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, to be dated as of September
25, 1996 (the "Indenture"), between Saks Holdings and Bankers Trust Company, as
Trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement. Wherever particular defined terms of the Indenture
(including the Notes) are referred to, such defined terms are incorporated
herein by reference (the Notes and various terms relating to the Notes being
referred to in the Indenture as "Securities"). The following summaries of
certain provisions of the Indenture do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the detailed
provisions of the Notes and the Indenture, including the definitions therein of
certain terms. Section references below are references to Sections of the
Indenture.
GENERAL
The Notes will be unsecured subordinated obligations of Saks Holdings, will
be limited to U.S. $240,000,000 aggregate principal amount (plus such additional
amount as may be issued under the Underwriters' over-allotment option), and will
mature on September 15, 2006. The Notes will bear interest at the rate per annum
shown on the front cover of this Prospectus from September 25, 1996, payable
semiannually on March 15 and September 15 of each year, commencing on March 15,
1997. Interest payable per $1,000 principal amount of Notes for the period from
September 25, 1996 to March 15, 1997 will be $25.97. (Sec.Sec. 301 and 307)
The Notes will be convertible into Common Stock initially at the conversion
rate stated on the cover page hereof, subject to adjustment upon the occurrence
of certain events described under "--Conversion Rights," at any time prior to
the close of business on the maturity date, unless previously redeemed or
repurchased. (Sec. 1301)
The Notes are redeemable under the circumstances and at the redemption
prices set forth below under "--Optional Redemption", plus accrued interest to
the redemption date. (Sec. 202)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. (Sec. 302) No service
charge will be made for any registration of transfer or exchange of Notes, but
Saks Holdings may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. (Sec. 305)
CONVERSION RIGHTS
The Holder of any Note will have the right, at the Holder's option, to
convert any portion of the principal amount of a Note that is an integral
multiple of $1,000 into shares of Common Stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion rate of 24.0601 shares of Common Stock per U.S. $1,000 principal
amount of Notes (the "Conversion Rate") (equivalent to a conversion price of
$41.563 per share of Common Stock) (subject to adjustment as described below).
The right to convert a Note called for redemption or delivered for repurchase
will terminate at the close of business on the Redemption Date for such Note or
the Repurchase Date, as the case may be. (Sec. 1301)
The right of conversion attaching to any Note may be exercised by the Holder
by delivering the Note at the specified office of the Conversion Agent,
accompanied by a duly signed and completed notice of conversion, a copy of which
may be obtained from the Trustee. The conversion date will be the date on which
the Note and the duly signed and completed notice of conversion are so
delivered. As promptly as practicable on or after the conversion date, Saks
Holdings will issue and deliver to the Trustee a certificate or certificates for
the number of full shares of Common Stock issuable upon conversion, together
with payment in lieu of any fraction of a share; such certificate
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will be sent by the Trustee to the Conversion Agent (if other than the Trustee)
for delivery to the Holder. Such shares of Common Stock issuable upon conversion
of the Notes, in accordance with the provisions of the Indenture, will be fully
paid and nonassessable and will rank pari passu with the other shares of Common
Stock of Saks Holdings outstanding from time to time. Any Note surrendered for
conversion during the period from the close of business on any Regular Record
Date next preceding any Interest Payment Date to the opening of business on such
Interest Payment Date (except Notes (or portions thereof) called for redemption
on a Redemption Date or which are repurchasable on a Repurchase Date occurring,
in either case, within such period) must be accompanied by payment of an amount
equal to the interest payable on such Interest Payment Date on the principal
amount of Notes being surrendered for conversion. The interest so payable on
such Interest Payment Date with respect to any Note (or portion thereof, if
applicable) which has been called for redemption on a Redemption Date, or which
may be repurchased on a Repurchase Date, occurring, in either case, during the
period from the close of business on any Regular Record Date next preceding any
Interest Payment Date to the opening of business on such Interest Payment Date,
which Note (or portion thereof, if applicable) is surrendered for conversion
during such period, shall be paid to the Holder of such Note being converted in
an amount equal to the interest that would have been payable on such Note if
such Note had been converted as of the close of business on such Interest
Payment Date. The interest so payable on such Interest Payment Date in respect
of any Note (or portion thereof, as the case may be) which has not been called
for redemption on a Redemption Date, or is not eligible for repurchase on a
Repurchase Date, occurring, in either case, during the period from the close of
business on any Regular Record Date next preceding any Interest Payment Date to
the opening of business on such Interest Payment Date, which Note (or portion
thereof, as the case may be) is surrendered for conversion during such period,
shall be paid to the Holder of such Note as of such Regular Record Date.
Interest payable in respect of any Note surrendered for conversion or repurchase
on or after an Interest Payment Date shall be paid to the Holder of such Note as
of the next preceding Regular Record Date, notwithstanding the exercise of the
right of conversion or repurchase. As a result of the foregoing provisions,
except as provided above, Holders that surrender Notes for conversion on a date
that is not an Interest Payment Date will not receive any interest for the
period from the Interest Payment Date next preceding the date of conversion to
the date of conversion or for any later period, even if the Notes are
surrendered for conversion after a notice of redemption (except for the payment
of interest on Notes called for redemption on a Redemption Date or to be
repurchased on a Repurchase Date between a Regular Record Date and the Interest
Payment Date to which it relates, as provided above). No other payment or
adjustment for interest, or for any dividends in respect of Common Stock, will
be made upon conversion. Holders of Common Stock issued upon conversion will not
be entitled to receive any dividends payable to holders of Common Stock as of
any record time or date before the close of business on the conversion date. No
fractional shares will be issued upon conversion but, in lieu thereof, Saks
Holdings will pay an appropriate amount in cash based on the market price of
Common Stock at the close of business on the day of conversion. (Sec.Sec. 101,
203, 307, 1302 and 1303)
A Holder delivering a Note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of the Common Stock in
a name other than that of the Holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the Holder have been paid. (Sec.Sec. 1302 and 1308)
The Conversion Rate is subject to adjustment in certain events, including,
without duplication: (a) dividends (and other distributions) payable in Common
Stock, (b) the issuance to all holders of Common Stock of rights, options or
warrants entitling them to subscribe for or purchase Common Stock at less than
the then Current Market Price of such Common Stock (determined as provided in
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the Indenture) as of the record date for shareholders entitled to receive such
rights, options or warrants, (c) subdivisions, combinations and
reclassifications of Common Stock, (d) distributions to all holders of Common
Stock of evidences of indebtedness of Saks Holdings, shares of capital stock,
cash or assets (including securities, but excluding those dividends, rights,
options, warrants and distributions referred to above, dividends and
distributions paid exclusively in cash and in mergers and consolidations to
which the next succeeding paragraph applies), (e) distributions consisting
exclusively of cash (excluding any cash portion of distributions referred to in
(d) above, or cash distributed upon a merger or consolidation to which the next
succeeding paragraph applies) to all holders of Common Stock in an aggregate
amount that, combined together with (i) other such all-cash distributions made
within the preceding 12 months in respect of which no adjustment has been made
and (ii) any cash and the fair market value of other consideration payable in
respect of any tender offer by Saks Holdings or any of its subsidiaries for
Common Stock concluded within the preceding 12 months in respect of which no
adjustment has been made, exceeds 10% of Saks Holdings' market capitalization
(being the product of the then Current Market Price per share of the Common
Stock and the number of shares of Common Stock then outstanding) on the record
date for such distribution, and (f) the successful completion of a tender offer
made by Saks Holdings or any of its subsidiaries for Common Stock which involves
an aggregate consideration that, together with (i) any cash and other
consideration payable in a tender offer by Saks Holdings or any of its
subsidiaries for Common Stock expiring within the 12 months preceding the
expiration of such tender offer in respect of which no adjustment has been made
and (ii) the aggregate amount of any such all-cash distributions referred to in
(e) above to all holders of Common Stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 10% of Saks Holdings' market capitalization on the expiration of
such tender offer. Saks Holdings reserves the right to make such increases in
the Conversion Rate in addition to those required in the foregoing provisions as
it considers to be advisable in order that any event treated for federal income
tax purposes as a dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock will not be taxable to the
recipients. No adjustment of the Conversion Rate will be required to be made
until the cumulative adjustments amount to 1.0% or more of the Conversion Rate.
(Sec. 1304) Saks Holdings shall compute any adjustments to the Conversion Rate
pursuant to this paragraph and will give notice to the Holders of the Notes of
any adjustments. (Sec. 1305)
In case of any consolidation or merger of Saks Holdings with or into another
Person or any merger of another Person into Saks Holdings (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale or transfer of all or
substantially all of the assets of Saks Holdings, each Note then outstanding
will, without the consent of the Holder of any Note, become convertible only
into the kind and amount of securities, cash and other property receivable upon
such consolidation, merger, sale or transfer by a holder of the number of shares
of Common Stock into which such Note was convertible immediately prior thereto
(assuming such holder of Common Stock failed to exercise any rights of election
and that such Note was then convertible). (Sec. 1311)
If at any time Saks Holdings makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States federal income tax purposes (e.g., distributions of evidences of
indebtedness or assets of Saks Holdings, but generally not stock dividends on
Common Stock or rights to subscribe for Common Stock) and, pursuant to the anti-
dilution provisions of the Indenture, the number of shares into which Notes are
convertible is increased, such increase may be deemed for federal income tax
purposes to be the payment of a taxable dividend to Holders of Notes. See
"Certain Tax Considerations."
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SUBORDINATION
The payment of the principal of, premium, if any, and interest on, the Notes
will be subordinated in right of payment, to the extent set forth in the
Indenture, to the prior payment in full of the principal of, premium, if any,
interest and other amounts in respect of all Senior Indebtedness of Saks
Holdings. Senior Indebtedness is defined in the Indenture to mean the principal
of (and premium, if any) and interest (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding, whether
or not a claim for post-petition interest is allowable as a claim in any such
proceeding) on, and all fees and other amounts payable in connection with, the
following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the Indenture or thereafter created,
incurred or assumed: (a) indebtedness of Saks Holdings to banks, insurance
companies and other financial institutions evidenced by credit or loan
agreements, notes or other written obligations, (b) all other indebtedness of
Saks Holdings (including indebtedness of others guaranteed by the Company) other
than the Notes, whether outstanding on the date of the Indenture or thereafter
created, incurred or assumed, which is (i) for money borrowed or (ii) evidenced
by a note or similar instrument given in connection with the acquisition of any
businesses, properties or assets of any kind, (c) obligations of Saks Holdings
as lessee under leases required to be capitalized on the balance sheet of the
lessee under generally accepted accounting principles, (d) obligations of Saks
Holdings under interest rate and currency swaps, caps, floors, collars or
similar agreements or arrangements intended to protect Saks Holdings against
fluctuations in interest or currency exchange rates and (e) renewals,
extensions, modifications, restatements and refundings of, or any indebtedness
or obligation issued in exchange for, any such indebtedness or obligation
described in clauses (a) through (d) of this paragraph; provided, however, that
Senior Indebtedness shall not include any such indebtedness or obligation (i) if
the terms of such indebtedness or obligation (or the terms of the instrument
under which, or pursuant to which, it is issued) expressly provide that such
indebtedness or obligation is not superior in right of payment to the Notes or
expressly provide that such indebtedness or obligation is "pari passu" with or
"junior" to the Notes, (ii) if such indebtedness or obligation is non-recourse
to Saks Holdings or (iii) if such indebtedness or obligation is a conditional
sale contract or an account payable or is created or assumed by Saks Holdings in
the ordinary course of business in connection with the obtaining of materials,
inventories or services. So long as there is any indebtedness outstanding under
Saks' credit facility, neither the subordination provisions of the Indenture nor
the definition of Senior Indebtedness under the Indenture may be modified in a
manner materially adverse to the lenders under Saks' credit facility. (Sec.Sec.
101, 1201, 1202 and 1216) As of August 3, 1996, Saks Holdings had no outstanding
Senior Indebtedness (other than guarantees of subsidiary indebtedness).
No payment on account of principal, premium, if any, or interest on, the
Notes may be made by Saks Holdings if there shall have occurred (i) a default in
the payment of principal, premium, if any, or interest (including a default
under any repurchase or redemption obligation) with respect to any Senior
Indebtedness or (ii) any other event of default with respect to any Senior
Indebtedness, permitting the holders thereof to accelerate the maturity thereof,
and such event of default shall not have been cured or waived or shall not have
ceased to exist after written notice of such event of default shall have been
given to Saks Holdings and the Trustee by any holder of Senior Indebtedness.
Upon any acceleration of the principal due on the Notes or payment or
distribution of assets of Saks Holdings to creditors upon any dissolution,
winding up, liquidation or reorganization, whether voluntary or involuntary, or
in bankruptcy, insolvency, receivership or other similar proceedings of Saks
Holdings, all principal, premium, if any, and interest or other amounts due on
all Senior Indebtedness must be paid in full before the Holders of the Notes are
entitled to receive any payment. By reason of such subordination, in the event
of insolvency, creditors of Saks Holdings who are holders of Senior Indebtedness
are likely to recover more, ratably, than the Holders of the Notes, and such
subordination may result in a reduction or elimination of payments to the
Holders of the Notes. (Sec.Sec. 1202, 1203 and 1204)
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In addition, the Notes will be structurally subordinated to all indebtedness
and other liabilities (including trade payables and lease obligations) of Saks
Holdings' subsidiaries, as any right of Saks Holdings to receive any assets of
its subsidiaries upon their liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's creditors (including
trade creditors), except to the extent that Saks Holdings itself is recognized
as a creditor of such subsidiary, in which case the claims of Saks Holdings
would still be subordinate to any security interest in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by Saks
Holdings. As of August 3, 1996, on a pro forma basis after giving effect to the
offering of the Notes made hereby and the application of the net proceeds
therefrom (including the Subordinated Debt Prepayment), the amount of
indebtedness and other liabilities of Saks Holdings' subsidiaries to which the
Notes are subordinated would have been $750.8 million (excluding intercompany
obligations).
The Indenture does not limit Saks Holdings' ability to incur Senior
Indebtedness or any other indebtedness.
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to September 15, 1999. Thereafter, the
Notes may be redeemed, in whole or in part, at the option of Saks Holdings, upon
not less than 30 nor more than 60 days' prior notice as provided under
"--Notices" below, at the redemption prices set forth below.
The redemption prices (expressed as a percentage of principal amount) are as
follows for the 12-month period beginning on September 15 of the following
years:
REDEMPTION
YEAR PRICE
- ------------------------------------------------------------- ----------
1999 103.850%
2000 103.300
2001 102.750
2002 102.200
2003 101.650
2004 101.100
2005 100.550
and thereafter at a redemption price equal to 100% of the principal amount, in
each case together with accrued interest to the date of redemption. (Sec.Sec.
203, Article Eleven)
No sinking fund is provided for the Notes.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
If a Change in Control (as defined) occurs, each Holder of Notes shall have
the right, at the Holder's option, to require Saks Holdings to repurchase all of
such Holder's Notes, or any portion of the principal amount thereof that is
equal to $1,000 or an integral multiple of $1,000 in excess thereof, on the date
(the "Repurchase Date") that is 45 days after the date of the Company Notice (as
defined), at a price equal to 100% of the principal amount of the Notes to be
repurchased, together with interest accrued to the Repurchase Date (the
"Repurchase Price"). (Sec. 1401)
Saks Holdings may, at its option, in lieu of paying the Repurchase Price in
cash, pay the Repurchase Price in Common Stock valued 95% of the average of the
closing prices of the Common Stock for the five consecutive trading days ending
on and including the third trading day
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preceding the Repurchase Date; provided that Saks Holdings may repurchase Notes
for cash only after repayment of all indebtedness under Saks' credit facility.
Additionally, payment may not be made in Common Stock unless Saks Holdings
satisfies certain conditions with respect to such payment as provided in the
Indenture. (Sec.Sec. 1401 and 1402)
Within 30 days after the occurrence of a Change in Control, Saks Holdings is
obligated to give to all Holders of the Notes notice, as provided in the
Indenture (the "Company Notice"), of the occurrence of such Change in Control
and of the repurchase right arising as a result thereof, or, at the request of
Saks Holdings on or before the 15th day after such occurrence, the Trustee shall
give the Company Notice. Saks Holdings must also deliver a copy of the Company
Notice to the Trustee and to the office of each Paying Agent. To exercise the
repurchase right, a Holder of Notes must deliver on or before the 30th day after
the date of the Company Notice irrevocable written notice to the Trustee or any
Paying Agent of the Holder's exercise of such right, together with the Notes
with respect to which the right is being exercised. (Sec. 1403)
A Change in Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Exchange Act) of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of
capital stock of Saks Holdings entitling such Person to exercise 50% or more
of the total voting power of all shares of capital stock of Saks Holdings
entitled to vote generally in elections of directors, other than any such
acquisition by Saks Holdings, any subsidiary of Saks Holdings or any
employee benefit plan of Saks Holdings; or
(ii) any consolidation or merger of Saks Holdings with or into any other
Person, any merger of another Person with or into Saks Holdings, or any
conveyance, sale, transfer or lease of all or substantially all of the
assets of Saks Holdings to another Person (other than (a) any such
transaction (x) which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock and (y)
pursuant to which holders of Common Stock immediately prior to such
transaction have the entitlement to exercise, directly or indirectly, 50% or
more of the total voting power of all shares of capital stock entitled to
vote generally in the election of directors of the continuing or surviving
person immediately after such transaction and (b) any merger which is
effected solely to change the jurisdiction of incorporation of Saks Holdings
and results in a reclassification, conversion or exchange of outstanding
shares of Common Stock into solely shares of common stock);
provided, however, that a Change in Control shall not be deemed to have occurred
if the closing price per share of the Common Stock for any five Trading Days
within the period of 10 consecutive Trading Days ending immediately after the
later of the Change in Control or the public announcement of the Change in
Control (in the case of a Change in Control under clause (i) above) or ending
immediately before the Change in Control (in the case of a Change in Control
under clause (ii) above) shall equal or exceed 105% of the Conversion Price of
the Notes in effect on each such Trading Day. The "Conversion Price" is equal to
$1,000 divided by the Conversion Rate. "Beneficial owner" shall be determined in
accordance with Rule 13d-3 promulgated by the Commission under the Exchange Act,
as in effect on the date of original execution of the Indenture. (Sec. 1404)
Any repurchase in connection with a Change in Control could, depending on
the circumstances and absent a waiver from the holders of Senior Indebtedness,
be blocked by the subordination provisions of the Notes. See "--Subordination."
Failure by Saks Holdings to repurchase the Notes when required may result in an
Event of Default with respect to the Notes whether or not such repurchase is
permitted by the subordination provisions. See "--Events of Default."
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Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to Holders of
the Notes. Saks Holdings will comply with this rule to the extent applicable at
that time.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving Saks
Holdings that may adversely affect Holders.
MERGERS AND SALES OF ASSETS BY SAKS HOLDINGS
Saks Holdings may not consolidate or merge with or into any other Person or,
directly, or indirectly, convey, transfer, sell, lease or otherwise dispose of
its properties and assets substantially as an entirety to any Person, and Saks
Holdings may not permit any Person to consolidate or merge with or into Saks
Holdings or convey, transfer, sell, lease or otherwise dispose such Person's
properties and assets substantially as an entirety to Saks Holdings, unless (a)
the Person formed by such consolidation or into or with which Saks Holdings is
merged or the Person to which the properties and assets of Saks Holdings are so
conveyed, transferred, sold, leased or otherwise disposed of is a corporation,
limited liability company, partnership or trust organized and existing under the
laws of the United States, any State thereof or the District of Columbia and has
expressly assumed the due and punctual payment of the principal of, premium, if
any, and interest on the Notes and the performance of the other covenants of
Saks Holdings under the Indenture, (b) immediately after giving effect to such
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, and (c) Saks Holdings has provided to the Trustee an Officer's
Certificate and Opinion of Counsel as provided in the Indenture. (Sec. 801)
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal or Redemption Price of any Note when due, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (b)
failure to pay any interest on any Note when due, continuing for 30 days,
whether or not such payment is prohibited by the subordination provisions of the
Indenture; (c) default in Saks Holdings' obligation to provide a Company Notice
of a Change in Control; (d) failure to perform any other covenant of Saks
Holdings in the Indenture, continuing for 60 days after written notice as
provided in the Indenture; (e) default in respect of any indebtedness for money
borrowed by Saks Holdings or Saks at final maturity thereof or that results in
acceleration of the maturity of an amount in each case in excess of $5,000,000
of indebtedness if such indebtedness is not discharged, or such acceleration is
not annulled, within 30 days after written notice as provided in the Indenture;
and (f) certain events of bankruptcy, insolvency or reorganization. (Sec. 501)
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any of the Holders, unless such Holders shall
have offered to the Trustee reasonable indemnity. (Sec. 603) Subject to such
provisions for the indemnification of the Trustee, the Holders of a majority in
aggregate principal amount of the Outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (Sec. 512)
If an Event of Default (other than an Event of Default specified in
subsections (a), (b), and (f) above) occurs and is continuing, either the
Trustee or the Holders of not less than 25% in aggregate principal amount of the
Outstanding Notes, may by notice in writing to Saks Holdings, declare the
principal of all the Notes to be due and payable immediately, and upon any such
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declaration such principal and any accrued interest thereon will become
immediately due and payable. If an Event of Default specified in subsections (a)
or (b) occurs and is continuing, the Holder of any Outstanding Note may, by
notice in writing to Saks Holdings (with a copy to the Trustee), declare the
principal of such Note to be due and payable immediately, and upon any such
declaration such principal and (subject to the Indenture) any accrued interest
will become immediately due and payable. If an Event of Default specified in
subsection (f) occurs and is continuing, the principal and any accrued interest
on all of the then Outstanding Notes shall ipso facto become due and payable
immediately without any declaration or other Act on the part of the Trustee or
any Holder. (Sec. 502)
At any time after a declaration of acceleration has been made but before a
judgment or decree based on acceleration, the Holders of a majority in aggregate
principal amount of Outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the nonpayment
of accelerated principal and interest have been cured or waived as provided in
the Indenture. (Sec. 502)
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (Sec. 507) However, such limitations do not apply to a suit instituted by
a Holder of a Note for the enforcement of payment of the principal of, premium,
if any, or interest on such Note on or after the respective due dates expressed
in such Note or of the right to convert such Note in accordance with the
Indenture. (Sec. 508)
Saks Holdings will be required to furnish to the Trustee annually a
statement as to the performance by Saks Holdings of certain of its obligations
under the Indenture and as to any default in such performance. (Sec. 1004)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made, and certain past
defaults by Saks Holdings may be waived with the written consent of the Holders
of not less than a majority in aggregate principal amount of the Notes at the
time Outstanding. However, no such modification or amendment may, without the
consent of the Holder of each outstanding Note affected thereby, (a) change the
Stated Maturity of the principal of, or any installment of interest on, any
Note, (b) reduce the principal amount of, or the premium, if any, or rate of
interest on, any Note, (c) reduce the amount payable upon redemption or
repurchase, (d) modify the provisions with respect to the repurchase right of
the Holders in a manner adverse to the Holders, (e) change the place or currency
of payment of principal of, premium, if any, or interest on, any Note, (f)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Note (including any payment of the Repurchase Right in respect of
such Note), (g) modify the obligation of Saks Holdings to maintain an office or
agency in New York City, (h) except as otherwise permitted or contemplated by
provisions concerning consolidation, merger, conveyance, transfer, sale or lease
of all or substantially all of the property and assets of Saks Holdings,
adversely affect the right of Holders to convert any of the Notes or to require
Saks Holdings to repurchase any Note other than as provided in the Indenture,
(i) modify the subordination provisions in a manner adverse to the Holders of
the Notes, (j) reduce the above-stated percentage of Outstanding Notes necessary
to modify or amend the Indenture, or (k) reduce the percentage of aggregate
principal amount of Outstanding Notes necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults. (Sec.Sec.
902 and 513)
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The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive compliance by Saks Holdings with certain restrictive provisions
of the Indenture. (Sec. 1011) The Holders of a majority in aggregate principal
amount of the Outstanding Notes also may waive any past default under the
Indenture, except a default in the payment of principal, premium, if any, or
interest. (Sec. 513)
TRANSFER AND EXCHANGE
Saks Holdings has initially appointed the Trustee as security registrar and
transfer agent, acting through its Corporate Trust Office in the City of New
York. Saks Holdings reserves the right to vary or terminate the appointment of
the security registrar or of any transfer agent or to appoint additional or
other transfer agents or to approve any change in the office through which any
security registrar or any transfer agent acts. (Sec.Sec. 305 and 1002)
PURCHASE AND CANCELLATION
Saks Holdings or any subsidiary may at any time and from time to time
purchase Notes at any price in the open market or otherwise.
All Notes surrendered for payment, redemption, repurchase, registration of
transfer or exchange or conversion shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee. All Notes so delivered to the
Trustee shall be cancelled promptly by the Trustee. No Notes shall be
authenticated in lieu of or in exchange for any Notes cancelled as provided in
the Indenture. Unless otherwise requested by Saks Holdings and confirmed in
writing, the Trustee shall, from time to time but not less than once annually,
destroy all cancelled Notes and deliver to Saks Holdings a certificate of
destruction, which certificate shall specify the number, principal amount and,
in the case of Notes, the form of each cancelled Note so destroyed. (Sec. 309)
TITLE
Saks Holdings and the Trustee may treat the registered owner (as reflected
in the Security Register) of any Note as the absolute owner thereof (whether or
not such Note shall be overdue) for the purpose of making payment and for all
other purposes.
NOTICES
Notice to Holders of the Notes will be given by mail to the addresses of
such Holders as they appear in the Security Register. Such notices will be
deemed to have been given on the date of the first such publication or on the
date of such mailing, as the case may be. (Sec.Sec. 101 and 105)
Notice of a redemption of Notes will be given at least once not less than 30
nor more than 60 days prior to the redemption date (which notice shall be
irrevocable) and will specify the redemption date.
REPLACEMENT OF NOTES
Notes that become mutilated, destroyed, stolen or lost will be replaced by
Saks Holdings at the expense of the Holder upon delivery to the Trustee of the
mutilated Notes or evidence of the loss, theft or destruction thereof
satisfactory to Saks Holdings and the Trustee. In the case of a lost, stolen or
destroyed Note indemnity satisfactory to the Trustee and Saks Holdings may be
required at the expense of the Holder of such Note before a replacement Note
will be issued. (Sec. 306)
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SATISFACTION AND DISCHARGE
Saks Holdings may discharge its payment obligations under the Indenture
while Notes remain outstanding if (a) all outstanding Notes have become due and
payable or will become due and payable at their scheduled maturity within one
year or (b) all outstanding Notes are scheduled for redemption within one year
and in the case of (a) or (b) above, Saks Holdings has deposited with the
Trustee an amount sufficient to pay and discharge the entire indebtedness on all
outstanding Notes on the date of their scheduled maturity or the scheduled date
of redemption. (Sec. 401)
PAYMENT OF STAMP AND OTHER TAXES
Saks Holdings shall pay all stamp and other duties, if any, which may be
imposed by the United States or any political subdivision thereof or taxing
authority thereof or therein with respect to the issuance of the Notes. Saks
Holdings will not be required to make any payment with respect to any other tax,
assessment or governmental charge imposed by any government or any political
subdivision thereof or taxing authority therein.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York. (Sec. 1112)
THE TRUSTEE
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee security or indemnity
satisfactory to it. (Sec.Sec. 601 and 603)
BOOK-ENTRY
The Notes will be issued in the form of a global note or notes (together,
the "Global Note") deposited with, or on behalf of, The Depository Trust Company
("DTC") and registered in the name of Cede & Co. as DTC's nominee. Owners of
beneficial interests in the Notes represented by the Global Note will hold such
interests pursuant to the procedures and practices of DTC and must exercise any
rights in respect of their interests (including any right to convert or require
repurchase of their interests) in accordance with those procedures and
practices. Such beneficial owners will not be Holders, and will not be entitled
to any rights under the Global Note or the Indenture, with respect to the Global
Note and Saks Holdings and the Trustee, and any of their respective agents, may
treat DTC as the sole Holder and owner of the Global Note.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants include securities brokers and dealers (including Goldman,
Sachs & Co.), banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange,
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Inc., the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a direct participant, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the Securities and Exchange Commission.
Unless and until they are exchanged in whole or in part for certificated
Notes in definitive form as set forth below, the Global Note may not be
transferred except as a whole by DTC to a nominee of DTC, or by a nominee of DTC
to DTC or another nominee of DTC.
The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if (i) DTC is at any time unwilling, unable or
ineligible to continue as depositary or (ii) there shall have occurred and be
continuing an Event of Default with respect to the Notes represented by the
Global Note, Saks Holdings will issue individual Notes in definitive form in
exchange for the Global Note. In addition, Saks Holdings may at any time and in
its sole discretion determine not to have a Global Note, and, in such event,
will issue individual Notes in definitive form in exchange for the Global Note
previously representing all such Notes. In such instances, an owner of a
beneficial interest in a Global Note will be entitled to physical delivery of
Notes in definitive form equal in principal amount to such beneficial interest
and to have such Notes registered in its name. Individual Notes so issued in
definitive form will be issued in denominations of $1,000 and any larger amount
that is an integral multiple of $1,000 and will be issued in registered form
only, without coupons.
Payments of principal of and interest on the Notes will be made by Saks
Holdings through the Trustee to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. Neither Saks Holdings nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. Saks Holdings expects that DTC, upon receipt of
any payment of principal or interest in respect of the Global Note, will credit
the accounts of the related participants with payment in amounts proportionate
to their respective holdings in principal amount of beneficial interest in the
Global Note as shown on the records of DTC. Saks Holdings also expects that
payments by participants to owners of beneficial interests in the Global Note
will be governed by standing customer instructions and customary practices, as
is now the case with securities held for the accounts of customers in bearer
form or registered in "street name," and will be the responsibility of such
participants.
So long as the Notes are represented by a Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
Holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by participants or by owners of beneficial interests in a
Global Note held through such participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with its
procedures on a form required by DTC and provided to participants. In order to
ensure that DTC's nominee will timely exercise a right to repayment, or the
right of conversion, with respect to a particular Note, the beneficial owner of
such Notes must instruct the broker or other participant through which it holds
an interest in such Notes to notify DTC of its desire to exercise a right to
repayment, or the right of conversion. Different firms have different cut-off
times for accepting instructions from their customers and, accordingly, each
beneficial owner should consult the broker or other participant through which it
holds an interest in a Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to DTC.
Saks Holdings will not be liable for any delay in delivery of such notice to
DTC.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Saks Holdings' authorized capital stock consists of 10 million shares of
preferred stock, of which no shares are issued and outstanding, and 150 million
shares of Common Stock, $.01 par value per share, of which 63,049,315 shares are
issued and 63,037,464 shares are outstanding as of August 28, 1996. The material
terms of Saks Holdings' certificate of incorporation and bylaws are discussed
below.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to vote cumulatively
for the election of directors. Holders of Common Stock have no redemption,
conversion, preemptive or other subscription rights. There are no sinking fund
provisions relating to the Common Stock. In the event of the liquidation,
dissolution or winding up of Saks Holdings, holders of Common Stock are entitled
to share ratably in all of the assets of Saks Holdings, if any, remaining after
satisfaction of the debts and liabilities of Saks Holdings. The outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, upon payment therefor as contemplated herein, validly issued, fully paid and
nonassessable.
Holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors of Saks Holdings out of funds legally
available therefor. Saks Holdings does not anticipate paying cash dividends on
the Common Stock in the foreseeable future. See "Dividend Policy".
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, to issue the preferred stock in one or more classes or series
and to fix the designations, powers, preferences, rights, qualifications,
limitations or restrictions of any such class or series. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of Saks Holdings. Saks Holdings has no
current plans to issue shares of preferred stock.
CERTAIN PROVISIONS OF DELAWARE LAW
Saks Holdings was incorporated in 1990 under the Delaware General
Corporation Law (the "DGCL"). Saks Holdings is subject to Section 203 of the
DGCL, which restricts certain transactions and "business combinations" between a
Delaware corporation and an "interested stockholder" (in general, a stockholder
owning 15% or more of the corporation's outstanding voting stock) or an
affiliate or associate of an interested stockholder, for a period of three years
from the date the stockholder becomes an interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
unless the transaction is approved by the Board of Directors and the holders of
at least 66 2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder), Section 203 prohibits significant
business transactions such as a merger with, disposition of assets to or receipt
of disproportionate financial benefits by the interested stockholder, or any
other transaction that would increase the interested stockholder's proportionate
ownership of any class or series of the corporation's stock. The
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statutory ban does not apply if, upon consummation of the transaction in which
any person becomes an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock of the corporation (excluding shares
held by persons who are both directors and officers or by certain employee stock
plans).
Saks Holdings' Certificate of Incorporation contains certain provisions
permitted under the DGCL relating to the liability of directors. The Certificate
of Incorporation provides that, to the fullest extent permitted by the DGCL, no
director of Saks Holdings will be liable to Saks Holdings or its stockholders
for monetary damages for breach of fiduciary duty as a director. The Certificate
of Incorporation and Bylaws of Saks Holdings also contain provisions
indemnifying the directors and officers of Saks Holdings to the fullest extent
permitted by the DGCL.
Section 203 and the provisions of Saks Holdings' Certificate of
Incorporation and Bylaws described above may make it more difficult for a third
party to acquire, or discourage acquisition bids for, Saks Holdings. Section 203
and these provisions could have the effect of inhibiting attempts to change the
membership of the Board of Directors of Saks Holdings. In addition, the limited
liability provisions in the Certificate of Incorporation and the indemnification
provisions in the Certificate of Incorporation and Bylaws may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty (including breaches resulting from grossly negligent conduct) and
may have the effect of reducing the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise have benefited Saks Holdings and its stockholders. Furthermore, a
stockholder's investment in Saks Holdings may be adversely affected to the
extent Saks Holdings pays the costs of settlement and damage awards against
directors and officers of Saks Holdings pursuant to the indemnification
provisions in Saks Holdings' Bylaws. The limited liability provisions in the
Certificate of Incorporation will not limit the liability of directors under
federal securities laws.
SHARES RESERVED FOR ISSUANCE
Saks Holdings has 6,209,045 shares of Common Stock reserved for issuance
upon the exercise of options granted or to be granted under the Incentive Plans.
As of August 28, 1996, options for the purchase of 3,072,035 shares were
outstanding. As of August 28, 1996 options for the purchase of 1,041,158 shares
of Common Stock have fully vested.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
LISTING
The Common Stock is listed on the New York Stock Exchange under the symbol
"SKS".
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CERTAIN TAX CONSIDERATIONS
In the opinion of Saks Holdings' counsel, Gibson, Dunn & Crutcher LLP, the
following is a summary of certain anticipated material United States federal
income tax consequences of holding and disposing of the Notes and any Common
Stock issued upon conversion of Notes. This discussion is based on existing
provisions of the United States Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations promulgated thereunder, judicial decisions and
administrative rulings, all of which are subject to change or alternative
construction with possible retroactive effect. This summary does not give a
detailed discussion of any state, local or foreign tax considerations, nor does
it purport to deal with all federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules, such as
foreign persons, banks, tax-exempt organizations, insurance companies, persons
that hold Notes or Common Stock that are a hedge or that are hedged against
currency risks or that are part of a straddle or conversion transaction, persons
whose functional currency is not the U.S. dollar and dealers in stocks and
securities. In addition, the summary is generally limited to Notes and the
Common Stock into which the Notes are convertible which are held as "capital
assets" within the meaning of Section 1221 of the Code by persons who are (i)
citizens or residents of the United States, (ii) domestic corporations, or (iii)
otherwise subject to United States federal income taxation on a net income basis
in respect of a Note or Common Stock. No rulings will be sought from the
Internal Revenue Service (the "IRS") with respect to the federal income tax
consequences of holding and disposing of the Notes.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE THE NOTES.
EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION
OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR SITUATION
BEFORE DETERMINING WHETHER TO PURCHASE THE NOTES.
NOTES
INTEREST. Holders of Notes will be required to include interest on the Notes
in gross income as ordinary income at the time such interest is accrued or
received in accordance with their usual methods of accounting for federal income
tax purposes.
DISPOSITION. In general, a holder of a Note will recognize gain or loss upon
the sale, exchange, redemption or other disposition (excluding conversion) of
the Note measured by the difference between (i) the amount of cash and the fair
market value of property received and (ii) the U.S. holder's adjusted tax basis
in the Note (except to the extent that the amount realized is attributable to
accrued interest on the Notes which has not previously been included in income,
which amount will be subject to the rules generally applicable to interest). Any
such gain or loss will generally be long-term capital gain or loss, provided the
Note had been held for more than one year at the time of the sale, exchange or
other disposition.
CONVERSION. A holder of a Note will not recognize gain or loss on the
conversion of a Note solely into Common Stock except with respect to cash in
lieu of fractional shares and except to the extent that the Common Stock issued
upon conversion is treated as attributable to accrued interest on the Notes. To
the extent that Common Stock is received by a holder of a Note without
recognition of gain or loss, the holding period of the Common Stock received
upon conversion of the Note will include the period during which the Note was
held, and the holder's aggregate basis in the Common Stock received upon
conversion of the Note will be equal to the holder's aggregate basis in the Note
exchanged therefor (less a portion thereof allocable to any fractional share). A
holder of a Note will recognize gain or loss for federal income tax purposes on
the receipt of cash in lieu of a fractional share of Common Stock in an amount
equal to the difference between the amount
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of cash received and such holder's basis in such fractional share. Except as
described above, such gain or loss will be capital gain or loss, and will be
long-term capital gain or loss if the fractional share has been deemed held for
more than one year. The fair market value of Common Stock received which is
attributable to accrued interest will be taxable as ordinary interest income.
CONSTRUCTIVE DIVIDEND. If at any time Saks Holdings makes a distribution of
property to stockholders which would be taxable to such stockholders as a
dividend (for example, distributions of evidences of indebtedness or assets of
Saks Holdings, but generally not stock dividends or rights to subscribe for
Common Stock) and, pursuant to the anti-dilution provisions, the conversion
price of the Notes is adjusted, such adjustment may result in constructive
distributions to holders of Notes that could be taxable to them as dividends
pursuant to Section 305 of the Code. Therefore, holders of Notes could have an
amount included in gross income as a result of an event pursuant to which they
received no cash or property that could be used to pay any related tax.
Similarly, a failure to adjust the conversion price of the Notes to reflect a
stock dividend or other event increasing the proportionate interest of the
holders of outstanding stock can in some circumstantances be deemed dividend
income to holders of such stock.
COMMON STOCK
The following summary of certain United States federal income tax
consequences of the ownership and disposition of Common Stock into which the
Notes are convertible does not take into account or discuss the tax laws of any
country other than the United States, or state and local tax considerations
within the United States and is not a comprehensive description of all United
States federal income tax considerations that may be relevant to a decision to
own Common Stock. Prospective holders of Common Stock should consult their own
tax advisors as to United States or other tax consequences of the ownership and
disposition of Common Stock, including the possible application of the "personal
holding company" rules.
For United States federal income tax purposes, the gross amount of dividends
paid, if any, with respect to Common Stock out of earnings and profits of Saks
Holdings to a holder of such Common Stock generally will be treated as ordinary
income to such holder. To the extent a distribution exceeds the earnings and
profits of Saks Holdings, it will be treated first as a return of capital to the
extent of the holder's basis in the Common Stock, and then as gain from the sale
of a capital asset.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING
Under current United States federal income tax law, holders of Notes or
Common Stock will be subject to information reporting and may be subject to,
under certain circumstances, "backup withholding" at the rate of 31% in respect
of cash payments of interest or OID on the Notes, or in respect of dividends
payable with respect to the stock into which the Notes may be converted. This
withholding generally applies if the holder (i) fails to furnish the payor of
the interest or dividends with its taxpayer identification number ("TIN"); (ii)
furnishes such payor an incorrect TIN; (iii) is notified by the IRS that it has
failed to properly report interest, dividends or other "reportable payments" as
defined in the Code; or (iv) under certain circumstances, fails to provide such
payor or the holder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number and that the
holder is not subject to backup withholding. Any amount withheld from a payment
to a holder under the backup withholding rules is allowable as a credit against
such holder's federal income tax liability, provided that the required
information is furnished to the IRS. Backup withholding will not apply with
respect to payments made to certain holders of Notes, including payments to
certain exempt recipients (such as corporations and exempt organizations).
Holders of Notes should consult their tax advisors as to their qualification for
exemption from the backup withholding requirements.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The material terms of certain indebtedness of Saks are described below. Each
of the following summaries is subject to and qualified in its entirety by
reference to the detailed provisions of the respective agreements and
instruments to which each summary relates. Copies of such agreements and
instruments have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
CREDIT AGREEMENT
In July 1993, Saks entered into an Amended and Restated Credit Agreement
with certain lenders (the "Lenders") which provided for $200 million in term
loans ("Term Loans"), $225 million in base revolving credit loans ("Base
Revolving Loans") and $100 million in working capital revolving credit loans
("Working Capital Revolving Loans"). The Term Loans, Base Revolving Loans and
Working Capital Revolving Loans collectively are referred to as the "Credit
Facility". The Term Loans consist of two tranches: the tranche A term loan (the
"Tranche A Loan") and the tranche B term loan (the "Tranche B Loan"), each
initially in the amount of $100 million. In March 1995, Saks and the Lenders
amended the Credit Facility to increase the principal amount of the Tranche B
Loan by $75 million for the primary purpose of financing the acquisition of four
stores previously operated by I. Magnin. In October 1995, Saks and the Lenders
amended the Credit Facility to (a) increase the principal amount of the Tranche
B Loan by $50 million, and (b) permit Saks to retain up to $25 million of net
proceeds from asset sales that otherwise would have been subject to mandatory
prepayment under the Credit Facility, each for the purpose of financing capital
expenditures relating to the remodeling, replacement and construction of retail
stores and a distribution center. For information regarding installment payments
due on the Tranche A Loan and the Tranche B Loan, see Note 5 to Consolidated
Financial Statements. As of August 3, 1996, there was approximately $25 million
and $113 million outstanding under the Tranche A and Tranche B Loans,
respectively.
In March 1996, Saks and the Lenders amended the Credit Facility, among other
things, to (i) permit Saks Holdings' initial public offering, (ii) exclude up to
$45 million in special charges from the calculation of certain restrictive
financial covenants and (iii) require that (a) at least one-third of the net
proceeds from Saks Holdings' initial public offering be used to prepay Term
Loans and (b) the remainder of such net proceeds be used to prepay first the
Working Capital Revolving Loans and then the Base Revolving Loans without
permanent reductions of availability. In April 1996, Saks and the Lenders
amended the Credit Facility, among other things, to (i) allow certain of the
proceeds of the Base Revolving Loans and Working Capital Revolving Loans to be
used to make permitted acquisitions and permitted capital expenditures, (ii) add
a covenant specifying a maximum ratio of outstanding loans to consolidated
adjusted operating profit tested annually and (iii) amend the method of
calculating interest rates under the Credit Facility as set forth below. In
April 1996, Saks and the Lenders amended the Credit Facility to allow Saks to
make payments, dividends or distributions with respect to operating costs
incurred by Saks Holdings in amounts not to exceed $4.0 million per fiscal year.
In August 1996, the Lenders consented to the issuance of the Notes and
certain payments from Saks to Saks Holdings pursuant to an intercompany note
(the "Intercompany Note") to permit Saks Holdings to fund payments of principal
of and interest on the Notes. The Lenders also consented to the prepayment of
Saks' existing subordinated debt. Saks is required to prepay the outstanding
balance of the term loans with the proceeds from the Intercompany Note.
As of August 3, 1996, an aggregate principal amount of approximately $291
million was available for borrowing under the Working Capital Revolving Loans
and the Base Revolving Loans, which amount is net of approximately $24.7 million
in borrowings and $6.6 million in standby letters
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of credit issued and outstanding under the Credit Facility. The Lenders'
commitments to make the Working Capital Revolving Loans and the Base Revolving
Loans expire on the earlier of June 30, 1998 and the termination of the
commitments under the Credit Facility. Saks and the Lenders currently are
reviewing Saks' Revolving Loans and intends to modify the terms of the Revolving
Loans to reflect Saks' improved credit worthiness.
Saks may borrow up to $20 million in aggregate principal amount of swingline
loans which bear interest at the Alternate Base Rate (as defined in the Credit
Facility) plus an applicable margin ranging from 0.0% to 1.0% depending on the
type of loan and the Interest Coverage Ratio (as defined in the Credit
Facility). All other loans under the Credit Facility bear interest at a rate
equal to, at Saks' option, (a) the Alternate Base Rate plus a percentage ranging
from 0.0% to 1.5% depending on the Interest Coverage Ratio or (b) the Eurodollar
Rate (as defined in the Credit Facility) plus a percentage ranging from 1.0% to
2.5% depending on the Interest Coverage Ratio. Saks has purchased three interest
rate cap agreements which limit the maximum interest rate on $400 million of
borrowings through September 2, 1996 to 5.5%.
The Credit Facility imposes certain covenants and other requirements on Saks
and its subsidiaries. In general, the affirmative covenants include standard
operating covenants requiring Saks, among other things, to: periodically and
upon the occurrence of certain events furnish certain financial information and
certificates to the administrative agent; pay obligations when due; continue to
engage in a business of the same general type as conducted on the date of the
Credit Facility; maintain property in good working order; maintain insurance
coverage on all property; keep proper books and records; promptly give notice
upon the occurrence of certain events; cause each Real Estate Holding Subsidiary
(as defined in the Credit Facility) to make certain distributions to Saks or a
subsidiary; grant a security interest to the administrative agent in certain new
leaseholds; and use reasonable best efforts to cause each such new leasehold to
be mortgageable and assignable. The Credit Facility also contains certain
negative covenants and restrictions that, among other things, restrict: (i) the
incurrence of indebtedness (as described below); (ii) the incurrence of liens or
other encumbrances; (iii) the incurrence of contingent obligations; (iv) the
sale, lease, assignment, transfer or other disposition of assets other than in
the ordinary course of business; (v) fundamental corporate changes including
acquisitions, mergers, consolidations, liquidations or material changes in Saks'
current method of conducting business or engaging in any type of business other
than the same general type presently conducted; (vi) investments, loans and
advances; (vii) capital expenditures; (viii) certain payments of dividends (see
"Risk Factors--No Dividends"); (ix) transactions with affiliates including
purchases, sales, leases, exchanges of property or rendering of any service with
any affiliate; (x) entering into certain foreign currency exchange contracts
other than for the purpose of hedging payments received in a foreign currency in
the ordinary course of business; (xi) changes in significant credit or
collection policies; (xii) prepayments and amendments of subordinated debt and
debt incurred pursuant to the REMIC Financing; (xiii) certain amendments of
leases of operating properties; and (xiv) waiver of surviving rights and causes
of action under the stock purchase agreement pursuant to which the stock of Saks
was acquired in 1990 and the I. Magnin acquisition agreement in 1994. Financial
covenants in the Credit Facility specify that consolidated net worth tested
quarterly may not be below the net proceeds from Saks Holdings' initial public
offering (approximately $418 million) plus $650 million and that consolidated
adjusted operating profit tested annually may not be below $155 million during
fiscal 1996 increasing to $225 million in fiscal 1999. Financial covenants in
the Credit Facility also require maintenance of the Interest Coverage Ratio
tested quarterly with respect to the immediately preceding four quarters which
increase from 1.90 to 1.00 for the third quarter of fiscal 1996, to 3.00 to 1.00
for the second quarter of fiscal 2000 and specify that the ratio of outstanding
loans to consolidated adjusted operating profit tested annually may not exceed a
certain level which decreases from 2.75 to 1.00 in fiscal 1996 to 1.75 to 1.00
in fiscal 1999.
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Saks and its subsidiaries may not create, incur, assume or suffer to exist
any indebtedness except: (i) indebtedness outstanding on the date of the Credit
Facility that was specifically scheduled, excluding the refinancing of such
indebtedness; (ii) indebtedness arising under the Credit Facility;
(iii) indebtedness incurred after the date of the Credit Facility for industrial
revenue bonds, capitalized lease obligations or the deferred purchase price of
newly acquired property not exceeding an aggregate at any one time outstanding
of $140 million plus amounts outstanding under certain capitalized leases;
(iv) intercompany indebtedness; (v) indebtedness evidenced by the Subordinated
Notes, subject to certain conditions; (vi) indebtedness pursuant to the REMIC
Financing; (vii) unsecured indebtedness not exceeding an aggregate principal
amount at any one time outstanding of $50 million; (viii) indebtedness in
respect of foreign currency exchange contracts otherwise permitted in the Credit
Facility; (ix) indebtedness in respect of the Accounts Receivable Financing (as
defined in the Credit Facility, which includes the transactions described under
"Receivables Securitization"); (x) unsecured indebtedness in respect of letters
of credit issued under other credit facilities, subject to a $25 million limit
in the aggregate; and (xi) indebtedness relating to certain specifically
scheduled store transactions.
Saks from time to time has amended covenants contained in the Credit
Facility in anticipation of changes in its results of operations and in economic
conditions generally.
Events of default under the Credit Facility include, among other things: (i)
the failure to pay any principal when due or any interest within five days of
being due; (ii) any representation or warranty in documents delivered in
connection with the Credit Facility which is proven to be materially incorrect
as of the date made; (iii) a failure by Saks, Saks Holdings or any subsidiary to
comply with or perform certain obligations under the Credit Facility or certain
documents delivered in connection therewith; (iv) a default by Saks or any
subsidiary in the payment when due of certain indebtedness or conditions or
agreements relating to such indebtedness, provided that the aggregate principal
amount of liabilities involved is at least $1 million; (v) certain insolvency
events; (vi) certain prohibited ERISA events; (vii) judgments or decrees entered
against Saks or any subsidiary involving an aggregate of $1 million or more
(excluding amounts covered by insurance) not stayed, discharged, vacated or
bonded within the applicable time for such action; (viii) the ineffectiveness or
unenforceability of documents delivered in connection with the Credit Facility;
(ix) a change of control, which is deemed to occur if any person (other than
Investcorp, any of its Affiliates or subsidiaries, any person who is senior
management of Saks or Saks Holdings, any entity that is majority-owned by such
senior management of Saks or Saks Holdings, or any person acting in the capacity
of an underwriter), whether singly or in concert with one or more persons,
directly or indirectly acquires the power to vote or direct the voting of 25% or
more, on a fully diluted basis, of the outstanding common stock of Saks or of
the Common Stock; and (x) any amendment or other modification of the
Subordinated Note Indenture or Subordinated Notes made without all required
written consents.
The Credit Facility is secured by substantially all of the assets of Saks
and its subsidiaries other than (i) a significant number of the real estate
properties owned or leased by Saks or its subsidiaries which are subject to the
REMIC Financing, (ii) certain accounts receivable of Saks which are subject to
sale under the accounts receivable financing discussed below, (iii) the
inventory of Saks and its subsidiaries and (iv) the capital stock of Saks' real
estate subsidiaries and accounts receivable subsidiaries. Saks Holdings has
guaranteed payment of the obligations of Saks under the Credit Facility and has
secured this guarantee with a pledge of all of the issued and outstanding
capital stock of Saks.
In addition, as of August 3, 1996, approximately $4.9 million in letters of
credit were outstanding under a separate $10 million letter of credit facility
between Saks and The Bank of Tokyo.
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SUBORDINATED DEBT
On July 1, 1993, Saks issued and sold in a private placement $50 million
principal amount of 9% Subordinated Notes due 2001 (the "Subordinated Notes").
The Subordinated Notes bear interest at 9% per year, payable semiannually in
arrears on each June 30 and December 31, and mature on May 31, 2001. The
Subordinated Notes are unsecured obligations of Saks and are subordinated in
right of payment to all existing and future Senior Indebtedness (as defined in
the indenture pursuant to which the Subordinated Notes were issued (the
"Subordinated Note Indenture")).
The Subordinated Notes may be redeemed at the option of Saks in whole or in
part at (a) 101% of the principal amount redeemed prior to November 30, 1996,
(b) 100.5% of the principal amount redeemed on or after November 30, 1996 but
prior to May 31, 1997 or (c) 100% of the principal amount redeemed on or after
May 31, 1997 through maturity, in each case plus accrued and unpaid interest, if
any. Pursuant to the Subordinated Debt Prepayment, Saks redeemed $35 million
aggregate principal amount of the Subordinated Notes with the proceeds from
borrowings under the Revolving Loan portion of the Credit Facility. Saks and the
holders of the Subordinated Notes entered into a supplement to the Subordinated
Note Indenture to permit the Subordinated Debt Prepayment without premium and to
change the maturity date of the remaining Subordinated Notes from May 2001 to
December 1997. Upon a "Change of Control," Saks is obligated to make an offer to
repurchase all outstanding Subordinated Notes at the optional redemption prices
set forth above, plus accrued and unpaid interest, if any, to and including the
Change of Control Payment Date (as defined in the Subordinated Note Indenture).
A "Change of Control" will be deemed to occur if any person (other than
Investcorp, an Affiliate of Investcorp, a person who is senior management of
Saks, any entity majority-owned by such senior management of Saks or any person
acting in the capacity of an underwriter), whether singly or in concert with one
or more persons, directly or indirectly, shall have acquired 20% or more, on a
fully diluted basis, of the outstanding Common Stock.
The Subordinated Note Indenture contains various restrictive covenants that,
among other things, limit: (i) the incurrence of certain additional indebtedness
by Saks or its subsidiaries; (ii) the creation of Senior Indebtedness of Saks
which is, by its terms, subordinated in right of payment to other indebtedness
of Saks; and (iii) the payment of dividends on capital stock of Saks (see "Risk
Factors--No Dividends"). Affirmative covenants include, among others, an
obligation to pay principal, interest and premium, if any, when due, hold funds
for note payments in trust, maintain its corporate existence, maintain its
properties in good condition, pay taxes when due, furnish to the trustee copies
of certain financial information, and certify as to whether Saks is in default
within 90 days after the end of each fiscal quarter of Saks. Events of default
under the Subordinated Note Indenture include, among other things: (i) a default
in the payment of any interest on any Note when due, which default continues for
30 days; (ii) a default in the payment of any principal of or premium, if any,
on any Note when due; (iii) a default in the deposit of any payment when due
pursuant to a Change of Control or redemption of any Note; (iv) the failure by
Saks to comply with any agreement or covenant in the Subordinated Note Indenture
with respect to the payment of dividends on capital stock, which failure
continues for ten business days; (v) the failure by Saks to comply with any
other agreement or covenant in the Subordinated Note Indenture, which failure
continues for 60 days after a Notice of Default (as defined in the Subordinated
Note Indenture) is given; (vi) the rendering of a final judgment in excess of
$20 million (excluding amounts covered by insurance) not discharged, waived or
stayed for 45 days after the date on which the right to final appeal expires,
which default continues for 30 days after a Notice of Default is given; (vii)
certain defaults under a bond, debenture, note or other indebtedness of Saks or
any Significant Subsidiary (as defined in the Subordinated Note Indenture), or
under a mortgage, indenture or other instrument under which there may be issued
or by which there may be secured or evidenced indebtedness for money borrowed by
Saks or such Significant Subsidiary, which indebtedness has a principal amount
of over $20
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million; and (viii) certain events of bankruptcy, insolvency or reorganization
of Saks or any Significant Subsidiary.
REMIC FINANCING
In May 1995, Fifth Avenue Capital Trust, a special purpose Delaware business
trust (the "Depositor") of which the primary beneficiary is Saks, made 27
commercial mortgage loans (the "Mortgage Loans") in the aggregate principal
amount of $335 million (the "REMIC Financing") to eight special purpose Delaware
corporations and one special purpose Delaware business trust (the "REMIC
Borrowers") which owned 28 properties operated as Saks stores (including the
Fifth Avenue store) and the Yonkers distribution center (the "REMIC
Properties"). The eight corporate REMIC Borrowers are direct or indirect
wholly-owned subsidiaries of Saks. All of the beneficial interests in the one
REMIC Borrower that is a business trust are owned indirectly by Saks.
The Mortgage Loans were deposited by the Depositor in a trust fund (the
"Trust Fund") created by the Depositor pursuant to a trust and servicing
agreement among the Depositor, Bankers Trust Company, as servicer (the
"Servicer"), and Marine Midland Bank, as trustee. Commercial Mortgage
Pass-Through Certificates in the aggregate principal amount of $335 million
representing beneficial ownership interests in the Trust Fund (the "REMIC
Certificates") were offered and sold in transactions exempt from registration
under the Securities Act pursuant to Rule 144A or Regulation S under the
Securities Act. The Depositor holds the REMIC Certificate representing the
residual interest in the Trust Fund. An election was made to treat the Trust
Fund as a REMIC for federal income tax purposes. The Depositor used the proceeds
of the sale of the REMIC Certificates to repay an existing $335 million
financing secured by certain of the REMIC Properties and certain other Saks
stores. For information regarding aggregate principal amounts of the various
series of REMIC Certificates, and the rates of interest payable thereon, see
Note 5 to Consolidated Financial Statements.
There is no scheduled principal amortization on the Mortgage Loans prior to
May 12, 2002. The unpaid principal balance of each Mortgage Loan is due in a
single balloon payment on that date.
Each REMIC Borrower has guaranteed the Mortgage Loans of each other REMIC
Borrower. Each REMIC Borrower has secured its obligations with respect to its
Mortgage Loans and its guaranty of each other REMIC Borrower's Mortgage Loans by
a first priority mortgage lien on each fee or leasehold interest of each REMIC
Borrower in its REMIC Properties and an assignment of leases, rents and lease
guarantees relating to all leases on each such REMIC Property, primarily
consisting of an operating lease (an "Operating Lease") with Saks or a direct or
indirect wholly-owned operating subsidiary of Saks (an "Operating Lessee"). The
Mortgage Loans also contain covenants limiting the ability of each REMIC
Borrower to incur certain additional indebtedness. In addition, a REMIC Borrower
may not renovate a REMIC Property if such renovation would cause the related
store to be closed for ten days or more or if the modification would cost more
than $5 million per REMIC Property or $15 million in the aggregate for all REMIC
Properties, subject to certain specific exceptions for renovation projects
scheduled in the related documents. The REMIC Borrowers are subject to covenants
which require them to maintain their businesses separate and apart from Saks and
restrict their ability to engage in any activity or business not directly
related to the REMIC Properties. Saks guarantees the obligations under all
Operating Leases with Operating Lessees other than Saks. Under the terms of the
Operating Leases, the Operating Lessees are required to pay as additional rent
all taxes, assessments, utility charges and similar fees and charges. The
Operating Lessees are also responsible for paying all operating expenses and
insurance premiums and paying all utilities, and cannot reduce or set off any
rent (except, in certain circumstances, in the case of a condemnation), nor can
they terminate the Operating Leases for any reason, including condemnation,
casualty or structural defects. The Operating Lessees are required to bear the
cost of all repairs (including structural repairs) to the REMIC properties.
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Events of default under the Mortgage Loans include the following: (i) a
default in the payment of any portion of the principal of or interest or
premium, if any, on any Mortgage Loan when due; (ii) a default in the payment of
any other amounts due and payable under any REMIC Certificate or related
Mortgage Loan document, which continues for a period of ten days after written
demand; (iii) an "Event of Default" as defined in any document evidencing or
securing the Mortgage Loans which has not been cured within any applicable cure
or grace period; (iv) a default by the REMIC Borrowers under any ground lease,
operating lease or reciprocal easement agreement and such default shall not be
cured prior to the expiration of any applicable grace period; and (v) the
failure of Saks to be the sole direct or indirect owner of any REMIC Borrower
that has not paid in full its REMIC Certificates.
The Mortgage Loans may be prepaid, as described in Note 5 to Consolidated
Financial Statements. In connection with any sale of the Yonkers facility, Saks
must prepay the Mortgage Loan with respect to such facility. The Mortgage Loan
with respect to the Owings Mills, Maryland store was prepaid in January 1996 in
connection with the closing of the store at that location and the disposition of
that REMIC Property. The aggregate outstanding principal amount of the Mortgage
Loans at August 28, 1996 was $330,840,901.
RECEIVABLES SECURITIZATION
Since 1991, Saks has sold its proprietary credit card receivables (the
"Receivables") to SFA Finance Company ("Finco"), a Delaware corporation and a
wholly owned subsidiary of Saks established solely for the purpose of purchasing
Receivables from Saks. Finco subsequently transferred the Receivables, in
exchange for cash and subordinated certificates of beneficial interests, to the
SFA Master Trust (the "Original Receivables Trust") established pursuant to a
pooling and servicing agreement among Finco, Saks, as servicer, and Bankers
Trust Company, as trustee (the "Original A/R Trustee"), which is consolidated by
Saks. Saks receives a fee for servicing the Receivables for the Original
Receivables Trust.
The Original Receivables Trust has sold two series of certificates of
beneficial interest in the Original Receivables Trust to third parties. These
certificates represent undivided interests in the receivables generated from
time to time by Saks by a portfolio of accounts meeting the designated
eligibility requirements. Series 1991-2 is a medium term series that matures in
November 1996. In May 1996, principal collections of Receivables allocable to
Series 1991-2 began to be accumulated in a bank account maintained by the
Original A/R Trustee in order to make the November 1996 principal repayment and
are not available to pay for new Receivables transferred by Finco. Class A of
Series 1991-2 at August 3, 1996 had an outstanding principal balance of $200
million and bore interest at LIBOR plus .45%. The Class A Certificates were sold
in transactions exempt from registration under the Securities Act pursuant to
Rule 144A or Regulation S under the Securities Act.
In April 1996 the Saks Master Trust (the "New Receivables Trust") was formed
pursuant to a pooling and servicing agreement among Finco, Saks, as servicer,
and Bankers Trust Company, as trustee (the "New A/R Trustee"). The assets of the
New Receivables Trust currently consist principally of a certificate evidencing
the entire interest in the Transition Certificate, Series 1996-1 (the
"Transition Certificate"), which is the second outstanding series issued by the
Original Receivables Trust. The Transition Certificate represents the interest
in the assets of the Original Receivables Trust not represented by Series 1991-2
and has a principal amount which will fluctuate from time to time according to
the level of receivables in the Original Receivables Trust in excess of the
amount required to support the Series 1991-2 Certificates. On the date on which
Series 1991-2 has been fully liquidated (the "Existing Trust Termination Date"),
the assets of the Original Receivables Trust will be transferred to the New
Receivables Trust in exchange for the cancellation
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of the Transition Certificate. After the Existing Trust Termination Date, Saks
will receive a fee for servicing the Receivables for the New Receivables Trust.
In April 1996 the New Receivables Trust sold two series of certificates of
beneficial interests. These certificates represent undivided interests in the
receivables generated from time to time by Saks by a portfolio of accounts
meeting the designated eligibility requirements. Series 1996-1 is a medium term
series that matures in April 1999. Approximately $297 million of Class A Series
1996-1 Certificates and $53 million of Class B Series 1996-1 Certificates were
sold in transactions exempt from registration under the Securities Act pursuant
to Rule 144A thereunder. Approximately $47 million of subordinated Series 1996-1
Certificates were privately placed at the same time. All such certificates bear
interest at fixed spreads over one-month LIBOR. Finco retains approximately
$16.5 million of subordinated Series 1996-1 Certificates. Series 1996-1 has a
substantial prefunded amount, which will be invested in Receivables (via the
Transition Certificate) as cash allocable to Series 1991-2 is no longer
reinvested in Receivables, but instead is accumulated in order to make the
principal payment due with respect thereto in November 1996.
Series 1996-2 is a series with a variable principal amount. The Class A
Series 1996-1 Certificates have a maximum outstanding principal balance of $100
million and have been privately placed. Subordinated Series 1996-2 Certificates,
with an aggregate maximum outstanding principal balance of approximately $16.0
million, also were privately placed. All Series 1996-2 Certificates bear
interest at fixed spreads over one-month LIBOR. Finco will retain up to
approximately $5.0 million of subordinated Series 1996-2 Certificates. The
principal balance of Series 1996-2 is currently zero.
Saks is obligated to repurchase Receivables related to customer credits such
as merchandise returns and other receivable defects. Saks has no obligation to
reimburse Finco, the Original Receivables Trust, the New Receivables Trust or
the purchasers of the certificates of beneficial interests for credit losses;
however, the subordinated certificates of beneficial interest in, and deposits
with, the Original Receivables Trust, and the New Receivables Trust which are
assets of Finco, and the discount on the sale of Receivables to Finco, if any,
are available to cover such losses.
Saks continues to provide for losses related to the receivables pursuant to
the recourse provisions of the relevant agreements in determining its allowance
for doubtful accounts.
Finco is subject to covenants which require it to maintain its business
separate and apart from Saks and restrict its ability to engage in any activity
or business not directly related to acquiring the Receivables and transferring
them to the trusts.
For additional information, see Note 4 to Consolidated Financial Statements.
79
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of August 28, 1996, 63,037,464 shares of Common Stock were outstanding.
Pursuant to the Secondary Offering, certain stockholders are offering for sale
up to 9,200,000 shares of Common Stock (including up to 1,200,000 shares to be
sold pursuant to over-allotment options). The 18,062,500 shares of Common Stock
sold in Saks Holdings' initial public offering in May 1996 are, and the shares
sold in the Secondary Offering will be, available for resale in the public
market without restriction or further registration under the Securities Act,
except for shares acquired in the offerings by "affiliates" of Saks Holdings (in
general, any person who has a control relationship with Saks Holdings), which
shares may be resold only if registered under the Securities Act or if
transferred pursuant to an exemption from registration, including resales
pursuant to Rule 144 and Regulation S under the Securities Act. The remaining
35,774,964 outstanding shares of Common Stock are deemed to be "restricted
securities" as that term is defined in Rule 144, all of which are eligible for
sale in the public market in compliance with Rule 144 and 28,200,727 of which
have been held for at least three years by persons Saks Holdings believes are
not affiliates.
Saks Holdings has agreed with the Underwriters that, during the period of 90
days from the date of this Prospectus, subject to certain exceptions, it will
not issue, sell, offer or agree to sell, grant any options for the sale of
(other than employee stock options) or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable for Common Stock, other than pursuant to the offering. In addition,
certain stockholders and the selling stockholders in the Secondary Offering have
agreed with the underwriters of the Secondary Offering that, subject to certain
exceptions, they will not offer, pledge, sell, transfer or otherwise dispose of
34,269,567 shares of Common Stock in connection with the Secondary Offering for
a period of 180 days after the date of the prospectus relating to the Secondary
Offering. Further, in connection with the initial public offering, certain other
stockholders owning 1,497,038 shares of Common Stock agreed with the
underwriters of the initial public offering that, subject to certain exceptions,
they will not offer, pledge, sell, transfer or otherwise dispose of such shares
of Common Stock prior to November 17, 1996. At the expiration of the lock-up
periods described above, or earlier with the written consent of the applicable
underwriters, the holders of 53,086,502 shares of Common Stock (assuming
consummation of the Secondary Offering, including shares to be sold thereby
pursuant to over-allotment options) will have the right to sell shares of Common
Stock without regard to the volume or other limitations of Rule 144 under the
Securities Act.
In addition, up to 3,072,035 shares of Common Stock may be issued upon
exercise of certain employee stock options that Saks Holdings has granted, of
which options to purchase 1,041,158 shares of Common Stock were exercisable as
of August 28, 1996. Saks Holdings has filed a registration statement on Form S-8
under the Securities Act to register the 6,209,045 shares of Common Stock
reserved for issuance under the Incentive Plans. As a result, any shares issued
upon exercise of stock options granted under such plans are available, subject
to special rules for affiliates, for resale in the public market, subject to
applicable lock-up arrangements. See "Underwriting" and "Management--Stock
Incentive Plans".
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years is entitled to sell, within any three-month period, a number of restricted
securities which does not exceed the greater of 1% of the then-outstanding
shares of Saks Holdings' Common Stock (630,374 shares as of August 28, 1996) or
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also may be subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about Saks Holdings. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of Saks Holdings at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted
80
<PAGE>
securities" under Rule 144 for at least three years, is entitled to sell such
shares under Rule 144(k) without regard to the volume limitation, manner of sale
provisions, public information requirements or notice requirements. Regulation S
permits the sale by affiliates and others of shares in an "offshore transaction"
(as defined in Regulation S), subject to certain other conditions including the
requirement that the purchaser not resell the shares to a U.S. person during a
40 day restricted period.
No prediction can be made as to the effect, if any, that market sales of
shares of Common Stock that are restricted securities or the availability of
such shares will have on the market price of the Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Common Stock and could impair Saks Holdings' future ability to
raise capital through an offering of equity securities.
Certain holders of Common Stock, including the stockholders participating in
the Secondary Offering, have, subject to certain conditions and restrictions,
the right to include their shares of Common Stock in registered public offerings
of Common Stock (or securities exchangeable for or convertible into Common
Stock) undertaken by Saks Holdings for its own account, as well as to require
Saks Holdings to register the sale of their shares of Common Stock upon demand.
Saks Holdings is undertaking the Secondary Offering pursuant to such
registration rights.
VALIDITY OF NOTES
The validity of the Notes offered hereby will be passed upon for Saks
Holdings by Gibson, Dunn & Crutcher LLP, New York, New York, and for the
Underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
The consolidated balance sheets of Saks Holdings as of January 28, 1995 and
February 3, 1996 and the consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended February
3, 1996, included in this Prospectus, have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Saks Holdings is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements, and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Judiciary Plaza, Washington, D.C., 20549, and at the Commission's
Regional Offices at Citicorp Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Reports, proxy and information statements and other information
concerning the Company may also be inspected at the offices of the New York
Stock Exchange, Inc. 20 Broad Street, New York, New York 10005, on which Saks
Holdings' Common Stock is listed.
81
<PAGE>
Saks Holdings has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Notes offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions having been omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
Saks Holdings and the Notes, reference is hereby made to such Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, although the material terms thereof are described in this
Prospectus, and, in each instance, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified by such reference to such exhibits. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any
part thereof may be obtained from such office upon payment of the fees
prescribed by the Commission.
82
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets at January 28, 1995 and February 3, 1996................ F-3
Consolidated Statements of Operations for the fiscal years ended January 29, 1994,
January 28, 1995 and February 3, 1996............................................. F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended
January 29, 1994, January 28, 1995 and February 3, 1996........................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1994,
January 28, 1995 and February 3, 1996............................................. F-6
Notes to Consolidated Financial Statements for fiscal years ended January 29, 1994,
January 28, 1995 and February 3, 1996............................................... F-7
Condensed Consolidated Balance Sheets at July 29, 1995 and August 3, 1996
(unaudited)......................................................................... F-26
Condensed Consolidated Statements of Operations for the six months ended July 29,
1995 and August 3, 1996 (unaudited)................................................. F-27
Condensed Consolidated Statements of Cash Flows for the six months ended July 29,
1995 and August 3, 1996 (unaudited)................................................. F-28
Notes to Condensed Consolidated Financial Statements for the six months ended July
29, 1995 and August 3, 1996 (unaudited)............................................. F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Saks Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Saks
Holdings, Inc. and Subsidiaries as of January 28, 1995 and February 3, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended February 3,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Saks Holdings, Inc. and Subsidiaries as of January 28, 1995 and February 3,
1996, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended February 3, 1996, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 13, 1996 except as to
the information regarding the amendments
to the Credit Facility in April 1996
presented in Note 5 for which the date is
April 18, 1996 and the information presented
in Note 15, for which the date is
April 26, 1996.
F-2
<PAGE>
SAKS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................................... $ 9,628 $ 6,627
Accounts receivable (net of allowances of $9,313 and
$11,160)........................................................ 43,797 37,426
Inventories................................................... 271,875 339,723
Other current assets.......................................... 44,820 55,420
Restricted cash............................................... 5,392 6,118
----------- -----------
Total current assets.................................... 375,512 445,314
----------- -----------
Property and equipment:
Land.......................................................... 192,053 188,157
Buildings and building improvements........................... 385,927 421,693
Furniture, fixtures and equipment............................. 252,694 229,276
Beneficial leasehold interests................................ 54,161 54,161
Construction in progress...................................... 17,156 5,088
Leased property under capital leases.......................... 95,875 107,008
Assets held for sale.......................................... 8,750 --
----------- -----------
1,006,616 1,005,383
Less, Accumulated depreciation and amortization............. (225,380 ) (225,119 )
----------- -----------
781,236 780,264
Goodwill (net of accumulated amortization of
$12,669 and $15,374).......................................... 95,828 93,123
Other intangibles (net of accumulated amortization of
$4,665 and $5,679)............................................ 9,547 8,533
Other noncurrent assets......................................... 27,074 38,953
----------- -----------
Total assets............................................ $1,289,197 $1,366,187
----------- -----------
----------- -----------
LIABILITIES:
Current liabilities:
Accounts payable, trade....................................... $ 96,577 $ 119,399
Accrued liabilities........................................... 92,756 108,491
Taxes other than income taxes................................. 31,561 21,456
Accrued interest.............................................. 5,504 10,821
Current portion of long-term debt............................. 19,825 26,463
Other......................................................... 4,167 4,772
----------- -----------
Total current liabilities............................... 250,390 291,402
Long term debt.................................................. 755,270 840,239
Obligations under capital leases................................ 95,240 104,468
Other noncurrent liabilities.................................... 41,103 46,903
----------- -----------
Total liabilities....................................... 1,142,003 1,283,012
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share, 10,000 shares
authorized, no shares issued and outstanding.................... -- --
Common Stock, $.01 par value per share, 150,000 shares
authorized, 45,089 issued and 44,958 outstanding................ 450 450
Additional paid-in capital...................................... 923,368 922,424
Accumulated deficit............................................. (775,022 ) (839,117 )
Treasury stock, at cost......................................... (1,602 ) (582 )
----------- -----------
Total stockholders' equity.............................. 147,194 83,175
----------- -----------
Total liabilities and stockholders' equity.............. $1,289,197 $1,366,187
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SAKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................................ $1,395,536 $1,418,163 $1,686,787
Cost of sales, including buying and occupancy........ (975,360) (979,650) (1,168,692)
---------- ---------- ----------
Gross margin....................................... 420,176 438,513 518,095
Selling, general and administrative expenses......... (394,828) (370,441) (438,603)
Management fees...................................... (2,000) (2,000) (7,000)
Impairment and special charges....................... (177,731) -- (36,415)
---------- ---------- ----------
Operating income (loss).......................... (154,383) 66,072 36,077
Interest, net........................................ (73,822) (76,155) (94,181)
---------- ---------- ----------
Income (loss) before income taxes and
extraordinary charge................................. (228,205) (10,083) (58,104)
Income taxes......................................... -- -- --
---------- ---------- ----------
Income (loss) before extraordinary charge........ (228,205) (10,083) (58,104)
Extraordinary charge--loss on early extinguishment of
debt................................................. (27,640) (535) (5,991)
---------- ---------- ----------
Net income (loss)................................ $ (255,845) $ (10,618) $ (64,095)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per share before extraordinary
charge............................................... $ (5.07) $ (.22) $ (1.29)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per share...................... $ (5.68) $ (.24) $ (1.43)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding.............. 45,030 45,010 44,955
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SAKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
CAPITAL STOCK
------------------- ADDITIONAL TREASURY TOTAL
SHARES PAR PAID-IN ACCUMULATED STOCK, STOCKHOLDERS'
OUTSTANDING VALUE CAPITAL DEFICIT AT COST EQUITY
----------- ----- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 30,
1993........................ 45,025 $450 $919,757 $(508,559) $ (247 ) $ 411,401
Purchase of treasury
stock....................... (2) (36 ) (36)
Reissuance of treasury
stock....................... 4 88 88
Payment of stock
subscriptions receivable... 34 34
Earned compensation......... 167 167
Gain on sale to affiliate... 3,250 3,250
1993 net loss............... (255,845) (255,845)
----------- ----- ---------- ----------- -------- -------------
Balance at January 29,
1994........................ 45,027 450 923,208 (764,404) (195 ) 159,059
----------- ----- ---------- ----------- -------- -------------
Purchase of treasury
stock....................... (70) (1,393 ) (1,393)
Reissuance of treasury
stock....................... 3 62 62
Employee stock subscriptions
receivable.................. (62) (62)
Surrender of unvested stock
grants...................... (3) 76 (76 ) 0
Earned compensation......... 146 146
1994 net loss............... (10,618) (10,618)
----------- ----- ---------- ----------- -------- -------------
Balance at January 28,
1995........................ 44,957 450 923,368 (775,022) (1,602 ) 147,194
----------- ----- ---------- ----------- -------- -------------
Purchase of treasury
stock....................... (1) (26 ) (26)
Reissuance of treasury
stock....................... 2 46 46
Conversion of stock......... (1,000) 1,000 0
Earned compensation......... 56 56
1995 net loss............... (64,095) (64,095)
----------- ----- ---------- ----------- -------- -------------
Balance at February 3,
1996........................ 44,958 $450 $922,424 $(839,117) $ (582 ) $ 83,175
----------- ----- ---------- ----------- -------- -------------
----------- ----- ---------- ----------- -------- -------------
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SAKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(255,845) $ (10,618) $ (64,095)
Adjustments to reconcile net loss to cash provided by
operating activities:
Extraordinary charge..................................... 27,640 535 5,991
Impairment and special charges........................... 177,731 -- 36,415
Depreciation and amortization............................ 86,812 67,974 66,766
Amortization of deferred financing costs................. 13,891 12,731 10,009
Non-cash interest, net................................... 738 (946) 462
Other items, net......................................... (15,395) (7,651) (1,045)
--------- --------- ---------
Net cash provided by operating activities before
changes in operating assets and liabilities.......... 35,572 62,025 54,503
Change in operating assets and liabilities:
Accounts receivable...................................... (35,976) (67,705) (62,583)
Proceeds from sale of accounts receivable................ 722,027 739,851 805,158
Origination of accounts receivable....................... (692,364) (673,202) (751,478)
Inventories.............................................. (15,045) (18,006) (70,974)
Accounts payable......................................... 7,363 21,265 27,322
Accrued liabilities...................................... (2,221) (12,634) 12,257
Accrued interest......................................... (690) 1,294 5,317
Taxes other than income taxes............................ 385 1,108 (10,105)
Other assets and liabilities............................. (3,468) (205) (15,522)
--------- --------- ---------
Net cash provided by (used in) operating activities.... 15,583 53,791 (6,105)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale and sale-leaseback of assets............ -- 31,150 12,806
Capital expenditures....................................... (49,752) (71,713) (87,028)
Construction allowances received from third parties........ 15,393 15,990 4,449
Change in restricted cash.................................. 4,105 9,327 (726)
Proceeds from the sale of subordinated certificates........ 13,500 13,427
--------- --------- ---------
Net cash used in investing activities.................. (30,254) (1,746) (57,072)
--------- --------- ---------
Cash flows from financing activities:
Payments under revolving credit loans and notes, net....... (27,500) (832) (13,566)
Proceeds from term loan.................................... 200,000 -- 125,000
Proceeds from commercial mortgage pass-through
certificates................................................ -- -- 335,000
Payment of Euronotes....................................... (11,000) (26,000) (335,000)
Payment of subordinated debt............................... (130,313) -- --
Premiums paid on early retirement of debt.................. (3,606) -- --
Payment of term loans...................................... (5,000) (16,573) (19,826)
Financing costs............................................ (18,087) (571) (27,064)
Proceeds on sale to affiliate.............................. 11,903 -- --
Principal payments under capital leases.................... (1,331) (2,483) (3,739)
Other...................................................... 32 (1,447) (629)
--------- --------- ---------
Net cash provided by (used in) financing activities.... 15,098 (47,906) 60,176
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents... 427 4,139 (3,001)
Cash and cash equivalents, beginning of period.............. 5,062 5,489 9,628
--------- --------- ---------
Cash and cash equivalents, end of period............... $ 5,489 $ 9,628 $ 6,627
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 60,582 $ 54,416 $ 69,504
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of non-cash investing and financing
activities:
Capital leases............................................. $ 4,947 $ 28,867 $ 13,626
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
1. BASIS OF PRESENTATION
Saks Holdings, Inc. ("Saks Holdings"), through its wholly-owned subsidiary
Saks & Company, which does business as Saks Fifth Avenue ("Saks", and together
with Saks Holdings, the "Company") is a premier fashion retailer, offering the
finest quality and latest style in women's and men's apparel. The consolidated
financial statements include the accounts of Saks Holdings and its direct and
indirect subsidiaries, and Fifth Avenue Capital Trust, an entity formed to
effect Saks' real estate financing (See Note 5). Saks Holdings' only asset is
its investment in Saks; it has no other operations or cash flows. All
significant intercompany balances and transactions have been eliminated in
consolidation. 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, 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. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
1995 contains 53 weeks and ended on February 3, 1996. Fiscal 1994 and fiscal
1993 contain 52 weeks and ended on January 28, 1995 and January 29, 1994,
respectively.
NET SALES:
Net sales include sales of merchandise and sales of leased departments, net
of returns. Sales of leased departments were $55,608, $56,416 and $70,940 in
fiscal 1993, fiscal 1994 and fiscal 1995, respectively.
SAKS FIRST PROGRAM:
The Company maintains a customer loyalty program which rewards customers who
spend more than two thousand dollars annually on their Saks credit card. The
rewards range from 2% to 6% of the customers' spending and are in the form of
gift checks redeemable at Saks. The cost associated with future redemptions is
recorded as a charge to cost of goods sold in the period in which the rewards
are earned.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use, and have
maturities, when purchased, of three months or less. Cash equivalents are stated
at cost which approximates market. Restricted cash consists of $1.5 million
payable to the Trust under the Company's accounts receivable securitization
program in both fiscal 1994 and fiscal 1995. Additionally, restricted cash
includes, in fiscal 1994 and fiscal 1995, $3.9 and $.4 million, respectively,
required under the Company's real estate financing and, in fiscal 1995, a $4.2
million real estate financing prepayment related to the sale of the Owings Mills
store location.
F-7
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
ACCOUNTS RECEIVABLE AND FINANCE CHARGE INCOME:
In accordance with industry practice, installments on deferred payment
accounts receivable maturing in more than one year have been included in current
assets.
The Company provides credit to its customers and performs ongoing credit
evaluations of its customers. Concentration of credit risk is limited because of
the large number of customers and their dispersion throughout the United States
and other countries. The Company maintains an allowance for potential credit
losses which, when realized, has been within the range of management's
expectations.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Allowance for uncollectable receivables--beginning of
period........................................................ $11,251 $10,892 $ 9,313
Bad debt expense.............................................. 14,444 11,400 20,628
Write-offs, net of recoveries................................. (14,803) (12,979) (18,781)
------- ------- -------
Allowance for uncollectable accounts--end of period........... $10,892 $ 9,313 $11,160
------- ------- -------
------- ------- -------
</TABLE>
The Company has an ongoing program to sell certain of its proprietary credit
card receivables (the "Receivables"). See Note 4. The Company's credit
operations generate finance charge income and service fee income which is
recognized as income when earned. Finance charge income, net of certain costs
associated with the securitization of accounts receivable is included as a
reduction of selling, general and administrative expenses in the consolidated
statements of operations and was $30,414, $34,424 and $37,084 in fiscal 1993,
fiscal 1994 and fiscal 1995, respectively. Service fee income was $5,420, $6,544
and $7,745 in fiscal 1993, fiscal 1994, and fiscal 1995, respectively. As noted
above, the Company's credit operations are an integral part of its business,
accordingly its records are not maintained to report credit as a separate line
of business.
MERCHANDISE INVENTORIES:
Merchandise inventories are stated at the lower of cost or market, as
determined by the retail method. Consignment merchandise on hand of $59,105 and
$72,720 at January 28, 1995 and February 3, 1996, respectively, are not
reflected in the consolidated balance sheets.
ADVERTISING:
Direct response advertising costs are deferred and amortized over the period
of expected benefit. Direct response advertising consists primarily of costs
associated with the production and distribution of the Company's catalogs. Such
costs are amortized within a three-month period following mailing. All other
advertising costs are expensed in the period incurred. Advertising expenses were
$26,842, $30,566 and $42,956, in fiscal 1993, fiscal 1994 and fiscal 1995,
respectively. Direct response advertising amounts included in Other current
assets in the consolidated balance sheets at January 28, 1995 and February 3,
1996 were $3,739 and $6,972, respectively.
STORE PREOPENING COSTS:
Costs associated with the opening of a new store are deferred and amortized
over the 12 months following the store opening.
F-8
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. The cost of property and
equipment placed in service prior to July 1990 was revalued at the acquisition
of Saks in 1990 (the "Acquisition"). Property and equipment are depreciated on a
straight-line basis over their estimated useful lives. In fiscal 1993 the
Company reviewed the carrying value of its store assets. See Note 3.
Leasehold improvements included in buildings and building improvements are
amortized over the shorter of their estimated useful lives or related lease
terms. Beneficial leasehold interests are being amortized on a straight-line
basis over 15 years.
The Company capitalizes both internally developed and purchased computer
software. The cost of such computer software is amortized on a straight-line
basis using its five-year estimated useful life. See Note 3. Capitalized
software costs included in the consolidated balance sheets at January 28, 1995
and February 3, 1996 were $15,095 and $8,062, respectively.
NONCURRENT ASSET IMPAIRMENT:
The Company assesses whether an asset has been impaired whenever factors
indicate that the carrying amount of a store's asset base may not be
recoverable. Significant factors considered include long-term economic downturns
in a market in which a store operates, a reduction of customer traffic due to
the opening of a new mall and the introduction of new competition to the
marketplace. These factors are used to assess whether the store's forecasted
operating results will recover the store's asset base over the remaining
depreciation and amortization periods.
DEFERRED FINANCING COSTS:
Financing costs are amortized over the life of the related debt. Such costs
are included in Other noncurrent assets in the consolidated balance sheets and
amortization is included in interest expense in the consolidated statements of
operations.
DERIVATIVES POLICY:
The Company's policy is to use financial derivatives only to reduce risk in
conjunction with specific business transactions.
The Company purchased interest rate cap agreements to limit its exposure to
adverse movements in interest rates related to the Credit Facility and the real
estate financing (See Note 5). The financial institutions associated with these
agreements are considered to be major, well-known institutions. The premiums
paid were capitalized and are being amortized over the term of the related
agreements.
GOODWILL:
Goodwill is amortized over 40 years by the straight-line method. Goodwill is
allocated to individual stores on the basis of their projected cash flows at
their acquisition date.
OTHER INTANGIBLES:
Other intangibles include computer software and customer lists acquired at
the Acquisition which are being amortized on a straight-line basis over their
useful lives of three and 14 years, respectively. Computer software costs became
fully amortized in July 1993.
F-9
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax assets and liabilities on the basis of the
difference between the financial statement and tax bases of assets and
liabilities at enacted tax rates in effect for the years in which the
differences are expected to reverse (See Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS:
In March 1995 and October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" (SFAS 121), and Statement of Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
respectively. SFAS 121 is effective for fiscal years beginning after December
31, 1995, and addresses the accounting for potential impairment of long-lived
assets. The effect of implementing SFAS 121 is not expected to be material to
the Company's financial position or results of operations. SFAS 123 is effective
for fiscal years beginning after December 15, 1996 and introduces a fair-value
based method of accounting for stock-based compensation. SFAS 123 encourages but
does not require companies to adopt the fair-value based method. Management does
not intend to adopt the recognition provisions of SFAS 123.
3. IMPAIRMENT AND SPECIAL CHARGES
In fiscal 1993 the Company recorded a charge of $177,731 related to asset
impairment and other special charges. The impairment charges which totaled
$118,015 reduced the carrying value of property and equipment, goodwill and
intangible assets of certain stores and an idle service center to their net
realizable values. The Company determined the net realizable values of these
assets by assessing the discounted cash flows it estimated would be generated in
the future. The writedown of property and equipment, goodwill and intangible
assets amounted to $81,481, $33,295, and $3,239, respectively.
The other special charges in fiscal 1993 consisted of $40,166 for store
closings and downsizing and $19,550 related to an early retirement program. The
store closings and downsizing charge related to the closing of five of its
full-line or resort stores and all of its specialty store operations. The
principal components of the charge consisted of reducing certain property and
equipment to net realizable value, lease related costs, cost of inventory
liquidations, and severance.
The non-cash impact of the asset impairment and store closings charges was
$134,671. The cash impact of the change in fiscal 1993 was $19,550. The
remaining items in the store closings and downsizings charge totaling $23,510
were settled in fiscal 1994 and fiscal 1995 in the range of management's
expectations.
In fiscal 1995 the Company recorded special charges totaling $36,415. The
charges recorded consist of exit costs of its Yonkers distribution center, the
integration costs of former I. Magnin locations and writedown of capitalized EDP
software and amounted to $19,015, $8,900 and $8,500, respectively.
Exit costs include the writedown of the Yonkers distribution center to net
realizable value. The writedown was necessary as a result of the Company's
decision to exit this facility in early 1997 and relocate distribution
activities to a facility currently under construction in Aberdeen, Maryland.
This writedown and the costs associated with exiting this facility totaled
$19,015. The costs of
F-10
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
exiting the Yonkers facility include the Company's estimate of the severance
costs, related to vacating the facility, and certain occupancy costs during the
period prior to the sale of the facility. The closing of this facility will
involve the termination of approximately 530 associates. The liability for these
costs is included in accrued liabilities in the consolidated balance sheet at
February 3, 1996. Amounts paid and charged against the liability and other
adjustments to the liability during fiscal 1995 were not material. The
anticipated costs of relocating its distribution activities to the Aberdeen
distribution facility have not been accrued and are not expected to materially
impact future results. Additionally, Saks will receive incentive payments from
various government agencies which are expected to approximate these costs.
Integration costs consist of costs to integrate the former I. Magnin store
locations into the Company's west coast locations. These costs include customer
acquisition costs, training and travel costs and remerchandising and other
costs.
The Company began implementation of a new core retail information processing
system in fiscal 1995. As a result certain of its capitalized software became
obsolete and was written off.
4. ACCOUNTS RECEIVABLE SALE
Saks has entered into agreements to securitize most of its Receivables.
The securitization of receivables involves the sale of Receivables with
limited recourse through a subsidiary to a trust in exchange for cash and
subordinated certificates representing undivided interests in the pool of
Receivables, and the subsequent sale by the trust of certificates of beneficial
interests, also representing undivided interests in the Receivables, to
investors. Saks is obligated to repurchase Receivables related to customer
credits such as merchandise returns and other receivable defects. Saks has no
obligation to reimburse the trust or the purchasers of beneficial interests for
credit losses; however, the subordinated certificates and deposits with the
trust and the discount on the sale of Receivables are available to cover such
losses.
Saks continues to service all receivables for the trust for a normal
servicing fee for similar types of transactions. Saks has agreements with third
parties to provide certain credit card processing and related credit services.
During fiscal 1994 and fiscal 1995, a portion of the subordinated
certificates were sold for $13,500 and $13,427, respectively. The Company
continues to hold the remaining subordinated certificates, which, subject to
approval of the trust, can be placed with third parties.
The reinvestment period of the securitization facility is scheduled to
terminate in May 1996. Upon expiration of the reinvestment period, subsequent
principal collections will be allocated on a pro rata basis to each
certificateholder. The Company expects to replace this facility in April 1996.
The Company's interest in subordinated certificates representing its equity
in the trust totaled $23,437 and $11,182, at January 28, 1995 and February 3,
1996, respectively, and is included in accounts receivable in the consolidated
balance sheets. At January 28, 1995 and February 3, 1996, $344,650 and $398,330,
respectively, of the Receivables sold to the trust on behalf of investors remain
outstanding.
Under the terms of the securitization agreements, the Company provides
enhancements for the protection of purchasers of the certificates of beneficial
interest against loss. A deposit with the trust of $7,602 and $8,447, at January
28, 1995 and February 3, 1996, respectively, is also available for credit loss
and is included in other noncurrent assets in the consolidated balance
F-11
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
sheets. The Company's obligation to repurchase Receivables subject to customer
credit adjustments is collateralized by letters of credit in the amount of
$8,621 and $1,459 at January 28, 1995 and February 3, 1996, respectively. The
Company provides for losses related to the Receivables in determining the
allowance for doubtful accounts.
5. LONG TERM DEBT
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Total Credit Facility:
Term Loans:
Tranche A.................................. $ 79,300 $ 59,475
Tranche B.................................. 99,127 224,127
Base Revolving Loans......................... 211,668 198,100
----------- -----------
390,095 481,702
----------- -----------
Total Real Estate Financing:
Euronotes.................................... 335,000 --
REMIC Certificates........................... -- 335,000
----------- -----------
335,000 335,000
----------- -----------
Subordinated Notes............................. 50,000 50,000
----------- -----------
775,095 866,702
Less current portion of long term debt......... 19,825 26,463
----------- -----------
$ 755,270 $ 840,239
----------- -----------
----------- -----------
</TABLE>
CREDIT FACILITY
In July 1993, Saks entered into a $525,000 amended and restated bank credit
facility (the "Credit Facility") which provided for $200,000 in term loans (the
"Term Loans"), $225,000 in base revolving credit loans (the "Base Revolving
Loans"), and $100,000 in working capital revolving credit loans (the "Working
Capital Revolving Loans"). The principal changes to the previous facility were
the establishment of the Term Loans and the extension of maturity dates on the
revolvers. Proceeds from the Term Loans were principally used to prepay 13%
Subordinated Debt. Deferred financing costs of $7.5 million relating to the
prior senior credit agreement were written off as an extraordinary charge in
fiscal 1993. The Term Loans consist of two tranches: the tranche A term loan
(the "Tranche A Loan") and the Tranche B term loan (the "Tranche B Loan"), each
initially in the amount of $100,000.
In March 1995, Saks and the lenders party to the Credit Facility (the
"Lenders") amended the Credit Facility to increase the principal amount of the
Tranche B Loan by $75,000, primarily for the purpose of financing the
acquisition and conversion of four stores previously operated by I. Magnin. In
October 1995, Saks and the Lenders amended the Credit Facility to (a) increase
the principal amount of the Tranche B Loan by $50,000 and (b) permit Saks to
retain up to $25,000 of net proceeds from asset sales that otherwise would have
been subject to mandatory prepayment under the Credit Facility, each for the
purpose of financing capital expenditures relating to the remodeling,
replacement and construction of retail stores and a distribution center.
F-12
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
In March 1996, Saks and the Lenders amended the Credit Facility to, among
other things, (i) permit the initial public offering of the shares of Common
Stock of Saks Holdings (the "Offerings") (see Note 15) provided that the gross
proceeds received by Saks Holdings from the Offerings exceed $200 million and
the net proceeds received by Saks Holdings from the Offerings are immediately
contributed to Saks, (ii) exclude up to $45 million in special charges from the
calculation of certain restrictive financial covenants and (iii) require that
(a) at least one-third of the net proceeds from the Offerings be used to prepay
Term Loans and (b) the remainder of such net proceeds be used to prepay first
the Working Capital Revolving Loans and then the Base Revolving Loans. In April
1996, Saks and the Lenders amended the Credit Facility to, among other things,
(i) allow certain of the proceeds of the Base Revolving Loans and Working
Capital Revolving Loans to be used to make permitted acquisitions and permitted
capital expenditures, (ii) add a covenant specifying a maximum ratio of
outstanding loans to consolidated adjusted operating profit tested annually and
(iii) amend the method of calculating interest rates under the Credit Facility
as set forth below. In April 1996, Saks and the Lenders amended the Credit
Facility to allow Saks to make payments, dividends or distributions with respect
to operating costs incurred by Saks Holdings in amounts not to exceed $4.0
million per fiscal year.
The Company, from time to time, may request standby or commercial letters of
credit which reduce amounts available under the Working Capital Revolving Loans.
At January 28, 1995 and February 3, 1996, approximately $9,242 and $6,694,
respectively, of letters of credit were outstanding.
The remaining principal amount of the Tranche A Loan is payable in five
consecutive semiannual installments, that increase over time from approximately
$9,900 to $12,400, commencing June 1996. The remaining principal amount of the
Tranche B Loan is payable in six consecutive semiannual installments, commencing
December 1997, ranging from approximately $5,600 for the first two installments
to approximately $56,000 for the last two installments.
Under the terms of the Credit Facility, the maximum borrowings under each
facility are reduced, on a pro rata basis, upon the incurrence of any
indebtedness not specifically permitted under the agreement or the consummation
of a sale, sale-leaseback or other disposition of the Company's property or
assets, as defined in the Credit Facility, except with respect to the REMIC
Financing described below and certain other sales of property or assets. As of
February 3, 1996 the maximum borrowings allowable under the Term Loans, Base
Revolving Loans and Working Capital Revolving Loans were $283,602, $225,000 and
$97,163, respectively.
As of January 28, 1995 and February 3, 1996, total available credit under
the Credit Facility was $101,253 and $117,369, respectively. During fiscal 1994
and fiscal 1995, the weighted average interest rate was approximately 7.33% and
9.0%, respectively, for all debt under the Credit Facility.
Prior to consummation of the Offerings, Saks may borrow up to $20 million in
aggregate principal amount of swingline loans which bear interest at the
Alternate Base Rate (as defined in the Credit Facility) plus 1 1/2%. All other
loans under the Credit Facility bear interest prior to the closing of the
Offerings at a rate equal to, at Saks' option, (a) the Alternate Base Rate plus
2% for the Tranche B Loan or 1 1/2% for all other loans, or (b) the Eurodollar
Rate (as defined in the Credit Facility) plus 3% for the Tranche B Loan or 2
1/2% for all other loans. Following the consummation of the Offerings, Saks may
borrow up to $20 million in aggregate principal amount of swingline loans which
bear interest at the Alternate Base Rate plus an applicable margin ranging from
0.0% to 1.0% depending on the Interest Coverage Ratio (as defined in the Credit
Facility). All other loans under
F-13
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
the Credit Facility following the closing of the Offerings will bear interest at
a rate equal to, at Saks' option, (a) the Alternate Base Rate plus a percentage
ranging from 0.0% to 1.5% depending on the Interest Coverage Ratio or (b) the
Eurodollar Rate plus a percentage ranging from 1.0% to 2.5% depending on the
Interest Coverage Ratio. Eurodollar loans can have maturities of one-, two-,
three- or six-month periods. Interest is payable on these loans at the maturity
dates, except for six-month period loans, which provide for interest to be
payable quarterly. Interest on Alternate Base Rate loans is payable quarterly.
During fiscal 1993 and fiscal 1994, the Company consummated the sale and
sale-leaseback of certain properties. In fiscal 1994, the net proceeds of such
sales were used to reduce the Tranche A, Tranche B and Working Capital Revolving
Loans by $10,700, $873 and $2,837, respectively.
The Credit Facility contains restrictive covenants, which include
limitations on capital expenditures, specified minimum levels of consolidated
net worth and minimum consolidated adjusted operating profit, as well as
maintenance of specified ratios, including an interest coverage ratio, as
defined. In addition, the Credit Facility contains restrictions on Saks' ability
to pay dividends or make other distributions to Saks Holdings. Saks Holdings is
a holding company with no business operations of its own. Saks Holdings
therefore is dependent upon payments, dividends and distributions from Saks for
funds to pay its expenses and to pay future cash dividends or distributions, if
any, to holders of the Common Stock. The Credit Facility provides that Saks may
not declare any dividends or make any other payments or distributions to Saks
Holdings except for amounts necessary (i) to pay Saks Holdings' operating
expenses up to $4 million per fiscal year and (ii) to pay Saks Holdings' taxes.
With respect to the impairment and special charges described in Note 3, the
Company received consent from the banks, in May 1994 and March 1996, which
excluded such charges from the aforementioned restrictive covenants. Amounts
outstanding under the Credit Facility are collateralized by the assets of Saks
and its subsidiaries, except for the real estate properties included in the real
estate financing described below, the accounts receivable described in Note 4,
inventories and the capital stock of Saks' real estate subsidiaries and the
capital stock of the subsidiaries established to effect the accounts receivable
sale. Saks Holdings has guaranteed the payment of principal and interest by Saks
and has collateralized this guarantee with a pledge of the capital stock of
Saks.
The occurrence of the Offerings will not trigger the change of control
provision under the Credit Facility.
REAL ESTATE FINANCING:
In December 1990, the Company issued $500,000 of Euronotes (the "Notes") in
connection with the completion of a major real estate financing. During fiscal
1993 and fiscal 1994, early repayment of Notes, arising from the sale and
closing of certain properties and the reversion of escrow amounts aggregated
$11,000 and $26,000, respectively. The sale of properties resulted in gains of
$3,250 and $2,115 in fiscal 1993 and fiscal 1994, respectively. (See Note 12.)
The Notes accrued interest at .75% over the three-month LIBOR with interest
payable on a quarterly basis. These Notes were refinanced in May 1995.
In May 1995, the Company through a subsidiary trust completed a real estate
financing, aggregating $335,000, through the issuance of mortgage loans
collateralized by intercompany leases. Mortgage certificates in the principal
amount of $175,000 bear interest at variable rates based on three-month LIBOR,
payable quarterly. The remaining $160,000 in certificates, which are
F-14
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
subordinated to the other certificates, bear interest at annual fixed rates
ranging from 8.98% to 12.36%, payable semiannually. All of the mortgage
certificates are scheduled to mature in May 2002. The debt related to individual
properties is prepayable at premiums ranging from stated value to 150% of stated
value. The various properties collateralizing the mortgage certificates are
cross guaranteed. Saks guarantees the obligations under all intercompany leases.
In January 1996, the Company sold one of its stores and prepaid the mortgage
loan associated with this property aggregating $4,159. The proceeds were used to
prepay the related mortgage certificate in February 1996 (See Note 2). The sale
of the Yonkers distribution center (See Notes 3 and 13) would require the
prepayment of mortgage certificates totaling $9,074.
SUBORDINATED NOTES:
In fiscal 1993, the Company issued $50,000 of Subordinated Notes due May
2001. Interest is payable at 9% per annum on a semiannual basis. The notes are
subject to optional redemption from time to time at specified prices ranging
from 104% to 100%. These notes are subordinated to other indebtedness of the
Company.
Proceeds from the issuance of the Term Loans and the 9% Subordinated Notes
were used to prepay the remaining 13% subordinated debt issued at the
Acquisition, which consisted of principal of $180,313, accrued interest of
$11,720, and redemption premiums of $3,606. Deferred financing costs of $16,155
related to the repaid subordinated debt and the aforementioned redemption
premiums are reflected as an extraordinary charge to operations in 1993.
The Subordinated Notes may be redeemed at the option of Saks in whole or in
part at any time before maturity. Upon a "Change of Control," as defined, Saks
is obligated to make an offer to repurchase all outstanding Subordinated Notes
at the optional redemption prices set forth above, plus accrued and unpaid
interest. The occurrence of the Offerings will not trigger a change of control.
The subordinated note indenture provides that Saks may not declare any dividends
or make any other distributions on any shares of its capital stock other than
dividends to Saks Holdings in amounts required for Saks Holdings to pay
franchise taxes and other fees required to maintain its corporate existence and
to pay Federal, state and local income taxes.
The Company has purchased various interest rate caps to minimize its
exposure to interest rate fluctuations (See Note 11).
In addition as of February 3, 1996 approximately $5.3 million in letters of
credit were outstanding under a $10 million letter of credit facility.
The Company's expected aggregate principal payments as of February 3, 1996
for all indebtedness, excluding capital leases (See Note 10), are as follows:
1996............................................................ $ 26,463
1997............................................................ 30,384
1998............................................................ 266,522
1999............................................................ 106,460
2000............................................................ 56,032
Thereafter...................................................... 380,841
--------
$866,702
--------
--------
F-15
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
6. STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR PER-SHARE AMOUNTS)
CAPITALIZATION:
The following is a summary of the capitalization of the Company at January
28, 1995 and February 3, 1996:
<TABLE>
<CAPTION>
<S> <C>
Class A Stock: 37,500 shares authorized, issued and outstanding.
Class B Stock: 2,250 shares authorized, issued and outstanding.
Class C Stock: 25,050 shares authorized; 5,187 and 5,239 shares issued and 5,107 and
5,158 shares outstanding, respectively, at January 28, 1995 and February
3, 1996. Additionally, treasury stock aggregated 80 and 29 shares as of
January 28, 1995 and February 3, 1996, respectively.
Class D Stock: 100 shares authorized and issued at January 28, 1995 and February 3, 1996;
100 and 50 shares outstanding at January 28, 1995 and February 3, 1996,
respectively.
Common Stock: 150,000 shares authorized; none issued and outstanding.
</TABLE>
All of the stock has a $.01 par value per share. The transfer of any shares
of stock is restricted as specified in the Company's Certificate of Designation
(the "Certificate").
Under the Senior Management Stock Incentive Plan and the 1996 Stock
Incentive Plan, an aggregate of, 6,209 shares of Class C Stock have been
reserved. In addition to the options described in Note 7, certain officers and
employees of the Company held 171.3 and 172.3 shares of restricted Class C
Shares as of January 28, 1995 and February 3, 1996, respectively.
CONVERSION OF STOCK:
In the event of an initial public offering or sale of the Company, as
defined in the Certificate, all issued and outstanding shares of Class A, Class
B, Class C and Class D Stock not otherwise redeemed by the Company shall
automatically convert into shares of Common Stock on a one-for-one basis.
VOTING RIGHTS:
Holders of shares of Class D Stock and Common Stock are entitled to one vote
for each share of such stock held. Until a change of control of the Company, as
defined in the Certificate, holders of Class A, Class B and Class C Stock have
no voting rights, except that the holders of these shares shall have the right
to one vote for each share held as to the approval of any change to the
Certificate of Incorporation that would increase or decrease the par value of
such stock, or change the powers, preferences or special rights of such stock so
as to have a material adverse effect on such holders.
Effective upon a change of control, holders of shares of Class A, Class B
and Class C Stock shall be entitled to one vote for each share of stock held.
Currently, affiliates of Investcorp S.A. ("Investcorp") own all of the
outstanding voting stock of the Company. Investcorp owns no voting stock and
less than 10% of the Company's total outstanding stock.
F-16
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
LIQUIDATION RIGHTS:
In the event of liquidation of the Company, each holder of Class A, Class B
and Class C Stock shall be entitled to receive $.001 per share before any
payment or distribution shall be made or set aside for payment on the Class D
Stock or Common Stock. Any remaining assets or proceeds therefrom are to be
distributed to all stockholders on a pro rata basis.
DIVIDEND RIGHTS:
Dividends are payable to all stockholders on a pro rata basis upon
declaration of such dividends by the Board of Directors.
7. STOCK INCENTIVE PLANS (IN THOUSANDS, EXCEPT FOR PER-SHARE AMOUNT)
In October 1990, Saks Holdings adopted a Senior Management Stock Incentive
Plan (the "Old Incentive Plan"), and in February 1996, Saks Holdings adopted a
1996 Management Stock Incentive Plan (the "New Incentive Plan" and together with
the Old Incentive Plan, the "Incentive Plans"), for members of senior management
and certain other officers and employees of the Company. As of February 3, 1996
there were options to purchase 1,455.2 shares of Common Stock outstanding under
the Old Incentive Plan, and no options outstanding under the New Incentive Plan.
No additional options will be granted under the Old Incentive Plan. The maximum
number of shares of Common Stock issuable pursuant to the Incentive Plans is
6,209, subject to adjustment to reflect stock splits, stock dividends and
similar stock transactions.
The Incentive Plans provide for the grant of options that qualify as
incentive stock options ("ISOs") under the Internal Revenue Code, as amended, as
well as options that do not qualify as ISOs ("Non-qualified Options")
(collectively referred to as the "Options"), and also provide for the grant of
stock appreciation rights and for the sale or grant of restricted stock. Options
to purchase shares of Common Stock may extend for ten years for ISOs and ten
years and 30 days for Non-qualified Options from the date of grant. Options may
not be granted and restricted stock may not be sold or granted under the
Incentive Plans after October 17, 2000. The exercise of Options is conditioned
upon active employment with the Company. In the event an employee ceases to be
employed by the Company, for any reason, the Company may repurchase at fair
market value, as determined annually by the Board of Directors, any shares of
Class C Stock acquired by such employee pursuant to exercise of an Option
granted under the Incentive Plans.
F-17
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
The following table summarizes the activity in Options:
<TABLE>
<CAPTION>
COMPANY-
OTHER PERFORMANCE
OPTIONS OPTIONS
------- -----------
<S> <C> <C>
Outstanding at January 29, 1994................... 155.4 1,330.5
Granted......................................... -- 147.2
Canceled........................................ (25.4) (301.1)
------- -----------
Outstanding at January 28, 1995................... 130.0 1,176.6
Granted......................................... 172.1 80.9
Canceled........................................ (16.1) (88.3)
------- -----------
Outstanding at February 3, 1996................... 286.0 1,169.2
------- -----------
------- -----------
</TABLE>
The exercise price of all Options granted is $20.00 per share, representing
the estimated fair market value at the time of grant.
In accordance with an exchange approved by the Board of Directors of the
Company on January 19, 1996, on February 28, 1996, Options to acquire 1,620.9
shares of Common Stock issued under the Old Plan were surrendered to the Company
in exchange for the issuance of Options to purchase an identical number of
shares under the New Incentive Plan. The exercise price of the new Options is
$16.00 per share. The individual Stock Option Agreements pursuant to which
Options are granted under the New Incentive Plan provide that Options vest to
the extent of one-third of the shares underlying the Options granted as of the
closing of the Offerings, one-third on the first anniversary thereof and
one-third on the second anniversary thereof. In the event of an Approved Sale
(as defined in the agreement), all options vest in their entirety. The Stock
Option Agreements further provide for the termination of the vested portions of
any Options upon the tenth anniversary of such Stock Option Agreement, and for
acceleration of termination if the employee ceases to be employed by Saks
Holdings or a subsidiary.
8. POSTEMPLOYMENT BENEFITS
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time employees. Benefits are based upon years of service
and compensation prior to retirement. As a result of the Company's special
retirement initiative in fiscal 1993 and funding limitations, the plan refunded
the Company $4,574 in fiscal 1994. The Company did not make a contribution in
fiscal 1994 or fiscal 1995. The Company's policy is to fund the plan to satisfy
the requirements of the Employee Retirement Income Security Act of 1974
("ERISA"). Pension Plan assets consist primarily of short term investments,
bonds, various equities and real estate interests.
F-18
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
The net periodic pension expense consisted of the following components:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Service cost.................................. $ 4,815 $ 4,250 $ 3,527
Interest cost................................. 6,137 6,226 5,778
Loss (return) on plan assets.................. (9,450) 3,085 (9,095)
Net (deferral) amortization................... 2,318 (8,600) 4,906
------- ------- -------
Net pension expense....................... $ 3,820 $ 4,961 $ 5,116
------- ------- -------
------- ------- -------
</TABLE>
The following table sets forth the Pension Plan's funded status and the
present value of benefit obligations:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested....................................... $ (62,169) $ (77,266)
Nonvested.................................... (3,618) (4,838)
----------- -----------
(65,787) (82,104)
Effect of projected future salary increases.... (2,776) (4,562)
----------- -----------
Projected benefit obligation................... (68,563) (86,666)
Plan assets at fair value...................... 48,598 53,058
----------- -----------
Plan assets (less than) projected benefit
obligation..................................... (19,965) (33,608)
Unrecognized net (gain) loss................... (4,108) 4,415
Unrecognized prior service cost................ (60) (56)
----------- -----------
(Accrued) pension cost..................... $ (24,133) $ (29,249)
----------- -----------
----------- -----------
</TABLE>
The Company also maintains an unfunded supplemental retirement plan which
provides for benefits in addition to those provided by the Pension Plan.
Expenses related to the supplemental plan were $591, $487 and $502 in fiscal
1993, fiscal 1994 and fiscal 1995, respectively. Payments from the supplemental
plan were $336 and $279 for fiscal 1994 and fiscal 1995, respectively. The
accrued liability for this plan at January 28, 1995 and February 3, 1996 was
$7,037 and $7,260, respectively.
The actuarial present value of the projected benefit obligations for both
the Pension Plan and supplemental plan was determined at a weighted-average
assumed discount rate and an assumed rate of increase in future compensation of
9.0% and 3.0%, respectively, for fiscal 1994 and 7.35% and 3.0%, respectively,
for fiscal 1995. The assumed long-term rate of return on plan assets was 9.0%
for both fiscal 1994 and fiscal 1995. A 1% change in the assumed discount rate
would change the accumulated benefit obligation by approximately $10 million.
The Company also maintains a 401(k) Plan which covers substantially all of
its employees. The plan is a defined contribution plan and is subject to the
provisions of ERISA. The assets of the plan can be invested in a fixed income
fund and six mutual funds. Eligible employees may contribute up to 16% of their
compensation, as defined. The Company contributes an amount equal to 1/4 of the
F-19
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
first 6% of an employee's contribution. The Company's expense was $1,914, $1,912
and $2,098, for fiscal 1993, fiscal 1994 and fiscal 1995, respectively.
As of the date of the Acquisition, the Company recorded an actuarially
determined liability representing the present value of certain postemployment
health care and life insurance benefit obligations for certain retirees as well
as active employees. In fiscal 1993, the Board approved changes to such benefits
which substantially reduced these benefits and resulted in aggregate reductions
in the accrued liability and employee benefit expenses of $6,452.
9. INCOME TAXES
The Company has net operating loss carryforwards for tax purposes of
approximately $727,597 at February 3, 1996. The carryforwards begin to expire,
unless utilized, in fiscal 2005 through fiscal 2010. The Company has not
reflected any benefit in the consolidated financial statements with respect to
these carryforwards because it has provided a valuation allowance equivalent to
the net deferred tax assets.
The Company recorded certain assets and liabilities at the date of the
Acquisition for financial reporting purposes which are not similarly recognized
under income tax regulations, aggregating a tax benefit of $34,525. Subsequent
realization of this tax benefit will be accounted for as a reduction of
goodwill.
At January 28, 1995 and February 3, 1996 the Company had net deferred tax
assets of $337,803 and $345,059, respectively. The tax effects of temporary
differences that give rise to the deferred tax assets are as follows:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforward................................... $ 253,506 $ 289,609
Accrued expenses and reserves................................. 20,962 17,722
Employee benefits............................................. 12,486 14,532
Depreciation/amortization and basis differences............... 39,702 15,575
Allowance for doubtful accounts............................... 3,707 4,442
Deferred lease payments....................................... 2,542 3,133
Other......................................................... 4,898 4,084
----------- -----------
Total deferred tax assets................................... 337,803 349,097
Deferred tax liability
Deferred financing costs...................................... 0 (4,038)
----------- -----------
Total deferred tax liability................................ 0 (4,038)
----------- -----------
Net deferred tax assets....................................... 337,803 345,059
Less valuation allowance...................................... (337,803) (345,059)
----------- -----------
Net deferred tax.............................................. $ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
The reconciliation between the statutory federal income tax rate and the
effective income tax rate for the last three years is as follows:
F-20
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate.................................. 35.0% 35.0% 35.0%
State and local income taxes, net of federal tax benefit........... 4.8 4.8 4.8
------ ------ ------
Effective income tax rate........................................ 39.8 39.8 39.8
Generation of NOL carryforward................................... (39.8 ) (39.8 ) (39.8 )
------ ------ ------
Net effective income tax rate.................................... 0.0% 0.0% 0.0%
------ ------ ------
------ ------ ------
</TABLE>
10. LEASES
The Company leases certain land and buildings under various noncancelable
capital and operating leases. The Company's capital leases have remaining terms
of up to 29 years. Operating leases consist of land leases and land and building
leases with terms from one to 54 years. All of these leases are subject to
renewal options.
Substantially all leases provide for contingent rentals based upon sales and
require the Company to pay taxes, insurance and occupancy costs. Certain rentals
are based solely on a percentage of sales.
The Company also leases certain equipment under operating leases expiring
during the next five fiscal years.
The Company's rent expense consisted of the following:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Land and building rent:
Fixed minimum.............................. $ 8,960 $ 8,787 $11,401
Contingent rentals......................... 5,694 4,516 5,454
------- ------- -------
Total land and building rent............. 14,654 13,303 16,855
Equipment and other.......................... 4,851 4,540 3,956
------- ------- -------
Total rent expense....................... $19,505 $17,843 $20,811
------- ------- -------
------- ------- -------
</TABLE>
F-21
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
At February 3, 1996, the future minimum lease commitments under
noncancelable operating and capital leases, including equipment leases, are as
follows:
FISCAL YEARS CAPITAL OPERATING
- --------------------------------------------------- -------- ---------
1996............................................... $ 14,311 $ 17,175
1997............................................... 13,898 22,751
1998............................................... 12,131 20,454
1999............................................... 11,851 19,415
2000............................................... 12,281 19,138
Thereafter......................................... 210,198 261,477
-------- ---------
Total minimum payments........................... 274,670 $360,410
---------
---------
Less, Executory costs.............................. 629
--------
Net minimum lease payments....................... 274,041
Less, Interest..................................... 164,801
--------
Present value of net minimum lease payments...... 109,240
Less, current...................................... 4,772
--------
Noncurrent obligations under capital leases...... $104,468
--------
--------
Leased property under capital leases is summarized as follows:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Building and equipment......................... $ 95,875 $ 107,008
Less, Accumulated amortization............... (15,269) (20,403)
----------- -----------
$ 80,606 $ 86,605
----------- -----------
----------- -----------
</TABLE>
The Company leases certain selling space within its stores to other
specialty retailers under contingent rental agreements. Rental income related to
these agreements was $8,988, $9,038 and $10,209 in fiscal 1993, fiscal 1994 and
fiscal 1995, respectively.
11. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate cap agreements to reduce the
impact of increases in interest rates on the REMIC Financing and Credit
Facility. The Company is also an indirect beneficiary of interest rate cap
agreements entered into by the Receivables Trust. At February 3, 1996, there
were 18 interest rate cap agreements outstanding. Accordingly, the Company is
entitled to receive from various financial institutions the amount, if any, by
which the Company's interest payments on its debt exceeds the stated interest
rates or strike rates. Payments received as a result of the caps in the
Company's debt are recorded as a reduction of interest expense. Payments
received by the Receivables trust as a result of the caps related to the
securitization are
F-22
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
recorded by the Company as an increase in finance charge income. The following
is a summary of the interest rate cap agreements as of February 3, 1996:
<TABLE>
<CAPTION>
NOTIONAL STRIKE
AMOUNT RATE EFFECTIVE DATE EXPIRATION DATE
-------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
A/R Floating Rate Certificate
Program.......................... 150,000 (1) 9.00% December 1991 May 1999
50,000 (1) 9.00% August 1992 May 1999
250,000 7.25-9.00 March 1995 May 1996
A/R Commercial Paper Program..... 191,500 (1) 9.00 October 1993 May 1999
142,000 7.25-9.00 March 1995 November 1996
142,000 7.25 November 1996 February 1997
A/R Series 1991-2 Class C
Certificates..................... 8,841 9.00 November 1992 May 1996
A/R Series 1991-2 Class B
Certificates..................... 13,500 9.00 September 1994 May 1996
A/R Series 1991-3 Class B1
Certificates..................... 10,338 9.00 September 1995 May 1996
A/R Series 1991-3 Class C1
Certificates..................... 8,475 9.00 September 1995 May 1996
Senior credit facility........... 100,000 5.00 September 1993 September 1996
100,000 5.00 September 1993 September 1996
200,000 6.00 September 1993 September 1996
50,000 7.25 March 1995 February 1997
400,000 7.25 September 1996 February 1997
Real estate financing............ 175,000 7.25 May 1995 February 1997
87,500 9.70 February 1997 May 2002
87,500 9.70 February 1997 May 2002
</TABLE>
- ------------
(1) Effective November 1996, the strike rate increases to 10% and the notional
amount begins amortizing each month at a variable rate.
The strike rate related to the senior credit facility and real estate
financing is based on three-month LIBOR contracts. The accounts receivable
strike rate is based on one-month LIBOR contracts.
The aggregate carrying value and fair value of the Company's interest rate
cap agreements was $1,575 and $3,839 at January 28, 1995 and $2,242 and $1,828
at February 3, 1996, respectively. The fair value of interest rate cap
agreements is based on current settlement price of comparable contracts obtained
from interest rate cap providers' quotes. The majority of the Company's
long-term debt bears interest at floating rates; therefore its carrying amount
and fair value are equal.
12. RELATED PARTY TRANSACTIONS
The Company receives various consulting and advisory services from an
affiliate of Investcorp, for which it pays fees. The fees paid or payable for
such services were $2 million, $2 million and $7 million in fiscal 1993, fiscal
1994 and fiscal 1995, respectively. Additionally, the Company purchased
merchandise for sale from Gucci Group N.V., Ebel S.A., and Chaumet International
S.A., all of which also may be deemed to be affiliates of Investcorp during such
fiscal year. The amount of such purchases in fiscal 1995 were $7.3, $.6 and $.5
million, respectively. In fiscal 1993 the
F-23
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
Company sold a closed store location to an affiliate of Investcorp. The net
proceeds and gain on sale were $11.9 million and $3.3 million, respectively. The
gain on sale was recorded as paid-in-capital in the consolidated statement of
stockholder's equity.
13. CONTINGENCIES
Saks is a defendant in a suit pending in the Supreme Court of the State of
New York, County of New York, in which the plaintiff, a former Saks employee,
contends, among other things, that Saks was negligent in hiring a co-worker who
allegedly assaulted the plaintiff. The plaintiff is seeking $10 million in
damages. Saks has moved to dismiss the action. Saks believes that, subject to a
self-insured retention, the claim is covered by Saks' insurance. In connection
with the suit, Saks also is in litigation with one of its insurance providers
regarding the provider's duties and obligations under its insurance contract
with Saks. Saks does not believe that the resolution of these suits will have a
material adverse impact on its financial position or results of operations.
The Company also is involved in various other suits and claims in the
ordinary course of business. Management does not believe that the disposition of
such suits will have a material adverse effect on the financial position or
continuing operations of the Company.
Management has entered into an agreement to sell its current distribution
facility, located in Yonkers, New York. The sale is subject to the successful
rezoning of the property. If rezoned, proceeds associated with the sale would
fall within a range of $20 to $25 million. A sale of the distribution center in
this price range could result in a gain on sale of $8 to $13 million. Management
is unable to determine at this time if this transaction will be completed.
14. QUARTERLY RESULTS (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL 1995
-------------------------------------------- FISCAL
FIRST SECOND THIRD FOURTH 1995
QUARTER QUARTER QUARTER QUARTER FULL YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales......................... $384,564 $353,229 $407,990 $541,004 $1,686,787
Cost of goods sold................ 262,435 262,956 275,092 368,209 1,168,692
Net income (loss) before
extraordinary charge.............. (16,553) (34,133) (35,319) 27,901 (58,104)
Net income (loss)................. (16,553) (39,817) (35,319) 27,594 (64,095)
Net income (loss) per share before
extraordinary charge.............. (.37) (.76) (.79) .62 (1.29)
Net income (loss) per share....... (.37) (.89) (.79) .61 (1.43)
</TABLE>
F-24
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except where otherwise indicated)
The Company recorded special charges in the first and third quarters of
$8,900 and $27,515, respectively. (See Note 3).
<TABLE>
<CAPTION>
FISCAL 1994
-------------------------------------------- FISCAL
FIRST SECOND THIRD FOURTH 1994
QUARTER QUARTER QUARTER QUARTER FULL YEAR
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales......................... $333,614 $298,455 $343,375 $442,719 $1,418,163
Cost of goods sold................ 229,104 220,920 233,818 295,808 979,650
Net income (loss) before
extraordinary charge.............. (9,211) (25,935) (5,426) 30,489 (10,083)
Net income (loss)................. (9,299) (26,341) (5,426) 30,448 (10,618)
Net income (loss) per share before
extraordinary charge.............. (.20) (.58) (.12) .68 (.22)
Net income (loss) per share....... (.21) (.59) (.12) .68 (.24)
</TABLE>
15. SUBSEQUENT EVENTS
The Company is in the process of filing an initial public offering for the
issuance of shares of common stock. This offering is expected to be completed
during the second quarter of fiscal 1996.
In April 1996, Saks Holdings effected a five-for-one split in the form of a
400% common stock dividend (the "Stock Split"). Saks Holdings has also increased
the number of authorized shares of its common stock to 150,000 and authorized
10,000 shares of preferred stock. All share and per share information has been
restated to reflect the stock split.
Since February 3, 1996, Saks Holdings has granted to members of management
options for the purchase of 449 shares of Common Stock. In addition, Saks
Holdings will grant, conditioned upon the closing of the Offerings, options for
the purchase of 1,200 shares of Common Stock.
F-25
<PAGE>
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
AUGUST 3, JULY 29,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................................... $ 2,688 $ 7,776
Accounts receivable, net........................................ 44,467 39,049
Inventories..................................................... 389,610 318,317
Other current assets and restricted cash........................ 52,149 39,889
---------- ----------
Total current assets.......................................... 488,914 405,031
---------- ----------
Property and equipment, net....................................... 798,386 784,449
Intangibles and other assets...................................... 134,259 144,646
---------- ----------
Total Assets.................................................. $1,421,559 $1,334,126
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade......................................... $ 142,312 $ 120,664
Accrued liabilities............................................. 92,365 95,382
Taxes other than income taxes................................... 13,795 33,164
Current portion of long term debt............................... 12,568 19,825
Other........................................................... 4,749 4,498
---------- ----------
Total current liabilities..................................... 265,789 273,533
Long term debt.................................................... 531,791 830,790
Other noncurrent liabilities...................................... 151,692 138,953
---------- ----------
Total liabilities............................................. 949,272 1,243,276
Stockholders' equity.............................................. 472,287 90,850
---------- ----------
Total Liabilities & Stockholders' Equity.......................... $1,421,559 $1,334,126
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes are an integral part of the
unaudited Condensed Consolidated Financial Statements.
F-26
<PAGE>
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
AUGUST 3, JULY 29,
1996 1995
---------- ----------
<S> <C> <C>
Net sales............................................................ $ 868,245 $ 737,793
Cost of sales, including buying & occupancy.......................... (621,173) (525,391)
---------- ----------
Gross margin..................................................... 247,072 212,402
Selling, general and administrative expenses......................... (230,516) (210,796)
Impairment and special charges....................................... -- (8,900)
---------- ----------
Operating income (loss).............................................. 16,556 (7,294)
Interest expense, net................................................ (42,163) (43,392)
---------- ----------
Income (loss) before income taxes and extraordinary charge......... (25,607) (50,686)
Income taxes......................................................... -- --
Income (loss) before extraordinary charge.......................... (25,607) (50,686)
Extraordinary charge - loss on early extinguishment of debt.......... (3,340) (5,684)
---------- ----------
Net income (loss)................................................ $ (28,947) $ (56,370)
---------- ----------
---------- ----------
Net income (loss) per share before extraordinary charge.......... $ (0.49) $ (1.13)
---------- ----------
---------- ----------
Net income (loss) per share.......................................... $ (0.55) $ (1.25)
---------- ----------
---------- ----------
Weighted average shares outstanding.................................. 52,311 44,955
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes are an integral part of the
unaudited Condensed Consolidated Financial Statements.
F-27
<PAGE>
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
AUGUST 3, JULY 29,
1996 1995
--------- --------
<S> <C> <C>
Net income (loss) plus depreciation and amortization............... $ 7,816 $(18,369)
Adjustments to reconcile to net cash provided by (used in)
operations:
Extraordinary charge--early extinguishment of debt............. 3,340 5,684
Impairment and special charges................................. -- 8,900
Change in operating assets and liabilities..................... (54,973) (14,701)
--------- --------
Net cash (used in) operating activities.................... (43,817) (18,486)
--------- --------
Cash flows from investing activities:
Net cash (used in) investing activities (primarily capital
expenditures)...................................................... (48,325) (32,078)
Cash flows from financing activities:
Additional paid-in-capital from initial public offering........ 417,769 --
Net revolver borrowing (payment) under senior credit
facility........................................................... (173,401) 10,433
Proceeds of commercial mortgage pass-through certificates...... -- 335,000
Payment of euronotes........................................... -- (335,000)
Borrowing (payment) of debt.................................... (148,943) 65,087
Financing costs................................................ (5,582) (25,000)
Other.......................................................... (1,640) (1,808)
--------- --------
Net cash provided by financing activities.................. 88,203 48,712
--------- --------
Increase (decrease) in cash and cash equivalents........... $ (3,939) $ (1,852)
--------- --------
--------- --------
</TABLE>
The accompanying Notes are an integral part of the
unaudited Condensed Consolidated Financial Statements.
F-28
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except where indicated)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Saks Holdings, Inc. and
its subsidiaries (the "Company") are submitted in response to the requirements
of Regulation S-X promulgated under the Securities Act and should be read in
conjunction with the annual consolidated financial statements included in this
prospectus. In the opinion of management, these statements contain all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position, the results of operations and net cash
flows for the interim periods presented. 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,
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
retail industry is seasonal in nature, and historically the results of
operations for interim periods may not be indicative of the results for the full
year.
2. INITIAL PUBLIC OFFERING
In May 1996, the Company completed an initial public offering. The Company
sold approximately 18 million shares at an initial public offering price of
$25.00 per share. The net proceeds from the offering were approximately $417.8
million. The net proceeds from the offering were primarily used to prepay term
loan borrowings under the Senior Credit Facility and repay outstanding balances
on the revolving credit portion of the facility. The Company recorded an
extraordinary charge of $3.3 million ($.06 per share) associated with the
accelerated write-off of deferred financing costs related to these pre-payments.
Effective with the offering, the Company amended its Senior Credit Facility to
reduce the spread on its variable interest rate borrowings under the facility
and change the availability of borrowings under the facility. The Company has
$322 million of borrowing capacity available under the revolving credit portion
of the facility and has $138 million in term loan borrowings outstanding.
3. SPECIAL CHARGES
A special charge of $8.9 million ($.20 per share) was recorded in the
thirteen weeks ended April 29, 1995. This charge represented costs to integrate
four former I. Magnin store locations.
4. RECEIVABLES SECURITIZATION
SFA Finance Company ("Finco") is a wholly-owned subsidiary established for
the purpose of purchasing proprietary credit card receivables (the
"Receivables") from Saks & Company ("Saks"). In April 1996 Saks Master Trust
(the "New Receivables Trust") was formed pursuant to a pooling and servicing
agreement among Finco, Saks, as servicer, and Bankers Trust Company, as trustee
(the "New A/R Trustee"). The assets of the New Receivables Trust currently
consist principally of a certificate evidencing the entire interest in the
Transition Certificate, Series 1996-1 (the "Transition Certificate"), which is
the second outstanding series issued by SFA Master Trust. The Transition
Certificate represents the interest in the assets of the SFA Master Trust not
represented by Series 1991-2 and has a principal amount which will fluctuate
from time to time according to the level of receivables in the SFA Master Trust
in excess of the amount required to support the Series 1991-2 Certificates. On
the date on which Series 1991-2 has been fully liquidated (the "Existing Trust
Termination Date"), the assets of the SFA Master Trust will be
F-29
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
(in thousands, except where indicated)
4. RECEIVABLES SECURITIZATION--(CONTINUED)
transferred to the New Receivables Trust in exchange for the cancellation of the
Transition Certificate. After the Existing Trust Termination Date, Saks will
continue to receive a fee for servicing the Receivables for the New Receivables
Trust.
In April 1996 the New Receivables Trust sold two series of certificates of
beneficial interests. These certificates represent undivided interests in the
receivables generated from time to time by Saks by a portfolio of accounts
meeting the designated eligibility requirements. Series 1996-1 is a medium term
series that matures in April 1999. Approximately $297 million of Class A Series
1996-1 Certificates and $53 million of Class B Series 1996-1 Certificates were
sold in non-public transactions. Approximately $47 million of subordinated
Series 1996-1 Certificates were privately placed at the same time. All such
certificates bear interest at fixed spreads over one-month LIBOR. Finco retains
approximately $16.5 million of subordinated Series 1996-1 Certificates. Series
1996-1 has a substantial prefunded amount, which will be invested in Receivables
(via the Transition Certificate) as cash allocable to Series 1991-2 is no longer
reinvested in Receivables, but instead is accumulated in order to make the
principal payment due with respect thereto in November 1996.
Series 1996-2 is a series with a variable principal amount. The Class A
Series 1996-2 Certificates have a maximum outstanding principal balance of $100
million and have been privately placed. Subordinated Series 1996-2 Certificates,
with an aggregate maximum outstanding principal balance of approximately $16.0
million, also were privately placed. All Series 1996-2 Certificates bear
interest at fixed spreads over one-month LIBOR. Finco will retain up to
approximately $5.0 million of subordinated Series 1996-2 Certificates. The
principal balance of Series 1996-2 is currently zero.
5. CONTINGENCIES
Saks is a defendant in a suit pending in the Supreme Court of the State of
New York, County of New York, in which the plaintiff, a former Saks employee,
contends, among other things, that Saks was negligent in hiring a co-worker who
allegedly assaulted the plaintiff. The plaintiff is seeking $10 million in
damages. Saks has moved to dismiss the action. Saks believes that, subject to a
self-insured retention, the claim is covered by Saks' insurance. In connection
with the suit, Saks also is in litigation with one of its insurance providers
regarding the provider's duties and obligations under its insurance contract
with Saks. Saks does not believe that the resolution of these suits will have a
material adverse impact on its financial position or results of operations.
The Company also is involved in various other suits and claims in the
ordinary course of business. Management does not believe that the disposition of
such suits will have a material adverse effect on the financial position or
continuing operations of the Company.
The Company has entered into an agreement to sell its current distribution
facility, located in Yonkers, New York. The sale is subject to the successful
rezoning of the property. If rezoned, proceeds associated with the sale would
fall within a range of $20 to $25 million. A sale of the distribution center in
this price range could result in a gain on sale of $8 to $13 million. Management
is unable to determine at this time if this transaction will be completed.
F-30
<PAGE>
SAKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
(in thousands, except where indicated)
5. CONTINGENCIES--(CONTINUED)
The Company has entered into an agreement with Dayton Hudson Corporation and
certain of its affiliates to acquire three Marshall Field store locations in
Texas, adding 250,000 square feet of store space. Two of these stores are
intended to replace two smaller stores currently operated by Saks in Houston and
Dallas. Saks intends to spend approximately $100 million in connection with the
acquisition and renovation of these stores. Completion of the transaction is
subject to certain conditions and is expected to be completed in December 1996.
6. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
As required, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets" beginning with
fiscal 1996 reporting. SFAS 121 requires that long-lived assets and certain
identifiable intangibles be reviewed whenever events or changes in circumstances
indicate that recoverability is questionable. The adoption did not have a
material effect on the results of operations or financial position.
F-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Saks
Holdings has agreed to sell to each of the Underwriters named below, and each of
such Underwriters has severally agreed to purchase from Saks Holdings, the
respective principal amounts of the Notes set forth opposite its name below:
PRINCIPAL
AMOUNT OF
UNDERWRITER NOTES
- ------------------------------------------------------------ ------------
Goldman, Sachs & Co......................................... $132,000,000
CS First Boston Corporation................................. 36,000,000
Morgan Stanley & Co. Incorporated........................... 36,000,000
Salomon Brothers Inc ....................................... 36,000,000
------------
Total..................................................... $240,000,000
------------
------------
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Notes offered hereby, if
any are taken.
The Underwriters propose to offer the Notes in part directly to the public
at the public offering price set forth on the cover page of this Prospectus, and
in part to certain securities dealers at such price less a concession of 1.5% of
the principal amount of the Notes. The Underwriters may allow, and such dealers
may reallow, a concession not to exceed 0.01% of the principal amount of the
Notes to certain brokers and dealers. After the Notes are released for sale to
the public, the offering price and the other selling terms may from time to time
be varied by the representatives.
Saks Holdings has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of $36,000,000
additional principal amount of the Notes solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the principal amount of the Notes to be
purchased by each of them, as shown in the foregoing table, bears to the
aggregate principal amount of the Notes offered hereby.
Saks Holdings has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of Saks Holdings which are substantially similar to
the shares of the Common Stock or securities which are convertible or
exchangeable into securities which are substantially similar to the shares of
the Common Stock (other than any sales or dispositions of Common Stock (i) upon
conversion of the Notes, (ii) in connection with the acquisition of or merger
with any other corporation or other entity or the acquisition of any assets or
properties thereof provided that, prior to the issuance of such securities, such
corporation or entity agrees to be similarly bound or (iii) pursuant to employee
stock option, stock purchase or other employee benefit plans existing on the
date of the Underwriting Agreement) without the prior written consent of the
Underwriters.
The Notes are a new issue of securities with no established trading market.
Saks Holdings has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the Notes.
Saks Holdings has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
U-1
<PAGE>
From time to time in the ordinary course of their businesses, affiliates of
certain of the Underwriters have engaged and may in the future engage in general
financing and banking transactions with Saks and its affiliates. Furthermore, it
is possible that more than 10% of the proceeds of the offering, not including
underwriting compensation, will be received by lenders to Saks under its credit
facility and revolving credit facility that are affiliated with members of the
National Association of Securities Dealers, Inc. ("NASD") who are participating
in the offering. As a result, the offering is being conducted in accordance with
NASD Corporate Financing Rule 2710.(c)(8) and Rule 2720.(c)(3)(A), which provide
that the minimum yield to maturity can be no lower than that recommended by a
"qualified independent underwriter" meeting certain standards. In accordance
with this provision, Goldman, Sachs & Co. has agreed to act in such role and
will recommend a minimum yield to maturity in compliance with the requirements
of Rule 2720.(c)(3)(A). Goldman, Sachs & Co. will receive compensation from Saks
Holdings in the amount of $10,000 for serving in such role. In connection with
the offering, Goldman, Sachs & Co. in its role as qualified independent
underwriter has performed due diligence investigations and reviewed and
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part. In addition, the Underwriters
may not confirm sales to any discretionary account without the prior specific
written approval of the customer.
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to Saks Holdings and its
affiliates, for which such Underwriters have received and will receive customary
fees and commissions.
U-2
<PAGE>
[SAKS FIFTH AVENUE LOGO]
- ------------------------
Back Gatefold
<TABLE>
"More than a store Saks Fifth Avenue is a Brand translating to Multiple
Formats..."
<S> <C> <C>
[Photo of Resort Store] [Photo of Off 5th Store] [Photo of Sales Person]
"Resort Stores" "Outlet Stores" "Full-line Stores"
[Photo of International Marketing Materials] [Photo of Labels]
"International Exploration" "Private Label"
[Photo of Folio Catalogs] [Photo of Web-Site]
"Direct Response" "Technological Exploration"
[Photo of Couple Holding Saks Fifth Avenue Shopping Bag]
". . . and a Patent for the Future"
</TABLE>
<PAGE>
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE $240,000,000
CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED SAKS HOLDINGS, INC.
UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF 5 1/2% CONVERTIBLE SUBORDINATED
AN OFFER TO BUY ANY SECURITIES OTHER NOTES DUE SEPTEMBER 15, 2006
THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF SAKS HOLDINGS SINCE THE
DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS -------------------
[LOGO]
PAGE -------------------
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Prospectus Summary.................... 3
Risk Factors.......................... 12
Use of Proceeds....................... 17
Price Range of Common Stock and
Dividend Policy....................... 18
Capitalization........................ 19
Selected Consolidated Financial
Data.................................. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 30
Management............................ 47
Principal Stockholders................ 55
Certain Transactions.................. 57
Description of Notes.................. 58 GOLDMAN, SACHS & CO.
Description of Capital Stock.......... 69
Certain Tax Considerations............ 71 CS FIRST BOSTON
Description of Certain Indebtedness... 73
Shares Eligible for Future Sale....... 80 MORGAN STANLEY & CO.
Validity of Notes..................... 81 INCORPORATED
Experts............................... 81
Additional Information................ 81 SALOMON BROTHERS INC
Index to Consolidated Financial
Statements............................ F-1
Underwriting.......................... U-1
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
