<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------------
(MARK ONE)
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM
--------- TO
---------
COMMISSION FILE NUMBER 1-6049
------------------------
DAYTON HUDSON CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-0215170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 NICOLLET MALL, MINNEAPOLIS, 55402-2055
MINNESOTA
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: 612/370-6948
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------- --------------------------------------
<S> <C>
Common Stock, par value $.1667 per New York Stock Exchange
share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 19, 1999 was $31,308,051,019, based on the closing price of
$67.75 per share of Common Stock as reported on the New York Stock
Exchange--Composite Index and $4,211.25 per share of Series B ESOP Convertible
Preferred Stock as determined by Duff & Phelps. (Excluded from this figure is
the voting stock held by Registrant's Directors and Executive Officers.)
Indicate the number of shares outstanding of each of Registrant's classes of
common stock, as of the latest practicable date. March 19, 1999: 442,682,048
shares of common stock, par value $.1667.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's 1998 Annual Report to Shareholders are
incorporated into Parts I and II.
2. Portions of Registrant's Proxy Statement dated April 12, 1999 are
incorporated into Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS.
The first paragraph of Fourth Quarter Results, Page 21; Analysis of
Financial Condition, Page 22; Performance Objectives, Page 23; Guest Credit,
Page 24; Business Segment Comparisons, excluding years 1993-1995, Page 25; first
textual paragraph of Summary of Accounting Policies--Organization, Page 26;
Quarterly Results (Unaudited), Page 36; the information relating to store
locations on Page 16 and the information relating to number of employees on Page
38, excluding years 1993-1995, of Registrant's 1998 Annual Report to
Shareholders are incorporated herein by reference. Registrant was incorporated
in Minnesota in 1902.
ITEM 2. PROPERTIES.
Leases, Pages 30-31 and the list of store locations on Page 16 of
Registrant's 1998 Annual Report to Shareholders are incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS.
Commitments and Contingencies, Page 29 of Registrant's 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
1
<PAGE>
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Registrant as of April 1, 1999 and their
positions and ages, are as follows:
<TABLE>
<CAPTION>
NAME TITLE AGE
- ---------------------------------------------- ---------------------------------------------- ---
<S> <C> <C>
Robert J. Ulrich.............................. Chairman, Chief Executive Officer, Chairman of 55
the Executive Committee and Director of
Registrant; Chairman and Chief Executive
Officer of Target (a division of Registrant)
Kenneth B. Woodrow............................ President of Target 54
Larry V. Gilpin............................... Executive Vice President Team, Guest and 55
Community Relations of Target
Robert G. McMahon............................. Senior Vice President, Property Development of 50
Target
John E. Pellegrene............................ Executive Vice President, Marketing of Target 62
Gregg W. Steinhafel........................... Executive Vice President, Merchandising of 44
Target
Bart Butzer................................... President of Mervyn's (a subsidiary of 43
Registrant)
Linda L. Ahlers............................... President of the Department Store Division (a 48
division of Registrant)
James T. Hale................................. Senior Vice President, General Counsel and 58
Secretary of Registrant
Douglas A. Scovanner.......................... Senior Vice President and Chief Financial 43
Officer of Registrant
Vivian M. Stephenson.......................... Executive Vice President and Chief Information 61
Officer of Registrant
Gerald L. Storch.............................. President, Credit and New Businesses of 42
Registrant
JoAnn Bogdan.................................. Controller and Chief Accounting Officer of 46
Registrant
</TABLE>
Each officer is elected by and serves at the pleasure of the Board of
Directors. There is no family relationship between any of the officers named nor
is there any arrangement or understanding pursuant to which any person was
selected as an officer. The period of service of each officer in the positions
listed and other business experience as of April 1, 1999 is set forth below.
ROBERT J. ULRICH Chairman of the Board, Chief Executive Officer, Chairman of
the Executive Committee and Director of Registrant since 1994. Chairman and
Chief Executive Officer of Target since 1987.
KENNETH B. WOODROW President of Target since 1994, Vice Chairman of Target
from 1993 to 1994 and Executive Vice President of Target from 1989 to 1993.
LARRY V. GILPIN Executive Vice President of Target since 1995 and Senior
Vice President of Target from 1981 to 1995.
ROBERT G. MCMAHON Senior Vice President of Target since 1991 and Vice
President of Target from 1990 to 1991.
2
<PAGE>
JOHN E. PELLEGRENE Executive Vice President of Target since 1995 and Senior
Vice President of Target from 1988 to 1995.
GREGG W. STEINHAFEL Executive Vice President of Target since 1994 and Senior
Vice President and General Merchandise Manager of Target from 1987 to 1994.
BART BUTZER President of Mervyn's since 1997 and Regional Senior Vice
President of Target from 1991 to 1997.
LINDA L. AHLERS President of the Department Store Division since 1996 and
Executive Vice President, Merchandising of the Department Store Division from
1995 to 1996. Senior Vice President of Target from 1989 to 1995.
JAMES T. HALE Senior Vice President, Secretary and General Counsel of
Registrant since 1981.
DOUGLAS A. SCOVANNER Senior Vice President and Chief Financial Officer of
Registrant since 1994. Treasurer of Registrant in 1994. Senior Vice President,
Finance of Fleming Companies, Inc. (a food wholesaler) from 1992 to 1994.
VIVIAN M. STEPHENSON Executive Vice President of Registrant since 1998 and
Senior Vice President of Registrant from 1995 to 1998. Senior Vice President,
MIS of Mervyn's from 1994 to 1995 and Vice President, MIS of Mervyn's from 1990
to 1994.
GERALD L. STORCH President, Credit and New Businesses of Registrant since
1998. President, Credit and Senior Vice President, Strategic Business
Development of Registrant from 1997 to 1998. Senior Vice President of Registrant
since 1993. Principal with McKinsey & Company (a consulting firm) from 1982 to
1993.
JOANN BOGDAN Controller and Chief Accounting Officer of Registrant since
1993. Assistant Controller of Registrant from 1988 to 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Dividends Declared Per Share and Common Stock price, Page 36 of Registrant's
1998 Annual Report to Shareholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The Data on years 1994-1998 in the Summary Financial and Operating Data
(excluding 1993 and Other Data), Page 38 of Registrant's 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis, Pages 17-24 and the last textual
paragraph of Pension and Postretirement Health Care Benefits, Page 35 of
Registrant's 1998 Annual Report to Shareholders are incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk exposure of market risk sensitive instruments is not material.
3
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pages 25-36 and 38 (excluding years 1993-1995 on Page 25 and 1993 and Other
Data in the Summary Financial and Operating Data on Page 38) and the Report of
Independent Auditors, Page 37 of Registrant's 1998 Annual Report to Shareholders
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Election of Directors, Pages 5-10 of Registrant's Proxy Statement dated
April 12, 1999, is incorporated herein by reference. See also Item X of Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation, Pages 13-18, Report of the Compensation Committee on
Executive Compensation, pages 19-23 and Director Compensation, Page 8 of
Registrant's Proxy Statement dated April 12, 1999, are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Largest Owners of the Corporation's Stock", Page 12 and "Stock Ownership of
Directors and Officers", Page 11 of Registrant's Proxy Statement dated April 12,
1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not Applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) FINANCIAL STATEMENTS:
Consolidated Results of Operations for the Years Ended January 30, 1999,
January 31, 1998, and February 1, 1997.
Consolidated Statements of Financial Position at January 30, 1999, and
January 31, 1998.
Consolidated Statements of Cash Flows for the Years Ended January 30, 1999,
January 31, 1998, and February 1, 1997.
Consolidated Statements of Shareholders' Investment for the Years Ended
January 30, 1999, January 31, 1998, and February 1, 1997.
Information which is an integral part of the financial statements: Notes to
Consolidated Financial Statements on Pages 25-31 and 33-36 (excluding years
1993-1995 on Page 25) and the Report of Independent Auditors on Page 37 in
Registrant's 1998 Annual Report to Shareholders.
4
<PAGE>
The Registrant, through its special purpose subsidiary, Dayton Hudson
Receivables Corporation ("DHRC") entered into a securitization transaction under
which it transfers, on an ongoing basis, substantially all of its credit card
receivables to a trust. Separate financial information is filed for DHRC in its
separate Annual Report on Form 10-K.
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
<TABLE>
<C> <S>
(2) Not applicable
(3)A. Restated Articles of Incorporation (as amended April 30, 1998). Incorporated by
reference to Exhibit (3)A. to Registrant's Form 10-Q Report for the quarter
ended May 2, 1998.
B. By-Laws (as amended through November 11, 1998). Incorporated by reference to
Exhibit (3)(ii). to Registrant's Form 10-Q Report for the quarter ended October
31, 1998.
(4)A. Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock, as amended. Incorporated by reference to Exhibit
A to Exhibit 1 to Registrant's Form 8-K Report dated September 12, 1996.
B. Certificate of Designation, Preference and Rights of Series B ESOP Convertible
Preferred Stock. Incorporated by reference to Exhibit (3)A. to Registrant's
Form 10-K Report for the year ended January 30, 1993.
C. Instruments defining the rights of security holders, including indentures.
Registrant agrees
to furnish the Commission on request copies of instruments with respect to
long-term
debt.
(9) Not applicable
(10)A. Executive Incentive Plan (PTOC & EVA) (a)
B. Director Stock Option Plan of 1995 (b)
C. Executive Incentive Plan (Personal Score) (c)
D. Excess Benefit Plan (d)
E. Supplemental Pension Plan I (e)
F. Executive Long-Term Incentive Plan of 1981, as amended and restated through
January 13, 1999
G. Supplemental Pension Plan II (f)
H. Supplemental Pension Plan III (g)
I. Deferred Compensation Plan Senior Management Group (h)
J. Deferred Compensation Plan Directors (i)
K. Income Continuance Policy, as amended through January 13, 1999
L. SMG Income Continuance Policy, as amended through January 13, 1999
M. SMG Executive Deferred Compensation Plan (j)
N. Director Deferred Compensation Plan (k)
(11) Not applicable
(12) Statements re Computations of Ratios
(13) 1998 Annual Report to Shareholders (only those portions specifically
incorporated by
reference herein shall be deemed filed with the Commission)
</TABLE>
5
<PAGE>
<TABLE>
<C> <S>
(16) Not applicable
(18) Not applicable
(21) List of Subsidiaries
(22) Not applicable
(23) Consent of Independent Auditors
(24) Powers of Attorney
(27) Financial Data Schedule for the fiscal year ended January 30, 1999.
(99)A. Registrant's Form 11-K Report
B. Registrant's Proxy Statement dated April 12, 1999 (only those portions
specifically incorporated by reference shall be deemed filed with the
Commission)(l)
C. Cautionary Statements Relating to Forward-Looking Information
</TABLE>
Copies of exhibits will be furnished upon written request and payment of
Registrant's reasonable expenses in furnishing the exhibits.
- ------------------------
(a) Incorporated by reference to Exhibit A to Registrant's Proxy Statement dated
April 19, 1995.
(b) Incorporated by reference to Exhibit B to Registrant's Proxy Statement dated
April 19, 1995.
(c) Incorporated by reference to Exhibit (10)C. to Registrant's Form 10-K Report
for the year ended January 29, 1994.
(d) Incorporated by reference to Exhibit (10)D. to Registrant's Form 10-K Report
for the year ended January 30, 1993.
(e) Incorporated by reference to Exhibit (10)E. to Registrant's Form 10-K Report
for the year ended February 1, 1997.
(f) Incorporated by reference to Exhibit (10)G. to the Registrant's Form 10-K
Report for the year ended February 1, 1997.
(g) Incorporated by reference to Exhibit (10)H. to the Registrant's Form 10-K
Report for the year ended February 1, 1997.
(h) Incorporated by reference to Exhibit (10)I. to the Registrant's Form 10-K
Report for the year ended February 1, 1997.
(i) Incorporated by reference to Exhibit (10)J. to the Registrant's Form 10-K
Report for the year ended February 1, 1997.
(j) Incorporated by reference to Exhibit (10)M. to the Registrant's Form 10-K
Report for the year ended February 1, 1997.
(k) Incorporated by reference to Exhibit (10)N. to the Registrant's Form 10-K
Report for the year ended February 1, 1997.
(l) Incorporated by reference to Registrant's Proxy Statement dated April 12,
1999.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
DAYTON HUDSON CORPORATION
By: /s/ DOUGLAS A. SCOVANNER
-----------------------------------------
Douglas A. Scovanner
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
Dated: April 12, 1999 OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ BOB ULRICH
--------------------------------------
Robert J. Ulrich
CHAIRMAN OF THE BOARD AND CHIEF
Dated: April 12, 1999 EXECUTIVE OFFICER
/s/ DOUGLAS A. SCOVANNER
--------------------------------------
Douglas A. Scovanner
SENIOR VICE PRESIDENT AND CHIEF
Dated: April 12, 1999 FINANCIAL OFFICER
/s/ J.A. BOGDAN
--------------------------------------
JoAnn Bogdan
CONTROLLER AND CHIEF ACCOUNTING
Dated: April 12, 1999 OFFICER
</TABLE>
<TABLE>
<S> <C> <C>
LIVIO D. DESIMONE SUSAN A. MCLAUGHLIN
ROGER A. ENRICO ANNE M. MULCAHY
WILLIAM W. GEORGE STEPHEN W. SANGER
MICHELE J. HOOPER JAMES A. SOLOMON D. TRUJILLO Directors
JOHNSON ROBERT J. ULRICH
RICHARD M. KOVACEVICH
</TABLE>
Douglas A. Scovanner, by signing his name hereto, does hereby sign this
document pursuant to powers of attorney duly executed by the Directors named,
filed with the Securities and Exchange Commission on behalf of such Directors,
all in the capacities and on the date stated, such persons being all of the
Directors of the Registrant.
<TABLE>
<S> <C> <C>
By: /s/ DOUGLAS A. SCOVANNER
-----------------------------------------
Douglas A. Scovanner
Dated: April 12, 1999 ATTORNEY-IN-FACT
</TABLE>
7
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EXHIBITS
FILED WITH
DAYTON HUDSON CORPORATION
FORM 10-K
FOR THE YEAR ENDED JANUARY 30, 1999
<TABLE>
<S> <C>
(10)F. Executive Long-Term Incentive Plan of 1981, as amended and restated through January
13, 1999
(10)K. Income Continuance Policy, as amended through January 13, 1999
(10)L. SMG Income Continuance Policy, as amended through January 13, 1999
(12) Statements re Computations of Ratios
(13) 1998 Annual Report to Shareholders
(21) List of Subsidiaries
(23) Consent of Independent Auditors
(24) Powers of Attorney
(27) Financial Data Schedule for the fiscal year ended January 30, 1999
(99)A. Registrant's Form 11-K Report
C. Cautionary Statements Relating to Forward-Looking Information
</TABLE>
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<PAGE>
DAYTON HUDSON CORPORATION
EXECUTIVE LONG TERM INCENTIVE PLAN
OF 1981
(AS AMENDED AND RESTATED JANUARY 13, 1999)
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.1 The name of this plan shall be "The Dayton Hudson Corporation
Executive Long Term Incentive Plan of 1981" (hereinafter called the "Plan").
1.2 The purpose of the Plan is to advance the interim performance and
long-term growth of the Company by offering long-term incentives, in addition
to current compensation and other benefits, to those key employees of the
Company and its Subsidiaries who the Plan Committee determines will
contribute to such performance and growth inuring to the benefit of the
shareholders of the Company. Such long-term incentives may take the form of
Stock Options, or Performance Shares, or Restricted Stock Awards or any
combination.
ARTICLE II
DEFINITIONS
2.1 AWARD. An "Award" is used at times in the Plan to refer to the
act of granting a Stock Option, Performance Share or Restricted Stock Award
under the Plan.
2.2 BOARD. "Board" is the Board of Directors of Dayton Hudson
Corporation.
2.3 CODE. "Code" is the Internal Revenue Code of 1986, as amended,
as now in force or as hereafter amended.
2.4 COMPANY. "Company" is Dayton Hudson Corporation, a Minnesota
corporation, and any successor thereof.
2.5 COVERED OFFICER. "Covered Officer" includes all Participants
whose compensation, in the year in which the Award is made, is subject to the
compensation expense deduction limitations set forth in Section 162(m) of the
Code.
2.6 DATE OF GRANT. "Date of Grant" shall be the date designated in
the resolution by the Plan Committee as the date of such Stock Option(s) or
Performance Share(s) or Restricted Stock Award(s), but such date shall not be
earlier than the date of the resolution and action thereon by the Plan
Committee, or earlier than the effective date of the Plan, and in the absence
of a date of grant or a fixed method of computing such date being
specifically set forth in the Plan Committee's resolution, then the Date of
Grant shall be the date of such Plan Committee's resolution and action.
<PAGE>
2.7 FAIR MARKET VALUE. "Fair Market Value" of a share of Company
common stock on any date is 100% of the mean between the high and low prices
for such stock as reported for such stock on the New York Stock Exchange
Composite Transactions Listing ("Composite Listing") on such date, or in the
absence of such report 100% of the mean between the high and low prices of
such stock on the New York Stock Exchange on such date or, if no sale has
been recorded on the Composite Listing or made on such Exchange on such date,
then on the last preceding date on which any such sale shall have been made
in the order of primacy above indicated.
2.8 HOLDER. A "Holder" is a person who has been granted a Restricted
Stock Award.
2.9 INCENTIVE STOCK OPTIONS. "Incentive Stock Options" are Stock
Options that are intended to qualify under Section 422 of the Code.
2.10 NON-QUALIFIED OPTIONS. "Non-Qualified Options" are Stock
Options that are not intended to qualify under Section 422 of the Code.
2.11 PARTICIPANT. A "Participant" is a person designated as such by
the Plan Committee, pursuant to Article III hereof, for participation in the
Plan.
2.12 PERFORMANCE GOALS. "Performance Goals" are defined in Section
4.1 hereof.
2.13 PERFORMANCE PERIOD. "Performance Period", with respect to a
Performance Share, is a period of four consecutive fiscal years of the
Company, beginning with the fiscal year in which such Performance Share is
granted and may be referred to herein and by the Plan Committee by use of the
calendar year in which a particular Performance Period commences.
2.14 PERFORMANCE SHARE. A "Performance Share" is a potential award
consisting of a right to one share of the Company's $.3333 par value common
stock (subject to increase as provided in Section 4.2 hereof) or a lesser
number of shares and the cash payment set forth in Section 5.2 hereof. A
Performance Share shall be of no value to a Participant unless and until
earned in accordance with Article V hereof.
2.15 PLAN COMMITTEE. The "Plan Committee" is the Committee
referenced in Article IX hereof.
2.16 PLAN YEAR. The "Plan Year" shall be a fiscal year of the
Company falling within the term of this Plan.
2.17 RELEVANT CHANGE ADJUSTMENTS. Appropriate adjustments in the
number of shares and in the option price per share as authorized herein, may
be made by the Plan Committee, in its discretion (except as provided in
Section 11.8 hereof), to give effect to adjustments made in the number of
shares of Company common stock through a merger, consolidation,
recapitalization, reclassification, combination, spin-off, common stock
dividend, stock split or other relevant change.
2
<PAGE>
2.18 RESTRICTED STOCK AWARD. A "Restricted Stock Award" is an Award
granted under Article VII of this Plan.
2.19 STOCK OPTION. A "Stock Option" is a right accruing in a
Participant to purchase from the Company one share of the Company's $.3333
par value common stock at the Fair Market Value of such share of common stock
on the Date of Grant of the Stock Option, such exercise of option to be made
any time within ten years and one day (ten years with respect to Incentive
Stock Options) following the Date of Grant, and containing the terms and
conditions set forth or allowed under Article VI hereof. Stock Options may
be either Non-Qualified Options or Incentive Stock Options.
2.20 SUBSIDIARY CORPORATION. For purposes of this Plan, the term
"Subsidiary" or "Subsidiary Corporation" means any corporation (other than
the Company) in an unbroken chain of corporations beginning with the Company,
in which each of the corporations other than the last corporation in the
unbroken chain owns stock possessing fifty percent or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain as determined at the point in time when reference
is made to such "Subsidiary" or "Subsidiary Corporation" in this Plan.
2.21 CHANGE IN CONTROL. A "Change in Control" shall be deemed to
have occurred if:
(a) a majority of the directors of the Company shall be persons other
than persons
(i) for whose election proxies shall have been solicited by the
Board or
(ii) who are then serving as directors appointed by the Board to
fill vacancies on the Board caused by death or resignation
(but not by removal) or to fill newly-created
directorships,
(b) 30% or more of the outstanding Voting Stock (as defined in Article
IV of the Restated Articles of Incorporation, as amended, of the
Company) of the Company is acquired or beneficially owned (as
defined in Article IV of the Restated Articles of Incorporation,
as amended, of the Company) by any person (as defined in Article
IV of the Restated Articles of Incorporation, as amended, of the
Company), or
(c) the shareholders of the Company approve a definitive agreement or
plan to
(i) merge or consolidate the Company with or into another
corporation (other than (1) a merger or consolidation with
a Subsidiary of the Company or (2) a merger in which the
Company is the surviving corporation and either (A) no
outstanding Voting Stock of the Company (other than
fractional shares) held by shareholders immediately prior
to the merger is converted into cash (except cash upon the
exercise by holders of Voting Stock of the Company of
statutory dissenters' rights), securities, or other
property or (B) all holders of outstanding Voting Stock of
the Company (other than fractional shares) immediately
prior to the merger (except those that exercise statutory
3
<PAGE>
dissenters' rights) have substantially the same
proportionate ownership of the Voting Stock of the Company
or its parent corporation immediately after the merger),
(ii) exchange, pursuant to a statutory exchange of shares of
Voting Stock of the Company held by shareholders of the
Company immediately prior to the exchange, shares of one or
more classes or series of Voting Stock of the Company for
shares of another corporation or other securities, cash or
other property,
(iii) sell or otherwise dispose of all or substantially all of
the assets of the Company (in one transaction or a series
of transactions) or
(iv) liquidate or dissolve the Company.
ARTICLE III
GRANTING OF STOCK OPTIONS, PERFORMANCE SHARES
AND RESTRICTED STOCK AWARDS TO PARTICIPANTS
3.1 ELIGIBLE EMPLOYEES. Stock Options, Restricted Stock Awards or
Performance Shares may be granted by the Plan Committee to any key employee
of the Company or a Subsidiary Corporation. A Stock Option(s) or Performance
Share(s) or Restricted Stock Award(s) may be granted to a director of the
Company provided that he/she is also at the time of grant a key employee of
the Company or a Subsidiary Corporation. No Stock Option(s) or Performance
Share(s) or Restricted Stock Award(s) shall be granted to a person who is at
the time of award a member of the Plan Committee. A person who has been
engaged by the Company for employment shall be eligible for grants under the
Plan, provided such person actually reports for and commences such employment
within ninety days after the Date of Grant.
3.2 DESIGNATION OF PARTICIPANTS. At any time and from time to time
during the Plan Year, the Plan Committee may designate the key employees of
the Company and its Subsidiaries eligible for Awards.
3.3 ALLOCATION OF STOCK OPTION(S), PERFORMANCE SHARE(S) OR RESTRICTED
STOCK AWARD(S). Contemporaneously with the designation of a Participant
pursuant to Section 3.2 hereof, the Plan Committee shall determine the number
of Stock Option(s) and/or Restricted Stock Award(s) and/or Performance
Share(s) to be granted to such Participant and the Date of Grant for such
related Stock Option or Performance Share or Restricted Stock Award, taking
into consideration such factors as it deems relevant, which may include the
following:
(a) the total number of Stock Option(s) and/or Restricted Stock
Award(s) and/or Performance Share(s) available for allocation to
all Participants; and
4
<PAGE>
(b) the work assignment or the position of the Participant and its
sensitivity and/or impact in relationship to the profitability and
growth of the Company and its Subsidiaries; and
(c) the Participant's current and potential performance in reference
to such factors.
Allocation of Awards may, in the discretion of the Plan Committee, be in the
form of Stock Option(s) solely or Performance Share(s) solely, or Restricted
Stock Award(s) solely, or any combination in whatever relationship one to the
other, if any, as the Plan Committee in its discretion so determines.
Allocation of Stock Options may, in the discretion of the Plan Committee, be
in the form of Incentive Stock Option(s) solely or Non-Qualified Option(s)
solely or a combination in whatever relationship to the other, if any, as the
Plan Committee in its discretion so determines.
3.4 NOTIFICATION TO PARTICIPANTS AND DELIVERY OF DOCUMENTS. As soon
as practicable after such determinations have been made, each Participant,
shall be notified of (i) his/her designation as a Participant, (ii) the Date
of Grant, and (iii) the number of Stock Option(s), and/or Restricted Stock
Award(s) and/or the number of Performance Share(s) granted to the
Participant, and in the case of Performance Share(s), the Performance Period
and in the case of Restricted Stock Award(s), the Restriction Period. The
Participant shall thereafter be supplied with written evidence of any such
granted Performance Share(s) and/or Restricted Stock Award(s), and shall
receive a Stock Option exercisable for purchase of one share of the Company's
$.3333 par value common stock for each Stock Option granted to the
Participant pursuant to this Plan or indicating the aggregate of such grant,
which option agreement(s) shall be in conformity with the provisions of
Article VI hereof.
ARTICLE IV
PERFORMANCE GOALS AND MAXIMUM AWARD
4.1 ESTABLISHMENT OF GOALS. Within a reasonable period of time after
the beginning of each Performance Period, Performance Goals relative to such
Performance Period shall be established by the Plan Committee in its absolute
discretion. Such Performance Goals may include, but, except as provided
below, are not limited to, criteria such as PTOC, EVA, amount or rate of
growth in consolidated profits of the Company expressed as a percent,
earnings per share, return on capital, return on investment, return on
shareholders' equity. Performance Goals for Covered Officers must be based
upon one or more of the foregoing specifically described performance goals.
Performance Goals may be absolute in their terms or be measured against or in
relationship to other companies comparably, similarly or otherwise situated.
The Plan Committee, in its sole discretion, may modify the Performance Goals
if it determines that circumstances have changed and modification is required
to reflect the original intent of the Performance Goals. The Plan Committee
may in its discretion classify Participants into as many groups as it
determines, and as to any Participant(s) relate his/her Performance Goals
partially, or entirely, to the measured performance, either absolutely or
relatively, of an identified Subsidiary, operating company or test strategy
or new venture of the Company.
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4.2 LEVELS OF PERFORMANCE REQUIRED TO EARN PERFORMANCE SHARES. At or
about the same time that Performance Goals are established for a specific
period, the Plan Committee shall in its absolute discretion establish the
percentage (not to exceed 150% thereof) of the Performance Share(s) granted
for such Performance Period which shall be earned by the Participant for
various levels of performance measured in relation to achievement of
Performance Goals for such Performance Period.
4.3 OTHER RESTRICTIONS. The Plan Committee may provide restrictions
on the delivery of common stock of the Company upon the earning of
Performance Shares, including the future forfeiture of all or part of the
common stock earned. The Plan Committee may provide that the shares of the
Company's .3333 par value common stock issued on Performance Shares Earned be
held in escrow and/or legended.
4.4 NOTIFICATION TO PARTICIPANTS. Promptly after the Plan Committee
has established Performance Goals for a specific Performance Period or
modified such goals, each Participant who has received a grant of any
Performance Share(s) for that period shall be provided with written evidence
of the Performance Goals so established or modified.
4.5 During any Plan Year, no Covered Officer may receive Awards that,
in the aggregate, could result in that Participant receiving, earning or
acquiring more than 1,000,000 shares of the Company's $.3333 par value common
stock, subject to the adjustments described in Section 2.17.
ARTICLE V
EARNING OF PERFORMANCE SHARES
5.1 MEASUREMENT OF PERFORMANCE AGAINST PERFORMANCE GOALS. The Plan
Committee shall as soon as practicable after the close of each Performance
Period, make a determination of:
(a) the extent to which the Performance Goals for such Performance
Period have been achieved;
(b) the percentage of the Performance Shares granted for such
Performance Period which are earned for such Performance Period by
Participants who have been from his/her date of hire in the
continuous employ of the Company or Subsidiary or a combination
thereof, during the subject Performance Period; and
(c) the percentage of Performance Shares to be paid in cash, if any.
The percentage paid in cash shall be uniform for all Participants
in a particular Performance Period.
These determinations shall be absolute and final as to the facts and
conclusions therein made and be binding on all parties. Promptly after the
Plan Committee has made the foregoing determination each Participant who has
earned Performance Share(s) based thereon shall be notified, in writing, of
the number of Performance Shares so earned. For all purposes of this Plan
notice shall be deemed to have been given the date action is taken by the
Plan Committee making the determination.
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5.2 TREATMENT OF PERFORMANCE SHARES EARNED. Upon the determination
that a percentage of the Performance Share(s) has been earned for a
Performance Period, a Participant to whom such earned Performance Share(s)
has been granted and who has been (or was) in the employ of the Company or a
Subsidiary thereof continuously from the date of his/her hire during the
subject Performance Period to which the grant relates, subject to the
exceptions set forth at Section 5.5 and Section 5.6 hereof, shall be
entitled, subject to the other conditions of this Plan, to receive the shares
of the Company's $.3333 par value common stock for each Performance Share
earned (less the shares paid in cash), plus a cash payment in the amount of
the Fair Market Value of the shares of common stock to be paid in cash as
determined in Section 5.1(c) hereof, calculated as of the close of business
on the date of the notice referred to in Section 5.1 hereof. The provisions
of Section 5.5 to the contrary notwithstanding, the Plan Committee may
provide that the issued shares of common stock be held in escrow and/or be
legended and that the common stock be subject to restrictions, including the
future forfeiture of all or a part of the shares. Performance Shares shall
under no circumstances become earned or have any value whatsoever for any
Participant who is not in the employ of the Company or its Subsidiaries
continuously during the entire Performance Period for which such Performance
Shares are granted, except as provided at Section 5.5 or Section 5.6 hereof.
5.3 STOCK-CASH DISTRIBUTION. Each distribution determined in
accordance with Section 5.2 above shall be made as soon as practicable after
Performance Shares have been determined to have been earned unless the
provisions of Section 5.4(a) hereof are applicable to a Participant.
5.4(a) DEFERRAL OF RECEIPT OF PERFORMANCE SHARE EARNOUT. A
Participant who has received a grant of Performance Shares may by compliance
with the then applicable procedures under the Plan irrevocably elect in
writing to defer receipt of all or any part of the stock-cash distribution
associated with the earnout, if any, of the Performance Shares (the
combination thereof hereafter referred to as the "deferred account"). The
deferral shall be effective until the Participant terminates his/her
employment with the Company and its Subsidiaries except as otherwise provided
herein.
The terms and conditions of such deferral, including but not limited
to, the period of time for, and form of, election; the manner and method of
payout; the form in which the deferred account shall be held; the interest
equivalent or other payment that shall accrue upon the deferred account
pending its payout; and the use and form of dividend equivalents in respect
of stock units included within any deferred account, shall be as determined
from time to time by the Plan Committee, which Plan Committee may change any
and all of the terms and conditions at any time applicable to deferrals
thereafter made.
5.4(b) AMENDMENT OF DEFERRAL ARRANGEMENTS. The Plan Committee may,
at any time and from time to time, but prospectively only except as
hereinafter provided, amend, modify, change, suspend or cancel any and all of
the rights, procedures, mechanics and timing parameters relating to the
deferral of receipt of Performance Share earnout under the Plan as set forth
at Section 5.4(a) hereof. In addition, the Plan Committee may, in its sole
discretion, accelerate the payout of the deferred account, or any portion
thereof, either in a lump sum or in a series of payments, but under the
following conditions only:
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(a) the Federal tax statutes, regulations or interpretations are
amended, modified, or otherwise changed or affected in such a
manner as to adversely alter or modify the tax effect of the
"deferred account" as it is comprehended under the tax law and
interpretations in effect for deferred accounts as of the
effective date of this Plan, or
(b) the deferred account holder suffers or incurs an event that would
qualify for a "withdrawal" of contributions that have not been
accumulated for two years without adverse consequences on the tax
status of a qualified profit-sharing or stock bonus plan under the
Federal tax laws applicable from time to time to such types of
plans.
5.5 NON-DISQUALIFYING TERMINATION OF EMPLOYMENT. Except for Section
5.6 hereof, the only exceptions to the requirement of continuous employment
during a Performance Period for Performance Share earnout eligibility are
termination of a Participant's employment by reason of death (in which event
the Performance Shares may be transferable by will or the laws of descent and
distribution only to such Participant's beneficiary designated to receive the
Performance Shares or to the Participant's applicable legal representatives,
heirs or legatees), total and permanent disability, normal or late retirement
or early retirement, with the consent of the Plan Committee, or transfer of
an executive in a spin-off, with the consent of the Plan Committee, occurring
during the Performance Period applicable to the subject Performance share
grant. In such instance an earnout of the Performance Shares shall be made,
as of the end of the Performance Period, and 100% of the total Performance
Shares that would have been earned during the Performance Period shall be
earned and paid out; provided, however, in a spin-off situation the Plan
Committee may set additional conditions, such as, without limiting the
generality of the foregoing, continuous employment with the spin-off entity.
If a Participant's termination of employment does not meet the criteria set
forth above, but the Participant had at least 15 years of continuous
employment with the Corporation or a Subsidiary or any combination thereof,
provided that if the person is not an Executive Officer (as defined under the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder) of the Corporation at time of termination such 15 years need not
be continuous, the Plan Committee may allow earn-outs of up to 100% of the
total Performance Shares for the Performance Period(s) in which the
termination of employment occurred, subject to any conditions that the Plan
Committee shall determine.
5.6 CHANGE IN CONTROL. In the event of a Change in Control, all
outstanding Performance Shares granted under the Plan shall be proratably
payable ten days after the Change in Control; provided that no Performance
Share shall be payable to a Participant within six months after the Date of
Grant. The amount of Performance Shares payable shall be determined by
multiplying 100% of each Performance Share grant by a fraction, the numerator
of which shall be the number of months that have elapsed in the applicable
Performance Period and the denominator of which shall be forty-eight.
ARTICLE VI
STOCK OPTIONS
6.1 NON-QUALIFIED OPTION. Non-Qualified Options granted under the
Plan are not intended to be Incentive Stock Options under the provisions of
Section 422 of the Code. The Non-Qualified
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Options shall be evidenced by Non-Qualified Option agreements in such form
and not inconsistent with the Plan as the Plan Committee shall in its sole
discretion approve from time to time, which agreements shall specify the
number of shares to which they pertain and the purchase price of such shares
and shall, but without limitation, contain in substance the following terms
and conditions:
(a) OPTION PERIOD. Each option granted shall expire and all rights to
purchase shares thereunder shall cease ten years and one day after
the Date of Grant of the Stock Option or on such date prior
thereto as may be fixed by the Plan Committee, or on such date
prior thereto as is provided by this Plan in the event of
termination of employment or death or reorganization pursuant to
Section 11.8(b) hereof. No option shall permit the purchase of
any shares thereunder during the first year after the Date of
Grant of such option, except as provided in Section 6.3 hereof.
(b) TRANSFERABILITY AND TERMINATION OF OPTIONS. During the lifetime of
an individual to whom an option is granted, the option may be
exercised only by such individual and only while such individual
is an employee of the Company or a Subsidiary and only if the
Participant has been continuously so employed by any one or
combination thereof since the Date of Grant of the option;
provided, however, that if the employment of such Participant by
the Company or a Subsidiary Corporation terminates, the option may
additionally be exercised as follows, or in any other manner
provided by the Plan Committee, but in no event later than 10
years and one day after the Date of Grant of the Stock Option,
except as set forth in (ii) below:
(i) if a Participant's termination of employment occurs by
reason of normal or late retirement under any retirement
plan of the Company or its Subsidiaries, such Participant's
Stock Options may be exercised within five years after the
date of such termination of employment. If a Participant's
termination of employment occurs by reason of early
retirement under any retirement plan of the Company or its
Subsidiaries, or, by reason of the transfer of an executive
in a spin-off, or by reason of total and permanent
disability, as determined by the Plan Committee, without
retirement, then such Participant's Stock Options shall be
exercisable for a period of up to five years after the date
of such termination of employment if the Plan Committee
consents to such an extension. During the extension period
the right to exercise options, if any, accruing in
installments, shall continue; provided, however, in an
early retirement or a spin-off situation the Plan Committee
may set additional conditions, such as, without limiting
the generality of the foregoing, an agreement to not
provide services to a competitor of the Company and its
Subsidiaries and/or continuous employment with the spin-off
entity.
(ii) if a Participant's termination of employment occurs by
reason of death, then within five years after the date of
death or the life of the option, whichever is
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less, but in no event less than one year after the date of
death, during which time installments shall continue to
accrue.
(iii) if a Participant's termination of employment occurs for any
reason other than as specified in Section 6.1(b)(i) or (ii)
hereof, the Participant has been continuously employed by
the Company or a Subsidiary or any combination for more
than 15 years, provided that if the person is not an
Executive Officer (as defined under the Securities Exchange
Act of 1934, as amended, and the regulations promulgated
thereunder) of the Corporation at the time of termination
such 15 years need not be continuous, and if the Plan
Committee so approves, then within a period of up to five
years after the date of termination of employment. During
the period the right to exercise options, if any, accruing
in installments shall continue; provided, however, the Plan
Committee may set additional conditions.
(iv) if a Participant's termination of employment occurs for any
reason other than as specified in Section 6.1(b)(i) or (ii)
hereof, the Plan Committee has not approved an extension
pursuant to Section 6.1(b)(iii) and Participant's
termination of employment is not occasioned by the
commission of a dishonest or other illegal act, then, but
only with respect to installments that have as of the date
of termination already accrued, within ninety days after
the date of such termination of employment except in the
case of Participants who would at the time be subject to
the provisions of Section 16(b) of the Securities Exchange
Act of 1934, in which instance the period of exercise shall
be two hundred ten days after termination. Those
Participants terminated because of the commission of a
dishonest or other illegal act shall have no additional
period after termination of employment in which to exercise
their options. Absence on a leave of absence approved by
the Plan Committee shall not be deemed a termination or
interruption of continuous employment for the purposes of
the Plan.
(v) Rights accruing to a Participant under the aforesaid
Subsections (b)(i), (b)(iii) and (b)(iv) may, upon the
death of a Participant subsequent to his/her termination of
employment, be exercised or perfected by his/her duly
designated beneficiary or otherwise by his/her applicable
legal representatives, heirs or legatees to the extent
vested in and unexercised or perfected by the Participant
at the date of his/her death.
No option shall be assignable or transferable by the
individual to whom it is granted, except that it may be
transferable by will or the laws of descent and
distribution in accordance with the provisions of the Plan.
An option, if so transferable, may be exercised after the
death of the individual to whom it is granted only by such
individual's beneficiary designated to exercise the option
or otherwise by his/her applicable legal representatives,
heirs or legatees, and only within the specific time period
set forth above.
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In no event whether by the Participant directly or by
his/her beneficiary or other representative shall any
option be exercisable at any time after its expiration date
as stated in the option agreement. When an option is no
longer exercisable it shall be deemed for all purposes and
without further act to have lapsed and terminated. The
Plan Committee may in its sole discretion, but shall not be
required to, determine, solely for the purposes of the
Plan, that a Participant is permanently and totally
disabled and the acts and decisions of the Plan Committee
made in good faith in relation to any such determination
shall be conclusive upon all persons and interests affected
thereby.
(c) EXERCISE OF OPTIONS. An individual entitled to exercise an option
may, subject to its terms and conditions and the terms and
conditions of the Plan, exercise it in whole at any time, or in
part from time to time, by delivery to the Company at its
principal office of written notice of exercise, specifying the
number of whole shares with respect to which the option is being
exercised. Before shares may be issued payment must be made in
full, in legal United States tender, in the amount of the purchase
price of the shares to be purchased at the time and any amounts
for withholding as provided in Section 11.9 hereof; provided,
however, in lieu of paying for the exercise price in cash as
described above, the individual may pay (subject to such
conditions and procedures as the Plan Committee may establish) all
or part of such exercise price by delivering owned and
unencumbered shares of the Company common stock having a Fair
Market Value on the date of exercise of the option equal to or
less than the exercise price of the options exercised, with cash,
as set forth above, for the remainder, if any, of the purchase
price. Subject to rules established by the Plan Committee, the
withholdings required by Section 11.9 hereof may be satisfied by
the Company withholding shares of Company common stock issued on
exercise that have a Fair Market Value on the date of exercise of
the option equal to or less than the withholding required by
Section 11.9 hereof.
6.2 INCENTIVE STOCK OPTION. Incentive Stock Options granted under
the Plan are intended to be incentive stock options under Section 422 of the
Code and the Plan shall be administered, except with respect to the right to
exercise options after termination of employment, to qualify Incentive Stock
Options issued hereunder as incentive stock options under Section 422 of the
Code. An Incentive Stock Option shall not be granted to an employee who
owns, or is deemed under Section 424(d) of the Code to own, stock of the
Company (or of any parent or Subsidiary of the Company) possessing more than
10% of the total combined voting power of all classes of stock therein. The
aggregate Fair Market Value (determined as of the time the option is granted)
of the stock with respect to which Incentive Stock Options are exercisable
for the first time by any Participant during any calendar year (under all
incentive stock option plans of the Company or any parent or Subsidiary of
the Company) shall not exceed $100,000. The Incentive Stock Options shall be
evidenced by Incentive Stock Option Agreements in such form and not
inconsistent with the Plan as the Plan Committee shall in its sole discretion
approve from time to time, which agreements shall specify the number of
shares to which they pertain and the purchase price of such shares.
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The terms and conditions set forth in Subsections (a) through (c) of
Section 6.1 hereof shall apply to an Incentive Stock Option; provided that
the term of the Incentive Stock Option shall not exceed ten years; and
provided, further, that in the event Section 6.1(b)(i) hereof is applicable,
all installments shall become immediately exercisable.
6.3 CHANGE IN CONTROL. In the event of a Change in Control, all
outstanding options granted under the Plan shall accelerate and will be
exercisable in full for a period of two hundred ten (210) days after the
Change in Control; provided that no option shall be exercisable by a
Participant (i) within six months after the Date of Grant of the option or
(ii) after the termination date of the option.
ARTICLE VII
RESTRICTED STOCK
7.1 RESTRICTION PERIOD TO BE ESTABLISHED BY THE PLAN COMMITTEE. At
the time a Restricted Stock Award is made, the Plan Committee shall establish
a period of time (the "Restriction Period") applicable to such Award, which
shall be not less than three years. Each Restricted Stock Award may have a
different Restriction Period, at the discretion of the Plan Committee.
Except as permitted or pursuant to Sections 7.4, 7.5 or 11.8 hereof, the
Restriction Period applicable to a particular Restricted Stock Award shall
not be changed.
7.2 OTHER TERMS AND CONDITIONS. Company common stock awarded
pursuant to a Restricted Stock Award shall be represented by a stock
certificate registered in the name of the Holder of such Restricted Stock
Award. The Holder shall have the right to enjoy all shareholder rights
during the Restriction Period with the exception that:
(i) The Holder shall not be entitled to delivery of the stock
certificate until the Restriction Period shall have expired.
(ii) The Company may either issue shares subject to such restrictive
legends and/or stop-transfer instructions as it deems appropriate
or provide for retention of custody of the Company common stock
during the Restriction Period.
(iii) The Holder may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of the Company common stock during the
Restriction Period.
(iv) A breach of the terms and conditions established by the Plan
Committee pursuant to the Restricted Stock Award shall cause a
forfeiture of the Restricted Stock Award, and any dividends
withheld thereon.
(v) Dividends payable in cash or in shares of stock or otherwise may
be either currently paid or withheld by the Company for the
Holder's account. At the discretion of the Plan Committee,
interest may be paid on the amount of cash dividends withheld,
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including cash dividends on stock dividends, at a rate and subject
to such terms as determined by the Plan Committee.
Provided, however, and the provisions of Section 7.4 to the contrary
notwithstanding, in lieu of the foregoing, the Plan Committee may provide
that no shares of common stock be issued until the Restriction Period is over
and further provide that the shares of common stock issued after the
Restriction Period has been completed, be issued in escrow and/or be legended
and that the common stock be subject to restrictions including the forfeiture
of all or a part of the shares.
7.3 PAYMENT FOR RESTRICTED STOCK. A Holder shall not be required to
make any payment for Company common stock received pursuant to a Restricted
Stock Award, unless the Plan Committee requires payment for such stock in the
Restricted Stock Award.
7.4 FORFEITURE PROVISIONS. Subject to Section 7.5, in the event a
Holder terminates employment during a Restriction Period, a Restricted Stock
Award will be forfeited; provided, however, when the Plan Committee issues
the Restricted Stock Award, it may provide in the Restricted Stock Award
agreement for proration or full payout in the event of a termination of
employment because of normal or late retirement, early retirement or spin-off
with the consent of the Plan Committee, or death or total and permanent
disability, as determined by the Plan Committee, or termination of employment
after 15 years of continuous employment with the Corporation or a Subsidiary
or any combination thereof, provided that if the person is not an Executive
Officer (as defined under the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder) of the Corporation at the time of
termination such 15 years need not be continuous, subject to any other
conditions the Plan Committee may determine.
7.5 CHANGE IN CONTROL. In the event of a Change in Control, all
outstanding Restricted Stock Awards granted under the Plan will be proratably
payable ten days after the Change in Control; provided that no Restricted
Stock Award shall be payable to a Participant within six months after the
Date of Grant. The amount of Company common stock payable shall be
determined by multiplying each Restricted Stock Award granted by a fraction,
the numerator of which shall be the number of months that have elapsed in the
applicable Restriction Period and the denominator of which shall be the
number of months in the Restriction Period.
ARTICLE VIII
SHARES OF STOCK SUBJECT TO THE PLAN
8.1 The total number of shares that may be available for issuance
under all Performance Shares, Stock Options and Restricted Stock Awards
granted pursuant to the Plan shall not exceed in the aggregate 18,600,000
shares of the Company's $.3333 par value common stock. Shares covered by
granted Performance Shares which are not earned pursuant to any of the
provisions of Article V hereof, or Stock Options or Performance Shares or
Restricted Stock Awards which are forfeited for any reason or are not
distributed or are covered by options that lapse or are cancelled before
exercise, shall (unless the Plan shall have been terminated) again be
available in the same relative amounts for other Performance Share,
Restricted Stock Award and Stock Option grants under the Plan (except for
shares for which cash equivalent payments are received by Participants
pursuant to
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the Plan), except that 660,825 shares for Stock Options, Performance Shares
or Restricted Stock Awards that were outstanding on April 10, 1991 that are
not earned or are forfeited for any reason or are not distributed or lapse or
are cancelled before exercise shall be available for future grants and any
additional shares for Stock Options, Performance Shares or Restricted Stock
Awards that were outstanding on April 10, 1991 that are not earned or are
forfeited for any reason or are not distributed or lapse or are cancelled
before exercise shall not be available for future Performance Shares,
Restricted Stock Awards or Stock Option Grants. Such shares may be
authorized and unissued shares, or may be treasury shares held by the Company
or may be shares purchased or held by the Company or a Subsidiary for
purposes of the Plan, or any combination thereof.
ARTICLE IX
ADMINISTRATION OF THE PLAN
9.1 The Plan will be administered by a committee of the Board
appointed from time to time by the Board. Each member of the committee shall
be a "non-employee director" as that term is defined under Rule 16b-3,
promulgated under the Securities Exchange Act of 1934, as amended, or any
successor statute or regulation comprehending the same subject matter.
9.2 The Plan Committee shall have and exercise all of the powers and
responsibilities granted expressly or by implication to it by the provisions
of the Plan. Subject to and as limited by such provisions, the Plan
Committee may from time to time enact, amend and rescind such rules,
regulations and procedures with respect to the administration of the Plan as
it deems appropriate or convenient.
9.3 All questions arising under the Plan, any Incentive Stock Option,
Non-Qualified Stock Option, Performance Share or Restricted Stock Award
agreement, or any rule, regulation or procedure adopted by the Plan Committee
shall be determined by the Plan Committee, and its determination thereof
shall be conclusive and binding upon all parties.
9.4 Any action required or permitted to be taken by the Plan
Committee under the Plan shall require the affirmative vote of a majority of
a quorum of the members of the Plan Committee. A majority of all members of
the Plan Committee shall constitute a "quorum" for Plan Committee business.
The Plan Committee may act by written determination instead of by affirmative
vote at a meeting, provided that any written determination shall be signed by
all members of the Plan Committee, and any such written determination shall
be as fully effective as a majority vote of a quorum at a meeting.
ARTICLE X
REDUCTION IN AWARDS
10.1 Anything in this Plan to the contrary notwithstanding, the
provisions of this Article X shall apply to a Participant if Ernst & Young
determines that each of (a) and (b) below are applicable.
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(a) Payments or distributions hereunder, determined without
application of this Article X, either alone or together with other
payments in the nature of compensation to the Participant which
are contingent on a change in the ownership or effective control
of the Company, or in the ownership of a substantial portion of
the assets of the Company, or otherwise (but after any elimination
or reduction of such payments under the terms of the Company's
Income Continuance Policy Statement or SMG Income Continuance
Policy Statement), would result in any portion of the payments
hereunder being subject to an excise tax on excess parachute
payments imposed under Section 4999 of the Code.
(b) The excise tax imposed on the Participant under Section 4999 of
the Code on excess parachute payments, from whatever source, would
result in a lesser net aggregate present value of payments and
distributions to the Participant (after subtraction of the excise
tax) than if payments and distributions to the Participant were
reduced to the maximum amount that could be made without incurring
the excise tax.
10.2 Under this Article X the payments and distributions under this
Plan shall be reduced (but not below zero) so that the present value of such
payments and distributions shall equal the Reduced Amount. The "Reduced
Amount" (which may be zero) shall be an amount expressed in present value
which maximizes the aggregate present value of payments and distributions
under this Plan which can be made without causing any such payment to be
subject to the excise tax under Section 4999 of the Code. The determinations
and reductions under this paragraph shall be made after eliminations or
reductions, if any, have been made under the Company's Income Continuance
Policy Statement or SMG Income Continuance Policy Statement.
10.3 If Ernst & Young determines that this Article X is applicable to a
Participant, it shall so advise the Plan Committee. The Plan Committee shall
then promptly give the Participant notice to that effect together with a copy of
the detailed calculation supporting such determination which shall include a
statement of the Reduced Amount. The Participant may then elect, in his/her
sole discretion, which and how much of the Stock Options, Restricted Stock
Awards and/or Performance Shares otherwise awarded under this Plan shall be
eliminated or reduced (as long as after such election the aggregate present
value of the remaining Stock Options, Restricted Stock Awards and/or Performance
Shares under this Plan equals the Reduced Amount), and shall advise the Plan
Committee in writing of his/her election within ten days of his/her receipt of
notice. If no such election is made by the Participant within such ten-day
period, the Plan Committee may elect which and how much of the Stock Options,
Restricted Stock Awards, and/or Performance Shares shall be eliminated or
reduced (as long as after such election their aggregate present value equals the
Reduced Amount) and shall notify the Participant promptly of such election. For
purposes of this Article X, present value shall be determined in accordance with
Section 280G of the Code. All the foregoing determinations made by Ernst &
Young under this Article X shall be made as promptly as practicable after it is
determined that parachute payments will be made to the Participant if an
elimination or reduction is not made. As promptly as practicable following the
election hereunder, the Company shall provide to or for the benefit of the
Participant such amounts and shares as are then due to the Participant under
this Plan and shall promptly provide to or for the
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<PAGE>
benefit of the Participant in the future such amounts and shares as become
due to the Participant under this Plan.
10.4 As a result of the uncertainty in the application of Section
280G of the Code at the time of the initial determination by Ernst & Young
hereunder, it is possible that payments or distributions under this Plan will
have been made which should not have been made ("Overpayment") or that
additional payments or distributions which will have not been made could have
been made ("Underpayment"), in each case, consistent with the calculation of
the Reduced Amount hereunder. In the event that Ernst & Young, based upon
the assertion of a deficiency by the Internal Revenue Service against the
Company or the Participant which Ernst & Young believes has a high
probability of success, determines that an Overpayment has been made, any
such Overpayment shall be treated for all purposes as a loan to the
Participant which the Participant shall repay together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no amount shall be payable by the Participant if and
to the extent such payment would not reduce the amount which is subject to
the excise tax under Section 4999 of the Code. In the event that Ernst &
Young, based upon controlling precedent, determines that an Underpayment has
occurred, any such Underpayment shall be promptly paid to or for the benefit
of the Participant together with interest at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Code.
10.5 In making its determination under this Article X, the value of
any non-cash benefit shall be determined by Ernst & Young in accordance with
the principles of Section 280G(d)(3) of the Code.
10.6 All determinations made by Ernst & Young under this Article X
shall be binding upon the Company, the Plan Committee and the Participant.
ARTICLE XI
GENERAL PROVISIONS
11.1 AMENDMENT OR TERMINATION. The Board may at any time amend,
suspend, discontinue or terminate the Plan (including the making of any
necessary enabling, conforming and procedural amendments to the Plan to
authorize and implement the granting of qualified Stock Options or other
income tax preferred stock options which may be authorized by enactment of
the United States Congress and/or the Internal Revenue Service subsequent to
the effective date of this Plan); provided, however, that no amendment by the
Board shall, without further approval of the shareholders of the Company:
(a) except as provided at Section 2.17 hereof, increase the total
number of shares of Company common stock which may be made subject
to the Plan; or
(b) except as provided at Section 2.17 hereof, change the purchase
price of Company common stock under the Plan; or
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<PAGE>
(c) materially modify the class of employees that are eligible to
receive Stock Options and/or Performance Shares and/or Restricted
Stock Awards pursuant to the Plan.
No action taken pursuant to this Section 11.1 of the Plan shall, without the
consent of a Participant, alter or impair any Performance Share(s) or Stock
Option(s) or Restricted Stock Award(s) which have been previously granted to
a Participant.
11.2 NON-ALIENATION OF RIGHTS AND BENEFITS. Except as expressly
provided herein, no right or benefit under the Plan shall be subject to
anticipation, alienation, sale, assignment, pledge, encumbrance or charge and
any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge
the same shall be void. No right or benefit hereunder shall in any manner be
liable for or subject to the debts, contracts, liabilities or torts of the
person entitled to such right or benefit. If any Participant or beneficiary
hereunder should become bankrupt or attempt to anticipate, alienate, sell,
assign, pledge, encumber or charge any right or benefit hereunder, then such
right or benefit shall, in the sole discretion of the Plan Committee, cease
and in such event the Company may hold or apply the same or any or no part
thereof for the benefit of the Participant or beneficiary, his/her spouse,
children or other dependents or any of them in any such manner and in such
proportion as the Plan Committee in its sole discretion may deem proper.
11.3 NO RIGHTS AS SHAREHOLDER. The granting of Performance Share(s)
and/or Stock Option(s) and/or Restricted Stock Award(s) under the Plan shall
not entitle a Participant or any other person succeeding to his/her rights,
to any dividend, voting or other right as a shareholder of the Company unless
and until the issuance of a stock certificate to the Participant or such
other person pursuant to the provisions of the Plan and then only subsequent
to the date of issuance thereof.
11.4 LIMITATION OF LIABILITY OR OBLIGATION OF THE COMPANY. As
illustrative only of the limitations of liability or obligation of the
Company and not intended to be exhaustive thereof, nothing in the Plan shall
be construed:
(a) to give any employee of the Company any right to be granted any
Stock Option and/or Performance Share and/or Restricted Stock
Award other than at the sole discretion of the Plan Committee;
(b) to give any Participant any rights whatsoever with respect to
shares of the Company's $.3333 par value common stock except as
specifically provided in the Plan;
(c) to limit in any way the right of the Company or any Subsidiary to
terminate, change or modify, with or without cause, the employment
of any Participant at any time; or
(d) to be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ any
Participant in any particular position at any particular rate of
compensation or for any particular period of time.
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<PAGE>
11.5 GOVERNMENT REGULATIONS. Notwithstanding any other provisions of
the Plan seemingly to the contrary, the obligation of the Company with
respect to Performance Shares, Stock Options or Restricted Stock Awards
granted under the Plan shall at all times be subject to any and all
applicable laws, rules, and regulations and such approvals by any government
agencies as may be required or deemed by the Board or Plan Committee as
reasonably necessary or appropriate for the protection of the Company.
In connection with any sale, issuance or transfer hereunder, the
Participant acquiring the shares shall, if requested by the Company give
assurances satisfactory to counsel of the Company that the shares are being
acquired for investment and not with a view to resale or distribution thereof
and assurances in respect of such other matters as the Company may deem
desirable to assure compliance with all applicable legal requirements.
11.6 NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan
by the Board nor the submission of the Plan to shareholders of the Company
for approval shall be construed as creating any limitations on the power or
authority of the Board to adopt such other or additional incentive or other
compensation arrangements of whatever nature as the Board may deem necessary
or desirable or preclude or limit the continuation of any other plan,
practice or arrangement for the payment of compensation or fringe benefits to
employees generally, or to any class or group of employees, which the Company
or any Subsidiary now has lawfully put into effect, including, without
limitation, any retirement, pension, savings, profit sharing or stock
purchase plan, insurance, death and disability benefits, and executive short
term incentive plans.
11.7 EFFECTIVE DATE. Subject to the approval of this restated Plan
by the holders of a majority of the voting power of the shares present and
entitled to vote at the Company's Annual Meeting of Shareholders to be held
May 21, 1997 and any necessary approval being obtained from any department,
board or agency of the United States or states having jurisdiction, the Plan
shall be effective as of May 21, 1997.
11.8 REORGANIZATION. In case the Company is merged or consolidated
with another corporation, or in case the property or stock of the Company is
acquired by another corporation, or in case of a separation, reorganization
or liquidation of the Company, the Plan Committee or a comparable committee
of any corporation assuming the obligations of the Company hereunder, shall
either:
(a) make appropriate provision for the protection of any outstanding
Performance Shares, Stock Options and Restricted Stock Awards
granted thereunder by the substitution on an equitable basis of
appropriate stock of the Company, or of the merged, consolidated
or otherwise reorganized corporation which will be issuable in
respect to the shares of the Company's $.3333 par value common
stock. Stock to be issued pursuant to such Performance Shares
shall be limited so that the excess of the aggregate fair market
value of the shares subject to the Performance Shares immediately
after such substitution over the purchase price thereof is not
more than the excess of the aggregate fair market value of the
shares subject to such
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<PAGE>
Performance Shares immediately before such substitution over the
purchase price thereof; or
(b) upon written notice to the Participant, provide that all
Performance Shares granted to the Participant are deemed earned,
that the Restriction Period of all Restricted Stock Awards has
been eliminated and that all outstanding Stock Options shall
accelerate and become exercisable in full but that all outstanding
Stock Options, whether or not exercisable prior to such
acceleration, must be exercised within not less than sixty days of
the date of such notice or they will be terminated. In any such
case the Plan Committee may, in its discretion, extend the
sixty-day exercise period.
11.9 WITHHOLDING TAXES, ETC. All distributions under the Plan shall
be subject to any required withholding taxes and other withholdings and, in
case of distributions in Company common stock, the Participant or other
recipient may, as a condition precedent to the delivery of the common stock,
be required to pay to his/her participating employer the excess, if any, of
the amount of required withholding over the withholdings, if any, from any
distributions in cash under the Plan. No distribution under the Plan shall
be made in fractional shares of the Company's common stock, but the
proportional market value thereof shall be paid in cash.
11.10 GENERAL RESTRICTION. Each Performance Share, Stock Option and
Restricted Stock Award shall be subject to the requirement that, if at any
time the Board shall determine, in its discretion, that the listing,
registration or qualification of the shares subject to such option and/or
right upon any securities exchange or under any state or Federal Law, or the
consent or approval of any government regulatory body, is necessary or
desirable as a condition of, or in connection with the granting of such
Performance Share or Stock Option or Restricted Stock Award or the issue or
purchase of shares respectively thereunder, such Performance Share or Stock
Option or Restricted Stock Award may not be exercised in whole or in part
unless such listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Board.
11.11 USE OF PROCEEDS. The proceeds derived from the sale of the
stock pursuant to Stock Options or Restricted Stock Awards granted under the
Plan shall constitute general funds of the Company.
11.12 HEADINGS. The headings of the Articles and their subparts in
this Plan are for convenience of reading only and are not meant to be of
substantive significance and shall not add to or detract from the meaning of
such Article or subpart to which it refers.
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<PAGE>
January 13, 1999
DAYTON HUDSON CORPORATION
INCOME CONTINUANCE POLICY STATEMENT
I. CONCEPTS
A. GENERAL
The present policy of the Corporation is to provide, under certain
defined circumstances, Income Continuance Payments to the persons
listed on Exhibit A in the event of termination of employment. This
policy is intended to assist in the occupational transition and
financial security of those Executives whose services are no longer
deemed required within the Corporation, who have during their tenure
been faithful and honest employees, who do not during the period of
those payments engage in disqualifying misconduct, and to the extent
not compensated for services to a directly competitive employer and to
assist Executives who terminate employment with the Corporation within
2 years after a Change in Control.
"Income Continuance" will be paid in monthly installments for from 18
to 24 months, depending upon the Executive's length of service in the
Corporation, in an amount equal to the Executive's cash compensation
prior to termination of employment.
This will be known as the Income Continuance Policy ("ICP") of the
Corporation. It will be interpreted and applied in accordance with
this Statement of policy and with any subsequent amendment or
restatement applicable to the Executive.
B. ELIGIBILITY
To be eligible under ICP, an Executive must be listed on Exhibit A and
be a member of the Corporation's Senior Management Group ("SMG").
C. REASSIGNMENT
An Executive will continue to have income protection under ICP for at
least 18 calendar months (Eligibility Period) after internal
reassignment to a position which is not an SMG position.
<PAGE>
D. SPIN-OFF
An Executive who retains substantially the same position in an ongoing
Operating Company or similar business unit after the Corporation has
ceased to be its owner or operator will remain eligible for the same
ICP benefits from the Corporation as if the Executive had been
transferred to a non-SMG position within the Corporation at the time
of the Spin-Off.
E. DISQUALIFICATION AND REDUCTION
Serious and deliberate misconduct in employment by an Executive
resulting in discharge for cause can disqualify an Executive from ICP
eligibility. Except as otherwise expressly provided in this
Statement, after termination under ICP and normal windup of former
duties an Executive will not be required to perform any regular
services for the Corporation, and will be free to accept any other
employment. Except as otherwise provided in this ICP, ICP Payments
otherwise payable to an Executive will be reduced or excused in the
amount of compensation from Directly Competitive Employment as
specifically defined to the Executive in advance according to this
Statement. An Executive otherwise entitled to ICP Payments after
Termination, Reassignment or Spin-Off will be disqualified from
receiving future Payments by reason of serious and deliberate
misconduct which is unlawful or clearly and seriously harmful to the
Corporation, or to its interest or those of certain subsequent
employers.
F. INTERPRETATION
Subject to the express terms of this Statement, the Chief Executive
Officer of the Corporation will have sole and final authority to
interpret the ICP and determine its application, and will interpret it
consistently and in good faith. Section I of this Statement is
intended as a summary of the more detailed provisions of Section II.
For that reason, Section II will control in the event of any
difference.
G. MODIFICATION
ICP and the ICP Statement can only be modified or discontinued
prospectively, and only by action of the Board of Directors or a
committee of Directors acting with the authority of the Board for this
purpose.
II. APPLICATION
A. ELIGIBILITY PERIOD - DEFINITION
The "Eligibility Period" of an Executive is determined by the number
of full calendar months between the Executive's most recent first date
of continuous service within the Corporation and the Effective Date of
Termination, Spin-Off or
2
<PAGE>
Reassignment by the Corporation. It will be calculated according to
the following schedule:
<TABLE>
<CAPTION>
Months of Service Eligibility Period
----------------- ------------------
<S> <C>
0 through 36 18 months
37 through 48 19 months
49 through 60 20 months
61 through 72 21 months
73 through 84 22 months
85 through 96 23 months
more than 96 24 months
</TABLE>
An Executive entitled to ICP Payments will not be entitled to
prepayment or other change in the monthly payment schedule.
B. ELIGIBILITY PERIOD - USE
The Eligibility Period of an Executive will determine the number of
consecutive calendar months for which an Executive remains eligible
for ICP Payments under this Statement after:
1. Reassignment to a new position within the Corporation which does
not include SMG membership, or
2. The effective date of a Spin-Off by the Corporation.
C. PAYMENT PERIOD - DEFINITION
The Payment Period for an Executive will consist of the same number of
months as the Executive's Eligibility Period, measured from the time
when ICP Payments first become payable to the Executive under the
terms of this Statement.
D. PAYMENTS
1. AMOUNT
Each monthly ICP Payment to an Executive during the Payment
Period will equal one twelfth (1/12) of the Executive's Final
Annual Cash Compensation from the Corporation which will consist
of the sum of:
a. BASE COMPENSATION
The annual Base (regular monthly or other fixed salary) rate
payable as Cash Compensation to the Executive at the time of
Notice of Termination or effective date of Reassignment or
Spin-
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<PAGE>
Off, but in no event less than the highest annual rate
paid to the Executive at any time during a number of months
equal to the Executive's Eligibility Period immediately
before the Notice of Termination or effective date of
Reassignment or Spin-Off, and
b. PERFORMANCE BONUS
The average amount of the three annual Performance Bonuses
most recently paid or credited to the Executive as Cash
Compensation or deferred bonus, prior to Executive's Notice
of Termination or effective date of Reassignment or Spin-Off
or downgrade. For purposes of ICP, the Performance Bonus of
an Executive shall be determined according to the applicable
Short Term Incentive Plan of the Corporation, shall also
include, if applicable, any discretionary bonus paid during
said applicable period on account of the Executive's
performance but outside of the purview of the then
applicable Short Term Incentive Plan.
c. ADJUSTMENT
The annual rate in dollars of each merit increase awarded to
an Executive before Notice of Termination will be included
in Base Compensation to determine the Executive's ICP
Payments. If the Executive's annual rate of Base
Compensation at the time of Notice of Termination has been
increased or decreased to reflect a change from the Short
Term Incentive Plan used to determine the Performance Bonus
defined above, and the change is for the purpose of altering
the future relationship of Bonus to total Annual Cash
Compensation of the Executive, then the dollar amount of
that increase or decrease in annual rate of Base
Compensation will be excluded in determining ICP Payments.
2. COMMENCEMENT
Monthly ICP Payments, or entitlement to begin receiving them,
will commence in the next full calendar month after the Effective
Date of Termination, subject to any Set-offs, Adjustments and
Withholding as specified in
a. DEFERRED ICP PAYMENTS
Until the Effective Date of Termination there will be no
change in the rate or timing of compensation, benefits or
perquisites to which the Executive was entitled immediately
before the Notice of Termination, and no amount received
from the Corporation before
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<PAGE>
that Effective Date will be charged against the ICP Payments
to which the Executive is entitled under this Statement.
b. DIFFERENT EMPLOYMENT SEVERANCE DATE
If the Corporation agrees in writing with the Executive
upon, or notifies the Executive of, an Employment Severance
Date later than the ICP Effective Date of Termination, then:
1) All Cash Compensation that the Executive receives after
the ICP Effective Date of Termination will be treated
as an Adjustment and deducted from ICP Payments
otherwise payable, as defined in 3 c below, and will be
paid in the amount(s) and at the time(s) to which the
Executive was entitled immediately before the Notice of
Termination, and
2) Employee benefits and normal use and expense of
executive perquisites and facilities available to the
Executive before the Notice of Termination will
continue until the Employment Severance Date and,
except to any extent otherwise specified in this
Statement or by written advance notice to the Executive
by the Corporation, will not be charged against ICP
Payments to which the Executive is entitled under this
Statement.
3. SET-OFF AND WITHHOLDING
ICP Payments are not intended to duplicate or be in addition to
any other payment due between the Corporation and the Executive.
a. REDUCTION
Each Payment otherwise due from the Corporation to the
Executive will be reduced, dollar for dollar and in timing
by all amounts which the Executive receives or is entitled
to receive from the Corporation or under a plan, program or
agreement maintained by and at the expense of the
Corporation after the Effective Date of Termination or
Spin-Off. This will include such sources as life and
disability insurance. It will not apply to accrued
vacation or expense reimbursement (both will be paid in
cash at termination), Pension proceeds, Supplemental
Retirement and Savings Plan proceeds, Deferred Compensation
Plans, Social Security, fully exercisable or earned-out
stock option, stock appreciation rights, performance shares
or restricted stock awards, or benefits payable under any
Worker's Compensation or similar law or regulation.
Termination of employment by reason of mandatory retirement
5
<PAGE>
under a lawful and uniform policy of the employer applicable
to the Executive will not be treated as a termination for
ICP purposes.
b. DEBT
The Corporation may apply not more than 25 percent of any
ICP Payment otherwise due to the Executive to pay any
overdue debt payable to the Corporation on any obligation of
the Executive or dependent of Executive, until all such
accounts are paid in full or current according to their
terms.
c. ADJUSTMENTS
If monthly payments received by the Executive from the
Corporation immediately after the Effective Date of
Termination are not computed under ICP, then when regular
monthly ICP Payments begin they will reflect itemized
adjustments to apply the ICP monthly rate to the ICP
Effective Date of Termination. Taxes and other amounts
required by law or by the Executive's written instruction
will be withheld from ICP amounts otherwise payable.
E. DEATH OF EXECUTIVE
If an Executive should die after Notice of Termination and before
completion of the Executive's Payment Period, the remaining Payments
will be made by the Corporation as follows, without unnecessary
interruption:
1. Unless the Executive has otherwise designated in unrevoked
writing, acknowledged in writing by the CEO, the surviving spouse
of the Executive, if any, will be entitled to all remaining
Payments.
2. If the Executive has otherwise effectively designated in
unrevoked writing, acknowledged in writing by the CEO, then
Payment will be made to or for the account of the person or
persons so designated as identified by the Corporation.
3. In the absence of effective prior written designation by the
Executive and of a known surviving spouse, the Corporation may
hold remaining Payments until the executor, heirs or
administrator of the Executive can be identified and Payment made
and receipted to the reasonable satisfaction of the Corporation
pursuant to the advice of its legal counsel.
4. In the interest of providing uninterrupted income to authorized
beneficiaries of the Executive, any ICP Payment made with
reasonable care and in good faith by the Corporation shall
conclusively constitute Payment by the Corporation in accordance
with and satisfaction of the
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<PAGE>
entitlement of the Executive and Executive's beneficiaries under
ICP. No interest or other charge shall be payable by the
Corporation or its representatives on any Payment delayed by the
Corporation to permit reasonable verification of authorized
recipient(s).
F. DISQUALIFICATION
No Executive will be disqualified from receipt of future ICP Payments
by reason of any act or omission of anyone other than the Executive or
one or more persons acting pursuant to the conscious and effective
control of the Executive. Disqualification will be interpreted as
follows:
1. WHILE EMPLOYED IN THE CORPORATION
Deliberate and serious disloyal or dishonest conduct in the
course of employment will disqualify if it justifies and results
in prompt discharge for specific cause under the established
policies and practices of the Corporation as interpreted by the
CEO for this purpose. Examples would include material unlawful
conduct, material and conscious falsification or unauthorized
disclosure of important records or reports, embezzlement or
unauthorized conversion of property, serious violation of
conflict of interest or vendor relations policies, and misuse or
disclosure of significant trade secrets or other information
likely to be of use to the detriment of the Corporation or its
interests.
2. AFTER NOTICE OF TERMINATION OR SPIN-OFF
The ICP will not restrict an Executive's conduct or employment
opportunities after Notice of Termination, or any independent
remedy of the Corporation or its representatives by reason of the
Executive's conduct while employed. The obligation of the
Corporation to or for an Executive during the Eligibility and
Payment Periods can be terminated only by the deliberate conduct
of the Executive or one acting under the Executive's conscious
and effective control, and only as to any ICP Payments not yet
due, by reason of one or more of the following events:
a. Unauthorized removal, use or disclosure of strategic or
operating plans, trade secrets, customer lists, internal
systems or other significant proprietary information of or
concerning the Corporation or its personnel, the use or
disclosure of which is intended or likely to cause loss or
reduction of business advantage or substantial injury to the
Corporation or its management, business opportunities or
interests.
b. Expressing or endorsing publication of untrue statements
which are intended or likely to receive broad public
attention and to bring the
7
<PAGE>
Corporation or its interests, methods or representatives
into disrepute.
c. Providing materially false or misleading information
concerning post-termination employment, or failure or
refusal promptly and accurately to provide required
information, verification or authorization required by the
CEO as provided in this Statement and affecting any ICP
payment due from the Corporation.
d. Solicitation of or an offer to an employee within the
Corporation to accept employment elsewhere, where the
selection of or offer to the recruited employee was based in
the whole or in part upon Executive's knowledge or
experience concerning the employee which was acquired by the
Executive while employed within the Corporation or through
one or more personal acquaintances employed within the
Corporation.
e. Exercising the discretion, authority or powers of an office
or position held by an Executive after Notice of
Termination, and whether or not before an Effective Date of
Termination or Employment Severance Date, unless
specifically authorized or directed in writing in advance by
an authorized executive of the Corporation.
f. Because ICP is not intended to encourage or reward
misconduct in employment, an Executive can be disqualified
from receipt of future ICP Payments from the Corporation
because of termination of employment by a Spin-Off employer
for unlawful or serious and deliberate misconduct during the
Executive's Eligibility Period. If the CEO independently
determines and informs the Executive in writing that
termination of employment by another employer was due to
unlawful or serious and deliberate misconduct which would
have resulted in ICP disqualification under the standards of
this Statement if committed against and while employed by
this Corporation, then the Executive will be deemed
conclusively and irrevocably to have waived and abandoned
all right to future ICP Payments from this Corporation. If
the CEO concludes that there is reason to believe that
disqualifying misconduct under this paragraph may have
resulted in a termination of employment which would
otherwise initiate or increase its ICP Payments to the
Executive, the Corporation may postpone commencement of or
change in ICP Payments until it has received from the
Executive a full and accurate explanation of the
circumstances and written authorization for the terminating
employer to make full and confidential disclosure to the
Corporation, and has had a
8
<PAGE>
reasonable time not exceeding 60 days to complete an
investigation and for the CEO to make a determination.
3. PRESERVATION OF RIGHTS
Neither ICP nor its application shall waive, excuse, preclude or
otherwise affect any right or remedy which the Corporation or any
agent or representative of the Corporation may have, individually
or collectively, under law by reason of conduct of the Executive
during or after employment within the Corporation.
Disqualification or reduction of Payments under ICP will be an
additional and not an exclusive remedy.
G. COMPETITIVE EMPLOYMENT
An Executive will receive not less than the full amount of the
specified ICP Payments from the Effective Date of Termination through
the full Payment Period whether or not compensated by another employer
for services in that Period, unless disqualified under Section F.,
immediately above or employed by a Spin-Off employer, as defined, or
as provided in this Section G. Compensation from employment which is
not identified as Directly Competitive Employment ("DCE") will be in
addition to and will not reduce any ICP Payment. If an Executive
engages in DCE as specifically defined in advance and by this
Statement, then each ICP Payment otherwise payable to the Executive
will be currently reduced., dollar for dollar and in timing, by the
amount of all Cash Compensation earned from that source during the
Payment Period.
These provisions will be interpreted and administered as follows:
1. PURPOSE OF SET-OFF
Reduction of ICP Payments by the amount of Cash Compensation
determined to be from DCE is not intended to restrict or penalize
an Executive's choice of alternative career opportunities, but
only to preserve and reconcile the personal income security
intended to be provided to Executives by ICP with the legitimate
interests of the Shareholders of the Corporation in its highly
competitive business context.
2. COMPETITORS IDENTIFIED
At or about the time of Notice of Termination, the Corporation
will inform the Executive in writing of those employers who have
been individually and specifically determined to offer DCE for
ICP purposes with respect to the Executive's former employment
within the Corporation. This designation will take into account
existing operations and known plans of the Corporation and of the
employers listed, and will not change during the Eligibility
Period by reason of subsequent and mutually unanticipated
9
<PAGE>
changes in the operations or plans of either. An Executive whose
employment with a Spin-Off employer is terminated during the
Eligibility Period without disqualifying misconduct and who is
not reemployed in the Corporation will receive designation of DCE
employers promptly after written notice by the Executive to the
Corporation of non-disqualifying termination of Spin-Off
employment.
3. CRITERIA
The following criteria will be employed in determining and
administering ICP application to DCE.
a. SELECTIVE POTENTIAL DETRIMENT
A position will not be determined to constitute DCE for this
purpose unless the CEO determines that the competitive
effectiveness of the Executive and the new employer would be
materially enhanced by the Executive's current knowledge of
such matters as the particular methods, policies, customers,
suppliers, personnel or plans of the Corporation or its
relevant Operating Company, as distinguished from the
skills, experience and services of the Executive generally.
The Corporation will identify for DCE purposes not more than
three persons, firms or corporations who are determined for
this purpose to be the leading direct and immediate
competitors of the affected business of the Corporation.
b. PRESERVATION OF EMPLOYMENT OPPORTUNITIES
Whether or not an Executive's most recent employment within
the Corporation involved direct participation in the
management of one or more Operating Companies, this section
will not be used to discourage or penalize otherwise
suitable employment opportunities in retailing or otherwise.
The Corporation may require, as a condition of avoiding DCE
designation for the Executive, a suitable written
undertaking by the Executive and the new employer that the
Executive remains obliged not to use or divulge trade
secrets or proprietary information of the Corporation and
that the Executive will not volunteer or be expected or
required to violate that obligation in the course of the new
employment.
c. RELEVANT CONSIDERATIONS
In determining DCE, the CEO will give suitable consideration
to geographic, product and price-line marketing overlaps,
the nature and content of the Executive's particular
knowledge of strategies
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<PAGE>
and plans within the Corporation, and the extent to which
the Executive's knowledge, as distinguished from skills,
is likely to be a significant factor in generating an
employment opportunity. Employment exclusively with a
component of a larger business entity, which component is
not presently or known to be planned to be a direct and
immediate competitor of the Executive's former Operating
Company, will not be treated as DCE merely because one or
more other components of that entity is or may become a
competitor of the Corporation or one or more of its other
Operating Companies.
4. ICP PAYMENT REDUCTION
Uniform and responsible administration of ICP will require
reliable information and verification to the Corporation.
a. REPORTING
To be eligible for any ICP Payment during a period of DCE,
an Executive must, in addition to all other required
reporting, provide to the Corporation in writing an accurate
statement of the amount and payment schedule of all Cash
Compensation or its equivalent to be received from the new
employer and of any subsequent change or correction of that
amount, in such form and with such verification as the CEO
may request in writing. An Executive will not be or become
entitled to receive or retain any portion of any ICP Payment
on account of any Payment Period for which that information,
and any required verification, is not currently and
accurately provided.
b. VERIFICATION AND RECONCILIATION
Required verification may include authorization for written
confirmation from the employer and confidential disclosure
of completed W-2, payroll and income tax forms of the
Executive on which taxes have been or will be paid. If the
Corporation withholds for more than 30 days any ICP Payment
pending receipt of required information or verification
which is later received and found satisfactory, the
Corporation will pay interest at a realistic rate determined
by the CEO for the period of delay. The Corporation and the
Executive will each fairly and promptly adjust by payment
any discrepancy later discovered between reported and actual
Cash Compensation of the Executive, but the Corporation will
have no liability for any amount not claimed by an Executive
in writing before final expiration of the Executive's
Payment Period.
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H. REASSIGNMENT AND SPIN-OFF
The purpose of ICP is to attract and preserve the services of
Executives for the benefit of the Corporation by providing unreduced
personal income to them for the full Eligibility and Payment Periods
in the absence of disqualifying personal misconduct, DCE or continued
employment after a Spin-Off. If the Corporation should determine that
its shareholders' interests would best be served by disposition or
major alteration of an Executive's current Operating Company or
position, ICP will be available to the Executive unless:
1. REASSIGNMENT AND OTHER ADJUSTMENTS
The Corporation may transfer an Executive to another position
within the Corporation or any of its Operating Companies or
reduce the Executive's Compensation in Executive's current
position (collectively referred to as "Reassignment"). An
Executive in the case of either event may elect ICP Payments if
the Executive's total monetary compensation after Reassignment
will be measurably and substantially below the total monetary
compensation of the Executive immediately before notice of
Reassignment. For this purpose, personal monetary compensation
will include salary and bonus and continuation, or payment of the
substantial equivalent in Cash Compensation, of all non-cash
personal benefits and perquisites which the Executive was
receiving immediately before and does not receive after the
Reassignment and which are susceptible of accurate and objective
measurement in dollars as determined by the CEO; or
2. SPIN-OFF
A Spin-Off (as defined) occurs and the Executive is requested by
the Corporation to continue in the resulting company or
operation in substantially the same position as immediately
before Spin-Off.
a. ICP ELIGIBILITY
An Executive will, in the event of Spin-Off, have the same
rights and limitations to elect to receive ICP payments in
lieu of the continuation of employment as if Reassigned at
that time to another position within the Corporation as
provided in subparagraph (1), immediately above. Comparison
of the Executive's monetary compensation before and after
the ownership change will be measured by the same standards
for this purpose. An Executive whose employment continues
after Spin-Off will remain eligible for ICP Payments from
the Corporation for the Executive's full
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ICP Eligibility Period, measured from the effective date of
Spin-Off.
b. SUBSEQUENT TERMINATION
If during the Eligibility period after Spin-Off the
Executive's employment should be involuntarily terminated,
or the Executive irrevocably terminates the employment
because of an involuntary reduction in monetary compensation
to a rate materially below the Executive's most recent
monetary compensation rate within the Corporation, the
Executive shall be eligible for full ICP Payments from the
Corporation as though the Executive were then employed by
the Corporation. Any amount paid to the Executive by the
Spin-Off employer after effective date or on account of that
termination will be set off against, and reduce dollar for
dollar and in timing, any ICP Payments otherwise payable to
the Executive by the Corporation.
c. REEMPLOYMENT OFFER
The obligation of the Corporation to make future ICP
Payments to an Executive because of a non-disqualifying
termination of employment after a Spin-Off under this
subsection can be terminated by a suitable offer to the
Executive of employment within the Corporation. Such an
offer will be suitable for this purpose if it is a good
faith offer of a management position at a rate of monetary
compensation at least equal to the Executive's rate
immediately before the effective date of Spin-Off, and is
timely. It will be timely for this purpose if communicated
to the Executive within 30 days after the Corporation
receives written notice or has actual knowledge of the
termination of the Executive's employment, and specifies a
starting date not less than 30 nor more than 60 days
thereafter. The Corporation will promptly initiate ICP
Payments when notified in writing of the non-disqualifying
termination, and continue Payments until the starting date
specified in the reemployment offer, whether or not the
offer is accepted. If the offer is not accepted and
implemented by the Executive according to its terms, the
obligation of the Corporation to make further ICP Payments
will irrevocably expire on the starting date specified in
the offer. If the offer is accepted, all Cash Compensation
paid to the Executive after reemployment within the
Corporation will be credited, dollar for dollar, against ICP
Payments otherwise payable to the Executive.
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d. ELIGIBILITY AFTER REEMPLOYMENT
If reemployed within the Corporation but not in an SMG
position after involuntary termination during the
Executive's Eligibility Period following Spin-Off under this
section, the Executive will remain eligible under ICP for
the balance of the Executive's Eligibility Period measured
from the effective date of Spin-Off, but in no event for a
period shorter than one-half of the number of calendar
months in the Executive's Eligibility Period on the
effective date of Spin-Off measured from the first date of
reemployment.
e. INTERPRETATION.
A Spin-Off will be deemed to have occurred for purposes of
this paragraph whether or not afterward: (a) the Executive
has a personal ownership or incentive interest in the
severed Company or operation; or (b) the severed Company or
operation becomes, as a result of or after the severance, a
part of one or more other legal entity or entities.
I. REPORTING
For convenience and uniformity of administration, each Executive while
eligible for or entitled to ICP Payments after Termination or Spin-Off
will be expected as a pre-condition currently and accurately to inform
the Corporation in writing of the name and business address of each
employer of Executive during the Eligibility and Payment Periods,
including a summary description of the nature and principal business
locations of the new employer and the title, principal duties, address
and telephone number of the Executive. Significant changes in
employment, duties or location will also be promptly reported. The
Corporation will not be required to make any ICP Payment for any
period for which it has not received a current and accurate report as
required by, or by the CEO in accordance with, this Statement.
J. INTERPRETATION
1. An Executive may at any time request in writing of the CEO, and
the CEO may respond or initiate to any, some or all of the
Executives, a written determination of the application of the ICP
to specific or reasonably foreseeable circumstances. The express
language of Section II of this Statement will control where
applicable, and the CEO will act reasonably and in good faith in
providing any ICP or Statement interpretation. Any decision of
the CEO consistent with those criteria will be: (1) Final and
conclusive of the rights and obligations of all affected parties
and (2) Applied uniformly as to all Executives then similarly
situated (subject to
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subsequent ICP amendment); and (3) Not subject to separate
determination or review by any public or private agency or
authority except as expressly provided in this Statement.
2. References to compensation and other monetary rates or
measurements in this Statement and its applications are in
current dollars, unadjusted by reason of inflation, deflation or
otherwise.
3. Any portion of a full calendar month or year will be prorated on
a full calendar basis, without differential related to such
considerations as working days or holidays. Any portion of a day
will be treated as a full day, and measurement days will begin
and end at midnight, current time. The fiscal year of the
Corporation will be treated for all purposes as it is for
financial reporting purposes.
4. In the event of application or interpretation of ICP to an
individual Executive who is a Director of the Corporation, or
otherwise in its sole discretion, the Board of Directors of the
Corporation or its authorized committee shall have and may
exercise the sole, exclusive and final authority and discretion
of the CEO for any purpose under ICP.
K. RELEASE
Payment and receipt of ICP Payments will be in full and final
satisfaction of all claims by or through an Executive against the
Corporation and its representatives by reason of the employment of the
Executive and its termination, except as otherwise expressly provided
in this Statement or as required by applicable law or regulation. A
signed written Release to that effect, in form approved by the CEO,
will be delivered by the Executive or the Executive's representative
to the Corporation before the effective date of a Spin-Off affecting
the Executive, and in any event before any ICP Payment will become
payable by the Corporation to or on account of the Executive. The
Release may, without limitation, require a representation that no
confidential documents concerning the Corporation or its intentions
have been or will be removed or retained by the Executive without
specific authority, and that the Executive will not engage in
disqualifying misconduct as defined in this Statement, in reference to
the Corporation. The Release will not affect any conversion, vested
or continuing rights available to an Executive under a plan of the
Corporation other than ICP.
L. GENERAL
The ICP and this Statement will not constitute or infer an obligation
or undertaking to employ any person for any future period of time or
in any specific position. ICP Eligibility or Payments after Notice of
Termination or Spin-Off will not create, continue or evidence any
employment relationship with the Corporation. All employment
privileges, benefits and perquisites not expressly
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and in writing reserved to an Executive under ICP will terminate on
the Effective Date of Termination or Spin-Off, unless otherwise
expressly agreed in advance in writing by the Corporation. This
will not affect any conversion, vested or other continuing benefits
or rights available to an Executive under a plan of the Corporation
other than ICP.
M. AMENDMENT
ICP and this Statement may not be terminated and may not be amended to
reduce benefits with respect an Executive subject to the ICP until two
years after the Executive receives written notice of the proposed
termination or amendment. Except as set forth in the first sentence
hereof, ICP and this Statement can be amended (including modification,
restatement, suspension and termination) at any time, without prior
written notice to or consultation with any Executive, by the Board of
Directors or any committee appointed by the Board of Directors having
the authority of the Board for that purpose. Any such change will
have effect as follows:
1. EFFECTIVE DATE OF CHANGE
Except as set forth below, any amendment will be effective on the
date of its adoption by the Board or committee or such other such
subsequent date or dates as may be specified in the amendment or
the resolution by which it is adopted. Unless otherwise mutually
agreed in writing by the parties, (a) an amendment or termination
will have no effect upon any Executive who at the time has
received Notice of Termination under ICP and (b) a termination or
an amendment that reduces benefits will not be effective as to an
Executive subject to the ICP until 2 years after the Executive
receives written notice of the termination or amendment.
2. NOTICE OF AMENDMENT
The Corporation will promptly after any amendment provide to each
Executive then eligible for ICP benefits a written statement of
ICP as amended, and no amendment will be effective as to an
Executive until the later of the date the Executive receives such
written statement, or two years after notice as provided in 1
above. An Executive will be deemed to have received the written
statement if it is delivered to the Executive in person, or after
48 hours following its hand delivery or dispatch by mail or other
suitable means of delivery to the last known address of the
Executive.
3. ACQUIESCENCE
An amendment will apply in full to an Executive if mutually
agreed in writing by the Executive and the Corporation, or if the
Executive or the
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Executive's representative knowingly receives a benefit or
improvement under ICP as amended which would not have been
available without the amendment. If any such benefit from an
amendment is knowingly received by an Executive with the
consent of the Corporation, then all elements of that
amendment and all prior ICP Statements and amendments then
currently in effect will also be applicable to the Executive.
4. ADJUSTMENT
A change in or addition or deletion of any benefit or perquisite
plan or program of the Corporation applicable to an Executive may
be expressly made subject to prior written agreement by the
Executive upon a corresponding change in the interpretation or
application of ICP to the Executive, to prevent redundant or
other unintended benefits or detriments to the Executive or the
Corporation which might otherwise result.
N. APPLICABLE LAW
It is intended that the decision of the CEO, as specified in the ICP
statement, will be exclusive and final with respect to any application
or interpretation of ICP. If any body of law should be used or
applied in determining the meaning or effect of ICP, in the interest
of consistency this will be deemed an agreement made and executed in
the State of Minnesota and the law of the State of Minnesota will
control.
O. DEFINITIONS
As used in this Statement:
1. "CASH COMPENSATION"
Means all amounts earned, whether or not currently payable, as
wages, salary, bonus or a combination by an Executive, payable in
cash or its equivalent or agreed to be in lieu of cash
compensation. This will not include the value of employee or
executive perquisites or benefits accrued or received pursuant to
a plan of the employer which is uniformly applied to all of the
employees of the employer who are similarly situated or is
consistent with established prior practice for the position
occupied by the Executive.
2. "CEO"
Means the Chief Executive Officer of Dayton Hudson Corporation,
as then currently designated by its Board of Directors, or as
otherwise expressly provided in the ICP Statement.
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3. "CORPORATION"
Means Dayton Hudson Corporation and each and all of its Operating
Companies, including divisions and subsidiaries, unless otherwise
clearly intended by the written context.
4. "DIRECTLY COMPETITIVE EMPLOYMENT" (OR "DCE")
Means personal services to, or for the direct and intended
benefit of, a person, firm or corporation determined by the CEO
and specified in writing to the Executive at or about the time of
Notice of Termination as constituting DCE for ICP purpose.
5. "EFFECTIVE DATE OF TERMINATION"
If no later date is specified in writing with the Notice of
Termination, the Effective Date of Termination for all purposes
will be the date the Notice is received by the Executive. No
delay in public announcement, or continuation of former duties
with or without the consent of the Corporation, will alter or
extend the Effective Date of Termination for ICP purposes, unless
expressly agreed upon in advance in writing. The Corporation
reserves the right to announce a termination at any time after
notice.
6. "EMPLOYMENT SEVERANCE DATE"
If there is no separate written agreement between the Executive
and the Corporation, all employment relationships between them
shall terminate on the ICP Effective Date of Termination and will
do so in any event upon the effective date of a Spin-Off. If the
Corporation agrees in writing in advance that the employment of
the Executive within the Corporation will continue after the ICP
Effective Date of Termination, then the Effective Date of
Termination will control all ICP Payments to which the Executive
is entitled under this Statement, but the employment of the
Executive within the Corporation will continue until the
Employment Severance Date to which the Corporation has agreed in
writing with, or has given advance written notice to, the
Executive.
7. "EXECUTIVE"
Means an individual listed on Exhibit A. Unless clearly
otherwise intended by the written context, Executive will include
all beneficiaries of and persons claiming by or through the
designated employee or former employee. Provided, however, if an
individual listed on Exhibit A terminates employment with the
Corporation and does not return as an SMG prior to the end of his
or her Eligibility Period, such individual will
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not be treated as an Executive and will not be eligible for the
ICP when he or she is rehired.
8. "NOTICE OF TERMINATION" (OR "NOTICE")
Means an unconditional written or oral statement of an
Executive's organizational superior that the Executive's
employment in the Corporation is terminated at the instance of
the Corporation. Notice that an Executive's employment will end
because of achievement of the age of mandatory retirement under
lawful policies of the Corporation will not be a Notice of
Termination for ICP purposes.
9. "OPERATING COMPANY"
Means a division or subsidiary of the Corporation which operates
a group of department, low margin, soft lines or specialty
stores, or a similar category of ventures within the Corporation
having a common business purpose and single chief executive
officer.
10. "PAYMENTS" (OR "ICP PAYMENTS")
By the Corporation will include all of those payments made by or
on account of the Corporation under ICP and will include all of
those made to or for the account of an Executive or a designated
creditor or authorized representative or beneficiary of an
Executive or deceased Executive.
11. "REASSIGNMENT"
Means a change in the assignment or work content of an Executive
within the Corporation.
12. "SPIN-OFF"
Means a sale or other disposition as a going business of the
Corporation's ownership or control of an Operating Company or
other unit previously a part of the Corporation.
13. "CHANGE IN CONTROL"
A "Change in Control" shall be
(a) a majority of the directors of the Corporation shall be
persons other than persons
(i) for whose election proxies shall have been solicited by
the Board of Directors of the Corporation or
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(ii) who are then serving as directors appointed by the
Board of Directors to fill vacancies on the Board of
Directors caused by death or resignation (but not by
removal) or to fill newly-created directorships,
(b) 30% or more of the outstanding Voting Stock (as defined in
Article IV of the Restated Articles of Incorporation of the
Corporation) of the Corporation is acquired or beneficially
owned (as defined in Article IV of the Restated Articles of
Incorporation of the Corporation) by any person (as defined
in Article IV of the Restated Articles of Incorporation of
the Corporation), or
(c) the shareholders of the Corporation approve a definitive
agreement or plan to
(i) merge or consolidate the Corporation with or into
another corporation (other than (1) a merger or
consolidation with a subsidiary of the Corporation
or (2) a merger in which the Corporation is the
surviving corporation and either (A) no
outstanding Voting Stock of the Corporation (other
than fractional shares) held by shareholders
immediately prior to the merger is converted into
cash, securities, or other property or (B) all
holders of outstanding Voting Stock of the
Corporation (other than fractional shares)
immediately prior to the merger have substantially
the same proportionate ownership of the Voting
Stock of the Corporation or its parent corporation
immediately after the merger),
(ii) exchange, pursuant to a statutory exchange of
shares of Voting Stock of the Corporation held by
shareholders of the Corporation immediately prior
to the exchange, shares of one or more classes or
series of Voting Stock of the Corporation for
shares of another corporation or other securities,
cash or other property,
(iii) sell or otherwise dispose of all or substantially
all of the assets of the Corporation (in one
transaction or a series of transactions), or
(iv) liquidate or dissolve the Corporation.
NOTE: Additional Definitions for particular purposes are
contained in the text.
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P. CHANGE IN CONTROL
Other provisions of this Statement to the contrary notwithstanding, in
the event of a Change in Control:
1. If an Executive's employment with the Corporation is terminated,
whether voluntarily or involuntarily, within two years from a
Change in Control, the Executive shall be eligible for ICP
Payments.
2. In lieu of periodic payments, the ICP Payment shall be made in a
lump sum within 20 days after Executive's termination of
employment. The lump sum amount shall be determined by
discounting the periodic ICP Payments by the Prime Rate of First
National Bank of Minneapolis.
3. Except for the Release required by Section II.K. of this
Statement all other obligations or restrictions of Executive
under this Statement shall terminate.
Q. CERTAIN REDUCTION OF PAYMENTS BY THE CORPORATION
1. Anything in this ICP to the contrary notwithstanding, the
provisions of this section Q shall apply to an Executive if Ernst
& Young LLP determines that each of a and b below are applicable.
a. Payments hereunder, determined without application of this
section Q, either alone or together with other payments in
the nature of compensation to the Executive which are
contingent on a change in the ownership or effective control
of the Corporation, or in the ownership of a substantial
portion of the assets of the Corporation, or otherwise,
would result in any portion of the payments hereunder being
subject to an excise tax on excess parachute payments
imposed under section 4999 of the Internal Revenue Code of
1986, as amended (the "Code").
b. The excise tax imposed on the Executive under section 4999
of the Code on excess parachute payments, from whatever
source, would result in a lesser net aggregate present value
of payments and distributions to the Executive (after
subtraction of the excise tax) than if payments and
distributions to the Executive were reduced to the maximum
amount that could be made without incurring the excise tax.
2. Under this section Q the payments under this ICP shall be reduced
(but not below zero) so that the present value of such payments
shall equal the Reduced Amount. The "Reduced Amount" (which may
be zero) shall be an amount expressed in present value which
maximizes the aggregate
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present value of payments under this ICP which can be made
without causing any such payment to be subject to the excise tax
under section 4999 of the Code.
3. If Ernst & Young LLP determines that this section Q is applicable
to an Executive, it shall so advise the Corporation. The
Corporation shall then promptly give the Executive notice to that
effect together with a copy of the detailed calculation
supporting such determination which shall include a statement of
the Reduced Amount. The Executive may then elect, in his/her
sole discretion, which and how much of payments otherwise to be
made under this ICP shall be eliminated or reduced (as long as
after such election the aggregate present value of the remaining
payments to be made under this ICP equals the Reduced Amount),
and shall advise the Corporation in writing of his/her election
within ten days of his/her receipt of notice. If no such
election is made by the Executive within such ten-day period, the
Corporation may elect which and how much of the payments shall be
eliminated or reduced (as long as after such election the
aggregate present value of the payments equals the Reduced
Amount) and shall notify the Executive promptly of such election.
For purposes of this section Q, present value shall be determined
in accordance with Section 280G of the Code. All the foregoing
determinations made by Ernst & Young LLP under this section Q
shall be made as promptly as practicable after it is determined
that parachute payments will be made to the Executive if an
elimination or reduction is not made. As promptly as practicable
following the election hereunder, the Corporation shall pay to or
for the benefit of the Executive such amounts as are then due to
the Executive under this ICP and shall promptly pay to or for the
benefit of the Executive in the future such amounts as become due
to the Executive under this ICP.
4. As a result of the uncertainty in the application of Section 280G
of the Code at the time of the initial determination by Ernst &
Young LLP hereunder, it is possible that payments under this ICP
will have been made which should not have been made
("Overpayment") or that additional payments which will have not
been made could have been made ("Underpayment"), in each case,
consistent with the calculation of the Reduced Amount hereunder.
In the event that Ernst & Young LLP, based upon the assertion of
a deficiency by the Internal Revenue Service against the
Corporation or the Executive which Ernst & Young LLP believes has
a high probability of success, determines that an Overpayment has
been made, any such Overpayment shall be treated for all purposes
as a loan to the Executive which the Executive shall repay
together with interest at the applicable Federal rate provided
for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive if and to the extent
such payment would not reduce the amount which is subject to the
excise tax under Section 4999 of the Code. In the event that
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Ernst & Young LLP, based upon controlling precedent, determines
that an Underpayment has occurred, any such Underpayment shall be
promptly paid to or for the benefit of the Executive together
with interest at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Code.
5. In making its determination under this section Q, the value of
any non-cash benefit shall be determined by Ernst & Young LLP in
accordance with the principles of section 380G(d)(3) of the Code.
6. All determinations made by Ernst & Young LLP under this section Q
shall be binding upon the Corporation and the Executive.
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January 13, 1999
DAYTON HUDSON CORPORATION
SMG INCOME CONTINUANCE POLICY STATEMENT
FOR MEMBERS OF THE SENIOR MANAGEMENT GROUP
I. CONCEPTS
A. GENERAL
The present policy of the Corporation is to provide, under certain
defined circumstances, Income Continuance Payments to certain members
of its Senior Management Group ("SMG") whose employment is terminated
at the instance of the Corporation or who terminates within two years
after a Change in Control. This policy is intended to assist in the
occupational transition and financial security of those identified
Executives whose services are no longer deemed required within the
Corporation, who have during their tenure been faithful and honest
employees, who do not during the period of those payments engage in
disqualifying misconduct, and to the extent not compensated for
services to a directly competitive employer and to assist Executives
who terminate employment with the Corporation within two years after a
Change in Control.
This will be known as the SMG Income Continuance Policy ("SMG-ICP") of
the Corporation. It will be interpreted and applied in accordance
with this Statement of policy and with any subsequent amendment or
restatement applicable to the Executive.
B. ELIGIBILITY
To be eligible under SMG-ICP, an Executive must be a member of the SMG
after July 13, 1988, as specified in this Statement, and not be
covered by the Dayton Hudson Corporation Income Continuance Policy
Statement. An SMG shall not be eligible to participate under this
policy if he/she is eligible to participate under the Dayton Hudson
Corporation Income Continuance Policy.
C. REASSIGNMENT
An Executive will continue to have income protection under SMG-ICP for
at least 12 calendar months (Eligibility Period) after internal
reassignment to a position which does not otherwise include
eligibility for SMG-ICP benefits.
<PAGE>
D. SPIN-OFF
An Executive who retains substantially the same position in an ongoing
Operating Company or similar business unit after the Corporation has
ceased to be its owner or operator will remain eligible for the same
SMG-ICP benefits from the Corporation as if the Executive had been
transferred to a non-SMG position within the Corporation at the time
of the Spin-Off.
E. DISQUALIFICATION AND REDUCTION
Serious and deliberate misconduct in employment by an Executive
resulting in discharge for cause can disqualify an Executive from
SMG-ICP eligibility. Except as otherwise expressly provided in
this Statement, after termination under SMG-ICP and normal windup
of former duties an Executive will not be required to perform any
regular services for the Corporation, and will be free to accept
any other employment. Except as otherwise provided in this
Statement, SMG-ICP Payments otherwise payable to an Executive will
be reduced or excused in the amount of compensation from Directly
Competitive Employment as specifically defined to the Executive in
advance according to this Statement. An Executive otherwise
entitled to SMG-ICP Payments after Termination, Reassignment or
Spin-Off will be disqualified from receiving future Payments by
reason of serious and deliberate misconduct which is unlawful or
clearly and seriously harmful to the Corporation, or to its
interest or those of certain subsequent employers.
F. INTERPRETATION
Subject to the express terms of this Statement, the Chief Executive
Officer of the Corporation will have sole and final authority to
interpret the SMG-ICP and determine its application, and will
interpret it consistently and in good faith. Section I of this
Statement is intended as a summary of the more detailed provisions of
Section II. For that reason, Section II will control in the event of
any difference.
II. APPLICATION
A. ELIGIBILITY PERIOD - DEFINITION
The "Eligibility Period" of an Executive is determined by the
Executive's most recent Salary Grade on the Effective Date of
Termination, Spin-Off or Reassignment by the Corporation; provided,
however, in the event of a downgrade or downgrades, the Eligibility
Period of the Executive's highest Salary Grade shall continue to be
applicable until the expiration of the Eligibility Period for that
Salary Grade and then the Eligibility Period for the next highest
Salary Grade shall be used until it expires and this process shall
continue until the Eligibility Period for the last Salary Grade for
which this Statement covers expires. It will be calculated according
to the following schedule:
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<TABLE>
<CAPTION>
Salary Grade Eligibility Period
------------ ------------------
<S> <C>
37-51 24 months
35-36 22 months
32-34 20 months
30-31 18 months
28-29 16 months
26-27 14 months
lower than 26 12 months
</TABLE>
An Executive entitled to SMG-ICP Payments will not be entitled to
prepayment or other change in the monthly payment schedule.
B. ELIGIBILITY PERIOD - USE
The Eligibility Period of an Executive will determine the number of
consecutive calendar months for which an Executive remains eligible
for SMG-ICP Payments under this Statement after:
1. Reassignment to a new position within the Corporation which is
not designated an SMG Position, or
2. The effective date of a Spin-Off by the Corporation, or
3. A downgrade as set forth in A. above.
C. PAYMENT PERIOD - DEFINITION
The Payment Period for an Executive will consist of the same number of
months as the Executive's Eligibility Period, measured from the time
when SMG-ICP Payments first become payable to the Executive under the
terms of this Statement.
D. PAYMENTS
1. AMOUNT
Each monthly SMG-ICP Payment to an Executive during the Payment
Period will equal one twelfth (1/12) of the Executive's Final
Annual Cash Compensation from the Corporation which will consist
of the sum of:
a. BASE COMPENSATION
The annual Base (regular monthly or other fixed salary) rate
payable as Cash Compensation to the Executive at the time of
Notice of Termination or effective date of Reassignment or
Spin-
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Off or downgrade, but in no event less than the highest
annual rate paid to the Executive at any time during a
number of months equal to the Executive's Eligibility Period
immediately before the Notice of Termination or effective
date of Reassignment or Spin-Off or downgrade, and
b. PERFORMANCE BONUS
The average amount of the three annual Performance Bonuses
most recently paid or credited to the Executive as Cash
Compensation or deferred bonus, prior to Executive's Notice
of Termination or effective date of Reassignment or Spin-Off
or downgrade. For purposes of SMG-ICP, the Performance Bonus
of an Executive shall be determined according to the
applicable Short Term Incentive Plan of the Corporation,
shall also include, if applicable, any discretionary bonus
paid during said applicable period on account of the
Executive's performance but outside of the purview of the
then applicable Short Term Incentive Plan.
c. ADJUSTMENT
The annual rate in dollars of each merit increase awarded to
an Executive before Notice of Termination will be included
in Base Compensation to determine the Executive's SMG-ICP
Payments. If the Executive's annual rate of Base
Compensation at the time of Notice of Termination has been
increased or decreased to reflect a change from the Short
Term Incentive Plan used to determine the Performance Bonus
defined above, and the change is for the purpose of altering
the future relationship of Bonus to total Annual Cash
Compensation of the Executive, then the dollar amount of
that increase or decrease in annual rate of Base
Compensation will be excluded in determining ICP Payments.
2. COMMENCEMENT
Monthly SMG-ICP Payments, or entitlement to begin receiving them,
will commence in the next full calendar month after the Effective
Date of Termination, subject to any Set-offs, Adjustments and
Withholding as specified in
a. DEFERRED SMG-ICP PAYMENTS
Until the Effective Date of Termination there will be no
change in the rate or timing of compensation, benefits or
perquisites to which the Executive was entitled immediately
before the Notice of Termination, and no amount received
from the Corporation before
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that Effective Date will be charged against the SMG-ICP
Payments to which the Executive is entitled under this
Statement.
b. DIFFERENT EMPLOYMENT SEVERANCE DATE
If the Corporation agrees in writing with the Executive
upon, or notifies the Executive of, an Employment Severance
Date later than the SMG-ICP Effective Date of Termination,
then:
1) All Cash Compensation that the Executive receives after
the SMG-ICP Effective Date of Termination will be
treated as an Adjustment and deducted from SMG-ICP
Payments otherwise payable, as defined in 3 c below,
and will be paid in the amount(s) and at the time(s) to
which the Executive was entitled immediately before the
Notice of Termination, and
2) Employee benefits and normal use and expense of
executive perquisites and facilities available to the
Executive before the Notice of Termination will
continue until the Employment Severance Date and,
except to any extent otherwise specified in this
Statement or by written advance notice to the Executive
by the Corporation, will not be charged against SMG-ICP
Payments to which the Executive is entitled under this
Statement.
3. SET-OFF AND WITHHOLDING
SMG-ICP Payments are not intended to duplicate or be in addition
to any other payment due between the Corporation and the
Executive.
a. REDUCTION
Each Payment otherwise due from the Corporation to the
Executive will be reduced, dollar for dollar and in
timing by all amounts which the Executive receives or is
entitled to receive from the Corporation or under a plan,
program or agreement maintained by and at the expense of
the Corporation after the Effective Date of Termination
or Spin-Off. This will include such sources as life and
disability insurance. It will not apply to accrued
vacation or expense reimbursement (both will be paid in
cash at termination), Pension proceeds, Supplemental
Retirement and Savings Plan proceeds, Deferred
Compensation Plans, Social Security, fully exercisable or
earned-out stock option, stock appreciation rights,
performance shares or restricted stock awards, or
benefits payable under any Worker's Compensation or
similar law or regulation.
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Termination of employment by reason of mandatory
retirement under a lawful and uniform policy of the
employer applicable to the Executive will not be treated
as a termination for SMG-ICP purposes.
b. DEBT
The Corporation may apply not more than 25 percent of any
SMG-ICP Payment otherwise due to the Executive to pay any
overdue debt payable to the Corporation on any obligation of
the Executive or dependent of Executive, until all such
accounts are paid in full or current according to their
terms.
c. ADJUSTMENTS
If monthly payments received by the Executive from the
Corporation immediately after the Effective Date of
Termination are not computed under SMG-ICP, then when
regular monthly SMG-ICP Payments begin they will reflect
itemized adjustments to apply the SMG-ICP monthly rate to
the SMG-ICP Effective Date of Termination. Taxes and other
amounts required by law or by the Executive's written
instruction will be withheld from SMG-ICP amounts otherwise
payable.
E. DEATH OF EXECUTIVE
If an Executive should die after Notice of Termination and before
completion of the Executive's Payment Period, the remaining Payments
will be made by the Corporation as follows, without unnecessary
interruption:
1. Unless the Executive has otherwise designated in unrevoked
writing, acknowledged in writing by the CEO, the surviving spouse
of the Executive, if any, will be entitled to all remaining
Payments.
2. If the Executive has otherwise effectively designated in
unrevoked writing, acknowledged in writing by the CEO, then
Payment will be made to or for the account of the person or
persons so designated as identified by the Corporation.
3. In the absence of effective prior written designation by the
Executive and of a known surviving spouse, the Corporation may
hold remaining Payments until the executor, heirs or
administrator of the Executive can be identified and Payment made
and receipted to the reasonable satisfaction of the Corporation
pursuant to the advice of its legal counsel.
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4. In the interest of providing uninterrupted income to authorized
beneficiaries of the Executive, any SMG-ICP Payment made with
reasonable care and in good faith by the Corporation shall
conclusively constitute Payment by the Corporation in accordance
with and satisfaction of the entitlement of the Executive and
Executive's beneficiaries under SMG-ICP. No interest or other
charge shall be payable by the Corporation or its representatives
on any Payment delayed by the Corporation to permit reasonable
verification of authorized recipient(s).
F. DISQUALIFICATION
No Executive will be disqualified from receipt of future SMG-ICP
Payments by reason of any act or omission of anyone other than the
Executive or one or more persons acting pursuant to the conscious and
effective control of the Executive. Disqualification will be
interpreted as follows:
1. WHILE EMPLOYED IN THE CORPORATION
Deliberate and serious disloyal or dishonest conduct in the
course of employment will disqualify if it justifies and results
in prompt discharge for specific cause under the established
policies and practices of the Corporation as interpreted by the
CEO for this purpose. Examples would include material unlawful
conduct, material and conscious falsification or unauthorized
disclosure of important records or reports, embezzlement or
unauthorized conversion of property, serious violation of
conflict of interest or vendor relations policies, and misuse or
disclosure of significant trade secrets or other information
likely to be of use to the detriment of the Corporation or its
interests.
2. AFTER NOTICE OF TERMINATION OR SPIN-OFF
The SMG-ICP will not restrict an Executive's conduct or
employment opportunities after Notice of Termination, or any
independent remedy of the Corporation or its representatives by
reason of the Executive's conduct while employed. The obligation
of the Corporation to or for an Executive during the Eligibility
and Payment Periods can be terminated only by the deliberate
conduct of the Executive or one acting under the Executive's
conscious and effective control, and only as to any SMG-ICP
Payments not yet due, by reason of one or more of the following
events:
a. Unauthorized removal, use or disclosure of strategic or
operating plans, trade secrets, customer lists, internal
systems or other significant proprietary information of or
concerning the Corporation or its personnel, the use or
disclosure of which is intended or likely to cause loss or
reduction of business advantage
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or substantial injury to the Corporation or its management,
business opportunities or interests.
b. Expressing or endorsing publication of untrue statements
which are intended or likely to receive broad public
attention and to bring the Corporation or its interests,
methods or representatives into disrepute.
c. Providing materially false or misleading information
concerning post-termination employment, or failure or
refusal promptly and accurately to provide required
information, verification or authorization required by the
CEO as provided in this Statement and affecting any SMG-ICP
payment due from the Corporation.
d. Solicitation of or an offer to an employee within the
Corporation to accept employment elsewhere, where the
selection of or offer to the recruited employee was based in
the whole or in part upon Executive's knowledge or
experience concerning the employee which was acquired by the
Executive while employed within the Corporation or through
one or more personal acquaintances employed within the
Corporation.
e. Exercising the discretion, authority or powers of an office
or position held by an Executive after Notice of
Termination, and whether or not before an Effective Date of
Termination or Employment Severance Date, unless
specifically authorized or directed in writing in advance by
an authorized executive of the Corporation.
f. Because SMG-ICP is not intended to encourage or reward
misconduct in employment, an Executive can be disqualified
from receipt of future SMG-ICP Payments from the Corporation
because of termination of employment by a Spin-Off employer
for unlawful or serious and deliberate misconduct during the
Executive's Eligibility Period. If the CEO independently
determines and informs the Executive in writing that
termination of employment by another employer was due to
unlawful or serious and deliberate misconduct which would
have resulted in SMG-ICP disqualification under the
standards of this Statement if committed against and while
employed by this Corporation, then the Executive will be
deemed conclusively and irrevocably to have waived and
abandoned all right to future SMG-ICP Payments from this
Corporation. If the CEO concludes that there is reason to
believe that disqualifying misconduct under this paragraph
may have resulted in a termination of employment which would
otherwise initiate or increase its SMG-ICP Payments to the
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Executive, the Corporation may postpone commencement of or
change in SMG-ICP Payments until it has received from the
Executive a full and accurate explanation of the
circumstances and written authorization for the terminating
employer to make full and confidential disclosure to the
Corporation, and has had a reasonable time not exceeding 60
days to complete an investigation and for the CEO to make a
determination.
3. PRESERVATION OF RIGHTS
Neither SMG-ICP nor its application shall waive, excuse, preclude
or otherwise affect any right or remedy which the Corporation or
any agent or representative of the Corporation may have,
individually or collectively, under law by reason of conduct of
the Executive during or after employment within the Corporation.
Disqualification or reduction of Payments under SMG-ICP will be
an additional and not an exclusive remedy.
G. COMPETITIVE EMPLOYMENT
An Executive will receive not less than the full amount of the
specified SMG-ICP Payments from the Effective Date of Termination
through the full Payment Period whether or not compensated by another
employer for services in that period, unless disqualified under
Section F., immediately above or employed by a Spin-Off employer, as
defined, or as provided in this Section G. Compensation from
employment which is not identified as Directly Competitive Employment
("DCE") will be in addition to and will not reduce any SMG-ICP
Payment. If an Executive engages in DCE as specifically defined in
advance and by this Statement, then each SMG-ICP Payment otherwise
payable to the Executive will be currently reduced., dollar for dollar
and in timing, by the amount of all Cash Compensation earned (whether
on a current or deferred payment basis) from that source during the
Payment Period.
These provisions will be interpreted and administered as follows:
1. PURPOSE OF SET-OFF
Reduction of SMG-ICP Payments by the amount of Cash Compensation
determined to be from DCE is not intended to restrict or penalize
an Executive's choice of alternative career opportunities, but
only to preserve and reconcile the personal income security
intended to be provided to Executives by SMG-ICP with the
legitimate interests of the Shareholders of the Corporation in
its highly competitive business context.
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2. COMPETITORS IDENTIFIED
At or about the time of Notice of Termination, the Corporation
will inform the Executive in writing of those employers who have
been individually and specifically determined to offer DCE for
SMG-ICP purposes with respect to the Executive's former
employment within the Corporation. This designation will take
into account existing operations and known plans of the
Corporation and of the employers listed, and will not change
during the Eligibility Period by reason of subsequent and
mutually unanticipated changes in the operations or plans of
either. An Executive whose employment with a Spin-Off employer
is terminated during the Eligibility Period without disqualifying
misconduct and who is not reemployed in the Corporation will
receive designation of DCE employers promptly after written
notice by the Executive to the Corporation of non-disqualifying
termination of Spin-Off employment.
3. CRITERIA
The following criteria will be employed in determining and
administering SMG-ICP application to DCE.
a. SELECTIVE POTENTIAL DETRIMENT
A position will not be determined to constitute DCE for this
purpose unless the CEO determines that the competitive
effectiveness of the Executive and the new employer would be
materially enhanced by the Executive's current knowledge of
such matters as the particular methods, policies, customers,
suppliers, personnel or plans of the Corporation or its
relevant Operating Company, as distinguished from the
skills, experience and services of the Executive generally.
The Corporation will identify for DCE purposes not more than
three persons, firms or corporations who are determined for
this purpose to be the leading direct and immediate
competitors of the affected business of the Corporation.
b. PRESERVATION OF EMPLOYMENT OPPORTUNITIES
Whether or not an Executive's most recent employment within
the Corporation involved direct participation in the
management of one or more Operating Companies, this section
will not be used to discourage or penalize otherwise
suitable employment opportunities in retailing or otherwise.
The Corporation may require, as a condition of avoiding DCE
designation for the Executive, a suitable written
undertaking by the Executive and the new employer that the
Executive remains obliged not to use or divulge trade
secrets or proprietary information of the Corporation
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and that the Executive will not volunteer or be expected or
required to violate that obligation in the course of the new
employment.
c. RELEVANT CONSIDERATIONS
In determining DCE, the CEO will give suitable consideration
to geographic, product and price-line marketing overlaps,
the nature and content of the Executive's particular
knowledge of strategies and plans within the Corporation,
and the extent to which the Executive's knowledge, as
distinguished from skills, is likely to be a significant
factor in generating an employment opportunity. Employment
exclusively with a component of a larger business entity,
which component is not presently or known to be planned to
be a direct and immediate competitor of the Executive's
former Operating Company, will not be treated as DCE merely
because one or more other components of that entity is or
may become a competitor of the Corporation or one or more of
its other Operating Companies.
4. SMG-ICP PAYMENT REDUCTION
Uniform and responsible administration of SMG-ICP will require
reliable information and verification to the Corporation.
a. REPORTING
To be eligible for any SMG-ICP Payment during a period of
DCE, an Executive must, in addition to all other required
reporting, provide to the Corporation in writing an accurate
statement of the amount and payment schedule of all Cash
Compensation or its equivalent to be received from the new
employer and of any subsequent change or correction of that
amount, in such form and with such verification as the CEO
may request in writing. An Executive will not be or become
entitled to receive or retain any portion of any SMG-ICP
Payment on account of any Payment Period for which that
information, and any required verification, is not currently
and accurately provided.
b. VERIFICATION AND RECONCILIATION
Required verification may include authorization for written
confirmation from the employer and confidential disclosure
of completed W-2, payroll and income tax forms of the
Executive on which taxes have been or will be paid. If the
Corporation withholds for more than 30 days any SMG-ICP
Payment pending
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receipt of required information or verification which is
later received and found satisfactory, the Corporation
will pay interest at a realistic rate determined by the
CEO for the period of delay. The Corporation and the
Executive will each fairly and promptly adjust by payment
any discrepancy later discovered between reported and
actual Cash Compensation of the Executive, but the
Corporation will have no liability for any amount not
claimed by an Executive in writing before final expiration
of the Executive's Payment Period.
H. REASSIGNMENT AND SPIN-OFF
The purpose of SMG-ICP is to attract and preserve the services of
Executives for the benefit of the Corporation by providing unreduced
personal income to them for the full Eligibility and Payment Periods
in the absence of disqualifying personal misconduct, DCE or continued
employment after a Spin-Off. If the Corporation should determine that
its shareholders' interests would best be served by disposition or
major alteration of an Executive's current Operating Company or
position, SMG-ICP will be available to the Executive unless:
1. REASSIGNMENT AND OTHER ADJUSTMENTS
The Corporation may transfer an Executive to another position
within the Corporation or any of its Operating Companies or
reduce the Executive's Compensation in Executive's current
position (collectively referred to as "Reassignment"). An
Executive in the case of either event may elect SMG-ICP Payments
if the Executive's total monetary compensation after Reassignment
will be measurably and substantially below the total monetary
compensation of the Executive immediately before notice of
Reassignment. For this purpose, personal monetary compensation
will include salary and bonus and continuation, or payment of the
substantial equivalent in Cash Compensation, of all non-cash
personal benefits and perquisites which the Executive was
receiving immediately before and does not receive after the
Reassignment and which are susceptible of accurate and objective
measurement in dollars as determined by the CEO; or
2. SPIN-OFF
A Spin-Off (as defined) occurs and the Executive is requested by
the Corporation to continue in the resulting company or operation
in substantially the same position as immediately before
Spin-Off.
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a. SMG-ICP ELIGIBILITY
An Executive will, in the event of Spin-Off, have the same
rights and limitations to elect to receive SMG-ICP payments
in lieu of the continuation of employment as if Reassigned
at that time to another position within the Corporation as
provided in subparagraph (1), immediately above. Comparison
of the Executive's monetary compensation before and after
the ownership change will be measured by the same standards
for this purpose. An Executive whose employment continues
after Spin-Off will remain eligible for SMG-ICP Payments
from the Corporation for the Executive's full SMG-ICP
Eligibility Period, measured from the effective date of
Spin-Off.
b. SUBSEQUENT TERMINATION
If during the Eligibility period after Spin-Off the
Executive's employment should be involuntarily terminated,
or the Executive irrevocably terminates the employment
because of an involuntary reduction in monetary compensation
to a rate materially below the Executive's most recent
monetary compensation rate within the Corporation, the
Executive shall be eligible for full SMG-ICP Payments from
the Corporation as though the Executive were then employed
by the Corporation. Any amount paid to the Executive by the
Spin-Off employer after effective date or on account of that
termination will be set off against, and reduce dollar for
dollar and in timing, any SMG-ICP Payments otherwise payable
to the Executive by the Corporation.
c. REEMPLOYMENT OFFER
The obligation of the Corporation to make future SMG-ICP
Payments to an Executive because of a non-disqualifying
termination of employment after a Spin-Off under this
subsection can be terminated by a suitable offer to the
Executive of employment within the Corporation. Such an
offer will be suitable for this purpose if it is a good
faith offer of a management position at a rate of monetary
compensation at least equal to the Executive's rate
immediately before the effective date of Spin-Off, and is
timely. It will be timely for this purpose if communicated
to the Executive within 30 days after the Corporation
receives written notice or has actual knowledge of the
termination of the Executive's employment, and specifies a
starting date not less than 30 nor more than 60 days
thereafter. The Corporation will promptly initiate SMG-ICP
Payments when notified in writing of the non-disqualifying
termination, and continue Payments until the
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starting date specified in the reemployment offer,
whether or not the offer is accepted. If the offer is
not accepted and implemented by the Executive according
to its terms, the obligation of the Corporation to make
further SMG-ICP Payments will irrevocably expire on the
starting date specified in the offer. If the offer is
accepted, all Cash Compensation paid to the Executive
after reemployment within the Corporation will be
credited, dollar for dollar, against SMG-ICP Payments
otherwise payable to the Executive.
d. ELIGIBILITY AFTER REEMPLOYMENT
If reemployed within the Corporation but not in an SMG
position after involuntary termination during the
Executive's Eligibility Period following Spin-Off under this
section, the Executive will remain eligible under SMG-ICP
for the balance of the Executive's Eligibility Period
measured from the effective date of Spin-Off, but in no
event for a period shorter than one-half of the number of
calendar months in the Executive's Eligibility Period on the
effective date of Spin-Off measured from the first date of
reemployment.
e. INTERPRETATION.
A Spin-Off will be deemed to have occurred for purposes of
this paragraph whether or not afterward: (a) the Executive
has a personal ownership or incentive interest in the
severed Company or operation; or (b) the severed Company or
operation becomes, as a result of or after the severance, a
part of one or more other legal entity or entities.
I. REPORTING
For convenience and uniformity of administration, each Executive while
eligible for or entitled to SMG-ICP Payments after Termination or
Spin-Off will be expected as a pre-condition currently and accurately
to inform the Corporation in writing of the name and business address
of each employer of Executive during the Eligibility and Payment
Periods, including a summary description of the nature and principal
business locations of the new employer and the title, principal
duties, address and telephone number of the Executive. Significant
changes in employment, duties or location will also be promptly
reported. The Corporation will not be required to make any SMG-ICP
Payment for any period for which it has not received a current and
accurate report as required by, or by the CEO in accordance with, this
Statement.
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J. INTERPRETATION
1. An Executive may at any time request in writing of the CEO, and
the CEO may respond or initiate to any, some or all of the
Executives, a written determination of the application of the
SMG-ICP to specific or reasonably foreseeable circumstances. The
express language of Section II of this Statement will control
where applicable, and the CEO will act reasonably and in good
faith in providing any SMG-ICP or Statement interpretation. Any
decision of the CEO consistent with those criteria will be: (1)
Final and conclusive of the rights and obligations of all
affected parties and (2) Applied uniformly as to all Executives
then similarly situated (subject to subsequent SMG-ICP
amendment); and (3) Not subject to separate determination or
review by any public or private agency or authority except as
expressly provided in this Statement.
2. References to compensation and other monetary rates or
measurements in this Statement and its applications are in
current dollars, unadjusted by reason of inflation, deflation or
otherwise.
3. Any portion of a full calendar month or year will be prorated on
a full calendar basis, without differential related to such
considerations as working days or holidays. Any portion of a day
will be treated as a full day, and measurement days will begin
and end at midnight, current time. The fiscal year of the
Corporation will be treated for all purposes as it is for
financial reporting purposes.
4. In the event of application or interpretation of SMG-ICP to an
individual Executive who is a Director of the Corporation, or
otherwise in its sole discretion, the Board of Directors of the
Corporation or its authorized committee shall have and may
exercise the sole, exclusive and final authority and discretion
of the CEO for any purpose under SMG-ICP.
K. RELEASE
Payment and receipt of SMG-ICP Payments will be in full and final
satisfaction of all claims by or through an Executive against the
Corporation and its representatives by reason of the employment of the
Executive and its termination, except as otherwise expressly provided
in this Statement or as required by applicable law or regulation. A
signed written Release to that effect, in form approved by the CEO,
will be delivered by the Executive or the Executive's representative
to the Corporation before the effective date of a Spin-Off affecting
the Executive, and in any event before any SMG-ICP Payment will become
payable by the Corporation to or on account of the Executive. The
Release may, without limitation, require a representation that no
confidential documents concerning the Corporation or its intentions
have been or will be removed or retained by the Executive without
specific authority, and that the Executive will
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not engage in disqualifying misconduct as defined in this Statement,
in reference to the Corporation. The Release will not affect any
conversion, vested or continuing rights available to an Executive
under a plan of the Corporation other than SMG-ICP.
L. GENERAL
The SMG-ICP and this Statement will not constitute or infer an
obligation or undertaking to employ any person for any future period
of time or in any specific position. SMG-ICP Eligibility or Payments
after Notice of Termination or Spin-Off will not create, continue or
evidence any employment relationship with the Corporation. All
employment privileges, benefits and perquisites not expressly and in
writing reserved to an Executive under SMG-ICP will terminate on the
Effective Date of Termination or Spin-Off, unless otherwise expressly
agreed in advance in writing by the Corporation. This will not affect
any conversion, vested or other continuing benefits or rights
available to an Executive under a plan of the Corporation other than
SMG-ICP.
M. AMENDMENT
SMG-ICP and this Statement may not be terminated and may not be
amended to reduce benefits with respect an Executive subject to the
SMG-ICP until two years after the Executive receives written notice of
the proposed termination or amendment. Except as set forth in the
first sentence hereof, SMG-ICP and this Statement can be amended
(including modification, restatement, suspension and termination) at
any time, without prior written notice to or consultation with any
Executive, by the Board of Directors or any committee appointed by the
Board of Directors having the authority of the Board for that purpose.
Any such change will have effect as follows:
1. EFFECTIVE DATE OF CHANGE
Except as set forth below, any amendment will be effective on the
date of its adoption by the Board or committee or such other such
subsequent date or dates as may be specified in the amendment or
the resolution by which it is adopted. Unless otherwise mutually
agreed in writing by the parties, (a) an amendment or termination
will have no effect upon any Executive who at the time has
received Notice of Termination under SMG-ICP and (b) a
termination or an amendment that reduces benefits will not be
effective as to an Executive subject to the SMG-ICP until 2 years
after the Executive receives written notice of the termination or
amendment.
2. NOTICE OF AMENDMENT
The Corporation will promptly after any amendment provide to each
Executive then eligible for SMG-ICP benefits a written statement
of
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SMG-ICP as amended, and no amendment will be effective as to
an Executive until the later of the date the Executive receives
such written statement, or two years after notice as provided in
1 above. An Executive will be deemed to have received the
written statement if it is delivered to the Executive in person,
or after 48 hours following its hand delivery or dispatch by mail
or other suitable means of delivery to the last known address of
the Executive.
3. ACQUIESCENCE
An amendment will apply in full to an Executive if mutually
agreed in writing by the Executive and the Corporation, or if the
Executive or the Executive's representative knowingly receives a
benefit or improvement under SMG-ICP as amended which would not
have been available without the amendment. If any such benefit
from an amendment is knowingly received by an Executive with the
consent of the Corporation, then all elements of that amendment
and all prior SMG-ICP Statements and amendments then currently in
effect will also be applicable to the Executive.
4. ADJUSTMENT
A change in or addition or deletion of any benefit or perquisite
plan or program of the Corporation applicable to an Executive may
be expressly made subject to prior written agreement by the
Executive upon a corresponding change in the interpretation or
application of SMG-ICP to the Executive, to prevent redundant or
other unintended benefits or detriments to the Executive or the
Corporation which might otherwise result.
N. APPLICABLE LAW
It is intended that the decision of the CEO, as specified in the
SMG-ICP statement, will be exclusive and final with respect to any
application or interpretation of SMG-ICP. If any body of law should
be used or applied in determining the meaning or effect of SMG-ICP, in
the interest of consistency this will be deemed an agreement made and
executed in the State of Minnesota and the law of the State of
Minnesota will control.
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O. DEFINITIONS
As used in this Statement:
1. "CASH COMPENSATION"
Means all amounts earned, whether or not currently payable, as
wages, salary, bonus or a combination by an Executive, payable in
cash or its equivalent or agreed to be in lieu of cash
compensation. This will not include the value of employee or
executive perquisites or benefits accrued or received pursuant to
a plan of the employer which is uniformly applied to all of the
employees of the employer who are similarly situated or is
consistent with established prior practice for the position
occupied by the Executive.
2. "CEO"
Means the Chief Executive Officer of Dayton Hudson Corporation,
as then currently designated by its Board of Directors, or as
otherwise expressly provided in the SMG-ICP Statement.
3. "CORPORATION"
Means Dayton Hudson Corporation and each and all of its Operating
Companies, including divisions and subsidiaries, unless otherwise
clearly intended by the written context.
4. "DIRECTLY COMPETITIVE EMPLOYMENT" (OR "DCE")
Means personal services to, or for the direct and intended
benefit of, a person, firm or corporation determined by the CEO
and specified in writing to the Executive at or about the time of
Notice of Termination as constituting DCE for SMG-ICP purpose.
5. "EFFECTIVE DATE OF TERMINATION"
If no later date is specified in writing with the Notice of
Termination, the Effective Date of Termination for all purposes
will be the date the Notice is received by the Executive. No
delay in public announcement, or continuation of former duties
with or without the consent of the Corporation, will alter or
extend the Effective Date of Termination for SMG-ICP purposes,
unless expressly agreed upon in advance in writing. The
Corporation reserves the right to announce a termination at any
time after notice.
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<PAGE>
6. "EMPLOYMENT SEVERANCE DATE"
If there is no separate written agreement between the Executive
and the Corporation, all employment relationships between them
shall terminate on the SMG-ICP Effective Date of Termination and
will do so in any event upon the effective date of a Spin-Off.
If the Corporation agrees in writing in advance that the
employment of the Executive within the Corporation will continue
after the SMG-ICP Effective Date of Termination, then the
Effective Date of Termination will control all SMG-ICP Payments
to which the Executive is entitled under this Statement, but the
employment of the Executive within the Corporation will continue
until the Employment Severance Date to which the Corporation has
agreed in writing with, or has given advance written notice to,
the Executive.
7. "EXECUTIVE"
Means an individual employed as an executive within the
Corporation who currently is, or within the designated
Eligibility period has been, a member of the SMG on or after July
13, 1988; provided, however, if a person is covered by the Dayton
Hudson Corporation Income Continuance Policy statement, that
person is not an Executive hereunder. Unless clearly otherwise
intended by the written context, Executive will include all
beneficiaries of and persons claiming by or through the
designated employee or former employee.
8. "NOTICE OF TERMINATION" (OR "NOTICE")
Means an unconditional written or oral statement of an
Executive's organizational superior that the Executive's
employment in the Corporation is terminated at the instance of
the Corporation. Notice that an Executive's employment will end
because of achievement of the age of mandatory retirement under
lawful policies of the Corporation will not be a Notice of
Termination for SMG-ICP purposes.
9. "OPERATING COMPANY"
Means a division or subsidiary of the Corporation which operates
a group of department, low margin, soft lines or specialty
stores, or a similar category of ventures within the Corporation
having a common business purpose and single chief executive
officer.
10. "PAYMENTS" (OR "ICP PAYMENTS")
By the Corporation will include all of those payments made by or
on account of the Corporation under SMG-ICP and will include all
of those made to or for the account of an Executive or a
designated creditor or
19
<PAGE>
authorized representative or beneficiary of an Executive or
deceased Executive.
11. "REASSIGNMENT"
Means a change in the assignment or work content of an Executive
within the Corporation.
12. "SPIN-OFF"
Means a sale or other disposition as a going business of the
Corporation's ownership or control of an Operating Company or
other unit previously a part of the Corporation.
13. "CHANGE IN CONTROL"
A "Change in Control" shall be
(a) a majority of the directors of the Corporation shall be
persons other than persons
(i) for whose election proxies shall have been solicited by
the Board of Directors of the Corporation or
(ii) who are then serving as directors appointed by the
Board of Directors to fill vacancies on the Board of
Directors caused by death or resignation (but not by
removal) or to fill newly-created directorships,
(b) 30% or more of the outstanding Voting Stock (as defined in
Article IV of the Restated Articles of Incorporation of the
Corporation) of the Corporation is acquired or beneficially
owned (as defined in Article IV of the Restated Articles of
Incorporation of the Corporation) by any person (as defined
in Article IV of the Restated Articles of Incorporation of
the Corporation), or
(c) the shareholders of the Corporation approve a definitive
agreement or plan to
(i) merge or consolidate the Corporation with or into
another corporation (other than (1) a merger or
consolidation with a subsidiary of the Corporation
or (2) a merger in which the Corporation is the
surviving corporation and either (A) no
outstanding Voting Stock of the Corporation (other
than fractional shares) held by shareholders
immediately prior to the merger is converted into
cash, securities, or other
20
<PAGE>
property or (B) all holders of outstanding Voting
Stock of the Corporation (other than fractional
shares) immediately prior to the merger have
substantially the same proportionate ownership of
the Voting Stock of the Corporation or its parent
corporation immediately after the merger),
(ii) exchange, pursuant to a statutory exchange of
shares of Voting Stock of the Corporation held by
shareholders of the Corporation immediately prior
to the exchange, shares of one or more classes or
series of Voting Stock of the Corporation for
shares of another corporation or other securities,
cash or other property,
(iii) sell or otherwise dispose of all or substantially
all of the assets of the Corporation (in one
transaction or a series of transactions), or
(iv) liquidate or dissolve the Corporation.
14. "SALARY GRADE"
The numerical "Salary Grade" that the Executive is assigned under
the Corporation's salary grading system.
NOTE: Additional Definitions for particular purposes are contained in
the text.
P. CHANGE IN CONTROL
Other provisions of this Statement to the contrary notwithstanding, in
the event of a Change in Control:
1. If an Executive's employment with the Corporation is terminated,
whether voluntarily or involuntarily, within two years from a
Change in Control, the Executive shall be eligible for ICP
Payments.
2. In lieu of periodic payments, the ICP Payment shall be made in a
lump sum within 20 days after Executive's termination of
employment. The lump sum amount shall be determined by
discounting the periodic ICP Payments by the Prime Rate of First
National Bank of Minneapolis.
3. Except for the Release required by Section II.K. of this
Statement all other obligations or restrictions of Executive
under this Statement shall terminate.
21
<PAGE>
Q. CERTAIN REDUCTION OF PAYMENTS BY THE CORPORATION
1. Anything in this SMG-ICP to the contrary notwithstanding, the
provisions of this section Q shall apply to an Executive if Ernst
& Young LLP determines that each of a and b below are applicable.
a. Payments hereunder, determined without application of this
section Q, either alone or together with other payments in
the nature of compensation to the Executive which are
contingent on a change in the ownership or effective control
of the Corporation, or in the ownership of a substantial
portion of the assets of the Corporation, or otherwise,
would result in any portion of the payments hereunder being
subject to an excise tax on excess parachute payments
imposed under section 4999 of the Internal Revenue Code of
1986, as amended (the "Code").
b. The excise tax imposed on the Executive under section 4999
of the Code on excess parachute payments, from whatever
source, would result in a lesser net aggregate present value
of payments and distributions to the Executive (after
subtraction of the excise tax) than if payments and
distributions to the Executive were reduced to the maximum
amount that could be made without incurring the excise tax.
2. Under this section Q the payments under this SMG-ICP shall be
reduced (but not below zero) so that the present value of such
payments shall equal the Reduced Amount. The "Reduced Amount"
(which may be zero) shall be an amount expressed in present value
which maximizes the aggregate present value of payments under
this SMG-ICP which can be made without causing any such payment
to be subject to the excise tax under section 4999 of the Code.
3. If Ernst & Young LLP determines that this section Q is applicable
to an Executive, it shall so advise the Corporation. The
Corporation shall then promptly give the Executive notice to that
effect together with a copy of the detailed calculation
supporting such determination which shall include a statement of
the Reduced Amount. The Executive may then elect, in his/her
sole discretion, which and how much of payments otherwise to be
made under this SMG-ICP shall be eliminated or reduced (as long
as after such election the aggregate present value of the
remaining payments to be made under this SMG-ICP equals the
Reduced Amount), and shall advise the Corporation in writing of
his/her election within ten days of his/her receipt of notice.
If no such election is made by the Executive within such ten-day
period, the Corporation may elect which and how much of the
payments shall be eliminated or reduced (as long as after such
election the aggregate present value of the payments equals the
Reduced Amount) and
22
<PAGE>
shall notify the Executive promptly of such election. For
purposes of this section Q, present value shall be determined
in accordance with Section 280G of the Code. All the
foregoing determinations made by Ernst & Young LLP under this
section Q shall be made as promptly as practicable after it is
determined that parachute payments will be made to the
Executive if an elimination or reduction is not made. As
promptly as practicable following the election hereunder, the
Corporation shall pay to or for the benefit of the Executive
such amounts as are then due to the Executive under this
SMG-ICP and shall promptly pay to or for the benefit of the
Executive in the future such amounts as become due to the
Executive under this SMG-ICP.
4. As a result of the uncertainty in the application of Section 280G
of the Code at the time of the initial determination by Ernst &
Young LLP hereunder, it is possible that payments under this
SMG-ICP will have been made which should not have been made
("Overpayment") or that additional payments which will have not
been made could have been made ("Underpayment"), in each case,
consistent with the calculation of the Reduced Amount hereunder.
In the event that Ernst & Young LLP, based upon the assertion of
a deficiency by the Internal Revenue Service against the
Corporation or the Executive which Ernst & Young LLP believes has
a high probability of success, determines that an Overpayment has
been made, any such Overpayment shall be treated for all purposes
as a loan to the Executive which the Executive shall repay
together with interest at the applicable Federal rate provided
for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive if and to the extent
such payment would not reduce the amount which is subject to the
excise tax under Section 4999 of the Code. In the event that
Ernst & Young LLP, based upon controlling precedent, determines
that an Underpayment has occurred, any such Underpayment shall be
promptly paid to or for the benefit of the Executive together
with interest at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Code.
5. In making its determination under this section Q, the value of
any non-cash benefit shall be determined by Ernst & Young LLP in
accordance with the principles of section 380G(d)(3) of the Code.
6. All determinations made by Ernst & Young LLP under this section Q
shall be binding upon the Corporation and the Executive.
23
<PAGE>
CLAIMS PROCEDURE
FOR THE
DAYTON HUDSON CORPORATION
SMG INCOME CONTINUANCE POLICY STATEMENT
FOR MEMBERS OF THE SENIOR MANAGEMENT GROUP
When your employment with Dayton Hudson Corporation (the "Company")
terminates, the Company will tell you whether you are eligible for benefits
from the above-referenced plan and, if so, the amount and timing of the
payments that will be made to you.
If you believe that the Company's determination is incorrect in any way, you
must file a written claim with the Chief Executive Officer of the Company.
The Chief Executive Officer ordinarily will respond to the claim within 90
days of the date on which it is received. However, if special circumstances
require an extension of the period of time for processing a claim, the 90-day
period can be extended for an additional 90 days by giving you written notice
of the extension and the reason that the extension is necessary.
If the claim for a benefit is approved, you will receive written notice of
the amount of your benefit and the date on which payments will begin. If your
claim is denied in whole or in part, you will be told in writing the specific
reasons for the decision and will receive an explanation of the procedures
for reviewing the decision.
If you do not agree with the decision, you can request that the Chief
Executive Officer reconsider his or her decision by filing a written request
for review within 60 days after receiving notice that the claim has been
denied. You or your representative can also present written statements which
explain why you believe that the benefit claimed should be paid and may
review all pertinent plan documents.
Generally, the decision will be reviewed within 60 days after the Chief
Executive Officer receives a request for reconsideration. However, if special
circumstances require a delay, the review may take up to 120 days. (If a
decision cannot be made within the 60-day period, you will be notified of
this fact in writing.) You will receive a written notice of the decision
which will explain the reasons for the decision by making specific reference
to the Plan provisions on which the decision is based.
<PAGE>
EXHIBIT (12)
DAYTON HUDSON CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Millions of Dollars)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
JAN. 30, JAN. 31, FEB. 1, FEB. 3, JAN. 28,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES:
Earnings:
Consolidated net earnings before extraordinary charges......... $ 962 $ 802 $ 474 $ 311 $ 434
Income taxes................................................... 594 524 309 190 280
--------- --------- --------- --------- ---------
Total earnings before extraordinary charges.................. 1,556 1,326 783 501 714
--------- --------- --------- --------- ---------
Fixed charges:
Interest expense............................................... 421 437 464 461 439
Interest portion of rental expense............................. 63 59 59 59 56
--------- --------- --------- --------- ---------
Total fixed charges.......................................... 484 496 523 520 495
--------- --------- --------- --------- ---------
Less:
Capitalized interest........................................... (16) (16) (16) (14) (7)
--------- --------- --------- --------- ---------
Fixed charges in earnings...................................... 468 480 507 506 488
--------- --------- --------- --------- ---------
Earnings available for fixed charges............................. $ 2,024 $ 1,806 $ 1,290 $ 1,007 $ 1,202
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings before extraordinary charges to fixed
charges........................................................ 4.18 3.65 2.46 1.94 2.43
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Total fixed charges, as above.................................... $ 484 $ 496 $ 523 $ 520 $ 495
Dividends on preferred stock (pre-tax basis)..................... 32 35 37 37 39
--------- --------- --------- --------- ---------
Total fixed charges and preferred stock dividends.............. 516 531 560 557 534
--------- --------- --------- --------- ---------
Earnings available for fixed charges and preferred stock
dividends...................................................... $ 2,024 $ 1,806 $ 1,290 $ 1,007 $ 1,202
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings before extraordinary charges to fixed charges
and preferred stock dividends.................................. 3.92 3.40 2.30 1.81 2.25
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
1998 RESULTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TARGET
(IN MILLIONS) 1998 1997 1996
<S> <C> <C> <C>
REVENUES $23,056 $20,368 $17,853
PRE-TAX SEGMENT PROFIT $ 1,578 $ 1,287 $ 1,048
STORES 851 796 736
RETAIL SQUARE FEET* 94,553 87,158 79,360
</TABLE>
* In thousands, reflects total square feet less office, warehouse and vacant
space.
- --------------------------------------------------------------------------------
TARGET (AT YEAR END) EMPLOYEES: 189,000
[MAP]
<TABLE>
<CAPTION>
RETAIL SQ. FT. NO. OF
IN THOUSANDS STORES
<S> <C> <C>
Alabama 117 1
Arizona 2,600 24
Arkansas 229 2
California 16,141 144
Colorado 2,484 23
Delaware 146 1
Florida 7,106 64
Georgia 2,913 27
Idaho 406 4
Illinois 5,791 50
Indiana 2,877 30
Iowa 1,818 17
Kansas 1,283 10
Kentucky 1,145 11
Louisiana 203 2
Maryland 1,900 16
Michigan 4,899 46
Minnesota 5,728 49
Mississippi 116 1
Missouri 1,506 14
Montana 299 3
Nebraska 1,072 9
Nevada 841 8
New Jersey 1,128 9
New Mexico 852 8
New York 1,770 14
North Carolina 2,409 22
North Dakota 437 4
Ohio 3,180 28
Oklahoma 817 8
Oregon 1,194 11
Pennsylvania 485 4
South Carolina 393 4
South Dakota 391 4
Tennessee 2,101 20
Texas 9,134 84
Utah 1,055 6
Virginia 2,526 21
Washington 2,525 24
Wisconsin 2,354 22
Wyoming 182 2
TOTAL 94,553 851
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR MARKETS NO. OF
STORES
<S> <C>
Greater Los Angeles 70
Chicago 36
Minneapolis/St. Paul 33
San Francisco Bay Area 28
Dallas/Ft. Worth 24
Detroit 23
Atlanta 22
Houston 21
Greater Miami 20
Phoenix 16
Denver/Boulder 15
San Diego 14
Washington DC 14
Seattle/Tacoma 13
St. Louis 12
Indianapolis 11
Tampa/St. Petersburg 11
Greater Cleveland 10
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MERVYN'S
(IN MILLIONS) 1998 1997 1996
<S> <C> <C> <C>
REVENUES $ 4,176 $ 4,227 $ 4,369
PRE-TAX SEGMENT PROFIT $ 240 $ 280 $ 272
STORES 268 269 300
RETAIL SQUARE FEET* 21,729 21,810 24,518
</TABLE>
* In thousands, reflects total square feet less office, warehouse and vacant
space.
- --------------------------------------------------------------------------------
MERVYN'S (AT YEAR END) EMPLOYEES: 30,000
[MAP]
<TABLE>
<CAPTION>
RETAIL SQ. FT. NO. OF
IN THOUSANDS STORES
<S> <C> <C>
Arizona 1,207 15
California 9,703 125
Colorado 854 11
Idaho 83 1
Louisiana 459 6
Michigan 1,176 15
Minnesota 1,132 9
Nevada 495 7
New Mexico 266 3
Oklahoma 270 3
Oregon 551 7
Texas 3,344 42
Utah 760 8
Washington 1,429 16
TOTAL 21,729 268
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR MARKETS
NO. OF
STORES
<S> <C>
Greater Los Angeles 48
San Francisco Bay Area 29
Dallas/Ft. Worth 12
San Diego 12
Phoenix 11
Detroit 9
Houston 9
Minneapolis/St. Paul 9
Seattle/Tacoma 9
Greater Salt Lake City 8
Denver/Boulder 6
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEPARTMENT STORES
(IN MILLIONS) 1998 1997 1996
<S> <C> <C> <C>
REVENUES $ 3,285 $ 3,162 $ 3,149
PRE-TAX SEGMENT PROFIT $ 279 $ 240 $ 151
STORES 63 65 65
RETAIL SQUARE FEET* 13,890 14,090 14,111
</TABLE>
* In thousands, reflects total square feet less office, warehouse and vacant
space.
- --------------------------------------------------------------------------------
DEPARTMENT STORES (AT YEAR END) EMPLOYEES: 35,000
[MAP]
<TABLE>
<CAPTION>
RETAIL SQ. FT. NO. OF
IN THOUSANDS STORES
<S> <C> <C>
DAYTON'S
Minnesota 3,035 12
North Dakota 297 3
South Dakota 102 1
Wisconsin 373 3
HUDSON'S
Michigan 4,619 20
MARSHALL FIELD'S
Illinois 4,173 17
Indiana 246 2
Ohio 618 3
Wisconsin 427 2
TOTAL DSD 13,890 63
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR MARKETS
NO. OF
STORES
<S> <C>
Chicago 16
Detroit 11
Minneapolis/St. Paul 10
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
ANALYSIS OF OPERATIONS
EARNINGS
[CHART]
DILUTED EARNINGS
PER SHARE
(dollars)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
------------------------------------------------
<S> <C> <C> <C> <C> <C>
AS REPORTED $.92 $.65 $.97 $1.59 $1.98
BEFORE UNUSUAL ITEMS $1.18 $1.64 $2.06
</TABLE>
Our net earnings were $935 million in 1998, compared with $751 million in
1997 and $463 million in 1996. Earnings per share were $1.98 in 1998, $1.59 in
1997 and $.97 in 1996. (References to earnings per share refer to diluted
earnings per share. Earnings per share, dividends per share and common shares
outstanding reflect our 1998 two-for-one share split and our three-for-one share
split in 1996.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EARNINGS ANALYSIS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
DILUTED EARNINGS
EARNINGS PER SHARE
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET EARNINGS BEFORE
UNUSUAL ITEMS $ 970 $ 775 $ 555 $2.06 $1.64 $1.18
FAVORABLE OUTCOME
OF INVENTORY
SHORTAGE
TAX MATTER 20 -- -- .04 -- --
SECURITIZATION
GAIN (PRE-TAX
1998 $35 MIL,
1997 $45 MIL) 21 27 -- .05 .06 --
SECURITIZATION LOSS
(PRE-TAX 1998
$38 MIL) (23) -- -- (.05) -- --
---------------------------------------------------------
NET SECURITIZATION
GAIN/(LOSS) (2) 27 -- -- .06 --
MAINFRAME
OUTSOURCING
(PRE-TAX 1998
$42 MIL) (26) -- -- (.06) -- --
REAL ESTATE
REPOSITIONING
(PRE-TAX 1996
$134 MIL) -- -- (81) -- -- (.18)
- --------------------------------------------------------------------------------
NET EARNINGS BEFORE
EXTRAORDINARY
CHARGES 962 802 474 2.04 1.70 1.00
EXTRAORDINARY
CHARGES -- DEBT
REPURCHASE (27) (51) (11) (.06) (.11) (.03)
- --------------------------------------------------------------------------------
NET EARNINGS $ 935 $ 751 $ 463 $1.98 $1.59 $.97
- --------------------------------------------------------------------------------
</TABLE>
[CHART]
PRE-TAX SEGMENT PROFIT
(millions)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1,189 $1,030 $1,471 $1,807 $2,097
</TABLE>
PRE-TAX SEGMENT PROFIT
Pre-tax segment profit increased 16 percent in 1998 to $2,097 million,
compared with $1,807 million in 1997 and $1,471 million in 1996. Pre-tax segment
profit is first-in, first-out (FIFO) earnings before securitization effects,
interest, corporate and other expense, and unusual items. Target and the
Department Store Division (DSD) both contributed to our pre-tax profit growth,
which was partially offset by Mervyn's performance. We expect growth in
profitability at all three operating companies in 1999.
TARGET'S pre-tax profit rose 23 percent in 1998 to $1,578 million. Target's
full-year profit margin rate increased to 6.8 percent in 1998 from 6.3 percent
in 1997, reflecting continued strong comparable-store sales growth of 6.1
percent and modest improvement in the gross margin rate due primarily to
favorable markdown performance. The operating expense rate improved slightly
from 1997, reflecting favorable sales leverage and store productivity, offset by
higher wage rates. Continued growth in guest credit also contributed to improved
sales and earnings. In 1999, we expect our profit margin rate to remain
essentially unchanged and total revenues are expected to grow due to
mid-single-digit comparable-store sales increases combined with new store sales
growth.
MERVYN'S pre-tax profit declined 14 percent in 1998 to $240 million.
Comparable-store sales grew 0.9 percent. The gross margin rate declined due to
unfavorable markdown performance, partially offset by improved markup, and the
expense rate increased due to lower sales leverage. Guest credit continued to
positively impact Mervyn's sales and earnings in 1998. Continuing the improved
trend from fourth quarter 1998, we expect measurable improvement in our 1999
profit margin rate and a low to mid-single-digit comparable-store sales
increase.
DSD's pre-tax profit in 1998 was $279 million, a 16 percent increase over
1997, reflecting comparable-store sales growth of 4.5 percent and a significant
improvement in the gross margin rate, due to improved markdowns and markup.
Comparable-store sales are expected to grow in the low-single-digits in 1999 and
our profit margin rate is expected to increase modestly from 1998.
17
<PAGE>
ANALYSIS OF OPERATIONS
REVENUES AND COMPARABLE-STORE SALES
In 1998, our total revenues increased 11.5 percent and comparable-store
sales increased 5.2 percent. Revenues include retail sales, finance charges,
late fees and other revenues. Comparable-store sales are sales from stores open
longer than one year. Target's revenue growth reflected strong comparable-store
sales and new store expansion. Mervyn's 1998 total revenues declined, due in
part to store closings during 1997. Mervyn's sales trend improved in the fourth
quarter, reflecting continued focus on merchandising and marketing initiatives.
DSD's total revenue growth reflected strong comparable-store sales. Increased
finance charge and late fee revenues also contributed to revenue growth.
[CHART]
REVENUES
(millions)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
------------------------------------------------
<S> <C> <C> <C> <C> <C>
$21,311 $23,516 $25,371 $27,757 $30,951
</TABLE>
Revenue growth in 1997 reflected a combination of new store and
comparable-store sales growth at Target and comparable-store sales growth at
Mervyn's and DSD, somewhat offset by a decline in Mervyn's total revenue due to
closed stores.
The impact of inflation on our consolidated operations was minimal and, as
a result, the overall comparable-store sales increase closely approximated real
growth.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
REVENUES AND COMPARABLE-STORE SALES GROWTH
1998 1997
- --------------------------------------------------------------------------------
COMPARABLE- COMPARABLE-
STORE STORE
REVENUES SALES REVENUES SALES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TARGET 13.2% 6.1% 14.1% 5.7%
MERVYN'S (1.2) 0.9 (3.3) 1.9
DSD 3.9 4.5 0.4 1.0
- --------------------------------------------------------------------------------
TOTAL 11.5% 5.2% 9.4% 4.5%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
REVENUES PER SQUARE FOOT*
(DOLLARS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TARGET $253 $244 $235
MERVYN'S 192 187 179
DSD 235 224 223
- --------------------------------------------------------------------------------
</TABLE>
(*Thirteen-month average retail square feet.)
GROSS MARGIN RATE
In 1998, our overall gross margin rate improved modestly from the prior
year. Gross margin includes cost of retail sales and excludes buying and
occupancy costs. Strong growth at Target, our lowest gross margin rate division,
continues to impact our business mix.
TARGET'S gross margin rate increased modestly in 1998 primarily due to
lower markdowns. In 1999, we anticipate the gross margin rate to be essentially
even with 1998.
MERVYN'S gross margin rate decreased reflecting unfavorable markdown
performance, partially offset by higher markup. In 1999, we expect Mervyn's
gross margin rate to increase as we continue to improve the quality and trend
content of our merchandise.
DSD's gross margin rate increased significantly over 1997 due to improved
markdowns and markup. In 1999, we anticipate DSD's gross margin rate will
increase modestly.
In 1997, our overall gross margin rate was essentially even with the prior
year, reflecting improved markup, partially offset by higher markdowns, at all
three divisions.
The LIFO provision, included in cost of retail sales, was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LIFO PROVISION: CREDIT/(EXPENSE)
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TARGET $ - $ - $ -
MERVYN'S 6 - 5
DSD 12 (6) (14)
- --------------------------------------------------------------------------------
TOTAL $ 18 $ (6) $ (9)
PER SHARE $.02 $(.01) $(.01)
- --------------------------------------------------------------------------------
</TABLE>
The LIFO provision is calculated based on inventory levels, markup rates
and internally generated retail price indices. The 1998 LIFO credit at Mervyn's
resulted primarily from higher inventory levels, reflecting an investment in
certain categories to improve basic in-stock positions. The LIFO credit at DSD
resulted from higher markup. The 1997 LIFO charge at DSD resulted from lower
inventory levels.
OPERATING EXPENSE RATE
Our overall operating expense rate was essentially even with 1997.
Operating expense includes selling, publicity and administrative expenses
(excluding start-up, and corporate and other expense), depreciation and
amortization, buying and occupancy costs, and taxes other than income taxes.
Target's strong growth continues to impact our overall expense rate structure.
18
<PAGE>
ANALYSIS OF OPERATIONS
TARGET'S operating expense rate improved slightly over 1997. In 1998, we
completed our three-year program to remove $200 million from operating expenses.
As previously disclosed, wage rate pressure within our competitive markets
somewhat offset our 1998 savings. In 1999, we will remain focused on controlling
our expenses, principally through improved productivity.
MERVYN'S operating expense rate increased in 1998 due to lower sales
leverage. We anticipate an improved rate in 1999 due to our expectation of
improved comparable-store sales results.
DSD's operating expense rate was essentially unchanged from 1997. In 1999,
we expect DSD's operating expense rate to be even with 1998.
The operating expense rate in 1997 improved over 1996 due to the favorable
effect of Target's increased impact on the overall expense rate structure and
significant operating expense rate improvements at DSD.
INTEREST EXPENSE
We consider payments to holders of our sold securitized receivables as
"interest equivalent." In 1998, combined interest expense and interest
equivalent was $446 million, $3 million lower than 1997 due to a lower average
portfolio interest rate, partially offset by higher average funded balances. The
average portfolio interest rate in 1998 was 7.8 percent. In 1997, combined
interest expense and interest equivalent was $18 million lower than 1996 due to
a lower average portfolio rate and lower average funded balances. The average
portfolio interest rate in 1997 was 8.1 percent. Combined interest expense and
interest equivalent in 1999 is expected to be similar to 1998. The average
portfolio interest rate is expected to continue to decline, offset by higher
average funded balances.
During 1998, we repurchased $127 million of debt for $170 million,
resulting in an after-tax extraordinary charge of $27 million ($.06 per share).
The debt repurchased had a weighted-average interest rate of 9.2 percent and an
average remaining life of 21 years. The replacement of this debt with lower
interest rate financing will have a favorable impact on interest expense going
forward. In 1997 and 1996, we repurchased $503 and $325 million of long-term
debt, resulting in after-tax extraordinary charges of $51 million ($.11 per
share) and $11 million ($.03 per share), respectively.
INCOME TAX RATE
The effective tax rate was 38.2 percent in 1998 and 39.5 percent in both
1997 and 1996. The 1998 effective tax rate reflects the beneficial effect of $20
million ($.04 per share), resulting from the favorable outcome of our inventory
shortage tax matter. Our 1999 tax rate is expected to approximate 39.0 percent.
SECURITIZED RECEIVABLES
During third quarter 1998, Dayton Hudson Receivables Corporation (DHRC), a
special-purpose subsidiary, sold to the public $400 million of securitized
receivables. This issue of asset-backed securities had an expected maturity of
five years and a stated rate of 5.90 percent. Proceeds from the sale were used
for general corporate purposes, including funding the growth of receivables. As
required by Statement of Financial Accounting Standards (SFAS) No. 125, the sale
transaction resulted in a $35 million pre-tax gain ($.05 per share). This gain
was offset by a $38 million pre-tax charge ($.05 per share) related to the
maturity of our 1995 securitization. The net impact was a $3 million (less than
$.01 per share) reduction of 1998 finance charge revenues and pre-tax earnings.
In 1997, DHRC sold to the public $400 million of securitized receivables,
with an expected maturity of five years and a stated rate of 6.25 percent. This
transaction resulted in a $32 million pre-tax gain. Additionally, 1997 results
included a $13 million pre-tax gain attributable to the application of SFAS No.
125 to our 1995 securitization. Combined, these gains resulted in a $45 million
($.06 per share) increase in finance charge revenues and pre-tax earnings.
Our Consolidated Results of Operations also include reductions of finance
charge revenues and bad debt expense related to the sold securitized
receivables. These amounts represent payments to holders of our sold securitized
receivables and are included in our pre-tax earnings reconciliation on page 25
as interest equivalent. Interest equivalent was $48 million in 1998, $33 million
in 1997 and $25 million in 1996. During 1999, our current $800 million of sold
securitized receivables will result in approximately $12 million of interest
equivalent per quarter.
19
<PAGE>
ANALYSIS OF OPERATIONS
MAINFRAME OUTSOURCING
In fourth quarter 1998, we obtained Board of Directors approval and
announced our plan to outsource our mainframe computer data center functions.
Subsequently, we finalized a contract with a vendor to provide us with these
functions. As part of the plan, we will sell our mainframe equipment to the
vendor and eliminate approximately 110 employee positions. The fourth quarter
1998 associated expenses were $42 million ($.06 per share) and are included in
selling, publicity and administrative expenses.
The expenses recognized in the fourth quarter include $36 million for
the write-down of mainframe equipment, $4 million in one-time, incremental
fees and $2 million in employee severance. In 1999, we expect to expense an
additional $5 million to $10 million related to the outsourcing and to
complete the transition by the third quarter.
REAL ESTATE REPOSITIONING
In 1996, we recorded a pre-tax charge of $134 million ($.18 per share) for
real estate repositioning at Mervyn's and DSD to strengthen competitive
positions and achieve improved long-term results. The charge included $114
million for Mervyn's to sell or close its 25 stores in Florida and Georgia, and
approximately ten other under-performing stores throughout the chain. Also
included was a net pre-tax charge of $20 million for DSD's sale of its Texas
stores and the closure of two other stores.
As of year-end 1998, we have substantially completed our repositioning
activities. Mervyn's has sold 24 stores and closed eight under-performing
stores, while DSD has sold all stores included in the plan. Exit costs incurred
in 1998 and 1997 (approximately $5 million and $17 million, respectively) were
charged against the reserve. The reserve remaining at year-end 1998 was $20
million, representing the estimated costs that will be incurred to sell the
closed stores.
START-UP EXPENSE
In first quarter 1999, we will adopt Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." The adoption will not impact
total year start-up expense, but will shift approximately $15 million of
start-up expense out of first quarter 1999 into the remaining quarters.
Substantially all of this effect will be at Target.
YEAR 2000 READINESS DISCLOSURE
We began mitigating the risks associated with the year 2000 date conversion
in 1993. In 1997, we established a corporate-wide, comprehensive plan of action
designed to achieve an uninterrupted transition into the year 2000. This project
includes three major elements: 1) information technology (IT) systems, 2)
non-IT, or embedded technology, systems and 3) relationships with our key
business partners. The project is divided into five phases: awareness,
assessment, renovation, validation and implementation. We have completed the
awareness and assessment phases for all three elements, and are currently at
different points in the renovation, validation and implementation phases for
each of the elements. We are using both internal and external resources to
implement our plan.
For our IT systems, we have assessed both existing and newly implemented
hardware and applications (software and operating systems), and have finalized
the development of plans to address all assessed risks. Approximately 95 percent
of our hardware is year 2000 compliant, and the remainder is currently in the
renovation phase. Approximately 80 percent of our applications are compliant,
with 20 percent in the renovation and validation phases. We anticipate
completion of the validation, or testing, phase for our software and all key
operating systems by mid 1999. Our year 2000 readiness in this area has been
significantly enhanced by our recent, substantial common systems development
initiatives through which we have invested heavily in IT over the past three
years.
We began addressing non-IT systems, or embedded technology/infrastructure,
risks at our stores, distribution centers and headquarters facilities early in
our initiative. Approximately 85 percent of our non-IT systems are compliant and
the remainder are currently in the renovation phase. Validation and
implementation are approximately 80 percent complete and we anticipate finishing
the balance by mid 1999.
We have identified our key business partners and have been working closely
with them to assess their readiness and mitigate the risk to us if they are not
prepared for the year 2000. We have installed the year 2000 compliant version of
Electronic Data Interchange (EDI) software and expect to finalize testing of EDI
and other electronic transmissions with key business partners by mid/late 1999.
20
<PAGE>
ANALYSIS OF OPERATIONS
In planning for the most reasonably likely worst case scenarios, we have
addressed all three major elements in our project. We believe our IT systems
will be ready for the year 2000, but we may experience isolated incidences of
non-compliance. We plan to allocate internal resources and retain dedicated
consultants and vendor representatives to be ready to take action if these
events occur. Our contingency plans for non-IT systems are currently in process,
and we are simultaneously putting the required resources in place to carry out
those plans for key non-IT systems, such as those within our stores. We are
contacting many critical business partners to assess their readiness and will
finish developing appropriate contingency plans by mid 1999. Although we value
our established relationships with key vendors, substitute products for most of
the goods we sell in our stores may be obtained from other vendors. If certain
vendors are unable to deliver product on a timely basis, due to their own year
2000 issues, we anticipate there will be others who will be able to deliver
similar goods. However, the lead time involved in sourcing certain goods may
result in temporary shortages of relatively few items. We also recognize the
risks to us if other key suppliers in areas such as utilities, communications,
transportation, banking and government are not ready for the year 2000, and are
developing contingency plans to minimize the potential adverse impacts of these
risks.
In 1998, we expensed $27 million related to year 2000 readiness. Prior to
1998, we expensed approximately $5 million. We estimate approximately another
$20 million will be expensed as incurred to complete the year 2000 readiness
program, with most of the spending occurring in the first half of 1999. In
addition, this program has accelerated the timing of approximately $25 million
of planned capital expenditures. All expenditures related to our year 2000
readiness initiative will be funded by cash flow from operations and will not
materially impact our other operating or investment plans.
INFORMATION SYSTEMS
We have invested heavily in information services (IS) in the past three
years. We consolidated our IS operations in 1996 and are developing and
implementing common systems across all three divisions to better leverage our
resources. As a result of our common systems initiatives, the growth in our IS
expense substantially outpaced our revenue growth in recent years. Net IS
expense growth in 1999 is expected to be similar to our revenue growth.
We adopted SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," in first quarter 1998. The adoption
resulted in decreased expense, which increased pre-tax earnings by approximately
$68 million, net of depreciation, for 1998 ($.09 per share), partially
offsetting our other systems expenses. The annual impact of software
capitalization will diminish significantly over the next few years.
FOURTH QUARTER RESULTS
Due to the seasonal nature of the retail industry, fourth quarter operating
results typically represent a substantially larger share of total year revenues
and earnings due to the inclusion of the holiday shopping season.
Fourth quarter 1998 net earnings were $423 million, compared with $356
million in 1997. Earnings per share were $.90 for the quarter, compared with
$.76 in 1997.
TARGET'S pre-tax profit increased 26 percent to $646 million, reflecting a
13.9 percent total revenue increase, a modestly higher gross margin rate due to
lower markdowns and an operating expense rate essentially even with last year.
Continued growth in the profitability of guest credit also contributed to
Target's fourth quarter profit improvement. Comparable-store sales increased 6.8
percent.
MERVYN'S pre-tax profit was equal to a year ago at $104 million, reflecting
a 3.4 percent total revenue increase, offset by a lower gross margin rate due to
higher markdowns. The operating expense rate improved slightly primarily due to
favorable sales leverage. Comparable-store sales increased 4.4 percent.
DSD's pre-tax profit increased 12 percent to $115 million, reflecting a 4.2
percent total revenue increase and a significantly higher gross margin rate due
to favorable markdowns and markup. The operating expense rate increased slightly
over 1997. Comparable-store sales increased 3.5 percent.
21
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
[CHART]
CASH FLOW FROM OPERATIONS
(millions)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
------------------------------------------------
<S> <C> <C> <C> <C> <C>
$892 $1,161 $1,458 $1,795 $1,862
</TABLE>
Our financial condition remains strong. Cash flow from operations was
$1,862 million, driven by earnings growth, strong inventory control and accounts
payable leveraging. Internally generated funds continue to be the most important
component of our capital resources and, along with our ability to access a
variety of financial markets, provide funding for our expansion plans. We
continue to fund the growth in our business through a combination of retained
earnings, debt and sold securitized receivables.
During 1998, average total receivables serviced (which includes both
retained and sold securitized receivables) increased 6 percent, or $124 million,
due to growth of the Target Guest Card. Year-end total receivables serviced
increased 3 percent from last year. In 1998, the number of Target Guest Card
holders grew to over 12 million accounts at year end, compared with over nine
million in 1997. In 1999, we expect continued growth of the Target Guest Card,
which will benefit sales growth and credit profitability.
Inventory levels increased $224 million in 1998. This growth was more than
fully funded by the $423 million increase in accounts payable over the same
period.
Capital expenditures were $1,657 million in 1998, compared with $1,354
million in 1997. Investment in Target accounted for 82 percent of 1998 capital
expenditures, with 10 percent at Mervyn's and 8 percent at DSD. Net property and
equipment increased $844 million, reflecting capital invested offset by
depreciation. During 1998, Target opened 55 net new stores, Mervyn's closed one
store and DSD closed two stores. Approximately 63 percent of total expenditures
was for new stores, expansions and remodels. Other capital investments were for
information systems, distribution and other infrastructure to support store
growth. Over the past five years, Target's retail square footage has grown at a
compound annual rate of approximately 10 percent. We expect Target to continue
to expand in the range of 7 to 9 percent annually for the foreseeable future.
Capital expenditures in 1999 are expected to approximate $1.8 billion for
the construction of new stores, expansion and remodeling of existing stores, and
other capital support. The majority of capital will continue to be invested in
Target. In the upcoming year, Target plans to open 60 to 65 net new stores,
including new stores in the Boston and Pittsburgh markets and additional stores
in New York, New Jersey, North and South Carolina, and other states. DSD plans
to open one new store in 1999. Our plans also include full-scale remodels of 46
Target, seven Mervyn's and nine DSD stores.
[CHART]
CAPITAL EXPENDITURES
(millions)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1,095 $1,522 $1,301 $1,354 $1,657
</TABLE>
Our financing strategy is to ensure liquidity and access
to capital markets, to manage the amount of floating-rate debt and to maintain a
balanced spectrum of debt maturities. Within these parameters, we seek to
minimize our cost of borrowing.
In January 1999, our Board of Directors authorized the repurchase of $1
billion of our common stock. We expect to complete our repurchase program over
the next two years. Repurchases will be made primarily in open market
transactions, subject to market conditions. There was no repurchase activity in
1998.
A key to our access to liquidity and capital markets is maintaining strong
investment-grade debt ratings. During the year, our long-term debt was upgraded
by Moody's and Standard and Poor's. Further liquidity is provided by $1.6
billion of committed lines of credit obtained through a group of 31 banks. Going
forward, we expect that continued profit increases and cash flow from operations
will allow us to fund our planned capital expenditures and share repurchase
while maintaining or improving our debt ratings.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CREDIT RATINGS
STANDARD DUFF &
MOODY'S AND POOR'S PHELPS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM DEBT A3 A- A-
COMMERCIAL PAPER P-2 A-2 D-1-
SOLD SECURITIZED RECEIVABLES Aaa AAA N/A
- --------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
PERFORMANCE OBJECTIVES
SHAREHOLDER RETURN
[CHART]
MARKET PRICE
PER SHARE (dollars)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HIGH $14.31 $13.25 $19.94 $36.84 $63.75
LOW $10.88 $10.75 $12.25 $18.94 $33.75
CLOSE $11.50 $12.50 $18.81 $35.97 $63.75
</TABLE>
Our primary objective is to maximize shareholder value over time through a
combination of share price appreciation and dividend income while maintaining a
prudent and flexible capital structure. Our total return to shareholders was 79
percent in fiscal 1998 and 45 percent and 27 percent per year over the last five
and ten years, respectively.
MEASURING VALUE CREATION
We measure value creation internally using a form of Economic Value
Added (EVA), which we define as after-tax segment profit less a capital
charge for all investment employed. The capital charge is an estimate of our
after-tax cost of capital adjusted for the age of our stores, recognizing
mature stores inherently have higher returns than newly opened stores. We
estimate the after-tax cost of capital for our retail business is
approximately 10 percent, while our credit operations' after-tax cost of
capital is approximately 6 percent as a result of its ability to support
higher debt levels. We expect to generate returns in excess of these costs of
capital, thereby producing EVA.
EVA is used to evaluate our performance and to guide capital investment
decisions. A significant portion of executive incentive compensation is tied to
the achievement of targeted levels of annual EVA improvement.
FINANCIAL OBJECTIVES
We believe that managing our business with a focus on EVA helps achieve our
objective of annual earnings per share growth of 15 percent or more over time.
We plan to produce these results, while maintaining a prudent debt ratio for our
retail operations, which will allow efficient capital market access to fund our
growth. Earnings per share before unusual items has grown at compound annual
rates of 20 percent and 14 percent over the last five and ten years,
respectively.
Reflecting our strong cash flow, we ended 1998 with a retail debt ratio of
41 percent. In evaluating our debt level, we separate retail operations from
credit operations due to their inherently different financial characteristics.
We view the appropriate capitalization of our credit business to be 88 percent
debt and 12 percent equity, similar to ratios of comparable credit card
businesses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DEBT RATIO*
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAIL 41% 45% 50%
CREDIT 88% 88% 88%
TOTAL DEBT RATIO 50% 54% 57%
- --------------------------------------------------------------------------------
</TABLE>
* Includes the impact of sold securitized receivables and off-balance sheet
operating leases as if they were debt.
[CHART]
RETAIL CAPITALIZATION
(millions)
<TABLE>
<CAPTION>
'96 '97 '98
--------------------------------------------
<S> <C> <C> <C>
DEBT $4,271 $4,127 $4,118
TOTAL $8,551 $9,082 $9,988
</TABLE>
CREDIT CAPITALIZATION
(millions)
<TABLE>
<CAPTION>
'96 '97 '98
--------------------------------------------
<S> <C> <C> <C>
DEBT $1,817 $2,026 $2,108
TOTAL $2,064 $2,302 $2,395
</TABLE>
PRE-TAX SEGMENT PROFIT AND EBITDA
Pre-tax segment profit is first-in, first-out (FIFO) earnings before
securitization effects, interest, corporate and other expense, and unusual
items. EBITDA is pre-tax segment profit before depreciation and amortization.
Management uses pre-tax segment profit and EBITDA, among other standards, to
measure divisional operating performance. EBITDA supplements, and is not
intended to represent a measure of performance in accordance with, disclosures
required by generally accepted accounting principles. It is included as a tool
for analyzing our results.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRE-TAX SEGMENT PROFIT AS A PERCENT OF REVENUES
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TARGET 6.8% 6.3% 5.9%
MERVYN'S 5.7% 6.6% 6.2%
DSD 8.5% 7.6% 4.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EBITDA AS A PERCENT OF REVENUES
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TARGET 9.0% 8.5% 8.0%
MERVYN'S 9.0% 9.6% 9.7%
DSD 12.6% 11.6% 8.6%
- --------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
GUEST CREDIT
[CHART]
NEW ACCOUNTS OPENED
(millions)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DSD .5 .6 .5 .7 .6
MERVYN'S 1.4 1.2 1.0 1.3 1.2
TARGET .4 2.1 2.7 3.9 3.9
</TABLE>
We offer proprietary credit in each of our business segments. These credit
programs strategically support our core retail operations and are an integral
component of each business segment. The programs contribute to our earnings
growth by driving sales at each of our business segments and through growth in
credit contribution. Therefore, credit contribution, shown below, is reflected
in each business segment's pre-tax profit on a receivables serviced basis.
Because we service both the retained and sold securitized receivables, we manage
our portfolio on a serviced basis. In contrast, our consolidated financial
statements reflect only our retained securitized receivables.
In 1998, pre-tax contribution from credit increased 18 percent over the
prior year, compared to the 6 percent growth in average receivables serviced.
The improved credit performance reflects continued growth of the Target Guest
Card, along with strong revenue increases associated with changes in credit
terms and expansion of our guest loyalty programs at all three divisions.
In 1999, we plan to continue to grow guest credit's contribution by
acquiring new accounts, enhancing guest loyalty programs, controlling bad debt
expense and leveraging operating expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CREDIT CONTRIBUTION
(MILLIONS OF DOLLARS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
FINANCE CHARGE AND
LATE FEE REVENUES $ 576 $ 501 $ 403
MERCHANT FEES AND OTHER 93 86 72
- --------------------------------------------------------------------------------
TOTAL REVENUES 669 587 475
- --------------------------------------------------------------------------------
EXPENSES:
BAD DEBT 180 190 149
OPERATIONS AND MARKETING 169 125 116
- --------------------------------------------------------------------------------
TOTAL EXPENSES 349 315 265
- --------------------------------------------------------------------------------
PRE-TAX CONTRIBUTION $ 320 $ 272 $ 210
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE RECEIVABLES SERVICED
(MILLIONS OF DOLLARS) 1998 1997 1996
- --------------------------------------------------------------------------------
TARGET $ 803 $ 644 $ 453
MERVYN'S 764 812 799
DSD 720 707 663
- --------------------------------------------------------------------------------
TOTAL AVERAGE
RECEIVABLES SERVICED $ 2,287 $ 2,163 $ 1,915
TOTAL YEAR-END
RECEIVABLES SERVICED $ 2,496 $ 2,424 $ 2,184
- --------------------------------------------------------------------------------
</TABLE>
Merchant fees are the fees charged to our retail operations on a basis
similar to fees charged by third-party credit cards. Merchant fees, including
deferred billing fees charged for carrying non-revenue-earning revolving
balances, are intercompany transfer prices that are eliminated in consolidation.
Operations and marketing expenses are those associated with the acquisition,
retention and servicing of accounts.
[CHART]
CREDIT CONTRIBUTION
(millions)
<TABLE>
<CAPTION>
'94 '95 '96 '97 '98
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$170 $179 $210 $272 $320
</TABLE>
The year-end allowance for doubtful accounts was $203 million, 8.1 percent
of year-end receivables serviced, an increase of 1.2 percentage points from the
prior year.
FORWARD-LOOKING STATEMENTS
The preceding Management's Discussion and Analysis contains forward-looking
statements regarding our performance, liquidity and the adequacy of our capital
resources. Those statements are based on our current assumptions and
expectations and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. We caution that the
forward-looking statements are qualified by the risks and challenges posed by
increased competition, shifting consumer demand, changing consumer credit
markets and general economic conditions, hiring and retaining effective team
members, sourcing merchandise from domestic and international vendors, preparing
for the impact of year 2000, and other risks and uncertainties. As a result,
while we believe that there is a reasonable basis for the forward-looking
statements, you should not place undue reliance on those statements. You are
encouraged to review Exhibit (99)c attached to our Form 10-K Report for the year
ended January 30, 1999, which contains additional important factors that may
cause actual results to differ materially from those predicted in the
forward-looking statements.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BUSINESS SEGMENT COMPARISONS
(MILLIONS OF DOLLARS) 1998 1997 1996 1995* 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
TARGET $ 23,056 $ 20,368 $ 17,853 $ 15,807 $ 13,600 $ 11,743
MERVYN'S 4,176 4,227 4,369 4,516 4,561 4,436
DEPARTMENT STORE DIVISION 3,285 3,162 3,149 3,193 3,150 3,054
CORPORATE AND OTHER 434 - - - - -
- -------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 30,951 $ 27,757 $ 25,371 $ 23,516 $ 21,311 $ 19,233
- -------------------------------------------------------------------------------------------------------------------
PRE-TAX SEGMENT PROFIT
TARGET $ 1,578 $ 1,287 $ 1,048 $ 721 $ 732 $ 600
MERVYN'S 240 280 272 117 198 172
DEPARTMENT STORE DIVISION 279 240 151 192 259 246
- -------------------------------------------------------------------------------------------------------------------
TOTAL PRE-TAX SEGMENT PROFIT $ 2,097 $ 1,807 $ 1,471 $ 1,030 $ 1,189 $ 1,018
- -------------------------------------------------------------------------------------------------------------------
LIFO PROVISION CREDIT/(EXPENSE) 18 (6) (9) (17) 19 91
SECURITIZATION ADJUSTMENTS:
SFAS 125 GAIN/(LOSS),NET (3) 45 - - - -
INTEREST EQUIVALENT (48) (33) (25) (10) - -
INTEREST EXPENSE (398) (416) (442) (442) (426) (446)
MAINFRAME OUTSOURCING (42) - - - - -
REAL ESTATE REPOSITIONING - - (134) - - -
CORPORATE AND OTHER (68) (71) (78) (60) (68) (56)
- -------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGES $ 1,556 $ 1,326 $ 783 $ 501 $ 714 $ 607
- -------------------------------------------------------------------------------------------------------------------
ASSETS
TARGET $ 10,475 $ 9,487 $ 8,257 $ 7,330 $ 6,247 $ 5,495
MERVYN'S 2,339 2,281 2,658 2,776 2,917 2,750
DEPARTMENT STORE DIVISION 2,123 2,188 2,296 2,309 2,392 2,240
CORPORATE AND OTHER 729 235 178 155 141 293
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 15,666 $ 14,191 $ 13,389 $ 12,570 $ 11,697 $ 10,778
- -------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
TARGET $ 496 $ 437 $ 377 $ 328 $ 294 $ 264
MERVYN'S 138 126 151 150 145 146
DEPARTMENT STORE DIVISION 135 128 119 113 108 104
CORPORATE AND OTHER 11 2 3 3 1 1
- -------------------------------------------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 780 $ 693 $ 650 $ 594 $ 548 $ 515
- -------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
TARGET $ 1,352 $ 1,155 $ 1,048 $ 1,067 $ 842 $ 716
MERVYN'S 169 72 79 273 146 180
DEPARTMENT STORE DIVISION 127 124 173 161 96 80
CORPORATE AND OTHER 9 3 1 21 11 2
- -------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 1,657 $ 1,354 $ 1,301 $ 1,522 $ 1,095 $ 978
- -------------------------------------------------------------------------------------------------------------------
SEGMENT EBITDA
TARGET $ 2,074 $ 1,724 $ 1,425 $ 1,049 $ 1,026 $ 864
MERVYN'S 378 406 423 267 343 318
DEPARTMENT STORE DIVISION 414 368 270 305 367 350
- -------------------------------------------------------------------------------------------------------------------
TOTAL SEGMENT EBITDA $ 2,866 $ 2,498 $ 2,118 $ 1,621 $ 1,736 $ 1,532
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Consisted of 53 Weeks
Each operating division's assets and operating results include the retained
securitized receivables held by Dayton Hudson Receivables Corporation and
Retailers National Bank, as well as related income and expenses.
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $30,951 $27,757 $25,371
COSTS AND EXPENSES
COST OF RETAIL SALES, BUYING AND OCCUPANCY 22,634 20,320 18,628
SELLING, PUBLICITY AND ADMINISTRATIVE 5,077 4,532 4,289
DEPRECIATION AND AMORTIZATION 780 693 650
INTEREST EXPENSE 398 416 442
TAXES OTHER THAN INCOME TAXES 506 470 445
REAL ESTATE REPOSITIONING - - 134
- -------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 29,395 26,431 24,588
- -------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY CHARGES 1,556 1,326 783
PROVISION FOR INCOME TAXES 594 524 309
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY CHARGES 962 802 474
EXTRAORDINARY CHARGES FROM PURCHASE AND REDEMPTION OF DEBT, NET OF TAX 27 51 11
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 935 $ 751 $ 463
- -------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
EARNINGS BEFORE EXTRAORDINARY CHARGES $ 2.14 $ 1.80 $ 1.05
EXTRAORDINARY CHARGES (.06) (.12) (.03)
- -------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 2.08 $ 1.68 $ 1.02
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
EARNINGS BEFORE EXTRAORDINARY CHARGES $ 2.04 $ 1.70 $ 1.00
EXTRAORDINARY CHARGES (.06) (.11) (.03)
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.98 $ 1.59 $ .97
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (MILLIONS)
BASIC 440.0 436.1 433.3
DILUTED 467.3 463.7 460.9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements throughout pages 25-36.
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION Dayton Hudson Corporation is a general merchandise retailer.
Our operating divisions consist of Target, Mervyn's and the Department Store
Division (DSD). Target, an upscale discount chain located in 41 states,
contributed 75 percent of our 1998 revenues. Mervyn's, a middle-market
promotional department store located in 14 states in the West, South and
Midwest, contributed 13 percent of revenues. DSD, a traditional department store
located in eight states in the upper Midwest, contributed 11 percent of
revenues. The Associated Merchandising Corporation and Rivertown Trading Company
contributed 1 percent of 1998 revenues.
CONSOLIDATION The financial statements include the balances of the
Corporation and its subsidiaries after elimination of material intercompany
balances and transactions. All material subsidiaries are wholly owned.
USE OF ESTIMATES The preparation of our financial statements, in
conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results may differ from
those estimates.
FISCAL YEAR Our fiscal year ends on the Saturday nearest January 31.
Unless otherwise stated, references to years in this report relate to fiscal
years rather than to calendar years. Fiscal years 1998, 1997 and 1996 consisted
of 52 weeks.
REVENUES
Finance charge and late fee revenues on internal credit sales, net of the
effect of sold securitized receivables, were $447 million on sales of $4.5
billion in 1998, $459 million on sales of $4.2 billion in 1997 and $346 million
on sales of $3.8 billion in 1996. Leased department sales were $188 million,
$165 million and $162 million in 1998, 1997 and 1996, respectively.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
Basic EPS is net earnings, less dividend requirements on the Employee Stock
Ownership Plan (ESOP) preferred shares, divided by the average number of common
shares outstanding during the period.
Diluted EPS assumes conversion of the ESOP preferred shares into common
shares and replacement of the ESOP preferred dividends with common stock
dividends. Net earnings were also adjusted for expense required to fund the ESOP
debt service, prior to repayment of the loan. References herein to earnings per
share refer to Diluted EPS.
All earnings per share, dividends per share and common shares outstanding
reflect our 1998 two-for-one share split and our three-for-one share split in
1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
BASIC EPS DILUTED EPS
(MILLIONS, EXCEPT PER SHARE DATA)
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET EARNINGS* $ 962 $ 802 $ 474 $ 962 $ 802 $ 474
LESS: ESOP NET
EARNINGS
ADJUSTMENT (20) (20) (20) (8) (13) (14)
- --------------------------------------------------------------------------------
ADJUSTED NET
EARNINGS* $ 942 $ 782 $ 454 $ 954 $ 789 $ 460
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 440.0 436.1 433.3 440.0 436.1 433.3
PERFORMANCE
SHARES - - - .8 1.3 1.7
STOCK OPTIONS - - - 5.5 3.9 2.4
ASSUMED CONVER-
SION OF ESOP
PREFERRED SHARES - - - 21.0 22.4 23.5
- --------------------------------------------------------------------------------
TOTAL COMMON
EQUIVALENT SHARES
OUTSTANDING 440.0 436.1 433.3 467.3 463.7 460.9
- --------------------------------------------------------------------------------
EARNINGS
PER SHARE* $ 2.14 $ 1.80 $ 1.05 $ 2.04 $ 1.70 $ 1.00
- --------------------------------------------------------------------------------
</TABLE>
*Before extraordinary charges
ADVERTISING COSTS
Advertising costs, included in selling, publicity and administrative
expenses, are expensed as incurred and were $745 million, $679 million and $634
million for 1998, 1997 and 1996, respectively.
IMPACT OF YEAR 2000
Year 2000 related costs, included in selling, publicity and administrative
expenses, are expensed as incurred. In 1998 we expensed $27 million related to
year 2000 readiness. Prior to 1998, we expensed approximately $5 million. Year
2000 capital expenditures are recorded at cost less accumulated depreciation.
MAINFRAME OUTSOURCING
In fourth quarter 1998, we obtained Board of Directors approval and
announced our plan to outsource our mainframe computer data center functions.
Subsequently, we finalized a contract with a vendor to provide us with these
functions. As part of the plan, we will sell our mainframe equipment to the
vendor and eliminate approximately 110 employee positions. The fourth quarter
1998 associated expenses were $42 million ($.06 per share) and are included in
selling, publicity and administrative expenses.
The expenses recognized in the fourth quarter include $36 million for
the write-down of mainframe equipment, $4 million in one-time, incremental
fees and $2 million in employee severance. We expect to complete the
transition by third quarter 1999.
REAL ESTATE REPOSITIONING
In 1996, we recorded a pre-tax charge of $134 million ($.18 per share) for
real estate repositioning at Mervyn's and DSD to strengthen competitive
positions and achieve improved long-term results. The charge included $114
million for Mervyn's to sell or close its 25 stores in Florida and Georgia, and
approximately ten other under-performing stores throughout the chain. Also
included was a net pre-tax charge of $20 million for DSD's sale of its Texas
stores and the closure of two other stores.
As of year-end 1998, we have substantially completed our repositioning
activities. Mervyn's has sold 24 stores and closed eight under-performing
stores, while DSD has sold all stores included in the plan. Exit costs incurred
in 1998 and 1997 (approximately $5 million and $17 million, respectively) were
charged against the reserve. The reserve remaining at year-end 1998 was $20
million, representing the estimated costs that will be incurred to sell the
closed stores.
START-UP EXPENSE
In first quarter 1999, we will adopt SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The adoption will not impact total year start-up expense,
but will shift approximately $15 million of start-up expense out of first
quarter 1999 into the remaining quarters. Substantially all of this effect will
be at Target.
27
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
(MILLIONS OF DOLLARS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 255 $ 211
RETAINED SECURITIZED RECEIVABLES 1,656 1,555
MERCHANDISE INVENTORIES 3,475 3,251
OTHER 619 544
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,005 5,561
PROPERTY AND EQUIPMENT
LAND 1,868 1,712
BUILDINGS AND IMPROVEMENTS 7,217 6,497
FIXTURES AND EQUIPMENT 3,274 2,915
CONSTRUCTION-IN-PROGRESS 378 389
ACCUMULATED DEPRECIATION (3,768) (3,388)
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 8,969 8,125
OTHER 692 505
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $15,666 $14,191
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 3,150 $ 2,727
ACCRUED LIABILITIES 1,444 1,346
INCOME TAXES PAYABLE 207 210
CURRENT PORTION OF LONG-TERM DEBT AND NOTES PAYABLE 256 273
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,057 4,556
LONG-TERM DEBT 4,452 4,425
DEFERRED INCOME TAXES AND OTHER 822 720
CONVERTIBLE PREFERRED STOCK, NET 24 30
SHAREHOLDERS' INVESTMENT
CONVERTIBLE PREFERRED STOCK 268 280
COMMON STOCK 74 73
ADDITIONAL PAID-IN-CAPITAL 286 196
RETAINED EARNINGS 4,683 3,930
LOAN TO ESOP - (19)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 5,311 4,460
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 15,666 $ 14,191
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements throughout pages 25-36.
CASH EQUIVALENTS
Cash equivalents represent short-term investments with a maturity of three
months or less from the time of purchase.
RETAINED SECURITIZED RECEIVABLES
Through our special purpose subsidiary, Dayton Hudson Receivables
Corporation (DHRC), we transfer, on an ongoing basis, substantially all of our
receivables to a trust in return for certificates representing undivided
interests in the trust's assets. DHRC owns the undivided interest in the trust's
assets, other than the sold securitized receivables and the 2 percent of trust
assets held by Retailers National Bank (RNB), a wholly owned subsidiary of the
Corporation that also services the receivables. Prior to June 1998, RNB held 5
percent of trust assets. The undivided interests held by DHRC and RNB, as well
as related income and expenses, are reflected in each operating division's
assets and operating results based on the origin of the credit sale giving rise
to the receivable.
During third quarter 1998, DHRC sold to the public $400 million of
securitized receivables. This issue of asset-backed securities had an expected
maturity of five years and a stated rate of 5.90 percent. Proceeds from the sale
were used for general corporate purposes, including funding the growth of
receivables. As required by SFAS No. 125, the sale transaction resulted in a $35
million pre-tax gain ($.05 per share). This gain was offset by a $38 million
pre-tax charge ($.05 per share) related to the maturity of our 1995
securitization. The net impact was a $3 million (less than $.01 per share)
reduction of 1998 finance charge revenues and pre-tax earnings.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1997, DHRC sold to the public $400 million of securitized receivables,
with an expected maturity of five years and a stated rate of 6.25 percent. This
transaction resulted in a $32 million pre-tax gain. Additionally, 1997 results
included a $13 million pre-tax gain attributable to the application of SFAS No.
125 to our 1995 securitization. Combined, these gains resulted in a $45 million
($.06 per share) increase in finance charge revenues and pre-tax earnings.
As of year-end 1998, $800 million of securitized receivables have been
sold to investors and DHRC has borrowed $100 million of notes payable secured by
receivables.
The fair value of the retained securitized receivables, classified as
available for sale, was $1,656 million and $1,555 million at year-end 1998 and
1997, respectively. The fair value of the retained securitized receivables was
lower than the aggregate receivables value by $156 million and $126 million at
year-end 1998 and 1997, respectively, due to our estimates of ultimate
collectibility. Write-downs have been included in selling, publicity and
administrative expenses in our Consolidated Results of Operations.
INVENTORIES
Inventories and the related cost of sales are accounted
for by the retail inventory accounting method using the last-in, first-out
(LIFO) basis and are stated at the lower of LIFO cost or market. The cumulative
LIFO provision was $60 million and $92 million at year-end 1998 and year-end
1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives. Buildings and improvements are depreciated over eight to 55 years.
Furniture and fixtures are depreciated over three to eight years. Accelerated
depreciation methods are generally used for income tax purposes.
On an ongoing basis, as required by SFAS No. 121, we evaluate our
long-lived assets for impairment using undiscounted cash flow analysis.
Impairment losses due to mainframe outsourcing and real estate repositioning are
described on page 27.
INTERNAL USE SOFTWARE
We adopted SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," in first quarter 1998. The adoption
resulted in decreased expense, which increased pre-tax earnings by approximately
$68 million, net of depreciation, for 1998 ($.09 per share), partially
offsetting our other systems expenses. The annual impact of software
capitalization will diminish significantly over the next few years.
Software is depreciated over four years.
ACCOUNTS PAYABLE
Outstanding drafts included in accounts payable were $519 million and $452
million at year-end 1998 and 1997, respectively.
INVENTORY SHORTAGE TAX MATTER
We have historically deducted for income tax purposes the inventory
shortage expense accrued for book purposes in a manner consistent with industry
practice. With respect to our 1983 Federal income tax return, the Internal
Revenue Service (IRS) challenged the practice of deducting accrued shortage not
verified with a year-end physical inventory. In 1997, the United States Tax
Court (Tax Court) returned a judgment on this issue in favor of the IRS. We
appealed the decision to the United States Court of Appeals for the Eighth
Circuit (Appeals Court) and in August 1998, the Appeals Court reversed the Tax
Court decision. In November 1998, we received notification that the IRS did not
appeal and the 1983 case had been closed. The beneficial effect resulting from
the outcome of the 1983 case is $20 million ($.04 per share) and has been
reflected as a reduction in the 1998 fourth-quarter and full-year effective
income tax rates.
COMMITMENTS AND CONTINGENCIES
Commitments for the purchase, construction, lease or remodeling of real
estate, facilities and equipment were approximately $412 million at year-end
1998. We are exposed to claims and litigation arising out of the ordinary course
of business. Management, after consulting with legal counsel, believes the
currently identified claims and litigation will not have a material adverse
effect on our results of operations or our financial condition taken as a whole.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET EARNINGS BEFORE EXTRAORDINARY CHARGES $ 962 $ 802 $ 474
RECONCILIATION TO CASH FLOW:
DEPRECIATION AND AMORTIZATION 780 693 650
DEFERRED TAX PROVISION (11) (63) (107)
OTHER NONCASH ITEMS AFFECTING EARNINGS 70 43 11
CHANGES IN OPERATING ACCOUNTS PROVIDING/(REQUIRING) CASH:
RETAINED SECURITIZED RECEIVABLES (56) (235) (210)
SOLD SECURITIZED RECEIVABLES 400 400 -
MATURITY OF SOLD SECURITIZED RECEIVABLES (400) - -
MERCHANDISE INVENTORIES (198) (220) (13)
ACCOUNTS PAYABLE 336 199 281
ACCRUED LIABILITIES 75 182 275
INCOME TAXES PAYABLE 15 62 55
OTHER (111) (68) 42
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY OPERATIONS 1,862 1,795 1,458
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
EXPENDITURES FOR PROPERTY AND EQUIPMENT (1,657) (1,354) (1,301)
PROCEEDS FROM DISPOSALS OF PROPERTY AND EQUIPMENT 107 123 103
ACQUISITION OF SUBSIDIARIES, NET OF CASH RECEIVED (100) - -
OTHER (5) - -
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW REQUIRED FOR INVESTING ACTIVITIES (1,655) (1,231) (1,198)
- -------------------------------------------------------------------------------------------------------------------
NET FINANCING SOURCES 207 564 260
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
DECREASE IN NOTES PAYABLE, NET (305) (127) (416)
ADDITIONS TO LONG-TERM DEBT 600 375 700
REDUCTIONS OF LONG-TERM DEBT (343) (690) (414)
PRINCIPAL PAYMENTS RECEIVED ON LOAN TO ESOP 8 22 40
DIVIDENDS PAID (178) (165) (155)
OTHER 55 31 11
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW USED FOR FINANCING ACTIVITIES (163) (554) (234)
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 44 10 26
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 211 201 175
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 255 $ 211 $ 201
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts presented herein are on a cash basis and therefore may differ from
those shown in other sections of this Annual Report. Cash paid for income
taxes was $564 million, $454 million and $352 million during 1998, 1997 and
1996, respectively. Cash paid for interest (including interest capitalized)
was $393 million, $485 million and $434 million during 1998, 1997 and 1996,
respectively.
See Notes to Consolidated Financial Statements throughout pages 25-36.
ACQUISITIONS
In first quarter 1998, we acquired The Associated Merchandising
Corporation, an international sourcing company that provides services to our
three operating divisions and other retailers, and we also acquired Rivertown
Trading Company, a direct marketing firm. Both subsidiaries are included in the
consolidated financial statements. Their revenues and operating results are
included in corporate and other in our pre-tax earnings reconciliation on page
25 and were immaterial in 1998.
LEASES
Assets held under capital leases are included in property and equipment and
are charged to depreciation and interest over the life of the lease. Operating
leases are not capitalized and lease rentals are expensed. Rent expense on
buildings, classified in buying and occupancy, includes percentage rents that
are based on a percentage of retail sales over stated levels. Total rent expense
was $150 million, $143 million and $146 million in 1998, 1997 and 1996,
respectively. Most of the long-term leases include options to renew, with terms
varying from five to 30 years. Certain leases also include options to purchase
the property.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments required under noncancelable lease agreements
existing at January 30, 1999 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUTURE MINIMUM LEASE PAYMENTS
OPERATING CAPITAL
(MILLIONS OF DOLLARS) LEASES LEASES
- --------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 115 $ 23
2000 94 22
2001 86 21
2002 78 21
2003 63 19
AFTER 2003 564 142
- --------------------------------------------------------------------------------
TOTAL FUTURE MINIMUM LEASE PAYMENTS $1,000 $ 248
LESS: INTEREST* (281) (103)
- --------------------------------------------------------------------------------
PRESENT VALUE OF MINIMUM LEASE PAYMENTS $ 719 $ 145**
- --------------------------------------------------------------------------------
</TABLE>
*Calculated using the interest rate at inception for each lease (the weighted
average interest rate was 9.0 percent).
**Includes current portion of $9 million.
LINES OF CREDIT
At January 30, 1999, two committed credit agreements totaling $1.6 billion
were in place through a group of 31 banks at specified rates. There were no
balances outstanding at any time during 1998 or 1997 under these agreements.
LONG-TERM DEBT AND NOTES PAYABLE
At January 30, 1999, $100 million of notes payable were outstanding
representing financing secured by the Dayton Hudson Credit Card Master Trust
Series 1996-1 Class A variable funding certificate. This certificate is debt of
DHRC and is classified in the current portion of long-term debt and notes
payable in our Consolidated Statements of Financial Position. The average amount
of secured and unsecured notes payable outstanding during 1998 was $715 million
at a weighted-average interest rate of 5.7 percent.
In 1998, we issued $200 million of long-term debt at 6.65 percent, maturing
in 2028 and $200 million at 5.88 percent, maturing in 2008. We also issued $200
million of long-term debt maturing in 2010, which is puttable in 2000, and we
sold to a third party the right to call and remarket these securities in 2000 to
their final maturity. The proceeds from all issuances were used for general
corporate purposes.
Also during 1998, we repurchased $127 million of long-term debt with an
average remaining life of 21 years and a weighted-average interest rate of 9.2
percent, resulting in an after-tax extraordinary charge of $27 million ($.06 per
share).
At year end the debt portfolio was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LONG-TERM DEBT AND NOTES PAYABLE
JANUARY 30, 1999 JANUARY 31, 1998
(MILLIONS OF DOLLARS) RATE* BALANCE RATE* BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOTES PAYABLE 5.2% $ 100 5.7% $ 405
NOTES AND DEBENTURES:
DUE 1998-2002 8.8 1,080 8.9 1,245
DUE 2003-2007 7.4 965 7.4 966
DUE 2008-2012 7.5 764 9.3 383
DUE 2013-2017 9.6 70 9.6 70
DUE 2018-2022 9.1 709 9.1 816
DUE 2023-2027 7.2 575 7.2 575
DUE 2028-2037 6.4 300 5.9 100
- --------------------------------------------------------------------------------
TOTAL NOTES PAYABLE, NOTES
AND DEBENTURES** 7.9% $4,563 8.1% $4,560
CAPITAL LEASE OBLIGATIONS 145 138
LESS: CURRENT PORTION (256) (273)
- --------------------------------------------------------------------------------
LONG-TERM DEBT AND
NOTES PAYABLE $4,452 $4,425
- --------------------------------------------------------------------------------
</TABLE>
*Reflects the weighted-average stated interest rate as of year end.
**The estimated fair value of total notes payable and notes and debentures,
using a discounted cash flow analysis based on our incremental interest
rates for similar types of financial instruments, was $5,123 million at
January 30, 1999 and $5,025 at January 31, 1998.
Required principal payments on long-term debt and notes payable over the
next five years, excluding capital lease obligations, are $247 million in 1999,
$389 million in 2000, $352 million in 2001, $192 million in 2002 and $464
million in 2003.
DERIVATIVES
From time to time we use interest rate swaps to hedge our exposure to
interest rate risk. The fair value of the swaps is not reflected in the
financial statements and any gain or loss recognized upon early termination is
amortized over the life of the related debt obligation. The fair value of
existing swaps is immaterial.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted for fiscal years beginning after June 15, 1999. The
adoption of this new statement is not expected to have a material effect on our
earnings or financial position.
31
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED LOAN TO
(MILLIONS OF DOLLARS, EXCEPT SHARE DATA) STOCK STOCK CAPITAL EARNINGS ESOP TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FEBRUARY 3, 1996 $257 $72 $110 $3,044 $(80) $3,403
CONSOLIDATED NET EARNINGS - - - 463 - 463
DIVIDENDS DECLARED - - - (159) - (159)
TAX BENEFIT ON UNALLOCATED PREFERRED
STOCK DIVIDENDS AND OPTIONS - - 7 - - 7
CONVERSION OF PREFERRED STOCK AND OTHER 14 - 16 - - 30
NET REDUCTION IN LOAN TO ESOP - - - - 33 33
STOCK OPTION ACTIVITY - - 13 - - 13
- -------------------------------------------------------------------------------------------------------------------
FEBRUARY 1, 1997 271 72 146 3,348 (47) 3,790
CONSOLIDATED NET EARNINGS - - - 751 - 751
DIVIDENDS DECLARED - - - (169) - (169)
TAX BENEFIT ON UNALLOCATED PREFERRED
STOCK DIVIDENDS AND OPTIONS - - 17 - - 17
CONVERSION OF PREFERRED STOCK AND OTHER 9 - 18 - - 27
NET REDUCTION IN LOAN TO ESOP - - - - 28 28
STOCK OPTION ACTIVITY - 1 15 - - 16
- -------------------------------------------------------------------------------------------------------------------
JANUARY 31, 1998 280 73 196 3,930 (19) 4,460
CONSOLIDATED NET EARNINGS - - - 935 - 935
DIVIDENDS DECLARED - - - (182) - (182)
TAX BENEFIT ON UNALLOCATED PREFERRED
STOCK DIVIDENDS AND OPTIONS - - 25 - - 25
CONVERSION OF PREFERRED STOCK AND OTHER (12) - 37 - - 25
NET REDUCTION IN LOAN TO ESOP - - - - 19 19
STOCK OPTION ACTIVITY - 1 28 - - 29
- -------------------------------------------------------------------------------------------------------------------
JANUARY 30, 1999 $268 $74 $286 $4,683 $- $5,311
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK Authorized 3,000,000,000 shares, $.1667 par value; 441,809,806
shares issued and outstanding at January 30, 1999; 437,833,456 shares issued
and outstanding at January 31, 1998.
In January 1999, our Board of Directors authorized the repurchase of $1
billion of our common stock. We expect to complete our repurchase program
over the next two years. Repurchases will be made primarily in open market
transactions, subject to market conditions. There was no repurchase activity
in 1998.
PREFERRED STOCK Authorized 5,000,000 shares; Series B ESOP Convertible
Preferred Stock $.01 par value, 338,492 shares issued and outstanding at
January 30, 1999; 362,004 shares issued and outstanding at January 31, 1998.
Each share converts into 60 shares of our common stock, has voting rights
equal to the equivalent number of common shares and is entitled to
cumulative annual dividends of $56.20. Beginning in January 2000, under
certain circumstances, the shares may be converted to common stock at our
election, or the election of the ESOP.
JUNIOR PREFERRED STOCK RIGHTS In September 1996, we declared a distribution
of shares of preferred share purchase rights. Terms of the plan provide for
a distribution of one preferred share purchase right for each outstanding
share of our common stock. Each right will entitle shareholders to buy one
six-hundredth of a share of a new series of junior participating preferred
stock at an exercise price of $50.00, subject to adjustment. The rights will
be exercisable only if a person or group acquires ownership of 20 percent or
more of our common stock or announces a tender offer to acquire 30 percent
or more of our common stock.
See Notes to Consolidated Financial Statements throughout pages 25-36.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN
We have a stock option plan for key employees. Options include Incentive
Stock Options, Non-Qualified Stock Options or a combination of the two. A
majority of the options vest annually in equal amounts over a four-year period.
These options are cumulatively exercisable and expire no later than ten years
after the date of the grant. We also have a non-qualified stock option plan for
non-employee members of our Board of Directors. Such options become exercisable
after one year and have a ten-year term. The typical frequency of stock option
grants is once each fiscal year; due to a change in timing, two annual grant
cycles fell into 1996.
A performance share and restricted share plan exists for key employees
although no grants have been made since 1995. Performance shares are issued to
the extent certain financial goals are met over the four-year period from the
date of grant. Restricted shares are issued four years from the date of grant.
Once issued, performance shares and restricted shares generally vest only upon
retirement.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
OPTIONS, PERFORMANCE SHARES AND
RESTRICTED SHARES OUTSTANDING
(SHARES IN THOUSANDS) OPTIONS
-------------------------------------------
TOTAL OUTSTANDING CURRENTLY EXERCISABLE
------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE PERFORM-
OF EXERCISE OF EXERCISE ANCE RESTRICTED
SHARES PRICE SHARES PRICE SHARES SHARES
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FEBRUARY 3, 1996 9,967 $11.09 5,372 $10.30 1,607 359
GRANTED 6,539 16.09
CANCELED (145) 12.19
EXERCISED (1,751) 9.67
- ---------------------------------------------------------------------------------------
FEBRUARY 1, 1997 14,610 $13.48 4,782 $10.88 1,264 311
GRANTED 2,653 33.63
CANCELED (346) 15.02
EXERCISED (2,450) 10.27
- ---------------------------------------------------------------------------------------
JANUARY 31, 1998 14,467 $17.69 4,860 $13.15 794 212
GRANTED 3,309 48.16
CANCELED (173) 23.77
EXERCISED (2,023) 12.27
- ---------------------------------------------------------------------------------------
JANUARY 30, 1999 15,580 $24.79 5,685 $16.49 519* 123*
- ---------------------------------------------------------------------------------------
</TABLE>
*Represents shares issued subsequent to year end pursuant to the plan.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
OPTIONS OUTSTANDING
SHARES OUTSTANDING RANGE OF
(SHARES IN THOUSANDS) AT JANUARY 30, 1999 EXERCISE PRICE
- ----------------------------------------------------------------------------------
<S> <C> <C>
6,274 $ 8.83 - $15.00
3,626 $15.00 - $25.00
2,371 $25.00 - $35.00
1,221 $35.00 - $45.00
2,088 $45.00 - $60.22
- ----------------------------------------------------------------------------------
TOTAL 15,580 $ 8.83 - $60.22
- ----------------------------------------------------------------------------------
</TABLE>
As of January 30, 1999, outstanding options had a weighted-average
remaining contractual life of 7.7 years. The number of unissued common shares
reserved for future grants under the stock option plans were 4,136,969 at
January 30, 1999, and 7,143,228 at January 31, 1998.
We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for our stock option and performance
share plans. Because the exercise price of our employee stock options equals the
market price of the underlying stock on the grant date, no compensation expense
related to options is recognized. Performance share compensation expense is
recognized based on the fair value of the shares at the end of each reporting
period. If we had elected to recognize compensation cost based on the fair value
of the options and performance shares at grant date as prescribed by SFAS No.
123, "Accounting for Stock-Based Compensation," net earnings would have been the
pro forma amounts shown below. EPS calculated under SFAS No. 123 was unchanged
from reported EPS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRO FORMA EARNINGS
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NET EARNINGS-- AS REPORTED $935 $751 $463
NET EARNINGS-- PRO FORMA $934 $751 $462
- --------------------------------------------------------------------------------
</TABLE>
The Black-Scholes method was used to estimate the fair value of the options
at grant date based on the following factors:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
DIVIDEND YIELD .7% 1.0% 1.7%
VOLATILITY 30% 25% 25%
RISK FREE INTEREST RATE 4.6% 5.4% 6.3%
EXPECTED LIFE IN YEARS 5.6 5.6 5.6
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE FAIR VALUE
AT GRANT DATE $16.24 $10.52 $5.65
- --------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Reconciliation of tax rates is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERCENT OF EARNINGS BEFORE INCOME TAXES
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL STATUTORY RATE 35.0% 35.0% 35.0%
STATE INCOME TAXES,
NET OF FEDERAL TAX BENEFIT 4.5 4.5 4.6
DIVIDENDS ON PREFERRED STOCK (.5) (.5) (.8)
WORK OPPORTUNITY TAX CREDITS (.2) (.1) -
INVENTORY SHORTAGE TAX MATTER (1.3) - -
OTHER .7 .6 .7
- --------------------------------------------------------------------------------
EFFECTIVE TAX RATE 38.2% 39.5% 39.5%
- --------------------------------------------------------------------------------
</TABLE>
The components of the provision for income taxes were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INCOME TAX PROVISION: EXPENSE/(BENEFIT)
(MILLIONS OF DOLLARS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
FEDERAL $497 $488 $344
STATE 110 99 72
- --------------------------------------------------------------------------------
607 587 416
- --------------------------------------------------------------------------------
DEFERRED:
FEDERAL (10) (55) (89)
STATE (3) (8) (18)
- --------------------------------------------------------------------------------
(13) (63) (107)
- --------------------------------------------------------------------------------
TOTAL $594 $524 $309
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax asset/(liability) were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSET/(LIABILITY) JANUARY 30, JANUARY 31,
(MILLIONS OF DOLLARS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
GROSS DEFERRED TAX ASSETS:
SELF-INSURED BENEFITS $132 $117
DEFERRED COMPENSATION 128 103
INVENTORY 72 46
VALUATION ALLOWANCE 64 52
POSTRETIREMENT HEALTH CARE OBLIGATION 42 42
OTHER 132 115
- --------------------------------------------------------------------------------
570 475
- --------------------------------------------------------------------------------
GROSS DEFERRED TAX LIABILITIES:
PROPERTY AND EQUIPMENT (374) (306)
OTHER (63) (49)
- --------------------------------------------------------------------------------
(437) (355)
- --------------------------------------------------------------------------------
TOTAL $133 $120
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
We sponsor a defined contribution employee benefit plan. Employees who meet
certain eligibility requirements can participate by investing up to 20 percent
of their compensation. We match 100 percent of each employee's contribution up
to 5 percent of respective total compensation. Our contribution to the plan is
invested in the ESOP. Through December 1998, ESOP preferred shares (401(k)
preferred shares) were allocated to participants. In January 1999, we began
providing new common shares to the ESOP to fund the employer match.
In 1989, we loaned $379 million to the ESOP at a 9 percent interest rate.
The loan was paid off during 1998. Proceeds from the loan were used by the ESOP
to purchase 438,353 shares of 401(k) preferred shares. The original issue value
of the 401(k) preferred shares of $864.60 per share is guaranteed by the
Corporation. Each 401(k) preferred share is convertible into 60 shares of our
common stock after giving effect to the 1998 and 1996 common share splits.
Our contributions to the ESOP, plus dividends paid on all 401(k) preferred
shares held by the ESOP, were used to repay the loan principal and interest. Our
cash contributions to the ESOP were $17 million in 1998, $3 million in 1997 and
$23 million in 1996. Dividends earned on 401(k) preferred shares held by the
ESOP were $19 million in 1998, $21 million in 1997 and $22 million in 1996. The
dividends on allocated 401(k) preferred shares were paid to participants'
accounts in additional 401(k) preferred shares until June 1998. Dividends are
now paid to participants in cash. Benefits expense, calculated based on the
shares allocated method, was $29 million in 1998, $17 million in 1997 and $31
million in 1996.
Upon a participant's termination, we are required to exchange at fair
value each 401(k) preferred share for 60 shares of common stock and cash, if
any. At January 30, 1999, 338,492 shares of 401(k) preferred shares were
allocated to participants with a fair market value of $1,319 million. The
401(k) preferred shares are classified as shareholders' investment to the
extent the preferred shares are permanent equity. The remaining 401(k)
preferred shares of $24 million represent our maximum cash obligation at
year-end, measured by the market value difference between the preferred
shares and common shares, and is excluded from shareholders' investment.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENSION AND POSTRETIREMENT
HEALTH CARE BENEFITS
We adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in 1998. The Statement only impacts disclosures of
pensions and other postretirement benefits and does not change the measurement
of expenses or recognition of the assets and liabilities associated with the
plans.
We have defined benefit pension plans that cover all employees who meet
certain age, length of service and hours worked per year requirements. Benefits
are provided based upon years of service and the employee's compensation.
Retired employees also become eligible for certain health care benefits if they
meet minimum age and service requirements and agree to contribute a portion of
the cost.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
POSTRETIREMENT
HEALTH CARE
PENSION BENEFITS BENEFITS
---------------- -----------------------
(MILLIONS OF DOLLARS) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BENEFIT OBLIGATION AT
BEGINNING OF YEAR $610 $523 $ 81 $ 77
SERVICE COST 35 27 1 1
INTEREST COST 45 39 6 5
PLAN AMENDMENTS - 2 - -
ACTUARIAL LOSS 65 59 5 5
ACQUISITIONS 26 - - -
BENEFITS PAID (52) (40) (8) (7)
- --------------------------------------------------------------------------------
BENEFIT OBLIGATION AT
DECEMBER 31 $729 $610 $ 85 $ 81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS
AT BEGINNING OF YEAR $718 $587 $ - $ -
ACTUAL RETURN ON PLAN ASSETS 106 118 - -
EMPLOYER CONTRIBUTION 59 50 8 7
ACQUISITIONS 25 - - -
BENEFITS PAID (49) (37) (8) (7)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS
AT DECEMBER 31 $859 $718 $ - $ -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECONCILIATION OF PREPAID/(ACCRUED) COST
- --------------------------------------------------------------------------------
FUNDED STATUS $130 $108 $ (85) $ (81)
UNRECOGNIZED ACTUARIAL GAIN (16) (32) (18) (23)
UNRECOGNIZED PRIOR
SERVICE COST 2 2 3 3
- --------------------------------------------------------------------------------
NET PREPAID/(ACCRUED) COST $116 $ 78 $(100) $(101)
- --------------------------------------------------------------------------------
</TABLE>
The benefit obligation and fair value of plan assets, for the pension plans
with benefit obligations in excess of plan assets, were $34 and $0 as of
December 31, 1998 and $26 and $0 as of December 31, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET PENSION AND POSTRETIREMENT HEALTH CARE
BENEFITS EXPENSE
POSTRETIREMENT
PENSION BENEFITS HEALTH CARE BENEFITS
---------------------- ----------------------------
(MILLIONS OF DOLLARS) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SERVICE COST BENEFITS
EARNED DURING THE
PERIOD $35 $27 $26 $1 $1 $1
INTEREST COST ON
PROJECTED BENEFIT
OBLIGATION 45 39 37 6 6 6
EXPECTED RETURN
ON ASSETS (58) (48) (44) - - -
RECOGNIZED GAINS
AND LOSSES 3 - 1 (1) (2) (1)
RECOGNIZED PRIOR
SERVICE COST - 1 1 - 1 -
- --------------------------------------------------------------------------------
TOTAL $25 $19 $21 $6 $6 $6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The amortization of any prior service cost is determined using a
straight-line amortization of the cost over the average remaining service period
of employees expected to receive benefits under the plan.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ACTUARIAL ASSUMPTIONS
POSTRETIREMENT
PENSION BENEFITS HEALTH CARE BENEFITS
------------------------- ------------------------
(AS OF DECEMBER 31) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DISCOUNT RATE 7% 7 1/4% 7 3/4% 7% 7 1/4% 7 3/4%
EXPECTED LONG-TERM
RATE OF RETURN ON
PLANS' ASSETS 9 9 9 N/A N/A N/A
AVERAGE ASSUMED
RATE OF COMPENSA-
TION INCREASE 4 4 1/4 4 3/4 N/A N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
An increase in the cost of covered health care benefits of 7 percent is
assumed for 1999. The rate is assumed to decrease to 6 percent in the year 2000
and remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. A 1 percent change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(MILLIONS OF DOLLARS) 1% INCREASE 1% DECREASE
- --------------------------------------------------------------------------------
<S> <C> <C>
EFFECT ON TOTAL OF SERVICE
AND INTEREST COST
COMPONENTS OF NET
PERIODIC POSTRETIREMENT
HEALTH CARE BENEFIT COST $- $ -
EFFECT ON THE HEALTH CARE
COMPONENT OF THE
POSTRETIREMENT BENEFIT
OBLIGATION $5 $(4)
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY RESULTS (UNAUDITED)
The same accounting policies are followed in preparing quarterly financial
data as are followed in preparing annual data. Costs directly associated with
revenues, such as cost of goods sold and percentage rent on leased stores, are
allocated based on revenues. Certain other costs not directly associated with
revenues, such as benefit plan expenses and real estate taxes, are allocated
evenly throughout the year.
The table below summarizes results by quarter for 1998 and 1997:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $6,468 5,889 $7,056 6,293 $7,288 6,622 $10,139 8,953 $30,951 27,757
GROSS PROFIT (a) $1,741 1,636 $1,913 1,707 $1,955 1,807 $ 2,708 2,287 $ 8,317 7,437
NET EARNINGS BEFORE
EXTRAORDINARY
CHARGES (b) (d) $ 160 126 $ 172 141 $ 183 179 $ 447 356 $ 962 802
NET EARNINGS (b) (c) (d) $ 158 105 $ 172 130 $ 182 160 $ 423 356 $ 935 751
BASIC EARNINGS
PER SHARE (b) (c) (d) (e) $ .35 .23 $ .38 .29 $ .40 .36 $ .95 .80 $ 2.08 1.68
DILUTED EARNINGS
PER SHARE (b) (c) (d) (e) $ .33 .22 $ .36 .27 $ .39 .34 $ .90 .76 $ 1.98 1.59
- ---------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED
PER SHARE (e) $ .09 .08 $ .09 .08 $ .09 .08 $ .09 .09 $ .36 .33
COMMON STOCK PRICE (f)
HIGH $44.81 23.00 $52.63 32.31 $48.25 32.75 $ 63.75 36.84 $ 63.75 36.84
LOW $36.25 18.94 $42.50 23.19 $33.75 26.19 $ 42.69 30.78 $ 33.75 18.94
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Gross profit is revenues less cost of retail sales, buying and
occupancy. The LIFO provision, included in gross profit, is analyzed each
quarter for estimated changes in year-end inventory levels, markup rates
and internally generated retail price indices. A final adjustment is
recorded in the fourth quarter for the difference between the prior
quarters' estimates and the actual total year LIFO provision.
(b)Third quarter 1998 net earnings include a $35 million pre-tax gain ($.05
per basic and diluted share) related to the 1998 securitization and a $38
million pre-tax loss ($.05 per basic and diluted share) related to the
maturity of the 1995 securitization. Third quarter 1997 net earnings
include a $32 million pre-tax gain ($.04 per basic and diluted share)
related to the 1997 securitization transaction. Total year 1997 net
earnings include a $45 million pre-tax gain ($.06 per basic and diluted
share) related to the 1997 and 1995 securitization transactions.
(c)In 1998, first, third and fourth quarter net earnings include
extraordinary charges, net of tax, related to the purchase and redemption
of debt of $2 million, $ 1 million and $24 million ($.01, $.00 and $.05
per basic and diluted share), respectively. In 1997, first, second and
third quarter net earnings include extraordinary charges, net of tax,
related to the purchase and redemption of debt of $21 million, $11
million and $19 million ($.05, $.03 and $.04 per basic share and $.05,
$.02 and $.04 per diluted share), respectively.
(d)Fourth quarter and total year 1998 net earnings before extraordinary
charges, net earnings and earnings per share include a mainframe
outsourcing pre-tax charge of $42 million ($.06 per basic and diluted
share) and the beneficial effect of $20 million ($.04 per basic and
diluted share) of the favorable outcome of our inventory shortage tax
matter.
(e)Per share amounts are computed independently for each of the quarters
presented. The sum of the quarters may not equal the total year amount
due to the impact of changes in average quarterly shares outstanding
and/or rounding caused by the 1998 two-for-one common share split.
(f)Our common stock is listed on the New York Stock Exchange and Pacific
Exchange. At March 19, 1999 there were 13,019 shareholders of record and
the common stock price was $67.75 per share.
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Dayton Hudson Corporation
We have audited the accompanying consolidated statements of financial
position of Dayton Hudson Corporation and subsidiaries as of January 30, 1999
and January 31, 1998 and the related consolidated results of operations, cash
flows and shareholders' investment for each of the three years in the period
ended January 30, 1999. These financial statements are the responsibility of the
Corporation'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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dayton Hudson
Corporation and subsidiaries at January 30, 1999 and January 31, 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 30, 1999 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 1, 1999
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
Management is responsible for the consistency, integrity and presentation
of the information in the Annual Report. The consolidated financial statements
and other information presented in this Annual Report have been prepared in
accordance with generally accepted accounting principles and include necessary
judgments and estimates by management.
To fulfill our responsibility, we maintain comprehensive systems of
internal control designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with established
procedures. The concept of reasonable assurance is based upon a recognition that
the cost of the controls should not exceed the benefit derived. We believe our
systems of internal control provide this reasonable assurance.
The Board of Directors exercises its oversight role with respect to the
Corporation's systems of internal control primarily through its Audit Committee,
which is comprised of five independent directors. The Committee oversees the
Corporation's systems of internal control, accounting practices, financial
reporting and audits to ensure their quality, integrity and objectivity are
sufficient to protect shareholders' investments. The Committee's report appears
on this page.
In addition, our consolidated financial statements have been audited by
Ernst & Young LLP, independent auditors, whose report also appears on this page.
As a part of its audit, Ernst & Young LLP develops and maintains an
understanding of the Corporation's internal accounting controls and conducts
such tests and employs such procedures as it considers necessary to render its
opinion on the consolidated financial statements. Their report expresses an
opinion as to the fair presentation, in all material respects, of the
consolidated financial statements and is based on independent audits made in
accordance with generally accepted auditing standards.
/s/ Robert J. Ulrich /s/ Douglas A. Scovanner
Robert J. Ulrich Douglas A. Scovanner
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
/s/ JoAnn Bogdan
JoAnn Bogdan
Controller and Chief Accounting Officer
March 1, 1999
- --------------------------------------------------------------------------------
REPORT OF AUDIT COMMITTEE
The Audit Committee met two times during fiscal 1998 to review the overall
audit scope, plans for internal and independent audits, the Corporation's
systems of internal control, emerging accounting issues, officer and director
expenses, audit fees and retirement plans. The Committee also met individually
with the internal auditors and independent auditors, without management present,
to discuss the results of their audits. The Committee encourages the internal
and independent auditors to communicate closely with the Committee.
Audit Committee results were reported to the full Board of Directors and
the Corporation's annual financial statements were reviewed and approved by the
Board of Directors before issuance. The Audit Committee also recommended to the
Board of Directors that the independent auditors be reappointed for fiscal 1999,
subject to the approval of the shareholders at the annual meeting.
March 1, 1999
37
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL AND OPERATING DATA
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995(a) 1994 1993
- -------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $30,951 27,757 25,371 23,516 21,311 19,233
- -------------------------------------------------------------------------------------------------------------------
COST OF RETAIL SALES, BUYING AND OCCUPANCY $22,634 20,320 18,628 17,527 15,636 14,164
- -------------------------------------------------------------------------------------------------------------------
SELLING, PUBLICITY AND ADMINISTRATIVE $ 5,077 4,532 4,289 4,043 3,614 3,158
- -------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION $ 780 693 650 594 548 515
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE AND INTEREST EQUIVALENT $ 446 449 467 452 426 446
- -------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGES (c) (d) $ 1,556 1,326 783 501 714 607
- -------------------------------------------------------------------------------------------------------------------
INCOME TAXES $ 594 524 309 190 280 232
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS (c) (d) (e) $ 935 751 463 311 434 375
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION DATA
- -------------------------------------------------------------------------------------------------------------------
WORKING CAPITAL $ 948 1,005 1,329 1,432 1,569 1,436
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $ 8,969 8,125 7,467 7,294 6,385 5,947
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $15,666 14,191 13,389 12,570 11,697 10,778
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $ 4,452 4,425 4,808 4,959 4,488 4,279
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT $ 5,311 4,460 3,790 3,403 3,193 2,849
- -------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (b)
- -------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (c) (d) (e) $ 1.98 1.59 .97 .65 .92 .80
- -------------------------------------------------------------------------------------------------------------------
CASH DIVIDEND DECLARED $ .36 .33 .32 .30 .28 .27
- -------------------------------------------------------------------------------------------------------------------
MARKET PRICE: HIGH $ 63.75 36.84 19.94 13.25 14.31 13.94
LOW $ 33.75 18.94 12.25 10.75 10.88 10.56
YEAR-END CLOSE $ 63.75 35.97 18.81 12.50 11.50 11.00
- -------------------------------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' INVESTMENT $ 11.41 9.59 8.21 7.47 7.07 6.38
- -------------------------------------------------------------------------------------------------------------------
OTHER DATA
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (MILLIONS) (b) 440.0 436.1 433.3 431.0 429.6 428.8
- -------------------------------------------------------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES
OUTSTANDING (MILLIONS) (b) 467.3 463.7 460.9 458.3 457.4 456.3
- -------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES $ 1,657 1,354 1,301 1,522 1,095 978
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF STORES: TARGET 851 796 736 670 611 554
MERVYN'S 268 269 300 295 286 276
DSD 63 65 65 64 63 63
- -------------------------------------------------------------------------------------------------------------------
TOTAL STORES 1,182 1,130 1,101 1,029 960 893
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETAIL SQUARE FOOTAGE (THOUSANDS) 130,172 123,058 117,989 109,091 101,163 93,947
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 256,000 230,000 218,000 214,000 194,000 174,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Consisted of 53 weeks.
(b)Earnings per share, dividends per share, market price per share and
common shares outstanding reflect our 1998 two-for-one common share split
and our 1996 three-for-one common share split.
(c)1998 includes a $35 million pre-tax gain ($.05 per share) related to the
sale of securitized accounts receivable and a $38 million pre-tax loss
($.05 per share) related to the maturity of our 1995 securitization; 1997
included a $45 million pre-tax gain ($.06 per share) related to the sales
of securitized accounts receivable.
(d)1998 includes a mainframe outsourcing pre-tax charge of $42 million
($.06 per share) and the beneficial effect of $20 million ($.04 per
share) of the favorable outcome of our inventory shortage tax matter.
1996 included a real estate repositioning pre-tax charge of $134 million
($.18 per share).
(e)Extraordinary charges, net of tax, related to early extinguishment of
debt were $27 million ($.06 per share) in 1998, $51 million ($.11 per
share) in 1997 and $11 million ($.02 per share) in 1996.
The Summary Financial and Operating Data should be read in conjunction with
the Notes to Consolidated Financial Statements throughout pages 25-36.
38
<PAGE>
EXHIBIT 21
DAYTON HUDSON CORPORATION
(A MINNESOTA CORPORATION)
LIST OF SUBSIDIARIES
(AS OF JANUARY 30, 1999)
The Associated Merchandising Corporation (NY)
Bullseye Corporation (DE)
Cahill & Company, Inc. (MN)
Capitol Lounge Corp. (WI)
Clybourn Trading Corp. (WI)
DHC Wine & Liquor Shop, Inc. (WI)
Daily Planet Company (MN)
Dayton Credit Company (MN)
Dayton Development Company (MN)
Dayton Hudson Brands, Inc. (MN)
Dayton Hudson Capital Corporation (MN)
Dayton Hudson Electronic Commerce, Inc. (MN)
Dayton Hudson Foundation (a MN not-for-profit organization)
Dayton Hudson Insurance Agency, Inc. (MN)
Dayton Hudson Receivables Corporation (MN)
Dayton's Commercial Interiors, Inc. (MN)
Dayton's Iron Horse Liquors, Inc. (MN)
Dayton's Sioux Falls, Inc. (SD)
Eighth Street Development Company (MN)
Highbridge Company (MN)
Highbridge Music Company (MN)
Hometown America Company (MN)
Marshall Field's Chicago, Inc. (DE)
Marshall Field of Columbus, Inc. (OH)
Marshall Field's Mayfair, Inc. (WI)
Marshall Field Stores, Inc. (DE)
Mervyn's (CA)
Mervyn's, Inc. (DE)
Northern Creations Company (MN)
Northern Fulfillment Services Company (MN)
Retailer's National Bank, N.A.
Rivertown Trading Company (MN)
Retail Properties, Inc. (DE)
RiverCrossings Company (MN)
Rooftop, Inc. (MN)
RTC Holding, Inc. (MN)
Seatamatic, Inc. (NV)
STL of Nebraska, Inc. (MN)
Target Connect, Inc. (MN)
Target Services, Inc. (MN)
Target Stores, Inc. (MN)
NOTE: Parenthetical information denotes state of incorporation
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Annual Report (Form 10-K)
of Dayton Hudson Corporation of our report dated March 1, 1999, included in
the 1998 Annual Report to Shareholders of Dayton Hudson Corporation.
We also consent to the incorporation by reference in Registration Statement
Numbers 33-42364 and 333-65347 on Form S-3 and Registration Statement Numbers
33-6918, 33-64013, 333-30311 and 333-27435 on Form S-8 of our report dated
March 1, 1999, with respect to the consolidated financial statements
incorporated by reference in this Annual Report (Form 10-K) of Dayton Hudson
Corporation.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 12, 1999
<PAGE>
EXHIBIT (24)
DAYTON HUDSON CORPORATION
Power of Attorney
of Director and/or Officer
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of DAYTON HUDSON CORPORATION, a Minnesota corporation (the
"Corporation"), does hereby make, constitute and appoint ROBERT J. ULRICH, JAMES
T. HALE, DOUGLAS A. SCOVANNER, STEPHEN C. KOWALKE and TIMOTHY R. BAER and each
or any one of them, the undersigned's true and lawful attorneys-in-fact, with
power of substitution, for the undersigned and in the undersigned's name, place
and stead, to sign and affix the undersigned's name as director and/or officer
of the Corporation to (1) a Form 10-K, Annual Report, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, for the fiscal year ended January
30, 1999, or other applicable form, including any and all exhibits, schedules,
supplements and supporting documents thereto, including, but not limited to, the
Form 11-K Annual Reports of the DHC 401(k) Plan (formerly referred to as the
"Supplemental Retirement, Savings, and Employee Stock Ownership Plan") and
similar plans pursuant to Section 15(d) of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and all amendments, supplementations and
corrections thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required in connection with its registration
under the 1934 Act, as amended; (2) one or more Form 3, Form 4 or Form 5
pursuant to Section 16(a) of the 1934 Act and all amendments, supplementations
and corrections thereto, to be filed with the SEC as required under the 1934
Act; and (3) one or more Registration Statements, on Form S-3, Form S-8, or
other applicable forms, and all amendments, including post-effective amendments,
thereto, to be filed by the Corporation with the SEC in connection with the
registration under the Securities Act of 1933, as amended, of debentures or
other securities of the Corporation, and to file the same, with all exhibits
thereto and other supporting documents, with the SEC.
The undersigned also grants to said attorneys-in-fact, and each of
them, full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted. This Power of Attorney shall remain in effect until revoked in writing
by the undersigned.
IN WITNESS WHEREOF, the undersigned has signed below as of this 10th
day of March, 1999.
/s/ L. DeSimone
-------------------------------------
Livio D. DeSimone
/s/ Roger A. Enrico
-------------------------------------
Roger A. Enrico
/s/ William W. George
-------------------------------------
William W. George
/s/ Michele J. Hooper
-------------------------------------
Michele J. Hooper
/s/ James A. Johnson
-------------------------------------
James A. Johnson
/s/ R. M. Kovacevich
-------------------------------------
Richard M. Kovacevich
/s/ Susan A. McLaughlin
-------------------------------------
Susan A. McLaughlin
/s/ Anne M. Mulcahy
-------------------------------------
Anne M. Mulcahy
/s/ S. W. Sanger
-------------------------------------
Stephen W. Sanger
/s/ Solomon D. Trujillo
-------------------------------------
Solomon D. Trujillo
/s/ Bob Ulrich
-------------------------------------
Bob Ulrich
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DAYTON
HUDSON CORPORATION'S FORM 10K FOR THE YEAR ENDED JANUARY 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 255
<SECURITIES> 0
<RECEIVABLES> 1812
<ALLOWANCES> 156
<INVENTORY> 3475
<CURRENT-ASSETS> 6005
<PP&E> 12737
<DEPRECIATION> 3768
<TOTAL-ASSETS> 15666
<CURRENT-LIABILITIES> 5057
<BONDS> 4452
24
0
<COMMON> 74
<OTHER-SE> 5237
<TOTAL-LIABILITY-AND-EQUITY> 15666
<SALES> 30951
<TOTAL-REVENUES> 30951
<CGS> 22634
<TOTAL-COSTS> 22634
<OTHER-EXPENSES> 1286
<LOSS-PROVISION> 112
<INTEREST-EXPENSE> 398
<INCOME-PRETAX> 1556
<INCOME-TAX> 594
<INCOME-CONTINUING> 962
<DISCONTINUED> 0
<EXTRAORDINARY> 27
<CHANGES> 0
<NET-INCOME> 935
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 1.98
</TABLE>
<PAGE>
EXHIBIT 99-C
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION.
The Company and its representatives may, from time to time, make written
or verbal forward-looking statements. Those statements relate to
developments, results, conditions or other events the Company expects or
anticipates will occur in the future. Without limiting the foregoing, those
statements may relate to future revenues, earnings, store openings, market
conditions and the competitive environment. Forward-looking statements are
based on management's then current views and assumptions and, as a result,
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected.
Any such forward-looking statements are qualified by the following which
contain certain of the important factors that could cause actual results to
differ materially from those predicted by the forward-looking statements:
COMPETITIVE PRESSURES
The retail business is highly competitive. Each of our operations
competes for customers, employees, locations, products, services and other
important aspects of their businesses with many other local, regional and
national retailers. Those competitors, some of which have a greater market
presence than the Company, include traditional and off-price store-based
retailers, direct mail businesses, entertainment and travel providers and
other forms of retail commerce. Unanticipated changes in the pricing and
other practices of those competitors may impact our expected results.
CONSUMER TRENDS
It is difficult to predict what merchandise consumers will demand,
particularly merchandise that is trend driven. A substantial part of our
business is dependent on our ability to make trend right decisions for a wide
variety of goods and services. Failure to accurately predict constantly
changing consumer tastes, preferences, spending patterns and other lifestyle
decisions could adversely affect short term results and long term
relationships with our guests.
CREDIT OPERATIONS
The Company's credit operations facilitate sales in our stores and
generate additional revenue from fees related to extending credit. Our
ability to extend credit to our guests depends on many factors including
compliance with federal and state banking and consumer protection laws, any
of which may change from time to time. In addition, changes in credit card
use, payment patterns and default rates may result from a variety of
economic, legal, social and other factors that we cannot control or predict
with certainty. Changes that adversely impact our ability to extend credit
and collect payments could negatively affect our results.
GENERAL ECONOMIC CONDITIONS
General economic factors that are beyond our control impact the
Company's forecasts and actual performance. These factors include interest
rates, recession, inflation, deflation, consumer credit availability,
consumer debt levels, tax rates and policy, unemployment trends and other
matters that influence consumer confidence and spending. Increasing
volatility in financial markets may cause these factors to change with a
greater degree of frequency and magnitude.
LABOR CONDITIONS
The Company's performance is dependent on attracting and retaining a
large and growing number of quality team members. Many of those team members
are in entry level or part time positions with historically high rates of
turnover. Our ability to meet our labor needs while controlling our costs is
subject to external factors such as unemployment levels, minimum wage
legislation and changing demographics.
<PAGE>
PRODUCT SOURCING
The products we sell are sourced from a wide variety of domestic and
international vendors. All of our vendors must comply with applicable laws
and our required standards of conduct. Our ability to find qualified vendors
and access products in a timely and efficient manner is a significant
challenge which is typically even more difficult with respect to goods
sourced outside the United States. Trade restrictions, tariffs, currency
exchange rates, transport capacity and costs and other factors significant to
this trade are beyond our control and could impact our business.
YEAR 2000 DATE CONVERSION
Our business may be adversely affected by the inability of
information systems and other technology to function properly using dates after
December 31, 1999. The scope of this issue is difficult to predict with
certainty and there can be no assurance that we, our business partners,
banks, public utilities and others whose goods or services support the retail
environment, will successfully complete every phase of the year 2000
conversion on a timely basis. Our current estimates of the cost and impact
of the year 2000 issue are based upon certain assumptions including the
continued availability of necessary resources, timely modifications to our
plans that may be necessary, the preparedness of parties on whom our business
depends and other factors. Failure of any of those assumptions could
result in higher costs, system failures or business interruptions and could
have a material, adverse impact on our future operations, earnings and
financial position.
OTHER FACTORS
Other factors that could cause actual results to differ materially from
those predicted include: weather, changes in the availability or cost of
capital, the availability of suitable new store locations on acceptable
terms, shifts in the seasonality of shopping patterns, labor strikes or other
work interruptions, the impact of excess retail capacity in our markets,
material acquisitions or dispositions, the success or failure of significant
new business ventures, adverse results in material litigation, natural
disasters, the outbreak of war or other significant national or international
events.
The foregoing list of important factors is not exclusive and the Company
does not undertake to revise any forward-looking statement to reflect events
or circumstances that occur after the date the statement is made.
